<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K/A
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For fiscal year ended December 31, 1996
------------------------
CTS CORPORATION
905 West Boulevard North
Elkhart, Indiana 46514
(219) 293-7511
Web site address: http://www.ctscorp.com
------------------------
<TABLE>
<S> <C> <C>
Incorporated in Indiana Commission File No. 1-4639 IRS No. 35-0225010
</TABLE>
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- - -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Common Stock, without par value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
------------------------
Indicate by check mark whether the registrant has: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
There were 5,226,496 shares of Common Stock, without par value, outstanding on
March 7, 1997.
The aggregate market value of the voting stock held by non-affiliates of CTS
Corporation was approximately $132.5 million on March 7, 1997.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the CTS Corporation 1996 Annual Report for the fiscal year ended
December 31, 1996, incorporated by reference in Part I and Part II.
(2) Certain portions of the CTS Corporation Form 10-K for the 1987 fiscal year
ended January 3, 1988, incorporated by reference in Part IV.
(3) Certain portions of Registration Statement No. 33-27749, effective March 23,
1989, incorporated by reference in Part IV.
(4) Certain portions of the 1989 Proxy Statement for annual meeting of
shareholders held April 28, 1989, incorporated by reference in Part IV.
(5) Certain portions of the CTS Corporation Form 10-K for the 1989 fiscal year
ended December 31, 1989, incorporated by reference in Part IV.
(6) Certain portions of the CTS Corporation Form 10-K for the 1991 fiscal year
ended December 31, 1991, incorporated by reference in Part IV.
(7) Certain portions of the CTS Corporation Form 10-K for the 1992 fiscal year
ended December 31, 1992, incorporated by reference in Part IV.
(8) Certain portions of the CTS Corporation Form 10-K for the 1994 fiscal year
ended December 31, 1994, incorporated by reference in Part IV.
2
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS
The registrant, CTS Corporation (CTS or Company), is an Indiana corporation
incorporated in 1929 as a successor to a company started in 1896. CTS' principal
executive offices are located at 905 West Boulevard North, Elkhart, Indiana,
46514, telephone number (219) 293-7511.
CTS designs, manufactures and sells electronic components. The engineering
and manufacturing of CTS products is performed at 16 facilities worldwide. CTS
products are sold through sales engineers, sales representatives, agents and
distributors.
In March 1987, a settlement was announced between CTS and Dynamics
Corporation of America (DCA), terminating the sale process of the Company and
resolving all disputes between CTS and DCA. Subsequently, the United States
Supreme Court held that the Control Share Acquisition Chapter of the Indiana
Business Corporation Law was constitutional. As a result of the Court's
decision, the issue of voting rights of 1,020,000 shares of CTS common stock
acquired by DCA in 1986 was submitted to a vote of CTS shareholders at the 1987
annual meeting. The affirmative vote of the majority of all shares eligible to
vote was necessary to grant voting rights. DCA was not eligible to vote on the
issue. The shareholders voted not to grant voting rights to DCA on these shares.
The Court's decision did not have an impact on the voting rights in additional
shares of CTS common stock previously or subsequently acquired by DCA. In May
1988, the settlement agreement expired pursuant to its terms. At the end of
1996, DCA owned 2,303,100 shares (44.1%) of CTS common stock, including the
1,020,000 shares which were not granted voting authority.
In January 1990, the Company formally announced the closing of its Switch
Division located in Paso Robles, California. The Paso Robles manufacturing
operations were relocated to the Company's facilities in Taiwan and Bentonville,
Arkansas. During 1992, the Company completed the sale of the Paso Robles
manufacturing plant and most of the associated real estate for $1.9 million. A
pretax gain of $0.9 million was realized from the sale. The manufacturing
operations for certain variable resistor and selector switch products, which
formerly were performed in Elkhart, Indiana, were also transferred to
Bentonville in 1990, to take advantage of any efficiencies to be gained in
consolidating such operations in Bentonville. The buildings located in Elkhart
which housed the plastics molding and element production were vacated, with
these manufacturing operations being consolidated into the main Elkhart plant.
CTS announced in July 1990 that its facility near Glasgow, Scotland, would
be expanded in order to manufacture and sell additional electronic component
products in Europe. The total capital investment has been approximately $13
million as of December 31, 1996. Automotive throttle position sensors and
precision and clock oscillators were added to the product lines already
manufactured in Scotland. The decision to expand the Scottish facility was based
on several factors, including the excellent business climate and skills base in
Scotland and the anticipated full participation of the United Kingdom in the
European Economic Community. The expansion of the Scotland facility represents a
major effort by CTS to serve the large and rapidly growing European market on a
direct basis.
In November 1991, construction was completed on a 53,000 square foot
manufacturing facility in Bangkok, Thailand. During 1992, the Company idled
operations at this facility. During 1994, a three-year lease was finalized with
an international computer peripheral manufacturer for this property. In early
1997, this lease was extended to March 31, 1999. The annual rental amount is
approximately U.S. $355,000.
Also during 1991, the Company significantly reduced the operating activities
at its Brownsville, Texas, facility and plans to sell this property. A portion
of the Brownsville facility is currently under a leasing arrangement which
expires in 1999, at an annual rental amount of approximately $60,000.
3
<PAGE>
The manufacturing space owned by CTS in Hong Kong, which consisted of two
floors in a multi-story building, was sold in March 1991. One floor was leased
back by CTS for the continuation of its manufacturing operations in Hong Kong.
During 1992, the Company terminated this lease and discontinued its
manufacturing operations in Hong Kong. However, the Company maintains a sales
office in Hong Kong.
During 1994, the Company purchased the assets of AT&T Microelectronics'
light emitting diode based optic data link products business. The transaction
also included sales contracts, backlog, intellectual property, trademarks, and
the design and manufacturing technology. These products are manufactured in the
Microelectronics West Lafayette, Indiana, facility.
The manufacturing space owned by CTS in Singapore consists of four floors in
a multi-story building. The current manufacturing requirements require three of
the four floors, leaving one level available for lease. During 1995, a lease for
an initial term of two years with a two-year renewal option was finalized with
an international semiconductor manufacturer for one floor of the Singapore
facility. The annual rental amount is approximately U.S. $800,000.
During 1996, the Company sold property in New Hope, Minnesota, for $550,000
in cash and a promissory note. The Company recognized a pretax gain of $35,000.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
All of the Company's products are considered one industry segment. Sales to
unaffiliated customers, operating earnings and identifiable assets, by
geographic area, are contained in "Note G--Business Segment and Non-U.S.
Operations," page 16, of the CTS Corporation 1996 Annual Report, and is
incorporated herein by reference.
PRINCIPAL BUSINESS AND PRODUCTS OF CTS
CTS is primarily in the business of developing, manufacturing and selling a
broad line of electronic components principally serving the electronic needs of
original equipment manufacturers (OEMs).
The Company sells classes of similar products consisting of the following:
<TABLE>
<S> <C>
Automotive control devices Insulated metal circuits
Fiber-optic transceivers Interconnect products
Flex cable assemblies Loudspeakers
Frequency control devices Resistor networks
Hybrid microcircuits Switches
Industrial electronics Variable resistors
</TABLE>
Most products within these product classes are manufactured by CTS from
purchased raw materials or subassemblies. Some products sold by CTS are
purchased and resold under the Company's name.
During the past three years, six classes of similar product lines accounted
for 10% or more of consolidated revenue during one or more years, as follows:
<TABLE>
<CAPTION>
PERCENT OF CONSOLIDATED REVENUE
-------------------------------------------
CLASS OF SIMILAR PRODUCTS 1996 1995 1994
- - ---------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Automotive control devices.......................... 30 29 30
Interconnect products............................... 20 14 17
Frequency control devices........................... 13 16 15
Resistor networks................................... 12 12 11
Hybrid microcircuits................................ 5 8 10
Other............................................... 20 21 17
--- --- ---
Total............................................... 100% 100% 100%
</TABLE>
4
<PAGE>
MARKETS
CTS estimates that its products have been sold in the following electronics
OEM and distribution markets and in the following percentages during the
preceding three fiscal years:
<TABLE>
<CAPTION>
PERCENT OF CONSOLIDATED REVENUE
-------------------------------------------
MARKETS 1996 1995 1994
- - ---------------------------------------------------- ------------- --------------- -----------
<S> <C> <C> <C>
Automotive.......................................... 34 36 38
Computer Equipment.................................. 21 19 17
Communications Equipment............................ 20 18 17
Instruments and Controls............................ 11 10 9
Defense and Aerospace............................... 7 8 11
Distribution........................................ 6 6 5
Consumer Electronics................................ 1 3 3
--- --- ---
Total............................................... 100% 100% 100%
</TABLE>
Products for the automotive market include throttle position sensors,
exhaust gas recirculation sensors, other automotive application sensors,
resistor networks, variable resistors, and loudspeakers for automotive
entertainment systems.
Products for the computer equipment market include flex cable assemblies,
backpanels, resistor networks, switches, frequency control devices, fiber-optic
transceivers and insulated metal circuits. Products for this market are
principally used in computers and computer peripheral equipment.
In the communications equipment market, CTS products include backpanels,
frequency control devices, hybrid microcircuits, fiber-optic transceivers,
switches, resistor networks and insulated metal circuits. Products for this
market are principally used in telephone equipment and in telephone switching
systems.
Products for the instruments and controls market include resistor networks,
hybrid microcircuits, variable resistors and switches. Principal end uses are
medical electronic devices and electronic testing, measuring and servicing
instruments.
CTS products for the defense and aerospace market, usually procured through
government contractors or subcontractors, are electronic connectors, hybrid
microcircuits, frequency control devices, programmable key storage devices and
backpanels.
In the distribution market, CTS' primary products include switches, resistor
networks and frequency control devices. In this market, standard CTS products
are sold for a wide variety of applications.
Products for the consumer electronics market, primarily variable resistors
and switches, are principally used in home entertainment equipment and
appliances.
MARKETING AND DISTRIBUTION
Sales of CTS electronic components to original equipment manufacturers are
principally by CTS sales engineers and manufacturers' representatives. CTS
maintains sales offices in Elkhart, Indiana; Detroit, Michigan; and in the
United Kingdom, Hong Kong, Taiwan and Japan. Various regions of the United
States are serviced by sales engineers working out of their homes. The sale of
electronic components is relatively integrated such that most of the product
lines of CTS are sold through the same field sales force. Approximately 40% of
net sales in 1996 were attributable to coverage by CTS sales engineers.
Generally, CTS sales engineers service the Company's largest customers with
application specific products. CTS sales engineers work closely with major
customers in determining customer requirements and in designing CTS products to
be provided to such customers.
5
<PAGE>
CTS uses the services of independent sales representatives and distributors
in the United States and other countries for customers not serviced by CTS sales
engineers. Sales representatives receive commissions from CTS. During 1996,
about 54% of net sales were attributable to coverage by sales representatives.
Independent distributors purchase products from CTS for resale to customers. In
1996, independent distributors accounted for about 6% of net sales.
RAW MATERIALS
Generally, CTS' major raw materials are steel, copper, brass, certain
precious metals, resistive and conductive inks, passive components and
semiconductors, used in several CTS products; ceramic materials used
particularly in resistor networks and hybrid microcircuits; synthetic quartz
used in frequency control devices; and laminate material used in printed circuit
boards. These raw materials are purchased from several vendors, and except for
certain semiconductors, CTS does not believe that it is dependent on one or on a
very few vendors. In 1996, all of these materials were available in adequate
quantities to meet CTS' production demands.
The Company does not presently anticipate any raw material shortages which
would significantly affect production. However, the lead times between the
placement of orders for certain raw materials and actual delivery to CTS may
vary significantly, and the Company may from time to time be required to order
raw materials in quantities and at prices less than optimal to compensate for
the variability of lead times for delivery.
Precious metals prices have a significant effect on the manufacturing cost
and selling prices of many CTS products, particularly some switches,
interconnect products, resistor networks and hybrid microcircuits. CTS has
continuing programs to reduce the precious metals content of several products,
when consistent with customer specifications.
WORKING CAPITAL
CTS does not usually buy inventories or manufacture products without actual
or reasonably anticipated customer orders, except for some standard,
off-the-shelf distributor products. The Company is not generally required to
carry significant amounts of inventories to meet rapid delivery requirements
because most customer orders are for custom products. CTS has entered into
"just-in-time" arrangements with certain major customers in order to meet
customers' just-in-time delivery needs.
CTS carries raw materials, including certain semiconductors, and certain
work-in-process and finished goods inventories which are unique to a particular
customer or to a small number of customers, and in the event of reductions in or
cancellations of orders, some inventories are not useable or cannot be returned
to vendors for credit. CTS generally imposes charges for the reduction or
cancellation of orders by customers, and these charges are usually sufficient to
cover the financial exposure of CTS to inventories which are unique to a
customer. CTS does not customarily grant special return privileges or payment
privileges to customers, although CTS' distributor program permits certain
returns. CTS' working capital requirements are generally cyclical but not
seasonal.
Working capital requirements are generally dependent on the overall business
level. During 1996, working capital increased significantly to $86.8 million,
primarily because cash increased and notes payable were paid off. During 1996,
cash increased primarily as a result of the higher level of earnings. Cash
represents a significant part of the Company's working capital. Cash of various
non-U.S. subsidiaries was held in U.S.-denominated cash equivalents at December
31, 1996. The cash, other than approximately $4.8 million, is generally
available to the parent Company. During 1996, the other changes in working
capital were primarily a result of the higher business activity level.
6
<PAGE>
PATENTS, TRADEMARKS AND LICENSES
CTS maintains a program of obtaining and protecting U.S. and non-U.S.
patents and trademarks. CTS believes that the success of its business is not
materially dependent on the existence or duration of any patent, group of
patents or trademarks.
CTS licenses the manufacture of several electronic products to companies in
the United States and non-U.S. countries. In 1996, license and royalty income
was less than 1% of net sales. CTS believes that the success of its business is
not materially dependent upon any licensing arrangement where CTS is either the
licensor or licensee.
MAJOR CUSTOMERS
CTS' 15 largest customers represented about 62%, 61% and 62% of net sales in
1996, 1995 and 1994, respectively. Sales to General Motors Corporation ("GM")
represented more than 10% of CTS' net sales in each of the last three years
(ranging from 15% to 18% of net sales over such period). The loss of, or
reduction in, orders from GM could have a material adverse effect on CTS.
BACKLOG OF ORDERS
Backlog of orders does not necessarily provide an accurate indication of
present or future business levels for CTS. For many electronic components, the
period between receipt of orders and delivery is relatively short. For large
orders from major customers that may constitute backlog over an extended period
of time, production scheduling and delivery are subject to change or
cancellation by the customers on relatively short notice. At the end of 1996,
the Company's backlog of orders was $85.5 million, compared with $85.3 million
at the end of 1995.
The backlog of orders at the end of 1996 will generally be filled during the
1997 fiscal year.
GOVERNMENT CONTRACTS
CTS believes that about 7% of its net sales are associated with purchases by
the U.S. Government or non-U.S. governments, principally for defense and
aerospace applications. Because most CTS products procured through government
contractors and subcontractors are for military end uses, the level of defense
and aerospace market sales by CTS is dependent upon government budgeting and
funding of programs utilizing electronic systems.
Almost all CTS sales involving government purchases are to primary
government contractors or subcontractors. CTS is usually subject to contract
provisions permitting termination of the contract, usually with penalties
payable by the government; maintenance of specified accounting procedures;
limitations on and renegotiations of profits; priority production scheduling;
and possible penalties or fines against CTS for late delivery or substandard
quality. Such contract provisions have not previously resulted in material
uncertainties or disruptions for CTS.
COMPETITION
CTS competes with many domestic and non-U.S. manufacturers principally on
the basis of product features, price, technology, quality, reliability, delivery
and service. Most product lines of CTS encounter significant competition. The
number of significant competitors varies from product line to product line. No
single competitor competes with CTS in every product line, but many competitors
are larger and more diversified than CTS. Some competitors are divisions or
affiliates of customers. CTS is subject to competitive risks inherent to the
electronics industry such as shorter product life cycles and technical
obsolescence.
7
<PAGE>
Some customers have reduced or plan to reduce the number of suppliers while
increasing the volume of purchases from independent suppliers. Most customers
are demanding higher quality, reliability and delivery standards from CTS as
well as competitors. These trends may create opportunities for CTS while also
increasing the risk of loss of business to competitors.
The Company believes that it competes most successfully in custom products
manufactured to meet specific applications of major original equipment
manufacturers.
CTS believes that it has some advantages over certain competitors because of
its ability to apply a broad range of technologies and materials capabilities to
develop products for the special requirements of customers. CTS also believes
that it has an advantage over some competitors in its capability to sell a broad
range of products manufactured to relatively consistent standards of quality and
delivery. CTS believes that the relative breadth of its product lines and
relative consistency in quality and delivery across product lines is an
advantage to CTS in selling products to customers.
CTS believes that it is one of the largest manufacturers of automotive
throttle position sensors.
FINANCIAL INFORMATION ABOUT NON-U.S. AND DOMESTIC
OPERATIONS AND EXPORT SALES
Information about revenue from sales to unaffiliated customers, operating
earnings and identifiable assets, by geographic area, is contained in "Note
G--Business Segment and Non-U.S. Operations," page 16, of the CTS Corporation
1996 Annual Report, and is incorporated herein by reference.
In 1996, approximately 40% of net sales to unaffiliated customers, after
eliminations, were attributable to non-U.S. operations. This represents an
increase from 35% of net sales attributable to non-U.S. operations in 1995.
About 33% of total CTS assets, after eliminations, are non-U.S. Except for cash
and equivalents, a substantial portion of these assets cannot readily be
liquidated. CTS believes that the business risks attendant to its present
non-U.S. operations, though substantial, are normal risks for non-U.S.
businesses, including expropriation, currency controls and changes in currency
exchange rates and government regulations.
RESEARCH AND DEVELOPMENT ACTIVITIES
In 1996, 1995 and 1994, CTS expended $10.7, $8.0 and $6.2 million,
respectively, for research and development. Most CTS research and development
activities relate to new product and process developments or the improvement of
product materials. Many such research and development activities are for the
benefit of one or a limited number of customers or potential customers.
During 1996, the Company did not enter into any new, significant product
lines, but continued to introduce additional versions of existing products in
response to present and future customer requirements.
ENVIRONMENTAL PROTECTION LAWS
In complying with federal, state and local environmental protection laws,
CTS has modified certain manufacturing processes and expects to continue to make
additional modifications. Such modifications that have been performed have not
materially affected the capital expenditures, earnings or competitive position
of CTS.
Certain processes in the manufacture of the Company's current and past
products create hazardous waste by-products as currently defined by federal and
state laws and regulations. The Company has been notified by the U.S.
Environmental Protection Agency, state environmental agencies and, in some
cases, generator groups, that it is or may be a Potentially Responsible Party
(PRP) regarding hazardous waste remediation at several non-CTS sites. The
factual circumstances of each site are different; the Company
8
<PAGE>
has determined that its role as a PRP with respect to these sites, even in the
aggregate, will not have a material adverse effect on the Company's business or
financial condition, based on the following: 1) the Company's status as a DE
MINIMIS party; 2) the large number of other PRPs identified; 3) the
identification and participation of many larger PRPs who are financially viable;
4) defenses concerning the nature and limited quantities of materials sent by
the Company to certain of the sites; and 5) the Company's experience to-date in
relation to the determination of its allocable share. In addition to these
non-CTS sites, the Company has an ongoing practice of providing reserves for
probable remediation activities at certain of its manufacturing locations and
for claims and proceedings against the Company with respect to other
environmental matters. In the opinion of management, based upon presently
available information, either adequate provision for probable costs has been
made, or the ultimate costs resulting will not materially affect the
consolidated financial position or results of operations of the Company.
There are claims against the Company with respect to environmental matters
which the Company contests. In the opinion of management, based upon presently
available information, either adequate provision for potential costs has been
made, or the costs which ultimately might result will not materially affect the
consolidated financial position or results of operations of the Company.
EMPLOYEES
CTS employed an average of 3,815 persons during 1996. About 39% of these
persons were employed outside the United States at the end of 1996.
Approximately 390 employees in the United States were covered by collective
bargaining agreements as of December 31, 1996. One of the two collective
bargaining agreements covering these employees will expire in 1999. The other
agreement will expire in 2000.
ITEM 2. PROPERTIES
CTS operations or facilities are at the following locations. The owned
properties are not subject to material liens or encumbrances.
<TABLE>
<CAPTION>
LOCATION EXPIRES
- - ----------------------------------------------------------------------- ------------------
<S> <C> <C> <C>
Elkhart, IN............................................................ 521,813 Owned --
Berne, IN.............................................................. 248,726 Owned --
Singapore.............................................................. 158,926 Owned* --
Kaohsiung, Taiwan...................................................... 132,887 Owned* --
Streetsville, Ontario, Canada.......................................... 111,740 Owned --
West Lafayette, IN..................................................... 105,983 Owned --
Sandwich, IL........................................................... 94,173 Owned --
Brownsville, TX........................................................ 84,679 Owned --
Bentonville, AR........................................................ 72,000 Owned --
Glasgow, Scotland...................................................... 75,000 Owned --
New Hope, MN (Science Center Dr.)...................................... 55,000 Leased December 1998
Bangkok, Thailand...................................................... 53,000 Owned --
Matamoros, Mexico...................................................... 50,590 Owned* --
Baldwin, WI............................................................ 39,050 Owned --
Cokato, MN............................................................. 36,000 Owned --
Burlington, WI......................................................... 5,000 Leased April 1997
----------
TOTAL.................................................................. 1,844,567
</TABLE>
- - ------------------------
* Buildings are located on land leased under renewable leases.
The Company is currently seeking to sell some, or all, of the Brownsville,
Texas, manufacturing building. A portion of the Brownsville facility is
currently under a leasing arrangement which expires in 1999. The annual rental
income is approximately $60,000. Also, a portion of the New Hope, Minnesota,
9
<PAGE>
facility is currently under a sublease arrangement, which expires in 1998. The
annual rental income is approximately $90,000.
In 1994, the Company entered into a three-year lease of the Bangkok,
Thailand, property. In early 1997, this lease was extended to March 31, 1999.
The annual rental amount is approximately U.S. $355,000.
During 1995, a lease for an initial term of two years with a two-year
renewal option was finalized with an international semiconductor manufacturer
for one floor of the Singapore facility. The annual rental amount is
approximately U.S. $800,000.
The Company regularly assesses the adequacy of its manufacturing facilities
for manufacturing capacity, available labor and location to the markets and
major customers for the Company's products. CTS also reviews the operating costs
of its facilities and may from time to time relocate facilities or certain
manufacturing activities in order to achieve operating cost reductions and
improved asset utilization and cash flow.
ITEM 3. LEGAL PROCEEDINGS
Contested claims involving various matters, including environmental claims
brought by government agencies, are being litigated by CTS, both in legal and
administrative forums. In the opinion of management, based upon currently
available information, adequate provision for potential costs has been made, or
the costs which might ultimately result from such litigation or administrative
proceedings will not materially affect the consolidated financial position of
the Company or the results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no issue was submitted to a vote of CTS
shareholders.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The principal market for CTS common stock is the New York Stock Exchange.
Information relative to the high and low trading prices for CTS Common Stock for
each quarter of the past two years and the frequency and amount of dividends
declared during the previous two years can be located in "Shareholder
Information," page 2, of the CTS Corporation 1996 Annual Report, incorporated
herein by reference. On March 7, 1997, there were approximately 977 holders of
record of CTS common stock.
The Company intends to continue a policy of considering dividends on a
quarterly basis. The declaration of a dividend and the amount of any such
dividend is subject to earnings, anticipated working capital, capital
expenditure and other investment requirements, the financial condition of CTS
and such other factors as the Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data for CTS, for each of the previous five
fiscal years, is contained in the "Five-Year Summary," page 3, of the CTS
Corporation 1996 Annual Report, incorporated herein by reference.
Certain divestitures and closures of businesses and certain accounting
changes affect the comparability of information contained in the "Five-Year
Summary."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information about liquidity, capital resources and results of operations,
for the three previous fiscal years, is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations (1994-1996),"
pages 20-23, of the CTS Corporation 1996 Annual Report, incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements, meeting the requirements of Regulation
S-X, and the Report of Independent Accountants, are contained in pages 4-19 of
the CTS Corporation 1996 Annual Report, incorporated herein by reference.
Quarterly per share financial data is provided in "Shareholder Information,"
under the subheadings, "Quarterly Results of Operations" and "Per Share Data,"
on page 2 of the CTS Corporation 1996 Annual Report, and is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
YEAR FIRST
DIRECTORS ELECTED DIRECTOR
- - ------------------------------------------------------------------------------------------------- -----------------
<S> <C>
GERALD H. FRIELING, JR. 1982
Vice Chairman of the Board of Tokheim Corporation (a manufacturer of petroleum dispensing
equipment, systems and control devices); President of Frieling and Associates (a consulting
firm); Chairman of the Audit Committee and Member of the Executive and Compensation
Committees of CTS Corporation. During the past five years, Mr. Frieling, age 66, served as
Chairman of the Board and Chief Executive Officer of Tokheim Corporation, and in his present
capacity at Frieling and Associates.
ANDREW LOZYNIAK 1987
Chairman of the Board and President of Dynamics Corporation of America (a manufacturer of
electrical appliances and electronic devices, fabricated metal products and equipment, and
power and controlled environmental systems); Chairman of the Compensation Committee and
Member of the Executive and Audit Committees of CTS Corporation. During the past five years,
Mr. Lozyniak, age 65, has served in his present capacities at Dynamics Corporation of
America. Mr. Lozyniak serves as a director of Dynamics Corporation of America and Physicians
Health Services, Inc.
JOSEPH P. WALKER 1987
Chairman of the Board, President and Chief Executive Officer of CTS Corporation; Chairman of
the Executive Committee of CTS Corporation. During the past five years, Mr. Walker, age 58,
has served in his present capacities at CTS. Mr. Walker is a director of NBD Bank, N.A.
LAWRENCE J. CIANCIA 1990
Vice President, Growth and Development, of Uponor U.S., Inc. (a supplier of PVC pipe products,
specialty chemicals and PVC compounds); Member of the Audit and Compensation Committees of
CTS Corporation. During the past five years, Mr. Ciancia, age 54, has served as President,
Chief Executive Officer and Chief Operating Officer of Uponor ETI Company, formerly Concorde
Industries, Inc.
PATRICK J. DORME 1993
Vice President and Chief Financial Officer of Dynamics Corporation of America (a manufacturer
of electrical appliances and electronic devices, fabricated metal products and equipment, and
power and controlled environmental systems); Member of the Audit and Compensation Committees
of CTS Corporation. During the past five years, Mr. Dorme, age 61, has served in his present
capacities at Dynamics Corporation of America. Mr. Dorme serves as a director of Dynamics
Corporation of America.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and Executive Officers, and persons who own more than
ten percent of a registered class of the Corporation's equity securities, to
file with the Securities and Exchange Commission and the New York Stock Exchange
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity
12
<PAGE>
securities of the Corporation. Executive Officers, directors and greater than
ten percent shareholders are required by SEC regulation to furnish the
Corporation with copies of all Section 16(a) forms they file.
To the Corporation's knowledge, based solely on its review of the copies of
such reports furnished to the Corporation and written representations that no
other reports were required during the year ended December 31, 1996, all Section
16(a) filing requirements applicable to its Executive Officers, directors and
greater than ten percent beneficial owners were complied with.
EXECUTIVE OFFICERS
The individuals listed were elected as executive officers of CTS at the
annual meeting of the Board of Directors on April 26, 1996, and are expected to
serve as executive officers until the next annual meeting of the Board of
Directors, scheduled on April 25, 1997, at which time the election of officers
will be considered again by the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
- - ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Joseph P. Walker..................................... 58 Director, Chairman, President and Chief Executive
Officer
Philip T. Christ..................................... 65 Group Vice President
Stanley J. Aris...................................... 56 Vice President Finance and Chief Financial Officer
Jeannine M. Davis.................................... 48 Vice President, Secretary and General Counsel
James L. Cummins..................................... 41 Vice President Human Resources
James N. Hufford..................................... 57 Vice President Research, Development and Engineering
Donald R. Schroeder.................................. 48 Vice President Sales and Marketing
George T. Newhart.................................... 54 Corporate Controller
Gary N. Hoipkemier................................... 42 Treasurer
</TABLE>
Joseph P. Walker has served as Chairman of the Board, President and Chief
Executive Officer of CTS since 1988. Mr. Walker is a Director of NBD Bank, N.A.
Philip T. Christ has served as Group Vice President since 1990.
Stanley J. Aris has served as Vice President Finance and Chief Financial
Officer since 1992. Prior to joining CTS, Mr. Aris worked for two years as a
business consultant.
Jeannine M. Davis has served as Vice President, Secretary and General
Counsel since 1988.
James L. Cummins was elected Vice President Human Resources on February 25,
1994. Prior to this appointment, he served as Director, Human Resources, CTS
Corporation from 1991-1994.
James N. Hufford was elected Vice President Research, Development and
Engineering on February 17, 1995. During the four years prior to this
appointment, Mr. Hufford served as Manager and then Director of Corporate
Research, Development and Engineering for the Corporation.
Donald R. Schroeder was elected Vice President Sales and Marketing on
February 17, 1995. During the six years prior to this appointment, Mr. Schroeder
served as Business Development Manager for innovative and new technology for the
CTS Microelectronics business unit in West Lafayette, Indiana.
George T. Newhart has served as Corporate Controller since 1989.
Gary N. Hoipkemier has served as Treasurer since 1989.
13
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth annual and long-term compensation information
for each of the last three fiscal years of the Chief Executive Officer and the
four highest compensated Executive Officers whose salary and bonus for fiscal
year 1996 exceeded $100,000. Information which is not required to be disclosed
in the table is identified by the letters "N/R."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
--------------------------------- STOCK UNDERLYING ALL OTHER
SALARY BONUS(1) OTHER(2) AWARD(S)(3) OPTIONS COMPENSATION(4)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) ($)
- - ---------------------------------------- --------- --------- --------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph P. Walker(5,6)................... 1996 342,167 205,300 N/R 0 0 6,007
Chairman of the Board, President and 1995 327,411 196,400 N/R 0 10,000 11,270
Chief Executive Officer 1994 311,878 147,200 N/R 231,250 0 8,496
Philip T. Christ(6)..................... 1996 203,903 122,400 N/R 0 0 11,363
Group Vice President 1995 178,775 107,300 N/R 231,000 8,000 7,677
1994 168,301 90,200 N/R 0 5,000 7,326
Stanley J. Aris(6)...................... 1996 174,309 104,600 N/R 0 0 3,375
Vice President Finance and Chief 1995 168,078 100,800 N/R 37,375 8,500 5,994
Financial Officer 1994 160,105 75,600 N/R 57,813 3,000 4,991
Donald R. Schroeder(6).................. 1996 126,692 76,000 N/R 0 0 4,464
Vice President, Sales and Marketing 1995 119,481 71,700 N/R 0 5,500 39,428
1994 N/R N/R N/R N/R N/R N/R
James N. Hufford(6)..................... 1996 122,464 73,500 N/R 0 0 3,978
Vice President Research Development and 1995 115,126 69,100 N/R 37,375 5,750 4,520
Engineering 1994 N/R N/R N/R N/R N/R N/R
</TABLE>
- - ------------------------
(1) Includes bonuses paid pursuant to the CTS Corporation Management Incentive
Plan, as described in the Report of the Compensation Committee below.
(2) he value of other personal benefits received from the Corporation by the
named Executive Officers is below the reporting threshold for perquisites.
(3) At the end of fiscal year 1996, Joseph P. Walker held 6,000 restricted
shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and
Cash Bonus Plan, on which the transfer restrictions had not lapsed, the
market value of which at December 31, 1996 was $256,500. At the time that
such restrictions lapse, a cash bonus is paid in an amount equal to the
market value of the shares on the date the restriction lapses. For Joseph P.
Walker, the cash payments made pursuant to the CTS Corporation 1988
Restricted Stock and Cash Bonus Plan for the three identified years were:
1996-- $75,000; 1995 -$62,000; and 1994--$49,250.
At the end of fiscal year 1996, Philip T. Christ held 6,000 restricted
shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and
Cash Bonus Plan, on which the transfer restrictions had not lapsed, the
market value of which on December 31, 1996 was $256,500. For Philip T.
Christ, the cash payments made pursuant to the CTS Corporation 1988
Restricted Stock and Cash Bonus Plan for the three identified years were:
1996--$69,375; 1995--$24,200; and 1994--$19,150.
14
<PAGE>
At the end of fiscal year 1996, Stanley J. Aris held 2,300 restricted shares,
issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus
Plan, on which the transfer restrictions had not lapsed, the market value of
which on December 31, 1996 was $98,325. For Stanley J. Aris, the cash
payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash
Bonus Plan for the three identified years were: 1996--$26,925;
1995--$15,500; and 1994--$0.
At the end of fiscal year 1996, Donald R. Schroeder held 600 restricted
shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and
Cash Bonus Plan, on which the transfer restrictions had not lapsed, the
market value of which on December 31, 1996 was $25,650. For Donald R.
Schroeder, the cash payments made pursuant to the CTS Corporation 1988
Restricted Stock and Cash Bonus Plan for the three identified years were:
1996--$8,175; 1995--$7,425 and 1994--N/R.
At the end of fiscal year 1996, James N. Hufford held 800 restricted shares,
issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus
Plan, on which the transfer restrictions had not lapsed, the market value of
which on December 31, 1996 was $34,200. For James N. Hufford, the cash
payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash
Bonus Plan for the three identified years were: 1996--$8,175; 1995--$0 and
1994--N/R.
The restrictions on 20% of the shares awarded under this Plan lapse at the
end of each of the five years following acquisition of the shares. Regular
dividends are paid to holders of restricted stock awarded under this Plan.
This Plan includes a change of control provision which provides that, upon a
change of control of the Corporation, as defined in the Plan, all
restrictions on shares awarded under the Plan will lapse and cash bonuses
will be paid relative to those shares.
(4) Includes (i) the Corporation's matching contributions to the CTS Corporation
Retirement Savings Plan on behalf of the named Executive Officers as
follows: for Joseph P. Walker, 1996 - $3,375; 1995-- $3,465; and
1994--$3,465; for Philip T. Christ, 1996--$3,375; 1995--$3,465; and
1994--$3,465; for Stanley J. Aris, 1996--$3,375; 1995--$3,465; and 1994
-$3,465; for Donald R. Schroeder, 1996-- $3,375; 1995--$2,592; and
1994--N/R; and for James N. Hufford, 1996--$3,375; 1995 -$3,135; and
1994--N/R; and (ii) the premiums paid by the Corporation on the term life
insurance policies with face values greater than $50,000 provided to each of
the named Executive Officers as follows: for Joseph P. Walker, 1996--$0;
1995 -$5,310; and 1994--$5,031; for Philip T. Christ, 1996--$7,988;
1995--$4,212; and 1994--$3,861; for Stanley J. Aris, 1996 -$0; 1995--$2,529;
and 1994--$1,526; for Donald R. Schroeder, 1996--$1,089; 1995--$929; and
1994--N/R; and for James N. Hufford, 1996-- $603; 1995--$1,386; and
1994--N/R.
For Joseph P. Walker, also includes the imputed income value of the term life
insurance portion of the coverage under a "split dollar" life insurance
policy as follows: for 1996 -$2,632; for 1995--$2,495; and for 1994--$0.
For Donald R. Schroeder, also includes for 1995 employee relocation expenses
paid by the Corporation.
(5) Joseph P. Walker has executed an employment agreement with the Corporation,
which provides that for a period of three years, beginning June 24, 1994,
Mr. Walker will be employed by the Corporation as Chairman of the Board,
President and Chief Executive Officer, at an initial annual salary of
$319,725. Termination of Mr. Walker's employment agreement by the
Corporation, for reasons other than cause as defined in the agreement,
entitles Mr. Walker to receive his then current annual salary for the number
of months remaining under his agreement, the same to be paid in equal
monthly payments.
(6) The Corporation has entered into Indemnification Agreements with each of the
named Executive Officers and all other Executive Officers of the Corporation
which provide that the Corporation agrees to indemnify the officer, to the
fullest extent allowed by the bylaws of the Corporation and the Indiana
Business Corporation Law, in the event that he/she was or is made a party or
threatened to be
15
<PAGE>
made a party to any action, suit or proceeding by reason of the fact that
he/she is an officer of the Corporation. The indemnification agreements
provide indemnification for acts occurring prior to the execution of the
agreements.
STOCK OPTIONS
No options for CTS Corporation Common Stock were awarded to the named
Executive Officers in 1996.
OPTION EXERCISES IN 1996
AND FISCAL YEAR END 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISES REALIZED UNEXERCISABLE UNEXERCISABLE
- - --------------------------------------------- ----------------- ------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Joseph P. Walker............................. -0- -0- 2,500/7,500 $ 13,438/$40,313
Philip T. Christ............................. -0- -0- 6,100/8,900 $ 92,988/$87,263
Stanley J. Aris.............................. -0- -0- 5,300/8,200 $ 76,063/$70,875
Donald R. Schroeder.......................... -0- -0- 2,000/4,500 $ 18,325/$29,238
James N. Hufford............................. -0- -0- 2,100/4,650 $ 18,863/$30,044
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors, comprised of Lawrence
J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak,
submits this report of Executive Compensation to the Corporation's shareholders.
COMPENSATION PRINCIPLES AND PHILOSOPHY
The Compensation Committee of the Board of Directors has implemented
executive compensation policies and programs designed to achieve the following
objectives:
Attract and retain key executives and managers
Align the financial interests of key executives and managers with those of
the shareholders of the Corporation
Reward individual performance
Reward Corporate performance
These objectives are achieved through a combination of annual and longer
term compensation arrangements including base salary, annual cash incentive
compensation, and long-term incentive compensation through stock options and
restricted stock awards, in addition to medical, pension and other benefits
available to employees in general.
The four principal components of the Executive Officer Compensation package
at CTS Corporation are: base salary, the CTS Corporation Management Incentive
Plan, the CTS Corporation Stock Option Plans and the CTS Corporation 1988
Restricted Stock and Cash Bonus Plan.
16
<PAGE>
BASE SALARY
The base salary of the Executive Officers of CTS Corporation is determined
in the same manner as the salaries of all exempt salaried employees of the
Corporation. A job classification system is utilized to determine appropriate
salary ranges for each Executive Officer position, based on qualifications, job
responsibilities and market factors. The goal of CTS Corporation's job
classification system is that Executive Officers, and employees in general, are
paid a salary which is commensurate with their qualifications, duties and
responsibilities and which is competitive in the market place. The Corporation
retained Towers Perrin to assess the current salaries and job classifications of
the Executive Officers compared with market data for similar positions at
similar companies and to provide periodic updates upon request.
The report from Towers Perrin indicated that the salaries of the
Corporation's Executive Officers are generally below competitive median
salaries. When the financial performance of the Corporation permits, salary
adjustments above the Corporation's salary budget for all exempt salaried
employees are considered for those in the lower portion of their salary range,
if individual performance warrants such consideration.
During each of the past three years, the named Executive Officers have been
granted salary increases in the same range established for all exempt salaried
employees of the Corporation, except that on occasion, certain officer salaries
were increased at higher rates in response to competitive salary information
provided by Towers Perrin.
CTS CORPORATION MANAGEMENT INCENTIVE PLAN
All Executive Officers of the Corporation are participants in the CTS
Corporation Management Incentive Plan, which provides cash compensation
incentives, based on the financial performance of the Corporation. For 1996,
financial performance was measured on the basis of achieving target levels of
return on assets (ROA). When Plan financial objectives are met at the 100%
level, each of the named Executive Officers is eligible for a bonus in an amount
equal to 40% of his/her base salary for the subject year. Maximum incentive
payments under this Plan range from 10% to 60% of the annual salary of the Plan
participants.
For 1996, the Corporation achieved 150% of its ROA target under the 1996 CTS
Corporation Management Incentive Plan. Accordingly, the named Executive Officers
received formula bonuses under the Plan equal to 60% of their base salaries.
For 1995, the Corporation achieved 150% of its ROA target under the 1995 CTS
Corporation Management Incentive Plan. Accordingly, the named Executive Officers
received formula bonuses under the Plan equal to 60% of their base salaries.
This Plan also authorizes the Compensation Committee to grant discretionary
bonuses when the Committee deems it appropriate to do so. No significant
discretionary bonuses have been paid to the named Executive Officers during any
of the three years for which compensation is disclosed.
CTS CORPORATION 1996 STOCK OPTION PLAN
The Compensation Committee administers the CTS Corporation 1996 Stock Option
Plan and predecessor stock option plans and determines to whom options will be
granted, the dates of such option grants, the number of shares subject to
option, the option price, option periods and option terms. No options were
granted to Executive Officers of the Corporation during 1996 under these Plans.
CTS CORPORATION 1988 RESTRICTED STOCK AND CASH BONUS PLAN
The CTS Corporation 1988 Restricted Stock and Cash Bonus Plan was adopted by
the shareholders in 1989 for the purpose of providing incentives to selected key
employees who contribute or are expected to
17
<PAGE>
contribute materially to the success of the Corporation, and to closely align
the financial interests of these key employees with those of the Corporation's
shareholders. The participants are selected and their level of participation
determined by the Compensation Committee.
Shares acquired by participants pursuant to the Plan are subject to
restriction that, during the period of five years after the date of acquisition,
the participant may not sell, transfer or otherwise dispose of such shares as to
which the restrictions shall not have lapsed. The restrictions lapse as to 20%
of the shares acquired pursuant to the Plan at the end of each year following
the acquisition of the shares. When the restrictions lapse, a cash bonus is paid
to the participant equal to the fair market value of such shares as of the date
of such lapse. In no event may the cash bonuses payable to any participant be
greater than twice the fair market value of such shares on the date they were
originally acquired.
Dividends are paid to participants in this Plan on all shares awarded to
them under the Plan. The Plan also provides for appropriate adjustment to the
number of shares awarded in the event of a stock dividend, stock split,
recapitalization, merger, combination or exchange of shares for other
securities.
No awards under the Plan were made to the named Executive Officers in 1996.
The number of shares previously awarded to the named Executive Officers, their
market value, vesting schedules, and bonuses paid relative thereto, are set
forth in the Summary Compensation Table above and the footnotes thereto.
DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits to
$1,000,000 per person the amount that the Corporation may deduct for
compensation paid to any of its most highly compensated officers in any year
after 1993. The levels of compensation paid to the Corporation's Executive
Officers do not exceed this limit. The Compensation Committee currently intends
for all compensation paid to its Executive Officers to be tax deductible to the
Company pursuant to Section 162(m).
Respectfully Submitted,
CTS CORPORATION COMPENSATION
COMMITTEE
Lawrence J. Ciancia, Patrick J. Dorme,
Gerald H. Frieling, Jr. and Andrew
Lozyniak
DIRECTOR COMPENSATION
Each member of the Board of Directors, who is not an employee or an officer
of the Corporation, is paid an annual retainer of $13,000 per year for service
on the Board of Directors, a meeting fee of $1,000 for each meeting of the Board
of Directors attended in person, and $500 for each meeting of the Board of
Directors attended by telephone. In addition, each member of the Executive
Committee and each member of the Compensation Committee is entitled to receive
an annual retainer of $500, and each member of the Audit Committee is entitled
to receive an annual retainer of $1,000, together with a meeting fee of $1,000
for attending each meeting of a committee of which he is a member, except that
he is entitled to receive $500 per meeting for a second or subsequent meeting
held on the same day and for any such meetings attended by telephone.
On April 27, 1990 the Corporation adopted the CTS Corporation Stock
Retirement Plan for Nonemployee Directors of the Corporation (the "Plan"). Under
the Plan, separate accounts are opened by the Corporation in the names of
nonemployee directors. On January 1 of each year, starting in 1991, a deferred
stock account in the name of each nonemployee director is credited with 100
Common Stock Units if said director was a nonemployee director of the
Corporation on the last day of the immediately preceding calendar year or ceased
to be a director during such preceding calendar year by reason of his
18
<PAGE>
retirement, disability or death. In addition, on May 1, 1990, the Corporation
credited to the deferred stock account of each such director 50 Common Stock
Units for each complete calendar year of his service to the Corporation as a
nonemployee director prior to May 1, 1990. Each deferred stock account will also
be credited with Common Stock Units when credits equivalent to cash dividends on
the shares in an account aggregate an amount equal to the value of a share of
Common Stock on a dividend payment date. All deferred Common Stock Units in a
director's account will be distributed in Common Stock as of the January 1st
after the director leaves the Board of Directors. Until such time, the
Corporation's obligation under the Plan is an unsecured promise to deliver
shares of Common Stock. No Common Stock will be held in trust or as a segregated
fund because of the adoption of the Plan. Four members of the Board of Directors
are currently eligible to participate in the Plan. The Corporation expensed
$17,100 in 1996 in respect of Common Stock Units credited to the accounts of the
eligible directors as a group pursuant to the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table includes information with respect to all persons and
groups known to the Corporation to be beneficial owners of more than five
percent of the Common Stock of the Corporation on March 7, 1997. The number of
shares and the percent of class held by each director and director-nominee is
also stated. Additionally, the number of shares and the percent of class held by
each executive officer of the Corporation included in the Summary Compensation
Table set forth under the caption "Executive Compensation" below is included,
together with the total number of shares and percent of class held by all
directors and officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP ON
BENEFICIAL OWNER MARCH 7, 1997 (1) PERCENT OF CLASS
- - ---------------------------------------------------------------------- ------------------------ ----------------
<S> <C> <C>
Dynamics Corporation of America....................................... 2,303,100(2) 44.07
475 Steamboat Road
Greenwich, CT 06830
The Gabelli Group, Inc................................................ 1,212,100(3) 23.19
GAMCO Investors, Inc.,
and Gabelli Funds, Inc.
655 Third Avenue
New York, NY 10017
Gerald H. Frieling, Jr................................................ 200,150(4) 3.83
Lawrence J. Ciancia................................................... 199,650(4) 3.82
Patrick J. Dorme...................................................... 199,150(4, 10) 3.81
Andrew Lozyniak....................................................... 199,150(4, 10) 3.81
Joseph P. Walker...................................................... 26,712(5) *
Philip T. Christ...................................................... 19,285(6) *
Stanley J. Aris....................................................... 11,114(7) *
Donald R. Schroeder................................................... 10,341(8) *
James N. Hufford...................................................... 4,515(9) *
13 Directors and Officers as a group.................................. 295,316(4, 11) 5.65
</TABLE>
19
<PAGE>
- - ------------------------
* Less than 1%.
(1) Information with respect to beneficial ownership is based upon information
furnished by each shareholder or contained in filings made with the
Securities and Exchange Commission. Except where otherwise indicated, the
shareholders listed in the table have sole voting and investment authority
with respect to the shares owned by them.
(2) Includes 1,020,000 shares for which voting authority was not granted by a
vote of the independent shareholders of the Corporation at the 1987 Annual
Meeting of Shareholders, pursuant to the Control Share Acquisition Chapter
of the Indiana Business Corporation Law.
(3) Includes 215,500 shares held by Gabelli Funds, Inc., and 996,600 shares held
by GAMCO Investors, Inc., which were reported on a joint Schedule 13D filed
March 6, 1996, the most recent filing by such Reporting Persons. According
to the Schedule 13D, each of the Reporting Persons and Covered Persons has
the sole power to vote or direct the vote and sole power to dispose or to
direct the disposition of the Securities reported for it, either for its own
benefit or for the benefit of its investment clients or its partners, as the
case may be, except that GAMCO Investors, Inc. does not have authority to
vote 173,000 of the reported shares, and except that Gabelli Funds, Inc. has
sole dispositive and voting power with respect to the 215,500 reported
shares held by the Funds, so long as the aggregate voting interest of all
joint filers does not exceed 25% of the issuer's total voting interest and,
in that event, the respective Proxy Voting Committee of each fund (other
than The Gabelli Growth Fund) will vote the shares held by that Fund; except
that, at any time, the Proxy Voting Committee of each such Fund may take and
exercise in its sole discretion the entire voting power with respect to the
shares held by such Fund under special circumstances such as regulatory
considerations; and that the power of Mr. Gabelli and Gabelli Funds, Inc. is
indirect with respect to securities beneficially owned directly by other
Reporting Persons.
(4) 199,150 of the shares shown as owned beneficially by each of Mr. Ciancia,
Mr. Dorme, Mr. Frieling, Mr. Lozyniak and 13 directors and officers as a
group are the same shares, which shares are held by The Northern Trust
Company as Trustee of the CTS Corporation Employee Benefit Plans Master
Trust (the "Trust"). The Compensation Committee of the Board of Directors
has voting and investment authority over said shares. The present members of
the Compensation Committee are Lawrence J. Ciancia, Patrick J. Dorme, Gerald
H. Frieling, Jr., and Andrew Lozyniak, who were appointed by the Board of
Directors of CTS Corporation.
(5) Includes 4,012 shares attributed to Joseph P. Walker's account in the CTS
Corporation Retirement Savings Plan, as shown as of December 31, 1996, the
most recent annual report of the Plan. The number of shares attributed to
Mr. Walker's account may not reflect shares that have accrued to his account
since the filing of the Plan's last annual report. Also includes 2,500
shares subject to options exercisable on March 7, 1997, or which become
exercisable within 60 days thereafter.
(6) Includes 1,685 shares attributed to Philip T. Christ's account in the CTS
Corporation Retirement Savings Plan, as shown as of December 31, 1996, the
most recent annual report of the Plan. The number of shares attributed to
Mr. Christ's account may not reflect shares that have accrued to his account
since the filing of the Plan's last annual report. Also includes 6,600
shares subject to options exercisable on March 7, 1997, or which become
exercisable within 60 days thereafter.
(7) Includes 314 shares attributed to Stanley J. Aris' account in the CTS
Corporation Retirement Savings Plan, as shown as of December 31, 1996, the
most recent annual report of the Plan. The number of shares attributed to
Mr. Aris' account may not reflect shares that have accrued to his account
since the filing of the Plan's last annual report. Also includes 5,800
shares subject to options exercisable on March 7, 1997, or which become
exercisable within 60 days thereafter.
20
<PAGE>
(8) Includes 6,341 shares attributed to Donald R. Schroeder's account in the CTS
Corporation Retirement Savings Plan, as shown as of December 31, 1996, the
most recent annual report of the Plan. The number of shares attributed to
Mr. Schroeder's account may not reflect shares that have accrued to his
account since the filing of the Plan's last annual report. Also includes
2,000 shares subject to options exercisable on March 7, 1997, or which
become exercisable within 60 days thereafter.
(9) Includes 1,015 shares attributed to James N. Hufford's account in the CTS
Corporation Retirement Savings Plan, as shown as of December 31, 1996, the
most recent annual report of the Plan. The number of shares attributed to
Mr. Hufford's account may not reflect shares that have accrued to his
account since the filing of the Plan's last annual report. Also includes
2,100 shares subject to options exercisable on March 7, 1997, or which
become exercisable within 60 days thereafter. Also includes 400 shares held
in a trust for his spouse, of which he disclaims beneficial ownership.
(10) Messrs. Dorme and Lozyniak are directors of Dynamics Corporation of
America.
(11) Includes 29,400 shares subject to options exercisable on March 7, 1997, or
which become exercisable within 60 days thereafter.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dynamics Corporation of America (DCA) owned 2,303,100 (44.1%) of the
Company's outstanding common stock as of December 31, 1996. CTS purchased
products from DCA totaling $157,000 in 1996, $143,000 in 1995 and $233,000 in
1994, principally consisting of certain component parts used by CTS in the
manufacture of frequency control devices. CTS had no sales to DCA in 1996, and
minimal sales in 1995 and 1994.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of CTS Corporation and
subsidiaries included in the annual report of the registrant to its shareholders
for the year ended December 31, 1996, are incorporated by reference in Item 8:
Consolidated balance sheets--December 31, 1996, and December 31, 1995
Consolidated statements of earnings--Years ended December 31, 1996,
December 31, 1995, and December 31, 1994
Consolidated statements of shareholders' equity--Years ended December 31,
1996, December 31, 1995, and December 31, 1994
Consolidated statements of cash flows--Years ended December 31, 1996,
December 31, 1995, and December 31, 1994
Notes to Consolidated Financial Statements
The following consolidated financial statement schedules of CTS Corporation
and subsidiaries, are included in item 14(d):
Schedule II--Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have
been omitted because they are inapplicable, not required or the
information is included in the consolidated financial statements or notes
thereto.
(a)(3) EXHIBITS
<TABLE>
<C> <S>
(3)(a) Articles of Incorporation, as amended April 16, 1973, previously filed as
exhibit (3)(a) to the Company's Form 10-K for 1987, and incorporated herein by
reference.
(3)(b) Bylaws, as amended and effective June 25, 1992, filed herewith.
(10)(a) Employment agreement dated June 24, 1994, between CTS and Joseph P. Walker,
filed herewith.
(10)(b) Prototype indemnification agreement, with Lawrence J. Ciancia, Patrick J. Dorme,
Gerald H. Frieling, Jr., Andrew Lozyniak, Joseph P. Walker, Philip T. Christ,
Jeannine M. Davis, George T. Newhart and Gary N. Hoipkemier, filed as exhibit
(10)(b) to the Company's Form 10-K for 1991, and incorporated herein by
reference.
(10)(c) CTS Corporation 1982 Stock Option Plan, as amended February 24, 1989, previously
filed as exhibit to the Company's Form 10-K for 1989, and incorporated herein by
reference.
(10)(d) CTS Corporation 1986 Stock Option Plan, approved by the shareholders at the
reconvened annual meeting on May 30, 1986. The CTS Corporation 1986 Stock Option
Plan is contained in Exhibit 4 to Registration Statement No. 33-27749, effective
March 23, 1989, and is incorporated herein by reference.
</TABLE>
22
<PAGE>
<TABLE>
<C> <S>
(10)(e) CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, as adopted by the CTS
Board of Directors on December 16, 1988, and approved by shareholders at the
1989 annual meeting of shareholders on April 28, 1989. The CTS Corporation 1988
Restricted Stock and Cash Bonus Plan is contained in Appendix A, pages 11-15, of
the 1989 Proxy Statement for the annual meeting of shareholders held April 28,
1989, under the caption "CTS Corporation 1988 Restricted Stock and Cash Bonus
Plan," previously filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
(10)(f) CTS Corporation 1996 Stock Option Plan, approved by the shareholders at the
annual meeting on April 26, 1996. The CTS Corporation 1996 Stock Option Plan is
contained in Exhibit 4 to Registration Statement No. 333-5730, effective October
3, 1996, and is incorporated herein by reference.
(10)(g) Prototype indemnification agreement, with Stanley J. Aris, James L. Cummins,
James N. Hufford and Donald R. Schroeder, filed herewith.
(13) CTS Corporation 1996 Annual Report, filed herewith.
(21) Subsidiaries of CTS Corporation, filed herewith.
(23) Consent of Price Waterhouse to incorporation by reference of this Annual Report
on Form 10-K for the fiscal year 1996 to Registration Statement 33-27749 on Form
S-8 and Registration Statement 333-5730, filed herewith.
</TABLE>
INDEMNIFICATION UNDERTAKING
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 33-27749 (filed March 23, 1989)and 333-5730 (filed October 3, 1996):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provision, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date August 13, 1997 By: /s/ STANLEY J. ARIS
-----------------------------------------
Stanley J. Aris,
Vice President Finance
and Chief Financial Officer
</TABLE>
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.
<TABLE>
<S> <C> <C>
Date August 13, 1997 By: /s/ LAWRENCE J. CIANCIA
-------------------------------------------
Lawrence J. Ciancia,
Director
Date August 13, 1997 By: /s/ PATRICK J. DORME
-------------------------------------------
Patrick J. Dorme
Director
Date August 13, 1997 By: /s/ GERALD H. FRIELING, JR.
-------------------------------------------
Gerald H. Frieling, Jr.,
Director
Date August 13, 1997 By: /s/ ANDREW LOZYNIAK
-------------------------------------------
Andrew Lozyniak,
Director
Date August 13, 1997 By: /s/ JOSEPH P. WALKER
-------------------------------------------
Joseph P. Walker,
Director
Date August 13, 1997 By: /s/ GEORGE T. NEWHART
-------------------------------------------
George T. Newhart,
Corporate Controller and principal
accounting officer
Date August 13, 1997 By: /s/ JEANNINE M. DAVIS
-------------------------------------------
Jeannine M. Davis,
Vice President, Secretary and General
Counsel
</TABLE>
24
<PAGE>
PRICE WATERHOUSE LLP
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of CTS Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 27, 1997, appearing on page 19 of the CTS Corporation 1996 Annual
Report incorporated by reference in this Annual Report on Form 10-K/A also
included an audit of the Financial Statement Schedule listed in item 14(a) of
this Form 10-K/A. 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.
PRICE WATERHOUSE LLP
Chicago, Illinois
January 27, 1997
S-1
<PAGE>
CTS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
CLASSIFICATION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) OF PERIOD
- - ------------------------------------------- --------------- ------------- --------------- --------------- -----------------
Year ended December 31, 1996:
Allowance for doubtful receivables....... $ 774 $ 239 $ 0 $ 391 $ 622
Year ended December 31, 1995: Allowance for
doubtful receivables..................... $ 869 $ 1 $ 0 $ 96 $ 774
Year ended December 31, 1994: Allowance for
doubtful receivables..................... $ 709 $ 277 $ 0 $ 117 $ 869
</TABLE>
- - ------------------------
(1) Uncollectible accounts written off.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
(3)(a) Articles of Incorporation, as amended April 16, 1973, previously filed as exhibit
(3)(a) to the Company's Form 10-K for 1987, and incorporated herein by reference.
(3)(b) Bylaws, as amended and effective June 25, 1992, filed herewith.
(10)(a) Employment agreement dated June 24, 1994, between CTS and Joseph P. Walker, filed
herewith.
(10)(b) Prototype indemnification agreement, with Lawrence J. Ciancia, Patrick J. Dorme,
Gerald H. Frieling, Jr., Andrew Lozyniak, Joseph P. Walker, Philip T. Christ,
Jeannine M. Davis, George T. Newhart and Gary N. Hoipkemier, filed as exhibit
(10)(b) to the Company's Form 10-K for 1991, and incorporated herein by reference.
(10)(c) CTS Corporation 1982 Stock Option Plan, as amended February 24, 1989, previously
filed as exhibit (10)(d) to the Company's Form 10-K for 1989, and incorporated
herein by reference.
(10)(d) CTS Corporation 1986 Stock Option Plan, approved by the shareholders at the
reconvened annual meeting on May 30, 1986. The CTS Corporation 1986 Stock Option
Plan is contained in Exhibit 4 to Registration Statement No. 33-27749, effective
March 23, 1989, and is incorporated herein by reference.
(10)(e) CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, as adopted by the CTS
Board of Directors on December 16, 1988, and approved by shareholders at the 1989
annual meeting of shareholders on April 28, 1989. The CTS Corporation 1988
Restricted Stock and Cash Bonus Plan is contained in Appendix A, pages 11-15, of
the 1989 Proxy Statement for the annual meeting of shareholders held April 28,
1989, under the caption "CTS Corporation 1988 Restricted Stock and Cash Bonus
Plan," previously filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
(10)(f) CTS Corporation 1996 Stock Option Plan, approved by the shareholders at the annual
meeting on April 26, 1996. The CTS Corporation 1996 Stock Option Plan is contained
in Exhibit 4 to Registration Statement No. 333-5730, effective October 3, 1996, and
is incorporated herein by reference.
(10)(g) Prototype indemnification agreement, with Stanley J. Aris, James L. Cummins, James
N. Hufford and Donald R. Schroeder, filed herewith.
(13) CTS Corporation 1996 Annual Report.
(21) Subsidiaries of CTS Corporation.
(23) Consent of Price Waterhouse to incorporation by reference of this Annual Report on
Form 10-K for the fiscal year 1996 to Registration Statement 33-27749 on Form S-8
and Registration Statement 333-5730.
</TABLE>
<PAGE>
EXHIBIT 3(b)
CTS CORPORATION
BYLAWS
(AS AMENDED JUNE 25, 1992)
ARTICLE I.
OFFICERS
The officers of this corporation shall be a President, one or more Vice
Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors
may also elect one or more Assistant Secretaries, Assistant Treasurers and
Assistant Controllers, and such other officers as may be determined, from time
to time, by the Board of Directors.
The President shall be a director of this corporation. Any offices, other
than those of President and Secretary, may be held by the same person.
The officers of this corporation shall be elected by the Board of Directors
at the annual meeting of the Board of Directors for the term of one year and
until their successors have been elected and qualified. Any vacancy occurring
among the above offices may be filled for the remainder of the term by the Board
of Directors at any regular or special meeting, and officers so elected shall
hold office until the next annual meeting of the Board of Directors and until
their successors have been elected and qualified.
ARTICLE II.
BOARD OF DIRECTORS ORGANIZATION
SECTION 1. The Board of Directors shall elect, from the members of the
Board of Directors who are not officers of the corporation, an Audit Committee
consisting of not less than three members. The members of the Audit Committee
shall be elected at each annual meeting of the Board of Directors to serve,
while qualified, at the pleasure of the Board of Directors, or if longer, for
one year and until their successors have been elected and qualified.
The Audit Committee shall be responsible directly to the Board of Directors
and, in addition to such authority and duties specifically delegated by the
Board of Directors, shall have the authority to review the conduct and the
report of the independent financial audit of the corporation and shall report to
the Board of Directors the findings, conclusions and recommendations of the
Audit Committee regarding the conduct and report of the independent financial
audit.
Unless the Board of Directors designates a Chairman, a majority of the
members of the Audit Committee may designate one member of the Audit Committee
as Chairman of the Audit Committee to preside at all meetings of the Audit
Committee.
SECTION 2. The Board of Directors shall elect from members of the Board of
Directors, who are not officers of the corporation, a Compensation Committee
consisting of not less than three members. The members of the Compensation
Committee shall be elected at each annual meeting of the Board of Directors to
serve, while qualified, at the pleasure of the Board of Directors, or if longer,
for one year and until their successors have been elected and qualified.
1
<PAGE>
The Compensation Committee shall be responsible directly to the Board of
Directors and, in addition to such authority and duties specifically delegated
by the Board of Directors, shall have authority to review, and make
recommendations to the Board of Directors regarding, the compensation, including
fringe benefits and stock options, for the officers of this corporation.
Unless the Board of Directors designates a Chairman, a majority of the
members of the Compensation Committee may designate one member of the
Compensation Committee as Chairman of the Compensation Committee to preside at
all meetings of the Compensation Committee.
SECTION 3. The Board of Directors shall designate from members of the Board
of Directors, a Chairman of the Board, who shall preside at meetings of
stockholders and of the Board of Directors unless the Chairman shall designate
an officer or other director of the corporation to do so. The Chairman of the
Board shall have such additional authority as granted by the Board of Directors
and shall perform such other duties as are assigned from time to time by the
Board of Directors.
ARTICLE III.
CORPORATE OFFICERS
SECTION 1. The President shall exercise specific authority and supervision
over, and shall be responsible for the direction of, the business and affairs of
the corporation, subject to the direction of the Board of Directors. In
addition, the President may be designated the Chief Executive Officer and, if
so, shall have the additional authority and duties and responsibilities
specified in these bylaws. The President shall also perform such other duties as
may be assigned from time to time, by the Board of Directors. The President
shall perform all the duties of the Chairman of the Board in the absence or
during any disability of the Chairman.
SECTION 2. The Board of Directors shall designate the Chairman of the Board
or the President as the Chief Executive Officer of the corporation. In addition
to other duties as an officer, the Chief Executive Officer shall exercise
general authority and supervision over, and shall be responsible for, management
of the business and affairs of the corporation, subject to the direction of the
Board of Directors.
The Chief Executive Officer shall determine the organization of the officers
of the corporation, shall designate to whom such officers shall report and be
responsible, and subject to the direction of the Board of Directors shall
determine their respective duties and responsibilities.
SECTION 3. Each Vice President shall perform such duties as may be assigned
from time to time by the President and shall report to and be responsible to
such officer as the President shall designate. Each Vice President shall also
have such additional authority and shall perform such other duties assigned from
time to time, by the Board of Directors.
The Board of Directors may designate a word or words to be placed before or
after the title of Vice President to indicate organizational or functional
authority or duty.
SECTION 4. The Secretary shall attend all meetings of the stockholders and
Board of Directors and all committees, and shall keep minutes of each meeting.
The Secretary shall give proper notice of all meetings of stockholders,
directors and committees, required in these bylaws. The Secretary shall maintain
proper records of ownership and transfer of the stock of this corporation. The
Secretary shall have the custody of, and affix, the seal of the corporation and
perform such other duties as may be assigned from time to time by the Board of
Directors.
SECTION 5. The Vice President Finance/Chief Financial Officer, shall be
responsible for the financial affairs of the corporation, shall submit to the
annual meeting of stockholders a statement of the financial condition of the
corporation, and whenever required by the Board of Directors, shall give account
of all transactions and of the financial condition of the corporation. The
Treasurer shall report to the Vice
2
<PAGE>
President Finance/Chief Financial Officer. The Treasurer shall establish and
maintain appropriate banking relations and arrangements on behalf of the
corporation. The Treasurer shall receive and have custody of, and shall
disburse, all moneys of the corporation, and in the name of the corporation,
shall deposit all moneys in, and disburse all moneys from, such bank, or banks,
as the Board of Directors shall designate, from time to time, as the
depositories of the corporation. The Treasurer shall perform such other duties
and render such services for, and on behalf of, the corporation as may be
assigned from time to time by the Vice President Finance, Chief Financial
Officer.
SECTION 6. The Controller shall be the accounting officer of the
corporation and shall formulate accounting procedures to record expenses,
losses, gains, assets and liabilities of the corporation, to report and
interpret results of operations of the corporation and to assure protection of
the assets of the corporation. The Controller shall prepare and submit to the
Board of Directors and the Chief Executive Officer such periodic balance sheets,
profit and loss statements and other financial statements as may be required to
keep such persons currently informed of the operations and the financial
condition of this corporation. The Controller shall perform such other duties
assigned from time to time by the Chief Executive Officer.
SECTION 7. The Assistant Secretary or Secretaries, Assistant Treasurer or
Treasurer or Treasurers, and the Assistant Controller or Controllers shall
perform the duties of the Secretary, of the Treasurer, and of the Controller,
respectively, in the absence of those officers and shall have such further
authority and perform such other duties as may be assigned.
ARTICLE IV.
DUTIES OF OFFICERS DELEGATED
In the absence or disability of any officer of this corporation, the Board
of Directors may delegate the powers and duties of any such officer to any other
officer or director of this corporation for such period of time as said Board of
Directors may determine.
ARTICLE V.
BONDS
The Board of Directors or the Chief Executive Officer may require any
officer, agent, or employee of the corporation to furnish the corporation a bond
for the faithful performance of duties and for the accounting of all moneys,
securities, records, or other property of the corporation coming into the hands
of such agent or employee.
ARTICLE VI.
MEETINGS OF STOCKHOLDERS
SECTION 1. Meetings of the stockholders of this corporation shall be held
at the place, either within or without the State of Indiana, stated in the
notice of said meeting.
SECTION 2. The annual meeting of stockholders of the corporation shall be
held on the last Friday in April of each year or at such other time established
for such meeting by 80% of the directors.
SECTION 3. A complete list of the stockholders entitled to vote at any
stockholders' meeting, arranged in alphabetical order and containing the address
and number of shares of stock so held by each stockholder who is entitled to
vote at said meeting, shall be prepared by the Secretary and shall be subject to
the inspection by any stockholder at the time and place of an annual meeting and
at the principal office of the corporation for five (5) days prior thereto.
3
<PAGE>
SECTION 4. At all stockholders' meetings a quorum shall consist of a
majority of all of the shares of stock outstanding and entitled by the Articles
of Incorporation to vote on the business to be transacted at said meeting, but a
meeting composed of less than a quorum may adjourn the meeting from day to day
thereafter or until some future time.
SECTION 5. At the annual meeting of the stockholders, there shall be
elected, by plurality vote, a Board of Directors, consisting of five (5)
members, who shall hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified.
SECTION 6. At all stockholders' meetings, each stockholder shall be
entitled to one (1) vote in person or by proxy for each share of common stock
registered in the stockholder's name on the books of the corporation as of the
record date which shall be as fixed by the Board of Directors and entitled, by
the Articles of Incorporation, to vote on the business to be transacted at said
meeting.
SECTION 7. The stockholders may be represented at any meeting thereof by
their duly appointed Attorney-in-Fact provided the proxy so appointing said
Attorney-in-Fact shall be filed with the Secretary prior to the meeting.
SECTION 8. Special meetings of the stockholders of this corporation may be
called by the Chairman of the Board, by the President, by the Board of
Directors, or by the stockholders holding not less than one-fourth of all of the
shares of stock outstanding and entitled, by the Articles of Incorporation, to
vote on the business to be transacted at said special meeting whenever in the
opinion of such person or body such meeting is necessary.
Whenever a special meeting of the stockholders shall be called by the
stockholders, the call shall be delivered to the Secretary who shall issue the
notice of said special meeting which is required to be given.
SECTION 9. Written notice of each meeting of the stockholders shall be
given by the Secretary to each stockholder of record at least ten (10) days
prior to the time fixed for the holding of such meeting; said notice shall state
the place, day and hour and the purpose for which said meeting is called, and
said notice shall be addressed to the last known place of residence of each
stockholder as shown by the stock books of this corporation. The ten (10) days
shall be computed from the date upon which said notice is deposited in the
mails.
SECTION 10. Notice of any stockholders' meeting may be waived in writing by
any stockholder if the waiver sets forth in reasonable detail the purpose or
purposes for which the meeting is called and the time and place thereof.
SECTION 11. No shares of stock shall be voted at any annual or special
meeting of stockholders upon which any installment is due and unpaid, which are
owned by this corporation or which have been transferred within ten (10) days
before the date fixed for said meeting.
ARTICLE VII.
DIRECTORS
SECTION 1. The property and business affairs of this corporation shall be
managed and controlled by a Board of Directors consisting of five (5) members,
who shall be elected at the annual or a special meeting of the stockholders and
shall hold office for a term of one year and until their successors are elected
and qualified. In case of the failure to hold the annual meeting on the date
fixed herein for the same to be held, the directors shall hold over until the
next annual meeting, unless prior to said meeting a special meeting of the
stockholders for the purpose of electing directors has been held.
SECTION 2. Any vacancy occurring in the Board of Directors caused by
resignation, death or other incapacity, shall be filled by majority vote of the
remaining members of the Board until the next annual
4
<PAGE>
meeting of stockholders; provided, however, that if the vote of the remaining
members of the Board of Directors shall result in a tie, such vacancy shall be
filled by the stockholders at the next annual meeting of the stockholders or at
a special meeting of the stockholders called for that purpose.
SECTION 3. Any vacancy occurring in the Board of Directors, caused by an
increase in the number of directors, shall be filled by a majority vote of the
members of the Board until the next annual meeting of stockholders; provided,
however, that if the vote of the members of the Board of Directors shall result
in a tie, such vacancy shall be filled by the stockholders at the next annual
meeting of the stockholders or at a special meeting of the stockholders called
for that purpose.
SECTION 4. A person shall not be nominated, stand for election or be
elected as a director of this corporation who (i) at the time of his election
shall be seventy (70) years of age or older, (ii) has retired from employment by
this corporation and is sixty-five (65) years of age or older or (iii) has
retired from active business and professional vocations; provided, however, that
Edward J. Mooney shall not be required to qualify under this provision to be
eligible to be nominated, stand for election or be elected as a director of this
corporation at any subsequent election.
ARTICLE VIII.
MEETINGS OF DIRECTORS
SECTION 1. Following the annual meeting of stockholders, the annual meeting
of the Board of Directors shall be held without notice, each and every year
hereafter, at the time and place determined by the directors.
SECTION 2. Regular meetings of the Board of Directors shall be held without
notice at 9:00 A.M. on the last Friday of February, June, August, October and
December at the offices of the corporation, unless another time and place is
designated.
SECTION 3. Special meetings of the Board of Directors may be called by the
Chairman of the Board, by the President, or by three (3) members of the Board of
Directors on three (3) days' notice by mail, or on twenty-four (24) hours'
notice by telegraph to each director, which notice shall be addressed to the
last known place of residence of each director, and said meetings may be held
either at the office of the corporation or at such other place as may be
designated in the notice of said meeting.
Whenever a special meeting of the Board of Directors shall be called, in
accordance with the provisions of this section, by members of the Board of
Directors, the call shall be in writing, signed by said directors and delivered
to the Secretary who shall thereupon issue the notice calling said meeting.
SECTION 4. Not less than one-half of the whole Board of Directors, shall
constitute a quorum for the transaction of any business except the filling of
vacancies, but a smaller number may adjourn, from time to time, until a future
date or until a quorum is secured.
For the purpose only of filling a vacancy or vacancies in the Board of
Directors, a quorum shall consist of a majority of the whole Board of Directors,
less the vacancy or vacancies therein.
The act of a majority of the directors present at a meeting, duly called, at
which a quorum is present shall be the act of the Board of Directors.
ARTICLE IX.
POWERS OF DIRECTORS
SECTION 1. The Board of Directors shall have, in addition to such powers as
are hereinafter expressly conferred upon it, all such powers as may be exercised
by the corporation, subject to the provisions of the
5
<PAGE>
statutes of the State of Indiana, the Articles of Incorporation and these bylaws
and subject to such further regulations as may, from time to time, be made by
the stockholders.
SECTION 2. The Board of Directors shall have express power:
(a) To purchase or otherwise acquire property, rights, or privileges for the
corporation, which the corporation has power to take, on such terms as
the Board may deem proper.
(b) To pay for the property, rights, or privileges acquired by this
corporation, in whole or in part, with money, stock, bonds, debentures or
other securities of this corporation or with other property owned by it.
(c) To create, make and issue mortgages, bonds, debentures, deeds of trust,
trust agreements and negotiable transferable instruments and securities,
secured by mortgages or otherwise, and to do every other act and thing
necessary to effectuate the same.
(d) To appoint agents, clerks, assistants, factors, servants and trustees
and to dismiss them at its discretion; to fix their duties and emoluments
and to change them from time to time; and to require security as it may
deem proper; but in the absence of action by the Board of Directors, the
employment and discharge of employees and the fixing of their
compensation shall be done by the officer of this corporation under whom
said employees work.
(e) To confer on any officer of the corporation the power of selecting,
discharging or suspending any of such employees.
(f) To determine by whom and in what manner the corporation's bills, notes
and receipts, acceptances, endorsements, checks, releases, contracts or
other documents shall be signed when said matter is not covered by these
Bylaws or any amendments thereto.
(g) To fix the compensation of officers, directors and members of committees
who are not salaried employees of this corporation.
(h) To fix and determine the price at which and the consideration for which
the shares of stock of this corporation may, from time to time, be
issued.
(i) To remove or suspend, with or without cause, any officer of the
corporation at any time.
ARTICLE X.
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
The members of the Board of Directors and members of committees of this
corporation, who are not salaried employees of this corporation, shall receive
such compensation for their services to be rendered as members of the Board of
Directors, or of committees as may, from time to time, be fixed by the Board of
Directors and the compensation so fixed shall continue to be payable until the
Board of Directors shall have thereafter fixed a different compensation, which
it may do at any annual, regular or special meeting.
ARTICLE XI.
CERTIFICATES OF STOCK
SECTION 1. Certificates of stock shall be issued to those legally entitled
thereto, as may be shown by the books of this corporation, and shall be signed
by the President and attested by the Secretary.
SECTION 2. The corporation may appoint one or more transfer agents and/or
registrars to issue, countersign, register, and transfer certificates
representing its capital stock and signatures of the corporation's officers and
of the transfer agents on stock certificates may be facsimiles. Upon surrender
to the
6
<PAGE>
corporation or the transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction on its books.
SECTION 3. The holder of any stock of the corporation shall immediately
notify the corporation of any loss, theft, destruction or mutilation of the
certificate for any such stock. A new certificate or certificates shall be
issued upon the surrender of the mutilated certificate or, in case of loss,
theft, or destruction, upon (i) delivery of an affidavit or affirmation, and
(ii) delivery of a bond in such sum and in such form and with such surety or
sureties as the Board of Directors (by general or specific resolutions) or the
President may approve, indemnifying the corporation against any claim with
respect to the certificate or certificates alleged to have been lost, stolen or
destroyed. However, the Board may, in its discretion, refuse to issue new
certificate or certificates, save upon the order of some Court having
jurisdiction in such matters.
ARTICLE XII.
TRANSFER OF STOCK
SECTION 1. The stock transfer books of the corporation may from time to
time be closed by order of the Board of Directors for any lawful purpose and for
such period consistent with law, but not exceeding thirty (30) days at any one
time, as the Board of Directors may deem advisable. In lieu of closing the stock
transfer books as aforesaid, the Board of Directors may, in its discretion, fix
in advance a date not exceeding fifty (50) days or less than ten (10) days next
preceding the date of any meeting of stockholders or the date for the payment of
any dividend or the date for the allotment of rights or the date when any change
or conversion or exchange of capital stock shall go into effect, as the record
date for the determination of the stockholders entitled to notice of and to vote
at any such meeting or entitled to receive any such dividend or to any such
allotment of rights or to exercise the rights of any such change, conversion or
exchange of capital stock; and, in such case, only such stockholders as shall be
stockholders of record at the close of business on the date so fixed shall be
entitled to notice of and to vote at such meeting or to receive such payment of
dividend or to receive such allotment of rights or to exercise such rights as
the case may be, notwithstanding any transfer of stock on the books of the
corporation after such record date fixed as aforesaid. In the event the Board of
Directors fails to fix in advance the record date for the determination of the
stockholders entitled to notice of and to vote at any meeting, no share of stock
transferred on the books of the corporation within ten (10) days next preceding
the date of a meeting shall be voted at such meeting.
SECTION 2. The corporation shall be entitled to treat the holder of record
of any share or shares of stock as the legal owner thereof and accordingly shall
not be bound to recognize any equitable claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, save as expressly provided in the laws of the State of
Indiana.
SECTION 3. The assignment of any certificate of stock shall constitute an
assignment to the assignee of the shares so assigned and of all dividends on the
shares assigned which are declared payable as of a record date subsequent to the
date the assignment is recorded on the stock record books of the corporation.
ARTICLE XIII.
FISCAL YEAR
Effective January 1, 1990, the fiscal year of this corporation shall
correspond to the calendar year.
7
<PAGE>
ARTICLE XIV.
CHECKS FOR MONEY
All checks, drafts or other orders for the payment of funds of this
corporation shall be signed by either the Chairman of the Board, the President,
or the Treasurer, or by such other individual or individuals as may hereafter,
from time to time, be designated by the Board of Directors. No check, draft or
other order for the payment of funds of this corporation shall be signed in
blank, either as to the amount of the check, draft or other order, or as to the
name of the payee.
ARTICLE XV.
DIVIDENDS
The Board of Directors may declare and pay dividends out of the unreserved
and unrestricted earned surplus of this corporation. Dividends may be declared
at any annual, regular or special meeting of the Board of Directors. Dividends
may be paid in cash, in property or in the shares of the capital stock of this
corporation, as provided by the Articles of Incorporation and the laws of the
State of Indiana.
ARTICLE XVI.
NOTICES
SECTION 1. A notice required to be given under the provisions of these
bylaws to any stockholder, director, officer and member of any committee shall
not be construed to mean personal notice but may be given in writing by
depositing the same in a post office or letter box in a postpaid sealed wrapper
addressed to such stockholder, director, officer and member of any committee at
such address as appears upon the books of the corporation, and such notice shall
be deemed to be given at the time when the same shall be thus mailed.
SECTION 2. Any stockholder, director, officer and member of any committee
may waive, in writing, any notice required to be given by these bylaws, either
before or after the time said notice should have been issued.
ARTICLE XVII.
COMPENSATION OF OFFICERS
The officers of this corporation shall receive such compensation for their
services as may, from time to time, be fixed by the Board of Directors, and the
compensation so fixed shall continue to be payable until the Board of Directors
shall have fixed a different compensation, which it may do at any annual,
regular, or special meeting.
ARTICLE XVIII.
CORPORATE SEAL
The seal of this corporation shall be a plain circular disk having engraved
thereon, near the outer edge thereof, at least the words, "CTS Corporation" and
in the center thereof the word, "Seal".
8
<PAGE>
ARTICLE XIX.
INDEMNIFICATION
SECTION 1. GENERAL. The corporation shall, to the fullest extent to which
it is empowered to do so by the Indiana Business Corporation Law, or any other
applicable laws, as from time to time in effect, indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal, by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
who, while serving as such director, officer, employee or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
whether for profit or not, against expenses (including counsel fees), judgments,
settlements, penalties and fines (including excise taxes assessed with respect
to employee benefit plans) actually or reasonably incurred by him in accordance
with such action, suit or proceeding, if such person acted in good faith and in
a manner such person reasonably believed, in the case of conduct in such
person's official capacity, was in the best interest of the corporation, and in
all other cases, was not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, such person either had
reasonable cause to believe the conduct was lawful or no reasonable cause to
believe the conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not meet the prescribed standard of conduct.
SECTION 2. AUTHORIZATION OF INDEMNIFICATION. To the extent that a director,
officer, employee or agent of the corporation has been successful, on the merits
or otherwise, in the defense of any action, suit or proceeding referred to in
Section 1 of this Article, or in the defense of any claim, issue or matter
therein, the corporation shall indemnify such person against expenses (including
counsel fees) actually and reasonably incurred by such person in connection
therewith. Any other indemnification under Section 1 of this Article (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case, upon a determination that indemnification of the director,
officer, employee or agent is permissible in the circumstances because such
director, officer, employee or agent has met the applicable standard of conduct.
Such determination shall be made (1) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not at the time parties to
such action, suit or proceeding; or (2) if a quorum cannot be obtained under
subdivision (1), by majority vote of a committee duly designated by the Board of
Directors (in which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties to such
action, suit or proceeding; or (3) by special legal counsel: (A) selected by the
Board of Directors or its committee in the manner prescribed in subdivision (1)
or (2), or (B) if a quorum of the Board of Directors cannot be obtained under
subdivision (1) and a committee cannot be designated under subdivision (2),
selected by majority vote of the full Board of Directors (in which selection
directors who are parties may participate); or (4) by the shareholders, but
shares owned by or voted under the control of directors who are at the time
parties to such action, suit or proceeding may not be voted on the
determination.
Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (3)
to select counsel.
SECTION 3. GOOD FAITH DEFINED. For purposes of any determination under
Section 1 of this Article XIX, a person shall be deemed to have acted in good
faith and to have otherwise met the applicable standard of conduct set forth in
Section 1 if such person's action is based on information, opinions, reports, or
statements, including financial statements and other financial data, if prepared
or presented by (1) one or more officers or employees of the corporation or
another enterprise whom such
9
<PAGE>
person reasonably believes to be reliable and competent in the matters
presented; (2) legal counsel, public accountants, appraisers or other persons as
to matters he reasonably believes are within the person's professional or expert
competence; or (3) a committee of the Board of Directors of the corporation or
another enterprise of which the person is not a member if such person reasonably
believes the committee merits confidence. The term "another enterprise" as used
in this Section 3 shall mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise of which such person
is or was serving at the request of the corporation as a director, officer,
partner, trustee, employee or agent. The provisions of this Section 3 shall not
be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standards of conduct set forth
in Section 1 of this Article XIX.
SECTION 4. PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in connection
with any civil or criminal action, suit or proceeding may be paid for or
reimbursed by the corporation in advance of the final disposition of such
action, suit or proceeding, as authorized in the specific case in the same
manner described in Section 2 of this Article, upon receipt of a written
affirmation of the director, officer, employee or agent's good faith belief that
such person has met the standard of conduct described in Section 1 of this
Article and upon receipt of a written undertaking by or on behalf of the
director, officer, employee or agent to repay such amount if it shall ultimately
be determined that such person did not meet the standard of conduct set forth in
this Article XIX, and a determination is made that the facts then known to those
making the determination would not preclude indemnification under this Article
XIX.
SECTION 5. PROVISIONS NOT EXCLUSIVE. The indemnification provided by this
Article shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under the Articles of Incorporation, any
other bylaw, any resolution of the Board of Directors or shareholders, any other
authorization, whenever adopted, after notice, by a majority vote of all voting
shares then outstanding, or any contract, both as to action in such person's
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent, and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 6. VESTED RIGHT TO INDEMNIFICATION. The right of any individual to
indemnification under this Article shall vest at the time of occurrence or
performance of any event, act or omission giving rise to any action, suit or
proceeding of the nature referred to in Section 1 of this Article and, once
vested, shall not later be impaired as a result of any amendment, repeal,
alteration or other modification of any or all of these bylaws. Notwithstanding
the foregoing, the indemnification afforded under this Article shall be
applicable to all alleged prior acts or omissions of any individual seeking
indemnification hereunder, regardless of the fact that such alleged acts or
omissions may have occurred prior to the adoption of this Article, and to the
extent such prior acts or omissions cannot be deemed to be covered by this
Article XIX, the right of any individual to indemnification shall be governed by
the indemnification provisions in effect at the time of such prior acts or
omissions.
SECTION 7. INSURANCE. The corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or who is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against any liability asserted against or incurred by the individual in that
capacity or arising from the individual's status as a director, officer,
employee or agent, whether or not the corporation would have power to indemnify
the individual against the same liability under this Article.
SECTION 8. ADDITIONAL DEFINITIONS. For purposes of this Article, references
to "the corporation" shall include any domestic or foreign predecessor entity of
the corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.
10
<PAGE>
For purposes of this Article, serving an employee benefit plan at the
request of the corporation shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or involves
services by such director, officer, employee, or agent with respect to an
employee benefit plan, its participants, or beneficiaries. A person who acted in
good faith and in a manner such person reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interest of
the corporation" referred to in this Article.
For purposes of this Article, "party" includes any individual who is or was
a plaintiff, defendant or respondent in any action, suit or proceeding, or who
is threatened to be made a named defendant or respondent in any action, suit or
proceeding.
For purposes of this Article, "official capacity," when used with respect to
a director, shall mean the office of director of the corporation; and when used
with respect to an individual other than a director, shall mean the office in
the corporation held by the officer or the employment or agency relationship
undertaken by the employee or agent on behalf of the corporation. "Official
capacity" does not include service for any other foreign or domestic corporation
or any partnership, joint venture, trust, employee benefit plan, or other
enterprise, whether for profit or not.
SECTION 9. PAYMENTS A BUSINESS EXPENSE. Any payments made to any
indemnified party under these bylaws or under any other right to indemnification
shall be deemed to be an ordinary and necessary business expense of the
corporation, and payment thereof shall not subject any person responsible for
the payment, or the Board of Directors, to any action for corporate waste or to
any similar action.
ARTICLE XX.
AMENDMENTS
SECTION 1. These bylaws may be amended, altered, repealed, or added to at
any annual or regular meeting of the directors, or at any special meeting
thereof.
SECTION 2. No amendment, alteration or addition to these bylaws shall
become effective unless the same is adopted by the affirmative vote of
two-thirds (2/3) of the members of the Board of Directors of this corporation.
ARTICLE XXI.
CONTROL SHARE ACQUISITIONS
As provided for in Section 5 thereof, Chapter 42 of the Indiana Business
Corporation Law, shall not apply to control share acquisitions of shares of the
corporation made after March 3, 1987.
11
<PAGE>
EXHIBIT 10(A)
EMPLOYMENT CONTRACT
This AGREEMENT entered into this 24th day of June, 1994, by and between CTS
Corporation, an Indiana corporation ("Company"), and JOSEPH P. WALKER, residing
at 56179 Dana Drive, Bristol, Indiana, 46507, ("Employee") to evidence
employment of the Employee by the Company under the following terms and
provisions:
1. EMPLOYMENT TERM. The Company agrees to employ Employee, and Employee
accepts employment as Chairman of the Board, President and Chief Executive
Officer of the Company for a term of three years commencing on June 24, 1994.
2. DUTIES. The Employee shall exert his best efforts and devote
substantially all of his time and attention to the affairs of the Company. The
Employee shall be in charge of the operation of the Company, and shall have full
authority and responsibility, subject to the direction, approval, and control of
the Board of Directors of the Company, for formulating policies and operating
the Company.
3. SALARY. For all services rendered by the Employee, the Company shall pay
the Employee, as regular compensation, a salary of three hundred nineteen
thousand seven hundred twenty-five dollars ($319,725) per year, payable in equal
monthly installments subject to applicable withholdings, commencing on July 1,
1994.
4. ADJUSTMENT OF SALARY. The Board of Directors of CTS may at any time or
from time to time change the regular compensation provided for in the preceding
paragraph or otherwise change the benefits receivable by the Employee under this
Employment Contract and the performance of Employee shall be reviewed annually
on or about the anniversary date of this contract for the purpose of considering
whether an adjustment should be made in Employee's regular compensation. In the
event that such regular compensation shall be increased, then, from and after
the date of such increase, such regular compensation shall be deemed to be the
amount as so increased.
5. VACATION. Employee shall be entitled to four (4) weeks vacation during
each year of the term of this Agreement or any extension thereof and, if unused,
Employee's vacation time may be accrued as provided in CTS Policy and Procedure
Personnel--16, Vacations for Exempt Salaried Employees.
6. GENERAL EMPLOYEE BENEFITS AND RESPONSIBILITIES. Except as provided in
paragraph 8(b) below, this Agreement is not intended to and shall not be deemed
to be in lieu of any rights, benefits and privileges to which Employee may be
entitled as an Employee of the Company, it being understood that the Employee
shall have the same rights and privileges as other salaried employees and other
executive officers of the Company, except to the extent that such rights or
privileges conflict with benefits provided to Employee under this Agreement. The
rights, benefits and privileges of salaried employees and executive officers
include, but are not limited to, the CTS Corporation Salaried Employees' Pension
Plan, the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, the CTS
Corporation Management Incentive Plan, the CTS Corporation Retirement Savings
Plan, the CTS Corporation 1986 Stock Option Plan, the Medical Expense Benefit
Plan, the Term Life Insurance and Accidental Death and Dismemberment Insurance,
the CTS Dental Plan, the CTS Long Term Disability Plan, the CTS Reimbursement of
Relocation Expense Policy, and the CTS Executive Officer Automobile Policy, and
Employee shall be entitled to participate in such plans and programs, to the
extent and upon the terms provided for each such plan or program. Employee shall
also be entitled to split dollar life insurance in amounts and on terms agreed
to between the Employee and the Compensation Committee of the Board of
Directors. Such insurance shall be in lieu of all except the first $50,000 of
the Term Life Insurance otherwise available to salaried employees and executive
officers. Employee further agrees to be bound by the Company's standard
agreement with its employees regarding Confidential Information and disclosure
and assignment of inventions.
1
<PAGE>
7. TERMINATION FOR CAUSE. Notwithstanding any other provisions of this
Agreement, the Company by action of its Board of Directors (the Employee not
voting) may at any time, without prior notice, discharge the Employee for either
of the following causes:
(a) Any illegal, dishonest, or malfeasant conduct which involves the
Company's funds or other assets; or
(b) The willful failure of Employee to carry out the provisions of this
Agreement.
Termination pursuant to this paragraph shall result in Employee's immediate
forfeiture of all rights and privileges under this Agreement, excluding accrued
salary, if any, which shall be immediately due and payable.
8. TERMINATION FOR ANY OTHER REASONS. Except as terminated pursuant to
paragraph 7, this Agreement may only be terminated prior to expiration under the
following terms and conditions:
(a) TERMINATION BY EMPLOYEE. The Employee may terminate this Agreement
by giving the Company ninety (90) days' written notice of his intent to
terminate his employment. If the Employee terminates his employment pursuant
to this Agreement excluding accrued salary, which shall be immediately due
and payable, the Employee's vested benefits (if any) in any employee benefit
plan, and his right to convert health and life insurance policies; provided,
however, that if the Employee terminates this Agreement because of a breach
of this agreement by the Company, then he shall be entitled to the rights
and benefits described under paragraph (b) below.
(b) TERMINATION BY THE COMPANY. The Company may terminate this Agreement
by giving the Employee ninety (90) days' written notice of his termination.
If the Company terminates the Employee's employment pursuant to this
subparagraph, the Company shall pay to the Employee, in full satisfaction of
the Company's obligations to Employee under this Agreement, a sum equal to
the product of his monthly salary at the time of termination, multiplied by
the number of months remaining under this Agreement, but in no event shall
Employee be paid less than 100% of his then annual salary, the same to be
paid to Employee in equal monthly installments over the remaining months of
this Agreement, plus a portion of the bonus payable under the CTS
Corporation Management Incentive Plan, for the year in which the Employee's
employment is terminated, the same to be paid at the same time and in the
same manner as other participants in the CTS Corporation Management
Incentive Plan. The bonus which would have been so payable to the Employee
for the full year shall then be multiplied by a fraction containing the
number of days in the year of termination which precede the termination date
in the numerator and the number 365 in the denominator to determine the
bonus payable to the Employee.
In addition to the salary and bonus to be paid to Employee upon
termination of this Agreement pursuant to this subparagraph, Employee shall
also be entitled to all termination benefits for which he would be eligible
as a salaried employee of the Company without regard to this Agreement,
including but not limited to the right to receive accrued vacation and elect
conversion privileges under the Company insurance plans, and shall also be
entitled to the rights on termination set forth in any other agreement with
the Company and in any options to purchase shares of the Company to which
Employee is a party at the time of termination.
9. DEATH OR DISABILITY OF EMPLOYEE. In the event of Employee's permanent and
total disability during the term of this Agreement, this Agreement shall
terminate at the end of the calendar month during which a determination is made
of his permanent and total disability. A conclusive determination of his
permanent and total disability shall occur when he is placed on Permanent
Inactive Disability Status under the CTS Corporation Salaried Employees' Pension
Plan. Employee shall be entitled to receive all disability benefits then
available under any of the Company's benefit plans. In the event of Employee's
death during the term of this Agreement, this Agreement shall terminate at the
end of the calendar month during which his death occurs. Employee's
beneficiaries and estate shall be entitled to receive all death benefits then
available to executive officers of the Company to the extent and upon the terms
provided for in any such benefit plans.
2
<PAGE>
10. ARBITRATION. The parties to this Agreement shall attempt to settle any
dispute arising under this Agreement by negotiation. If a satisfactory
settlement of any dispute is not reached within ten (10) days between the
parties, either party may demand arbitration by serving on the other party by
registered mail a written demand for arbitration. The written demand must
specify the nature of the dispute. The American Arbitration Association shall be
asked to submit an arbitration panel of seven (7) members from whom the
arbitrator shall be chosen. After the list has been furnished, the Employer
shall strike three (3) names from the list, and the Employee shall strike three
(3) names from the remaining four (4). The name remaining after the others have
been stricken shall be the arbitrator. The expense of the arbitrator and/or fee
of the American Arbitration Association shall be borne equally by both parties.
The function of the arbitrator shall be of a judicial rather than a
legislative nature. The arbitrator shall not have the authority to add to,
ignore, or modify any of the terms of this Agreement. The arbitrator shall not
decide issues that are not directly involved in the dispute submitted to him,
and no decision of the arbitrator shall require payment of compensation
different from or in addition to the compensation set forth in this Agreement.
The arbitrator shall have no authority to impose on either party hereto any
limitations or obligations not specifically provided in this Agreement.
The decision of the arbitrator shall be final and binding upon both parties.
11. WAIVER. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one or more times be deemed a waiver or relinquishment of
such right or power at any other time or times.
12. SEVERABILITY. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
13. ENTIRE AGREEMENT. This Agreement is the entire agreement and
understanding of the Company and Employee. Oral changes will have no effect. It
may be altered only by a written agreement signed by the party against whom
enforcement of any waiver, change, extension or discharge is sought.
14. CONSTRUCTION OF AGREEMENT. This Agreement and all questions arising in
connection herewith shall be governed by the laws of the State of Indiana. This
Agreement shall be enforceable against the Company and its successors, agents
and assignees by Employee or his personal representatives or estate, and in
enforcing this Agreement, Employee, his personal representatives or estate shall
be entitled to receive reasonable attorneys' fees and court costs from the
Company if Employee is the prevailing party. Similarly, if the Company prevails
in any action brought by either party to enforce this Agreement, the Company
shall be entitled to receive reasonable attorneys' fees and court costs from the
Employee.
IN WITNESS WHEREOF, the parties have signed this Agreement this 24th day of
June, 1994.
<TABLE>
<S> <C> <C>
CTS CORPORATION
By: /s/ ANDREW LOZYNIAK
-----------------------------------------
Andrew Lozyniak
CHAIRMAN OF THE COMPENSATION COMMITTEE
</TABLE>
ATTEST:
/s/ JEANNINE M. DAVIS
- - -------------------------
Jeannine M. Davis, Secretary
/s/ JOSEPH P. WALKER
------------------------------------------------------------------
Joseph P. Walker, Employee
3
<PAGE>
EXHIBIT 10(G)
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into this day of , 19 by and
between (the "Officer") and CTS CORPORATION, an Indiana corporation (the
"Company").
WHEREAS, the Officer is an officer of the Company; and
WHEREAS, to induce the Officer to continue to serve as an officer, the
Company has provided for indemnification in Article XIX of its bylaws, a copy of
which is attached hereto as Exhibit A ("Bylaw Indemnity"), and has maintained
insurance and has a policy of continuing to maintain insurance for such persons
against liabilities or losses incurred by the Officer as a consequence of his
service in such capacity ("O & D Insurance"), to the extent available on terms
acceptable to the Company; and
WHEREAS, the Company has determined that O & D Insurance may not be
available to it on acceptable terms in the future; and
WHEREAS, in order to induce the Officer to serve as an Officer, the Company
is willing to provide the indemnification provided herein;
NOW, THEREFORE, in consideration of the premises and the Officer's continued
service as an officer, the parties hereto agree as follows:
Section 1. INDEMNIFICATION. The Company shall, to the fullest extent to
which it is empowered to do so under the Indiana Business Corporation Law, or
other applicable laws, as from time to time in effect, indemnify the Officer in
the event that he was or is made a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative and whether formal or informal,
by reason of the fact that he is or was an officer, director, employee or agent
of the Company, or who, while serving as such officer, director, employee or
agent of the Company, is or was serving at the request of the Company as an
officer, director, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including counsel fees), judgments, settlements, penalties and
fines (including excise taxes assessed with respect to employee benefit plans)
("Indemnifiable Expenses") actually or reasonably incurred by him in accordance
with such action, suit or proceeding (net of any related insurance proceeds
received by him or paid on his behalf), if the Officer (a) was wholly
successful, on the merits or otherwise, in the defense of any such action, suit
or proceeding or (b) acted in good faith and if he reasonably believed, in the
case of conduct in his official capacity, that his conduct was not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, he either had reasonable cause to believe his conduct was lawful or
no reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement or conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the Officer did not meet the prescribed standard of conduct.
For purposes of any determination under this Section 1, a person shall be
deemed to have acted in good faith and to have otherwise met the applicable
standard of conduct set forth in Section 1 if his action is based on
information, opinions, reports, or statements, including financial statements
and other financial data, if prepared or presented by (1) one or more officers
or employees of the corporation or another enterprise whom he reasonably
believes to be reliable and competent in the matters presented; (2) legal
counsel, public accountants, appraisers or other persons as to matters he
reasonably believes are within the person's professional or expert competence;
or (3) a committee of the Board of Directors of the corporation or another
enterprise of which the person is not a member if he reasonably believes the
committee merits confidence. The term "another enterprise" as used in this
Section 3 shall mean any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise of which such person is or was
serving at the request of the corporation as a director, officer, partner,
trustee,
1
<PAGE>
employee or agent. The provisions of this paragraph shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standards of conduct set forth in this Section
1.
Section 2. METHOD OF INDEMNIFICATION. If the Officer is wholly successful,
on the merits or otherwise, in the defense of any action, suit or proceeding,
the Officer shall be entitled to receive from the Company, and the Company
hereby covenants and agrees to provide the Officer, within ten business days of
the Company's receipt of a written request of the Officer, accompanied by the
supporting documentation set forth below, reimbursement in cash for the total
amount of his Indemnifiable Expenses with respect thereto which shall not have
been previously reimbursed by the Company. In making a written request for such
reimbursement of Indemnifiable Expenses, the Officer shall submit to the Company
a schedule setting forth in reasonable detail his Indemnifiable Expenses and the
dollar amount expended for each such Indemnifiable Expense. Such schedule shall
be accompanied by a copy of the bill, agreement, judgment or other documentation
relating to each Indemnifiable Expense listed therein.
If the Officer is unsuccessful on the merits in the defense of any action,
suit or proceeding, the Officer shall be similarly entitled to receive from the
Company, and the Company covenants and agrees to provide the Officer,
reimbursement in cash for the total amount of his Indemnifiable Expenses with
respect thereto which shall not have been previously reimbursed by the Company,
within three business days after a determination has been made that the Officer
has met the applicable standards of conduct set forth in Section 1. Such
determination shall be made in good faith (1) by the Board by a majority vote of
a quorum consisting of directors who were not at the time parties to such
action, suit or proceeding; or (2) if a quorum cannot be obtained under
subdivision (1), by majority vote of a committee duly designated by the Board
(in which designation directors who are parties may participate), consisting
solely of two or more directors not at the time parties to such action, suit or
proceeding; or (3) by special legal counsel: (A) selected by the Board or its
committee in the manner prescribed in subdivision (1) or (2), or (B) if a quorum
of the Board cannot be obtained under subdivision (1) and a committee cannot be
designated under subdivision (2), selected by a majority vote of the full Board
(in which selection directors who are parties may participate); or (4) by the
shareholders, but stock owned by or voted under the control of directors who are
at the time parties to such action, suit or proceeding may not be voted on the
determination. The foregoing determination shall be made within ten business
days of the Company's receipt of a written request of the Officer, accompanied
by the supporting documentation described above, unless the determination is to
be made by the shareholders, in which case the Company covenants and agrees to
call a special meeting of the shareholders within ten business days of such
receipt. The evaluation of the reasonableness of expenses shall be made at the
same time and in the same manner; provided that if the determination that
indemnification is permissible is to be made by special legal counsel, the
evaluation as to the reasonableness of expenses shall be made by those entitled
to select such counsel.
Section 3. PAYMENT OF EXPENSES IN ADVANCE. Expenses previously incurred by
the Officer or reasonably expected by the Officer to be incurred in connection
with any action, suit or proceeding shall be paid for or reimbursed by the
Company in advance of the final disposition of such action, suit or proceeding,
within ten business days of the Company's receipt of a written request of the
Officer accompanied by a written affirmation of the Officer's good faith belief
that he has met the standards of conduct described in Section 1 of this
Agreement, and a schedule setting forth in reasonable detail the amount incurred
or reasonably expected to be incurred for any expenses, but only upon a
determination made in the manner and by any of the persons described in the
second paragraph of Section 2 of this Agreement that the facts then known to
them would not preclude indemnification hereunder because the Officer failed to
meet the applicable standards of conduct described in Section 1 of this
Agreement. The Officer hereby covenants and agrees with the Company to repay
such amount if it is ultimately determined that the Officer did not meet the
standards of conduct described in Section 1 of this Agreement. The Officer may
make as many requests for advances under this Section 3 as he deems reasonably
necessary to cover his actual or reasonably expected expenses.
2
<PAGE>
Section 4. PROVISIONS NOT EXCLUSIVE. The indemnification provided by this
Agreement shall not be deemed exclusive of any other right to be indemnified or
insured by the Company or any other person or entity to which the Officer may be
entitled under any statute, agreement, policy of insurance or surety, the
Articles of Incorporation or bylaws of the Company, any resolution of the Board
of Directors or shareholders, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue after the Officer has ceased to be an officer, employee or agent
of the Company, and shall inure to the benefit of his heirs, executors and
administrators.
Section 5. DEFINITIONS. For purposes of this Agreement, serving an employee
benefit plan at the request of the Company shall include any service as a
director, officer, employee or agent of the Company which imposes duties on, or
involves services by the Officer with respect to an employee benefit plan, its
participants, or beneficiaries. If the Officer acted in good faith and in a
manner he reasonably believed to be in the best interests of the participants
and beneficiaries of an employee benefit plan, he shall be deemed to have acted
in a manner "not opposed to the best interests of the Company" referred to in
Section 1 of this Agreement.
For purposes of this Agreement, "party" includes any individual who is or
was a plaintiff, defendant or respondent in any action, suit or proceeding, or
who is threatened to be made a named defendant or respondent in any action, suit
or proceeding.
For purposes of this Agreement, "Official capacity," when used with respect
to the Officer, shall mean the office of director of the Company and any office
of the Company held by the Officer or other employment or agency relationship
undertaken by the Officer on behalf of the Company. "Official capacity" does not
include service for any other foreign or domestic corporation or any
partnership, joint venture, trust, employee benefit plan, or other enterprise,
whether for profit or not.
Section 6. GOOD FAITH. The Company agrees to perform its obligations under
this Agreement in good faith; and in any litigation brought by the Officer to
enforce any such obligations, the Company shall have the burden of establishing
by a preponderance of the evidence that it (and the Board or a committee
thereof, if applicable) so performed such obligations, and in the absence of
fulfilling such burden, the Company hereby consents to the entry of the
judgment, decree and other relief sought by the Officer in such litigation and
further agrees not to appeal or otherwise resist the enforcement thereof.
Section 7. NOTICE. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered in person or mailed by United States registered mail, return receipt
requested, postage prepaid, as follows:
If to the Officer:
__________________________
__________________________
__________________________
If to the Company:
CTS Corporation
905 West Boulevard North
Elkhart, In 46514
Attention: General Counsel
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
Section 8. MISCELLANEOUS.
(a) This Agreement shall be binding on the successors and assigns of the
Company.
(b) This Agreement contains the entire agreement of the parties with respect
to the matters covered herein, and may not be amended except by a written
instrument executed by the parties hereto.
3
<PAGE>
(c) This Agreement shall be governed by and construed in accordance with the
substantive laws of the State of Indiana.
(d) The invalidity or unenforceability in any respect of any provision of
this Agreement shall not affect the validity or enforceability of such provision
in any other respect or of any other provision of this Agreement, all of which
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
<TABLE>
<S> <C>
THE OFFICER THE COMPANY
Jeannine M. Davis
Vice President, General
Counsel and Secretary
</TABLE>
4
<PAGE>
EXHIBIT 13
CTS CORPORATION
1996 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE
DATA)
----------------------------------
<S> <C> <C> <C>
FOR THE YEAR 1996 1995 1994
- - ----------------------------------------------------------------------------- ---------- ---------- ----------
Net sales.................................................................... $321,297 $300,157 $268,707
Net earnings................................................................. 21,170 17,164 13,967
Average common and common equivalent shares outstanding...................... 5,259 5,201 5,170
Per share data:
Net earnings............................................................... $4.03 $3.30 $2.70
Dividends declared......................................................... .69 .60 .45
Capital expenditures......................................................... 17,210 11,181 13,401
At Year-End
Working capital.............................................................. $86,810 $75,151 $65,875
Notes payable................................................................ 6,685 7,436
Long-term obligations (including current maturities)......................... 13,647 15,925 15,899
Shareholders' equity......................................................... 166,232 146,253 131,855
Equity per outstanding share................................................. 31.82 28.03 25.46
</TABLE>
1
<PAGE>
CTS CORPORATION
SHAREHOLDER INFORMATION
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NET GROSS OPERATING NET
SALES EARNINGS EARNINGS EARNINGS
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1996
1st quarter......................................................... $ 80,186 $ 19,799 $ 6,587 $ 4,414
2nd quarter......................................................... 83,820 21,874 8,218 5,340
3rd quarter......................................................... 76,457 20,726 7,847 5,060
4th quarter......................................................... 80,834 25,097 10,768 6,356
---------- --------- ----------- ---------
$ 321,297 $ 87,496 $ 33,420 $ 21,170
1995
1st quarter......................................................... $ 75,978 $ 17,273 $ 4,877 $ 3,256
2nd quarter......................................................... 76,413 19,148 7,023 4,642
3rd quarter......................................................... 73,890 18,345 6,416 4,218
4th quarter......................................................... 73,876 20,038 9,172 5,048
---------- --------- ----------- ---------
$ 300,157 $ 74,804 $ 27,488 $ 17,164
</TABLE>
PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
DIVIDENDS NET
HIGH(A) LOW(A) DECLARED EARNINGS
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
1996
1st quarter............................................................. $ 38.63 $ 36.00 $ .15 $ .83
2nd quarter............................................................. 47.00 37.38 .18 1.03
3rd quarter............................................................. 47.00 40.50 .18 .96
4th quarter............................................................. 43.00 38.13 .18 1.21
$ .69 $ 4.03
1995
1st quarter............................................................. $ 32.00 $ 27.38 $ .15 $ .63
2nd quarter............................................................. 33.50 29.25 .15 .89
3rd quarter............................................................. 34.50 29.94 .15 .81
4th quarter............................................................. 37.75 29.63 .15 .97
--------- --------- ----- -----
$ .60 $ 3.30
</TABLE>
- - ------------------------
(a) The market price range of CTS Corporation common stock on the New York Stock
Exchange for each of the quarters during the last two years.
2
<PAGE>
CTS CORPORATION
FIVE-YEAR SUMMARY
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
% OF % OF % OF
1996 SALES 1995 SALES 1994 SALES 1993
--------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Net Sales............................ $ 321,297 100.0 $ 300,157 100.0 $ 268,707 100.0 $ 236,979
Cost of goods sold................. 233,801 72.8 225,353 75.1 205,640 76.5 183,927
Selling general and administrative
expenses......................... 43,333 13.5 39,312 13.1 36,175 13.5 36,323
Research and development
expenses......................... 10,743 3.3 8,004 2.7 6,208 2.3 5,708
(Gain) on sale of property and
other related provisions.........
Operating earnings................. 33,420 10.4 27,488 9.1 20,684 7.7 11,021
Other Income (expenses)-net.......... 182 0.1 196 0.1 803 0.3 (761)
Earnings before income taxes and
cumulative effect of changes in
accounting principles............ 33,602 10.5 27,684 9.2 21,487 8.0 10,260
Income taxes......................... 12,432 3.9 10,520 3.5 7,520 2.8 3,690
Net earnings--before accounting
changes.......................... 21,170 6.6 17,164 5.7 13,967 5.2 6,570
Cumulative effect on prior years of
accounting changes (a)............. (4,614)
Net earnings..................... 21,170 6.6 17,164 5.7 13,967 5.2 1,956
Retained earnings-beginning of
year............................... 126,546 112,506 100,868 100,973
Dividends declared................... (3,604) (3,124) (2,329) (2,061)
Retained earnings-end of year........ $ 144,112 $ 126,546 $ 112,506 $ 100,868
Average common and common equivalent
of shares outstanding.............. 5,259,284 5,200,818 5,170,406 5,152,556
Net earnings per share:
Before accounting changes.......... $ 4.03 $ 3.30 $ 2.70 $ 1.27
Cumulative effect on prior years of
accounting changes(a)............ (0.89)
Net earnings....................... $ 4.03 $ 3.30 $ 2.70 $ 0.38
Cash dividends per share............. $ 0.69 $ 0.60 $ 0.45 $ 0.40
Capital expenditures................. 17,210 11,181 13,401 11,696
Depreciation and amortization........ 12,491 11,683 11,236 12,143
Financial Position at Year-End
Current assets....................... $ 138,201 $ 126,113 $ 110,667 $ 97,266
Current liabilities.................. 51,391 50,962 44,792 49,888
Current ratio........................ 2.7 to 1 2.5 to 1 2.5 to 1 1.9 to 1
Working capital...................... $ 86,810 $ 75,151 $ 65,875 $ 47,378
Inventories.......................... 38,761 38,885 41,456 36,059
Property, plant and equipment-net.... 56,103 50,696 50,777 47,842
Total assets......................... 249,372 227,127 206,826 185,064
Short-term notes payable............. 6,685 7,436 12,822
Long-term obligations................ 11,220 13,714 15,595 4,995
Shareholders' equity................. 166,232 146,253 131,855 119,203
Common shares outstanding............ 5,224,956 5,217,329 5,178,604 5,153,424
Equity (book value) per share........ $ 31.82 $ 28.03 $ 25.46 $ 23.13
Other data
Stock price range (dollars per share $ 47.00- $ 37.75- $ 31.00- $ 22.38-
to the nearest 1/8)................ $ 36.00 $ 27.38 $ 19.50 $ 17.00
Average number of employees.......... 3,815 4,007 4,056 3,975
Number of shareholders at year-end... 986 1,062 1,136 1,198
<CAPTION>
% OF % OF
SALES 1992 SALES
----- --------- -----
<S> <C> <C> <C>
Summary of Operations
Net Sales............................ 100.0 $ 277,391 100.0
Cost of goods sold................. 77.6 180,198 79.2
Selling general and administrative
expenses......................... 15.3 37,855 16.6
Research and development
expenses......................... 2.4 6,092 2.7
(Gain) on sale of property and
other related provisions......... (852) (0.3)
Operating earnings................. 4.7 4,098 1.8
Other Income (expenses)-net.......... (0.4) (277) (0.1)
Earnings before income taxes and
cumulative effect of changes in
accounting principles............ 4.3 3,821 1.7
Income taxes......................... 1.6 1,920 0.9
Net earnings--before accounting
changes.......................... 2.7 1,901 0.8
Cumulative effect on prior years of
accounting changes (a)............. (1.9)
Net earnings..................... 0.8 1,901 0.8
Retained earnings-beginning of
year............................... 102,482
Dividends declared................... (3,410)
Retained earnings-end of year........ $ 100,973
Average common and common equivalent
of shares outstanding.............. 5,141,936
Net earnings per share:
Before accounting changes.......... $ 0.37
Cumulative effect on prior years of
accounting changes(a)............
Net earnings....................... $ 0.37
Cash dividends per share............. $ 0.6625
Capital expenditures................. 8,831
Depreciation and amortization........ 11,665
Financial Position at Year-End
Current assets....................... $ 87,376
Current liabilities.................. 37,262
Current ratio........................ 2.3 to 1
Working capital...................... $ 50,114
Inventories.......................... 37,222
Property, plant and equipment-net.... 48,529
Total assets......................... 170,773
Short-term notes payable............. 5,827
Long-term obligations................ 10,826
Shareholders' equity................. 119,372
Common shares outstanding............ 5,150,824
Equity (book value) per share........ $ 23.18
Other data
Stock price range (dollars per share $ 24.50-
to the nearest 1/8)................ $ 17.13
Average number of employees.......... 4,335
Number of shareholders at year-end... 1,278
</TABLE>
- - ------------------------
(a) The Company adopted FASB 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and FASB 109, "Accounting for Income Taxes,"
as of January 1, 1993.
3
<PAGE>
CTS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1996 1995 1994
------------ ------------ ------------
Net Sales............................................................... $ 321,297 $ 300,157 $ 268,707
Costs and expenses:
Cost of goods sold.................................................... 233,801 225,353 205,640
Selling, general and administrative expenses.......................... 43,333 39,312 36,175
Research and development expenses..................................... 10,743 8,004 6,208
Operating earnings................................................ 33,420 27,488 20,684
Other (expenses) income
Interest expense...................................................... (1,449) (1,790) (714)
Interest income....................................................... 1,881 1,421 657
Other................................................................. (250) 565 860
Total other income (expenses)..................................... 182 196 803
Earnings before income taxes...................................... 33,602 27,684 21,487
Income taxes--Note F.................................................... 12,432 10,520 7,520
Net earnings...................................................... $ 21,170 $ 17,164 $ 13,967
Net earnings per share............................................ $ 4.03 $ 3.30 $ 2.70
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CTS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON RETAINED TRANSLATION DEFERRED TREASURY
STOCK EARNINGS ADJUSTMENT COMPENSATION STOCK TOTAL
--------- ---------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993.............. $ 34,222 $ 100,868 $ (1,049) $ (92) $ (14,746) $ 119,203
Net earnings............................... 13,967 13,967
Cash dividends of $.45 per share........... (2,329) (2,329)
Nonemployee Directors' stock retirement
plan..................................... (4) 3 12 11
Cumulative translation adjustment.......... 695 695
Issued 15,500 shares on restricted stock
and cash bonus........................... 51 (358) 307
Issued 8,650 shares on exercise of stock
options.................................. (72) 248 176
Stock compensation......................... 1 12 13
Deferred compensation recognized........... 119 119
--------- ---------- ----------- ----- ---------- ----------
Balances at December 31, 1994.............. 34,198 112,506 (354) (328) (14,167) 131,855
Net earnings............................... 17,164 17,164
Cash dividends of $.60 per share........... (3,124) (3,124)
Nonemployee Directors' stock retirement
plan..................................... 15 15
Cumulative translation adjustment.......... (291) (291)
Issued 18,500 shares on restricted stock
and cash bonus........................... 76 (632) 556
Issued 17,325 shares on exercise of stock
options.................................. (163) 522 359
Acquired compensation...................... 7 (7)
Stock compensation......................... 3 93 96
Deferred compensation recognized........... 17 162 179
--------- ---------- ----------- ----- ---------- ----------
Balances at December 31, 1995.............. 34,138 126,546 (645) (783) (13,003) 146,253
Net earnings............................... 21,170 21,170
Cash dividends of $.69 per share........... (3,604) (3,604)
Nonemployee Directors' stock retirement
plan..................................... 17 17
Cumulative translation adjustment.......... 2,018 2,018
Issued 1,500 shares on restricted stock and
cash bonus............................... 23 (70) 47
Issued 6,300 shares on exercise of stock
options.................................. (51) 197 146
Acquired 73 shares traded on
options--net............................. 3 (3)
Stock compensation......................... 27 100 127
Deferred compensation recognized........... 236 236
Acquired 3,200 shares for treasury stock... (131) (131)
--------- ---------- ----------- ----- ---------- ----------
Balances at December 31, 1996.............. $ 34,140 $ 144,112 $ 1,373 $ (600) $ (12,793) $ 166,232
--------- ---------- ----------- ----- ---------- ----------
--------- ---------- ----------- ----- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE>
CTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents................................................................ $ 44,957 $ 37,271
Accountants receivable, less allowances (1996--$622; 1995--$774).................... 43,984 41,737
Inventories
Finished goods.................................................................... 8,504 7,445
Work-in-process................................................................... 17,138 14,789
Raw materials..................................................................... 13,119 16,651
------------ ------------
Total inventories............................................................... 38,761 38,885
Other current assets................................................................ 3,787 2,544
Deferred income taxes--Note F....................................................... 6,712 5,676
------------ ------------
Total current assets............................................................ 138,201 126,113
Property, Plant and Equipment
Buildings and land.................................................................. 42,800 42,547
Machinery and equipment............................................................. 146,589 139,594
------------ ------------
Total property, plant and equipment............................................. 189,389 182,141
Less accumulated depreciation....................................................... 133,286 131,445
------------ ------------
Net property, plant and equipment............................................... 56,103 50,696
Other Assets
Goodwill, less accumulated amortization (1996--$8,361; 1995--$7,687)................ 4,039 4,603
Prepaid pension expense--Note E..................................................... 50,152 44,739
Other............................................................................... 877 976
------------ ------------
Total other assets.............................................................. 55,068 50,318
------------ ------------
Total Assets.......................................................................... $ 249,372 $ 227,127
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable--Note B............................................................... $ 6,685
Current maturities of long-term obligations--Note C................................. $ 2,427 2,211
Accounts payable.................................................................... 17,146 15,605
Accrued salaries, wages and vacation................................................ 6,836 6,695
Accrued taxes other than income..................................................... 2,070 1,740
Income taxes payable................................................................ 5,946 3,991
Other accrued liabilities--Note H................................................... 16,966 14,035
------------ ------------
Total current liabilities....................................................... 51,391 50,962
Long-term Obligations--Note C......................................................... 11,220 13,714
Deferred Income Taxes--Note F......................................................... 16,146 11,909
Postretirement Benefits--Note E....................................................... 4,383 4,289
Contingencies--Note H
Shareholders' Equity
Common stock-authorized 8,000,000 shares without par value; issued 5,807,031........ 33,540 33,355
Retained earnings................................................................... 144,112 126,546
Cumulative translation adjustment................................................... 1,373 (645)
------------ ------------
179,025 159,256
Less cost of common stock held in treasury (1996--582,075 shares; 1995--589,702
shares).......................................................................... 12,793 13,003
------------ ------------
Total shareholders' equity...................................................... 166,232 146,253
------------ ------------
Total Liabilities and Shareholders' Equity............................................ $ 249,372 $ 227,127
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
CTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net earnings.......................................................... $ 21,170 $ 17,164 $ 13,967
Adjustment to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization......................................... 12,491 11,683 11,236
Deferred income taxes................................................. 3,201 3,239 2,519
Other................................................................. (160) (52) (421)
Charges in assets and liabilities:
Accounts receivable................................................. (2,247) (6,708) (4,402)
Inventories......................................................... 124 2,571 (3,297)
Prepaid pension asset............................................... (5,413) (5,331) (6,563)
Accounts payable and accrued liabilities............................ 4,943 4,280 (38)
Income taxes payable................................................ 1,955 1,703 882
Other............................................................... (961) (1,688) (1,328)
------------ ------------ ------------
Total adjustments................................................... 13,933 9,697 (1,412)
------------ ------------ ------------
Net cash provided by operating activities......................... 35,103 26,861 12,555
Cash flows from financing activities:
Proceeds from sale of property, plant and equipment................. 822 236 411
Capital expenditures................................................ (17,210) (11,181) (10,000)
Payment for purchase of business acquisitions....................... (5,501)
------------ ------------ ------------
Net cash used in investing activities............................. (16,388) (10,945) (15,090)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations..................... 15,000
Payments of long-term obligations................................... (2,208) (286) (4,479)
Decrease in notes payable........................................... (6,685) (751) (6,050)
Proceeds from stock options exercised............................... 146 359 176
Dividends paid...................................................... (3,446) (3,118) (2,067)
Purchases of treasury stock......................................... (131)
------------ ------------ ------------
Net cash (used in) provided by financing activities............... (12,324) (3,796) 2,580
Effect of exchange rate changes on cash................................. 1,295 229 1,343
------------ ------------ ------------
Net increase in cash.................................................... 7,686 12,349 1,388
Cash and equivalents at beginning of year............................... 37,271 24,922 23,534
------------ ------------ ------------
Cash and equivalents at end of year..................................... $ 44,957 $ 37,271 $ 24,922
------------ ------------ ------------
Supplemental cash flow information
Cash paid during the year for:
Interest.......................................................... $ 1,467 $ 1,791 $ 658
Income taxes--net................................................. 7,276 5,590 4,009
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
principally determined using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at
cost. Depreciation is computed over the estimated useful lives of the assets
principally on the straight-line method. Useful lives for buildings and
improvements range from 10 to 45 years, and machinery and equipment from 3 to 8
years.
GOODWILL The excess of cost over the fair value of net assets of businesses
acquired is amortized on the straight-line method over the periods expected to
be benefited.
RETIREMENT PLANS The Company has various defined benefit and defined
contribution retirement plans covering a majority of its employees. The
Company's policy is to annually fund the defined benefit pension plans at or
above the minimum required under the Employee Retirement Income Security Act of
1974 (ERISA).
RESEARCH AND DEVELOPMENT Research and development costs consist of
expenditures incurred during the course of planned search and investigation
aimed at discovery of new knowledge which will be useful in developing new
products or processes, or significantly enhancing existing products or
production processes, and the implementation of such through design, testing of
product alternatives or construction of prototypes. The Company expenses all
research and development costs as incurred.
INCOME TAXES The Company provides deferred income taxes for transactions
reported in different periods for financial reporting and income tax return
purposes pursuant to the requirements of Financial Accounting Standards Board
(FASB) Statement No. 109, "Accounting for Income Taxes." The underlying
differences relate primarily to depreciation differences, pension income,
postemployment benefits, certain nondeductible accruals and inventory reserves.
TRANSLATION OF FOREIGN CURRENCIES The financial statements of all of the
Company's non-U.S. subsidiaries, except the United Kingdom subsidiary, are
remeasured into U.S. dollars using the U.S. dollar as the functional currency
with all remeasurement adjustments included in the determination of net
earnings. The assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars principally at the current exchange rate at
period end, with resulting translation adjustments made directly to the
"Cumulative translation adjustment" component of shareholders' equity.
Statements of earnings accounts are translated at the average rates during the
period.
FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily
of cash, cash equivalents, trade receivables and payables, and obligations under
notes payable and long-term debt. In accordance with the requirements of FASB
Statement No. 107, "Disclosures about Fair Value of Financial Instruments," the
Company is providing the following fair value estimates and information
regarding valuation methodologies. The carrying value for cash and cash
equivalents, and trade receivables and payables approximates fair value based on
the short-term maturities of these instruments. The carrying value for all
long-term debt outstanding at December 31, 1996, and 1995 approximates fair
value where fair value is based on market prices for the same or similar debt
and maturities.
8
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company occasionally uses forward exchange currency contracts to
minimize the impact of foreign currency fluctuations on the Company's costs and
expenses. At December 31, 1996, the Company's forward foreign exchange currency
contracts were not material. These contracts are accounted for as hedges and
have minimal credit risk because the counterparties are well-established
financial institutions.
CASH EQUIVALENTS The Company considers all highly liquid investments with a
maturity of three months or less from the purchase date to be cash equivalents.
CONCENTRATION OF CREDIT RISK The Company sells its products to customers
primarily in the automotive, computer equipment, communications equipment and
instruments and controls industries, primarily in North America, Europe and the
Pacific Rim. The Company performs ongoing credit evaluations of its customers to
minimize credit risk. The Company generally does not require collateral.
STOCK-BASED COMPENSATION FASB Statement No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based compensation at fair value. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related Interpretation. See
Note D for the required pro forma net income and earnings per share disclosures
required by FASB Statement No. 123.
EARNINGS PER SHARE Earnings per common share are based on the weighted
average number of common and common equivalent shares outstanding.
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 at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE B--SHORT-TERM BORROWINGS
The Company has no outstanding short-term borrowings at December 31, 1996.
At December 31, 1995, short-term borrowings consisted of demand notes payable to
various banks, with an average interest rate of 6.6%. The Company has unsecured
lines of credit arrangements which totaled $15,855,000 at December 31, 1996.
These arrangements are generally subject to annual renewal and renegotiation,
and may be withdrawn at the banks' option.
Average daily short-term borrowings over the year, including borrowings
denominated in non-U.S. currencies, during 1996, 1995 and 1994 were $2,308,000,
$6,781,000 and $11,776,000, respectively. The weighted average interest rates,
computed by relating interest expense to average daily short-term borrowings,
were 6.1% in 1996, 6.5% in 1995 and 5.5% in 1994.
The maximum amount of short-term borrowings at the end of any month during
1996, 1995 and 1994 was $8,055,000, $8,440,000 and $12,977,000, respectively.
The short-term borrowings outstanding at December 31, 1994, were $7,436,000.
9
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--LONG-TERM OBLIGATIONS
Long-term obligations were comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
--------- --------------
<S> <C> <C>
Long-term debt:
Term loan at 8.4%, due in annual installments through 1999........................... $ 13,000 $ 15,000
Other................................................................................ 647 608
--------- -------
13,647 15,608
Less current maturities.............................................................. 2,427 2,211
--------- -------
Total long-term debt............................................................... 11,220 13,397
Other.................................................................................. 317
--------- -------
Total long-term obligations........................................................ 11,220 13,714
</TABLE>
The Company has a $13,000,000 term loan with four banks, of which $2,000,000
expires in 1997, $2,000,000 expires in 1998 and $9,000,000 expires in 1999.
The Company has unsecured revolving credit agreements totaling $45,000,000
with four banks, which expire in 2001. Interest rates on these borrowings
fluctuate based upon market rates. The Company pays a commitment fee that varies
based on performance under certain financial covenants applicable to the
revolving credit agreements. Currently, that fee is .15 percent per annum. The
credit agreements and term loan require, among other things, that the Company
maintain certain tangible net worth, interest coverage requirements and a
specified total liabilities to tangible net worth ratio.
Annual maturities of long-term obligations during the three years subsequent
to 1997 are as follows: 1998--$2,220,000; 1999--$9,000,000; 2000--$0.
NOTE D--STOCK PLANS
At December 31, 1996, the Company has four stock-based compensation plans,
which are described below. The Company applies Accounting Principles Board
Opinion No. 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans while compensation expense has been recognized for its compensatory plans.
Had compensation cost for the Company's two fixed stock-based compensation plans
been determined based on the fair value based method, as defined in FASB
Statement No. 123, the Company's net earnings per share would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
--------------------
<S> <C> <C> <C>
1996 1995
--------- ---------
As reported $ 21,170 $ 17,164
Net earnings................................................................ Pro forma $ 20,936 $ 17,141
As reported $ 4.03 $ 3.30
Net earnings per share...................................................... Pro forma $ 3.99 $ 3.30
</TABLE>
The effects of applying FASB Statement No. 123 in the above pro forma
disclosures are not indicative of future amounts as they do not include the
effects of awards granted prior to 1995, some of which would have had income
statement effects in 1995 and 1996 due to the five-year vesting period
associated with the fixed stock option awards.
10
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's two fixed stock option plans, approved by the shareholders,
provide for grants of incentive stock options or nonqualified stock options to
officers and key employees. Under the 1986 Stock Option Plan which expired in
1995, the Company could grant options to its officers and key employees for up
to 300,000 shares of common stock. Of the 300,000 shares, approximately 100,000
shares were granted. Under the 1996 Stock Option Plan, the Company may grant
options to its officers and key employees for up to 200,000 shares of common
stock.
Under the 1996 Stock Option Plan, options are granted at the fair market
value on the grant date and are exercisable generally in cumulative annual
installments over a maximum ten-year period, commencing at least one year from
the date of grant. Upon the exercise of stock options, payment may be made using
cash, shares of the Company's common stock or any combination thereof. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995: dividend yield of 1.63%; expected
volatility of 19.93%, risk-free interest rate of 5.62%; and expected life of 4.3
years. There were no grants in 1996.
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1996, 1995 and 1994, and changes during the years ending on those
dates, is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
--------- ----------- ---------- ----------- --------- -----------
Outstanding at beginning of year............... 152,925 $ 31.82 86,000 $ 23.15 44,650 $ 20.13
Granted........................................ 94,050 36.89 57,000 24.75
Exercised...................................... (6,300) 23.56 (17,325) 21.05 (8,650) 20.44
Expired or canceled............................ (9,100) 33.47 (9,800) 23.39 (7,000) 20.30
--------- ----------- ---------- ----------- --------- -----------
Outstanding at end of year..................... 137,525 $ 32.09 152,925 $ 31.82 86,000 $ 23.15
--------- ----------- ---------- ----------- --------- -----------
Options exercisable at year-end................ 51,425 19,225 22,150
Weighted-average fair value of options granted
during the year.............................. $ 8.26
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
NUMBER REMAINING --------------------------------------
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
PRICES 12/31/96 (YEARS) EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- - ------------------ --------------- ------------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
$19.125 - 24.750... 53,475 2.37 $ 24.07 29,925 $ 23.81
$31.250 - 37.375... 84,050 3.94 $ 37.19 21,500 $ 37.18
</TABLE>
Under the 1986 Stock Option Plan, options to purchase a total of 55,975
shares were outstanding as of December 31, 1996. At December 31, 1996, 30,625 of
these shares were exercisable.
During 1996, the shareholders of the Company approved the 1996 Stock Option
Plan, under which a maximum of 200,000 shares of common stock were reserved for
issuance to certain officers and key employees. Under the 1996 Stock Option
Plan, options to purchase a total of 81,550 shares were outstanding as of
December 31, 1996. At December 31, 1996, 20,800 of these shares were
exercisable.
11
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has a discretionary Restricted Stock and Cash Bonus Plan (Plan)
which reserves 400,000 shares of the Company's common stock for sale, at market
price or below, or award to key employees. Shares sold or awarded are subject to
restrictions against transfer and repurchase rights of the Company. In general,
restrictions lapse at the rate of 20% per year beginning one year from the award
or sale. In addition, the Plan provides for a cash bonus to the participant
equal to the fair market value of the shares on the dates restrictions lapse, in
the case of an award, or the excess of the fair market value over the original
purchase price if the shares were purchased. The total bonus paid to any
participant during the restricted period is limited to twice the fair market
value of the shares on the date of award or sale.
Under the Plan, during 1996, 1,500 shares were awarded leaving 343,900
shares available for award or sale at December 31, 1996. Under the Plan, in 1995
and 1994, 18,500 and 15,500 shares were awarded, respectively. In addition to
the shares issued and the amortization of deferred compensation included in the
Consolidated Statements of Shareholders' Equity, the Company accrued $408,000,
$306,000, and $212,000 for additional compensation payable under the provisions
of the Plan in 1996, 1995 and 1994, respectively.
The Company has a Stock Retirement Plan for Nonemployee Directors. This
retirement plan provides for a portion of the total compensation payable to
Nonemployee Directors to be deferred and paid in Company stock. Under this plan,
the amount of the actual dollar compensation was $17,100, $15,100 and $11,100 in
1996, 1995 and 1994, respectively.
NOTE E--EMPLOYEE RETIREMENT PLANS
DEFINED BENEFIT PLANS
The Company has a number of noncontributory defined benefit pension plans
(Plans) covering approximately 46% of its employees. Plans covering salaried
employees provide pension benefits that are based on the employees' compensation
prior to retirement. Plans covering hourly employees generally provide benefits
of stated amounts for each year of service.
Net pension income for the Plans in 1996, 1995 and 1994 includes the
following components:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------
<S> <C> <C> <C>
1996 1995 1995
---------- ---------- ----------
Service cost-benefits earned during the year.................................. $ 2,787 $ 2,216 $ 2,374
Interest cost on projected benefit obligation................................. 5,430 5,330 4,769
Actual (return) loss on plan assets........................................... (20,982) (23,252) 2,565
Net amortization and deferral................................................. 7,352 10,375 (16,271)
---------- ---------- ----------
Net pension income............................................................ $ (5,413) $ (5,331) $ (6,563)
---------- ---------- ----------
</TABLE>
12
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table details the funded status of the Plans at December 31,
1996, and December 31, 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------
<S> <C> <C>
1996 1995
-------------- ----------
Actuarial present value of benefit obligations:
Vested benefits..................................................................... $ 68,570 $ 66,736
Nonvested benefits.................................................................. 2,598 2,960
-------------- ----------
Accumulated benefit obligation...................................................... $ 71,168 $ 69,696
-------------- ----------
Plan assets at fair value............................................................. $ 151,841 $ 134,595
Projected benefit obligation.......................................................... 78,046 77,138
-------------- ----------
Plan assets in excess of the projected benefit obligation............................. 73,795 57,457
Unrecognized prior year service cost.................................................. 397 154
Unrecognized net (gain) loss.......................................................... (15,146) (1,935)
Unrecognized net asset................................................................ (8,894) (10,937)
-------------- ----------
Prepaid pension expense............................................................... $ 50,152 $ 44,739
-------------- ----------
</TABLE>
Assumptions used in determining net pension income and the funded status of
U.S. defined benefit pension plans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Discount rates (funded status)................................................... 7.75% 7.25% 8.25%
Rates of increase in compensation levels (salaried plan only).................... 5%-7% 5%-7% 5%-7%
Expected long-term rate of return on assets...................................... 9.75% 9.00% 9.00%
</TABLE>
Net pension income is determined using assumptions as of the beginning of
each year. Funded status is determined using assumptions as of the end of each
year. Effective with the December 31, 1996, measurement date, the discount rate
was increased to 7.75% to reflect current market conditions. This change had no
impact on 1996 pension income, but will increase 1997 pension income by
$562,000. Effective with the December 31, 1995, measurement date, the discount
rate was reduced to 7.25% to reflect market conditions. This change had no
impact on 1995 pension income, but reduced 1996 pension income by $310,000.
Effective with the December 31, 1994, measurement date, the discount rate,
expected long-term rate of return on assets and mortality assumptions were
revised to reflect current market and demographic conditions. As a result of
these changes, the December 31, 1994, projected benefit obligation decreased by
$2.4 million. These changes had no effect on 1994 pension income, but reduced
1995 pension income by $1.2 million.
The majority of U.S. defined benefit pension plan assets are invested in
common stock, including approximately $8.5 million in CTS common stock. The
balance is invested in corporate bonds, U.S. government backed mortgage
securities and bonds, asset backed securities, a private equity fund, non-U.S.
corporate bonds and convertible issues.
Because the domestic plans are fully funded, the Company made no
contributions during 1996, 1995 or 1994. Benefits paid by all Plans during 1996,
1995 and 1994 were $4,240,000, $4,085,000 and $4,175,000, respectively.
13
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pension coverage for employees of certain non-U.S. subsidiaries is provided
through separate plans. Contributions of $167,000, $237,000 and $172,000 were
made to the non-U.S. Plans in 1996, 1995 and 1994, respectively.
DEFINED CONTRIBUTION PLANS
The Company sponsors a 401(k) Plan and several other defined contribution
plans which cover some of its non-U.S. employees and its domestic hourly
employees not covered by a defined benefit pension plan. Contributions and costs
are generally determined as a percentage of the covered employee's annual
salary. Amounts expensed for the 401(k) Plan and the other plans totaled
$2,382,000 in 1996, $2,294,000 in 1995 and $2,506,000 in 1994.
POSTRETIREMENT LIFE INSURANCE PLANS
In addition to providing pension benefits, the Company provides certain life
insurance programs for retired employees. Substantially all of the Company's
domestic employees are eligible for life insurance benefits.
Summary information on the Company's plans as of December 31, 1996, and
December 31, 1995, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Accumulated postretirement benefit obligation:
Active employees........................................................................... $ (1,298) $ (1,282)
Retirees and dependents.................................................................... (2,698) (2,912)
--------- ---------
(3,996) (4,194)
Unrecognized net gain...................................................................... (574) (345)
Postretirement benefit obligation.......................................................... $ (4,570) $ (4,539)
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense for 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Service cost-benefits earned during the year............................................ $ 34 $ 28 $ 43
Interest cost on accumulated benefit obligation......................................... 295 330 511
Net amortization and deferral........................................................... (1,008)
--------- --------- ---------
Net expense (income).................................................................... $ 329 $ (650) $ 554
--------- --------- ---------
</TABLE>
The accumulated postretirement benefit obligation was determined using
relevant actuarial assumptions and the terms of the Company's life insurance
plans. For measurement purposes, a 7.75%, 7.25% and 8.25% annual discount rate
was used to determine the remaining life obligation for 1996, 1995 and 1994,
respectively.
The Company funds life insurance benefits through term life insurance
policies. The Company plans to continue funding premiums on a pay-as-you-go
basis.
14
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--INCOME TAXES
The components of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Domestic......................................................................... $ 16,381 $ 17,563 $ 15,391
Non-U.S.......................................................................... 17,221 10,121 6,096
--------- --------- ---------
Total........................................................................ $ 33,602 $ 27,684 $ 21,487
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Current:
Federal......................................................................... $ 3,105 $ 1,935 $ 1,998
State........................................................................... 1,012 963 604
Non-U.S......................................................................... 5,114 4,383 2,367
--------- --------- ---------
Total current................................................................. 9,231 7,281 4,969
--------- --------- ---------
Deferred:
Federal......................................................................... 2,761 2,534 1,268
State........................................................................... 313 578 400
Non-U.S......................................................................... 127 127 883
--------- --------- ---------
Total deferred................................................................ 3,201 3,239 2,551
--------- --------- ---------
Total provision for income taxes.............................................. $ 12,432 $ 10,520 $ 7,520
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
at December 31, 1996, and 1995, are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Depreciation................................................................................. $ 1,460 $ 1,063
Pensions..................................................................................... 17,683 15,767
Other........................................................................................ 3,185 2,282
--------- ---------
Gross deferred tax liabilities............................................................... 22,328 19,112
--------- ---------
Postemployment benefits...................................................................... 1,622 1,611
Inventory reserves........................................................................... 2,721 2,613
Loss carryforwards........................................................................... 5,778 5,847
Credit carryforwards......................................................................... 4,355 5,537
Nondeductible accruals....................................................................... 4,365 3,200
Other........................................................................................ 818 710
--------- ---------
Gross deferred tax assets.................................................................... 19,659 19,518
--------- ---------
Net deferred tax (liabilities) assets........................................................ (2,669) 406
Deferred tax asset valuation allowance....................................................... (6,765) (6,639)
--------- ---------
Total........................................................................................ $ (9,434) $ (6,233)
--------- ---------
--------- ---------
</TABLE>
15
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1996, the valuation allowance was increased as a result of an
increase in unutilized net operating loss carryforwards in some taxing
jurisdictions, and decreased by the utilization of net operating losses and
scheduled tax credits in other jurisdictions. The net increase in the valuation
allowance was $126,000.
A reconciliation from the statutory federal income tax to the Company's
effective income tax follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Taxes at the U.S. statutory rate.................................................. $ 11,761 $ 9,689 $ 7,306
State income taxes, net of federal income tax benefit............................. 861 1,002 663
Non-U.S. income taxed at rates different than the U.S. statutory rate............. (728) 1,159 1,639
Utilization of net operating loss carryforwards and benefit of scheduled tax
credits......................................................................... (279) (2,024) (2,544)
Foreign distributions, net of foreign tax credits................................. 297 372
Other............................................................................. 520 322 456
--------- --------- ---------
Provision for income taxes........................................................ $ 12,432 $ 10,520 $ 7,520
</TABLE>
Undistributed earnings of certain non-U.S. subsidiaries amount to
$52,892,000 at December 31, 1996. These earnings are intended to be permanently
invested and, accordingly, no provision has been made for non-U.S. withholding
taxes. In the event all undistributed earnings were remitted, approximately
$4,795,000 of withholding tax would be imposed, which would be substantially
offset by foreign tax credits.
The Company has U.S. tax basis business tax credits and foreign tax credits
of approximately $1,624,000 at December 31, 1996. The U.S. business credit
carryforwards expire between the years 2001 and 2010. In addition, the Company
has various non-U.S. tax basis net operating losses and business credit
carryforwards of $20,937,000 and $70,000, respectively. The non-U.S. net
operating losses have an unlimited carryforward period. The non-U.S. credit
carryforwards expire in 1997. In addition, the Company has alternative minimum
tax credit carryforwards of approximately $2,661,000, which have no expiration
dates.
NOTE G--BUSINESS SEGMENT AND NON-U.S. OPERATIONS
The Company's operations comprise one business segment, the manufacturing of
electronic components. Electronic components include production and sale of
automotive control devices, fiber-optic transceivers, flex cable assemblies,
frequency control devices, hybrid microcircuits, industrial electronics,
insulated metal circuits, interconnect products, loudspeakers, resistor
networks, switches and variable resistors.
CTS' 15 largest customers represented about 62%, 61% and 62% of net sales in
1996, 1995 and 1994, respectively. Sales to General Motors Corportation ("GM")
represented more than 10% of CTS' net sales in each of the last three years
(ranging from 15% to 18% of net sales over such period). The loss of, or
reduction in, orders from GM could have a material adverse effect on CTS.
The non-U.S. operations or facilities are located in Canada, Hong Kong,
Japan, Mexico, Singapore, Taiwan, Thailand and the United Kingdom. Net sales to
unaffiliated customers from the United Kingdom equaled 24%, 17% and 16% of the
consolidated total for 1996, 1995 and 1994, respectively. Net sales to
unaffiliated customers from Other non-U.S. operations in the aggregate equaled
16%, 19% and 18% of the consolidated total for each of the years 1996, 1995 and
1994, respectively.
Net sales by geographic area include both sales to unaffiliated customers
and transfers between geographic areas. Such transfers are accounted for
primarily on the basis of a uniform intercompany pricing policy. Operating
earnings are total net sales less operating expenses. In computing operating
earnings, none of the following items have been added or deducted: general
corporate expenses, interest income, interest expense, other income and expenses
and income taxes. Identifiable assets by geographic area are those assets that
are used in the Company's operations in each such area. The Corporate Office
assets are principally cash and equivalents and the prepaid pension asset.
16
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized financial information concerning the geographic areas of
operation for 1996, 1995 and 1994 is shown in the following table. The caption
"Eliminations" includes intercompany sales and other transactions which are
eliminated or adjusted in arriving at consolidated data.
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------
GEOGRAPHIC AREA 1996 1995 1994
- - ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net Sales
United States:
Sales to unaffiliated customers.......................................... $ 193,474 $ 194,016 $ 178,032
Transfers to non-U.S. area............................................... 8,181 5,439 4,179
---------- ---------- ----------
United Kingdom: 201,655 199,455 182,211
Sales to unaffiliated customers.......................................... 76,204 49,571 42,779
Transfers to other areas................................................. 730 732 514
---------- ---------- ----------
Other non-U.S.: 76,934 50,303 43,293
Sales to unaffiliated customers.......................................... 51,619 56,570 47,896
Transfers to other areas................................................. 7,400 6,092 7,692
---------- ---------- ----------
59,019 62,662 55,588
Eliminations............................................................... (16,311) (12,263) (12,385)
---------- ---------- ----------
Total net sales........................................................ $ 321,297 $ 300,157 $ 268,707
Operating Earnings
United States.............................................................. $ 23,226 $ 22,204 $ 18,109
United Kingdom............................................................. 10,192 6,483 4,569
Other non-U.S.............................................................. 9,141 6,345 3,708
---------- ---------- ----------
42,559 35,032 26,386
Eliminations............................................................... (72) 140 1
---------- ---------- ----------
42,487 35,172 26,387
General corporate expenses................................................. 9,067 7,684 5,703
---------- ---------- ----------
Operating earnings......................................................... 33,420 27,488 20,684
Other income--net.......................................................... 182 196 803
---------- ---------- ----------
Earnings before income taxes............................................. $ 33,602 $ 27,684 $ 21,487
---------- ---------- ----------
---------- ---------- ----------
Assets Apportioned by Area
United States.............................................................. $ 88,189 $ 87,862 $ 86,605
United Kingdom............................................................. 36,037 24,718 23,419
Other non-U.S.............................................................. 47,689 49,848 43,272
---------- ---------- ----------
171,915 162,428 153,296
Eliminations................................................................. (4,672) (3,783) (3,305)
---------- ---------- ----------
167,243 158,645 149,991
Corporate assets............................................................. 82,129 68,482 56,835
---------- ---------- ----------
Total assets........................................................... $ 249,372 $ 227,127 $ 206,826
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
17
<PAGE>
CTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- CONTINGENCIES
Certain processes in the manufacture of the Company's current and past
products create hazardous waste by-products as currently defined by federal and
state laws and regulations. The Company has been notified by the U.S.
Environmental Protection Agency, state environmental agencies and, in some
cases, generator groups, that it is or may be a Potentially Responsible Party
(PRP) regarding hazardous waste remediation at several non-CTS sites. The
factual circumstances of each site are different; the Company has determined
that its role as a PRP with respect to these sites, even in the aggregate, will
not have a material adverse effect on the Company's business or financial
condition, based on the following: 1) the Company's status as a DE MINIMIS
party; 2) the large number of other PRPs identified; 3) the identification and
participation of many larger PRPs who are financially viable; 4) defenses
concerning the nature and limited quantities of materials sent by the Company to
certain of the sites; and/or 5) the Company's experience to-date in relation to
the determination of its allocable share. In addition to these non-CTS sites,
the Company has an ongoing practice of providing reserves for probable
remediation activities at certain of its manufacturing locations and for claims
and proceedings against the Company with respect to other environmental matters.
Accrued environmental costs as of December 31, 1996, totaled $4.8 million,
compared with $4.5 million at December 31, 1995. In the opinion of management,
based upon presently available information, either adequate provision for
probable costs has been made, or the ultimate costs resulting will not
materially affect the consolidated financial position or results of operations
of the Company.
Certain claims are pending against the Company with respect to matters
arising out of the ordinary conduct of its business. In the opinion of
management, based upon presently available information, either adequate
provision for anticipated costs has been made by insurance, accruals or
otherwise, or the ultimate anticipated costs resulting will not materially
affect the Company's consolidated financial position or results of operations.
NOTE I--RELATED PARTY TRANSACTIONS
Dynamics Corporation of America (DCA) owned 2,303,100 shares (44.1%) of the
Company's outstanding common stock at December 31, 1996. Of these shares,
1,020,000 were not granted voting authority by CTS shareholders in 1987. In
addition to stock ownership, as of December 31, 1996, two representatives of DCA
serve on the Company's Board of Directors. The normal business transactions
between the Company and DCA are insignificant.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
To the Shareholders and
Board of Directors of CTS Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of CTS
Corporation and its subsidiaries at December 31, 1996, and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/PRICE WATERHOUSE LLP
South Bend, Indiana
January 27, 1997
19
<PAGE>
CTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1994--1996)
LIQUIDITY AND CAPITAL RESOURCES
The table below highlights significant comparisons and ratios related to
liquidity and capital resources of CTS Corporation (CTS or Company) for each of
the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
Net cash provided by (used in):
Operating activities.................................. $ 35,103 $ 26,861 $ 12,555
Investing activities.................................. (16,388) (10,945) (15,090)
Financing activities.................................. (12,324) (3,796) 2,580
Cash and equivalents.................................... $ 44,957 $ 37,271 $ 24,922
Accounts receivable, net................................ 43,984 41,737 35,029
Inventories, net........................................ 38,761 38,885 41,456
Current assets.......................................... 138,201 126,113 110,667
Notes payable........................................... 6,685 7,436
Accounts payable........................................ 17,146 15,605 12,768
Accrued liabilities..................................... 31,818 26,461 24,284
Current liabilities..................................... 51,391 50,962 44,792
Working capital......................................... 86,810 75,151 65,875
Current ratio........................................... 2.69 2.47 2.47
Interest-bearing debt................................... $ 13,428 $ 22,267 $ 23,318
Net tangible worth...................................... 162,193 141,650 126,634
Ratio of interest-bearing debt to net tangible worth.... .08 .16 .18
</TABLE>
During 1996, $35.1 million of positive cash flow was generated from
operating activities. This amount, which exceeded 1995 by 31%, or $8.2 million,
was primarily a result of the higher level of earnings and improved management
of working capital, particularly accounts receivable.
The 1995 cash flow from operating activities of $26.9 million improved by
$14.3 million from 1994, primarily as a result of higher net earnings and
reduction in inventories, partially offset by an increase in accounts
receivable.
During 1994, cash flow of $12.6 million was positive from operating
activities, primarily as a result of the significant improvement in operating
earnings when compared to 1993. However, offsetting the favorable impact of the
higher earnings was the higher working capital requirements to support the
increased sales levels, which reduced operating cash flow by $5.0 million from
1993.
Cash expenditures for investing activities totaled $16.4 million in 1996,
exceeding the prior year's amount by $5.4 million, or 50%. The major change in
financing activities was cash payments of $8.9 million for short and long-term
debt. As of year-end, the Company had no short-term debt.
Spending of cash for investing activities in 1995 was $10.9 million and
comparable to 1994 after the impact of the 1994 expenditures for the light
emitting diode (LED)-based fiber-optic data link (ODL-Registered Trademark-)
product line of $3.4 million. In terms of financing activities, the impact of
the notes payable reduction during 1995 was $5.3 million from the increased cash
flow.
Investing requirements increased during 1994, primarily due to the $13.4
million of capital expenditures, including $3.4 million for the acquisition of
ODL fixed assets. Additionally, financing activities
20
<PAGE>
increased during 1994 and were generated by the higher sales levels and the
acquisition of the ODL product line for which $2.1 million of additional
expenditures were made for inventory.
A significant noncash component and a decreasing component of operating
earnings during the 1994 to 1996 period was pension income of $5.4 million, $5.3
million and $6.6 million in 1996, 1995 and 1994, respectively. The 1996 pension
income amount was approximately the same as 1995, but decreased from 1994 as a
result of actuarial changes. As a result of the Company's overfunded pension
position, no overall cash contributions are anticipated to be required in the
immediate future to meet the Company's pension obligations.
The major investment activity during the last three years has been capital
expenditures, which totaled $17.2 million in 1996, $11.2 million in 1995 and
$13.4 million in 1994. The major capital expenditures in 1996 were for new
products and product line enhancements. Also during 1996, as in 1995, capacity
increases were required in our automotive and European interconnect product
lines. The Company expects to increase its capital expenditures in 1997 over
1996 levels. These capital expenditures will be primarily for new products and
cost reduction programs, as well as selected manufacturing equipment capacity
expansion.
The most recent major long-term financing activity outside the CTS revolving
credit agreements occurred during 1994, when the Company negotiated a five-year,
$15.0 million long-term loan which expires in 1999. As of December 31, 1996,
$13.0 million remains outstanding on this loan.
Dividends paid were $3.4 million in 1996, $3.1 million in 1995 and $2.1
million in 1994. During 1996, as a result of continuing improved earnings
performance and positive cash flow, the Company increased its quarterly dividend
to $.18 per share, effective with the August payment. In December 1994, the
Board of Directors, principally as a result of the Company's improving
performance and cash position, increased the quarterly dividend to $.15 per
share, effective with the February 1995 payment.
At the end of each of the last three years, cash of various non-U.S.
subsidiaries was invested in U.S.-denominated cash equivalents. Such cash is
generally available to the parent Company and the Company's intention is not to
repatriate non-U.S. earnings. If all non-U.S. earnings were repatriated,
approximately $4.8 million of withholding taxes would accrue, but would be
substantially offset by foreign tax credits.
In 1996, CTS renegotiated its long-term revolving credit agreement and at
the end of 1996, CTS had $45.0 million of borrowing capacity available under
long-term revolving credit agreements with four banks. These revolving
agreements, which expire in 2001, are the Company's primary credit vehicles and,
together with cash from operations, should adequately fund the Company's
anticipated cash needs.
21
<PAGE>
RESULTS OF OPERATIONS
The following table highlights significant information with regard to the
Company's twelve months results of operations during the past three fiscal
years.
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1996 1995 1994
------------ ------------ ------------
Net sales............................................................... $ 321,297 $ 300,157 $ 268,707
Gross earnings.......................................................... 87,496 74,804 63,067
Gross earnings as a percent of sales.................................... 27.2% 24.9% 23.5%
Selling, general and administrative expenses............................ $ 43,333 $ 39,312 $ 36,175
Selling, general and administrative expenses as a percent of sales...... 13.5% 13.1% 13.5%
Research and development expenses....................................... $ 10,743 $ 8,004 $ 6,208
Research and development expenses as a percent of sales................. 3.3% 2.7% 2.3%
Operating earnings...................................................... $ 33,420 $ 27,488 $ 20,684
Operating earnings as a percent of sales................................ 10.4% 9.1% 7.7%
Interest (income) expense, net.......................................... $ (432) $ 369 $ 57
Earnings before income taxes............................................ 33,602 27,684 21,487
Income taxes............................................................ 12,432 10,520 7,520
Income tax rate......................................................... 37.0% 38.0% 35.0%
</TABLE>
Net sales for 1996 increased by $21.1 million, or 7.0% over 1995,
principally due to the increased demand in the domestic and European automotive,
computer equipment and communications equipment markets.
The 1995 net sales increased $31.5 million, or 11.7% over 1994, primarily
due to broad increases in demand for electronic component products into our
automotive, computer equipment and communications equipment markets.
From 1993 to 1994, total sales increased by 13.4%, primarily as a result of
substantial increases in our automotive and European interconnect product lines.
During the three-year period 1994-1996, the percentage of overall sales to
the automotive market decreased from 38% to 34%. During this same period, our
sales into the computer equipment market increased from 19% to 24%, as a percent
of total sales. Sales into other markets have generally remained constant.
The Company's 15 largest customers represented 62% of net sales in 1996, 61%
in 1995 and 62% in 1994. One customer, a major manufacturer of automobiles,
comprised 15% of net sales in 1996 as compared to 18% in 1995 and 1994.
Because most of CTS' revenues are derived from the sale of custom products,
the relative contribution to revenues of changes in unit volume cannot be
meaningfully determined. The Company's products are usually priced with
reference to expected or required profit margins, customer expectations and
market competition. Pricing for most of the Company's electronic component
products frequently decreases over time and also fluctuates in accordance with
total industry utilization of manufacturing capacity.
In 1996, 1995 and 1994, improvements in gross earnings were realized over
each of the preceding years in absolute terms and as a percent of sales,
principally due to higher sales volume, production efficiencies and higher
absorption of fixed manufacturing overhead expenses.
Selling, general and administrative expenses as a percent of sales have
remained constant over the last three years, ranging from 13.1% to 13.5%. In
1996, as in previous years, the Company continued to control these expenses
while increasing sales. Also during 1994, the Company successfully resolved
approximately
22
<PAGE>
$1 million of outstanding legal and customer claims, the provision for most of
which had been established in 1993.
During 1996, research and development expenses increased by $2.7 million, or
34% over 1995, as the Company continued investment efforts in new product
development and product improvements, particularly in automotive, frequency
control and hybrid microcircuit products. Research and development expenses
increased by $1.8 million, or 29%, in 1995 over 1994, with much of the
additional effort devoted to the "hall effect" non-contacting sensor development
for our automotive products, as well as other new product development programs
in the automotive and the resistor network product areas.
The net of interest expense and interest income is reflective of the levels
of debt during the 1994-1996 period. The lower amount of expense in 1994 relates
to the timing of the $15.0 million loan secured in late 1994, while the 1996
income amount is a result of lower levels of short-term debt compared to 1995.
During 1996 and 1995, the primary reasons for the substantial operating
earnings improvement include the higher overall sales and related productivity
in our automotive, resistor network and interconnect products, and the reduction
of losses from our frequency control products. These improvements substantially
offset losses from our defense and aerospace products, caused primarily by the
declining market conditions. In 1994, the level of operating earnings was a
result of the higher automotive and interconnect product sales, and improved
performance within our resistor network and electromechanical products, which
more than offset losses from our frequency control and hybrid microcircuit
products during that year.
The 1996 effective tax rate of 37% approximated the 1995 tax rate of 38%.
The Company has net operating loss carryforwards of approximately $21 million in
certain non-U.S. subsidiaries, and has established a 100% valuation reserve on
these amounts based upon historical pretax losses.
With respect to the recently issued FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and FASB Statement No. 123, "Accounting for Stock-Based Compensation," the
Company has realized no impact on financial position or results of operations
upon adoption in 1996.
In terms of environmental issues, the Company has been notified by the U.S.
Environmental Protection Agency, as well as state agencies and generator groups,
that it is or may be a Potentially Responsible Party regarding hazardous waste
remediation at non-CTS sites. Additionally, the Company provides reserves for
probable remediation activities at certain of its manufacturing locations. These
issues are discussed in Note H--Contingencies.
23
<PAGE>
EXHIBIT 21
CTS CORPORATION AND SUBSIDIARIES
CTS Corporation (Registrant), an Indiana corporation
SUBSIDIARIES
CTS Corporation (Delaware), a Delaware corporation
CTS of Panama, Inc., a Republic of Panama corporation
CTS Components Taiwan, Ltd.,(1) a Taiwan, Republic of China corporation
CTS Singapore Pte., Ltd., a Republic of Singapore corporation
CTS Electro de Matamoros, S.A.,(1) a Republic of Mexico corporation
CTS Export Corporation, a Virgin Islands corporation
CTS Japan, Inc., a Japan corporation
CTS of Canada, Ltd., a Province of Ontario (Canada) corporation
CTS Manufacturing (Thailand) Ltd.,(1) a Thailand corporation
CTS Electronics Hong Kong Ltd.,(1) a Hong Kong corporation
CTS Corporation U.K. Ltd., a United Kingdom corporation
CTS Printex, Inc., a California corporation
CTS Micro Peripherals, Inc., a California corporation
Micro Peripherals Singapore (Private) Limited, a Republic of Singapore
corporation
Corporations whose names are indented are subsidiaries of the preceding
non-indented corporations. Except as indicated, each of the above subsidiaries
is 100% owned by its parent company. Operations of all subsidiaries and
divisions are consolidated in the financial statements filed.
- - ------------------------
(1) Less than 1% of the outstanding shares of stock is owned of record by
nominee shareholders pursuant to national laws regarding resident or nominee
ownership.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-27749 and No. 333-5730) of CTS Corporation of our
report dated January 27, 1997, appearing on page 19 of the CTS Corporation 1996
Annual Report which is incorporated in this Annual Report on Form 10-K/A. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page S-1 of this Form 10-K/A.
PRICE WATERHOUSE LLP
Chicago, Illinois
August 13, 1997
