CTS CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
1997
FORM 10-K
ANNUAL REPORT
CTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for Fiscal Year Ended December 31, 1997
CTS CORPORATION
905 West Boulevard North
Elkhart, Indiana 46514
219-293-7511
Indiana 1-4639 35-0225010
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
The Company (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities and Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the
past 90 days.
The number of shares of the Company's Common Stock outstanding at
March 6, 1998 was 14,312,499.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For Fiscal Year Ended December 31, 1997
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0225010
(State or other jurisdiction of (IRS Employer Identifi-
incorporation or organization) cation Number)
905 West Boulevard North, Elkhart, Indiana 46514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 219-293-7511
Web site address: http://www.ctscorp.com
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common stock, without par value New York Stock Exchange
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 14,312,499 shares of Common Stock, without par value,
outstanding on March 6, 1998. The aggregate market value of the
voting stock held by non-affiliates of CTS Corporation was
approximately $411.5 million on March 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the CTS Corporation 1997 Annual Report for the fiscal
year ended December 31, 1997, incorporated by reference in Part I
and Part II.
(2) Portions of the 1998 Proxy Statement for annual meeting of
shareholders to be held on April 24, 1998, incorporated by reference
in Part III.
(3) Certain portions of the CTS Corporation Form 10-K for the
1991 fiscal year ended December 31, 1991, incorporated by
reference in Part IV.
(4) Portions of the CTS Corporation Form 8-K filed October
20, 1997, incorporated by reference in Part IV.
(5) Portions of the CTS Corporation Form 14D-1 filed May 16,
1997, incorporated by reference in Part IV.
(6) Portions of the CTS Corporation Form 10-Q filed June 29,
1997, incorporated by reference in Part IV.
(7) Portions of the CTS Corporation Form 10-K for the year
ended December 31, 1995, incorporated by reference in
Part IV.
(8) Portions of the CTS Corporation Schedule 13D, filed on
July 18, 1997, incorporated by reference in Part IV.
(9) Portions of the DCA Corporation 10-Q for the quarter
ended March 31, 1997 incorporated by reference in Part
IV.
(10) Portions of the CTS Corporation form 10-Q for the quarter
ended March 30, 1997 incorporated by reference in Part
IV.
EXHIBIT INDEX -- PAGES 18-20
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 and electronic
component assemblies as well as commercial and industrial products. The
engineering and manufacturing of CTS products is performed at 21 facilities
worldwide. CTS products are sold primarily through sales engineers, sales
representatives, agents and distributors.
During 1994, the Company purchased the assets of AT&T
Microelectronics' light emitting diode based optical data link
products business. The transaction also included sales contracts,
backlog, intellectual property, trademarks, and the design and
manufacturing technology. These products, manufactured in the
Company's West Lafayette, Indiana, Microelectronics facility, were being
phased out during 1997.
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.
On October 16, 1997, the Company acquired Dynamics Corporation of
America ("DCA"), (the "merger" or "acquisition") including the
reacquisition of 6,909,300 CTS shares held by DCA, as described in
"Note B-Acquisition", page 19 of the CTS Corporation 1997 Annual
Report, and as incorporated herein by reference. CTS shareholders
on October 16, 1997, approved an increase in CTS' authorized
capitalization to 75,000,000 common shares and 25,000,000 preferred
shares. CTS shareholders also approved a 3-for-1 stock split in
the form of a stock dividend to CTS shareholders of record on
October 24, 1997.
During 1997, the Company sold assets in Baldwin, WI and property
and assets in Cokato, Minnesota for approximately $7,837,000. The
Company recognized a pretax profit of approximately $350,000 after
the write-off of associated goodwill.
The Company leased a facility in Dongguan, China during 1997 to
serve Taiwanese manufacturers establishing operations in China.
These manufacturers are purchasing the required components locally.
This facility is positioned to serve these customers and other
entrants to the Chinese manufacturing market.
During 1997, the Company announced the closing of its switch and
variable resistor manufacturing facility in Bentonville, Arkansas.
The Company plans to sell this property. The Bentonville
manufacturing and distribution operations will be relocated to the
Company's facilities in Kaohsiung, Taiwan, Matamoros, Mexico and
Brownsville, Texas.
Also during 1997, the Company leased a 20,000 square foot facility
in Hudson, New Hampshire to increase our electronic manufacturing
service capability. This location was selected to serve the
expanding North American electronic manufacturing requirements.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
The Company's products include electronic components and assemblies,
electrical appliances, power and controlled environmental systems and
fabricated metal products and equipment. Sales to unaffiliated
customers operating earnings and identifiable assets, by
geographic area, are contained in "Note H - Business Segment and
Non-U.S. Operations," page 24, of the CTS Corporation 1997 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 products principally serving
the electronic needs of original equipment manufacturers (OEMs).
The Company sells classes of similar electronic products consisting of the
following:
Electronic components
Electronic component assemblies
A substantial portion of the products within these product classes
are manufactured by CTS from purchased raw materials or subassemblies.
Electronic products (components and assemblies) are typically
manufactured at the same locations and sold to similar OEM customers.
Some products sold by CTS are purchased and resold under the Company's name.
During the past three years, two product classes accounted for 10% or more of
consolidated revenue during one or more years, as follows:
Percent of
Consolidated Revenue
Product Classes 1997 1996 1995
Electronic components 57 67 73
Electronic component assemblies 36 32 26
Other 7 1 1
Total 100% 100% 100%
In addition to contributing to its line of electronic components,
the merger added products to the Company's "other" class.
"Other" includes electrical appliances, power and controlled
environmental systems and fabricated metal products.
MARKETS
CTS estimates that its products have been sold in the following
electronics markets and in the following percentages during the
preceding three fiscal years:
Percent of Consolidated Revenue
Markets 1997 1996 1995
Automotive 29 34 36
Computer Equipment 28 21 19
Communications Equipment 17 20 18
Other 26 25 27
100% 100% 100%
OEM 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.
OEM products for the computer equipment market include flex cable
assemblies, backpanels, resistor networks, switches, frequency
control devices, fiber-optic transceivers, heat dissipators,
heatsinks and printed circuit board retainers. Products for this
market are principally used in computers and computer peripheral
equipment.
In the communications equipment market, CTS OEM products include
backpanels, frequency control devices, hybrid microcircuits, fiber-optic
transceivers, switches and resistor networks. Products for
this market are principally used in telephone equipment and
telephone switching systems.
"Other" markets, which encompass OEM and all distribution sales, include
the following products: resistor networks, hybrid microcircuits, variable
resistors, switches, electronic connectors, frequency control devices,
backpanels, electrical appliances, power and controlled environmental
systems and fabricated metal products and equipment.
End uses for these products include: medical electronic devices,
electronic testing, measuring and servicing instruments, electronic
and medical diagnostic equipment, home entertainment equipment,
appliances, defense and commercial construction.
MARKETING AND DISTRIBUTION
Sales of CTS electronic components to OEMs are principally by CTS
sales engineers and manufacturers' representatives. CTS maintains
sales offices in Elkhart, Indiana; Detroit, Michigan; 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 52% of net sales in 1997 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.
CTS utilizes 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 1997, approximately 40% of net sales
were attributable to coverage by sales representatives.
Independent distributors purchase products from CTS for resale to
customers. In 1997, independent distributors and/or dealers
accounted for approximately 8% of net sales.
RAW MATERIALS
Generally, CTS' major raw materials are steel, copper, brass,
aluminum, certain precious metals, resistive and conductive inks,
passive electronic 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
1997, 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 their 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 1997, working capital increased
to $93.4 million, primarily because of the increase in the
overall business level. During 1997, cash decreased due to the
requirements of the DCA acquisition, partially offset by
increased cash generated through financing and 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, 1997. This
cash, other than approximately $5.3 million, is generally
available to the Company. During 1997, the other changes in
working capital were primarily a result of the DCA acquisition
and higher business activity.
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 right to manufacture several electronic products
to companies in the United States and non-U.S. countries. In
1997, 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 65%, 62% and 61% of
net sales in 1997, 1996 and 1995, respectively. Sales to General Motors
Corporation represented more than 10% of CTS' sales in each of the last
three years (ranging from 12% to 18% of net sales over such period).
Sales to Digital Equipment Corporation represented more than 10% of
CTS' net sales in one of the last three years. Sales to Seagate
Technology, Inc. represented more than 10% of CTS' net sales in one of the last
three years. The loss of, or reduction in, orders from one or more of
these customers could have a materially 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 1997, the Company's backlog of orders was $165 million,
which includes $82 million for DCA. This compares to $85
million at the end of 1996.
The backlog of orders at the end of 1997 will generally be filled
during the 1998 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.
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.
Some customers have reduced or plan to reduce the number of
suppliers while increasing the volume of purchases from
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
OEMs.
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 are advantages to CTS in selling
products to customers.
CTS believes that it is one of the largest manufacturers of
automotive throttle position sensors in the world.
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 H - Business Segment and Non-U.S.
Operations," pages 24-25, of the CTS Corporation 1997 Annual Report,
and is incorporated herein by reference.
In 1997, approximately 40% of net sales to unaffiliated
customers, after eliminations, were attributable to non-U.S.
operations. This is the same percentage as 1996. About 27% 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 1997, 1996 and 1995, CTS expended $13.3, $10.7 and $8.0
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 1997, the Company 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 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 5,044 persons at December 31, 1997. About 31% of
these persons were employed outside the United States at the end
of 1997. Approximately 700 CTS employees in the United States
were covered by collective bargaining agreements as of December
31, 1997. One of the four collective bargaining agreements
covering these employees will expire in 1999. The other three
agreements 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.
Square Owned/
Location Feet Leased Expires
Elkhart, IN 412,000 Owned -
Scranton, PA 270,000 Owned -
Berne, IN 249,000 Owned -
New Hartford, CT 212,000 Owned -
Singapore 159,000 Owned* -
Batavia, OH 148,000 Owned -
Kaohsiung, Taiwan 133,000 Owned* -
Streetsville, Ontario, Canada 112,000 Owned -
West Lafayette, IN 106,000 Owned -
Bridgeport, CT 97,000 Owned -
Sandwich, IL 94,000 Owned -
Carlisle, PA 94,000 Leased February
2009
Brownsville, TX 85,000 Owned -
Carson, CA 76,000 Leased October
2007
Glasgow, Scotland 75,000 Owned -
McConnellsburg, PA 74,000 Owned -
Bentonville, AR 72,000 Owned -
New Hope, MN 55,000 Leased December
(Science Center Dr.) 1998
Winsted, CT 55,000 Owned -
Bangkok, Thailand 53,000 Owned -
Matamoros, Mexico 51,000 Owned* -
Baldwin, WI 39,000 Owned -
Burbank, CA 37,000 Leased** January
2000
Dongguan, China 23,000 Leased October
2002
Burbank, CA 21,000 Owned -
Hudson, NH 20,000 Leased September
1999
Greenwich, Ct 8,000 Leased December
2000
TOTAL 2,816,000
* Buildings are located on land leased under renewable leases.
** There is a ground lease on a parcel that expires in 2015.
The Company is currently seeking to sell the Bentonville,
Arkansas manufacturing facility.
A portion of the Brownsville facility is currently under a
leasing arrangement which expires in 1999. The annual rental
income is approximately $60,000. The New Hope, Minnesota facility
is currently under two separate sublease arrangements, each
expiring in 1998. The combined annual rental income is
approximately $170,000.
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. $280,000.
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. During 1997, the two-year renewal
option was exercised, with an annual rental amount of approximately $840,000.
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
A special meeting of the shareholders of CTS Corporation was held
on October 16, 1997. At that meeting, two matters were submitted
to a vote of the shareholders: (1) The issuance of common stock
pursuant to the Amended and Restated Agreement and Plan of Merger
among the Company, a wholly-owned subsidiary of the Company, and
Dynamics Corporation of America ("DCA") and related amendments to
the Company's Articles of Incorporation; and (2) The grant of
employee stock options to certain executive officers of CTS and
DCA. Following are the tabulations of the voting results on
these issues, on which 4,229,589 shares were entitled to vote and
3,782,012 of such shares were represented at the meeting:
Issuance of Common Stock and Related Amendments to the
Articles of Incorporation
Votes Cast For Votes Cast Against Abstentions
3,709,196 69,545 3,271
Grant of Stock Options
Votes Cast For Votes Cast Against Abstentions
3,602,429 124,224 55,359
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 12, of the CTS Corporation 1997 Annual Report,
incorporated herein by reference. On March 6, 1998, there were
approximately 1,435 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 13, of the CTS Corporation 1997 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 (1995-1997)," pages 28-31, of the CTS
Corporation 1997 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 14-27 of the CTS Corporation 1997 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 12 of the CTS Corporation 1997 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information responsive to Items 401(a) and 401(e) of Regulation
S-K pertaining to directors of CTS is contained in the 1998 Proxy
Statement under the caption "Election of Directors," pages 6-7,
filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
Information responsive to Item 405 of Regulation S-K pertaining
to compliance with Section 16(a) of the Securities Exchange Act
of 1934 is contained in the 1998 Proxy Statement under the
caption "Section 16(a) Beneficial Ownership Reporting
Compliance," page 8, filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
The individuals listed were elected as executive officers of CTS
at the annual meeting of the Board of Directors on April 25,
1997, except for William J. Kaska, who was elected at the August
13, 1997 meeting of the Board of Directors. They are expected to
serve as executive officers until the next annual meeting of the
Board of Directors, scheduled on April 24, 1998, at which time
the election of officers will be considered again by the Board of
Directors.
Name Age Position and Offices
Joseph P. Walker 59 Director, Chairman,
President and Chief
Executive Officer
William J. Kaska 56 Group Vice President
Stanley J. Aris 57 Vice President Finance and
Chief Financial Officer
Jeannine M. Davis 49 Vice President, Secretary
and General Counsel
James L. Cummins 42 Vice President, Human Resources
James N. Hufford 58 Vice President, Research,
Development and Engineering
Donald R. Schroeder 49 Vice President, Sales and
Marketing
George T. Newhart 55 Corporate Controller
Gary N. Hoipkemier 43 Treasurer
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.
William J. Kaska was elected Group Vice President on August 13,
1997. Prior to his appointment, he served as General Manager and
Vice President of CTS Automotive Products.
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 has served as Vice President, Human Resources
since 1994. For the three years prior to this appointment, he
served as Director, Human Resources, CTS Corporation from 1991-1994.
James N. Hufford has served as Vice President, Research,
Development and Engineering since 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 has served as Vice President, Sales and
Marketing since 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.
Item 11. Executive Compensation
Information responsive to Item 402 of Regulation S-K pertaining
to management remuneration is contained in the 1998 Proxy
Statement in the captions "Executive Compensation," pages 9-12
and "Director Compensation," pages 17-18, filed with the
Securities and Exchange Commission, and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information responsive to Item 403 of Regulation S-K pertaining
to security ownership of certain beneficial owners and management
is contained in the 1998 Proxy Statement in the caption
"Securities Beneficially Owned by Principal Shareholders and
Management," pages 3-6, filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
On October 16, 1997, the Company acquired Dynamics Corporation of
America ("DCA"), including the reacquisition of CTS shares held
by DCA. Other transactions between DCA and CTS, prior to the
acquisition, were minimal.
Information responsive to Item 404 of Regulation S-K pertaining to
security ownership of certain beneficial owners and management is
contained in the 1998 Proxy Statment in the caption "Certain Relationships
and Related Transactions", pages 7-8, filed with the Securities and Exchange
Commission and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
The list of financial statements and financial statement
schedules required by Item 14(a)(1) and (2) is contained on page
S-1 herein.
(a) (3) Exhibits
(3)(a) Articles of Incorporation, as amended and restated
October 16, 1997, (incorporated by reference to
Exhibit (3) (a) to the Company's Current Report on
form 8-K, filed October 20, 1997).
(3)(b) Bylaws, effective October 31, 1997, filed
herewith.
(10)(a) Employment Agreement, dated as of May 9, 1997,
between the Company and Joseph P. Walker
(incorporated by reference to Exhibit (c)(2) to
the Schedule 14D-1 filed by the Company on May 16,
1997).
(10)(b) Prototype indemnification agreements, executed with
all officers and directors of the Corporation, incorporated
by reference to Exhibit (10)(b) to the Company's
Annual Report on Form 10-K for 1991).
(10)(c) CTS Corporation 1986 Stock Option Plan, approved
by the shareholders on May 30, 1986, as amended
and restated on May 9, 1997, (incorporated by
reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 29, 1997).
(10)(d) CTS Corporation 1988 Restricted Stock and Cash
Bonus Plan approved by the shareholders on April
28, 1989, as amended and restated on May 9, 1997,
(incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1997).
(10)(e) CTS Corporation 1996 Stock Option Plan, approved
by the shareholders on April 26, 1996, as amended
and restated on May 9, 1997, (incorporated by
reference to Exhibit 10(f) to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 29, 1997).
(10)(f) Amended and Restated Agreement and Plan of Merger,
dated as of May 9, 1997, and amended and restated
on July 17, 1997, and further amended on October
15, 1997, among the Company, CTS First Acquisition
Corp., a wholly owned subsidiary of the Company
("Sub"), and DCA (incorporated by reference to
Exhibit (c)(6) to Amendment No. 3 to the Schedule
13D filed by the Company in respect of DCA on July
18, 1997, (the "Schedule 13-D") and Exhibit 2(a)
to the Company's Current Report on Form 8-K, filed
October 20, 1997).
(10)(g) Shareholders Agreement, dated as of July 17, 1997,
among the Company, Sub, WHX Corporation ("WHX")
and SB Acquisition Corp., a subsidiary of WHX
(incorporated by reference to Exhibit (c)(7) to
the Schedule 13-D).
(10)(h) Employment Agreement, dated as of May 9, 1997,
between the Company and Andrew Lozyniak
(incorporated by reference to Exhibit 10.5 of
DCA's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, (the "DCA 10-Q").
(10)(i) Employment Agreement, dated as of May 9, 1997,
between the Company and Patrick J. Dorme
(incorporated by reference to the DCA 10-Q).
(10)(j) Employment Agreement, dated as of May 9, 1997,
between the Company and Henry V. Kensing
(incorporated by reference to the DCA 10-Q).
(10)(k) The Form of Severance Agreement, dated April 11,
1997, between the Company and certain officers of
the Company (incorporated by reference to Exhibit
(a)(99) of the Company's Quarterly Report on Form
10-Q for the quarter ended March 30, 1997) and
amendment thereto, dated May 9, 1997,
(incorporated by reference to Exhibit 10(m) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1997.
(10) (l) Stock Option Agreements, with Stanley J. Aris,
Jeannine M. Davis, Andrew Lozyniak and Joseph P.
Walker, pursuant to option approval by
shareholders on October 16, 1997, filed herewith.
(21) Subsidiaries as of October 16, 1997, filed herewith.
(23) Consent of Price Waterhouse to incorporation by
reference of this Annual Report on Form 10-K for the
fiscal year 1997 to Registration Statement 33-27749 on
Form S-8 and Registration Statement 333-5730 on Form S-8.
(27) Financial Data Schedule (filed only electronically with
the SEC).
b. Reports on Forms 8-K
Announcements that the Effective Time for the Merger had
occurred on October 16, 1997, and describing related events;
filed October 20, 1997.
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.
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.
Date By /S/ Stanley J. Aris
Stanley J. Aris,
Vice President Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Date By /S/ Lawrence J. Ciancia
Lawrence J. Ciancia,
Director
Date By /S/ Patrick J. Dorme
Patrick J. Dorme,
Director
Date By /S/ Gerald H. Frieling, Jr.
Gerald H. Frieling, Jr.,
Director
Date By /S/ Andrew Lozyniak
Andrew Lozyniak,
Director
Date By /S/ Robert A. Profusek
Robert A. Profusek,
Director
Date By /S/ Joseph P. Walker
Joseph P. Walker,
Director
Date By /S/ George T. Newhart
George T. Newhart,
Corporate Controller
and Principal Accounting
Officer
Date By /S/ Jeannine M. Davis
Jeannine M. Davis,
Vice President, Secretary
and General Counsel
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) AND (2) AND ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
CTS CORPORATION AND SUBSIDIARIES
ELKHART, INDIANA
FORM 10-K - ITEM 14(a) (1) AND (2) AND ITEM 14 (d)
CTS CORPORATION AND SUBSIDIARIES
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,
1997, are incorporated by reference in Item 8:
Consolidated balance sheets - December 31, 1997, and
December 31, 1996
Consolidated statements of earnings - Years ended
December 31, 1997, December 31, 1996, and December 31, 1995
Consolidated statements of shareholders' equity - Years
ended December 31, 1997, December 31, 1996, and December 31,
1995
Consolidated statements of cash flows - Years ended
December 31, 1997, December 31, 1996, and December 31, 1995
Notes to consolidated financial statements
The following consolidated financial statement schedules of CTS
Corporation and subsidiaries, are included in item 14(d):
Page
Schedule II - Valuation and qualifying accounts S-3
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.
S-1
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 30, 1998, appearing on page 27 of the
CTS Corporation 1997 Annual Report (which report and consolidated
financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial
Statement Schedule listed in item 14(a) of this Form 10-K. In
our opinion, this Financial Statement Schedule presents fairly,
in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements.
PRICE WATERHOUSE LLP
Chicago, Illinois
January 30, 1998
S-2
<TABLE>
CTS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<CAPTION>
Additions
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Classification Period Expenses Accounts Deductions(1) End of Period
Year ended December 31, 1997:
Allowance for
<S> <C> <C> <C> <C> <C>
doubtful receivables $622 $(66) $522(2) $ 4 $1,074
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
</TABLE>
(1) Uncollectible accounts written off.
(2) Balance from DCA Merger.
S-3
CTS CORPORATION
BY LAWS
(As Amended and in Effect on October 31, 1997)
ARTICLE I.
Officers
The officers of CTS Corporation
(the "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 the Corporation. Any offices, other
than those of President and Secretary, may be held by the same person.
The officers of the 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 two 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 two 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.
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 the 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 shareholders 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
shareholders and Board of Directors and all committees, and shall keep
minutes of each meeting. The Secretary shall give proper notice of all
meetings of shareholders, directors and committees, required in these
Bylaws. The Secretary shall maintain proper records of ownership and
transfer of the stock of the 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 shareholders 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
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 the
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 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 the Corporation, the
Board of Directors may delegate the powers and duties of any such officer
to any other officer or director of the 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 Shareholders
Section 1. Meetings of the shareholders of the 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 shareholders 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 shareholders entitled to vote at
any shareholders' meeting, arranged in alphabetical order and containing
the address and number of shares of stock so held by each shareholder who
is entitled to vote at said meeting, shall be prepared by the Secretary
and shall be subject to the inspection by any shareholder at the time and
place of an annual meeting and at the principal office of the Corporation
for five (5) days prior thereto.
Section 4. At all shareholders' 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 shareholders, there shall be
elected, by plurality vote, a Board of Directors, who shall hold office
until the next annual meeting of shareholders and until their successors
have been elected and qualified.
Section 6. At all shareholders' meetings, each shareholder shall be
entitled to one (1) vote in person or by proxy for each share of common
stock registered in the shareholder'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 shareholders 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 shareholders of the Corporation
may be called by the Chairman of the Board, by the President, by the
Board of Directors, or by the shareholders 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 shareholders shall be called by the
shareholders, 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 shareholders shall
be given by the Secretary to each shareholder 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 shareholder as shown by the stock books of the
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 shareholders' meeting may be waived in
writing by any shareholder 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 shareholders upon which any installment is due and
unpaid or which are owned by the Corporation.
ARTICLE VII.
Directors
Section 1. The property and business affairs of the Corporation
shall be managed under the direction of the Board of Directors.
Directors shall be elected by a plurality vote at the annual meeting or a
special meeting of the shareholders and shall hold office for a term of
one year or 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
shareholders for the purpose of electing directors has been held.
Subject to the rights, if any, of any series of Preferred Stock to elect
additional directors under circumstances specified in the Articles of
Incorporation and to the minimum and maximum number of authorized
directors provided in the Articles of Incorporation, the authorized
number of directors will be as determined from time to time by the Board
of Directors. If no determination of the number of directors has been
made by the Board of Directors, the number of directors shall be [seven].
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 meeting of
shareholders; 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 shareholders at the next annual meeting of the
shareholders or at a special meeting of the shareholders 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
shareholders; 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 shareholders at the next annual meeting of the shareholders or at a
special meeting of the shareholders called for that purpose.
Section 4. A person shall not be nominated, stand for election or be
elected as a director of the Corporation who (I) at the time of his
election shall be seventy (70) years of age or older, (ii) has retired
from employment by the Corporation and is sixty-five (65) years of age or
older or (iii) has retired from active business and professional
vocations.
Article VIII.
Meetings of Directors
Section 1. Following the annual meeting of shareholders, 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 an
twenty-four (24) hours' notice by telegraph, telephone, facsimile or
other similar medium of communication to each director, which notice
shall be addressed to the last known place of business or 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 provision 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 at 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 at 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.
Compensation of Directors and
Members of Committees
The members of the Board of Directors and members of committees of
the Corporation, who are not salaried employees of the 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 X.
Certificates of Stock
Section 1. Certificates of stock shall be issued to those legally
entitled thereto, as may be shown by the books of the 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 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 XI.
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 shareholders 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 shareholders 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 shareholders as shall be shareholders 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 shareholders 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 XII.
Fiscal Year
The fiscal year of the Corporation shall correspond to the calendar
year.
ARTICLE XIII.
Checks for Money
All checks, drafts or other orders for the payment of funds of the
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
the 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 XIV.
Dividends
The Board of Directors may declare and pay dividends out of the
unreserved and unrestricted earned surplus of the 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 the Corporation, as provided by the Articles of
Incorporation and the laws of the State of Indiana.
ARTICLE XV.
Notices
Section 1. A notice required to be given under the provisions of
these Bylaws to any shareholder, 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 shareholder, 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 shareholder, 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 XVI.
Compensation of Officers
The officers of the 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 XVII.
Corporate Seal
The seal of the 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".
ARTICLE XVIII.
Indemnification
Section 1. General. Without limiting the generality or effect of
Article XI of the Articles of Incorporation, the Corporation shall, to
the fullest extent to which it is empowered to do so by the Indiana
Business Corporation Law (hereinafter the "IBCL"), or any other
applicable laws, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than
such law permitted the Corporation to provide prior to such amendment),
indemnify and hold harmless any person who was or is involved in any
manner (including without limitation as a party or a witness), or is
threatened to be made so involved, in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal
(hereinafter a "proceeding"), by reason of the fact that such person is
or was a director or officer of the Corporation, or who is or was serving
at the request of the Board of Directors as a director, officer, partner
or trustee of another corporation or a partnership, joint venture, trust,
employee benefit plan or other entity, whether for profit or not for
profit, (any such person hereinafter an "indemnitee"), whether or not the
basis of such proceeding is alleged action in an official capacity while
serving as a director, or officer, against all expense, liability and
loss (including attorneys' fees and expenses, judgments, settlements,
penalties, fines, and excise taxes assessed with respect to employee
benefit plans) actually and reasonably incurred or suffered by such
person in connection therewith; provided, however, that, except as
provided in Section 3 of this Article XVIII with respect to proceedings
to enforce rights to indemnification, the Corporation shall indemnify any
such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation.
Section 2. Right to Advancement of Expenses. The right to
indemnification conferred in Article XVIII shall include the right to be
paid by the Corporation the expenses (including, without limitation,
attorneys' fees and expenses) incurred in defending any such proceeding
in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the IBCL so requires, an
advancement of expenses incurred by an indemnitee in his or her capacity
as a director or officer (and not in any other capacity in which service
was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to
the Corporation of an undertaking (hereinafter an "undertaking"), by or
on behalf of such indemnitee, to repay all amounts so advanced if it
shall ultimately be determined by final judicial decision from which
there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses
under this Section 2 or otherwise.
The rights to indemnification and to the advancement of expenses
conferred in Article XVIII shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a director or officer
and shall inure to the benefit of the indemnitee's heirs, executors and
administrators. For purposes of Article XVIII, 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.
Section 3. Right of Indemnitee to Bring Suit. If a claim under
Section 1 or Section 2 of this Article XVIII is not paid in full by the
Corporation within 60 calendar days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be 20
calendar days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by
the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also
the expense of prosecuting or defending such suit. In (i) any suit
brought by the indemnitee to enforce a right to indemnification hereunder
(but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) any suit
brought by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has
not met any applicable standard for indemnification set forth in the
IBCL. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or shareholders) to have made a
determination prior to the commencement of such suit that indemnification
of the indemnitee is proper in the circumstances because the indemnitee
has met the applicable standard of conduct set forth in the IBCL, nor an
actual determination by the Corporation (including its Board of
Directors, independent legal counsel or shareholders) that the indemnitee
has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the indemnitee, be a
defense to such suit. In any suit brought by the indemnitee to enforce a
right to indemnification or to an advancement of expenses hereunder, or
brought by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the burden of proving that the indemnitee
is not entitled to be indemnified, or to such advancement of expenses,
under this Article XVIII or otherwise shall be on the Corporation.
Section 4. Non-Exclusivity of Rights. The rights to
indemnification and to the advancement of expenses conferred in this
Article XVIII shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's
Articles of Incorporation, Bylaws, agreement, vote of shareholders or
disinterested directors or otherwise.
Section 5. Insurance. The Corporation may maintain insurance, at
its expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the IBCL.
Section 6. Vested Right to Indemnification. The right of any
individual to indemnification under this Article XVIII shall vest at the
time of occurrence or performance of any event, act or omission giving
rise to any Proceeding 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 XVIII 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 these Bylaws, and
to the extent such prior acts or omissions cannot be deemed to be covered
by these Bylaws, 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. Indemnification of Employees and Agents of the
Corporation. The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification and to
the advancement of expenses to any employee or agent of this corporation,
or to any individual who is or was serving at the request of the Board of
Directors as an employee or agent of another corporation or a
partnership, joint venture, trust, employee benefit plan or other entity,
whether for profit or not for profit, to the fullest extent of the
provisions of these Bylaws with respect to the indemnification and
advancement of expenses of directors and officers of this corporation.
Section 8. 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, to any action for corporate waste or to
any similar action.
Section 9. Severability. If any provision or provisions of
Article XVIII is or are held to be invalid, illegal, or unenforceable for
any reason whatsoever: (I) the validity, legality, and enforceability of
the remaining provisions of such Article (including without limitation
all portions of any paragraph of such Article containing any such
provision held to be invalid, illegal, or unenforceable, that are not
themselves invalid, illegal, or unenforceable) will not in any way be
affected or impaired thereby and (ii) to the fullest extent possible, the
provisions of such Article (including without limitation all portions of
any paragraph of such Article containing any such provision held to be
invalid, illegal, or unenforceable, that are not themselves invalid,
illegal, or unenforceable) will be construed so as to give effect to the
intent manifested by the provision held invalid, illegal, or illegal, or
unenforceable.
ARTICLE XIX.
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 a majority of the members of the Board of Directors.
ARTICLE XX.
Control Share Acquisitions
As provided for in Section 5 thereof, Chapter 42 of the Indiana
Business Corporation Law, relating to control share acquisitions, shall
not apply to control share acquisitions of shares of the corporation made
after March 3, 1987.
CTS CORPORATION
Nonqualified Stock Option Agreement
RECITALS:
A. Joseph P. Walker (the "Optionee") is an employee of CTS Corporation,
an Indiana corporation, or a subsidiary thereof, (collectively, the
"Corporation").
B. The Board of Directors of the Corporation (the "Board") has on May
9, 1997 authorized the execution of a stock option agreement in the form
hereof ("Agreement"), as of such date (the "Date of Grant"), subject to
shareholder approval and certain other conditions which approval has been
obtained and conditions have been satisfied as of the date hereof.
C. The option granted hereby is intended to be a nonqualified stock
option and will not be treated as an "incentive stock option" within the
meaning of that term under Section 422 of the Internal Revenue Code of
1986 (the "Code").
NOW, THEREFORE, subject to the terms and conditions herein set
forth, the Corporation hereby grants to the Optionee a nonqualified
option (the "Option") to purchase 600,000 Common Shares (the "Option
Shares") at an exercise price per Option Share equal to $20.83 (the
"Exercise Price").
1. Vesting of Option. (a) Unless terminated as hereinafter provided,
the Option will be fully exercisable as of the date of this Agreement.
2. Termination of Option. The Option will terminate automatically and
without further action on the earliest of the following dates:
(a) the date of the termination by the Corporation of the
Optionee's employment for Cause as defined herein;
(b) 60 days after the termination of the Optionee's employment
with the Corporation by reason of his or her death;
(c) 180 days after the termination of the Optionee's employment with
the Corporation by reason of his or her total and permanent disability;
(d) 30 days after the voluntary termination by the Optionee of his
employment with the Corporation for any reason or the termination by the
Corporation of the Optionee's employment with the Corporation for any
reason other than disability or Cause; or
(e) ten years after the Date of Grant, if the Optionee remains in
continuous employment with the Corporation during that ten-year period.
As used herein, "Cause" means that the Optionee:
(I) has been convicted of a criminal violation involving fraud,
embezzlement or theft in connection with his or her duties or in the
course of his or her employment with the Corporation; or
(ii) has intentionally and wrongfully disclosed secret processes,
trade secrets or confidential information of the Corporation
and any such act has been demonstrably and materially harmful to the
Corporation. For purposes of this Agreement, no act or failure to act on
the part of the Optionee will be deemed to be "intentional" if it was due
primarily to an error in judgment or negligence, and will be deemed to be
"intentional" only if done or omitted to be done by the Optionee not in
good faith and without reasonable belief that his action or omission was
in the best interest of the Corporation.
3. Payment of Exercise Price. The Exercise Price may be paid (a)
in cash or check or other cash equivalent acceptable to the Corporation,
(b) by actual or constructive transfer to the Corporation of
nonforfeitable, nonrestricted Common Shares owned by the Optionee for a
minimum of six months prior to the date of such exercise, or (c) by any
combination of the foregoing methods of payment. Constructive, rather
than actual, surrender of Common Shares owned by the Optionee is
permitted, provided that the Internal Revenue Service deems such
constructive surrender as an actual exchange for tax purposes, and
further provided that Optionee provides evidence satisfactory to the
Corporation of his ownership of such constructively surrendered Common
Shares. Nonforfeitable, nonrestricted Common Shares that are transferred
by the Optionee in payment of all or any part of the Exercise Price will
be valued at the reported closing price per share of CTS Common Stock on
the New York Stock Exchange on the date the Option is exercised or, if
not reported on such date, the next preceding date for which such closing
price is reported. The requirement of payment in cash will be deemed
satisfied if the Optionee makes arrangements that are satisfactory to the
Corporation with a broker that is a member of the National Association of
Securities Dealers, Inc. to sell a sufficient number of the Option Shares
which are being purchased pursuant to the exercise so that the net
proceeds of the sale transaction will at least equal the amount of the
aggregate Exercise Price, plus interest at the "applicable Federal rate"
within the meaning of that term under Section 1274 of the Code, or any
successor provision thereto, for the period from the date of exercise to
the date of payment, and pursuant to which the broker undertakes to
deliver to the Corporation the amount of the aggregate Exercise Price,
plus such interest, not later than the date on which the sale transaction
will settle in the ordinary course of business.
As a further condition precedent to the exercise of this Option,
the Optionee shall comply with all regulations and requirements of any
regulatory authority having control of, or supervision over, the issuance
of Common Shares and in connection therewith shall execute any documents
which the Compensation Committee shall in its sole discretion deem
necessary or advisable.
4. Compliance with Law. The Corporation will make reasonable
efforts to comply with all applicable securities laws; provided, however,
that notwithstanding any other provision of this agreement, the Option
will not be exercisable if the exercise thereof would result in a
violation of any such law.
5. Consideration for Option. In consideration for the grant of
this Option, Optionee agrees that for a period of one year following the
termination of his or her employment with the Corporation, he or she will
not render services of any kind to any business engaged in, or about to
become engaged in, research or development, marketing, leasing or selling
of any product, which is the same as, or similar to, a product of the
Corporation to which Optionee was exposed during the last two years of
his or her employment with the Corporation.
Optionee further agrees not to communicate or disclose to any
person, firm or corporation either directly or indirectly any knowledge
or information acquired during his or her employment with the
Corporation, or any subsidiary or division thereof, concerning business
plans and strategies, inventions, trade secrets, customer or price lists
or any other confidential information with respect to the property or
business of the Corporation or any subsidiary or division thereof.
6. Right to Terminate Employment or Service and Adjust
Compensation. No provision of this Agreement will limit in any way
whatsoever any right that the Corporation may otherwise have to terminate
the employment or adjust the compensation of the Optionee at any time.
7. Relation to Other Benefits. Any economic or other benefit to
the Optionee under this Agreement will not be taken into account in
determining any other benefits to which the Optionee may be entitled
under any profit-sharing, retirement or other benefit or compensation
plan maintained by the Corporation or under any employment agreement or
severance agreement between the Optionee and the Corporation, and will
not affect the amount of any life insurance coverage available to any
beneficiary under any life insurance plan covering employees of the
Corporation.
8. Transferability. The Option may be transferred during the
lifetime of the Optionee, only to (i) a member of Optionee's immediate
family; (ii) a trust for the benefit of members of Optionee's immediate
family; or (iii) a partnership or other entity of which family members of
the Optionee are the sole owners; provided that such transfer is effected
by Optionee in strict compliance with all applicable laws and
regulations.
Notwithstanding the foregoing, this Section shall not be construed
to entitle the Optionee to compel the Corporation to file any
registration statement or take any other action which may be necessary to
enable the Optionee to exercise his right of transfer under this Section.
9. Withholding Taxes. To the extent that the Corporation is
required to withhold any federal, state, local or foreign taxes in
connection with any benefit realized by the Optionee under this
Agreement, and the amounts otherwise available to the Corporation for
such withholding are insufficient, it shall be a condition to the
realization of any such benefit that the Optionee make arrangements
satisfactory to the Corporation for payment of the balance of any taxes
required to be withheld. Subject to applicable law, any such
arrangements may without limitation include voluntary or mandatory
relinquishment of a portion of any such benefit or the surrender of
outstanding Common Shares. The Corporation and the Optionee may also
make similar arrangements with respect to the payment of any taxes on
which withholding is not required.
10. Adjustments. The number, type and price of Option Shares
covered by this Option shall be proportionately and appropriately
adjusted by the Compensation Committee of the Corporation in good faith
to reflect changes in the capital structure of the corporation by reason
of any stock split or dividend, recapitalization, merger, consolidation,
combination or exchange of shares for other securities or other similar
corporate change. In addition, in the event of any merger, consolidation
or other transaction or event having a similar effect, the Optionee may
elect to receive awards economically equivalent to the Option provided
hereunder in respect of securities of the surviving entity of such
transaction.
11. Severability. In the event that one or more of the
provisions of this Agreement may be invalidated for any reason by a
court, any provision so invalidated will be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof will
continue to be valid and fully enforceable.
12. Governing Law. This Agreement is made under, and will be
construed in accordance with, the laws of the State of Indiana, without
giving effect to the principle of conflict of laws of such State.
This Agreement is executed by the Corporation on this 31st day
of October, 1997, effective as of the Date of Grant.
CTS CORPORATION
By: \S\Jeannine M. Davis
The undersigned Optionee hereby acknowledges receipt of an
executed original of this Agreement and accepts the Option granted
hereunder, subject to the terms and conditions hereinabove set forth.
\S\Joseph P. Walker
Optionee
Date: October 31, 1997
CTS CORPORATION
Nonqualified Stock Option Agreement
RECITALS:
A. Stanley J. Aris (the "Optionee") is an employee of CTS
Corporation, an Indiana corporation, or a subsidiary thereof,
(collectively, the "Corporation").
B. The Board of Directors of the Corporation (the "Board") has on
May 9, 1997 authorized the execution of a stock option agreement in the
form hereof ("Agreement"), as of such date (the "Date of Grant"), subject
to shareholder approval and certain other conditions which approval has
been obtained and conditions have been satisfied as of the date hereof.
C. The option granted hereby is intended to be a nonqualified stock
option and will not be treated as an "incentive stock option" within the
meaning of that term under Section 422 of the Internal Revenue Code of
1986 (the "Code").
NOW, THEREFORE, subject to the terms and conditions herein set
forth, the Corporation hereby grants to the Optionee a nonqualified
option (the "Option") to purchase 150,000 Common Shares (the "Option
Shares") at an exercise price per Option Share equal to $20.83 (the
"Exercise Price").
1. Vesting of Option. (a) Unless terminated as hereinafter
provided, the Option will be fully exercisable as of the date of this
Agreement.
(b) To the extent that the Option is exercisable in accordance
with the terms of this Section 1, it may be exercised in whole or in part
from time to time thereafter.
2. Termination of Option. The Option will terminate automatically
and without further action on the earliest of the following dates:
(a) the date of the termination by the Corporation of the
Optionee's employment for Cause as defined herein;
(b) 360 days after the termination of the Optionee's employment
with the Corporation by reason of his or her death;
(c) 180 days after the termination of the Optionee's employment
with the Corporation by reason of his or her total and permanent
disability;
(d) 30 days after the voluntary termination by the Optionee of
his employment with the Corporation for any reason or the termination by
the Corporation of the Optionee's employment with the Corporation for any
reason other than disability or Cause; or
(e) ten years after the Date of Grant, if the Optionee remains
in continuous employment with the Corporation during that ten-year
period.
As used herein, "Cause" means that the Optionee:
(I) has been convicted of a criminal violation involving fraud,
embezzlement or theft in connection with his or her duties or in the
course of his or her employment with the Corporation; or
(ii) has intentionally and wrongfully disclosed secret
processes, trade secrets or confidential information of the Corporation
and any such act has been demonstrably and materially harmful to the
Corporation. For purposes of this Agreement, no act or failure to act on
the part of the Optionee will be deemed to be "intentional" if it was due
primarily to an error in judgment or negligence, and will be deemed to be
"intentional" only if done or omitted to be done by the Optionee not in
good faith and without reasonable belief that his action or omission was
in the best interest of the Corporation.
3. Payment of Exercise Price. The Exercise Price may be paid (a)
in cash or check or other cash equivalent acceptable to the Corporation,
(b) by actual or constructive transfer to the Corporation of
nonforfeitable, nonrestricted Common Shares owned by the Optionee for a
minimum of six months prior to the date of such exercise, or (c) by any
combination of the foregoing methods of payment. Constructive, rather
than actual, surrender of Common Shares owned by the Optionee is
permitted, provided that the Internal Revenue Service deems such
constructive surrender as an actual exchange for tax purposes, and
further provided that Optionee provides evidence satisfactory to the
Corporation of his ownership of such constructively surrendered Common
Shares. Nonforfeitable, nonrestricted Common Shares that are transferred
by the Optionee in payment of all or any part of the Exercise Price will
be valued at the reported closing price per share of CTS Common Stock on
the New York Stock Exchange on the date the Option is exercised or, if
not reported on such date, the next preceding date for which such closing
price is reported. The requirement of payment in cash will be deemed
satisfied if the Optionee makes arrangements that are satisfactory to the
Corporation with a broker that is a member of the National Association of
Securities Dealers, Inc. to sell a sufficient number of the Option Shares
which are being purchased pursuant to the exercise so that the net
proceeds of the sale transaction will at least equal the amount of the
aggregate Exercise Price, plus interest at the "applicable Federal rate"
within the meaning of that term under Section 1274 of the Code, or any
successor provision thereto, for the period from the date of exercise to
the date of payment, and pursuant to which the broker undertakes to
deliver to the Corporation the amount of the aggregate Exercise Price,
plus such interest, not later than the date on which the sale transaction
will settle in the ordinary course of business.
As a further condition precedent to the exercise of this Option,
the Optionee shall comply with all regulations and requirements of any
regulatory authority having control of, or supervision over, the issuance
of Common Shares and in connection therewith shall execute any documents
which the Compensation Committee shall in its sole discretion deem
necessary or advisable.
4. Compliance with Law. The Corporation will make reasonable
efforts to comply with all applicable securities laws; provided, however,
that notwithstanding any other provision of this agreement, the Option
will not be exercisable if the exercise thereof would result in a
violation of any such law.
5. Consideration for Option. In consideration for the grant of
this Option, Optionee agrees that for a period of one year following the
termination of his or her employment with the Corporation, he or she will
not render services of any kind to any business engaged in, or about to
become engaged in, research or development, marketing, leasing or selling
of any product, which is the same as, or similar to, a product of the
Corporation to which Optionee was exposed during the last two years of
his or her employment with the Corporation.
Optionee further agrees not to communicate or disclose to any
person, firm or corporation either directly or indirectly any knowledge
or information acquired during his or her employment with the
Corporation, or any subsidiary or division thereof, concerning business
plans and strategies, inventions, trade secrets, customer or price lists
or any other confidential information with respect to the property or
business of the Corporation or any subsidiary or division thereof.
6. Right to Terminate Employment or Service and Adjust
Compensation. No provision of this Agreement will limit in any way
whatsoever any right that the Corporation may otherwise have to terminate
the employment or adjust the compensation of the Optionee at any time.
7. Relation to Other Benefits. Any economic or other benefit to
the Optionee under this Agreement will not be taken into account in
determining any other benefits to which the Optionee may be entitled
under any profit-sharing, retirement or other benefit or compensation
plan maintained by the Corporation or under any employment agreement or
severance agreement between the Optionee and the Corporation, and will
not affect the amount of any life insurance coverage available to any
beneficiary under any life insurance plan covering employees of the
Corporation.
8. Transferability. The Option may be transferred during the
lifetime of the Optionee, only to (i) a member of Optionee's immediate
family; (ii) a trust for the benefit of members of Optionee's immediate
family; or (iii) a partnership or other entity of which family members of
the Optionee are the sole owners; provided that such transfer is effected
by Optionee in strict compliance with all applicable laws and
regulations.
Notwithstanding the foregoing, this Section shall not be
construed to entitle the Optionee to compel the Corporation to file any
registration statement or take any other action which may be necessary to
enable the Optionee to exercise his right of transfer under this Section.
9. Withholding Taxes. To the extent that the Corporation is
required to withhold any federal, state, local or foreign taxes in
connection with any benefit realized by the Optionee under this
Agreement, and the amounts otherwise available to the Corporation for
such withholding are insufficient, it shall be a condition to the
realization of any such benefit that the Optionee make arrangements
satisfactory to the Corporation for payment of the balance of any taxes
required to be withheld. Subject to applicable law, any such
arrangements may without limitation include voluntary or mandatory
relinquishment of a portion of any such benefit or the surrender of
outstanding Common Shares. The Corporation and the Optionee may also
make similar arrangements with respect to the payment of any taxes on
which withholding is not required.
10. Adjustments. The number, type and price of Option Shares
covered by this Option shall be proportionately and appropriately
adjusted by the Compensation Committee of the Corporation in good faith
to reflect changes in the capital structure of the corporation by reason
of any stock split or dividend, recapitalization, merger, consolidation,
combination or exchange of shares for other securities or other similar
corporate change. In addition, in the event of any merger, consolidation
or other transaction or event having a similar effect, the Optionee may
elect to receive awards economically equivalent to the Option provided
hereunder in respect of securities of the surviving entity of such
transaction.
11. Severability. In the event that one or more of the
provisions of this Agreement may be invalidated for any reason by a
court, any provision so invalidated will be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof will
continue to be valid and fully enforceable.
12. Governing Law. This Agreement is made under, and will be
construed in accordance with, the laws of the State of Indiana, without
giving effect to the principle of conflict of laws of such State.
This Agreement is executed by the Corporation on this 31st day
of October, 1997, effective as of the Date of Grant.
CTS CORPORATION
By:\S\Jeannine M. Davis
The undersigned Optionee hereby acknowledges receipt of an
executed original of this Agreement and accepts the Option granted
hereunder, subject to the terms and conditions hereinabove set forth.
\S\Stanley J. Aris
Optionee
Date: October 31, 1997
CTS CORPORATION
Nonqualified Stock Option Agreement
RECITALS:
A. Jeannine M. Davis (the "Optionee") is an employee of CTS
Corporation, an Indiana corporation, or a subsidiary thereof,
(collectively, the "Corporation").
B. The Board of Directors of the Corporation (the "Board") has on
May 9, 1997 authorized the execution of a stock option agreement in the
form hereof ("Agreement"), as of such date (the "Date of Grant"), subject
to shareholder approval and certain other conditions which approval has
been obtained and conditions have been satisfied as of the date hereof.
C. The option granted hereby is intended to be a nonqualified stock
option and will not be treated as an "incentive stock option" within the
meaning of that term under Section 422 of the Internal Revenue Code of
1986 (the "Code").
NOW, THEREFORE, subject to the terms and conditions herein set
forth, the Corporation hereby grants to the Optionee a nonqualified
option (the "Option") to purchase 150,000 Common Shares (the "Option
Shares") at an exercise price per Option Share equal to $20.83 (the
"Exercise Price").
1. Vesting of Option. (a) Unless terminated as hereinafter
provided, the Option will be fully exercisable as of the date of this
Agreement.
(b) To the extent that the Option is exercisable in accordance with
the terms of this Section 1, it may be exercised in whole or in part from
time to time thereafter.
2. Termination of Option. The Option will terminate automatically
and without further action on the earliest of the following dates:
(a) the date of the termination by the Corporation of the Optionee's
employment for Cause as defined herein;
(b) 360 days after the termination of the Optionee's employment with
the Corporation by reason of his or her death;
(c) 180 days after the termination of the Optionee's employment with
the Corporation by reason of his or her total and permanent disability;
(d) 30 days after the voluntary termination by the Optionee of his
employment with the Corporation for any reason or the termination by the
Corporation of the Optionee's employment with the Corporation for any
reason other than disability or Cause; or
(e) ten years after the Date of Grant, if the Optionee remains in
continuous employment with the Corporation during that ten-year period.
As used herein, "Cause" means that the Optionee:
(i) has been convicted of a criminal violation involving fraud,
embezzlement or theft in connection with his or her duties or in the
course of his or her employment with the Corporation; or
(ii) has intentionally and wrongfully disclosed secret
processes, trade secrets or confidential information of the Corporation
and any such act has been demonstrably and materially harmful to the
Corporation. For purposes of this Agreement, no act or failure to act on
the part of the Optionee will be deemed to be "intentional" if it was due
primarily to an error in judgment or negligence, and will be deemed to be
"intentional" only if done or omitted to be done by the Optionee not in
good faith and without reasonable belief that his action or omission was
in the best interest of the Corporation.
3. Payment of Exercise Price. The Exercise Price may be paid (a)
in cash or check or other cash equivalent acceptable to the Corporation,
(b) by actual or constructive transfer to the Corporation of
nonforfeitable, nonrestricted Common Shares owned by the Optionee for a
minimum of six months prior to the date of such exercise, or (c) by any
combination of the foregoing methods of payment. Constructive, rather
than actual, surrender of Common Shares owned by the Optionee is
permitted, provided that the Internal Revenue Service deems such
constructive surrender as an actual exchange for tax purposes, and
further provided that Optionee provides evidence satisfactory to the
Corporation of his ownership of such constructively surrendered Common
Shares. Nonforfeitable, nonrestricted Common Shares that are transferred
by the Optionee in payment of all or any part of the Exercise Price will
be valued at the reported closing price per share of CTS Common Stock on
the New York Stock Exchange on the date the Option is exercised or, if
not reported on such date, the next preceding date for which such closing
price is reported. The requirement of payment in cash will be deemed
satisfied if the Optionee makes arrangements that are satisfactory to the
Corporation with a broker that is a member of the National Association of
Securities Dealers, Inc. to sell a sufficient number of the Option Shares
which are being purchased pursuant to the exercise so that the net
proceeds of the sale transaction will at least equal the amount of the
aggregate Exercise Price, plus interest at the "applicable Federal rate"
within the meaning of that term under Section 1274 of the Code, or any
successor provision thereto, for the period from the date of exercise to
the date of payment, and pursuant to which the broker undertakes to
deliver to the Corporation the amount of the aggregate Exercise Price,
plus such interest, not later than the date on which the sale transaction
will settle in the ordinary course of business.
As a further condition precedent to the exercise of this Option,
the Optionee shall comply with all regulations and requirements of any
regulatory authority having control of, or supervision over, the issuance
of Common Shares and in connection therewith shall execute any documents
which the Compensation Committee shall in its sole discretion deem
necessary or advisable.
4. Compliance with Law. The Corporation will make reasonable
efforts to comply with all applicable securities laws; provided, however,
that notwithstanding any other provision of this agreement, the Option
will not be exercisable if the exercise thereof would result in a
violation of any such law.
5. Consideration for Option. In consideration for the grant of
this Option, Optionee agrees that for a period of one year following the
termination of his or her employment with the Corporation, he or she will
not render services of any kind to any business engaged in, or about to
become engaged in, research or development, marketing, leasing or selling
of any product, which is the same as, or similar to, a product of the
Corporation to which Optionee was exposed during the last two years of
his or her employment with the Corporation.
Optionee further agrees not to communicate or disclose to any
person, firm or corporation either directly or indirectly any knowledge
or information acquired during his or her employment with the
Corporation, or any subsidiary or division thereof, concerning business
plans and strategies, inventions, trade secrets, customer or price lists
or any other confidential information with respect to the property or
business of the Corporation or any subsidiary or division thereof.
6. Right to Terminate Employment or Service and Adjust
Compensation. No provision of this Agreement will limit in any way
whatsoever any right that the Corporation may otherwise have to terminate
the employment or adjust the compensation of the Optionee at any time.
7. Relation to Other Benefits. Any economic or other benefit to
the Optionee under this Agreement will not be taken into account in
determining any other benefits to which the Optionee may be entitled
under any profit-sharing, retirement or other benefit or compensation
plan maintained by the Corporation or under any employment agreement or
severance agreement between the Optionee and the Corporation, and will
not affect the amount of any life insurance coverage available to any
beneficiary under any life insurance plan covering employees of the
Corporation.
8. Transferability. The Option may be transferred during the
lifetime of the Optionee, only to (i) a member of Optionee's immediate
family; (ii) a trust for the benefit of members of Optionee's immediate
family; or (iii) a partnership or other entity of which family members of
the Optionee are the sole owners; provided that such transfer is effected
by Optionee in strict compliance with all applicable laws and
regulations.
Notwithstanding the foregoing, this Section shall not be
construed to entitle the Optionee to compel the Corporation to file any
registration statement or take any other action which may be necessary to
enable the Optionee to exercise his right of transfer under this Section.
9. Withholding Taxes. To the extent that the Corporation is
required to withhold any federal, state, local or foreign taxes in
connection with any benefit realized by the Optionee under this
Agreement, and the amounts otherwise available to the Corporation for
such withholding are insufficient, it shall be a condition to the
realization of any such benefit that the Optionee make arrangements
satisfactory to the Corporation for payment of the balance of any taxes
required to be withheld. Subject to applicable law, any such
arrangements may without limitation include voluntary or mandatory
relinquishment of a portion of any such benefit or the surrender of
outstanding Common Shares. The Corporation and the Optionee may also
make similar arrangements with respect to the payment of any taxes on
which withholding is not required.
10. Adjustments. The number, type and price of Option Shares
covered by this Option shall be proportionately and appropriately
adjusted by the Compensation Committee of the Corporation in good faith
to reflect changes in the capital structure of the corporation by reason
of any stock split or dividend, recapitalization, merger, consolidation,
combination or exchange of shares for other securities or other similar
corporate change. In addition, in the event of any merger, consolidation
or other transaction or event having a similar effect, the Optionee may
elect to receive awards economically equivalent to the Option provided
hereunder in respect of securities of the surviving entity of such
transaction.
11. Severability. In the event that one or more of the
provisions of this Agreement may be invalidated for any reason by a
court, any provision so invalidated will be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof will
continue to be valid and fully enforceable.
12. Governing Law. This Agreement is made under, and will be
construed in accordance with, the laws of the State of Indiana, without
giving effect to the principle of conflict of laws of such State.
This Agreement is executed by the Corporation on this 31st day
of October, 1997, effective as of the Date of Grant.
CTS CORPORATION
By:\S\Joseph P. Walker
The undersigned Optionee hereby acknowledges receipt of an
executed original of this Agreement and accepts the Option granted
hereunder, subject to the terms and conditions hereinabove set forth.
\S\Jeannine M. Davis
Optionee
Date: October 31, 1997
CTS CORPORATION
Nonqualified Stock Option Agreement
RECITALS:
A. Andrew Lozyniak (the "Optionee") is an employee of CTS
Corporation, an Indiana corporation, or a subsidiary thereof,
(collectively, the "Corporation").
B. The Board of Directors of the Corporation (the "Board") has on
May 9, 1997 authorized the execution of a stock option agreement in the
form hereof ("Agreement"), as of such date (the "Date of Grant"), subject
to shareholder approval and certain other conditions which approval has
been obtained and conditions have been satisfied as of the date hereof.
C. The option granted hereby is intended to be a nonqualified stock
option and will not be treated as an "incentive stock option" within the
meaning of that term under Section 422 of the Internal Revenue Code of
1986 (the "Code").
NOW, THEREFORE, subject to the terms and conditions herein set
forth, the Corporation hereby grants to the Optionee a nonqualified
option (the "Option") to purchase 300,000 Common Shares (the "Option
Shares") at an exercise price per Option Share equal to $20.83 (the
"Exercise Price").
1. Vesting of Option. (a) Unless terminated as hereinafter
provided, the Option will be fully exercisable as of the date of this
Agreement.
(b) To the extent that the Option is exercisable in accordance
with the terms of this Section 1, it may be exercised in whole or in part
from time to time thereafter.
2. Termination of Option. The Option will terminate automatically
and without further action on the earliest of the following dates:
(a) the date of the termination by the Corporation of the
Optionee's employment for Cause as defined herein;
(b) 360 days after the termination of the Optionee's employment
with the Corporation by reason of his or her death;
(c) 180 days after the termination of the Optionee's employment
with the Corporation by reason of his or her total and permanent
disability;
(d) 30 days after the voluntary termination by the Optionee of
his employment with the Corporation for any reason or the termination by
the Corporation of the Optionee's employment with the Corporation for any
reason other than disability or Cause; or
(e) ten years after the Date of Grant, if the Optionee remains
in continuous employment with the Corporation during that ten-year
period.
As used herein, "Cause" means that the Optionee:
(i) has been convicted of a criminal violation involving fraud,
embezzlement or theft in connection with his or her duties or in the
course of his or her employment with the Corporation; or
(ii) has intentionally and wrongfully disclosed secret
processes, trade secrets or confidential information of the Corporation
and any such act has been demonstrably and materially harmful to the
Corporation. For purposes of this Agreement, no act or failure to act on
the part of the Optionee will be deemed to be "intentional" if it was due
primarily to an error in judgment or negligence, and will be deemed to be
"intentional" only if done or omitted to be done by the Optionee not in
good faith and without reasonable belief that his action or omission was
in the best interest of the Corporation.
3. Payment of Exercise Price. The Exercise Price may be paid (a)
in cash or check or other cash equivalent acceptable to the Corporation,
(b) by actual or constructive transfer to the Corporation of
nonforfeitable, nonrestricted Common Shares owned by the Optionee for a
minimum of six months prior to the date of such exercise, or (c) by any
combination of the foregoing methods of payment. Constructive, rather
than actual, surrender of Common Shares owned by the Optionee is
permitted, provided that the Internal Revenue Service deems such
constructive surrender as an actual exchange for tax purposes, and
further provided that Optionee provides evidence satisfactory to the
Corporation of his ownership of such constructively surrendered Common
Shares. Nonforfeitable, nonrestricted Common Shares that are transferred
by the Optionee in payment of all or any part of the Exercise Price will
be valued at the reported closing price per share of CTS Common Stock on
the New York Stock Exchange on the date the Option is exercised or, if
not reported on such date, the next preceding date for which such closing
price is reported. The requirement of payment in cash will be deemed
satisfied if the Optionee makes arrangements that are satisfactory to the
Corporation with a broker that is a member of the National Association of
Securities Dealers, Inc. to sell a sufficient number of the Option Shares
which are being purchased pursuant to the exercise so that the net
proceeds of the sale transaction will at least equal the amount of the
aggregate Exercise Price, plus interest at the "applicable Federal rate"
within the meaning of that term under Section 1274 of the Code, or any
successor provision thereto, for the period from the date of exercise to
the date of payment, and pursuant to which the broker undertakes to
deliver to the Corporation the amount of the aggregate Exercise Price,
plus such interest, not later than the date on which the sale transaction
will settle in the ordinary course of business.
As a further condition precedent to the exercise of this Option,
the Optionee shall comply with all regulations and requirements of any
regulatory authority having control of, or supervision over, the issuance
of Common Shares and in connection therewith shall execute any documents
which the Compensation Committee shall in its sole discretion deem
necessary or advisable.
4. Compliance with Law. The Corporation will make reasonable
efforts to comply with all applicable securities laws; provided, however,
that notwithstanding any other provision of this agreement, the Option
will not be exercisable if the exercise thereof would result in a
violation of any such law.
5. Consideration for Option. In consideration for the grant of
this Option, Optionee agrees that for a period of one year following the
termination of his or her employment with the Corporation, he or she will
not render services of any kind to any business engaged in, or about to
become engaged in, research or development, marketing, leasing or selling
of any product, which is the same as, or similar to, a product of the
Corporation to which Optionee was exposed during the last two years of
his or her employment with the Corporation.
Optionee further agrees not to communicate or disclose to any
person, firm or corporation either directly or indirectly any knowledge
or information acquired during his or her employment with the
Corporation, or any subsidiary or division thereof, concerning business
plans and strategies, inventions, trade secrets, customer or price lists
or any other confidential information with respect to the property or
business of the Corporation or any subsidiary or division thereof.
6. Right to Terminate Employment or Service and Adjust
Compensation. No provision of this Agreement will limit in any way
whatsoever any right that the Corporation may otherwise have to terminate
the employment or adjust the compensation of the Optionee at any time.
7. Relation to Other Benefits. Any economic or other benefit to
the Optionee under this Agreement will not be taken into account in
determining any other benefits to which the Optionee may be entitled
under any profit-sharing, retirement or other benefit or compensation
plan maintained by the Corporation or under any employment agreement or
severance agreement between the Optionee and the Corporation, and will
not affect the amount of any life insurance coverage available to any
beneficiary under any life insurance plan covering employees of the
Corporation.
8. Transferability. The Option may be transferred during the
lifetime of the Optionee, only to (i) a member of Optionee's immediate
family; (ii) a trust for the benefit of members of Optionee's immediate
family; or (iii) a partnership or other entity of which family members of
the Optionee are the sole owners; provided that such transfer is effected
by Optionee in strict compliance with all applicable laws and
regulations.
Notwithstanding the foregoing, this Section shall not be
construed to entitle the Optionee to compel the Corporation to file any
registration statement or take any other action which may be necessary to
enable the Optionee to exercise his right of transfer under this Section.
9. Withholding Taxes. To the extent that the Corporation is
required to withhold any federal, state, local or foreign taxes in
connection with any benefit realized by the Optionee under this
Agreement, and the amounts otherwise available to the Corporation for
such withholding are insufficient, it shall be a condition to the
realization of any such benefit that the Optionee make arrangements
satisfactory to the Corporation for payment of the balance of any taxes
required to be withheld. Subject to applicable law, any such
arrangements may without limitation include voluntary or mandatory
relinquishment of a portion of any such benefit or the surrender of
outstanding Common Shares. The Corporation and the Optionee may also
make similar arrangements with respect to the payment of any taxes on
which withholding is not required.
10. Adjustments. The number, type and price of Option Shares
covered by this Option shall be proportionately and appropriately
adjusted by the Compensation Committee of the Corporation in good faith
to reflect changes in the capital structure of the corporation by reason
of any stock split or dividend, recapitalization, merger, consolidation,
combination or exchange of shares for other securities or other similar
corporate change. In addition, in the event of any merger, consolidation
or other transaction or event having a similar effect, the Optionee may
elect to receive awards economically equivalent to the Option provided
hereunder in respect of securities of the surviving entity of such
transaction.
11. Severability. In the event that one or more of the
provisions of this Agreement may be invalidated for any reason by a
court, any provision so invalidated will be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof will
continue to be valid and fully enforceable.
12. Governing Law. This Agreement is made under, and will be
construed in accordance with, the laws of the State of Indiana, without
giving effect to the principle of conflict of laws of such State.
This Agreement is executed by the Corporation on this 31st day
of October, 1997, effective as of the Date of Grant.
CTS CORPORATION
By:\S\Jeannine M. Davis
The undersigned Optionee hereby acknowledges receipt of an
executed original of this Agreement and accepts the Option granted
hereunder, subject to the terms and conditions hereinabove set forth.
\S\Andrew Lozyniak
Optionee
Date: October 31, 1997
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
Dynamics Corporation of America, a New York corporation
International Electronic Research Corporation, a California
corporation
LTB Investment Corporation, a Delaware corporation
Corporations whose names are indented are subsidiaries of the preceding
non-indented corporations. Except as indicated, each of the above
subsidiaries is wholly-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.
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 30, 1998, appearing on page 27 of the CTS
Corporation 1997 Annual Report which is incorporated in this Annual
Report on Form 10-K. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule, which appears on page
S-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 27, 1998
FINANCIAL HIGHLIGHTS
(In thousands except per share data)
For the Year 1997 1996 1995
Net sales $415,151 $321,297 $300,157
Net earnings 22,813 21,170 17,164
Average common shares
outstanding-diluted 15,976 15,766 15,656
Per share data:
Net earnings-diluted--Note L $1.43 $1.34 $1.10
Dividends declared .24 .23 .20
Capital expenditures 22,418 17,210 11,181
At Year-End
Working capital $ 93,381 $ 86,810 $ 75,151
Notes payable 6,685
Long-term obligations (including
current maturities) 68,939 13,647 15,925
Shareholders' equity 147,496 166,232 146,253
Equity per outstanding share 9.72 10.61 9.34
<TABLE>
<CAPTION>
SHAREHOLDER INFORMATION
(In thousands of dollars except per share data)
Quarterly Results of Operations
(Unaudited)
Net Gross Operating Net
Sales Earnings Earnings Earnings
1997
<S> <C> <C> <C> <C>
1st quarter $ 91,269 $25,291 $ 10,493 $ 6,954
2nd quarter 107,482 28,837 13,720 8,458
3rd quarter 89,980 25,162 11,624 7,683
4th quarter 126,420 36,332 (689)* (282)*
$415,151 $115,622 $35,148 $22,813
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
Per Share Data
(Unaudited)
Dividends Net Earnings
High(a) Low(a) Declared Basic Diluted
1997
1st quarter $17.00 $13.58 $.06 $ .45 $.44
2nd quarter 23.42 17.13 .06 .54 .53
3rd quarter 30.92 22.85 .06 .49 .48
4th quarter 37.25 28.31 .06 (.02)* (.02)*
$.24 $1.46 $1.43
1996
1st quarter $12.88 $12.00 $.05 $ .28 $.28
2nd quarter 15.67 12.46 .06 .34 .34
3rd quarter 15.67 13.50 .06 .32 .32
4th quarter 14.33 12.71 .06 .41 .40
$.23 $1.35 $1.34
</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.
* The fourth quarter results include a one-time, transaction-related
compensation charge of $16.2 million, or $10.5 million after tax
($.67 per share).
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY
(In thousands of dollars except per share data)
% of % of % of % of % of
1997 Sales 1996 Sales 1995 Sales 1994 Sales 1993 Sales
Summary of Operations
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $415,151 100.0 $321,297 100.0 $300,157 100.0 $268,707 100.0 $236,979 100.0
Cost of goods sold 299,529 72.1 233,801 72.8 225,353 75.1 205,640 76.5 183,927 77.6
Selling, general and
administrative
expenses 50,984 12.3 43,333 13.5 39,312 13.1 36,175 13.5 36,323 15.3
Transaction related
compensation charge 16,200 3.9
Research and develop-
ment expenses 13,290 3.2 10,743 3.3 8,004 2.7 6,208 2.3 5,708 2.4
Operating earnings 35,148 8.5 33,420 10.4 27,488 9.1 20,684 7.7 11,021 4.7
Other (income)
expense--net (51) 0.0 182 0.1 196 0.1 803 0.3 (761) (0.4)
Earnings before in-
come taxes and
cumulative effect
of changes in account-
ing principles 35,097 8.5 33,602 10.5 27,684 9.2 21,487 8.0 10,260 4.3
Income taxes 12,284 3.0 12,432 3.9 10,520 3.5 7,520 2.8 3,690 1.6
Net earnings--before
accounting changes 22,813 5.5 21,170 6.6 17,164 5.7 13,967 5.2 6,570 2.7
Cumulative effect on
prior years of account-
ing changes (a) (4,614) (1.9)
Net earnings 22,813 5.5 21,170 6.6 17,164 5.7 13,967 5.2 1,956 0.8
Retained earnings--
beginning of year 144,112 126,546 112,506 100,868 100,973
Dividends declared (3,756) (3,604) (3,124) (2,329) (2,061)
Retained earnings--end
of year $163,169 $144,112 $126,546 $112,506 $100,868
Average shares out-
standing-basic 15,624,149 15,668,415 15,602,454 15,511,218 15,457,668
Net earnings per share:
Before accounting
changes $1.46 $1.35 $1.10 $0.90 $0.43
Cumulative effect on
prior years of accounting
changes (a) (.30)
Net earnings - Basic $1.46 $1.35 $1.10 $0.90 $0.13
Net earnings - Diluted $1.43 $1.34 $1.10 $0.90 $0.13
Cash dividends per share $0.24 $0.23 $0.20 $0.15 $0.13
Capital expenditures 22,418 17,210 11,181 13,401 11,696
Depreciation and
amortization 16,965 12,491 11,683 11,236 12,143
Financial Position at
Year-End
Current assets $185,733 $138,201 $126,113 $110,667 $97,266
Current liabilities 92,352 51,391 50,962 44,792 49,888
Current ratio 2.0 to 1 2.7 to 1 2.5 to 1 2.5 to 1 1.9 to 1
Working capital $93,381 $86,810 $75,151 $65,875 $47,378
Inventories 56,007 38,761 38,885 41,456 36,059
Property, plant and
equipment--net 76,027 56,103 50,696 50,777 47,842
Total assets 329,581 249,372 227,127 206,826 185,064
Short-term notes
payable 6,685 7,436 12,822
Long-term obligations 63,474 11,220 13,714 15,595 4,995
Shareholders' equity 147,496 166,232 146,253 131,855 119,203
Common shares
outstanding 15,177,617 15,674,868 15,651,987 15,535,812 15,460,272
Equity (book value)
per share $9.72 $10.61 $9.34 $8.49 $7.71
Other Data
Stock price range
(dollars per share to
the nearest 1/16) $37.25-$13.58 $15.67-$12.00 $12.58-$9.13 $10.33-$6.50 $7.46-$5.67
Average number
of employees 4,132 3,815 4,007 4,056 3,975
Number of shareholders
at year-end 1,404 986 1,062 1,136 1,198
</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.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except per share amounts)
Year Ended
December 31 December 31 December 31
1997 1996 1995
<S> <C> <C> <C>
Net sales $415,151 $321,297 $300,157
Costs and expenses:
Cost of goods sold 299,529 233,801 225,353
Selling, general
and administra-
tive expenses 50,984 43,333 39,312
Transaction-related
compensation charge--Note E 16,200
Research and development expenses 13,290 10,743 8,004
Operating earnings 35,148 33,420 27,488
Other (expense) income:
Interest expense (2,883) (1,449) (1,790)
Interest income 2,397 1,881 1,421
Other 435 (250) 565
Total other (expense) income (51) 182 196
Earnings before income taxes 35,097 33,602 27,684
Income taxes--Note G 12,284 12,432 10,520
Net earnings $ 22,813 $ 21,170 $ 17,164
Net earnings per
share--Note L
Basic $1.46 $1.35 $1.10
Diluted $1.43 $1.34 $1.10
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars) Cumulative Additional
Common Retained Translation Contributed Treasury
Stock Earnings Adjustment Capital Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $34,198 $112,506 $ (354) $(328) $(14,167) $131,855
Net earnings 17,164 17,164
Cash dividends of $.20 per share (3,124) (3,124)
Nonemployee Directors' stock
retirement plan 15 15
Cumulative translation adjustment (291) (291)
Issued 55,500 shares on restricted
stock and cash bonus plan 76 (632) 556
Issued 51,975 shares on exercise
ofstock options (163) 522 359
Acquired 600 shares traded on
options--net 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 $.23 per share (3,604) (3,604)
Nonemployee Directors' stock
retirement plan 17 17
Cumulative translation adjustment 2,018 2,018
Issued 4,500 shares on restricted
stock and cash bonus plan 23 (70) 47
Issued 18,900 shares on exercise of
stock options (51) 197 146
Acquired 219 shares traded on options
--net 3 (3) (3)
Stock compensation 27 100 127
Deferred compensation recognized 236 236
Acquired 9,600 shares for treasury
stock (131) (131)
Balances at December 31, 1996 34,140 144,112 1,373 (600) (12,793) 166,232
Net earnings 22,813 22,813
Cash dividends of $.24 per share (3,756) (3,756)
Nonemployee Directors'
stock retirement plan 205 205
Cumulative translation adjustment (679) (679)
Issued 6,051 shares on restricted
stock and cash bonus plan--net 135 (224) 89
Issued 107,141 shares on exercise
of stock options--net 273 558 831
Stock compensation 19 12 31
Transaction-related compensation
charge 16,200 16,200
Deferred compensation recognized 241 241
Acquired 7,241,823 shares for treasury
stock (206,849) (206,849)
Issued 6,629,580 shares in connection
with the merger 152,227 152,227
Balances at December 31, 1997 $186,794 $163,169 $694 $15,822 $218,983) $147,496
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS December 31 December 31
(In thousands of dollars) 1997 1996
ASSETS
Current Assets
<S> <C> <C>
Cash and equivalents $ 39,847 $ 44,957
Accounts receivable, less allowances
(1997--$1,074; 1996--$622) 68,679 43,984
Inventories
Finished goods 8,061 8,504
Work-in-process 26,036 17,138
Raw materials 21,910 13,119
Total inventories 56,007 38,761
Other current assets 5,327 3,787
Deferred income taxes--Note G 15,873 6,712
Total current assets 185,733 138,201
Property, Plant and Equipment
Buildings and land 50,647 42,800
Machinery and equipment 156,287 146,589
Total property, plant and equipment 206,934 189,389
Less accumulated depreciation 130,907 133,286
Net property, plant and equipment 76,027 56,103
Other Assets
Prepaid pension expense--Note F 61,738 50,152
Other 6,083 4,916
Total other assets 67,821 55,068
Total Assets $329,581 $249,372
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
<S> <C> <C>
Current maturities of long-term obligations--Note D $ 5,465 $2,427
Accounts payable 28,200 17,146
Accrued salaries, wages and vacation 10,220 6,836
Accrued taxes other than income 2,484 2,070
Income taxes payable 13,517 5,946
Other accrued liabilities--Note K 32,466 16,966
Total current liabilities 92,352 51,391
Long-term Obligations--Note D 63,474 11,220
Deferred Income Taxes--Note G 21,950 16,146
Postretirement Benefits--Note F 4,309 4,383
Contingencies--Note K
Shareholders' Equity
Preferred stock -authorized 25,000,000 shares
without par value; none issued--Note I
Common stock-authorized 75,000,000 shares
without par value; issued 24,050,673
shares-Note--I 186,794 34,140
Additional contributed capital 15,822 (600)
Retained earnings 163,169 144,112
Cumulative translation adjustment 694 1,373
366,479 179,025
Less cost of common stock held in treasury
(1997-- 8,873,056 shares; 1996--1,746,225
shares)-Note--J 218,983 12,793
Total shareholders' equity 147,496 166,232
Total Liabilities and Shareholders' Equity $329,581 $249,372
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended
December 31 December 31 December 31
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $22,813 $21,170 $17,164
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 16,965 12,491 11,683
Deferred income taxes (1,462) 3,201 3,239
Transaction-related compensation
charge--Note E 16,200
Other 712 (160) (52)
Changes in assets and liabilities
net of effects from
purchase of DCA:
Accounts receivable (1,071) (2,247) (6,708)
Inventories 10,132 124 2,571
Prepaid pension asset (6,199) (5,413) (5,331)
Accounts payable and accrued
liabilities (572) 4,943 4,280
Income taxes payable 2,764 1,955 1,703
Other (1,400) (961) (1,688)
Total adjustments 36,069 13,933 9,697
Net cash provided by operating
activities 58,882 35,103 26,861
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment 2,973 822 236
Capital expenditures (22,418) (17,210) (11,181)
Payment for purchase of DCA, net of
cash acquired--Note B (71,353)
Net cash used in investing activities (90,798) (16,388) (10,945)
Cash flows from financing activities:
Proceeds from issuance of long-term
obligations 50,000
Payments of long-term obligations (8,707) (2,208) (286)
Decrease in notes payable (6,685) (751)
Dividends paid (3,768) (3,446) (3,118)
Purchases of treasury stock (10,121) (131) 146
Other (106) 146 359
Net cash provided by (used in)
financing activities 27,298 (12,324) (3,796)
Effect of exchange rate changes on cash (492) 1,295 229
Net (decrease) increase in cash (5,110) 7,686 12,349
Cash and equivalents at beginning of year 44,957 37,271 24,922
Cash and equivalents at end of year $39,847 $44,957 $37,271
Supplemental cash flow information
Cash paid during the year for:
Interest $2,649 $ 1,467 $ 1,791
Income taxes - net $10,646 7,276 5,590
Noncash investing and financing activities
Liabilities assumed in connection with
the purchase of DCA $53,639
Common stock issued in connection
with the purchase of DCA 152,227
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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.
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.
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.
Retirement Plans: The Company has various defined benefit and defined contri-
bution 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."
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, 1997, and
1996 approximates fair value where fair value is based on market prices for
the same or similar debt and maturities.
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, 1997, 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. Concentration of Credit Risk: The
Company sells its products to customers primarily in the computer equipment,
automotive, 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
(APB) No. 25, "Accounting for Stock Issued to Employees" and its related
Interpretation. See Note E for the required pro forma net income and
earnings per share disclosures required by FASB Statement No. 123.
Earnings Per Share: Basic and diluted earnings per common share are reported
in conformity with FASB Statement No.128, "Earnings per Share." All prior
period earnings per share (EPS) data presented have been restated to comply
with FASB Statement No. 128 and also to reflect the 3 for 1 stock split (Note
I). Basic earnings per share exclude any dilution and is computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts to
issue common stock resulted in the issuance of common stock that shared in the
earnings of the Company. Refer to Note L - Earnings Per Share, for the
reconciliation of the numerator and denominator of the basic and diluted EPS
computations.
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 TO CONSOLIDATED STATEMENTS
NOTE B - Acquisition
On October 16, 1997, the Company acquired all of the outstanding common stock
of Dynamics Corporation of America ("DCA")(the "merger" or "acquisition"),
including the reacquisition of CTS shares held by DCA. DCA is a diversified
manufacturer of commercial and industrial products. Its seven operating units
located within the United States manufacture electronic components, mobile
vans and transportable shelters for specialized electronic and diagnostic
equipment, portable electronic housewares and commercial appliances, air
distribution equipment, specialized air-conditioning equipment and generator
sets.
The acquisition has been accounted for as a purchase and, accordingly,
the operating results of DCA have been included in the Company's consolidated
financial statements since the date of acquisition.
The purchase price was comprised of cash of $68,509,000, utilizing cash on
hand and borrowings, and issuance of 6,629,580 shares of the Company's common
stock with a value of $152,227,000. The total cost of the acquisition,
including transaction-related expenses and estimated liabilities assumed, was
$237,300,000.
Due to the timing of the acquisition, the Company has not yet completed its
plans to integrate the newly acquired DCA units into CTS, although a number
of integration actions have been taken and reflected in the December 31, 1997,
financial statements. Accordingly, the allocation of the total purchase price
is preliminary and subject to revision during 1998. It is not expected that
the finalization of the integration will have any significant effect on the
consolidated financial position or results of operations of the Company.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1997, and 1996, assume the DCA acquisition occurred
on January 1 of each year:
Pro Forma Information - Unaudited:
(In millions, except per share data)
1997 1996
Net sales $ 523.3 $ 450.5
Net earnings 37.9 18.8
Diluted earnings per share $2.39 $1.19
DCA's results have been adjusted to exclude equity earnings in CTS and merger-
related transaction costs. The postacquisition results of DCA in 1997 generated
net sales of $33,079,000 and approximately a $.06 per share positive impact on
net earnings. The pro forma amounts are based on certain assumptions and
estimates, and do not reflect any benefit from synergies which might be
achieved from combined operations. The pro forma results are not necessarily
indicative of CTS' operating results that would have occurred had the merger
been consummated as of such dates, or of results which may occur in the future.
NOTE C - Short-term Borrowings
The Company has unsecured lines of credit arrangements of $13,868,000 at
December 31, 1997. These arrangements are generally subject to annual renewal
and renegotiation, and may be withdrawn at the banks' option. There were
minimal borrowings against these lines during 1997.
Average daily short-term borrowings, including borrowings denominated in
non-U.S. currencies, were $2,308,000 and $6,781,000 during 1996 and 1995,
respectively. The weighted average interest rates, computed by relating
interest expense to average daily short-term borrowings, were 6.1% in 1996
and 6.5% in 1995.
The maximum amount of short-term borrowings at the end of any month during
1996 and 1995 was $8,055,000 and $8,440,000, respectively. The short-term
borrowings outstanding at December 31, 1995, were $6,685,000.
NOTE D - Long-term Obligations
Long-term obligations were comprised of the following:
(In thousands)
1997 1996
Long-term debt:
Term loan at 8.4%, due in annual
installments through 1999 $11,000 $13,000
Term loan at 6.4%, due in quarterly
installments through 2003 50,000
Other 802 647
61,802 13,647
Less current maturities 5,465 2,427
Total long-term debt 56,337 11,220
Other 7,137
Total long-term obligations $63,474 $11,220
The Company has an $11,000,000 term loan with four banks, of which $2,000,000
is payable in 1998 and $9,000,000 in 1999.
The Company also has a $50,000,000 term loan with four banks which matures as
follows: 1998 - $3,000,000; 1999 - $5,000,000; 2000 - $10,000,000;
2001 - $10,000,000; 2002 - $10,000,000 and 2003 - $12,000,000.
The Company has an unsecured revolving credit agreement totaling $75,000,000
with four banks, which expires in 2003. Interest rates on these borrowings
fluctuate based upon LIBOR plus 0.50 percent per annum through March 31, 1998,
with adjustments thereafter based on the ratio of CTS' consolidated total
indebtedness to consolidated earnings before interest, taxes, depreciation
and amortization (EBITDA). The Company pays a commitment fee that varies
based on performance under certain financial covenants applicable to the
undrawn portion of the revolving credit agreement. Currently, that fee is
0.175 percent per annum. The credit agreement and term loans require,
among other things, that the Company maintain a minimum tangible net worth,
a minimum fixed charge coverage ratio and a minimum leverage ratio.
Other long-term obligations include $6,794,000 of liability relating to common
shares to be issued to DCA shareholders as a result of the merger.
NOTE E - Stock Plans
At December 31, 1997, the Company has four stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. With the exception of the
transaction-related option grant, compensation cost is normally not recognized
for its fixed stock option grants as they are granted at fair market value at
the grant dates, 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 and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(In thousands, except per share amounts)
1997 1996 1995
Net earnings As reported $22,813 $21,170 $17,164
Pro forma $21,360 $20,936 $17,141
Net earnings
per share- As reported $1.43 $1.34 $1.10
diluted Pro forma $1.34 $1.32 $1.10
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 and 1997: dividend yield of 1.63% and
0.70%, respectively; expected volatility of 19.93% for both years, risk-free
interest rate of 5.62% and 5.80%, respectively; and expected life of 4.3 and
2.0 years, respectively.
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, 1996 and 1997 due to the five-year vesting period
associated with the fixed stock option awards.
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 900,000 shares of common stock. Of the 900,000 shares, approximately
300,000 shares were granted. Under the 1996 Stock Option Plan, the Company
may grant options to its officers and key employees for up to 600,000
shares of common stock.
On October 16, 1997, the Company granted 1,200,000 options to certain officers
and Board members. These options are fully vested and are exercisable over a
ten-year period terminating May 8, 2007. Based on the value of CTS shares on
the date of the merger and the option price of $20.83 per share, a $16.2
million before tax, $10.5 million after tax, or $.67 per share, charge to
expense was recorded. The actual tax benefit to be realized will depend
on the amounts calculated upon exercise of the options.
The pro forma information presented above includes the effect of the difference
between the intrinsic value compensation charge calculated under APB Opinion
No. 25 and the fair value amount calculated under FASB Statement No.123.
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 a combination thereof
subject to certain restrictions as described in the plan document.
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1997, 1996 and 1995, and changes during the years ending on those
dates, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted Weighted
-Average -Average -Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at begin-
<S> <C> <C> <C> <C> <C> <C>
ning of year 412,575 $10.70 458,775 $10.61 258,000 $7.72
Granted 1,200,000 20.83 - - 282,150 12.30
Exercised (115,583) 9.46 (18,900) 7.85 (51,975) 7.02
Expired or canceled (6,450) 10.40 (27,300) 11.16 (29,400) 7.80
Outstanding at end
of year 1,490,542 $18.96 412,575 $10.70 458,775 $10.61
Options exercisable
at year-end 1,361,692 154,275 57,675
Weighted-average fair
value of options
granted during the
year $15.19 $ 2.75
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life (Years) Price at 12/31/97 Price
$6.375-
8.250 86,925 1.43 $8.12 65,925 $8.08
$10.420-
12.458 203,617 2.93 12.38 95,767 12.37
$20.833 1,200,000 9.42 20.83 1,200,000 20.83
Under the 1986 Stock Option Plan, options to purchase a total of 94,425 shares
were outstanding as of December 31, 1997. At December 31, 1997, 70,125 of
these shares were exercisable.
Under the 1996 Stock Option Plan, options to purchase a total of 196,117 shares
were outstanding as of December 31, 1997. At December 31, 1997, 91,567
of these shares were exercisable.
The Company has a discretionary Restricted Stock and Cash Bonus Plan (Plan)
which reserves 1,200,000 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 1997, 21,000 shares were awarded leaving 1,010,700
shares available for award or sale at December 31, 1997. Under the Plan,
in 1996 and 1995, 4,500 and 55,500 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 $427,000, $408,000 and $306,000 for additional compensation payable
under the provisions of the Plan in 1997, 1996 and 1995, 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 $205,100, $17,100
and $15,100 in 1997, 1996 and 1995, respectively.
NOTE F - Employee Retirement Plans
Defined benefit plans
The Company has a number of noncontributory defined benefit pension plans
(Plans) covering approximately 48% 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.
The Company also contributes to a multi-employer plan which provides defined
retirement benefits, as required by collective bargaining agreements.
Information concerning the Company's share of related estimated plan benefit
obligations and assets is not available for the multi-employer plan.
Net pension income for the Plans in 1997, 1996 and 1995 includes the following
components: (In thousands)
1997 1996 1995
Service cost--benefits
earned during the year $ 2,846 $ 2,787 $ 2,216
Interest cost on projected
benefit obligation 6,196 5,430 5,330
Actual return on plan assets (43,970) (20,982) (23,252)
Net amortization and deferral 28,729 7,352 10,375
Net pension income $(6,199) $(5,413) $(5,331)
The following table details the funded status of the Plans at
December 31, 1997, and December 31, 1996:
(In thousands)
1997 1996
Actuarial present value
of benefit obligations:
Vested benefits $ 91,114 $ 68,570
Nonvested benefits 6,229 2,598
Accumulated benefit obligation $ 97,343 $ 71,168
Plan assets at fair value $218,294 $151,841
Projected benefit obligation 106,962 78,046
Plan assets in excess of the projected
benefit obligation 111,332 73,795
Unrecognized prior year service cost 323 397
Unrecognized net gain (42,776) (15,146)
Unrecognized net asset (7,141) (8,894)
Prepaid pension expense $61,738 $ 50,152
A significant amount of the increases in plan assets, projected benefit
obligation, and prepaid pension expense were due to the merger, in which CTS
acquired additional plan assets with a fair value of $28,039,000, projected
benefit obligation of $22,652,000 and prepaid pension expense of $5,386,000.
Assumptions used in determining net pension income and the funded status of
U.S. defined benefit pension plans were as follows:
1997 1996 1995
Discount rates (funded status) 7.50% 7.75% 7.25%
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% 9.75% 9.00%
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, 1997, measurement date, the discount
rate was decreased to 7.50% to reflect current market conditions. This change
had no impact on 1997 pension income, but will decrease 1998 pension income by
$287,000.
The majority of U.S. defined benefit pension plan assets are invested in common
stock, including approximately $23.3 million and $8.5 million in CTS common
stock at December 31, 1997 and 1996, respectively. 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 1997, 1996 or 1995. Benefits paid by all Plans during 1997, 1996 and
1995 were $5,202,000, $4,240,000 and $4,085,000, respectively.
Pension coverage for employees of certain non-U.S. subsidiaries is provided
through separate plans. Contributions of $216,000, $167,000 and $237,000 were
made to the non-U.S. Plans in 1997, 1996 and 1995, respectively.
The Company has a noncontributing, nonqualified defined benefit supplemental
retirement plan for certain employees. The 1997 net periodic pension cost
was $53,000 and the related liability at December 31, 1997, was $384,000. At
December 31, 1997, the plan was fully funded with shares of the Company's stock.
Defined contribution plans
The Company sponsors a 401(k) Plan, as well as 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 $2,351,000 in 1997, $2,382,000 in 1996 and
$2,294,000 in 1995.
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, 1997, and
December 31, 1996, is as follows:
(In thousands)
1997 1996
Accumulated postretirement
benefit obligation:
Active employees $(1,663) $(1,298)
Retirees and dependents (2,623) (2,698)
(4,286) (3,996)
Unrecognized net gain (449) (574)
Postretirement benefit obligation $(4,735) $(4,570)
The components of net periodic postretirement benefit expense for 1997,
1996 and 1995 are as follows:
(In thousands)
1997 1996 1995
Service cost--benefits earned
during the year $ 32 $ 34 $ 28
Interest cost on accumulated
benefit obligation 298 295 330
Net amortization and deferral (12) (1,008)
Net expense (income) $318 $ 329 $(650)
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 7.50%, 7.75% and 7.25% annual discount rate was used to
determine the remaining life obligation for 1997, 1996 and 1995, 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.
The components of earnings before income taxes are as follows:
(In thousands)
1997 1996 1995
Domestic $3,023 $16,381 $17,563
Non-U.S. 32,074 17,221 10,121
Total $35,097 $33,602 $27,684
The provision for income taxes consists of the following:
(In thousands)
1997 1996 1995
Current:
Federal $2,104 $3,105 $1,935
State 1,081 1,012 963
Non-U.S. 9,928 5,114 4,383
Total current 13,113 9,231 7,281
Deferred:
Federal (540) 2,761 2,534
State (462) 313 578
Non-U.S. 173 127 127
Total deferred (829) 3,201 3,239
Total provision for income taxes 12,284 $12,432 $10,520
Significant components of the Company's deferred tax liabilities and assets at
December 31, 1997, and 1996, are:
(In thousands)
1997 1996
Pensions $21,685 $17,683
Depreciation 1,135 1,460
Basis difference-acquired assets 976
Other 2,592 3,185
Gross deferred tax liabilities 26,388 22,328
Postretirement benefits 1,618 1,622
Inventory reserves 4,586 2,721
Loss carryforwards 2,731 5,778
Credit carryforwards 1,658 4,355
Nondeductible accruals 6,650 4,365
Non-recurring compensation charge 4,664
Other 882 818
Gross deferred tax assets 22,789 19,659
Net deferred tax liabilities (3,599) (2,669)
Deferred tax asset valuation allowance (2,731) (6,765)
Total $(6,330) $(9,434)
During 1997, the valuation allowance was decreased as a result of the
expiration of unused net operating losses in one taxing jurisdiction, and the
utilization of net operating losses and tax credits in other jurisdictions.
The total decrease in the valuation allowance was $4,034,000.
A reconciliation from the statutory federal income tax to the Company's
effective income tax follows:
(In thousands)
1997 1996 1995
Taxes at the U.S. statutory rate $12,284 $ 11,761 $9,689
State income taxes, net of federal
income tax benefit 402 861 1,002
Non-U.S. income taxed at rates
different than the U.S. statutory rate (154) (728) 1,159
Utilization of net operating loss
carryforwards and benefit of
scheduled tax credits (1,552) (279) (2,024)
Foreign distributions, net of foreign
tax credits 156 297 372
Non-recurring compensation expense 1,006
Other 142 520 322
Provision for income taxes $12,284 $12,432 $10,520
Undistributed earnings of certain non-U.S. subsidiaries amount to $52,600,000
at December 31, 1997. Prior year earnings are intended to be invested
indefinitely and, accordingly, no provision has been made for non-U.S.
withholding taxes. In the event all undistributed earnings were remitted,
approximately $5,300,000 of withholding tax would be imposed, which would be
substantially offset by foreign tax credits.
The Company has various non-U.S. tax basis net operating losses of
$10,083,000. Of this amount, $9,796,000 has an unlimited carryforward period.
The remainderof $287,000 expires in 1998 and 1999. In addition, the Company
has alternative minimum tax credit carryforwards of approximately $1,658,000,
which have no expiration date.
NOTE H - Business Segment and Non-U.S. Operations
The Company's operations historically comprised one reportable 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, insulated metal circuits, interconnect products,
loudspeakers, resistornetworks, switches and variable resistors. In addition
to contributing to its line of electronic components, the merger added
electrical appliances, power and controlled environmental systems, and
fabricated metal products and equipment to the Company's product offerings.
These additional product offerings are notmaterial for separate disclosure
and have been aggregated and shown as "Other Segments" in the information
that follows.
Sales to a major automotive manufacturer were approximately $50,000,000 in 1997,
$49,100,000 in 1996 and $54,900,000 in 1995. Sales to a major computer
equipment manufacturer were approximately $47,600,000 in 1997, $24,100,000 in
1996 and $10,700,000 in 1995. Also, sales to another major computer equipment
manufacturer were approximately $43,300,000 in 1997, $11,300,000 in 1996 and
$300,000 in 1995.
The non-U.S. operations or facilities are located in Canada, China, Hong Kong,
Japan, Mexico, Singapore, Taiwan, Thailand and the United Kingdom. Net sales
to unaffiliated customers from the United Kingdom equaled 26%, 24% and 17% of
the consolidated total for 1997, 1996 and 1995, respectively. Net sales to
unaffiliated customers from Other non-U.S. operations in the aggregate
equaled 14%, 16% and 19% of the consolidated total for each of the years 1997,
1996 and 1995, respectively. United States export sales to unaffiliated
customers for 1997 were principally to Thailand.
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.
Depreciation and amortization, and capital expenditures for the Electronic
Component Segment represented $16,516,000 and $22,180,000 respectively, of the
total for 1997.
Summarized financial information concerning the Company's business segments
and geographic areas of operation for 1997, 1996 and 1995 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.
Geographic Area (In thousands)
1997 1996 1995
Net Sales
Electronic Component Segment:
United States:
Sales to unaffiliated $155,288 $167,162 $179,640
customers (U.S.)
Sales to unaffiliated
customers (export) 69,491 26,312 14,376
Transfers to non-U.S. area 10,859 8,181 5,439
235,638 201,655 199,455
United Kingdom:
Sales to unaffiliated customers 108,145 76,204 49,571
Transfers to other areas 1,165 730 732
109,310 76,934 50,303
Other non-U.S.:
Sales to unaffiliated customers 57,678 51,619 56,570
Transfers to other areas 9,228 7,400 6,092
66,906 59,019 62,662
Other Segments: 24,549
Eliminations (21,252) (16,311) (12,263)
Total net sales $415,151 $321,297 $300,157
Operating Earnings
Electronic Component Segment:
United States $22,119 $ 23,226 $ 22,204
United Kingdom 20,452 10,192 6,483
Other non-U.S. 16,040 9,141 6,345
58,611 42,559 35,032
Other Segments: 1,835
Eliminations (14) (72) 140
60,432 42,487 35,172
General corporate expenses 25,284 9,067 7,684
Other(expense)income-net (51) 182 196
Earnings before income taxes $35,097 $ 33,602 $ 27,684
Assets Apportioned by Area
Electronic Component Segment:
United States $94,628 $88,189 $87,862
United Kingdom 36,190 36,037 24,718
Other non-U.S. 55,126 47,689 49,848
185,944 171,915 162,428
Other Segments: 48,834
Eliminations (7,276) (4,672) (3,783)
227,502 167,243 158,645
Corporate assets 102,079 82,129 68,482
Total assets $329,581 $249,372 $227,127
NOTE I - Capital Stock
On October 16, 1997, CTS shareholders approved an amendment to the Company
bylaws which increased authorized capitalization from 24,000,000 to 75,000,000
common shares, without par value, and 25,000,000 preferred shares, without
par value. CTS shareholders also approved a 3-for-1 stock split in the form
of a stock dividend to CTS shareholders of record on October 24, 1997. Under
the split, CTS common shareholders received a stock dividend of two CTS shares
for each CTS share held. All shares outstanding and per share amounts have been
restated to reflect the stock split.
NOTE J - Treasury Stock
Common stock held in treasury at December 31, 1997, totaled 8,873,056 shares
with a value of $218,983,000 compared to 1,746,225 shares with a value of
$12,793,000 at December 31, 1996. The increase results primarily from the
purchase of 6,909,300 shares of CTS common stock previously owned by DCA for
$196,728,000 in connection with the merger.
The Company also repurchased 332,523 shares with a value of approximately
$10,121,000 during 1997, primarily during the fourth quarter. On October 16,
1997, the Company announced its intention to reinstitute its common stock
repurchase plan whereby it may, from time to time, depending on market
conditions and other factors, purchase its shares of common stock in open
market or privately negotiated transactions. The remaining shares authorized
for repurchase under the Board of Directors' authorization dated October 30,
1987, and amended on February 23, 1990, is approximately 1,200,000 shares.
There can be no assurance as to the number of shares CTS may repurchase or
the timing of such purchases.
NOTE K - 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, 1997, totaled $5.9
million, compared with $4.8 million at December 31, 1996. 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 L - Earnings Per Share
FASB Statement No. 128, "Earnings per Share", requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted EPS
computations. The calculation below provides net earnings, average common
shares outstanding and the resultant earnings per share for both basic and the
diluted EPS for 1997, 1996 and 1995. The other dilutive securities of 74,094
at December 31, 1997, consisted primarily of shares of CTS common stock to be
issued to DCA shareholders who have not yet tendered their DCA shares.
Earnings Shares Per Share
(Numerator) (Denominator) Amount
1997:
Basic EPS $22,813,000 15,624,149 $1.46
Effect of Dilutive
Securities:
Stock Options 277,822
Other 74,094
Diluted EPS $22,813,000 15,976,065 $1.43
1996:
Basic EPS $21,170,000 15,668,415 $1.35
Effect of Dilutive
Securities:
Stock Options 91,981
Other 5,550
Diluted EPS $21,170,000 15,765,946 $1.34
1995:
Basic EPS $17,164,000 15,602,454 $1.10
Effect of Dilutive
Securities:
Stock Options 51,769
Other 1,800
Diluted EPS $17,164,000 15,656,023 $1.10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1995 - 1997)
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.
(In thousands)
December 31 December 31 December 31
1997 1996 1995
Net cash provided by (used in):
Operating activities $58,882 $35,103 $26,861
Investing activities (90,798) (16,388) (10,945)
Financing activities 27,298 (12,324) (3,796)
Cash and equivalents $39,847 $44,957 $37,271
Accounts receivable, net 68,679 43,984 41,737
Inventories, net 56,007 38,761 38,885
Current assets 185,733 138,201 126,113
Notes payable 6,685
Accounts payable 28,200 17,146 15,605
Accrued liabilities 58,687 31,818 26,461
Current liabilities 92,352 51,391 50,962
Working capital 93,381 86,810 75,151
Current ratio 2.01 2.69 2.47
Interest-bearing debt $61,206 $13,428 $22,267
Net tangible worth 146,320 162,193 141,650
Ratio of interest-bearing debt
to net tangible worth .42 .08 .16
The 1997 positive cash flow from operating activities of $58.9 million, an
improvement of $23.8 million, or 68% over 1996, was primarily a result of the
substantial reduction in inventories of $10.1 million, excluding impacts of
the DCA acquisition, and the higher operating earnings after giving
consideration to the noncash transaction-related compensation charge of $16.2
million.
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.
Cash expenditures for investing activities totaled $90.8 million in 1997,
primarily as a result of the purchase of the DCA operating assets. The Company
completed the acquisition of DCA, including the reacquisition of 6,909,300
shares of CTS common stock owned by DCA, in October 1997. The total purchase
price of $237 million included total cash expended in connection with the
merger of $71 million. In addition, CTS issued $152 million of common stock in
exchange for all of the outstanding common stock of DCA. Of the total cash
consideration, $50 million was obtained from an unsecured six-year amortizing
term loan. The Company is continuing the process of finalizing its integration
of DCA and expects to complete the integration within one year. It is not
expected that the integration will involve significant additional expenditures.
Capital expenditures were $22.4 million in 1997, an increase of 30% from 1996.
Spending of cash for investing activities in 1996 and 1995 was $16.4 million
and $10.9 million, respectively, principally for capital expenditures.
Investment activities during the last three years include capital expenditures,
which totaled $22.4 million in 1997, $17.2 million in 1996 and $11.2 million
in 1995. During 1997, major capital additions included capacity expansions
in certain key product lines and expenditures for new product production
equipment. 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 1998 over 1997 levels.
These capital expenditures will be primarily for new products and cost
reduction programs, as well as selected manufacturing equipment capacity
expansion.
Financing activities during 1997 generated $27.3 million and related primarily
to the Company's $50.0 million term loan in connection with the acquisition of
DCA, partially reduced by purchases of treasury stock of $10.1 million and
payments of long-term obligations of $8.7 million. During 1996, total
financing activities amounted to $12.3 million and resulted primarily from the
elective repayment of debt. In terms of 1995 financing activities, the impact
of the notes payable reduction was $5.3 million from the prior year.
A significant noncash component and a decreasing component of operating
earnings during the 1995 to 1997 period was pension income of $6.2 million,
$5.4 million and $5.3 million in 1997, 1996 and 1995, respectively. The 1997
pension income amount was slightly higher than in prior years, primarily as a
result of the increasing asset base and the current year amortization effect
of recent favorable investment returns in excess of actuarial return
assumptions. 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.
During 1997, a long-term Credit Agreement was finalized consisting of an
unsecured six-year amortizing term loan of $50.0 million and an unsecured
six-year revolving credit facility of $75.0 million. On June 16, 1997, the
Company borrowed $50.0 million under the term loan portion of the Credit
Agreement which was used to finance the purchase of 1.2 million DCA shares.
As of December 31, 1997, $50.0 million remains outstanding on this loan.
Dividends paid were $3.8 million in 1997, $3.4 million in 1996 and $3.1
million in 1995. During 1996, as a result of continuing improved earnings
performance and positive cash flow, the Company increased its quarterly
dividend to $.06 per share (on a post-split basis), effective with the
August 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. No provision for U.S. income taxes
or withholding taxes on the undistributed earnings at December 31, 1997, has
been made because prior year earnings are indefinitely reinvested in the
subsidiaries. If all non-U.S. earnings were repatriated, approximately $5.3
million of withholding taxes would accrue and substantially be offset by
foreign tax credits.
Under the Company's common stock repurchase plan, CTS repurchased shares with
a cost of $10.1 million during the fourth quarter of 1997. Refer to
Note J--Treasury Stock, for a description of the Company's repurchase plan.
The Company's credit vehicles, together with cash from opera- tions, should
adequately fund the Company's future cash needs.
Results of Operations
The following table highlights significant information with regard to the
Company's results of operations during the past three fiscal years.
(In thousands)
December 31 December 31 December 31
1997 1996 1995
Net sales $415,151 $321,297 $300,157
Gross earnings 115,622 87,496 74,804
Gross earnings as a percent
of sales 27.9% 27.2% 24.9%
Selling, general and
administrative expenses $ 50,984 $ 43,333 $ 39,312
Selling, general and
administrative expenses
as a percent of sales 12.3% 13.5% 13.1%
Transaction related
compensation charge $ 16,200
Research and development
expenses $ 13,290 $ 10,743 $ 8,004
Research and development
expenses as a percent of
sales 3.2% 3.3% 2.7%
Operating earnings - before
transaction-related
compensation charge $ 51,348 $ 33,420 $ 27,488
Operating earnings - before
transaction-related
compensation charge as a
percent of sales 12.4% 10.4% 9.1%
Operating earnings - after
transaction-related
compensation charge $ 35,148 $33,420 $27,488
Operating earnings - after
transaction-related
compensation charges as a
percent of sales 8.5% 10.4% 9.1%
Interest expense(income), net $ 486 $ (432) $ 369
Earnings before income taxes 35,097 33,602 27,684
Income taxes 12,284 12,432 10,520
Income tax rate 35.0% 37.0% 38.0%
Net sales for 1997 included $33.1 million from the DCA operating units for the
period from October 17 through year-end, resulting in approximately a $.06
positive earnings per share contribution. Excluding the DCA sales, CTS sales
increased by $60.8 million or 18.9% over 1996. This growth to record levels
was primarily in our automotive and computer equipment products sold
domestically and in Europe.
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.
As a percent of total annual sales, during the three-year period of 1995-1997,
sales to the automotive market decreased from 36% to 29% while our sales into
the computer equipment market increased from 22% to 31% as a percent of total
sales. Sales to other markets have generally remained constant.
The Company's 15 largest customers represented approximately 65% of net sales
in 1997, 62% in 1996 and 61% in 1995. One customer, a major manufacturer of
automobiles, comprised 12.0% of net sales in 1997 as compared to 15.3% in 1996
and 18.3% in 1995. Two other customers within the computer equipment industry
individually comprised 11.5% and 10.4% of net sales in 1997, compared to 7.5%
and 3.5% in 1996, and 3.6% and 0.1% in 1995.
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 1997, 1996 and 1995, 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, as well as overall expense control.
Selling, general and administrative expenses as a percent of sales have
remained relatively constant over the last three years, ranging from 12.3%
to 13.5%. In 1997, as in previous years, the Company continued to control
these expenses while increasing sales. During 1997, research and development
expenses increased by $2.5 million, or 24% over 1996, though remaining
relatively constant as a percent of sales as the Company continued to invest
in new products and product improvements. As in recent years, a substantial
portion of the research and development efforts were devoted to additional
products and product enhancements within our automotive, resistor network and
frequency control products.
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.
Excluding the nonrecurring compensation charge of $16.2 million related to the
acquisition, operating earnings increased by $17.9 million, or 54% over 1996.
Contributing to this substantial earnings increase was the overall volume
increase, operating improvements and continued expense control. Earnings
improvements were realized in all of our major product lines.
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.
The 1997 effective tax rate of 35% was lower than the 1996 tax rate of 37%,
principally due to the utilization of net operating loss carryforwards in
non-U.S. jurisdictions. The Company has remaining net operating loss
carryforwards of approximately $10.1 million in certain non-U.S. subsidiaries,
and has established a 100% valuation reserve on these amounts based upon
economic and political uncertainties, as well as historical pretax losses.
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 K - Contingencies.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by YEAR 2000 software failures. The Company is addressing
the integrity and reliability of its operational systems. Corporate management
is directly involved in identification, audit and timely implementation of
solutions to all YEAR 2000 issues. In this regard, the Company has recently
upgraded some of its enterprise software. Additional enterprise systems
upgrades are planned or in process, and along with addressing other
non-enterprise YEAR 2000 issues, the Company does not expect to be materially
impacted by the YEAR 2000 issue.
EXHIBIT 27
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<CIK> 0000026058
<NAME> CTS CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 39,847
<SECURITIES> 0
<RECEIVABLES> 69,753
<ALLOWANCES> 1,074
<INVENTORY> 56,007
<CURRENT-ASSETS> 185,733
<PP&E> 206,934
<DEPRECIATION> 130,907
<TOTAL-ASSETS> 329,581
<CURRENT-LIABILITIES> 92,352
<BONDS> 0
0
0
<COMMON> 186,794
<OTHER-SE> (39,298)
<TOTAL-LIABILITY-AND-EQUITY> 329,581
<SALES> 415,151
<TOTAL-REVENUES> 415,151
<CGS> 299,529
<TOTAL-COSTS> 380,003
<OTHER-EXPENSES> (2,832)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,883
<INCOME-PRETAX> 35,097
<INCOME-TAX> 12,284
<INCOME-CONTINUING> 22,813
<DISCONTINUED> 0
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<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.43
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