SECURITIES and EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
Commission file number 0-7304
DYNAMICS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
NEW YORK 13-0579260
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Steamboat Road, Greenwich, Connecticut 06830-7197
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-869-3211
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Title of Each Class Name of Each Exchange
------------------- ---------------------
on which Registered
---------------------
Common Stock (Voting)
$.10 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by 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
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1996:
Common Stock, $.10 Par Value--$92,920,000
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 15, 1996:
Common Stock, par value $.10 per share Shares
Voting 3,812,118
Non-Voting 3,843
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to security holders for the year ended December
31, 1995 are incorporated by reference into Parts I and II of this Form 10-K.
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 3, 1996 are incorporated by reference into Part
III of this Form 10-K.
Exhibits Index - Pages 18 and 19
<PAGE>
Part I
Item l. Business
A description of Dynamics Corporation of America ("DCA" or
"Company") and financial information about industry segments on pages 23 and 24
of the annual report to security holders for the year ended December 31, 1995,
and the classification of the Company's manufacturing divisions and subsidiary
for industry segments, including a description of each, on the inside back cover
of the annual report to security holders for the year ended December 31, 1995
are incorporated herein by reference.
Unless otherwise noted, the additional information required
pursuant to this item which follows pertains to continuing operations of the
Company.
Sources and Availability of Raw Materials
DCA is a user of steel, aluminum, copper, plastics and electronic
components. Generally, these materials are available from many sources, domestic
and offshore. Prices paid are competitive. Supplies are normally plentiful
except during national emergencies, unusually prolonged basic industry strikes,
or periods of accelerated demand for products exceeding industry capacity.
Patents and Trademarks
Although DCA owns or is licensed under a number of domestic and
foreign patents and patent applications, management believes that no single
patent or group of patents is material to the business as a whole. The
trademarks Waring(R), Blendor(R), NuBlend(R), TouchBlend(TM), Acme
Juicerator(R), Qualheim(TM), Anemostat(R), Multi-Vent(R), Anemotrak(R),
Envirotrak(R), and Environ(R) are well recognized in their trading areas and
signify desirable quality and value. These trademarks should be available for
Company use as long as it desires.
Backlog
The backlog of unfilled orders was approximately $22,564,000 at
December 31, 1995 as compared with approximately $31,900,000 at December 31,
1994. Substantially all the orders are expected to be completed in 1996. The
Power and Controlled Environmental Systems segment accounts for approximately
41% of the unfilled orders at December 31, 1995, and backlog continues to be
significant when projecting future financial results of this segment of the
Company's business.
Customers
In general, the businesses engaged in by the Company are not
dependent upon one or a few customers. The Company derived approximately 10.1%
of its sales in 1995, in the Power and Controlled Environmental Systems
1
<PAGE>
segment, from a single customer for power plant applications in the Pacific Rim.
The Company derived approximately 12% of its sales in 1993, in the Power and
Controlled Environmental Systems segment, from a single contractor to the U.S.
Government for custom mobile trailers. Neither the Company nor the Power and
Controlled Environmental Systems segment are dependent on either of these
customers. The remaining segments of the Company serve a broad base of customers
who are predominantly commercial in nature.
Competition
DCA normally experiences varying degrees of competition with
respect to each of its segments and with respect to particular products within
each segment.
The electrical appliances produced by the Company's Waring Products
Division experience keen competition in the consumer and commercial segments of
the market. The Company's Waring Blendor(R), NuBlend(R), TouchBlend(TM), Acme
Juicerator(R) and Qualheim(TM) trademarks are recognized names in their field.
The Reeves-Hoffman Division encounters strong competition for the
crystal products, oscillators and hermetic seal packages it sells due in large
part to the multiplicity of suppliers in the industry. The same is true with
respect to the heat dissipating devices sold by the Company's International
Electronic Research Corporation subsidiary.
Anemostat's air distribution, systems and door products compete in
a well supplied market with regard to quality, price and delivery. The Company's
Anemostat(R) air diffusers and vision frames and louvers for fire-rated doors
are recognized names in the industry. Sales of these products tend to follow the
expansion and contraction of the commercial construction industry.
As a supplier of specialized equipment for government, industry and
power plant use, the Ellis & Watts Division is generally required to submit
competitive bids. The mobile medical van and transportable suite segment of the
market which it serves is highly competitive among the suppliers serving that
market.
Distribution
The methods of distribution and marketing utilized by the Company
vary from division to division. In general, sales for all the Company's segments
combine some direct selling in certain market areas with appropriate
manufacturers' representatives, wholesalers, distributors and/or dealers.
Research and Development
DCA engages in a variety of research and development programs
throughout its divisions, the primary purposes of which are to improve existing
products and processes, modify current products to extend their market life and
expand markets by developing new products. Expenditures for Company sponsored
research and development amounted to $1,714,000 in 1995, $1,664,000 in 1994 and
$1,252,000 in 1993. A significant portion of each year's expenditures was
incurred in the design and qualification testing of new and improved electrical
appliances in the Electrical Appliances and Electronic Devices segment.
2
<PAGE>
Environmental Matters
The Company has been notified by the U.S. Environmental Protection
Agency ("EPA") that it is a Potentially Responsible Party ("PRP") regarding
hazardous waste cleanup at a non-Company site in Connecticut and at a Company
site in California. Certain of the PRPs at the Connecticut site have agreed with
the EPA to fund a feasibility study at the site and have sued the Company and
other PRPs who have not agreed to share the costs. A property owner adjacent to
the California site has sued the Company and others for allegedly causing
contamination of their property. The Company incurred costs of $165,000 in 1995
to fund engineering studies and conduct investigations of, and to remove
contaminants from, the California site and to pay related expenses. The Company
has settled a lawsuit brought by a state environmental agency for response costs
at a non-Company site in Pennsylvania, as to which the Company was earlier
designated a PRP; and the Company has also been sued by certain of the PRPs who
have agreed with the state agency to fund other past response costs at the
Pennsylvania site, to recover a portion of those costs from the Company and
other PRPs who have not agreed to participate in such funding. The Company is
also a defendant in two lawsuits seeking contribution for Superfund cleanup
costs relating to two other non-Company sites in Pennsylvania.
The amount of future environmental-related expenditures and the
extent of insurance coverage is not determinable at this time and the Company is
not in a position to estimate the loss or range of loss, if any, which may
result from environmental-related matters. Based upon its knowledge of the
extent of the Company's exposure and current statutes, rules and regulations,
and emerging alternative remedial approaches, management believes that the
anticipated costs resulting from claims and proceedings with respect to the
above mentioned sites, including possible remediation, the extent of which is
presently unknown, will not materially affect the financial position of the
Company. However, it is possible, but unanticipated at this time, that future
results of operations or cash flows could be materially affected by an
unfavorable resolution of these matters.
In 1995 the Company expended or provided $695,000, including
$165,000 for the California site and $415,000 for one of the Pennsylvania sites,
to manage hazardous substances, to monitor pollutants, to test for contaminants,
to provide for required removal activities and to settle the lawsuit for past
response costs at one of the non-Company sites in Pennsylvania, a 75% increase
in such costs over the prior year. Accruals for such matters at December 31,
1995 amounted to $565,000.
Number of Employees
DCA employed 1,194 persons at December 31, 1995.
Foreign Operations
The Company sells in foreign countries primarily through
manufacturers' representatives and agents and does not have manufacturing
operations abroad. Revenues from direct sales abroad represented approximately
21% of sales in 1995 and 15% in 1994. In addition, the Company receives revenue
from licenses and technology transfers which amounted to $113,000 in 1995,
$157,000 in 1994 and $1,207,000 in 1993. Included in the 1993 amount is income
from an initial royalty of $1,000,000 under a technology transfer agreement with
a customer in the Power and Controlled Environmental Systems segment; future
royalty amounts from that customer are dependent upon future contract awards
received by the customer.
3
<PAGE>
Division Held for Sale
The Company determined to discontinue operations at its Fermont
division, a manufacturer of electrical power systems for government and
commercial markets, effective as of September 30, 1991, and to put the
division's assets and business up for sale. At the time the determination was
made, Fermont was a party to a contract with the U.S. Government for the
production of 3KW engine generator sets. The contract was subject to First
Article approval of prototype 3KW units. In March 1995, the Government
terminated the 3KW contract for the convenience of the Government and the
Company has filed a claim for several million dollars as compensation for its
costs and losses related to the termination.
In July 1994, Fermont bid on a major new government generator set
contract and decided to pursue other contracts. Accordingly, commencing on July
1, 1994, the division is no longer classified as a discontinued operation but as
a business held for sale.
In January 1995, Fermont was awarded a contract to manufacture
tactical quiet (TQ) generator sets for the U.S. Army Aviation and Troop Command.
The Government's initial delivery order issued with the award and subsequent
additions call for delivery of gensets for an aggregate price of $69,000,000.
Shipments are expected to begin in 1996 subject to First Article prototype
testing and approval. Projected cash requirements for working capital and
equipment, net of Government progress payments, are expected to approximate $5.0
million in 1996; however, Fermont expects to generate positive cash flow in the
period of performance under the contract. (Notes 4 and 7 on pages 12 and 14 of
the annual report to security holders for the year ended December 31, 1995 are
incorporated herein by reference.)
Discontinued Operation
In December, 1992 the Company sold its 33.3% interest in Farmhand
Inc. for $1,700,000 in cash and a $500,000 long-term note. The entire principal
balance of the renegotiated note of $476,000 was paid in 1995.
Investment in CTS Corporation
At December 31, 1995, the Company's holdings of the common stock of
CTS Corporation ("CTS") aggregated 2,303,100 shares. The Company's equity
ownership in CTS represents 44.1% of the outstanding stock of CTS.
The current CTS Board of Directors is comprised of five individuals
including two directors who also are officers and directors of DCA. The
Company's investment in CTS is accounted for under the equity method. CTS, whose
shares are listed on the New York Stock Exchange, designs, manufactures and
sells electronic components for the automotive, communications equipment, data
processing, defense and aerospace, instruments and controls, and consumer
electronic markets. CTS is headquartered in Elkhart, Indiana and operates
manufacturing plants in the U.S. and abroad, primarily in a single business
segment, electronic components and subsystems, in worldwide markets. (Note 6 on
page 14 of the Company's annual report to security holders for the year ended
December 31, 1995 is incorporated herein by reference.)
4
<PAGE>
Item 2. Properties
The following is a summary by industry segment of the properties occupied by the
Company.
<TABLE>
<CAPTION>
Square
Division Location Feet Type Occupancy
- -------- -------- ------ ------- ---------
<S> <C> <C> <C> <C>
Executive 475 Steamboat Road 7,704 Part of Lease expiring
Greenwich, CT modern 12/31/2000
office bldg.
Electrical Appliances and Electronic Devices:
- --------------------------------------------
Waring New Hartford, CT 212,000 Modern 1 Fee ownership
Products story
McConnellsburg, PA 74,000 Modern 1 Fee ownership
story
Winsted, CT 55,000 Multi-story Fee ownership
I.E.R.C. Burbank, CA 37,000 2 Modern Lease expiring
bldgs.; 4 1/31/2000
stories &
1 story
Burbank, CA 21,000 3 Modern Fee ownership
bldgs.; one
2 stories &
two 1 story
Reeves- Carlisle, PA 94,000 Modern 1 Lease expiring
Hoffman story 2/28/99
Fabricated Metal Products and Equipment:
- ----------------------------------------
Anemostat Scranton, PA 270,000 Modern 1 Fee ownership
Products story
Carson, CA 76,000 Modern 1 Lease expiring
story 10/31/2007
</TABLE>
5
<PAGE>
Square
Division Location Feet Type Occupancy
- -------- -------- ------ ------- ---------
Power and Controlled Environmental Systems:
- -------------------------------------------
Ellis & Cincinnati, OH 147,900 1 Modern Fee ownership
Watts bldg.; 1
story mfg.
& 2 stories
offices
All plants are of adequate capacity and are utilized generally on a one-shift
basis except for the Burbank, California facility, portions of which are
utilized on a two-shift basis. The Winsted, CT facility of the Waring Products
Division is utilized as a records storage facility and is also available for
sale. Approximately 66,000 square feet of the Scranton, PA facility of the
Anemostat Products Division has been leased on a short-term basis.
Properties Held for Sale:
- -------------------------
The following property, which continues to be occupied and operated by the
Fermont Division, is held for sale in connection with the sale of the Fermont
business.
Bridgeport, CT 97,000 2 Modern Fee Ownership
bldgs.; 2
stories &
1 story
6
<PAGE>
Item 3. Legal Proceedings
With respect to claims and actions against the Company, including
environmental matters, it is the opinion of Management that they will have no
material effect on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Executive Officers of the Registrant
Name Age Office
---- --- ------
Andrew Lozyniak 64 Chairman of the Board and
President
Henry V. Kensing 62 Vice President, General
Counsel and Secretary
Patrick J. Dorme 60 Vice President-Finance and
Chief Financial Officer
Richard E. Smith 47 Treasurer
The officers named above were elected to hold the offices set opposite their
respective names until the meeting of directors following the next annual
meeting of shareholders. Henry V. Kensing was elected Secretary of the
Corporation by the Board of Directors on February 23, 1994.
Except as above stated, the officers named above have served in their respective
capacities for the past five years.
There are no family relationships between any directors or executive officers of
the Company.
7
<PAGE>
Part II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
Range of Stock Prices and Dividend Information on page 24 of the
annual report to security holders for the year ended December 31, 1995 is
incorporated herein by reference.
Item 6. Selected Financial Data
Selected Financial Data on page 22 of the annual report to security
holders for the year ended December 31, 1995 is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Results of Operations and
Financial Condition on pages 4 through 6 of the annual report to security
holders for the year ended December 31, 1995 is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant
and its subsidiaries are included in the annual report to security holders for
the year ended December 31, 1995 and are incorporated herein by reference.
Page(s) in the
Annual Report
--------------
Consolidated Balance Sheets--As of
December 31, 1995 and 1994 7
Consolidated Statements of Income--For
the Years Ended December 31, 1995, 1994
and 1993 8
Consolidated Statements of Stockholders'
Equity--For the Years Ended December 31,
1995, 1994 and 1993 9
Consolidated Statements of Cash Flows--For
the Years Ended December 31, 1995, 1994
and 1993 10
Notes to Consolidated Financial Statements 11-19
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure
Not applicable
8
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
Identification of directors of the registrant and information
related thereto is included in the definitive proxy statement for the Annual
Meeting of Shareholders to be held on May 3, 1996, under caption "Election of
Directors", and said information is incorporated herein by reference.
Identification of executive officers of the registrant and
information related thereto is included in Part I of this Form 10-K.
Item 11. Executive Compensation
Remuneration of directors and officers and information related
thereto is included in the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 3, 1996, under the captions "Election of
Directors", including information on the Stock Retirement Plan for Outside
Directors, and under the captions "Executive Compensation", "Pension Benefits",
"Savings and Investment Plan" and "1980 Restricted Stock and Cash Bonus Plan",
and said information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Security ownership of management and of certain beneficial owners
and information related thereto is included in the definitive proxy statement
for the Annual Meeting of Shareholders to be held on May 3, 1996, under the
captions "Election of Directors" and "Security Ownership of Certain Beneficial
Owners", and said information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Transactions with management and others and information related
thereto is included in the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 3, 1996, under the caption "Transactions with
Management and Others", and said information is incorporated herein by
reference.
9
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) The report of independent auditors and the following consolidated
financial statements of the registrant and its subsidiaries
included in the annual report to security holders for the year
ended December 31, 1995 are incorporated by reference in Item 8
above:
Consolidated Balance Sheets--
As of December 31, 1995 and 1994
Consolidated Statements of Income--
For the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity--
For the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows--
For the Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(a)(2)
and(d) The following consolidated financial statement schedules of the
registrant and its subsidiaries are included in this Form 10-K.
Page(s)
-------
Schedule II--Valuation and Qualifying
Accounts--For the Years
Ended December 31, 1995,
1994 and 1993 15-17
10
<PAGE>
The consolidated financial statements of CTS Corporation, the
registrant's investment in which is accounted for by the equity method, are
subject to the Rules and Regulations of the Securities and Exchange Commission
and have been examined by Price Waterhouse, independent accountants for CTS
Corporation. The following consolidated financial statement information and
schedules concerning CTS Corporation, which are included in CTS Corporation's
annual report on Form 10-K for the year ended December 31, 1995, certain
consolidated financial statement schedules included in said Form 10-K and CTS
Corporation's annual report to stockholders for 1995 attached to said Form 10-K
as Exhibit 13 thereto (all of which are included as Exhibit 99 to this Form
10-K), are incorporated by reference herein.
Page(s) in CTS
Corporation's annual report
to stockholders for 1995
---------------------------
Consolidated Statements of Earnings --
years ended December 31, 1995,
1994 and 1993 12
Consolidated Statements of Shareholders'
Equity -- years ended December 31,
1995, 1994 and 1993 13
Consolidated Balance Sheets --
December 31, 1995 and 1994 14
Consolidated Statements of Cash Flows--
years ended December 31, 1995,
1994 and 1993 15
Notes to Consolidated Financial Statements 16-23
Report of independent accountants 24
Page(s) in CTS Corporation
annual report on Form 10-K
for the year ended
December 31, 1995
---------------------------
Report of independent accountants
on financial statement schedule S-2
Schedule II - Valuation and qualifying
accounts S-3
11
<PAGE>
The above financial statement information and schedules concerning
CTS Corporation incorporated herein by reference were furnished to the
registrant by CTS Corporation and were used by the registrant as the basis of
recording registrant's net income from its equity investment in CTS Corporation,
and the amounts of income included in registrant's financial statements are
based solely on the aforesaid CTS Corporation financial statement information
and schedules and report of Price Waterhouse, independent accountants for CTS
Corporation.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable, and therefore
have been omitted, or the information is included in the consolidated financial
statements, or notes thereto, of registrant or of CTS Corporation incorporated
by reference herein.
(a) (3)
and (c) Exhibits
The response to this portion of Item 14 appears on the Exhibits
Index in a separate section of this Form 10-K on pages 18 and 19.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on December 29, 1995,
stating that the Board of Directors of the Company at its
December meeting had voted to extend the expiration date of the
rights issued under the Company's 1986 Preferred Stock Purchase
Rights Plan until February 14, 2006.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DYNAMICS CORPORATION OF AMERICA
/S/ Patrick J. Dorme March 27, 1996
- -------------------------------------------
(Signature)
Patrick J. Dorme - 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 date indicated.
/S/ Andrew Lozyniak March 27, 1996
- --------------------------------------------
Andrew Lozyniak - Chairman of the Board
and President
/S/ Henry V. Kensing March 27 1996
- --------------------------------------------
Henry V. Kensing - Director, Vice President,
General Counsel and Secretary
/S/ Patrick J. Dorme March 27, 1996
- --------------------------------------------
Patrick J. Dorme - Director, Vice President-
Finance and Chief Financial Officer
/S/ Harold Cohan March 27, 1996
- --------------------------------------------
Harold Cohan - Director
/S/ Frank A. Gunther March 27, 1996
- --------------------------------------------
Frank A. Gunther - Director
/S/ Russell H. Knisel March 27, 1996
- --------------------------------------------
Russell H. Knisel - Director
/S/ Saul Sperber March 27, 1996
- ---------------------------------------------
Saul Sperber - Director
/S/ M. Gregory Bohnsack March 27, 1996
- --------------------------------------------
M. Gregory Bohnsack - Corporate Controller
and Principal Accounting Officer
13
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CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Dynamics Corporation of America
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Dynamics Corporation of America of our report dated February 27, 1996,
included in the 1995 Annual Report to Stockholders of Dynamics Corporation of
America.
Our audits also included the financial statement schedules of Dynamics
Corporation of America listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Stamford, Connecticut
February 27, 1996
14
<PAGE>
DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1995
(in thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
Balance At Charged To Balance
Beginning Costs And At End
Description Of Period Expenses Deductions Of Period
Valuation accounts deducted from assets to which they apply:
Allowance for net
unrealized losses
on marketable
equity securities $1,484 $ -0- $1,484(a) $ -0-
====== ====== ====== ======
Allowance for
doubtful accounts $ 571 $ 107 $ 211(b) $ 467
====== ====== ====== ======
Allowance for cash
discounts $ 33 $ 66 $ 82(c) $ 17
====== ====== ====== ======
Reserves not shown
elsewhere:
Reserve for
warranties $ 967 $1,054 $1,080(d) $ 941
====== ====== ====== ======
Notes:
(a)-- Reduction of reserve upon disposition of portfolio.
(b)-- Bad debts, net of recoveries, written off against allowance
provided therefor.
(c)-- Discounts charged against allowance provided therefor.
(d)-- Warranty costs incurred and charged against reserve provided
therefor.
15
<PAGE>
DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1994
(in thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
Balance At Charged To Balance
Beginning Costs And At End
Description Of Period Expenses Deductions Of Period
- ----------- ---------- ---------- ---------- ---------
Valuation accounts deducted from assets to which they apply:
Allowance for net
unrealized losses
on marketable
equity securities $1,428 $ 56 $ -0- $1,484
====== ====== ====== ======
Allowance for
doubtful accounts $ 505 $ 33 $ (33)(a) $ 571
====== ====== ====== ======
Allowance for cash
discounts $ 26 $ 138 $ 131(b) $ 33
====== ====== ====== ======
Reserves not shown
elsewhere:
Reserve for
warranties $1,182 $1,006 $1,221(c) $ 967
====== ====== ====== ======
Notes:
(a)-- Recoveries, net of amounts written off against allowance
provided therefor.
(b)-- Discounts charged against allowance provided therefor.
(c)-- Warranty costs incurred and charged against reserve provided
therefor.
16
<PAGE>
DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1993
(in thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
Balance At Charged To Balance
Beginning Costs And At End
Description Of Period Expenses Deductions Of Period
Valuation accounts deducted from assets to which they apply:
Allowance for net
unrealized losses
on marketable
equity securities $1,607 $ -0- $ 179(a) $1,428
====== ====== ====== ======
Allowance for
doubtful accounts $ 571 $ 113 $ 179(b) $ 505
====== ====== ====== ======
Allowance for cash
discounts $ 29 $ 94 $ 97(c) $ 26
====== ====== ====== ======
Reserves not shown
elsewhere:
Reserve for
warranties $1,672 $ 918 $1,408(d) $1,182
====== ====== ====== ======
Notes:
(a)-- Market recoveries, net of changes to portfolio holdings.
(b)-- Bad debts, net of recoveries, written off against allowance
provided therefor.
(c)-- Discounts charged against allowance provided therefor.
(d)-- Warranty costs incurred and charged against reserve provided
therefor.
17
<PAGE>
Exhibits Index
Item 14. (a) (3) and (c)
Pursuant to Regulation S-K, Item 601, following is a list of Exhibits:
(A) Exhibits incorporated by reference.
Exhibit 3 - Articles of incorporation and bylaws:
1. Bylaws, as amended, were included in the Exhibits
of the registrant's Form 10-K Annual Report for the
year ended December 31, 1993.
Exhibit 4 - Instruments defining the rights of security holders:
1. The rights of common stockholders and preferred
stockholders (currently unissued) are defined in
the Articles of Incorporation referred to in
Exhibit 3 and in the Form 8A for registration of
certain classes of securities (Rights and Preferred
Stock), Rights Agreement dated as of January 30,
1986, Summary of Rights, letter to stockholders,
press release and Listing Application to the New
York Stock Exchange with respect to the Rights, all
of which were included in the Exhibits of the
registrant's Form 10-Q Quarterly Report for the
period ended March 31, 1986.
Exhibit 10 - Material contracts:
Management Compensatory Plans, Contracts and Arrangements
1. 1980 Restricted Stock and Cash Bonus Plan, as
amended, was included in the registrant's
definitive proxy statement for the Annual Meeting
of Shareholders on May 6, 1988.
2. Stock Retirement Plan for Outside Directors, as
amended, was included in the registrant's
definitive proxy statement for the Annual Meeting
of Shareholders on May 1, 1992.
3. Incentive Performance Plan was included in the
Exhibits of the registrant's Form 10-K Annual
Report for the year ended December 31, 1992.
4. Executive Life Insurance Policies was included in
the Exhibits of the registrant's Form 10-K Annual
Report for the year ended December 31, 1992.
5. Prescription Drug Plan for Outside Directors was
included in the Exhibits of the registrant's Form
10-K Annual Report for the year ended December 31,
1992.
Other
Agreement dated October 9, 1990 between Dynamics
Corporation of America and Gabelli Funds, Inc. and
GAMCO Investors, Inc. was included in the Exhibits
of the registrant's Form 10-K Annual Report for the
year ended December 31, 1990.
18
<PAGE>
Exhibit 21 - Subsidiaries of the registrant were included in the Exhibits
of the registrant's Form 10-K Annual Report for the year ended
December 31, 1984.
(B) Exhibits filed in or as a separate section of this report.
Page
Exhibit 4 - Instruments defining the rights of security holders:
1. Letter dated January 17, 1996 from the (a)
registrant to First National Bank of Boston
extending to February 14, 2006 the expiration date
of the rights issued pursuant to the rights
agreement dated as of January 30, 1986 between the
Company and First National Bank of Boston
previously filed with the registrant's Form 10-Q
Quarterly Report for the period ended March 31,
1986.
Exhibit 10 - Material Contracts:
Management Compensatory Plans, Contracts and
Arrangements
1. Employment contracts dated February 1, 1996 with:
Andrew Lozyniak - Chairman of the Board and President (a)
Patrick J. Dorme - Vice President-Finance
and Chief Financial Officer (a)
Henry V. Kensing - Vice President,
General Counsel and Secretary (a)
Exhibit 13 - Annual report to security holders for the
year ended December 31, 1995. (a)
Exhibit 23 - Consent of Independent Auditors 14
Exhibit 27 - Financial Data Schedule (b)
Exhibit 99 - CTS Corporation annual report on Form 10-K
for the year ended December 31, 1995, (without
Exhibits except as noted), the Report of
Independent Accountants and the Financial Statement
Schedule II included in said Form 10-K, and CTS
Corporation's annual report to stockholders for
1995 included in said Form 10-K as Exhibit 13
thereto. (c)
(a) Unnumbered and immediately following the final numbered page of
this report.
(b) Filed electronically only pursuant to regulations.
(c) Unnumbered and immediately following the registrant's annual report to
security holders for the year ended December 31, 1995.
19
REGISTERED MAIL, January 17, 1996
- ----------------
RETURN RECEIPT REQUESTED
- ------------------------
The First National Bank of Boston
Shareholder Services Department
150 Royall Street
Canton, Massachusetts 02021
MS-45-01-11
Attn: Ms. Jean Parillo
Dear Sirs:
I refer you to the Rights Agreement dated as of January 30, 1986 (`Rights
Agreement') between you and Dynamics Corporation of America (``Company'').
This letter shall constitute notice to you that the Company, acting through its
Board of Directors and pursuant to the Board's resolution adopted at its meeting
on December 27, 1995, has determined to extend the Expiration Date of the Rights
(as defined in the Rights Agreement) for a period of ten years, or until
February 14, 2006, as provided for in Section 7(b) of the Rights Agreement. The
Company agrees to continue to be bound by and to perform its obligations under
the Rights Agreement. Please acknowledge receipt of this notice and your
agreement to continue to be bound by and to perform your obligations under the
Rights Agreement by executing in the place provided and returning to the Company
the enclosed copy of this letter in the postage paid, self-addressed envelope
provided herewith.
Very truly yours,
DYNAMICS CORPORATION OF AMERICA
by: /s/Henry V. Kensing
-------------------------------
Henry V. Kensing,
Vice President,
General Counsel
and Secretary
Receipt so acknowledged and so agreed:
THE FIRST NATIONAL BANK OF BOSTON
by: /s/ Daniel T. Notartomaso, Jr., Senior Manager
------------------------------------------------
E M P L O Y M E N T A G R E E M E N T
---------------------------------------
EMPLOYMENT AGREEMENT made and entered into as of this 1st day of February,
1996 by and between DYNAMICS CORPORATION OF AMERICA ("DCA"), a New York
corporation, and ANDREW LOZYNIAK (the "Executive").
W I T N E S S E T H :
WHEREAS, DCA desires to employ the Executive, and the Executive desires to
be employed by DCA, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto hereby agree as follows:
FIRST: A. DCA employs the Executive as its Chairman, President and Chief
-----
Executive Officer for the period (the "Employment Period") of five years
commencing on the date of this Employment Agreement. The Executive accepts such
employment, agrees to perform such services consistent with his office as shall
from time to time be reasonably assigned to him by, or pursuant to authorization
of, the Board of Directors of DCA and agrees to be a full time employee of DCA
and diligently to devote substantially all of his business time, energy and
skill to the promotion of DCA's interests and that this Employment Agreement
supersedes and nullifies the Employment Agreement entered into between the
parties hereto dated as of February 1, 1991.
B. DCA agrees that the Executive's duties under this Employment
Agreement shall be performed primarily at DCA's principal executive offices.
C. DCA agrees that the Executive will be named as one of the
management nominees to its Board of Directors at each meeting of the
stockholders of DCA held during the Employment Period at which the class of
directors of DCA of which the Executive shall have been a member is to be
elected, and the Executive shall act as a director of DCA without any
compensation in addition to that provided for in Article SECOND hereof.
D. If DCA shall so request, the Executive shall become and shall,
during such portion or portions of the Employment Period as DCA shall request,
act as a director and/or officer of any of DCA's subsidiaries without any
compensation in addition to that provided for in Article SECOND hereof.
SECOND: A. DCA shall pay to the Executive, and the Executive shall
------
accept from DCA, for the Executive's services during the Employment Period,
regular compensation at the rate of not less than $343,194.72 per annum, payable
in accordance with DCA's customary payroll policy, but not less often than in
monthly installments.
B. The Board of Directors of DCA may at any time or from time to time
increase the regular compensation provided for in part A of this Article SECOND
or otherwise increase the benefits receivable by the Executive under this
Employment Agreement. In the event that such regular compensation shall be so
increased, then, from and after the date of such increase, such regular
compensation shall be deemed to be the amount as so increased. Notwithstanding
any provision in this Employment Agreement to the contrary, the Executive's
regular compensation shall be increased as of March 1st of each year during the
Employment Period by an amount which shall not be less than the product of the
Executive's regular compensation as of the day preceding March 1st of each year
during the Employment Period and a fraction the numerator of which shall be the
average of the monthly Consumer Price Indexes-United States City Average for
Urban Wage and Clerical Workers, All Items (1967 equals 100), as reported by the
Department of Labor, for the twelve month period ending on December 31st
preceding said March 1st and the denominator of which shall be the average of
such monthly Indexes for the twelve month period next preceding such first
mentioned twelve month period.
C. DCA shall, during the Employment Period, make available to the
Executive, at its cost and expense, (i) an automobile and (ii) furnished office
space and secretarial services as shall be reasonably necessary for the
satisfactory performance of his services.
D. The Executive will submit to DCA periodic reports of travel and
other expenses in connection with his employment hereunder in such forms and at
such times as may be required by DCA, and DCA will promptly reimburse the
Executive for such expenses as are approved by DCA, which approval shall not be
unreasonably withheld.
E. The Executive shall be conclusively deemed to be an "employee" of
DCA for all purposes and, as such an employee, shall be entitled to participate
in any health, hospitalization, disability, insurance, bonus, pension, profit
sharing, stock option or similar plans of DCA now in effect or which may be
hereafter adopted and made available to eligible employees of DCA. In addition,
if the Executive shall die during the Employment Period and if his wife shall
survive him, DCA shall pay to his wife, the sum of $60,000 per year, payable
semi-monthly, during the period commencing on the date of the death of the
Executive and ending on the tenth anniversary thereof. Such payments shall
cease if she dies within said ten year period.
F. DCA (i) shall during the Employment Period continue
to pay to the insurance carrier referred to hereafter the annual premium, at the
same annual rate and in the same month as paid by
DCA in 1995, on the individual "split dollar" life insurance policy issued by
the Security Mutual Life Insurance Company of New York and owned by the
Executive or a trust created by the Executive ("Policy"), and (ii),
notwithstanding the assignment of the Policy to DCA as collateral heretofore
executed by the Executive ("Collateral Assignment"), shall not take any action
to reduce the annual premium, borrow against the cash surrender value of the
Policy or endanger in any way any benefit available to the Executive or the
trustee or trustees of any such trust thereunder and shall not be entitled to be
repaid to the extent of its interest in the Policy until the earlier of the
death of the insured under the Policy or the surrender of the Policy by the
Executive.
G.1. In order to restore certain retirement income benefits which are not
available to the Executive under the Retirement Plan for Employees of DCA
("Qualified Plan") by reason of Section 401(a)(17), Section 415 and Section
401(a)(4) of the Internal Revenue Code ("Code"), DCA shall pay to the Executive
supplemental retirement income commencing on his retirement date (normal, early,
disabled or postponed) as defined in and under the Qualified Plan in an amount
equal to the difference between (a) the monthly amount of the retirement income
payable to the Executive upon his retirement under the Qualified Plan, if such
benefit were calculated under the Qualified Plan without giving effect to the
compensation limit under Section 401(a)(17) of the Code or to the limitations
imposed by the application of Section 415 of the Code, and assuming that the
benefit described in Section 4.01(d) of the Qualified Plan continued to apply on
and after January 1, 1989 notwithstanding the provisions of Section 401(a)(4) of
the Code, expressed as a single life annuity, and (b) the monthly amount of
retirement income payable to the Executive upon his retirement under the
Qualified Plan based on his compensation up to the said compensation limit and
based on the limitations imposed by the application of Section 415 of the Code,
and the limitations imposed by the application of Section 401(a)(4) of the Code
to Section 4.01(d) of the Qualified Plan, expressed as a single life annuity.
Such supplemental retirement income shall be paid to the Executive in cash by
DCA, to the extent so not paid by the trustee referred to in subparagraph G.4.
below, as an Actuarial Equivalent single lump sum as soon as practical following
the Executive's retirement. "Actuarial Equivalent" shall mean the present value
of a life annuity, assuming the retirement age is the Executive's age on his
retirement date, which is the date benefits hereunder are calculated; the
interest rate is the rate appearing in the table published in the Wall Street
-----------
Journal entitled `Markets Diary'' under the heading ``Bond Buyer municipal",
- -------
corresponding to 20-year Aaa bonds, and reflecting the rate for the first day of
the month preceding the month in which the benefits hereunder are calculated;
and mortality is determined under the 1983 Group Annuity Mortality Table.
2. If the Executive dies while eligible for a retirement benefit under
subparagraph G.1. above and prior to his retirement and/or the payment of such
retirement benefit, the Executive's surviving spouse shall be entitled to
receive a supplemental pre-retirement survivor benefit equal to the difference
between (a) the monthly amount of retirement income to which the deceased
Executive's spouse would have been entitled under the Qualified Plan if the
Executive had retired on the day prior to his death having elected a 100% joint
and survivor annuity option and if such benefit were calculated under the
Qualified Plan without giving effect to the compensation limit under Section
401(a)(17) of the Code or the limitations imposed by the application of Section
415 of the Code, and assuming that the benefit described in Section 4.01(d) of
the Qualified Plan continued to apply on and after January 1, 1989
notwithstanding the provisions of Section 401(a)(4) of the Code, and (b) the
monthly amount of retirement income to which the deceased Executive's spouse is
entitled under the Qualified Plan based on his compensation up to the said
compensation limit and based on the limitations imposed by the application of
Section 415 of the Code, and the limitations imposed by the application of
Section 401(a)(4) of the Code to Section 4.01(d) of the Qualified Plan. Such
supplemental pre-retirement survivor benefit shall be paid to such surviving
spouse in cash by DCA, to the extent not so paid by the trustee referred to in
subparagraph G.4. below, as an "Actuarial Equivalent" single lump sum, as above
defined, as soon as practicable following the Executive's death.
3. In order to restore benefits which are not available to the Executive
under the DCA Employee Savings and Investment Plan ("401-K Plan") by reason of
the compensation limit under Section 401(a)(17) of the Code, DCA shall pay to
the Executive on his retirement date an amount equal to two percent (2%) of his
annual base compensation in excess of $150,000 in calendar year 1996 and in each
calendar year in the Employment Period in which his annual base compensation
exceeds $150,000 (subject to indexation by the Internal Revenue Service), with
interest at the annual rate of eight percent (8%) on such excess amount from and
after December 31 of each such year. The aggregate of all such amounts and the
interest thereon shall be paid, to the extent not so paid by the trustee
referred to in subparagraph G.4. below, to the Executive in cash by DCA in a
lump sum as soon as practical following the Executive's retirement. If the
Executive dies while eligible for a benefit under this subparagraph G.3. and
prior to the payment of such benefit, the Executive's surviving spouse shall be
entitled to receive in cash from DCA, to the extent not so received from the
trustee referred to in subparagraph G.4. below, as soon as practical following
the Executive's death an amount equal to the amount the Executive would have
received under this subparagraph G.3. if he had retired under the Qualified Plan
on the day prior to his death.
4. Commencing no later than December 31, 1996 and continuing on or before
each December 31 thereafter during the Employment Period, DCA shall contribute
cash on an annual basis to a trust established as hereinafter provided ("Trust")
sufficient to pay all of the supplemental retirement income, supplemental pre-
retirement survivor benefits, and the other benefits to the Executive and his
surviving spouse provided for in subparagraphs G.1.,G.2. and G.3. above, but no
funds or assets of DCA shall be segregated or physically set aside with respect
to its obligations under the benefit restoration plan set forth in this part G.
in a manner which would cause said benefit restoration plan to be "funded" for
purposes of the Employee Retirement Income Security Act of 1974, as amended.
Neither the Executive nor his surviving spouse shall have any interest in any
specific asset of DCA as a result of this part G. and any rights to receive
benefits hereunder shall be only the right of an unsecured general creditor of
DCA. The Trust shall be established in full compliance with I.R.S. Revenue
Procedure 92-64 and the trustee shall be Chemical Bank or another financial
institution satisfactory to Executive. Upon the last of the Executive, Henry V.
Kensing and Patrick J. Dorme to receive payment from the trustee under this
subpart G., any funds remaining in the Trust shall be distributed pro rata in
equal shares to the Executive, Henry V. Kensing and Patrick J. Dorme or their
surviving spouses or heirs.
THIRD: A. If the Executive is unable to perform the duties required of
-----
him pursuant to the provisions of this Employment Agreement for any period of
six consecutive months during the Employment Period by reason of illness or
other incapacity, DCA shall continue to pay the Executive during such six months
the full regular compensation provided for in part A of Article SECOND hereof at
not less than the rate in effect at the time such inability commenced. If such
inability continues for a further period of six months, DCA shall continue to
pay the Executive not less than one-half of the regular compensation provided
for in said part A at the rate in effect at the time such inability commenced.
DCA shall have the right to terminate this Employment Agreement if such
inability shall have continued for a period of twelve consecutive months;
provided, however, that if DCA shall terminate this Employment Agreement, it
shall be obligated to pay to the Executive compensation at the rate of 40% of
the regular compensation provided for in said part A at the rate in effect at
the date of such termination during the period commencing on the date of such
termination and ending on the earlier of the tenth anniversary thereof or the
date on which the Executive reaches age 65. The issue of whether the Executive
is unable to perform his required duties at any relevant time shall be decided
by the Board of Directors of DCA.
B. For a period of ten (10) years, or the earlier death of the
Executive, commencing on the date of the formal retirement of the Executive
under the Qualified Plan and ending on the tenth anniversary thereof, or the
earlier death of the Executive, the Executive and his wife, and their dependent
children, if any, shall be entitled to enroll in an insured health and
hospitalization plan or plans, including, without limitation, plans offered by
health maintenance organizations, with benefits substantially equal to the
benefits of the health and hospitalization plans of DCA in effect on the date of
said retirement, and DCA shall pay to the Executive quarterly and in advance an
amount in cash grossed up so as to be sufficient, after the payment by the
Executive of all federal, state and local income and all other taxes due by
reason of the receipt of said payment, if any, to pay when due the premiums for
such insured coverage; provided, however, that during all times in such period
of the Executive's retirement as either the Executive or his wife shall be
eligible for Medicare coverage, in lieu of such participation by the Executive
or his wife, or both of them, as the case may be, in the insured health and
hospitalization plans referred to above, DCA shall pay to the Executive
quarterly and in advance an amount in cash grossed up so as to be sufficient,
after the payment by the Executive of all federal, state and local income and
all other taxes due by reason of the receipt of said payment,if any, to pay when
due the annual premiums for Medigap supplementary coverage for the Executive
and/or his wife with an insurance carrier selected by the Executive or his wife,
with the extent of such coverage to be as provided in Standard Plan J of the
National Association of Insurance Commissioners (`NAIC'') or in the NAIC
Standard Plan hereafter adopted which provides the most extensive benefit
coverage at the time of the payment to the Executive provided for under this
part B. For purposes of this part B., the amount of any required gross up shall
be calculated by utilizing the highest tax rate for federal income tax in effect
at the time of calculation, and 5% for state and local income taxes, and the
then current rate for Federal Insurance Contributions Act (FICA) taxes for both
the Executive's share and DCA's share of such taxes.
In the event that the Executive dies within said ten (10) year period, his
wife shall continue to be entitled to said payments for a period of six (6)
months from the date of death of the Executive.
The provisions of this Article which take effect upon the termination of
this Employment Agreement or the formal retirement of the Executive under the
Qualified Plan shall survive and not be affected by any change of control of
DCA.
The parties agree that, notwithstanding any other provision of this
Employment Agreement, the Executive shall not be entitled to retire under the
Qualified Plan during the Employment Period unless the Board of Directors
consents to such retirement, except that the Executive may so retire without
such consent upon expiration or termination of this Employment Agreement.
FOURTH: A. In the event that DCA shall at any time during the Employment
------
Period sell all or substantially all of its assets to any other person, firm or
corporation or consolidate with any other person, firm or corporation, or enter
into any merger with any person, firm or corporation in which DCA is not the
surviving entity, or in the event that voting control of DCA shall be obtained
by any person, firm or corporation, or by any group of persons, firms or
corporations, which shall not have such control on the date hereof, the
Executive shall have the right to terminate this Employment Agreement upon
thirty days written notice given at any time within three months after the
occurrence of such event. If the Executive shall have terminated this
Employment Agreement pursuant to the foregoing provisions of this part A, or if
DCA or the consolidated entity or the surviving corporation shall have
terminated this Employment Agreement during such three month period, DCA or the
consolidated entity or the surviving corporation, as the case may be, shall pay
to the Executive as compensation, in a lump sum on the date of such termination,
in lieu of any further compensation provided for in Article SECOND hereof, an
amount equal to five times the sum of (a) two-thirds of the aggregate regular
compensation provided for in part A of said Article SECOND, at the rate in
effect at the time of such termination and (b) two-thirds of the largest amount
earned by the Executive as stock and cash bonuses for any of the five fiscal
years preceding that in which termination occurs, undiminished by the amount of
any excise tax, or other similar tax, which is, or may in the future be, imposed
upon the receipt of said lump sum payment by the Executive. Said excise, or
other similar tax, shall be paid by DCA, the consolidated entity or the
surviving corporation, as the case may be.
In addition, DCA or said consolidated entity or surviving corporation (a)
shall pay in a single lump sum to Security Mutual Life Insurance Company of New
York, to be held in a side fund in escrow by said carrier to pay when due the
annual premiums on the Policy, an amount equal to ten (10) times the amount of
the last annual premium payment on the Policy made prior to the date of
termination, (b) shall forfeit all rights under the Collateral Assignment to be
repaid the aggregate amount of all premiums paid on the Policy prior to, on or
after the date of termination, and (c) shall release and waive all rights under
the Collateral Assignment, shall not endanger in any way any benefit available
to the Executive under the Policy and shall not be entitled to any further
rights or interest in the Policy.
In addition, the Executive shall be entitled to retire under the Qualified
Plan and shall immediately thereafter become entitled to payment of the benefits
provided in part G. of Article SECOND and part B. of Article THIRD.
B. If DCA shall terminate this Employment Agreement other than (i) by
reason of any material breach by the Executive of the provisions hereof or (ii)
by reason of an inability of the Executive to perform his services hereunder
pursuant to Article THIRD hereof, or (iii) in the circumstances referred to in
part A. of Article FOURTH above, DCA shall pay to the Executive as compensation,
in a lump sum within 30 days of the date of such termination, in lieu of any
further regular compensation provided for in part A of Article SECOND hereof, an
amount equal to the sum of (a) two-thirds of the regular compensation provided
for in part A of said Article SECOND, at the rate in effect at the time of such
termination, from the date of such termination to the last day of the Employment
Period and (b) two-thirds of the largest amount earned by the Executive as stock
and cash bonuses for any of the five fiscal years preceding that in which
termination occurs multiplied by the number of years and/or fraction thereof
then remaining in the Employment Period, undiminished by the amount of any
excise tax, or other similar tax, which is, or may in the future be, imposed
upon the receipt of said lump sum payment by the Executive. Said excise, or
other similar tax, shall be paid by DCA, the consolidated entity or the
surviving corporation, as the case may be. The rights provided for in this part
B shall be in addition to all other rights, in law or in equity, which the
Executive may have in connection with any breach by DCA of the provisions of
this Employment Agreement, other than the right to recover damages as a result
of the loss of any further regular compensation provided for in said part A of
Article SECOND.
FIFTH: The Executive agrees to keep secret and confidential all
-----
information heretofore or hereafter acquired by him concerning the business and
affairs of DCA, and further agrees that he will not at any time during the
Employment Period or thereafter disclose any such information to any person,
firm or corporation or use the same in any manner other than in connection with
the business and affairs of DCA.
SIXTH: The Executive agrees, to the extent permitted by law, that
-----
he shall not at any time prior to the first anniversary of the termination of
the Employment Period, or the termination of this Employment Agreement by either
party, anywhere in the United States, directly or indirectly, own, manage,
operate, join or control, or participate in the ownership, management, operation
or control of, or be a director or an employee of, or a consultant to, any
person, firm or corporation which has interests inimical to, or competes with,
DCA or any of its subsidiaries; provided, however, that the provisions of this
Article SIXTH shall not apply to investments by the Executive in shares of stock
traded on a national securities exchange or in the over-the-counter market which
shall have an aggregate market value, at the time of acquisition, of less than
$100,000 and shall constitute less than 2% of the outstanding shares of such
stock.
SEVENTH: DCA agrees that, prior to the termination of this Employment
-------
Agreement by it by reason of any breach by the Executive of the provisions
hereof, it will give the Executive written notice specifying such breach and
permit the Executive to cure such breach within the period of thirty days after
the receipt of such notice.
EIGHTH: Any controversy or claim arising out of this Employment
------
Agreement shall be settled by arbitration in New York, New York, by a single
arbitrator in accordance with the rules of the American Arbitration Association.
Judgment upon the award rendered in such arbitration may be entered in any
court of competent jurisdiction.
All costs, fees, including all attorneys' fees, and expenses
associated with the enforcement of DCA's obligations under this Employment
Agreement will be promptly paid by DCA and not by the Executive, if the
arbitrator's award requires DCA to comply with one or more of said obligations.
NINTH: All communications hereunder shall be in writing and shall
-----
be sent by registered or certified mail, return receipt requested; if intended
for DCA, shall be addressed to it at 475 Steamboat Road, Greenwich, Connecticut
06830, or at such other address of which DCA shall have given notice to the
Executive in the manner herein provided; and if intended for the Executive,
shall be addressed to him, in care of DCA, at 475 Steamboat Road, Greenwich,
Connecticut 06830, or at such other address of which the Executive shall have
given notice to DCA in the manner herein provided.
TENTH: This Employment Agreement constitutes the entire
-----
understanding between the parties and no waiver or modification of the terms
hereof shall be valid unless in writing signed by the party to be charged and
only to the extent therein set forth.
ELEVENTH: This Employment Agreement shall be binding upon and inure to
--------
the benefit of the parties hereto, their respective heirs, administrators,
executors, successors and assigns; provided, however, that this Employment
Agreement may not be assigned by either of the parties hereto unless consented
to by the other party.
TWELFTH: This Employment Agreement shall be governed by, and
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construed in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement as of the day and year first above written.
DYNAMICS CORPORATION OF AMERICA
By:
-----------------------------------
CORPORATE SEAL /s/ Andrew Lozyniak
----------------------------------
ANDREW LOZYNIAK
ATTEST:
/s/Henry V. Kensing
------------------------------
Secretary
E M P L O Y M E N T A G R E E M E N T
---------------------------------------
EMPLOYMENT AGREEMENT made and entered into as of this 1st day of February,
1996 by and between DYNAMICS CORPORATION OF AMERICA ("DCA"), a New York
corporation, and PATRICK J. DORME (the "Executive").
W I T N E S S E T H :
WHEREAS, DCA desires to employ the Executive, and the Executive desires to
be employed by DCA, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto hereby agree as follows:
FIRST: A. DCA employs the Executive as its Vice President - Finance and
-----
Chief Financial Officer for the period (the "Employment Period") of five years
commencing on the date of this Employment Agreement. The Executive accepts such
employment, agrees to perform such services consistent with his office as shall
from time to time be reasonably assigned to him by, or pursuant to authorization
of, the Board of Directors of DCA and agrees to be a full time employee of DCA
and diligently to devote substantially all of his business time, energy and
skill to the promotion of DCA's interests and that this Employment Agreement
supersedes and nullifies the Employment Agreement entered into between the
parties hereto dated as of February 1, 1991.
B. DCA agrees that the Executive's duties under this Employment
Agreement shall be performed primarily at DCA's principal executive offices.
C. DCA agrees that the Executive will be named as one of the
management nominees to its Board of Directors at each meeting of the
stockholders of DCA held during the Employment Period at which the class of
directors of DCA of which the Executive shall have been a member is to be
elected, and the Executive shall act as a director of DCA without any
compensation in addition to that provided for in Article SECOND hereof.
D. If DCA shall so request, the Executive shall become and shall,
during such portion or portions of the Employment Period as DCA shall request,
act as a director and/or officer of any of DCA's subsidiaries without any
compensation in addition to that provided for in Article SECOND hereof.
SECOND: A. DCA shall pay to the Executive, and the Executive shall
------
accept from DCA, for the Executive's services during the Employment Period,
regular compensation at the rate of not less than $148,168.56 per annum, payable
in accordance with DCA's customary payroll policy, but not less often than in
monthly installments.
B. The Board of Directors of DCA may at any time or from time to time
increase the regular compensation provided for in part A of this Article SECOND
or otherwise increase the benefits receivable by the Executive under this
Employment Agreement. In the event that such regular compensation shall be so
increased, then, from and after the date of such increase, such regular
compensation shall be deemed to be the amount as so increased. Notwithstanding
any provision in this Employment Agreement to the contrary, the Executive's
regular compensation shall be increased as of March 1st of each year during the
Employment Period by an amount which shall not be less than the product of the
Executive's regular compensation as of the day preceding March 1st of each year
during the Employment Period and a fraction the numerator of which shall be the
average of the monthly Consumer Price Indexes-United States City Average for
Urban Wage and Clerical Workers, All Items (1967 equals 100), as reported by the
Department of Labor, for the twelve month period ending on December 31st
preceding said March 1st and the denominator of which shall be the average of
such monthly Indexes for the twelve month period next preceding such first
mentioned twelve month period.
C. DCA shall, during the Employment Period, make available to the
Executive, at its cost and expense, (i) an automobile and (ii) furnished office
space and secretarial services as shall be reasonably necessary for the
satisfactory performance of his services.
D. The Executive will submit to DCA periodic reports of travel and
other expenses in connection with his employment hereunder in such forms and at
such times as may be required by DCA, and DCA will promptly reimburse the
Executive for such expenses as are approved by DCA, which approval shall not be
unreasonably withheld.
E. The Executive shall be conclusively deemed to be an "employee" of
DCA for all purposes and, as such an employee, shall be entitled to participate
in any health, hospitalization, disability, insurance, bonus, pension, profit
sharing, stock option or similar plans of DCA now in effect or which may be
hereafter adopted and made available to eligible employees of DCA. In addition,
if the Executive shall die during the Employment Period and if his wife shall
survive him, DCA shall pay to his wife, the sum of $50,000 per year, payable
semi-monthly, during the period commencing on the date of the death of the
Executive and ending on the tenth anniversary thereof. Such payments shall
cease if she dies within said ten year period.
F. DCA (i) shall during the Employment Period continue
to pay to the insurance carrier referred to hereafter the annual premium, at the
same annual rate and in the same month as paid by
DCA in 1995, on the individual "split dollar" life insurance policy issued by
the Security Mutual Life Insurance Company of New York and owned by the
Executive or a trust created by the Executive ("Policy"), and (ii),
notwithstanding the assignment of the Policy to DCA as collateral heretofore
executed by the Executive ("Collateral Assignment"), shall not take any action
to reduce the annual premium, borrow against the cash surrender value of the
Policy or endanger in any way any benefit available to the Executive or the
trustee or trustees of any such trust thereunder and shall not be entitled to be
repaid to the extent of its interest in the Policy until the earlier of the
death of the insured under the Policy or the surrender of the Policy by the
Executive.
G.1. In order to restore certain retirement income benefits which are not
available to the Executive under the Retirement Plan for Employees of DCA
("Qualified Plan") by reason of Section 401(a)(17), Section 415 and Section
401(a)(4) of the Internal Revenue Code ("Code"), DCA shall pay to the Executive
supplemental retirement income commencing on his retirement date (normal, early,
disabled or postponed) as defined in and under the Qualified Plan in an amount
equal to the difference between (a) the monthly amount of the retirement income
payable to the Executive upon his retirement under the Qualified Plan, if such
benefit were calculated under the Qualified Plan without giving effect to the
compensation limit under Section 401(a)(17) of the Code or to the limitations
imposed by the application of Section 415 of the Code, and assuming that the
benefit described in Section 4.01(d) of the Qualified Plan continued to apply on
and after January 1, 1989 notwithstanding the provisions of Section 401(a)(4) of
the Code, expressed as a single life annuity, and (b) the monthly amount of
retirement income payable to the Executive upon his retirement under the
Qualified Plan based on his compensation up to the said compensation limit and
based on the limitations imposed by the application of Section 415 of the Code,
and the limitations imposed by the application of Section 401(a)(4) of the Code
to Section 4.01(d) of the Qualified Plan, expressed as a single life annuity.
Such supplemental retirement income shall be paid to the Executive in cash by
DCA, to the extent so not paid by the trustee referred to in subparagraph G.4.
below, as an Actuarial Equivalent single lump sum as soon as practical following
the Executive's retirement. "Actuarial Equivalent" shall mean the present value
of a life annuity, assuming the retirement age is the Executive's age on his
retirement date, which is the date benefits hereunder are calculated; the
interest rate is the rate appearing in the table published in the Wall Street
-----------
Journal entitled `Markets Diary'' under the heading ``Bond Buyer municipal",
- -------
corresponding to 20-year Aaa bonds, and reflecting the rate for the first day of
the month preceding the month in which the benefits hereunder are calculated;
and mortality is determined under the 1983 Group Annuity Mortality Table.
2. If the Executive dies while eligible for a retirement benefit under
subparagraph G.1. above and prior to his retirement and/or the payment of such
retirement benefit, the Executive's surviving spouse shall be entitled to
receive a supplemental pre-retirement survivor benefit equal to the difference
between (a) the monthly amount of retirement income to which the deceased
Executive's spouse would have been entitled under the Qualified Plan if the
Executive had retired on the day prior to his death having elected a 100% joint
and survivor annuity option and if such benefit were calculated under the
Qualified Plan without giving effect to the compensation limit under Section
401(a)(17) of the Code or the limitations imposed by the application of Section
415 of the Code, and assuming that the benefit described in Section 4.01(d) of
the Qualified Plan continued to apply on and after January 1, 1989
notwithstanding the provisions of Section 401(a)(4) of the Code, and (b) the
monthly amount of retirement income to which the deceased Executive's spouse is
entitled under the Qualified Plan based on his compensation up to the said
compensation limit and based on the limitations imposed by the application of
Section 415 of the Code, and the limitations imposed by the application of
Section 401(a)(4) of the Code to Section 4.01(d) of the Qualified Plan. Such
supplemental pre-retirement survivor benefit shall be paid to such surviving
spouse in cash by DCA, to the extent not so paid by the trustee referred to in
subparagraph G.4. below, as an "Actuarial Equivalent" single lump sum, as above
defined, as soon as practicable following the Executive's death.
3. In order to restore benefits which are not available to the Executive
under the DCA Employee Savings and Investment Plan ("401-K Plan") by reason of
the compensation limit under Section 401(a)(17) of the Code, DCA shall pay to
the Executive on his retirement date an amount equal to two percent (2%) of his
annual base compensation in excess of $150,000 in calendar year 1996 and in each
calendar year in the Employment Period in which his annual base compensation
exceeds $150,000 (subject to indexation by the Internal Revenue Service), with
interest at the annual rate of eight percent (8%) on such excess amount from and
after December 31 of each such year. The aggregate of all such amounts and the
interest thereon shall be paid, to the extent not so paid by the trustee
referred to in subparagraph G.4. below, to the Executive in cash by DCA in a
lump sum as soon as practical following the Executive's retirement. If the
Executive dies while eligible for a benefit under this subparagraph G.3. and
prior to the payment of such benefit, the Executive's surviving spouse shall be
entitled to receive in cash from DCA, to the extent not so received from the
trustee referred to in subparagraph G.4. below, as soon as practical following
the Executive's death an amount equal to the amount the Executive would have
received under this subparagraph G.3. if he had retired under the Qualified Plan
on the day prior to his death.
4. Commencing no later than December 31, 1996 and continuing on or before
each December 31 thereafter during the Employment Period, DCA shall contribute
cash on an annual basis to a trust established as hereinafter provided ("Trust")
sufficient to pay all of the supplemental retirement income, supplemental pre-
retirement survivor benefits, and the other benefits to the Executive and his
surviving spouse provided for in subparagraphs G.1.,G.2. and G.3. above, but no
funds or assets of DCA shall be segregated or physically set aside with respect
to its obligations under the benefit restoration plan set forth in this part G.
in a manner which would cause said benefit restoration plan to be "funded" for
purposes of the Employee Retirement Income Security Act of 1974, as amended.
Neither the Executive nor his surviving spouse shall have any interest in any
specific asset of DCA as a result of this part G. and any rights to receive
benefits hereunder shall be only the right of an unsecured general creditor of
DCA. The Trust shall be established in full compliance with I.R.S. Revenue
Procedure 92-64 and the trustee shall be Chemical Bank or another financial
institution satisfactory to Executive. Upon the last of the Executive, Andrew
Lozyniak and Henry V. Kensing to receive payment from the trustee under this
subpart G., any funds remaining in the Trust shall be distributed pro rata in
equal shares to the Executive, Andrew Lozyniak and Henry V. Kensing or their
surviving spouses or heirs.
THIRD: A. If the Executive is unable to perform the duties required of
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him pursuant to the provisions of this Employment Agreement for any period of
six consecutive months during the Employment Period by reason of illness or
other incapacity, DCA shall continue to pay the Executive during such six months
the full regular compensation provided for in part A of Article SECOND hereof at
not less than the rate in effect at the time such inability commenced. If such
inability continues for a further period of six months, DCA shall continue to
pay the Executive not less than one-half of the regular compensation provided
for in said part A at the rate in effect at the time such inability commenced.
DCA shall have the right to terminate this Employment Agreement if such
inability shall have continued for a period of twelve consecutive months;
provided, however, that if DCA shall terminate this Employment Agreement, it
shall be obligated to pay to the Executive compensation at the rate of 40% of
the regular compensation provided for in said part A at the rate in effect at
the date of such termination during the period commencing on the date of such
termination and ending on the earlier of the tenth anniversary thereof or the
date on which the Executive reaches age 65. The issue of whether the Executive
is unable to perform his required duties at any relevant time shall be decided
by the Board of Directors of DCA.
B. For a period of ten (10) years, or the earlier death of the
Executive, commencing on the date of the formal retirement of the Executive
under the Qualified Plan and ending on the tenth anniversary thereof, or the
earlier death of the Executive, the Executive and his wife, and their dependent
children, if any, shall be entitled to enroll in an insured health and
hospitalization plan or plans, including, without limitation, plans offered by
health maintenance organizations, with benefits substantially equal to the
benefits of the health and hospitalization plans of DCA in effect on the date of
said retirement, and DCA shall pay to the Executive quarterly and in advance an
amount in cash grossed up so as to be sufficient, after the payment by the
Executive of all federal, state and local income and all other taxes due by
reason of the receipt of said payment, if any, to pay when due the premiums for
such insured coverage; provided, however, that during all times in such period
of the Executive's retirement as either the Executive or his wife shall be
eligible for Medicare coverage, in lieu of such participation by the Executive
or his wife, or both of them, as the case may be, in the insured health and
hospitalization plans referred to above, DCA shall pay to the Executive
quarterly and in advance an amount in cash grossed up so as to be sufficient,
after the payment by the Executive of all federal, state and local income and
all other taxes due by reason of the receipt of said payment,if any, to pay when
due the annual premiums for Medigap supplementary coverage for the Executive
and/or his wife with an insurance carrier selected by the Executive or his wife,
with the extent of such coverage to be as provided in Standard Plan J of the
National Association of Insurance Commissioners (`NAIC'') or in the NAIC
Standard Plan hereafter adopted which provides the most extensive benefit
coverage at the time of the payment to the Executive provided for under this
part B. For purposes of this part B., the amount of any required gross up shall
be calculated by utilizing the highest tax rate for federal income tax in effect
at the time of calculation, and 5% for state and local income taxes, and the
then current rate for Federal Insurance Contributions Act (FICA) taxes for both
the Executive's share and DCA's share of such taxes.
In the event that the Executive dies within said ten (10) year period, his
wife shall continue to be entitled to said payments for a period of six (6)
months from the date of death of the Executive.
The provisions of this Article which take effect upon the termination of
this Employment Agreement or the formal retirement of the Executive under the
Qualified Plan shall survive and not be affected by any change of control of
DCA.
The parties agree that, notwithstanding any other provision of this
Employment Agreement, the Executive shall not be entitled to retire under the
Qualified Plan during the Employment Period unless the Board of Directors
consents to such retirement, except that the Executive may so retire without
such consent upon expiration or termination of this Employment Agreement.
FOURTH: A. In the event that DCA shall at any time during the Employment
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Period sell all or substantially all of its assets to any other person, firm or
corporation or consolidate with any other person, firm or corporation, or enter
into any merger with any person, firm or corporation in which DCA is not the
surviving entity, or in the event that voting control of DCA shall be obtained
by any person, firm or corporation, or by any group of persons, firms or
corporations, which shall not have such control on the date hereof, the
Executive shall have the right to terminate this Employment Agreement upon
thirty days written notice given at any time within three months after the
occurrence of such event. If the Executive shall have terminated this
Employment Agreement pursuant to the foregoing provisions of this part A, or if
DCA or the consolidated entity or the surviving corporation shall have
terminated this Employment Agreement during such three month period, DCA or the
consolidated entity or the surviving corporation, as the case may be, shall pay
to the Executive as compensation, in a lump sum on the date of such termination,
in lieu of any further compensation provided for in Article SECOND hereof, an
amount equal to five times the sum of (a) two-thirds of the aggregate regular
compensation provided for in part A of said Article SECOND, at the rate in
effect at the time of such termination and (b) two-thirds of the largest amount
earned by the Executive as stock and cash bonuses for any of the five fiscal
years preceding that in which termination occurs, undiminished by the amount of
any excise tax, or other similar tax, which is, or may in the future be, imposed
upon the receipt of said lump sum payment by the Executive. Said excise, or
other similar tax, shall be paid by DCA, the consolidated entity or the
surviving corporation, as the case may be.
In addition, DCA or said consolidated entity or surviving corporation (a)
shall pay in a single lump sum to Security Mutual Life Insurance Company of New
York, to be held in a side fund in escrow by said carrier to pay when due the
annual premiums on the Policy, an amount equal to ten (10) times the amount of
the last annual premium payment on the Policy made prior to the date of
termination, (b) shall forfeit all rights under the Collateral Assignment to be
repaid the aggregate amount of all premiums paid on the Policy prior to, on or
after the date of termination, and (c) shall release and waive all rights under
the Collateral Assignment, shall not endanger in any way any benefit available
to the Executive under the Policy and shall not be entitled to any further
rights or interest in the Policy.
In addition, the Executive shall be entitled to retire under the Qualified
Plan and shall immediately thereafter become entitled to payment of the benefits
provided in part G. of Article SECOND and part B. of Article THIRD.
B. If DCA shall terminate this Employment Agreement other than (i) by
reason of any material breach by the Executive of the provisions hereof or (ii)
by reason of an inability of the Executive to perform his services hereunder
pursuant to Article THIRD hereof, or (iii) in the circumstances referred to in
part A. of Article FOURTH above, DCA shall pay to the Executive as compensation,
in a lump sum within 30 days of the date of such termination, in lieu of any
further regular compensation provided for in part A of Article SECOND hereof, an
amount equal to the sum of (a) two-thirds of the regular compensation provided
for in part A of said Article SECOND, at the rate in effect at the time of such
termination, from the date of such termination to the last day of the Employment
Period and (b) two-thirds of the largest amount earned by the Executive as stock
and cash bonuses for any of the five fiscal years preceding that in which
termination occurs multiplied by the number of years and/or fraction thereof
then remaining in the Employment Period, undiminished by the amount of any
excise tax, or other similar tax, which is, or may in the future be, imposed
upon the receipt of said lump sum payment by the Executive. Said excise, or
other similar tax, shall be paid by DCA, the consolidated entity or the
surviving corporation, as the case may be. The rights provided for in this part
B shall be in addition to all other rights, in law or in equity, which the
Executive may have in connection with any breach by DCA of the provisions of
this Employment Agreement, other than the right to recover damages as a result
of the loss of any further regular compensation provided for in said part A of
Article SECOND.
FIFTH: The Executive agrees to keep secret and confidential all
-----
information heretofore or hereafter acquired by him concerning the business and
affairs of DCA, and further agrees that he will not at any time during the
Employment Period or thereafter disclose any such information to any person,
firm or corporation or use the same in any manner other than in connection with
the business and affairs of DCA.
SIXTH: The Executive agrees, to the extent permitted by law, that
-----
he shall not at any time prior to the first anniversary of the termination of
the Employment Period, or the termination of this Employment Agreement by either
party, anywhere in the United States, directly or indirectly, own, manage,
operate, join or control, or participate in the ownership, management, operation
or control of, or be a director or an employee of, or a consultant to, any
person, firm or corporation which has interests inimical to, or competes with,
DCA or any of its subsidiaries; provided, however, that the provisions of this
Article SIXTH shall not apply to investments by the Executive in shares of stock
traded on a national securities exchange or in the over-the-counter market which
shall have an aggregate market value, at the time of acquisition, of less than
$100,000 and shall constitute less than 2% of the outstanding shares of such
stock.
SEVENTH: DCA agrees that, prior to the termination of this Employment
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Agreement by it by reason of any breach by the Executive of the provisions
hereof, it will give the Executive written notice specifying such breach and
permit the Executive to cure such breach within the period of thirty days after
the receipt of such notice.
EIGHTH: Any controversy or claim arising out of this Employment
------
Agreement shall be settled by arbitration in New York, New York, by a single
arbitrator in accordance with the rules of the American Arbitration Association.
Judgment upon the award rendered in such arbitration may be entered in any
court of competent jurisdiction.
All costs, fees, including all attorneys' fees, and expenses
associated with the enforcement of DCA's obligations under this Employment
Agreement will be promptly paid by DCA and not by the Executive, if the
arbitrator's award requires DCA to comply with one or more of said obligations.
NINTH: All communications hereunder shall be in writing and shall
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be sent by registered or certified mail, return receipt requested; if intended
for DCA, shall be addressed to it at 475 Steamboat Road, Greenwich, Connecticut
06830, or at such other address of which DCA shall have given notice to the
Executive in the manner herein provided; and if intended for the Executive,
shall be addressed to him, in care of DCA, at 475 Steamboat Road, Greenwich,
Connecticut 06830, or at such other address of which the Executive shall have
given notice to DCA in the manner herein provided.
TENTH: This Employment Agreement constitutes the entire
-----
understanding between the parties and no waiver or modification of the terms
hereof shall be valid unless in writing signed by the party to be charged and
only to the extent therein set forth.
ELEVENTH: This Employment Agreement shall be binding upon and inure to
--------
the benefit of the parties hereto, their respective heirs, administrators,
executors, successors and assigns; provided, however, that this Employment
Agreement may not be assigned by either of the parties hereto unless consented
to by the other party.
TWELFTH: This Employment Agreement shall be governed by, and
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construed in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement as of the day and year first above written.
DYNAMICS CORPORATION OF AMERICA
By:
------------------------------------
CORPORATE SEAL /s/Patrick J. Dorme
----------------------------------
PATRICK J. DORME
ATTEST
/s/Henry V. Kensing
---------------------------------
Secretary
E M P L O Y M E N T A G R E E M E N T
---------------------------------------
EMPLOYMENT AGREEMENT made and entered into as of this 1st day of February,
1996 by and between DYNAMICS CORPORATION OF AMERICA ("DCA"), a New York
corporation, and HENRY V. KENSING (the "Executive").
W I T N E S S E T H :
WHEREAS, DCA desires to employ the Executive, and the Executive desires to
be employed by DCA, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto hereby agree as follows:
FIRST: A. DCA employs the Executive as its Vice President, General
-----
Counsel and Secretary for the period (the "Employment Period") of five years
commencing on the date of this Employment Agreement. The Executive accepts such
employment, agrees to perform such services consistent with his office as shall
from time to time be reasonably assigned to him by, or pursuant to authorization
of, the Board of Directors of DCA and agrees to be a full time employee of DCA
and diligently to devote substantially all of his business time, energy and
skill to the promotion of DCA's interests and that this Employment Agreement
supersedes and nullifies the Employment Agreement entered into between the
parties hereto dated as of February 1, 1991.
B. DCA agrees that the Executive's duties under this Employment
Agreement shall be performed primarily at DCA's principal executive offices.
C. DCA agrees that the Executive will be named as one of the
management nominees to its Board of Directors at each meeting of the
stockholders of DCA held during the Employment Period at which the class of
directors of DCA of which the Executive shall have been a member is to be
elected, and the Executive shall act as a director of DCA without any
compensation in addition to that provided for in Article SECOND hereof.
D. If DCA shall so request, the Executive shall become and shall,
during such portion or portions of the Employment Period as DCA shall request,
act as a director and/or officer of any of DCA's subsidiaries without any
compensation in addition to that provided for in Article SECOND hereof.
SECOND: A. DCA shall pay to the Executive, and the Executive shall
------
accept from DCA, for the Executive's services during the Employment Period,
regular compensation at the rate of not less than $178,260.48 per annum, payable
in accordance with DCA's customary payroll policy, but not less often than in
monthly installments.
B. The Board of Directors of DCA may at any time or from time to time
increase the regular compensation provided for in part A of this Article SECOND
or otherwise increase the benefits receivable by the Executive under this
Employment Agreement. In the event that such regular compensation shall be so
increased, then, from and after the date of such increase, such regular
compensation shall be deemed to be the amount as so increased. Notwithstanding
any provision in this Employment Agreement to the contrary, the Executive's
regular compensation shall be increased as of March 1st of each year during the
Employment Period by an amount which shall not be less than the product of the
Executive's regular compensation as of the day preceding March 1st of each year
during the Employment Period and a fraction the numerator of which shall be the
average of the monthly Consumer Price Indexes-United States City Average for
Urban Wage and Clerical Workers, All Items (1967 equals 100), as reported by the
Department of Labor, for the twelve month period ending on December 31st
preceding said March 1st and the denominator of which shall be the average of
such monthly Indexes for the twelve month period next preceding such first
mentioned twelve month period.
C. DCA shall, during the Employment Period, make available to the
Executive, at its cost and expense, (i) an automobile and (ii) furnished office
space and secretarial services as shall be reasonably necessary for the
satisfactory performance of his services.
D. The Executive will submit to DCA periodic reports of travel and
other expenses in connection with his employment hereunder in such forms and at
such times as may be required by DCA, and DCA will promptly reimburse the
Executive for such expenses as are approved by DCA, which approval shall not be
unreasonably withheld.
E. The Executive shall be conclusively deemed to be an "employee" of
DCA for all purposes and, as such an employee, shall be entitled to participate
in any health, hospitalization, disability, insurance, bonus, pension, profit
sharing, stock option or similar plans of DCA now in effect or which may be
hereafter adopted and made available to eligible employees of DCA. In addition,
if the Executive shall die during the Employment Period and if his wife shall
survive him, DCA shall pay to his wife, the sum of $50,000 per year, payable
semi-monthly, during the period commencing on the date of the death of the
Executive and ending on the tenth anniversary thereof. Such payments shall
cease if she dies within said ten year period.
F. DCA (i) shall during the Employment Period continue
to pay to the insurance carrier referred to hereafter the annual premium, at the
same annual rate and in the same month as paid by
DCA in 1995, on the individual "split dollar" life insurance policy issued by
the Security Mutual Life Insurance Company of New York and owned by the
Executive or a trust created by the Executive ("Policy"), and (ii),
notwithstanding the assignment of the Policy to DCA as collateral heretofore
executed by the Executive ("Collateral Assignment"), shall not take any action
to reduce the annual premium, borrow against the cash surrender value of the
Policy or endanger in any way any benefit available to the Executive or the
trustee or trustees of any such trust thereunder and shall not be entitled to be
repaid to the extent of its interest in the Policy until the earlier of the
death of the insured under the Policy or the surrender of the Policy by the
Executive.
G.1. In order to restore certain retirement income benefits which are not
available to the Executive under the Retirement Plan for Employees of DCA
("Qualified Plan") by reason of Section 401(a)(17), Section 415 and Section
401(a)(4) of the Internal Revenue Code ("Code"), DCA shall pay to the Executive
supplemental retirement income commencing on his retirement date (normal, early,
disabled or postponed) as defined in and under the Qualified Plan in an amount
equal to the difference between (a) the monthly amount of the retirement income
payable to the Executive upon his retirement under the Qualified Plan, if such
benefit were calculated under the Qualified Plan without giving effect to the
compensation limit under Section 401(a)(17) of the Code or to the limitations
imposed by the application of Section 415 of the Code, and assuming that the
benefit described in Section 4.01(d) of the Qualified Plan continued to apply on
and after January 1, 1989 notwithstanding the provisions of Section 401(a)(4) of
the Code, expressed as a single life annuity, and (b) the monthly amount of
retirement income payable to the Executive upon his retirement under the
Qualified Plan based on his compensation up to the said compensation limit and
based on the limitations imposed by the application of Section 415 of the Code,
and the limitations imposed by the application of Section 401(a)(4) of the Code
to Section 4.01(d) of the Qualified Plan, expressed as a single life annuity.
Such supplemental retirement income shall be paid to the Executive in cash by
DCA, to the extent so not paid by the trustee referred to in subparagraph G.4.
below, as an Actuarial Equivalent single lump sum as soon as practical following
the Executive's retirement. "Actuarial Equivalent" shall mean the present value
of a life annuity, assuming the retirement age is the Executive's age on his
retirement date, which is the date benefits hereunder are calculated; the
interest rate is the rate appearing in the table published in the Wall Street
-----------
Journal entitled `Markets Diary'' under the heading ``Bond Buyer municipal",
- -------
corresponding to 20-year Aaa bonds, and reflecting the rate for the first day of
the month preceding the month in which the benefits hereunder are calculated;
and mortality is determined under the 1983 Group Annuity Mortality Table.
2. If the Executive dies while eligible for a retirement benefit under
subparagraph G.1. above and prior to his retirement and/or the payment of such
retirement benefit, the Executive's surviving spouse shall be entitled to
receive a supplemental pre-retirement survivor benefit equal to the difference
between (a) the monthly amount of retirement income to which the deceased
Executive's spouse would have been entitled under the Qualified Plan if the
Executive had retired on the day prior to his death having elected a 100% joint
and survivor annuity option and if such benefit were calculated under the
Qualified Plan without giving effect to the compensation limit under Section
401(a)(17) of the Code or the limitations imposed by the application of Section
415 of the Code, and assuming that the benefit described in Section 4.01(d) of
the Qualified Plan continued to apply on and after January 1, 1989
notwithstanding the provisions of Section 401(a)(4) of the Code, and (b) the
monthly amount of retirement income to which the deceased Executive's spouse is
entitled under the Qualified Plan based on his compensation up to the said
compensation limit and based on the limitations imposed by the application of
Section 415 of the Code, and the limitations imposed by the application of
Section 401(a)(4) of the Code to Section 4.01(d) of the Qualified Plan. Such
supplemental pre-retirement survivor benefit shall be paid to such surviving
spouse in cash by DCA, to the extent not so paid by the trustee referred to in
subparagraph G.4. below, as an "Actuarial Equivalent" single lump sum, as above
defined, as soon as practicable following the Executive's death.
3. In order to restore benefits which are not available to the Executive
under the DCA Employee Savings and Investment Plan ("401-K Plan") by reason of
the compensation limit under Section 401(a)(17) of the Code, DCA shall pay to
the Executive on his retirement date an amount equal to two percent (2%) of his
annual base compensation in excess of $150,000 in calendar year 1996 and in each
calendar year in the Employment Period in which his annual base compensation
exceeds $150,000 (subject to indexation by the Internal Revenue Service), with
interest at the annual rate of eight percent (8%) on such excess amount from and
after December 31 of each such year. The aggregate of all such amounts and the
interest thereon shall be paid, to the extent not so paid by the trustee
referred to in subparagraph G.4. below, to the Executive in cash by DCA in a
lump sum as soon as practical following the Executive's retirement. If the
Executive dies while eligible for a benefit under this subparagraph G.3. and
prior to the payment of such benefit, the Executive's surviving spouse shall be
entitled to receive in cash from DCA, to the extent not so received from the
trustee referred to in subparagraph G.4. below, as soon as practical following
the Executive's death an amount equal to the amount the Executive would have
received under this subparagraph G.3. if he had retired under the Qualified Plan
on the day prior to his death.
4. Commencing no later than December 31, 1996 and continuing on or before
each December 31 thereafter during the Employment Period, DCA shall contribute
cash on an annual basis to a trust established as hereinafter provided ("Trust")
sufficient to pay all of the supplemental retirement income, supplemental pre-
retirement survivor benefits, and the other benefits to the Executive and his
surviving spouse provided for in subparagraphs G.1.,G.2. and G.3. above, but no
funds or assets of DCA shall be segregated or physically set aside with respect
to its obligations under the benefit restoration plan set forth in this part G.
in a manner which would cause said benefit restoration plan to be "funded" for
purposes of the Employee Retirement Income Security Act of 1974, as amended.
Neither the Executive nor his surviving spouse shall have any interest in any
specific asset of DCA as a result of this part G. and any rights to receive
benefits hereunder shall be only the right of an unsecured general creditor of
DCA. The Trust shall be established in full compliance with I.R.S. Revenue
Procedure 92-64 and the trustee shall be Chemical Bank or another financial
institution satisfactory to Executive. Upon the last of the Executive, Andrew
Lozyniak and Patrick J. Dorme to receive payment from the trustee under this
subpart G., any funds remaining in the Trust shall be distributed pro rata in
equal shares to the Executive, Andrew Lozyniak and Patrick J. Dorme or their
surviving spouses or heirs.
THIRD: A. If the Executive is unable to perform the duties required of
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him pursuant to the provisions of this Employment Agreement for any period of
six consecutive months during the Employment Period by reason of illness or
other incapacity, DCA shall continue to pay the Executive during such six months
the full regular compensation provided for in part A of Article SECOND hereof at
not less than the rate in effect at the time such inability commenced. If such
inability continues for a further period of six months, DCA shall continue to
pay the Executive not less than one-half of the regular compensation provided
for in said part A at the rate in effect at the time such inability commenced.
DCA shall have the right to terminate this Employment Agreement if such
inability shall have continued for a period of twelve consecutive months;
provided, however, that if DCA shall terminate this Employment Agreement, it
shall be obligated to pay to the Executive compensation at the rate of 40% of
the regular compensation provided for in said part A at the rate in effect at
the date of such termination during the period commencing on the date of such
termination and ending on the earlier of the tenth anniversary thereof or the
date on which the Executive reaches age 65. The issue of whether the Executive
is unable to perform his required duties at any relevant time shall be decided
by the Board of Directors of DCA.
B. For a period of ten (10) years, or the earlier death of the
Executive, commencing on the date of the formal retirement of the Executive
under the Qualified Plan and ending on the tenth anniversary thereof, or the
earlier death of the Executive, the Executive and his wife, and their dependent
children, if any, shall be entitled to enroll in an insured health and
hospitalization plan or plans, including, without limitation, plans offered by
health maintenance organizations, with benefits substantially equal to the
benefits of the health and hospitalization plans of DCA in effect on the date of
said retirement, and DCA shall pay to the Executive quarterly and in advance an
amount in cash grossed up so as to be sufficient, after the payment by the
Executive of all federal, state and local income and all other taxes due by
reason of the receipt of said payment, if any, to pay when due the premiums for
such insured coverage; provided, however, that during all times in such period
of the Executive's retirement as either the Executive or his wife shall be
eligible for Medicare coverage, in lieu of such participation by the Executive
or his wife, or both of them, as the case may be, in the insured health and
hospitalization plans referred to above, DCA shall pay to the Executive
quarterly and in advance an amount in cash grossed up so as to be sufficient,
after the payment by the Executive of all federal, state and local income and
all other taxes due by reason of the receipt of said payment,if any, to pay when
due the annual premiums for Medigap supplementary coverage for the Executive
and/or his wife with an insurance carrier selected by the Executive or his wife,
with the extent of such coverage to be as provided in Standard Plan J of the
National Association of Insurance Commissioners (`NAIC'') or in the NAIC
Standard Plan hereafter adopted which provides the most extensive benefit
coverage at the time of the payment to the Executive provided for under this
part B. For purposes of this part B., the amount of any required gross up shall
be calculated by utilizing the highest tax rate for federal income tax in effect
at the time of calculation, and 5% for state and local income taxes, and the
then current rate for Federal Insurance Contributions Act (FICA) taxes for both
the Executive's share and DCA's share of such taxes.
In the event that the Executive dies within said ten (10) year period, his
wife shall continue to be entitled to said payments for a period of six (6)
months from the date of death of the Executive.
The provisions of this Article which take effect upon the termination of
this Employment Agreement or the formal retirement of the Executive under the
Qualified Plan shall survive and not be affected by any change of control of
DCA.
The parties agree that, notwithstanding any other provision of this
Employment Agreement, the Executive shall not be entitled to retire under the
Qualified Plan during the Employment Period unless the Board of Directors
consents to such retirement, except that the Executive may so retire without
such consent upon expiration or termination of this Employment Agreement.
FOURTH: A. In the event that DCA shall at any time during the Employment
------
Period sell all or substantially all of its assets to any other person, firm or
corporation or consolidate with any other person, firm or corporation, or enter
into any merger with any person, firm or corporation in which DCA is not the
surviving entity, or in the event that voting control of DCA shall be obtained
by any person, firm or corporation, or by any group of persons, firms or
corporations, which shall not have such control on the date hereof, the
Executive shall have the right to terminate this Employment Agreement upon
thirty days written notice given at any time within three months after the
occurrence of such event. If the Executive shall have terminated this
Employment Agreement pursuant to the foregoing provisions of this part A, or if
DCA or the consolidated entity or the surviving corporation shall have
terminated this Employment Agreement during such three month period, DCA or the
consolidated entity or the surviving corporation, as the case may be, shall pay
to the Executive as compensation, in a lump sum on the date of such termination,
in lieu of any further compensation provided for in Article SECOND hereof, an
amount equal to five times the sum of (a) two-thirds of the aggregate regular
compensation provided for in part A of said Article SECOND, at the rate in
effect at the time of such termination and (b) two-thirds of the largest amount
earned by the Executive as stock and cash bonuses for any of the five fiscal
years preceding that in which termination occurs, undiminished by the amount of
any excise tax, or other similar tax, which is, or may in the future be, imposed
upon the receipt of said lump sum payment by the Executive. Said excise, or
other similar tax, shall be paid by DCA, the consolidated entity or the
surviving corporation, as the case may be.
In addition, DCA or said consolidated entity or surviving corporation (a)
shall pay in a single lump sum to Security Mutual Life Insurance Company of New
York, to be held in a side fund in escrow by said carrier to pay when due the
annual premiums on the Policy, an amount equal to ten (10) times the amount of
the last annual premium payment on the Policy made prior to the date of
termination, (b) shall forfeit all rights under the Collateral Assignment to be
repaid the aggregate amount of all premiums paid on the Policy prior to, on or
after the date of termination, and (c) shall release and waive all rights under
the Collateral Assignment, shall not endanger in any way any benefit available
to the Executive under the Policy and shall not be entitled to any further
rights or interest in the Policy.
In addition, the Executive shall be entitled to retire under the Qualified
Plan and shall immediately thereafter become entitled to payment of the benefits
provided in part G. of Article SECOND and part B. of Article THIRD.
B. If DCA shall terminate this Employment Agreement other than (i) by
reason of any material breach by the Executive of the provisions hereof or (ii)
by reason of an inability of the Executive to perform his services hereunder
pursuant to Article THIRD hereof, or (iii) in the circumstances referred to in
part A. of Article FOURTH above, DCA shall pay to the Executive as compensation,
in a lump sum within 30 days of the date of such termination, in lieu of any
further regular compensation provided for in part A of Article SECOND hereof, an
amount equal to the sum of (a) two-thirds of the regular compensation provided
for in part A of said Article SECOND, at the rate in effect at the time of such
termination, from the date of such termination to the last day of the Employment
Period and (b) two-thirds of the largest amount earned by the Executive as stock
and cash bonuses for any of the five fiscal years preceding that in which
termination occurs multiplied by the number of years and/or fraction thereof
then remaining in the Employment Period, undiminished by the amount of any
excise tax, or other similar tax, which is, or may in the future be, imposed
upon the receipt of said lump sum payment by the Executive. Said excise, or
other similar tax, shall be paid by DCA, the consolidated entity or the
surviving corporation, as the case may be. The rights provided for in this part
B shall be in addition to all other rights, in law or in equity, which the
Executive may have in connection with any breach by DCA of the provisions of
this Employment Agreement, other than the right to recover damages as a result
of the loss of any further regular compensation provided for in said part A of
Article SECOND.
FIFTH: The Executive agrees to keep secret and confidential all
-----
information heretofore or hereafter acquired by him concerning the business and
affairs of DCA, and further agrees that he will not at any time during the
Employment Period or thereafter disclose any such information to any person,
firm or corporation or use the same in any manner other than in connection with
the business and affairs of DCA.
SIXTH: The Executive agrees, to the extent permitted by law, that
-----
he shall not at any time prior to the first anniversary of the termination of
the Employment Period, or the termination of this Employment Agreement by either
party, anywhere in the United States, directly or indirectly, own, manage,
operate, join or control, or participate in the ownership, management, operation
or control of, or be a director or an employee of, or a consultant to, any
person, firm or corporation which has interests inimical to, or competes with,
DCA or any of its subsidiaries; provided, however, that the provisions of this
Article SIXTH shall not apply to investments by the Executive in shares of stock
traded on a national securities exchange or in the over-the-counter market which
shall have an aggregate market value, at the time of acquisition, of less than
$100,000 and shall constitute less than 2% of the outstanding shares of such
stock.
SEVENTH: DCA agrees that, prior to the termination of this Employment
-------
Agreement by it by reason of any breach by the Executive of the provisions
hereof, it will give the Executive written notice specifying such breach and
permit the Executive to cure such breach within the period of thirty days after
the receipt of such notice.
EIGHTH: Any controversy or claim arising out of this Employment
------
Agreement shall be settled by arbitration in New York, New York, by a single
arbitrator in accordance with the rules of the American Arbitration Association.
Judgment upon the award rendered in such arbitration may be entered in any
court of competent jurisdiction.
All costs, fees, including all attorneys' fees, and expenses
associated with the enforcement of DCA's obligations under this Employment
Agreement will be promptly paid by DCA and not by the Executive, if the
arbitrator's award requires DCA to comply with one or more of said obligations.
NINTH: All communications hereunder shall be in writing and shall
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be sent by registered or certified mail, return receipt requested; if intended
for DCA, shall be addressed to it at 475 Steamboat Road, Greenwich, Connecticut
06830, or at such other address of which DCA shall have given notice to the
Executive in the manner herein provided; and if intended for the Executive,
shall be addressed to him, in care of DCA, at 475 Steamboat Road, Greenwich,
Connecticut 06830, or at such other address of which the Executive shall have
given notice to DCA in the manner herein provided.
TENTH: This Employment Agreement constitutes the entire
-----
understanding between the parties and no waiver or modification of the terms
hereof shall be valid unless in writing signed by the party to be charged and
only to the extent therein set forth.
ELEVENTH: This Employment Agreement shall be binding upon and inure to
--------
the benefit of the parties hereto, their respective heirs, administrators,
executors, successors and assigns; provided, however, that this Employment
Agreement may not be assigned by either of the parties hereto unless consented
to by the other party.
TWELFTH: This Employment Agreement shall be governed by, and
-------
construed in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement as of the day and year first above written.
DYNAMICS CORPORATION OF AMERICA
By:
-----------------------------------
CORPORATE SEAL /s/Henry V. Kensing
--------------------------------
HENRY V. KENSING
ATTEST:
/s/Henry V. Kensing
--------------------------------
Secretary
Dynamics
Corporation
of
America
1995
Annual Report
<PAGE>
Dynamics Corporation of America
475 Steamboat Road
Greenwich, Connecticut 06830-7197
<PAGE>
Dynamics Corporation of America
<TABLE>
<CAPTION>
Contents Page
<S> <C>
President's Message 2
Management's Discussion and Analysis 4
Consolidated Balance Sheets 7
Consolidated Statements of Income 8
Consolidated Statements of Stockholders' Equity 9
Consolidated Statements of Cash Flows 10
Notes to Consolidated Financial Statements 11
Report of Independent Auditors 21
Selected Financial Data 22
Segments of Business 23
Range of Stock Prices and Dividend Information 24
Divisions and Subsidiary Inside Back Cover
</TABLE>
Dynamics Corporation of America is a diversified manufacturer of commercial
and industrial products founded in 1924 and incorporated in New York. Its
corporate headquarters are in Greenwich, Connecticut and its shares are
listed on the New York Stock Exchange (trading symbol: DYA). The Company's
seven plants are located in California, Connecticut, Ohio and Pennsylvania.
Its five separate business units manufacture electronic components such as
heat dissipators and Zero Insertion Force (ZIF(tm)) printed circuit board
retainers, frequency control components and oscillators; commercial and
consumer appliances sold under the Waring(R), Acme Juicerator(R),
Qualheim(tm), Blendor(R), NuBlend(R) and Touchblend(tm) tradenames; air
distribution products and systems sold under the Anemostat(R), Anemotrak(R)
and Envirotrak(R) tradenames; vision frames and louvers for fire rated doors;
and air conditioning and related equipment for power plant and other
applications, and mobile vans and transportable shelters (including the
Environ(R)) for specialized electronic and medical diagnostic equipment such
as CT and MRI scanners. The Company also invests from time to time in shares
of other businesses. The Company currently holds a 44.1% stake in CTS
Corporation ("CTS"), an Indiana corporation headquartered in Elkhart whose
shares are listed on the New York Stock Exchange (trading symbol: CTS). CTS
is a manufacturer of electronic and electromechanical components and
subsystems for the automotive, communications equipment, data processing,
defense and aerospace, instruments and controls and consumer electronic
markets.
1
<PAGE>
President's Message
to Shareholders
Dynamics Corporation of America recorded a 25% increase in its income from
continuing operations, representing the highest level since 1985 as sales
increased by $15,267,000, or 15.8%. The major contributing factors to the
improved performance of Dynamics Corporation of America in 1995 were the
increasing profitability of the CTS Corporation, in which DCA has a major and
increasing investment, greater profitability of our International Electronic
Research Corporation subsidiary, and the return to profitability of the
Reeves-Hoffman Division. Responding to these better results, DCA shares,
which were valued in the marketplace at $20.375 per share at December 31,
1994, increased in value by 20% to $24.50 at year-end.
For the year ended December 31, 1995, the Company reported net income of
$6,723,000, or $1.75 per share, on sales of $111,720,000, compared with net
income of $8,732,000, or $2.25 per share, on sales of $96,453,000 in 1994.
Net income for 1995 was increased by $998,000, or $.26 per share, reflecting
a favorable resolution of prior year tax matters. Net income for 1994
included $3,334,000, or $.86 per share, of income reflecting the Company's
settlement of a claim of its Fermont Division on a contract with the U.S.
Government, net of related expenses and income taxes.
Included in net income was the Company's proportionate share of CTS
Corporation's income for the year ended December 31, 1995, in accordance with
the equity method of accounting, which was $4,411,000, or $1.15 per share,
compared to $3,618,000, or $.93 per share, in 1994.
As in 1994, the most notable contribution to operating earnings was made
by International Electronic Research Corporation which increased its sales by
44% to $22,883,000 and increased its profitability by 26%. These results
would have been even better had it not been for the sluggish retail demand
for computers at year-end. Computer manufacturers reduced or extended orders
for our heat dissipating products in the last two months of 1995, reducing
IERC's monthly bookings to almost one-half the rate experienced during the
first ten months of the year. However, delivery of customer ordered
prototypes is again at a high level, bookings have begun to increase, and it
is anticipated that, as new and more powerful computer models are introduced
to the marketplace, orders will continue to accelerate.
Even with this setback, IERC in 1995 recorded the highest sales and
profitability in its history. Efforts to reduce its costs and expand its
markets will continue.
Reeves-Hoffman Division also improved its performance in 1995, returning
to profitability with increasing sales. More importantly, the Division has
expanded its engineering capabilities and continues to do so since the
technology-driven markets it serves require new and higher performing crystal
and oscillator products.
Waring Products Division on the other hand experienced its most difficult
year in recent memory with reduced sales of almost $4,000,000 compared to
1994. Waring's management had anticipated as the year began that an
aggressive introduction of new products in 1995 would greatly increase 1995
sales over the prior year. As the year progressed, the credit worthiness of a
number of its customers deteriorated and a decision was made to restrict
sales to only financially sound retailers. Partly as a result, and because of
curtailment of consumer spending, projected sales did not materialize and
inventories rose beyond acceptable levels. On the positive side, however,
Waring was fortunate not to have experienced large write-offs of its
receivables from retailers who were unable to pay and some of whom were even
forced into bankruptcy. New management at Waring is focused on building on
the success of Waring's commercial appliance business as it addresses the
uncertainties in its retail markets.
Our Ellis & Watts operation increased its sales by approximately
$8,500,000 primarily by shipments of power plant products to a customer in
the Pacific Rim and as a result provided a meaningful contribution to the
sales and profitability of Dynamics Corporation of America in 1995. The
division's management is presently in negotiations with the same customer for
orders for similar products and it is hoped that a significant contract will
be entered into during the first half of 1996.
Dynamics Corporation of America during the year purchased 81,000 shares of
CTS Corporation common stock for $2,674,000, thereby increasing its ownership
from 42.9% to 44.1%. Included in the Company's income from continuing
operations is the proportionate share of CTS Corporation's results for the
year, $4,411,000 in 1995 compared to $3,618,000 in 1994 and $1,619,000 in
1993.
CTS Corporation achieved a significant improvement in performance in 1995.
On February 1, 1996, it announced net sales of $300 million, $31 million or
12% higher than in 1994, and net income of $17.2 million, 22% higher than the
$14 million recorded in the prior year.
2
<PAGE>
1996 marks the 100th anniversary of CTS Corporation. Joseph Walker,
Chairman, President and Chief Executive Officer, reflecting on this milestone
for CTS, recently stated in his letter to shareholders: "It is quite an
accomplishment for any business considering the challenging and shifting
economic circumstances, rapid technological developments and dramatically
changing market needs which occurred in the past century. CTS has
demonstrated its engineering capability to evolve technologies to serve the
needs of a customer base which has changed continually since 1896. During
this time, CTS has not only adapted to the demands of the marketplace, but
has clearly demonstrated its ability to develop those products which meet the
needs of its customers."
We consider our investment in CTS a sound and long term one which will
result in significant value to Dynamics Corporation of America's
shareholders.
In contrast to recent years when Dynamics Corporation of America did not
require any borrowings, toward the end of the year the Company borrowed
$3,000,000 under its Revolving Credit Agreement. These borrowed funds and
internally generated funds were required to finance a $4,000,000 increase in
accounts receivable and $5,000,000 in increased inventories at year-end. The
Company also used $412,000 of its funds to acquire 17,577 shares of its
common stock and to pay dividends of $768,000 to shareholders, as well as
increasing its holdings in CTS.
As we enter 1996, the latest economic statistics are not reassuring:
January payrolls fell by 200,000 persons and the unemployment rate climbed;
household spending is flat; debt levels and delinquencies are rising while
consumer confidence levels are falling. In sharp contrast to this economic
activity, financial assets, in particular the stock market, are booming.
Faced with this undetermined and uncertain economic landscape, planning
for our operations will focus short term on insuring that our inventories are
at proper levels and operating costs are in line with revenues, while at the
same time we will expand our technology base, recruit talented personnel, and
continue the design and development of new products.
As always, we pledge our best efforts to evaluate all of our operations to
determine the best allocation of the Company's resources and by so doing
enhance shareholder values.
Management sincerely thanks those employees who have responded to these
challenging times with ingenuity, dedication and hard work. We also express
our thanks to our shareholders, suppliers, customers and lending institutions
who by their continued support and encouragement have made possible DCA's
progress to date.
[Signature of Andrew Lozyniak]
Andrew Lozyniak
Chairman of the Board and President
March 8, 1996
3
<PAGE>
Management's Discussion and Analysis of Results
of Operations and Financial Condition
The following discussion, unless otherwise noted, pertains to continuing
operations.
Results of Operations
(1995 compared to 1994)
Sales increased $15,267,000, or 15.8%, which included an increase in export
sales of $9,839,000. Sales in the Electrical Appliances and Electronic
Devices segment increased $6,456,000; sales of electronic devices, especially
heat dissipators for computer microprocessors and frequency control crystal
oscillators for the telecommunication industry, rose significantly, and sales
of commercial electrical appliances to food and beverage equipment suppliers
and restaurant chains were also up; competitive factors and a troubled retail
industry reduced consumer appliance sales dramatically. Sales in the Power
and Controlled Environmental Systems segment improved by $8,434,000,
primarily on the strength of power plant product shipments to a single
customer in the Pacific Rim who accounted for 10.1% of Company sales in 1995;
sales of custom mobile products were also up in the segment, but were
significantly offset by lower thermal and medical trailer and shelter
shipments. Sales in the Fabricated Metal Products and Equipment segment
increased $377,000, as sales from the door and systems product lines
increased while air product line sales were flat.
Gross profit increased $2,841,000 on higher sales; however, the gross
profit percentage declined from 25.9% to 24.9%, due to material costs
increases and lower selling prices required to meet intense competition.
Gross profit in the Electrical Appliances and Electronic Devices segment
increased on the strength of higher sales, especially of electronic devices,
and lower manufacturing costs and better yields through process improvements
for frequency control products, offset by declines in gross profit from
electrical appliance sales because of reduced shipments, lower average
selling prices for consumer products and a less favorable product mix. Gross
profit increased in the Power and Controlled Environmental Systems segment
due to the significant increase in sales of power plant products. Gross
profit in the Fabricated Metal Products and Equipment segment was lower
because of increases in material costs and production inefficiencies.
Selling, general and administrative expenses increased $2,182,000 but
declined as a percent of sales from 23.6% to 22.3%. Commissions accounted for
the most significant portion of the rise in expenses, which also included
increases in staffing, related fringe benefit and relocation costs,
professional fees and insurance.
Other expenses, net increased $1,309,000, which include charges of
$444,000 for recall of the Dualit toaster, $415,000 for settlement of certain
environmental matters, and $360,000 as an additional provision for future
operating losses of a division held for sale, offset by a $198,000 gain from
the sale of excess property and leasehold rights.
A favorable resolution of prior year tax matters amounting to $998,000
resulted in a net income tax benefit of $215,000 for an effective tax benefit
rate of 10.3%, compared to the prior year effective tax provision rate of
35.2% and the effective Federal statutory rate of 34%. Excluding the prior
year tax matters, the effective tax rate increased 2.1% to 37.3% due to the
effects of state taxes and non-deductible expenses.
Equity in CTS Corporation
Equity in the earnings of CTS Corporation increased $793,000 as a result of
an increase in CTS' earnings of $3,197,000. According to CTS' published
reports, investments in research and development and capital equipment for
new products and cost reduction, combined with expansion in international
markets and a 1994 product line acquisition, contributed to its increased
sales and profitability.
Liquidity and Financial Resources
Cash and cash equivalents amounted to $1,767,000 at December 31, 1995, a
decrease of $5,070,000 from the previous year end, due substantially to
increases in accounts receivable and inventories amounting to $9,057,000.
During the year the Company borrowed $3,000,000 under its Revolving Credit
Agreement which amount remained outstanding at December 31, 1995.
During the year, the Company acquired 81,000 shares of CTS Corporation
common stock for $2,674,000, paid $412,000 to acquire 17,577 shares of the
Company's common stock for treasury, paid dividends of $768,000 to
shareholders, and invested $1,915,000 in new equipment, including $403,000
for production and test equipment to manufacture approximately $69 million of
generator sets in 1996 and 1997 under a Government contract awarded in 1995
to Fermont, a division held for sale.
4
<PAGE>
The assets of Fermont amounted to $1,759,000 at December 31, 1995. Under
the above mentioned Government contract, projected net cash requirements in
1996, when deliveries are scheduled to begin, for working capital and
equipment, net of Government progress payments, are estimated to approximate
$5.0 million; however, Fermont projects positive cash flow on the contract.
The Company has available unused credit of $34,000,000 under its Revolving
Credit Agreement with four banks and an additional $9,000,000 under an
uncommitted line of credit with a bank.
Liquidity and financial resources are considered adequate to fund planned
Company operations, including capital expenditures and payment of dividends.
The Company intends to continue its stated policy of reviewing potential
acquisitions which it believes could enhance growth and profitability.
The Company recorded deferred income taxes for transactions reported
during different years for financial reporting and for income tax reporting
purposes, as required by generally accepted accounting principles. In
general, the Company has recorded deductions for financial reporting purposes
which become deductible in subsequent years for income tax reporting purposes
(temporary differences). The application of anticipated income tax rates to
these deductions results in future tax benefits, or deferred tax assets.
Management anticipates that the Company's deferred tax assets will be
realized based upon its expectation of future taxable earnings. The Company's
income from continuing operations before income taxes aggregated $6,519,000
for the three years ended December 31, 1995, and sustaining this income level
would be sufficient to realize all deferred tax assets over the statutory tax
recovery period. The Company will require aggregate taxable income of
$14,522,000 to realize its net deferred tax assets of $5,533,000, excluding
deferred tax liabilities for the undistributed earnings of the Company's equity
investment in CTS Corporation amounting to $3,083,000 at December 31, 1995.
Under applicable carryback provisions of the current Internal Revenue Code,
$11,510,000 of the prior years' taxable income could be utilized to realize
deferred tax assets. Although they are not expected to be required, the
Company has available various tax planning strategies, including property
sale and leaseback strategies, to supplement taxable income from operations
in order to realize deferred tax assets. The Company in large measure
controls the reversal of $7,516,000 of temporary differences and a
significant portion of the remaining differences is expected to reverse
during the next five years.
The Company has been notified by the U.S. Environmental Protection Agency
("EPA") that it is a Potentially Responsible Party ("PRP") regarding
hazardous waste cleanup at a non-Company site in Connecticut and at a Company
site in California. Certain of the PRPs at the Connecticut site have agreed
with the EPA to fund a feasibility study at the site and have sued the
Company and other PRPs who have not agreed to share the costs. A property
owner adjacent to the California site has sued the Company and others for
allegedly causing contamination of their property. The Company incurred costs
to fund engineering studies and conduct investigations of, and to remove
contaminants from, the California site and to pay related expenses. The
Company has settled a lawsuit brought by a state environmental agency for
response costs at a non-Company site in Pennsylvania as to which the Company
was earlier designated a PRP; and the Company has also been sued by certain
of the PRPs who have agreed with the state agency to fund other past response
costs at the Pennsylvania site, to recover a portion of those costs from the
Company and other PRPs who have not agreed to participate in such funding.
The Company is also a defendant in two lawsuits seeking contribution for
Superfund cleanup costs relating to two other non-Company sites in
Pennsylvania.
The amount of future environmental-related expenditures and the extent of
insurance coverage is not determinable at this time and the Company is not in
a position to estimate the loss or range of loss, if any, which may result
from environmental-related matters. Based upon its knowledge of the extent of
the Company's exposure and current statutes, rules and regulations, and
emerging alternative remedial approaches, management believes that the
anticipated costs resulting from claims and proceedings with respect to the
above mentioned sites, including possible remediation, the extent of which is
presently unknown, will not materially affect the financial position of the
Company. However, it is possible, but unanticipated at this time, that future
results of operations or cash flows could be materially affected by an
unfavorable resolution of these matters.
In 1995 the Company expended or provided $695,000, including $165,000 for
the California site and $415,000 for one of the Pennsylvania sites, to manage
hazardous substances, to monitor pollutants, to test for contaminants, to
provide for required removal activities and to settle the lawsuit for past
response costs at one of the non-Company sites in Pennsylvania, a 75%
increase in such costs over the prior year. Accruals for such matters at
December 31, 1995 amounted to $565,000.
5
<PAGE>
In complying with federal, state and local environmental statutes and
regulations, the Company has altered or modified certain manufacturing
processes and expects to do so in the future. Such modifications to date have
not significantly increased capital expenditures or affected the
competitiveness of the Company.
With respect to recently issued FASB Statements Nos. 121 and 123, as
described in the Notes to the Financial Statements, the Company anticipates
no substantial impact on its financial position or results of operations upon
adoption in 1996.
Results of Operations
(1994 compared to 1993)
Sales decreased $4,876,000 or 4.8%. Sales in the Electrical Appliances and
Electronic Devices segment increased $2,442,000 on a nearly threefold
increase in sales of heat dissipating devices for advanced microprocessors
installed in personal computers. Sales of frequency control products were
marginally higher, while sales of electrical appliances declined sharply in
the consumer domestic portion of the segment because of reduced product
placement with retailers for blender and food mixer products and
significantly lower sales of food preparation specialty products. Sales in
the Power and Controlled Environmental Systems segment declined $8,240,000
due to lower sales of custom mobile products principally because of the
completion in the prior year of a multi-unit defense-related contract. Sales
of power plant products and services and mobile and transportable medical
units increased, offsetting a decline in the sales of thermal products. Sales
in the Fabricated Metal Products and Equipment segment increased $922,000 as
sales of air and door products increased due to the modest recovery in the
commercial building construction market. Systems sales declined on lower
start-up and installation revenues.
Gross profit improved $162,000 on lower sales, to 25.9% from 24.5% of
sales. Gross profit in the Electrical Appliances and Electronic Devices
segment increased as a result of the increased sales of heat dissipating
devices; however, the gross profit percentage from segment sales was slightly
lower due to the lower gross profit percentage earned on electrical appliance
sales because of product sales mix and pricing pressures. Gross profit in the
Power and Controlled Environmental Systems segment declined on sharply lower
sales; however, the gross profit percentage increased significantly on the
sale of power plant products and services, and on mobile and transportable
medical units. Gross profit in the Fabricated Metal Products and Equipment
segment increased on higher sales and favorable product mix.
Selling, general and administrative expenses decreased $1,355,000. Staff
reductions undertaken in the prior year were primarily responsible for a
$967,000 reduction in compensation and related benefits. Advertising expenses
decreased $734,000, primarily because of lower advertising expenditures for
electrical appliances. Commission expense increased $557,000 as a greater
portion of sales were commissionable. All other expenses decreased $211,000.
Other income decreased $445,000. Royalty income decreased $1,050,000 as,
unlike 1993, no royalty was earned under a technology transfer agreement with
a customer in the Power and Controlled Environmental Systems segment. Staff
reductions in 1993 resulted in a $470,000 charge. Net interest income
increased $103,000, investments in marketable securities resulted in a
$87,000 reduction in other income, while remaining other income (net)
increased $119,000.
Income taxes amounted to $967,000, increasing $350,000 principally because
of the $1,072,000 increase in income before taxes. The 1994 effective tax
rate is slightly higher than the applicable 34% Federal statutory rate
primarily because of state income taxes.
Equity in CTS Corporation
Equity in the earnings of CTS Corporation increased $1,999,000 as a result of
CTS' increase in earnings of $7,397,000 over 1993, before accounting changes,
and because the Company's proportionate share in CTS' earnings increased as
its percentage ownership of CTS common stock increased to 42.9% from 37.3%
during the year through purchases of CTS stock. In 1993 the Company recorded
a charge of $1,716,000, or $.44 per share, for its proportionate share of
CTS' net charge from its adoption of FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", and FASB
Statement No. 109, "Accounting for Income Taxes."
Division Held for Sale
In May 1994, the Company agreed to accept $6,450,000 from the Government in
settlement of the preproduction portion of its proposed change order on a
contract for 3KW generator sets with the Company's Fermont Division. The
settlement, net of related expenses and income taxes, amounted to $3,334,000,
or $.86 per share, and was reported as income from discontinued operations.
Effective July 1, 1994, Fermont is no longer classified as a discontinued
operation but as a business held for sale, based upon its decision to bid on
new contracts. In January 1995, Fermont was awarded a contract by the U.S.
Army for tactical quiet (TQ) generator sets, the first order under which,
valued at $57.8 million, has been received.
6
<PAGE>
Dynamics Corporation of America
Consolidated Balance Sheets
(dollar amounts in thousands)
<TABLE>
<CAPTION>
As of December 31, 1995 1994
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,767 $ 6,837
Accounts receivable, less allowances of $484 and $604 19,175 15,214
Inventories--Note 2 22,989 17,893
Other current assets--Note 3 1,237 3,065
Current assets of division held for sale--Note 4 1,191 1,185
Deferred income taxes 4,434 5,418
----- -------
Total Current Assets 50,793 49,612
Property, Plant and Equipment, at cost, less accumulated depreciation and
amortization--Notes 5 and 8 3,603 3,472
Equity Investment in CTS Corporation--Note 6 77,180 69,291
Other Assets 2,725 1,719
Deferred Income Taxes 83
----- -------
Total Assets $134,301 $124,177
===== =======
Liabilities
Current Liabilities:
Current installments of long-term debt $ 63 $ 126
Accounts payable 6,284 4,454
Accrued expenses and sundry liabilities--Notes 4 and 7 14,616 15,648
Federal income taxes payable 851 2,006
----- -------
Total Current Liabilities 21,814 22,234
Long-term Debt--Note 8 3,424 401
Other Liabilities--Note 13 1,605 1,817
Deferred Income Taxes 1,984
----- -------
Total Liabilities 28,827 24,452
----- -------
Contingencies--Note 14
Stockholders' Equity--Notes 9 and 10
Preferred Stock, par value $1 per share--authorized 894,000 shares--none issued
Series A Participating Preferred Stock, par value $1 per share--authorized
106,000 shares--none issued
Common Stock, par value $.10 per share--authorized 10,600,000; outstanding
3,829,561 and 3,846,677 shares 383 385
Paid-in Additional Capital 11,623 11,698
Retained Earnings 93,807 88,133
Deferred Compensation (339) (491)
----- -------
Total Stockholders' Equity 105,474 99,725
----- -------
Total Liabilities and Stockholders' Equity $134,301 $124,177
===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
Dynamics Corporation of America
Consolidated Statements of Income
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Net sales $111,720 $96,453 $101,329
Cost of sales 83,914 71,488 76,526
----- ---- -------
Gross profit 27,806 24,965 24,803
Selling, general and administrative expenses 24,898 22,716 24,071
----- ---- -------
2,908 2,249 732
Other income (expense), net--Note 11 (811) 498 943
----- ---- -------
Income from continuing operations before items shown below 2,097 2,747 1,675
Income tax charge (benefit)--Note 12 (215) 967 617
----- ---- -------
Income from continuing operations before equity in CTS
Corporation 2,312 1,780 1,058
Income from equity investment in CTS Corporation, net of income
tax charges of $2,158, $1,082 and $52 4,411 3,618 1,619
----- ---- -------
Income from continuing operations 6,723 5,398 2,677
Income from discontinued operation, net of income tax charge of
$2,022--Note 4 3,334
Equity in CTS' cumulative effect to January 1, 1993 of changes in
accounting methods--Note 6 (1,716)
----- ---- -------
Net income $ 6,723 $ 8,732 $ 961
===== ==== =======
Income (loss) per common share:
Continuing operations $ 1.75 $ 1.39 $ .68
Discontinued operation .86
Equity in CTS' cumulative effect to January 1, 1993 of changes
in accounting methods (.44)
----- ---- -------
Net income $ 1.75 $ 2.25 $ .24
===== ==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
Dynamics Corporation of America
Consolidated Statements of Stockholders' Equity
(dollar amounts in thousands, except per share data)
For the Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Common Paid-in Total
shares Par additional Retained Deferred stockholders'
outstanding* value capital earnings compensation equity
---------- ------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 3,903,035 $390 $11,573 $81,015 ($ 262) $ 92,716
Shares issued and issuable from
treasury pursuant to benefit
plans and other 3,727 1 65 (32) 34
Shares acquired for treasury and
pursuant to benefit plans (17,011) (2) (183) (70) 58 (197)
Amortization of deferred
compensation and related tax
charge (4) 85 81
Net income 961 961
Cash dividends ($.20 per share) (781) (781)
-------- ------ ------ ----- -------- ----------
Balance at December 31, 1993 3,889,751 389 11,451 81,125 (151) 92,814
Shares issued and issuable from
treasury pursuant to benefit
plans 35,055 4 524 (507) 21
Shares acquired for treasury and
pursuant to benefit plans (78,129) (8) (274) (947) 43 (1,186)
Amortization of deferred
compensation and related tax
charge (3) 124 121
Net income 8,732 8,732
Cash dividends ($.20 per share) (777) (777)
-------- ------ ------ ----- -------- ----------
Balance at December 31, 1994 3,846,677 385 11,698 88,133 (491) 99,725
Shares issued and issuable from
treasury pursuant to benefit
plans 461 19 19
Shares acquired for treasury and
pursuant to benefit plans (17,577) (2) (129) (281) (412)
Amortization of deferred
compensation and related tax
benefit 35 152 187
Net income 6,723 6,723
Cash dividends ($.20 per share) (768) (768)
-------- ------ ------ ----- -------- ----------
Balance at December 31, 1995 3,829,561 $383 $11,623 $93,807 ($ 339) $105,474
======== ====== ====== ===== ======== ==========
<FN>
*Net of shares held in treasury--3,345,600, 3,328,484 and 3,285,410 voting
shares at December 31, 1995, 1994 and 1993, respectively. The cumulative
cost of treasury shares at December 31, 1995 amounted to approximately
$35,300. Includes non-voting shares outstanding of 3,892 at December 31,
1995.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
Dynamics Corporation of America
Consolidated Statements of Cash Flows
(dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Years ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Operating activities:
Net income $ 6,723 $ 8,732 $ 961
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,498 1,292 1,227
Deferred income taxes 3,051 498 301
Loss (income) before income taxes from equity investment
in CTS (6,569) (4,700) 45
Dividends from CTS 1,354 930 767
Gain on sale of property (198)
Issuance of Company Common Stock 19 21 34
Decrease in other liabilities (212) (1,137) (962)
Decrease (increase) in other assets (605) 1 (347)
Other, net 194 122 85
Changes in operating assets and liabilities:
Accounts receivable (3,961) 1,073 3,404
Inventories (5,096) 199 3,083
Other current assets 1,352 (1,168) (771)
Accounts payable, accrued expenses and sundry liabilities 798 3,937 (3,704)
Federal income taxes payable (1,155) (348) 1
Decrease (increase) in assets of division held for sale (409) 223 1,042
---- ---- ------
Net cash provided by (used in) operating activities (3,216) 9,675 5,166
---- ---- ------
Investing activities:
Purchases of CTS common stock (2,674) (8,538)
Purchases of property, plant and equipment (1,512) (859) (929)
Proceeds from sale of property 200
Proceeds from note receivable 476 49 47
---- ---- ------
Net cash used in investing activities: (3,510) (9,348) (882)
---- ---- ------
Financing activities:
Principal payments under capital lease obligations and
mortgages (164) (496) (432)
Borrowings under lines of credit 3,000
Purchases of treasury stock (412) (1,186) (197)
Dividends paid (768) (777) (781)
---- ---- ------
Net cash provided by (used in) financing activities 1,656 (2,459) (1,410)
---- ---- ------
Increase (decrease) in cash and cash equivalents (5,070) (2,132) 2,874
Cash and cash equivalents at beginning of year 6,837 8,969 6,095
---- ---- ------
Cash and cash equivalents at end of year $ 1,767 $ 6,837 $ 8,969
==== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
Dynamics Corporation of America
Notes to Consolidated
Financial Statements
Note 1: Significant Accounting Policies
(a) The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly owned. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts and disclosures. Actual results could differ
from those reported. The investment in CTS Corporation is accounted for by
the equity method of accounting. All material intercompany transactions and
accounts have been eliminated in consolidation.
(b) Revenues are reported on contracts, principally government related, based
on the proportion of units completed to units contracted. Costs related to
such revenues are based on estimated average costs for units contracted.
(c) Inventories are stated at the lower of cost or market. Inventory costs
have been determined by the last-in, first-out (LIFO) method for
approximately 41% (1995) and 36% (1994) of inventories, excluding inventories
subject to progress billings under contracts. Costs for other inventories
have been determined principally by the first-in, first-out (FIFO) method.
(d) Depreciation is computed on the straight-line and declining balance
methods over the estimated useful lives of assets.
(e) Realized gain or loss on the sale of marketable securities is determined
using specific cost identification. The Company's current marketable
securities are considered trading securities.
(f) Research and development costs are expensed as incurred and amounted to
$1,714,000 (1995), $1,664,000 (1994) and $1,252,000 (1993).
(g) Advertising costs are expensed as incurred and amounted to $2,283,000
(1995), $2,396,000 (1994) and $3,130,000 (1993).
(h) Per share data is based upon the weighted average number of common and
common equivalent shares outstanding during the periods.
(i) For purposes of the Consolidated Statements of Cash Flows, the Company
considers all investment instruments with a maturity of three months or less
at the time of purchase to be cash equivalents. The carrying amount of cash
and cash equivalents approximates fair value.
(j) Certain of the Company's products are sold with warranties, under which
the Company will repair or replace products during the designated warranty
periods. Costs associated with warranties are determined on the basis of
estimated future costs.
(k) The Company's concentration of credit risk with respect to its accounts
receivable is limited due to the large number of customers and their
diversification across many different industries. The Company performs
ongoing credit evaluations of its customers' financial condition and requires
letters of credit in some instances.
(l) In 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock- Based Compensation," which provides an accounting
alternative to APB Opinion No. 25, "Accounting for Stock Issued to
Employees," for stock-based compensation issued to employees effective for
fiscal years beginning after December 15, 1995. The Statement allows for a
fair value-based method of accounting for employee stock options and similar
equity instruments. If the Company continues to account for stock-based
compensation arrangements under Opinion No. 25, Statement No. 123 requires
disclosure of the pro forma effect on net income and earnings per share of
fair value-based accounting for those arrangements. The Company has not yet
determined whether it will adopt the recognition provision of Statement No.
123.
(m) In 1995, the FASB issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Statement, which must be adopted in 1996,
requires companies to investigate potential impairments of long-lived assets,
certain identifiable intangibles, and associated goodwill on an exception
basis, when there is evidence that events or changes in circumstances have
made recovery of an asset's carrying value unlikely. The Company does not
believe that the adoption of Statement No. 121 will have a material effect on
its financial position or results of operations.
11
<PAGE>
Notes to Consolidated Financial Statements (continued)
Note 2: Inventories
<TABLE>
<CAPTION>
1995 1994
-----------------
(in thousands)
<S> <C> <C>
Raw materials and supplies $ 8,772 $ 7,579
Work in process 7,354 6,791
Finished goods 6,863 3,391
---- -----
22,989 17,761
---- -----
Inventories subject to
progress billings 666
Progress billings (534)
---- -----
132
---- -----
$22,989 $17,893
==== =====
</TABLE>
The excess of current replacement cost over LIFO cost of inventories
amounted to approximately $800,000 (1995) and $982,000 (1994).
The United States Government has liens on substantially all inventories
subject to progress billings.
Note 3: Other Current Assets
Other current assets as of December 31, 1994 included marketable
securities at market of $631,000, with a cost basis of $2,115,000.
Note 4: Division Held for Sale--Fermont Division
On September 30, 1991, the Company determined to discontinue operations at
its Fermont Division, a manufacturer of electrical power systems for
government and commercial markets, and put the assets and business up for
sale. In conjunction with the discontinuance, the Company recorded a
provision for disposition of $5,600,000 for costs estimated to be incurred
prior to Fermont's disposition, including $3,629,000 for operating losses
during the phaseout period. The provision for disposition in the Consolidated
Statement of Operations in 1991 was reduced by $1,600,000 before taxes for
the favorable settlement of a court action involving a contract for the sale
of 60 KW engine generator sets to the Government. Fermont's sales for the
years ended December 31, 1995, 1994 and 1993 were $2,444,000, $11,247,000
(including the $6,450,000 settlement referred to below) and $5,248,000,
respectively.
At the time the operations were discontinued, Fermont was a party to a
contract with the U.S. Government for the production of 3KW engine generator
sets. The contract was subject to First Article approval of prototype 3KW
units. A proposed change order was submitted to the Government in April 1992
seeking equitable compensation for constructive changes by the Government and
associated delays in the contract. In May 1994, the Company agreed to accept
$6,450,000 from the Government in settlement of the preproduction portion of
its proposed change order. The settlement, net of related expenses and income
taxes, amounted to $3,334,000, or $.86 per share, and was reported as income
from discontinued operations in 1994. The Government contracted for further
testing of prototype units at that time. In March 1995, the Government
terminated the 3KW contract for the convenience of the Government; the
Company has filed a claim for compensation for its costs and losses related
to the termination.
In July 1994, Fermont bid on a major new generator set contract and
decided to pursue other contracts. Accordingly, commencing on July 1, 1994,
the division is no longer classified as a discontinued operation but as a
business held for sale. An estimate for the projected operating losses for
the ensuing twelve month period, including costs to consummate the division's
sale and adjustments for the net realizable value of the division's assets,
was provided from the remainder of the reserve established in 1991 to
discontinue the operation. In June 1995, the Company recorded an additional
provision for future operating losses of $360,000. Although the amount
recorded at December 31, 1995 represents management's best estimate of the
outcome of these matters, it is possible that future adjustments to this
reserve may be required.
In January 1995, Fermont was awarded a contract to manufacture tactical
quiet (TQ) generator sets for the U.S. Army Aviation and Troop Command. The
Government's initial delivery order issued with the award and subsequent
additions call for deliveries of gensets aggregating $69,000,000. Shipments
are expected to begin in 1996 subject to First Article prototype approval.
The contract is a two-year requirements contract.
Current assets of the division held for sale consist primarily of accounts
receivable and inventories. Accounts payable and accrued expenses and sundry
liabilities included $862,000 and $677,000 at December 31, 1995 and 1994,
respectively, related to the division held for sale.
12
<PAGE>
Note 5: Property, Plant and Equipment
(in thousands)
<TABLE>
<CAPTION>
1995
-------------------------------
Fixed Capital
Classification Assets Leases Total
- ------------------------------------- ------- ------- ---------
<S> <C> <C> <C>
Land and improvements $ 983 $ 983
Buildings and improvements 8,972 $1,520 10,492
Machinery, equipment, furniture and
fixtures 23,974 688 24,662
Leasehold improvements 517 517
------ ------ -------
34,446 2,208 36,654
Less accumulated depreciation and
amortization 31,243 1,808 33,051
------ ------ -------
$ 3,203 $ 400 $ 3,603
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------
Fixed Capital
Classification Assets Leases Total
- ------------------------------------- ------- ------- ---------
<S> <C> <C> <C>
Land and improvements $ 983 $ 983
Buildings and improvements 8,979 $2,270 11,249
Machinery, equipment, furniture and
fixtures 22,536 651 23,187
Leasehold improvements 507 507
------ ------ -------
33,005 2,921 35,926
Less accumulated depreciation and
amortization 29,908 2,546 32,454
------ ------ -------
$ 3,097 $ 375 $ 3,472
====== ====== =======
</TABLE>
Note 6: Equity Investment in CTS Corporation
The Company's holdings aggregated 2,303,100, 2,222,100 and 1,920,900 shares
of CTS Corporation ("CTS") common stock at December 31, 1995, 1994 and 1993,
respectively. The Company's equity ownership in CTS was 44.1%, 42.9% and
37.3% at December 31, 1995, 1994 and 1993, respectively.
The market value of the Company's investment in CTS amounted to
$86,942,000 and $61,663,000 at December 31, 1995 and 1994, respectively. The
market value of the Company's investment in CTS on February 27, 1996 amounted
to $86,654,000, on holdings of 2,303,100 shares. Under the Control Share
Acquisitions Chapter of the Indiana Business Corporation Law, 1,020,000 of
the Company's shares of CTS stock presently have no voting rights.
The excess of the carrying amount of the Company's investment over the
underlying equity in the net assets of CTS, net of accumulated amortization
of $8,334,000, amounted to $14,143,000 at December 31, 1995 and is being
amortized over twenty-five years (commencing in 1986) using the straight-line
method ($854,000 in 1995). At December 31, 1995, undistributed net income of
CTS included in the Company's retained earnings, before Company-provided
deferred income taxes of $3,083,000, amounted to $9,068,000.
CTS operates primarily in one business segment, electronic and
electromechanical components and subsystems, in worldwide markets. Summarized
financial information derived from CTS' 1995 Annual Report to Stockholders
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994 1993
-------- -------- ----------
(in thousands)
<S> <C> <C> <C>
Net sales $300,157 $268,707 $236,979
======= ======= ========
Gross profit $ 74,804 $ 63,067 $ 53,052
======= ======= ========
Earnings before cumulative effect of
changes in accounting principles $ 17,164 $ 13,967 $ 6,570
Cumulative effect of accounting
change
--postretirement benefits (5,096)
Cumulative effect of accounting
change
--income taxes 482
------- ------- --------
Net earnings $ 17,164 $ 13,967 $ 1,956
======= ======= ========
Current assets $126,113 $110,667 $ 97,266
======= ======= ========
Noncurrent assets $101,014 $ 96,159 $ 87,798
======= ======= ========
Current liabilities $ 50,962 $ 44,792 $ 49,888
======= ======= ========
Noncurrent liabilities $ 29,912 $ 30,179 $ 15,973
======= ======= ========
Stockholders' equity $146,253 $131,855 $119,203
======= ======= ========
</TABLE>
13
<PAGE>
Notes to Consolidated
Financial Statements (continued)
Certain reclassifications have been made for all years presented in CTS'
financial statements to conform to the classifications adopted by CTS in
1995.
The Company recognized its proportionate share, in accordance with the
equity method of accounting, of CTS' net charge from its adoption of FASB
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," a charge of $1,896,000, or $.49 per share, and FASB Statement
No. 109, "Accounting for Income Taxes," a credit of $180,000, or $.05 per
share. These onetime, non-cash accounting changes were adopted by CTS in the
first quarter of 1993 as cumulative effects to January 1, 1993.
CTS is required to file annual and other reports, including audited annual
financial statements, with the Securities and Exchange Commission and such
reports and statements are available for review at the offices of the
Securities and Exchange Commission in Washington, D.C. The Company has relied
on CTS' financial information to compile its financial statements.
Note 7: Accrued Expenses and Sundry Liabilities
<TABLE>
<CAPTION>
1995 1994
---------------------
(in thousands)
<S> <C> <C>
Salaries, wages, commissions and
employee benefits $ 3,972 $ 2,988
Taxes, other than Federal income taxes 1,116 1,398
Insurance 1,715 1,242
Customer contract claims, including
price adjustments and refunds 2,800 2,800
Advances from customers 1,131 1,835
Warranties 941 967
Division held for sale 642 2,497
Other 2,299 1,921
------- --------
$14,616 $15,648
======= ========
</TABLE>
Note 8: Long-term Debt and Credit Facilities
<TABLE>
<CAPTION>
Long-term Debt 1995 1994
------------------
(in thousands)
<S> <C> <C>
Revolving credit notes, 6.10% at
December 31, 1995 $3,000
Obligations under capital leases 487 $527
------- --------
3,487 527
Less current portion 63 126
------- --------
$3,424 $401
======= ========
</TABLE>
Capital leases generally provide that the Company pay property taxes and
operating costs. Certain capital leases contain renewal and/or purchase
options.
Minimum lease payments under capital leases total $741,000, including
$254,000 representing interest. Minimum lease payments in each year for the
next five years are: $106,000, $86,000, $78,000, $58,000 and $45,000.
The Company leases real estate and equipment under operating leases.
Certain of the leases contain renewal options and escalation clauses relating
to taxes and maintenance. Rental expense amounted to $747,000, $585,000 and
$676,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Minimum lease payments under operating leases total $3,035,000. Minimum
lease payments in each year for the next five years are: $657,000, $529,000,
$456,000, $388,000 and $276,000.
Interest payments amounted to $85,000, $73,000 and $118,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
Credit Facilities
The Company has a Revolving Credit Agreement with banks which provides a line
of credit of up to $37,000,000 through November 30, 1998 at the lower of the
prime rate or other rate options available at the time of borrowing. The
Company pays a commitment fee of 1/4% based on the unused portion of the
line. The Agreement provides that, at the option of the Company, the
principal outstanding at November 30, 1998 may be converted to a four year
term loan, with interest at the lower of the prime rate or other rate
options, payable in equal semi-annual principal installments. The Agreement
contains restrictions which, among other things, require the Company to have
income from continuing operations before equity in the operating results of
unconsolidated affiliates for the year and in at least one of any two
consecutive fiscal quarters. The Agreement requires maintenance of certain
financial ratios and contains other restrictive covenants, including a
restriction on payment of dividends to 50% of current year's net income plus
$3,000,000.
The Company also has an uncommitted line of credit with a bank amounting
to $9,000,000. The Company does not pay any fee for the uncommitted line and
therefore the availability of the line is at the discretion of the bank.
Outstanding letters of credit, principally related to imports and bid and
performance bond obligations, amounted to $5,229,000 at December 31, 1995.
14
<PAGE>
Note 9: Stockholders' Equity
1980 Restricted Stock and Cash Bonus Plan
The Plan, prior to amendment, provided for the discretionary award or sale of
up to 400,000 shares of common stock to key executives. The shares awarded or
sold are subject to restrictions against transfer as well as repurchase
rights of the Company which, in effect, provide for the lapse of restrictions
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 date restrictions lapse in the case of
an award, or the excess of the fair market value thereof as of such date over
the original purchase price if the shares were purchased, with a limit upon
the total bonuses paid to any participant during the 5-year period of twice
the fair market value of the shares on the date of award or sale. The Plan
was amended in 1988 to make additional shares available for issuance to
replenish the Plan for shares awarded since its inception. At December 31,
1995, 1994 and 1993, 339,000, 339,000 and 370,500 shares, respectively, were
available for award or sale under the Plan.
In addition to the shares issued and amortization of deferred compensation
included in the Consolidated Statements of Stockholders' Equity, the Company
accrued bonuses of $349,000 (1995), $272,000 (1994) and $58,000 (1993) and
reacquired (at no cost) through forfeitures 3,000 (1994) and 3,800 (1993)
previously issued restricted shares pursuant to the Plan.
1986 Stock Plan for Outside Directors
The Plan provides for a portion of outside directors' compensation to be
deferred and to be paid in shares of the Company's common stock upon a
director's retirement, disability or death. Under the Plan, common stock
units (payable in shares of the Company's common stock on a one-for-one
basis) are credited to the directors based on their service as outside
directors each year. Common stock units of 437 (1995), 547 (1994) and 449
(1993) were credited to the outside directors. In 1995, 100 shares were
distributed under the Plan to a deceased director's estate. The total number
of units in the Plan is 4,911 at December 31, 1995.
Note 10: Preferred Stock Purchase Rights
In 1986 the Company declared a distribution to shareholders of record on
February 14, 1986 of one preferred stock purchase right for each outstanding
share of the Company's voting and non-voting common stock. Under certain
conditions, each right may be exercised to purchase one one-hundredth of a
share of a newly created series of participating preferred stock at an
exercise price of $80. The rights become exercisable ten days after a public
announcement that a party or group has acquired or obtained the right to
acquire 20% or more of the Company's common stock in a transaction not
previously approved by the Board of Directors of the Company, or after
commencement or public announcement of a tender offer for 25% or more of the
Company's common stock. The rights, which are non-voting, may be redeemed by
the Company at a price of $.05 per right at any time prior to their
expiration or prior to the acquisition by a party or group of 20% of the
Company's common stock, unless approved by the Board of Directors. The
participating preferred stock to be purchased upon exercise of the rights
will be nonredeemable.
In the event the Company is acquired in a merger or other business
combination transaction after the rights become exercisable, provision shall
be made so that each holder of a right shall have the right to receive, upon
exercise thereof and payment of the then current exercise price, that number
of shares of common stock of the surviving company which at the time of such
transaction would have a market value of two times the exercise price of the
right. If the Company is the surviving company, each holder would have the
right to receive for the then current exercise price preferred stock of the
Company with a market value of two times the exercise price.
In December 1995, the Board of Directors of the Company voted to extend
the expiration date of the rights from February 14, 1996 to February 14,
2006, at which time the rights will expire unless further extended.
15
<PAGE>
Notes to Consolidated
Financial Statements (continued)
Note 11: Other Income (Expense), Net
<TABLE>
<CAPTION>
Income (Expense): 1995 1994 1993
---------------------
(in thousands)
<S> <C> <C> <C>
Interest:
Income $ 211 $239 $ 181
Expense (92) (73) (118)
--- - ----
119 166 63
Royalties 113 157 1,207
Sales of property and
leasehold rights 236
Dualit toaster recall (444)
Environmental
response costs (415)
Division held for
sale (360)
Staff reduction (125) (470)
Other, net 65 175 143
--- --- ----
($ 811) $498 $ 943
=== === ====
</TABLE>
Note 12: Income Taxes
Income tax charges (credits) from continuing operations consist of:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------
(in thousands)
<S> <C> <C> <C>
Current income taxes:
Federal ($ 1,159) $ 937 $211
State (81) 225 77
Foreign 35 327
----- ----- ---
(1,205) 1,489 288
----- ----- ---
Deferred income
taxes:
Federal 790 (273) 51
State 160 (136) 125
Foreign 40 (113) 153
----- ----- ---
990 (522) 329
----- ----- ---
($ 215) $ 967 $617
===== ===== ===
</TABLE>
Gross income subject to foreign taxes amounted to $516,000, $1,328,000 and
$1,000,000 for tax years 1995, 1994 and 1993, respectively.
Deferred income tax charges (credits) result from the following:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------
(in thousands)
<S> <C> <C> <C>
Inventory $ 636 ($ 205) ($572)
Employee benefits (35) 107 (94)
Division held for
sale 729 (13) 438
Warranties 123 152
Environmental costs (180)
Deferred income (98) (274) 372
Insurance (141) (292)
Toaster recall (110)
Investments 241
Prepaid commissions (79)
Depreciation (49)
Other, net 76 32 33
-- --- -----
$ 990 ($ 522) $329
== === =====
</TABLE>
A reconciliation of the applicable Federal statutory rate to the Company's
consolidated effective tax (benefit) rate from continuing operations before
equity in CTS follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net
of Federal income tax
benefit 2.5 2.1 8.0
Foreign taxes 3.6 11.9 9.2
Resolution of prior
year tax matters (47.6)
Employee benefits (1.1) (1.0) (3.9)
Foreign tax credits (3.7) (12.3) (12.6)
Other, net 2.0 .5 2.1
---- --- -----
(10.3%) 35.2% 36.8%
==== === =====
</TABLE>
16
<PAGE>
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Warranty reserve $ 363 $ 381
Bad debt allowance 191 226
Inventory 1,389 2,025
Employee benefit plans 1,476 1,441
Investments 250 491
Division held for sale 251 980
Customer contract claims 624 625
Depreciation 471 422
Insurance 453 312
Other, net 330 202
---- ------
5,798 7,105
Valuation allowance for
deferred tax assets (250) (251)
---- ------
Total deferred tax
assets 5,548 6,854
---- ------
Deferred tax liabilities:
Undistributed earnings of
CTS (3,083) (1,019)
Deferred income (98)
Other, net (15) (236)
---- ------
Total deferred tax
liabilities (3,098) (1,353)
---- ------
Net deferred tax assets $ 2,450 $ 5,501
==== ======
</TABLE>
The change in the valuation allowance for deferred tax assets decreased
the provision for income taxes $1,000, $22,000 and $5,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Income tax payments, net of refunds, amounted to $470,000, $3,611,000 and
$302,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Note 13: Employee Benefit Plans
The Company has a noncontributory defined benefit retirement plan covering
substantially all of its employees. The benefits are based on the employee's
years of service and career average compensation. Pension costs are generally
funded to the extent amounts are tax deductible. Contributions are intended
to provide not only for benefits attributed to service to date but also for
those expected to be earned in the forthcoming year. The Company also
contributes to a multi-employer plan which provides defined retirement
benefits, as required by collective bargaining agreements.
A summary of the components of net periodic pension cost of the defined
benefit plan and the total contributions charged to pension expense for the
multi-employer plan follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------
(in thousands)
<S> <C> <C> <C>
Defined benefit plan:
Service cost--
benefits earned
during the period $ 522 $ 586 $ 628
Interest cost on
projected benefit
obligation 1,510 1,440 1,402
Actual return on plan
assets (2,961) (2,085)
Net amortization and
deferral 1,325 (1,688) 520
---- ---- ------
Net pension charges
for:
Defined benefit plan 396 338 465
Multi-employer plan 306 323 294
---- ---- ------
Net periodic pension
cost $ 702 $ 661 $ 759
==== ==== ======
</TABLE>
Net periodic pension cost for the defined benefit plan includes $70,000
(1995), $39,000 (1994) and $87,000 (1993) charged against the reserve for
division held for sale.
17
<PAGE>
Notes to Consolidated
Financial Statements (continued)
Assumptions used in accounting for the
defined benefit plan as of December 31 were:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------
<S> <C> <C> <C>
Discount rate 7.25% 8.50% 7.50%
Rate of increase in
compensation levels 5.0 % 5.0 % 5.0 %
Expected long-term rate of
return on assets 9.0 % 9.0 % 9.0 %
</TABLE>
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets as of December 31, 1995 and 1994 for the
Company's defined benefit pension plan:
<TABLE>
<CAPTION>
1995 1994
---------------------
(in thousands)
<S> <C> <C>
Actuarial present value of
benefit obligation:
Accumulated benefit
obligation, including
vested benefits of $17,923
and $15,202 ($ 20,053) ($ 16,715)
Effect of salary projections (1,850) (1,313)
------ --------
Projected benefit obligation
for service rendered to date (21,903) (18,028)
Plan assets at fair value 18,371 16,700
------ --------
Projected benefit obligation in
excess of plan assets (3,532) (1,328)
Unrecognized net loss from past
experience different from
assumed and effect of changes
in assumptions 2,433 987
Prior service cost not yet
recognized in net periodic
pension cost 178 206
Unrecognized net asset
remaining from initial
application of FASB Statement
No. 87 (1,292) (1,682)
------ --------
Accrued pension cost (2,213) (1,817)
Less current portion 608
------ --------
Accrued long-term pension cost ($ 1,605) ($ 1,817)
====== ========
</TABLE>
The 1995 change in the discount rate from 8.50% to 7.25% resulted in a
$2,755,000 increase in the projected benefit obligation.
Plan assets are invested in cash equivalents, guaranteed investment
contracts and equity stocks, including 100,000 shares of common stock of the
Company having a market value of $2,450,000 and $2,037,500 at December 31,
1995 and 1994, respectively. Dividend payments to the Plan on Company common
stock amounted to $20,000 in both 1995 and 1994.
Information concerning the Company's share of related estimated plan
benefit obligations and assets is not available for the multi-employer plan.
The Company has a Savings and Investment Plan for all full time employees
not covered by collective bargaining agreements, which qualifies as a profit
sharing plan under Section 401(k) of the Internal Revenue Code. The Company's
contributions under the Plan are based on specified percentages of employee
contributions and were $347,000 (1995), $325,000 (1994) and $342,000 (1993).
Note 14: Contingencies
The Company is a supplier to the United States Government under contracts
and subcontracts on which there are cost allocation, cost allowability and
compliance issues under examination by various agencies or departments of the
Federal government. In the course of the resolution of these issues, the
Company may be required to adjust certain prices or refund certain payments
on its government contracts and subcontracts. The Company believes that any
such price adjustments or refunds will not have a materially adverse effect
on the financial position or results of operations of the Company.
In October 1994, the Company, after notifying the Consumer Products Safety
Commission, commenced a recall of approximately 2,700 electronic toasters
manufactured in the United Kingdom by Dualit, Ltd. and distributed in the
U.S. by the Company's Waring Products Division, because of a defect in the
electronic timer on the units. The Company has advised the manufacturer that
it will seek full indemnity from the manufacturer, as provided in the
agreement between the parties, for all costs related to the defect.
The Company has been notified by the U.S. Environmental Protection Agency
("EPA") that it is a Potentially Responsible Party ("PRP") regarding
hazardous waste cleanup at a non-Company site in Connecticut and at a Company
site in California. Certain of the PRPs at the Connecticut site have agreed
with the EPA to fund a feasibility study at the site and have sued the
Company and other PRPs who have not agreed to share the costs. A property
owner neighboring the Company site in California has sued the Company and
others for allegedly causing contamination at the neighbor's property. In
18
<PAGE>
February 1996, the Company settled the past costs portion of a 1995 lawsuit
by a state environmental agency to recover past and future response costs
related to the cleanup of a non-Company site in Pennsylvania as to which the
Company was earlier designated a PRP; and the Company has also been sued by
certain of the PRPs who have agreed with the state agency to fund other past
response costs at that site to recover a portion of those costs from the
Company and other PRPs who have not agreed to participate in such funding.
The Company is also a defendant in two lawsuits seeking contribution for
Superfund cleanup costs relating to two other non- Company sites in that
state. In 1995 the Company expended or provided $695,000, including $165,000
for the California site and $415,000 for one of the Pennsylvania sites, to
manage hazardous substances, to monitor pollutants, to test for contaminants,
to provide for required removal activities and to settle the lawsuit for past
costs and to provide for future response costs at the non-Company site in
Pennsylvania. Accruals for such matters at December 31, 1995 amounted to
$565,000. Based upon its knowledge of the extent of the Company's exposure
and current statutes, rules and regulations, and emerging alternative
remedial approaches, management believes that the anticipated costs resulting
from claims and proceedings with respect to the above mentioned sites,
including remediation, the extent and cost of which are presently unknown,
will not materially affect the financial position of the Company. However, it
is possible, but unanticipated at this time, that future results of
operations or cash flow could be materially affected by an unfavorable
resolution of these matters.
With respect to other claims and actions against the Company, it is the
opinion of Management that they will not have a material effect on the
financial position of the Company.
Note 15: Industry Segments
See Financial Information About Industry Segments on pages 23 and 24 of this
report.
19
<PAGE>
Notes to Consolidated
Financial Statements (continued)
Note 16: Quarterly Financial Data (Unaudited)
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Year
March 31 June 30 September 30 December 31
---------- -------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
1995
Net sales $25,119 $27,501 $30,077 $29,023 $111,720
======== ====== ============= ============= =======
Gross profit $ 6,555 $ 7,208 $ 7,526 $ 6,517 $ 27,806
======== ====== ============= ============= =======
Net income $ 1,083 $ 1,585(a) $ 2,444(b) $ 1,611(c) $ 6,723
======== ====== ============= ============= =======
Net income per share $ .28 $ .41(a) $ .64(b) $ .42(c) $ 1.75
======== ====== ============= ============= =======
1994
Net sales $22,716 $23,998 $24,732 $25,007 $ 96,453
======== ====== ============= ============= =======
Gross profit $ 6,027 $ 6,689 $ 6,803 $ 5,446 $ 24,965
======== ====== ============= ============= =======
Income from
continuing
operations $ 933 $ 1,733 $ 1,162 $ 1,570 $ 5,398
======== ====== ============= ============= =======
Net income $ 933 $ 5,067(d) $ 1,162 $ 1,570 $ 8,732
======== ====== ============= ============= =======
Income per share:
Income from
continuing
operations $ .24 $ .45 $ .30 $ .40 $ 1.39
======== ====== ============= ============= =======
Net income $ .24 $ 1.31(d) $ .30 $ .40 $ 2.25
======== ====== ============= ============= =======
<FN>
(a) Includes a charge of $227 ($.06 per share) for an additional provision
for future operating losses of the Fermont Division, a business held for
sale, and $124 ($.03 per share) of income from the sale of excess
property and leasehold rights.
(b) Increased by $998 ($.26 per share) for resolution of prior year tax
matters.
(c) Includes charges of $260 ($.07 per share) for environmental response
costs and $204 ($.05 per share) for Dualit toaster recall costs.
(d) Includes $3,334 ($.86 per share) of income from a discontinued operation
reflecting the Company's favorable settlement of a claim of its Fermont
Division on a contract with the U.S. Government.
</FN>
</TABLE>
20
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
[Logo] Ernst & Young LLP
1111 Summer Street
Stamford, Connecticut 06905
Phone: 203 326 8200
Fax: 203 358 9644
To the Board of Directors and Stockholders of Dynamics Corporation of America
We have audited the accompanying consolidated balance sheets of Dynamics
Corporation of America as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. The financial statements of CTS Corporation (a corporation in
which the Company had a 44.1% interest at December 31, 1995) have been
audited by other auditors whose report, which included an explanatory
paragraph for CTS Corporation's accounting changes discussed in Note 6 to
these consolidated financial statements, has been furnished to us; insofar as
our opinion on the consolidated financial statements relates to data included
for CTS Corporation, it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Dynamics Corporation of
America at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 6 to the consolidated financial statements, in 1993 CTS
Corporation changed its method of accounting for income taxes and
post-retirement health care and life insurance benefits.
[Signature of Ernst & Young LLP]
February 27, 1996
21
<PAGE>
Selected Financial Data
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net sales $111,720 $ 96,453 $101,329 $110,243 $111,962
====== ====== ======= ====== =======
Gross profit $ 27,806 $ 24,965 $ 24,803 $ 30,467 $ 27,890
====== ====== ======= ====== =======
Income from continuing operations
before equity in CTS $ 2,312(a) $ 1,780 $ 1,058(c) $ 3,775(e) $ 2,580(h)
Income (loss) from equity investment
in continuing operations of CTS 4,411 3,618 1,619 (442) 650
------ ------ ------- ------ -------
Income from continuing operations 6,723 5,398 2,677 3,333 3,230
Income (loss) from discontinued
division 3,334(b) (4,071)(i)
Equity in loss of discontinued
unconsolidated affiliate (20) (492)
Loss on disposition of unconsolidated
affiliate (248)(f)
Equity in CTS' cumulative effect to
January 1, 1993 of changes in
accounting methods (1,716)(d)
Cumulative effect to January 1, 1992
of change in accounting for income
taxes (942)(g)
------ ------ ------- ------ -------
Net income (loss) $ 6,723 $ 8,732 $ 961 $ 2,123 ($ 1,333)
====== ====== ======= ====== =======
Average common shares outstanding 3,839,488 3,877,106 3,902,164 3,915,224 3,914,312
====== ====== ======= ====== =======
Amounts per common share:
Income from continuing operations $ 1.75 $ 1.39 $ .68 $ .85 $ .83
====== ====== ======= ====== =======
Net income (loss) $ 1.75 $ 2.25 $ .24 $ .54 ($ .34)
====== ====== ======= ====== =======
Cash dividends $ .20 $ .20 $ .20 $ .20 $ .20
====== ====== ======= ====== =======
Stockholders' equity(j) $ 27.54 $ 25.92 $ 23.86 $ 23.75 $ 23.33
====== ====== ======= ====== =======
Total assets $134,301 $124,177 $115,364 $120,288 $122,020
====== ====== ======= ====== =======
Long-term debt $ 3,424 $ 401 $ 623 $ 1,023 $ 1,313
====== ====== ======= ====== =======
<FN>
(a) Increased by $998 ($.26 per share) for resolution of prior year tax
matters and $124 ($.03 per share) from the sale of property and leasehold
rights, and reduced by charges of $278 ($.07 per share) for toaster
recall costs, $260 ($.07 per share) for environmental response costs and
$227 ($.06 per share) for an additional provision for future operating
losses of the Fermont Division, a business held for sale.
(b) Income from a discontinued operation of $3,334 ($.86 per share),
reflecting the Company's favorable settlement of a claim of its Fermont
Division on a contract with the U.S. Government.
(c) Increased by $608 ($.16 per share) from initial royalty income under a
technology transfer agreement. Includes a charge of $286 ($.07 per share)
for staff reduction costs.
(d) The Company recognized its proportionate share under equity accounting of
CTS' adoption of FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," a charge of $1,896 ($.49
per share), and FASB Statement No. 109, "Accounting for Income Taxes," a
credit of $180 ($.05 per share). These onetime, non-cash accounting
changes were adopted by CTS as cumulative effects to January 1, 1993.
(e) Increased by $780 ($.20 per share) for resolution of prior years tax
matters and $349 ($.09 per share) from the sale of property.
(f) Loss on disposition of the Company's equity investment in Farmhand Inc.
($.06 per share).
(g) Cumulative effect to January 1, 1992 of a change in the Company's method
of accounting for income taxes from the deferred method to the liability
method required by FASB Statement No. 109, "Accounting for Income Taxes"
($.24 per share).
(h) Includes income from a resolution of prior years tax matters of $1,015
($.26 per share) and from a nonrefundable escrow deposit of $155 ($.04
per share) from the decision by Halton OY of Finland not to proceed with
the purchase of the Company's Anemostat Division.
(i) Includes a charge of $2,678 ($.68 per share) for estimated operating
losses and costs during the phase out period of the Company's Fermont
Division.
(j) Based upon shares outstanding at end of period.
The above Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company, including the Notes to
Consolidated Financial Statements, appearing elsewhere in this Annual Report.
</FN>
</TABLE>
22
<PAGE>
SEGMENTS OF BUSINESS
During 1995, the Company's continuing operations were in a number of
manufacturing businesses conducted by four divisions and a subsidiary, each
of which operates as a separate unit and each of which maintains its own
sales, administration, accounting, marketing, engineering and manufacturing
operations. Corporate headquarters determines policy and provides such
services as legal counsel, accounting, financing, cash management, auditing,
insurance, public relations and long-range planning guidance.
The Company sells its products predominately in the United States and export
sales are concentrated primarily in the Pacific Rim and Europe. The methods
of distribution and marketing utilized by the Company vary by operation. In
general, sales for all the Company's segments combine some direct selling in
certain market areas with appropriate manufacturers' representatives,
wholesalers, distributors and/or dealers.
The operations are classified into three industry segments: electrical
appliances and electronic devices, fabricated metal products and equipment,
and power and controlled environmental systems.
Segments are grouped according to similarities in profitability, risk, growth
potential, material and labor composition of products and/or capital
requirements.
These segments accounted for the following net sales, operating results and
other financial data for each of the three years in the period ended December
31, 1995:
Financial Information About Industry Segments
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
-------------------------------
(in thousands)
<S> <C> <C> <C>
Net Sales:
Electrical Appliances and Electronic
Devices $ 62,711 $ 56,255 $ 53,813
Fabricated Metal Products and Equipment 23,646 23,269 22,347
Power and Controlled Environmental Systems 25,363 16,929 25,169
----- ----- -------
$111,720 $ 96,453 $101,329
===== ===== =======
Operating Profit (Loss):
Electrical Appliances and Electronic
Devices $ 2,880 $ 3,067 $ 1,438
Fabricated Metal Products and Equipment (354) 450 498
Power and Controlled Environmental Systems 1,889 1,101 2,399
----- ----- -------
4,415 4,618 4,335
Corporate Expenses (2,315) (2,008) (2,719)
Interest Income, net 112 159 52
Other Income (Expense), net (115) (22) 7
----- ----- -------
$ 2,097 $ 2,747 $ 1,675
===== ===== =======
Depreciation and Amortization:
Electrical Appliances and Electronic
Devices $ 995 $ 944 $ 795
Fabricated Metal Products and Equipment 201 189 255
Power and Controlled Environmental Systems 275 135 157
Corporate 27 24 20
----- ----- -------
$ 1,498 $ 1,292 $ 1,227
===== ===== =======
Capital Expenditures:
Electrical Appliances and Electronic
Devices $ 1,175 $ 768 $ 748
Fabricated Metal Products and Equipment 272 69 149
Power and Controlled Environmental Systems 156 31
Corporate 33 22 22
----- ----- -------
$ 1,636 $ 859 $ 950
===== ===== =======
Identifiable Assets:
Electrical Appliances and Electronic
Devices $ 28,019 $ 21,920 $ 23,317
Fabricated Metal Products and Equipment 8,277 8,224 8,154
Power and Controlled Environmental Systems 13,771 11,172 10,837
Corporate 82,475 81,499 71,440
----- ----- -------
132,542 122,815 113,748
Division Held For Sale 1,759 1,362 1,616
----- ----- -------
$134,301 $124,177 $115,364
===== ===== =======
</TABLE>
23
<PAGE>
Financial Information About Industry Segments (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C>
U.S. Government Sales, direct and indirect (occurring
predominantly in the Power and Controlled Environmental
Systems segment) $ 5,606 $ 7,340 $18,151
======= ======= =========
Export Sales (primarily Pacific Rim and Europe) $23,864 $14,025 $ 8,787
======= ======= =========
Sales to single customers representing 10% or more of Company
net sales:
Power and Controlled Environmental Systems $11,333 $12,701
======= =========
Classes of products representing 10% or more of Company net
sales:
Electrical Appliances and Electronic Devices:
Consumer and Commercial Portable Electrical Appliances 25.5% 33.4% 37.0%
Thermal Management Components 20.5% 16.5%
Quartz Crystal Products 10.1%
Fabricated Metal Products and Equipment:
Air Distribution Equipment and Controls 21.2% 24.1% 22.1%
Power and Controlled Environmental Systems:
Power Plant Equipment 11.2%
</TABLE>
Notes:
See page inside back cover for the classification of the Company's present
manufacturing Divisions and Subsidiary for segment purposes and a brief
description of each.
Total revenue by industry segments includes sales to all unaffiliated
customers including the U.S. Government.
Operating profit is total revenues less operating expenses. Identifiable
assets by industry segments are those assets that are used in the Company's
operations in each industry. Corporate assets are principally cash,
receivables and marketable securities, including the Company's equity
investment in CTS Corporation, substantially all of which is held by its
wholly owned subsidiary, LTB Investment Corporation.
It should be noted that the reported information follows the pronouncements
of the Financial Accounting Standards Board and does not follow the Company's
internal allocation procedures relating to interest, other income and certain
administrative costs such as management, legal and financial. Accordingly,
the information may not be indicative of the financial results of, or
investments in, the reported segments were they independent organizations, or
useful for comparison with operations of other companies.
Range of Stock Prices and Dividend Information
The Company's Common Stock (Voting) is traded on the New York Stock Exchange
(ticker symbol: DYA). There is no market for the Non-Voting Common Shares of
the Company.
The prices of the Company's Common Stock and dividends paid per share during
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
New York Stock Exchange Dividends Paid
--------------------------------- ---------------
1995 1994 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
HIGH LOW HIGH LOW
---- ---- ---- ----
1st Quarter 26-3/4 19-1/2 16 13-1/4 $.10 $.10
2nd Quarter 24-3/4 22-1/4 15-5/8 13
3nd Quarter 24-5/8 22-1/2 20-1/4 14 $.10 $.10
4th Quarter 25-7/8 21-5/8 21 17-7/8
</TABLE>
As of February 27, 1996 there were 3,766 shareholders of record.
The Board of Directors of the Company established a semi-annual dividend
policy in January 1978 and expects to continue this policy. At its January
1984 meeting, the Board of Directors established the regular semi-annual
dividend rate of ten cents ($.10) per share. The first payment for 1996 was
made on March 1 to shareholders of record as of the close of business on
February 15, 1996.
The number of employees of the Company as of December 31, 1995 was 1,194.
24
<PAGE>
DCA's Manufacturing Divisions and Subsidiary
The following is the classification of the Company's present operations
for industry segment purposes and a brief description of each:
Electrical Appliances
and Electronic Devices
INTERNATIONAL ELECTRONIC
RESEARCH CORPORATION
135 West Magnolia Blvd.
Burbank, California
91502-7704
Tel. 818-842-7277
Designs and manufactures heat dissipators/sinks and the Zero Insertion Force
(ZIF(tm)) printed circuit board retainer, ZIF II using tool free concept,
thermally efficient coldwalls and enclosures using the integrated ZIF(tm) or
the machined ZIF(tm) technology approach for high performance electronic
systems, and other components related to thermal management of electronic
systems for the military/aerospace, computer and commercial marketplace
worldwide.
REEVES-HOFFMAN DIVISION
400 West North Street
Carlisle, Pennsylvania
17013-2248
Tel. 717-243-5929
Designs and manufactures quartz crystals, crystal oscillators, crystal
filters and glass-to-metal hermetic seal packages for sales to customers
worldwide. Primary applications include telecommunications, hybrid
microcircuits, navigation, position location, medical electronics, test
equipment, microwave and satellite communications and guidance systems.
WARING PRODUCTS DIVISION
283 Main Street
New Hartford, Connecticut
06057-0319
Tel. 860-379-0731
Manufactures commercial and consumer portable electrical appliances such as
the original Blendor(R), NuBlend(R) and Touchblend(tm) blenders, mixers, can
openers, food processors, juicers, juice extractors, cookers, coffee
preparation products, ice cream makers and steamers sold under the Waring(R),
Acme Juicerator(R) and Qualheim(tm) brand names for both the domestic and
export markets.
Power and Controlled Environmental Systems
ELLIS AND WATTS DIVISION
4400 Glen Willow Lake Lane
Batavia, Ohio
45103-2356
Tel. 513-752-9000
Manufactures special air conditioning equipment, liquid cooling systems,
fluid transfer units, air handling equipment, special fans, dehydrators,
humidifiers, mobile vans and transportable suites (Environ(R)) for
specialized electronic and medical diagnostic equipment, including "CT"
Scanners, Lithotriptors and Magnetic Resonance Imaging (MRI) systems, for
government, industry, medical and power plant use.
Fabricated Metal
Products and Equipment
ANEMOSTAT PRODUCTS
DIVISION
888 North Keyser Avenue
Scranton, Pennsylvania
18504-9723
Tel. 717-346-6586
Designs, manufactures and markets a broad line of air distribution products
and systems with both pneumatic and electronic controls to meet the need for
total environmental control in laboratories, industrial buildings, commercial
buildings, and air distribution in aircraft, marine and rail equipment. Brand
names include Anemostat(R), Anemotherm(R), Multi-Vent(R), Anemotrak(R) and
Envirotrak(R). Anemostat also manufactures a line of UL(R) approved vision
frames and louvers for fire rated doors.
<PAGE>
Dynamics Corporation of America
Directors
HAROLD COHAN +*
Business Consultant
PATRICK J. DORME
Vice President-Finance and
Chief Financial Officer of the Corporation
FRANK A. GUNTHER +*
President, Highpoint Enterprises Incorporated
HENRY V. KENSING
Vice President, General Counsel and Secretary
of the Corporation
RUSSELL H. KNISEL +*
Business Consultant
ANDREW LOZYNIAK
Chairman of the Board and President
of the Corporation
SAUL SPERBER +*
Financial Advisor
Officers
ANDREW LOZYNIAK
Chairman of the Board and President
HENRY V. KENSING
Vice President, General Counsel and Secretary
PATRICK J. DORME
Vice President-Finance and
Chief Financial Officer
RICHARD E. SMITH
Treasurer
M. GREGORY BOHNSACK
Controller
+Member of Audit Committee
*Member of Compensation Committee
Shareholders' Meeting:
The annual meeting of shareholders will be held on May 3, 1996 at 10:30 A.M.
in the Cole Auditorium of the Greenwich Library, West Putnam Avenue at
Dearfield Drive, Greenwich, Connecticut.
Stock Listing:
New York Stock Exchange Ticker Symbol: DYA NYSE-Composite Transactions
Symbol: DynaAmer
Additional Information:
A copy of the Company's annual report on Form 10-K filed with the Securities
and Exchange Commission will be furnished, without charge, on the written
request of a shareholder. Requests should be forwarded to the Company,
attention of the Secretary, 475 Steamboat Road, Greenwich, Connecticut
06830-7197
Executive Offices:
475 Steamboat Road
Greenwich, Connecticut
06830-7197
Tel. 203-869-3211
Transfer Agent and Registrar:
THE FIRST NATIONAL BANK OF BOSTON
c/o Boston EquiServe
P.O. Box 644
Mail Stop 45-02-09
Boston, Massachusetts 02102-0644
Tel. 617-575-3400
Independent Auditors:
ERNST & YOUNG LLP
1111 Summer Street
Stamford, Connecticut
06905-5571
Tel. 203-326-8200
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,767
<SECURITIES> 0
<RECEIVABLES> 19,659
<ALLOWANCES> 484
<INVENTORY> 22,989
<CURRENT-ASSETS> 50,793
<PP&E> 36,654
<DEPRECIATION> 33,051
<TOTAL-ASSETS> 134,301
<CURRENT-LIABILITIES> 21,814
<BONDS> 3,424
0
0
<COMMON> 383
<OTHER-SE> 105,091
<TOTAL-LIABILITY-AND-EQUITY> 134,301
<SALES> 111,720
<TOTAL-REVENUES> 111,720
<CGS> 83,914
<TOTAL-COSTS> 83,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 2,097
<INCOME-TAX> (215)
<INCOME-CONTINUING> 6,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,723
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.75
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1995
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
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 5,218,529 shares of Common Stock, without par value,
outstanding on March 8, 1996.
The aggregate market value of the voting stock held by non-affiliates
of CTS Corporation was approximately $99 million on March 8, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the CTS Corporation 1995 Annual Report for
the fiscal year ended December 31, 1995, incorporated by
reference in Part I and Part II.
(2) Portions of the 1996 Proxy Statement for annual meeting
of shareholders to be held on April 26, 1996,
incorporated by reference in Part III.
(3) Certain portions of the CTS Corporation Form 10-K for the
1987 fiscal year ended January 3, 1988, incorporated by
reference in Part IV.
(4) Certain portions of Registration Statement No. 33-27749,
effective March 23, 1989, incorporated by reference in
Part IV.
(5) Certain portions of the 1989 Proxy Statement for annual
meeting of shareholders held April 28, 1989, incorporated
by reference in Part IV.
(6) Certain portions of the CTS Corporation Form 10-K for the
1989 fiscal year ended December 31, 1989, incorporated by
reference in Part IV.
(7) Certain portions of the CTS Corporation Form 10-K for the
1991 fiscal year ended December 31, 1991, incorporated by
reference in Part IV.
(8) Certain portions of the CTS Corporation Form 10-K for the
1992 fiscal year ended December 31, 1992, incorporated by
reference in Part IV.
(9) Certain portions of the CTS Corporation Form 10-K for the
1994 fiscal year ended December 31, 1994, incorporated by
reference in Part IV.
EXHIBIT INDEX -- PAGES 17 AND 18
Part I
Item 1. Business
INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS
The registrant, CTS Corporation (CTS or Company), is an Indiana
corporation incorporated in 1929 as a successor to a company
started in 1896. CTS' principal executive offices are located at
905 West Boulevard North, Elkhart, Indiana, 46514, telephone number
(219) 293-7511.
CTS designs, manufactures and sells electronic components. The
engineering and manufacturing of CTS products is performed at 16
facilities worldwide. CTS products are sold through sales
engineers, sales representatives, agents and distributors.
In March 1987, a settlement was announced between CTS and Dynamics
Corporation of America (DCA), terminating the sale process of the
Company and resolving all disputes between CTS and DCA.
Subsequently, the United States Supreme Court held that the Control
Share Acquisition Chapter of the Indiana Business Corporation Law
was constitutional. As a result of the Court's decision, the issue
of voting rights of 1,020,000 shares of CTS common stock acquired
by DCA in 1986 was submitted to a vote of CTS shareholders at the
1987 annual meeting. The affirmative vote of the majority of all
shares eligible to vote was necessary to grant voting rights. DCA
was not eligible to vote on the issue. The shareholders voted not
to grant voting rights to DCA on these shares. The Court's
decision did not have an impact on the voting rights in additional
shares of CTS common stock previously or subsequently acquired by
DCA. In May 1988, the settlement agreement expired pursuant to its
terms. At the end of 1995, DCA owned 2,303,100 shares (44.1%) of
CTS common stock, including the 1,020,000 shares without voting
rights.
In January 1990, the Company formally announced the closing of its
Switch Division located in Paso Robles, California. The Paso Robles
manufacturing operations were relocated to the Company's facilities
in Taiwan and Bentonville, Arkansas. During 1992, the Company
completed the sale of the Paso Robles manufacturing plant and most
of the associated real estate for $1.9 million. A pretax-tax gain
of $0.9 million was realized from the sale. The manufacturing
operations for certain variable resistor and selector switch
products, which formerly were performed in Elkhart, Indiana, were
also transferred to Bentonville in 1990, to take advantage of any
efficiencies to be gained in consolidating such operations in
Bentonville. The buildings located in Elkhart which housed the
plastics molding and element production were vacated, with these
manufacturing operations being consolidated into the main Elkhart
plant.
CTS announced in July 1990 that its facility near Glasgow,
Scotland, would be expanded in order to manufacture and sell
additional electronic products in Europe. The total capital
investment has been approximately $12 million as of December 31,
1995. Automotive throttle position sensors and precision and clock
oscillators were added to the product lines already manufactured in
Scotland. The decision to expand the Scottish facility was based
on several factors, including the excellent business climate and
skills base in Scotland and the anticipated full participation of
the United Kingdom in the European Economic Community. The
expansion of the Scotland facility represents a major effort by CTS
to serve the large and rapidly growing European market on a direct
basis.
In November 1991, construction was completed on a 53,000 square
foot manufacturing facility in Bangkok, Thailand. During 1992, the
Company idled operations at this facility. During 1994, a three-
year lease was finalized with an international computer peripheral
manufacturer for this property. The annual rental amount is
approximately U.S. $355,000.
Also during 1991, the Company significantly reduced the operating
activities at its Brownsville, Texas, facility and plans to sell
this property. A portion of the Brownsville facility is currently
under a leasing arrangement which expires in 1999, at an annual
rental amount of approximately $60,000.
The manufacturing space owned by CTS in Hong Kong, which consisted
of two floors in a multi-story building, was sold in March 1991.
One floor was leased back by CTS for the continuation of its
manufacturing operations in Hong Kong. During 1992, the Company
terminated this lease and discontinued its manufacturing operations
in Hong Kong. However, the Company maintains a sales office in
Hong Kong.
During 1994, the Company purchased the assets of AT&T
Microelectronics' light emitting diode based optic data link
products business. The transaction also included sales contracts,
backlog, intellectual property, trademarks, and the design and
manufacturing technology. These products are manufactured in the
Microelectronics West Lafayette, Indiana, facility.
The manufacturing space owned by CTS in Singapore consists of four
floors in a multi-story building. The current manufacturing
requirements require three of the four floors, leaving one level
available for lease. During 1995, a lease for an initial term of
two years with a two-year renewal option was finalized with an
international semiconductor manufacturer for one floor of the
Singapore facility. The annual rental amount is approximately U.S.
$800,000.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
All of the Company's products are considered one industry segment.
Sales to unaffiliated customers, operating profit and identifiable
assets, by geographic area, are contained in "Note H - Business
Segment and Non-U.S. Operations," pages 22-23, of the CTS
Corporation 1995 Annual Report, and is incorporated herein by
reference.
PRINCIPAL BUSINESS AND PRODUCTS OF CTS
CTS is primarily in the business of developing, manufacturing and
selling a broad line of electronic components principally serving
the electronic needs of original equipment manufacturers (OEMs).
The Company sells classes of similar products consisting of the
following:
Automotive control devices Insulated metal circuits
Interconnect products Loudspeakers
Fiber-optic transceivers Programmable switches
Frequency control devices Resistor networks
Hybrid microcircuits Selector switches
Industrial electronics Variable resistors
Most products within these product classes are manufactured by CTS
from purchased raw materials or subassemblies. Some products sold
by CTS are purchased and resold under the Company's name.
During the past three years, five classes of similar product lines
accounted for 10% or more of consolidated revenue during one or
more years, as follows:
Percent of Consolidated Revenue
Class of Similar Products 1995 1994 1993
Automotive control devices 29 30 26
Frequency control devices 16 15 15
Interconnect products 14 17 14
Resistor networks 12 11 14
Hybrid microcircuits 8 10 14
Other 21 17 17
Total 100% 100% 100%
MARKETS
CTS estimates that its products have been sold in the following
electronics OEM and distribution markets and in the following
percentages during the preceding three fiscal years:
Percent of Consolidated Revenue
Markets 1995 1994 1993
Automotive 36 38 32
Data Processing 19 17 22
Communications Equipment 18 17 17
Instruments and Controls 10 9 9
Defense and Aerospace 8 11 12
Distribution 6 5 4
Consumer Electronics 3 3 4
Total 100% 100% 100%
Products for the automotive market include throttle position
sensors, switch assemblies for operator interface, exhaust gas
recirculation subsystems, variable resistors and switches for
automotive entertainment systems and other applications, and
loudspeakers.
Products for the data processing market include resistor networks,
frequency control devices, programmable switches, fiber-optic
transceivers and hybrid microcircuits. Products for this market
are principally used in computers and computer peripheral
equipment.
In the communications equipment market, CTS products include
frequency control devices, hybrid microcircuits, fiber-optic
transceivers, switches and resistor networks. Products for this
market are principally used in telephone equipment and in telephone
switching systems.
Products for the instruments and controls market include hybrid
microcircuits, variable resistors and switches. Principal end uses
are medical electronic devices and electronic testing, measuring
and servicing instruments.
CTS products for the defense and aerospace market, usually procured
through government contractors or subcontractors, are electronic
connectors, hybrid microcircuits, backpanels, frequency control
devices and programmable key storage devices.
In the distribution market, CTS' primary products include program-
mable switches, resistor networks and frequency control devices.
In this market, standard CTS products are sold for a wide variety
of applications.
Products for the consumer electronics market, primarily variable
resistors and switches, are principally used in home entertainment
equipment and appliances.
MARKETING AND DISTRIBUTION
Sales of CTS electronic components to original equipment
manufacturers are principally by CTS sales engineers and
manufacturers' representatives. CTS maintains sales offices in
Elkhart, Indiana; Detroit, Michigan; and in the United Kingdom,
Hong Kong, Taiwan and Japan. Various regions of the United States
are serviced by sales engineers working out of their homes. The
sale of electronic components is relatively integrated such that
most of the product lines of CTS are sold through the same field
sales force. Approximately 39% of net sales in 1995 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 require-
ments and in designing CTS products to be provided to such
customers.
CTS uses the services of independent sales representatives and
distributors in the United States and other countries for customers
not serviced by CTS sales engineers. Sales representatives receive
commissions from CTS. During 1995, about 55% of net sales were at-
tributable to coverage by sales representatives. Independent
distributors purchase products from CTS for resale to customers.
In 1995, independent distributors accounted for about 6% of net
sales.
RAW MATERIALS
Generally, CTS' major raw materials are steel, copper, brass,
certain precious metals, resistive and conductive inks, passive
components and semiconductors, used in several CTS products;
ceramic materials used particularly in resistor networks and hybrid
microcircuits; synthetic quartz used in frequency control devices;
and laminate material used in printed circuit boards. These raw
materials are purchased from several vendors, and except for
certain semiconductors, CTS does not believe that it is dependent
on one or on a very few vendors. In 1995, all of these materials
were available in adequate quantities to meet CTS' production
demands.
The Company does not presently anticipate any raw material short-
ages which would significantly affect production. However, the
lead times between the placement of orders for certain raw mater-
ials 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 manufactur-
ing cost and selling prices of many CTS products, particularly some
programmable switches, electronic connectors and resistor networks.
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 inven-
tories to meet rapid delivery requirements because most customer
orders are for custom products. CTS has entered into "just-in-
time" arrangements with certain major customers in order to meet
customers' just-in-time delivery needs.
CTS carries raw materials, including certain semiconductors, and
certain work-in-process and finished goods inventories which are
unique to a particular customer or to a small number of customers,
and in the event of reductions in or cancellations of orders, some
inventories are not useable or cannot be returned to vendors for
credit. CTS generally imposes charges for the reduction or
cancellation of orders by customers, and these charges are usually
sufficient to cover the financial exposure of CTS to inventories
which are unique to a customer. CTS does not customarily grant
special return privileges or payment privileges to customers,
although CTS' distributor program permits certain returns. CTS'
working capital requirements are generally cyclical but not
seasonal.
Working capital requirements are generally dependent on the overall
business level. During 1995, working capital increased
significantly to $75.2 million, as receivables increased in
response to the greater sales. 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, 1995. The cash, other than approximately $4.6
million, is generally available to the parent Company.
PATENTS, TRADEMARKS AND LICENSES
CTS maintains a program of obtaining and protecting U.S. and non-
U.S. patents and trademarks. CTS believes that the success of its
business is not materially dependent on the existence or duration
of any patent, group of patents or trademarks.
CTS licenses the manufacture of several electronic products to
companies in the United States and non-U.S. countries. In 1995,
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 61%, 62% and 62% of net
sales in 1995, 1994 and 1993, respectively.
Of the net sales to unaffiliated customers, approximately $54.9
million, $49.4 million and $40.1 million were derived from sales to
a major manufacturer of automobiles in 1995, 1994 and 1993,
respectively. During 1993, $24.0 million was derived from sales to
a major manufacturer of data processing equipment. However, during
1995 and 1994, sales to this customer amounted to $9.9 and $4.4
million, respectively. CTS is dependent upon these and other
customers for a significant percentage of its sales and profits,
and the loss of one or more of these customers or reduction of
orders by one or more of these customers could have a materially
adverse effect upon the Company.
BACKLOG OF ORDERS
Backlog of orders does not necessarily provide an accurate indica-
tion of present or future business levels for CTS. For many
electronic products, 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 1995, the Company's backlog of orders was $85.3 million,
compared with $82.7 million at the end of 1994. This increase was
primarily attributable to increased demand from automotive and
electronic connector customers.
The backlog of orders at the end of 1995 will generally be filled
during the 1996 fiscal year.
GOVERNMENT CONTRACTS
CTS believes that about 8% of its net sales are associated with
purchases by the U.S. Government or non-U.S. governments,
principally for defense and aerospace applications. Because most
CTS products procured through government contractors and
subcontractors are for military end uses, the level of defense and
aerospace market sales by CTS is dependent upon government
budgeting and funding of programs utilizing electronic systems.
Almost all CTS sales involving government purchases are to primary
government contractors or subcontractors. CTS is usually subject
to contract provisions permitting termination of the contract,
usually with penalties payable by the government; maintenance of
specified accounting procedures; limitations on and renegotiations
of profits; priority production scheduling; and possible penalties
or fines against CTS for late delivery or substandard quality. Such
contract provisions have not previously resulted in material
uncertainties or disruptions for CTS.
COMPETITION
CTS competes with many domestic and non-U.S. manufacturers prin-
cipally on the basis of product features, price, engineering,
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 com-
petitors are larger and more diversified than CTS. Some com-
petitors 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 independent
suppliers. Most customers are demanding higher quality,
reliability and delivery standards from CTS as well as competitors.
These trends may create opportunities for CTS while also increasing
the risk of loss of business to competitors.
The Company believes that it competes most successfully in custom
products manufactured to meet specific applications of major
original equipment manufacturers.
CTS believes that it has some advantages over certain competitors
because of its ability to apply a broad range of technologies and
materials capabilities to develop products for the special require-
ments of customers. CTS also believes that it has an advantage
over some competitors in its capability to sell a broad range of
products manufactured to relatively consistent standards of quality
and delivery. CTS believes that the relative breadth of its
product lines and relative consistency in quality and delivery
across product lines is an advantage to CTS in selling products to
customers.
CTS believes that it is one of the largest manufacturers of
automotive throttle position sensors.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS AND EXPORT SALES
Information about revenue from sales to unaffiliated customers,
operating profit and identifiable assets, by geographic area, is
contained in "Note H - Business Segment and Non-U.S. Operations,"
pages 22-23, of the CTS Corporation 1995 Annual Report, and is
incorporated herein by reference.
In 1995, approximately 35% of net sales to unaffiliated customers,
after eliminations, were attributable to non-U.S. operations. This
represents an increase from 34% of net sales attributable to non-
U.S. operations in 1994. About 32% 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 1995, 1994 and 1993, CTS spent $8.0, $6.2 and $5.7 million,
respectively, for research and development. Most CTS research and
development activities relate to new product and process develop-
ments 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 1995, the Company did not enter into any new, significant
product lines, but continued to introduce additional versions of
existing products in response to present and future customer
requirements.
ENVIRONMENTAL PROTECTION LAWS
In complying with federal, state and local environmental protection
laws, CTS has modified certain manufacturing processes and expects
to continue to make additional modifications. Such modifications
that have been performed have not materially affected the capital
expenditures, earnings or competitive position of CTS.
Certain processes in the manufacture of the Company's current and
past products create hazardous waste by-products as currently
defined by federal and state laws and regulations. The Company has
been notified by the U.S. Environmental Protection Agency, state
environmental agencies and, in some cases, generator groups, that
it is or may be a Potentially Responsible Party (PRP) regarding
hazardous waste remediation at several non-CTS sites. The factual
circumstances of each site are different; the Company has
determined that its role as a PRP with respect to these sites, even
in the aggregate, will not have a material adverse effect on the
Company's business or financial condition, based on the following:
1) the Company's status as a de minimis party; 2) the large number
of other PRPs identified; 3) the identification and participation
of many larger PRPs who are financially viable; 4) defenses
concerning the nature and limited quantities of materials sent by
the Company to certain of the sites; and 5) the Company's
experience to-date in relation to the determination of its
allocable share. In addition to these non-CTS sites, the Company
has an ongoing practice of providing reserves for probable
remediation activities at certain of its manufacturing locations
and for claims and proceedings against the Company with respect to
other environmental matters. In the opinion of management, based
upon presently available information, either adequate provision for
probable costs has been made, or the ultimate costs resulting will
not materially affect the consolidated financial position or
results of operations of the Company.
There are claims against the Company with respect to environmental
matters which the Company contests. In the opinion of management,
based upon presently available information, either adequate
provision for potential costs has been made, or the costs which
ultimately might result will not materially affect the consolidated
financial position or results of operations of the Company.
EMPLOYEES
CTS employed an average of 4,007 persons during 1995. About 39% of
these persons were employed outside the United States at the end of
1995. Approximately 361 employees in the United States were
covered by collective bargaining agreements as of December 31,
1995. One of the two collective bargaining agreements covering
these employees will expire in 1999. The other agreement will
expire in 2000.
Item 2. Properties
CTS operations or facilities are at the following locations. The
owned properties are not subject to material liens or encumbrances.
Location
Elkhart, IN 521,813 Owned -
Berne, IN 248,726 Owned -
Singapore 158,926 Owned* -
Kaohsiung, Taiwan 132,887 Owned* -
Streetsville,
Ontario, Canada 111,740 Owned -
West Lafayette, IN 105,983 Owned -
Sandwich, IL 94,173 Owned -
Brownsville, TX 84,679 Owned -
Bentonville, AR 72,000 Owned -
Glasgow, Scotland 75,000 Owned -
New Hope, MN 55,000 Leased December
(Science Center Dr.) 1998
Bangkok, Thailand 53,000 Owned -
Matamoros, Mexico 50,590 Owned* -
Baldwin, WI 39,050 Owned -
Cokato, MN 36,000 Owned -
Burlington, WI 5,000 Leased April
1997
TOTAL 1,844,567
* Buildings are located on land leased under renewable leases.
The Company is currently seeking to sell some, or all, of the
Brownsville, Texas, manufacturing building. A portion of the
Brownsville facility is currently under a leasing arrangement which
expires in 1999. The annual rental income is approximately
$60,000. Also, a portion of the New Hope, Minnesota, facility is
currently under a sublease arrangement, which expires in 1998. The
annual rental income is approximately $90,000.
The Company constructed the Bangkok, Thailand, facility during
1991. This facility was idled during 1992 and was idle for all of
1993. During 1994, the Company entered a three-year lease on this
property at an annual rental amount of approximately U.S. $355,000.
The Company regularly assesses the adequacy of its manufacturing
facilities for manufacturing capacity, available labor and location
to the markets and major customers for the Company's products. CTS
also reviews the operating costs of its facilities and may from
time to time relocate facilities or certain manufacturing
activities in order to achieve operating cost reductions and
improved asset utilization and cash flow.
Item 3. Legal Proceedings
Contested claims involving various matters, including environmental
claims brought by government agencies, are being litigated by CTS,
both in legal and administrative forums. In the opinion of
management, based upon currently available information, adequate
provision for potential costs has been made, or the costs which
might ultimately result from such litigation or administrative
proceedings will not materially affect the consolidated financial
position of the Company or the results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1995, no issue was submitted to a vote
of CTS shareholders.
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 10, of the
CTS Corporation 1995 Annual Report, incorporated herein by
reference. On March 8, 1996, there were approximately 1,042
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 are 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 11, of the CTS Corporation 1995 Annual Report,
incorporated herein by reference.
Certain divestitures and closures of businesses and certain
accounting changes affect the comparability of information con-
tained 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 (1993-1995)," pages 25-27, of the CTS
Corporation 1995 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 12-24 of the CTS Corporation 1995 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 10 of the CTS Corporation 1995 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 1996 Proxy
Statement under the caption "Election of Directors," pages 5-6,
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 1996 Proxy Statement under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of
1934," page 6, filed with the Securities and Exchange Commission,
and is incorporated herein by reference.
The individuals listed, except for Mr. Hannan, were elected as
executive officers of CTS at the annual meeting of the Board of
Directors on April 28, 1995, and are expected to serve as executive
officers until the next annual meeting of the Board of Directors,
scheduled on April 26, 1996, at which time the election of officers
will be considered again by the Board of Directors.
Name Age Position and Offices
Joseph P. Walker 57 Director, Chairman,
President and Chief
Executive Officer
Philip T. Christ 64 Group Vice President
D. Richard Hannan 54 Group Vice President
Stanley J. Aris 55 Vice President Finance and
Chief Financial Officer
Jeannine M. Davis 47 Vice President, Secretary
and General Counsel
James L. Cummins 40 Vice President Human Resources
James N. Hufford 56 Vice President Research,
Development and Engineering
Donald R. Schroeder 47 Vice President Sales and
Marketing
George T. Newhart 53 Corporate Controller
Gary N. Hoipkemier 41 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.
Philip T. Christ has served as Group Vice President since 1990.
D. Richard Hannan was elected Group Vice President on May 22, 1995.
Prior to joining CTS, Mr. Hannan worked for two years as a business
consultant. Prior to 1993, Mr. Hannan served as Vice President and
General Manager of an operating unit of TRW, Inc.
Stanley J. Aris has served as Vice President, Finance and Chief
Financial Officer since May 18, 1992. Prior to joining CTS, Mr.
Aris worked for two years as a business consultant.
Jeannine M. Davis has served as Vice President, General Counsel
and Secretary since 1988.
James L. Cummins was elected Vice President Human Resources on
February 25, 1994. Prior to this appointment, he served as
Director, Human Resources, CTS Corporation from 1991-1994. From
1990-1991, Mr. Cummins served as Human Resources Director, CTS
Corporation Electromechanical Group and in 1991 was appointed
Assistant Human Resources Director, CTS Corporation.
James N. Hufford was elected Vice President Research, Development
and Engineering on February 17, 1995. During the four years prior
to this appointment, Mr. Hufford served as Manager and then
Director of Corporate Research, Development and Engineering for the
Corporation.
Donald R. Schroeder was elected Vice President Sales and Marketing
on February 17, 1995. During the six years prior to this
appointment, Mr. Schroeder served as Business Development Manager
for innovative and new technology for the CTS Microelectronics
business unit in West Lafayette, Indiana.
George T. Newhart has served as Corporate Controller since 1989.
Gary N. Hoipkemier has served as Treasurer since 1989.
Item 11. Executive Compensation
Information responsive to Item 402 of Regulation S-K pertaining to
management remuneration is contained in the 1996 Proxy Statement in
the captions "Executive Compensation," pages 7-8 and "Director
Compensation," page 14, 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 1996 Proxy Statement in the caption "Securities
Beneficially Owned by Principal Shareholders and Management," pages
3-5 filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Dynamics Corporation of America (DCA) owned 2,303,100 (44.1%) of
the Company's outstanding common stock as of December 31, 1995.
CTS purchased products from DCA totaling about $143,000 in 1995,
$233,000 in 1994 and $145,000 in 1993, principally consisting of
certain component parts used by CTS in the manufacture of frequency
control devices. CTS had minimal sales to DCA in 1995 and 1994,
and no sales in 1993.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) (1) and (2)
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 April 16,
1973, previously filed as exhibit (3)(a) to the
Company's Form 10-K for 1987, and incorporated
herein by reference.
(3)(b) Bylaws, as amended and effective June 25, 1992,
previously filed as exhibit (3)(b) to the Company's
Form 10-K for 1992, and incorporated herein by
reference.
(10)(a) Employment agreement dated June 24, 1994, between
CTS and Joseph P. Walker, previously filed as
exhibit (10)(a) to the Company's Form 10-K for
1994, and incorporated herein by reference.
(10)(b) Prototype indemnification agreement, with
Lawrence J. Ciancia, Patrick J. Dorme, Gerald H.
Frieling, Jr., Andrew Lozyniak, Joseph P. Walker,
Philip T. Christ, Stanley J. Aris, Jeannine M.
Davis, James L. Cummins, George T. Newhart, Gary N.
Hoipkemier, filed as exhibit (10)(b) to the
Company's Form 10-K for 1991, and incorporated
herein by reference.
(10)(c) CTS Corporation 1982 Stock Option Plan, as amended
February 24, 1989, was previously filed as exhibit
(10)(d) to the Company's Form 10-K for 1989, and is
incorporated herein by reference.
(10)(d) CTS Corporation 1986 Stock Option Plan, approved by
the shareholders at the reconvened annual meeting
on May 30, 1986. The CTS Corporation 1986 Stock
Option Plan is contained in Exhibit 4 to
Registration Statement No. 33-27749, effective
March 23, 1989, and is incorporated herein by
reference.
(10)(e) CTS Corporation 1988 Restricted Stock and Cash
Bonus Plan, as adopted by the CTS Board of
Directors on December 16, 1988, and approved by
shareholders at the 1989 annual meeting of -
shareholders on April 28, 1989. The CTS
Corporation 1988 Restricted Stock and Cash Bonus
Plan is contained in Appendix A, pages 11-15, of
the 1989 Proxy Statement for the annual meeting of
shareholders held April 28, 1989, under the caption
"CTS Corporation 1988 Restricted Stock and Cash
Bonus Plan," previously filed with the Securities
and Exchange Commission, and is incorporated herein
by reference.
(10)(f) CTS Corporation 1996 Stock Option Plan, subject to
shareholder approval at the annual meeting of
shareholders to be held on April 26, 1996, filed as
exhibit (10)(f) to the Company's Form 10-K for
1995.
(10)(g) Prototype indemnification agreement, with James N.
Hufford, Donald R. Schroeder and D. Richard Hannan,
filed as exhibit (10)(g) to the Company's Form 10-K
for 1995.
(13) CTS Corporation 1995 Annual Report.
(21) Subsidiaries of CTS Corporation.
(23) Consent of Price Waterhouse to incorporation by
reference of this Annual Report on Form 10-K for
the fiscal year 1995 to Registration Statement 2-
84230 on Form S-8 and Registration Statement 33-
27749 on Form S-8.
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. 2-84230 (filed June 13, 1983) and 33-27749 (filed
March 23, 1989):
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date March 21, 1996 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 March 21, 1996 By /S/ Lawrence J. Ciancia
Lawrence J. Ciancia,
Director
Date March 21, 1996 By /S/ Patrick J. Dorme
Patrick J. Dorme,
Director
Date March 21, 1996 By /S/ Gerald H. Frieling, Jr.
Gerald H. Frieling, Jr.,
Director
Date March 21, 1996 By /S/ Andrew Lozyniak
Andrew Lozyniak,
Director
Date March 21, 1996 By /S/ Joseph P. Walker
Joseph P. Walker,
Director
Date March 21, 1996 By /S/ George T. Newhart
George T. Newhart,
Corporate Controller
and principal accounting
officer
Date March 21, 1996 By /S/ Jeannine M. Davis
Jeannine M. Davis,
Vice President, Secretary
and General Counsel
<PAGE>
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, 1995
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, 1995, are incorpo-
rated by reference in Item 8:
Consolidated balance sheets - December 31, 1995, and
December 31, 1994
Consolidated statements of earnings - Years ended
December 31, 1995, December 31, 1994, and December 31,
1993
Consolidated statements of shareholders' equity - Years
ended December 31, 1995, December 31, 1994, and Decem-
ber 31, 1993
Consolidated statements of cash flows - Years ended
December 31, 1995, December 31, 1994, and December 31,
1993
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 state-
ments or notes thereto.
S-1
<PAGE>
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 February 1, 1996, appearing on page 24 of the CTS
Corporation 1995 Annual Report (which report and
consolidated financial statements are incorporated by reference
in the 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
South Bend, Indiana
February 1, 1996
S-2
<PAGE>
<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 End of Period
Year ended December 31, 1995:
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful receivables $869 $ 1 $ 0 $ 96 $774
Year ended December 31, 1994:
Allowance for
doubtful receivables $709 $277 $ 0 $117 $869
Year ended December 31, 1993:
Allowance for
doubtful receivables $303 $521 $85 $200 $709
S-3
</TABLE>
<PAGE>
EXHIBIT 21
CTS CORPORATION AND SUBSIDIARIES
CTS Corporation (Registrant), an Indiana corporation
Subsidiaries
CTS Corporation, 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 de Mexico 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 corpora-
tion
CTS Corporation U.K. Ltd., a United Kingdom corporation
CTS Printex, Inc., a California corporation
CTS Micro Peripherals, Inc., a California corporation
Micro Peripherals Singapore (Private) Limited, a Republic of
Singapore corporation
Corporations whose names are indented are subsidiaries of the
preceding non-indented corporations. Except as indicated, each of
the above subsidiaries is 100% owned by its parent company.
Operations of all subsidiaries and divisions are consolidated in
the financial statements filed.
(1) Less than 1% of the outstanding shares of stock is owned
of record by nominee shareholders pursuant to national
laws regarding resident or nominee ownership.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (No. 2-84230 and No. 33-
27749) of CTS Corporation of our report dated February 1, 1996,
appearing on page 24 of the CTS Corporation 1995 Annual Report
which is incorporated in the 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
South Bend, Indiana
March 21, 1996
<PAGE>
SHAREHOLDER INFORMATION
(In thousands of dollars except per share data)
Quarterly Results of Operations
(Unaudited)
Net Gross Operating Net
Sales Earnings Earnings Earnings
1995
1st quarter$ 75,978 $17,273 $ 4,877 $ 3,256
2nd quarter 76,413 19,148 7,023 4,642
3rd quarter 73,890 18,345 6,416 4,218
4th quarter 73,876 20,038 9,172 5,048
$300,157 $74,804 $27,488 $17,164
1994
1st quarter$ 64,357 $15,597 $ 3,560 $ 2,490
2nd quarter 70,618 17,152 5,525 3,889
3rd quarter 65,950 15,100 4,368 3,031
4th quarter 67,782 15,218 7,231 (a) 4,557 (a)
$268,707 $63,067 $20,684 $13,967
Per Share Data
Dividends Net
High(b) Low(b) Declared Earnings
1995
1st quarter $32.00 $27.38 $.15 $ .63
2nd quarter 33.50 29.25 .15 .89
3rd quarter 34.50 29.94 .15 .81
4th quarter 37.75 29.63 .15 .97
$.60 $3.30
1994
1st quarter $24.00 $19.50 $.10 $ .48
2nd quarter 26.13 21.88 .10 .75
3rd quarter 29.13 24.63 .10 .59
4th quarter 31.00 27.13 .15 .88
$.45 $2.70
(a) Includes reversal of $975 of litigation and customer claims reserves
which were favorably settled.
(b) 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.
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except per share amounts)
Year Ended
<CAPTION>
December 31 December 31 December 31
1995 1994 1993
<S> <C> <C> <C>
Net sales $300,157 $268,707 $236,979
Costs and expenses:
Cost of goods sold 225,353 205,640 183,927
Selling, general and
administrative expenses 39,312 36,175 36,323
Research and development expenses 8,004 6,208 5,708
Operating earnings 27,488 20,684 11,021
Other (expenses) income:
Interest expense (1,790) (714) (980)
Interest income 1,421 657 580
Other 565 860 (361)
Total other income (expenses) 196 803 (761)
Earnings before income taxes and
cumulative effect of changes
in accounting principles 27,684 21,487 10,260
Income taxes--Note G 10,520 7,520 3,690
Earnings before cumulative effect of
changes in accounting principles 17,164 13,967 6,570
Cumulative effect of accounting change -
postretirement benefits--Notes A and F (5,096)
Cumulative effect of accounting change -
income taxes--Notes A and G 482
Net earnings $ 17,164 $ 13,967 $ 1,956
Net earnings per share:
Before accounting changes $3.30 $2.70 $1.27
Cumulative effect on prior years of
accounting changes (.89)
Net earnings per share $3.30 $2.70 $ .38
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
Consolidated Statements of Shareholders' Equity
(In thousands of dollars)
<CAPTION>
Cumulative Deferred
Common Retained Translation Compen- Treasury
Stock Earnings Adjustment sation Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 $34,245 $100,973 $ (863) $(164) $(14,819) $119,372
Net earnings 1,956 1,956
Cash dividends of $.40 per share (2,061) (2,061)
Nonemployee Directors' stock retirement plan 8 8
Cumulative translation adjustment (186) (186)
Issued 1,000 shares on restricted stock and
cash bonus plan (9) (19) 28
Stock compensation (14) 45 31
Deferred compensation recognized 83 83
Balances at December 31, 1993 34,222 100,868 (1,049) (92) (14,746) 119,203
Net earnings 13,967 13,967
Cash dividends of $.45 per share (2,329) (2,329)
Nonemployee Directors' stock retirement plan (4) 3 12 11
Cumulative translation adjustment 695 695
Issued 15,500 shares on restricted stock and
cash bonus plan 51 (358) 307
Issued 8,650 shares on exercise of stock options (72) 248 176
Stock compensation 1 12 13
Deferred compensation recognized 119 119
Balances at December 31, 1994 34,198 112,506 (354) (328) (14,167) 131,855
Net earnings 17,164 17,164
Cash dividends of $.60 per share (3,124) (3,124)
Nonemployee Directors' stock retirement plan 15 15
Cumulative translation adjustment (291) (291)
Issued 18,500 shares on restricted stock and
cash bonus plan 76 (632) 556
Issued 17,325 shares on exercise of stock
options (163) 522 359
Acquired 200 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
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS December 31 December 31
(In thousands of dollars) 1995 1994
ASSETS
Current Assets
<S> <C> <C>
Cash and equivalents $ 37,271 $ 24,922
Accounts receivable, less
allowances (1995--$774; 1994--$869) 41,737 35,029
Inventories
Finished goods 7,445 5,725
Work-in-process 14,789 16,531
Raw materials 16,651 19,200
Total inventories 38,885 41,456
Other current assets 2,544 3,032
Deferred income taxes--Note G 5,676 6,228
Total current assets 126,113 110,667
Property, Plant and Equipment
Buildings and land 42,547 41,945
Machinery and equipment 139,594 148,481
Total property, plant and equipment 182,141 190,426
Less accumulated depreciation 131,445 139,649
Net property, plant and equipment 50,696 50,777
Other Assets
Goodwill, less accumulated
amortization (1995--$7,687; 1994--$7,010) 4,603 5,221
Prepaid pension expense--Note F 44,739 39,408
Other 976 753
Total other assets 50,318 45,382
Total Assets $227,127 $206,826
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable--Note C $ 6,685 $ 7,436
Current maturities of long-term
obligations--Note D 2,211 304
Accounts payable 15,605 12,768
Accrued salaries, wages and vacation 6,695 6,483
Accrued taxes other than income 1,740 1,577
Income taxes payable 3,991 2,288
Other accrued liabilities--Note I 14,035 13,936
Total current liabilities 50,962 44,792
Long-term Obligations--Note D 13,714 15,595
Deferred Income Taxes--Note G 11,909 9,222
Postretirement Benefits--Note F 4,289 5,362
Contingencies--Note I
Shareholders' Equity
Common stock-authorized 8,000,000 shares
without par value; issued 5,807,031 shares 33,355 33,870
Retained earnings 126,546 112,506
Cumulative translation adjustment (645) (354)
159,256 146,022
Less cost of common stock held in treasury
(1995-- 589,702 shares; 1994--628,427 shares) 13,003 14,167
Total shareholders' equity 146,253 131,855
Total Liabilities and Shareholders' Equity $227,127 $206,826
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended
<CAPTION>
December 31 December 31 December 31
1995 1994 1993
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $17,164 $13,967 $ 1,956
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Cumulative effect of change in accounting for:
Postretirement benefits 5,096
Income taxes (482)
Depreciation and amortization 11,683 11,236 12,143
Deferred income taxes 3,239 2,519 767
Other (52) (421) 458
Changes in assets and liabilities (net of effects of
purchase of ODL)--Note B:
Accounts receivable (6,708) (4,402) (2,747)
Inventories 2,571 (3,297) 1,163
Prepaid pension asset (5,331) (6,563) (5,986)
Accounts payable and accrued liabilities 4,280 (38) 1,627
Income taxes payable 1,703 882 1,629
Other (1,688) (1,328) 1,941
Total adjustments 9,697 (1,412) 15,609
Net cash provided by operating activities 26,861 12,555 17,565
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 236 411 998
Capital expenditures (excluding ODL) (11,181) (10,000) (11,696)
Payment for purchase of ODL (5,501)
Net cash used in investing activities (10,945) (15,090) (10,698)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations 15,000
Payments of long-term obligations (286) (4,479) (6,179)
(Decrease) increase in notes payable (751) (6,050) 6,898
Proceeds from stock options exercised 359 176
Dividends paid (3,118) (2,067) (2,061)
Net cash (used in) provided by
financing activities (3,796) 2,580 (1,342)
Effect of exchange rate changes on cash 229 1,343 (446)
Net increase in cash 12,349 1,388 5,079
Cash and equivalents at beginning of year 24,922 23,534 18,455
Cash and equivalents at end of year $37,271 $24,922 $23,534
Supplemental cash flow information
Cash paid during the year for:
Interest $ 1,791 $ 658 $ 1,076
Income taxes - net 5,590 4,009 1,294
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly-
owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
Inventories: Inventories are stated at the lower of cost or
market. Cost is principally determined using the first-in, first-
out method.
Property, Plant and Equipment: Property, plant and equipment are
stated at cost. Depreciation is computed over the estimated
useful lives of the assets principally on the straight-line
method. Useful lives for buildings and improvements range from 10
to 45 years, and machinery and equipment from 3 to 8 years.
Goodwill: The excess of cost over the fair value of net assets of
businesses acquired is amortized on the straight-line method over
the periods expected to be benefited.
Retirement Plans: The Company has various defined benefit and
defined contribution retirement plans covering a majority of its
employees. The Company's policy is to annually fund the defined
benefit pension plans at or above the minimum required under the
Employee Retirement Income Security Act of 1974 (ERISA).
Research and Development: Research and development costs consist
of expenditures incurred during the course of planned search and
investigation aimed at discovery of new knowledge which will be
useful in developing new products or processes, or significantly
enhancing existing products or production processes, and the
implementation of such through design, testing of product
alternatives or construction of prototypes. The Company expenses
all research and development costs as they are incurred.
Income Taxes: The Company provides deferred income taxes for
transactions reported in different periods for financial reporting
and income tax return purposes pursuant to the requirements of
Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes." The underlying differences consist
primarily of depreciation differences, pension income,
postemployment benefits, certain nondeductible accruals and
inventory reserves.
Reclassifications: Certain reclassifications have been made for
all years presented in the financial statements to conform to the
classifications adopted in 1995.
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 income. The
assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars principally at the current
exchange rate 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, 1995, and 1994 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, 1995, the Company's
forward foreign exchange currency contracts were not material.
These contracts are accounted for as hedges and have minimal
credit risk because the counterparties are well-established
financial institutions.
Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less from the
purchase date to be cash equivalents.
Concentration of Credit Risk: The Company sells its products to
customers primarily in the automotive, data processing,
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.
Accounting Changes: Effective January 1, 1993, the Company
adopted the provisions of FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and
FASB Statement No. 109, "Accounting for Income Taxes." For
postretirement benefits, the Company changed its practice from
expensing these costs as incurred to accruing these costs during
the employees' active working careers. For income taxes, the
Company changed its practice from following FASB Statement No. 96,
of the same title, which required a similar approach in computing
deferred income taxes. The primary change was to recognize
deferred tax benefits that were not recognized under FASB
Statement No. 96.
In October 1995, the FASB issued Statement No. 123, "Accounting
for Stock-Based Compensation." This Statement, which must be
adopted in 1996, allows for either continued recognition of stock
compensation cost under the intrinsic value based method of
accounting as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," ("Disclosure Method"), or recognition
through the statements of earnings under a fair value based
method. Selection of the Disclosure Method will require certain
pro forma disclosures. The Company has not yet decided on the
method of adoption, nor has the Company determined the effect of
the fair value method.
In March 1995, the FASB issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." This Statement, which must be adopted in 1996,
requires companies to investigate potential impairments of long-
lived assets, certain identifiable intangibles and associated
goodwill on an exception basis, when there is evidence that events
or changes in circumstances have made recovery of an asset's
carrying value unlikely. The Company does not believe that the
adoption of this standard will have a material effect on its
financial position or results of operations.
Earnings Per Share: Earnings per common share are based on the
weighted average number of shares outstanding.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
NOTE B - Purchase of Assets
During 1994, the Company acquired, in a cash transaction,
inventory and fixed assets of the light emitting diode (LED)-based
fiber optic data link (ODL ) product line of AT&T Microelectronics
for $5.5 million. The cost of the acquisition, which also
included order backlog on sales contracts, rights to intellectual
property, design and manufacturing technology and trademark of the
AT&T Lightwave LED-based ODL business, was allocated among the
assets purchased based on estimated fair value, with fixed assets
being reduced for the excess of fair value over cost.
NOTE C - Short-term Borrowings
Short-term borrowings consist of demand notes payable to various
banks with an average interest rate of 6.6% at December 31, 1995,
and 1994, and 4.4% at December 31, 1993. The notes were issued in
connection with unsecured lines of credit arrangements, the unused
portions of which totaled $8,591,000 at December 31, 1995. These
arrangements are generally subject to annual renewal and
renegotiation, and may be withdrawn at the banks' option.
Average daily short-term borrowings, including borrowings
denominated in non-U.S. currencies, during 1995, 1994 and 1993
were $6,781,000, $11,776,000 and $12,051,000, respectively. The
weighted average interest rates, computed by relating interest
expense to average daily short-term borrowings, were 6.5% in 1995,
5.5% in 1994 and 4.3% in 1993.
The maximum amount of short-term borrowings at the end of any
month during 1995, 1994 and 1993 was $8,440,000, $12,977,000 and
$13,842,000, respectively. The short-term borrowings outstanding
at December 31, 1993, were $12,822,000.
NOTE D - Long-term Obligations
Long-term obligations were comprised of the following:
(In thousands)
1995 1994
Long-term debt:
Five-year term loan at 8.4%, due in
1996 through 1999. $15,000 $15,000
Other 608 899
15,608 15,899
Less current maturities 2,211 304
Total long-term debt 13,397 15,595
Other 317
Total long-term obligations $13,714 $15,595
The Company has a five-year $15,000,000 term loan with three
banks, of which $2,000,000 expires in 1996, $2,000,000 expires in
1997, $2,000,000 expires in 1998 and $9,000,000 expires in 1999.
The Company has unsecured revolving credit agreements totaling
$47,000,000 with four banks, of which $2,000,000 expires in 1996
and $45,000,000 expires in 1997. Interest rates on these
borrowings fluctuate based upon market rates. The Company pays an
average commitment fee of three-tenths percent per annum on the
revolving credit agreements. The credit agreements and term loan
require, among other things, that the Company maintain certain
minimum working capital, tangible net worth and interest coverage
requirements and maximum total liabilities to tangible net worth
ratio.
Annual maturities of long-term obligations during the three years
subsequent to 1996 are as follows: 1997--$2,520,000; 1998--
$2,194,000; 1999--$9,000,000.
NOTE E - Stock Plans
Under the Company's stock option plans, options may be granted to
officers and key employees in the form of incentive stock options
or nonqualified stock options.
Options are granted at the fair market value on the grant date and
are exercisable generally in cumulative annual installments over a
maximum ten-year period, commencing at least one year from the
date of grant. Upon the exercise of stock options, payment may be
made using cash, shares of the Company's common stock or any
combination thereof.
Information regarding the Company's stock option plans is as
follows:
Number of Price Per
Shares Share
Outstanding at January 1, 1994 44,650 $19.125 to $20.625
Granted 57,000 24.750
Exercised (8,650) 19.125 to 20.625
Expired or canceled (7,000) 19.125 to 24.750
Outstanding at December 31, 1994 86,000 19.125 to 24.750
Granted 94,050 31.250 to 37.375
Exercised (17,325) 20.625 to 24.750
Expired or canceled (9,800) 19.125 to 31.250
Outstanding at December 31, 1995 152,925 19.125 to 37.375
Exercisable at December 31, 1995 19,225 19.125 to 24.750
Available for future grants at
December 31, 1995 113,450
Under the 1986 Stock Option Plan, options to purchase a total of
66,375 shares were outstanding as of December 31, 1995. At
December 31, 1995, 19,225 of these shares were exercisable.
In December 1995, the Board of Directors adopted, subject to
shareholders' approval at the 1996 Annual Meeting, the
1996 Stock Option Plan, under which a maximum of 200,000 shares
were reserved for issuance to certain officers and key employees.
Subject to shareholders' approval, options to purchase a total of
86,550 shares were granted and considered outstanding as of
December 31, 1995.
The Company has a discretionary Restricted Stock and Cash Bonus
Plan (Plan) which reserves 400,000 shares of the Company's common
stock for sale, at market price or below, or award to key
employees. Shares awarded or sold 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 1995, 18,500 shares were awarded leaving
345,400 shares available for award or sale at December 31, 1995.
Under the Plan, in 1994 and 1993, 15,500 and 1,000 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 $306,000,
$212,000 and $68,000 for additional compensation payable under the
provisions of the Plan in 1995, 1994 and 1993, 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 $15,100, $11,100 and $7,900 in
1995, 1994 and 1993, respectively.
NOTE F - Employee Retirement Plans
Defined benefit plans
The Company has a number of noncontributory defined benefit
pension plans (Plans) covering approximately 44% of its employees.
Plans covering salaried employees provide pension benefits that
are based on the employees' compensation prior to retirement.
Plans covering hourly employees generally provide benefits of
stated amounts for each year of service.
Net pension income for the Plans in 1995, 1994 and 1993 includes
the following components:
(In thousands)
1995 1994 1993
Service cost--benefits earned
during the year $ 2,216 $ 2,374 $ 2,143
Interest cost on projected
benefit obligation 5,330 4,769 4,632
Actual (return) loss on plan
assets (23,252) 2,565 (13,622)
Net amortization and deferral 10,375 (16,271) 861
Net pension income $(5,331) $(6,563) $(5,986)
The following table details the funded status of the Plans at
December 31, 1995, and December 31, 1994:
(In thousands)
1995 1994
Actuarial present value of benefit obligations:
Vested benefits $ 66,736 $ 58,224
Nonvested benefits 2,960 2,461
Accumulated benefit obligation $ 69,696 $ 60,685
Plan assets at fair value $134,595 $115,319
Projected benefit obligation 77,138 66,775
Plan assets in excess of the projected
benefit obligation 57,457 48,544
Unrecognized prior year service cost 154 212
Unrecognized net (gain) loss (1,935) 3,672
Unrecognized net asset (10,937) (13,020)
Prepaid pension expense $44,739 $ 39,408
Assumptions used in determining net pension income and the funded
status of U.S. defined benefit pension plans were as follows:
1995 1994 1993
Discount rates (funded status) 7.25% 8.25% 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% 9% 10%
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, 1995, measurement date, the discount rate was
reduced 100 basis points to 7.25% to reflect current market
conditions. This change had no impact on 1995 pension income,
but will reduce 1996 pension income by $310,000. Effective with
the December 31, 1994, measurement date, the discount rate,
expected long-term rate of return on assets and mortality
assumptions were revised to reflect current market and
demographic conditions. As a result of these changes, the
December 31, 1994, projected benefit obligation decreased by $2.4
million. These changes had no effect on 1994 pension income, but
reduced 1995 pension income by $1.2 million.
The majority of U.S. defined benefit pension plan assets are
invested in common stock, including approximately $7,518,000 in
CTS common stock, U.S. government bonds and cash and equivalents.
The balance is invested in corporate bonds, a private equity
fund, non-U.S. bonds and convertible issues.
Because the domestic plans are fully funded, the Company made no
contributions during 1995, 1994 or 1993. Benefits paid by all
Plans during 1995, 1994 and 1993 were $4,085,000, $4,175,000 and
$4,289,000, respectively.
Pension coverage for employees of certain non-U.S. subsidiaries
is provided through separate plans. Contributions of $237,000,
$172,000 and $174,000 were made to the non-U.S. Plans in 1995,
1994 and 1993, respectively.
Defined contribution plans
The Company sponsors a 401(k) Plan and several other defined
contribution plans which cover some of its non-U.S. employees and
its domestic hourly employees not covered by a defined benefit
pension plan. Contributions and costs are generally determined
as a percentage of the covered employee's annual salary. Amounts
expensed for the 401(k) Plan and the other plans totaled
$2,294,000 in 1995, $2,506,000 in 1994 and $2,532,000 in 1993.
Postretirement health and life insurance plans
In addition to providing pension benefits, the Company provides
certain health care and life insurance programs for retired
employees. Effective January 1, 1993, the Company implemented,
on the immediate recognition basis, FASB Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," which resulted in a noncash charge of $5,096,000, net
of an income tax benefit of $3,123,000, or $.99 per share.
Substantially all of the Company's domestic employees are
eligible for life insurance benefits. Substantially all of the
Company's domestic employees hired before December 31, 1993,
became eligible for health care benefits under the plan if they
attained normal retirement age prior to discontinuance of those
benefits effective January 1, 1996.
Summary information on the Company's plans as of December 31,
1995, and December 31, 1994, is as follows:
(In thousands)
1995 1994
Accumulated postretirement benefit obligation:
Active employees $(1,282) $(1,089)
Retirees and dependents (2,912) (3,589)
(4,194) (4,678)
Unrecognized net gain (345) (1,910)
Postretirement benefit obligation $(4,539) $(6,588)
The components of net periodic postretirement benefit expense for
1995 and 1994 are as follows:
(In thousands)
1995 1994
Service cost--benefits earned during period $ 28 $ 43
Interest cost on accumulated benefit obligation 330 511
Net amortization and deferral (1,008)
Net (income) expense $ (650) $554
The accumulated postretirement benefit obligation was determined
using relevant actuarial assumptions and the terms of the
Company's medical, dental and life insurance plans, including the
effects of capped Company contribution rates and discontinuance
of Company payments toward retiree health and dental insurance
effective January 1, 1996. The Company has no accrued
postretirement medical obligation at December 31, 1995, due to
the elimination of the Company's postretirement medical coverage
effective January 1, 1996. The elimination of this coverage and
improved favorable medical plan experience resulted in
approximately a $1 million gain recognized throughout 1995. For
measurement purposes, a 7.25 and 8.25 percent annual discount
rate was used to determine the remaining life obligation for 1995
and 1994, respectively.
Effective with the December 31, 1994, measurement date, the
discount rate and mortality assumptions were revised to reflect
current market and demographic conditions. As a result of these
changes and favorable medical claims experience, the accumulated
postretirement life obligation decreased by approximately
$800,000 and the accumulated postretirement medical obligation
decreased by approximately $700,000.
The Company funds medical and dental costs as incurred and funds
life insurance benefits through term life insurance policies.
The Company plans to continue funding term life insurance
premiums on a pay-as-you-go basis.
NOTE G - Income Taxes
Effective January 1, 1993, the Company adopted the provisions of
FASB Statement No. 109, "Accounting for Income Taxes." FASB
Statement No. 109 replaced FASB Statement No. 96, of the same
title, which the Company previously used to account for income
taxes. The effect of adopting FASB Statement No. 109 is to
recognize deferred tax benefits that were not recognized under
FASB Statement No. 96. The cumulative effect of the change in
the method of accounting for income taxes as of the beginning of
1993 increased earnings by $482,000 or $.10 per share.
The components of earnings before income taxes and cumulative
effect of changes in accounting principles are comprised of the
following:
(In thousands)
1995 1994 1993
Domestic $17,563 $15,391 $8,965
Non-U.S. 10,121 6,096 1,295
Total $27,684 $21,487 $10,260
The provision for income taxes charged to earnings before
cumulative effect of changes in accounting principles is
comprised of the following:
(In thousands)
1995 1994 1993
Current:
Federal $1,935 $1,998 $ 908
State 963 604 375
Non-U.S. 4,383 2,367 2,124
Total current 7,281 4,969 3,407
Deferred:
Federal 2,534 1,268 154
State 578 400 429
Non-U.S. 127 883 (300)
Total deferred 3,239 2,551 283
Total provision for income taxes $10,520 $7,520 $3,690
Significant components of the Company's deferred tax liabilities
and assets at December 31, 1995, and 1994, are:
(In thousands)
1995 1994
Depreciation $ 1,063 $ 913
Pensions 15,767 13,396
Other 2,282 2,192
Gross deferred tax liabilities 19,112 16,501
Postemployment benefits 1,611 2,240
Inventory reserves 2,613 2,778
Loss carryforwards 5,847 6,575
Credit carryforwards 5,537 5,705
Nondeductible accruals 3,200 3,013
Other 710 425
Gross deferred tax assets 19,518 20,736
Net deferred tax assets 406 4,235
Deferred tax assets valuation allowance (6,639) (7,229)
Total $(6,233) $(2,994)
During 1995, the valuation allowance was increased as a result of
an increase in unutilized net operating loss carryforwards in
some taxing jurisdictions, and decreased by the utilization of
net operating losses and scheduled tax credits in other
jurisdictions. The net decrease in the valuation allowance was
$590,000.
A reconciliation of the Company's effective income tax to the
statutory federal income tax follows:
(In thousands)
1995 1994 1993
Taxes at the U.S. statutory rate $9,689 $ 7,306 $3,488
State income taxes, net of federal
income tax benefit 1,002 663 531
Non-U.S. income taxed at rates
different than the U.S. statutory rate 1,159 1,639 1,494
Utilization of net operating loss
carryforwards and benefit of scheduled
tax credits (2,024) (2,544) (1,842)
Foreign distributions, net of foreign
tax credits 372
Other 322 456 19
Provision for income taxes $10,520 $ 7,520 $3,690
Undistributed earnings of certain non-U.S. subsidiaries amounting
to $46,965,000 at December 31, 1995, are intended to be
permanently invested and accordingly, no provision has been made
for non-U.S. withholding taxes on these earnings. In the event
all undistributed earnings were remitted, approximately
$4,629,000 of withholding tax would be imposed.
The Company has U.S. tax basis business tax credits of
approximately $2,559,000 at December 31, 1995. The U.S. business
credit carryforwards expire between the years 2001 and 2009. In
addition, the Company has various non-U.S. tax basis net
operating losses and business credit carryforwards of $21,218,000
and $74,000, respectively. The non-U.S. credit carryforwards
expire in 1997. The non-U.S. net operating losses have an
unlimited carryforward period. In addition, the Company has
alternative minimum tax credit carryforwards of approximately
$2,904,000, which have no expiration date.
NOTE H - Business Segment and Non-U.S. Operations
The Company's operations comprise one business segment, the
manufacturing of electronic components. Electronic components
include production and sale of resistor networks, variable
resistors, frequency control devices, interconnect products,
hybrid microcircuits, automotive control devices, switches,
loudspeakers, fiber-optic transceivers, insulated metal circuits
and industrial electronics.
Sales to a major automotive manufacturer were $54,900,000 in
1995, $49,400,000 in 1994 and $40,100,000 in 1993. Although
sales to a major data processing equipment manufacturer were
$9,900,000 in 1995 and $4,400,000 in 1994, sales to the same
customer were significantly higher in 1993 at $24,000,000.
The non-U.S. operations or facilities are located in Taiwan,
Singapore, Hong Kong, Thailand, United Kingdom, Canada, Mexico
and Japan. Net sales to unaffiliated customers from other non-
U.S. operations in the aggregate equaled 19%, 18% and 16% of the
consolidated total for each of the years 1995, 1994 and 1993,
respectively. Net sales to unaffiliated customers from the
United Kingdom operation equaled 17%, 16% and 12% of the
consolidated total for 1995, 1994 and 1993, respectively.
Net assets of subsidiaries located in non-U.S. countries as of
December 31, 1995, and December 31, 1994, are summarized as
follows:
(In thousands)
1995 1994
Net current assets $27,275 $23,751
Property, plant and equipment--net 22,423 23,342
Goodwill and other long-term assets 1,625 2,331
Long-term obligations (714) (586)
Deferred income taxes (1,526) (1,485)
Total net assets of non-U.S. subsidiaries $49,083 $47,353
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 is total
revenue less operating expenses. In computing operating
earnings, none of the following items have been added or
deducted: general corporate expenses, 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 property and equipment and other noncurrent assets.
Summarized financial information concerning the geographic areas
of operation for 1995, 1994 and 1993 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)
1995 1994 1993
Net Sales
Domestic:
Sales to unaffiliated customers $194,016 $178,032 $170,566
Transfers to non-U.S. areas 5,439 4,179 4,484
199,455 182,211 175,050
Other non-U.S.:
Sales to unaffiliated customers 56,570 47,896 37,868
Transfers to other areas 6,092 7,692 11,172
62,662 55,588 49,040
United Kingdom:
Sales to unaffiliated customers 49,571 42,779 28,545
Transfers to other areas 732 514 156
50,303 43,293 28,701
Eliminations (12,263) (12,385) (15,812)
Total net sales $300,157 $268,707 $236,979
Operating Earnings
Domestic $22,204 $ 18,109 $ 12,060
Other non-U.S. 6,345 3,708 4,476
United Kingdom 6,483 4,569 910
35,032 26,386 17,446
Eliminations 140 1 (19)
35,172 26,387 17,427
General corporate expenses 7,684 5,703 6,406
Operating earnings 27,488 20,684 11,021
Other income (expenses)--net 196 803 (761)
Earnings before income taxes and
cumulative effect of changes in
accounting principles $27,684 $ 21,487 $ 10,260
Assets Apportioned by Area
Domestic $87,862 $ 86,605 $ 73,256
Other non-U.S. 49,848 43,272 54,452
United Kingdom 24,718 23,419 18,398
162,428 153,296 146,106
Eliminations (3,783) (3,305) (5,047)
158,645 149,991 141,059
Corporate assets 68,482 56,835 44,005
Total assets $227,127 $206,826 $185,064
Geographic Area
(In thousands)
1995 1994 1993
Capital Expenditures
Domestic $ 7,505 $ 9,738 $7,318
Other non-U.S. 2,468 2,367 3,300
United Kingdom 1,208 1,296 1,078
Total $11,181 $13,401 $11,696
NOTE I - 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, 1995, totaled $4.5
million, compared with $3.8 million at December 31, 1994. 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 J - Related Party Transactions
Dynamics Corporation of America (DCA) owned 2,303,100 shares
(44.1%) of the Company's outstanding common stock at December 31,
1995. In 1987, CTS shareholders voted not to grant DCA voting
rights on 1,020,000 of these shares. In addition to stock
ownership, as of December 31, 1995, two representatives of DCA
serve on the Company's Board of Directors. The normal business
transactions between the Company and DCA are insignificant.
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
To the Shareholders and
Board of Directors of CTS Corporation
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings, shareholders'
equity and of cash flows present fairly, in all material
respects, the financial position of CTS Corporation and its
subsidiaries at December 31, 1995, and 1994, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in the Notes to Consolidated Financial Statements,
effective January 1, 1993, the Company changed its method of
accounting for income taxes by adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Also effective January 1, 1993, the Company changed its method of
accounting for postretirement healthcare and life insurance
benefits by adopting, on an immediate recognition basis,
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
South Bend, Indiana
February 1, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1993 - 1995)
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
1995 1994 1993
Net cash provided by (used in):
Operating activities $ 26,861 $ 12,555 $ 17,565
Investing activities (10,945) (15,090) (10,698)
Financing activities (3,796) 2,580 (1,342)
Cash and equivalents $ 37,271 $ 24,922 $ 23,534
Accounts receivable, net 41,737 35,029 30,627
Inventories, net 38,885 41,456 36,059
Current assets 126,113 110,667 97,266
Notes payable 6,685 7,436 12,822
Accounts payable 15,605 12,768 11,611
Accrued liabilities 26,461 24,284 25,114
Current liabilities 50,962 44,792 49,888
Working capital 75,151 65,875 47,378
Current ratio 2.47 2.47 1.95
Interest-bearing debt $ 22,267 $ 23,318 $ 17,992
Net tangible worth 141,650 126,634 113,402
Ratio of interest-bearing debt
to net tangible worth .16 .18 .16
The 1995 cash flow from operating activities of $26.9 million
improved substantially, 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.
Spending of cash for investing activities in 1995 was $10.9 million
and almost comparable to 1994 after the impact of the 1994
expenditures for the ODL product line of $3.4 million. In terms of
financing activities, the impact of the notes payable reduction
during 1995 was $5.3 million from the increased cash flow.
During 1994, cash flow of $12.6 million was positive from operating
activities, primarily as a result of the significant improvement in
operating earnings when compared to 1993. However, offsetting the
favorable impact of the higher earnings was the higher working
capital requirements to support the increased sales levels, which
reduced operating cash flow by $5.0 million from 1993.
Investing requirements increased during 1994 by $4.4 million,
primarily due to the $13.4 million of capital expenditures,
including $3.4 million for the acquisition of ODL fixed assets.
Additionally, financing activities increased during 1994 and were
generated by the higher sales levels and the acquisition of the ODL
product line for which $2.1 million of additional expenditures were
made for inventory.
During 1993, positive cash flow of $17.6 million was generated from
operating activities, primarily due to the increase in sales and
earnings, before noncash charges for accounting changes.
A significant noncash component of operating earnings during the
1993 to 1995 period was pension income of $5.3 million, $6.6
million and $6.0 million in 1995, 1994 and 1993, respectively. The
1995 income amount dropped from prior years primarily as a result
of lower actuarial estimated earnings on the Plan assets. As a
result of the Company's overfunded pension position, no cash
contributions are anticipated to be required in the immediate
future to meet the Company's pension benefit obligations.
The major investment activity during the last three years was
capital expenditures, which totaled $11.2 million in 1995, $13.4
million in 1994 and $11.7 million in 1993. The major capital
expenditures in 1995 were for new products and product line
enhancements. Also during 1995, and similar to 1994, capacity
increases were required in our automotive and European interconnect
product lines. The Company expects to increase its capital
expenditures in 1996 over 1995 levels. These capital expenditures
will be primarily for new products and cost reduction programs, as
well as selected manufacturing equipment capacity expansion.
The most recent major financing activity occurred during 1994, when
the Company negotiated a five-year, $15.0 million long-term loan
which expires in 1999. This loan was primarily for the asset
purchase and working capital needs related to the ODL product line
acquisition. The net cash used for financing activities in 1993
primarily reflects loan renegotiations which reduced certain non-
U.S. long-term debt and increased short-term borrowings, and
additional short-term borrowings at certain non-U.S. locations.
Dividends paid were $3.1 million in 1995, and $2.1 million in 1994
and 1993. In response to the 1992 decrease in cash provided by
operations, the Company reduced its annual quarterly dividend from
$.1875 to $.10 per share effective with its February 1993 payment.
However, in December 1994, the Board of Directors, principally as a
result of the Company's improving performance and cash position,
increased the quarterly dividend to $.15 per share, effective with
the February 1995 payment.
At the end of each of the last three years, cash of various non-
U.S. subsidiaries was invested in U.S.-denominated cash
equivalents. Such cash is generally available to the parent
Company and the Company's intention is not to repatriate non-U.S.
earnings. If all non-U.S. earnings were repatriated, approximately
$4.6 million of withholding taxes would accrue.
At the end of 1995, CTS had $47.0 million of borrowing capacity
available under two long-term revolving credit agreements. The
U.S. revolving agreement of $45.0 million, which expires in April
1997, is the Company's primary credit vehicle and, together with
cash from operations, should adequately fund the Company's
anticipated cash needs.
Results of Operations
The following table highlights significant information with regard
to the Company's twelve months results of operations during the
past three fiscal years.
(In thousands)
December 31 December 31 December 31
1995 1994 1993
Net sales $300,157 $268,707 $236,979
Gross earnings 74,804 63,067 53,052
Gross earnings as a percent
of sales 24.9% 23.5% 22.4%
Selling, general and
administrative expenses $ 39,312 $ 36,175 $ 36,323
Selling, general and
administrative expenses
as a percent of sales 13.1% 13.5% 15.3%
Research and development
expenses $ 8,004 $ 6,208 $ 5,708
Research and development
expenses as a percent of
sales 2.7% 2.3% 2.4%
Operating earnings $ 27,488 $ 20,684 $ 11,021
Operating earnings as a
percent of sales 9.1% 7.7% 4.7%
Interest expense, net $ 369 $ 57 $ 400
Earnings before income taxes and
cumulative effect of changes
in accounting principles 27,684 21,487 10,260
Income taxes 10,520 7,520 3,690
Income tax rate 38.0% 35.0% 36.0%
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, data processing and communications
equipment markets. Within these overall increases, the ODL product
line acquired late in 1994, contributed approximately $14 million
in higher revenues in 1995.
From 1993 to 1994, total sales increased by 13.4%, primarily as a
result of substantial increases in our automotive and European
interconnect product lines.
During the three-year period 1993-1995, the percentage of overall
sales to the automotive market increased from 32% to 36%. During
this same period, our sales into the defense and aerospace markets
declined from 12% to 9%, as a percent of total sales. Sales into
other markets have generally remained constant.
The Company's 15 largest customers represented 61% of net sales in
1995, and 62% in 1994 and 1993. One customer, a major manufacturer
of automobiles, comprised 18% of net sales in 1995 and 1994,
compared with 17% for 1993. Although at a lower level in 1995 and
1994, a major manufacturer of data processing equipment comprised
10% of total net sales in 1993.
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 1995 and 1994, improvements were realized over the preceding
year in gross earnings dollars and as a percent of sales,
principally due to higher sales volume, production efficiencies and
higher absorption of fixed manufacturing overhead expenses. Gross
earnings were lower in 1993, due to the lower sales and lower
absorption of manufacturing expenses.
During 1995 and 1994, selling, general and administrative expenses
increased in dollars in 1995 over 1994, and in 1994 remained at the
same level as 1993. The increase in 1995 was principally as a
result of increases in salaries and related expenses. Selling,
general and administrative expenses decreased as a percent of sales
in 1995 and 1994 from the previous year, as the Company continued
to control these expenses while increasing sales. Also during
1994, the Company successfully resolved approximately $1 million of
outstanding legal and customer claims, the provision for most of
which had been established in 1993.
Research and development expenses increased by $1.8 million or 29%
in 1995 over 1994, with much of the additional effort devoted to
the "hall effect" non-contacting sensor development for our
automotive products, as well as other new product development
programs in the automotive and the resistor network product areas.
The net of interest expense and interest income is reflective of
the levels of debt during the 1993-1995 period. The lower amount
in 1994 relates to the timing of the $15.0 million loan secured in
late 1994.
During 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 on our frequency control
products. These improvements substantially offset losses from our
defense and aerospace products, caused primarily by the declining
market conditions. In 1994, compared to 1993, the improved
operating earnings were a result of the higher automotive and
interconnect product sales, and improved performance with our
resistor networks and electromechanical products, which more than
offset losses from our frequency controls and hybrid
microelectronic products.
The higher 1995 effective tax rate of 38%, compared to 35% in 1994,
was due to foreign distributions, a lower benefit from the
utilization of U.S. net operating loss carryforwards and scheduled
tax credits. The Company has net operating loss carryforwards of
approximately $21 million in Singapore, Thailand and Hong Kong, and
has established a 100% valuation reserve based upon previous pretax
losses and a current planned breakeven position. The slightly
lower 1994 effective tax rate compared to 1993 was a result of
improved earnings, generating an increase in net operating loss
carryforward utilization.
The effects of the 1993 accounting pronouncements FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and FASB Statement No. 109, "Accounting for Income
Taxes," have been discussed in financial statement footnotes, Note
F and Note G, respectively. With respect to the recently issued
FASB Statements No. 121 and 123, and as described in the Notes to
Consolidated Financial Statements, the Company anticipates no
substantial impact on financial position or results of operations
upon adoption in 1996.
In terms of environmental issues, the Company has been notified by
the U.S. Environmental Protection Agency, as well as state agencies
and generator groups, that it is or may be a Potentially
Responsible Party regarding hazardous waste remediation at non-CTS
sites. Additionally, the Company provides reserves for probable
remediation activities at certain of its manufacturing locations.
These issues are discussed in Note I - Contingencies.
<TABLE>
Five-Year Summary
(In thousands of dollars except per share data)
<CAPTION>
% of % of % of % of % of
1995 Sales 1994 Sales 1993 Sales 1992 Sales 1991 Sales
Summary of Operations
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $300,157 100.0 $268,707 100.0 $236,979 100.0 $227,391 100.0 $229,536 100.0
Cost of goods sold 225,353 75.1 205,640 76.5 183,927 77.6 180,198 79.2 183,462 79.9
Selling, general and
administrative expenses 39,312 13.1 36,175 13.5 36,323 15.3 37,855 16.6 35,980 15.7
Research and development
expenses 8,004 2.7 6,208 2.3 5,708 2.4 6,092 2.7 5,656 2.5
(Gain) on sale of property
and other related provisions (852) (0.3) (1,857) (0.8)
Operating earnings 27,488 9.1 20,684 7.7 11,021 4.7 4,098 1.8 6,295 2.7
Other income (expenses)--net 196 0.1 803 0.3 (761) (0.4) (277) (0.1) (51) 0.0
Earnings before income
taxes and cumulative effect
of changes in accounting
principles 27,684 9.2 21,487 8.0 10,260 4.3 3,821 1.7 6,244 2.7
Income taxes 10,520 3.5 7,520 2.8 3,690 1.6 1,920 0.9 2,030 0.9
Net earnings--before
accounting changes 17,164 5.7 13,967 5.2 6,570 2.7 1,901 0.8 4,214 1.8
Cumulative effect on prior
years of accounting changes (a) (4,614) (1.9)
Net earnings 17,164 5.7 13,967 5.2 1,956 0.8 1,901 0.8 4,214 1.8
Retained earnings--beginning
of year 112,506 100,868 100,973 102,482 102,110
Dividends declared (3,124) (2,329) (2,061) (3,410) (3,842)
Retained earnings--end of
year $126,546 $112,506 $100,868 $100,973 $102,482
Average shares
outstanding 5,200,818 5,170,406 5,152,556 5,141,936 5,122,433
Net earnings per share:
Before accounting changes $3.30 $2.70 $1.27 $0.37 $0.82
Cumulative effect on prior
years of accounting changes (a) (0.89)
Net earnings $3.30 $2.70 $0.38 $0.37 $0.82
Cash dividends per share $0.60 $0.45 $0.40 $0.6625 $0.75
Capital expenditures 11,181 13,401 11,696 8,831 15,967
Depreciation and amortiza-
tion 11,683 11,236 12,143 11,665 13,102
Financial Position at Year-End
Current assets $126,113 $110,667 $97,266 $87,376 $91,493
Current liabilities 50,962 44,792 49,888 37,262 39,569
Current ratio 2.5 to 1 2.5 to 1 1.9 to 1 2.3 to 1 2.3 to 1
Working capital $75,151 $65,875 $47,378 $50,114 $51,924
Inventories 38,885 41,456 36,059 37,222 40,855
Property, plant and
equipment--net 50,696 50,777 47,842 48,529 53,828
Total assets 227,127 206,826 185,064 170,773 176,361
Short-term notes payable 6,685 7,436 12,822 5,827 8,160
Long-term obligations 13,714 15,595 4,995 10,826 11,297
Shareholders' equity 146,253 131,855 119,203 119,372 122,485
Common shares outstanding 5,217,329 5,178,604 5,153,424 5,150,824 5,123,824
Equity (book value) per
share $28.03 $25.46 $23.13 $23.18 $23.91
Other Data
Stock price range (dollars
per share to the nearest
1/8) $37.75-$27.38 $31.00-$19.50 $22.38-$17.00 $24.50-$17.13 $24.00-$16.38
Average number of employees 4,007 4,056 3,975 4,335 4,847
Number of shareholders at
year-end 1,062 1,136 1,198 1,278 1,343
<FN>
(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.
</FN>
</TABLE>
