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
For the fiscal year ended December 31, 1996
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 14, 1997:
Common Stock, $.10 Par Value--$123,040,000
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 14, 1997:
Common Stock, par value $.10 per share Shares
Voting 3,815,194
Non-Voting 3,572
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to security holders for the year ended December
31, 1996 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 2, 1997 are incorporated by reference into Part
III of this Form 10-K.
Exhibits Index - Pages 19 and 20
<PAGE>
Part I
Item l. Business
--------
A description of Dynamics Corporation of America ("DCA" or
"Company") and financial information about industry segments on pages 22 and 23
of the annual report to security holders for the year ended December 31, 1996,
and the classification of the Company's manufacturing divisions and subsidiary
for industry segments, including a description of each, on page 24 of the
annual report to security holders for the year ended December 31, 1996 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, including the reclassified operations of the Fermont Division.
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(R), Acme Juicerator(R),
Qualheim(TM), Anemostat(R), Multi-Vent(R), Anemotrak(R), Envirotrak(R),
LoPro(TM), 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 $85,167,000
at December 31, 1996 as compared with approximately $91,886,000 at December 31,
1995. Approximately 68% of the orders are expected to be completed in 1997. The
Power and Controlled Environmental Systems segment accounts for approximately
84% of the unfilled orders at December 31, 1996, and backlog continues to be
significant when projecting future revenues 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, except that from 1994-1996 the Fermont Division classified
in the Power and Controlled Environmental Systems segment derived substantially
all its revenues from the U.S. Government under several contracts for the
design, testing and production of engine generator sets. The Company's Fermont
Division is substantially dependent on the U.S.
1
<PAGE>
Government for future business. 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), TouchBlend(R), 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 LoPro(TM) 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.
A substantial portion of the Fermont Division's business, the
production of engine generator sets, has been with the U.S. Government on a
contract basis, which in the ordinary course is conducted under invitations to
bid and is highly competitive.
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 $1,435,000 in 1996, $1,732,000 in 1995 and
$1,669,000 in 1994. 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, having
agreed with the EPA to fund a feasibility study at the site, sued the Company to
recover a share of those costs and in September 1996 a $287,000 judgment was
entered against the Company following trial of the action, which was
subsequently paid. The Company has elected to participate in the allocation of
responsibility proceedings conducted by the PRP group formed in connection with
the Superfund site in the vicinity of the California site. A suit against the
Company by a property owner neighboring the California site for allegedly
causing contamination at the neighbor's property has been discontinued. In
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.
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 and cash flows could be materially affected by an
unfavorable resolution of these matters.
In 1996 the Company incurred expenses of $1,111,000, including
$912,000 for non-Company 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 the Connecticut site, a 59%
increase in such expenses over the prior year. Accruals for such matters
amounted to $951,000 and $565,000 at December 31, 1996 and 1995, respectively.
Number of Employees
- -------------------
DCA employed 1,195 persons at December 31, 1996.
Foreign Operations
- ------------------
The Company sells in foreign countries primarily through
manufacturers' representatives and agents and does not have manufacturing
operations abroad. Revenues from sales abroad represented approximately 15% of
sales in 1996 and 21% in 1995. In addition, the Company receives revenue from
licenses and technology transfers which amounted to
3
<PAGE>
$1,154,000 in 1996, $113,000 in 1995 and $157,000 in 1994. Included in the 1996
amount is income from royalties of $1,079,000 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.
Reclassification of Fermont Division
- ------------------------------------
Effective in April 1996, Fermont's results of operations are included in the
Company's Consolidated Statements of Income, as a result of the Company's
decision to bid on new contracts in addition to the contract to manufacture
tactical quiet (TQ) generator sets for the U.S. Army Aviation and Troop Command.
Accordingly, reported results for prior periods have been reclassified.
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 of $5,600,000 for
operating losses estimated to be incurred prior to Fermont's disposition.
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, which amount is included in net sales. The settlement, net of
related expenses and income taxes, amounted to $3,334,000, or $.86 per share.
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 filed a claim for compensation for its costs and
losses related to the termination. In September 1996, the Company agreed to
accept $1,937,000 from the Government in settlement of its claim related to that
termination, which amount is included in net sales. The settlement, net of
amounts due to subcontractors, income taxes and other related costs, amounted to
$915,000, or $.24 per share.
In January 1995, Fermont was awarded the TQ contract. The Government's initial
delivery order issued with the award and subsequent additions call for
deliveries of gensets aggregating $81.8 million. Shipments began in March 1997
and are scheduled to continue through 1998.
Investment in CTS Corporation
- -----------------------------
At December 31, 1996, 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.
4
<PAGE>
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 and electromechanical components for the automotive,
computer equipment, communications equipment, instruments and controls, defense
and aerospace and consumer electronics 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, in worldwide markets. (Note 4 on
page 12 of the Company's annual report to security holders for the year ended
December 31, 1996 is incorporated herein by reference.)
5
<PAGE>
Item 2. Properties
----------
The following is a summary by industry segment of the properties occupied by the
Company.
Square
Division Location Feet Type Occupancy
- -------- -------- ------ ---- ---------
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
6
<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
Fermont Bridgeport, CT 97,000 2 Modern Fee Ownership
bldgs.; 2
stories &
1 story
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 available for sale.
Approximately 55,000 square feet of the Scranton, PA facility of the Anemostat
Products Division have been leased on a short-term basis. The Fermont Division,
in addition to the space it occupies for production purposes, utilizes 35,000
square feet at the Waring Products Division's New Hartford facility for the
storage of U.S. Government owned and furnished engines.
7
<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 65 Chairman of the Board and
President
Henry V. Kensing 63 Vice President, General
Counsel and Secretary
Patrick J. Dorme 61 Vice President-Finance and
Chief Financial Officer
Richard E. Smith 48 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.
8
<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 23 of
the annual report to security holders for the year ended December 31, 1996 is
incorporated herein by reference.
Item 6. Selected Financial Data
-----------------------
Selected Financial Data on page 21 of the annual report to
security holders for the year ended December 31, 1996 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, 1996 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, 1996 and are incorporated herein by
reference.
Page(s) in the
Annual Report
Consolidated Balance Sheets--As of
December 31, 1996 and 1995 7
Consolidated Statements of Income--For
the Years Ended December 31, 1996, 1995
and 1994 8
Consolidated Statements of Stockholders'
Equity--For the Years Ended December 31,
1996, 1995 and 1994 9
Consolidated Statements of Cash Flows--For
the Years Ended December 31, 1996, 1995
and 1994 10
Notes to Consolidated Financial Statements 11-19
Item 9. Changes In and Disagreements with Accountants
---------------------------------------------
on Accounting and Financial Disclosure
--------------------------------------
Not applicable
9
<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 2, 1997, 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 2, 1997, 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 2, 1997,
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
----------------------------------------------
Not applicable
10
<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, 1996 are incorporated by
reference in Item 8 above:
Consolidated Balance Sheets--
As of December 31, 1996 and 1995
Consolidated Statements of Income--
For the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity--
For the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows--
For the Years Ended December 31, 1996, 1995 and 1994
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, 1996,
1995 and 1994 16-18
11
<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, 1996, certain
consolidated financial statement schedules included in said Form 10-K and CTS
Corporation's annual report to stockholders for 1996 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.
<TABLE>
<CAPTION>
Page(s) in CTS
Corporation's annual report
to stockholders for 1996
---------------------------
<S> <C>
Consolidated Statements of Earnings --
years ended December 31, 1996,
1995 and 1994 12
Consolidated Statements of Shareholders'
Equity -- years ended December 31,
1996, 1995 and 1994 13
Consolidated Balance Sheets --
December 31, 1996 and 1995 14
Consolidated Statements of Cash Flows--
years ended December 31, 1996,
1995 and 1994 15
Notes to Consolidated Financial Statements 16-23
Report of independent accountants 24
</TABLE>
<TABLE>
<CAPTION>
Page(s) in CTS Corporation
annual report on Form 10-K
for the year ended
December 31, 1996
--------------------------
<S> <C>
Report of independent accountants
on financial statement schedule S-2
Schedule II - Valuation and qualifying
accounts S-3
</TABLE>
12
<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 19 and 20.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed for the three months
ended December 31, 1996.
13
<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 26, 1997
- --------------------------------------------
(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 26, 1997
- --------------------------------------------
Andrew Lozyniak - Chairman of the Board
and President
/S/ Henry V. Kensing March 26, 1997
- --------------------------------------------
Henry V. Kensing - Director, Vice President,
General Counsel and Secretary
/S/ Patrick J. Dorme March 26, 1997
- --------------------------------------------
Patrick J. Dorme - Director, Vice President-
Finance and Chief Financial Officer
/S/ Harold Cohan March 26, 1997
- --------------------------------------------
Harold Cohan - Director
/S/ Frank A. Gunther March 26, 1997
- --------------------------------------------
Frank A. Gunther - Director
/S/ Russell H. Knisel March 26, 1997
- --------------------------------------------
Russell H. Knisel - Director
/S/ Saul Sperber March 26, 1997
- --------------------------------------------
Saul Sperber - Director
/S/ M. Gregory Bohnsack March 26, 1997
- --------------------------------------------
M. Gregory Bohnsack - Corporate Controller
and Principal Accounting Officer
14
<PAGE>
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 26, 1997,
included in the 1996 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 26, 1997
15
<PAGE>
DYNAMICS CORPORATION OF AMERICA AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1996
(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
doubtful accounts $ 596 $ 16 $ 88(a) $ 524
====== ====== ====== ======
Allowance for
cash discounts $ 17 $ 54 $ 59(b) $ 12
====== ====== ====== ======
Reserves not shown
elsewhere:
Reserve for
warranties $ 941 $1,047 $ 896(c) $1,092
====== ====== ====== ======
Notes:
(a)--Bad debts, net of recoveries, 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, 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* $ 687 $ 108 199(b) $ 596
====== ====== ===== ======
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.
*Reclassified to include Fermont Division as a continuing operation; see Note 11
to the Consolidated Financial Statements incorporated in this report.
17
<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* $ 609 $ 45 $ (33)(a) $ 687
====== ====== ====== ======
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.
*Reclassified to include Fermont Division as a continuing operation; see Note 11
to the Consolidated Financial Statements incorporated in this report.
18
<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 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.
2. Letter dated January 17, 1996 from the 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,
was included in the Exhibits of the registrant's
Form 10-K Annual Report for the year ended
December 31, 1995.
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 Patrick
J. Dorme - Vice President-Finance and Chief Financial
Officer Henry V. Kensing - Vice President, General
Counsel and Secretary were included in the Exhibits of
the registrant's Form 10-K Annual Report for the year
ended December 31, 1995.
2. 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.
3. 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.
4. Incentive Performance Plan was included in the Exhibits
of the registrant's Form 10-K Annual Report for the year
ended December 31, 1992.
19
<PAGE>
5. 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.
6. 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.
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 3 - Articles of incorporation and bylaws:
1. Bylaws, as amended. (a)
Exhibit 13 - Annual report to security holders for the
year ended December 31, 1996. (b)
Exhibit 23 - Consent of Independent Auditors 15
Exhibit 27 - Financial Data Schedules (c)
Exhibit 99 - CTS Corporation annual report on Form 10-K for the year ended
December 31, 1996, (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 1996 included in said
Form 10-K as Exhibit 13 thereto. (d)
(a) Filed herewith.
(b) Unnumbered and immediately following the final numbered page of
this report.
(c) Filed electronically only pursuant to regulations.
(d) Unnumbered and immediately following the registrant's annual report to
security holders for the year ended December 31, 1996.
20
BY-LAWS
OF
DYNAMICS CORPORATION OF AMERICA
ARTICLE I
MEETING OF STOCKHOLDERS
SECTION 1. Place of Meetings. Every meeting of the stockholders of Dynamics
Corporation of America (hereinafter called the Corporation) shall be held at the
principal office of the Corporation in the State of Connecticut or at such other
place as shall be specified in the notice or waiver of notice thereof.
SECTION 2. Annual Meetings. Each Annual Meeting of the Stockholders of the
Corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held on the first
Friday in May in each year (or, if that day shall be a legal holiday, then on
the next succeeding business day) at such hour as may be specified in the notice
thereof.
SECTION 3. Special Meetings. Special meetings of the stockholders, unless
otherwise provided by law, may be called by the Chairman of the Board of
Directors, the President or by a majority of the Board of Directors of the
Corporation (hereinafter called the Board) and shall be called by the Chairman
of the Board or the President on the written request of the holders of record of
at least twenty-five percent (25%) of the shares of stock of the Corporation
issued and outstanding and entitled to vote thereat. Such request in writing
shall state the purpose or purposes of such meeting.
SECTION 4. Notice of Meetings. Notice of every meeting of the stockholders
shall be in writing and signed by the Chairman or Vice Chairman or the President
or a Vice President or the Secretary or an Assistant Secretary of the
Corporation. Such notice shall state the purpose or purposes for which the
meeting is called and the time when and the place where it is to be held, and a
copy thereof shall be served, either personally or by mail, upon each
stockholder of record entitled to vote at such meeting, not less than ten nor
more than fifty days before the meeting. If mailed, such copy shall be directed
to each stockholder at his address as it appears on the stock book unless he
shall have filed with the Secretary of the Corporation a written request that
notices intended for him be mailed to some other address designated in such
request. Such notice shall not be required to be given to any stockholder who
shall attend such meeting in person or by proxy, or who shall waive notice
thereof as hereinafter provided. Notice of any adjourned meeting need not be
given, except when expressly required by law.
SECTION 5. Quorum. Unless otherwise provided by law or in the Certificate
of Incorporation or other certificate filed pursuant to law, at each meeting of
the stockholders, the holders of a majority of the shares of Common Stock of the
Corporation issued and outstanding and entitled to vote at such meeting, present
in person or represented by proxy, shall constitute a quorum for the transaction
of business; provided, however, that
<PAGE>
at any meeting of the stockholders at which the holders of shares of Preferred
Stock shall have the right, pursuant to the provisions of the Certificate of
Incorporation of the Corporation, or Board action thereunder, to vote for
Directors, the terms and conditions of the shares of Preferred Stock issued and
outstanding and entitled to vote in such election shall be given effect for the
purpose of constituting a quorum for the conduct of such election. In the
absence of a quorum at any such meeting or any adjournment or adjournments
thereof, a majority in voting interest of those present in person or represented
by proxy, or in the absence therefrom of all the stockholders any officer
entitled to preside at, or to act as Secretary of, such meeting, may adjourn
such meeting from time to time until a quorum is present thereat. At any such
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called.
SECTION 6. Organization. At each meeting of the stockholders, the Chairman
of the Board or the Vice Chairman or the President, in that order, or, in their
absence, a designee of the Chairman or in the absence of said designee, a
Chairman chosen by a majority vote of the stockholders present in person or
represented by proxy and entitled to vote thereat, shall act as Chairman of the
meeting. The Secretary shall act as Secretary at each meeting of stockholders,
or in his absence the Chairman of the meeting may appoint any person present to
act as Secretary of the meeting.
SECTION 7. Order of Business. The order of business at all meetings of the
stockholders shall be as determined by the Chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum shall be
present may be changed by the holders of a majority in number of the shares of
stock present in person or represented by proxy and entitled to vote thereon.
SECTION 8. Voting. Unless otherwise provided by law or in the Certificate
of Incorporation, other certificate filed pursuant to law, or the terms and
conditions of any Preferred Stock issued and outstanding, each holder of record
of shares of Common Stock of the Corporation shall be entitled at each meeting
of the stockholders to one vote for every share of said stock of the Corporation
standing in his name on the stock book of the Corporation, and may vote either
in person or by proxy. At all meetings of stockholders, a quorum being present,
all matters, except those the manner of deciding upon which is otherwise
provided by law or in the Certificate of Incorporation or other certificate
filed pursuant to law or these By-laws, shall be decided by the affirmative vote
of the holders of a majority in number of the shares of stock present in person
or represented by proxy and entitled to vote thereon. Unless demanded by a
stockholder present in person or represented by proxy at any meeting of the
stockholders and entitled to vote thereat or so directed by the Chairman of the
meeting, the vote thereat need not be by ballot, except in the case of a vote
for the election of directors. Upon a demand by any such stockholder for a vote
by ballot or any question or at the direction of such Chairman that a vote by
ballot be taken on any question, such vote shall be so taken. On a vote by
ballot each ballot shall be signed by the stockholder voting, or by his proxy as
such if there be such proxy, and it shall show the number and class of shares
voted by such stockholder or proxy. Except as otherwise provided by law or by
these By-laws, all voting may be viva voce. The provisions of this Section 8 are
subject to any superseding provision contained in any duly issued and
outstanding Preferred Stock.
SECTION 9. Inspectors of Election. At each meeting of the stockholders the
Chairman of the meeting shall appoint two
<PAGE>
inspectors of election to act thereat. No director or candidate for the office
of director shall be appointed such inspector. Each inspector of election so
appointed, before entering upon the discharge of his duties, shall be sworn
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability, and the oath so taken
shall be subscribed by such inspectors. Such inspectors of election shall take
charge of the polls and after the voting on any question shall make a
certificate of the result of the vote taken. Inspectors need not be
stockholders.
ARTICLE II
DIRECTORS
SECTION 1. Number, Election, Term. The property, business and affairs of
the Corporation shall be managed by the Board as from time to time constituted.
The Board shall consist of not less than seven (7) nor more than twenty-one (21)
directors. The Board shall by resolution determine the number to be chosen
within said limits. All directors shall be of full age and at least one of them
shall be a citizen of the United States and a resident of the State of New York.
At all meetings of the stockholders for the election of directors, a quorum
being present, the persons receiving a plurality of the votes cast shall be
directors. The term of office of each director shall be as set out in the Proxy
Statement of the year of such director's election and qualification for a term
from the time of his election and qualification and until his successor shall
have been duly elected and shall have qualified, or until his death, or until he
shall resign, or until he shall have been removed in the manner hereinafter
provided. Directors need not be stockholders. The provisions of this Section 1
are subject to any superseding provision contained in any duly issued and
outstanding Preferred Stock.
SECTION 2. First Meeting. After each annual election of directors, on the
same day and at the conclusion of the meeting of stockholders at which such
election shall be held, and at the place where such election is held, the newly
elected Board may meet for the purpose of organization, the appointment of
officers and the transaction of other business. Notice of such meeting need not
be given. Such meeting may be held at any other time or place which shall be
specified in a notice given as hereinafter provided for special meetings of the
Board, or in a waiver of notice thereof, signed by all the directors.
SECTION 3. Regular Meetings. Regular meetings of the Board may be held at
such times and places as the Board by resolution may determine. If any day fixed
for a regular meeting shall be a legal holiday at the place where the meeting is
to be held, then the meeting which would otherwise be held on that day shall be
held at the same hour on the next succeeding business day at said place. Except
as provided by law or these By-laws, notice of regular meetings need not be
given.
SECTION 4. Special Meetings. Special meetings of the Board shall be held
whenever called by the Chairman of the Board, the President, or by the Secretary
at the request of any two directors. Notice of each such special meeting shall
be mailed to each director, addressed to him at his residence or usual place of
business, at least two days before the day on which such meeting is to be held,
or shall be sent addressed to him at such place by telegraph, cable or wireless,
or be delivered personally or by telephone, not later than the day before the
day on which such meeting is to be held. Such notice need not, however, be given
to any director, if waived by him as hereinafter provided, or if he shall be
present at such meeting. Except as otherwise
<PAGE>
specifically provided by law or by these By-laws, such notice or waiver of
notice need not contain any statement of the purposes of the meeting or any
specification of the business to be transacted thereat.
SECTION 5. Quorum. At each meeting of the Board, the presence of a majority
of the whole Board shall be necessary to constitute a quorum for the transaction
of business. In the absence of a quorum at any such meeting, a majority of the
directors present thereat may adjourn such meeting from time to time until a
quorum shall be present. Notice of any adjourned meeting need not be given. At
any adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally called.
Participation by Telephone. Any one or more members of the Board of
Directors or any Committee thereof may participate in a meeting of the Board of
Directors or such Committee by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at a meeting.
SECTION 6. Voting. At all meetings of the Board, a quorum being present,
all matters, except those the manner of deciding upon which is otherwise
provided by law or in the Certificate of Incorporation or other certificate
filed pursuant to law or in these By-laws, shall be decided by the affirmative
vote of a majority of the directors present. The directors shall act only as a
board and the individual directors shall have no power as such.
SECTION 7. Organization. At each meeting of the Board, the Chairman, or in
the absence of the Chairman, the Vice Chairman, or in his absence, a director
chosen by a majority of the directors present, shall act as Chairman of the
meeting. The Secretary, or in his absence any person appointed by the Chairman
of the meeting, shall act as Secretary of the meeting. Any meeting of the Board
may be adjourned by the vote of a majority of the directors present at such
meeting.
SECTION 8. Removal of Directors. Any director may be removed, either with
or without cause, at any time, by the affirmative vote of the holders of record
of a majority of the shares of Common Stock of the Corporation then outstanding
and entitled to vote, in person or by proxy, at a special meeting of
stockholders called for the purpose. The provisions of this Section 8 are
subject to any superseding provision contained in any duly issued and
outstanding Preferred Stock.
SECTION 9. Vacancies. Any vacancy in the Board caused by death,
resignation, an increase in the number of directors or any other cause (except
the removal of a director) may be filled by the Board at any regular or special
meeting thereof or by the stockholders of the Corporation at a special meeting
of stockholders called for the purpose. Any vacancy in the Board caused by the
removal of a director in the manner hereinabove provided shall be filled by the
stockholders at the special meeting of stockholders at which such director shall
have been removed or at any subsequent meeting called for the purpose. The
provisions of this Section 9 are subject to any superseding provision contained
in any duly issued and outstanding Preferred Stock.
SECTION 10. Place of Meeting. The Board may hold its meetings at such place
or places within or without the State of New York as it may from time to time by
resolution determine or as shall be specified or fixed in the respective notices
or
<PAGE>
waivers of notice thereof.
SECTION 11. Compensation. Directors who are also full time employees of the
Corporation and who are compensated as employees, shall receive no additional
compensation for their services. Other directors shall receive a salary of
$10,000 per annum for their services as such directors and, in addition, shall
be paid $800.00 as a fee for attendance at any meeting of the Board; provided,
however, that nothing herein contained shall be construed so as to preclude any
employee of the Corporation and who is compensated as such, from serving the
Corporation, or any subsidiary or affiliated corporation, in any other capacity
and receiving proper compensation therefor.
In addition to the cash compensation payable to outside directors, the
Corporation shall, in accordance with the Stock Retirement Plan for Outside
Directors effective as of May 2, 1986, credit 100 Common Stock Units per
calendar year to a Deferred Stock Account maintained by the Corporation in the
name of each outside director and be paid to each such director as and when
provided by said Plan.
ARTICLE III
OFFICERS
SECTION 1. Number. The executive officers of the Corporation shall be a
Chairman of the Board, a Vice Chairman and a President, each of whom shall be a
member of the Board, one or more Vice Presidents, a Secretary and a Treasurer;
and there may be, in addition, such assistants, agents and employees as shall be
appointed in accordance with the provisions of these By-laws. One person may
hold any two or more offices except those of Chairman and Vice Chairman or
President and Vice President.
SECTION 2. Appointment, Term of Office. The executive officers of the
Corporation shall be chosen by the Board as soon as practicable after each
annual election of directors, each such executive officer to hold office until
his successor shall have been duly chosen and shall have qualified, or until his
death, or until he shall resign, or until he shall have been removed in the
manner hereinafter provided.
SECTION 3. Subordinate Officers. The Board may appoint such assistants,
agents or employees as the Board may deem necessary or advisable, including one
or more Assistant Treasurers and one or more Assistant Secretaries; and in the
event there shall be established one or more operating divisions of the
Corporation, the Board may appoint a President, Vice President, a Treasurer,
Assistant Treasurer, a Secretary, Assistant Secretary and a Comptroller of each
such division as it deems necessary or convenient. Each of the foregoing
assistants, agents, employees and divisional officers shall hold office for such
period, have such authority and perform such duties as the Board may from time
to time determine. The Board may delegate to any executive officer the power to
appoint and remove any such assistants, agents, employees and divisional
officers.
SECTION 4. Removal. Any officer of the Corporation may be removed, either
with or without cause, at any time, by resolution adopted by a majority of the
whole Board at a special meeting thereof called for that purpose. The removal of
an officer shall be without prejudice to the contract rights, if any, of the
officer so removed.
SECTION 5. The Chairman of the Board. The Chairman of the Board shall be
the chief executive officer of the Corporation and shall have primary
responsibility for the general management,
<PAGE>
supervision and control of the business of the Corporation, subject to the
direction and control of the Board. He shall, if present, preside at all
meetings of the shareholders and the Board and shall be ex-officio a member of
all committees of the Board. He shall see that all orders and resolutions of the
Board are carried into effect and, in general, shall perform all duties incident
to the office of Chairman of the Board and such other duties as may be assigned
to him by the Board or by these Bylaws. He may, with the Secretary or an
Assistant Secretary sign certificates for shares of stock of the Corporation; he
may execute and deliver in the name of the Corporation all deeds, bonds,
mortgages, contracts or other instruments authorized by the Board, except in
cases where the execution or delivery thereof shall be expressly delegated by
the Board or these Bylaws to some other officer or agent of the Corporation, and
except any instruments required by law otherwise to be executed or delivered; he
may affix the seal of the Corporation to any instrument requiring the same.
SECTION 6. Vice Chairman of the Board. The Vice Chairman of the Board shall
have such powers and perform such duties as the Board may from time to time
prescribe. He may sign with the Secretary or an Assistant Secretary,
certificates for shares of stock of the Corporation. Except as otherwise
provided by law, he shall possess the same powers as the Chairman to execute and
deliver all deeds, bonds, mortgages, contracts or other instruments authorized
by the Board. At the request of the Chairman, or in case of his absence or
inability to act, the Vice Chairman shall perform duties of Chairman and when so
acting shall have all of the powers and be subject to all of the restrictions
upon the Chairman.
SECTION 7. President. The President shall be the chief operating officer of
the Corporation and shall have direct responsibility and authority for the day
to day business activities and affairs of the Corporation, subject to the
supervision of the Chairman of the Board and to the control of the Board. In the
absence of the Chairman and Vice Chairman of the Board, he shall preside at all
meetings of the shareholders and the Board and, unless or until the Board shall
otherwise determine, be vested with all of the powers of the Chairman of the
Board. He may sign, with the Secretary or an Assistant Secretary, certificates
for shares of stock of the Corporation; he may execute and deliver in the name
of the Corporation all deeds, bonds, mortgages, contracts, or other instruments
authorized by the Board, except in cases where the execution or delivery thereof
shall be expressly delegated by the Board or these By-laws to some other officer
or agent of the Corporation, and except any instruments required by law
otherwise to be executed or delivered; and he may affix the seal of the
Corporation to any instrument requiring the same. He shall be a member
ex-officio of any committee appointed by the Board. The President shall see that
all orders of the Chairman of the Board are carried into effect, shall perform
such other duties as may be assigned to him by the Board or by these By-laws
and, in general, shall perform all duties incident to the office of President.
SECTION 8. Vice President. Each Vice President shall have such powers and
perform such duties as the Board may from time to time prescribe. Any Vice
President may sign, with the Secretary or an Assistant Secretary, certificates
for shares of stock of the Corporation. Except as otherwise provided by law,
each of the Vice Presidents shall possess the same power as the President to
execute and deliver all deeds, bonds, mortgages, contracts, or other instruments
authorized by the Board.
SECTION 9. The Treasurer. The Treasurer shall have the
<PAGE>
care and custody of, and be responsible for, all of the funds and securities of
the Corporation and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name of and to the credit of the Corporation
in such banks or other depositories as may be designated by the Board; he shall
disburse the funds of the Corporation as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board, the President or to the Board, whenever the Chairman, the President or
the Board may require him so to do, a statement of all his transactions as
Treasurer and an account of the financial condition of the Corporation; and, in
general, he shall perform all the duties incident to the office of Treasurer and
such other duties as may from time to time be assigned to him by the President
or the Board.
SECTION 10. The Secretary. The Secretary shall act as secretary of, and
keep the minutes of, all meetings of the Board and of the stockholders; he shall
cause to be given such notice of all meetings of the stockholders and directors
as may be required; he shall be custodian of the seal of the Corporation and
shall affix the seal or cause it to be affixed to all certificates for shares of
stock of the Corporation and to all documents the execution of which on behalf
of the Corporation under its seal shall have been specifically or generally
authorized by the Board; he shall have charge of the stock book and also of the
other books, records and papers of the Corporation relating to its organization
as a corporation, and shall see that the reports, statements and other documents
required by law are properly kept or filed; and he shall in general perform all
the duties incident to the office of Secretary. He may sign, with any other
authorized officer, certificates for shares of stock of the Corporation. He
shall have such other powers and perform such other duties as the Chairman of
the Board, the President or the Board shall from time to time prescribe.
SECTION 11. Salaries. The salaries of the officers of the Corporation, if
any, shall be fixed, from time to time by the Board, and none of such officers
shall be prevented from receiving a salary by reasons of the fact that he is
also a member of the Board.
SECTION 12. Vacancies. Any vacancy in the office of any officer, caused by
death, resignation, removal or any other cause, may be filled by the Board for
the unexpired portion of the term.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
SECTION 1. Executive Committee - Designations, Vacancies. The Board may, by
resolution or resolutions adopted by a majority of the whole Board, designate
two or more of their number to constitute an Executive Committee. The Board
shall designate one of the members of the Executive Committee to act as Chairman
of the Executive Committee. The Chairman of the Executive Committee shall
preside at its meetings and shall perform such other duties as may from time to
time be assigned to him by the Executive Committee. The Secretary of the
Corporation, or such other person as the Executive Committee shall from time to
time determine, shall act as secretary of the Executive Committee. The Board, by
action of a majority of the whole Board, shall have power to remove members of
and to fill vacancies in the Executive Committee.
<PAGE>
SECTION 2. Executive Committee - Powers. The Executive Committee shall have
and may exercise all the powers of the Board in the management of the property,
business and affairs of the Corporation, during the intervals between meetings
of the Board.
SECTION 3. Executive Committee - Procedure. The Executive Committee shall
fix its own rules of procedure and may hold its meetings at any place which it
may find convenient. The Executive Committee shall keep a record of its
proceedings and report them to the Board at the next meeting thereof after such
proceedings shall have been taken. All action taken by the Executive Committee
shall be subject to ratification or alteration by the Board. The members of the
Executive Committee shall act only as a committee and the individual members
shall have no power as such.
SECTION 4. Other Committees. The Board of Directors, by resolution passed
by a majority of the whole Board, may designate members of the Board to
constitute other committees, which shall in each case consist of such number of
directors and shall have and may exercise, except as otherwise prescribed by
statute, such powers as the Board may determine and specify in the respective
resolutions appointing them. A majority of all of the members of such committee
may determine its action and fix the time and place of its meeting, unless the
Board shall otherwise provide. The Board shall have power at any time to change
the members of any such committee to fill vacancies and to discharge any such
committee, either with or without cause.
ARTICLE V
RESIGNATIONS
SECTION 1. Resignations. Any director or officer may resign his office at
any time by giving written notice of his resignation to the Chairman of the
Board, the President or the Secretary of the Corporation. Such resignation shall
take effect at the time specified therein or, if no time be specified therein,
at the time of the receipt thereof, and the acceptance thereof shall not be
necessary to make it effective.
ARTICLE VI
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 1. Execution of Contracts. Except as otherwise provided by law or
in these By-laws, the Board may authorize any officer or officers, agent or
agents, in the name of and on behalf of the Corporation, to enter into any
contract or to execute and deliver any instrument, and such authority may be
general or confined to specific instances. Unless so authorized by the Board or
expressly authorized by these By-laws, no officer or agent or employee shall
have any power or authority to bind the Corporation by any contract or
engagement or to pledge its credit or to render it pecuniarily liable for any
purpose or to any amount.
SECTION 2. Indebtedness. No loans shall be contracted on behalf of the
Corporation and no negotiable paper shall be issued in its name unless
authorized by the Board. When authorized by the Board so to do, any officer or
agent of the Corporation thereunto authorized may effect loans and advances at
any time for the Corporation from any bank, trust company or other institution,
or from any firm, corporation or individual, and for such loans and advances may
make, execute and deliver promissory
<PAGE>
notes, bonds, or other certificates or evidences of indebtedness of the
Corporation and, when authorized so to do, may pledge, hypothecate or transfer
any securities or other property of the Corporation as security for any such
loans or advances. Such authority may be general or confined to specific
instances.
SECTION 3. Checks, Drafts, etc. All checks, drafts, and other orders for
the payment of moneys out of the funds of the Corporation and all notes or other
evidences of indebtedness of the Corporation shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by the
Board.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board may select or as may
be selected by any officer or officers, agent or agents of the Corporation to
whom such power may from time to time be delegated.
SECTION 5. Proxies. Unless otherwise provided by the Board, the Chairman of
the Board, the Vice Chairman, the President or any Vice President may from time
to time appoint an attorney or attorneys or agent or agents of the Corporation,
in the name and on behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as the holder of stock or other securities
in any other corporation, or to consent in writing, in the name of the
Corporation as such holder, to any action by such other corporation, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed in the
name and on behalf of the Corporation, and under its corporate seal, or
otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises.
ARTICLE VII
SHARES AND CERTIFICATES
SECTION 1. Certificates. Each holder of record of shares of stock of the
Corporation shall be entitled to a certificate or certificates in such form as
shall be approved by the Board, signed by the Chairman of the Board, the Vice
Chairman, the President or a Vice President and the Secretary or an Assistant
Secretary, and sealed with the seal of the Corporation, which seal may be an
engraved or printed facsimile, certifying the number of shares owned by him in
the Corporation. If any such certificate is signed by a transfer agent or
transfer clerk and by a registrar, the signatures of any of the officers
specified above may be engraved or printed facsimiles. In case any such officer
who shall have signed or whose facsimile signature shall have been placed upon
such certificate shall have ceased to be such before such certificate is issued,
it may be issued by the Corporation with the same effect as if such officer had
not ceased to be such at the date of its issue.
SECTION 2. Transfers. Shares of stock of the Corporation shall be
transferable on the stock book of the Corporation by the holder thereof in
person or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary or the transfer agent. Except as
hereinafter provided in the case of loss, destruction or mutilation of
certificates, no transfer of stock shall be entered until the previous
certificate given for the same shall have been duly endorsed, surrendered and
canceled. The Board may also make such additional rules and regulations as it
may deem expedient concerning the issue and transfer of certificates
representing shares of stock of the Corporation. No transfer of shares shall be
valid as against the
<PAGE>
Corporation or its shareholders for any purpose until it shall have been entered
in the share records of the Corporation by an entry showing from and to whom
transferred.
SECTION 3. Closing of Transfer Books, Record Date. The Board may prescribe
a period, not exceeding fifty (50) days prior to any meeting of stockholders or
prior to the last day on which the consent or dissent of stockholders may be
effectively expressed for any purpose without a meeting, during which no
transfer of stock on the books of the Corporation may be made; or, in lieu of
prohibiting the transfer of stock, may fix a day and hour not more than fifty
(50) days prior to the day and hour then fixed for the holding of any meeting of
stockholders or prior to the last day on which the consent or dissent of
stockholders may be effectively expressed for any purpose without a meeting as
the time as of which stockholders entitled to notice of and to vote at such
meeting or whose consent or dissent is required or may be expressed for any
purpose, as the case may be, shall be determined, and all persons who were
holders of record of voting stock at such time and no others shall be entitled
to notice of and to vote at such meeting or to express their consent or dissent,
as the case may be. The Board may fix a day and hour not exceeding fifty (50)
days preceding the date fixed for the payment of any dividend or the making of
any distribution, or for the delivery of evidences of rights or evidences of
interest arising out of any change, conversion or exchange of capital stock, as
a record time for the determination of the stockholders entitled to receive any
such dividend, distribution, rights or interests, and in such case only
stockholders of record at the time so fixed shall be entitled to receive such
dividend, distribution, rights or interests. The Board at its option, in lieu of
so fixing a record time, may prescribe a period not exceeding fifty (50) days
prior to the date fixed for the payment of such dividend, distribution or
delivery during which no transfer of stock on the books of the Corporation may
be made.
SECTION 4. Lost, Destroyed or Mutilated Certificates. In case of loss,
destruction or mutilation of any certificate of stock, another may be issued in
its place upon proof of such loss, destruction or mutilation and upon the giving
of a bond of indemnity to the Corporation in such form and in such sum as the
Board may prescribe; provided, however, that a new certificate may be issued
without requiring any bond when, in the judgment of the Board, it is proper to
do so.
ARTICLE VIII
OFFICES AND BOOKS
SECTION 1. Offices. The principal office of the Corporation shall be at 475
Steamboat Road, Greenwich, CT. The Board may from time to time and at any time
establish other offices of the Corporation or branches of its business at
whatever place or places seem to it expedient.
SECTION 2. Books. There shall be kept at the principal office of the
Corporation correct books of account of all the business and transactions of the
Corporation and, either at said office of the Corporation or at the office of
the transfer agent of the Corporation, the stock book of the Corporation, which
shall contain the names, alphabetically arranged, of all persons who are
stockholders of the Corporation, showing their respective places of residence,
the number of shares of stock held by them respectively, and the time when they
respectively became the owners thereof.
<PAGE>
ARTICLE IX
SEAL
SECTION 1. The seal of the Corporation shall be circular in form and
contain the name of the Corporation and the words and figures "Corporate Seal
1924 New York".
ARTICLE X
WAIVER OF NOTICE
SECTION 1. Whenever any notice whatever is required by these By-laws or the
Certificate of Incorporation or by law, the person entitled thereto may, in
person, or, in the case of a stockholder, by his duly authorized attorney, waive
such notice in writing (which shall include the use of telegraph, cable, radio
or wireless), whether before or after the meeting or other matter or event in
respect of which such notice is to be given.
ARTICLE XI
FISCAL YEAR
SECTION 1. The fiscal year of the Corporation shall end on the 31st day of
December in each year.
ARTICLE XII
INDEMNIFICATION
SECTION 1. Right of Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person for whom he or
she is the legal representative is or was a director or officer, employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director or officer, employee or agent of another corporation including
subsidiaries of the Corporation, or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official capacity
as a director, officer, employee or agent or in any other capacity while serving
as so requested as a director, officer, employee or agent, shall be indemnified
and held harmless by the Corporation to the fullest extent permitted by the New
York Business Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent such amendment
permits the Corporation to provide broader indemnification rights then said law
permitted the Corporation to provide prior to such amendment) against all
expenses, liability and loss (including attorneys' fees, judgment, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith. Such
right shall be a contract right and shall include the right to be paid by the
Corporation expenses incurred in defending any such proceeding in advance of its
final disposition; provided, however, that the payment of such expenses incurred
by a director or officer of the Corporation in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of such
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is
<PAGE>
not entitled to be indemnified under this section or otherwise.
SECTION 2. Right of Claimant to Bring Suit. If a claim under Section 1 is
not paid in full by the Corporation within 90 days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking has been tendered to the Corporation) that the claimant has not met
the standards of conduct which make it permissible under the New York Business
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation. The
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the New York Business Corporation Law, shall not be a defense to
the action nor shall an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) that the
claimant had not met such applicable standard of conduct, create a presumption
that claimant had not met the applicable standard of conduct.
SECTION 3. Non-Exclusivity of Rights. The rights conferred by Sections 1
and 2 shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute, provision of the Articles of Incorporation,
By-laws, agreement, vote of stockholders or disinterested directors or
otherwise.
SECTION 4. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any such director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the New York Business Corporation Law.
ARTICLE XIII
AMENDMENTS
SECTION 1. These By-laws or any of them may be altered, amended or
repealed, or new By-laws may be adopted, by the vote of a majority of the whole
Board at any regular or special meeting thereof, or by the vote of the holders
of a majority in number of the issued and outstanding shares of stock of the
Corporation given at any annual or special meeting of stockholders, provided
that notice thereof shall have been given in the notice of such meeting of
stockholders. The power of the Board to make, alter, amend and rescind the
By-laws of the Corporation shall be subject to such restrictions and
regulations, if any, as may be contained in any By-laws made and adopted at any
time by the stockholders. Any By-law adopted, amended and repealed by the Board
which regulates an impending election of directors shall be set forth in the
notice of the next meeting of stockholders for the election of directors,
together with a concise statement of the changes made.
Exhibit 13
1996 Annual Report
DCA
Dynamics
Corporation of
America
<PAGE>
DYNAMICS CORPORATION OF AMERICA
Contents
Page
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 ......... 20
Selected Financial Data ............... 21
Segments of Business .................. 22
Range of Stock Prices and Dividend
Information ........................... 23
Divisions and
Subsidiary ........................... 24
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 eight plants are
located in California, Connecticut, Ohio and Pennsylvania. Its six 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[RegTM], Acme Juicerator[RegTM], Qualheim[TM], Blendor[RegTM],
NuBlend[RegTM] and Touchblend[RegTM] tradenames; engine generator sets; air
distribution products and systems sold under the Anemostat[RegTM],
Anemotrak[RegTM] and Envirotrak[RegTM] tradenames; vision frames sold under the
LoPro[TM] tradename 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[RegTM]) 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 for the automotive, computer equipment, communications equipment,
defense and aerospace, instruments and controls and consumer electronics
markets.
1
<PAGE>
PRESIDENT'S MESSAGE
TO SHAREHOLDERS
In 1996, Dynamics Corporation of America continued to grow as sales
increased by 13% to $129,206,000 from $114,164,000 in 1995 and net income
increased by 58% to $10,607,000 from $6,723,000 in 1995. There were other
notable achievements in 1996: stockholders' equity rose to a record
$115,038,000, market value per share increased 15% to $28.25 and the Company
again ended the year with solid cash flow and no bank debt. DCA continued to
maintain a strong balance sheet with total assets of $140,736,000 and total
liabilities of $25,698,000, providing a firm base to further grow the Company
with continued emphasis on liquidity and improving profitability.
By far the single largest contribution to DCA's earnings in 1996 came from
its equity investment in CTS Corporation, the electronic and electromechanical
components manufacturer in which DCA owns a 44.1% stake. CTS' earnings have
grown significantly over the past three years with record earnings of
$21,170,000 being recorded for 1996. To date, our investment in CTS has been the
largest and most successful of the investments that DCA has made in the shares
of other companies. A little history may be helpful to our newer shareholders
who may not be aware how this important part of DCA's business has over the
years greatly enhanced shareholders' equity. As stated in our 1985 Annual
Report: "In 1985 DCA's investments once again contributed to its profits as they
have in every year since its investment portfolio was initiated in 1975. As you
know, the investments are made in sound companies and the income from these
investments constitutes an integral part of DCA's strategy for orderly,
sustained growth." In furtherance of that strategy, we reported in our 1986
message to shareholders: "The third major change that occurred in 1986 has the
greatest potential to influence the Corporation's future. Early in 1986 we
decided to make a much greater investment in the CTS Corporation...." The
performance of CTS over the last few years and particularly its record sales and
earnings in 1996 have confirmed the wisdom of that investment decision. The
market value of the Company's CTS shares, which amounted to $86,942,000 at
December 31, 1995, increased to $98,458,000 at December 31, 1996 and on March
10, 1997 was $115,443,000. In addition to this growth in the value of our
investment in CTS, the contribution made by CTS to our earnings under equity
accounting also grew substantially in 1996. It should be noted that since 1987
two members of DCA's management have served as directors on the CTS Board and
the present Chairman and President of CTS served as a director of DCA prior to
his appointment as President in 1988. The intervening years have not been
without their challenges but steady progress has been made in strengthening CTS'
balance sheet and growing its earnings, by eliminating unprofitable product
lines, selling underutilized facilities in favor of more productive and
mechanized equipment, focusing the research and development effort on the design
and development of new and innovative products, emphasizing positive cash flow
and debt reduction, and relentlessly increasing the company's capabilities in
management, technology, engineering, and marketing and sales. As Joseph P.
Walker, President of CTS, recently reported to shareholders: "As we enter our
second century of operations, we are well positioned to realize significant,
profitable growth. The foundation of our progress toward total customer
satisfaction has been established on cultural change, leadership development,
business process initiatives and validation of core competencies." We agree with
this assessment and look for continued growth in our CTS investment and more
value for DCA's shareholders.
While all but two of DCA's own operations, including those engaged in the
manufacture of electronic components, made favorable contributions to profits in
1996, the combined pretax losses of approximately $6,300,000 at our Waring
Products Division and at the Scranton facility of our Anemostat Products
Division substantially negated those earnings, resulting in a minimal profit
from our own operations for the year.
The inability of Waring to sell sufficient quantities of a number of new
consumer products developed and targeted for sale through mass merchants during
the 1995 holiday season produced a major buildup in inventories of these
products which had to be resolved in 1996. Waring's new management has
determined to de-emphasize these low margin products and their marketing through
mass merchants and has instead been focusing on its higher quality and higher
margin consumer and commercial products. However, the write-
down and sell-off of the low margin inventory and reductions in staff to levels
appropriate to the new strategy resulted in charges to 1996 operations of
approximately $2 million. These costs are now behind us. The new focus at Waring
may result in the short term in lower sales levels but is directed toward a
return to profitability. Orders for our commercial and higher margin consumer
products toward the end of 1996 and thus far in 1997 confirm the new approach is
working.
Significant steps have also been undertaken to improve the Anemostat
Scranton operation. Management
2
<PAGE>
changes have been made in all aspects and disciplines: manufacturing,
engineering, sales and marketing, financial and human resources. The new team is
concentrating on the basics: product redesign to enhance manufacturability,
culling of unprofitable products, on-time deliveries, production efficiencies
and attention to customer requirements. The Scranton operation is reporting a
reduction in its losses so far in 1997 and is projecting a return to
profitability in the second half.
In marked contrast, the profitable Anemostat West operation, which
experienced a reduction in earnings in 1995, returned once again to an
acceptable level of profitability in 1996 and continues to sustain that level in
1997. The successful introduction of the new LoPro[TM] vision frame in the door
product line, made possible by a substantial investment in automated production
machinery, appears to be fueling this increase in profits.
In 1996, the Fermont Division successfully produced and tested the nine
different models of prototype generator sets to be manufactured under the $81.8
million contract awarded to Fermont by the U. S. Government in 1995. Its major
task in 1997 is to achieve and sustain the high levels of production of
generator sets required to meet delivery schedules under this contract.
Shipments began in March and are projected to reach $30 million in 1997 and $38
million in 1998.
Profits at our International Electronic Research Corporation subsidiary did
not keep pace with 1995 levels, mainly because of a weak computer market early
in 1996 coupled with inefficiencies in the startup of production on a number of
its new thermal management products. The market for IERC's products currently
appears strong and this has been reflected in higher order levels early in 1997.
Reeves-Hoffman, our other electronic components manufacturer, experienced
essentially flat sales and profits in 1996. However, the division materially
enhanced the level of its talent in engineering and sales and marketing in 1996.
In addition, the market for its products, particularly in communications, is
quite strong as we enter 1997 and order rates, especially for oscillators, have
risen substantially, reflecting a rising technical and manufacturing capability
and portending better times for this operation.
Our continued emphasis on cash flow during the year enabled DCA to purchase
$440,000 of DCA shares, repay $3 million of bank debt, pay dividends of $765,000
to shareholders, and acquire $2.6 million of capital equipment to increase
production capacity and efficiency at our operations.
The general economic landscape as we enter 1997 is the best it has been in
a number of years: moderate but sustained growth with low inflation. The current
expansion is approaching historic proportions in terms of its duration but it is
generally believed that even Alan Greenspan has not been able to repeal the
economic laws regarding the business cycle. The Federal Reserve's current
skepticism concerning the financial markets could produce an increase in
interest rates and trigger the long predicted but thus far deferred recession.
This would likely affect the currently strong order rates for our products, and
a drop in stock prices may negatively impact the economy. Thus, our optimism for
the year ahead is tempered by some caution.
Central to our efforts is the continued support of our employees, customers
and shareholders, to all of whom we extend our thanks and our commitment to
continue our efforts on their behalf.
/s/ Andrew Lozyniak
- -------------------
Andrew Lozyniak
Chairman of the Board and President
March 10, 1997
3
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF
RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion, unless otherwise noted, pertains to continuing
operations including the reclassified operations of the Fermont Division.
Results of Operations
(1996 compared to 1995)
- --------------------------------------
Sales increased $15,042,000, or 13.2%. Sales in the Electrical Appliances and
Electronic Devices segment decreased $367,000, as sales decreases for heat
dissipating devices exceeded sales increases for frequency control devices and
electrical appliances. Sales in the Power and Controlled Environmental Systems
segment increased by $12,315,000, primarily on the strength of sales to the U.S.
Government of engines which are to be incorporated in generator sets to be
provided under a contract for delivery in 1997 and 1998; sales of mobile and
shelter products increased but were offset by sales declines in thermal and
power plant products. Sales in the Fabricated Metal Products and Equipment
segment rose $3,094,000 from increased air and door product line sales.
Gross profit decreased $1,688,000 despite higher sales and the gross profit
percentage declined from 23.3% to 19.3%. Gross profit in the Electrical
Appliances and Electronic Devices segment was adversely affected by an
adjustment to the carrying value of certain low margin electrical appliance
products and other charges related thereto amounting to approximately
$1,300,000, and by price competition on consumer electrical appliances and heat
dissipating devices. Start-up production costs and manufacturing inefficiencies
associated with heat dissipating products and certain frequency control
components also reduced margins. Gross profit increased in the Power and
Controlled Environmental Systems segment mainly as a result of a termination
settlement on a contract for the production of 3KW generator sets, but was
reduced in part by lower gross margins on sales of power plant, custom mobile,
and shelter products. Gross profit in the Fabricated Metal Products and
Equipment segment was lower due to production cost inefficiencies in the
manufacture of air products at the segment's Pennsylvania facility.
Selling, general and administrative expenses decreased $1,042,000 and
declined as a percent of sales from 22.6% to 19.1%, due primarily to lower
commission expense based upon product mix in the Power and Controlled
Environmental Systems segment and lower advertising and product promotion
expense in the Electrical Appliances and Electronic Devices segment.
Other expense, net decreased $199,000. Environmental response costs
increased $497,000; staff reduction costs increased $195,000 in order to align
future operating costs with expected revenues in the electrical appliance
business; and interest expenses increased due to the higher level of borrowing
for working capital requirements while interest income declined due to a lower
level of investments. Other income increased $1,041,000 from royalties under a
technology transfer agreement with a customer in the Power and Controlled
Environmental Systems segment.
The 1996 effective tax rate was 43.7% or 6.6% higher, after excluding the
effect of a favorable resolution of tax matters on the 1995 rate, and was higher
than the applicable 34% Federal statutory rate principally because of state
income taxes.
Equity in CTS Corporation
Income from the Company's equity investment in CTS Corporation increased
$5,869,000. A portion of the improvement is attributable to an increase in CTS'
earnings from $17,164,000 to $21,170,000. According to CTS' published reports,
its operating results reflect continued strength in its domestic and European
automotive and computer equipment markets, and the benefits of manufacturing and
cost improvement programs; increased investments in research and development and
capital equipment expenditures for new products have also contributed to
increasing sales and profitability.
The Company's reported share of CTS' net earnings also increased by
$2,466,000 from a change in the effective tax rate applied by the Company to its
cumulative share of CTS' undistributed earnings through January 1, 1996. The
lower tax rate applied also resulted in a $2,108,000 increase in the Company's
reported share of CTS' earnings for 1996.
Reclassification of Provision for Fermont Disposition
Beginning on April 1, 1996, the Fermont Division's results of operations are
included in the Company's Consolidated Statements of Income (see Note 11--
Reclassification of Provision for Fermont Disposition in the Notes to
Consolidated Financial Statements). Reported results for prior periods have been
reclassified, including reversals ($251,000 in 1996 and $948,000 in 1995) of the
operating loss provision for Fermont recorded in a prior period.
Liquidity and Financial Resources
Cash and cash equivalents amounted to $1,146,000 at December 31, 1996, a
decrease of $621,000 from the
4
<PAGE>
previous year end. Positive cash flow from operations permitted the Company to
repay $3,000,000 outstanding at December 31, 1995 under the Company's Revolving
Credit Agreement.
Also, during the year the Company purchased $2,627,000 in machinery and
equipment, acquired 18,751 shares of the Company's common stock for treasury at
a cost of $440,000 and paid dividends of $765,000.
Waring Products Division's decision to de-emphasize the sale of low margin
electrical appliances and to reduce staff and other costs is expected to reduce
sales modestly in 1997 but have a positive effect on profitability.
The Company has available unused credit of $37,000,000 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 $8,596,000 for the three years ended December 31, 1996,
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 $14,532,000 to realize its net deferred tax assets
of $5,706,000, excluding deferred tax liabilities of $1,143,000 at December 31,
1996 for the undistributed earnings of the Company's equity investment in CTS
Corporation. Under applicable carryback provisions of the current Internal
Revenue Code, $11,698,000 of the prior years' taxable income could be utilized
to realize deferred tax assets. Although 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 has control over the reversal of
approximately $7,800,000 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, having agreed with the
EPA to fund a feasibility study at the site, sued the Company to recover a share
of those costs and in September 1996 a $287,000 judgment was entered against the
Company following trial of the action, which was subsequently paid. The Company
has elected to participate in the allocation of responsibility proceedings
conducted by the PRP group formed in connection with the Superfund site in the
vicinity of the California site. A suit against the Company by a property owner
neighboring the California site for allegedly causing contamination at the
neighbor's property has been discontinued. In 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.
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 and
cash flows could be materially affected by an unfavorable resolution of these
matters.
5
<PAGE>
In 1996 the Company incurred expenses of $1,111,000, including $912,000 for
non-Company 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 the Connecticut site, a 59% increase in
such expenses over the prior year. Accruals for such matters amounted to
$951,000 and $565,000 at December 31, 1996 and 1995, respectively.
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.
Results of Operations
(1995 compared to 1994)
- --------------------------------------
Sales increased $6,464,000, or 6.0%, which included an increase in export sales
of $9,844,000. 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 decreased by $369,000, as sales of engine
generator sets declined sharply from the prior year when the $6,450,000
settlement of a proposed change order with the government was recorded. Power
plant product shipments to a single customer in the Pacific Rim and sales of
custom mobile products were 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 decreased $5,046,000 on higher sales and the gross profit
percentage declined from 29.4% to 23.3%, due in large part to the high margin on
revenues from the settlement with the government in 1994 and to material cost
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 decreased in the Power
and Controlled Environmental Systems segment due to the profit on the 1994
settlement, offset in part by a significant increase in sales of higher margin
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 $1,342,000 but
declined slightly as a percent of sales from 22.7% to 22.6%. 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 income (expense), net was a net charge of $296,000 as compared to
income of $613,000. The current year's net expense included charges of $444,000
for recall of the Dualit toaster and $415,000 for settlement of certain
environmental matters, 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 $782,000 for an effective tax benefit
rate of 134.4%, 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 1.9% to 37.1% 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.
Reclassification of Provision for Fermont Disposition
Beginning on April 1, 1996, the Fermont Division's results of operations are
included in the Company's Consolidated Statements of Income (see Note 11--
Reclassification of Provision for Fermont Disposition in the Notes to
Consolidated Financial Statements). Reported results for prior periods have been
reclassified, including reversals ($948,000 in 1995 and $8,000 in 1994) of the
operating loss provision for Fermont recorded in a prior period.
6
<PAGE>
DYNAMICS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
As of December 31, 1996 1995
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ...................................................... $ 1,146 $ 1,767
Accounts receivable, less allowances of $536 and $613 ........................... 19,583 19,898
Inventories--Note 2 ............................................................ 22,624 23,440
Other current assets ............................................................ 1,196 1,254
Deferred income taxes ......................................................... 4,801 4,434
-------- --------
Total Current Assets ......................................................... 49,350 50,793
Property, Plant and Equipment, at cost, less accumulated depreciation and
amortization--Notes 3 and 6 ................................................... 5,121 4,164
Equity Investment in CTS Corporation--Note 4 .................................... 84,046 77,180
Other Assets ..................................................................... 2,219 2,164
-------- --------
Total Assets .................................................................. $140,736 $134,301
======== ========
Liabilities
Current Liabilities:
Current installments of long-term debt .......................................... $ 50 $ 63
Accounts payable ............................................................... 6,898 6,284
Accrued expenses and sundry liabilities--Note 5 ................................. 15,291 14,616
Federal income taxes payable ................................................... 1,578 851
-------- --------
Total Current Liabilities ................................................... 23,817 21,814
Long-term Debt--Note 6 ......................................................... 374 3,424
Other Liabilities--Note 12 ...................................................... 1,269 1,605
Deferred Income Taxes ............................................................ 238 1,984
-------- --------
Total Liabilities ............................................................ 25,698 28,827
-------- --------
Contingencies--Note 13
Stockholders' Equity--Notes 7 and 8
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
3,810,810 and 3,829,561 shares ................................................ 381 383
Paid-in Additional Capital ...................................................... 11,518 11,623
Retained Earnings ............................................................... 103,365 93,807
Deferred Compensation ............................................................ (226) (339)
-------- --------
Total Stockholders' Equity ................................................... 115,038 105,474
-------- --------
Total Liabilities and Stockholders' Equity .................................... $140,736 $134,301
======== ========
</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, 1996 1995 1994
<S> <C> <C> <C>
Net sales ............................................................... $129,206 $114,164 $107,700
Cost of sales ......................................................... 104,245 87,515 76,005
-------- -------- --------
Gross profit ......................................................... 24,961 26,649 31,695
Selling, general and administrative expenses ........................... 24,729 25,771 24,429
-------- -------- --------
232 878 7,266
Other income (expense), net--Note 9 .................................... (97) (296) 613
-------- -------- --------
Income from continuing operations before items shown below ............ 135 582 7,879
Income tax charge (benefit)--Note 10 ................................. 59 (782) 2,773
-------- -------- --------
Income from continuing operations before equity in CTS Corporation ... 76 1,364 5,106
Income from equity investment in CTS Corporation, including income
tax charge (benefit) of ($1,825), $2,158 and $1,082--Note 4 ............ 10,280 4,411 3,618
-------- -------- --------
Income from continuing operations .................................... 10,356 5,775 8,724
Reclassification of provision for Fermont disposition, including income
tax charge (benefit) of $160, $567 and ($216)--Note 11 ............... 251 948 8
-------- -------- --------
Net income ............................................................ $ 10,607 $ 6,723 $ 8,732
======== ======== ========
Income per common share:
Continuing operations ................................................ $ 2.71 $ 1.50 $ 2.25
Reclassification of provision for Fermont disposition ............... .07 .25
-------- -------- --------
Net income ............................................................ $ 2.78 $ 1.75 $ 2.25
======== ======== ========
</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, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Paid-in Total
Common shares additional Retained Deferred stockholders'
outstanding* Par value capital earnings compensation equity
------------- --------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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 ($.20 per share) ............ (768) (768)
--------- ---- ------- -------- ------ --------
Balance at December 31, 1995 ............... 3,829,561 383 11,623 93,807 (339) 105,474
Shares issued and issuable from treasury
pursuant to benefit plans ............... 12 12
Shares acquired for treasury and pursuant to
benefit plans ........................... (18,751) (2) (154) (284) (440)
Amortization of deferred compensation and
related tax benefit ..................... 37 113 150
Net income ................................. 10,607 10,607
Cash dividends ($.20 per share) ............ (765) (765)
--------- ---- ------- -------- ------ --------
Balance at December 31, 1996 ............... 3,810,810 $381 $11,518 $103,365 ($ 226) $115,038
========= ==== ======= ======== ====== ========
</TABLE>
*Net of shares held in treasury--3,364,351, 3,345,600 and 3,328,484 voting
shares at December 31, 1996, 1995 and 1994, respectively. The cumulative cost of
treasury shares at December 31, 1996 amounted to approximately $35,714. Includes
non-voting shares outstanding of 3,572 at December 31, 1996.
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, 1996 1995 1994
<S> <C> <C> <C>
Operating activities:
Net income ......................................................... $10,607 $ 6,723 $ 8,732
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................... 1,628 1,515 1,323
Deferred income taxes .......................................... (2,113) 3,051 498
Income before income taxes from equity investment in CTS ......... (8,455) (6,569) (4,700)
Dividends from CTS ............................................. 1,589 1,354 930
Increase in other assets ....................................... (55) (622) (30)
Decrease in other liabilities .................................... (336) (212) (1,137)
Gain on sale of property ....................................... (198)
Issuance of Company Common Stock ................................. 12 19 21
Other, net ...................................................... 192 194 122
Changes in operating assets and liabilities:
Accounts receivable ............................................. 315 (3,793) 557
Inventories ................................................... 816 (5,257) 939
Other current assets .......................................... 58 1,339 (1,169)
Accounts payable, accrued expenses and sundry liabilities ...... 1,289 798 3,937
Federal income taxes payable .................................... 727 (1,155) (348)
------- ------- -------
Net cash provided by (used in) operating activities ............... 6,274 (2,813) 9,675
------- ------- -------
Investing activities:
Purchases of CTS common stock .................................... (2,674) (8,538)
Purchases of property, plant and equipment ........................ (2,627) (1,915) (859)
Proceeds from sale of property .................................... 200
Proceeds from note receivable .................................... 476 49
------- -------
Net cash used in investing activities .............................. (2,627) (3,913) (9,348)
------- ------- -------
Financing activities:
Principal payments under capital lease obligations ............... (63) (164) (496)
Borrowings (repayments) under lines of credit ..................... (3,000) 3,000
Purchases of treasury stock ....................................... (440) (412) (1,186)
Dividends paid ................................................... (765) (768) (777)
------- ------- -------
Net cash provided by (used in) financing activities ............... (4,268) 1,656 (2,459)
------- ------- -------
Decrease in cash and cash equivalents .............................. (621) (5,070) (2,132)
Cash and cash equivalents at beginning of year ..................... 1,767 6,837 8,969
------- ------- -------
Cash and cash equivalents at end of year ........................... $ 1,146 $ 1,767 $ 6,837
======= ======= =======
</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
- ---------------------------------------
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. The financial statements for prior periods have
been reclassified to reflect the Fermont Division as part of continuing
operations (see Note 11).
The Company recognizes revenues from product sales upon shipment.
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 26% (1996)
and 41% (1995) 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.
Depreciation is computed on the straight-line and declining balance methods over
the estimated useful lives of assets (buildings and improvements 15-33 years;
equipment, fixtures and leaseholds 1-5 years).
Research and development costs are expensed as incurred and amounted to
$1,435,000 (1996), $1,732,000 (1995) and $1,669,000 (1994).
Advertising costs are expensed as incurred and amounted to $1,868,000 (1996),
$2,286,000 (1995) and $2,397,000 (1994).
Per share data is based upon the weighted average number of common and common
equivalent shares outstanding during the periods: 3,820,302 (1996), 3,839,488
(1995) and 3,877,106 (1994).
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.
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.
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.
The Company accounts for stock-based compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." There is no pro forma effect
on net income and earnings per share under FASB Statement No. 123, "Accounting
for Stock-Based Compensation."
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 was 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. No impairment losses were recognized in 1996.
Note 2: Inventories
- ---------------------------------------
1996 1995
---------- ---------
(in thousands)
Raw materials and supplies ...... $ 6,276 $7,655
Work in process .................. 7,024 8,565
Finished goods .................. 5,466 6,863
------- ------
18,766 23,083
------- ------
Inventories subject to progress
billings ........................ 5,184 1,233
Progress billings ............... (1,326) (876)
------- ------
3,858 357
------- ------
$22,624 $23,440
======= ======
The excess of current replacement cost over LIFO cost of inventories
amounted to approximately $950,000 (1996) and $800,000 (1995).
The United States Government has liens on substantially all inventories
subject to progress billings.
11
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
Note 3: Property, Plant and Equipment
(in thousands)
- ---------------------------------------
1996
----------------------------
Fixed Capital
Classification Assets Leases Total
- -------------- ------ ------- -----
Land and
improvements ...... $1,138 $1,138
Buildings and
improvements ...... 10,158 $1,520 11,678
Machinery,
equipment,
furniture and
fixtures ......... 28,271 630 28,901
Leasehold
improvements ...... 517 517
------ ------
40,084 2,150 42,234
Less accumulated
depreciation and
amortization ...... 35,289 1,824 37,113
------ ------ ------
$4,795 $ 326 $5,121
====== ====== ======
1996
----------------------------
Fixed Capital
Classification Assets Leases Total
- -------------- ------ ------- -----
Land and
improvements ... $1,138 $1,138
Buildings and
improvements ... 10,158 $1,520 11,678
Machinery,
equipment,
furniture and
fixtures ...... 26,191 688 26,879
Leasehold
improvements ... 517 517
------ ------
38,004 2,208 40,212
Less accumulated
depreciation and
amortization ... 34,240 1,808 36,048
------ ------ ------
$3,764 $ 400 $4,164
====== ====== ======
Note 4: Equity Investment in CTS Corporation
- --------------------------------------------
The Company's holdings aggregated 2,303,100, 2,303,100 and 2,222,100 shares
of CTS Corporation ("CTS") common stock at December 31, 1996, 1995 and 1994,
respectively. The Company's equity ownership in CTS was 44.1%, 44.1% and 42.9%
at December 31, 1996, 1995 and 1994, respectively.
The market value of the Company's investment in CTS amounted to $98,458,000
and $86,942,000 at December 31, 1996 and 1995, respectively. The market value of
the Company's investment in CTS on February 26, 1997 amounted to $111,700,000,
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
$9,216,000, amounted to $13,161,000 at December 31, 1996 and is being amortized
over twenty-five years (commencing in 1986) using the straight-line method
($882,000 in 1996). At December 31, 1996, undistributed net income of CTS
included in the Company's retained earnings, before Company-provided deferred
income taxes of $1,143,000, amounted to $16,816,000.
CTS operates primarily in one business segment, electronic and
electromechanical components and subsystems, in worldwide markets. Summarized
financial information derived from CTS' 1996 Annual Report to Stockholders
follows:
Year ended December 31,
---------------------------------
1996 1995 1994
----------- ----------- ---------
(in thousands)
Net sales ............... $321,297 $300,157 $268,707
======== ======== ========
Gross profit ............ $ 87,496 $ 74,804 $ 63,067
======== ======== ========
Net earnings ............ $ 21,170 $ 17,164 $ 13,967
======== ======== ========
Current assets ............ $138,201 $126,113 $110,667
======== ======== ========
Noncurrent assets ......... $111,171 $101,014 $ 96,159
======== ======== ========
Current liabilities ...... $ 51,391 $ 50,962 $ 44,792
======== ======== ========
Noncurrent
liabilities ............ $ 31,749 $ 29,912 $ 30,179
======== ======== ========
Stockholders' equity $166,232 $146,253 $131,855
======== ======== ========
The Company's proportionate share of CTS' earnings in accordance with the
equity method of accounting reflects a change as of January 1, 1996 in the
effective tax rate applied by the Company to its share of CTS' undistributed
earnings. The Company decided to change the rate applied to its share of CTS'
income from the corporate tax rate to the lower dividends received rate, based
on the substantially improved operating results of CTS and its continuing strong
cash flow. The application of the lower rate increased the Company's reported
share of CTS' net earnings for 1996 by $2,108,000 ($.56 per share). In addition,
the Company's reported share of CTS' net earnings increased by $2,466,000 ($.64
per share) for the adjustment to taxes
12
<PAGE>
previously provided at the corporate rate on the Company's cumulative share of
CTS' undistributed earnings through January 1, 1996.
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 5: Accrued Expenses and Sundry Liabilities
- -----------------------------------------------
1996 1995
------- -------
(in thousands)
Salaries, wages, commissions
and employee benefits ...... $4,337 $3,972
Taxes, other than Federal
income taxes ............... 1,350 1,116
Insurance ..................... 2,579 1,715
Customer contract claims,
including price adjustments
and refunds .................. 2,800 2,800
Environmental matters ......... 951 565
Advances from customers ...... 540 1,131
Warranties .................. 1,092 941
Other ........................ 1,642 2,376
------- -------
$15,291 $14,616
======= =======
Note 6: Long-term Debt and Credit Facilities
- --------------------------------------------
Long-term Debt 1996 1995
------- -------
(in thousands)
Revolving credit notes, 6.10% ...... $3,000
Obligations under capital leases . $424 487
---- ------
424 3,487
Less current portion ............... 50 63
---- ------
$374 $3,424
==== ======
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, including
dividends received from CTS Corporation, 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 $2,395,000 at December 31, 1996.
Interest payments amounted to $245,000, $85,000 and $73,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Leases
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 $634,000, including $210,000
representing interest. Minimum lease payments in each year for the next five
years are: $85,000, $78,000, $58,000, $45,000, 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 $895,000, $794,000 and
$625,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Minimum lease payments under operating leases total $2,633,000. Minimum lease
payments in each year for the next five years are: $764,000, $565,000, $408,000,
$281,000 and $90,000.
Note 7: 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
13
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
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, 1996, 1995 and 1994, 339,000 shares
were available each of those years 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 $216,000 (1996), $349,000 (1995) and $272,000 (1994) and
reacquired (at no cost) through forfeitures 3,000 (1994) 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 438 (1996), 437 (1995) and 547 (1994) 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 credited under the Plan is
5,349 at December 31, 1996.
Note 8: 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.
14
<PAGE>
Note 9: Other Income (Expense), Net
- ---------------------------------------
1996 1995 1994
-------- -------- -------------
(in thousands)
Interest:
Income ..................... $ 23 $ 212 $ 244
Expense .................. (274) (92) (73)
---- ----- -----
(251) 120 171
Royalties .................. 1,154 113 157
Sales of property and
leasehold rights ......... 236
Dualit toaster recall ...... (108) (444)
Environmental response
costs ..................... (912) (415)
Staff reductions ............ (320) (125)
Other, net .................. 340 219 285
---- ----- -----
($ 97) ($296) $ 613
==== ===== =====
Note 10: Income Taxes
- ---------------------------------------
Income tax charges (credits) from continuing operations consist of:
1996 1995 1994
------ ------ ------
(in thousands)
Current income taxes:
Federal ............ $ 98 ($ 1,668) $2,579
State ............... 89 (139) 389
Foreign ............ 47 35 327
----- -------- ------
234 (1,772) 3,295
----- -------- ------
Deferred income taxes:
Federal ............ (117) 790 (273)
State ............... (58) 160 (136)
Foreign ............ 40 (113)
-------- ------
(175) 990 (522)
----- -------- ------
$ 59 ($ 782) $2,773
===== ======== ======
Gross income subject to foreign taxes amounted to $330,000, $516,000 and
$1,328,000 for tax years 1996, 1995 and 1994, respectively.
Deferred income tax charges (credits) result from the following:
1996 1995 1994
------ ------ ------
(in thousands)
Inventory ............... ($435) $636 ($205)
Employee benefits ......... 163 (35) 107
Warranties ............... 123
Environmental costs ...... (153) (180)
Deferred income ......... 424 (98) (274)
Insurance ............... (290) (141) (292)
Toaster recall ............ (110)
Investments ............... 241
Prepaid commissions ...... (79)
Depreciation ............ 2 (49)
Other, net ............... 114 805 19
----- ----- -----
($175) $ 990 ($522)
===== ===== =====
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:
1996 1995 1994
------- ------ ------
Statutory rate ............ 34.0% 34.0% 34.0%
State income taxes, net
of Federal income tax
benefit .................. 15.2 2.4 2.1
Foreign taxes ............ 34.8 12.9 4.2
Resolution of prior year
tax matters ............... (171.5)
Employee benefits ......... (25.3) (4.1) (.3)
Foreign tax credits ...... (34.8) (13.2) (4.3)
Other, net ............... 19.8 5.1 (.5)
------ ---------- -----
43.7% (134.4%) 35.2%
====== ========== =====
15
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
1996 1995
----------- ---------
(in thousands)
Deferred tax assets:
Warranty reserve ............ $ 438 $ 363
Bad debt allowance ......... 164 191
Inventory .................. 1,824 1,389
Employee benefit plans ...... 1,298 1,476
Investments .................. 251 250
Customer contract claims ... 626 624
Depreciation ............... 472 471
Insurance .................. 743 453
Other, net .................. 564 581
------- -------
6,380 5,798
Valuation allowance for
deferred tax assets ......... (250) (250)
------- -------
Total deferred tax assets 6,130 5,548
------- -------
Deferred tax liabilities:
Undistributed earnings of CTS (1,143) (3,083)
Deferred income ............ (424)
Other, net .................. (15)
------- -------
Total deferred tax
liabilities ............... (1,567) (3,098)
------- -------
Net deferred tax assets ...... $ 4,563 $ 2,450
======= =======
The change in the valuation allowance for deferred tax assets decreased the
provision for income taxes $1,000 and $22,000 for the years ended December 31,
1995 and 1994, respectively.
Income tax payments (refunds), net amounted to ($473,000), $470,000 and
$3,611,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Note 11: Reclassification of Provision for Fermont Disposition
- --------------------------------------------------------------
Effective in April 1996, Fermont's results of operations are included in the
Company's Consolidated Statements of Income, as a result of the Company's
decision to bid on new contracts in addition to the contract to manufacture
tactical quiet (TQ) generator sets for the U.S. Army Aviation and Troop Command.
Accordingly, reported results for prior periods have been reclassified.
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 of
$5,600,000 for operating losses estimated to be incurred prior to Fermont's
disposition.
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, which amount is included in net sales. The settlement, net of
related expenses and income taxes, amounted to $3,334,000, or $.86 per share.
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 filed a claim for compensation for its costs and
losses related to the termination. In September 1996, the Company agreed to
accept $1,937,000 from the Government in settlement of its claim related to that
termination, which amount is included in net sales. The settlement, net of
amounts due to subcontractors, income taxes and other related costs, amounted to
$915,000, or $.24 per share.
In January 1995, Fermont was awarded the TQ contract. The Government's
initial delivery order issued with the award and subsequent additions call for
deliveries of gensets aggregating $81.8 million. Shipments of production units
will begin in March 1997 and are scheduled to continue through 1998.
Summarized financial information for the Fermont Division follows:
Year ended December 31,
--------------------------------
1996 1995 1994
------- -------- -------
(in thousands)
Net sales ......... $17,504 $ 2,444 $11,247
======= ======== =======
Operating profit
(loss) ............ $ 569 ($ 1,875) $ 5,132
======= ======== =======
Total assets ...... $ 6,488 $ 1,759 $ 1,366
======= ======== =======
Total liabilities $ 2,980 $ 862 $ 677
======= ======== =======
16
<PAGE>
Note 12: 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:
1996 1995 1994
-------- -------- --------
(in thousands)
Defined benefit plan:
Service cost--
benefits earned
during the period . $ 665 $ 522 $ 586
Interest cost on
projected benefit
obligation ............ 1,556 1,510 1,440
Actual return on plan
assets ............... (2,544) (2,961)
Net amortization and
deferral ............... 772 1,325 (1,688)
------- ------- -------
Net pension charges for:
Defined benefit plan ... 449 396 338
Multi-employer plan ...... 382 306 323
------- ------- -------
Net periodic pension
cost .................. $ 831 $ 702 $ 661
======= ======= =======
The 1995 change in the discount rate from 8.5% to 7.25% resulted in a
$93,000 increase in the 1996 net periodic pension cost.
Assumptions used in accounting for the defined benefit plan as of December
31 were:
1996 1995 1994
-------- -------- -------
Discount rate ............ 7.50% 7.25% 8.50%
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%
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets as of December 31, 1996 and 1995 for the
Company's defined benefit pension plan:
1996 1995
-------- --------
(in thousands)
Actuarial present value of
benefit obligation:
Accumulated benefit
obligation, including
vested benefits of
$18,437 and $17,923 ($ 20,554) ($ 20,053)
Effect of salary
projections ............... (1,843) (1,850)
-------- --------
Projected benefit
obligation for service
rendered to date ............ (22,397) (21,903)
Plan assets at fair value ... 20,235 18,371
-------- --------
Projected benefit obligation
in excess of plan assets ... (2,162) (3,532)
Unrecognized net loss from
past experience different
from assumed and effect of
changes in assumptions ...... 915 2,433
Prior service cost not yet
recognized in net periodic
pension cost .................. 151 178
Unrecognized net asset
remaining from initial
application of FASB
Statement No. 87 ............ (902) (1,292)
--------- ---------
Accrued pension cost ......... (1,998) (2,213)
Less current portion ......... 893 608
--------- ---------
Accrued long-term pension cost ($ 1,105) ($ 1,605)
========= =========
The 1996 change in the discount rate from 7.25% to 7.5% resulted in a
$634,000 decrease 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 $2,825,000 and $2,450,000 at December 31, 1996
and 1995, respectively. Dividend payments to the Plan on Company common stock
amounted to $20,000 in both 1996 and 1995.
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 non-contributory non-qualified defined benefit
supplemental retirement plan for certain key employees. The 1996 net periodic
pension cost and related accrued liability at December 31, 1996 for the Plan was
$164,000. At December 31, 1996, the plan was not funded.
17
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
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 $351,000 (1996), $347,000 (1995) and $325,000 (1994).
Note 13: 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.
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, having agreed with the
EPA to fund a feasibility study at the site, sued the Company to recover a share
of those costs and in September 1996 a $287,000 judgment was entered against the
Company following trial of the action. The Company has elected to participate in
the allocation of responsibility proceedings conducted by the PRP group formed
in connection with the Superfund site in the vicinity of the California site. A
suit against the Company by a property owner neighboring the California site for
allegedly causing contamination at the neighbor's property has been
discontinued. In 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 1996 the Company
incurred expenses of $1,111,000, including $454,000 for the California site and
$405,000 for the Connecticut site, to manage hazardous substances, to monitor
pollutants, to test for contaminants, to provide for required remediation
activities and to pay the judgment against the Company for its share of the
feasibility study costs at the Connecticut site. 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 and cash flows 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 14: Industry Segments
- ---------------------------------------
See Financial Information About Industry Segments on pages 22 and 23 of
this report.
18
<PAGE>
Note 15: 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>
1996
Net sales ............ $27,864 $ 33,326 $ 35,008 $ 33,008 $129,206
======= ======== ======== ======== ========
Gross profit ......... $ 5,075 $ 6,528 $ 7,532 $ 5,826 $ 24,961
======= ======== ======== ======== ========
Income from continuing
operations (a) ...... $ 3,226 $ 2,139 $2,238(b) $2,753(c) $ 10,356
======= ======== ======== ======== ========
Net income (a) ......... $ 3,477 $ 2,139 $2,238(b) $2,753(c) $ 10,607
======= ======== ======== ======== ========
Income per share:
Income from continuing
operations (a) ...... $ .84 $ .56 $ .59(b) $ .72(c) $ 2.71
======= ======== ======== ======== ========
Net income (a) ...... $ .91 $ .56 $ .59(b) $ .72(c) $ 2.78
======= ======== ======== ======== ========
1995
Net sales ............ $25,810 $ 28,750 $ 30,384 $ 29,220 $114,164
======= ======== ======== ======== ========
Gross profit ......... $ 6,339 $ 7,029 $ 7,172 $ 6,109 $ 26,649
======= ======== ======== ======== ========
Income from continuing
operations ............ $ 809 $1,562(d) $2,092(e) $1,312(f) $ 5,775
======= ======== ======== ======== ========
Net income ............ $ 1,083 $1,585(d) $2,444(e) $1,611(f) $ 6,723
======= ======== ======== ======== ========
Income per share:
Income from continuing
operations ......... $ .21 $ .40(d) $ .55(e) $ .34(f) $ 1.50
======= ======== ======== ======== ========
Net income ............ $ .28 $ .41(d) $ .64(e) $ .42(f) $ 1.75
======= ======== ======== ======== ========
<FN>
(a) The Company's reported share of CTS' net earnings for the three months ended
March 31, June 30, September 30, and December 31, 1996 increased by $436
($.12 per share), $528 ($.14 per share), $493 ($.13 per share) and $651
($.17 per share), respectively, for the change from the corporate tax rate
to the dividends received rate applied to the Company's share of CTS'
undistributed earnings. In addition, the Company's reported share of CTS'
net earnings for the three months ended March 31, 1996 increased by $2,466
($.64 per share) for the favorable adjustment to taxes previously provided
at the corporate rate on the Company's cumulative share of CTS'
undistributed earnings through January 1, 1996.
(b) Includes income of $915 ($.24 per share) from a settlement with the
Government concerning the termination of an engine generator contract for
the convenience of the Government and a charge of $173 ($.05 per share) for
environmental matters.
(c) Includes income of $655 ($.17 per share) from royalties and a charge of $194
($.05 per share) for staff reduction costs.
(d) Includes $124 ($.03 per share) of income from the sale of excess property
and leasehold rights.
(e) Increased by $998 ($.26 per share) for resolution of prior year tax matters.
(f) Includes charges of $260 ($.07 per share) for environmental response costs
and $204 ($.05 per share) for Dualit toaster recall costs.
</FN>
</TABLE>
19
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
[ERNST & YOUNG LLP Letterhead]
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. 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, 1996) have been audited by
other auditors whose report 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, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
February 26, 1997
20
<PAGE>
SELECTED FINANCIAL DATA
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales ........................... $ 129,206 $ 114,164 $ 107,700 $ 106,577 $124,898
========= ========= ========= ========= ========
Gross profit ........................ $ 24,961 $ 26,649 $ 31,695 $ 24,610 $ 30,585
========= ========= ========= ========= ========
Income (loss) from equity investment
in continuing operations of CTS ... $ 10,280 $ 4,411 $ 3,618 $ 1,619 ($ 442)
========= ========= ========= ========= ========
Income from continuing operations ... $ 10,356 $ 5,775 $ 8,724 $ 1,787 $ 2,444
========= ========= ========= ========= ========
Total assets ........................ $ 140,736 $ 134,301 $ 124,177 $ 115,364 $120,288
========= ========= ========= ========= ========
Long-term debt ..................... $ 374 $ 3,424 $ 401 $ 623 $ 1,023
========= ========= ========= ========= ========
Amounts per common share:
Income from continuing operations $ 2.71 $ 1.50 $ 2.25 $ .45 $ .62
========= ========= ========= ========= ========
Cash dividends ..................... $ .20 $ .20 $ .20 $ .20 $ .20
========= ========= ========= ========= ========
Stockholders' equity ............... $ 30.19 $ 27.54 $ 25.92 $ 23.86 $ 23.75
========= ========= ========= ========= ========
Average common shares outstanding ... 3,820,302 3,839,488 3,877,106 3,902,164 3,915,224
========= ========= ========= ========= ========
</TABLE>
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.
21
<PAGE>
SEGMENTS OF BUSINESS
During 1996, the Company's manufacturing businesses were conducted by five
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 predominantly 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, 1996:
Financial Information About Industry Segments
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Net Sales:
Electrical Appliances and Electronic Devices ...... $62,344 $62,711 $56,255
Fabricated Metal Products and Equipment ............ 26,740 23,646 23,269
Power and Controlled Environmental Systems ......... 40,122 27,807 28,176
-------- -------- --------
$129,206 $114,164 $107,700
======== ======== ========
Operating Profit (Loss):
Electrical Appliances and Electronic Devices ...... $ 866 $ 2,880 $ 3,067
Fabricated Metal Products and Equipment ............ (677) (354) 450
Power and Controlled Environmental Systems ......... 2,808 (8) 7,024
-------- -------- --------
2,997 2,518 10,541
Corporate Expenses ................................. (2,710) (2,293) (2,799)
Interest Income (Expense), net ..................... (262) 112 159
Other Income (Expense), net ........................ 110 245 (22)
-------- -------- --------
$ 135 $ 582 $ 7,879
======== ======== ========
Depreciation and Amortization:
Electrical Appliances and Electronic Devices ...... $ 1,110 $ 995 $ 944
Fabricated Metal Products and Equipment ............ 271 201 189
Power and Controlled Environmental Systems ......... 227 292 166
Corporate .......................................... 20 27 24
-------- -------- --------
$ 1,628 $ 1,515 $ 1,323
======== ======== ========
Capital Expenditures:
Electrical Appliances and Electronic Devices ...... $ 1,119 $ 1,175 $ 768
Fabricated Metal Products and Equipment ............ 319 272 69
Power and Controlled Environmental Systems ......... 1,189 559
Corporate .......................................... 33 22
-------- -------- --------
$ 2,627 $ 2,039 $ 859
======== ======== ========
Identifiable Assets:
Electrical Appliances and Electronic Devices ...... $23,666 $28,019 $21,920
Fabricated Metal Products and Equipment ............ 8,664 8,277 8,224
Power and Controlled Environmental Systems ......... 19,256 16,000 13,856
Corporate .......................................... 89,150 82,005 80,177
-------- -------- --------
$140,736 $134,301 $124,177
======== ======== ========
</TABLE>
22
<PAGE>
Financial Information About Industry Segments (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
(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) ............ $22,138 $7,839 $18,117
======== ======= ========
Export Sales ......................................................... $19,232 $23,879 $14,035
======== ======= ========
Classes of products representing 10% or more of Company net sales:
Electrical Appliances and Electronic Devices:
Consumer and Commercial Portable Electrical Appliances ............ 22.3% 25.0% 29.9%
Thermal Management Components ....................................... 16.5% 20.0% 14.7%
Fabricated Metal Products and Equipment:
Air Distribution Equipment and Controls ........................... 20.7% 20.7% 21.6%
Power and Controlled Environmental Systems:
Integrated Electrical Power Systems ................................. 13.5% 10.4%
Power Plant Equipment ............................................. 11.0%
</TABLE>
Notes:
See page 24 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 segment. Corporate assets are principally cash and the Company's equity
investment in CTS Corporation, substantially all of which is held by its wholly
owned subsidiary, LTB Investment Corporation.
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
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
New York Stock Exchange Dividends Paid
-------------------------------------------- -------------------
1996 1995 1996 1995
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 24-7/8 22-1/8 26-3/4 19-1/2 $.10 $.10
2nd Quarter 27-7/8 23-1/4 24-3/4 22-1/4
3rd Quarter 29-1/8 25 24-5/8 22-1/2 $.10 $.10
4th Quarter 29-1/4 27-7/8 25-7/8 21-5/8
</TABLE>
As of February 26, 1997 there were 3,584 shareholders of record.
The Board of Directors of the Company established a semi-annual dividend policy
in January 1978 and expects to continue this policy. At its January 1984
meeting, the Board of Directors established the regular semi-annual dividend
rate of ten cents ($.10) per share. The first payment for 1997 was made on
February 28 to shareholders of record as of the close of business on February
14, 1997.
The number of employees of the Company as of December 31, 1996 was 1,195.
23
<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 a 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[RegTM], NuBlend[RegTM] and Touchblend[RegTM] blenders, food
processors, drink mixers, juicers, juice extractors, and frozen dessert makers
sold under the Waring[RegTM], Acme Juicerator[RegTM] 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[RegTM]) 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.
FERMONT DIVISION
141 North Avenue
Bridgeport, Connecticut
06606-5195
Tel. 203-366-5211
Designs, manufactures and tests integrated electrical power systems primarily
for government markets.
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[RegTM], Anemotherm[RegTM], Multi-Vent[RegTM],
Anemotrak[RegTM] and Envirotrak[RegTM]. Anemostat also manufactures a line of
UL[RegTM] approved vision frames utilizing the brand name LoPro[TM] and louvers
for fire rated doors.
24
<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 2, 1997 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
<PAGE>
Dynamics Corporation of America
475 Steamboat Road
Greenwich, Connecticut 06830-7197
CTS CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
1996
FORM 10-K
ANNUAL REPORT
CTS
UNITED STATES
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, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0225010
(State or other jurisdiction of (IRS Employer Identifi-
incorporation or organization) cation Number)
905 West Boulevard North, Elkhart, Indiana 46514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 219-293-7511
Web site address: http://www.ctscorp.com
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common stock, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant has: (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
X
There were 5,226,496 shares of Common Stock, without par value,
outstanding on March 7, 1997.
The aggregate market value of the voting stock held by non-affiliates
of CTS Corporation was approximately $132.5 million on March 7, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the CTS Corporation 1996 Annual Report for the fiscal
year ended December 31, 1996, incorporated by reference in Part I and
Part II.
(2) Portions of the 1997 Proxy Statement for annual meeting of share-
holders to be held on April 25, 1997, 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
<PAGE>
Part I
Item 1. Business
INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS
The registrant, CTS Corporation (CTS or Company), is an Indiana
corporation incorporated in 1929 as a successor to a company
started in 1896. CTS' principal executive offices are located at
905 West Boulevard North, Elkhart, Indiana, 46514, telephone number
(219) 293-7511.
CTS designs, manufactures and sells electronic components. The
engineering and manufacturing of CTS products is performed at 16
facilities worldwide. CTS products are sold through sales
engineers, sales representatives, agents and distributors.
In March 1987, a settlement was announced between CTS and Dynamics
Corporation of America (DCA), terminating the sale process of the
Company and resolving all disputes between CTS and DCA.
Subsequently, the United States Supreme Court held that the Control
Share Acquisition Chapter of the Indiana Business Corporation Law
was constitutional. As a result of the Court's decision, the issue
of voting rights of 1,020,000 shares of CTS common stock acquired
by DCA in 1986 was submitted to a vote of CTS shareholders at the
1987 annual meeting. The affirmative vote of the majority of all
shares eligible to vote was necessary to grant voting rights. DCA
was not eligible to vote on the issue. The shareholders voted not
to grant voting rights to DCA on these shares. The Court's
decision did not have an impact on the voting rights in additional
shares of CTS common stock previously or subsequently acquired by
DCA. In May 1988, the settlement agreement expired pursuant to its
terms. At the end of 1996, DCA owned 2,303,100 shares (44.1%) of
CTS common stock, including the 1,020,000 shares which were not
granted voting authority.
In January 1990, the Company formally announced the closing of its
Switch Division located in Paso Robles, California. The Paso Robles
manufacturing operations were relocated to the Company's facilities
in Taiwan and Bentonville, Arkansas. During 1992, the Company
completed the sale of the Paso Robles manufacturing plant and most
of the associated real estate for $1.9 million. A pretax gain
of $0.9 million was realized from the sale. The manufacturing
operations for certain variable resistor and selector switch
products, which formerly were performed in Elkhart, Indiana, were
also transferred to Bentonville in 1990, to take advantage of any
efficiencies to be gained in consolidating such operations in
Bentonville. The buildings located in Elkhart which housed the
plastics molding and element production were vacated, with these
manufacturing operations being consolidated into the main Elkhart
plant.
CTS announced in July 1990 that its facility near Glasgow,
Scotland, would be expanded in order to manufacture and sell
additional electronic component products in Europe. The total
capital investment has been approximately $13 million as of
December 31, 1996. Automotive throttle position sensors and
precision and clock oscillators were added to the product lines
already manufactured in Scotland. The decision to expand the
Scottish facility was based on several factors, including the
excellent business climate and skills base in Scotland and the
anticipated full participation of the United Kingdom in the
European Economic Community. The expansion of the Scotland
facility represents a major effort by CTS to serve the large and
rapidly growing European market on a direct basis.
In November 1991, construction was completed on a 53,000 square
foot manufacturing facility in Bangkok, Thailand. During 1992, the
Company idled operations at this facility. During 1994, a three-year
lease was finalized with an international computer peripheral
manufacturer for this property. In early 1997, this lease was
extended to March 31, 1999. The annual rental amount is
approximately U.S. $355,000.
Also during 1991, the Company significantly reduced the operating
activities at its Brownsville, Texas, facility and plans to sell
this property. A portion of the Brownsville facility is currently
under a leasing arrangement which expires in 1999, at an annual
rental amount of approximately $60,000.
The manufacturing space owned by CTS in Hong Kong, which consisted
of two floors in a multi-story building, was sold in March 1991.
One floor was leased back by CTS for the continuation of its
manufacturing operations in Hong Kong. During 1992, the Company
terminated this lease and discontinued its manufacturing operations
in Hong Kong. However, the Company maintains a sales office in
Hong Kong.
During 1994, the Company purchased the assets of AT&T
Microelectronics' light emitting diode based optic data link
products business. The transaction also included sales contracts,
backlog, intellectual property, trademarks, and the design and
manufacturing technology. These products are manufactured in the
Microelectronics West Lafayette, Indiana, facility.
The manufacturing space owned by CTS in Singapore consists of four
floors in a multi-story building. The current manufacturing
requirements require three of the four floors, leaving one level
available for lease. During 1995, a lease for an initial term of
two years with a two-year renewal option was finalized with an
international semiconductor manufacturer for one floor of the
Singapore facility. The annual rental amount is approximately U.S.
$800,000.
During 1996, the Company sold property in New Hope, Minnesota, for $550,000
in cash and a promissory note. The Company recognized a pretax gain of
$35,000.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
All of the Company's products are considered one industry segment.
Sales to unaffiliated customers, operating earnings and
identifiable assets, by geographic area, are contained in "Note G -
Business Segment and Non-U.S. Operations," page 22, of the CTS
Corporation 1996 Annual Report, and is incorporated herein by
reference.
PRINCIPAL BUSINESS AND PRODUCTS OF CTS
CTS is primarily in the business of designing, 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
Fiber-optic transceivers Interconnect products
Flex cable assemblies Loudspeakers
Frequency control devices Resistor networks
Hybrid microcircuits 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, six 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 1996 1995 1994
Automotive control devices 30 29 30
Interconnect products 20 14 17
Frequency control devices 13 16 15
Resistor networks 12 12 11
Hybrid microcircuits 5 8 10
Other 20 21 17
Total 100% 100% 100%
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 1996 1995 1994
Automotive 34 36 38
Computer Equipment 21 19 17
Communications Equipment 20 18 17
Instruments and Controls 11 10 9
Defense and Aerospace 7 8 11
Distribution 6 6 5
Consumer Electronics 1 3 3
Total 100% 100% 100%
Products for the automotive market include throttle position
sensors, exhaust gas recirculation sensors, other automotive
application sensors, resistor networks, variable resistors, and
loudspeakers for automotive entertainment systems.
Products for the computer equipment market include flex cable
assemblies, backpanels, resistor networks, switches, frequency
control devices, fiber-optic transceivers and insulated metal
circuits. Products for this market are principally used in
computers and computer peripheral equipment.
In the communications equipment market, CTS products include
backpanels, frequency control devices, hybrid microcircuits, fiber-optic
transceivers, switches, resistor networks and insulated metal
circuits. Products for this market are principally used in
telephone equipment and in telephone switching systems.
Products for the instruments and controls market include resistor
networks, hybrid microcircuits, variable resistors and switches.
Principal end uses are medical electronic devices and electronic
testing, measuring and servicing instruments.
CTS products for the defense and aerospace market, usually procured
through government contractors or subcontractors, are electronic
connectors, hybrid microcircuits, frequency control devices,
programmable key storage devices and backpanels.
In the distribution market, CTS' primary products include switches,
resistor networks and frequency control devices. In this market,
standard CTS products are sold for a wide variety of applications.
Products for the consumer electronics market, primarily variable
resistors and switches, are principally used in home entertainment
equipment and appliances.
MARKETING AND DISTRIBUTION
Sales of CTS electronic components to original equipment
manufacturers are principally by CTS sales engineers and
manufacturers' representatives. CTS maintains sales offices in
Elkhart, Indiana; Detroit, Michigan; and in the United Kingdom,
Hong Kong, Taiwan and Japan. Various regions of the United States
are serviced by sales engineers working out of their homes. The
sale of electronic components is relatively integrated such that
most of the product lines of CTS are sold through the same field
sales force. Approximately 40% of net sales in 1996 were
attributable to coverage by CTS sales engineers.
Generally, CTS sales engineers service the Company's largest
customers with application specific products. CTS sales engineers
work closely with major customers in determining customer 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 1996, about 54% of net sales were at-
tributable to coverage by sales representatives. Independent
distributors purchase products from CTS for resale to customers.
In 1996, independent distributors accounted for about 6% of net
sales.
RAW MATERIALS
Generally, CTS' major raw materials are steel, copper, brass,
certain precious metals, resistive and conductive inks, passive
components and semiconductors, used in several CTS products;
ceramic materials used particularly in resistor networks and hybrid
microcircuits; synthetic quartz used in frequency control devices;
and laminate material used in printed circuit boards. These raw
materials are purchased from several vendors, and except for
certain semiconductors, CTS does not believe that it is dependent
on one or on a very few vendors. In 1996, all of these materials
were available in adequate quantities to meet CTS' production
demands.
The Company does not presently anticipate any raw material 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
switches, interconnect products, resistor networks and hybrid
microcircuits. CTS has continuing programs to reduce the precious
metals content of several products, when consistent with customer
specifications.
WORKING CAPITAL
CTS does not usually buy inventories or manufacture products
without actual or reasonably anticipated customer orders, except
for some standard, off-the-shelf distributor products. The Company
is not generally required to carry significant amounts of 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 1996, working capital increased
significantly to $86.8 million, primarily because cash increased
and notes payable were paid off. During 1996, cash increased
primarily as a result of the higher level of earnings. Cash
represents a significant part of the Company's working capital.
Cash of various non-U.S. subsidiaries was held in U.S.-denominated
cash equivalents at December 31, 1996. The cash, other than
approximately $4.8 million, is generally available to the parent
Company. During 1996, the other changes in working capital were
primarily a result of the higher business activity level.
PATENTS, TRADEMARKS AND LICENSES
CTS maintains a program of obtaining and protecting U.S. and non-U.S.
patents and trademarks. CTS believes that the success of its
business is not materially dependent on the existence or duration
of any patent, group of patents or trademarks.
CTS licenses the manufacture of several electronic products to
companies in the United States and non-U.S. countries. In 1996,
license and royalty income was less than 1% of net sales. CTS
believes that the success of its business is not materially
dependent upon any licensing arrangement where CTS is either the
licensor or licensee.
MAJOR CUSTOMERS
CTS' 15 largest customers represented about 62%, 61% and 62% of net
sales in 1996, 1995 and 1994, respectively.
Of the net sales to unaffiliated customers, approximately $49.1
million, $54.9 million and $49.4 million were derived from sales to
a major manufacturer of automobiles in 1996, 1995 and 1994,
respectively. CTS is dependent upon this 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 components, the period between receipt of orders and
delivery is relatively short. For large orders from major
customers that may constitute backlog over an extended period of
time, production scheduling and delivery are subject to change or
cancellation by the customers on relatively short notice. At the
end of 1996, the Company's backlog of orders was $85.5 million,
compared with $85.3 million at the end of 1995.
The backlog of orders at the end of 1996 will generally be filled
during the 1997 fiscal year.
GOVERNMENT CONTRACTS
CTS believes that about 7% of its net sales are associated with
purchases by the U.S. Government or non-U.S. governments,
principally for defense and aerospace applications. Because most
CTS products procured through government contractors and
subcontractors are for military end uses, the level of defense and
aerospace market sales by CTS is dependent upon government
budgeting and funding of programs utilizing electronic systems.
Almost all CTS sales involving government purchases are to primary
government contractors or subcontractors. CTS is usually subject
to contract provisions permitting termination of the contract,
usually with penalties payable by the government; maintenance of
specified accounting procedures; limitations on and renegotiations
of profits; priority production scheduling; and possible penalties
or fines against CTS for late delivery or substandard quality. Such
contract provisions have not previously resulted in material
uncertainties or disruptions for CTS.
COMPETITION
CTS competes with many domestic and non-U.S. manufacturers prin-
cipally on the basis of product features, price, technology,
quality, reliability, delivery and service. Most product lines of
CTS encounter significant competition. The number of significant
competitors varies from product line to product line. No single
competitor competes with CTS in every product line, but many 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 NON-U.S. AND DOMESTIC
OPERATIONS AND EXPORT SALES
Information about revenue from sales to unaffiliated customers,
operating earnings and identifiable assets, by geographic area, is
contained in "Note G - Business Segment and Non-U.S. Operations,"
page 22, of the CTS Corporation 1996 Annual Report, and is
incorporated herein by reference.
In 1996, approximately 40% of net sales to unaffiliated customers,
after eliminations, were attributable to non-U.S. operations. This
represents an increase from 35% of net sales attributable to non-U.S.
operations in 1995. About 33% of total CTS assets, after
eliminations, are non-U.S. Except for cash and equivalents, a
substantial portion of these assets cannot readily be liquidated.
CTS believes that the business risks attendant to its present non-U.S.
operations, though substantial, are normal risks for non-U.S.
businesses, including expropriation, currency controls and changes
in currency exchange rates and government regulations.
RESEARCH AND DEVELOPMENT ACTIVITIES
In 1996, 1995 and 1994, CTS expended $10.7, $8.0 and $6.2 million,
respectively, for research and development. Most CTS research and
development activities relate to new product and process 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 1996, the Company did not enter into any new, significant
product lines, but continued to introduce additional versions of
existing products in response to present and future customer
requirements.
ENVIRONMENTAL PROTECTION LAWS
In complying with federal, state and local environmental protection
laws, CTS has modified certain manufacturing processes and expects
to continue to make additional modifications. Such modifications
that have been performed have not materially affected the capital
expenditures, earnings or competitive position of CTS.
Certain processes in the manufacture of the Company's current and
past products create hazardous waste by-products as currently
defined by federal and state laws and regulations. The Company has
been notified by the U.S. Environmental Protection Agency, state
environmental agencies and, in some cases, generator groups, that
it is or may be a Potentially Responsible Party (PRP) regarding
hazardous waste remediation at several non-CTS sites. The factual
circumstances of each site are different; the Company has
determined that its role as a PRP with respect to these sites, even
in the aggregate, will not have a material adverse effect on the
Company's business or financial condition, based on the following:
1) the Company's status as a de minimis party; 2) the large number
of other PRPs identified; 3) the identification and participation
of many larger PRPs who are financially viable; 4) defenses
concerning the nature and limited quantities of materials sent by
the Company to certain of the sites; and 5) the Company's
experience to-date in relation to the determination of its
allocable share. In addition to these non-CTS sites, the Company
has an ongoing practice of providing reserves for probable
remediation activities at certain of its manufacturing locations
and for claims and proceedings against the Company with respect to
other environmental matters. In the opinion of management, based
upon presently available information, either adequate provision for
probable costs has been made, or the ultimate costs resulting will
not materially affect the consolidated financial position or
results of operations of the Company.
There are claims against the Company with respect to environmental
matters which the Company contests. In the opinion of management,
based upon presently available information, either adequate
provision for potential costs has been made, or the costs which
ultimately might result will not materially affect the consolidated
financial position or results of operations of the Company.
EMPLOYEES
CTS employed an average of 3,815 persons during 1996. About 39% of
these persons were employed outside the United States at the end of
1996. Approximately 390 employees in the United States were
covered by collective bargaining agreements as of December 31,
1996. One of the two collective bargaining agreements covering
these employees will expire in 1999. The other agreement will
expire in 2000.
Item 2. Properties
CTS operations or facilities are at the following locations. The
owned properties are not subject to material liens or encumbrances.
Location Expires
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.
In 1994, the Company entered into a three-year lease of the
Bangkok, Thailand, property. In early 1997, this lease was
extended to March 31, 1999. The annual rental amount is
approximately U.S. $355,000.
During 1995, a lease for an initial term of two years with a two-year
renewal option was finalized with an international
semiconductor manufacturer for one floor of the Singapore facility.
The annual rental amount is approximately U.S. $800,000.
The Company regularly assesses the adequacy of its manufacturing
facilities for manufacturing capacity, available labor and location
to the markets and major customers for the Company's products. CTS
also reviews the operating costs of its facilities and may from
time to time relocate facilities or certain manufacturing
activities in order to achieve operating cost reductions and
improved asset utilization and cash flow.
Item 3. Legal Proceedings
Contested claims involving various matters, including environmental
claims brought by government agencies, are being litigated by CTS,
both in legal and administrative forums. In the opinion of
management, based upon currently available information, adequate
provision for potential costs has been made, or the costs which
might ultimately result from such litigation or administrative
proceedings will not materially affect the consolidated financial
position of the Company or the results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1996, no issue was submitted to a vote
of CTS shareholders.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
The principal market for CTS common stock is the New York Stock
Exchange. Information relative to the high and low trading prices
for CTS Common Stock for each quarter of the past two years and the
frequency and amount of dividends declared during the previous two
years can be located in "Shareholder Information," page 10, of the
CTS Corporation 1996 Annual Report, incorporated herein by
reference. On March 7, 1997, there were approximately 977 holders
of record of CTS common stock.
The Company intends to continue a policy of considering dividends
on a quarterly basis. The declaration of a dividend and the amount
of any such dividend is subject to earnings, anticipated working
capital, capital expenditure and other investment requirements, the
financial condition of CTS and such other factors as the Board of
Directors deems relevant.
Item 6. Selected Financial Data
A summary of selected financial data for CTS, for each of the
previous five fiscal years, is contained in the "Five-Year
Summary," page 11, of the CTS Corporation 1996 Annual Report,
incorporated herein by reference.
Certain divestitures and closures of businesses and certain
accounting changes affect the comparability of information 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 (1994-1996)," pages 25-27, of the CTS
Corporation 1996 Annual Report, incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements, meeting the requirements of
Regulation S-X, and the Report of Independent Accountants, are
contained in pages 12-24 of the CTS Corporation 1996 Annual Report,
incorporated herein by reference. Quarterly per share financial
data is provided in "Shareholder Information," under the
subheadings, "Quarterly Results of Operations" and "Per Share
Data," on page 10 of the CTS Corporation 1996 Annual Report, and is
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There were no disagreements.
<PAGE>
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 1997 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 1997 Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance," page 7,
filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
The individuals listed were elected as executive officers of CTS at
the annual meeting of the Board of Directors on April 26, 1996, and
are expected to serve as executive officers until the next annual
meeting of the Board of Directors, scheduled on April 25, 1997, at
which time the election of officers will be considered again by the
Board of Directors.
Name Age Position and Offices
Joseph P. Walker 58 Director, Chairman,
President and Chief
Executive Officer
Philip T. Christ 65 Group Vice President
Stanley J. Aris 56 Vice President Finance and
Chief Financial Officer
Jeannine M. Davis 48 Vice President, Secretary
and General Counsel
James L. Cummins 41 Vice President Human Resources
James N. Hufford 57 Vice President Research,
Development and Engineering
Donald R. Schroeder 48 Vice President Sales and
Marketing
George T. Newhart 54 Corporate Controller
Gary N. Hoipkemier 42 Treasurer
Joseph P. Walker has served as Chairman of the Board, President and
Chief Executive Officer of CTS since 1988. Mr. Walker is a
Director of NBD Bank, N.A.
Philip T. Christ has served as Group Vice President since 1990.
Stanley J. Aris has served as Vice President Finance and Chief
Financial Officer since 1992. Prior to joining CTS, Mr. Aris
worked for two years as a business consultant.
Jeannine M. Davis has served as Vice President, Secretary and General
Counsel since 1988.
James L. Cummins was elected Vice President Human Resources on
February 25, 1994. Prior to this appointment, he served as
Director, Human Resources, CTS Corporation from 1991-1994.
James N. Hufford was elected Vice President Research, Development
and Engineering on February 17, 1995. During the four years prior
to this appointment, Mr. Hufford served as Manager and then
Director of Corporate Research, Development and Engineering for the
Corporation.
Donald R. Schroeder was elected Vice President Sales and Marketing
on February 17, 1995. During the six years prior to this
appointment, Mr. Schroeder served as Business Development Manager
for innovative and new technology for the CTS Microelectronics
business unit in West Lafayette, Indiana.
George T. Newhart has served as Corporate Controller since 1989.
Gary N. Hoipkemier has served as Treasurer since 1989.
Item 11. Executive Compensation
Information responsive to Item 402 of Regulation S-K pertaining to
management remuneration is contained in the 1997 Proxy Statement in
the captions "Executive Compensation," pages 8-9 and "Director
Compensation," pages 13-14, 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 1997 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, 1996.
CTS purchased products from DCA totaling $157,000 in 1996, $143,000
in 1995 and $233,000 in 1994, principally consisting of certain
component parts used by CTS in the manufacture of frequency control
devices. CTS had no sales to DCA in 1996, and minimal sales in
1995 and 1994.
<PAGE>
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, Jeannine M. Davis, George T.
Newhart and Gary N. Hoipkemier, filed as exhibit
(10)(b) to the Company's Form 10-K for 1991, and
incorporated herein by reference.
(10)(c) CTS Corporation 1982 Stock Option Plan, as amended
February 24, 1989, 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, approved by
the shareholders at the annual meeting on April 26,
1996. The CTS Corporation 1996 Stock Option Plan
is contained in Exhibit 4 to Registration Statement
No. 333-5730, effective October 3, 1996, and is
incorporated herein by reference.
(10)(g) Prototype indemnification agreement, with Stanley
J. Aris, James L. Cummins, James N. Hufford and
Donald R. Schroeder, filed as exhibit (10)(g) to
the Company's Form 10-K for 1995.
(13) CTS Corporation 1996 Annual Report.
(21) Subsidiaries of CTS Corporation.
(23) Consent of Price Waterhouse to incorporation by
reference of this Annual Report on Form 10-K for
the fiscal year 1996 to Registration Statement 33-27749
on Form S-8 and Registration Statement 333-5730.
Indemnification Undertaking
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the
Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form
S-8 Nos. 33-27749 (filed March 23, 1989)and 333-5730 (filed
October 3, 1996):
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of
the registrant pursuant to the foregoing provision,
or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange
Commission such indemnification is against public
policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event
that a claim for indemnification against such
liabilities (other than the payment by the
registrant of expenses incurred or paid by a
director, officer or controlling person of the
registrant in the successful defense of any action,
suit or proceeding) is asserted by such director,
officer or controlling person in connection with
the securities being registered, the registrant
will, unless in the opinion of its counsel the
matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the
question whether such indemnification by it is
against public policy as expressed in the Act and
will be governed by the final adjudication of such
issue.
<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 20, 1997 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 20, 1997 By /S/ Lawrence J. Ciancia
Lawrence J. Ciancia,
Director
Date March 20, 1997 By /S/ Patrick J. Dorme
Patrick J. Dorme,
Director
Date March 20, 1997 By /S/ Gerald H. Frieling, Jr.
Gerald H. Frieling, Jr.,
Director
Date March 20, 1997 By /S/ Andrew Lozyniak
Andrew Lozyniak,
Director
Date March 20, 1997 By /S/ Joseph P. Walker
Joseph P. Walker,
Director
Date March 20, 1997 By /S/ George T. Newhart
George T. Newhart,
Corporate Controller
and principal accounting
officer
Date March 20, 1997 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, 1996
CTS CORPORATION AND SUBSIDIARIES
ELKHART, INDIANA
<PAGE>
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, 1996, are incorpo-
rated by reference in Item 8:
Consolidated balance sheets - December 31, 1996, and
December 31, 1995
Consolidated statements of earnings - Years ended
December 31, 1996, December 31, 1995, and December 31, 1994
Consolidated statements of shareholders' equity - Years
ended December 31, 1996, December 31, 1995, and December 31, 1994
Consolidated statements of cash flows - Years ended
December 31, 1996, December 31, 1995, and December 31, 1994
Notes to consolidated financial statements
The following consolidated financial statement schedules of CTS
Corporation and subsidiaries, are included in item 14(d):
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 January 27, 1997, appearing on page 24 of the
CTS Corporation 1996 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
January 27, 1997
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(1) End of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for
doubtful receivables $774 $239 $ 0 $391 $622
Year ended December 31, 1995:
Allowance for
doubtful receivables $869 $ 1 $ 0 $ 96 $774
Year ended December 31, 1994:
Allowance for
doubtful receivables $709 $277 $ 0 $117 $869
(1) Uncollectible accounts written off.
</TABLE>
S-3
<PAGE>
EXHIBIT 21
CTS CORPORATION AND SUBSIDIARIES
CTS Corporation (Registrant), an Indiana corporation
Subsidiaries
CTS Corporation (Delaware), a Delaware corporation
CTS of Panama, Inc., a Republic of Panama corporation
CTS Components Taiwan, Ltd.,(1) a Taiwan, Republic of
China corporation
CTS Singapore Pte., Ltd., a Republic of Singapore
corporation
CTS Electro de Matamoros, S.A.,(1) a Republic of Mexico
corporation
CTS Export Corporation, a Virgin Islands corporation
CTS Japan, Inc., a Japan corporation
CTS of Canada, Ltd., a Province of Ontario (Canada) corporation
CTS Manufacturing (Thailand) Ltd.,(1) a Thailand corporation
CTS Electronics Hong Kong Ltd.,(1) a Hong Kong corporation
CTS Corporation U.K. Ltd., a United Kingdom corporation
CTS Printex, Inc., a California corporation
CTS Micro Peripherals, Inc., a California corporation
Micro Peripherals Singapore (Private) Limited, a Republic of
Singapore corporation
Corporations whose names are indented are subsidiaries of the preceding
non-indented corporations. Except as indicated, each of the above
subsidiaries is 100% owned by its parent company. Operations of all
subsidiaries and divisions are consolidated in the financial statements
filed.
(1) Less than 1% of the outstanding shares of stock is owned of
record by nominee shareholders pursuant to national laws
regarding resident or nominee ownership.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-27749 and No. 333-5730) of CTS Corporation
of our report dated January 27, 1997, appearing on page 24 of the CTS
Corporation 1996 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 20, 1997
<PAGE>
SHAREHOLDER INFORMATION
(In thousands of dollars except per share data)
Quarterly Results of Operations
(Unaudited)
Net Gross Operating Net
Sales Earnings Earnings Earnings
1996
1st quarter $ 80,186 $19,799 $ 6,587 $ 4,414
2nd quarter 83,820 21,874 8,218 5,340
3rd quarter 76,457 20,726 7,847 5,060
4th quarter 80,834 25,097 10,768 6,356
$321,297 $87,496 $33,420 $21,170
1995
1st quarter $ 75,978 $17,273 $ 4,877 $ 3,256
2nd quarter 76,413 19,148 7,023 4,642
3rd quarter 73,890 18,345 6,416 4,218
4th quarter 73,876 20,038 9,172 5,048
$300,157 $74,804 $27,488 $17,164
Per Share Data
(Unaudited)
Dividends Net
High(a) Low(a) Declared Earnings
1996
1st quarter $38.63 $36.00 $.15 $.83
2nd quarter 47.00 37.38 .18 1.03
3rd quarter 47.00 40.50 .18 .96
4th quarter 43.00 38.13 .18 1.21
$.69 $4.03
1995
1st quarter $32.00 $27.38 $.15 $ .63
2nd quarter 33.50 29.25 .15 .89
3rd quarter 34.50 29.94 .15 .81
4th quarter 37.75 29.63 .15 .97
$.60 $3.30
(a) The market price range of CTS Corporation common stock on the New York
Stock Exchange for each of the quarters during the last two years.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except per share amounts)
<CAPTION>
Year Ended
December 31 December 31 December 31
1996 1995 1994
<S> <C> <C> <C>
Net sales $321,297 $300,157 $268,707
Costs and expenses:
Cost of goods sold 233,801 225,353 205,640
Selling, general and administrative
expenses 43,333 39,312 36,175
Research and development expenses 10,743 8,004 6,208
Operating earnings 33,420 27,488 20,684
Other (expenses) income:
Interest expense (1,449) (1,790) (714)
Interest income 1,881 1,421 657
Other (250) 565 860
Total other income (expenses) 182 196 803
Earnings before income taxes 33,602 27,684 21,487
Income taxes--Note F 12,432 10,520 7,520
Net earnings $ 21,170 $ 17,164 $ 13,967
Net earnings per share $4.03 $3.30 $2.70
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<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, 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
Net earnings 21,170 21,170
Cash dividends of $.69 per share (3,604) (3,604)
Nonemployee Directors' stock retirement plan 17 17
Cumulative translation adjustment 2,018 2,018
Issued 1,500 shares on restricted stock and
cash bonus plan 23 (70) 47
Issued 6,300 shares on exercise of stock options (51) 197 146
Acquired 73 shares traded on options--net 3 (3)
Stock compensation 27 100 127
Deferred compensation recognized 236 236
Acquired 3,200 shares for treasury stock (131) (131)
Balances at December 31, 1996 $34,140 $144,112 $1,373 $(600) $(12,793) $166,232
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS December 31 December 31
(In thousands of dollars) 1996 1995
ASSETS
Current Assets
Cash and equivalents $ 44,957 $ 37,271
Accounts receivable, less allowances
(1996--$622; 1995--$774) 43,984 41,737
Inventories
Finished goods 8,504 7,445
Work-in-process 17,138 14,789
Raw materials 13,119 16,651
Total inventories 38,761 38,885
Other current assets 3,787 2,544
Deferred income taxes--Note F 6,712 5,676
Total current assets 138,201 126,113
Property, Plant and Equipment
Buildings and land 42,800 42,547
Machinery and equipment 146,589 139,594
Total property, plant and equipment 189,389 182,141
Less accumulated depreciation 133,286 131,445
Net property, plant and equipment 56,103 50,696
Other Assets
Goodwill, less accumulated amortization
(1996--$8,361; 1995--$7,687) 4,039 4,603
Prepaid pension expense--Note E 50,152 44,739
Other 877 976
Total other assets 55,068 50,318
Total Assets $249,372 $227,127
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable--Note B $ 6,685
Current maturities of long-term obligations--Note C $ 2,427 2,211
Accounts payable 17,146 15,605
Accrued salaries, wages and vacation 6,836 6,695
Accrued taxes other than income 2,070 1,740
Income taxes payable 5,946 3,991
Other accrued liabilities--Note H 16,966 14,035
Total current liabilities 51,391 50,962
Long-term Obligations--Note C 11,220 13,714
Deferred Income Taxes--Note F 16,146 11,909
Postretirement Benefits--Note E 4,383 4,289
Contingencies--Note H
Shareholders' Equity
Common stock-authorized 8,000,000 shares without
par value; issued 5,807,031 shares 33,540 33,355
Retained earnings 144,112 126,546
Cumulative translation adjustment 1,373 (645)
179,025 159,256
Less cost of common stock held in treasury
(1996-- 582,075 shares; 1995--589,702 shares) 12,793 13,003
Total shareholders' equity 166,232 146,253
Total Liabilities and Shareholders' Equity $249,372 $227,127
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<CAPTION>
Year Ended
December 31 December 31 December 31
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $21,170 $17,164 $13,967
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 12,491 11,683 11,236
Deferred income taxes 3,201 3,239 2,519
Other (160) (52) (421)
Changes in assets and liabilities:
Accounts receivable (2,247) (6,708) (4,402)
Inventories 124 2,571 (3,297)
Prepaid pension asset (5,413) (5,331) (6,563)
Accounts payable and accrued
liabilities 4,943 4,280 (38)
Income taxes payable 1,955 1,703 882
Other (961) (1,688) (1,328)
Total adjustments 13,933 9,697 (1,412)
Net cash provided by operating
activities 35,103 26,861 12,555
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment 822 236 411
Capital expenditures (17,210) (11,181) (10,000)
Payment for purchase of business acquisitions (5,501)
Net cash used in investing
activities (16,388) (10,945) (15,090)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations 15,000
Payments of long-term obligations (2,208) (286) (4,479)
Decrease in notes payable (6,685) (751) (6,050)
Proceeds from stock options exercised 146 359 176
Dividends paid (3,446) (3,118) (2,067)
Purchases of treasury stock (131)
Net cash (used in) provided by
financing activities (12,324) (3,796) 2,580
Effect of exchange rate changes on cash 1,295 229 1,343
Net increase in cash 7,686 12,349 1,388
Cash and equivalents at beginning of year 37,271 24,922 23,534
Cash and equivalents at end of year $44,957 $37,271 $24,922
Supplemental cash flow information
Cash paid during the year for:
Interest $1,467 $ 1,791 $ 658
Income taxes - net 7,276 5,590 4,009
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany accounts and transactions
have been eliminated.
Inventories: Inventories are stated at the lower of cost or
market. Cost is principally determined using the first-in, first-out method.
Property, Plant and Equipment: Property, plant and equipment are
stated at cost. Depreciation is computed over the estimated
useful lives of the assets principally on the straight-line
method. Useful lives for buildings and improvements range from 10
to 45 years, and machinery and equipment from 3 to 8 years.
Goodwill: The excess of cost over the fair value of net assets of
businesses acquired is amortized on the straight-line method over
the periods expected to be benefited.
Retirement Plans: The Company has various defined benefit and
defined contribution retirement plans covering a majority of its
employees. The Company's policy is to annually fund the defined
benefit pension plans at or above the minimum required under the
Employee Retirement Income Security Act of 1974 (ERISA).
Research and Development: Research and development costs consist
of expenditures incurred during the course of planned search and
investigation aimed at discovery of new knowledge which will be
useful in developing new products or processes, or significantly
enhancing existing products or production processes, and the
implementation of such through design, testing of product
alternatives or construction of prototypes. The Company expenses
all research and development costs as incurred.
Income Taxes: The Company provides deferred income taxes for
transactions reported in different periods for financial reporting
and income tax return purposes pursuant to the requirements of
Financial Accounting Standards Board (FASB) Statement No. 109,
"Accounting for Income Taxes." The underlying differences relate
primarily to depreciation differences, pension income,
postemployment benefits, certain nondeductible accruals and
inventory reserves.
Translation of Foreign Currencies: The financial statements of
all of the Company's non-U.S. subsidiaries, except the United
Kingdom subsidiary, are remeasured into U.S. dollars using the
U.S. dollar as the functional currency with all remeasurement
adjustments included in the determination of net earnings. The
assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars principally at the current
exchange rate at period end, with resulting translation adjust-
ments made directly to the "Cumulative translation adjustment"
component of shareholders' equity. Statements of earnings
accounts are translated at the average rates during the period.
Financial Instruments: The Company's financial instruments
consist primarily of cash, cash equivalents, trade receivables and
payables, and obligations under notes payable and long-term debt.
In accordance with the requirements of FASB Statement No. 107,
"Disclosures about Fair Value of Financial Instruments," the
Company is providing the following fair value estimates and
information regarding valuation methodologies. The carrying value
for cash and cash equivalents, and trade receivables and payables
approximates fair value based on the short-term maturities of
these instruments. The carrying value for all long-term debt
outstanding at December 31, 1996, and 1995 approximates fair value
where fair value is based on market prices for the same or similar
debt and maturities.
The Company occasionally uses forward exchange currency contracts
to minimize the impact of foreign currency fluctuations on the
Company's costs and expenses. At December 31, 1996, the Company's
forward foreign exchange currency contracts were not material.
These contracts are accounted for as hedges and have minimal
credit risk because the counterparties are well-established
financial institutions.
Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less from the
purchase date to be cash equivalents.
Concentration of Credit Risk: The Company sells its products to
customers primarily in the automotive, computer equipment,
communications equipment and instruments and controls industries,
primarily in North America, Europe and the Pacific Rim. The
Company performs ongoing credit evaluations of its customers to
minimize credit risk. The Company generally does not require
collateral.
Stock-Based Compensation: FASB Statement No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require,
companies to record compensation cost for stock-based compensation
at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related
Interpretation. See Note D for the required pro forma net income
and earnings per share disclosures required by FASB Statement No.
123.
Earnings Per Share: Earnings per common share are based on the
weighted average number of common and common equivalent shares
outstanding.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
NOTE B - Short-term Borrowings
The Company has no outstanding short-term borrowings at December
31, 1996. At December 31, 1995, short-term borrowings consisted
of demand notes payable to various banks, with an average
interest rate of 6.6%. The Company has unsecured lines of credit
arrangements which totaled $15,855,000 at December 31, 1996.
These arrangements are generally subject to annual renewal and
renegotiation, and may be withdrawn at the banks' option.
Average daily short-term borrowings over the year, including
borrowings denominated in non-U.S. currencies, during 1996, 1995
and 1994 were $2,308,000, $6,781,000 and $11,776,000,
respectively. The weighted average interest rates, computed by
relating interest expense to average daily short-term borrowings,
were 6.1% in 1996, 6.5% in 1995 and 5.5% in 1994.
The maximum amount of short-term borrowings at the end of any
month during 1996, 1995 and 1994 was $8,055,000, $8,440,000 and
$12,977,000, respectively. The short-term borrowings outstanding
at December 31, 1994, were $7,436,000.
NOTE C - Long-term Obligations
Long-term obligations were comprised of the following:
(In thousands)
1996 1995
Long-term debt:
Term loan at 8.4%, due in annual
installments through 1999. $13,000 $15,000
Other 647 608
13,647 15,608
Less current maturities 2,427 2,211
Total long-term debt 11,220 13,397
Other 317
Total long-term obligations $11,220 $13,714
The Company has a $13,000,000 term loan with four banks, of which
$2,000,000 expires in 1997, $2,000,000 expires in 1998 and
$9,000,000 expires in 1999.
The Company has unsecured revolving credit agreements totaling
$45,000,000 with four banks, which expire in 2001. Interest rates
on these borrowings fluctuate based upon market rates. The
Company pays a commitment fee that varies based on performance
under certain financial covenants applicable to the revolving
credit agreements. Currently, that fee is .15 percent per annum.
The credit agreements and term loan require, among other things,
that the Company maintain certain tangible net worth, interest
coverage requirements and a specified total liabilities to
tangible net worth ratio.
Annual maturities of long-term obligations during the three years
subsequent to 1997 are as follows: 1998--$2,220,000; 1999--$9,000,000;
2000--$0.
NOTE D - Stock Plans
At December 31, 1996, the Company has four stock-based
compensation plans, which are described below. The Company
applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option
plans while compensation expense has been recognized for its
compensatory plans. Had compensation cost for the Company's two
fixed stock-based compensation plans been determined based on the
fair value based method, as defined in FASB Statement No. 123, the
Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
(In thousands, except per share amounts)
1996 1995
Net earnings As reported $21,170 $17,164
Pro forma $20,936 $17,141
Net earnings per share As reported $4.03 $3.30
Pro forma $3.99 $3.30
The effects of applying FASB Statement No. 123 in the above pro
forma disclosures are not indicative of future amounts as they do
not include the effects of awards granted prior to 1995, some of
which would have had income statement effects in 1995 and 1996 due
to the five-year vesting period associated with the fixed stock
option awards.
The Company's two fixed stock option plans, approved by the
shareholders, provide for grants of incentive stock options or
nonqualified stock options to officers and key employees. Under
the 1986 Stock Option Plan which expired in 1995, the Company
could grant options to its officers and key employees for up to
300,000 shares of common stock. Of the 300,000 shares,
approximately 100,000 shares were granted. Under the 1996 Stock
Option Plan, the Company may grant options to its officers and key
employees for up to 200,000 shares of common stock.
Under the 1996 Stock Option Plan, options are granted at the fair
market value on the grant date and are exercisable generally in
cumulative annual installments over a maximum ten-year period,
commencing at least one year from the date of grant. Upon the
exercise of stock options, payment may be made using cash, shares
of the Company's common stock or any combination thereof.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1995:
dividend yield of 1.63%; expected volatility of 19.93%, risk-free
interest rate of 5.62%; and expected life of 4.3 years. There
were no grants in 1996.
A summary of the status of the Company's two fixed stock option
plans as of December 31, 1996, 1995 and 1994, and changes during
the years ending on those dates, is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
-Average -Average -Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at begin-
ning of year 152,925 $31.82 86,000 $23.15 44,650 $20.13
Granted 94,050 36.89 57,000 24.75
Exercised (6,300) 23.56 (17,325) 21.05 (8,650) 20.44
Expired or canceled (9,100) 33.47 (9,800) 23.39 (7,000) 20.30
Outstanding at end
of year 137,525 $32.09 152,925 $31.82 86,000 $23.15
Options exercisable
at year-end 51,425 19,225 22,150
Weighted-average fair
value of options
granted during the
year $ 8.26
</TABLE>
The following table summarizes information about fixed stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life (Years) Price at 12/31/96 Price
<S> <C> <C> <C> <C> <C>
$19.125--
24.750 53,475 2.37 $24.07 29,925 $23.81
$31.250--
37.375 84,050 3.94 $37.19 21,500 $37.18
</TABLE>
Under the 1986 Stock Option Plan, options to purchase a total of
55,975 shares were outstanding as of December 31, 1996. At
December 31, 1996, 30,625 of these shares were exercisable.
During 1996, the shareholders of the Company approved the 1996
Stock Option Plan, under which a maximum of 200,000 shares of
common stock were reserved for issuance to certain officers and
key employees. Under the 1996 Stock Option Plan, options to
purchase a total of 81,550 shares were outstanding as of December
31, 1996. At December 31, 1996, 20,800 of these shares were
exercisable.
The Company has a discretionary Restricted Stock and Cash Bonus
Plan (Plan) which reserves 400,000 shares of the Company's common
stock for sale, at market price or below, or award to key
employees. Shares sold or awarded are subject to restrictions
against transfer and repurchase rights of the Company. In
general, restrictions lapse at the rate of 20% per year beginning
one year from the award or sale. In addition, the Plan provides
for a cash bonus to the participant equal to the fair market value
of the shares on the dates restrictions lapse, in the case of an
award, or the excess of the fair market value over the original
purchase price if the shares were purchased. The total bonus paid
to any participant during the restricted period is limited to
twice the fair market value of the shares on the date of award or
sale.
Under the Plan, during 1996, 1,500 shares were awarded leaving
343,900 shares available for award or sale at December 31, 1996.
Under the Plan, in 1995 and 1994, 18,500 and 15,500 shares were
awarded, respectively. In addition to the shares issued and the
amortization of deferred compensation included in the Consolidated
Statements of Shareholders' Equity, the Company accrued $408,000,
$306,000, and $212,000 for additional compensation payable under
the provisions of the Plan in 1996, 1995 and 1994, respectively.
The Company has a Stock Retirement Plan for Nonemployee Directors.
This retirement plan provides for a portion of the total
compensation payable to Nonemployee Directors to be deferred and
paid in Company stock. Under this plan, the amount of the actual
dollar compensation was $17,100, $15,100 and $11,100 in 1996, 1995
and 1994, respectively.
NOTE E - Employee Retirement Plans
Defined benefit plans
The Company has a number of noncontributory defined benefit
pension plans (Plans) covering approximately 46% of its employees.
Plans covering salaried employees provide pension benefits that
are based on the employees' compensation prior to retirement.
Plans covering hourly employees generally provide benefits of
stated amounts for each year of service.
Net pension income for the Plans in 1996, 1995 and 1994 includes
the following components:
<TABLE>
<CAPTION>
(In thousands)
1996 1995 1994
<S> <C> <C> <C>
Service cost--benefits earned
during the year $ 2,787 $ 2,216 $ 2,374
Interest cost on projected
benefit obligation 5,430 5,330 4,769
Actual (return) loss on plan
assets (20,982) (23,252) 2,565
Net amortization and deferral 7,352 10,375 (16,271)
Net pension income $(5,413) $(5,331) $(6,563)
</TABLE>
The following table details the funded status of the Plans at
December 31, 1996, and December 31, 1995:
(In thousands)
1996 1995
Actuarial present value of benefit obligations:
Vested benefits $ 68,570 $ 66,736
Nonvested benefits 2,598 2,960
Accumulated benefit obligation $ 71,168 $ 69,696
Plan assets at fair value $151,841 $134,595
Projected benefit obligation 78,046 77,138
Plan assets in excess of the projected
benefit obligation 73,795 57,457
Unrecognized prior year service cost 397 154
Unrecognized net (gain) loss (15,146) (1,935)
Unrecognized net asset (8,894) (10,937)
Prepaid pension expense $50,152 $ 44,739
Assumptions used in determining net pension income and the funded
status of U.S. defined benefit pension plans were as follows:
1996 1995 1994
Discount rates (funded status) 7.75% 7.25% 8.25%
Rates of increase in compensation levels
(salaried plan only) 5%-7% 5%-7% 5%-7%
Expected long-term rate of return on assets 9.75% 9.00% 9.00%
Net pension income is determined using assumptions as of the
beginning of each year. Funded status is determined using
assumptions as of the end of each year. Effective with the
December 31, 1996, measurement date, the discount rate was
increased to 7.75% to reflect current market conditions. This
change had no impact on 1996 pension income, but will increase
1997 pension income by $562,000. Effective with the December 31,
1995, measurement date, the discount rate was reduced to 7.25% to
reflect market conditions. This change had no impact on 1995
pension income, but reduced 1996 pension income by $310,000.
Effective with the December 31, 1994, measurement date, the
discount rate, expected long-term rate of return on assets and
mortality assumptions were revised to reflect current market and
demographic conditions. As a result of these changes, the
December 31, 1994, projected benefit obligation decreased by $2.4
million. These changes had no effect on 1994 pension income, but
reduced 1995 pension income by $1.2 million.
The majority of U.S. defined benefit pension plan assets are
invested in common stock, including approximately $8.5 million in
CTS common stock. The balance is invested in corporate bonds,
U.S. government backed mortgage securities and bonds, asset
backed securities, a private equity fund, non-U.S. corporate
bonds and convertible issues.
Because the domestic plans are fully funded, the Company made no
contributions during 1996, 1995 or 1994. Benefits paid by all
Plans during 1996, 1995 and 1994 were $4,240,000, $4,085,000 and
$4,175,000, respectively.
Pension coverage for employees of certain non-U.S. subsidiaries
is provided through separate plans. Contributions of $167,000,
$237,000 and $172,000 were made to the non-U.S. Plans in 1996,
1995 and 1994, respectively.
Defined contribution plans
The Company sponsors a 401(k) Plan and several other defined
contribution plans which cover some of its non-U.S. employees and
its domestic hourly employees not covered by a defined benefit
pension plan. Contributions and costs are generally determined
as a percentage of the covered employee's annual salary. Amounts
expensed for the 401(k) Plan and the other plans totaled
$2,382,000 in 1996, $2,294,000 in 1995 and $2,506,000 in 1994.
Postretirement life insurance plans
In addition to providing pension benefits, the Company provides
certain life insurance programs for retired employees.
Substantially all of the Company's domestic employees are
eligible for life insurance benefits.
Summary information on the Company's plans as of December 31,
1996, and December 31, 1995, is as follows:
(In thousands)
1996 1995
Accumulated postretirement benefit obligation:
Active employees $(1,298) $(1,282)
Retirees and dependents (2,698) (2,912)
(3,996) (4,194)
Unrecognized net gain (574) (345)
Postretirement benefit obligation $(4,570) $(4,539)
The components of net periodic postretirement benefit expense for
1996, 1995 and 1994 are as follows:
(In thousands)
1996 1995 1994
Service cost--benefits earned
during the year $ 34 $ 28 $ 43
Interest cost on accumulated
benefit obligation 295 330 511
Net amortization and deferral (1,008)
Net expense (income) $329 $ (650) $554
The accumulated postretirement benefit obligation was determined
using relevant actuarial assumptions and the terms of the
Company's life insurance plans. For measurement purposes, a
7.75%, 7.25% and 8.25% annual discount rate was used to determine
the remaining life obligation for 1996, 1995 and 1994,
respectively.
The Company funds life insurance benefits through term life
insurance policies. The Company plans to continue funding
premiums on a pay-as-you-go basis.
NOTE F - Income Taxes
The components of earnings before income taxes are as follows:
(In thousands)
1996 1995 1994
Domestic $16,381 $17,563 $15,391
Non-U.S. 17,221 10,121 6,096
Total $33,602 $27,684 $21,487
The provision for income taxes consists of the following:
(In thousands)
1996 1995 1994
Current:
Federal $3,105 $1,935 $1,998
State 1,012 963 604
Non-U.S. 5,114 4,383 2,367
Total current 9,231 7,281 4,969
Deferred:
Federal 2,761 2,534 1,268
State 313 578 400
Non-U.S. 127 127 883
Total deferred 3,201 3,239 2,551
Total provision for income taxes $12,432 $10,520 $7,520
Significant components of the Company's deferred tax liabilities
and assets at December 31, 1996, and 1995, are:
(In thousands)
1996 1995
Depreciation $ 1,460 $ 1,063
Pensions 17,683 15,767
Other 3,185 2,282
Gross deferred tax liabilities 22,328 19,112
Postemployment benefits 1,622 1,611
Inventory reserves 2,721 2,613
Loss carryforwards 5,778 5,847
Credit carryforwards 4,355 5,537
Nondeductible accruals 4,365 3,200
Other 818 710
Gross deferred tax assets 19,659 19,518
Net deferred tax (liabilities) assets (2,669) 406
Deferred tax asset valuation allowance (6,765) (6,639)
Total $(9,434) $(6,233)
During 1996, the valuation allowance was increased as a result of
an increase in unutilized net operating loss carryforwards in
some taxing jurisdictions, and decreased by the utilization of
net operating losses and scheduled tax credits in other
jurisdictions. The net increase in the valuation allowance was
$126,000.
A reconciliation from the statutory federal income tax to the
Company's effective income tax follows:
<TABLE>
<CAPTION>
(In thousands)
1996 1995 1994
<S> <C> <C> <C>
Taxes at the U.S. statutory rate $11,761 $ 9,689 $7,306
State income taxes, net of federal
income tax benefit 861 1,002 663
Non-U.S. income taxed at rates
different than the U.S. statutory rate (728) 1,159 1,639
Utilization of net operating loss
carryforwards and benefit of scheduled
tax credits (279) (2,024) (2,544)
Foreign distributions, net of foreign
tax credits 297 372
Other 520 322 456
Provision for income taxes $12,432 $10,520 $7,520
</TABLE>
Undistributed earnings of certain non-U.S. subsidiaries amount to
$52,892,000 at December 31, 1996. These earnings are intended to
be permanently invested and, accordingly, no provision has been
made for non-U.S. withholding taxes. In the event all
undistributed earnings were remitted, approximately $4,795,000 of
withholding tax would be imposed, which would be substantially
offset by foreign tax credits.
The Company has U.S. tax basis business tax credits and foreign
tax credits of approximately $1,624,000 at December 31, 1996.
The U.S. business credit carryforwards expire between the years
2001 and 2010. In addition, the Company has various non-U.S. tax
basis net operating losses and business credit carryforwards of
$20,937,000 and $70,000, respectively. The non-U.S. net
operating losses have an unlimited carryforward period. The non-U.S.
credit carryforwards expire in 1997. In addition, the
Company has alternative minimum tax credit carryforwards of
approximately $2,661,000, which have no expiration dates.
NOTE G - Business Segment and Non-U.S. Operations
The Company's operations comprise one business segment, the
manufacturing of electronic components. Electronic components
include production and sale of automotive control devices, fiber-optic
transceivers, flex cable assemblies, frequency control
devices, hybrid microcircuits, industrial electronics, insulated
metal circuits, interconnect products, loudspeakers, resistor
networks, switches and variable resistors.
Sales to a major automotive manufacturer were $49,100,000 in
1996, $54,900,000 in 1995 and $49,400,000 in 1994.
The non-U.S. operations or facilities are located in Canada, Hong
Kong, Japan, Mexico, Singapore, Taiwan, Thailand and the United
Kingdom. Net sales to unaffiliated customers from the United
Kingdom equaled 24%, 17% and 16% of the consolidated total for
1996, 1995 and 1994, respectively. Net sales to unaffiliated
customers from Other non-U.S. operations in the aggregate equaled
16%, 19% and 18% of the consolidated total for each of the years
1996, 1995 and 1994, respectively.
Net sales by geographic area include both sales to unaffiliated
customers and transfers between geographic areas. Such transfers
are accounted for primarily on the basis of a uniform
intercompany pricing policy. Operating earnings are total net
sales less operating expenses. In computing operating earnings,
none of the following items have been added or deducted: general
corporate expenses, interest income, interest expense, other
income and expenses and income taxes. Identifiable assets by
geographic area are those assets that are used in the Company's
operations in each such area. The Corporate Office assets are
principally cash and equivalents and the prepaid pension asset.
Summarized financial information concerning the geographic areas
of operation for 1996, 1995 and 1994 is shown in the following
table. The caption "Eliminations" includes intercompany sales
and other transactions which are eliminated or adjusted in
arriving at consolidated data.
Geographic Area (In thousands)
1996 1995 1994
Net Sales
United States:
Sales to unaffiliated customers $193,474 $194,016 $178,032
Transfers to non-U.S. area 8,181 5,439 4,179
201,655 199,455 182,211
United Kingdom:
Sales to unaffiliated customers 76,204 49,571 42,779
Transfers to other areas 730 732 514
76,934 50,303 43,293
Other non-U.S.:
Sales to unaffiliated customers 51,619 56,570 47,896
Transfers to other areas 7,400 6,092 7,692
59,019 62,662 55,588
Eliminations (16,311) (12,263) (12,385)
Total net sales $321,297 $300,157 $268,707
Operating Earnings
United States $23,226 $ 22,204 $ 18,109
United Kingdom 10,192 6,483 4,569
Other non-U.S. 9,141 6,345 3,708
42,559 35,032 26,386
Eliminations (72) 140 1
42,487 35,172 26,387
General corporate expenses 9,067 7,684 5,703
Operating earnings 33,420 27,488 20,684
Other income--net 182 196 803
Earnings before income taxes $33,602 $ 27,684 $ 21,487
Assets Apportioned by Area
United States $88,189 $ 87,862 $ 86,605
United Kingdom 36,037 24,718 23,419
Other non-U.S. 47,689 49,848 43,272
171,915 162,428 153,296
Eliminations (4,672) (3,783) (3,305)
167,243 158,645 149,991
Corporate assets 82,129 68,482 56,835
Total assets $249,372 $227,127 $206,826
NOTE H - Contingencies
Certain processes in the manufacture of the Company's current and
past products create hazardous waste by-products as currently
defined by federal and state laws and regulations. The Company
has been notified by the U.S. Environmental Protection Agency,
state environmental agencies and, in some cases, generator
groups, that it is or may be a Potentially Responsible Party
(PRP) regarding hazardous waste remediation at several non-CTS
sites. The factual circumstances of each site are different; the
Company has determined that its role as a PRP with respect to
these sites, even in the aggregate, will not have a material
adverse effect on the Company's business or financial condition,
based on the following: 1) the Company's status as a de minimis
party; 2) the large number of other PRPs identified; 3) the
identification and participation of many larger PRPs who are
financially viable; 4) defenses concerning the nature and limited
quantities of materials sent by the Company to certain of the
sites; and/or 5) the Company's experience to-date in relation to
the determination of its allocable share. In addition to these
non-CTS sites, the Company has an ongoing practice of providing
reserves for probable remediation activities at certain of its
manufacturing locations and for claims and proceedings against
the Company with respect to other environmental matters. Accrued
environmental costs as of December 31, 1996, totaled $4.8
million, compared with $4.5 million at December 31, 1995. In the
opinion of management, based upon presently available
information, either adequate provision for probable costs has
been made, or the ultimate costs resulting will not materially
affect the consolidated financial position or results of
operations of the Company.
Certain claims are pending against the Company with respect to
matters arising out of the ordinary conduct of its business. In
the opinion of management, based upon presently available
information, either adequate provision for anticipated costs has
been made by insurance, accruals or otherwise, or the ultimate
anticipated costs resulting will not materially affect the
Company's consolidated financial position or results of
operations.
NOTE I - Related Party Transactions
Dynamics Corporation of America (DCA) owned 2,303,100 shares
(44.1%) of the Company's outstanding common stock at December 31,
1996. Of these shares, 1,020,000 were not granted voting
authority by CTS shareholders in 1987. In addition to stock
ownership, as of December 31, 1996, two representatives of DCA
serve on the Company's Board of Directors. The normal business
transactions between the Company and DCA are insignificant.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of CTS Corporation
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings, shareholders'
equity and of cash flows present fairly, in all material
respects, the financial position of CTS Corporation and its
subsidiaries at December 31, 1996, and 1995, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/S/PRICE WATERHOUSE LLP
South Bend, Indiana
January 27, 1997
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1994 - 1996)
Liquidity and Capital Resources
The table below highlights significant comparisons and ratios
related to liquidity and capital resources of CTS Corporation (CTS
or Company) for each of the last three years.
(In thousands)
December 31 December 31 December 31
1996 1995 1994
Net cash provided by (used in):
Operating activities $ 35,103 $ 26,861 $ 12,555
Investing activities (16,388) (10,945) (15,090)
Financing activities (12,324) (3,796) 2,580
Cash and equivalents $ 44,957 $ 37,271 $ 24,922
Accounts receivable, net 43,984 41,737 35,029
Inventories, net 38,761 38,885 41,456
Current assets 138,201 126,113 110,667
Notes payable 6,685 7,436
Accounts payable 17,146 15,605 12,768
Accrued liabilities 31,818 26,461 24,284
Current liabilities 51,391 50,962 44,792
Working capital 86,810 75,151 65,875
Current ratio 2.69 2.47 2.47
Interest-bearing debt $ 13,428 $ 22,267 $ 23,318
Net tangible worth 162,193 141,650 126,634
Ratio of interest-bearing debt
to net tangible worth .08 .16 .18
During 1996, $35.1 million of positive cash flow was generated from
operating activities. This amount, which exceeded 1995 by 31%, or
$8.2 million, was primarily a result of the higher level of
earnings and improved management of working capital, particularly
accounts receivable.
The 1995 cash flow from operating activities of $26.9 million
improved by $14.3 million from 1994, primarily as a result of
higher net earnings and reduction in inventories, partially offset
by an increase in accounts receivable.
During 1994, cash flow of $12.6 million was positive from operating
activities, primarily as a result of the significant improvement in
operating earnings when compared to 1993. However, offsetting the
favorable impact of the higher earnings was the higher working
capital requirements to support the increased sales levels, which
reduced operating cash flow by $5.0 million from 1993.
Cash expenditures for investing activities totaled $16.4 million in
1996, exceeding the prior year's amount by $5.4 million, or 50%.
The major change in financing activities was cash payments of $8.9
million for short and long-term debt. As of year-end, the Company
had no short-term debt.
Spending of cash for investing activities in 1995 was $10.9 million
and comparable to 1994 after the impact of the 1994 expenditures
for the light emitting diode (LED)-based fiber-optic data link
(ODL ) product line of $3.4 million. In terms of financing
activities, the impact of the notes payable reduction during 1995
was $5.3 million from the increased cash flow.
Investing requirements increased during 1994, primarily due to the
$13.4 million of capital expenditures, including $3.4 million for
the acquisition of ODL fixed assets. Additionally, financing
activities increased during 1994 and were generated by the higher
sales levels and the acquisition of the ODL product line for which
$2.1 million of additional expenditures were made for inventory.
A significant noncash component and a decreasing component of
operating earnings during the 1994 to 1996 period was pension
income of $5.4 million, $5.3 million and $6.6 million in 1996, 1995
and 1994, respectively. The 1996 pension income amount was
approximately the same as 1995, but decreased from 1994 as a result
of actuarial changes. As a result of the Company's overfunded
pension position, no overall cash contributions are anticipated to
be required in the immediate future to meet the Company's pension
obligations.
The major investment activity during the last three years has been
capital expenditures, which totaled $17.2 million in 1996, $11.2
million in 1995 and $13.4 million in 1994. The major capital
expenditures in 1996 were for new products and product line
enhancements. Also during 1996, as in 1995, capacity increases
were required in our automotive and European interconnect product
lines. The Company expects to increase its capital expenditures in
1997 over 1996 levels. These capital expenditures will be
primarily for new products and cost reduction programs, as well as
selected manufacturing equipment capacity expansion.
The most recent major long-term financing activity outside the CTS
revolving credit agreements occurred during 1994, when the Company
negotiated a five-year, $15.0 million long-term loan which expires
in 1999. As of December 31, 1996, $13.0 million remains
outstanding on this loan.
Dividends paid were $3.4 million in 1996, $3.1 million in 1995 and
$2.1 million in 1994. During 1996, as a result of continuing
improved earnings performance and positive cash flow, the Company
increased its quarterly dividend to $.18 per share, effective with
the August payment. In December 1994, the Board of Directors,
principally as a result of the Company's improving performance and
cash position, increased the quarterly dividend to $.15 per share,
effective with the February 1995 payment.
At the end of each of the last three years, cash of various non-U.S.
subsidiaries was invested in U.S.-denominated cash
equivalents. Such cash is generally available to the parent
Company and the Company's intention is not to repatriate non-U.S.
earnings. If all non-U.S. earnings were repatriated, approximately
$4.8 million of withholding taxes would accrue, but would be
substantially offset by foreign tax credits.
In 1996, CTS renegotiated its long-term revolving credit agreement
and at the end of 1996, CTS had $45.0 million of borrowing capacity
available under long-term revolving credit agreements with four
banks. These revolving agreements, which expire in 2001, are the
Company's primary credit vehicles and, together with cash from
operations, should adequately fund the Company's anticipated cash
needs.
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
1996 1995 1994
Net sales $321,297 $300,157 $268,707
Gross earnings 87,496 74,804 63,067
Gross earnings as a percent
of sales 27.2% 24.9% 23.5%
Selling, general and
administrative expenses $ 43,333 $ 39,312 $ 36,175
Selling, general and
administrative expenses
as a percent of sales 13.5% 13.1% 13.5%
Research and development
expenses $ 10,743 $ 8,004 $ 6,208
Research and development
expenses as a percent of
sales 3.3% 2.7% 2.3%
Operating earnings $ 33,420 $ 27,488 $ 20,684
Operating earnings as a
percent of sales 10.4% 9.1% 7.7%
Interest (income) expense, net $ (432) $ 369 $ 57
Earnings before income taxes 33,602 27,684 21,487
Income taxes 12,432 10,520 7,520
Income tax rate 37.0% 38.0% 35.0%
Net sales for 1996 increased by $21.1 million, or 7.0% over 1995,
principally due to the increased demand in the domestic and
European automotive, computer equipment and communications
equipment markets.
The 1995 net sales increased $31.5 million, or 11.7% over 1994,
primarily due to broad increases in demand for electronic component
products into our automotive, computer equipment and communications
equipment markets.
From 1993 to 1994, total sales increased by 13.4%, primarily as a
result of substantial increases in our automotive and European
interconnect product lines.
During the three-year period 1994-1996, the percentage of overall
sales to the automotive market decreased from 38% to 34%. During
this same period, our sales into the computer equipment market
increased from 19% to 24%, as a percent of total sales. Sales into
other markets have generally remained constant.
The Company's 15 largest customers represented 62% of net sales in
1996, 61% in 1995 and 62% in 1994. One customer, a major
manufacturer of automobiles, comprised 15% of net sales in 1996 as
compared to 18% in 1995 and 1994.
Because most of CTS' revenues are derived from the sale of custom
products, the relative contribution to revenues of changes in unit
volume cannot be meaningfully determined. The Company's products
are usually priced with reference to expected or required profit
margins, customer expectations and market competition. Pricing for
most of the Company's electronic component products frequently
decreases over time and also fluctuates in accordance with total
industry utilization of manufacturing capacity.
In 1996, 1995 and 1994, improvements in gross earnings were
realized over each of the preceding years in absolute terms and as
a percent of sales, principally due to higher sales volume,
production efficiencies and higher absorption of fixed
manufacturing overhead expenses.
Selling, general and administrative expenses as a percent of sales
have remained constant over the last three years, ranging from
13.1% to 13.5%. In 1996, as in previous years, the Company
continued to control these expenses while increasing sales. Also
during 1994, the Company successfully resolved approximately $1
million of outstanding legal and customer claims, the provision for
most of which had been established in 1993.
During 1996, research and development expenses increased by $2.7
million, or 34% over 1995, as the Company continued investment
efforts in new product development and product improvements,
particularly in automotive, frequency control and hybrid
microcircuit products. Research and development expenses increased
by $1.8 million, or 29%, in 1995 over 1994, with much of the
additional effort devoted to the "hall effect" non-contacting
sensor development for our automotive products, as well as other
new product development programs in the automotive and the resistor
network product areas.
The net of interest expense and interest income is reflective of
the levels of debt during the 1994-1996 period. The lower amount
of expense in 1994 relates to the timing of the $15.0 million loan
secured in late 1994, while the 1996 income amount is a result of
lower levels of short-term debt compared to 1995.
During 1996 and 1995, the primary reasons for the substantial
operating earnings improvement include the higher overall sales and
related productivity in our automotive, resistor network and
interconnect products, and the reduction of losses from our
frequency control products. These improvements substantially
offset losses from our defense and aerospace products, caused
primarily by the declining market conditions. In 1994, the level
of operating earnings was a result of the higher automotive and
interconnect product sales, and improved performance within our
resistor network and electromechanical products, which more than
offset losses from our frequency control and hybrid microcircuit
products during that year.
The 1996 effective tax rate of 37% approximated the 1995 tax rate
of 38%. The Company has net operating loss carryforwards of
approximately $21 million in certain non-U.S. subsidiaries, and has
established a 100% valuation reserve on these amounts based upon
historical pretax losses.
With respect to the recently issued FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and FASB Statement No. 123,
"Accounting for Stock-Based Compensation," the Company has realized
no impact on financial position or results of operations upon
adoption in 1996.
In terms of environmental issues, the Company has been notified by
the U.S. Environmental Protection Agency, as well as state agencies
and generator groups, that it is or may be a Potentially
Responsible Party regarding hazardous waste remediation at non-CTS
sites. Additionally, the Company provides reserves for probable
remediation activities at certain of its manufacturing locations.
These issues are discussed in Note H - Contingencies.
<TABLE>
FIVE-YEAR SUMMARY
(In thousands of dollars except per share data)
<CAPTION>
% of % of % of % of % of
1996 Sales 1995 Sales 1994 Sales 1993 Sales 1992 Sales
Summary of Operations
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $321,297 100.0 $300,157 100.0 $268,707 100.0 $236,979 100.0 $227,391 100.0
Cost of goods sold 233,801 72.8 225,353 75.1 205,640 76.5 183,927 77.6 180,198 79.2
Selling, general and admin-
istrative expenses 43,333 13.5 39,312 13.1 36,175 13.5 36,323 15.3 37,855 16.6
Research and development
expenses 10,743 3.3 8,004 2.7 6,208 2.3 5,708 2.4 6,092 2.7
(Gain) on sale of property
and other related provisions (852) (0.3)
Operating earnings 33,420 10.4 27,488 9.1 20,684 7.7 11,021 4.7 4,098 1.8
Other income (expenses)--net 182 0.1 196 0.1 803 0.3 (761) (0.4) (277) (0.1)
Earnings before income taxes
and cumulative effect of
changes in accounting
principles 33,602 10.5 27,684 9.2 21,487 8.0 10,260 4.3 3,821 1.7
Income taxes 12,432 3.9 10,520 3.5 7,520 2.8 3,690 1.6 1,920 0.9
Net earnings--before
accounting changes 21,170 6.6 17,164 5.7 13,967 5.2 6,570 2.7 1,901 0.8
Cumulative effect on prior
years of accounting
changes (a) (4,614) (1.9)
Net earnings 21,170 6.6 17,164 5.7 13,967 5.2 1,956 0.8 1,901 0.8
Retained earnings--beginning
of year 126,546 112,506 100,868 100,973 102,482
Dividends declared (3,604) (3,124) (2,329) (2,061) (3,410)
Retained earnings--end of
year $144,112 $126,546 $112,506 $100,868 $100,973
Average common and common
equivalent shares
outstanding 5,259,284 5,200,818 5,170,406 5,152,556 5,141,936
Net earnings per share:
Before accounting changes $4.03 $3.30 $2.70 $1.27 $0.37
Cumulative effect on prior
years of accounting
changes (a) (0.89)
Net earnings $4.03 $3.30 $2.70 $0.38 $0.37
Cash dividends per share $0.69 $0.60 $0.45 $0.40 $0.6625
Capital expenditures 17,210 11,181 13,401 11,696 8,831
Depreciation and amortization 12,491 11,683 11,236 12,143 11,665
Financial Position at Year-End
Current assets $138,201 $126,113 $110,667 $97,266 $87,376
Current liabilities 51,391 50,962 44,792 49,888 37,262
Current ratio 2.7 to 1 2.5 to 1 2.5 to 1 1.9 to 1 2.3 to 1
Working capital $86,810 $75,151 $65,875 $47,378 $50,114
Inventories 38,761 38,885 41,456 36,059 37,222
Property, plant and equipment--
net 56,103 50,696 50,777 47,842 48,529
Total assets 249,372 227,127 206,826 185,064 170,773
Short-term notes payable 6,685 7,436 12,822 5,827
Long-term obligations 11,220 13,714 15,595 4,995 10,826
Shareholders' equity 166,232 146,253 131,855 119,203 119,372
Common shares outstanding 5,224,956 5,217,329 5,178,604 5,153,424 5,150,824
Equity (book value) per share $31.82 $28.03 $25.46 $23.13 $23.18
Other Data
Stock price range (dollars
per share to the
nearest 1/8) $47.00-$36.00 $37.75-$27.38 $31.00-$19.50 $22.38-$17.00 $24.50-$17.13
Average number of employees 3,815 4,007 4,056 3,975 4,335
Number of shareholders at
year-end 986 1,062 1,136 1,198 1,278
(a) The Company adopted FASB 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and FASB 109, "Accounting for Income Taxes," as of January 1, 1993.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,146
<SECURITIES> 0
<RECEIVABLES> 20,119
<ALLOWANCES> 536
<INVENTORY> 22,624
<CURRENT-ASSETS> 49,350
<PP&E> 42,234
<DEPRECIATION> 37,113
<TOTAL-ASSETS> 140,736
<CURRENT-LIABILITIES> 23,817
<BONDS> 374
0
0
<COMMON> 381
<OTHER-SE> 114,657
<TOTAL-LIABILITY-AND-EQUITY> 140,736
<SALES> 129,206
<TOTAL-REVENUES> 129,206
<CGS> 104,245
<TOTAL-COSTS> 104,245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> 135
<INCOME-TAX> 59
<INCOME-CONTINUING> 10,356
<DISCONTINUED> 251
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,607
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 6,837
<SECURITIES> 0
<RECEIVABLES> 16,825
<ALLOWANCES> 720
<INVENTORY> 18,183
<CURRENT-ASSETS> 49,612
<PP&E> 39,130
<DEPRECIATION> 35,483
<TOTAL-ASSETS> 124,177
<CURRENT-LIABILITIES> 22,234
<BONDS> 401
0
0
<COMMON> 385
<OTHER-SE> 99,340
<TOTAL-LIABILITY-AND-EQUITY> 124,177
<SALES> 107,700
<TOTAL-REVENUES> 107,700
<CGS> 76,005
<TOTAL-COSTS> 76,005
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 7,879
<INCOME-TAX> 2,773
<INCOME-CONTINUING> 8,724
<DISCONTINUED> 8
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,732
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.25
</TABLE>
