-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T16NJeoUneEGvThijRnPha3qTzdcX3hc3mACBybO81xQgCtPcr6lI39FeBbrTOw+ KxkSbYRS/efFEuKuVYNZkQ== 0000026058-97-000001.txt : 19970321 0000026058-97-000001.hdr.sgml : 19970321 ACCESSION NUMBER: 0000026058-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04639 FILM NUMBER: 97560132 BUSINESS ADDRESS: STREET 1: 905 W BLVD N CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192937511 10-K 1 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 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. 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. 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. 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. 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 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 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 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 CTS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands of dollars)
Additions Balance at Charged to Charged to Beginning of Costs and Other Balance at Classification Period Expenses Accounts Deductions(1) End of Period Year ended December 31, 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.
S-3 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. 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 EX-1 2 FINANCIAL HIGHLIGHTS (In thousands except per share data) For the Year 1996 1995 1994 Net sales $321,297 $300,157 $268,707 Net earnings 21,170 17,164 13,967 Average common and common equivalent shares outstanding 5,259 5,201 5,170 Per share data: Net earnings $4.03 $3.30 $2.70 Dividends declared .69 .60 .45 Capital expenditures 17,210 11,181 13,401 At Year-End Working capital $ 86,810 $ 75,151 $ 65,875 Notes payable 6,685 7,436 Long-term obligations (including current maturities) 13,647 15,925 15,899 Shareholders' equity 166,232 146,253 131,855 Equity per outstanding share 31.82 28.03 25.46 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. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars except per share amounts)
Year Ended December 31 December 31 December 31 1996 1995 1994 Net sales $321,297 $300,157 $268,707 Costs and expenses: Cost of goods sold 233,801 225,353 205,640 Selling, general and administrative expenses 43,333 39,312 36,175 Research and development expenses 10,743 8,004 6,208 Operating earnings 33,420 27,488 20,684 Other (expenses) income: Interest expense (1,449) (1,790) (714) Interest income 1,881 1,421 657 Other (250) 565 860 Total other income (expenses) 182 196 803 Earnings before income taxes 33,602 27,684 21,487 Income taxes--Note F 12,432 10,520 7,520 Net earnings $ 21,170 $ 17,164 $ 13,967 Net earnings per share $4.03 $3.30 $2.70 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands of dollars)
Cumulative Deferred Common RetainedTranslation Compen- Treasury Stock Earnings Adjustment sation Stock Total 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.
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. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
Year Ended December 31 December 31 December 31 1996 1995 1994 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.
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:
1996 1995 1994 Weighted Weighted Weighted -Average -Average -Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price 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
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
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 $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
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:
(In thousands) 1996 1995 1994 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)
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:
(In thousands) 1996 1995 1994 Taxes at the U.S. statutory rate $11,761 $ 9,689 $7,306 State income taxes, net of federal income tax benefit 861 1,002 663 Non-U.S. income taxed at rates different than the U.S. statutory rate (728) 1,159 1,639 Utilization of net operating loss carryforwards and benefit of scheduled tax credits (279) (2,024) (2,544) Foreign distributions, net of foreign tax credits 297 372 Other 520 322 456 Provision for income taxes $12,432 $10,520 $7,520
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. 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 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. EX-2 3 FIVE-YEAR SUMMARY (In thousands of dollars except per share data)
% of % of % of % of % of 1996 Sales 1995 Sales 1994 Sales 1993 Sales 1992 Sales Summary of Operations 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.
EX-3 4 CTS CORPORATION 905 WEST BOULEVARD NORTH - ELKHART, INDIANA 46514 Notice of Annual Meeting of Shareholders To Be Held April 25, 1997 To CTS Shareholders: The Annual Meeting of Shareholders of CTS Corporation will be held at 9:00 a.m. Eastern Standard Time, Friday, April 25, 1997, at the CTS Corporate Headquarters, 905 West Boulevard North, Elkhart, Indiana 46514, for the following purposes: 1. To elect five directors to serve for one year and until their successors are elected and qualified; 2. To transact other business properly presented at the meeting. Only shareholders of record at the close of business on March 7, 1997 are entitled to notice of, and to vote at, the meeting or any adjournment thereof. Accompanying this Notice of Annual Meeting are a Proxy Statement, a proxy and the Annual Report for the fiscal year ended December 31, 1996. By Order of the Board of Directors, Jeannine M. Davis Secretary Elkhart, Indiana March 17, 1997 It is important that your shares be represented at this meeting. We urge you to date, sign and return your proxy promptly in the enclosed envelope, which requires no postage if mailed in the United States. CTS CORPORATION 905 WEST BOULEVARD NORTH - ELKHART, INDIANA 46514 Proxy Statement Voting Information This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of CTS Corporation for the Annual Meeting of Shareholders to be held April 25, 1997. If the enclosed proxy is signed and returned, it may, nevertheless, be revoked by you at any time prior to being voted, by written notice delivered to the Secretary. The Proxy Statement and proxy were first mailed to shareholders about March 17, 1997. The Corporation had outstanding 5,226,496 shares of Common Stock as of the close of business on March 7, 1997, the record date for the Annual Meeting as set by the Board of Directors. As a result of shareholder action taken at the 1987 Annual Meeting, 1,020,000 shares of Common Stock owned by Dynamics Corporation of America are not votable at the meeting. With the exception of those shares, each shareholder is entitled to one vote in person or by proxy for each share of Common Stock owned on the record date. There are no other voting securities. If the enclosed proxy is signed and returned, the shares represented will be voted in the manner indicated except that if any nominee for director is unable to serve at the time of the Annual Meeting, the proxy will be voted in accordance with the judgment on such matters of the person or persons acting as proxy. Proxy solicitation will be principally by mail, but proxies may also be solicited in person or by telephone. The expense of this solicitation will be paid by the Corporation. Brokers and certain other holders for beneficial owners will be reimbursed for out-of-pocket expenses incurred in the solicitation of proxies from the beneficial owners of shares held in their names. The Corporation has retained Georgeson & Co., Inc. to assist in the solicitation of proxies at an estimated cost of $5,000, plus reasonable out-of-pocket expenses. The Board of Directors is not aware of any business to be acted upon at the Annual Meeting other than for which notice is given, but in the event other business is properly presented at the meeting, requiring a vote of the shareholders, the proxy will be voted in accordance with the judgment on such matters of the person or persons acting as proxy. Shareholders are requested to exercise their right to vote by completing and signing the enclosed proxy and returning it promptly in the enclosed envelope. Unless otherwise specified by the shareholder, all shares represented by valid proxies will be voted in favor of the election of all director-nominees. Securities Beneficially Owned by Principal Shareholders and Management The following table includes information with respect to all persons and groups known to the Corporation to be beneficial owners of more than five percent of the Common Stock of the Corporation on March 7, 1997. The number of shares and the percent of class held by each director and director-nominee is also stated. Additionally, the number of shares and the percent of class held by each executive officer of the Corporation included in the Summary Compensation Table set forth under the caption "Executive Compensation" below is included, together with the total number of shares and percent of class held by all directors and officers as a group. Amount and Nature of Beneficial Ownership On Percent Beneficial Owner March 7, 1997 (1) of Class Dynamics Corporation of America 2,303,100 (2) 44.07 475 Steamboat Road Greenwich, CT 06830 The Gabelli Group, Inc. 1,212,100 (3) 23.19 GAMCO Investors, Inc., and Gabelli Funds, Inc. 655 Third Avenue New York, NY 10017 Gerald H. Frieling, Jr. 200,150 (4) 3.83 Lawrence J. Ciancia 199,650 (4) 3.82 Patrick J. Dorme 199,150 (4, 10) 3.81 Andrew Lozyniak 199,150 (4, 10) 3.81 Joseph P. Walker 26,712 (5) * Philip T. Christ 19,285 (6) * Stanley J. Aris 11,114 (7) * Donald R. Schroeder 10,341 (8) * James N. Hufford 4,515 (9) * 13 directors and officers 295,316 (4, 11) 5.65 as a group ___________________________ *Less than 1%. (1) Information with respect to beneficial ownership is based upon information furnished by each shareholder or contained in filings made with the Securities and Exchange Commission. Except where otherwise indicated, the shareholders listed in the table have sole voting and investment authority with respect to the shares owned by them. (2) Includes 1,020,000 shares for which voting authority was not granted by a vote of the independent shareholders of the Corpora- tion at the 1987 Annual Meeting of Shareholders, pursuant to the Control Share Acquisition Chapter of the Indiana Business Corpora- tion Law. (3) Includes 215,500 shares held by Gabelli Funds, Inc., and 996,600 shares held by GAMCO Investors, Inc., which were reported on a joint Schedule 13D filed March 6, 1996, the most recent filing by such Reporting Persons. According to the Schedule 13D, each of the Reporting Persons and Covered Persons has the sole power to vote or direct the vote and sole power to dispose or to direct the disposition of the Securities reported for it, either for its own benefit or for the benefit of its investment clients or its partners, as the case may be, except that GAMCO Investors, Inc. does not have authority to vote 173,000 of the reported shares, and except that Gabelli Funds, Inc. has sole dispositive and voting power with respect to the 215,500 reported shares held by the Funds, so long as the aggregate voting interest of all joint filers does not exceed 25% of the issuer's total voting interest and, in that event, the respective Proxy Voting Committee of each fund (other than The Gabelli Growth Fund) will vote the shares held by that Fund; except that, at any time, the Proxy Voting Committee of each such Fund may take and exercise in its sole discretion the entire voting power with respect to the shares held by such Fund under special circumstances such as regulatory considerations; and that the power of Mr. Gabelli and Gabelli Funds, Inc. is indirect with respect to securities beneficially owned directly by other Reporting Persons. (4) 199,150 of the shares shown as owned beneficially by each of Mr. Ciancia, Mr. Dorme, Mr. Frieling, Mr. Lozyniak and 13 directors and officers as a group are the same shares, which shares are held by The Northern Trust Company as Trustee of the CTS Corporation Employee Benefit Plans Master Trust (the "Trust"). The Compensa- tion Committee of the Board of Directors has voting and investment authority over said shares. The present members of the Compensation Committee are Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak, who were appointed by the Board of Directors of CTS Corporation. (5) Includes 4,012 shares attributed to Joseph P. Walker's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1996, the most recent annual report of the Plan. The number of shares attributed to Mr. Walker's account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. Also includes 2,500 shares subject to options exercisable on March 7, 1997, or which become exercisable within 60 days thereafter. (6) Includes 1,685 shares attributed to Philip T. Christ's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1996, the most recent annual report of the Plan. The number of shares attributed to Mr. Christ's account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. Also includes 6,600 shares subject to options exercisable on March 7, 1997, or which become exercisable within 60 days thereafter. (7) Includes 314 shares attributed to Stanley J. Aris' account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1996, the most recent annual report of the Plan. The number of shares attributed to Mr. Aris' account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. Also includes 5,800 shares subject to options exercisable on March 7, 1997, or which become exercisable within 60 days thereafter. (8) Includes 6,341 shares attributed to Donald R. Schroeder's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1996, the most recent annual report of the Plan. The number of shares attributed to Mr. Schroeder's account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. Also includes 2,000 shares subject to options exercisable on March 7, 1997, or which become exercisable within 60 days thereafter. (9) Includes 1,015 shares attributed to James N. Hufford's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1996, the most recent annual report of the Plan. The number of shares attributed to Mr. Hufford's account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. Also includes 2,100 shares subject to options exercisable on March 7, 1997, or which become exercisable within 60 days thereafter. Also includes 400 shares held in a trust for his spouse, of which he disclaims beneficial ownership. (10) Messrs. Dorme and Lozyniak are directors of Dynamics Corporation of America. (11) Includes 29,400 shares subject to options exercisable on March 7, 1997, or which become exercisable within 60 days thereafter. Election of Directors At the Annual Meeting, five directors are to be elected for terms of one year. Each director will hold office until the next Annual Meeting of Shareholders and until his successor has been elected and qualified. Each person listed below has been nominated by the Board of Directors and has agreed to serve as a director, if elected. Year First Elected Director GERALD H. FRIELING, JR. 1982 Vice Chairman of the Board of Tokheim Corporation (a manufacturer of petroleum dispensing equipment, systems and control devices); President of Frieling and Associates (a consulting firm); Chairman of the Audit Committee and Member of the Executive and Compensation Committees of CTS Corporation. During the past five years, Mr. Frieling, age 66, served as Chairman of the Board and Chief Executive Officer of Tokheim Corporation, and in his present capacity at Frieling and Associates. ANDREW LOZYNIAK 1987 Chairman of the Board and President of Dynamics Corporation of America (a manufacturer of electrical appliances and electronic devices, fabricated metal products and equipment, and power and controlled environmental systems); Chairman of the Compensation Committee and Member of the Executive and Audit Committees of CTS Corporation. During the past five years, Mr. Lozyniak, age 65, has served in his present capacities at Dynamics Corporation of America. Mr. Lozyniak serves as a director of Dynamics Corporation of America and Physicians Health Services, Inc. JOSEPH P. WALKER 1987 Chairman of the Board, President and Chief Executive Officer of CTS Corporation; Chairman of the Executive Committee of CTS Corporation. During the past five years, Mr. Walker, age 58, has served in his present capacities at CTS. Mr. Walker is a director of NBD Bank, N.A. LAWRENCE J. CIANCIA 1990 Vice President, Growth and Development, of Uponor U.S., Inc. (a supplier of PVC pipe products, specialty chemicals and PVC compounds); Member of the Audit and Compensation Committees of CTS Corporation. During the past five years, Mr. Ciancia, age 54, has served as President, Chief Executive Officer and Chief Operating Officer of Uponor ETI Company, formerly Concorde Industries, Inc. PATRICK J. DORME 1993 Vice President and Chief Financial Officer of Dynamics Corporation of America (a manufacturer of electrical appliances and electronic devices, fabricated metal products and equipment, and power and controlled environmental systems); Member of the Audit and Compensation Committees of CTS Corporation. During the past five years, Mr. Dorme, age 61, has served in his present capacities at Dynamics Corporation of America. Mr. Dorme serves as a director of Dynamics Corporation of America. The affirmative vote of the holders of a plurality of the shares represented in person or by proxy at the meeting is required to elect the director-nominees. The Board of Directors unanimously recommends that the shareholders vote in favor of each of the director-nominees named above. In the event that any of such nominees are unable or unwilling to serve as a director, an event which the Corporation does not anticipate, the proxies hereby solicited will be voted for the remaining nominees named above or for such substitute person or persons as the Board of Directors may select. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors and Executive Officers, and persons who own more than ten percent of a registered class of the Corporation's equity securities, to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Corporation. Executive Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. To the Corporation's knowledge, based solely on its review of the copies of such reports furnished to the Corporation and written representations that no other reports were required during the year ended December 31, 1996, all Section 16(a) filing requirements applicable to its Executive Officers, directors and greater than ten percent beneficial owners were complied with. Board of Directors and Standing Committees During 1996, the Board of Directors held six meetings. The standing committees of the Board of Directors include an Audit Committee, an Executive Committee and a Compensation Committee. The Audit Committee, consisting of Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr. and Andrew Lozyniak, held two meetings in 1996. The Committee performs the following principal functions: recommendation of the engagement or discharge of the Corporation's independent accountants; review of the plan and results of the auditing engagement with the independent accountants; review of the adequacy of the Corporation's internal accounting controls; and review of the independence of the independent accountants and the audit fees of the independent accountants. The Executive Committee, consisting of Gerald H. Frieling, Jr., Andrew Lozyniak and Joseph P. Walker, held five meetings in 1996. The Committee reviews and advises management on financial and operational matters between meetings of the Board of Directors. The Compensation Committee, consisting of Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr. and Andrew Lozyniak, held three meetings in 1996. The Committee performs the function of recommending officer compensation arrangements and amounts to the Board of Directors. The Committee also administers the CTS Corporation 1986 Stock Option Plan, the CTS Corporation 1996 Stock Option Plan, the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, and the CTS Corporation Management Incentive Plan. Each director-nominee attended 100% of the meetings of the Board of Directors and the committees to which he was assigned during 1996. Executive Compensation The following table sets forth annual and long-term compensation information for each of the last three fiscal years of the Chief Executive Officer and the four highest compensated Executive Officers whose salary and bonus for fiscal year 1996 exceeded $100,000. Information which is not required to be disclosed in the table is identified by the letters "N/R." SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Restricted Securities Name and Stock Underlying All Other Principal Salary Bonus(1) Other(2) Award(s)(3) Options Compensation(4) Position Year ($) ($) ($) ($) (#) ($) Joseph P. Walker (5, 6) 1996 342,167 205,300 N/R 0 0 6,007 Chairman of the 1995 327,411 196,400 N/R 0 10,000 11,270 Board, President and 1994 311,878 147,200 N/R 231,250 0 8,496 Chief Executive Officer Philip T. Christ (6) 1996 203,903 122,400 N/R 0 0 11,363 Group Vice 1995 178,775 107,300 N/R 231,000 8,000 7,677 President 1994 168,301 90,200 N/R 0 5,000 7,326 Stanley J. Aris (6) 1996 174,309 104,600 N/R 0 0 3,375 Vice President 1995 168,078 100,800 N/R 37,375 8,500 5,994 Finance and Chief 1994 160,105 75,600 N/R 57,813 3,000 4,991 Financial Officer Donald R. Schroeder (6) 1996 126,692 76,000 N/R 0 0 4,464 Vice President, Sales 1995 119,481 71,700 N/R 0 5,500 39,428 and Marketing 1994 N/R N/R N/R N/R N/R N/R James N. Hufford (6) 1996 122,464 73,500 N/R 0 0 3,978 Vice President 1995 115,126 69,100 N/R 37,375 5,750 4,520 Research Development 1994 N/R N/R N/R N/R N/R N/R and Engineering (1) Includes bonuses paid pursuant to the CTS Corporation Management Incentive Plan, as described in the Report of the Compensation Committee below. (2) The value of other personal benefits received from the Corporation by the named Executive Officers is below the reporting threshold for perquisites. (3) At the end of fiscal year 1996, Joseph P. Walker held 6,000 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which at December 31, 1996 was $256,500. At the time that such restrictions lapse, a cash bonus is paid in an amount equal to the market value of the shares on the date the restriction lapses. For Joseph P. Walker, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1996 - $75,000; 1995 - $62,000; and 1994 - $49,250. At the end of fiscal year 1996, Philip T. Christ held 6,000 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1996 was $256,500. For Philip T. Christ, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1996 - $69,375; 1995 - $24,200; and 1994 - $19,150. At the end of fiscal year 1996, Stanley J. Aris held 2,300 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1996 was $98,325. For Stanley J. Aris, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1996 - $26,925; 1995 - $15,500; and 1994 - $0. At the end of fiscal year 1996, Donald R. Schroeder held 600 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1996 was $25,650. For Donald R. Schroeder, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1996 - $8,175; 1995 - $7,425 and 1994 - N/R. At the end of fiscal year 1996, James N. Hufford held 800 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1996 was $34,200. For James N. Hufford, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1996 - $8,175; 1995 - $0 and 1994 - N/R. The restrictions on 20% of the shares awarded under this Plan lapse at the end of each of the five years following acquisition of the shares. Regular dividends are paid to holders of restricted stock awarded under this Plan. This Plan includes a change of control provision which provides that, upon a change of control of the Corporation, as defined in the Plan, all restrictions on shares awarded under the Plan will lapse and cash bonuses will be paid relative to those shares. (4) Includes (i) the Corporation's matching contributions to the CTS Corporation Retirement Savings Plan on behalf of the named Executive Officers as follows: for Joseph P. Walker, 1996 - $3,375; 1995 - $3,465; and 1994 - $3,465; for Philip T. Christ, 1996 - $3,375; 1995 - $3,465; and 1994 - $3,465; for Stanley J. Aris, 1996 - $3,375; 1995 - $3,465; and 1994 - $3,465; for Donald R. Schroeder, 1996 - $3,375; 1995 - $2,592; and 1994 - N/R; and for James N. Hufford, 1996 - $3,375; 1995 - $3,135; and 1994 - N/R; and (ii) the premiums paid by the Corporation on the term life insurance policies with face values greater than $50,000 provided to each of the named Executive Officers as follows: for Joseph P. Walker, 1996 - $0; 1995 - $5,310; and 1994 - $5,031; for Philip T. Christ, 1996 - $7,988; 1995 - $4,212; and 1994 - $3,861; for Stanley J. Aris, 1996 - $0; 1995 - $2,529; and 1994 - $1,526; for Donald R. Schroeder, 1996 - $1,089; 1995 - $929; and 1994 - N/R; and for James N. Hufford, 1996 - $603; 1995 - $1,386; and 1994 - N/R. For Joseph P. Walker, also includes the imputed income value of the term life insurance portion of the coverage under a "split dollar" life insurance policy as follows: for 1996 - $2,632; for 1995 - $2,495; and for 1994 - $0. For Donald R. Schroeder, also includes for 1995 employee relocation expenses paid by the Corporation. (5) Joseph P. Walker has executed an employment agreement with the Corporation, which provides that for a period of three years, beginning June 24, 1994, Mr. Walker will be employed by the Corporation as Chairman of the Board, President and Chief Executive Officer, at an initial annual salary of $319,725. Termination of Mr. Walker's employment agreement by the Corporation, for reasons other than cause as defined in the agreement, entitles Mr. Walker to receive his then current annual salary for the number of months remaining under his agreement, the same to be paid in equal monthly payments. (6) The Corporation has entered into Indemnification Agreements with each of the named Executive Officers and all other Executive Officers of the Corporation which provide that the Corporation agrees to indemnify the officer, to the fullest extent allowed by the bylaws of the Corporation and the Indiana Business Corporation Law, in the event that he/she was or is made a party or threatened to be made a party to any action, suit or proceeding by reason of the fact that he/she is an officer of the Corporation. The indemnification agreements provide indemnification for acts occurring prior to the execution of the agreements. Stock Options No options for CTS Corporation Common Stock were awarded to the named Executive Officers in 1996.
OPTION EXERCISES IN 1996 AND FISCAL YEAR END 1996 OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at Fiscal Options at Fiscal Shares Year-End Year-End Acquired Value Exercisable/ Exercisable/ Name On Exercise Realized Unexercisable Unexercisable Joseph P. Walker -0- -0- 2,500/7,500 $13,438/$40,313 Philip T. Christ -0- -0- 6,100/8,900 $92,988/$87,263 Stanley J. Aris -0- -0- 5,300/8,200 $76,063/$70,875 Donald R. Schroeder -0- -0- 2,000/4,500 $18,325/$29,238 James N. Hufford -0- -0- 2,100/4,650 $18,863/$30,044
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors, comprised of Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak, submits this report of Executive Compensation to the Corporation's shareholders. Compensation Principles and Philosophy The Compensation Committee of the Board of Directors has implemented executive compensation policies and programs designed to achieve the following objectives: Attract and retain key executives and managers Align the financial interests of key executives and managers with those of the shareholders of the Corporation Reward individual performance Reward Corporate performance These objectives are achieved through a combination of annual and longer term compensation arrangements including base salary, annual cash incentive compensation, and long-term incentive compensation through stock options and restricted stock awards, in addition to medical, pension and other benefits available to employees in general. The four principal components of the Executive Officer Compensation package at CTS Corporation are: base salary, the CTS Corporation Management Incentive Plan, the CTS Corporation Stock Option Plans and the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan. Base Salary The base salary of the Executive Officers of CTS Corporation is determined in the same manner as the salaries of all exempt salaried employees of the Corporation. A job classification system is utilized to determine appropriate salary ranges for each Executive Officer position, based on qualifications, job responsibilities and market factors. The goal of CTS Corporation's job classification system is that Executive Officers, and employees in general, are paid a salary which is commensurate with their qualifications, duties and responsibilities and which is competi- tive in the market place. The Corporation retained Towers Perrin to assess the current salaries and job classifications of the Executive Officers compared with market data for similar positions at similar companies and to provide periodic updates upon request. The report from Towers Perrin indicated that the salaries of the Corporation's Executive Officers are generally below competitive median salaries. When the financial performance of the Corporation permits, salary adjustments above the Corporation's salary budget for all exempt salaried employees are considered for those in the lower portion of their salary range, if individual performance warrants such consideration. During each of the past three years, the named Executive Officers have been granted salary increases in the same range established for all exempt salaried employees of the Corporation, except that on occasion, certain officer salaries were increased at higher rates in response to competitive salary information provided by Towers Perrin. CTS Corporation Management Incentive Plan All Executive Officers of the Corporation are participants in the CTS Corporation Management Incentive Plan, which provides cash compensation incentives, based on the financial performance of the Corporation. For 1996, financial performance was measured on the basis of achieving target levels of return on assets (ROA). When Plan financial objectives are met at the 100% level, each of the named Executive Officers is eligible for a bonus in an amount equal to 40% of his/her base salary for the subject year. Maximum incentive payments under this Plan range from 10% to 60% of the annual salary of the Plan participants. For 1996, the Corporation achieved 150% of its ROA target under the 1996 CTS Corporation Management Incentive Plan. Accordingly, the named Executive Officers received formula bonuses under the Plan equal to 60% of their base salaries. For 1995, the Corporation achieved 150% of its ROA target under the 1995 CTS Corporation Management Incentive Plan. Accordingly, the named Executive Officers received formula bonuses under the Plan equal to 60% of their base salaries. This Plan also authorizes the Compensation Committee to grant discretionary bonuses when the Committee deems it appropriate to do so. No significant discretionary bonuses have been paid to the named Executive Officers during any of the three years for which compensation is disclosed. CTS Corporation 1996 Stock Option Plan The Compensation Committee administers the CTS Corporation 1996 Stock Option Plan and predecessor stock option plans and determines to whom options will be granted, the dates of such option grants, the number of shares subject to option, the option price, option periods and option terms. No options were granted to Executive Officers of the Corporation during 1996 under these Plans. CTS Corporation 1988 Restricted Stock and Cash Bonus Plan The CTS Corporation 1988 Restricted Stock and Cash Bonus Plan was adopted by the shareholders in 1989 for the purpose of providing incentives to selected key employees who contribute or are expected to contribute materially to the success of the Corporation, and to closely align the financial interests of these key employees with those of the Corporation's shareholders. The participants are selected and their level of participation determined by the Compensation Committee. Shares acquired by participants pursuant to the Plan are subject to restriction that, during the period of five years after the date of acquisition, the participant may not sell, transfer or otherwise dispose of such shares as to which the restrictions shall not have lapsed. The restrictions lapse as to 20% of the shares acquired pursuant to the Plan at the end of each year following the acquisition of the shares. When the restrictions lapse, a cash bonus is paid to the participant equal to the fair market value of such shares as of the date of such lapse. In no event may the cash bonuses payable to any participant be greater than twice the fair market value of such shares on the date they were originally acquired. Dividends are paid to participants in this Plan on all shares awarded to them under the Plan. The Plan also provides for appropriate adjustment to the number of shares awarded in the event of a stock dividend, stock split, recapitalization, merger, combination or exchange of shares for other securities. No awards under the Plan were made to the named Executive Officers in 1996. The number of shares previously awarded to the named Executive Officers, their market value, vesting schedules, and bonuses paid relative thereto, are set forth in the Summary Compensation Table above and the footnotes thereto. Deductibility of Compensation Section 162(m) of the Internal Revenue Code of 1986, as amended, limits to $1,000,000 per person the amount that the Corporation may deduct for compensation paid to any of its most highly compensated officers in any year after 1993. The levels of compensation paid to the Corporation's Executive Officers do not exceed this limit. The Compensation Committee currently intends for all compensation paid to its Executive Officers to be tax deductible to the Company pursuant to Section 162(m). Respectfully Submitted, CTS CORPORATION COMPENSATION COMMITTEE Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr. and Andrew Lozyniak STOCK PERFORMANCE CHART The following graph compares the cumulative total shareholder return on the Corporation's Common Stock for the last five fiscal years with the cumulative total return on the S & P 500 Index and an index of peer companies over the same period. CTS Corporation Salaried Employees' Pension Plan The CTS Corporation Salaried Employees' Pension Plan is a retirement plan for exempt salaried employees of some CTS Corporation divisions and subsidiaries. The benefit formula is calculated as 1% of a participant's highest average monthly pay during any three calendar years of a participant's last ten calendar years of service, multiplied by a participant's credited service. The credited service for the named Executive Officers as of December 31, 1996, is as follows: Joseph P. Walker, 8.78 years, Philip T. Christ, 7.56 years, Stanley J. Aris, 4.78 years, Donald R. Schroeder, 24.44 years and James N. Hufford, 31.2 years. Covered compensation for the named Executive Officers is essentially equivalent to the amount reported in the Annual Compensation Section of the Summary Compensation Table above under the Salary and Bonus columns. No benefit under this plan is subject to Social Security or other offsets. The following table shows the annual benefits payable under the plan to persons in specified compensation and credited service classifications at normal retirement age of 65: PENSION TABLE* Years of Participation Compensation 15 Years 20 Years 25 Years 30 Years 35 Years $100,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000 125,000 18,750 25,000 31,250 37,500 43,750 150,000 22,500 30,000 37,500 45,000 52,500 175,000 26,250 35,000 43,750 52,500 61,250 200,000 30,000 40,000 50,000 60,000 70,000 225,000 33,750 45,000 56,250 67,500 78,750 250,000 37,500 50,000 62,500 75,000 87,500 300,000 45,000 60,000 75,000 90,000 105,000 400,000 60,000 80,000 100,000 120,000 140,000 *The benefit limitation under the Internal Revenue Code of 1986, as amended, for 1997 is $120,000. No more than $160,000 (as adjusted from time to time for cost-of-living increases of $10,000 or more) of cash compensation may be taken into account in calculating benefits under this plan. In order to maintain the level of total retirement benefits which, but for the Internal Revenue Code limitation on compensation which may be taken into account, would otherwise be payable under this plan, two actions were taken in 1996. A supplemental benefit was added to this plan, and a Nonqualified Excess Benefit Retirement Plan was adopted. The named Executive Officers and other officers and key managers whose regular plan benefits are negatively impacted by the Internal Revenue Code compensation limitation, will be beneficiaries of these actions, under which any benefits otherwise lost will be restored. Director Compensation Each member of the Board of Directors, who is not an employee or an officer of the Corporation, is paid an annual retainer of $13,000 per year for service on the Board of Directors, a meeting fee of $1,000 for each meeting of the Board of Directors attended in person, and $500 for each meeting of the Board of Directors attended by telephone. In addition, each member of the Executive Committee and each member of the Compensation Committee is entitled to receive an annual retainer of $500, and each member of the Audit Committee is entitled to receive an annual retainer of $1,000, together with a meeting fee of $1,000 for attending each meeting of a committee of which he is a member, except that he is entitled to receive $500 per meeting for a second or subsequent meeting held on the same day and for any such meetings attended by telephone. On April 27, 1990 the Corporation adopted the CTS Corporation Stock Retirement Plan for Nonemployee Directors of the Corporation (the "Plan"). Under the Plan, separate accounts are opened by the Corporation in the names of nonemployee directors. On January 1 of each year, starting in 1991, a deferred stock account in the name of each nonemployee director is credited with 100 Common Stock Units if said director was a nonemployee director of the Corporation on the last day of the immediately preceding calendar year or ceased to be a director during such preceding calendar year by reason of his retirement, disability or death. In addition, on May 1, 1990, the Corporation credited to the deferred stock account of each such director 50 Common Stock Units for each complete calendar year of his service to the Corporation as a nonemployee director prior to May 1, 1990. Each deferred stock account will also be credited with Common Stock Units when credits equivalent to cash dividends on the shares in an account aggregate an amount equal to the value of a share of Common Stock on a dividend payment date. All deferred Common Stock Units in a director's account will be distributed in Common Stock as of the January 1st after the director leaves the Board of Directors. Until such time, the Corporation's obligation under the Plan is an unsecured promise to deliver shares of Common Stock. No Common Stock will be held in trust or as a segregated fund because of the adoption of the Plan. Four members of the Board of Directors are currently eligible to participate in the Plan. The Corporation expensed $17,100 in 1996 in respect of Common Stock Units credited to the accounts of the eligible directors as a group pursuant to the Plan. Corporation's Independent Accountants The Corporation's independent accountants are Price Water- house. Representatives of the independent accountants will attend the Annual Meeting, to be available to respond to appropriate questions by shareholders and to have the opportunity to make statements, if they so desire. Shareholder Proposals To be considered for inclusion in the 1998 proxy solicitation material and proxy, shareholder proposals must be received by the Corporation at its Corporate Offices no later than November 21, 1997. 1996 Annual Report on S.E.C. Form 10-K Upon the written request of a CTS shareholder owning shares of Common Stock on the record date, to Jeannine M. Davis, Secretary of CTS Corporation, 905 West Boulevard North, Elkhart, Indiana 46514, the Corporation will provide to such shareholder, without charge, a copy of its 1996 Annual Report on S.E.C. Form 10-K, including the financial statements and financial statement schedules. Jeannine M. Davis Secretary Elkhart, Indiana March 17, 1997 EX-27 5
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 44,957 0 44,606 622 38,761 138,201 189,389 133,286 249,372 51,391 0 0 0 33,540 132,692 249,372 321,297 321,297 233,801 287,877 (1,631) 0 1,449 33,602 12,432 21,170 0 0 0 21,170 4.03 4.03
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