-----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, Hw5M4bd0pvPnQszfEPJ3Py6q0iglgMEGQ0gRYMSNAJfg0XIXv0FhCjLoBrY3o7fY yE6pib5xuNf+J1nI3Un9yA== 0000026058-98-000003.txt : 19980330 0000026058-98-000003.hdr.sgml : 19980330 ACCESSION NUMBER: 0000026058-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 001-04639 FILM NUMBER: 98576475 BUSINESS ADDRESS: STREET 1: 905 W BLVD N CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192937511 MAIL ADDRESS: STREET 1: 905 W BLVD NORTH CITY: ELKHART STATE: IN ZIP: 46514 10-K 1 CTS CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION 1997 FORM 10-K ANNUAL REPORT CTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for Fiscal Year Ended December 31, 1997 CTS CORPORATION 905 West Boulevard North Elkhart, Indiana 46514 219-293-7511 Indiana 1-4639 35-0225010 (State of (Commission File No.) (IRS Employer Incorporation) Identification No.) The Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. The number of shares of the Company's Common Stock outstanding at March 6, 1998 was 14,312,499. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For Fiscal Year Ended December 31, 1997 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number: 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 (State or other jurisdiction of (IRS Employer Identifi- incorporation or organization) cation Number) 905 West Boulevard North, Elkhart, Indiana 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 219-293-7511 Web site address: http://www.ctscorp.com Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common stock, without par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant has: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X There were 14,312,499 shares of Common Stock, without par value, outstanding on March 6, 1998. The aggregate market value of the voting stock held by non-affiliates of CTS Corporation was approximately $411.5 million on March 6, 1998. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the CTS Corporation 1997 Annual Report for the fiscal year ended December 31, 1997, incorporated by reference in Part I and Part II. (2) Portions of the 1998 Proxy Statement for annual meeting of shareholders to be held on April 24, 1998, incorporated by reference in Part III. (3) Certain portions of the CTS Corporation Form 10-K for the 1991 fiscal year ended December 31, 1991, incorporated by reference in Part IV. (4) Portions of the CTS Corporation Form 8-K filed October 20, 1997, incorporated by reference in Part IV. (5) Portions of the CTS Corporation Form 14D-1 filed May 16, 1997, incorporated by reference in Part IV. (6) Portions of the CTS Corporation Form 10-Q filed June 29, 1997, incorporated by reference in Part IV. (7) Portions of the CTS Corporation Form 10-K for the year ended December 31, 1995, incorporated by reference in Part IV. (8) Portions of the CTS Corporation Schedule 13D, filed on July 18, 1997, incorporated by reference in Part IV. (9) Portions of the DCA Corporation 10-Q for the quarter ended March 31, 1997 incorporated by reference in Part IV. (10) Portions of the CTS Corporation form 10-Q for the quarter ended March 30, 1997 incorporated by reference in Part IV. EXHIBIT INDEX -- PAGES 18-20 Part I Item 1. Business INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS The registrant, CTS Corporation (CTS or Company), is an Indiana corporation incorporated in 1929 as a successor to a company started in 1896. CTS' principal executive offices are located at 905 West Boulevard North, Elkhart, Indiana, 46514, telephone number (219) 293-7511. CTS designs, manufactures and sells electronic components and electronic component assemblies as well as commercial and industrial products. The engineering and manufacturing of CTS products is performed at 21 facilities worldwide. CTS products are sold primarily through sales engineers, sales representatives, agents and distributors. During 1994, the Company purchased the assets of AT&T Microelectronics' light emitting diode based optical data link products business. The transaction also included sales contracts, backlog, intellectual property, trademarks, and the design and manufacturing technology. These products, manufactured in the Company's West Lafayette, Indiana, Microelectronics facility, were being phased out during 1997. During 1996, the Company sold property in New Hope, Minnesota, for $550,000 in cash and a promissory note. The Company recognized a pretax gain of $35,000. On October 16, 1997, the Company acquired Dynamics Corporation of America ("DCA"), (the "merger" or "acquisition") including the reacquisition of 6,909,300 CTS shares held by DCA, as described in "Note B-Acquisition", page 19 of the CTS Corporation 1997 Annual Report, and as incorporated herein by reference. CTS shareholders on October 16, 1997, approved an increase in CTS' authorized capitalization to 75,000,000 common shares and 25,000,000 preferred shares. CTS shareholders also approved a 3-for-1 stock split in the form of a stock dividend to CTS shareholders of record on October 24, 1997. During 1997, the Company sold assets in Baldwin, WI and property and assets in Cokato, Minnesota for approximately $7,837,000. The Company recognized a pretax profit of approximately $350,000 after the write-off of associated goodwill. The Company leased a facility in Dongguan, China during 1997 to serve Taiwanese manufacturers establishing operations in China. These manufacturers are purchasing the required components locally. This facility is positioned to serve these customers and other entrants to the Chinese manufacturing market. During 1997, the Company announced the closing of its switch and variable resistor manufacturing facility in Bentonville, Arkansas. The Company plans to sell this property. The Bentonville manufacturing and distribution operations will be relocated to the Company's facilities in Kaohsiung, Taiwan, Matamoros, Mexico and Brownsville, Texas. Also during 1997, the Company leased a 20,000 square foot facility in Hudson, New Hampshire to increase our electronic manufacturing service capability. This location was selected to serve the expanding North American electronic manufacturing requirements. FINANCIAL INFORMATION ON INDUSTRY SEGMENTS The Company's products include electronic components and assemblies, electrical appliances, power and controlled environmental systems and fabricated metal products and equipment. Sales to unaffiliated customers operating earnings and identifiable assets, by geographic area, are contained in "Note H - Business Segment and Non-U.S. Operations," page 24, of the CTS Corporation 1997 Annual Report, and is incorporated herein by reference. PRINCIPAL BUSINESS AND PRODUCTS OF CTS CTS is primarily in the business of developing, manufacturing and selling a broad line of electronic products principally serving the electronic needs of original equipment manufacturers (OEMs). The Company sells classes of similar electronic products consisting of the following: Electronic components Electronic component assemblies A substantial portion of the products within these product classes are manufactured by CTS from purchased raw materials or subassemblies. Electronic products (components and assemblies) are typically manufactured at the same locations and sold to similar OEM customers. Some products sold by CTS are purchased and resold under the Company's name. During the past three years, two product classes accounted for 10% or more of consolidated revenue during one or more years, as follows: Percent of Consolidated Revenue Product Classes 1997 1996 1995 Electronic components 57 67 73 Electronic component assemblies 36 32 26 Other 7 1 1 Total 100% 100% 100% In addition to contributing to its line of electronic components, the merger added products to the Company's "other" class. "Other" includes electrical appliances, power and controlled environmental systems and fabricated metal products. MARKETS CTS estimates that its products have been sold in the following electronics markets and in the following percentages during the preceding three fiscal years: Percent of Consolidated Revenue Markets 1997 1996 1995 Automotive 29 34 36 Computer Equipment 28 21 19 Communications Equipment 17 20 18 Other 26 25 27 100% 100% 100% OEM products for the automotive market include throttle position sensors, exhaust gas recirculation sensors, other automotive application sensors, resistor networks, variable resistors, and loudspeakers for automotive entertainment systems. OEM products for the computer equipment market include flex cable assemblies, backpanels, resistor networks, switches, frequency control devices, fiber-optic transceivers, heat dissipators, heatsinks and printed circuit board retainers. Products for this market are principally used in computers and computer peripheral equipment. In the communications equipment market, CTS OEM products include backpanels, frequency control devices, hybrid microcircuits, fiber-optic transceivers, switches and resistor networks. Products for this market are principally used in telephone equipment and telephone switching systems. "Other" markets, which encompass OEM and all distribution sales, include the following products: resistor networks, hybrid microcircuits, variable resistors, switches, electronic connectors, frequency control devices, backpanels, electrical appliances, power and controlled environmental systems and fabricated metal products and equipment. End uses for these products include: medical electronic devices, electronic testing, measuring and servicing instruments, electronic and medical diagnostic equipment, home entertainment equipment, appliances, defense and commercial construction. MARKETING AND DISTRIBUTION Sales of CTS electronic components to OEMs are principally by CTS sales engineers and manufacturers' representatives. CTS maintains sales offices in Elkhart, Indiana; Detroit, Michigan; the United Kingdom, Hong Kong, Taiwan and Japan. Various regions of the United States are serviced by sales engineers working out of their homes. The sale of electronic components is relatively integrated such that most of the product lines of CTS are sold through the same field sales force. Approximately 52% of net sales in 1997 were attributable to coverage by CTS sales engineers. Generally, CTS sales engineers service the Company's largest customers with application specific products. CTS sales engineers work closely with major customers in determining customer requirements and in designing CTS products to be provided to such customers. CTS utilizes the services of independent sales representatives and distributors in the United States and other countries for customers not serviced by CTS sales engineers. Sales representatives receive commissions from CTS. During 1997, approximately 40% of net sales were attributable to coverage by sales representatives. Independent distributors purchase products from CTS for resale to customers. In 1997, independent distributors and/or dealers accounted for approximately 8% of net sales. RAW MATERIALS Generally, CTS' major raw materials are steel, copper, brass, aluminum, certain precious metals, resistive and conductive inks, passive electronic components and semiconductors, used in several CTS products; ceramic materials used particularly in resistor networks and hybrid microcircuits; synthetic quartz used in frequency control devices; and laminate material used in printed circuit boards. These raw materials are purchased from several vendors, and except for certain semiconductors, CTS does not believe that it is dependent on one or on a very few vendors. In 1997, all of these materials were available in adequate quantities to meet CTS' production demands. The Company does not presently anticipate any raw material shortages which would significantly affect production. However, the lead times between the placement of orders for certain raw materials and actual delivery to CTS may vary significantly, and the Company may from time to time be required to order raw materials in quantities and at prices less than optimal to compensate for the variability of lead times for delivery. Precious metals prices have a significant effect on the manufacturing cost and selling prices of many CTS products, particularly some switches, interconnect products, resistor networks and hybrid microcircuits. CTS has continuing programs to reduce the precious metals content of several products, when consistent with customer specifications. WORKING CAPITAL CTS does not usually buy inventories or manufacture products without actual or reasonably anticipated customer orders, except for some standard, off-the-shelf distributor products. The Company is not generally required to carry significant amounts of inventories to meet rapid delivery requirements because most customer orders are for custom products. CTS has entered into "just-in-time" arrangements with certain major customers in order to meet their just-in-time delivery needs. CTS carries raw materials, including certain semiconductors, and certain work-in-process and finished goods inventories which are unique to a particular customer or to a small number of customers, and in the event of reductions in or cancellations of orders, some inventories are not useable or cannot be returned to vendors for credit. CTS generally imposes charges for the reduction or cancellation of orders by customers, and these charges are usually sufficient to cover the financial exposure of CTS to inventories which are unique to a customer. CTS does not customarily grant special return privileges or payment privileges to customers, although CTS' distributor program permits certain returns. CTS' working capital requirements are generally cyclical but not seasonal. Working capital requirements are generally dependent on the overall business level. During 1997, working capital increased to $93.4 million, primarily because of the increase in the overall business level. During 1997, cash decreased due to the requirements of the DCA acquisition, partially offset by increased cash generated through financing and the higher level of earnings. Cash represents a significant part of the Company's working capital. Cash of various non-U.S. subsidiaries was held in U.S.-denominated cash equivalents at December 31, 1997. This cash, other than approximately $5.3 million, is generally available to the Company. During 1997, the other changes in working capital were primarily a result of the DCA acquisition and higher business activity. PATENTS, TRADEMARKS AND LICENSES CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents and trademarks. CTS believes that the success of its business is not materially dependent on the existence or duration of any patent, group of patents or trademarks. CTS licenses the right to manufacture several electronic products to companies in the United States and non-U.S. countries. In 1997, license and royalty income was less than 1% of net sales. CTS believes that the success of its business is not materially dependent upon any licensing arrangement where CTS is either the licensor or licensee. MAJOR CUSTOMERS CTS' 15 largest customers represented about 65%, 62% and 61% of net sales in 1997, 1996 and 1995, respectively. Sales to General Motors Corporation represented more than 10% of CTS' sales in each of the last three years (ranging from 12% to 18% of net sales over such period). Sales to Digital Equipment Corporation represented more than 10% of CTS' net sales in one of the last three years. Sales to Seagate Technology, Inc. represented more than 10% of CTS' net sales in one of the last three years. The loss of, or reduction in, orders from one or more of these customers could have a materially adverse effect on CTS. BACKLOG OF ORDERS Backlog of orders does not necessarily provide an accurate indication of present or future business levels for CTS. For many electronic components, the period between receipt of orders and delivery is relatively short. For large orders from major customers that may constitute backlog over an extended period of time, production scheduling and delivery are subject to change or cancellation by the customers on relatively short notice. At the end of 1997, the Company's backlog of orders was $165 million, which includes $82 million for DCA. This compares to $85 million at the end of 1996. The backlog of orders at the end of 1997 will generally be filled during the 1998 fiscal year. GOVERNMENT CONTRACTS CTS believes that about 7% of its net sales are associated with purchases by the U.S. Government or non-U.S. governments, principally for defense and aerospace applications. Because most CTS products procured through government contractors and subcontractors are for military end uses, the level of defense and aerospace market sales by CTS is dependent upon government budgeting and funding of programs utilizing electronic systems. CTS is usually subject to contract provisions permitting termination of the contract, usually with penalties payable by the government; maintenance of specified accounting procedures; limitations on and renegotiations of profits; priority production scheduling; and possible penalties or fines against CTS for late delivery or substandard quality. Such contract provisions have not previously resulted in material uncertainties or disruptions for CTS. COMPETITION CTS competes with many domestic and non-U.S. manufacturers principally on the basis of product features, price, technology, quality, reliability, delivery and service. Most product lines of CTS encounter significant competition. The number of significant competitors varies from product line to product line. No single competitor competes with CTS in every product line, but many competitors are larger and more diversified than CTS. Some competitors are divisions or affiliates of customers. CTS is subject to competitive risks inherent to the electronics industry such as shorter product life cycles and technical obsolescence. Some customers have reduced or plan to reduce the number of suppliers while increasing the volume of purchases from suppliers. Most customers are demanding higher quality, reliability and delivery standards from CTS as well as competitors. These trends may create opportunities for CTS while also increasing the risk of loss of business to competitors. The Company believes that it competes most successfully in custom products manufactured to meet specific applications of major OEMs. CTS believes that it has some advantages over certain competitors because of its ability to apply a broad range of technologies and materials capabilities to develop products for the special requirements of customers. CTS also believes that it has an advantage over some competitors in its capability to sell a broad range of products manufactured to relatively consistent standards of quality and delivery. CTS believes that the relative breadth of its product lines and relative consistency in quality and delivery across product lines are advantages to CTS in selling products to customers. CTS believes that it is one of the largest manufacturers of automotive throttle position sensors in the world. FINANCIAL INFORMATION ABOUT NON-U.S. AND DOMESTIC OPERATIONS AND EXPORT SALES Information about revenue from sales to unaffiliated customers, operating earnings and identifiable assets, by geographic area, is contained in "Note H - Business Segment and Non-U.S. Operations," pages 24-25, of the CTS Corporation 1997 Annual Report, and is incorporated herein by reference. In 1997, approximately 40% of net sales to unaffiliated customers, after eliminations, were attributable to non-U.S. operations. This is the same percentage as 1996. About 27% of total CTS assets, after eliminations, are non-U.S. Except for cash and equivalents, a substantial portion of these assets cannot readily be liquidated. CTS believes that the business risks attendant to its present non-U.S. operations, though substantial, are normal risks for non-U.S. businesses, including expropriation, currency controls and changes in currency exchange rates and government regulations. RESEARCH AND DEVELOPMENT ACTIVITIES In 1997, 1996 and 1995, CTS expended $13.3, $10.7 and $8.0 million, respectively, for research and development. Most CTS research and development activities relate to new product and process developments or the improvement of product materials. Many such research and development activities are for the benefit of one or a limited number of customers or potential customers. During 1997, the Company continued to introduce additional versions of existing products in response to present and future customer requirements. ENVIRONMENTAL PROTECTION LAWS In complying with federal, state and local environmental protection laws, CTS has modified certain manufacturing processes and expects to continue to make additional modifications. Such modifications that have been performed have not materially affected the capital expenditures, earnings or competitive position of CTS. Certain processes in the manufacture of the Company's current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. The Company has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. The factual circumstances of each site are different; the Company has determined that its role as a PRP with respect to these sites, even in the aggregate, will not have a material adverse effect on the Company's business or financial condition, based on the following: 1) the Company's status as a de minimis party; 2) the large number of other PRPs identified; 3) the identification and participation of many larger PRPs who are financially viable; 4) defenses concerning the nature and limited quantities of materials sent by the Company to certain of the sites; and 5) the Company's experience to-date in relation to the determination of its allocable share. In addition to these non-CTS sites, the Company has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against the Company with respect to other environmental matters. In the opinion of management, based upon presently available information, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position or results of operations of the Company. There are claims against the Company with respect to environmental matters which the Company contests. In the opinion of management, based upon presently available information, either adequate provision for potential costs has been made, or the costs which ultimately might result will not materially affect the consolidated financial position or results of operations of the Company. EMPLOYEES CTS employed 5,044 persons at December 31, 1997. About 31% of these persons were employed outside the United States at the end of 1997. Approximately 700 CTS employees in the United States were covered by collective bargaining agreements as of December 31, 1997. One of the four collective bargaining agreements covering these employees will expire in 1999. The other three agreements will expire in 2000. Item 2. Properties CTS operations or facilities are at the following locations. The owned properties are not subject to material liens or encumbrances. Square Owned/ Location Feet Leased Expires Elkhart, IN 412,000 Owned - Scranton, PA 270,000 Owned - Berne, IN 249,000 Owned - New Hartford, CT 212,000 Owned - Singapore 159,000 Owned* - Batavia, OH 148,000 Owned - Kaohsiung, Taiwan 133,000 Owned* - Streetsville, Ontario, Canada 112,000 Owned - West Lafayette, IN 106,000 Owned - Bridgeport, CT 97,000 Owned - Sandwich, IL 94,000 Owned - Carlisle, PA 94,000 Leased February 2009 Brownsville, TX 85,000 Owned - Carson, CA 76,000 Leased October 2007 Glasgow, Scotland 75,000 Owned - McConnellsburg, PA 74,000 Owned - Bentonville, AR 72,000 Owned - New Hope, MN 55,000 Leased December (Science Center Dr.) 1998 Winsted, CT 55,000 Owned - Bangkok, Thailand 53,000 Owned - Matamoros, Mexico 51,000 Owned* - Baldwin, WI 39,000 Owned - Burbank, CA 37,000 Leased** January 2000 Dongguan, China 23,000 Leased October 2002 Burbank, CA 21,000 Owned - Hudson, NH 20,000 Leased September 1999 Greenwich, Ct 8,000 Leased December 2000 TOTAL 2,816,000 * Buildings are located on land leased under renewable leases. ** There is a ground lease on a parcel that expires in 2015. The Company is currently seeking to sell the Bentonville, Arkansas manufacturing facility. A portion of the Brownsville facility is currently under a leasing arrangement which expires in 1999. The annual rental income is approximately $60,000. The New Hope, Minnesota facility is currently under two separate sublease arrangements, each expiring in 1998. The combined annual rental income is approximately $170,000. In 1994, the Company entered into a three-year lease of the Bangkok, Thailand, property. In early 1997, this lease was extended to March 31, 1999. The annual rental amount is approximately U.S. $280,000. During 1995, a lease for an initial term of two years with a two-year renewal option was finalized with an international semiconductor manufacturer for one floor of the Singapore facility. During 1997, the two-year renewal option was exercised, with an annual rental amount of approximately $840,000. The Company regularly assesses the adequacy of its manufacturing facilities for manufacturing capacity, available labor and location to the markets and major customers for the Company's products. CTS also reviews the operating costs of its facilities and may from time to time relocate facilities or certain manufacturing activities in order to achieve operating cost reductions and improved asset utilization and cash flow. Item 3. Legal Proceedings Contested claims involving various matters, including environmental claims brought by government agencies, are being litigated by CTS, both in legal and administrative forums. In the opinion of management, based upon currently available information, adequate provision for potential costs has been made, or the costs which might ultimately result from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Item 4. Submission of Matters to a Vote of Security Holders A special meeting of the shareholders of CTS Corporation was held on October 16, 1997. At that meeting, two matters were submitted to a vote of the shareholders: (1) The issuance of common stock pursuant to the Amended and Restated Agreement and Plan of Merger among the Company, a wholly-owned subsidiary of the Company, and Dynamics Corporation of America ("DCA") and related amendments to the Company's Articles of Incorporation; and (2) The grant of employee stock options to certain executive officers of CTS and DCA. Following are the tabulations of the voting results on these issues, on which 4,229,589 shares were entitled to vote and 3,782,012 of such shares were represented at the meeting: Issuance of Common Stock and Related Amendments to the Articles of Incorporation Votes Cast For Votes Cast Against Abstentions 3,709,196 69,545 3,271 Grant of Stock Options Votes Cast For Votes Cast Against Abstentions 3,602,429 124,224 55,359 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters The principal market for CTS common stock is the New York Stock Exchange. Information relative to the high and low trading prices for CTS Common Stock for each quarter of the past two years and the frequency and amount of dividends declared during the previous two years can be located in "Shareholder Information," page 12, of the CTS Corporation 1997 Annual Report, incorporated herein by reference. On March 6, 1998, there were approximately 1,435 holders of record of CTS common stock. The Company intends to continue a policy of considering dividends on a quarterly basis. The declaration of a dividend and the amount of any such dividend is subject to earnings, anticipated working capital, capital expenditure and other investment requirements, the financial condition of CTS and such other factors as the Board of Directors deems relevant. Item 6. Selected Financial Data A summary of selected financial data for CTS, for each of the previous five fiscal years, is contained in the "Five-Year Summary," page 13, of the CTS Corporation 1997 Annual Report, incorporated herein by reference. Certain divestitures and closures of businesses and certain accounting changes affect the comparability of information contained in the "Five-Year Summary." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information about liquidity, capital resources and results of operations, for the three previous fiscal years, is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations (1995-1997)," pages 28-31, of the CTS Corporation 1997 Annual Report, incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Consolidated financial statements, meeting the requirements of Regulation S-X, and the Report of Independent Accountants, are contained in pages 14-27 of the CTS Corporation 1997 Annual Report, incorporated herein by reference. Quarterly per share financial data is provided in "Shareholder Information," under the subheadings, "Quarterly Results of Operations" and "Per Share Data," on page 12 of the CTS Corporation 1997 Annual Report, and is incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no disagreements. PART III Item 10. Directors and Executive Officers of the Registrant Information responsive to Items 401(a) and 401(e) of Regulation S-K pertaining to directors of CTS is contained in the 1998 Proxy Statement under the caption "Election of Directors," pages 6-7, filed with the Securities and Exchange Commission, and is incorporated herein by reference. Information responsive to Item 405 of Regulation S-K pertaining to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the 1998 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," page 8, filed with the Securities and Exchange Commission, and is incorporated herein by reference. The individuals listed were elected as executive officers of CTS at the annual meeting of the Board of Directors on April 25, 1997, except for William J. Kaska, who was elected at the August 13, 1997 meeting of the Board of Directors. They are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled on April 24, 1998, at which time the election of officers will be considered again by the Board of Directors. Name Age Position and Offices Joseph P. Walker 59 Director, Chairman, President and Chief Executive Officer William J. Kaska 56 Group Vice President Stanley J. Aris 57 Vice President Finance and Chief Financial Officer Jeannine M. Davis 49 Vice President, Secretary and General Counsel James L. Cummins 42 Vice President, Human Resources James N. Hufford 58 Vice President, Research, Development and Engineering Donald R. Schroeder 49 Vice President, Sales and Marketing George T. Newhart 55 Corporate Controller Gary N. Hoipkemier 43 Treasurer Joseph P. Walker has served as Chairman of the Board, President and Chief Executive Officer of CTS since 1988. Mr. Walker is a Director of NBD Bank, N.A. William J. Kaska was elected Group Vice President on August 13, 1997. Prior to his appointment, he served as General Manager and Vice President of CTS Automotive Products. Stanley J. Aris has served as Vice President, Finance and Chief Financial Officer since 1992. Prior to joining CTS, Mr. Aris worked for two years as a business consultant. Jeannine M. Davis has served as Vice President, Secretary and General Counsel since 1988. James L. Cummins has served as Vice President, Human Resources since 1994. For the three years prior to this appointment, he served as Director, Human Resources, CTS Corporation from 1991-1994. James N. Hufford has served as Vice President, Research, Development and Engineering since 1995. During the four years prior to this appointment, Mr. Hufford served as Manager and then Director of Corporate Research, Development and Engineering for the Corporation. Donald R. Schroeder has served as Vice President, Sales and Marketing since 1995. During the six years prior to this appointment, Mr. Schroeder served as Business Development Manager for innovative and new technology for the CTS Microelectronics business unit in West Lafayette, Indiana. George T. Newhart has served as Corporate Controller since 1989. Gary N. Hoipkemier has served as Treasurer since 1989. Item 11. Executive Compensation Information responsive to Item 402 of Regulation S-K pertaining to management remuneration is contained in the 1998 Proxy Statement in the captions "Executive Compensation," pages 9-12 and "Director Compensation," pages 17-18, filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information responsive to Item 403 of Regulation S-K pertaining to security ownership of certain beneficial owners and management is contained in the 1998 Proxy Statement in the caption "Securities Beneficially Owned by Principal Shareholders and Management," pages 3-6, filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions On October 16, 1997, the Company acquired Dynamics Corporation of America ("DCA"), including the reacquisition of CTS shares held by DCA. Other transactions between DCA and CTS, prior to the acquisition, were minimal. Information responsive to Item 404 of Regulation S-K pertaining to security ownership of certain beneficial owners and management is contained in the 1998 Proxy Statment in the caption "Certain Relationships and Related Transactions", pages 7-8, filed with the Securities and Exchange Commission and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The list of financial statements and financial statement schedules required by Item 14(a)(1) and (2) is contained on page S-1 herein. (a) (3) Exhibits (3)(a) Articles of Incorporation, as amended and restated October 16, 1997, (incorporated by reference to Exhibit (3) (a) to the Company's Current Report on form 8-K, filed October 20, 1997). (3)(b) Bylaws, effective October 31, 1997, filed herewith. (10)(a) Employment Agreement, dated as of May 9, 1997, between the Company and Joseph P. Walker (incorporated by reference to Exhibit (c)(2) to the Schedule 14D-1 filed by the Company on May 16, 1997). (10)(b) Prototype indemnification agreements, executed with all officers and directors of the Corporation, incorporated by reference to Exhibit (10)(b) to the Company's Annual Report on Form 10-K for 1991). (10)(c) CTS Corporation 1986 Stock Option Plan, approved by the shareholders on May 30, 1986, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997). (10)(d) CTS Corporation 1988 Restricted Stock and Cash Bonus Plan approved by the shareholders on April 28, 1989, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997). (10)(e) CTS Corporation 1996 Stock Option Plan, approved by the shareholders on April 26, 1996, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997). (10)(f) Amended and Restated Agreement and Plan of Merger, dated as of May 9, 1997, and amended and restated on July 17, 1997, and further amended on October 15, 1997, among the Company, CTS First Acquisition Corp., a wholly owned subsidiary of the Company ("Sub"), and DCA (incorporated by reference to Exhibit (c)(6) to Amendment No. 3 to the Schedule 13D filed by the Company in respect of DCA on July 18, 1997, (the "Schedule 13-D") and Exhibit 2(a) to the Company's Current Report on Form 8-K, filed October 20, 1997). (10)(g) Shareholders Agreement, dated as of July 17, 1997, among the Company, Sub, WHX Corporation ("WHX") and SB Acquisition Corp., a subsidiary of WHX (incorporated by reference to Exhibit (c)(7) to the Schedule 13-D). (10)(h) Employment Agreement, dated as of May 9, 1997, between the Company and Andrew Lozyniak (incorporated by reference to Exhibit 10.5 of DCA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, (the "DCA 10-Q"). (10)(i) Employment Agreement, dated as of May 9, 1997, between the Company and Patrick J. Dorme (incorporated by reference to the DCA 10-Q). (10)(j) Employment Agreement, dated as of May 9, 1997, between the Company and Henry V. Kensing (incorporated by reference to the DCA 10-Q). (10)(k) The Form of Severance Agreement, dated April 11, 1997, between the Company and certain officers of the Company (incorporated by reference to Exhibit (a)(99) of the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 1997) and amendment thereto, dated May 9, 1997, (incorporated by reference to Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1997. (10) (l) Stock Option Agreements, with Stanley J. Aris, Jeannine M. Davis, Andrew Lozyniak and Joseph P. Walker, pursuant to option approval by shareholders on October 16, 1997, filed herewith. (21) Subsidiaries as of October 16, 1997, filed herewith. (23) Consent of Price Waterhouse to incorporation by reference of this Annual Report on Form 10-K for the fiscal year 1997 to Registration Statement 33-27749 on Form S-8 and Registration Statement 333-5730 on Form S-8. (27) Financial Data Schedule (filed only electronically with the SEC). b. Reports on Forms 8-K Announcements that the Effective Time for the Merger had occurred on October 16, 1997, and describing related events; filed October 20, 1997. Indemnification Undertaking For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-27749 (filed March 23, 1989)and 333-5730 (filed October 3, 1996): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provision, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date By /S/ Stanley J. Aris Stanley J. Aris, Vice President Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date By /S/ Lawrence J. Ciancia Lawrence J. Ciancia, Director Date By /S/ Patrick J. Dorme Patrick J. Dorme, Director Date By /S/ Gerald H. Frieling, Jr. Gerald H. Frieling, Jr., Director Date By /S/ Andrew Lozyniak Andrew Lozyniak, Director Date By /S/ Robert A. Profusek Robert A. Profusek, Director Date By /S/ Joseph P. Walker Joseph P. Walker, Director Date By /S/ George T. Newhart George T. Newhart, Corporate Controller and Principal Accounting Officer Date By /S/ Jeannine M. Davis Jeannine M. Davis, Vice President, Secretary and General Counsel ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) AND (2) AND ITEM 14(d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1997 CTS CORPORATION AND SUBSIDIARIES ELKHART, INDIANA FORM 10-K - ITEM 14(a) (1) AND (2) AND ITEM 14 (d) CTS CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of CTS Corporation and subsidiaries included in the annual report of the registrant to its shareholders for the year ended December 31, 1997, are incorporated by reference in Item 8: Consolidated balance sheets - December 31, 1997, and December 31, 1996 Consolidated statements of earnings - Years ended December 31, 1997, December 31, 1996, and December 31, 1995 Consolidated statements of shareholders' equity - Years ended December 31, 1997, December 31, 1996, and December 31, 1995 Consolidated statements of cash flows - Years ended December 31, 1997, December 31, 1996, and December 31, 1995 Notes to consolidated financial statements The following consolidated financial statement schedules of CTS Corporation and subsidiaries, are included in item 14(d): Page Schedule II - Valuation and qualifying accounts S-3 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are inapplicable, not required or the information is included in the consolidated financial statements or notes thereto. S-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of CTS Corporation Our audits of the consolidated financial statements referred to in our report dated January 30, 1998, appearing on page 27 of the CTS Corporation 1997 Annual Report (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Chicago, Illinois January 30, 1998 S-2 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, 1997: Allowance for doubtful receivables $622 $(66) $522(2) $ 4 $1,074 Year ended December 31, 1996 Allowance for doubtful receivables $774 $ 239 $ 0 $391 $622 Year ended December 31, 1995: Allowance for doubtful receivables $869 $1 $ 0 $96 $774
(1) Uncollectible accounts written off. (2) Balance from DCA Merger. S-3 CTS CORPORATION BY LAWS (As Amended and in Effect on October 31, 1997) ARTICLE I. Officers The officers of CTS Corporation (the "Corporation") shall be a President, one or more Vice Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors may also elect one or more Assistant Secretaries, Assistant Treasurers and Assistant Controllers, and such other officers as may be determined, from time to time, by the Board of Directors. The President shall be a director of the Corporation. Any offices, other than those of President and Secretary, may be held by the same person. The officers of the Corporation shall be elected by the Board of Directors at the annual meeting of the Board of Directors for the term of one year and until their successors have been elected and qualified. Any vacancy occurring among the above offices may be filled for the remainder of the term by the Board of Directors at any regular or special meeting, and officers so elected shall hold office until the next annual meeting of the Board of Directors and until their successors have been elected and qualified. ARTICLE II. Board of Directors Organization Section 1. The Board of Directors shall elect, from the members of the Board of Directors who are not officers of the Corporation, an Audit Committee consisting of not less than two members. The members of the Audit Committee shall be elected at each annual meeting of the Board of Directors to serve, while qualified, at the pleasure of the Board of Directors, or if longer, for one year and until their successors have been elected and qualified. The Audit Committee shall be responsible directly to the Board of Directors and, in addition to such authority and duties specifically delegated by the Board of Directors, shall have the authority to review the conduct and the report of the independent financial audit of the Corporation and shall report to the Board of Directors the findings, conclusions and recommendations of the Audit Committee regarding the conduct and report of the independent financial audit. Unless the Board of Directors designates a Chairman, a majority of the members of the Audit Committee may designate one member of the Audit Committee as Chairman of the Audit Committee to preside at all meetings of the Audit Committee. Section 2. The Board of Directors shall elect from members of the Board of Directors, who are not officers of the Corporation, a Compensation Committee consisting of not less than two members. The members of the Compensation Committee shall be elected at each annual meeting of the Board of Directors to serve, while qualified, at the pleasure of the Board of Directors, or if longer, for one year and until their successors have been elected and qualified. The Compensation Committee shall be responsible directly to the Board of Directors and, in addition to such authority and duties specifically delegated by the Board of Directors, shall have authority to review, and make recommendations to the Board of Directors regarding the compensation, including fringe benefits and stock options, for the officers of the Corporation. Unless the Board of Directors designates a Chairman, a majority of the members of the Compensation Committee may designate one member of the Compensation Committee as Chairman of the Compensation Committee to preside at all meetings of the Compensation Committee. Section 3. The Board of Directors shall designate from members of the Board of Directors, a Chairman of the Board, who shall preside at meetings of shareholders and of the Board of Directors unless the Chairman shall designate an officer or other director of the Corporation to do so. The Chairman of the Board shall have such additional authority as granted by the Board of Directors and shall perform such other duties as are assigned from time to time by the Board of Directors. ARTICLE III. Corporate Officers Section 1. The President shall exercise specific authority and supervision over, and shall be responsible for the direction of, the business and affairs of the Corporation, subject to the direction of the Board of Directors. In addition, the President may be designated the Chief Executive Officer and, if so, shall have the additional authority and duties and responsibilities specified in these Bylaws. The President shall also perform such other duties as may be assigned from time to time, by the Board of Directors. The President shall perform all the duties of the Chairman of the Board in the absence or during any disability of the Chairman. Section 2. The Board of Directors shall designate the Chairman of the Board or the President as the Chief Executive Officer of the Corporation. In addition to other duties as an officer, the Chief Executive Officer shall exercise general authority and supervision over, and shall be responsible for, management of the business and affairs of the Corporation, subject to the direction of the Board of Directors. The Chief Executive Officer shall determine the organization of the officers of the Corporation, shall designate to whom such officers shall report and be responsible, and subject to the direction of the Board of Directors shall determine their respective duties and responsibilities. Section 3. Each Vice President shall perform such duties as may be assigned from time to time by the President and shall report to and be responsible to such officer as the President shall designate. Each Vice President shall also have such additional authority and shall perform such other duties assigned from time to time, by the Board of Directors. The Board of Directors may designate a word or words to be placed before or after the title of Vice President to indicate organizational or functional authority or duty. Section 4. The Secretary shall attend all meetings of the shareholders and Board of Directors and all committees, and shall keep minutes of each meeting. The Secretary shall give proper notice of all meetings of shareholders, directors and committees, required in these Bylaws. The Secretary shall maintain proper records of ownership and transfer of the stock of the Corporation. The Secretary shall have the custody of, and affix, the seal of the Corporation and perform such other duties as may be assigned from time to time by the Board of Directors. Section 5. The Vice President Finance/Chief Financial Officer, shall be responsible for the financial affairs of the Corporation, shall submit to the annual meeting of shareholders a statement of the financial condition of the Corporation, and whenever required by the Board of Directors, shall give account of all transactions and of the financial condition of the Corporation. The Treasurer shall report to the Vice President Finance/Chief Financial Officer. The Treasurer shall establish and maintain appropriate banking relations and arrangements on behalf of the Corporation. The Treasurer shall receive and have custody of, and shall disburse, all moneys of the Corporation, and in the name of the Corporation, shall deposit all moneys in, and disburse all moneys from, such bank, or banks, as the Board of Directors shall designate, from time to time, as the depositories of the Corporation. The Treasurer shall perform such other duties and render such services for, and on behalf of, the Corporation as may be assigned from time to time by the Vice President Finance, Chief Financial Officer. Section 6. The Controller shall be the accounting officer of the Corporation and shall formulate accounting procedures to record expenses, losses, gains, assets and liabilities of the Corporation, to report and interpret results of operations of the Corporation and to assure protection of the assets of the Corporation. The Controller shall prepare and submit to the Board of Directors and the Chief Executive Officer such periodic balance sheets, profit and loss statements and other financial statements as may be required to keep such persons currently informed of the operations and the financial condition of the Corporation. The Controller shall perform such other duties assigned from time to time by the Chief Executive Officer. Section 7. The Assistant Secretary or Secretaries, Assistant Treasurer or Treasurers, and the Assistant Controller or Controllers shall perform the duties of the Secretary, of the Treasurer, and of the Controller, respectively, in the absence of those officers and shall have such further authority and perform such other duties as may be assigned. ARTICLE IV. Duties of Officers Delegated In the absence or disability of any officer of the Corporation, the Board of Directors may delegate the powers and duties of any such officer to any other officer or director of the Corporation for such period of time as said Board of Directors may determine. ARTICLE V. Bonds The Board of Directors or the Chief Executive Officer may require any officer, agent, or employee of the Corporation to furnish the Corporation a bond for the faithful performance of duties and for the accounting of all moneys, securities, records, or other property of the Corporation coming into the hands of such agent or employee. ARTICLE VI. Meetings of Shareholders Section 1. Meetings of the shareholders of the Corporation shall be held at the place, either within or without the State of Indiana, stated in the notice of said meeting. Section 2. The annual meeting of shareholders of the Corporation shall be held on the last Friday in April of each year or at such other time established for such meeting by 80% of the directors. Section 3. A complete list of the shareholders entitled to vote at any shareholders' meeting, arranged in alphabetical order and containing the address and number of shares of stock so held by each shareholder who is entitled to vote at said meeting, shall be prepared by the Secretary and shall be subject to the inspection by any shareholder at the time and place of an annual meeting and at the principal office of the Corporation for five (5) days prior thereto. Section 4. At all shareholders' meetings a quorum shall consist of a majority of all of the shares of stock outstanding and entitled by the Articles of Incorporation to vote on the business to be transacted at said meeting, but a meeting composed of less than a quorum may adjourn the meeting from day to day thereafter or until some future time. Section 5. At the annual meeting of the shareholders, there shall be elected, by plurality vote, a Board of Directors, who shall hold office until the next annual meeting of shareholders and until their successors have been elected and qualified. Section 6. At all shareholders' meetings, each shareholder shall be entitled to one (1) vote in person or by proxy for each share of common stock registered in the shareholder's name on the books of the Corporation as of the record date which shall be as fixed by the Board of Directors and entitled, by the Articles of Incorporation, to vote on the business to be transacted at said meeting. Section 7. The shareholders may be represented at any meeting thereof by their duly appointed Attorney-in-Fact provided the proxy so appointing said Attorney-in-Fact shall be filed with the Secretary prior to the meeting. Section 8. Special meetings of the shareholders of the Corporation may be called by the Chairman of the Board, by the President, by the Board of Directors, or by the shareholders holding not less than one-fourth of all of the shares of stock outstanding and entitled, by the Articles of Incorporation, to vote on the business to be transacted at said special meeting whenever in the opinion of such person or body such meeting is necessary. Whenever a special meeting of the shareholders shall be called by the shareholders, the call shall be delivered to the Secretary who shall issue the notice of said special meeting which is required to be given. Section 9. Written notice of each meeting of the shareholders shall be given by the Secretary to each shareholder of record at least ten (10) days prior to the time fixed for the holding of such meeting; said notice shall state the place, day and hour and the purpose for which said meeting is called, and said notice shall be addressed to the last known place of residence of each shareholder as shown by the stock books of the Corporation. The ten (10) days shall be computed from the date upon which said notice is deposited in the mails. Section 10. Notice of any shareholders' meeting may be waived in writing by any shareholder if the waiver sets forth in reasonable detail the purpose or purposes for which the meeting is called and the time and place thereof. Section 11. No shares of stock shall be voted at any annual or special meeting of shareholders upon which any installment is due and unpaid or which are owned by the Corporation. ARTICLE VII. Directors Section 1. The property and business affairs of the Corporation shall be managed under the direction of the Board of Directors. Directors shall be elected by a plurality vote at the annual meeting or a special meeting of the shareholders and shall hold office for a term of one year or until their successors are elected and qualified. In case of the failure to hold the annual meeting on the date fixed herein for the same to be held, the directors shall hold over until the next annual meeting, unless prior to said meeting a special meeting of the shareholders for the purpose of electing directors has been held. Subject to the rights, if any, of any series of Preferred Stock to elect additional directors under circumstances specified in the Articles of Incorporation and to the minimum and maximum number of authorized directors provided in the Articles of Incorporation, the authorized number of directors will be as determined from time to time by the Board of Directors. If no determination of the number of directors has been made by the Board of Directors, the number of directors shall be [seven]. Section 2. Any vacancy occurring in the Board of Directors caused by resignation, death or other incapacity, shall be filled by majority vote of the remaining members of the Board until the next annual meeting of shareholders; provided, however, that if the vote of the remaining members of the Board of Directors shall result in a tie, such vacancy shall be filled by the shareholders at the next annual meeting of the shareholders or at a special meeting of the shareholders called for that purpose. Section 3. Any vacancy occurring in the Board of Directors, caused by an increase in the number of directors, shall be filled by a majority vote of the members of the Board until the next annual meeting of shareholders; provided, however, that if the vote of the members of the Board of Directors shall result in a tie, such vacancy shall be filled by the shareholders at the next annual meeting of the shareholders or at a special meeting of the shareholders called for that purpose. Section 4. A person shall not be nominated, stand for election or be elected as a director of the Corporation who (I) at the time of his election shall be seventy (70) years of age or older, (ii) has retired from employment by the Corporation and is sixty-five (65) years of age or older or (iii) has retired from active business and professional vocations. Article VIII. Meetings of Directors Section 1. Following the annual meeting of shareholders, the annual meeting of the Board of Directors shall be held without notice, each and every year hereafter, at the time and place determined by the directors. Section 2. Regular meetings of the Board of Directors shall be held without notice at 9:00 A.M. on the last Friday of February, June, August, October and December at the offices of the Corporation, unless another time and place is designated. Section 3. Special meetings of the Board of Directors may be called by the Chairman of the Board, by the President, or by three (3) members of the Board of Directors on three (3) days' notice by mail, or an twenty-four (24) hours' notice by telegraph, telephone, facsimile or other similar medium of communication to each director, which notice shall be addressed to the last known place of business or residence of each director, and said meetings may be held either at the office of the Corporation or at such other place as may be designated in the notice of said meeting. Whenever a special meeting of the Board of Directors shall be called, in accordance with the provision of this section, by members of the Board of Directors, the call shall be in writing, signed by said directors and delivered to the secretary who shall thereupon issue the notice calling said meeting. Section 4. Not less than one-half at the whole Board of Directors, shall constitute a quorum for the transaction of any business except the filling of vacancies, but a smaller number may adjourn, from time to time, until a future date or until a quorum is secured. For the purpose only of filling a vacancy or vacancies in the Board of Directors, a quorum shall consist of a majority of the whole Board of Directors, less the vacancy or vacancies therein. The act of a majority at the directors present at a meeting duly called, at which a quorum is present shall be the act of the Board of Directors. ARTICLE IX. Compensation of Directors and Members of Committees The members of the Board of Directors and members of committees of the Corporation, who are not salaried employees of the Corporation, shall receive such compensation for their services to be rendered as members of the Board of Directors, or of committees, as may, from time to time, be fixed by the Board of Directors and the compensation so fixed shall continue to be payable until the Board of Directors shall have thereafter fixed a different compensation, which it may do at any annual, regular or special meeting. ARTICLE X. Certificates of Stock Section 1. Certificates of stock shall be issued to those legally entitled thereto, as may be shown by the books of the Corporation, and shall be signed by the President and attested by the Secretary. Section 2. The Corporation may appoint one or more transfer agents and/or registrars to issue, countersign, register, and transfer certificates representing its capital stock and signatures of the Corporation's officers and of the transfer agents on stock certificates may be facsimiles. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. Section 3. The holder of any stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificate for any such stock. A new certificate or certificates shall be issued upon the surrender of the mutilated certificate or, in case of loss, theft, or destruction, upon (I) delivery of an affidavit or affirmation, and (ii) delivery of a bond in such sum and in such form and with such surety or sureties as the Board of Directors (by general or specific resolutions) or the President may approve, indemnifying the Corporation against any claim with respect to the certificate or certificates alleged to have been lost, stolen or destroyed. However, the Board may, in its discretion, refuse to issue new certificate or certificates, save upon the order of some Court having jurisdiction in such matters. ARTICLE XI. Transfer of Stock Section 1. The stock transfer books of the Corporation may from time to time be closed by order of the Board of Directors for any lawful purpose and for such period consistent with law, but not exceeding thirty (30) days at any one time, as the Board of Directors may deem advisable. In lieu of closing the stock transfer books as aforesaid, the Board of Directors may, in its discretion, fix in advance a date not exceeding fifty (50) days or less than ten (10) days next preceding the date of any meeting of shareholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect, as the record date for the determination of the shareholders entitled to notice of and to vote at any such meeting or entitled to receive any such dividend or to any such allotment of rights or to exercise the rights of any such change, conversion or exchange of capital stock; and, in such case, only such shareholders as shall be shareholders of record at the close of business on the date so fixed shall be entitled to notice of and to vote at such meeting or to receive such payment of dividend or to receive such allotment of rights or to exercise such rights as the case may be, notwithstanding any transfer of stock on the books of the Corporation after such record date fixed as aforesaid. In the event the Board of Directors fails to fix in advance the record date for the determination of the shareholders entitled to notice of and to vote at any meeting, no share of stock transferred on the books of the corporation within ten (10) days next preceding the date of a meeting shall be voted at such meeting. Section 2. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the legal owner thereof and accordingly shall not be bound to recognize any equitable claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided in the laws of the State of Indiana. Section 3. The assignment of any certificate of stock shall constitute an assignment to the assignee of the shares so assigned and of all dividends on the shares assigned which are declared payable as of a record date subsequent to the date the assignment is recorded on the stock record books of the Corporation. ARTICLE XII. Fiscal Year The fiscal year of the Corporation shall correspond to the calendar year. ARTICLE XIII. Checks for Money All checks, drafts or other orders for the payment of funds of the Corporation shall be signed by either the Chairman of the Board, the President, or the Treasurer, or by such other individual or individuals as may hereafter, from time to time, be designated by the Board of Directors. No check, draft or other order for the payment of funds of the Corporation shall be signed in blank, either as to the amount of the check, draft or other order, or as to the name of the payee. ARTICLE XIV. Dividends The Board of Directors may declare and pay dividends out of the unreserved and unrestricted earned surplus of the Corporation. Dividends may be declared at any annual, regular or special meeting of the Board of Directors. Dividends may be paid in cash, in property or in the shares of the capital stock of the Corporation, as provided by the Articles of Incorporation and the laws of the State of Indiana. ARTICLE XV. Notices Section 1. A notice required to be given under the provisions of these Bylaws to any shareholder, director, officer and member of any committee shall not be construed to mean personal notice but may be given in writing by depositing the same in a post office or letter box in a postpaid sealed wrapper addressed to such shareholder, director, officer and member of any committee at such address as appears upon the books of the Corporation, and such notice shall be deemed to be given at the time when the same shall be thus mailed. Section 2. Any shareholder, director, officer and member of any committee may waive, in writing, any notice required to be given by these Bylaws, either before or after the time said notice should have been issued. ARTICLE XVI. Compensation of Officers The officers of the Corporation shall receive such compensation for their services as may, from time to time, be fixed by the Board of Directors, and the compensation so fixed shall continue to be payable until the Board of Directors shall have fixed a different compensation, which it may do at any annual, regular, or special meeting. ARTICLE XVII. Corporate Seal The seal of the Corporation shall be a plain circular disk having engraved thereon, near the outer edge thereof, at least the words, "CTS Corporation" and in the center thereof the word, "Seal". ARTICLE XVIII. Indemnification Section 1. General. Without limiting the generality or effect of Article XI of the Articles of Incorporation, the Corporation shall, to the fullest extent to which it is empowered to do so by the Indiana Business Corporation Law (hereinafter the "IBCL"), or any other applicable laws, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), indemnify and hold harmless any person who was or is involved in any manner (including without limitation as a party or a witness), or is threatened to be made so involved, in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (hereinafter a "proceeding"), by reason of the fact that such person is or was a director or officer of the Corporation, or who is or was serving at the request of the Board of Directors as a director, officer, partner or trustee of another corporation or a partnership, joint venture, trust, employee benefit plan or other entity, whether for profit or not for profit, (any such person hereinafter an "indemnitee"), whether or not the basis of such proceeding is alleged action in an official capacity while serving as a director, or officer, against all expense, liability and loss (including attorneys' fees and expenses, judgments, settlements, penalties, fines, and excise taxes assessed with respect to employee benefit plans) actually and reasonably incurred or suffered by such person in connection therewith; provided, however, that, except as provided in Section 3 of this Article XVIII with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Section 2. Right to Advancement of Expenses. The right to indemnification conferred in Article XVIII shall include the right to be paid by the Corporation the expenses (including, without limitation, attorneys' fees and expenses) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the IBCL so requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 2 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Article XVIII shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators. For purposes of Article XVIII, references to "the Corporation" shall include any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. Section 3. Right of Indemnitee to Bring Suit. If a claim under Section 1 or Section 2 of this Article XVIII is not paid in full by the Corporation within 60 calendar days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 calendar days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the IBCL. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or shareholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the IBCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or shareholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article XVIII or otherwise shall be on the Corporation. Section 4. Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Article XVIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. Section 5. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the IBCL. Section 6. Vested Right to Indemnification. The right of any individual to indemnification under this Article XVIII shall vest at the time of occurrence or performance of any event, act or omission giving rise to any Proceeding and once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these Bylaws. Notwithstanding the foregoing, the indemnification afforded under this Article XVIII shall be applicable to all alleged prior acts or omissions of any individual seeking indemnification hereunder, regardless of the fact that such alleged acts or omissions may have occurred prior to the adoption of these Bylaws, and to the extent such prior acts or omissions cannot be deemed to be covered by these Bylaws, the right of any individual to indemnification shall be governed by the indemnification provisions in effect at the time of such prior acts or omissions. Section 7. Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of this corporation, or to any individual who is or was serving at the request of the Board of Directors as an employee or agent of another corporation or a partnership, joint venture, trust, employee benefit plan or other entity, whether for profit or not for profit, to the fullest extent of the provisions of these Bylaws with respect to the indemnification and advancement of expenses of directors and officers of this corporation. Section 8. Business Expense. Any payments made to any indemnified party under these Bylaws or under any other right to indemnification shall be deemed to be an ordinary and necessary business expense of the Corporation, and payment thereof shall not subject any person responsible for the payment, or the Board, to any action for corporate waste or to any similar action. Section 9. Severability. If any provision or provisions of Article XVIII is or are held to be invalid, illegal, or unenforceable for any reason whatsoever: (I) the validity, legality, and enforceability of the remaining provisions of such Article (including without limitation all portions of any paragraph of such Article containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) will not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of such Article (including without limitation all portions of any paragraph of such Article containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) will be construed so as to give effect to the intent manifested by the provision held invalid, illegal, or illegal, or unenforceable. ARTICLE XIX. Amendments Section 1. These Bylaws may be amended, altered, repealed, or added to at any annual or regular meeting of the directors, or at any special meeting thereof. Section 2. No amendment, alteration or addition to these Bylaws shall become effective unless the same is adopted by the affirmative vote of a majority of the members of the Board of Directors. ARTICLE XX. Control Share Acquisitions As provided for in Section 5 thereof, Chapter 42 of the Indiana Business Corporation Law, relating to control share acquisitions, shall not apply to control share acquisitions of shares of the corporation made after March 3, 1987. CTS CORPORATION Nonqualified Stock Option Agreement RECITALS: A. Joseph P. Walker (the "Optionee") is an employee of CTS Corporation, an Indiana corporation, or a subsidiary thereof, (collectively, the "Corporation"). B. The Board of Directors of the Corporation (the "Board") has on May 9, 1997 authorized the execution of a stock option agreement in the form hereof ("Agreement"), as of such date (the "Date of Grant"), subject to shareholder approval and certain other conditions which approval has been obtained and conditions have been satisfied as of the date hereof. C. The option granted hereby is intended to be a nonqualified stock option and will not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986 (the "Code"). NOW, THEREFORE, subject to the terms and conditions herein set forth, the Corporation hereby grants to the Optionee a nonqualified option (the "Option") to purchase 600,000 Common Shares (the "Option Shares") at an exercise price per Option Share equal to $20.83 (the "Exercise Price"). 1. Vesting of Option. (a) Unless terminated as hereinafter provided, the Option will be fully exercisable as of the date of this Agreement. 2. Termination of Option. The Option will terminate automatically and without further action on the earliest of the following dates: (a) the date of the termination by the Corporation of the Optionee's employment for Cause as defined herein; (b) 60 days after the termination of the Optionee's employment with the Corporation by reason of his or her death; (c) 180 days after the termination of the Optionee's employment with the Corporation by reason of his or her total and permanent disability; (d) 30 days after the voluntary termination by the Optionee of his employment with the Corporation for any reason or the termination by the Corporation of the Optionee's employment with the Corporation for any reason other than disability or Cause; or (e) ten years after the Date of Grant, if the Optionee remains in continuous employment with the Corporation during that ten-year period. As used herein, "Cause" means that the Optionee: (I) has been convicted of a criminal violation involving fraud, embezzlement or theft in connection with his or her duties or in the course of his or her employment with the Corporation; or (ii) has intentionally and wrongfully disclosed secret processes, trade secrets or confidential information of the Corporation and any such act has been demonstrably and materially harmful to the Corporation. For purposes of this Agreement, no act or failure to act on the part of the Optionee will be deemed to be "intentional" if it was due primarily to an error in judgment or negligence, and will be deemed to be "intentional" only if done or omitted to be done by the Optionee not in good faith and without reasonable belief that his action or omission was in the best interest of the Corporation. 3. Payment of Exercise Price. The Exercise Price may be paid (a) in cash or check or other cash equivalent acceptable to the Corporation, (b) by actual or constructive transfer to the Corporation of nonforfeitable, nonrestricted Common Shares owned by the Optionee for a minimum of six months prior to the date of such exercise, or (c) by any combination of the foregoing methods of payment. Constructive, rather than actual, surrender of Common Shares owned by the Optionee is permitted, provided that the Internal Revenue Service deems such constructive surrender as an actual exchange for tax purposes, and further provided that Optionee provides evidence satisfactory to the Corporation of his ownership of such constructively surrendered Common Shares. Nonforfeitable, nonrestricted Common Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price will be valued at the reported closing price per share of CTS Common Stock on the New York Stock Exchange on the date the Option is exercised or, if not reported on such date, the next preceding date for which such closing price is reported. The requirement of payment in cash will be deemed satisfied if the Optionee makes arrangements that are satisfactory to the Corporation with a broker that is a member of the National Association of Securities Dealers, Inc. to sell a sufficient number of the Option Shares which are being purchased pursuant to the exercise so that the net proceeds of the sale transaction will at least equal the amount of the aggregate Exercise Price, plus interest at the "applicable Federal rate" within the meaning of that term under Section 1274 of the Code, or any successor provision thereto, for the period from the date of exercise to the date of payment, and pursuant to which the broker undertakes to deliver to the Corporation the amount of the aggregate Exercise Price, plus such interest, not later than the date on which the sale transaction will settle in the ordinary course of business. As a further condition precedent to the exercise of this Option, the Optionee shall comply with all regulations and requirements of any regulatory authority having control of, or supervision over, the issuance of Common Shares and in connection therewith shall execute any documents which the Compensation Committee shall in its sole discretion deem necessary or advisable. 4. Compliance with Law. The Corporation will make reasonable efforts to comply with all applicable securities laws; provided, however, that notwithstanding any other provision of this agreement, the Option will not be exercisable if the exercise thereof would result in a violation of any such law. 5. Consideration for Option. In consideration for the grant of this Option, Optionee agrees that for a period of one year following the termination of his or her employment with the Corporation, he or she will not render services of any kind to any business engaged in, or about to become engaged in, research or development, marketing, leasing or selling of any product, which is the same as, or similar to, a product of the Corporation to which Optionee was exposed during the last two years of his or her employment with the Corporation. Optionee further agrees not to communicate or disclose to any person, firm or corporation either directly or indirectly any knowledge or information acquired during his or her employment with the Corporation, or any subsidiary or division thereof, concerning business plans and strategies, inventions, trade secrets, customer or price lists or any other confidential information with respect to the property or business of the Corporation or any subsidiary or division thereof. 6. Right to Terminate Employment or Service and Adjust Compensation. No provision of this Agreement will limit in any way whatsoever any right that the Corporation may otherwise have to terminate the employment or adjust the compensation of the Optionee at any time. 7. Relation to Other Benefits. Any economic or other benefit to the Optionee under this Agreement will not be taken into account in determining any other benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Corporation or under any employment agreement or severance agreement between the Optionee and the Corporation, and will not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Corporation. 8. Transferability. The Option may be transferred during the lifetime of the Optionee, only to (i) a member of Optionee's immediate family; (ii) a trust for the benefit of members of Optionee's immediate family; or (iii) a partnership or other entity of which family members of the Optionee are the sole owners; provided that such transfer is effected by Optionee in strict compliance with all applicable laws and regulations. Notwithstanding the foregoing, this Section shall not be construed to entitle the Optionee to compel the Corporation to file any registration statement or take any other action which may be necessary to enable the Optionee to exercise his right of transfer under this Section. 9. Withholding Taxes. To the extent that the Corporation is required to withhold any federal, state, local or foreign taxes in connection with any benefit realized by the Optionee under this Agreement, and the amounts otherwise available to the Corporation for such withholding are insufficient, it shall be a condition to the realization of any such benefit that the Optionee make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. Subject to applicable law, any such arrangements may without limitation include voluntary or mandatory relinquishment of a portion of any such benefit or the surrender of outstanding Common Shares. The Corporation and the Optionee may also make similar arrangements with respect to the payment of any taxes on which withholding is not required. 10. Adjustments. The number, type and price of Option Shares covered by this Option shall be proportionately and appropriately adjusted by the Compensation Committee of the Corporation in good faith to reflect changes in the capital structure of the corporation by reason of any stock split or dividend, recapitalization, merger, consolidation, combination or exchange of shares for other securities or other similar corporate change. In addition, in the event of any merger, consolidation or other transaction or event having a similar effect, the Optionee may elect to receive awards economically equivalent to the Option provided hereunder in respect of securities of the surviving entity of such transaction. 11. Severability. In the event that one or more of the provisions of this Agreement may be invalidated for any reason by a court, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable. 12. Governing Law. This Agreement is made under, and will be construed in accordance with, the laws of the State of Indiana, without giving effect to the principle of conflict of laws of such State. This Agreement is executed by the Corporation on this 31st day of October, 1997, effective as of the Date of Grant. CTS CORPORATION By: \S\Jeannine M. Davis The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Option granted hereunder, subject to the terms and conditions hereinabove set forth. \S\Joseph P. Walker Optionee Date: October 31, 1997 CTS CORPORATION Nonqualified Stock Option Agreement RECITALS: A. Stanley J. Aris (the "Optionee") is an employee of CTS Corporation, an Indiana corporation, or a subsidiary thereof, (collectively, the "Corporation"). B. The Board of Directors of the Corporation (the "Board") has on May 9, 1997 authorized the execution of a stock option agreement in the form hereof ("Agreement"), as of such date (the "Date of Grant"), subject to shareholder approval and certain other conditions which approval has been obtained and conditions have been satisfied as of the date hereof. C. The option granted hereby is intended to be a nonqualified stock option and will not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986 (the "Code"). NOW, THEREFORE, subject to the terms and conditions herein set forth, the Corporation hereby grants to the Optionee a nonqualified option (the "Option") to purchase 150,000 Common Shares (the "Option Shares") at an exercise price per Option Share equal to $20.83 (the "Exercise Price"). 1. Vesting of Option. (a) Unless terminated as hereinafter provided, the Option will be fully exercisable as of the date of this Agreement. (b) To the extent that the Option is exercisable in accordance with the terms of this Section 1, it may be exercised in whole or in part from time to time thereafter. 2. Termination of Option. The Option will terminate automatically and without further action on the earliest of the following dates: (a) the date of the termination by the Corporation of the Optionee's employment for Cause as defined herein; (b) 360 days after the termination of the Optionee's employment with the Corporation by reason of his or her death; (c) 180 days after the termination of the Optionee's employment with the Corporation by reason of his or her total and permanent disability; (d) 30 days after the voluntary termination by the Optionee of his employment with the Corporation for any reason or the termination by the Corporation of the Optionee's employment with the Corporation for any reason other than disability or Cause; or (e) ten years after the Date of Grant, if the Optionee remains in continuous employment with the Corporation during that ten-year period. As used herein, "Cause" means that the Optionee: (I) has been convicted of a criminal violation involving fraud, embezzlement or theft in connection with his or her duties or in the course of his or her employment with the Corporation; or (ii) has intentionally and wrongfully disclosed secret processes, trade secrets or confidential information of the Corporation and any such act has been demonstrably and materially harmful to the Corporation. For purposes of this Agreement, no act or failure to act on the part of the Optionee will be deemed to be "intentional" if it was due primarily to an error in judgment or negligence, and will be deemed to be "intentional" only if done or omitted to be done by the Optionee not in good faith and without reasonable belief that his action or omission was in the best interest of the Corporation. 3. Payment of Exercise Price. The Exercise Price may be paid (a) in cash or check or other cash equivalent acceptable to the Corporation, (b) by actual or constructive transfer to the Corporation of nonforfeitable, nonrestricted Common Shares owned by the Optionee for a minimum of six months prior to the date of such exercise, or (c) by any combination of the foregoing methods of payment. Constructive, rather than actual, surrender of Common Shares owned by the Optionee is permitted, provided that the Internal Revenue Service deems such constructive surrender as an actual exchange for tax purposes, and further provided that Optionee provides evidence satisfactory to the Corporation of his ownership of such constructively surrendered Common Shares. Nonforfeitable, nonrestricted Common Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price will be valued at the reported closing price per share of CTS Common Stock on the New York Stock Exchange on the date the Option is exercised or, if not reported on such date, the next preceding date for which such closing price is reported. The requirement of payment in cash will be deemed satisfied if the Optionee makes arrangements that are satisfactory to the Corporation with a broker that is a member of the National Association of Securities Dealers, Inc. to sell a sufficient number of the Option Shares which are being purchased pursuant to the exercise so that the net proceeds of the sale transaction will at least equal the amount of the aggregate Exercise Price, plus interest at the "applicable Federal rate" within the meaning of that term under Section 1274 of the Code, or any successor provision thereto, for the period from the date of exercise to the date of payment, and pursuant to which the broker undertakes to deliver to the Corporation the amount of the aggregate Exercise Price, plus such interest, not later than the date on which the sale transaction will settle in the ordinary course of business. As a further condition precedent to the exercise of this Option, the Optionee shall comply with all regulations and requirements of any regulatory authority having control of, or supervision over, the issuance of Common Shares and in connection therewith shall execute any documents which the Compensation Committee shall in its sole discretion deem necessary or advisable. 4. Compliance with Law. The Corporation will make reasonable efforts to comply with all applicable securities laws; provided, however, that notwithstanding any other provision of this agreement, the Option will not be exercisable if the exercise thereof would result in a violation of any such law. 5. Consideration for Option. In consideration for the grant of this Option, Optionee agrees that for a period of one year following the termination of his or her employment with the Corporation, he or she will not render services of any kind to any business engaged in, or about to become engaged in, research or development, marketing, leasing or selling of any product, which is the same as, or similar to, a product of the Corporation to which Optionee was exposed during the last two years of his or her employment with the Corporation. Optionee further agrees not to communicate or disclose to any person, firm or corporation either directly or indirectly any knowledge or information acquired during his or her employment with the Corporation, or any subsidiary or division thereof, concerning business plans and strategies, inventions, trade secrets, customer or price lists or any other confidential information with respect to the property or business of the Corporation or any subsidiary or division thereof. 6. Right to Terminate Employment or Service and Adjust Compensation. No provision of this Agreement will limit in any way whatsoever any right that the Corporation may otherwise have to terminate the employment or adjust the compensation of the Optionee at any time. 7. Relation to Other Benefits. Any economic or other benefit to the Optionee under this Agreement will not be taken into account in determining any other benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Corporation or under any employment agreement or severance agreement between the Optionee and the Corporation, and will not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Corporation. 8. Transferability. The Option may be transferred during the lifetime of the Optionee, only to (i) a member of Optionee's immediate family; (ii) a trust for the benefit of members of Optionee's immediate family; or (iii) a partnership or other entity of which family members of the Optionee are the sole owners; provided that such transfer is effected by Optionee in strict compliance with all applicable laws and regulations. Notwithstanding the foregoing, this Section shall not be construed to entitle the Optionee to compel the Corporation to file any registration statement or take any other action which may be necessary to enable the Optionee to exercise his right of transfer under this Section. 9. Withholding Taxes. To the extent that the Corporation is required to withhold any federal, state, local or foreign taxes in connection with any benefit realized by the Optionee under this Agreement, and the amounts otherwise available to the Corporation for such withholding are insufficient, it shall be a condition to the realization of any such benefit that the Optionee make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. Subject to applicable law, any such arrangements may without limitation include voluntary or mandatory relinquishment of a portion of any such benefit or the surrender of outstanding Common Shares. The Corporation and the Optionee may also make similar arrangements with respect to the payment of any taxes on which withholding is not required. 10. Adjustments. The number, type and price of Option Shares covered by this Option shall be proportionately and appropriately adjusted by the Compensation Committee of the Corporation in good faith to reflect changes in the capital structure of the corporation by reason of any stock split or dividend, recapitalization, merger, consolidation, combination or exchange of shares for other securities or other similar corporate change. In addition, in the event of any merger, consolidation or other transaction or event having a similar effect, the Optionee may elect to receive awards economically equivalent to the Option provided hereunder in respect of securities of the surviving entity of such transaction. 11. Severability. In the event that one or more of the provisions of this Agreement may be invalidated for any reason by a court, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable. 12. Governing Law. This Agreement is made under, and will be construed in accordance with, the laws of the State of Indiana, without giving effect to the principle of conflict of laws of such State. This Agreement is executed by the Corporation on this 31st day of October, 1997, effective as of the Date of Grant. CTS CORPORATION By:\S\Jeannine M. Davis The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Option granted hereunder, subject to the terms and conditions hereinabove set forth. \S\Stanley J. Aris Optionee Date: October 31, 1997 CTS CORPORATION Nonqualified Stock Option Agreement RECITALS: A. Jeannine M. Davis (the "Optionee") is an employee of CTS Corporation, an Indiana corporation, or a subsidiary thereof, (collectively, the "Corporation"). B. The Board of Directors of the Corporation (the "Board") has on May 9, 1997 authorized the execution of a stock option agreement in the form hereof ("Agreement"), as of such date (the "Date of Grant"), subject to shareholder approval and certain other conditions which approval has been obtained and conditions have been satisfied as of the date hereof. C. The option granted hereby is intended to be a nonqualified stock option and will not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986 (the "Code"). NOW, THEREFORE, subject to the terms and conditions herein set forth, the Corporation hereby grants to the Optionee a nonqualified option (the "Option") to purchase 150,000 Common Shares (the "Option Shares") at an exercise price per Option Share equal to $20.83 (the "Exercise Price"). 1. Vesting of Option. (a) Unless terminated as hereinafter provided, the Option will be fully exercisable as of the date of this Agreement. (b) To the extent that the Option is exercisable in accordance with the terms of this Section 1, it may be exercised in whole or in part from time to time thereafter. 2. Termination of Option. The Option will terminate automatically and without further action on the earliest of the following dates: (a) the date of the termination by the Corporation of the Optionee's employment for Cause as defined herein; (b) 360 days after the termination of the Optionee's employment with the Corporation by reason of his or her death; (c) 180 days after the termination of the Optionee's employment with the Corporation by reason of his or her total and permanent disability; (d) 30 days after the voluntary termination by the Optionee of his employment with the Corporation for any reason or the termination by the Corporation of the Optionee's employment with the Corporation for any reason other than disability or Cause; or (e) ten years after the Date of Grant, if the Optionee remains in continuous employment with the Corporation during that ten-year period. As used herein, "Cause" means that the Optionee: (i) has been convicted of a criminal violation involving fraud, embezzlement or theft in connection with his or her duties or in the course of his or her employment with the Corporation; or (ii) has intentionally and wrongfully disclosed secret processes, trade secrets or confidential information of the Corporation and any such act has been demonstrably and materially harmful to the Corporation. For purposes of this Agreement, no act or failure to act on the part of the Optionee will be deemed to be "intentional" if it was due primarily to an error in judgment or negligence, and will be deemed to be "intentional" only if done or omitted to be done by the Optionee not in good faith and without reasonable belief that his action or omission was in the best interest of the Corporation. 3. Payment of Exercise Price. The Exercise Price may be paid (a) in cash or check or other cash equivalent acceptable to the Corporation, (b) by actual or constructive transfer to the Corporation of nonforfeitable, nonrestricted Common Shares owned by the Optionee for a minimum of six months prior to the date of such exercise, or (c) by any combination of the foregoing methods of payment. Constructive, rather than actual, surrender of Common Shares owned by the Optionee is permitted, provided that the Internal Revenue Service deems such constructive surrender as an actual exchange for tax purposes, and further provided that Optionee provides evidence satisfactory to the Corporation of his ownership of such constructively surrendered Common Shares. Nonforfeitable, nonrestricted Common Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price will be valued at the reported closing price per share of CTS Common Stock on the New York Stock Exchange on the date the Option is exercised or, if not reported on such date, the next preceding date for which such closing price is reported. The requirement of payment in cash will be deemed satisfied if the Optionee makes arrangements that are satisfactory to the Corporation with a broker that is a member of the National Association of Securities Dealers, Inc. to sell a sufficient number of the Option Shares which are being purchased pursuant to the exercise so that the net proceeds of the sale transaction will at least equal the amount of the aggregate Exercise Price, plus interest at the "applicable Federal rate" within the meaning of that term under Section 1274 of the Code, or any successor provision thereto, for the period from the date of exercise to the date of payment, and pursuant to which the broker undertakes to deliver to the Corporation the amount of the aggregate Exercise Price, plus such interest, not later than the date on which the sale transaction will settle in the ordinary course of business. As a further condition precedent to the exercise of this Option, the Optionee shall comply with all regulations and requirements of any regulatory authority having control of, or supervision over, the issuance of Common Shares and in connection therewith shall execute any documents which the Compensation Committee shall in its sole discretion deem necessary or advisable. 4. Compliance with Law. The Corporation will make reasonable efforts to comply with all applicable securities laws; provided, however, that notwithstanding any other provision of this agreement, the Option will not be exercisable if the exercise thereof would result in a violation of any such law. 5. Consideration for Option. In consideration for the grant of this Option, Optionee agrees that for a period of one year following the termination of his or her employment with the Corporation, he or she will not render services of any kind to any business engaged in, or about to become engaged in, research or development, marketing, leasing or selling of any product, which is the same as, or similar to, a product of the Corporation to which Optionee was exposed during the last two years of his or her employment with the Corporation. Optionee further agrees not to communicate or disclose to any person, firm or corporation either directly or indirectly any knowledge or information acquired during his or her employment with the Corporation, or any subsidiary or division thereof, concerning business plans and strategies, inventions, trade secrets, customer or price lists or any other confidential information with respect to the property or business of the Corporation or any subsidiary or division thereof. 6. Right to Terminate Employment or Service and Adjust Compensation. No provision of this Agreement will limit in any way whatsoever any right that the Corporation may otherwise have to terminate the employment or adjust the compensation of the Optionee at any time. 7. Relation to Other Benefits. Any economic or other benefit to the Optionee under this Agreement will not be taken into account in determining any other benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Corporation or under any employment agreement or severance agreement between the Optionee and the Corporation, and will not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Corporation. 8. Transferability. The Option may be transferred during the lifetime of the Optionee, only to (i) a member of Optionee's immediate family; (ii) a trust for the benefit of members of Optionee's immediate family; or (iii) a partnership or other entity of which family members of the Optionee are the sole owners; provided that such transfer is effected by Optionee in strict compliance with all applicable laws and regulations. Notwithstanding the foregoing, this Section shall not be construed to entitle the Optionee to compel the Corporation to file any registration statement or take any other action which may be necessary to enable the Optionee to exercise his right of transfer under this Section. 9. Withholding Taxes. To the extent that the Corporation is required to withhold any federal, state, local or foreign taxes in connection with any benefit realized by the Optionee under this Agreement, and the amounts otherwise available to the Corporation for such withholding are insufficient, it shall be a condition to the realization of any such benefit that the Optionee make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. Subject to applicable law, any such arrangements may without limitation include voluntary or mandatory relinquishment of a portion of any such benefit or the surrender of outstanding Common Shares. The Corporation and the Optionee may also make similar arrangements with respect to the payment of any taxes on which withholding is not required. 10. Adjustments. The number, type and price of Option Shares covered by this Option shall be proportionately and appropriately adjusted by the Compensation Committee of the Corporation in good faith to reflect changes in the capital structure of the corporation by reason of any stock split or dividend, recapitalization, merger, consolidation, combination or exchange of shares for other securities or other similar corporate change. In addition, in the event of any merger, consolidation or other transaction or event having a similar effect, the Optionee may elect to receive awards economically equivalent to the Option provided hereunder in respect of securities of the surviving entity of such transaction. 11. Severability. In the event that one or more of the provisions of this Agreement may be invalidated for any reason by a court, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable. 12. Governing Law. This Agreement is made under, and will be construed in accordance with, the laws of the State of Indiana, without giving effect to the principle of conflict of laws of such State. This Agreement is executed by the Corporation on this 31st day of October, 1997, effective as of the Date of Grant. CTS CORPORATION By:\S\Joseph P. Walker The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Option granted hereunder, subject to the terms and conditions hereinabove set forth. \S\Jeannine M. Davis Optionee Date: October 31, 1997 CTS CORPORATION Nonqualified Stock Option Agreement RECITALS: A. Andrew Lozyniak (the "Optionee") is an employee of CTS Corporation, an Indiana corporation, or a subsidiary thereof, (collectively, the "Corporation"). B. The Board of Directors of the Corporation (the "Board") has on May 9, 1997 authorized the execution of a stock option agreement in the form hereof ("Agreement"), as of such date (the "Date of Grant"), subject to shareholder approval and certain other conditions which approval has been obtained and conditions have been satisfied as of the date hereof. C. The option granted hereby is intended to be a nonqualified stock option and will not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986 (the "Code"). NOW, THEREFORE, subject to the terms and conditions herein set forth, the Corporation hereby grants to the Optionee a nonqualified option (the "Option") to purchase 300,000 Common Shares (the "Option Shares") at an exercise price per Option Share equal to $20.83 (the "Exercise Price"). 1. Vesting of Option. (a) Unless terminated as hereinafter provided, the Option will be fully exercisable as of the date of this Agreement. (b) To the extent that the Option is exercisable in accordance with the terms of this Section 1, it may be exercised in whole or in part from time to time thereafter. 2. Termination of Option. The Option will terminate automatically and without further action on the earliest of the following dates: (a) the date of the termination by the Corporation of the Optionee's employment for Cause as defined herein; (b) 360 days after the termination of the Optionee's employment with the Corporation by reason of his or her death; (c) 180 days after the termination of the Optionee's employment with the Corporation by reason of his or her total and permanent disability; (d) 30 days after the voluntary termination by the Optionee of his employment with the Corporation for any reason or the termination by the Corporation of the Optionee's employment with the Corporation for any reason other than disability or Cause; or (e) ten years after the Date of Grant, if the Optionee remains in continuous employment with the Corporation during that ten-year period. As used herein, "Cause" means that the Optionee: (i) has been convicted of a criminal violation involving fraud, embezzlement or theft in connection with his or her duties or in the course of his or her employment with the Corporation; or (ii) has intentionally and wrongfully disclosed secret processes, trade secrets or confidential information of the Corporation and any such act has been demonstrably and materially harmful to the Corporation. For purposes of this Agreement, no act or failure to act on the part of the Optionee will be deemed to be "intentional" if it was due primarily to an error in judgment or negligence, and will be deemed to be "intentional" only if done or omitted to be done by the Optionee not in good faith and without reasonable belief that his action or omission was in the best interest of the Corporation. 3. Payment of Exercise Price. The Exercise Price may be paid (a) in cash or check or other cash equivalent acceptable to the Corporation, (b) by actual or constructive transfer to the Corporation of nonforfeitable, nonrestricted Common Shares owned by the Optionee for a minimum of six months prior to the date of such exercise, or (c) by any combination of the foregoing methods of payment. Constructive, rather than actual, surrender of Common Shares owned by the Optionee is permitted, provided that the Internal Revenue Service deems such constructive surrender as an actual exchange for tax purposes, and further provided that Optionee provides evidence satisfactory to the Corporation of his ownership of such constructively surrendered Common Shares. Nonforfeitable, nonrestricted Common Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price will be valued at the reported closing price per share of CTS Common Stock on the New York Stock Exchange on the date the Option is exercised or, if not reported on such date, the next preceding date for which such closing price is reported. The requirement of payment in cash will be deemed satisfied if the Optionee makes arrangements that are satisfactory to the Corporation with a broker that is a member of the National Association of Securities Dealers, Inc. to sell a sufficient number of the Option Shares which are being purchased pursuant to the exercise so that the net proceeds of the sale transaction will at least equal the amount of the aggregate Exercise Price, plus interest at the "applicable Federal rate" within the meaning of that term under Section 1274 of the Code, or any successor provision thereto, for the period from the date of exercise to the date of payment, and pursuant to which the broker undertakes to deliver to the Corporation the amount of the aggregate Exercise Price, plus such interest, not later than the date on which the sale transaction will settle in the ordinary course of business. As a further condition precedent to the exercise of this Option, the Optionee shall comply with all regulations and requirements of any regulatory authority having control of, or supervision over, the issuance of Common Shares and in connection therewith shall execute any documents which the Compensation Committee shall in its sole discretion deem necessary or advisable. 4. Compliance with Law. The Corporation will make reasonable efforts to comply with all applicable securities laws; provided, however, that notwithstanding any other provision of this agreement, the Option will not be exercisable if the exercise thereof would result in a violation of any such law. 5. Consideration for Option. In consideration for the grant of this Option, Optionee agrees that for a period of one year following the termination of his or her employment with the Corporation, he or she will not render services of any kind to any business engaged in, or about to become engaged in, research or development, marketing, leasing or selling of any product, which is the same as, or similar to, a product of the Corporation to which Optionee was exposed during the last two years of his or her employment with the Corporation. Optionee further agrees not to communicate or disclose to any person, firm or corporation either directly or indirectly any knowledge or information acquired during his or her employment with the Corporation, or any subsidiary or division thereof, concerning business plans and strategies, inventions, trade secrets, customer or price lists or any other confidential information with respect to the property or business of the Corporation or any subsidiary or division thereof. 6. Right to Terminate Employment or Service and Adjust Compensation. No provision of this Agreement will limit in any way whatsoever any right that the Corporation may otherwise have to terminate the employment or adjust the compensation of the Optionee at any time. 7. Relation to Other Benefits. Any economic or other benefit to the Optionee under this Agreement will not be taken into account in determining any other benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Corporation or under any employment agreement or severance agreement between the Optionee and the Corporation, and will not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Corporation. 8. Transferability. The Option may be transferred during the lifetime of the Optionee, only to (i) a member of Optionee's immediate family; (ii) a trust for the benefit of members of Optionee's immediate family; or (iii) a partnership or other entity of which family members of the Optionee are the sole owners; provided that such transfer is effected by Optionee in strict compliance with all applicable laws and regulations. Notwithstanding the foregoing, this Section shall not be construed to entitle the Optionee to compel the Corporation to file any registration statement or take any other action which may be necessary to enable the Optionee to exercise his right of transfer under this Section. 9. Withholding Taxes. To the extent that the Corporation is required to withhold any federal, state, local or foreign taxes in connection with any benefit realized by the Optionee under this Agreement, and the amounts otherwise available to the Corporation for such withholding are insufficient, it shall be a condition to the realization of any such benefit that the Optionee make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. Subject to applicable law, any such arrangements may without limitation include voluntary or mandatory relinquishment of a portion of any such benefit or the surrender of outstanding Common Shares. The Corporation and the Optionee may also make similar arrangements with respect to the payment of any taxes on which withholding is not required. 10. Adjustments. The number, type and price of Option Shares covered by this Option shall be proportionately and appropriately adjusted by the Compensation Committee of the Corporation in good faith to reflect changes in the capital structure of the corporation by reason of any stock split or dividend, recapitalization, merger, consolidation, combination or exchange of shares for other securities or other similar corporate change. In addition, in the event of any merger, consolidation or other transaction or event having a similar effect, the Optionee may elect to receive awards economically equivalent to the Option provided hereunder in respect of securities of the surviving entity of such transaction. 11. Severability. In the event that one or more of the provisions of this Agreement may be invalidated for any reason by a court, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable. 12. Governing Law. This Agreement is made under, and will be construed in accordance with, the laws of the State of Indiana, without giving effect to the principle of conflict of laws of such State. This Agreement is executed by the Corporation on this 31st day of October, 1997, effective as of the Date of Grant. CTS CORPORATION By:\S\Jeannine M. Davis The undersigned Optionee hereby acknowledges receipt of an executed original of this Agreement and accepts the Option granted hereunder, subject to the terms and conditions hereinabove set forth. \S\Andrew Lozyniak Optionee Date: October 31, 1997 EXHIBIT 21 CTS CORPORATION AND SUBSIDIARIES CTS Corporation (Registrant), an Indiana corporation Subsidiaries CTS Corporation (Delaware), a Delaware corporation CTS of Panama, Inc., a Republic of Panama corporation CTS Components Taiwan, Ltd.,(1) a Taiwan, Republic of China corporation CTS Singapore Pte., Ltd., a Republic of Singapore corporation CTS Electro de Matamoros, S.A.,(1) a Republic of Mexico corporation CTS Export Corporation, a Virgin Islands corporation CTS Japan, Inc., a Japan corporation CTS of Canada, Ltd., a Province of Ontario (Canada) corporation CTS Manufacturing (Thailand) Ltd.,(1) a Thailand corporation CTS Electronics Hong Kong Ltd.,(1) a Hong Kong corporation CTS Corporation U.K. Ltd., a United Kingdom corporation CTS Printex, Inc., a California corporation CTS Micro Peripherals, Inc., a California corporation Dynamics Corporation of America, a New York corporation International Electronic Research Corporation, a California corporation LTB Investment Corporation, a Delaware corporation Corporations whose names are indented are subsidiaries of the preceding non-indented corporations. Except as indicated, each of the above subsidiaries is wholly-owned by its parent company. Operations of all subsidiaries and divisions are consolidated in the financial statements filed. (1) Less than 1% of the outstanding shares of stock is owned of record by nominee shareholders pursuant to national laws regarding resident or nominee ownership. EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-27749 and No. 333-5730) of CTS Corporation of our report dated January 30, 1998, appearing on page 27 of the CTS Corporation 1997 Annual Report which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page S-2 of this Form 10-K. PRICE WATERHOUSE LLP Chicago, Illinois March 27, 1998 EX-1 2 FINANCIAL HIGHLIGHTS (In thousands except per share data) For the Year 1997 1996 1995 Net sales $415,151 $321,297 $300,157 Net earnings 22,813 21,170 17,164 Average common shares outstanding-diluted 15,976 15,766 15,656 Per share data: Net earnings-diluted--Note L $1.43 $1.34 $1.10 Dividends declared .24 .23 .20 Capital expenditures 22,418 17,210 11,181 At Year-End Working capital $ 93,381 $ 86,810 $ 75,151 Notes payable 6,685 Long-term obligations (including current maturities) 68,939 13,647 15,925 Shareholders' equity 147,496 166,232 146,253 Equity per outstanding share 9.72 10.61 9.34
SHAREHOLDER INFORMATION (In thousands of dollars except per share data) Quarterly Results of Operations (Unaudited) Net Gross Operating Net Sales Earnings Earnings Earnings 1997 1st quarter $ 91,269 $25,291 $ 10,493 $ 6,954 2nd quarter 107,482 28,837 13,720 8,458 3rd quarter 89,980 25,162 11,624 7,683 4th quarter 126,420 36,332 (689)* (282)* $415,151 $115,622 $35,148 $22,813 1996 1st quarter $ 80,186 $19,799 $ 6,587 $ 4,414 2nd quarter 83,820 21,874 8,218 5,340 3rd quarter 76,457 20,726 7,847 5,060 4th quarter 80,834 25,097 10,768 6,356 $321,297 $87,496 $33,420 $21,170 Per Share Data (Unaudited) Dividends Net Earnings High(a) Low(a) Declared Basic Diluted 1997 1st quarter $17.00 $13.58 $.06 $ .45 $.44 2nd quarter 23.42 17.13 .06 .54 .53 3rd quarter 30.92 22.85 .06 .49 .48 4th quarter 37.25 28.31 .06 (.02)* (.02)* $.24 $1.46 $1.43 1996 1st quarter $12.88 $12.00 $.05 $ .28 $.28 2nd quarter 15.67 12.46 .06 .34 .34 3rd quarter 15.67 13.50 .06 .32 .32 4th quarter 14.33 12.71 .06 .41 .40 $.23 $1.35 $1.34
(a) The market price range of CTS Corporation common stock on the New York Stock Exchange for each of the quarters during the last two years. * The fourth quarter results include a one-time, transaction-related compensation charge of $16.2 million, or $10.5 million after tax ($.67 per share).
FIVE-YEAR SUMMARY (In thousands of dollars except per share data) % of % of % of % of % of 1997 Sales 1996 Sales 1995 Sales 1994 Sales 1993 Sales Summary of Operations Net sales $415,151 100.0 $321,297 100.0 $300,157 100.0 $268,707 100.0 $236,979 100.0 Cost of goods sold 299,529 72.1 233,801 72.8 225,353 75.1 205,640 76.5 183,927 77.6 Selling, general and administrative expenses 50,984 12.3 43,333 13.5 39,312 13.1 36,175 13.5 36,323 15.3 Transaction related compensation charge 16,200 3.9 Research and develop- ment expenses 13,290 3.2 10,743 3.3 8,004 2.7 6,208 2.3 5,708 2.4 Operating earnings 35,148 8.5 33,420 10.4 27,488 9.1 20,684 7.7 11,021 4.7 Other (income) expense--net (51) 0.0 182 0.1 196 0.1 803 0.3 (761) (0.4) Earnings before in- come taxes and cumulative effect of changes in account- ing principles 35,097 8.5 33,602 10.5 27,684 9.2 21,487 8.0 10,260 4.3 Income taxes 12,284 3.0 12,432 3.9 10,520 3.5 7,520 2.8 3,690 1.6 Net earnings--before accounting changes 22,813 5.5 21,170 6.6 17,164 5.7 13,967 5.2 6,570 2.7 Cumulative effect on prior years of account- ing changes (a) (4,614) (1.9) Net earnings 22,813 5.5 21,170 6.6 17,164 5.7 13,967 5.2 1,956 0.8 Retained earnings-- beginning of year 144,112 126,546 112,506 100,868 100,973 Dividends declared (3,756) (3,604) (3,124) (2,329) (2,061) Retained earnings--end of year $163,169 $144,112 $126,546 $112,506 $100,868 Average shares out- standing-basic 15,624,149 15,668,415 15,602,454 15,511,218 15,457,668 Net earnings per share: Before accounting changes $1.46 $1.35 $1.10 $0.90 $0.43 Cumulative effect on prior years of accounting changes (a) (.30) Net earnings - Basic $1.46 $1.35 $1.10 $0.90 $0.13 Net earnings - Diluted $1.43 $1.34 $1.10 $0.90 $0.13 Cash dividends per share $0.24 $0.23 $0.20 $0.15 $0.13 Capital expenditures 22,418 17,210 11,181 13,401 11,696 Depreciation and amortization 16,965 12,491 11,683 11,236 12,143 Financial Position at Year-End Current assets $185,733 $138,201 $126,113 $110,667 $97,266 Current liabilities 92,352 51,391 50,962 44,792 49,888 Current ratio 2.0 to 1 2.7 to 1 2.5 to 1 2.5 to 1 1.9 to 1 Working capital $93,381 $86,810 $75,151 $65,875 $47,378 Inventories 56,007 38,761 38,885 41,456 36,059 Property, plant and equipment--net 76,027 56,103 50,696 50,777 47,842 Total assets 329,581 249,372 227,127 206,826 185,064 Short-term notes payable 6,685 7,436 12,822 Long-term obligations 63,474 11,220 13,714 15,595 4,995 Shareholders' equity 147,496 166,232 146,253 131,855 119,203 Common shares outstanding 15,177,617 15,674,868 15,651,987 15,535,812 15,460,272 Equity (book value) per share $9.72 $10.61 $9.34 $8.49 $7.71 Other Data Stock price range (dollars per share to the nearest 1/16) $37.25-$13.58 $15.67-$12.00 $12.58-$9.13 $10.33-$6.50 $7.46-$5.67 Average number of employees 4,132 3,815 4,007 4,056 3,975 Number of shareholders at year-end 1,404 986 1,062 1,136 1,198
(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.
CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars except per share amounts) Year Ended December 31 December 31 December 31 1997 1996 1995 Net sales $415,151 $321,297 $300,157 Costs and expenses: Cost of goods sold 299,529 233,801 225,353 Selling, general and administra- tive expenses 50,984 43,333 39,312 Transaction-related compensation charge--Note E 16,200 Research and development expenses 13,290 10,743 8,004 Operating earnings 35,148 33,420 27,488 Other (expense) income: Interest expense (2,883) (1,449) (1,790) Interest income 2,397 1,881 1,421 Other 435 (250) 565 Total other (expense) income (51) 182 196 Earnings before income taxes 35,097 33,602 27,684 Income taxes--Note G 12,284 12,432 10,520 Net earnings $ 22,813 $ 21,170 $ 17,164 Net earnings per share--Note L Basic $1.46 $1.35 $1.10 Diluted $1.43 $1.34 $1.10 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands of dollars) Cumulative Additional Common Retained Translation Contributed Treasury Stock Earnings Adjustment Capital Stock Total Balances at December 31, 1994 $34,198 $112,506 $ (354) $(328) $(14,167) $131,855 Net earnings 17,164 17,164 Cash dividends of $.20 per share (3,124) (3,124) Nonemployee Directors' stock retirement plan 15 15 Cumulative translation adjustment (291) (291) Issued 55,500 shares on restricted stock and cash bonus plan 76 (632) 556 Issued 51,975 shares on exercise ofstock options (163) 522 359 Acquired 600 shares traded on options--net 7 (7) Stock compensation 3 93 96 Deferred compensation recognized 17 162 179 Balances at December 31, 1995 34,138 126,546 (645) (783) (13,003) 146,253 Net earnings 21,170 21,170 Cash dividends of $.23 per share (3,604) (3,604) Nonemployee Directors' stock retirement plan 17 17 Cumulative translation adjustment 2,018 2,018 Issued 4,500 shares on restricted stock and cash bonus plan 23 (70) 47 Issued 18,900 shares on exercise of stock options (51) 197 146 Acquired 219 shares traded on options --net 3 (3) (3) Stock compensation 27 100 127 Deferred compensation recognized 236 236 Acquired 9,600 shares for treasury stock (131) (131) Balances at December 31, 1996 34,140 144,112 1,373 (600) (12,793) 166,232 Net earnings 22,813 22,813 Cash dividends of $.24 per share (3,756) (3,756) Nonemployee Directors' stock retirement plan 205 205 Cumulative translation adjustment (679) (679) Issued 6,051 shares on restricted stock and cash bonus plan--net 135 (224) 89 Issued 107,141 shares on exercise of stock options--net 273 558 831 Stock compensation 19 12 31 Transaction-related compensation charge 16,200 16,200 Deferred compensation recognized 241 241 Acquired 7,241,823 shares for treasury stock (206,849) (206,849) Issued 6,629,580 shares in connection with the merger 152,227 152,227 Balances at December 31, 1997 $186,794 $163,169 $694 $15,822 $218,983) $147,496
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS December 31 December 31 (In thousands of dollars) 1997 1996 ASSETS Current Assets Cash and equivalents $ 39,847 $ 44,957 Accounts receivable, less allowances (1997--$1,074; 1996--$622) 68,679 43,984 Inventories Finished goods 8,061 8,504 Work-in-process 26,036 17,138 Raw materials 21,910 13,119 Total inventories 56,007 38,761 Other current assets 5,327 3,787 Deferred income taxes--Note G 15,873 6,712 Total current assets 185,733 138,201 Property, Plant and Equipment Buildings and land 50,647 42,800 Machinery and equipment 156,287 146,589 Total property, plant and equipment 206,934 189,389 Less accumulated depreciation 130,907 133,286 Net property, plant and equipment 76,027 56,103 Other Assets Prepaid pension expense--Note F 61,738 50,152 Other 6,083 4,916 Total other assets 67,821 55,068 Total Assets $329,581 $249,372
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term obligations--Note D $ 5,465 $2,427 Accounts payable 28,200 17,146 Accrued salaries, wages and vacation 10,220 6,836 Accrued taxes other than income 2,484 2,070 Income taxes payable 13,517 5,946 Other accrued liabilities--Note K 32,466 16,966 Total current liabilities 92,352 51,391 Long-term Obligations--Note D 63,474 11,220 Deferred Income Taxes--Note G 21,950 16,146 Postretirement Benefits--Note F 4,309 4,383 Contingencies--Note K Shareholders' Equity Preferred stock -authorized 25,000,000 shares without par value; none issued--Note I Common stock-authorized 75,000,000 shares without par value; issued 24,050,673 shares-Note--I 186,794 34,140 Additional contributed capital 15,822 (600) Retained earnings 163,169 144,112 Cumulative translation adjustment 694 1,373 366,479 179,025 Less cost of common stock held in treasury (1997-- 8,873,056 shares; 1996--1,746,225 shares)-Note--J 218,983 12,793 Total shareholders' equity 147,496 166,232 Total Liabilities and Shareholders' Equity $329,581 $249,372
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 1997 1996 1995 Cash flows from operating activities: Net earnings $22,813 $21,170 $17,164 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 16,965 12,491 11,683 Deferred income taxes (1,462) 3,201 3,239 Transaction-related compensation charge--Note E 16,200 Other 712 (160) (52) Changes in assets and liabilities net of effects from purchase of DCA: Accounts receivable (1,071) (2,247) (6,708) Inventories 10,132 124 2,571 Prepaid pension asset (6,199) (5,413) (5,331) Accounts payable and accrued liabilities (572) 4,943 4,280 Income taxes payable 2,764 1,955 1,703 Other (1,400) (961) (1,688) Total adjustments 36,069 13,933 9,697 Net cash provided by operating activities 58,882 35,103 26,861 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 2,973 822 236 Capital expenditures (22,418) (17,210) (11,181) Payment for purchase of DCA, net of cash acquired--Note B (71,353) Net cash used in investing activities (90,798) (16,388) (10,945) Cash flows from financing activities: Proceeds from issuance of long-term obligations 50,000 Payments of long-term obligations (8,707) (2,208) (286) Decrease in notes payable (6,685) (751) Dividends paid (3,768) (3,446) (3,118) Purchases of treasury stock (10,121) (131) 146 Other (106) 146 359 Net cash provided by (used in) financing activities 27,298 (12,324) (3,796) Effect of exchange rate changes on cash (492) 1,295 229 Net (decrease) increase in cash (5,110) 7,686 12,349 Cash and equivalents at beginning of year 44,957 37,271 24,922 Cash and equivalents at end of year $39,847 $44,957 $37,271 Supplemental cash flow information Cash paid during the year for: Interest $2,649 $ 1,467 $ 1,791 Income taxes - net $10,646 7,276 5,590 Noncash investing and financing activities Liabilities assumed in connection with the purchase of DCA $53,639 Common stock issued in connection with the purchase of DCA 152,227
The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. Inventories: Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets principally on the straight-line method. Useful lives for buildings and improvements range from 10 to 45 years, and machinery and equipment from 3 to 8 years. Retirement Plans: The Company has various defined benefit and defined contri- bution retirement plans covering a majority of its employees. The Company's policy is to annually fund the defined benefit pension plans at or above the minimum required under the Employee Retirement Income Security Act of 1974 (ERISA). Research and Development: Research and development costs consist of expenditures incurred during the course of planned search and investigation aimed at discovery of new knowledge which will be useful in developing new products or processes, or significantly enhancing existing products or production processes, and the implementation of such through design, testing of product alternatives or construction of prototypes. The Company expenses all research and development costs as incurred. Income Taxes: The Company provides deferred income taxes for transactions reported in different periods for financial reporting and income tax return purposes pursuant to the requirements of Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes." Translation of Foreign Currencies: The financial statements of all of the Company's non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings. The assets and liabilities of the Company's United Kingdom subsidiary are translated into U.S. dollars principally at the current exchange rate at period end, with resulting translation adjustments made directly to the "Cumulative translation adjustment" component of shareholders' equity. Statements of earnings accounts are translated at the average rates during the period. Financial Instruments: The Company's financial instruments consist primarily of cash, cash equivalents, trade receivables and payables, and obligations under notes payable and long-term debt. In accordance with the requirements of FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," the Company is providing the following fair value estimates and information regarding valuation methodologies. The carrying value for cash and cash equivalents, and trade receivables and payables approximates fair value based on the short-term maturities of these instruments. The carrying value for all long-term debt outstanding at December 31, 1997, and 1996 approximates fair value where fair value is based on market prices for the same or similar debt and maturities. The Company occasionally uses forward exchange currency contracts to minimize the impact of foreign currency fluctuations on the Company's costs and expenses. At December 31, 1997, the Company's forward foreign exchange currency contracts were not material. These contracts are accounted for as hedges and have minimal credit risk because the counterparties are well-established financial institutions. Concentration of Credit Risk: The Company sells its products to customers primarily in the computer equipment, automotive, communications equipment, and instruments and controls industries, primarily in North America, Europe and the Pacific Rim. The Company performs ongoing credit evaluations of its customers to minimize credit risk. The Company generally does not require collateral. Stock-Based Compensation: FASB Statement No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based compensation at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and its related Interpretation. See Note E for the required pro forma net income and earnings per share disclosures required by FASB Statement No. 123. Earnings Per Share: Basic and diluted earnings per common share are reported in conformity with FASB Statement No.128, "Earnings per Share." All prior period earnings per share (EPS) data presented have been restated to comply with FASB Statement No. 128 and also to reflect the 3 for 1 stock split (Note I). Basic earnings per share exclude any dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock resulted in the issuance of common stock that shared in the earnings of the Company. Refer to Note L - Earnings Per Share, for the reconciliation of the numerator and denominator of the basic and diluted EPS computations. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE TO CONSOLIDATED STATEMENTS NOTE B - Acquisition On October 16, 1997, the Company acquired all of the outstanding common stock of Dynamics Corporation of America ("DCA")(the "merger" or "acquisition"), including the reacquisition of CTS shares held by DCA. DCA is a diversified manufacturer of commercial and industrial products. Its seven operating units located within the United States manufacture electronic components, mobile vans and transportable shelters for specialized electronic and diagnostic equipment, portable electronic housewares and commercial appliances, air distribution equipment, specialized air-conditioning equipment and generator sets. The acquisition has been accounted for as a purchase and, accordingly, the operating results of DCA have been included in the Company's consolidated financial statements since the date of acquisition. The purchase price was comprised of cash of $68,509,000, utilizing cash on hand and borrowings, and issuance of 6,629,580 shares of the Company's common stock with a value of $152,227,000. The total cost of the acquisition, including transaction-related expenses and estimated liabilities assumed, was $237,300,000. Due to the timing of the acquisition, the Company has not yet completed its plans to integrate the newly acquired DCA units into CTS, although a number of integration actions have been taken and reflected in the December 31, 1997, financial statements. Accordingly, the allocation of the total purchase price is preliminary and subject to revision during 1998. It is not expected that the finalization of the integration will have any significant effect on the consolidated financial position or results of operations of the Company. The following unaudited pro forma consolidated results of operations for the years ended December 31, 1997, and 1996, assume the DCA acquisition occurred on January 1 of each year: Pro Forma Information - Unaudited: (In millions, except per share data) 1997 1996 Net sales $ 523.3 $ 450.5 Net earnings 37.9 18.8 Diluted earnings per share $2.39 $1.19 DCA's results have been adjusted to exclude equity earnings in CTS and merger- related transaction costs. The postacquisition results of DCA in 1997 generated net sales of $33,079,000 and approximately a $.06 per share positive impact on net earnings. The pro forma amounts are based on certain assumptions and estimates, and do not reflect any benefit from synergies which might be achieved from combined operations. The pro forma results are not necessarily indicative of CTS' operating results that would have occurred had the merger been consummated as of such dates, or of results which may occur in the future. NOTE C - Short-term Borrowings The Company has unsecured lines of credit arrangements of $13,868,000 at December 31, 1997. These arrangements are generally subject to annual renewal and renegotiation, and may be withdrawn at the banks' option. There were minimal borrowings against these lines during 1997. Average daily short-term borrowings, including borrowings denominated in non-U.S. currencies, were $2,308,000 and $6,781,000 during 1996 and 1995, respectively. The weighted average interest rates, computed by relating interest expense to average daily short-term borrowings, were 6.1% in 1996 and 6.5% in 1995. The maximum amount of short-term borrowings at the end of any month during 1996 and 1995 was $8,055,000 and $8,440,000, respectively. The short-term borrowings outstanding at December 31, 1995, were $6,685,000. NOTE D - Long-term Obligations Long-term obligations were comprised of the following: (In thousands) 1997 1996 Long-term debt: Term loan at 8.4%, due in annual installments through 1999 $11,000 $13,000 Term loan at 6.4%, due in quarterly installments through 2003 50,000 Other 802 647 61,802 13,647 Less current maturities 5,465 2,427 Total long-term debt 56,337 11,220 Other 7,137 Total long-term obligations $63,474 $11,220 The Company has an $11,000,000 term loan with four banks, of which $2,000,000 is payable in 1998 and $9,000,000 in 1999. The Company also has a $50,000,000 term loan with four banks which matures as follows: 1998 - $3,000,000; 1999 - $5,000,000; 2000 - $10,000,000; 2001 - $10,000,000; 2002 - $10,000,000 and 2003 - $12,000,000. The Company has an unsecured revolving credit agreement totaling $75,000,000 with four banks, which expires in 2003. Interest rates on these borrowings fluctuate based upon LIBOR plus 0.50 percent per annum through March 31, 1998, with adjustments thereafter based on the ratio of CTS' consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA). The Company pays a commitment fee that varies based on performance under certain financial covenants applicable to the undrawn portion of the revolving credit agreement. Currently, that fee is 0.175 percent per annum. The credit agreement and term loans require, among other things, that the Company maintain a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum leverage ratio. Other long-term obligations include $6,794,000 of liability relating to common shares to be issued to DCA shareholders as a result of the merger. NOTE E - Stock Plans At December 31, 1997, the Company has four stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. With the exception of the transaction-related option grant, compensation cost is normally not recognized for its fixed stock option grants as they are granted at fair market value at the grant dates, while compensation expense has been recognized for its compensatory plans. Had compensation cost for the Company's two fixed stock-based compensation plans been determined based on the fair value based method, as defined in FASB Statement No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: (In thousands, except per share amounts) 1997 1996 1995 Net earnings As reported $22,813 $21,170 $17,164 Pro forma $21,360 $20,936 $17,141 Net earnings per share- As reported $1.43 $1.34 $1.10 diluted Pro forma $1.34 $1.32 $1.10 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1995 and 1997: dividend yield of 1.63% and 0.70%, respectively; expected volatility of 19.93% for both years, risk-free interest rate of 5.62% and 5.80%, respectively; and expected life of 4.3 and 2.0 years, respectively. The effects of applying FASB Statement No. 123 in the above pro forma disclosures are not indicative of future amounts as they do not include the effects of awards granted prior to 1995, some of which would have had income statement effects in 1995, 1996 and 1997 due to the five-year vesting period associated with the fixed stock option awards. The Company's two fixed stock option plans, approved by the shareholders, provide for grants of incentive stock options or nonqualified stock options to officers and key employees. Under the 1986 Stock Option Plan which expired in 1995, the Company could grant options to its officers and key employees for up to 900,000 shares of common stock. Of the 900,000 shares, approximately 300,000 shares were granted. Under the 1996 Stock Option Plan, the Company may grant options to its officers and key employees for up to 600,000 shares of common stock. On October 16, 1997, the Company granted 1,200,000 options to certain officers and Board members. These options are fully vested and are exercisable over a ten-year period terminating May 8, 2007. Based on the value of CTS shares on the date of the merger and the option price of $20.83 per share, a $16.2 million before tax, $10.5 million after tax, or $.67 per share, charge to expense was recorded. The actual tax benefit to be realized will depend on the amounts calculated upon exercise of the options. The pro forma information presented above includes the effect of the difference between the intrinsic value compensation charge calculated under APB Opinion No. 25 and the fair value amount calculated under FASB Statement No.123. Under the 1996 Stock Option Plan, options are granted at the fair market value on the grant date and are exercisable generally in cumulative annual installments over a maximum ten-year period, commencing at least one year from the date of grant. Upon the exercise of stock options, payment may be made using cash, shares of the Company's common stock or a combination thereof subject to certain restrictions as described in the plan document. A summary of the status of the Company's two fixed stock option plans as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates, is presented below:
1997 1996 1995 Weighted Weighted Weighted -Average -Average -Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at begin- ning of year 412,575 $10.70 458,775 $10.61 258,000 $7.72 Granted 1,200,000 20.83 - - 282,150 12.30 Exercised (115,583) 9.46 (18,900) 7.85 (51,975) 7.02 Expired or canceled (6,450) 10.40 (27,300) 11.16 (29,400) 7.80 Outstanding at end of year 1,490,542 $18.96 412,575 $10.70 458,775 $10.61 Options exercisable at year-end 1,361,692 154,275 57,675 Weighted-average fair value of options granted during the year $15.19 $ 2.75
The following table summarizes information about fixed stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/97 Life (Years) Price at 12/31/97 Price $6.375- 8.250 86,925 1.43 $8.12 65,925 $8.08 $10.420- 12.458 203,617 2.93 12.38 95,767 12.37 $20.833 1,200,000 9.42 20.83 1,200,000 20.83 Under the 1986 Stock Option Plan, options to purchase a total of 94,425 shares were outstanding as of December 31, 1997. At December 31, 1997, 70,125 of these shares were exercisable. Under the 1996 Stock Option Plan, options to purchase a total of 196,117 shares were outstanding as of December 31, 1997. At December 31, 1997, 91,567 of these shares were exercisable. The Company has a discretionary Restricted Stock and Cash Bonus Plan (Plan) which reserves 1,200,000 shares of the Company's common stock for sale, at market price or below, or award to key employees. Shares sold or awarded are subject to restrictions against transfer and repurchase rights of the Company. In general, restrictions lapse at the rate of 20% per year beginning one year from the award or sale. In addition, the Plan provides for a cash bonus to the participant equal to the fair market value of the shares on the dates restrictions lapse, in the case of an award, or the excess of the fair market value over the original purchase price if the shares were purchased. The total bonus paid to any participant during the restricted period is limited to twice the fair market value of the shares on the date of award or sale. Under the Plan, during 1997, 21,000 shares were awarded leaving 1,010,700 shares available for award or sale at December 31, 1997. Under the Plan, in 1996 and 1995, 4,500 and 55,500 shares were awarded, respectively. In addition to the shares issued and the amortization of deferred compensation included in the Consolidated Statements of Shareholders' Equity, the Company accrued $427,000, $408,000 and $306,000 for additional compensation payable under the provisions of the Plan in 1997, 1996 and 1995, respectively. The Company has a Stock Retirement Plan for Nonemployee Directors. This retirement plan provides for a portion of the total compensation payable to Nonemployee Directors to be deferred and paid in Company stock. Under this plan, the amount of the actual dollar compensation was $205,100, $17,100 and $15,100 in 1997, 1996 and 1995, respectively. NOTE F - Employee Retirement Plans Defined benefit plans The Company has a number of noncontributory defined benefit pension plans (Plans) covering approximately 48% of its employees. Plans covering salaried employees provide pension benefits that are based on the employees' compensation prior to retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The Company also contributes to a multi-employer plan which provides defined retirement benefits, as required by collective bargaining agreements. Information concerning the Company's share of related estimated plan benefit obligations and assets is not available for the multi-employer plan. Net pension income for the Plans in 1997, 1996 and 1995 includes the following components: (In thousands) 1997 1996 1995 Service cost--benefits earned during the year $ 2,846 $ 2,787 $ 2,216 Interest cost on projected benefit obligation 6,196 5,430 5,330 Actual return on plan assets (43,970) (20,982) (23,252) Net amortization and deferral 28,729 7,352 10,375 Net pension income $(6,199) $(5,413) $(5,331) The following table details the funded status of the Plans at December 31, 1997, and December 31, 1996: (In thousands) 1997 1996 Actuarial present value of benefit obligations: Vested benefits $ 91,114 $ 68,570 Nonvested benefits 6,229 2,598 Accumulated benefit obligation $ 97,343 $ 71,168 Plan assets at fair value $218,294 $151,841 Projected benefit obligation 106,962 78,046 Plan assets in excess of the projected benefit obligation 111,332 73,795 Unrecognized prior year service cost 323 397 Unrecognized net gain (42,776) (15,146) Unrecognized net asset (7,141) (8,894) Prepaid pension expense $61,738 $ 50,152 A significant amount of the increases in plan assets, projected benefit obligation, and prepaid pension expense were due to the merger, in which CTS acquired additional plan assets with a fair value of $28,039,000, projected benefit obligation of $22,652,000 and prepaid pension expense of $5,386,000. Assumptions used in determining net pension income and the funded status of U.S. defined benefit pension plans were as follows: 1997 1996 1995 Discount rates (funded status) 7.50% 7.75% 7.25% Rates of increase in compensation levels (salaried plan only) 5%-7% 5%-7% 5%-7% Expected long-term rate of return on assets 9.75% 9.75% 9.00% Net pension income is determined using assumptions as of the beginning of each year. Funded status is determined using assumptions as of the end of each year. Effective with the December 31, 1997, measurement date, the discount rate was decreased to 7.50% to reflect current market conditions. This change had no impact on 1997 pension income, but will decrease 1998 pension income by $287,000. The majority of U.S. defined benefit pension plan assets are invested in common stock, including approximately $23.3 million and $8.5 million in CTS common stock at December 31, 1997 and 1996, respectively. The balance is invested in corporate bonds, U.S. government backed mortgage securities and bonds, asset backed securities, a private equity fund, non-U.S. corporate bonds and convertible issues. Because the domestic plans are fully funded, the Company made no contributions during 1997, 1996 or 1995. Benefits paid by all Plans during 1997, 1996 and 1995 were $5,202,000, $4,240,000 and $4,085,000, respectively. Pension coverage for employees of certain non-U.S. subsidiaries is provided through separate plans. Contributions of $216,000, $167,000 and $237,000 were made to the non-U.S. Plans in 1997, 1996 and 1995, respectively. The Company has a noncontributing, nonqualified defined benefit supplemental retirement plan for certain employees. The 1997 net periodic pension cost was $53,000 and the related liability at December 31, 1997, was $384,000. At December 31, 1997, the plan was fully funded with shares of the Company's stock. Defined contribution plans The Company sponsors a 401(k) Plan, as well as several other defined contribution plans, which cover some of its non-U.S. employees and its domestic hourly employees not covered by a defined benefit pension plan. Contributions and costs are generally determined as a percentage of the covered employee's annual salary. Amounts expensed for the 401(k) Plan and the other plans totaled $2,351,000 in 1997, $2,382,000 in 1996 and $2,294,000 in 1995. Postretirement life insurance plans In addition to providing pension benefits, the Company provides certain life insurance programs for retired employees. Substantially all of the Company's domestic employees are eligible for life insurance benefits. Summary information on the Company's plans as of December 31, 1997, and December 31, 1996, is as follows: (In thousands) 1997 1996 Accumulated postretirement benefit obligation: Active employees $(1,663) $(1,298) Retirees and dependents (2,623) (2,698) (4,286) (3,996) Unrecognized net gain (449) (574) Postretirement benefit obligation $(4,735) $(4,570) The components of net periodic postretirement benefit expense for 1997, 1996 and 1995 are as follows: (In thousands) 1997 1996 1995 Service cost--benefits earned during the year $ 32 $ 34 $ 28 Interest cost on accumulated benefit obligation 298 295 330 Net amortization and deferral (12) (1,008) Net expense (income) $318 $ 329 $(650) The accumulated postretirement benefit obligation was determined using relevant actuarial assumptions and the terms of the Company's life insurance plans. For measurement purposes, a 7.50%, 7.75% and 7.25% annual discount rate was used to determine the remaining life obligation for 1997, 1996 and 1995, respectively. The Company funds life insurance benefits through term life insurance policies. The Company plans to continue funding premiums on a pay-as-you-go basis. The components of earnings before income taxes are as follows: (In thousands) 1997 1996 1995 Domestic $3,023 $16,381 $17,563 Non-U.S. 32,074 17,221 10,121 Total $35,097 $33,602 $27,684 The provision for income taxes consists of the following: (In thousands) 1997 1996 1995 Current: Federal $2,104 $3,105 $1,935 State 1,081 1,012 963 Non-U.S. 9,928 5,114 4,383 Total current 13,113 9,231 7,281 Deferred: Federal (540) 2,761 2,534 State (462) 313 578 Non-U.S. 173 127 127 Total deferred (829) 3,201 3,239 Total provision for income taxes 12,284 $12,432 $10,520 Significant components of the Company's deferred tax liabilities and assets at December 31, 1997, and 1996, are: (In thousands) 1997 1996 Pensions $21,685 $17,683 Depreciation 1,135 1,460 Basis difference-acquired assets 976 Other 2,592 3,185 Gross deferred tax liabilities 26,388 22,328 Postretirement benefits 1,618 1,622 Inventory reserves 4,586 2,721 Loss carryforwards 2,731 5,778 Credit carryforwards 1,658 4,355 Nondeductible accruals 6,650 4,365 Non-recurring compensation charge 4,664 Other 882 818 Gross deferred tax assets 22,789 19,659 Net deferred tax liabilities (3,599) (2,669) Deferred tax asset valuation allowance (2,731) (6,765) Total $(6,330) $(9,434) During 1997, the valuation allowance was decreased as a result of the expiration of unused net operating losses in one taxing jurisdiction, and the utilization of net operating losses and tax credits in other jurisdictions. The total decrease in the valuation allowance was $4,034,000. A reconciliation from the statutory federal income tax to the Company's effective income tax follows: (In thousands) 1997 1996 1995 Taxes at the U.S. statutory rate $12,284 $ 11,761 $9,689 State income taxes, net of federal income tax benefit 402 861 1,002 Non-U.S. income taxed at rates different than the U.S. statutory rate (154) (728) 1,159 Utilization of net operating loss carryforwards and benefit of scheduled tax credits (1,552) (279) (2,024) Foreign distributions, net of foreign tax credits 156 297 372 Non-recurring compensation expense 1,006 Other 142 520 322 Provision for income taxes $12,284 $12,432 $10,520 Undistributed earnings of certain non-U.S. subsidiaries amount to $52,600,000 at December 31, 1997. Prior year earnings are intended to be invested indefinitely and, accordingly, no provision has been made for non-U.S. withholding taxes. In the event all undistributed earnings were remitted, approximately $5,300,000 of withholding tax would be imposed, which would be substantially offset by foreign tax credits. The Company has various non-U.S. tax basis net operating losses of $10,083,000. Of this amount, $9,796,000 has an unlimited carryforward period. The remainderof $287,000 expires in 1998 and 1999. In addition, the Company has alternative minimum tax credit carryforwards of approximately $1,658,000, which have no expiration date. NOTE H - Business Segment and Non-U.S. Operations The Company's operations historically comprised one reportable business segment, the manufacturing of electronic components. Electronic components include production and sale of automotive control devices, fiber-optic transceivers, flex cable assemblies, frequency control devices, hybrid microcircuits, insulated metal circuits, interconnect products, loudspeakers, resistornetworks, switches and variable resistors. In addition to contributing to its line of electronic components, the merger added electrical appliances, power and controlled environmental systems, and fabricated metal products and equipment to the Company's product offerings. These additional product offerings are notmaterial for separate disclosure and have been aggregated and shown as "Other Segments" in the information that follows. Sales to a major automotive manufacturer were approximately $50,000,000 in 1997, $49,100,000 in 1996 and $54,900,000 in 1995. Sales to a major computer equipment manufacturer were approximately $47,600,000 in 1997, $24,100,000 in 1996 and $10,700,000 in 1995. Also, sales to another major computer equipment manufacturer were approximately $43,300,000 in 1997, $11,300,000 in 1996 and $300,000 in 1995. The non-U.S. operations or facilities are located in Canada, China, Hong Kong, Japan, Mexico, Singapore, Taiwan, Thailand and the United Kingdom. Net sales to unaffiliated customers from the United Kingdom equaled 26%, 24% and 17% of the consolidated total for 1997, 1996 and 1995, respectively. Net sales to unaffiliated customers from Other non-U.S. operations in the aggregate equaled 14%, 16% and 19% of the consolidated total for each of the years 1997, 1996 and 1995, respectively. United States export sales to unaffiliated customers for 1997 were principally to Thailand. Net sales by geographic area include both sales to unaffiliated customers and transfers between geographic areas. Such transfers are accounted for primarily on the basis of a uniform intercompany pricing policy. Operating earnings are total net sales less operating expenses. In computing operating earnings, none of the following items have been added or deducted: general corporate expenses, interest income, interest expense, other income and expenses and income taxes. Identifiable assets by geographic area are those assets that are used in the Company's operations in each such area. The Corporate Office assets are principally cash and equivalents and the prepaid pension asset. Depreciation and amortization, and capital expenditures for the Electronic Component Segment represented $16,516,000 and $22,180,000 respectively, of the total for 1997. Summarized financial information concerning the Company's business segments and geographic areas of operation for 1997, 1996 and 1995 is shown in the following table. The caption "Eliminations" includes intercompany sales and other transactions which are eliminated or adjusted in arriving at consolidated data. Geographic Area (In thousands) 1997 1996 1995 Net Sales Electronic Component Segment: United States: Sales to unaffiliated $155,288 $167,162 $179,640 customers (U.S.) Sales to unaffiliated customers (export) 69,491 26,312 14,376 Transfers to non-U.S. area 10,859 8,181 5,439 235,638 201,655 199,455 United Kingdom: Sales to unaffiliated customers 108,145 76,204 49,571 Transfers to other areas 1,165 730 732 109,310 76,934 50,303 Other non-U.S.: Sales to unaffiliated customers 57,678 51,619 56,570 Transfers to other areas 9,228 7,400 6,092 66,906 59,019 62,662 Other Segments: 24,549 Eliminations (21,252) (16,311) (12,263) Total net sales $415,151 $321,297 $300,157 Operating Earnings Electronic Component Segment: United States $22,119 $ 23,226 $ 22,204 United Kingdom 20,452 10,192 6,483 Other non-U.S. 16,040 9,141 6,345 58,611 42,559 35,032 Other Segments: 1,835 Eliminations (14) (72) 140 60,432 42,487 35,172 General corporate expenses 25,284 9,067 7,684 Other(expense)income-net (51) 182 196 Earnings before income taxes $35,097 $ 33,602 $ 27,684 Assets Apportioned by Area Electronic Component Segment: United States $94,628 $88,189 $87,862 United Kingdom 36,190 36,037 24,718 Other non-U.S. 55,126 47,689 49,848 185,944 171,915 162,428 Other Segments: 48,834 Eliminations (7,276) (4,672) (3,783) 227,502 167,243 158,645 Corporate assets 102,079 82,129 68,482 Total assets $329,581 $249,372 $227,127 NOTE I - Capital Stock On October 16, 1997, CTS shareholders approved an amendment to the Company bylaws which increased authorized capitalization from 24,000,000 to 75,000,000 common shares, without par value, and 25,000,000 preferred shares, without par value. CTS shareholders also approved a 3-for-1 stock split in the form of a stock dividend to CTS shareholders of record on October 24, 1997. Under the split, CTS common shareholders received a stock dividend of two CTS shares for each CTS share held. All shares outstanding and per share amounts have been restated to reflect the stock split. NOTE J - Treasury Stock Common stock held in treasury at December 31, 1997, totaled 8,873,056 shares with a value of $218,983,000 compared to 1,746,225 shares with a value of $12,793,000 at December 31, 1996. The increase results primarily from the purchase of 6,909,300 shares of CTS common stock previously owned by DCA for $196,728,000 in connection with the merger. The Company also repurchased 332,523 shares with a value of approximately $10,121,000 during 1997, primarily during the fourth quarter. On October 16, 1997, the Company announced its intention to reinstitute its common stock repurchase plan whereby it may, from time to time, depending on market conditions and other factors, purchase its shares of common stock in open market or privately negotiated transactions. The remaining shares authorized for repurchase under the Board of Directors' authorization dated October 30, 1987, and amended on February 23, 1990, is approximately 1,200,000 shares. There can be no assurance as to the number of shares CTS may repurchase or the timing of such purchases. NOTE K - Contingencies Certain processes in the manufacture of the Company's current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. The Company has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. The factual circumstances of each site are different; the Company has determined that its role as a PRP with respect to these sites, even in the aggregate, will not have a material adverse effect on the Company's business or financial condition, based on the following: 1) the Company's status as a de minimis party; 2) the large number of other PRPs identified; 3) the identification and participation of many larger PRPs who are financially viable; 4) defenses concerning the nature and limited quantities of materials sent by the Company to certain of the sites; and/or 5) the Company's experience to-date in relation to the determination of its allocable share. In addition to these non-CTS sites, the Company has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against the Company with respect to other environmental matters. Accrued environmental costs as of December 31, 1997, totaled $5.9 million, compared with $4.8 million at December 31, 1996. In the opinion of management, based upon presently available information, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position or results of operations of the Company. Certain claims are pending against the Company with respect to matters arising out of the ordinary conduct of its business. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect the Company's consolidated financial position or results of operations. NOTE L - Earnings Per Share FASB Statement No. 128, "Earnings per Share", requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted EPS computations. The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and the diluted EPS for 1997, 1996 and 1995. The other dilutive securities of 74,094 at December 31, 1997, consisted primarily of shares of CTS common stock to be issued to DCA shareholders who have not yet tendered their DCA shares. Earnings Shares Per Share (Numerator) (Denominator) Amount 1997: Basic EPS $22,813,000 15,624,149 $1.46 Effect of Dilutive Securities: Stock Options 277,822 Other 74,094 Diluted EPS $22,813,000 15,976,065 $1.43 1996: Basic EPS $21,170,000 15,668,415 $1.35 Effect of Dilutive Securities: Stock Options 91,981 Other 5,550 Diluted EPS $21,170,000 15,765,946 $1.34 1995: Basic EPS $17,164,000 15,602,454 $1.10 Effect of Dilutive Securities: Stock Options 51,769 Other 1,800 Diluted EPS $17,164,000 15,656,023 $1.10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1995 - 1997) Liquidity and Capital Resources The table below highlights significant comparisons and ratios related to liquidity and capital resources of CTS Corporation (CTS or Company) for each of the last three years. (In thousands) December 31 December 31 December 31 1997 1996 1995 Net cash provided by (used in): Operating activities $58,882 $35,103 $26,861 Investing activities (90,798) (16,388) (10,945) Financing activities 27,298 (12,324) (3,796) Cash and equivalents $39,847 $44,957 $37,271 Accounts receivable, net 68,679 43,984 41,737 Inventories, net 56,007 38,761 38,885 Current assets 185,733 138,201 126,113 Notes payable 6,685 Accounts payable 28,200 17,146 15,605 Accrued liabilities 58,687 31,818 26,461 Current liabilities 92,352 51,391 50,962 Working capital 93,381 86,810 75,151 Current ratio 2.01 2.69 2.47 Interest-bearing debt $61,206 $13,428 $22,267 Net tangible worth 146,320 162,193 141,650 Ratio of interest-bearing debt to net tangible worth .42 .08 .16 The 1997 positive cash flow from operating activities of $58.9 million, an improvement of $23.8 million, or 68% over 1996, was primarily a result of the substantial reduction in inventories of $10.1 million, excluding impacts of the DCA acquisition, and the higher operating earnings after giving consideration to the noncash transaction-related compensation charge of $16.2 million. During 1996, $35.1 million of positive cash flow was generated from operating activities. This amount, which exceeded 1995 by 31%, or $8.2 million, was primarily a result of the higher level of earnings and improved management of working capital, particularly accounts receivable. The 1995 cash flow from operating activities of $26.9 million improved by $14.3 million from 1994, primarily as a result of higher net earnings and reduction in inventories, partially offset by an increase in accounts receivable. Cash expenditures for investing activities totaled $90.8 million in 1997, primarily as a result of the purchase of the DCA operating assets. The Company completed the acquisition of DCA, including the reacquisition of 6,909,300 shares of CTS common stock owned by DCA, in October 1997. The total purchase price of $237 million included total cash expended in connection with the merger of $71 million. In addition, CTS issued $152 million of common stock in exchange for all of the outstanding common stock of DCA. Of the total cash consideration, $50 million was obtained from an unsecured six-year amortizing term loan. The Company is continuing the process of finalizing its integration of DCA and expects to complete the integration within one year. It is not expected that the integration will involve significant additional expenditures. Capital expenditures were $22.4 million in 1997, an increase of 30% from 1996. Spending of cash for investing activities in 1996 and 1995 was $16.4 million and $10.9 million, respectively, principally for capital expenditures. Investment activities during the last three years include capital expenditures, which totaled $22.4 million in 1997, $17.2 million in 1996 and $11.2 million in 1995. During 1997, major capital additions included capacity expansions in certain key product lines and expenditures for new product production equipment. The major capital expenditures in 1996 were for new products and product line enhancements. Also during 1996, as in 1995, capacity increases were required in our automotive and European interconnect product lines. The Company expects to increase its capital expenditures in 1998 over 1997 levels. These capital expenditures will be primarily for new products and cost reduction programs, as well as selected manufacturing equipment capacity expansion. Financing activities during 1997 generated $27.3 million and related primarily to the Company's $50.0 million term loan in connection with the acquisition of DCA, partially reduced by purchases of treasury stock of $10.1 million and payments of long-term obligations of $8.7 million. During 1996, total financing activities amounted to $12.3 million and resulted primarily from the elective repayment of debt. In terms of 1995 financing activities, the impact of the notes payable reduction was $5.3 million from the prior year. A significant noncash component and a decreasing component of operating earnings during the 1995 to 1997 period was pension income of $6.2 million, $5.4 million and $5.3 million in 1997, 1996 and 1995, respectively. The 1997 pension income amount was slightly higher than in prior years, primarily as a result of the increasing asset base and the current year amortization effect of recent favorable investment returns in excess of actuarial return assumptions. As a result of the Company's overfunded pension position, no overall cash contributions are anticipated to be required in the immediate future to meet the Company's pension obligations. During 1997, a long-term Credit Agreement was finalized consisting of an unsecured six-year amortizing term loan of $50.0 million and an unsecured six-year revolving credit facility of $75.0 million. On June 16, 1997, the Company borrowed $50.0 million under the term loan portion of the Credit Agreement which was used to finance the purchase of 1.2 million DCA shares. As of December 31, 1997, $50.0 million remains outstanding on this loan. Dividends paid were $3.8 million in 1997, $3.4 million in 1996 and $3.1 million in 1995. During 1996, as a result of continuing improved earnings performance and positive cash flow, the Company increased its quarterly dividend to $.06 per share (on a post-split basis), effective with the August payment. At the end of each of the last three years, cash of various non-U.S. subsidiaries was invested in U.S.-denominated cash equivalents. Such cash is generally available to the parent Company. No provision for U.S. income taxes or withholding taxes on the undistributed earnings at December 31, 1997, has been made because prior year earnings are indefinitely reinvested in the subsidiaries. If all non-U.S. earnings were repatriated, approximately $5.3 million of withholding taxes would accrue and substantially be offset by foreign tax credits. Under the Company's common stock repurchase plan, CTS repurchased shares with a cost of $10.1 million during the fourth quarter of 1997. Refer to Note J--Treasury Stock, for a description of the Company's repurchase plan. The Company's credit vehicles, together with cash from opera- tions, should adequately fund the Company's future cash needs. Results of Operations The following table highlights significant information with regard to the Company's results of operations during the past three fiscal years. (In thousands) December 31 December 31 December 31 1997 1996 1995 Net sales $415,151 $321,297 $300,157 Gross earnings 115,622 87,496 74,804 Gross earnings as a percent of sales 27.9% 27.2% 24.9% Selling, general and administrative expenses $ 50,984 $ 43,333 $ 39,312 Selling, general and administrative expenses as a percent of sales 12.3% 13.5% 13.1% Transaction related compensation charge $ 16,200 Research and development expenses $ 13,290 $ 10,743 $ 8,004 Research and development expenses as a percent of sales 3.2% 3.3% 2.7% Operating earnings - before transaction-related compensation charge $ 51,348 $ 33,420 $ 27,488 Operating earnings - before transaction-related compensation charge as a percent of sales 12.4% 10.4% 9.1% Operating earnings - after transaction-related compensation charge $ 35,148 $33,420 $27,488 Operating earnings - after transaction-related compensation charges as a percent of sales 8.5% 10.4% 9.1% Interest expense(income), net $ 486 $ (432) $ 369 Earnings before income taxes 35,097 33,602 27,684 Income taxes 12,284 12,432 10,520 Income tax rate 35.0% 37.0% 38.0% Net sales for 1997 included $33.1 million from the DCA operating units for the period from October 17 through year-end, resulting in approximately a $.06 positive earnings per share contribution. Excluding the DCA sales, CTS sales increased by $60.8 million or 18.9% over 1996. This growth to record levels was primarily in our automotive and computer equipment products sold domestically and in Europe. Net sales for 1996 increased by $21.1 million, or 7.0% over 1995, principally due to the increased demand in the domestic and European automotive, computer equipment and communications equipment markets. The 1995 net sales increased $31.5 million, or 11.7% over 1994, primarily due to broad increases in demand for electronic component products into our automotive, computer equipment and communications equipment markets. As a percent of total annual sales, during the three-year period of 1995-1997, sales to the automotive market decreased from 36% to 29% while our sales into the computer equipment market increased from 22% to 31% as a percent of total sales. Sales to other markets have generally remained constant. The Company's 15 largest customers represented approximately 65% of net sales in 1997, 62% in 1996 and 61% in 1995. One customer, a major manufacturer of automobiles, comprised 12.0% of net sales in 1997 as compared to 15.3% in 1996 and 18.3% in 1995. Two other customers within the computer equipment industry individually comprised 11.5% and 10.4% of net sales in 1997, compared to 7.5% and 3.5% in 1996, and 3.6% and 0.1% in 1995. Because most of CTS' revenues are derived from the sale of custom products, the relative contribution to revenues of changes in unit volume cannot be meaningfully determined. The Company's products are usually priced with reference to expected or required profit margins, customer expectations and market competition. Pricing for most of the Company's electronic component products frequently decreases over time and also fluctuates in accordance with total industry utilization of manufacturing capacity. In 1997, 1996 and 1995, improvements in gross earnings were realized over each of the preceding years in absolute terms and as a percent of sales, principally due to higher sales volume, production efficiencies and higher absorption of fixed manufacturing overhead expenses, as well as overall expense control. Selling, general and administrative expenses as a percent of sales have remained relatively constant over the last three years, ranging from 12.3% to 13.5%. In 1997, as in previous years, the Company continued to control these expenses while increasing sales. During 1997, research and development expenses increased by $2.5 million, or 24% over 1996, though remaining relatively constant as a percent of sales as the Company continued to invest in new products and product improvements. As in recent years, a substantial portion of the research and development efforts were devoted to additional products and product enhancements within our automotive, resistor network and frequency control products. During 1996, research and development expenses increased by $2.7 million, or 34% over 1995, as the Company continued investment efforts in new product development and product improvements, particularly in automotive, frequency control and hybrid microcircuit products. Research and development expenses increased by $1.8 million, or 29%, in 1995 over 1994, with much of the additional effort devoted to the Hall effect non-contacting sensor development for our automotive products, as well as other new product development programs in the automotive and the resistor network product areas. Excluding the nonrecurring compensation charge of $16.2 million related to the acquisition, operating earnings increased by $17.9 million, or 54% over 1996. Contributing to this substantial earnings increase was the overall volume increase, operating improvements and continued expense control. Earnings improvements were realized in all of our major product lines. During 1996 and 1995, the primary reasons for the substantial operating earnings improvement include the higher overall sales and related productivity in our automotive, resistor network and interconnect products, and the reduction of losses from our frequency control products. These improvements substantially offset losses from our defense and aerospace products, caused primarily by the declining market conditions. The 1997 effective tax rate of 35% was lower than the 1996 tax rate of 37%, principally due to the utilization of net operating loss carryforwards in non-U.S. jurisdictions. The Company has remaining net operating loss carryforwards of approximately $10.1 million in certain non-U.S. subsidiaries, and has established a 100% valuation reserve on these amounts based upon economic and political uncertainties, as well as historical pretax losses. In terms of environmental issues, the Company has been notified by the U.S. Environmental Protection Agency, as well as state agencies and generator groups, that it is or may be a Potentially Responsible Party regarding hazardous waste remediation at non-CTS sites. Additionally, the Company provides reserves for probable remediation activities at certain of its manufacturing locations. These issues are discussed in Note K - Contingencies. The Company recognizes the need to ensure that its operations will not be adversely impacted by YEAR 2000 software failures. The Company is addressing the integrity and reliability of its operational systems. Corporate management is directly involved in identification, audit and timely implementation of solutions to all YEAR 2000 issues. In this regard, the Company has recently upgraded some of its enterprise software. Additional enterprise systems upgrades are planned or in process, and along with addressing other non-enterprise YEAR 2000 issues, the Company does not expect to be materially impacted by the YEAR 2000 issue. EXHIBIT 27 EX-27 3
5 0000026058 CTS CORPORATION 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 39,847 0 69,753 1,074 56,007 185,733 206,934 130,907 329,581 92,352 0 0 0 186,794 (39,298) 329,581 415,151 415,151 299,529 380,003 (2,832) 0 2,883 35,097 12,284 22,813 0 0 0 22,813 1.46 1.43
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