-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, bTe6hzl0CuDS0ojMlpJMLYBX9I3CD3fK1UxTnazZstYes1poy+ErnmuJBnCPDPRV zPzVXrwdYj0HN2+4e9MR+Q== 0000026058-95-000002.txt : 19950615 0000026058-95-000002.hdr.sgml : 19950615 ACCESSION NUMBER: 0000026058-95-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04639 FILM NUMBER: 95521528 BUSINESS ADDRESS: STREET 1: 905 W BLVD N CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192937511 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For Fiscal Year Ended December 31, 1994 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number: 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 (State or other jurisdiction of (IRS Employer Identifi- incorporation or organization) cation Number) 905 West Boulevard North, Elkhart, Indiana 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 219-293-7511 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common stock, without par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant has: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X There were 5,193,854 shares of Common Stock, without par value, outstanding on March 10, 1995. The aggregate market value of the voting stock held by non-affiliates of CTS Corporation was approximately $80 million on March 10, 1995. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the CTS Corporation 1994 Annual Report for the fiscal year ended December 31, 1994, incorporated by reference in Part I and Part II. (2) Portions of the 1995 Proxy Statement for annual meeting of stockholders to be held on April 28, 1995, incorporated by reference in Part III. (3) Certain portions of the CTS Corporation Form 10-K for the 1987 fiscal year ended January 3, 1988, incorporated by reference in Part IV. (4) Certain portions of Registration Statement No. 33-27749, effective March 23, 1989, incorporated by reference in Part IV. (5) Certain portions of the 1989 Proxy Statement for annual meeting of stockholders held April 28, 1989, incorporated by reference in Part IV. (6) Certain portions of the CTS Corporation Form 10-K for the 1989 fiscal year ended December 31, 1989, incorporated by reference in Part IV. (7) Certain portions of the CTS Corporation Form 10-K for the 1991 fiscal year ended December 31, 1991, incorporated by reference in Part IV. (8) Certain portions of the CTS Corporation Form 10-K for the 1992 fiscal year ended December 31, 1992, incorporated by reference in Part IV. EXHIBIT INDEX -- PAGES 17 AND 18 Part I Item 1. Business INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS The registrant, CTS Corporation (CTS or Company), is an Indiana corporation incorporated in 1929 as a successor to a company started in 1896. CTS' principal executive offices are located at 905 West Boulevard North, Elkhart, Indiana 46514, telephone number (219) 293-7511. CTS designs, manufactures and sells electronic components. The engineering and manufacturing of CTS products is performed at 16 facilities worldwide. CTS products are sold through sales engineers, sales representatives, agents and distributors. In March 1987, a settlement was announced between CTS and Dynamics Corporation of America (DCA), terminating the sale process of the Company and resolving all disputes between CTS and DCA. Subsequently, the United States Supreme Court held that the Control Share Acquisition Chapter of the Indiana Business Corporation Law was constitutional. As a result of the Court's decision, the issue of voting rights of 1,020,000 shares of CTS common stock acquired by DCA in 1986 was submitted to a vote of CTS stockholders at the 1987 annual meeting. The affirmative vote of the majority of all shares eligible to vote was necessary to grant voting rights. DCA was not eligible to vote on the issue. The stockholders voted not to grant voting rights to DCA on these shares. The Court's decision did not have an impact on the voting rights in additional shares of CTS common stock previously or subsequently acquired by DCA. In May 1988, the settlement agreement expired pursuant to its terms. At the end of 1994, DCA owned 2,222,100 shares (42.9%) of CTS common stock, including the 1,020,000 shares without voting rights. In January 1990, the Company formally announced the closing of its Switch Division located in Paso Robles, California. The Paso Robles manufacturing operations were relocated to the Company's facilities in Taiwan and Bentonville, Arkansas. During 1992, the Company completed the sale of the Paso Robles manufacturing plant and most of the associated real estate for $1.9 million. A pretax-tax gain of $0.9 was realized from the sale. The manufacturing operations for certain variable resistor and selector switch products, which formerly were performed in Elkhart, Indiana, were also transferred to Bentonville in 1990, to take advantage of any efficiencies to be gained in consolidating such operations in Bentonville. The buildings located in Elkhart which housed the plastics molding, and element production, were vacated, with these manufacturing operations being consolidated into the main Elkhart plant. CTS announced in July 1990 that its facility near Glasgow, Scotland, would be expanded in order to manufacture and sell additional electronic products in Europe. The total capital investment has been approximately $11 million as of December 31, 1994. Automotive throttle position sensors and precision and clock oscillators were added to the product lines already manufactured in Scotland. The decision to expand the Scottish facility was based on several factors, including the excellent business climate and skills base in Scotland and the anticipated full participation of the United Kingdom in the European Economic Community. The expansion of the Scotland facility represents a major effort by CTS to serve the large and rapidly growing European market on a direct basis. In November 1991, construction was completed on a 53,000 square foot manufacturing facility in Bangkok, Thailand. During 1992, the Company idled operations at this facility. During 1994, a three- year lease was finalized with an international computer peripheral manufacturer for this property. The annual rental amount is approximately U.S. $345,000. Also during 1991, the Company significantly reduced the operating activities at its Brownsville, Texas, facility and plans to sell this property. A portion of the Brownsville facility is currently under a leasing arrangement which expires in 1999, at an annual rental amount of approximately $60,000. The manufacturing space owned by CTS in Hong Kong, which consisted of two floors in a multi-story building, was sold in March 1991. One floor was leased back by CTS for the continuation of its manufacturing operations in Hong Kong. During 1992, the Company terminated this lease and discontinued its manufacturing operations in Hong Kong. During 1994, the Company purchased the assets of AT&T Microelectronics' light emitting diode based optic data link products business. The transaction also included sales contracts, backlog, intellectual property, trademarks, and the design and manufacturing technology. These products will be manufactured in the Microelectronics West Lafayette, Indiana, facility. FINANCIAL INFORMATION ON INDUSTRY SEGMENTS All of the Company's products are considered one industry segment. Sales to unaffiliated customers, operating profit and identifiable assets, by geographic area, are contained in "Note I - Business Segment and Non-U.S. Operations," pages 21-23, of the CTS Corporation 1994 Annual Report, and is incorporated herein by reference. PRINCIPAL BUSINESS AND PRODUCTS OF CTS CTS is primarily in the business of developing, manufacturing and selling a broad line of electronic components principally serving the electronic needs of original equipment manufacturers (OEMs). The Company sells classes of similar products consisting of the following: Automotive control devices Loudspeakers Electronic connectors Programmable switches Frequency control devices Resistor networks Hybrid microcircuits Selector switches Industrial electronics Variable resistors Most products within these product classes are manufactured by CTS from purchased raw materials or subassemblies. Some products sold by CTS are purchased and resold under the Company's name. During the past three years, five classes of similar product lines accounted for 10% or more of consolidated revenue during one or more years, as follows: Percent of Consolidated Revenue Class of Similar Products 1994 1993 1992 Automotive Control Devices 30 26 20 Electronic Connectors 17 14 17 Frequency Control Devices 15 15 17 Resistor Networks 11 14 16 Hybrid Microcircuits 10 14 11 Other 17 17 19 Total 100% 100% 100% MARKETS CTS estimates that its products have been sold in the following segments of the electronics OEM and distribution markets and in the following percentages during the preceding three fiscal years: Percent of Consolidated Revenue Markets 1994 1993 1992 Automotive 38 32 25 Data Processing 17 22 20 Communications Equipment 17 17 18 Defense and Aerospace 11 12 17 Instruments and Controls 9 9 12 Distribution 5 4 5 Consumer Electronics 3 4 3 Total 100% 100% 100% Products for the automotive market include throttle position sensors, switch assemblies for operator interface, exhaust gas recirculation subsystems, variable resistors and switches for automotive entertainment systems and other applications, and loudspeakers. Products for the data processing market include resistor networks, frequency control devices, programmable switches and hybrid microcircuits. Products for this market are principally used in computers and computer peripheral equipment. In the communications equipment market, CTS products include frequency control devices, hybrid microcircuits, switches and resistor networks. Products for this market are principally used in telephone equipment and in telephone switching systems. CTS products for the defense and aerospace market, usually procured through government contractors or subcontractors, are electronic connectors, hybrid microcircuits, backpanels, frequency control devices and programmable key storage devices. Products for the instruments and controls market include hybrid microcircuits, variable resistors and switches. Principal end uses are medical electronic devices and electronic testing, measuring and servicing instruments. In the distribution market, CTS' primary products include program- mable switches, resistor networks and frequency control devices. In this market, standard CTS products are sold for a wide variety of applications. Products for the consumer electronics market, primarily variable resistors and switches, are principally used in home entertainment equipment and appliances. MARKETING AND DISTRIBUTION Sales of CTS electronic components to original equipment manufacturers are principally by CTS sales engineers and manufacturers' representatives. CTS maintains sales offices in Elkhart, Indiana; Detroit, Michigan; and in the United Kingdom, Hong Kong, Taiwan and Japan. Various regions of the United States are serviced by sales engineers working out of their homes. The sale of electronic components is relatively integrated such that most of the product lines of CTS are sold through the same field sales force. Approximately 40% of net sales in 1994 were attributable to coverage by CTS sales engineers. Generally, CTS sales engineers service the Company's largest customers with application specific products. CTS sales engineers work closely with major customers in determining customer require- ments and in designing CTS products to be provided to such customers. CTS uses the services of independent sales representatives and distributors in the United States and other countries for customers not serviced by CTS sales engineers. Sales representatives receive commissions from CTS. During 1994, about 55% of net sales were at- tributable to coverage by sales representatives. Independent distributors purchase products from CTS for resale to customers. In 1994, independent distributors accounted for about 5% of net sales. RAW MATERIALS Generally, CTS' major raw materials are steel, copper, brass, certain precious metals, resistive and conductive inks, passive components and semiconductors, used in several CTS products; ceramic materials used particularly in resistor networks and hybrid microcircuits; synthetic quartz used in frequency control devices; and laminate material used in printed circuit boards. These raw materials are purchased from several vendors, and except for certain semiconductors, CTS does not believe that it is dependent on one or on a very few vendors. In 1994, all of these materials were available in adequate quantities to meet CTS' production demands. The Company does not presently anticipate any raw material short- ages which would significantly affect production. However, the lead times between the placement of orders for certain raw mater- ials and actual delivery to CTS are quite variable, and the Company may from time to time be required to order raw materials in quantities and at prices less than optimal to compensate for the variability of lead times for delivery. Precious metals prices have a significant effect on the manufactur- ing cost and selling prices of many CTS products, particularly some programmable switches, electronic connectors and resistor networks. CTS has continuing programs to reduce the precious metals content of several products, when consistent with customer specifications. WORKING CAPITAL CTS does not usually buy inventories or manufacture products without actual or reasonably anticipated customer orders, except for some standard, off-the-shelf distributor products. The Company is not generally required to carry significant amounts of inven- tories to meet rapid delivery requirements because most customer orders are for custom products. CTS has entered into "just-in- time" arrangements with certain major customers in order to meet customers' just-in-time delivery needs. CTS carries raw materials, including certain semiconductors, and certain work-in-process and finished goods inventories which are unique to a particular customer or to a small number of customers, and in the event of reductions in or cancellations of orders, some inventories are not useable or cannot be returned to vendors for credit. CTS generally imposes charges for the reduction or cancellation of orders by customers, and these charges are usually sufficient to cover the financial exposure of CTS to inventories which are unique to a customer. CTS does not customarily grant special return privileges or payment privileges to customers, although CTS' distributor program permits certain returns. CTS' working capital requirements are generally cyclical but not seasonal. Working capital requirements are generally dependent on the overall business level. During 1994, working capital increased significantly to $65.9 million, as receivables and inventories increased in response to the greater sales. Also, short-term debt was reduced, generally being replaced by long-term obligations at relatively more favorable borrowing rates. 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, 1994. The cash, other than approximately $4.6 million, is generally available to the parent Company. PATENTS, TRADEMARKS AND LICENSES CTS maintains a program of obtaining and protecting U.S. and non- U.S. patents and trademarks. CTS believes that the success of its business is not materially dependent on the existence or duration of any patent, group of patents or trademarks. CTS licenses the manufacture of several electronic products to companies in the United States and non-U.S. countries. In 1994 license and royalty income was less than 1% of net sales. CTS believes that the success of its business is not materially dependent upon any licensing arrangement where CTS is either the licensor or licensee. MAJOR CUSTOMERS CTS' 15 largest customers represented about 62%, 62% and 58% of net sales in 1994, 1993 and 1992, respectively. Of the net sales to unaffiliated customers, approximately $49.4 million, $40.1 million and $30.7 million were derived from sales to General Motors Corporation in 1994, 1993 and 1992, respectively. During 1993 and 1992, $24.0 million and $19.3 million were derived from sales to International Business Machines Corporation. However, during 1994 sales to this customer decreased to $4.4 million. CTS is dependent upon these and other customers for a significant percentage of its sales and profits, and the loss of one or more of these customers or reduction of orders by one or more of these customers could have a materially adverse effect upon the Company. BACKLOG OF ORDERS Backlog of orders does not necessarily provide an accurate indica- tion of present or future business levels for CTS. For many electronic products, the period between receipt of orders and delivery is relatively short. For large orders from major customers that may constitute backlog over an extended period of time, production scheduling and delivery are subject to change or cancellation by the customers on relatively short notice. At the end of 1994, the Company's backlog of orders was $82.7 million, compared with $70.5 million at the end of 1993. This increase was primarily attributable to increased demand from automotive and microelectronics customers. The backlog of orders at the end of 1994 will generally be filled during the 1995 fiscal year. GOVERNMENT CONTRACTS CTS believes that about 11% of its net sales are associated with purchases by the U.S. Government or non-U.S. governments, principally for defense and aerospace applications. Because most CTS products procured through government contractors and subcontractors are for military end uses, the level of defense and aerospace market sales by CTS is dependent upon government budgeting and funding of programs utilizing electronic systems. Almost all CTS sales involving government purchases are to primary government contractors or subcontractors. CTS is usually subject to contract provisions permitting termination of the contract, usually with penalties payable by the government; maintenance of specified accounting procedures; limitations on and renegotiations of profits; priority production scheduling; and possible penalties or fines against CTS for late delivery or substandard quality. Such contract provisions have not previously resulted in material uncertainties or disruptions for CTS. COMPETITION CTS competes with many domestic and non-U.S. manufacturers prin- cipally on the basis of product features, price, engineering, quality, reliability, delivery and service. Most product lines of CTS encounter significant competition. The number of significant competitors varies from product line to product line. No single competitor competes with CTS in every product line, but many com- petitors are larger and more diversified than CTS. Some com- petitors are divisions or affiliates of customers. CTS is subject to competitive risks typical in the electronics industry such as shorter product life cycles and new products causing existing products to become obsolete. Some customers have reduced or plan to reduce the number of suppliers while increasing the volume of purchases from independent suppliers. Most customers are demanding higher quality, reliability and delivery standards from CTS as well as competitors. These trends may create opportunities for CTS while also increasing the risk of loss of business to competitors. The Company believes that it competes most successfully in custom products manufactured to meet specific applications of major original equipment manufacturers. CTS believes that it has some advantages over certain competitors because of its ability to apply a broad range of technologies and materials capabilities to develop products for the special require- ments of customers. CTS also believes that it has an advantage over some competitors in its capability to sell a broad range of products manufactured to relatively consistent standards of quality and delivery. CTS believes that the relative breadth of its product lines and relative consistency in quality and delivery across product lines is an advantage to CTS in selling products to customers. CTS believes that it is one of the largest manufacturers of automotive throttle position sensors. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Information about revenue from sales to unaffiliated customers, operating profit and identifiable assets, by geographic area, is contained in "Note I - Business Segment and Non-U.S. Operations," pages 21-23, of the CTS Corporation 1994 Annual Report, and is incorporated herein by reference. In 1994, approximately 34% of net sales to unaffiliated customers, after eliminations, were attributable to non-U.S. operations. This represents an increase from 28% of net sales attributable to non- U.S. operations in 1993. About 32% of total CTS assets, after eliminations, are non-U.S. Except for cash and equivalents, a substantial portion of these assets cannot readily be liquidated. CTS believes that the business risks attendant to its present non- U.S. operations, though substantial, are normal risks for non-U.S. businesses, including expropriation, currency controls and changes in currency exchange rates and government regulations. RESEARCH AND DEVELOPMENT ACTIVITIES In 1994, 1993 and 1992, CTS spent $7.1, $5.7 and $6.1 million, respectively, for research and development. Most CTS research and development activities relate to new product and process develop- ments or the improvement of product materials. Many such research and development activities are for the benefit of one or a limited number of customers or potential customers. During 1994, except for the purchase of the light emitting diode based optic data link products assets, the Company did not enter into any new, significant product lines, but continued to introduce additional versions of existing products in response to present and future customer requirements. ENVIRONMENTAL PROTECTION LAWS In complying with federal, state and local environmental protection laws, CTS has modified certain manufacturing processes and expects to continue to make additional modifications. Such modifications that have been performed have not materially affected the capital expenditures, earnings or competitive position of CTS. Certain processes in the manufacture of the Company's current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. The Company has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. The factual circumstances of each site are different; the Company has determined that its role as a PRP with respect to these sites, even in the aggregate, will not have a material adverse effect on the Company's business or financial condition, based on the following: 1) the Company's status as a de minimis party; 2) the large number of other PRPs identified; 3) the identification and participation of many larger PRPs who are financially viable; 4) defenses concerning the nature and limited quantities of materials sent by the Company to certain of the sites; and 5) the Company's experience to-date in relation to the determination of its allocable share. In addition to these non-CTS sites, the Company has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against the Company with respect to other environmental matters. In the opinion of management, based upon presently available information, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position or results of operations of the Company. There are claims against the Company with respect to environmental matters which the Company contests. In the opinion of management, based upon presently available information, either adequate provision for potential costs has been made, or the costs which ultimately might result will not materially affect the consolidated financial position or results of operations of the Company. EMPLOYEES CTS employed an average of 4,056 persons during 1994. About 45% of these persons were employed outside the United States at the end of 1994. Approximately 370 employees in the United States were covered by collective bargaining agreements as of December 31, 1994. One of the two collective bargaining agreements covering these employees will expire in 1995. The other agreement will expire in 1999. Item 2. Properties CTS operations or facilities are at the following locations. The owned properties are not subject to material liens or encumbrances. Location Elkhart, IN 521,813 Owned - Berne, IN 248,726 Owned - Singapore 158,926 Owned* - Kaohsiung, Taiwan 132,887 Owned* - Streetsville, Ontario, Canada 111,740 Owned - West Lafayette, IN 105,983 Owned - Sandwich, IL 94,173 Owned - Brownsville, TX 84,679 Owned - Bentonville, AR 72,000 Owned - Glasgow, Scotland 75,000 Owned - New Hope, MN 55,000 Leased December (Science Center Dr.) 1998 Bangkok, Thailand 53,000 Owned - Matamoros, Mexico 50,590 Owned* - Baldwin, WI 39,050 Owned - Cokato, MN 36,000 Owned - Burlington, WI 5,000 Leased March 1995 TOTAL 1,844,567 * Buildings are located on land leased under renewable leases. The Company is currently seeking to sell some, or all, of the Streetsville, Ontario, Canada, facility and related property, and the Brownsville, Texas, manufacturing building. A portion of the Brownsville facility is currently under a leasing arrangement which expires in 1999. The annual rental income is approximately $60,000. Also, a portion of the New Hope, Minnesota, facility is currently under a sublease arrangement, which expires in 1998. The annual rental income is approximately $88,400. The Company constructed the Bangkok, Thailand, facility during 1991. This facility was idled during 1992 and was idle for all of 1993. During 1994, the Company entered a three-year lease on this property at an annual rental amount of approximately U.S. $345,000. The Company regularly assesses the adequacy of its manufacturing facilities for manufacturing capacity, available labor and location to the markets and major customers for the Company's products. CTS also reviews the operating costs of its facilities and may from time to time relocate facilities or certain manufacturing activities in order to achieve operating cost reductions and improved asset utilization and cash flow. Item 3. Legal Proceedings Contested claims involving various matters, including environmental claims brought by government agencies, are being litigated by CTS, both in legal and administrative forums. In the opinion of management, based upon currently available information, adequate provision for potential costs has been made, or the costs which might ultimately result from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1994, no issue was submitted to a vote of CTS stockholders. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder 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 "Stockholder Information," page 10, of the CTS Corporation 1994 Annual Report, incorporated herein by reference. On March 10, 1995, there were approximately 1,120 holders of record of CTS common stock. The Company intends to continue a policy of considering dividends on a quarterly basis. The declaration of a dividend and the amount of any such dividend are subject to earnings, anticipated working capital, capital expenditure and other investment requirements, the financial condition of CTS and such other factors as the Board of Directors deems relevant. Item 6. Selected Financial Data A summary of selected financial data for CTS, for each of the previous five fiscal years, is contained in the "Five-Year Summary," page 11, of the CTS Corporation 1994 Annual Report, incorporated herein by reference. Certain divestitures and closures of businesses and certain accounting changes affect the comparability of information con- tained in the "Five-Year Summary." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information about liquidity, capital resources and results of operations, for the three previous fiscal years, is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations (1992-1994)," pages 25-27, of the CTS Corporation 1994 Annual Report, incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Consolidated financial statements, meeting the requirements of Regulation S-X, and the Report of Independent Accountants, are contained in pages 12-24 of the CTS Corporation 1994 Annual Report, incorporated herein by reference. Quarterly per share financial data is provided in "Stockholder Information," under the subheadings, "Quarterly Results of Operations" and "Per Share Data," on page 10 of the CTS Corporation 1994 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 1995 Proxy Statement under the caption "Election of Directors," page 6, filed with the Securities and Exchange Commission, and is incorporated herein by reference. Information responsive to Item 405 of Regulation S-K pertaining to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the 1995 Proxy Statement under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934," page 7, filed with the Securities and Exchange Commission, and is incorporated herein by reference. The individuals listed were elected as executive officers of CTS at the annual meeting of the Board of Directors on April 29, 1994, and are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled on April 28, 1995, at which time the election of officers will be considered again by the Board of Directors. Name Age Position and Offices Joseph P. Walker 56 Director, Chairman, President and Chief Executive Officer Philip T. Christ 63 Group Vice President Stanley J. Aris 54 Vice President Finance and Chief Financial Officer Jeannine M. Davis 46 Vice President, Secretary and General Counsel James L. Cummins 39 Vice President Human Resources George T. Newhart 52 Corporate Controller Gary N. Hoipkemier 40 Treasurer James N. Hufford 55 Vice President Research, Development and Engineering Donald R. Schroeder 46 Vice President Sales and Marketing Joseph P. Walker has served as Chairman of the Board, President and Chief Executive Officer of CTS since 1988. Mr. Walker is a Director of NBD Bank, N.A. Philip T. Christ has served as Group Vice President since 1990. Mr. Christ served as a Senior Vice President at Simplex Time Recorder from 1976-1986. Stanley J. Aris has served as Vice President, Finance and Chief Financial Officer since May 18, 1992. Prior to joining CTS, Mr. Aris worked for two years as a business consultant. From 1989 to 1990 Mr. Aris served as Vice President, Finance of Hypres Corporation. Jeannine M. Davis has served as Vice President, General Counsel and Secretary since 1988. Between 1980 and 1988, she served as legal counsel, Assistant Secretary, Assistant General Counsel and General Counsel of the Corporation. James L. Cummins was elected Vice President Human Resources on February 25, 1994. Prior to this appointment, he served as Director, Human Resources, CTS Corporation from 1991-1994. From 1990-1991, Mr. Cummins served as Human Resources Director, CTS Corporation Electromechanical Group and in 1991 was appointed Assistant Human Resources Director, CTS Corporation. George T. Newhart has served as Corporate Controller since 1989. Prior to joining the Company in June 1989, he was Chief Financial and Administrative Officer of the Chelsea Electronic Distribution Group from 1987-1989. Gary N. Hoipkemier has served as Treasurer since 1989. He served as Chief Financial Officer of Riblet Products Corporation from 1988-1989. James N. Hufford was elected Vice President Research, Development and Engineering on February 17, 1995. During the four years prior to this appointment, Mr. Hufford served as Manager and then Director of Corporate Research, Development and Engineering for the Corporation. From 1981 through 1991, Mr. Hufford held key engineering positions at the Corporation's Elkhart manufacturing facility. Donald R. Schroeder was elected Vice President Sales and Marketing on February 17, 1995. During the six years prior to this appointment, Mr. Schroeder served as Business Development Manager for innovative and new technology for the CTS Microelectronics business unit in West Lafayette, Indiana. Prior to 1989, Mr. Schroeder held several other management and marketing positions with various operating units of the Corporation. Item 11. Executive Compensation Information responsive to Item 402 of Regulation S-K pertaining to management remuneration is contained in the 1995 Proxy Statement in the captions "Executive Compensation," pages 8-9 and "Director Compensation," page 14, filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information responsive to Item 403 of Regulation S-K pertaining to security ownership of certain beneficial owners and management is contained in the 1995 Proxy Statement in the caption "Securities Beneficially Owned by Principal Stockholders and Management," pages 3-5 filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Dynamics Corporation of America (DCA) owned 2,222,100 (42.9%) of the Company's outstanding common stock as of December 31, 1994. CTS purchased products from DCA totalling about $233,000 in 1994, $145,000 in 1993 and $93,000 in 1992, principally consisting of certain component parts used by CTS in the manufacture of frequency control devices. CTS had minimal sales to DCA in 1994, and no sales in 1993 and 1992. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (2) The list of financial statements and financial statement schedules required by Item 14 (a)(1) and (2) is contained on page S-1 herein. (a)(3) Exhibits (3)(a) Articles of Incorporation, as amended April 16, 1973, previously filed as exhibit (3)(a) to the Company's Form 10-K for 1987, and incorporated herein by reference. (3)(b) Bylaws, as amended and effective June 25, 1992, previously filed as exhibit (3)(b) to the Company's Form 10-K for 1992, and incorporated herein by reference. (10)(a) Employment agreement dated June 24, 1994, between CTS and Joseph P. Walker, filed as exhibit (10)(a) to the Company's Form 10-K for 1994, and incorporated herein by reference. (10)(b) Prototype indemnification agreement, with Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., Andrew Lozyniak, Joseph P. Walker, Philip T. Christ, Stanley J. Aris, Jeannine M. Davis, James L. Cummins, George T. Newhart and Gary N. Hoipkemier, previously filed as exhibit (10)(b) to the Company's Form 10-K for 1991, and incorporated herein by reference. (10)(c) CTS Corporation 1982 Stock Option Plan, as amended February 24, 1989, was previously filed as exhibit (10)(d) to the Company's Form 10-K for 1989, and is incorporated herein by reference. (10)(d) CTS Corporation 1986 Stock Option Plan, approved by the stockholders at the reconvened annual meeting on May 30, 1986. The CTS Corporation 1986 Stock Option Plan is contained in Exhibit 4 to Registration Statement No. 33-27749, effective March 23, 1989, and is incorporated herein by reference. (10)(e) CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, as adopted by the CTS Board of Directors on December 16, 1988, and approved by stockholders at the 1989 annual meeting of stock- holders on April 28, 1989. The CTS Corporation 1988 Restricted Stock and Cash Bonus Plan is contained in Appendix A, pages 11-15, of the 1989 Proxy Statement for the annual meeting of stockholders held April 28, 1989, under the caption "CTS Corporation 1988 Restricted Stock and Cash Bonus Plan," previously filed with the Securities and Exchange Commission, and is incorporated herein by reference. (13) CTS Corporation 1994 Annual Report. (21) Subsidiaries of CTS Corporation. (23) Consent of Price Waterhouse to incorporation by reference of this Annual Report on Form 10-K for the fiscal year 1994 to Registration Statement 2- 84230 on Form S-8 and Registration Statement 33- 27749 on Form S-8. Indemnification Undertaking For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 2-84230 (filed June 13, 1983) and 33-27749 (filed March 23, 1989): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provision, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ANNUAL REPORT ON FOR 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, 1994 CTS CORPORATION AND SUBSIDIARIES ELKHART, INDIANA FORM 10-K - ITEM 14(a) (1) AND (2) 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, 1994, are incorpo- rated by reference in Item 8: Consolidated balance sheets - December 31, 1994, and December 31, 1993 Consolidated statements of earnings - Years ended December 31, 1994, December 31, 1993, and December 31, 1992 Consolidated statements of stockholders' equity - Years ended December 31, 1994, December 31, 1993, and Decem- ber 31, 1992 Consolidated statements of cash flows - Years ended December 31, 1994, December 31, 1993, and December 31, 1992 Notes to consolidated financial statements The following consolidated financial statement schedules of CTS Corporation and subsidiaries, are included in item 14(d): Page Schedule II - Valuation and qualifying accounts S-3 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are inapplicable, not required or the information is included in the consolidated financial state- ments or notes thereto. S-1 EXHIBIT 22 CTS CORPORATION AND SUBSIDIARIES CTS Corporation (Registrant), an Indiana corporation Subsidiaries CTS Corporation, a Delaware corporation CTS Singapore, Pte. Ltd., a Republic of Singapore corporation CTS of Panama, Inc., a Republic of Panama corporation CTS Components Taiwan, Ltd.,1 a Taiwan, Republic of China corporation CTS de Mexico S.A.,1 a Republic of Mexico corporation CTS Export Corporation, a Virgin Islands 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 Republic of Hong Kong corpora- tion CTS Corporation U.K. Ltd., a United Kingdom corporation CTS Printex, Inc., a California corporation CTS Micro Peripherals, Inc., a California corporation Micro Peripherals Singapore (Private) Limited, a Republic of Singapore corporation Corporations whose names are indented are subsidiaries of the preceding non-indented corporations. Except as indicated, each of the above subsidiaries is 100% owned by its parent company. Operations of all subsidiaries and divisions are consolidated in the financial statements filed. 1 Less than 1% of the outstanding shares of stock is owned of record by nominee shareholders pursuant to national laws regarding resident or nominee ownership. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date March 17, 1995 By /S/ Stanley J. Aris Stanley J. Aris Vice President Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date March 17, 1995 By /S/ Lawrence J. Ciancia Lawrence J. Ciancia, Director Date March 17, 1995 By /S/ Patrick J. Dorme Patrick J. Dorme, Director Date March 17, 1995 By /S/ Gerald H. Frieling, Jr. Gerald H. Frieling, Jr., Director Date March 17, 1995 By /S/ Andrew Lozyniak Andrew Lozyniak, Director Date March 17, 1995 By /S/ Joseph P. Walker Joseph P. Walker, Director Date March 17, 1995 By /S/ George T. Newhart George T. Newhart, Corporate Controller and principal accounting officer Date March 17, 1995 By /S/ Jeannine M. Davis Jeannine M. Davis, Vice President, Secretary and General Counsel 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 End of Period Year ended December 31, 1994: Allowance for doubtful receivables $ 709 $ 277 $ 0 $ 117 $ 869 Year ended December 31, 1993: Allowance for doubtful receivables $ 303 $ 521 $ 85 $ 200 $ 709 Year ended December 31, 1992: Allowance for doubtful receivables $ 420 $ 157 $ 7(a) $ 281(b) $ 303
(a) Recoveries. (b) Uncollectible accounts written off. S-3 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-84230 and No. 33- 27749) of CTS Corporation of our report dated February 2, 1995, appearing within the 1994 CTS Corporation Annual Report to Stockholders which is incorporated in the Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page S-2 of this Form 10-K. PRICE WATERHOUSE LLP South Bend, Indiana March 17, 1995 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of CTS Corporation Our audits of the consolidated financial statements referred to in our report dated February 2, 1995, appearing within the CTS Corporation 1994 Annual Report to Stockholders, (which report and consolidated financial statements are incorporated by reference in the Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP South Bend, Indiana February 2, 1995 EX-1 2 FINANCIAL HIGHLIGHTS (In thousands except per share data) For the Year 1994 1993 1992 Net sales $268,707 $236,979 $227,391 Net earnings 13,967 1,956 1,901 Average shares outstanding 5,170 5,153 5,142 Per share data: Earnings before accounting changes $ 2.70 $ 1.27 $ .37 Accounting changes (.89) Net earnings 2.70 .38 .37 Dividends declared .45 .40 .6625 Capital expenditures 13,401 11,696 8,831 At Year-End Working capital $ 65,875 $ 47,378 $ 50,114 Notes payable 7,436 12,822 5,827 Long-term obligations (including current maturities) 15,899 5,336 11,625 Stockholders' equity 131,855 119,203 119,372 Equity per outstanding share 25.46 23.13 23.18 STOCKHOLDER INFORMATION (In thousands of dollars except per share data) Quarterly Results of Operations Earnings Before Net Net Gross OperatingChanges inAccounting Earnings Sales Earnings EarningsAccounting Changes (Loss) 1994 1st quarter $ 64,357 $14,127 $ 3,560 $2,490 $2,490 2nd quarter 70,618 15,633 5,525 3,889 3,889 3rd quarter 65,950 13,667 4,368 3,031 3,031 4th quarter 67,782 13,432 7,231(a) 4,557(a) 4,557(a) $268,707 $56,859 $20,684 $13,967 $13,967 1993 1st quarter $ 60,439 $12,620 $2,579 $1,767 $(4,614) $(2,847) 2nd quarter 62,613 12,711 3,043 1,810 1,810 3rd quarter 58,107 10,285 2,189 1,063 1,063 4th quarter 55,820 11,728 3,210 1,930 1,930 $236,979 $47,344 $11,021 $6,570 $(4,614) $1,956 Per Share Data Earnings Before Net Dividends Changes inAccounting Earnings High(b) Low(b) Declared Accounting Changes (Loss) 1994 1st quarter $24.00 $19.50 $.10 $ .48 $.48 2nd quarter 26.13 21.88 .10 .75 .75 3rd quarter 29.13 24.63 .10 .59 .59 4th quarter 31.00 27.13 .15 .88 .88 $.45 $2.70 $2.70 1993 1st quarter $19.50 $17.25 $.10 $ .34 $(.89) $(.55) 2nd quarter 21.00 17.00 .10 .35 .35 3rd quarter 22.38 20.25 .10 .21 .21 4th quarter 22.00 19.13 .10 .37 .37 $.40 $1.27 $(.89) $ .38 (a) Includes reversal of $975 of litigation and customer claims reserves which were favorably settled. (b) The market price range of CTS Corporation common stock on the New York Stock Exchange for each of the quarters during the last two years. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars except per share amounts) Year Ended December 31 December 31 December 31 1994 1993 1992 Net sales $268,707 $236,979 $227,391 Cost of goods sold 211,848 189,635 186,290 Gross earnings 56,859 47,344 41,101 Selling, general and administrative expenses 36,175 36,323 37,855 (Gain) on sale of property and other related provisions--Note B (852) Operating earnings 20,684 11,021 4,098 Other (expenses) income: Interest expense (714) (980) (1,267) Interest income 657 580 656 Other 860 (361) 334 Total other income (expenses) 803 (761) (277) Earnings before income taxes and cumulative effect of changes in accounting principles 21,487 10,260 3,821 Income taxes--Note H 7,520 3,690 1,920 Earnings before cumulative effect of changes in accounting principles 13,967 6,570 1,901 Cumulative effect of accounting change - postretirement benefits --Notes A and G (5,096) Cumulative effect of accounting change - income taxes--Notes A and H 482 Net earnings $ 13,967 $ 1,956 $ 1,901 Net earnings per share: Before accounting changes $2.70 $1.27 $.37 Cumulative effect on prior years of accounting changes (.89) Net earnings per share $2.70 $.38 $.37 The accompanying notes are an integral part of the consolidated financial statements. (a) Includes research and development costs during 1994, 1993 and 1992 of $7,050, $5,708 and $6,092, respectively. Consolidated Statements of Stockholders' Equity (In thousands of dollars)
CumulativeDeferred Common RetainedTranslation Compen- Treasury Stock Earnings Adjustment sation Stock Total Balances at December 31, 1991 $34,472 $102,482 $1,294 $(172) $(15,591)$122,485 Net earnings 1,901 1,901 Cash dividends of $.6625 per share (3,410) (3,410) Issued 23,400 shares on exercise of stock options (204) 669 465 Nonemployee Directors' stock retirement plan 7 7 Currency translation adjustment (2,157) (2,157) Issued 3,600 shares net on restricted stock and cash bonus plan (23) (80) 103 Deferred compensation recognized 81 81 Balances at December 31, 1992 34,245 100,973 (863) (164) (14,819) 119,372 Net earnings 1,956 1,956 Cash dividends of $.40 per share (2,061) (2,061) Nonemployee Directors' stock retirement plan 8 8 Currency translation adjustment (186) (186) Issued 1,000 shares on restricted stock and cash bonus plan (9) (19) 28 Stock compensation (14) 45 31 Deferred compensation recognized 83 83 Balances at December 31, 1993 34,222 100,868 (1,049) (92) (14,746) 119,203 Net earnings 13,967 13,967 Cash dividends of $.45 per share (2,329) (2,329) Nonemployee Directors' stock retirement plan (4) 3 12 11 Currency translation adjustment 695 695 Issued 15,500 shares on restricted stock and cash bonus plan 51 (358) 307 Issued 8,650 shares on exercise of stock options (72) 248 176 Stock compensation 1 12 13 Deferred compensation recognized 119 119 Balances at December 31, 1994 $34,198 $112,506 $ (354) $(328) $(14,167)$131,855 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS December 31 December 31 (In thousands of dollars) 1994 1993 ASSETS Current Assets Cash and equivalents $ 24,922 $ 23,534 Accounts receivable, less allowances (1994--$869; 1993--$710) 35,029 30,627 Inventories Finished goods 5,725 5,064 Work-in-process 16,531 15,344 Raw materials 19,200 15,651 Total inventories 41,456 36,059 Other current assets 3,032 1,929 Deferred income taxes--Note H 6,228 5,117 Total current assets 110,667 97,266 Property, Plant and Equipment Buildings and land 41,945 40,669 Machinery and equipment 148,481 141,739 Total property, plant and equipment 190,426 182,408 Less accumulated depreciation 139,649 134,566 Net property, plant and equipment 50,777 47,842 Other Assets Goodwill, less accumulated amortization (1994--$7,010; 1993--$6,330) 5,221 5,801 Prepaid pension expense--Note G 39,408 32,845 Other 753 1,310 Total other assets 45,382 39,956 Total Assets $206,826 $185,064 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable--Note C $ 7,436 $ 12,822 Current maturities of long-term obligations 304 341 Accounts payable 12,768 11,611 Accrued salaries and wages 6,483 5,802 Accrued taxes other than income 1,577 1,823 Income taxes payable 2,288 1,406 Other accrued liabilities--Note K 13,936 16,083 Total current liabilities 44,792 49,888 Long-term Obligations--Note D 15,595 4,995 Deferred Income Taxes--Note H 9,222 5,329 Postretirement Benefits--Note G 5,362 5,649 Stockholders' Equity Common stock-authorized 8,000,000 shares without par value; issued 5,807,031 shares 33,870 34,130 Retained earnings 112,506 100,868 Cumulative translation adjustment (354) (1,049) 146,022 133,949 Less cost of common stock held in treasury (1994-- 628,427 shares; 1993--653,607 shares) 14,167 14,746 Total stockholders' equity 131,855 119,203 Total Liabilities and Stockholders' Equity $206,826 $185,064 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 1994 1993 1992 Cash flows from operating activities: Net earnings $13,967 $ 1,956 $ 1,901 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting for: Postretirement benefits 5,096 Income taxes (482) Depreciation and amortization 11,236 12,143 11,665 Deferred income taxes 2,519 767 303 Gain on sale of property, plant and equipment (20) (17) (944) Translation (gain) loss (523) 384 92 Deferred compensation 122 91 88 Provision for disposition of operations 621 Change in assets and liabilities (net of effects of purchase of ODL)--Note B: Accounts receivable (4,402) (2,747) 2,473 Inventories (3,297) 1,163 3,442 Prepaid pension asset (6,563) (5,986) (4,907) Accounts payable and accrued liabilities (38) 1,627 2,258 Income taxes payable 882 1,629 (2,040) Other (1,328) 1,941 (2,114) Total adjustments (1,412) 15,609 10,937 Net cash provided by operating activities 12,555 17,565 12,838 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 411 998 1,401 Capital expenditures (excluding ODL) (10,000) (11,696) (8,831) Payment for purchase of ODL (5,501) Other 129 Net cash used in investing activities (15,090) (10,698) (7,301) Cash flows from financing activities: Proceeds from issuance of long-term obligations 15,000 2,938 Payments of long-term obligations (4,479) (6,179) (2,348) (Decrease) increase in notes payable (6,050) 6,898 (2,319) Stock options exercised 176 465 Dividends paid (2,067) (2,061) (3,857) Net cash provided by (used in) financing activities 2,580 (1,342) (5,121) Effect of exchange rate changes on cash 1,343 (446) (92) Net increase in cash 1,388 5,079 324 Cash at beginning of year 23,534 18,455 18,131 Cash at end of year $24,922 $23,534 $18,455 Supplemental cash flow information Cash paid during the year for: Interest $ 658 $ 1,076 $ 1,206 Income taxes - net 4,009 1,294 2,819 The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries. All intercompany accounts and transactions have been eliminated. Inventories: Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first- out method. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets principally on the straight-line method. Goodwill: The excess of cost over the fair value of net assets of businesses acquired is amortized on the straight-line method over the periods expected to be benefited. Retirement Plans: The Company has various defined benefit and defined contribution retirement plans covering a majority of its employees. The Company's policy is to annually fund the defined benefit pension plans at or above the minimums required under the Employee Retirement Income Security Act of 1974 (ERISA). Research and Development: Research and development costs, included in cost of sales, consist of expenditures incurred during the course of planned search and investigation aimed at discovery of new knowledge which will be useful in developing new products or processes, or significantly enhancing existing products or production processes, and the implementation of such through design, testing of product alternatives or construction of prototypes. The Company expenses all research and development costs as they are incurred. Income Taxes: The Company provides deferred income taxes for transactions reported in different periods for financial reporting and income tax return purposes pursuant to the requirements of Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes." The underlying differences consist primarily of depreciation differences, pension income, postemployment benefits, certain nondeductible accruals and inventory reserves. Reclassifications: Certain reclassifications have been made for all years presented in the financial statements to conform to the classifications adopted in 1994. Translation of Foreign Currencies: The financial statements of all of the Company's non-U.S. subsidiaries, except the United NOTE A - Summary of Significant Accounting Policies (continued) Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all translation adjustments included in the determination of net income. The assets and liabilities of the Company's United Kingdom subsidiary are translated into U.S. dollars principally at the current exchange rate with resulting translation adjustments made directly to the "Cumulative translation adjustment" component of stockholders' equity. Income statement 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, 1994, and 1993 approximates fair value where fair value is based on market prices for the same or similar debt and maturities. At December 31, 1994, the Company had forward foreign exchange currency contracts for the sale of various currencies aggregating $5 million. The cost of these contracts approximates fair value. The Company occasionally uses forward exchange currency contracts to minimize the impact of foreign currency fluctuations on the Company's costs and expenses. These contracts have minimal credit risk because the counterparties are well-established financial institutions. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. Concentration of Credit Risk: The Company sells its products to customers primarily in the automotive, data processing, communications equipment and defense and aerospace industries, primarily in North America, Europe and the Pacific Rim. The Company performs ongoing credit evaluations of its customers to minimize credit risk. The Company generally does not require collateral. Accounting Changes: Effective January 1, 1993, the Company adopted the provisions of FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and FASB Statement No. 109, "Accounting for Income Taxes." For postretirement benefits, the Company changed its practice from expensing these costs as incurred to accruing these costs during NOTE A - Summary of Significant Accounting Policies (continued) the employees' active working careers. For income taxes, the Company changed its practice from following FASB Statement No. 96, of the same title, which required a similar approach in computing deferred income taxes. The primary change was to recognize deferred tax benefits that were not recognized under FASB Statement No. 96. Earnings Per Share: Earnings per common share are based on the weighted average number of shares outstanding. NOTE B - Purchase of Assets, Sale of Property and Other Related Provisions During 1994, the Company acquired, in a cash transaction, inventory and fixed assets of the Light Emitting Diode (LED)-- based Fiber Optic Data Link (ODL) product line of AT&T Microelectronics for $5.5 million. The cost of the acquisition, which also included order backlog on sales contracts, rights to intellectual property, design and manufacturing technology and trademark of the AT&T Lightwave LED-based ODL business, was allocated among the assets purchased based on estimated fair value, with fixed assets being reduced for the excess of fair value over cost. During 1992, the Company sold the assets of its tool, die and machinery business recognizing a pretax gain of $587,000. Also, during 1992, the Company sold its Paso Robles, California, manufacturing plant and most of the associated real estate and recognized a net pretax gain of $886,000. Additionally, during 1992, the Company incurred $621,000 of expense to close its remaining Hong Kong manufacturing operations. NOTE C - Short-term Borrowings Short-term borrowings consist of demand notes payable to various banks with an average interest rate of 6.6% at December 31, 1994, 4.4% at December 31, 1993, and 4.8% at December 31, 1992. The notes were issued in connection with unsecured lines of credit arrangements, the unused portions of which totaled $7,544,000 at December 31, 1994. These arrangements are generally subject to annual renewal and renegotiation, and may be withdrawn at the banks' option. Average daily short-term borrowings, including borrowings denominated in non-U.S. currencies, during 1994, 1993 and 1992 were $11,776,000, $12,051,000 and $6,269,000, respectively. The weighted average interest rates, computed by relating interest expense to average daily short-term borrowings, were 5.5% in 1994, 4.3% in 1993 and 5.4% in 1992. The maximum amount of short-term borrowings at the end of any month during 1994, 1993 and 1992 was $12,977,000, $13,842,000 and $8,334,000, respectively. The short-term borrowings outstanding at December 31, 1992, were $5,827,000. NOTE D - Long-term Obligations Long-term obligations were comprised of the following: (In thousands) 1994 1993 Long-term debt: Five-year term loan at 8.38%, due in 1996 through 1999. $15,000 Revolving credit agreements, average interest rates of 6.2% in 1994 and 6.1% in 1993, due in 1996 and 1997 $3,959 Other 899 1,211 15,899 5,170 Less current maturities 304 341 Total long-term debt 15,595 4,829 Other 166 Total long-term obligations $15,595 $4,995 The Company has a five-year $15,000,000 term loan with three banks, of which $2,000,000 expires in 1996, $2,000,000 expires in 1997, $2,000,000 expires in 1998 and $9,000,000 expires in 1999. The Company has unsecured revolving credit agreements totaling $47,000,000 with four banks, of which $2,000,000 expires in 1996 and $45,000,000 expires in 1997. Interest rates on these borrowings fluctuate based upon market rates. The Company pays an average commitment fee of three-tenths percent per annum on the revolving credit agreements. The credit agreements and term loan require, among other things, that the Company maintain certain minimum working capital, total liabilities to tangible net worth, tangible net worth requirements and interest coverage. Annual maturities of long-term debt during the four years subsequent to 1995 are as follows: 1996--$2,203,000; 1997-- $2,196,000; 1998--$2,196,000; 1999--$9,000,000. NOTE E - Operating Leases The Company leases certain facilities and machinery and equipment under noncancelable operating leases which expire at various dates through 1999 and thereafter. Certain of these leases contain renewal options. All leases require the Company to pay property taxes, insurance and normal maintenance. Total minimum rental payments under all operating leases are not significant. NOTE F - Stock Plans Under the Company's stock option plans, options may be granted to officers and key employees in the form of incentive stock options or nonqualified stock options. Options are granted at the fair market value on the grant date and are exercisable generally in cumulative annual installments over a maximum ten-year period, commencing at least one year from the date of grant. Upon the exercise of stock options, payment may be made using cash, shares of the Company's common stock or any combination thereof. Information regarding the Company's stock option plans is as follows: Number of Price Shares Per Share Outstanding at January 1, 1993 59,750 $19.75 to $25.50 Granted 11,000 19.125 Expired or canceled (26,100) 19.75 to 25.50 Outstanding at December 31, 1993 44,650 19.125 to 20.625 Granted 57,000 24.75 Exercised (8,650) 19.125 to 20.625 Expired or canceled (7,000) 19.125 to 24.75 Outstanding at December 31, 1994 86,000 19.125 to 24.75 Exercisable at December 31, 1994 22,150 19.125 to 20.625 Available for future grants at December 31, 1994 199,739 The Company has a discretionary Restricted Stock and Cash Bonus Plan (Plan) which reserves 400,000 shares of the Company's common stock for sale, at market price or below, or award to key employees. Shares awarded or sold are subject to restrictions against transfer and repurchase rights of the Company. In general, restrictions lapse at the rate of 20% per year beginning one year from the award or sale. In addition, the Plan provides for a cash bonus to the participant equal to the fair market value of the shares on the dates restrictions lapse, in the case of an award, or the excess of the fair market value over the original purchase price if the shares were purchased. The total bonus paid to any participant during the restricted period is limited to twice the fair market value of the shares on the date of award or sale. Under the Plan, during 1994, 15,500 shares were awarded leaving 363,900 shares available for award or sale at December 31, 1994. In 1993, 1,000 shares were awarded. In 1992, 6,000 shares were awarded and 2,400 shares were forfeited due to terminations. In addition to the shares issued and the amortization of deferred NOTE F - Stock Plans (continued) compensation included in the Consolidated Statements of Stockholders' Equity, the Company accrued $212,000, $68,000 and $82,000 for additional compensation payable under the provisions of the Plan in 1994, 1993 and 1992, 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 $11,100, $7,900 and $7,000 in 1994, 1993 and 1992, respectively. NOTE G - Employee Retirement Plans Defined benefit plans The Company has a number of noncontributory defined benefit pension plans (Plans) covering approximately 40% of its employees. Plans covering salaried employees provide pension benefits that are based on the employees' compensation prior to retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. Net pension income for the Plans in 1994, 1993 and 1992 includes the following components: (In thousands) 1994 1993 1992 Service cost--benefits earned during the year $ 2,374 $ 2,143 $ 2,375 Interest cost on projected benefit obligation 4,769 4,632 4,670 Actual loss (return) on plan assets 2,565 (13,622) (13,667) Net amortization and deferral (16,271) 861 1,715 Net pension income $(6,563) $(5,986) $(4,907) The following table details the funded status of the Plans at December 31, 1994, and December 31, 1993: (In thousands) 1994 1993 Actuarial present value of benefit obligations: Vested benefits $ 58,224 $ 59,722 Nonvested benefits 2,461 2,610 Accumulated benefit obligation $ 60,685 $ 62,332 Plan assets at fair value $115,319 $121,966 Projected benefit obligation 66,775 67,282 Plan assets in excess of the projected benefit obligation 48,544 54,684 Unrecognized prior year service cost 212 351 Unrecognized net loss (gain) 3,672 (8,883) Unrecognized net asset (13,020) (13,307) Prepaid pension expense $ 39,408 $ 32,845 NOTE G - Employee Retirement Plans (continued) Assumptions used in determining net pension income and the funded status of U.S. defined benefit pension plans were as follows: 1994 1993 1992 Discount rates (funded status) 8.25% 7.25% 7.25% Rates of increase in compensation levels (salaried plan only) 5%-7% 5%-7% 5%-7% Expected long-term rate of return on assets 9% 10% 10% Net pension income is determined using assumptions as of the beginning of each year. Funded status is determined using assumptions as of the end of each year. Effective with the December 31, 1994, measurement date, the discount rate, expected long-term rate of return on assets and mortality assumptions were revised to reflect current market and demographic conditions. As a result of these changes, the December 31, 1994, projected benefit obligation decreased by $2.4 million. These changes had no effect on 1994 pension income, but will reduce 1995 pension income by $1.2 million. The majority of U.S. defined benefit pension plan assets are invested in common stock, including $5,526,000 in CTS common stock, U.S. government bonds and cash and equivalents. The balance is invested in corporate bonds, a private equity fund, non-U.S. bonds and convertible issues. Because the domestic plans are fully funded, the Company made no contributions during 1994, 1993 or 1992. Benefits paid by all Plans during 1994, 1993 and 1992 were $4,175,000, $4,289,000 and $3,900,000, respectively. Pension coverage for employees of certain non-U.S. subsidiaries is provided through separate plans. Contributions of $172,000, $174,000 and $223,000 were made to the non-U.S. Plans in 1994, 1993 and 1992, respectively. Defined contribution plans The Company sponsors a 401(k) Plan and several other defined contribution plans which cover some of its non-U.S. employees and its domestic hourly employees not covered by a defined benefit pension plan. Contributions and costs are generally determined as a percentage of the covered employee's annual salary. Amounts expensed for the 401(k) Plan and the other plans totaled $2,506,000 in 1994, $2,532,000 in 1993 and $1,998,000 in 1992. NOTE G - Employee Retirement Plans (continued) Postretirement health and life insurance plans In addition to providing pension benefits, the Company provides certain health care and life insurance programs for retired employees. Substantially all of the Company's domestic employees hired before December 31, 1993, become eligible for these benefits if they reach normal retirement age while working for the Company. Effective January 1, 1993, the Company implemented, on the immediate recognition basis, FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which resulted in a noncash charge of $5,096,000, net of an income tax benefit of $3,123,000, or $.99 per share. Summary information on the Company's plans as of December 31, 1994, and December 31, 1993, is as follows: (In thousands) 1994 1993 Accumulated postretirement benefit obligation: Active employees $(1,089) $(1,479) Retirees and dependents (3,589) (5,560) (4,678) (7,039) Unrecognized net gain (1,910) (187) Postretirement benefit obligation $(6,588) $(7,226) The accumulated postretirement benefit obligation was determined using relevant actuarial assumptions and the terms of the Company's medical, dental and life insurance plans, including the effects of capped Company contribution rates and discontinuance of Company payments toward retiree health and dental insurance effective January 1, 1996. The effect of a 1.0% annual increase in the assumed medical inflation rate of zero would be insignificant. Effective with the December 31, 1994, measurement date, the discount rate and mortality assumptions were revised to reflect current market and demographic conditions. As a result of these changes and favorable medical claims experience, the accumulated postretirement life obligation decreased by approximately $800,000 and the accumulated postretirement medical obligation decreased by approximately $700,000. The Company funds medical and dental costs as incurred and funds life insurance benefits through term life insurance policies. The Company plans to continue funding these benefits on a pay-as- you-go basis. The components of net periodic postretirement benefit expense for 1994 and 1993 are as follows: (In thousands) 1994 1993 Service cost--beneifts earned during period $ 43 $ 43 Interest cost on accumulated benefit obligation 511 637 Net expense $554 $680 NOTE H - Income Taxes Effective January 1, 1993, the Company adopted the provisions of FASB Statement No. 109, "Accounting for Income Taxes." FASB Statement No. 109 replaced FASB Statement No. 96, of the same title, which the Company previously used to account for income taxes. The effect of adopting FASB Statement No. 109 is to recognize deferred tax benefits that were not recognized under FASB Statement No. 96. The cumulative effect of the change in the method of accounting for income taxes as of the beginning of 1993 increased earnings by $482,000 or $.10 per share. Prior years' financial statements have not been restated to reflect the provisions of FASB Statement No. 109. The information disclosed for 1992 is computed under the requirements of FASB Statement No. 96. The components of earnings before income taxes and cumulative effect of changes in accounting principles are comprised of the following: (In thousands) 1994 1993 1992 Domestic $15,391 $ 8,965 $5,151 Non-U.S. 6,096 1,295 (1,330) Total $21,487 $10,260 $3,821 The provision for income taxes charged to earnings before cumulative effect of changes in accounting principles is comprised of the following: (In thousands) 1994 1993 1992 Current: Federal $1,998 $ 908 $ 292 State 604 375 207 Non-U.S. 2,367 2,124 1,115 Total current 4,969 3,407 1,614 Deferred: Federal 1,268 154 648 State 400 429 Non-U.S. 883 (300) (342) Total deferred 2,551 283 306 Total provision for income taxes $7,520 $3,690 $1,920 NOTE H - Income Taxes (continued) Significant components of the Company's deferred tax liabilities and assets at December 31, 1994, and 1993, are: (In thousands) 1994 1993 Depreciation $ 913 $ 270 Pensions 13,396 11,176 Other 2,192 1,013 Gross deferred tax liabilities 16,501 12,459 Postemployment benefits 2,240 2,513 Inventory reserves 2,778 1,777 Loss carryforwards 6,575 8,119 Credit carryforwards 5,705 3,764 Nondeductible accruals 3,013 3,064 Other 425 802 Gross deferred tax assets 20,736 20,039 Net deferred tax assets 4,235 7,580 Deferred tax assets valuation allowance (7,229) (8,023) Total $ (2,994) $ (443) During 1994, the valuation allowance was increased as a result of an increase in unutilized net operating loss carryforwards in some taxing jurisdictions and decreased by the utilization of net operating losses in other jurisdictions. The net decrease in the valuation allowance was $794,000. A reconciliation of the Company's effective income tax to the statutory federal income tax follows: (In thousands) 1994 1993 1992 Taxes at the U.S. statutory rate $ 7,306 $ 3,488 $1,299 State income taxes, net of federal income tax benefit 663 531 176 Non-U.S. income taxed at rates different than the U.S. statutory rate 1,639 1,494 1,511 Utilization of net operating loss carryforwards and benefit of scheduled tax credits (2,544) (1,842) (1,751) Alternative Minimum Tax 711 Other 456 19 (26) Provision for income taxes $ 7,520 $ 3,690 $1,920 NOTE H - Income Taxes (continued) Undistributed earnings of certain non-U.S. subsidiaries amounting to $40,741,000 at December 31, 1994, are intended to be permanently invested and accordingly, no provision has been made for non-U.S. withholding taxes on these earnings. In the event all undistributed earnings were remitted, approximately $4,602,000 of withholding tax would be imposed. The Company has U.S. tax basis net operating loss carryforwards and business tax credits of approximately $4,297,000 and $2,933,000, respectively, at December 31, 1994. All of the U.S. net operating losses and business credit carryforwards expire between the years 2001 and 2006. In addition, the Company has various non-U.S. tax basis net operating losses and business credit carryforwards of $18,673,000 and $25,000, respectively. A portion, $2,496,000, of the non-U.S. net operating loss and $25,000 of the business credit carryforwards expire in 1997. The remainder of the net operating loss carryforwards has an unlimited carryforward period. In addition, the Company has alternative minimum tax credit carryforwards of approximately $2,747,000, which have no expiration date. NOTE I - Business Segment and Non-U.S. Operations The Company's operations comprise one business segment, the manufacturing of electronic components. Electronic components include production and sale of resistor networks, variable resistors, frequency control devices, electronic connectors, hybrid microcircuits, automotive control devices, switches, loudspeakers and industrial electronics. Sales to a major automotive manufacturer were $49,400,000 in 1994, $40,100,000 in 1993 and $30,700,000 in 1992. Although sales to a major computer manufacturer were only $4,400,000 in 1994, sales to the same customer were significantly higher in 1993 at $24,000,000 and in 1992, were $19,300,000. The non-U.S. operations or facilities are located in Taiwan, Singapore, Hong Kong, Thailand, United Kingdom, Canada and Mexico. Net sales to unaffiliated customers from other non-U.S. operations in the aggregate equaled 18%, 16% and 14% of the consolidated total for each of the years 1994, 1993 and 1992, respectively. Net sales to unaffiliated customers from the United Kingdom operation equaled 16%, 12% and 10% of the consolidated total for 1994, 1993 and 1992, respectively. Net assets of subsidiaries located in non-U.S. countries as of December 31, 1994, and December 31, 1993, are summarized as follows: (In thousands) 1994 1993 Net current assets $23,751 $19,910 Property, plant and equipment--net 23,342 23,899 Goodwill and other long-term assets 2,331 2,304 Long-term obligations (586) (4,699) Deferred income taxes (1,485) (174) Total net assets of non-U.S. subsidiaries $47,353 $41,240 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 profit is total revenue less operating expenses. In computing operating profit, none of the following items have been added or deducted: general corporate expenses, interest expense, other income and expenses and income taxes. Identifiable assets by geographic area are those assets that are used in the Company's operations in each such area. The Corporate Office assets are principally property and equipment and other noncurrent assets. Summarized financial information concerning the geographic areas of operation for 1994, 1993 and 1992 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. NOTE I - Business Segment and Non-U.S. Operations (continued) Geographic Area (In thousands) 1994 1993 1992 Net Sales Domestic: Sales to unaffiliated customers $178,032 $170,566 $172,646 Transfers to non-U.S. area 4,179 4,484 4,469 182,211 175,050 177,115 Other Non-U.S.: Sales to unaffiliated customers 47,896 37,868 32,743 Transfers to domestic area 7,168 10,397 15,703 55,064 48,265 48,446 United Kingdom: Sales to unaffiliated customers 42,779 28,545 22,002 Transfers to domestic area 514 149 388 43,293 28,694 22,390 Eliminations (11,861) (15,030) (20,560) Total net sales $268,707 $236,979 $227,391 Operating Profit Domestic $ 18,109 $ 12,060 $ 8,237 Other Non-U.S. 3,708 4,476 2,860 United Kingdom 4,569 910 (1,313) (Gain) on sale of property and other related provisions (852) 26,386 17,446 10,636 Eliminations 1 (19) (51) 26,387 17,427 10,585 General corporate expenses 5,703 6,406 6,487 Operating profit 20,684 11,021 4,098 Other income (expenses)--net 803 (761) (277) Earnings before income taxes and cumulative effect of changes in accounting principles $ 21,487 $ 10,260 $ 3,821 Assets Apportioned by Area Domestic $ 86,605 $ 73,256 $ 78,747 Other Non-U.S. 43,272 54,452 48,331 United Kingdom 23,419 18,398 17,847 153,296 146,106 144,925 Eliminations (3,305) (5,047) (2,972) 149,991 141,059 141,953 Corporate assets 56,835 44,005 28,820 Total assets $206,826 $185,064 $170,773 NOTE I - Business Segment and Non-U.S. Operations (continued) Geographic Area (In thousands) 1994 1993 1992 Capital Expenditures Domestic $ 9,738 $ 7,318 $4,062 Other Non-U.S. 2,367 3,300 1,790 United Kingdom 1,296 1,078 2,979 Total $13,401 $11,696 $8,831 NOTE J - Supplemental Statement of Earnings Information The following costs and expenses were charged to operations: (In thousands) 1994 1993 1992 Maintenance and repairs $ 4,329 $ 3,778 $ 3,248 Depreciation of property, plant and equipment 10,556 11,211 10,977 Amortization of intangible assets 680 932 688 Research and development costs 7,050 5,708 6,092 Rent expense 1,391 1,241 1,172 Royalties, taxes (other than payroll taxes and income taxes) and advertising costs were each less than one percent of the total sales for each of the three years. 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, 1994, totaled $3.8 million, compared with $3.0 million at December 31, 1993. 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 - Related Party Transactions Dynamics Corporation of America (DCA) owned 2,222,100 shares (42.9%) of the Company's outstanding common stock at December 31, 1994. In 1987, CTS shareholders voted not to grant DCA voting rights on 1,020,000 of these shares. In addition to stock ownership, as of December 31, 1994, two representatives of DCA serve on the Company's Board of Directors. The normal business transactions between the Company and DCA are insignificant. REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of CTS Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of CTS Corporation and its subsidiaries at December 31, 1994, and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the Notes to Consolidated Financial Statements, effective January 1, 1993, the Company changed its method of accounting for income taxes by adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Also effective January 1, 1993, the Company changed its method of accounting for postretirement healthcare and life insurance benefits by adopting, on an immediate recognition basis, Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." South Bend, Indiana February 2, 1995 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1992 - 1994) 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 1994 1993 1992 Net cash provided by (used in): Operating activities $ 12,555 $ 17,565 $ 12,838 Investing activities (15,090) (10,698) (7,301) Financing 2,580 (1,342) (5,121) Working capital $ 65,875 $ 47,378 $ 50,114 Current ratio 2.47 1.95 2.34 Interest-bearing debt $ 23,318 $ 17,992 $ 16,359 Cash and equivalents 24,922 23,534 18,455 Net tangible worth 126,634 113,402 112,693 Ratio of interest-bearing debt to net tangible worth .18 .16 .15 During 1994, cash flow of $12.6 million continued positive from operating activities, primarily as a result of the significant improvement in operating earnings. However, offsetting the favorable impact of the higher earnings was the higher working capital requirements to support the increased sales levels, which reduced operating cash flow by $5.0 million from 1993. Investing requirements increased during 1994 by $4.4 million, primarily due to the $13.4 million of capital expenditures, including $3.4 million for ODL fixed assets. Additionally, financing activities increased during 1994 and were generated by the higher sales levels and the acquisition of the ODL product line where $2.1 million of additional expenditures were made for inventory. During 1993, positive cash flow from operating activities increased by $4.7 million from 1992, primarily due to the $9.6 million increase in sales, which resulted in a $4.7 million increase in earnings before noncash charges for accounting changes. Cash flow in 1992 from operating activities was also significantly favorable, primarily due to the appropriate management of assets. A significant noncash component of operating earnings during the 1992 to 1994 period was pension income of $6.6 million, $6.0 million and $4.9 million in 1994, 1993 and 1992, respectively. As a result of the Company's overfunded pension position, no cash contributions are anticipated to be required in the immediate future to meet the Company's pension benefit obligations. The major investment activity during the last three years was capital expenditures, which totaled $13.4 million in 1994, $11.7 million in 1993 and $8.8 million in 1992. The major capital expenditures in 1994 were for new products and product line enhancements. Also during 1994, capacity increases were required in our automotive and European connector businesses. The Company expects to increase its capital expenditures in 1995 over 1994 levels. These capital expenditures will be generally for new products and cost reduction programs. In terms of financing activities, the Company negotiated a five- year, $15.0 million long-term loan which expires in 1999. This loan was primarily for the asset purchase and working capital needs related to the ODL product line acquisition. The net cash used for financing activities in 1993 primarily reflects loan renegotiations which reduced certain non-U.S. long-term debt and increased short- term borrowings, and additional short-term borrowings at certain non-U.S. locations. The primary financing use of cash in 1992 was the elective paydown of $1.7 million in debt. Dividends paid in 1994 and 1993 were $2.1 million, while dividends paid in 1992 were $3.9 million. In response to the 1992 decrease in cash provided by operations, the Company reduced its annual quarterly dividend from $.1875 to $.10 per share effective with its February 1993 payment. However, in December 1994, the Board of Directors, principally as a result of the Company's improving performance, increased the quarterly dividend to $.15 per share, effective with the February 1995 payment. At the end of each of the last three years, cash of various non- U.S. subsidiaries was invested in U.S.-denominated cash equivalents. Such cash is generally available to the parent Company. However, it is the Company's intention not to repatriate non-U.S. earnings. If all non-U.S. earnings were repatriated, approximately $4.6 million of withholding taxes would accrue. At the end of 1994, CTS had $47.0 million of borrowing capacity available under two long-term revolving credit agreements. The U.S. revolving agreement of $45.0 million, which expires in April 1997, is the Company's primary credit vehicle and, together with cash from operations, should adequately fund the Company's anticipated cash needs. Results of Operations The table below highlights significant information with regard to the Company's results of twelve months of operations during the past three fiscal years. (In thousands) December 31 December 31 December 31 1994 1993 1992 Net sales $268,707 $236,979 $227,391 Gross earnings 56,859 47,344 41,101 Gross earnings as a percent of sales 21.2% 20.0% 18.1% Selling, general and administrative expense $ 36,175 $ 36,323 $ 37,855 Selling, general and administrative expense as a percent of sales 13.5% 15.3% 16.6% Gain on sale of property and other related provisions 852 Operating earnings $ 20,684 $ 11,021 $ 4,098 Operating earnings as a percent of sales 7.7% 4.7% 1.8% Earnings before income taxes and cumulative effect of changes in accounting principles $ 21,487 $ 10,260 $ 3,821 Income taxes 7,520 3,690 1,920 Income tax rate 35.0% 36.0% 50.2% From 1993 to 1994, total sales increased by 13.4%, primarily as a result of substantial increases in our automotive and European connector businesses. From 1992 to 1993, total sales increased by 4.2%, principally due to increased sales in our automotive product lines, which more than offset sales declines in our military connector and frequency controls products. During the three-year period 1992-1994, the percentage of overall sales to the automotive market has increased from 25% to 38%, the defense and aerospace market percentage has decreased from 17% to 11%, and the other market areas have remained fairly constant. The Company's 15 largest customers represented 62% of net sales in 1994 and 1993, and 58% in 1992. One customer, a major manufacturer of automobiles, comprised 18% of net sales in 1994, compared with 17% for 1993 and 14% for 1992. Although at a much lower level in 1994, a major manufacturer of data processing equipment comprised 10% and 8% of total net sales in 1993 and 1992, respectively. 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. During 1994, improvement was realized in gross earnings, principally due to higher sales volume, production efficiencies and higher absorption of manufacturing expenses. Gross earnings were relatively similar in 1993 and 1992, giving consideration to the respective volume levels. During 1994, selling, general and administrative expenses, slightly lower in dollars, also decreased as a percent of sales, principally owing to the fixed nature of the majority of these expenses and the continuing cost reduction programs. Also during 1994, the Company successfully resolved approximately $1 million of outstanding legal and customer claims, the provision for most of which had been established in 1993. Selling, general and administrative expenses, in dollars and as a percent of sales, decreased during 1993, primarily as a result of the cost containment and expense reduction programs in place during the year. A portion of the higher 1992 expenses in this area was due to problems caused by defective parts from a supplier. Also, during 1992, the Company continued to incur start-up costs in conjunction with its European expansion efforts. During 1992, the Company continued to dispose of nonproductive assets, including its closed Paso Robles, California, facility and assets of its tooling business. These major asset sales generated cash of $2.7 million and a net pretax gain of $1.5 million. In 1994, the principal reason for the improved operating earnings was the higher automotive and connector product sales, and improved performance in the resistor networks and electrocomponents businesses, which more than offset losses in our frequency controls and microelectronics product lines. The primary reason for the operating earnings increase in 1993 from 1992 was the increased automotive product sales. During 1992, the Company suffered losses as a result of a supplier-related defective component, which resulted in direct expenses of approximately $2.0 million and negatively affected our 1992 and 1993 sales. A settlement was negotiated with this vendor in 1993 and the Company recognized a $2.25 million recovery. The slightly lower 1994 effective tax rate is a result of improved earnings, generating an increase in net operating loss carryforward utilization. This same situation contributed to the substantially lower effective tax rate for 1993, as compared to 1992. Additionally, several non-U.S. locations, where no tax benefit was available, incurred losses in 1992 which resulted in the higher 1992 effective tax rate. The effects of the 1993 accounting pronouncements FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and FASB Statement No. 109, "Accounting for Income Taxes," have been discussed in financial statement footnotes, Note G and Note H, respectively. 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. EX-2 3 Five-Year Summary (In thousands of dollars except per share data)
% of % of % of % of % of 1994 Sales 1993 Sales 1992 Sales 1991 Sales 1990 Sales SUMMARY OF OPERATIONS Net sales 268707 100 236979 100 227391 100 229536 100 251044 100 Cost of goods sold 211848 78.8 189635 80 186290 81.9 189118 82.4 202115 80.5 Gross earnings 56859 21.2 47344 20 41101 18.1 40418 17.6 48929 19.5 Selling, general and administrative expenses 36175 13.5 36323 15.3 37855 16.6 35980 15.7 38051 15.2 (Gain) on sale of property and other related provisions -852 -.3 -1857 -.8 796 0.3 Operating earnings 20684 7.7 11021 4.7 4098 1.8 6295 2.7 10082 4 Other income (expenses) --net 803 0.3 -761 -.4 -277 -.1 -51 0 -549 -.2 Earnings before income taxes and cumulative effect of changes in accounting principles 21487 8.0 10260 4.3 3821 1.7 6244 2.7 9533 3.8 Income taxes 7520 2.8 3690 1.6 1920 0.9 2030 0.9 2193 0.9 Net earnings--before accounting changes 13967 5.2 6570 2.7 1901 0.8 4214 1.8 7340 2.9 Cumulative effect on prior years of accounting changes (a) -4614 -1.9 Net earnings 13967 5.2 1956 0.8 1901 0.8 4214 1.8 7340 2.9 Retained earnings - --beginning of year 100868 100973 102482 102110 98629 Dividends declared -2329 -2061 -3410 -3842 -3859 Retained earnings - --end of year 112506 100868 100973 102482 102110 Average shares outstanding 5170406 5152556 5141936 5122433 5168688 Net earnings per share: Before accounting changes 2.7 1.27 0.37 0.82 1.42 Cumulative effect on prior years of accounting changes (a) -0.89 Net earnings 2.7 0.38 0.37 0.82 1.42 Cash dividends per share 0.45 0.4 0.6625 0.75 0.75 Capital expenditures 13401 11696 8831 15967 11821 Depreciation and amortization 11236 12143 11665 13102 13052 FINANCIAL POSITION AT YEAR-END Current assets 110667 97266 87376 91493 91152 Current liabilities 44792 49888 37262 39569 39102 Current ratio 2.5 to 1 1.9 to 1 2.3 to 1 2.3 to 1 2.3 to 1 Working capital 65875 47378 50114 51924 52050 Inventories 41456 36059 37222 40855 45389 Property, plant and equipment--net 50777 47842 48529 53828 53207 Total assets 206826 185064 170773 176361 172525 Short-term notes payable 7436 12822 5827 8160 7750 Long-term obligations 15595 4995 10826 11297 8858 Stockholders' equity 131855 119203 119372 122485 122298 Common shares outstanding 5178604 5153424 5150824 5123824 5122124 Equity (book value) per share 25.46 23.13 23.18 23.91 23.88 OTHER DATA Stock price range (dollars per share to the nearest 1/8) $31.00-$19.50 $22.38-$17.00 $24.50-$17.13 $24.00-$16.38 $23.63-$16.00 Average number of employees 4056 3975 4335 4847 5540 Number of stockholders at year-end 1136 1198 1278 1343 1439 (a) The Company adopted FASB 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and FASB 109, "Accounting for Income Taxes," as of January 1, 1993.
EX-3 4 CTS CORPORATION 905 WEST BOULEVARD NORTH - ELKHART, INDIANA 46514 Notice of Annual Meeting of Stockholders To Be Held April 28, 1995 To CTS Stockholders: The Annual Meeting of Stockholders of CTS Corporation will be held at 9:00 a.m. Eastern Standard Time, Friday, April 28, 1995, at the Quality Inn City Centre, 300 South Main Street, Elkhart, Indiana 46516, for the following purposes: 1. To elect five directors to serve for one year and until their successors are elected and qualified; 2. To transact other business properly presented at the meeting. Only stockholders of record at the close of business on March 10, 1995 are entitled to notice of, and to vote at, the meeting or any adjournment thereof. Accompanying this Notice of Annual Meeting are a Proxy Statement, a proxy and the Annual Report for the fiscal year ended December 31, 1994. By Order of the Board of Directors, Jeannine M. Davis Secretary Elkhart, Indiana March 17, 1995 It is important that your stock be represented at this meeting. We urge you to date, sign and return your proxy promptly in the enclosed envelope, which requires no postage if mailed in the United States. CTS CORPORATION 905 WEST BOULEVARD NORTH - ELKHART, INDIANA 46514 Proxy Statement Voting Information This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of CTS Corporation for the Annual Meeting of Stockholders to be held April 28, 1995. If the enclosed proxy is signed and returned, it may, nevertheless, be revoked by you at any time prior to being voted, by written notice delivered to the Secretary. The Proxy Statement and proxy were first mailed to stockholders about March 17, 1995. The Corporation had outstanding 5,193,854 shares of Common Stock as of the close of business on March 10, 1995, the record date for the Annual Meeting as set by the Board of Directors. As a result of stockholder action taken at the 1987 Annual Meeting, 1,020,000 shares of Common Stock owned by Dynamics Corporation of America are not votable at the meeting. With the exception of those shares, each stockholder is entitled to one vote in person or by proxy for each share of Common Stock owned on the record date. There are no other voting securities. If the enclosed proxy is signed and returned, the shares represented will be voted in the manner indicated except that if any nominee for director is unable to serve at the time of the Annual Meeting, the proxy will be voted in accordance with the judgment on such matters of the person or persons acting as proxy. Proxy solicitation will be principally by mail, but proxies may also be solicited in person or by telephone. The expense of this solicitation will be paid by the Corporation. Brokers and certain other holders for beneficial owners will be reimbursed for out-of-pocket expenses incurred in the solicitation of proxies from the beneficial owners of shares held in their names. The Corporation has retained Georgeson & Co., Inc. to assist in the solicitation of proxies at an estimated cost of $5,000, plus reasonable out-of-pocket expenses. The Board of Directors is not aware of any business to be acted upon at the Annual Meeting other than for which notice is given, but in the event other business is properly presented at the meeting, requiring a vote of the stockholders, the proxy will be voted in accordance with the judgment on such matters of the person or persons acting as proxy. Stockholders are requested to exercise their right to vote by completing and signing the enclosed proxy and returning it promptly in the enclosed envelope. Unless otherwise specified by the stockholder, all shares represented by valid proxies will be voted in favor of the election of all Director-Nominees. Securities Beneficially Owned by Principal Stockholders and Management The following table includes information with respect to all persons and groups known to the Corporation to be beneficial owners of more than five percent of the Common Stock of the Corporation on March 1, 1995. The number of shares and the percent of class held by each director and director-nominee is also stated. Additionally, the number of shares and the percent of class held by each executive officer of the Corporation included in the Summary Compensation Table set forth under the caption "Executive Compensation" below is included, together with the total number of shares and percent of class held by all Directors and Officers as a Group. Amount and Nature of Beneficial Ownership On Percent Beneficial Owner March 1, 1995 1 of Class Dynamics Corporation of 2,222,100 2 42.78 America 475 Steamboat Road Greenwich, CT 06830 The Gabelli Group, Inc. 1,217,700 3 23.45 GAMCO Investors, Inc., and Gabelli Funds, Inc. 655 Third Avenue New York, NY 10017 CTS Corporation Employee 275,836 4 5.31 Benefit Plans Master Trust Harris Trust and Savings Bank, Trustee Chicago, IL 60603 Gerald H. Frieling, Jr. 276,836 4 5.33 Lawrence J. Ciancia 276,336 4 5.32 Andrew Lozyniak 275,836 4,10 5.31 Patrick J. Dorme 275,836 4,10 5.31 Joseph P. Walker 23,635 5 * Philip T. Christ 11,335 6 * Stanley J. Aris 5,304 7 * Jeannine M. Davis 4,745 8 * James L. Cummins 2,778 9 * 13 Directors and Officers 335,254 4,11 6.46 as a Group ___________________________ *Less than 1% 1Information with respect to beneficial ownership is based upon information furnished by each stockholder or contained in filings made with the Securities and Exchange Commission. Except where otherwise indicated, the stockholders listed in the table have sole voting and investment authority with respect to the shares owned by them. 2Includes 1,020,000 shares for which voting authority was not granted by a vote of the independent stockholders of the Corpora- tion at the 1987 Annual Meeting of Stockholders, pursuant to the Control Share Acquisition Chapter of the Indiana Business Corpora- tion Law. 3Includes 253,000 shares held by Gabelli Funds, Inc. and 964,700 shares held by GAMCO Investors, Inc., which were reported on a joint Schedule 13D filed November 11, 1994, the most recent filing by such Reporting Person. According to the Schedule 13D, each of the Reporting Persons and Covered Persons has the sole power to vote or direct the vote and sole power to dispose or to direct the disposition of the Securities reported for it, either for its own benefit or for the benefit of its investment clients or its partners, as the case may be, except that GAMCO Investors, Inc. does not have authority to vote 135,900 of the reported shares, and except that Gabelli Funds, Inc. shares with the Board of Directors of The Gabelli Growth Fund, The Gabelli Global Telecommunications Fund, The Gabelli Global Interactive Couch Potato Fund, The Gabelli Global Convertible Securities Fund, The Gabelli Gold Fund, Inc., The Gabelli Convertible Securities Fund and The Gabelli Equity Income Fund voting power with respect to any shares which may be held from time to time by such funds, so long as the aggregate voting interest of all joint filers does not exceed 25% of the issuer's total voting interest and, in that event, the respective Proxy Voting Committee of each fund (other than The Gabelli Growth Fund) will vote the shares held by that Fund; except that, since the aggregate voting interest of all joint filers exceeds 25% of the issuer's total voting interest, the sole voting power with respect to the 100,000 shares held by The Gabelli Asset Fund, the 118,100 shares held by The Gabelli Equity Trust Inc. and the 35,000 shares held by The Gabelli Small Cap Growth Fund is exercised by the respective Proxy Voting Committee of each such fund; except that the power of Mr. Gabelli and GFI is indirect with respect to Securities beneficially owned directly by other Reporting Persons. 4275,836 of the shares shown as owned beneficially by each of Mr. Ciancia, Mr. Dorme, Mr. Frieling, Mr. Lozyniak, the CTS Corporation Benefit Plans Master Trust and 13 Directors and Officers as a Group are the same shares, which shares are held by Harris Trust and Savings Bank as Trustee of the CTS Corporation Employee Benefit Plans Master Trust (the "Trust"). The Compensation Committee of the Board of Directors has voting and investment authority over said shares, except for shares held in participant-directed accounts under the CTS Corporation Retirement Savings Plan, over which individual participants hold investment authority. The present members of the Compensation Committee are Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak, who were appointed by the Board of Directors of CTS Corporation. The 275,836 shares held by the Master Trust include, in addition to the shares attributed to the accounts of Joseph P. Walker, Philip T. Christ, Stanley J. Aris, Jeannine M. Davis and James L. Cummins in the CTS Corporation Retirement Savings Plan as set forth in footnote numbers five, six, seven, eight and nine below, respectively, 7,224 shares attributed to the accounts of other officers of the Corporation in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1994, the most recent annual report of the Plan. The number of shares attributed to the accounts of such other officers may not reflect shares that have accrued to such accounts since the filing of the Plan's last report. 5Includes 3,435 shares attributed to Joseph P. Walker's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1994, the most recent annual report of the Plan. The number of shares attributed to Mr. Walker's account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. 6Includes 1,335 shares attributed to Philip T. Christ's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1994, the most recent annual report of the Plan. The number of shares attributed to Mr. Christ's account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. Also includes 1,000 shares subject to options exercisable on March 1, 1995 or which become exercisable within 60 days thereafter. 7Includes 304 shares attributed to Stanley J. Aris' account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1994, the most recent annual report of the Plan. The number of shares attributed to Mr. Aris' account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. Also includes 1,000 shares subject to options exercisable on March 1, 1995 or which become exercisable within 60 days thereafter. 8Includes 323 shares attributed to Jeannine M. Davis' account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1994, the most recent report of the Plan. The number of shares attributed to Ms. Davis' account may not reflect shares that have accrued to her account since the filing of the Plan's last annual report. Also includes 2,200 shares subject to options exercisable on March 1, 1995 or which become exercisable within 60 days thereafter. 9Includes 274 shares attributed to James L. Cummins' spouse's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1994, the most recent report of the Plan. The number of shares attributed to Mrs. Cummins' account may not reflect shares that have accrued to her account since the filing of the Plan's last annual report. Also includes 1,000 shares subject to options exercisable on March 1, 1995 or which become exercisable within 60 days thereafter. 10Messrs. Lozyniak and Dorme are directors of Dynamics Corporation of America. 11Includes 8,700 shares subject to options exercisable on March 1, 1995 or which become exercisable within 60 days thereafter. Election of Directors At the Annual Meeting, five directors are to be elected for terms of one year. Each director will hold office until the next Annual Meeting of Stockholders and until his successor has been elected and qualified. Each person listed below has been nominated by the Board of Directors and has agreed to serve as a director, if elected. Year First Elected Director GERALD H. FRIELING, JR. 1982 President of Frieling and Associates (a consulting firm); Chairman of the Board of Tokheim Corporation (a manufacturer of petroleum dispensing equipment, systems and control devices); Chairman of the Audit Committee and Member of the Executive and Compensation Committees of CTS Corporation. During the past five years, Mr. Frieling, age 64, served as Chief Executive Officer of Tokheim Corporation, and served in his present capacities at Frieling and Associates and Tokheim Corporation. ANDREW LOZYNIAK 1987 Chairman of the Board and President of Dynamics Corporation of America (a manufacturer of electrical appliances and electronic devices, fabricated metal products and equipment, and power and controlled environmental systems); Chairman of the Compensation Committee and Member of the Executive and Audit Committees of CTS Corporation. During the past five years, Mr. Lozyniak, age 63, has served in his present capacities at Dynamics Corporation of America. Mr. Lozyniak serves as a director of Dynamics Corporation of America. JOSEPH P. WALKER 1987 Chairman of the Board, President and Chief Executive Officer of CTS Corporation; Chairman of the Executive Committee of CTS Corporation. During the past five years, Mr. Walker, age 56, has served in his present capacities at CTS. Mr. Walker is a director of NBD Bank, N.A. LAWRENCE J. CIANCIA 1990 Chief Executive Officer and Chief Operating Officer of Uponor ETI Company (a supplier of PVC pipe products, specialty chemicals and PVC compounds); Member of the Audit and Compensation Committees of CTS Corporation. During the past five years, Mr. Ciancia, age 52, has served in his present capacities at Uponor ETI Company, formerly Concorde Industries, Inc. PATRICK J. DORME 1993 Vice President and Chief Financial Officer of Dynamics Corporation of America (a manufacturer of electrical appliances and electronic devices, fabricated metal products and equipment, and power and controlled environmental systems); Member of the Audit and Compensation Committees of CTS Corporation. During the past five years, Mr. Dorme, age 59, has served in his present capacities at Dynamics Corporation of America. Mr. Dorme serves as a director of Dynamics Corporation of America. The affirmative vote of the holders of a plurality of the shares represented in person or by proxy at the meeting is required to elect the Director-Nominees. The Board of Directors unanimously recommends a vote in favor of each of the Director-Nominees named above. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors and Executive Officers, and persons who own more than ten percent of a registered class of the Corporation's equity securities, to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Corporation. Executive Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. To the Corporation's knowledge, based solely on its review of the copies of such reports furnished to the Corporation and written representations that no other reports were required during the year ended December 31, 1994, all Section 16(a) filing requirements applicable to its Executive Officers, directors and greater than ten percent beneficial owners were complied with. Board of Directors and Standing Committees During 1994, the Board of Directors held six meetings. The standing committees of the Board of Directors include an Audit Committee, an Executive Committee and a Compensation Committee. The Audit Committee, consisting of Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak, held two meetings in 1994. The Committee performs the following principal functions: recommendation of the engagement or discharge of the Corporation's independent accountants; review of the plan and results of the auditing engagement with the independent accountants; review of the adequacy of the Corporation's internal accounting controls; and review of the independence of the independent accountants and the audit fees of the independent accountants. The Executive Committee, consisting of Gerald H. Frieling, Jr., Andrew Lozyniak and Joseph P. Walker, held four meetings in 1994. The Committee reviews and advises management on financial and operational matters between meetings of the Board of Directors. The Compensation Committee, consisting of Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak, held three meetings in 1994. The Committee performs the function of recommending officer compensation arrangements and amounts to the Board of Directors. The Committee also administers the CTS Corporation 1986 Stock Option Plan, the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, and the CTS Corporation Management Incentive Plan. Each Director-Nominee attended at least 93% of the aggregate of the meetings of the Board of Directors and the committees to which he was assigned during 1994. Executive Compensation The following table sets forth annual and long-term compensation information for each of the last three fiscal years of the Chief Executive Officer and the four highest compensated Executive Officers whose salary and bonus for fiscal year 1994 exceeded $100,000. Information which is not required to be disclosed in the table is identified by the letters "N/R." SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation Restricted All Other Name and Principal Position Year Salary ($) Bonus1 $ Other2 ($) Stock Award(s)3 ($) Compensation4 ($) Joseph P. Walker5,6 1994 311,878 147,200 N/R 231,250 8,496 Chairman of the 1993 297,083 0 N/R 0 6,426 Board, President and 1992 283,075 0 N/R 0 5,695 Chief Executive Officer Philip T. Christ6 1994 168,301 90,200 N/R 0 7,326 Group Vice 1993 158,442 80,000 N/R 0 7,023 President 1992 150,983 0 N/R 41,000 6,080 Stanley J. Aris6 1994 160,105 75,600 N/R 57,813 4,991 Vice President 1993 153,663 20,250 5,555 0 4,813 Finance and Chief 1992 92,308 0 N/R 0 2,077 Financial Officer Jeannine M. Davis6 1994 109,063 51,500 N/R 0 2,944 Vice President, 1993 95,035 0 N/R 0 2,762 General Counsel 1992 90,510 0 N/R 41,000 2,136 and Secretary James L. Cummins6 1994 83,908 46,900 N/R 0 2,648 Vice President 1993 N/R N/R N/R N/R N/R Human Resources 1992 N/R N/R N/R N/R N/R
1Includes bonuses paid pursuant to the CTS Corporation Management Incentive Plan, as described in the Report of the Compensation Committee below. 2The value of other personal benefits received from the Corporation by the named Executive Officers is below the reporting threshold for perquisites. 3At the end of fiscal year 1994, Joseph P. Walker held 10,000 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which at December 31, 1994 was $277,500. At the time that such restrictions lapse, a cash bonus is paid in an amount equal to the market value of the shares on the date the restriction lapses. For Joseph P. Walker, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1994 - $49,250; 1993 - $39,250; and 1992 - $46,250. At the end of fiscal year 1994, Philip T. Christ held 1,600 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1994 was $44,400. For Philip T. Christ, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1994 - $19,150; 1993 - $15,500; and 1992 - $9,400. At the end of fiscal year 1994, Stanley J. Aris held 2,500 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1994 was $69,375. No cash payments have been made to Mr. Aris pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years. At the end of fiscal year 1994, Jeannine M. Davis held 1,200 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1994 was $33,300. For Jeannine M. Davis, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1994 - $9,200; 1993 - $7,300; and 1992 - 0. The restrictions on 20% of the shares awarded under this Plan lapse at the end of each of the five years following acquisition of the shares. Regular dividends are paid to holders of restricted stock awarded under this Plan. This Plan includes a change of control provision which provides that, upon a change of control of the Corporation, as defined in the Plan, all restrictions on shares awarded under the Plan will lapse and cash bonuses will be paid relative to those shares. 4Includes (i) the Corporation's matching contributions to the CTS Corporation Retirement Savings Plan on behalf of the named Executive Officers as follows: for Joseph P. Walker, 1994 - $3,465; 1993 - $3,373 and 1992 - $3,273; for Philip T. Christ, 1994 - - $3,465; 1993 - $3,373 and 1992 - $3,204; for Stanley J. Aris, 1994 - $3,465; 1993 - $3,373 and 1992 - $2,077; for Jeannine M. Davis, 1994 - $2,454; 1993 - $2,303 and 1992 - $1,911; and for James L. Cummins, 1994 - $2,234 and (ii) the premiums paid by the Corporation on the term life insurance policies with face values greater than $50,000 provided to each of the named Executive Officers as follows: for Joseph P. Walker, 1994 - $5,031, 1993 - $3,053 and 1992 - $2,422; for Philip T. Christ, 1994 - $3,861, 1993 - $3,650 and 1992 - $2,876; for Stanley J. Aris, 1994 - $1,526, 1993 - $1,440 and 1992 - $.00; for Jeannine M. Davis, 1994 - - $490, 1993 - $459 and 1992 - $225; and for James L. Cummins, 1994 - - $414. 5Joseph P. Walker has executed an employment agreement with the Corporation, which provides that for a period of three years, beginning June 24, 1994, Mr. Walker will be employed by the Corporation as Chairman of the Board, President and Chief Executive Officer, at an initial annual salary of $319,725. Termination of Mr. Walker's employment agreement by the Corporation, for reasons other than cause as defined in the agreement, entitles Mr. Walker to receive his then current annual salary for the number of months remaining under his agreement, the same to be paid in equal monthly payments. 6The Corporation has entered into Indemnification Agreements with each of the named Executive Officers and all other Executive Officers of the Corporation which provide that the Corporation agrees to indemnify the officer, to the fullest extent allowed by the bylaws of the Corporation and the Indiana Business Corporation Law, in the event that he/she was or is made a party or threatened to be made a party to any action, suit or proceeding by reason of the fact that he/she is an officer of the Corporation. The indemnification agreements provide indemnification for acts occurring prior to the execution of the agreements. Stock Options Shown below is information on grants of options for CTS Corporation Common Stock awarded pursuant to the CTS Corporation 1986 Stock Option Plan to the named Executive Officers in 1994. OPTION GRANTS IN 1994 INDIVIDUAL GRANTS
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation For Option Term1 Number of % of Total Securities Options Granted Exercise Underlying to Employees Price Expiration Name Options Granted2 in 1994 ($/Share) Date 5%($) 10%($) Joseph P. Walker 0 0 N/A N/A N/A N/A Philip T. Christ 5,000 8.9% 24.75 6-23-99 34,190 75,550 Stanley J. Aris 3,000 5.3% 24.75 6-23-99 20,520 45,330 Jeannine M. Davis 4,000 7.0% 24.75 6-23-99 27,350 60,440 James L. Cummins 3,000 5.3% 24.75 6-23-99 20,520 45,330
1Potential realizable value is determined by assuming an initial value of $24.75 per share, the market closing price for CTS Corporation Common Stock on the date of grant and applying the stated annual appreciation rate compounded annually for the remaining term of the option (five years), subtracting the exercise price and multiplying the remaining number by the number of options granted. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall stock market condition. 2All options become exercisable over a four-year period at the rate of 25% per year commencing on the first anniversary of the option grant. OPTION EXERCISES IN 1994 AND FISCAL YEAR END 1994 OPTION VALUES
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options At Options at Fiscal Year End Fiscal Year End Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized Unexercisable Unexercisable Joseph P. Walker 0 0 0 0 Philip T. Christ 0 0 500/6,500 $ 4,313/27,938 Stanley J. Aris 0 0 500/4,500 4,313/21,938 Jeannine M. Davis 0 0 2,200/4,000 15,675/12,000 James L. Cummins 0 0 1,000/3,000 7,125/9,000 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors, comprised of Larry J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak, submits this report of Executive Compensation to the Corporation's stockholders. Compensation Principles and Philosophy The Compensation Committee of the Board of Directors has implemented executive compensation policies and programs designed to achieve the following objectives: Attract and retain key executives and managers Align the financial interests of key executives and managers with those of the stockholders of the Corporation Reward individual performance Reward Corporate performance These objectives are achieved through a combination of annual and longer term compensation arrangements including base salary, annual cash incentive compensation, and long-term incentive compensation through stock options and restricted stock awards, in addition to medical, pension and other benefits available to employees in general. The four principal components of the Executive Officer Compensation package at CTS Corporation are: base salary, the CTS Corporation Management Incentive Plan, the CTS Corporation 1986 Stock Option Plan and the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan. Base Salary The base salary of the Executive Officers of CTS Corporation is determined in the same manner as the salaries of all exempt salaried employees of the Corporation. A job classification system is utilized to determine appropriate salary ranges for each Executive Officer position, based on qualifications, job responsi- bilities and market factors. The goal of CTS Corporation's job classification system is that Executive Officers, and employees in general, are paid a salary which is commensurate with their qualifications, duties and responsibilities and which is competi- tive in the market place. The Corporation retained in 1994 Towers Perrin to assess the current salaries and classifications of the Executive Officers compared with market data for similar positions at similar companies. The report from Towers Perrin indicated that the salaries of the Corporation's Executive Officers are generally below competitive median salaries. When the financial performance of the Corporation permits, salary adjustments above a cost-of- living level are considered for those in the lower portion of their salary range, if individual performance warrants such consideration. During each of the past three years, the named Executive Officers have been granted salary increases during these years in the cost-of-living range established for all exempt salaried employees of the Corporation, except that in February of 1994, certain officer salaries were increased at higher than cost-of-living rates in response to competitive salary information provided by Towers Perrin. CTS Corporation Management Incentive Plan All Executive Officers of the Corporation are participants in the CTS Corporation Management Incentive Plan, which provides cash compensation incentives, based on the financial performance of the Corporation. Currently, financial performance is measured on the basis of achieving target levels of return on assets (ROA). When plan financial objectives are met at the 100% level, each of the named Executive Officers is eligible for a bonus in an amount equal to 40% of his/her base salary for the subject year. Maximum incentive payments under this Plan range from 10% to 60% of the annual salary of the Plan participants. For 1994, the Corporation achieved 118% of its ROA target under the 1994 Corporation Management Incentive Plan. Accordingly, the named Executive Officers received formula bonuses under the Plan equal to 47.2% of their base salaries, except that Philip T. Christ's 1994 bonus also reflects the higher ROA performance achievement of the operating units which report to him. This Plan also authorizes the Compensation Committee to grant discretionary bonuses when the Committee deems it appropriate to do so. No discretionary bonuses have been paid to the named Executive Officers during any of the three years for which compensation is disclosed, except that for 1993 a discretionary award of $39,450 was made to Philip T. Christ, based on his direct and substantial contribution to the success of the Corporation's Automotive Products business unit. CTS Corporation 1986 Stock Option Plan The Compensation Committee administers the Corporation's stock option plan and determines to whom options will be granted, the dates of such option grants, the number of shares subject to option, the option price, option periods and option terms. Stock options were granted to Philip T. Christ, Stanley J. Aris, Jeannine M. Davis and James L. Cummins during 1994 in order to establish a direct link between these Executive Officers and long- term Corporate performance, as reflected in stock price appreciation. CTS Corporation 1988 Restricted Stock and Cash Bonus Plan The CTS Corporation 1988 Restricted Stock and Cash Bonus Plan was adopted by the stockholders in 1989 for the purpose of providing incentives to selected key employees who contribute or are expected to contribute materially to the success of the Corporation, and to closely align the financial interests of these key employees with those of the Corporation's stockholders. The participants are selected and their level of participation determined by the Compensation Committee. Shares acquired by participants pursuant to the Plan are subject to restriction that, during the period of five years after the date of acquisition, the participant may not sell, transfer or otherwise dispose of such shares as to which the restrictions shall not have lapsed. The restrictions lapse as to 20% of the shares acquired pursuant to the Plan at the end of each year following the acquisition of the shares. When the restrictions lapse, a cash bonus is paid to the participant equal to the fair market value of such shares as of the date of such lapse. In no event may the cash bonuses payable to any participant be greater than twice the fair market value of such shares on the date they were originally acquired. Dividends are paid to participants in this Plan on all shares awarded to them under the Plan. The Plan also provides for appropriate adjustment to the number of shares awarded in the event of a stock dividend, stock split, recapitalization, merger, combination or exchange of shares for other securities. Awards under the Plan were made to Joseph P. Walker and Stanley J. Aris, for 10,000 shares and 2,500 shares respectively in 1994. Mr. Walker and Mr. Aris were selected for awards in order to align their interests with the Corporation's stockholders and in view of their abilities, as Chief Executive Officer and Chief Financial Officer, to contribute materially to the success of the Corporation. The number of shares previously awarded to the named Executive Officers, their market value, vesting schedules, and bonuses paid relative thereto, are set forth in the Summary Compensation Table above and the footnotes thereto. Deductibility of Compensation Section 162(m) of the Internal Revenue Code of 1986, as amended, limits to $1,000,000 per person the amount that the Corporation may deduct for compensation paid to any of its most highly compensated officers in any year after 1993. The levels of compensation paid to the Corporation's Executive Officers do not exceed this limit. The Compensation Committee currently intends for all compensation paid to its Executive Officers to be tax deductible to the Company pursuant to Section 162(m). Respectfully Submitted, CTS CORPORATION COMPENSATION COMMITTEE Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr. and Andrew Lozyniak STOCK PERFORMANCE CHART The following graph compares the cumulative total stockholder return on the Corporation's common stock for the last five fiscal years with the cumulative total return on the S & P 500 Index and an index of peer companies over the same period. CTS Corporation Salaried Employees' Pension Plan The CTS Corporation Salaried Employees' Pension Plan is a retirement plan for exempt salaried employees of some CTS Corpora tion divisions and subsidiaries. The benefit formula is calculated as 1% of a participant's highest average monthly pay during any three calendar years of a participant's last ten calendar years of service, multiplied by a participant's credited service. The credited service for the named Executive Officers as of December 31, 1994, is as follows: Joseph P. Walker, 6.52 years, Philip T. Christ, 4.78 years, Stanley J. Aris, 1.78 years, Jeannine M. Davis, 14 years, and James L. Cummins, 17 years. Covered compensation for the named Executive Officers is essen tially equivalent to the amount reported in the Annual Compensation Section of the Summary Compensation Table above under the Salary and Bonus Columns. No benefit under this plan is subject to Social Security or other offsets. The following table shows the annual benefits payable under the plan to persons in specified compensation and credited service classifications at normal retirement age of 65: PENSION TABLE* Years of Participation Compensation 15 Years 20 Years 25 Years 30 Years 35 Years $100,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000 125,000 18,750 25,000 31,250 37,500 43,750 150,000 22,500 30,000 37,500 45,000 52,500 175,000 26,250 35,000 43,750 52,500 61,250 200,000 30,000 40,000 50,000 60,000 70,000 225,000 33,750 45,000 56,250 67,500 78,750 250,000 37,500 50,000 62,500 75,000 87,500 300,000 45,000 60,000 75,000 90,000 105,000 400,000 60,000 80,000 100,000 120,000 140,000 *The benefit limitation under the Internal Revenue Code of 1986, as amended, for 1995 is $120,000. Effective July 1, 1994, no more than $150,000 (as adjusted from time to time for cost of living increases of $10,000 or more) of cash compensation may be taken into account in calculating benefits under this plan. Director Compensation Each member of the Board of Directors, who is not an employee or an officer of the Corporation, is paid an annual retainer of $12,000 per year for service on the Board of Directors, a meeting fee of $1,000 for each meeting of the Board of Directors attended in person, and $500 for each meeting of the Board of Directors attended by telephone. In addition, each member of the Executive Committee and each member of the Compensation Committee is entitled to receive an annual retainer of $500, and each member of the Audit Committee is entitled to receive an annual retainer of $1,000, together with a meeting fee of $1,000 for attending each meeting of a committee of which he is a member, except that he is entitled to receive $500 per meeting for a second or subsequent meeting held on the same day and for any such meetings attended by telephone. On April 27, 1990 the Corporation adopted the CTS Corporation Stock Retirement Plan for Non-Employee Directors of the Corporation (the "Plan"). Under the Plan, separate accounts are opened by the Corporation in the names of non-employee directors. On January 1 of each year, starting in 1991, a Deferred Stock Account in the name of each non-employee director is credited with 100 Common Stock Units if said director was a non-employee director of the Corporation on the last day of the immediately preceding calendar year or ceased to be a director during such preceding calendar year by reason of his retirement, disability or death. In addition, on May 1, 1990, the Corporation credited to the Deferred Stock Account of each such director 50 Common Stock Units for each complete calendar year of his service to the Corporation as a non-employee director prior to May 1, 1990. Each Deferred Stock Account will also be credited with Common Stock Units when credits equivalent to cash dividends on the shares in an account aggregate an amount equal to the value of a share of Common Stock on a dividend payment date. All Deferred Stock Units in a director's account will be distributed in Common Stock as of the January 1st after the director leaves the Board of Directors. Until such time, the Corporation's obligation under the Plan is an unsecured promise to deliver shares of Common Stock. No Common Stock will be held in trust or as a segregated fund because of the adoption of the Plan. Four members of the Board of Directors are currently eligible to participate in the Plan. The Corporation expensed $11,100 in 1994 in respect of Common Stock Units credited to the accounts of the eligible directors as a group pursuant to the Plan. Corporation's Independent Accountants The Corporation's independent accountants are Price Water- house. Representatives of the independent accountants will attend the Annual Meeting, to be available to respond to appropriate questions by stockholders and to have the opportunity to make statements, if they so desire. Stockholder Proposals To be considered for inclusion in the 1996 proxy solicitation material and proxy, stockholder proposals must be received by the Corporation at its Corporate offices no later than November 24, 1995. 1994 Annual Report on S.E.C. Form 10-K Upon the written request of a CTS stockholder owning shares of Common Stock on the record date, to Jeannine M. Davis, Secretary of CTS Corporation, 905 West Boulevard North, Elkhart, Indiana 46514, the Corporation will provide to such stockholder, without charge, a copy of its 1994 annual report on S.E.C. Form 10-K, including the financial statements and financial statement schedules. Jeannine M. Davis Secretary Elkhart, Indiana March 17, 1995
EX-27 5
5 This schedule contains summary financial information extracted from the 1994 10-K and is qualified in its entirety by reference to such 10-K. YEAR DEC-31-1994 JAN-1-1994 DEC-31-1994 24,922 0 35,898 869 41,456 110,667 190,426 139,649 206,826 44,792 0 33,870 0 0 112,152 206,826 268,707 268,707 211,848 248,023 (1,517) 0 714 21,487 7,520 13,967 0 0 0 13,967 2.70 2.70
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