-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QZdd8Y7v+FUvEkl820KvawHJeWnd+SECXsKp62KZEvRxtjZUW3iBv63L7rYrNP5J o+L2jcNOdISwjPSBU71DyQ== 0000026058-96-000001.txt : 19960322 0000026058-96-000001.hdr.sgml : 19960322 ACCESSION NUMBER: 0000026058-96-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960321 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: 96536886 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, 1995 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number: 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 (State or other jurisdiction of (IRS Employer Identifi- incorporation or organization) cation Number) 905 West Boulevard North, Elkhart, Indiana 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 219-293-7511 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common stock, without par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant has: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X There were 5,218,529 shares of Common Stock, without par value, outstanding on March 8, 1996. The aggregate market value of the voting stock held by non-affiliates of CTS Corporation was approximately $99 million on March 8, 1996. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the CTS Corporation 1995 Annual Report for the fiscal year ended December 31, 1995, incorporated by reference in Part I and Part II. (2) Portions of the 1996 Proxy Statement for annual meeting of shareholders to be held on April 26, 1996, incorporated by reference in Part III. (3) Certain portions of the CTS Corporation Form 10-K for the 1987 fiscal year ended January 3, 1988, incorporated by reference in Part IV. (4) Certain portions of Registration Statement No. 33-27749, effective March 23, 1989, incorporated by reference in Part IV. (5) Certain portions of the 1989 Proxy Statement for annual meeting of shareholders held April 28, 1989, incorporated by reference in Part IV. (6) Certain portions of the CTS Corporation Form 10-K for the 1989 fiscal year ended December 31, 1989, incorporated by reference in Part IV. (7) Certain portions of the CTS Corporation Form 10-K for the 1991 fiscal year ended December 31, 1991, incorporated by reference in Part IV. (8) Certain portions of the CTS Corporation Form 10-K for the 1992 fiscal year ended December 31, 1992, incorporated by reference in Part IV. (9) Certain portions of the CTS Corporation Form 10-K for the 1994 fiscal year ended December 31, 1994, incorporated by reference in Part IV. EXHIBIT INDEX -- PAGES 17 AND 18 Part I Item 1. Business INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS The registrant, CTS Corporation (CTS or Company), is an Indiana corporation incorporated in 1929 as a successor to a company started in 1896. CTS' principal executive offices are located at 905 West Boulevard North, Elkhart, Indiana, 46514, telephone number (219) 293-7511. CTS designs, manufactures and sells electronic components. The engineering and manufacturing of CTS products is performed at 16 facilities worldwide. CTS products are sold through sales engineers, sales representatives, agents and distributors. In March 1987, a settlement was announced between CTS and Dynamics Corporation of America (DCA), terminating the sale process of the Company and resolving all disputes between CTS and DCA. Subsequently, the United States Supreme Court held that the Control Share Acquisition Chapter of the Indiana Business Corporation Law was constitutional. As a result of the Court's decision, the issue of voting rights of 1,020,000 shares of CTS common stock acquired by DCA in 1986 was submitted to a vote of CTS shareholders at the 1987 annual meeting. The affirmative vote of the majority of all shares eligible to vote was necessary to grant voting rights. DCA was not eligible to vote on the issue. The shareholders voted not to grant voting rights to DCA on these shares. The Court's decision did not have an impact on the voting rights in additional shares of CTS common stock previously or subsequently acquired by DCA. In May 1988, the settlement agreement expired pursuant to its terms. At the end of 1995, DCA owned 2,303,100 shares (44.1%) of CTS common stock, including the 1,020,000 shares without voting rights. In January 1990, the Company formally announced the closing of its Switch Division located in Paso Robles, California. The Paso Robles manufacturing operations were relocated to the Company's facilities in Taiwan and Bentonville, Arkansas. During 1992, the Company completed the sale of the Paso Robles manufacturing plant and most of the associated real estate for $1.9 million. A pretax-tax gain of $0.9 million was realized from the sale. The manufacturing operations for certain variable resistor and selector switch products, which formerly were performed in Elkhart, Indiana, were also transferred to Bentonville in 1990, to take advantage of any efficiencies to be gained in consolidating such operations in Bentonville. The buildings located in Elkhart which housed the plastics molding and element production were vacated, with these manufacturing operations being consolidated into the main Elkhart plant. CTS announced in July 1990 that its facility near Glasgow, Scotland, would be expanded in order to manufacture and sell additional electronic products in Europe. The total capital investment has been approximately $12 million as of December 31, 1995. Automotive throttle position sensors and precision and clock oscillators were added to the product lines already manufactured in Scotland. The decision to expand the Scottish facility was based on several factors, including the excellent business climate and skills base in Scotland and the anticipated full participation of the United Kingdom in the European Economic Community. The expansion of the Scotland facility represents a major effort by CTS to serve the large and rapidly growing European market on a direct basis. In November 1991, construction was completed on a 53,000 square foot manufacturing facility in Bangkok, Thailand. During 1992, the Company idled operations at this facility. During 1994, a three- year lease was finalized with an international computer peripheral manufacturer for this property. The annual rental amount is approximately U.S. $355,000. Also during 1991, the Company significantly reduced the operating activities at its Brownsville, Texas, facility and plans to sell this property. A portion of the Brownsville facility is currently under a leasing arrangement which expires in 1999, at an annual rental amount of approximately $60,000. The manufacturing space owned by CTS in Hong Kong, which consisted of two floors in a multi-story building, was sold in March 1991. One floor was leased back by CTS for the continuation of its manufacturing operations in Hong Kong. During 1992, the Company terminated this lease and discontinued its manufacturing operations in Hong Kong. However, the Company maintains a sales office in Hong Kong. During 1994, the Company purchased the assets of AT&T Microelectronics' light emitting diode based optic data link products business. The transaction also included sales contracts, backlog, intellectual property, trademarks, and the design and manufacturing technology. These products are manufactured in the Microelectronics West Lafayette, Indiana, facility. The manufacturing space owned by CTS in Singapore consists of four floors in a multi-story building. The current manufacturing requirements require three of the four floors, leaving one level available for lease. During 1995, a lease for an initial term of two years with a two-year renewal option was finalized with an international semiconductor manufacturer for one floor of the Singapore facility. The annual rental amount is approximately U.S. $800,000. FINANCIAL INFORMATION ON INDUSTRY SEGMENTS All of the Company's products are considered one industry segment. Sales to unaffiliated customers, operating profit and identifiable assets, by geographic area, are contained in "Note H - Business Segment and Non-U.S. Operations," pages 22-23, of the CTS Corporation 1995 Annual Report, and is incorporated herein by reference. PRINCIPAL BUSINESS AND PRODUCTS OF CTS CTS is primarily in the business of developing, manufacturing and selling a broad line of electronic components principally serving the electronic needs of original equipment manufacturers (OEMs). The Company sells classes of similar products consisting of the following: Automotive control devices Insulated metal circuits Interconnect products Loudspeakers Fiber-optic transceivers Programmable switches Frequency control devices Resistor networks Hybrid microcircuits Selector switches Industrial electronics Variable resistors Most products within these product classes are manufactured by CTS from purchased raw materials or subassemblies. Some products sold by CTS are purchased and resold under the Company's name. During the past three years, five classes of similar product lines accounted for 10% or more of consolidated revenue during one or more years, as follows: Percent of Consolidated Revenue Class of Similar Products 1995 1994 1993 Automotive control devices 29 30 26 Frequency control devices 16 15 15 Interconnect products 14 17 14 Resistor networks 12 11 14 Hybrid microcircuits 8 10 14 Other 21 17 17 Total 100% 100% 100% MARKETS CTS estimates that its products have been sold in the following electronics OEM and distribution markets and in the following percentages during the preceding three fiscal years: Percent of Consolidated Revenue Markets 1995 1994 1993 Automotive 36 38 32 Data Processing 19 17 22 Communications Equipment 18 17 17 Instruments and Controls 10 9 9 Defense and Aerospace 8 11 12 Distribution 6 5 4 Consumer Electronics 3 3 4 Total 100% 100% 100% Products for the automotive market include throttle position sensors, switch assemblies for operator interface, exhaust gas recirculation subsystems, variable resistors and switches for automotive entertainment systems and other applications, and loudspeakers. Products for the data processing market include resistor networks, frequency control devices, programmable switches, fiber-optic transceivers and hybrid microcircuits. Products for this market are principally used in computers and computer peripheral equipment. In the communications equipment market, CTS products include frequency control devices, hybrid microcircuits, fiber-optic transceivers, switches and resistor networks. Products for this market are principally used in telephone equipment and in telephone switching systems. Products for the instruments and controls market include hybrid microcircuits, variable resistors and switches. Principal end uses are medical electronic devices and electronic testing, measuring and servicing instruments. CTS products for the defense and aerospace market, usually procured through government contractors or subcontractors, are electronic connectors, hybrid microcircuits, backpanels, frequency control devices and programmable key storage devices. In the distribution market, CTS' primary products include program- mable switches, resistor networks and frequency control devices. In this market, standard CTS products are sold for a wide variety of applications. Products for the consumer electronics market, primarily variable resistors and switches, are principally used in home entertainment equipment and appliances. MARKETING AND DISTRIBUTION Sales of CTS electronic components to original equipment manufacturers are principally by CTS sales engineers and manufacturers' representatives. CTS maintains sales offices in Elkhart, Indiana; Detroit, Michigan; and in the United Kingdom, Hong Kong, Taiwan and Japan. Various regions of the United States are serviced by sales engineers working out of their homes. The sale of electronic components is relatively integrated such that most of the product lines of CTS are sold through the same field sales force. Approximately 39% of net sales in 1995 were attributable to coverage by CTS sales engineers. Generally, CTS sales engineers service the Company's largest customers with application specific products. CTS sales engineers work closely with major customers in determining customer require- ments and in designing CTS products to be provided to such customers. CTS uses the services of independent sales representatives and distributors in the United States and other countries for customers not serviced by CTS sales engineers. Sales representatives receive commissions from CTS. During 1995, about 55% of net sales were at- tributable to coverage by sales representatives. Independent distributors purchase products from CTS for resale to customers. In 1995, independent distributors accounted for about 6% of net sales. RAW MATERIALS Generally, CTS' major raw materials are steel, copper, brass, certain precious metals, resistive and conductive inks, passive components and semiconductors, used in several CTS products; ceramic materials used particularly in resistor networks and hybrid microcircuits; synthetic quartz used in frequency control devices; and laminate material used in printed circuit boards. These raw materials are purchased from several vendors, and except for certain semiconductors, CTS does not believe that it is dependent on one or on a very few vendors. In 1995, all of these materials were available in adequate quantities to meet CTS' production demands. The Company does not presently anticipate any raw material short- ages which would significantly affect production. However, the lead times between the placement of orders for certain raw mater- ials and actual delivery to CTS may vary significantly, and the Company may from time to time be required to order raw materials in quantities and at prices less than optimal to compensate for the variability of lead times for delivery. Precious metals prices have a significant effect on the manufactur- ing cost and selling prices of many CTS products, particularly some programmable switches, electronic connectors and resistor networks. CTS has continuing programs to reduce the precious metals content of several products, when consistent with customer specifications. WORKING CAPITAL CTS does not usually buy inventories or manufacture products without actual or reasonably anticipated customer orders, except for some standard, off-the-shelf distributor products. The Company is not generally required to carry significant amounts of inven- tories to meet rapid delivery requirements because most customer orders are for custom products. CTS has entered into "just-in- time" arrangements with certain major customers in order to meet customers' just-in-time delivery needs. CTS carries raw materials, including certain semiconductors, and certain work-in-process and finished goods inventories which are unique to a particular customer or to a small number of customers, and in the event of reductions in or cancellations of orders, some inventories are not useable or cannot be returned to vendors for credit. CTS generally imposes charges for the reduction or cancellation of orders by customers, and these charges are usually sufficient to cover the financial exposure of CTS to inventories which are unique to a customer. CTS does not customarily grant special return privileges or payment privileges to customers, although CTS' distributor program permits certain returns. CTS' working capital requirements are generally cyclical but not seasonal. Working capital requirements are generally dependent on the overall business level. During 1995, working capital increased significantly to $75.2 million, as receivables increased in response to the greater sales. Cash represents a significant part of the Company's working capital. Cash of various non-U.S. subsidiaries was held in U.S.-denominated cash equivalents at December 31, 1995. The cash, other than approximately $4.6 million, is generally available to the parent Company. PATENTS, TRADEMARKS AND LICENSES CTS maintains a program of obtaining and protecting U.S. and non- U.S. patents and trademarks. CTS believes that the success of its business is not materially dependent on the existence or duration of any patent, group of patents or trademarks. CTS licenses the manufacture of several electronic products to companies in the United States and non-U.S. countries. In 1995, license and royalty income was less than 1% of net sales. CTS believes that the success of its business is not materially dependent upon any licensing arrangement where CTS is either the licensor or licensee. MAJOR CUSTOMERS CTS' 15 largest customers represented about 61%, 62% and 62% of net sales in 1995, 1994 and 1993, respectively. Of the net sales to unaffiliated customers, approximately $54.9 million, $49.4 million and $40.1 million were derived from sales to a major manufacturer of automobiles in 1995, 1994 and 1993, respectively. During 1993, $24.0 million was derived from sales to a major manufacturer of data processing equipment. However, during 1995 and 1994, sales to this customer amounted to $9.9 and $4.4 million, respectively. CTS is dependent upon these and other customers for a significant percentage of its sales and profits, and the loss of one or more of these customers or reduction of orders by one or more of these customers could have a materially adverse effect upon the Company. BACKLOG OF ORDERS Backlog of orders does not necessarily provide an accurate indica- tion of present or future business levels for CTS. For many electronic products, the period between receipt of orders and delivery is relatively short. For large orders from major customers that may constitute backlog over an extended period of time, production scheduling and delivery are subject to change or cancellation by the customers on relatively short notice. At the end of 1995, the Company's backlog of orders was $85.3 million, compared with $82.7 million at the end of 1994. This increase was primarily attributable to increased demand from automotive and electronic connector customers. The backlog of orders at the end of 1995 will generally be filled during the 1996 fiscal year. GOVERNMENT CONTRACTS CTS believes that about 8% of its net sales are associated with purchases by the U.S. Government or non-U.S. governments, principally for defense and aerospace applications. Because most CTS products procured through government contractors and subcontractors are for military end uses, the level of defense and aerospace market sales by CTS is dependent upon government budgeting and funding of programs utilizing electronic systems. Almost all CTS sales involving government purchases are to primary government contractors or subcontractors. CTS is usually subject to contract provisions permitting termination of the contract, usually with penalties payable by the government; maintenance of specified accounting procedures; limitations on and renegotiations of profits; priority production scheduling; and possible penalties or fines against CTS for late delivery or substandard quality. Such contract provisions have not previously resulted in material uncertainties or disruptions for CTS. COMPETITION CTS competes with many domestic and non-U.S. manufacturers prin- cipally on the basis of product features, price, engineering, quality, reliability, delivery and service. Most product lines of CTS encounter significant competition. The number of significant competitors varies from product line to product line. No single competitor competes with CTS in every product line, but many com- petitors are larger and more diversified than CTS. Some com- petitors are divisions or affiliates of customers. CTS is subject to competitive risks inherent to the electronics industry such as shorter product life cycles and technical obsolescence. Some customers have reduced or plan to reduce the number of suppliers while increasing the volume of purchases from independent suppliers. Most customers are demanding higher quality, reliability and delivery standards from CTS as well as competitors. These trends may create opportunities for CTS while also increasing the risk of loss of business to competitors. The Company believes that it competes most successfully in custom products manufactured to meet specific applications of major original equipment manufacturers. CTS believes that it has some advantages over certain competitors because of its ability to apply a broad range of technologies and materials capabilities to develop products for the special require- ments of customers. CTS also believes that it has an advantage over some competitors in its capability to sell a broad range of products manufactured to relatively consistent standards of quality and delivery. CTS believes that the relative breadth of its product lines and relative consistency in quality and delivery across product lines is an advantage to CTS in selling products to customers. CTS believes that it is one of the largest manufacturers of automotive throttle position sensors. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Information about revenue from sales to unaffiliated customers, operating profit and identifiable assets, by geographic area, is contained in "Note H - Business Segment and Non-U.S. Operations," pages 22-23, of the CTS Corporation 1995 Annual Report, and is incorporated herein by reference. In 1995, approximately 35% of net sales to unaffiliated customers, after eliminations, were attributable to non-U.S. operations. This represents an increase from 34% of net sales attributable to non- U.S. operations in 1994. About 32% of total CTS assets, after eliminations, are non-U.S. Except for cash and equivalents, a substantial portion of these assets cannot readily be liquidated. CTS believes that the business risks attendant to its present non- U.S. operations, though substantial, are normal risks for non-U.S. businesses, including expropriation, currency controls and changes in currency exchange rates and government regulations. RESEARCH AND DEVELOPMENT ACTIVITIES In 1995, 1994 and 1993, CTS spent $8.0, $6.2 and $5.7 million, respectively, for research and development. Most CTS research and development activities relate to new product and process develop- ments or the improvement of product materials. Many such research and development activities are for the benefit of one or a limited number of customers or potential customers. During 1995, the Company did not enter into any new, significant product lines, but continued to introduce additional versions of existing products in response to present and future customer requirements. ENVIRONMENTAL PROTECTION LAWS In complying with federal, state and local environmental protection laws, CTS has modified certain manufacturing processes and expects to continue to make additional modifications. Such modifications that have been performed have not materially affected the capital expenditures, earnings or competitive position of CTS. Certain processes in the manufacture of the Company's current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. The Company has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. The factual circumstances of each site are different; the Company has determined that its role as a PRP with respect to these sites, even in the aggregate, will not have a material adverse effect on the Company's business or financial condition, based on the following: 1) the Company's status as a de minimis party; 2) the large number of other PRPs identified; 3) the identification and participation of many larger PRPs who are financially viable; 4) defenses concerning the nature and limited quantities of materials sent by the Company to certain of the sites; and 5) the Company's experience to-date in relation to the determination of its allocable share. In addition to these non-CTS sites, the Company has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against the Company with respect to other environmental matters. In the opinion of management, based upon presently available information, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position or results of operations of the Company. There are claims against the Company with respect to environmental matters which the Company contests. In the opinion of management, based upon presently available information, either adequate provision for potential costs has been made, or the costs which ultimately might result will not materially affect the consolidated financial position or results of operations of the Company. EMPLOYEES CTS employed an average of 4,007 persons during 1995. About 39% of these persons were employed outside the United States at the end of 1995. Approximately 361 employees in the United States were covered by collective bargaining agreements as of December 31, 1995. One of the two collective bargaining agreements covering these employees will expire in 1999. The other agreement will expire in 2000. Item 2. Properties CTS operations or facilities are at the following locations. The owned properties are not subject to material liens or encumbrances. Location Elkhart, IN 521,813 Owned - Berne, IN 248,726 Owned - Singapore 158,926 Owned* - Kaohsiung, Taiwan 132,887 Owned* - Streetsville, Ontario, Canada 111,740 Owned - West Lafayette, IN 105,983 Owned - Sandwich, IL 94,173 Owned - Brownsville, TX 84,679 Owned - Bentonville, AR 72,000 Owned - Glasgow, Scotland 75,000 Owned - New Hope, MN 55,000 Leased December (Science Center Dr.) 1998 Bangkok, Thailand 53,000 Owned - Matamoros, Mexico 50,590 Owned* - Baldwin, WI 39,050 Owned - Cokato, MN 36,000 Owned - Burlington, WI 5,000 Leased April 1997 TOTAL 1,844,567 * Buildings are located on land leased under renewable leases. The Company is currently seeking to sell some, or all, of the Brownsville, Texas, manufacturing building. A portion of the Brownsville facility is currently under a leasing arrangement which expires in 1999. The annual rental income is approximately $60,000. Also, a portion of the New Hope, Minnesota, facility is currently under a sublease arrangement, which expires in 1998. The annual rental income is approximately $90,000. The Company constructed the Bangkok, Thailand, facility during 1991. This facility was idled during 1992 and was idle for all of 1993. During 1994, the Company entered a three-year lease on this property at an annual rental amount of approximately U.S. $355,000. The Company regularly assesses the adequacy of its manufacturing facilities for manufacturing capacity, available labor and location to the markets and major customers for the Company's products. CTS also reviews the operating costs of its facilities and may from time to time relocate facilities or certain manufacturing activities in order to achieve operating cost reductions and improved asset utilization and cash flow. Item 3. Legal Proceedings Contested claims involving various matters, including environmental claims brought by government agencies, are being litigated by CTS, both in legal and administrative forums. In the opinion of management, based upon currently available information, adequate provision for potential costs has been made, or the costs which might ultimately result from such litigation or administrative proceedings will not materially affect the consolidated financial position of the Company or the results of operations. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1995, no issue was submitted to a vote of CTS shareholders. PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters The principal market for CTS common stock is the New York Stock Exchange. Information relative to the high and low trading prices for CTS Common Stock for each quarter of the past two years and the frequency and amount of dividends declared during the previous two years can be located in "Shareholder Information," page 10, of the CTS Corporation 1995 Annual Report, incorporated herein by reference. On March 8, 1996, there were approximately 1,042 holders of record of CTS common stock. The Company intends to continue a policy of considering dividends on a quarterly basis. The declaration of a dividend and the amount of any such dividend are subject to earnings, anticipated working capital, capital expenditure and other investment requirements, the financial condition of CTS and such other factors as the Board of Directors deems relevant. Item 6. Selected Financial Data A summary of selected financial data for CTS, for each of the previous five fiscal years, is contained in the "Five-Year Summary," page 11, of the CTS Corporation 1995 Annual Report, incorporated herein by reference. Certain divestitures and closures of businesses and certain accounting changes affect the comparability of information con- tained in the "Five-Year Summary." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information about liquidity, capital resources and results of operations, for the three previous fiscal years, is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations (1993-1995)," pages 25-27, of the CTS Corporation 1995 Annual Report, incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Consolidated financial statements, meeting the requirements of Regulation S-X, and the Report of Independent Accountants, are contained in pages 12-24 of the CTS Corporation 1995 Annual Report, incorporated herein by reference. Quarterly per share financial data is provided in "Shareholder Information," under the subheadings, "Quarterly Results of Operations" and "Per Share Data," on page 10 of the CTS Corporation 1995 Annual Report, and is incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no disagreements. PART III Item 10. Directors and Executive Officers of the Registrant Information responsive to Items 401(a) and 401(e) of Regulation S-K pertaining to directors of CTS is contained in the 1996 Proxy Statement under the caption "Election of Directors," pages 5-6, filed with the Securities and Exchange Commission, and is incorporated herein by reference. Information responsive to Item 405 of Regulation S-K pertaining to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the 1996 Proxy Statement under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934," page 6, filed with the Securities and Exchange Commission, and is incorporated herein by reference. The individuals listed, except for Mr. Hannan, were elected as executive officers of CTS at the annual meeting of the Board of Directors on April 28, 1995, and are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled on April 26, 1996, at which time the election of officers will be considered again by the Board of Directors. Name Age Position and Offices Joseph P. Walker 57 Director, Chairman, President and Chief Executive Officer Philip T. Christ 64 Group Vice President D. Richard Hannan 54 Group Vice President Stanley J. Aris 55 Vice President Finance and Chief Financial Officer Jeannine M. Davis 47 Vice President, Secretary and General Counsel James L. Cummins 40 Vice President Human Resources James N. Hufford 56 Vice President Research, Development and Engineering Donald R. Schroeder 47 Vice President Sales and Marketing George T. Newhart 53 Corporate Controller Gary N. Hoipkemier 41 Treasurer Joseph P. Walker has served as Chairman of the Board, President and Chief Executive Officer of CTS since 1988. Mr. Walker is a Director of NBD Bank, N.A. Philip T. Christ has served as Group Vice President since 1990. D. Richard Hannan was elected Group Vice President on May 22, 1995. Prior to joining CTS, Mr. Hannan worked for two years as a business consultant. Prior to 1993, Mr. Hannan served as Vice President and General Manager of an operating unit of TRW, Inc. Stanley J. Aris has served as Vice President, Finance and Chief Financial Officer since May 18, 1992. Prior to joining CTS, Mr. Aris worked for two years as a business consultant. Jeannine M. Davis has served as Vice President, General Counsel and Secretary since 1988. James L. Cummins was elected Vice President Human Resources on February 25, 1994. Prior to this appointment, he served as Director, Human Resources, CTS Corporation from 1991-1994. From 1990-1991, Mr. Cummins served as Human Resources Director, CTS Corporation Electromechanical Group and in 1991 was appointed Assistant Human Resources Director, CTS Corporation. James N. Hufford was elected Vice President Research, Development and Engineering on February 17, 1995. During the four years prior to this appointment, Mr. Hufford served as Manager and then Director of Corporate Research, Development and Engineering for the Corporation. Donald R. Schroeder was elected Vice President Sales and Marketing on February 17, 1995. During the six years prior to this appointment, Mr. Schroeder served as Business Development Manager for innovative and new technology for the CTS Microelectronics business unit in West Lafayette, Indiana. George T. Newhart has served as Corporate Controller since 1989. Gary N. Hoipkemier has served as Treasurer since 1989. Item 11. Executive Compensation Information responsive to Item 402 of Regulation S-K pertaining to management remuneration is contained in the 1996 Proxy Statement in the captions "Executive Compensation," pages 7-8 and "Director Compensation," page 14, filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information responsive to Item 403 of Regulation S-K pertaining to security ownership of certain beneficial owners and management is contained in the 1996 Proxy Statement in the caption "Securities Beneficially Owned by Principal Shareholders and Management," pages 3-5 filed with the Securities and Exchange Commission, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Dynamics Corporation of America (DCA) owned 2,303,100 (44.1%) of the Company's outstanding common stock as of December 31, 1995. CTS purchased products from DCA totaling about $143,000 in 1995, $233,000 in 1994 and $145,000 in 1993, principally consisting of certain component parts used by CTS in the manufacture of frequency control devices. CTS had minimal sales to DCA in 1995 and 1994, and no sales in 1993. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (2) The list of financial statements and financial statement schedules required by Item 14 (a)(1) and (2) is contained on page S-1 herein. (a)(3) Exhibits (3)(a) Articles of Incorporation, as amended April 16, 1973, previously filed as exhibit (3)(a) to the Company's Form 10-K for 1987, and incorporated herein by reference. (3)(b) Bylaws, as amended and effective June 25, 1992, previously filed as exhibit (3)(b) to the Company's Form 10-K for 1992, and incorporated herein by reference. (10)(a) Employment agreement dated June 24, 1994, between CTS and Joseph P. Walker, previously filed as exhibit (10)(a) to the Company's Form 10-K for 1994, and incorporated herein by reference. (10)(b) Prototype indemnification agreement, with Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., Andrew Lozyniak, Joseph P. Walker, Philip T. Christ, Stanley J. Aris, Jeannine M. Davis, James L. Cummins, George T. Newhart, Gary N. Hoipkemier, filed as exhibit (10)(b) to the Company's Form 10-K for 1991, and incorporated herein by reference. (10)(c) CTS Corporation 1982 Stock Option Plan, as amended February 24, 1989, was previously filed as exhibit (10)(d) to the Company's Form 10-K for 1989, and is incorporated herein by reference. (10)(d) CTS Corporation 1986 Stock Option Plan, approved by the shareholders at the reconvened annual meeting on May 30, 1986. The CTS Corporation 1986 Stock Option Plan is contained in Exhibit 4 to Registration Statement No. 33-27749, effective March 23, 1989, and is incorporated herein by reference. (10)(e) CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, as adopted by the CTS Board of Directors on December 16, 1988, and approved by shareholders at the 1989 annual meeting of - shareholders on April 28, 1989. The CTS Corporation 1988 Restricted Stock and Cash Bonus Plan is contained in Appendix A, pages 11-15, of the 1989 Proxy Statement for the annual meeting of shareholders held April 28, 1989, under the caption "CTS Corporation 1988 Restricted Stock and Cash Bonus Plan," previously filed with the Securities and Exchange Commission, and is incorporated herein by reference. (10)(f) CTS Corporation 1996 Stock Option Plan, subject to shareholder approval at the annual meeting of shareholders to be held on April 26, 1996, filed as exhibit (10)(f) to the Company's Form 10-K for 1995. (10)(g) Prototype indemnification agreement, with James N. Hufford, Donald R. Schroeder and D. Richard Hannan, filed as exhibit (10)(g) to the Company's Form 10-K for 1995. (13) CTS Corporation 1995 Annual Report. (21) Subsidiaries of CTS Corporation. (23) Consent of Price Waterhouse to incorporation by reference of this Annual Report on Form 10-K for the fiscal year 1995 to Registration Statement 2- 84230 on Form S-8 and Registration Statement 33- 27749 on Form S-8. Indemnification Undertaking For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 2-84230 (filed June 13, 1983) and 33-27749 (filed March 23, 1989): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provision, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) AND (2) AND ITEM 14(d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1995 CTS CORPORATION AND SUBSIDIARIES ELKHART, INDIANA FORM 10-K - ITEM 14(a) (1) AND (2) AND ITEM 14 (d) CTS CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of CTS Corporation and subsidiaries included in the annual report of the registrant to its shareholders for the year ended December 31, 1995, are incorpo- rated by reference in Item 8: Consolidated balance sheets - December 31, 1995, and December 31, 1994 Consolidated statements of earnings - Years ended December 31, 1995, December 31, 1994, and December 31, 1993 Consolidated statements of shareholders' equity - Years ended December 31, 1995, December 31, 1994, and Decem- ber 31, 1993 Consolidated statements of cash flows - Years ended December 31, 1995, December 31, 1994, and December 31, 1993 Notes to consolidated financial statements The following consolidated financial statement schedules of CTS Corporation and subsidiaries, are included in item 14(d): Page Schedule II - Valuation and qualifying accounts S-3 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are inapplicable, not required or the information is included in the consolidated financial state- ments or notes thereto. S-1 EXHIBIT 21 CTS CORPORATION AND SUBSIDIARIES CTS Corporation (Registrant), an Indiana corporation Subsidiaries CTS Corporation, a Delaware corporation CTS of Panama, Inc., a Republic of Panama corporation CTS Components Taiwan, Ltd.,(1) a Taiwan, Republic of China corporation CTS Singapore, Pte. Ltd., a Republic of Singapore corporation CTS de Mexico S.A.,(1) a Republic of Mexico corporation CTS Export Corporation, a Virgin Islands corporation CTS Japan, Inc., a Japan corporation CTS of Canada, Ltd., a Province of Ontario (Canada) corporation CTS Manufacturing (Thailand) Ltd.,(1) a Thailand corporation CTS Electronics Hong Kong Ltd.,(1) a Hong Kong corpora- tion CTS Corporation U.K. Ltd., a United Kingdom corporation CTS Printex, Inc., a California corporation CTS Micro Peripherals, Inc., a California corporation Micro Peripherals Singapore (Private) Limited, a Republic of Singapore corporation Corporations whose names are indented are subsidiaries of the preceding non-indented corporations. Except as indicated, each of the above subsidiaries is 100% owned by its parent company. Operations of all subsidiaries and divisions are consolidated in the financial statements filed. (1) Less than 1% of the outstanding shares of stock is owned of record by nominee shareholders pursuant to national laws regarding resident or nominee ownership. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date March 21, 1996 By /S/ Stanley J. Aris Stanley J. Aris Vice President Finance and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date March 21, 1996 By /S/ Lawrence J. Ciancia Lawrence J. Ciancia, Director Date March 21, 1996 By /S/ Patrick J. Dorme Patrick J. Dorme, Director Date March 21, 1996 By /S/ Gerald H. Frieling, Jr. Gerald H. Frieling, Jr., Director Date March 21, 1996 By /S/ Andrew Lozyniak Andrew Lozyniak, Director Date March 21, 1996 By /S/ Joseph P. Walker Joseph P. Walker, Director Date March 21, 1996 By /S/ George T. Newhart George T. Newhart, Corporate Controller and principal accounting officer Date March 21, 1996 By /S/ Jeannine M. Davis Jeannine M. Davis, Vice President, Secretary and General Counsel 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, 1995: Allowance for doubtful receivables $869 $ 1 $ 0 $ 96 $774 Year ended December 31, 1994: Allowance for doubtful receivables $709 $277 $ 0 $117 $869 Year ended December 31, 1993: Allowance for doubtful receivables $303 $521 $85 $200 $709 S-3
EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-84230 and No. 33- 27749) of CTS Corporation of our report dated February 1, 1996, appearing on page 24 of the CTS Corporation 1995 Annual Report which is incorporated in the Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page S-2 of this Form 10-K. PRICE WATERHOUSE LLP South Bend, Indiana March 21, 1996 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of CTS Corporation Our audits of the consolidated financial statements referred to in our report dated February 1, 1996, appearing on page 24 of the CTS Corporation 1995 Annual Report (which report and consolidated financial statements are incorporated by reference in the Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP South Bend, Indiana February 1, 1996 S-2 EX-1 2 FINANCIAL HIGHLIGHTS (In thousands of dollars except per share data) For the Year 1995 1994 1993 Net sales $300,157 $268,707 $236,979 Net earnings 17,164 13,967 1,956 Average shares outstanding 5,201 5,170 5,153 Per share data: Earnings before accounting changes $ 3.30 $ 2.70 $ 1.27 Accounting changes (.89) Net earnings 3.30 2.70 .38 Dividends declared .60 .45 .40 Capital expenditures 11,181 13,401 11,696 At Year-End Working capital $ 75,151 $ 65,875 $ 47,378 Notes payable 6,685 7,436 12,822 Long-term obligations (including current maturities) 15,925 15,899 5,336 Shareholders' equity 146,253 131,855 119,203 Equity per outstanding share 28.03 25.46 23.13 SHAREHOLDER INFORMATION (In thousands of dollars except per share data) Quarterly Results of Operations (Unaudited) Net Gross Operating Net Sales Earnings Earnings Earnings 1995 1st quarter$ 75,978 $17,273 $ 4,877 $ 3,256 2nd quarter 76,413 19,148 7,023 4,642 3rd quarter 73,890 18,345 6,416 4,218 4th quarter 73,876 20,038 9,172 5,048 $300,157 $74,804 $27,488 $17,164 1994 1st quarter$ 64,357 $15,597 $ 3,560 $ 2,490 2nd quarter 70,618 17,152 5,525 3,889 3rd quarter 65,950 15,100 4,368 3,031 4th quarter 67,782 15,218 7,231 (a) 4,557 (a) $268,707 $63,067 $20,684 $13,967 Per Share Data Dividends Net High(b) Low(b) Declared Earnings 1995 1st quarter $32.00 $27.38 $.15 $ .63 2nd quarter 33.50 29.25 .15 .89 3rd quarter 34.50 29.94 .15 .81 4th quarter 37.75 29.63 .15 .97 $.60 $3.30 1994 1st quarter $24.00 $19.50 $.10 $ .48 2nd quarter 26.13 21.88 .10 .75 3rd quarter 29.13 24.63 .10 .59 4th quarter 31.00 27.13 .15 .88 $.45 $2.70 (a) Includes reversal of $975 of litigation and customer claims reserves which were favorably settled. (b) The market price range of CTS Corporation common stock on the New York Stock Exchange for each of the quarters during the last two years. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars except per share amounts) Year Ended
December 31 December 31 December 31 1995 1994 1993 Net sales $300,157 $268,707 $236,979 Costs and expenses: Cost of goods sold 225,353 205,640 183,927 Selling, general and administrative expenses 39,312 36,175 36,323 Research and development expenses 8,004 6,208 5,708 Operating earnings 27,488 20,684 11,021 Other (expenses) income: Interest expense (1,790) (714) (980) Interest income 1,421 657 580 Other 565 860 (361) Total other income (expenses) 196 803 (761) Earnings before income taxes and cumulative effect of changes in accounting principles 27,684 21,487 10,260 Income taxes--Note G 10,520 7,520 3,690 Earnings before cumulative effect of changes in accounting principles 17,164 13,967 6,570 Cumulative effect of accounting change - postretirement benefits--Notes A and F (5,096) Cumulative effect of accounting change - income taxes--Notes A and G 482 Net earnings $ 17,164 $ 13,967 $ 1,956 Net earnings per share: Before accounting changes $3.30 $2.70 $1.27 Cumulative effect on prior years of accounting changes (.89) Net earnings per share $3.30 $2.70 $ .38 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Shareholders' Equity (In thousands of dollars)
Cumulative Deferred Common Retained Translation Compen- Treasury Stock Earnings Adjustment sation Stock Total Balances at December 31, 1992 $34,245 $100,973 $ (863) $(164) $(14,819) $119,372 Net earnings 1,956 1,956 Cash dividends of $.40 per share (2,061) (2,061) Nonemployee Directors' stock retirement plan 8 8 Cumulative translation adjustment (186) (186) Issued 1,000 shares on restricted stock and cash bonus plan (9) (19) 28 Stock compensation (14) 45 31 Deferred compensation recognized 83 83 Balances at December 31, 1993 34,222 100,868 (1,049) (92) (14,746) 119,203 Net earnings 13,967 13,967 Cash dividends of $.45 per share (2,329) (2,329) Nonemployee Directors' stock retirement plan (4) 3 12 11 Cumulative translation adjustment 695 695 Issued 15,500 shares on restricted stock and cash bonus plan 51 (358) 307 Issued 8,650 shares on exercise of stock options (72) 248 176 Stock compensation 1 12 13 Deferred compensation recognized 119 119 Balances at December 31, 1994 34,198 112,506 (354) (328) (14,167) 131,855 Net earnings 17,164 17,164 Cash dividends of $.60 per share (3,124) (3,124) Nonemployee Directors' stock retirement plan 15 15 Cumulative translation adjustment (291) (291) Issued 18,500 shares on restricted stock and cash bonus plan 76 (632) 556 Issued 17,325 shares on exercise of stock options (163) 522 359 Acquired 200 shares traded on options--net 7 (7) Stock compensation 3 93 96 Deferred compensation recognized 17 162 179 Balances at December 31, 1995 $34,138 $126,546 $(645) $(783) $(13,003) $146,253 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS December 31 December 31 (In thousands of dollars) 1995 1994 ASSETS Current Assets Cash and equivalents $ 37,271 $ 24,922 Accounts receivable, less allowances (1995--$774; 1994--$869) 41,737 35,029 Inventories Finished goods 7,445 5,725 Work-in-process 14,789 16,531 Raw materials 16,651 19,200 Total inventories 38,885 41,456 Other current assets 2,544 3,032 Deferred income taxes--Note G 5,676 6,228 Total current assets 126,113 110,667 Property, Plant and Equipment Buildings and land 42,547 41,945 Machinery and equipment 139,594 148,481 Total property, plant and equipment 182,141 190,426 Less accumulated depreciation 131,445 139,649 Net property, plant and equipment 50,696 50,777 Other Assets Goodwill, less accumulated amortization (1995--$7,687; 1994--$7,010) 4,603 5,221 Prepaid pension expense--Note F 44,739 39,408 Other 976 753 Total other assets 50,318 45,382 Total Assets $227,127 $206,826 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable--Note C $ 6,685 $ 7,436 Current maturities of long-term obligations--Note D 2,211 304 Accounts payable 15,605 12,768 Accrued salaries, wages and vacation 6,695 6,483 Accrued taxes other than income 1,740 1,577 Income taxes payable 3,991 2,288 Other accrued liabilities--Note I 14,035 13,936 Total current liabilities 50,962 44,792 Long-term Obligations--Note D 13,714 15,595 Deferred Income Taxes--Note G 11,909 9,222 Postretirement Benefits--Note F 4,289 5,362 Contingencies--Note I Shareholders' Equity Common stock-authorized 8,000,000 shares without par value; issued 5,807,031 shares 33,355 33,870 Retained earnings 126,546 112,506 Cumulative translation adjustment (645) (354) 159,256 146,022 Less cost of common stock held in treasury (1995-- 589,702 shares; 1994--628,427 shares) 13,003 14,167 Total shareholders' equity 146,253 131,855 Total Liabilities and Shareholders' Equity $227,127 $206,826 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) Year Ended
December 31 December 31 December 31 1995 1994 1993 Cash flows from operating activities: Net earnings $17,164 $13,967 $ 1,956 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting for: Postretirement benefits 5,096 Income taxes (482) Depreciation and amortization 11,683 11,236 12,143 Deferred income taxes 3,239 2,519 767 Other (52) (421) 458 Changes in assets and liabilities (net of effects of purchase of ODL)--Note B: Accounts receivable (6,708) (4,402) (2,747) Inventories 2,571 (3,297) 1,163 Prepaid pension asset (5,331) (6,563) (5,986) Accounts payable and accrued liabilities 4,280 (38) 1,627 Income taxes payable 1,703 882 1,629 Other (1,688) (1,328) 1,941 Total adjustments 9,697 (1,412) 15,609 Net cash provided by operating activities 26,861 12,555 17,565 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 236 411 998 Capital expenditures (excluding ODL) (11,181) (10,000) (11,696) Payment for purchase of ODL (5,501) Net cash used in investing activities (10,945) (15,090) (10,698) Cash flows from financing activities: Proceeds from issuance of long-term obligations 15,000 Payments of long-term obligations (286) (4,479) (6,179) (Decrease) increase in notes payable (751) (6,050) 6,898 Proceeds from stock options exercised 359 176 Dividends paid (3,118) (2,067) (2,061) Net cash (used in) provided by financing activities (3,796) 2,580 (1,342) Effect of exchange rate changes on cash 229 1,343 (446) Net increase in cash 12,349 1,388 5,079 Cash and equivalents at beginning of year 24,922 23,534 18,455 Cash and equivalents at end of year $37,271 $24,922 $23,534 Supplemental cash flow information Cash paid during the year for: Interest $ 1,791 $ 658 $ 1,076 Income taxes - net 5,590 4,009 1,294 The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries. All intercompany accounts and transactions have been eliminated. Inventories: Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first- out method. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets principally on the straight-line method. Useful lives for buildings and improvements range from 10 to 45 years, and machinery and equipment from 3 to 8 years. Goodwill: The excess of cost over the fair value of net assets of businesses acquired is amortized on the straight-line method over the periods expected to be benefited. Retirement Plans: The Company has various defined benefit and defined contribution retirement plans covering a majority of its employees. The Company's policy is to annually fund the defined benefit pension plans at or above the minimum required under the Employee Retirement Income Security Act of 1974 (ERISA). Research and Development: Research and development costs consist of expenditures incurred during the course of planned search and investigation aimed at discovery of new knowledge which will be useful in developing new products or processes, or significantly enhancing existing products or production processes, and the implementation of such through design, testing of product alternatives or construction of prototypes. The Company expenses all research and development costs as they are incurred. Income Taxes: The Company provides deferred income taxes for transactions reported in different periods for financial reporting and income tax return purposes pursuant to the requirements of Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes." The underlying differences consist primarily of depreciation differences, pension income, postemployment benefits, certain nondeductible accruals and inventory reserves. Reclassifications: Certain reclassifications have been made for all years presented in the financial statements to conform to the classifications adopted in 1995. NOTE A - Summary of Significant Accounting Policies (continued) Translation of Foreign Currencies: The financial statements of all of the Company's non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net income. The assets and liabilities of the Company's United Kingdom subsidiary are translated into U.S. dollars principally at the current exchange rate with resulting translation adjustments made directly to the "Cumulative translation adjustment" component of shareholders' equity. Statements of earnings accounts are translated at the average rates during the period. Financial Instruments: The Company's financial instruments consist primarily of cash, cash equivalents, trade receivables and payables, and obligations under notes payable and long-term debt. In accordance with the requirements of FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," the Company is providing the following fair value estimates and information regarding valuation methodologies. The carrying value for cash and cash equivalents, and trade receivables and payables approximates fair value based on the short-term maturities of these instruments. The carrying value for all long-term debt outstanding at December 31, 1995, and 1994 approximates fair value where fair value is based on market prices for the same or similar debt and maturities. The Company occasionally uses forward exchange currency contracts to minimize the impact of foreign currency fluctuations on the Company's costs and expenses. At December 31, 1995, the Company's forward foreign exchange currency contracts were not material. These contracts are accounted for as hedges and have minimal credit risk because the counterparties are well-established financial institutions. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. Concentration of Credit Risk: The Company sells its products to customers primarily in the automotive, data processing, communications equipment and instruments and controls industries, primarily in North America, Europe and the Pacific Rim. The Company performs ongoing credit evaluations of its customers to minimize credit risk. The Company generally does not require collateral. Accounting Changes: Effective January 1, 1993, the Company adopted the provisions of FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and FASB Statement No. 109, "Accounting for Income Taxes." For postretirement benefits, the Company changed its practice from expensing these costs as incurred to accruing these costs during 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. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation." This Statement, which must be adopted in 1996, allows for either continued recognition of stock compensation cost under the intrinsic value based method of accounting as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," ("Disclosure Method"), or recognition through the statements of earnings under a fair value based method. Selection of the Disclosure Method will require certain pro forma disclosures. The Company has not yet decided on the method of adoption, nor has the Company determined the effect of the fair value method. In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement, which must be adopted in 1996, requires companies to investigate potential impairments of long- lived assets, certain identifiable intangibles and associated goodwill on an exception basis, when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. The Company does not believe that the adoption of this standard will have a material effect on its financial position or results of operations. Earnings Per Share: Earnings per common share are based on the weighted average number of shares outstanding. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - Purchase of Assets During 1994, the Company acquired, in a cash transaction, inventory and fixed assets of the light emitting diode (LED)-based fiber optic data link (ODL ) product line of AT&T Microelectronics for $5.5 million. The cost of the acquisition, which also included order backlog on sales contracts, rights to intellectual property, design and manufacturing technology and trademark of the AT&T Lightwave LED-based ODL business, was allocated among the assets purchased based on estimated fair value, with fixed assets being reduced for the excess of fair value over cost. NOTE C - Short-term Borrowings Short-term borrowings consist of demand notes payable to various banks with an average interest rate of 6.6% at December 31, 1995, and 1994, and 4.4% at December 31, 1993. The notes were issued in connection with unsecured lines of credit arrangements, the unused portions of which totaled $8,591,000 at December 31, 1995. These arrangements are generally subject to annual renewal and renegotiation, and may be withdrawn at the banks' option. Average daily short-term borrowings, including borrowings denominated in non-U.S. currencies, during 1995, 1994 and 1993 were $6,781,000, $11,776,000 and $12,051,000, respectively. The weighted average interest rates, computed by relating interest expense to average daily short-term borrowings, were 6.5% in 1995, 5.5% in 1994 and 4.3% in 1993. The maximum amount of short-term borrowings at the end of any month during 1995, 1994 and 1993 was $8,440,000, $12,977,000 and $13,842,000, respectively. The short-term borrowings outstanding at December 31, 1993, were $12,822,000. NOTE D - Long-term Obligations Long-term obligations were comprised of the following: (In thousands) 1995 1994 Long-term debt: Five-year term loan at 8.4%, due in 1996 through 1999. $15,000 $15,000 Other 608 899 15,608 15,899 Less current maturities 2,211 304 Total long-term debt 13,397 15,595 Other 317 Total long-term obligations $13,714 $15,595 The Company has a five-year $15,000,000 term loan with three banks, of which $2,000,000 expires in 1996, $2,000,000 expires in 1997, $2,000,000 expires in 1998 and $9,000,000 expires in 1999. The Company has unsecured revolving credit agreements totaling $47,000,000 with four banks, of which $2,000,000 expires in 1996 and $45,000,000 expires in 1997. Interest rates on these borrowings fluctuate based upon market rates. The Company pays an average commitment fee of three-tenths percent per annum on the revolving credit agreements. The credit agreements and term loan require, among other things, that the Company maintain certain minimum working capital, tangible net worth and interest coverage requirements and maximum total liabilities to tangible net worth ratio. Annual maturities of long-term obligations during the three years subsequent to 1996 are as follows: 1997--$2,520,000; 1998-- $2,194,000; 1999--$9,000,000. NOTE E - Stock Plans Under the Company's stock option plans, options may be granted to officers and key employees in the form of incentive stock options or nonqualified stock options. Options are granted at the fair market value on the grant date and are exercisable generally in cumulative annual installments over a maximum ten-year period, commencing at least one year from the date of grant. Upon the exercise of stock options, payment may be made using cash, shares of the Company's common stock or any combination thereof. Information regarding the Company's stock option plans is as follows: Number of Price Per Shares Share Outstanding at January 1, 1994 44,650 $19.125 to $20.625 Granted 57,000 24.750 Exercised (8,650) 19.125 to 20.625 Expired or canceled (7,000) 19.125 to 24.750 Outstanding at December 31, 1994 86,000 19.125 to 24.750 Granted 94,050 31.250 to 37.375 Exercised (17,325) 20.625 to 24.750 Expired or canceled (9,800) 19.125 to 31.250 Outstanding at December 31, 1995 152,925 19.125 to 37.375 Exercisable at December 31, 1995 19,225 19.125 to 24.750 Available for future grants at December 31, 1995 113,450 Under the 1986 Stock Option Plan, options to purchase a total of 66,375 shares were outstanding as of December 31, 1995. At December 31, 1995, 19,225 of these shares were exercisable. In December 1995, the Board of Directors adopted, subject to shareholders' approval at the 1996 Annual Meeting, the 1996 Stock Option Plan, under which a maximum of 200,000 shares were reserved for issuance to certain officers and key employees. Subject to shareholders' approval, options to purchase a total of 86,550 shares were granted and considered outstanding as of December 31, 1995. The Company has a discretionary Restricted Stock and Cash Bonus Plan (Plan) which reserves 400,000 shares of the Company's common stock for sale, at market price or below, or award to key employees. Shares awarded or sold are subject to restrictions against transfer and repurchase rights of the Company. In general, restrictions lapse at the rate of 20% per year beginning NOTE E - Stock Plans (continued) one year from the award or sale. In addition, the Plan provides for a cash bonus to the participant equal to the fair market value of the shares on the dates restrictions lapse, in the case of an award, or the excess of the fair market value over the original purchase price if the shares were purchased. The total bonus paid to any participant during the restricted period is limited to twice the fair market value of the shares on the date of award or sale. Under the Plan, during 1995, 18,500 shares were awarded leaving 345,400 shares available for award or sale at December 31, 1995. Under the Plan, in 1994 and 1993, 15,500 and 1,000 shares were awarded, respectively. In addition to the shares issued and the amortization of deferred compensation included in the Consolidated Statements of Shareholders' Equity, the Company accrued $306,000, $212,000 and $68,000 for additional compensation payable under the provisions of the Plan in 1995, 1994 and 1993, respectively. The Company has a Stock Retirement Plan for Nonemployee Directors. This retirement plan provides for a portion of the total compensation payable to Nonemployee Directors to be deferred and paid in Company stock. Under this plan, the amount of the actual dollar compensation was $15,100, $11,100 and $7,900 in 1995, 1994 and 1993, respectively. NOTE F - Employee Retirement Plans Defined benefit plans The Company has a number of noncontributory defined benefit pension plans (Plans) covering approximately 44% of its employees. Plans covering salaried employees provide pension benefits that are based on the employees' compensation prior to retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. Net pension income for the Plans in 1995, 1994 and 1993 includes the following components: (In thousands) 1995 1994 1993 Service cost--benefits earned during the year $ 2,216 $ 2,374 $ 2,143 Interest cost on projected benefit obligation 5,330 4,769 4,632 Actual (return) loss on plan assets (23,252) 2,565 (13,622) Net amortization and deferral 10,375 (16,271) 861 Net pension income $(5,331) $(6,563) $(5,986) The following table details the funded status of the Plans at December 31, 1995, and December 31, 1994: (In thousands) 1995 1994 Actuarial present value of benefit obligations: Vested benefits $ 66,736 $ 58,224 Nonvested benefits 2,960 2,461 Accumulated benefit obligation $ 69,696 $ 60,685 Plan assets at fair value $134,595 $115,319 Projected benefit obligation 77,138 66,775 Plan assets in excess of the projected benefit obligation 57,457 48,544 Unrecognized prior year service cost 154 212 Unrecognized net (gain) loss (1,935) 3,672 Unrecognized net asset (10,937) (13,020) Prepaid pension expense $44,739 $ 39,408 NOTE F - 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: 1995 1994 1993 Discount rates (funded status) 7.25% 8.25% 7.25% Rates of increase in compensation levels (salaried plan only) 5%-7% 5%-7% 5%-7% Expected long-term rate of return on assets 9% 9% 10% Net pension income is determined using assumptions as of the beginning of each year. Funded status is determined using assumptions as of the end of each year. Effective with the December 31, 1995, measurement date, the discount rate was reduced 100 basis points to 7.25% to reflect current market conditions. This change had no impact on 1995 pension income, but will reduce 1996 pension income by $310,000. Effective with the December 31, 1994, measurement date, the discount rate, expected long-term rate of return on assets and mortality assumptions were revised to reflect current market and demographic conditions. As a result of these changes, the December 31, 1994, projected benefit obligation decreased by $2.4 million. These changes had no effect on 1994 pension income, but reduced 1995 pension income by $1.2 million. The majority of U.S. defined benefit pension plan assets are invested in common stock, including approximately $7,518,000 in CTS common stock, U.S. government bonds and cash and equivalents. The balance is invested in corporate bonds, a private equity fund, non-U.S. bonds and convertible issues. Because the domestic plans are fully funded, the Company made no contributions during 1995, 1994 or 1993. Benefits paid by all Plans during 1995, 1994 and 1993 were $4,085,000, $4,175,000 and $4,289,000, respectively. Pension coverage for employees of certain non-U.S. subsidiaries is provided through separate plans. Contributions of $237,000, $172,000 and $174,000 were made to the non-U.S. Plans in 1995, 1994 and 1993, respectively. Defined contribution plans The Company sponsors a 401(k) Plan and several other defined contribution plans which cover some of its non-U.S. employees and its domestic hourly employees not covered by a defined benefit pension plan. Contributions and costs are generally determined as a percentage of the covered employee's annual salary. Amounts expensed for the 401(k) Plan and the other plans totaled $2,294,000 in 1995, $2,506,000 in 1994 and $2,532,000 in 1993. NOTE F - 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. Effective January 1, 1993, the Company implemented, on the immediate recognition basis, FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which resulted in a noncash charge of $5,096,000, net of an income tax benefit of $3,123,000, or $.99 per share. Substantially all of the Company's domestic employees are eligible for life insurance benefits. Substantially all of the Company's domestic employees hired before December 31, 1993, became eligible for health care benefits under the plan if they attained normal retirement age prior to discontinuance of those benefits effective January 1, 1996. Summary information on the Company's plans as of December 31, 1995, and December 31, 1994, is as follows: (In thousands) 1995 1994 Accumulated postretirement benefit obligation: Active employees $(1,282) $(1,089) Retirees and dependents (2,912) (3,589) (4,194) (4,678) Unrecognized net gain (345) (1,910) Postretirement benefit obligation $(4,539) $(6,588) The components of net periodic postretirement benefit expense for 1995 and 1994 are as follows: (In thousands) 1995 1994 Service cost--benefits earned during period $ 28 $ 43 Interest cost on accumulated benefit obligation 330 511 Net amortization and deferral (1,008) Net (income) expense $ (650) $554 The accumulated postretirement benefit obligation was determined using relevant actuarial assumptions and the terms of the Company's medical, dental and life insurance plans, including the effects of capped Company contribution rates and discontinuance of Company payments toward retiree health and dental insurance effective January 1, 1996. The Company has no accrued postretirement medical obligation at December 31, 1995, due to the elimination of the Company's postretirement medical coverage effective January 1, 1996. The elimination of this coverage and improved favorable medical plan experience resulted in approximately a $1 million gain recognized throughout 1995. For measurement purposes, a 7.25 and 8.25 percent annual discount rate was used to determine the remaining life obligation for 1995 and 1994, respectively. NOTE F - Employee Retirement Plans (continued) Effective with the December 31, 1994, measurement date, the discount rate and mortality assumptions were revised to reflect current market and demographic conditions. As a result of these changes and favorable medical claims experience, the accumulated postretirement life obligation decreased by approximately $800,000 and the accumulated postretirement medical obligation decreased by approximately $700,000. The Company funds medical and dental costs as incurred and funds life insurance benefits through term life insurance policies. The Company plans to continue funding term life insurance premiums on a pay-as-you-go basis. NOTE G - Income Taxes Effective January 1, 1993, the Company adopted the provisions of FASB Statement No. 109, "Accounting for Income Taxes." FASB Statement No. 109 replaced FASB Statement No. 96, of the same title, which the Company previously used to account for income taxes. The effect of adopting FASB Statement No. 109 is to recognize deferred tax benefits that were not recognized under FASB Statement No. 96. The cumulative effect of the change in the method of accounting for income taxes as of the beginning of 1993 increased earnings by $482,000 or $.10 per share. The components of earnings before income taxes and cumulative effect of changes in accounting principles are comprised of the following: (In thousands) 1995 1994 1993 Domestic $17,563 $15,391 $8,965 Non-U.S. 10,121 6,096 1,295 Total $27,684 $21,487 $10,260 The provision for income taxes charged to earnings before cumulative effect of changes in accounting principles is comprised of the following: (In thousands) 1995 1994 1993 Current: Federal $1,935 $1,998 $ 908 State 963 604 375 Non-U.S. 4,383 2,367 2,124 Total current 7,281 4,969 3,407 Deferred: Federal 2,534 1,268 154 State 578 400 429 Non-U.S. 127 883 (300) Total deferred 3,239 2,551 283 Total provision for income taxes $10,520 $7,520 $3,690 Significant components of the Company's deferred tax liabilities and assets at December 31, 1995, and 1994, are: NOTE G - Income Taxes (continued) (In thousands) 1995 1994 Depreciation $ 1,063 $ 913 Pensions 15,767 13,396 Other 2,282 2,192 Gross deferred tax liabilities 19,112 16,501 Postemployment benefits 1,611 2,240 Inventory reserves 2,613 2,778 Loss carryforwards 5,847 6,575 Credit carryforwards 5,537 5,705 Nondeductible accruals 3,200 3,013 Other 710 425 Gross deferred tax assets 19,518 20,736 Net deferred tax assets 406 4,235 Deferred tax assets valuation allowance (6,639) (7,229) Total $(6,233) $(2,994) During 1995, the valuation allowance was increased as a result of an increase in unutilized net operating loss carryforwards in some taxing jurisdictions, and decreased by the utilization of net operating losses and scheduled tax credits in other jurisdictions. The net decrease in the valuation allowance was $590,000. A reconciliation of the Company's effective income tax to the statutory federal income tax follows: (In thousands) 1995 1994 1993 Taxes at the U.S. statutory rate $9,689 $ 7,306 $3,488 State income taxes, net of federal income tax benefit 1,002 663 531 Non-U.S. income taxed at rates different than the U.S. statutory rate 1,159 1,639 1,494 Utilization of net operating loss carryforwards and benefit of scheduled tax credits (2,024) (2,544) (1,842) Foreign distributions, net of foreign tax credits 372 Other 322 456 19 Provision for income taxes $10,520 $ 7,520 $3,690 NOTE G - Income Taxes (continued) Undistributed earnings of certain non-U.S. subsidiaries amounting to $46,965,000 at December 31, 1995, are intended to be permanently invested and accordingly, no provision has been made for non-U.S. withholding taxes on these earnings. In the event all undistributed earnings were remitted, approximately $4,629,000 of withholding tax would be imposed. The Company has U.S. tax basis business tax credits of approximately $2,559,000 at December 31, 1995. The U.S. business credit carryforwards expire between the years 2001 and 2009. In addition, the Company has various non-U.S. tax basis net operating losses and business credit carryforwards of $21,218,000 and $74,000, respectively. The non-U.S. credit carryforwards expire in 1997. The non-U.S. net operating losses have an unlimited carryforward period. In addition, the Company has alternative minimum tax credit carryforwards of approximately $2,904,000, which have no expiration date. NOTE H - Business Segment and Non-U.S. Operations The Company's operations comprise one business segment, the manufacturing of electronic components. Electronic components include production and sale of resistor networks, variable resistors, frequency control devices, interconnect products, hybrid microcircuits, automotive control devices, switches, loudspeakers, fiber-optic transceivers, insulated metal circuits and industrial electronics. Sales to a major automotive manufacturer were $54,900,000 in 1995, $49,400,000 in 1994 and $40,100,000 in 1993. Although sales to a major data processing equipment manufacturer were $9,900,000 in 1995 and $4,400,000 in 1994, sales to the same customer were significantly higher in 1993 at $24,000,000. The non-U.S. operations or facilities are located in Taiwan, Singapore, Hong Kong, Thailand, United Kingdom, Canada, Mexico and Japan. Net sales to unaffiliated customers from other non- U.S. operations in the aggregate equaled 19%, 18% and 16% of the consolidated total for each of the years 1995, 1994 and 1993, respectively. Net sales to unaffiliated customers from the United Kingdom operation equaled 17%, 16% and 12% of the consolidated total for 1995, 1994 and 1993, respectively. Net assets of subsidiaries located in non-U.S. countries as of December 31, 1995, and December 31, 1994, are summarized as follows: (In thousands) 1995 1994 Net current assets $27,275 $23,751 Property, plant and equipment--net 22,423 23,342 Goodwill and other long-term assets 1,625 2,331 Long-term obligations (714) (586) Deferred income taxes (1,526) (1,485) Total net assets of non-U.S. subsidiaries $49,083 $47,353 Net sales by geographic area include both sales to unaffiliated customers and transfers between geographic areas. Such transfers are accounted for primarily on the basis of a uniform intercompany pricing policy. Operating earnings is total revenue less operating expenses. In computing operating earnings, none of the following items have been added or deducted: general corporate expenses, interest expense, other income and expenses and income taxes. Identifiable assets by geographic area are those assets that are used in the Company's operations in each such area. The Corporate Office assets are principally property and equipment and other noncurrent assets. Summarized financial information concerning the geographic areas of operation for 1995, 1994 and 1993 is shown in the following table. The caption "Eliminations" includes intercompany sales and other transactions which are eliminated or adjusted in arriving at consolidated data. NOTE H - Business Segment and Non-U.S. Operations (continued) Geographic Area (In thousands) 1995 1994 1993 Net Sales Domestic: Sales to unaffiliated customers $194,016 $178,032 $170,566 Transfers to non-U.S. areas 5,439 4,179 4,484 199,455 182,211 175,050 Other non-U.S.: Sales to unaffiliated customers 56,570 47,896 37,868 Transfers to other areas 6,092 7,692 11,172 62,662 55,588 49,040 United Kingdom: Sales to unaffiliated customers 49,571 42,779 28,545 Transfers to other areas 732 514 156 50,303 43,293 28,701 Eliminations (12,263) (12,385) (15,812) Total net sales $300,157 $268,707 $236,979 Operating Earnings Domestic $22,204 $ 18,109 $ 12,060 Other non-U.S. 6,345 3,708 4,476 United Kingdom 6,483 4,569 910 35,032 26,386 17,446 Eliminations 140 1 (19) 35,172 26,387 17,427 General corporate expenses 7,684 5,703 6,406 Operating earnings 27,488 20,684 11,021 Other income (expenses)--net 196 803 (761) Earnings before income taxes and cumulative effect of changes in accounting principles $27,684 $ 21,487 $ 10,260 Assets Apportioned by Area Domestic $87,862 $ 86,605 $ 73,256 Other non-U.S. 49,848 43,272 54,452 United Kingdom 24,718 23,419 18,398 162,428 153,296 146,106 Eliminations (3,783) (3,305) (5,047) 158,645 149,991 141,059 Corporate assets 68,482 56,835 44,005 Total assets $227,127 $206,826 $185,064 NOTE H - Business Segment and Non-U.S. Operations (continued) Geographic Area (In thousands) 1995 1994 1993 Capital Expenditures Domestic $ 7,505 $ 9,738 $7,318 Other non-U.S. 2,468 2,367 3,300 United Kingdom 1,208 1,296 1,078 Total $11,181 $13,401 $11,696 NOTE I - Contingencies Certain processes in the manufacture of the Company's current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. The Company has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. The factual circumstances of each site are different; the Company has determined that its role as a PRP with respect to these sites, even in the aggregate, will not have a material adverse effect on the Company's business or financial condition, based on the following: 1) the Company's status as a de minimis party; 2) the large number of other PRPs identified; 3) the identification and participation of many larger PRPs who are financially viable; 4) defenses concerning the nature and limited quantities of materials sent by the Company to certain of the sites; and/or 5) the Company's experience to-date in relation to the determination of its allocable share. In addition to these non-CTS sites, the Company has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against the Company with respect to other environmental matters. Accrued environmental costs as of December 31, 1995, totaled $4.5 million, compared with $3.8 million at December 31, 1994. In the opinion of management, based upon presently available information, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position or results of operations of the Company. Certain claims are pending against the Company with respect to matters arising out of the ordinary conduct of its business. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect the Company's consolidated financial position or results of operations. NOTE J - Related Party Transactions Dynamics Corporation of America (DCA) owned 2,303,100 shares (44.1%) of the Company's outstanding common stock at December 31, 1995. In 1987, CTS shareholders voted not to grant DCA voting rights on 1,020,000 of these shares. In addition to stock ownership, as of December 31, 1995, two representatives of DCA serve on the Company's Board of Directors. The normal business transactions between the Company and DCA are insignificant. REPORT OF INDEPENDENT ACCOUNTANTS Price Waterhouse LLP To the Shareholders and Board of Directors of CTS Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of CTS Corporation and its subsidiaries at December 31, 1995, and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the Notes to Consolidated Financial Statements, effective January 1, 1993, the Company changed its method of accounting for income taxes by adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Also effective January 1, 1993, the Company changed its method of accounting for postretirement healthcare and life insurance benefits by adopting, on an immediate recognition basis, Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." South Bend, Indiana February 1, 1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1993 - 1995) Liquidity and Capital Resources The table below highlights significant comparisons and ratios related to liquidity and capital resources of CTS Corporation (CTS or Company) for each of the last three years. (In thousands) December 31 December 31 December 31 1995 1994 1993 Net cash provided by (used in): Operating activities $ 26,861 $ 12,555 $ 17,565 Investing activities (10,945) (15,090) (10,698) Financing activities (3,796) 2,580 (1,342) Cash and equivalents $ 37,271 $ 24,922 $ 23,534 Accounts receivable, net 41,737 35,029 30,627 Inventories, net 38,885 41,456 36,059 Current assets 126,113 110,667 97,266 Notes payable 6,685 7,436 12,822 Accounts payable 15,605 12,768 11,611 Accrued liabilities 26,461 24,284 25,114 Current liabilities 50,962 44,792 49,888 Working capital 75,151 65,875 47,378 Current ratio 2.47 2.47 1.95 Interest-bearing debt $ 22,267 $ 23,318 $ 17,992 Net tangible worth 141,650 126,634 113,402 Ratio of interest-bearing debt to net tangible worth .16 .18 .16 The 1995 cash flow from operating activities of $26.9 million improved substantially, by $14.3 million from 1994, primarily as a result of higher net earnings and reduction in inventories, partially offset by an increase in accounts receivable. Spending of cash for investing activities in 1995 was $10.9 million and almost comparable to 1994 after the impact of the 1994 expenditures for the ODL product line of $3.4 million. In terms of financing activities, the impact of the notes payable reduction during 1995 was $5.3 million from the increased cash flow. During 1994, cash flow of $12.6 million was positive from operating activities, primarily as a result of the significant improvement in operating earnings when compared to 1993. However, offsetting the favorable impact of the higher earnings was the higher working capital requirements to support the increased sales levels, which reduced operating cash flow by $5.0 million from 1993. Investing requirements increased during 1994 by $4.4 million, primarily due to the $13.4 million of capital expenditures, including $3.4 million for the acquisition of ODL fixed assets. Additionally, financing activities increased during 1994 and were generated by the higher sales levels and the acquisition of the ODL product line for which $2.1 million of additional expenditures were made for inventory. During 1993, positive cash flow of $17.6 million was generated from operating activities, primarily due to the increase in sales and earnings, before noncash charges for accounting changes. A significant noncash component of operating earnings during the 1993 to 1995 period was pension income of $5.3 million, $6.6 million and $6.0 million in 1995, 1994 and 1993, respectively. The 1995 income amount dropped from prior years primarily as a result of lower actuarial estimated earnings on the Plan assets. As a result of the Company's overfunded pension position, no cash contributions are anticipated to be required in the immediate future to meet the Company's pension benefit obligations. The major investment activity during the last three years was capital expenditures, which totaled $11.2 million in 1995, $13.4 million in 1994 and $11.7 million in 1993. The major capital expenditures in 1995 were for new products and product line enhancements. Also during 1995, and similar to 1994, capacity increases were required in our automotive and European interconnect product lines. The Company expects to increase its capital expenditures in 1996 over 1995 levels. These capital expenditures will be primarily for new products and cost reduction programs, as well as selected manufacturing equipment capacity expansion. The most recent major financing activity occurred during 1994, when the Company negotiated a five-year, $15.0 million long-term loan which expires in 1999. This loan was primarily for the asset purchase and working capital needs related to the ODL product line acquisition. The net cash used for financing activities in 1993 primarily reflects loan renegotiations which reduced certain non- U.S. long-term debt and increased short-term borrowings, and additional short-term borrowings at certain non-U.S. locations. Dividends paid were $3.1 million in 1995, and $2.1 million in 1994 and 1993. In response to the 1992 decrease in cash provided by operations, the Company reduced its annual quarterly dividend from $.1875 to $.10 per share effective with its February 1993 payment. However, in December 1994, the Board of Directors, principally as a result of the Company's improving performance and cash position, increased the quarterly dividend to $.15 per share, effective with the February 1995 payment. At the end of each of the last three years, cash of various non- U.S. subsidiaries was invested in U.S.-denominated cash equivalents. Such cash is generally available to the parent Company and the Company's intention is not to repatriate non-U.S. earnings. If all non-U.S. earnings were repatriated, approximately $4.6 million of withholding taxes would accrue. At the end of 1995, CTS had $47.0 million of borrowing capacity available under two long-term revolving credit agreements. The U.S. revolving agreement of $45.0 million, which expires in April 1997, is the Company's primary credit vehicle and, together with cash from operations, should adequately fund the Company's anticipated cash needs. Results of Operations The following table highlights significant information with regard to the Company's twelve months results of operations during the past three fiscal years. (In thousands) December 31 December 31 December 31 1995 1994 1993 Net sales $300,157 $268,707 $236,979 Gross earnings 74,804 63,067 53,052 Gross earnings as a percent of sales 24.9% 23.5% 22.4% Selling, general and administrative expenses $ 39,312 $ 36,175 $ 36,323 Selling, general and administrative expenses as a percent of sales 13.1% 13.5% 15.3% Research and development expenses $ 8,004 $ 6,208 $ 5,708 Research and development expenses as a percent of sales 2.7% 2.3% 2.4% Operating earnings $ 27,488 $ 20,684 $ 11,021 Operating earnings as a percent of sales 9.1% 7.7% 4.7% Interest expense, net $ 369 $ 57 $ 400 Earnings before income taxes and cumulative effect of changes in accounting principles 27,684 21,487 10,260 Income taxes 10,520 7,520 3,690 Income tax rate 38.0% 35.0% 36.0% The 1995 net sales increased $31.5 million, or 11.7% over 1994, primarily due to broad increases in demand for electronic component products into our automotive, data processing and communications equipment markets. Within these overall increases, the ODL product line acquired late in 1994, contributed approximately $14 million in higher revenues in 1995. From 1993 to 1994, total sales increased by 13.4%, primarily as a result of substantial increases in our automotive and European interconnect product lines. During the three-year period 1993-1995, the percentage of overall sales to the automotive market increased from 32% to 36%. During this same period, our sales into the defense and aerospace markets declined from 12% to 9%, as a percent of total sales. Sales into other markets have generally remained constant. The Company's 15 largest customers represented 61% of net sales in 1995, and 62% in 1994 and 1993. One customer, a major manufacturer of automobiles, comprised 18% of net sales in 1995 and 1994, compared with 17% for 1993. Although at a lower level in 1995 and 1994, a major manufacturer of data processing equipment comprised 10% of total net sales in 1993. Because most of CTS' revenues are derived from the sale of custom products, the relative contribution to revenues of changes in unit volume cannot be meaningfully determined. The Company's products are usually priced with reference to expected or required profit margins, customer expectations and market competition. Pricing for most of the Company's electronic component products frequently decreases over time and also fluctuates in accordance with total industry utilization of manufacturing capacity. In 1995 and 1994, improvements were realized over the preceding year in gross earnings dollars and as a percent of sales, principally due to higher sales volume, production efficiencies and higher absorption of fixed manufacturing overhead expenses. Gross earnings were lower in 1993, due to the lower sales and lower absorption of manufacturing expenses. During 1995 and 1994, selling, general and administrative expenses increased in dollars in 1995 over 1994, and in 1994 remained at the same level as 1993. The increase in 1995 was principally as a result of increases in salaries and related expenses. Selling, general and administrative expenses decreased as a percent of sales in 1995 and 1994 from the previous year, as the Company continued to control these expenses while increasing sales. Also during 1994, the Company successfully resolved approximately $1 million of outstanding legal and customer claims, the provision for most of which had been established in 1993. Research and development expenses increased by $1.8 million or 29% in 1995 over 1994, with much of the additional effort devoted to the "hall effect" non-contacting sensor development for our automotive products, as well as other new product development programs in the automotive and the resistor network product areas. The net of interest expense and interest income is reflective of the levels of debt during the 1993-1995 period. The lower amount in 1994 relates to the timing of the $15.0 million loan secured in late 1994. During 1995, the primary reasons for the substantial operating earnings improvement include the higher overall sales and related productivity in our automotive, resistor network and interconnect products, and the reduction of losses on our frequency control products. These improvements substantially offset losses from our defense and aerospace products, caused primarily by the declining market conditions. In 1994, compared to 1993, the improved operating earnings were a result of the higher automotive and interconnect product sales, and improved performance with our resistor networks and electromechanical products, which more than offset losses from our frequency controls and hybrid microelectronic products. The higher 1995 effective tax rate of 38%, compared to 35% in 1994, was due to foreign distributions, a lower benefit from the utilization of U.S. net operating loss carryforwards and scheduled tax credits. The Company has net operating loss carryforwards of approximately $21 million in Singapore, Thailand and Hong Kong, and has established a 100% valuation reserve based upon previous pretax losses and a current planned breakeven position. The slightly lower 1994 effective tax rate compared to 1993 was a result of improved earnings, generating an increase in net operating loss carryforward utilization. The effects of the 1993 accounting pronouncements FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and FASB Statement No. 109, "Accounting for Income Taxes," have been discussed in financial statement footnotes, Note F and Note G, respectively. With respect to the recently issued FASB Statements No. 121 and 123, and as described in the Notes to Consolidated Financial Statements, the Company anticipates no substantial impact on financial position or results of operations upon adoption in 1996. In terms of environmental issues, the Company has been notified by the U.S. Environmental Protection Agency, as well as state agencies and generator groups, that it is or may be a Potentially Responsible Party regarding hazardous waste remediation at non-CTS sites. Additionally, the Company provides reserves for probable remediation activities at certain of its manufacturing locations. These issues are discussed in Note I - Contingencies. EX-2 3 Five-Year Summary (In thousands of dollars except per share data)
% of % of % of % of % of 1995 Sales 1994 Sales 1993 Sales 1992 Sales 1991 Sales Summary of Operations Net sales $300,157 100.0 $268,707 100.0 $236,979 100.0 $227,391 100.0 $229,536 100.0 Cost of goods sold 225,353 75.1 205,640 76.5 183,927 77.6 180,198 79.2 183,462 79.9 Selling, general and administrative expenses 39,312 13.1 36,175 13.5 36,323 15.3 37,855 16.6 35,980 15.7 Research and development expenses 8,004 2.7 6,208 2.3 5,708 2.4 6,092 2.7 5,656 2.5 (Gain) on sale of property and other related provisions (852) (0.3) (1,857) (0.8) Operating earnings 27,488 9.1 20,684 7.7 11,021 4.7 4,098 1.8 6,295 2.7 Other income (expenses)--net 196 0.1 803 0.3 (761) (0.4) (277) (0.1) (51) 0.0 Earnings before income taxes and cumulative effect of changes in accounting principles 27,684 9.2 21,487 8.0 10,260 4.3 3,821 1.7 6,244 2.7 Income taxes 10,520 3.5 7,520 2.8 3,690 1.6 1,920 0.9 2,030 0.9 Net earnings--before accounting changes 17,164 5.7 13,967 5.2 6,570 2.7 1,901 0.8 4,214 1.8 Cumulative effect on prior years of accounting changes (a) (4,614) (1.9) Net earnings 17,164 5.7 13,967 5.2 1,956 0.8 1,901 0.8 4,214 1.8 Retained earnings--beginning of year 112,506 100,868 100,973 102,482 102,110 Dividends declared (3,124) (2,329) (2,061) (3,410) (3,842) Retained earnings--end of year $126,546 $112,506 $100,868 $100,973 $102,482 Average shares outstanding 5,200,818 5,170,406 5,152,556 5,141,936 5,122,433 Net earnings per share: Before accounting changes $3.30 $2.70 $1.27 $0.37 $0.82 Cumulative effect on prior years of accounting changes (a) (0.89) Net earnings $3.30 $2.70 $0.38 $0.37 $0.82 Cash dividends per share $0.60 $0.45 $0.40 $0.6625 $0.75 Capital expenditures 11,181 13,401 11,696 8,831 15,967 Depreciation and amortiza- tion 11,683 11,236 12,143 11,665 13,102 Financial Position at Year-End Current assets $126,113 $110,667 $97,266 $87,376 $91,493 Current liabilities 50,962 44,792 49,888 37,262 39,569 Current ratio 2.5 to 1 2.5 to 1 1.9 to 1 2.3 to 1 2.3 to 1 Working capital $75,151 $65,875 $47,378 $50,114 $51,924 Inventories 38,885 41,456 36,059 37,222 40,855 Property, plant and equipment--net 50,696 50,777 47,842 48,529 53,828 Total assets 227,127 206,826 185,064 170,773 176,361 Short-term notes payable 6,685 7,436 12,822 5,827 8,160 Long-term obligations 13,714 15,595 4,995 10,826 11,297 Shareholders' equity 146,253 131,855 119,203 119,372 122,485 Common shares outstanding 5,217,329 5,178,604 5,153,424 5,150,824 5,123,824 Equity (book value) per share $28.03 $25.46 $23.13 $23.18 $23.91 Other Data Stock price range (dollars per share to the nearest 1/8) $37.75-$27.38 $31.00-$19.50 $22.38-$17.00 $24.50-$17.13 $24.00-$16.38 Average number of employees 4,007 4,056 3,975 4,335 4,847 Number of shareholders at year-end 1,062 1,136 1,198 1,278 1,343 (a) The Company adopted FASB 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and FASB 109, "Accounting for Income Taxes," as of January 1, 1993.
EX-3 4 CTS CORPORATION 905 WEST BOULEVARD NORTH - ELKHART, INDIANA 46514 Notice of Annual Meeting of Shareholders To Be Held April 26, 1996 To CTS Shareholders: The Annual Meeting of Shareholders of CTS Corporation will be held at 9:00 a.m. Eastern Standard Time, Friday, April 26, 1996, at the CTS Corporate Headquarters, 905 West Boulevard North, Elkhart, Indiana 46514, for the following purposes: 1. To elect five directors to serve for one year and until their successors are elected and qualified; 2. To consider and vote on approval of the CTS Corporation 1996 Stock Option Plan; 3. To transact other business properly presented at the meeting. Only shareholders of record at the close of business on March 8, 1996 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, 1995. By Order of the Board of Directors, Jeannine M. Davis Secretary Elkhart, Indiana March 18, 1996 It is important that your shares be represented at this meeting. We urge you to date, sign and return your proxy promptly in the enclosed envelope, which requires no postage if mailed in the United States. CTS CORPORATION 905 WEST BOULEVARD NORTH - ELKHART, INDIANA 46514 Proxy Statement Voting Information This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of CTS Corporation for the Annual Meeting of Shareholders to be held April 26, 1996. If the enclosed proxy is signed and returned, it may, nevertheless, be revoked by you at any time prior to being voted, by written notice delivered to the Secretary. The Proxy Statement and proxy were first mailed to shareholders about March 18, 1996. The Corporation had outstanding 5,218,529 shares of Common Stock as of the close of business on March 8, 1996, the record date for the Annual Meeting as set by the Board of Directors. As a result of shareholder action taken at the 1987 Annual Meeting, 1,020,000 shares of Common Stock owned by Dynamics Corporation of America are not votable at the meeting. With the exception of those shares, each shareholder is entitled to one vote in person or by proxy for each share of Common Stock owned on the record date. There are no other voting securities. If the enclosed proxy is signed and returned, the shares represented will be voted in the manner indicated except that if any nominee for director is unable to serve at the time of the Annual Meeting, the proxy will be voted in accordance with the judgment on such matters of the person or persons acting as proxy. Proxy solicitation will be principally by mail, but proxies may also be solicited in person or by telephone. The expense of this solicitation will be paid by the Corporation. Brokers and certain other holders for beneficial owners will be reimbursed for out-of-pocket expenses incurred in the solicitation of proxies from the beneficial owners of shares held in their names. The Corporation has retained Georgeson & Co., Inc. to assist in the solicitation of proxies at an estimated cost of $5,000, plus reasonable out-of-pocket expenses. The Board of Directors is not aware of any business to be acted upon at the Annual Meeting other than for which notice is given, but in the event other business is properly presented at the meeting, requiring a vote of the shareholders, the proxy will be voted in accordance with the judgment on such matters of the person or persons acting as proxy. Shareholders are requested to exercise their right to vote by completing and signing the enclosed proxy and returning it promptly in the enclosed envelope. Unless otherwise specified by the shareholder, all shares represented by valid proxies will be voted in favor of the election of all director-nominees and the approval of the CTS Corporation 1996 Stock Option Plan. Securities Beneficially Owned by Principal Shareholders and Management The following table includes information with respect to all persons and groups known to the Corporation to be beneficial owners of more than five percent of the Common Stock of the Corporation on March 1, 1996. 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, 1996 (1) of Class Dynamics Corporation of 2,303,100 (2) 44.14 America 475 Steamboat Road Greenwich, CT 06830 The Gabelli Group, Inc., 1,269,100 (3) 24.32 GAMCO Investors, Inc., and Gabelli Funds, Inc. 655 Third Avenue New York, NY 10017 Gerald H. Frieling, Jr. 200,150 (4) 3.84 Lawrence J. Ciancia 199,650 (4) 3.83 Patrick J. Dorme 199,150 (4,10) 3.82 Andrew Lozyniak 199,150 (4,10) 3.82 Joseph P. Walker 24,107 (5) * Philip T. Christ 15,322 (6) * Stanley J. Aris 7,609 (7) * D. Richard Hannan 2,226 (8) * Jeannine M. Davis 6,751 (9) * 14 directors and officers 275,893 (4,11) 5.29 as a group ___________________________ *Less than 1%. (1) Information with respect to beneficial ownership is based upon information furnished by each shareholder or contained in filings made with the Securities and Exchange Commission. Except where otherwise indicated, the shareholders listed in the table have sole voting and investment authority with respect to the shares owned by them. (2) Includes 1,020,000 shares for which voting authority was not granted by a vote of the independent shareholders of the Corpora- tion at the 1987 Annual Meeting of Shareholders, pursuant to the Control Share Acquisition Chapter of the Indiana Business Corpora- tion Law. (3) Includes 260,000 shares held by Gabelli Funds, Inc., and 1,009,100 shares held by GAMCO Investors, Inc., which were reported on a joint Schedule 13D filed April 17, 1995, 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 156,600 of the reported shares, and except that Gabelli Funds, Inc. has sole dispositive and voting power with respect to the 260,000 reported shares held by The Gabelli ABC Fund, The Gabelli Asset Fund, The Gabelli Equity Trust, Inc., The Gabelli Value Fund, The Gabelli Small Cap Growth Fund, The Gabelli Global Multimedia Trust Inc., 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 Convert- ible Securities Fund and The Gabelli Equity Income Fund, so long as the aggregate voting interest of all joint filers does not exceed 25% of the issuer's total voting interest and, in that event, the respective Proxy Voting Committee of each fund (other than The Gabelli Growth Fund) will vote the shares held by that Fund; except that, at any time, the Proxy Voting Committee of each such Fund may take and exercise in its sole discretion the entire voting power with respect to the shares held by such Fund under special circumstances such as regulatory considerations; and that the power of Mr. Gabelli and Gabelli Funds, Inc. is indirect with respect to securities beneficially owned directly by other Reporting Persons. (4) 199,150 of the shares shown as owned beneficially by each of Mr. Ciancia, Mr. Dorme, Mr. Frieling, Mr. Lozyniak and 14 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 Compensa- tion Committee of the Board of Directors has voting and investment authority over said shares. The present members of the Compensa- tion Committee are Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr., and Andrew Lozyniak, who were appointed by the Board of Directors of CTS Corporation. (5) Includes 3,907 shares attributed to Joseph P. Walker's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1995, 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. (6) Includes 1,522 shares attributed to Philip T. Christ's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1995, 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 2,800 shares subject to options exercisable on March 1, 1996 or which become exercisable within 60 days thereafter. (7) Includes 309 shares attributed to Stanley J. Aris' account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1995, 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 2,300 shares subject to options exercisable on March 1, 1996 or which become exercisable within 60 days thereafter. (8) Includes 126 shares attributed to D. Richard Hannan's account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1995, the most recent annual report of the Plan. The number of shares attributed to Mr. Hannan's account may not reflect shares that have accrued to his account since the filing of the Plan's last annual report. (9) Includes 329 shares attributed to Jeannine M. Davis' account in the CTS Corporation Retirement Savings Plan, as shown as of December 31, 1995, the most recent annual 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 1,000 shares subject to options exercisable on March 1, 1996 or which become exercisable within 60 days thereafter. (10) Messrs. Dorme and Lozyniak are directors of Dynamics Corporation of America. (11) Includes 8,300 shares subject to options exercisable on March 1, 1996 or which become exercisable within 60 days thereafter. Election of Directors At the Annual Meeting, five directors are to be elected for terms of one year. Each director will hold office until the next Annual Meeting of Shareholders and until his successor has been elected and qualified. Each person listed below has been nominated by the Board of Directors and has agreed to serve as a director, if elected. Year First Elected Director GERALD H. FRIELING, JR. 1982 Chairman of the Board of Tokheim Corporation (a manufacturer of petroleum dispensing equipment, systems and control devices); President of Frieling and Associates (a consulting firm); Chairman of the Audit Committee and Member of the Executive and Compensation Committees of CTS Corporation. During the past five years, Mr. Frieling, age 65, served as Chief Executive Officer of Tokheim Corporation, and in his present capacities at Tokheim Corporation and Frieling and Associates. ANDREW LOZYNIAK 1987 Chairman of the Board and President of Dynamics Corporation of America (a manufacturer of electrical appliances and electronic devices, fabricated metal products and equipment, and power and controlled environmental systems); Chairman of the Compensation Committee and Member of the Executive and Audit Committees of CTS Corporation. During the past five years, Mr. Lozyniak, age 64, 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 57, 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 53, 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 60, has served in his present capacities at Dynamics Corporation of America. Mr. Dorme serves as a director of Dynamics Corporation of America. The affirmative vote of the holders of a plurality of the shares represented in person or by proxy at the meeting is required to elect the director-nominees. The Board of Directors unanimously recommends that the shareholders vote in favor of each of the director-nominees named above. In the event that any of such nominees are unable or unwilling to serve as a director, an event which the Corporation does not anticipate, the proxies hereby solicited will be voted for the remaining nominees named above or for such substitute person or persons as the Board of Directors may select. 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, 1995, 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 1995, the Board of Directors held seven 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 1995. 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 1995. 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 1995. 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 100% of the meetings of the Board of Directors and the committees to which he was assigned during 1995. 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 1995 exceeded $100,000. Information which is not required to be disclosed in the table is identified by the letters "N/R." SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation Name and Restricted All Other Principal Salary Bonus(1) Other(2) Stock Award(s)(3) Compensation(4) Position Year ($) ($) ($) ($) ($) Joseph P. Walker(5,6) 1995 327,411 196,400 N/R 0 11,270 Chairman of the 1994 311,878 147,200 N/R 231,250 8,496 Board, President 1993 297,083 0 N/R 0 6,426 and Chief Executive Officer Philip T. Christ(6) 1995 178,775 107,300 N/R 231,000 7,677 Group Vice 1994 168,301 90,200 N/R 0 7,326 President 1993 158,442 80,000 N/R 0 7,023 Stanley J. Aris(6) 1995 168,078 100,800 N/R 37,375 5,994 Vice President 1994 160,105 75,600 N/R 57,813 4,991 Finance and Chief 1993 153,663 20,250 5,555 0 4,813 Financial Officer D. Richard Hannan(6) 1995 98,365 107,000 N/R 0 3,198 Group Vice 1994 0 0 0 0 0 President 1993 0 0 0 0 0 Jeannine M. Davis(6) 1995 115,421 69,300 N/R 37,375 4,064 Vice President, 1994 109,063 51,500 N/R 0 2,944 General Counsel and 1993 95,035 0 N/R 0 2,762 Secretary
(1) Includes bonuses paid pursuant to the CTS Corporation Management Incentive Plan, as described in the Report of the Compensation Committee below. For D. Richard Hannan, includes $77,500 which was the market value of the 2,500 shares of CTS Common Stock transferred to Mr. Hannan upon attainment of one incentive goal included in his employment offer letter. (2) The value of other personal benefits received from the Corporation by the named Executive Officers is below the reporting threshold for perquisites. (3) At the end of fiscal year 1995, Joseph P. Walker held 8,000 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, 1995 was $302,000. 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: 1995 - $62,000; 1994 - $49,250; and 1993 - $39,250. At the end of fiscal year 1995, Philip T. Christ held 7,800 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1995 was $294,450. 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: 1995 - $24,200; 1994 - $19,150; and 1993 - $15,500. At the end of fiscal year 1995, Stanley J. Aris held 3,000 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1995 was $113,250. For Stanley J. Aris, the cash payments made pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan for the three identified years were: 1995 - $15,500; 1994 - $0; and 1993 - $0. At the end of fiscal year 1995, Jeannine M. Davis held 1,800 restricted shares, issued pursuant to the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, on which the transfer restrictions had not lapsed, the market value of which on December 31, 1995 was $67,950. 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: 1995 - $12,100; 1994 - $9,200; and 1993 - $7,300. The restrictions on 20% of the shares awarded under this Plan lapse at the end of each of the five years following acquisition of the shares. Regular dividends are paid to holders of restricted stock awarded under this Plan. This Plan includes a change of control provision which provides that, upon a change of control of the Corporation, as defined in the Plan, all restrictions on shares awarded under the Plan will lapse and cash bonuses will be paid relative to those shares. (4) Includes (i) the Corporation's matching contributions to the CTS Corporation Retirement Savings Plan on behalf of the named Executive Officers as follows: for Joseph P. Walker, 1995 - $3,465; 1994 - $3,465; and 1993 - $3,373; for Philip T. Christ, 1995 - $3,465; 1994 - $3,465; and 1993 - $3,373; for Stanley J. Aris, 1995 - $3,465; 1994 - $3,465; and 1993 - $3,373; for D. Richard Hannan, 1995 - $2,213; 1994 - $0; and 1993 - $0; and for Jeannine M. Davis, 1995 - $3,465; 1994 - $2,454; and 1993 - $2,303 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, 1995 - $5,310; 1994 - $5,031; and 1993 - $3,053; for Philip T. Christ, 1995 - $4,212; 1994 - $3,861; and 1993 - $3,650; for Stanley J. Aris, 1995 - $2,529; 1994 - $1,526; and 1993 - $1,440; for D. Richard Hannan, 1995 - $985; 1994 - $0; and 1993 - $0; and for Jeannine M. Davis, 1995 - $599; 1994 - $490; and 1993 - $459. For Joseph P. Walker, also includes $2,495, the imputed income value of the term life insurance portion of the coverage under a "split dollar" life insurance policy. (5) Joseph P. Walker has executed an employment agreement with the Corporation, which provides that for a period of three years, beginning June 24, 1994, Mr. Walker will be employed by the Corporation as Chairman of the Board, President and Chief Executive Officer, at an initial annual salary of $319,725. Termination of Mr. Walker's employment agreement by the Corporation, for reasons other than cause as defined in the agreement, entitles Mr. Walker to receive his then current annual salary for the number of months remaining under his agreement, the same to be paid in equal monthly payments. (6) The Corporation has entered into Indemnification Agreements with each of the named Executive Officers and all other Executive Officers of the Corporation which provide that the Corporation agrees to indemnify the officer, to the fullest extent allowed by the bylaws of the Corporation and the Indiana Business Corporation Law, in the event that he/she was or is made a party or threatened to be made a party to any action, suit or proceeding by reason of the fact that he/she is an officer of the Corporation. The indemnification agreements provide indemnification for acts occurring prior to the execution of the agreements. Stock Options Shown below is information on grants of options for CTS Corporation Common Stock awarded to the named Executive Officers in 1995. OPTION GRANTS IN 1995 INDIVIDUAL GRANTS(1) Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation For Option Term(2)
Number of % of Total Securities Options Underlying Granted to Exercise Options Employees Price Expiration Name Granted(3) in 1995 ($/Share) Date 5%($) 10%($) Joseph P. Walker 10,000 10.6% $37.375 12-14-2000 103,260 228,178 Philip T. Christ 8,000 8.5% 37.375 12-14-2000 82,608 182,542 Stanley J. Aris 8,500 9.0% 37.375 12-14-2000 87,771 193,951 D. Richard Hannan 0 0 N/A N/A N/A N/A Jeannine M. Davis 6,300 6.7% 37.375 12-14-2000 65,054 143,752
(1) These options were granted to the named Executive Officers pursuant to the proposed CTS Corporation 1996 Stock Option Plan, subject to the approval of said Plan by the shareholders as proposed herein. (2) Potential realizable value is determined by assuming an initial value of $37.375 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 shares subject to options granted. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall stock market conditions. (3) All 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 1995 AND FISCAL YEAR END 1995 OPTION VALUES Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at Shares Fiscal Year End Fiscal Year End Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized Unexercisable Unexercisable Joseph P. Walker 0 0 0/10,000 $0/3,750 Philip T. Christ 0 0 2,300/12,700 35,325/69,725 Stanley J. Aris 0 0 1,800/11,700 29,025/50,413 D. Richard Hannan 0 0 0 0 Jeannine M. Davis 2,200 $21,725 1,000/9,300 13,000/41,363 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors, comprised of Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr. and Andrew Lozyniak, submits this report of Executive Compensation to the Corporation's shareholders. Compensation Principles and Philosophy The Compensation Committee of the Board of Directors has implemented executive compensation policies and programs designed to achieve the following objectives: Attract and retain key executives and managers Align the financial interests of key executives and managers with those of the shareholders of the Corporation Reward individual performance Reward corporate performance These objectives are achieved through a combination of annual and longer term compensation arrangements including base salary, annual cash incentive compensation, and long-term incentive compensation through stock options and restricted stock awards, in addition to medical, pension and other benefits available to employees in general. The four principal components of the Executive Officer Compensation package at CTS Corporation are: base salary, the CTS Corporation Management Incentive Plan, the CTS Corporation Stock Option Plans and the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan. Base Salary The base salary of the Executive Officers of CTS Corporation is determined in the same manner as the salaries of all exempt salaried employees of the Corporation. A job classification system is utilized to determine appropriate salary ranges for each Executive Officer position, based on qualifications, job 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 salaries and job 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 the Corpora- tion's salary budget for all exempt salaried employees are considered for those in the lower portion of their salary range, if individual performance warrants such consideration. During each of the past three years, the named Executive Officers have been granted salary increases in the same range established for all exempt salaried employees of the Corporation, except that on occasion, certain officer salaries were increased at higher rates in response to the 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 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 1995, the Corporation achieved 150% of its ROA target under the 1995 CTS Corporation Management Incentive Plan. On this basis, the named Executive Officers, other than D. Richard Hannan and Philip T. Christ, received formula bonuses under the Plan equal to 60% of their base salaries. Mr. Hannan and Mr. Christ received formula bonuses under the Plan, half of which were based on the Corporation's achieving 150% of its ROA target and the other half of which were based on the ROA performance of the units for which each Group Vice President was responsible. For 1994, the Corporation achieved 118% of its ROA target under the 1994 CTS 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 reflected the higher ROA performance achievement of the 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 unit. CTS Corporation 1986 Stock Option Plan The Compensation Committee administers the CTS Corporation 1986 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. No options were granted to Executive Officers of the Corporation during 1995 under this Plan which expired in December, 1995. CTS Corporation 1988 Restricted Stock and Cash Bonus Plan The CTS Corporation 1988 Restricted Stock and Cash Bonus Plan was adopted by the shareholders in 1989 for the purpose of providing incentives to selected key employees who contribute or are expected to contribute materially to the success of the Corporation, and to closely align the financial interests of these key employees with those of the Corporation's shareholders. The participants are selected and their level of participation determined by the Compensation Committee. Shares acquired by participants pursuant to the Plan are subject to restriction that, during the period of five years after the date of acquisition, the participant may not sell, transfer or otherwise dispose of such shares as to which the restrictions shall not have lapsed. The restrictions lapse as to 20% of the shares acquired pursuant to the Plan at the end of each year following the acquisition of the shares. When the restrictions lapse, a cash bonus is paid to the participant equal to the fair market value of such shares as of the date of such lapse. In no event may the cash bonuses payable to any participant be greater than twice the fair market value of such shares on the date they were originally acquired. Dividends are paid to participants in this Plan on all shares awarded to them under the Plan. The Plan also provides for appropriate adjustment to the number of shares awarded in the event of a stock dividend, stock split, recapitalization, merger, combination or exchange of shares for other securities. Awards under the Plan were made to Philip T. Christ, Stanley J. Aris and Jeannine M. Davis, for 7,000 shares, 1,000 shares and 1,000 shares, respectively in 1995. Mr. Christ, Mr. Aris and Ms. Davis were selected for awards in order to align their interests with the Corporation's shareholders and in view of their abilities, as Group Vice President, Chief Financial Officer and General Counsel, respectively 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 Corporation pursuant to Section 162(m). Respectfully Submitted, CTS CORPORATION COMPENSATION COMMITTEE Lawrence J. Ciancia, Patrick J. Dorme, Gerald H. Frieling, Jr. and Andrew Lozyniak New CTS Corporation 1996 Stock Option Plan In 1986 CTS shareholders approved a stock option plan designed to offer key employees the opportunity to participate in the ownership of the Corporation by increased stock holdings. The 1986 plan has now expired. The 1986 plan reserved 300,000 shares for issue upon exercise of options granted under that plan. The Board of Directors believes that stock option plans further the growth and profitability of the Corporation, in the interest of shareholders, by providing incentives to key employees who contribute to the management of the Corporation to acquire and increase equity interests in the Corporation. Accordingly, in December 1995, the Board of Directors adopted the CTS Corporation 1996 Stock Option Plan (hereinafter, the "Plan"), subject to the approval of shareholders at the 1996 annual meeting. When the CTS Corporation 1986 Stock Option Plan expired in 1995, approximately 200,000 shares remained in the plan, not subject to future grants or option exercises under that plan. The purpose of the CTS Corporation 1996 Stock Option Plan is to reserve anew those remaining 200,000 shares for stock options to key employees of the Corporation. The Plan provides for the reservation of 200,000 shares of Common Stock, which may be either authorized and unissued shares or shares held as treasury stock, for issue upon exercise of options granted under the Plan. The number and price of shares reserved for issuance upon exercise of options granted under the Plan are subject to adjustment to reflect the effects of stock splits, stock dividends or any other change in the capital structure of the Corporation or to reflect any merger, consolidation, sale or exchange of assets or stock of the Corporation. The closing market value per share of Common Stock on March 1, 1996 was $38.00. The Plan will be administered by the Compensation Committee of the Board of Directors. The Compensation Committee shall determine the recipients of the options, the dates options are to be granted, the number of shares subject to each option, the option price, option periods and option terms. The Compensation Committee may also prescribe, amend and rescind rules and procedures for the convenient administration of the Plan. The Plan permits shares subject to option, which expire without being exercised, to again be made subject to option. Options granted under the Plan are irrevocable and may be nonqualified or may be incentive stock options in conformity with Section 422A of the Internal Revenue Code of 1954, as amended (hereinafter, the "Code"). Options may not be granted under the Plan at prices lower than the fair market value of the shares on the date of grant. Fair market value of the shares shall be the closing price of the shares on the New York Stock Exchange on the date the option is granted, or if not reported on such date, the next preceding date for which such a closing price is reported. The period during which options may be granted under the Plan by the Compensation Committee shall extend no longer than ten years from the date of the Plan's adoption, December 15, 1995. The period during which an option may be exercised shall not extend more than ten years from the date an option is granted. The right to exercise options granted under the Plan shall accrue in such annual, cumulative installments as designated by the Compensation Committee, commencing at least one year after the date the option is granted. Unless designated otherwise by the Compensation Committee, the number of installments shall be the number of years of the option period minus one; each installment shall be equal to the number of shares under such option divided by the number of installments, and each installment cumulatively shall permit the exercise of any previously unexercised installment. Under the Code, the grant of nonqualified or incentive stock options under the Plan does not result in taxable income to the employee or provide a business expense deduction to the Corporation. An optionee realizes ordinary income upon the exercise of a nonqualified option, measured by the difference between the option price and the fair market value of the stock on the date of exercise. Such amount is also deductible on the federal income tax return of the Corporation for that year. However, the exercise of an incentive stock option does not result in taxable income to the employee and does not provide a business expense deduction to the Corporation. If the shares obtained upon exercise of an incentive stock option are held for two years after the date of grant and one year after the date of exercise, the holder will be entitled to long-term capital gain treatment on the disposition of the shares. If such shares are disposed of before the completion of the one and two year periods, the optionee will be taxed on the excess of the market value of the stock on the date of exercise over the option price as ordinary income, and such amount will be deductible by the Corporation for the same year. The Compensation Committee presently expects about 70 key employees, including officers of the Corporation, to be eligible to receive options under the Plan. Directors of the Corporation, who are not also employees or officers of the Corporation, are not eligible to receive options. The aggregate fair market value (determined as of the time the option is granted) of the shares of Common Stock for which any participant may be granted incentive stock options which become first exercisable in any calendar year may not exceed $100,000. No option holder shall have rights as a shareholder with respect to shares subject to option unless or until such shares are issued, and no option holder can assign or transfer options except by the laws of descent and distribution. In the event of death, total and permanent disability or retirement of the option holder, all unexpired option installments shall be accelerated and shall accrue as of the date of death, disability or retirement. Such options shall be exercisable within one year from the date of death or disability and within three months of retirement, or sooner if the option period expires earlier. Upon termination of employment of the option holder with the Corporation for any other reason, the option holder may exercise options which are exercisable on such date for a period of thirty days thereafter, or for a shorter period of time if the option period expires earlier. An option may be exercised by immediate payment of the option price in cash or in previously acquired Common Stock of the Corporation. The Board of Directors may amend the Plan at any time without further shareholder approval except that any such amendment may not increase the number of reserved shares, decrease an option price, change the class of eligible employees or option ceiling or impair any option previously granted. The Plan and the resolution to be voted on are attached as Appendix A to this Proxy Statement. The affirmative vote of the holders of a plurality of the shares represented in person or by proxy at the meeting is required to adopt the Plan. The Board of Directors unanimously recommends a vote in favor of the adoption of the CTS Corporation 1996 Stock Option Plan. STOCK PERFORMANCE CHART The following graph compares the cumulative total shareholder return on the Corporation's Common Stock for the last five fiscal years with the cumulative total return on the S & P 500 Index and an index of peer companies over the same period. CTS Corporation Salaried Employees' Pension Plan The CTS Corporation Salaried Employees' Pension Plan is a retirement plan for exempt salaried employees of some CTS 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, 1995, is as follows: Joseph P. Walker, 7.78 years, Philip T. Christ, 6.56 years, Stanley J. Aris, 3.78 years, D. Richard Hannan, .78 years and Jeannine M. Davis, 15.78 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 1996 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 $13,000 per year for service on the Board of Directors, a meeting fee of $1,000 for each meeting of the Board of Directors attended in person, and $500 for each meeting of the Board of Directors attended by telephone. In addition, each member of the Executive Committee and each member of the Compensation Committee is entitled to receive an annual retainer of $500, and each member of the Audit Committee is entitled to receive an annual retainer of $1,000, together with a meeting fee of $1,000 for attending each meeting of a committee of which he is a member, except that he is entitled to receive $500 per meeting for a second or subsequent meeting held on the same day and for any such meetings attended by telephone. On April 27, 1990 the Corporation adopted the CTS Corporation Stock Retirement Plan for Nonemployee Directors of the Corporation (the "Plan"). Under the Plan, separate accounts are opened by the Corporation in the names of nonemployee directors. On January 1 of each year, starting in 1991, a deferred stock account in the name of each nonemployee director is credited with 100 Common Stock Units if said director was a nonemployee director of the Corporation on the last day of the immediately preceding calendar year or ceased to be a director during such preceding calendar year by reason of his retirement, disability or death. In addition, on May 1, 1990, the Corporation credited to the deferred stock account of each such director 50 Common Stock Units for each complete calendar year of his service to the Corporation as a nonemployee director prior to May 1, 1990. Each deferred stock account will also be credited with Common Stock Units when credits equivalent to cash dividends on the shares in an account aggregate an amount equal to the value of a share of Common Stock on a dividend payment date. All deferred Common Stock Units in a director's account will be distributed in Common Stock as of the January 1st after the director leaves the Board of Directors. Until such time, the Corporation's obligation under the Plan is an unsecured promise to deliver shares of Common Stock. No Common Stock will be held in trust or as a segregated fund because of the adoption of the Plan. Four members of the Board of Directors are currently eligible to participate in the Plan. The Corporation expensed $15,100 in 1995 in respect of Common Stock Units credited to the accounts of the eligible directors as a group pursuant to the Plan. Corporation's Independent Accountants The Corporation's independent accountants are Price Water- house. Representatives of the independent accountants will attend the Annual Meeting, to be available to respond to appropriate questions by shareholders and to have the opportunity to make statements, if they so desire. Shareholder Proposals To be considered for inclusion in the 1997 proxy solicitation material and proxy, shareholder proposals must be received by the Corporation at its Corporate Offices no later than November 22, 1996. 1995 Annual Report on S.E.C. Form 10-K Upon the written request of a CTS shareholder owning shares of Common Stock on the record date, to Jeannine M. Davis, Secretary of CTS Corporation, 905 West Boulevard North, Elkhart, Indiana 46514, the Corporation will provide to such shareholder, without charge, a copy of its 1995 annual report on S.E.C. Form 10-K, including the financial statements and financial statement schedules. Jeannine M. Davis Secretary Elkhart, Indiana March 18, 1996 APPENDIX A The following resolution will be presented at the Annual Meeting of Shareholders: RESOLVED, that the CTS Corporation 1996 Stock Option Plan, hereinafter referred to as the "Plan", adopted by the Board of Directors on December 15, 1995, be adopted and approved by the shareholders of CTS Corporation and that a copy of the Plan be appended to the minutes of this Annual Meeting of Shareholders. CTS CORPORATION 1996 STOCK OPTION PLAN FIRST: Shares Reserved for Options Two hundred thousand (200,000) shares of CTS Corporation Common Stock, without par value, which may be either authorized and unissued shares or shares held as treasury stock, are reserved for issuance upon exercise of options granted under the Plan. The number and kind of shares reserved for issuance may be adjusted as provided by ITEM FOURTEENTH. Shares subject to an unexercised installment of any canceled, surrendered or expired installment or option may be again subject to option under the Plan. SECOND: Administration The Plan shall be administered by the CTS Corporation Compensation Committee appointed by the Board of Directors, hereinafter the "Committee." Within the provisions of the Plan, the Committee shall have full power and authority: (a) to determine and designate the recipients of options, the dates options are granted, the number of shares subject to option, option prices, option periods and option terms, except as otherwise limited herein, and (b) to prescribe, amend and rescind rules and procedures for convenient administration of the Plan. Action by the Committee shall be authorized or ratified by a majority of the Committee members and may be without notice or meeting, by a writing signed by a majority of the Committee members. In any dispute or disagreement as to the interpretation of the Plan, or any rule or procedure of the Committee, or any question, right or obligation under the Plan, the decision of the Board of Directors shall be final and binding upon all persons. THIRD: Eligibility Key employees, including officers, of CTS shall be eligible to receive options and shall receive options when, and if, designated by the Committee. Directors who are not also employees or officers of CTS shall not be eligible to receive options. FOURTH: Option Grant The Committee shall determine and designate (i) the recipients of options, (ii) the dates options are granted, (iii) the number of shares subject to option, (iv) the option prices and (v) the option periods. FIFTH: Option Price The option price shall be not less than the fair market value of the shares on the date the option is granted. Fair market value of the shares shall be the reported closing price of the shares on the New York Stock Exchange on the date the option is granted, or, if not reported on such date, on the next preceding date for which such a closing price is reported. SIXTH: Option Ceiling The aggregate fair market value (determined as of the time the option is granted) of the shares of Common Stock for which any participant may be granted incentive stock options which become first exercisable in any calendar year, shall not exceed $100,000. SEVENTH: Option Grant Period The period during which an option may be granted shall, in no case, extend more than ten years after the Plan is adopted, or the date such Plan is approved by the shareholders, whichever is earlier. EIGHTH: Option Exercise Period The period during which an option may be exercised shall, in no case, extend more than ten years after the date the option is granted. NINTH: Option Terms The options shall be irrevocable and shall, on the date of grant, conform in all respects with the Plan and may be non- qualified or may conform with Section 422A of the Internal Revenue Code of 1986, as amended, hereinafter the "Code," or with any law supplemental thereto or substituted therefor. Inconsistencies between an option and the Plan shall be resolved according to the terms of the Plan. TENTH: Exercise of Option The right to exercise an option shall accrue in such annual and cumulative installments and at such times as designated by the Committee, commencing at least one year from the date the option is granted. Unless otherwise designated by the Committee (i) the number of installments shall be equal to the total number of years of the option period minus one, (ii) each installment shall be equal to the total number of shares under option divided by the number of installments and (iii) each installment cumulatively shall permit the exercise of any previously unexercised install- ment. ELEVENTH: Payment Payment of the option price shall be made upon exercise of any installment of an option, and the person exercising such option shall supply the Committee such pertinent information as the Committee may deem necessary. Payment may be made in cash or in previously acquired CTS Common Stock. Except as provided in ITEM THIRTEENTH, no option may be exercised unless, from the date the option is granted to the date of exercise, the option holder is an employee of CTS. An option holder shall have no rights as a shareholder with respect to shares subject to option until such shares are issued. TWELFTH: Nontransferability of Option Options shall not be assignable or transferable by the option holder other than by will or by the laws of descent and distribu- tion. THIRTEENTH: Effect of Termination of Employment Upon the death of an option holder, all unexpired installments of his options shall be accelerated and shall accrue as of the date of death, and his estate or the person or persons to whom his rights under the option shall pass by will or by the laws of descent and distribution may exercise the options, but only within one year after his death or, if sooner, until the option period expires. Upon total and permanent disability of an option holder, within the meaning of Section 105(d)(4) of the Code, all unexpired installments of his options shall be accelerated and shall accrue as of the date of such disability, and he may exercise the options but only within one year of the date of such disability or, if sooner, until the option period expires. Upon retirement of an option holder, all unexpired install- ments of his options shall be accelerated and shall accrue as of the date of retirement, and he may exercise the options, but only within three months after retirement or, if sooner, until the option period expires. Upon termination of employment of the option holder with CTS for any reason, other than death, disability, or retirement, he may exercise his options only to the extent he is entitled by the option terms on the date of termination, but such exercise may only be within thirty days after termination or, if sooner, until the option period expires. FOURTEENTH: Adjustment for Capital Change The number, kind and price of shares subject to option and the number and kind of securities or property reserved for issuance, and to be issued, upon exercise of options shall be proportionately and appropriately adjusted by the Committee to reflect the effects of stock splits, stock dividends and any other change in the capital structure of CTS Corporation or to reflect any merger, consolidation or exchange or sale of assets or shares of CTS Corporation. FIFTEENTH: Amendment and Termination The Board of Directors may modify or amend the Plan without shareholder approval at any time for the purpose of conforming to changes in pertinent law or government regulations or for any purpose permitted by law. In no event, however, shall any such action of the Board of Directors (i) increase, except as provided by ITEM FOURTEENTH, the number of shares of Common Stock which may be issued hereunder, (ii) decrease the option price, provided by ITEM FIFTH, (iii) change the class of eligible employees, provided by ITEM THIRD, (iv) change the option ceiling, provided by ITEM SIXTH or (v) impair any option granted prior to such action. INDEMNIFICATION AGREEMENT THIS AGREEMENT is entered into this _____ day of ___________, 19__ by and between _____________________ (the "Officer") and CTS CORPORATION, an Indiana corporation (the "Company"). WHEREAS, the Officer is an officer of the Company; and WHEREAS, to induce the Officer to continue to serve as an officer, the Company has provided for indemnification in Article XIX of its bylaws, a copy of which is attached hereto as Exhibit A ("Bylaw Indemnity"), and has maintained insurance and has a policy of continuing to maintain insurance for such persons against liabilities or losses incurred by the Officer as a consequence of his service in such capacity ("O & D Insurance"), to the extent available on terms acceptable to the Company; and WHEREAS, the Company has determined that O & D Insurance may not be available to it on acceptable terms in the future; and WHEREAS, in order to induce the Officer to serve as an Officer, the Company is willing to provide the indemnification provided herein; NOW, THEREFORE, in consideration of the premises and the Officer's continued service as an officer, the parties hereto agree as follows: Section 1. Indemnification. The Company shall, to the fullest extent to which it is empowered to do so under the Indiana Business Corporation Law, or other applicable laws, as from time to time in effect, indemnify the Officer in the event that he was or is made a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that he is or was an officer, director, employee or agent of the Company, or who, while serving as such officer, director, employee or agent of the Company, is or was serving at the request of the Company as an officer, director, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including counsel fees), judgments, settlements, penalties and fines (including excise taxes assessed with respect to employee benefit plans) ("Indemnifiable Expenses") actually or reasonably incurred by him in accordance with such action, suit or proceeding (net of any related insurance proceeds received by him or paid on his behalf), if the Officer (a) was wholly successful, on the merits or otherwise, in the defense of any such action, suit or proceeding or (b) acted in good faith and if he reasonably believed, in the case of conduct in his official capacity, that his conduct was not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, he either had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Officer did not meet the prescribed standard of conduct. For purposes of any determination under this Section 1, a person shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in Section 1 if his action is based on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (1) one or more officers or employees of the corporation or another enterprise whom he reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants, appraisers or other persons as to matters he reasonably believes are within the person's professional or expert competence; or (3) a committee of the Board of Directors of the corporation or another enterprise of which the person is not a member if he reasonably believes the committee merits confidence. The term "another enterprise" as used in this Section 3 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent. The provisions of this paragraph shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standards of conduct set forth in this Section 1. Section 2. Method of Indemnification. If the Officer is wholly successful, on the merits or otherwise, in the defense of any action, suit or proceeding, the Officer shall be entitled to receive from the Company, and the Company hereby covenants and agrees to provide the Officer, within ten business days of the Company's receipt of a written request of the Officer, accompanied by the supporting documentation set forth below, reimbursement in cash for the total amount of his Indemnifiable Expenses with respect thereto which shall not have been previously reimbursed by the Company. In making a written request for such reimbursement of Indemnifiable Expenses, the Officer shall submit to the Company a schedule setting forth in reasonable detail his Indemnifiable Expenses and the dollar amount expended for each such Indemnifiable Expense. Such schedule shall be accompanied by a copy of the bill, agreement, judgment or other documentation relating to each Indemnifiable Expense listed therein. If the Officer is unsuccessful on the merits in the defense of any action, suit or proceeding, the Officer shall be similarly entitled to receive from the Company, and the Company covenants and agrees to provide the Officer, reimbursement in cash for the total amount of his Indemnifiable Expenses with respect thereto which shall not have been previously reimbursed by the Company, within three business days after a determination has been made that the Officer has met the applicable standards of conduct set forth in Section 1. Such determination shall be made in good faith (1) by the Board by a majority vote of a quorum consisting of directors who were not at the time parties to such action, suit or proceeding; or (2) if a quorum cannot be obtained under subdivision (1), by majority vote of a committee duly designated by the Board (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to such action, suit or proceeding; or (3) by special legal counsel: (A) selected by the Board or its committee in the manner prescribed in subdivision (1) or (2), or (B) if a quorum of the Board cannot be obtained under subdivision (1) and a committee cannot be designated under subdivision (2), selected by a majority vote of the full Board (in which selection directors who are parties may participate); or (4) by the shareholders, but stock owned by or voted under the control of directors who are at the time parties to such action, suit or proceeding may not be voted on the determination. The foregoing determination shall be made within ten business days of the Company's receipt of a written request of the Officer, accompanied by the supporting documentation described above, unless the determination is to be made by the shareholders, in which case the Company covenants and agrees to call a special meeting of the shareholders within ten business days of such receipt. The evaluation of the reasonableness of expenses shall be made at the same time and in the same manner; provided that if the determination that indemnification is permissible is to be made by special legal counsel, the evaluation as to the reasonableness of expenses shall be made by those entitled to select such counsel. Section 3. Payment of Expenses in Advance. Expenses previously incurred by the Officer or reasonably expected by the Officer to be incurred in connection with any action, suit or proceeding shall be paid for or reimbursed by the Company in advance of the final disposition of such action, suit or proceeding, within ten business days of the Company's receipt of a written request of the Officer accompanied by a written affirmation of the Officer's good faith belief that he has met the standards of conduct described in Section 1 of this Agreement, and a schedule setting forth in reasonable detail the amount incurred or reasonably expected to be incurred for any expenses, but only upon a determination made in the manner and by any of the persons described in the second paragraph of Section 2 of this Agreement that the facts then known to them would not preclude indemnification hereunder because the Officer failed to meet the applicable standards of conduct described in Section 1 of this Agreement. The Officer hereby covenants and agrees with the Company to repay such amount if it is ultimately determined that the Officer did not meet the standards of conduct described in Section 1 of this Agreement. The Officer may make as many requests for advances under this Section 3 as he deems reasonably necessary to cover his actual or reasonably expected expenses. Section 4. Provisions Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other right to be indemnified or insured by the Company or any other person or entity to which the Officer may be entitled under any statute, agreement, policy of insurance or surety, the Articles of Incorporation or bylaws of the Company, any resolution of the Board of Directors or shareholders, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue after the Officer has ceased to be an officer, employee or agent of the Company, and shall inure to the benefit of his heirs, executors and administrators. Section 5. Definitions. For purposes of this Agreement, serving an employee benefit plan at the request of the Company shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by the Officer with respect to an employee benefit plan, its participants, or beneficiaries. If the Officer acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan, he shall be deemed to have acted in a manner "not opposed to the best interests of the Company" referred to in Section 1 of this Agreement. For purposes of this Agreement, "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding, or who is threatened to be made a named defendant or respondent in any action, suit or proceeding. For purposes of this Agreement, "Official capacity," when used with respect to the Officer, shall mean the office of director of the Company and any office of the Company held by the Officer or other employment or agency relationship undertaken by the Officer on behalf of the Company. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not. Section 6. Good Faith. The Company agrees to perform its obligations under this Agreement in good faith; and in any litigation brought by the Officer to enforce any such obligations, the Company shall have the burden of establishing by a preponderance of the evidence that it (and the Board or a committee thereof, if applicable) so performed such obligations, and in the absence of fulfilling such burden, the Company hereby consents to the entry of the judgment, decree and other relief sought by the Officer in such litigation and further agrees not to appeal or otherwise resist the enforcement thereof. Section 7. Notice. All notices and other communications pursuant to this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Officer: __________________________ __________________________ __________________________ If to the Company: CTS Corporation 905 West Boulevard North Elkhart, In 46514 Attention: General Counsel or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. Section 8. Miscellaneous. (a) This Agreement shall be binding on the successors and assigns of the Company. (b) This Agreement contains the entire agreement of the parties with respect to the matters covered herein, and may not be amended except by a written instrument executed by the parties hereto. (c) This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Indiana. (d) The invalidity or unenforceability in any respect of any provision of this Agreement shall not affect the validity or enfor- ceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THE OFFICER THE COMPANY ___________________________ _____________________________ Jeannine M. Davis Vice President, General Counsel and Secretary EX-27 5
5 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 37,271 0 42,511 774 38,885 126,113 182,141 131,445 227,127 50,962 0 33,355 0 0 112,898 227,127 300,157 300,157 225,353 272,669 (1,986) 0 1,790 27,684 10,520 17,164 0 0 0 17,164 3.30 3.30
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