CTS CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
1998
FORM 10-K
ANNUAL REPORT
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For Fiscal Year Ended December 31, 1998
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0225010
(State or other jurisdiction of (IRS Employer Identifi-
incorporation or organization) cation Number)
905 West Boulevard North, Elkhart, Indiana 46514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 219-293-7511
Web site address: http://www.ctscorp.com
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common stock, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant has: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
There were 13,650,435 shares of Common Stock, without par value, outstanding on
February 22, 1999. The aggregate market value of the voting stock held by
non-affiliates of CTS Corporation was approximately $607.8 million on February
22, 1999.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the 1999 Proxy Statement to be filed for the
annual meeting of shareholders to be held on April 30, 1999,
incorporated by reference in Part 3.
(2) Certain portions of the CTS Corporation Form 10-K for the 1995
fiscal year ended December 31, 1995, incorporated by reference
in Part 4.
(3) Portions of the CTS Corporation Form 8-K filed with the
Commission September 2, 1998 incorporated by reference in
Part 4.
(4) Portions of the CTS Corporation Form 14D-1 filed with the
Commission May 16, 1997 incorporated by reference in Part 4.
(5) Portions of the CTS Corporation Form 10-Q for the quarter
ended June 29, 1997 filed with the Commission on August 12,
1997, incorporated by reference in Part 4.
SEE THE EXHIBIT INDEX -- PAGES 20 - 21
<PAGE>
PART 1
Item 1
Business News and Information
CTS IS A 100 YEAR OLD COMPANY MOVING INTO THE NEXT CENTURY
CTS Corporation was established in 1896 as Chicago Telephone Supply, a provider
of high-quality telephone products. The technology was soon adapted to the
emerging radio industry, to which CTS became a major supplier of quality
components. Today, CTS is a recognized leader in the design and manufacture of
electronic components and electronic assemblies.
CTS designs, manufactures, assembles and sells a broad line of passive
electronic components and electronic assemblies, serving the electronic needs of
original equipment manufacturers worldwide in the computer equipment,
automotive, communications equipment and other markets. Manufacturing
operations, sales representatives and distributors are located throughout the
United States and in many countries worldwide to work closely with customers.
CTS' growth has been worldwide. The major elements contributing to the
sustained growth are:
* customer focused, market driven new product development enabled by
existing and new technologies,
* high volume manufacturing to consistent standards of quality and
reliability, cost effectiveness and delivery and
* state-of-the-art manufacturing technologies and processes.
On December 22, 1998, CTS signed a definitive agreement to acquire the
Component Products Division (CPD) of Motorola, Inc. CPD will be wholly-owned
by CTS and operate under the name CTS Wireless Components, Inc. CPD
manufactures ceramics, quartz, oscillators, lead zirconate titanate and
surface acoustic wave components, primarily for the wireless communications
industry.
During 1998, CTS finalized its plan for integration and disposal of the
Dynamics Corporation of America (DCA) businesses acquired on October 16,
1997. Prior to acquisition by CTS, DCA owned 44% of CTS' common stock and
seven separate businesses. Except for DCA's frequency and heat sink
businesses, which have been integrated into CTS' complementary operations,
all other DCA businesses are reflected in CTS' financial results as
discontinued operations (including the Waring Division which was sold in May,
1998.)
<PAGE>
BUSINESS SEGMENTS AND PRODUCTS BY MAJOR MARKET
CTS' operations comprise two reportable business segments, the manufacturing
of electronic components and electronic assemblies. Electronic components are
products which perform the basic level electronic function for a given
product family for use in customer assemblies. Electronic components consist
principally of automotive sensors used in commercial or consumer vehicles,
frequency control devices such as crystals and clocks, loudspeakers, resistor
networks, switches and variable resistors. CTS' electronic assemblies are
assemblies of electronic or electronic and mechanical products which, apart
from the assembly, may themselves be marketed as separate stand-alone
products. Such assembly represents a completed, higher- level functional
product to be used in customer end products or assemblies. These products
consist principally of flex cable assemblies used in the disk drive market,
hybrid microcircuits used in the healthcare market, cursor controls for
computers and interconnect products such as backpanels and connectors used in
the telecommunications industry.
Within the two business segments, products are also identified by market. CTS
products are principally sold into four primary original equipment
manufacturing (OEM) markets including computer equipment, automotive,
communications equipment and other markets. Other markets include OEMs for
consumer electronics, instruments and controls, and defense and aerospace
equipment.
Electronic components sales as a percent of consolidated sales were 67% of
sales for 1998, 61% for 1997 and 67% for 1996. Electronic assemblies sales as
a percent of consolidated sales were 33% of sales for 1998, 39% for 1997 and
33% for 1996. The following table breaks down the percentages by segment into
each segment's major markets:
Electronic Components Electronic Assemblies
Markets 1998 1997 1996 1998 1997 1996
- ------- ---- ---- ---- ---- ---- ----
Computer Equipment 9% 8% 11% 23% 25% 14%
Automotive 32% 31% 34% - - -
Communications Equipment 17% 12% 11% 6% 8% 10%
Other 9% 10% 11% 4% 6% 9%
Segment as a % of
Consolidated 67% 61% 67% 33% 39% 33%
Sales to unaffiliated customers, operating earnings and identifiable assets,
by geographic area, are contained in "Note I - Business Segments" appearing
herein the financial statements as noted in the index appearing under Item
14(a)(1) and (2).
<PAGE>
The following table identifies major products by their business segment and
markets. Many products are sold into several (OEM) markets.
Product Computer Automotive Communications Other
Description Equipment Market Equipment Markets
Market Market
------ ------
Electronic Components:
DIP/Rotary Switches o o o
Automotive Sensors o
Frequency Control Devices o o o
(Crystals and Oscillators)
Loudspeakers o o
Potentiometers and Trimmers o o o o
Resistor Networks o o o o
Thermal Dissipators o o o
Electronic Assemblies:
Cursor Controls o
Flex Cable Assemblies o
Hybrid Microcircuits o o
Interconnect Systems, Backpanels o o o
<PAGE>
MARKETING AND DISTRIBUTION
CTS sales engineers and manufacturers' representatives sell CTS electronic
components and electronic assemblies to original equipment manufacturers. CTS
maintains sales offices in Elkhart, Indiana; Southfield, Michigan; Hong Kong;
Taiwan and Japan in addition to several business unit locations. Various
regions of the United States are serviced by sales engineers working at
independent locations.
Approximately half of the sales in 1998 were attributable to coverage by CTS
sales engineers. CTS sales engineers generally service the largest customers
with application specific products. The engineers work closely with major
customers in designing products to meet or exceed customer requirements.
CTS utilizes the services of independent sales representatives and
distributors in the United States and other countries for customers not
serviced directly by CTS sales engineers. Sales representatives receive
commissions from CTS. During 1998, approximately 43% of net sales were
attributable to coverage by sales representatives. Additionally, independent
distributors purchase products from CTS for resale to customers. In 1998,
independent distributors and/or dealers accounted for approximately 6% of net
sales.
RAW MATERIALS
* Raw materials used in many CTS products include steel, copper,
brass, aluminum, certain precious metals, resistive and conductive
inks, passive electronic components and semiconductors.
* Ceramic materials are used in resistor networks and hybrid
microcircuits.
* Synthetic quartz is used in frequency control devices.
* Molding compounds are used in automotive sensors, DIP/rotary switches
and loudspeakers.
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 1998, all of these materials were available in
adequate quantities to meet CTS' production demands.
CTS does not currently anticipate any raw material shortages which would slow
production. However, the lead times between the placement of orders for
certain raw materials and actual delivery to CTS may vary, and occasionally
might require the Company to order raw materials in quantities and at prices
less than optimal to compensate for the variability of lead times for
delivery.
Precious metal prices may have a significant effect on the cost and selling
price of many CTS products, particularly some switches, interconnect
products, resistor networks and hybrid microcircuits. CTS reduced the
precious metals content of several products in 1998, and will continue the
program in 1999 when consistent with customer specifications.
<PAGE>
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. CTS is not generally required to carry
significant amounts of inventories in anticipation of rapid delivery
requirements because most customer orders are custom built. CTS has entered
into "just-in-time" arrangements with certain major customers in order to
meet their delivery requirements.
CTS carries raw materials, including certain semiconductors, work-in-process
and finished goods inventories which are unique to a particular customer(s),
and in the event of reductions or cancellations of orders, some inventories
may not be useable or returnable 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 or payment privileges to customers, although CTS' distributor
program permits certain returns or adjustments. CTS' working capital
requirements are generally cyclical but not seasonal.
Working capital requirements are generally dependent on the overall business
level. During 1998, working capital decreased to $36.2 million, primarily due
to the decrease in cash. Cash declined as a result of the repurchase of 1.8
million CTS common stock shares for treasury, partially offset by proceeds
from the sale of the Waring Products Division. Cash of various non-U.S.
subsidiaries was held in U.S.-denominated cash equivalents at December 31,
1998. Cash, except for approximately $1.8 million which would be due in
foreign withholding taxes, is generally available to the 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 right to manufacture several electronic products to
companies in the United States and non- U.S. countries. In 1998, 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 66%, 67% and 62% of net sales in
1998, 1997 and 1996, respectively. Sales of electronic components to General
Motors Corporation represented 12% to 15% of CTS' sales in each of the last
three years. Sales of electronic assemblies to Compaq Computer Corporation
represented 12% of CTS' net sales in two of the last three years. Sales of
electronic assemblies to Seagate Technology, Inc. represented 11% of CTS' net
sales in one of the last three years.
<PAGE>
BACKLOG OF ORDERS
Backlog of orders may not provide an accurate indication of present or future
business levels for CTS. For many electronic components and electronic
assemblies the period between receipt of orders and expected delivery is
relatively short. Large orders from major customers may constitute backlog
over an extended period of time. Production scheduling and delivery for such
orders could be changed or canceled by the customer on relatively short
notice. At December 31, 1998, CTS' backlog of orders was $90 million compared
to $91 million at December 31, 1997. The backlog of orders at the end of 1998
will generally be filled during the 1999 fiscal year.
GOVERNMENT CONTRACTS
CTS estimates that about 3% 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. The Ellis and Watts and
Fermont businesses, which are both discontinued operations, do have
significant government contracts. The sale of these discontinued businesses
may not relieve CTS of all liabilities associated with its government
contracts.
CTS is usually subject to contract provisions permitting termination of the
contract, usually with penalties payable by the government, maintenance of
specified accounting procedures, limitations on and renegotiations of
profits, priority production scheduling and possible penalties or fines
against CTS for late delivery or substandard quality. Such contract
provisions have not previously resulted in material uncertainties or
disruptions for CTS.
COMPETITION
CTS competes with many domestic and non-U.S. manufacturers principally on the
basis of product features, price, technology, quality, reliability, delivery
and service. Most CTS product lines encounter significant competition. The
number of significant competitors varies from product line to product line.
No one competes with CTS in every product line, but many competitors are
larger and more diversified than CTS. Some competitors are divisions or
affiliates of customers. CTS is subject to competitive risks which are the
nature of the electronics industry including 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. Most customers are demanding higher
quality, reliability and delivery standards from CTS as well as competitors.
These trends create opportunities for CTS, but also increase 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.
<PAGE>
CTS believes that it has an advantage over certain competitors:
* The ability to apply a broad range of technologies and
materials capabilities to develop products for the special requirements
of customers.
* The capability to sell a broad range of products manufactured
to consistent standards of quality and delivery.
* CTS is one of the largest manufacturers of automotive throttle position
sensors in the world.
NON-U.S. REVENUES AND RISKS
In 1998 approximately 40% of net sales to unaffiliated customers were
attributable to non-U.S. operations. This is unchanged from 1997. In 1998,
approximately 28% of total CTS assets are non-U.S. A substantial portion of
these assets, other than cash and equivalents, cannot readily be liquidated.
CTS believes that the business risks to its 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. Southeast Asia is currently experiencing currency,
economic and political instability. CTS has manufacturing facilities in
Taiwan and Singapore, but the majority of their sales are to Europe and the
United States, which Management believes minimizes any potential risk to the
Compny.
Information about revenue from sales to unaffiliated customers, operating
earnings and identifiable assets, by geographic area, is contained in "Note I -
Business Segments" appearing herein the financial statements as noted in the
index appearing under Item 14(a)(1) and (2).
RESEARCH AND DEVELOPMENT ACTIVITIES
In 1998, 1997 and 1996, CTS spent $13.4, $13.1 and $10.7 million,
respectively, for research and development. Most CTS research and development
activities relate to developing new products and technologies, improving
product flow and adding product value to meet the current and future needs of
its customers. CTS'engineers and technicians apply engineering techniques such
as computer aided design and computer aided manufacturing to develop and
produce prototypes. CTS provides its customers with full systems support to
ensure product quality and reliability through all phases of design, launch
and production manufacturing to meet or exceed customer requirements. The 1998
efforts were particularly devoted to the automotive products in North America
and Europe. Many such research and development activities are for the benefit
of one or a limited number of customers or potential customers. The Company
expenses all research and development costs as incurred. Design and
development costs may be paid or shared by the customer.
<PAGE>
ENVIRONMENTAL PROTECTION LAWS
In complying with federal, state and local environmental protection laws, CTS
continues to make additional modifications to manufacturing processes. Such
modifications have not materially affected the capital expenditures, earnings
or competitive position of CTS.
The manufacturing process of certain 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. Management believes 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 CTS 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 CTS.
There are claims against CTS with respect to environmental matters which the
Company contests. Management believes that either adequate provision for
potential costs has been made, or the potential costs would not materially
affect the consolidated financial position or results of operations of CTS.
<PAGE>
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
CTS is addressing the issues associated with the programming code in existing
computer systems and other equipment which may be affected by the rollover of
the two-digit year value to 00 in the year 2000. Systems that do not properly
recognize such dates could generate erroneous information or cause a system
to fail. The Year 2000 issue creates risk for CTS from unforeseen problems in
its own systems and from worldwide third parties with whom CTS transacts
business. CTS believes that its products are not "time and date" sensitive.
CTS has formed a Company-wide Year 2000 Readiness Project to identify and
resolve Year 2000 issues. This program includes the inventory of financial,
manufacturing, design and other internal systems, hardware, equipment and
embedded chips in industrial control instruments, and the assessment,
remediation and testing of the systems. All systems were inventoried,
reviewed and assessed in 1998, and the majority of systems which were not
Year 2000 ready were remedied or replaced and tested in 1998. The project is
approximately 85% completed and the remaining remediation of systems is
expected to be completed by the end of the second quarter of 1999. Acceptance
testing and certification of these systems are projected for completion by
the third quarter of 1999. A task force, comprised of members from operating
units and executive management, meets regularly and tracks the progress of
the program, prioritizes all the potential risks and develops plans to
eliminate or reduce risks.
CTS also faces risk to the extent that suppliers of products, services and
systems purchased by CTS and others with whom CTS transacts business on a
worldwide basis do not comply with Year 2000 requirements. As part of the
program, Year 2000 Readiness Surveys have been sent to significant service
providers, vendors, suppliers, customers and governmental entities that are
believed to be critical to business operations. CTS is currently in the
process of evaluating responses and sending follow-up requests to the
estimated 20% that have not responded. While Management believes that it will
be able to qualify alternative suppliers as needed, until all supplier and
customer survey responses have been received and evaluated, the Company
cannot fully evaluate the extent of potential problems and the costs
associated with corrective actions. A contingency plan is being evaluated and
reviewed, and will not be formally established until the third quarter of
1999 when the evaluation of suppliers and the remaining remediation of
systems and testing is completed. CTS is unable to determine what effect the
failure of systems due to Year 2000 issues by CTS or its suppliers or
customers may have, but any significant failures could have an adverse
material effect on CTS' results of operations and financial condition.
The cost to complete the program is estimated at $2 million for the costs of
outside consultants, software and hardware applications. There has been $1
million spent to date as of December 31, 1998 with the remainder projected to
be spent in 1999. CTS has not tracked the internal costs incurred for all of
the hours spent on the project.
<PAGE>
EMPLOYEES
CTS employed 4,012 persons at December 31, 1998, and approximately 46% of
these persons were employed outside the United States at the end of 1998.
Approximately 700 CTS employees in the United States were covered by
collective bargaining agreements as of December 31, 1998. There are two
continuing operations with collective bargaining agreements, one will expire
in 2003 and the other will expire in 2005. There are two discontinued
operations with collective bargaining agreements which will expire in 2000.
Item 2
Properties
CTS has manufacturing facilities, administrative, research and development
and sales offices in many locations. The manufacturing properties are listed
and identified with a representative product. The other facilities are shown
along with the primary activity. Each property's relative size is shown in
square footage, and each location is identified as to whether it is leased or
owned.
<TABLE>
<CAPTION>
Square Owned/
Manufacturing Facility Footage Leased Representative Product
<S> <C> <C> <C>
Berne, Indiana 249,000 Owned Resistor Networks/Systems
Burbank, California 37,000 Leased Thermal Dissipators
Burbank, California 21,000 Owned Thermal Dissipators
Carlisle, Pennsylvania 94,000 Leased Frequency Control Devices
Dongguan, China 23,000 Leased DIPS, Potentiometers & Trimmers
Elkhart, Indiana 412,000 Owned Sensors
Glasgow, Scotland 75,000 Owned Interconnect Systems,
Glasgow, Scotland 20,000 Leased Backpanels and Sensors
Hudson, New Hampshire 38,000 Leased Interconnect Systems
Kaohsiung, Taiwan 133,000 Owned DIPS, Potentiometers & Trimmers
Matamoros, Mexico 51,000 Owned Loudspeakers
Sandwich, Illinois 94,000 Owned Frequency Control Devices
Singapore 159,000 Owned Frequency Control Devices
Streetsville, Ontario, Canada 112,000 Owned Sensors
West Lafayette, Indiana 106,000 Owned Hybrid Microcircuits
Total Manufacturing 1,624,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Properties Continued) Square Owned/
Other Facilities Footage Leased Primary Activity
- ---------------- ------- ------ ----------------
<S> <C> <C> <C>
Baldwin, Wisconsin 39,000 Owned Storage Facility
Bangkok, Thailand 53,000 Owned Leased Through April, 1999
Brownsville, Texas 85,000 Owned Warehousing Facility
Elkhart, Indiana 90,000 Owned Administrative Offices & Research
Greenwich, Connecticut 8,000 Leased Offices
Kowloon, Hong Kong 650 Leased Sales Office
New Hartford, Connecticut 212,000 Owned Leased Property
Southfield, Michigan 1,500 Leased Sales Office
Winsted, Connecticut 55,000 Owned Storage Facility
Yokohama, Japan 1,400 Leased Sales Office
Taipei, Taiwan 1,250 Leased Sales Office
Discontinued Operations
Carson, California 76,000 Leased Anemostat West Operations
Batavia, Ohio 148,000 Owned Ellis & Watts Operations
Bridgeport, Connecticut 97,000 Owned Fermont Operations
Scranton, Pennsylvania 270,000 Owned Anemostat East Operations
</TABLE>
CTS regularly assesses the adequacy of its manufacturing facilities for
manufacturing capacity, available labor and location to its markets and major
customers. CTS also reviews the operating costs of its facilities and may
from time to time relocate or move a portion of its manufacturing activities
in order to reduce operating costs and improve asset utilization and cash
flow. CTS is currently marketing its discontinued properties.
Item 3
Legal Proceedings
Contested claims involving various matters, including environmental claims
brought by governmental agencies, are being litigated by CTS, both in legal
and administrative forums. CTS is subject to normal litigation which results
from the ordinary conduct of its business operations, however, Management is
not aware of any significant pending litigation.
<PAGE>
Item 4
Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998, no matter was submitted to a vote of
security holders of the Company.
PART 2
Item 5
Stock and Dividend Information
The principal market for CTS common stock is the New York Stock Exchange.
Quarterly market high and low trading prices for CTS Common Stock for each
quarter of the past two years and the amount of dividends declared during the
previous two years are contained in "Shareholder Information," appearing
herein. On December 31, 1998, there were approximately 1,379 holders of record
of CTS common stock.
CTS intends to continue its policy of considering dividends on a quarterly
basis. The declaration of a dividend and the amount of any such dividend is
subject to earnings, anticipated working capital, capital expenditures, other
investment requirements, the financial condition of CTS and any other factors
considered relevant by the Board of Directors.
Item 6
Five-Year Financial Summary
A summary of selected financial data for CTS for each of the previous five
years is contained in the "Five-Year Summary," appearing herein the financial
statements as noted in the index appearing under Item 14(a)(1) and (2).
Certain divestitures and closures of businesses do affect the comparability
of information contained in the "Five-Year Summary."
Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
1996-1998
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 (1996- 1998),"
appearing herein the financial statements as noted in the index appearing
under Item 14(a)(1) and (2).
<PAGE>
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 the CTS
Corporation 1998 Annual Report, incorporated herein. Quarterly per share
financial data is provided in "Shareholder Information," under the
subheadings, "Per Share Data," appearing herein the financial statements as
noted in the index appearing under Item 14(a)(1) and (2).
Item 9
Changes in Auditors or Disagreements
With Accountants on Accounting and Financial Disclosure
There were no disagreements or changes.
PART 3
Item 10
Directors and Executive Officers
Information responsive to Items 401(a) and 401(e) of Regulation S-K
pertaining to directors of CTS is contained in the 1999 Proxy Statement, page
7, under the caption "Election of Directors" to be 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
1999 Proxy Statement, page 13, under the caption "Directors & Officers' Stock
Ownership", to be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
The individuals in the following list were elected as executive officers of
CTS at the annual meeting of the Board of Directors on April 26, 1998, except
for George T. Newhart, elected Vice President and Corporate Controller
effective on June 26, 1998, Timothy J. Cunningham, elected Vice President
Finance and Chief Financial Officer effective on October 5, 1998, Philip G.
Semprevio, elected Group Vice President effective on November 16, 1998,
George A. Harding, elected Group Vice President effective on December 18,
1998, and Jeannine M. Davis, elected Senior Vice President and General
Counsel, effective on December 18, 1998. They are expected to serve as
executive officers until the next annual meeting of the Board of Directors,
scheduled on April 30, 1999, at which time the election of officers will be
considered again by the Board of Directors.
<PAGE>
List Of Officers
Name Age Position and Offices
Joseph P. Walker 60 Chairman, President
and Chief Executive Officer
George A. Harding 52 Group Vice President
William J. Kaska 57 Group Vice President
Philip G. Semprevio 48 Group Vice President
Jeannine M. Davis 50 Senior Vice President, Secretary
and General Counsel
Timothy J. Cunningham 45 Vice President Finance
and Chief Financial Officer
James L. Cummins 43 Vice President Human Resources
James N. Hufford 59 Vice President Research,
Development and Engineering
George T. Newhart 56 Vice President and Corporate Controller
Donald R. Schroeder 50 Vice President Sales and Marketing
Gary N. Hoipkemier 44 Treasurer
Brief History of Officers
Joseph P. Walker has served as Chairman of the Board, President and Chief
Executive Officer of CTS since 1988.
George A. Harding was elected as Group Vice President effective December 18,
1998. Mr. Harding served as Vice President and General Manager for the CTS
Microelectronics business unit from 1996 to 1998, and for the CTS Resistor
Products business unit from 1993 to 1996. Prior to joining CTS, Mr. Harding
was Operations Manager and General Manager of Dale Electronics, subsidiary of
Vishay Intertechnology.
William J. Kaska has served as Group Vice President since 1997. Prior to his
appointment, he served as Vice President and General Manager of CTS
Automotive Products.
Philip G. Semprevio was elected as Group Vice President effective November
16, 1998. Prior to his appointment, he served as President, Justrite
Manufacturing Company, LLC, a subsidiary of Federal Signal Corporation. Mr.
Semprevio worked for CTS as Vice President and General Manager of the
Electrocomponents business unit from 1990-1994.
Jeannine M. Davis was elected Senior Vice President, Secretary and General
Counsel effective on December 18, 1998. Previously she served as Vice
President, Secretary and General Counsel since 1988.
Timothy J. Cunningham was elected as Vice President Finance and Chief
Financial Officer effective October 5, 1998. Prior to joining CTS, Mr.
Cunningham was Vice President of Finance for Moore Document Solutions a $1.2
billion division of Moore Corporation, Ltd.
<PAGE>
(Officer History Continued)
James L. Cummins has served as Vice President Human Resources since 1994. For
the three years prior to this appointment, he served as Director, Human
Resources, CTS Corporation.
James N. Hufford has served as Vice President Research, Development and
Engineering since 1995. During the four years prior to this appointment, Mr.
Hufford served as Manager and then Director of Corporate Research,
Development and Engineering for CTS.
George T. Newhart was elected Vice President and Corporate Controller
effective on June 26, 1998. From 1989 until this appointment Mr. Newhart
served as Corporate Controller.
Donald R. Schroeder has served as Vice President Sales and Marketing since
1995. During the six years prior to this appointment, Mr. Schroeder served as
Business Development Manager for innovative and new technology for the CTS
Microelectronics business unit.
Gary N. Hoipkemier has served as Treasurer since 1989.
Item 11
Director and Executive Compensation
Information responsive to Item 402 of Regulation S-K pertaining to management
remuneration is contained in the 1999 Proxy Statement in the captions
"Director Compensation," page 9 and "Executive Compensation," pages 14 - 18,
to be filed with the Securities and Exchange Commission, and is incorporated
herein by reference.
Item 12
Directors and Officers' Stock Ownership
Information responsive to Item 403 of Regulation S-K pertaining to security
ownership of certain beneficial owners and management is contained in the
1999 Proxy Statement in the caption "Directors & Officers' Stock Ownership,"
pages 13 - 14, to be filed with the Securities and Exchange Commission, and
is incorporated herein by reference.
Item 13
Certain Relationships and Related Transactions
Mr. Profusek is a Partner and Head of the Merger Department of the law firm
of Jones, Day, Reavis & Pogue, a law firm which CTS has retained for specific
legal services and litigation, on a case by case basis, for over five years.
<PAGE>
<TABLE>
<CAPTION>
PART 4
Item 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K The list of
financial statements and schedules required by Item 14(a)(1) and (2) is
contained herein.
(a) (3) Exhibits
<S> <C> <C> <C>
(3)(a) Amended and Restated Articles of Incorporation, (incorporated by reference to Exhibit 5
to the Company's current Report on Form 8-K, filed with the Commission on September
2, 1998).
(3)(b) Bylaws, (Incorporated by reference to Exhibit 4 to
the Company's current Report on Form 8-K, filed with
the Commission on September 2, 1998).
(10)(a) Employment Agreement, dated as of May 9, 1997, between the Company and Joseph P.
Walker (incorporated by reference to Exhibit (c)(2) to the Schedule 14D-1 filed with the
Commission on May 16, 1997).
(10)(b) Prototype officers and directors' indemnification agreement (incorporated by reference to
Exhibit (10) (g) to the Company's Annual Report on Form 10-K for 1995 filed with the
Commission on March 21, 1996.)
(10)(c) CTS Corporation 1986 Stock Option Plan, approved by the shareholders on May 30,
1986, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit
10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29,
1997 filed with the Commission on August 12, 1997.)
(10)(d) CTS Corporation 1998 Restricted Stock and Cash Bonus Plan approved by
the shareholders on April 28, 1989, as amended and restated on May 9, 1997,
(incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 29, 1997 filed with the Commission on
August 12, 1997.
(10)(e) CTS Corporation 1996 Stock Option Plan, approved by the shareholders on April 26,
1996, as amended and restated on May 9, 1997, (incorporated by reference to Exhibit
10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29,
1997 filed with the Commission on August 12, 1997.)
(10) (f) Asset Sale Agreement dated December 22, 1998 and Earnout Exhibit thereto between
CTS Wireless Components, Inc. and Motorola, Inc. underwhich CTS Wireless Components, Inc.
will acquire the assets of Motorola's Components Products Division.
(10) (g) Shareholders Agreement, dated as of July 17, 1997, among the Company, Sub, WHX Corporation
("WHX") and SB Acquisition Corp., a subsidiary of WHX (incorporated by reference to Exhibit ( c ) (7)
to the Schedule 13-D).
(21) Subsidiaries filed herewith.
(23) Consent of PricewaterhouseCoopers to incorporation by reference on Form 10-K for the fiscal year
1998 to Registration Statement 33-27749 on Form S-8 and Registration Statement 333-5730 on Form S-8.
</TABLE>
<PAGE>
(Part 4, Item 14 Continued)
(b) Reports on Form 8-K
Announcement of a Shareholder Rights Plan and related Amendments to the
Articles of Incorporation and Bylaws, filed September 2, 1998.
Announcement of the signing of the Definitive Asset Sale Agreement with
Motorola, Inc. under which CTS Corporation will acquire the assets of
Motorola's Components Products Division, filed September 16, 1998.
Indemnification Undertaking
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statements on
Form S-8 Nos. 33-27749 (filed March 23, 1989) and 333-5730 (filed October 3,
1996):
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provision, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date By_______________________________
Timothy J. Cunningham,
Vice President Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date By______________________________
Lawrence J. Ciancia, Director
Date By______________________________
Thomas G. Cody, Director
Date By______________________________
Gerald H. Frieling, Jr., Director
Date By______________________________
Andrew Lozyniak, Director
Date By______________________________
Robert A. Profusek, Director
Date By______________________________
Joseph P. Walker, Director
Date By______________________________
Jeannine M. Davis,
Senior Vice President, Secretary
and General Counsel
Date By______________________________
George T. Newhart,
Vice President and Controller
and principal accounting officer
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. Date By
/S/Timothy J. Cunningham Timothy J. Cunningham, Vice President Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date By /S/ Lawrence J. Ciancia
Lawrence J. Ciancia,
Director
Date By /S/ Thomas G. Cody
Thomas G. Cody,
Director
Date By /S/ Gerald H. Frieling, Jr.
Gerald H. Frieling, Jr.,
Director
Date By /S/ Andrew Lozyniak
Andrew Lozyniak,
Director
Date By /S/ Robert A. Profusek
Robert A. Profusek,
Director
Date By /S/ Joseph P. Walker
Joseph P. Walker,
Director
Date By /S/ Jeannine M. Davis
Jeannine M. Davis,
Senior Vice President, Secretary
and General Counsel
Date By /S/ George T. Newhart
George T. Newhart,
Vice President and Controller
and principal accounting officer
<PAGE>
FINANCIAL STATEMENTS 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, 1998
CTS CORPORATION AND SUBSIDIARIES
ELKHART, INDIANA
<PAGE>
FORM 10-K - ITEM 14(a) (1) AND (2) AND ITEM 14 (d)
CTS CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of CTS Corporation and
subsidiaries to be included in the annual report of the registrant to its
shareholders for the year ended December 31, 1998, are referenced in Item 8 and
incorporated herein:
Consolidated balance sheets - December 31, 1998, and
December 31, 1997
Consolidated statements of earnings - Years ended December 31, 1998,
December 31, 1997, and December 31, 1996
Consolidated statements of shareholders' equity - Years ended December
31, 1998, December 31, 1997, and December 31, 1996
Consolidated statements of cash flows - Years ended December 31,1998,
December 31, 1997, and December 31, 1996
Notes to consolidated financial statements
The following consolidated financial statement schedules of CTS Corporation
and subsidiaries, are included in item 14(d):
Schedule II - Valuation and qualifying accounts Reference Page S-3
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
because they are inapplicable, not required or the information is included in
the consolidated financial statements or notes thereto.
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of CTS Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) and (2) on page S-1 present fairly, in all
material respects, the financial position of CTS Corporation and its
subsidiaries at December 31, 1998, and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principals. 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 misstatements. 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 28, 1999
S-2
<PAGE>
<TABLE>
<CAPTION>
CTS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
Additions (Reductions)
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Classification Period Expenses Accounts Deductions(1) End of Period
Year ended December 31, 1998:
<S> <C> <C> <C> <C> <C>
Allowance for $ 692 $(79) $0 $61 $ 552
doubtful receivables
Year ended December 31, 1997
Allowance for
doubtful receivables $622 $ 74 $0 $ 4 $ 692
Year ended December 31, 1996:
Allowance for
doubtful receivables $774 $239 $0 $391 $ 622
(1) Uncollectible accounts written off.
S-3
</TABLE>
<PAGE>
Financial Highlights
(In thousands except per share data)
<TABLE>
<CAPTION>
For the Year 1998 1997 1996
- ------------ ---- ---- ----
<S> <C> <C> <C>
Net sales $ 370,441 $ 390,602 $ 321,297
Net earnings 37,474 22,813 21,170
Average common shares outstanding -- diluted 14,614 15,976 15,766
Per share data:
Net earnings -- diluted -- Note M $ 2.56 $ 1.43 $ 1.34
Dividends declared .24 .24 .23
Capital expenditures 21,330 22,180 17,210
At Year-End
- -----------
Working capital $ 36,206 $ 65,756 $ 86,810
Long-term debt(including current maturities) 56,000 61,206 13,428
Shareholders' equity 123,839 147,496 166,232
Equity (book value) per outstanding share 9.09 9.72 10.61
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDER INFORMATION
(In thousands of dollars except per share data)
Quarterly Results of Operations
(Unaudited)
Earnings Earnings
from from
Net Gross Operating Continuing Discontinued Net
Sales Earnings Earnings Operations Operations Earnings
----- -------- -------- ---------- ---------- --------
1998
<S> <C> <C> <C> <C> <C> <C>
1st quarter $ 94,041 $ 26,367 $10,323 $ 7,378 $ 1,334 $ 8,712
2nd quarter 99,293 31,219 13,379 8,900 766 9,666
3rd quarter 83,777 26,341 11,543 7,804 394 8,198
4th quarter 93,330 30,670 14,363 9,991 907 10,898
$370,441 $114,597 $49,608 $34,073 $ 3,401 $37,474
1997
1st quarter $ 91,269 $ 25,291 $10,493 $ 6,954 $ 0 $ 6,954
2nd quarter 107,482 28,353 13,236 8,458 0 8,458
3rd quarter 89,980 25,162 11,624 7,683 0 7,683
4th quarter 101,871 31,711 (2,380)* 98* (380) (282)*
$390,602 $110,517 $32,973 $ 23,193 $ (380) $ 22,813
</TABLE>
<TABLE>
<CAPTION>
Per Share Data
(Unaudited)
Dividends Earnings from Earnings from
Declared Continuing Operations Discontinued Operations Net earnings
-------- --------------------- ----------------------- ------------
High (a) Low (a) Basic Diluted Basic Diluted Basic Diluted
1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st quarter $34.88 $27.25 $ 0.06 $ 0.50 $ 0.47 $ 0.09 $ 0.09 $ 0.59 $ 0.56
2nd quarter 38.00 27.63 0.06 0.63 0.61 0.06 0.05 0.69 0.66
3rd quarter 32.88 26.44 0.06 0.57 0.55 0.03 0.03 0.60 0.58
4th quarter 43.88 23.63 0.06 0.73 0.70 0.06 0.06 0.79 0.76
$ 0.24 $ 2.43 $ 2.33 $ 0.24 $ 0.23 $ 2.67 $ 2.56
1997
1st quarter $17.00 $13.58 $ 0.06 $ 0.45 $ 0.44 $ 0 $ 0 $ 0.45 $ 0.44
2nd quarter 23.42 17.13 0.06 0.54 0.53 0 0 0.54 0.53
3rd quarter 30.92 22.85 0.06 0.49 0.48 0 0 0.49 0.48
4th quarter 37.25 28.31 0.06 0* 0* (0.02) (0.02) (0.02)* (0.02)*
$ 0.24 $ 1.48 $ 1.45 $ (0.02) $(0.02) $ 1.46 $ 1.43
(a)The market price range of CTS Corporation common stock on the New York
Stock Exchange for each of the quarters during the last two years.
*The fourth quarter of 1997 results include a one-time, transaction-related
compensation charge of $16.2 million, or $10.5 million after tax ($0.65 a
diluted share).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Five-Year Summary
(In thousands of dollars except per share data)
% of % of % of % of % of
1998 Sales 1997 Sales 1996 Sales 1995 Sales 1994 Sales
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
---- ----- ---- ----- ---- ----- ---- -----
Summary of Operations
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $370,441 100.0 $390,602 100.0 $321,297 100.0 $300,157 100.0 $268,707 100.0
Cost of goods sold 255,844 69.1 280,085 71.7 233,801 72.8 225,353 75.1 205,640 76.5
Selling, general and administrative
expenses 51,602 13.9 48,213 12.4 43,333 13.5 39,312 13.1 36,175 13.5
Transaction-related compensation
charge 0 0 16,200 4.1 0 0 0 0 0 0
Research and development expenses 13,387 3.6 13,131 3.4 10,743 3.3 8,004 2.7 6,208 2.3
Operating earnings 49,608 13.4 32,973 8.4 33,420 10.4 27,488 9.1 20,684 7.7
Other(expense) income--net (167) (0.1) 2,757 0.7 182 0.1 196 0.1 803 0.3
Earnings before income taxes 49,441 13.3 35,730 9.1 33,602 10.5 27,684 9.2 21,487 8.0
Income taxes 15,368 4.1 12,537 3.2 12,432 3.9 10,520 3.5 7,520 2.8
Earnings from continuing operations 34,073 9.2 23,193 5.9 21,170 6.6 17,164 5.7 13,967 5.2
Discontinued Operations:
Net earnings (loss) from discontinued
operations 3,401 0.9 (380) (0.1) 0 0 0 0 0 0
Net earnings 37,474 10.1 22,813 5.8 21,170 6.6 17,164 5.7 13,967 5.2
Retained earnings--beginning of year 163,169 144,112 126,546 112,506 100,868
Dividends declared (3,358) (3,756) (3,604) (3,124) (2,329)
Retained earnings--end of year $197,285 $163,169 $144,112 $126,546 $112,506
Earnings per share:
Basic:
Continuing operations $2.43 $1.48 $1.35 $1.10 $0.90
Discontinued operations 0.24 (0.02) 0 0 0
Net earnings per share $2.67 $1.46 $1.35 $1.10 $0.90
Diluted:
Continuing operations $2.33 $1.45 $1.34 $1.10 $0.90
Discontinued operations 0.23 (0.02) 0 0 0
Net earnings per share $2.56 $1.43 $1.34 $1.10 $0.90
Average basic shares outstanding 14,014 15,624 15,668 15,602 15,511
Average diluted shares outstanding 14,614 15,976 15,766 15,656 15,544
Cash dividends per share $.24 $.24 $.23 $.20 $.15
Capital expenditures 21,330 22,180 17,210 11,181 13,401
Depreciation and amortization 19,155 16,016 12,491 11,683 11,236
Financial Position at Year-End
Current assets $118,583 $146,747 $138,201 $126,113 $110,667
Current liabilities 82,377 80,991 51,391 50,962 44,792
Current ratio 1.4 to 1 1.8 to 1 2.7 to 1 2.5 to 1 2.5 to 1
Working capital $36,206 $65,756 $86,810 $75,151 $65,875
Inventories 33,322 34,683 38,761 38,885 41,456
Property, plant and equipment--net 67,186 66,511 56,103 50,696 50,777
Total assets 293,189 318,196 249,372 227,127 206,826
Short-term notes payable 0 0 0 6,685 7,436
Long-term debt 42,000 56,000 11,214 13,385 15,578
Shareholders' equity 123,839 147,496 166,232 146,253 131,855
Common shares outstanding (in thousands) 13,621 15,178 15,675 15,652 15,536
Equity (book value) per share $9.09 $9.72 $10.61 $9.34 $8.49
Other Data
Stock price range $43.88-$23.63 $37.25-$13.58 $15.67-$12.00 $12.58-$9.13 $10.33-$6.50
Average number of employees 4,105 3,954 3,815 4,007 4,056
Number of shareholders at year-end 1,379 1,404 986 1,062 1,136
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
(In thousands of dollars except per share amounts)
Year Ended
----------
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 370,441 $ 390,602 $ 321,297
Costs and expenses:
Cost of goods sold 255,844 280,085 233,801
Selling, general and administrative expenses 51,602 48,213 43,333
Transaction-related compensation charge -- Note F 0 16,200 0
Research and development expenses 13,387 13,131 10,743
Operating earnings 49,608 32,973 33,420
Other (expense) income:
Interest expense (2,194) (2,478) (1,449)
Interest income 1,141 2,397 1,881
Other 886 2,838 (250)
Total other (expense) income (167) 2,757 182
Earnings before income taxes 49,441 35,730 33,602
Income taxes -- Note H 15,368 12,537 12,432
Earnings from continuing operations 34,073 23,193 21,170
Discontinued operations:
Earnings (loss) from discontinued operations, net of
income tax charge (benefit) of $2,267 in 1998 and ($253)
in 1997 -- Note C 3,401 (380) 0
Net earnings $ 37,474 $ 22,813 $ 21,170
Earnings per share -- Note M
Basic:
Continuing operations $ 2.43 $ 1.48 $ 1.35
Discontinued operations 0.24 (0.02) 0
Net earnings per share $ 2.67 $ 1.46 $ 1.35
Diluted:
Continuing operations $ 2.33 $ 1.45 $ 1.34
Discontinued operatio 0.23 (0.02) -
Net earnings per share $ 2.56 $ 1.43 $ 1.34
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
(In thousands of dollars)
Accumulated
Other Additional
Common Retained Comprehensive Comprehensive Contributed Treasury
Stock Earnings Earnings Earnings Capital Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 34,138 $126,546 $ (645) $ (783) $(13,003) $146,253
Net earnings 21,170 $21,170 21,170
Cumulative translation adjustment
(net of tax of $747) 2,018 2,018 2,018
-----------
Comprehensive earnings $23,188
===========
Cash dividends of $0.23 per share (3,604) (3,604)
Nonemployee Directors' stock retirement plan 17 17
Issued 4,500 shares on restricted stock and
cash bonus plan - net 23 (70) 47
Issued 18,900 shares on exercise of stock
options (51) 197 146
Acquired 219 shares traded on options -- net 3 (3)
Stock compensation 27 100 127
Deferred compensation recognized 236 236
Acquired 9,600 shares for treasury stock --Note K (131) (131)
Balances at December 31, 1996 34,140 144,112 1,373 (600) (12,793) 166,232
Net earnings 22,813 $22,813 22,813
Cumulative translation adjustment
(net of tax benefit of $238) (679) (679) (679)
-----------
Comprehensive earnings $22,134
===========
Cash dividends of $0.24 per share (3,756) (3,756)
Nonemployee Directors' stock retirement plan 205 205
Issued 6,051 shares on restricted stock and
cash bonus plan -- net 135 (224) 89
Issued 107,141 shares on exercise
of stock options -- net 273 558 831
Stock compensation 19 12 31
Transaction-related compensation charge 16,200 16,200
Deferred compensation recognized 241 241
Acquired 7,241,823 shares for treasury
stock -- Note K (206,849) (206,849)
Issued 6,629,580 shares in connection with
the merger 152,227 152,227
Balances at December 31, 1997 186,794 163,169 694 15,822 (218,983) 147,496
Net earnings 37,474 $37,474 37,474
Cumulative translation adjustment
(net of tax of $36) 112 112 112
-----------
Comprehensive earnings $37,586
===========
Cash dividends of $0.24 per share (3,358) (3,358)
Nonemployee Directors' stock retirement plan 54 54
Returned 5,100 shares to treasury on default of
restricted stock and cash bonus plan --
net (9) 57 (48)
Issued 83,221 shares on exercise
of stock options -- net 503 (167) 336
Stock options acquired -- Note F (5,273) (5,273)
Deferred compensation recognized 212 212
Acquired 1,767,514 shares for treasury
stock -- Note K (56,273) (56,273)
Issued 133,221 shares to former DCA
shareholders 3,059 3,059
Balances at December 31, 1998 $190,347 $197,285 $806 $10,872 $(275,471) $123,839
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(In thousands of dollars)
December 31 December 31
ASSETS 1998 1997
Current Assets
<S> <C> <C>
Cash and equivalents $ 16,273 $39,847
Accounts receivable, less allowances (1998 -- $552; 1997 -- $692) 47,043 51,314
Inventories
Finished goods 9,289 6,257
Work-in-process 10,396 13,295
Raw materials 13,637 15,131
Total inventories 33,322 34,683
Other current assets 5,553 5,030
Deferred income taxes -- Note H 16,392 15,873
Total current assets 118,583 146,747
Property, Plant and Equipment
Buildings and land 43,113 43,560
Machinery and equipment 160,784 152,998
Total property, plant and equipment 203,897 196,558
Less accumulated depreciation 136,711 130,047
Net property, plant and quipment 67,186 66,511
Other Assets
Prepaid pension expense -- Note G 69,074 61,738
Investment in discontinued operations -- Note C 35,123 37,117
Other 3,223 6,083
Total other assets 107,420 104,938
Total Assets $293,189 $318,196
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt -- Note E $ 14,000 $ 5,206
Accounts payable 17,412 22,593
Accrued salaries, wages and vacation 11,181 9,449
Accrued taxes other than income 1,651 1,607
Income taxes payable 10,229 13,517
Other accrued liabilities -- Note L 27,904 28,619
Total current liabilities 82,377 80,991
Long-term Debt -- Note E 42,000 56,000
Other Long-term Obligations -- Note E 13,568 7,450
Deferred Income Taxes -- Note H 27,145 21,950
Postretirement Benefits -- Note G 4,260 4,309
Contingencies -- Note L 0 0
Shareholders' Equity
Preferred stock -- authorized 25,000,000 shares without par value;
none issued - Note J
Common stock -- authorized 75,000,000 shares without par value;
issued 24,183,894 - Note J 190,347 186,794
Additional contributed capital 10,872 15,822
Retained earnings 197,285 163,169
Cumulative translation adjustment 806 694
399,310 366,479
Less cost of common stock held in treasury (1998 -- 10,562,449 shares;
1997 -- 8,873,056 shares) -- Note K 275,471 218,983
Total shareholders' equity 123,839 147,496
Total Liabilities and Shareholders' Equity $293,189 $318,196
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended
December 31 December 31 December 31
----------- ----------- -----------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $37,474 $22,813 $21,170
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Net (earnings) losses from discontinued operations (3,401) 380 0
Depreciation and amortization 19,155 16,016 12,491
Deferred income taxes 6,176 (1,462) 3,201
Transaction-related compensation charge -- Note F 0 16,200 0
Other (523) 708 (160)
Changes in assets and liabilities net of effects from purchase of DCA:
Accounts receivable 4,271 (1,029) (2,247)
Inventories 1,924 8,782 124
Prepaid pension asset (7,336) (6,199) (5,413)
Accounts payable and accrued liabilities (7,548) 1,583 4,943
Income taxes payable (4,088) 2,764 1,955
Other (392) (1,427) (961)
Total adjustments 8,238 36,316 13,933
Net cash provided by continuing operations 45,712 59,129 35,103
Net cash provided by (used in)discontinued operations 6,659 (485) 0
Net cash provided by operating activities 52,371 58,644 35,103
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment, net 21,591 2,973 822
Capital expenditures (21,330) (22,180) (17,210)
Payment for purchase of DCA, net of cash acquired -- Note B (6,416) (71,353) 0
Net cash used in investing activities (6,155) (90,560) (16,388)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations 0 50,000 0
Payments of long-term obligations (5,206) (8,707) (2,208)
Decrease in notes payable 0 0 (6,685)
Dividends paid (3,421) (3,768) (3,446)
Purchases of treasury stock (56,273) (10,121) (131)
Stock options acquired (5,273) 0 0
Other 288 (106) 146
Net cash (used in) provided by financing activities (69,885) 27,298 (12,324)
Effect of exchange rate changes on cash 95 (492) 1,295
Net (decrease) increase in cash (23,574) (5,110) 7,686
Cash and equivalents at beginning of year 39,847 44,957 37,271
Cash and equivalents at end of year $16,273 $ 39,847 $44,957
Supplemental cash flow information
Cash paid during the year for:
Interest $ 4,685 $ 2,649 $ 1,467
Income taxes -- net 17,218 10,646 7,276
Noncash investing and financing activities
Common stock issued in connection with the purchase of DCA $3,059 $152,227 0
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of CTS and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue Recognition: Revenues from product sales are recognized at the time
of shipment to the customer.
Cash Equivalents: CTS considers all highly liquid investments with a maturity
of three months or less from the purchase date to be cash equivalents.
Inventories: Inventories are stated at the lower of cost or market. Cost is
principally determined using the first-in, first-out method.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Depreciation is computed over the estimated useful lives of the assets
principally on the straight-line method. Useful lives for buildings and
improvements range from 10 to 45 years, and average lives are approximately
16 years. For machinery and equipment useful lives range from three to eight
years. Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, any related gain or loss is credited or charged
to other income and expense, respectively.
CTS assesses the recoverability of long-lived assets including goodwill and
other intangible assets whenever adverse events or changes in circumstances
or business climate indicate that an impairment may have occurred. If the
future cash flows (undiscounted and without interest) expected to result from
the use of the related assets are less than the carrying value of such
assets, an impairment has been incurred and a loss is recognized to reduce
the carrying value of the long-lived assets, including goodwill.
Retirement Plans: CTS has various defined benefit and defined contribution
retirement plans covering a majority of its employees. CTS' 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.
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. CTS expenses all
research and development costs as incurred.
<PAGE>
NOTE A - Summary of Significant Accounting Policies (continued)
Income Taxes: CTS provides deferred income taxes for transactions reported in
different periods for financial reporting and income tax return purposes
pursuant to the requirements of FASB Statement No. 109, "Accounting for
Income Taxes."
Translation of Foreign Currencies: The financial statements of all of CTS'
non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured
into U.S. dollars using the U.S. dollar as the functional currency with all
remeasurement adjustments included in the determination of net earnings. The
assets and liabilities of the Company's United Kingdom subsidiary are
translated into U.S. dollars principally at the current exchange rate at
period end, with resulting translation adjustments made directly to the
"Cumulative translation adjustment" component of shareholders' equity.
Statements of earnings accounts are translated at the average rates during
the period.
Financial Instruments: CTS' 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, 1998, and 1997 approximates fair
value where fair value is based on market prices for the same or similar debt
and maturities.
Concentration of Credit Risk: CTS sells its products to customers primarily
in the computer equipment, automotive, communications equipment, and
instruments and controls industries, primarily in North America, Europe and
the Pacific Rim. CTS performs ongoing credit evaluations of its customers to
minimize credit risk. CTS generally does not require collateral. At December
31, 1998, and 1997, CTS had no significant concentrations of credit risk.
Stock-Based Compensation: FASB Statement No. 123, "Accounting for Stock-Based
Compensation" encourages, but does not require, companies to record
compensation cost for stock-based compensation at fair value. CTS has chosen
to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of CTS' stock at the date of the grant
over the amount that must be paid to acquire the stock. See Note F for the
required pro forma net income and earnings per share disclosures required by
FASB Statement No. 123.
<PAGE>
NOTE A - Summary of Significant Accounting Policies (continued)
Earnings Per Share: Basic and diluted earnings per common share are reported
in conformity with FASB Statement No.128, "Earnings per Share." All prior
period earnings per share (EPS) data presented have been restated to comply
with FASB Statement No. 128 and also to reflect the 3-for-1 stock split
during 1997(Note J). Basic earnings per share exclude any dilution and is
computed by dividing net earnings available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock resulted in the issuance
of common stock that shared in the earnings of CTS. Diluted earnings per
share is computed by dividing net earnings by the weighted-average number of
common shares outstanding during the period plus the incremental shares that
would have been outstanding upon the assumed exercise of dilutive stock
options. Refer to Note M - Earnings Per Share, for the reconciliation of the
numerator and denominator of the basic and diluted EPS computations.
Comprehensive Earnings: CTS reports comprehensive earnings in accordance with
FASB Statement No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive earnings and its
components in general- purpose financial statements.
The components of comprehensive earnings for CTS include foreign translation
adjustments and net earnings. These components can be found within the
Statements of Shareholders' Equity in the columns titled "Comprehensive
Earnings" and "Accumulated Other Comprehensive Earnings."
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, the disclosure of contingent 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.
Reclassifications: Certain reclassifications have been made for the years
presented in the financial statements to conform to the classifications
adopted in 1998.
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
NOTE B - Pending Acquisition/Acquisition
On December 22, 1998, CTS Wireless Components, Inc. signed an asset sale
agreement to acquire the Component Products Division (CPD) of Motorola, Inc.
CTS Wireless Components, Inc. will be wholly-owned by CTS. CPD manufactures
ceramics, quartz, oscillators, lead zirconate titanate and surface acoustic
wave components, primarily for the wireless communications industry.
CTS will pay Motorola $94 million at the closing and assume approximately $51
million of Motorola obligations. In addition, CTS may be obligated to pay up
to an additional $105 million over five years depending upon increased sales
and profitability of CPD. CTS expects to finance a substantial portion of the
purchase price through bank borrowings.
The acquisition will be accounted for as a purchase. Accordingly, the
purchase price will be allocated to the underlying assets and liabilities
based upon their estimated fair values at the date of the acquisition. The
transaction is expected to be completed in the first quarter of 1999, subject
to financing and customary closing conditions.
On October 16, 1997, CTS acquired all of the outstanding common stock of
Dynamics Corporation of America ("DCA"),including the reacquisition of CTS
shares held by DCA. DCA was a diversified manufacturer of commercial and
industrial products.
The purchase price was comprised of cash of $77,769,000, utilizing cash on
hand and borrowings, and issuance of 6,762,801 shares of CTS' common stock
with a value of $155,286,000. The total cost of the acquisition, including
actual transaction-related costs and liabilities assumed, was $250,236,000.
The DCA acquisition was accounted for as a purchase and, accordingly, the
operating results of DCA are included in CTS' consolidated financial
statements since the date of acquisition.
The following unaudited pro forma consolidated results of operations for the
year ended December 31, 1997, assumes the DCA acquisition occurred on January
1, 1997:
Pro Forma Information - Unaudited:
(In millions except per share data)
1997
----
Net sales $423.3
Net earnings 38.8
Diluted earnings per share 2.43
<PAGE>
NOTE B - Pending Acquisition/Acquisition (continued)
The unaudited pro forma consolidated results have been adjusted to exclude
equity earnings in CTS, merger-related transaction costs and discontinued
operations. The pro forma results are not necessarily indicative of CTS'
operating results that would have occurred had the acquisition of DCA been
consummated as of such date, or of results which may occur in the future.
<PAGE>
NOTE C - Discontinued Operations
During 1998, CTS finalized a plan to sell all of the businesses of Dynamics
Corporation of America not strategic to the Company's core business segments
of electronic components and electronic assemblies. These non-core businesses
are recorded as discontinued operations for all periods presented in the
consolidated financial statements. During 1998, CTS completed the sale of the
Waring Products Division resulting in gross proceeds of approximately $21.8
million.
CTS is currently soliciting buyers or negotiating the sale of the remaining
non-strategic DCA businesses, all of which are expected to be sold by the end
of 1999. CTS does not expect that the sales of the remaining businesses will
result in a loss. The investment in discontinued operations included in the
balance sheet at December 31, 1998, is primarily comprised of accounts
receivable, inventory, fixed assets and accounts payable. Operating results
for discontinued operations, including an allocation of interest expense and
excluding any allocation of corporate expenses, are as follows:
(In thousands)
Discontinued Operations 1998 1997
Net Sales $102,984 $24,549
Earnings before income taxes $ 5,668 $ (633)
Provision for income taxes 2,267 (253)
Total discontinued operations,
net of income taxes $ 3,401 $ (380)
<PAGE>
Note D - Short-term Borrowings
CTS has unsecured lines of credit arrangements of $13,951,000 at December 31,
1998. These arrangements are generally subject to annual renewal and
renegotiation, and may be withdrawn at the banks' option. There were minimal
borrowings against these lines during 1998 and 1997.
<PAGE>
NOTE E- Long-term Debt and Other Long-term Obligations
Long-term debt and other long-term obligations were comprised of the following:
(In thousands)
1998 1997
---- ----
Long-term debt:
Term loan at 8.4%, due in annual
installments through 1999 $ 9,000 $11,000
Term loan at 6.1% (1998) and 6.4%
(1997), due in quarterly
installments through 2003 47,000 50,000
Other - 206
56,000 61,206
Less current maturities 14,000 5,206
Total long-term debt $ 42,000 $56,000
Other long-term obligations:
DCA employee termination benefits,
payable ratably through 2007 $ 9,356 $ -
Untendered shares of DCA 3,735 6,794
Other 477 656
Total other long-term obligations $ 13,568 $ 7,450
CTS has a $9,000,000 term loan with four banks payable in 1999.
CTS also has a $47,000,000 term loan with four banks which
matures as follows: 1999 - $5,000,000; 2000 - $10,000,000; 2001
- - $10,000,000; 2002 - $10,000,000 and 2003 - $12,000,000.
CTS has an unsecured revolving credit agreement totaling $75,000,000 with
four banks, which expires in 2003. Interest rates on these borrowings
fluctuate based upon LIBOR plus 0.50 percent per annum, with adjustments
based on the ratio of CTS' consolidated total indebtedness to consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA). The
Company pays a commitment fee that varies based on performance under certain
financial covenants applicable to the undrawn portion of the revolving credit
agreement. Currently, that fee is 0.175 percent per annum. The credit
agreement and term loans require, among other things, that the Company
maintain a minimum tangible net worth, a minimum fixed charge coverage ratio
and a minimum leverage ratio.
<PAGE>
NOTE F- Stock Plans
At December 31, 1998, CTS has four stock-based compensation plans, which are
described below. CTS applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. With the exception of the 1997
transaction-related option grant, compensation cost is normally not
recognized for its fixed stock option grants as they are granted at fair
market value at the grant dates, while compensation expense has been
recognized for its compensatory plans. Had compensation cost for CTS' two
fixed stock-based compensation plans been determined based on the fair value
based method, as defined in FASB Statement No. 123, CTS' net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(In thousands except per share amounts)
1998 1997 1996
Net earnings As reported $37,474 $22,813 $21,170
Pro forma $37,206 $21,360 $20,936
Net earnings
per share- As reported $2.56 $1.43 $1.34
diluted Pro forma $2.55 $1.34 $1.32
The pro forma information presented above includes the effect of the
difference between the intrinsic value compensation charge calculated under
APB Opinion No. 25 and the fair value amount calculated under FASB Statement
No.123.
The effects of applying FASB Statement No. 123 in the above pro forma
disclosures are not indicative of future amounts as they do not include the
effects of awards granted prior to 1995, some of which would have had income
statement effects in 1996, 1997 and 1998 due to the fixed stock option awards
generally vesting 25% per year over a four-year period.
The weighted-average fair value of each option grant (which is amortized over
the option vesting period for purposes of determining the pro forma impact)
is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in
1998, 1997, and 1995: dividend yield of 0.85%, 0.70% and 1.63%, respectively;
expected volatility of 30.49%, 19.93% and 19.93%, respectively; risk-free
interest rate of 5.30%, 5.80% and 5.62%, respectively; and expected life of
4.2, 4.3 and 2.0 years, respectively.
CTS' two fixed stock option plans, approved by the shareholders, provide for
grants of incentive stock options or nonqualified stock options to officers
and key employees. Under the 1986 Stock Option Plan which expired in 1995,
CTS could grant options to its officers and key employees for up to 900,000
shares of common stock. Of the 900,000 shares, approximately 300,000 shares
were granted.
<PAGE>
NOTE F Stock Plans (continued)
Under the 1996 Stock Option Plan, CTS may grant options to its officers and
key employees for up to 600,000 shares of common stock. Under this Plan, options
are granted at the fair market value on the grant date and are exercisable
generally in cumulative annual installments over a maximum ten-year period,
commencing at least one year from the date of grant. Upon the exercise of stock
options, payment may be made using cash, shares of the Company's common stock or
a combination thereof subject to certain restrictions as described in the plan
document.
During 1997, CTS granted 1,200,000 options to certain officers and Board
members. These options were fully vested and are exercisable over a ten-year
period terminating May 8, 2007. Based on the value of CTS shares on the date of
the merger and the option price of $20.83 per share, a $16,200,000 before tax,
$10,530,000 after tax, or $0.65 a diluted share, charge to expense was
recorded. During 1998, the Company acquired 450,000 of these options at a cost
of $5,273,000. The actual tax benefit to be realized will depend on the amounts
calculated upon exercise of the remaining options. Of the 1,200,000 options
granted, 750,000 remain to be exercised at December 31, 1998.
<PAGE>
NOTE F- Stock Plans (continued)
A summary of the status of CTS' fixed stock option plans as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at begin-
ning of year 1,490,542 $18.96 412,575 $10.70 458,775 $10.61
Granted 140,500 28.17 1,200,000 20.83 - -
Exercised (108,625) 10.89 (115,583) 9.46 (18,900) 7.85
Acquired (450,000) 20.83 - - - -
Expired or canceled (3,313) 20.17 (6,450) 10.40 (27,300) 11.16
Outstanding at end
of year 1,069,104 $20.09 1,490,542 $18.96 412,575 $10.70
Options exercisable
at year-end 884,854 1,361,692 154,275
Weighted-average fair
value of options
granted during the
year $8.51 $15.19 -
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/98 Life (Years) Price at 12/31/98 Price
<S> <C> <C> <C> <C> <C>
$ 8.250 47,854 0.50 $ 8.25 47,854 $ 8.25
$10.420 -
12.458 132,750 1.91 12.34 87,000 12.31
$20.833 -
23.625 755,000 8.40 20.85 750,000 20.83
$28.000 -
33.000 133,500 4.56 28.34 - -
Under the 1986 Stock Option Plan, options to purchase a total of 55,354 shares
were outstanding as of December 31, 1998. At December 31, 1998, 54,154 of these
shares were exercisable.
</TABLE>
<PAGE>
NOTE F- Stock Plans (continued)
Under the 1996 Stock Option Plan, options to purchase a total of 263,750
shares were outstanding as of December 31, 1998. At December 31, 1998, 80,700
of these shares were exercisable.
CTS has a discretionary Restricted Stock and Cash Bonus Plan (Plan) which
reserves 1,200,000 shares of the Company's common stock for sale, at market
price or below, or award to key employees. Shares sold or awarded are subject
to restrictions against transfer and repurchase rights of CTS. In general,
restrictions lapse at the rate of 20% per year beginning one year from the
award or sale. In addition, the Plan provides for a cash bonus to the
participant equal to the fair market value of the shares on the dates
restrictions lapse, in the case of an award, or the excess of the fair market
value over the original purchase price if the shares were purchased. The
total bonus paid to any participant during the restricted period is limited
to twice the fair market value of the shares on the date of award or sale.
Under the Plan, during 1998, no shares were awarded, leaving 1,010,700 shares
available for award or sale at December 31, 1998. Under the Plan, in 1997 and
1996, 21,000 and 4,500 shares were awarded, respectively. In addition to the
shares issued and the amortization of deferred compensation included in the
Consolidated Statements of Shareholders' Equity, CTS accrued $371,000,
$427,000 and $408,000 for additional compensation payable under the
provisions of the Plan in 1998, 1997 and 1996, respectively.
CTS 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 CTS stock. Under this plan, the amount
of the actual dollar compensation was $54,300, $205,100 and $17,100 in 1998,
1997 and 1996, respectively.
<PAGE>
NOTE G - Employee Retirement Plans
Defined benefit plans
CTS has a number of noncontributory defined benefit pension plans (Plans)
covering approximately 39% 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.
CTS provides other postretirement benefits consisting of life insurance
programs for retired employees. A majority of the Company's domestic
employees are eligible for life insurance benefits. The Company funds life
insurance benefits through term life insurance policies. The Company plans to
continue funding premiums on a pay-as-you-go basis.
The following provides a reconciliation of benefit obligations, plan assets,
and the funded status of the plans and other postretirement benefits.
(In thousands)
Other
Postretirement
Pension Benefits Benefits
---------------- --------
Change in Benefit Obligation: 1998 1997 1998 1997
Benefit obligation at
January 1 $106,962 $78,046 $4,735 $4,570
Service cost 3,482 2,846 35 32
Interest cost 7,830 6,196 296 298
Acquisitions/divestitures - 22,652 - -
Plan amendments 2,658 - 10 -
Actuarial (gain) loss 9,350 2,424 (244) 163
Benefits paid (6,230) (5,202) (326) (328)
Benefit obligation at
December 31 $124,052 $106,962 $4,506 $4,735
Change in Plan assets:
Assets at fair value at
January 1 $218,294 $151,841 $ - $ -
Actual return on assets 33,714 43,970 - -
Acquisitions/divestitures - 28,039 - -
Company contributions 311 216 326 328
Benefits paid (6,230) (5,202) (326) (328)
Administrative and other
expenses (209) (570) - -
Assets at fair value at
December 31 $245,880 $218,294 $ - $ -
Reconciliation of prepaid (accrued) cost:
Funded status of the Plan $121,828 $111,332 ($4,506) ($4,735)
Unrecognized net (gain) loss (49,983) (42,776) (66) 175
Unrecognized prior service cost 2,808 323 10 -
Unrecognized transition asset (5,579) (7,141) - -
Prepaid (accrued) cost $ 69,074 $ 61,738 ($4,450) ($4,560)
<PAGE>
NOTE G - Employee Retirement Plans (Continued)
Net pension income for the Plans in 1998, 1997 and 1996 includes the
following components:
<TABLE>
<CAPTION>
(In thousands) Other
Postretirement
Pension Benefits Benefits
---------------- --------
1998 1997 1996 1998 1997 1996
Service cost--benefits earned
<S> <C> <C> <C> <C> <C> <C>
during the year $3,482 $ 2,846 $ 2,787 $ 35 $ 32 $ 34
Interest cost on projected
benefit obligation 7,830 6,196 5,430 296 298 295
Expected return on plan assets (29,737) (43,970) (20,982) - - -
Net amortization and deferral 11,089 28,729 7,352 (2) (12) -
Net(income)expense $(7,336) ($6,199) $(5,413) $329 $318 $329
Assumptions for 1998:
Discount rate as of December 31 6.75% 7.50% 7.75% 6.75% 7.50% 7.75%
Expected return on Plan assets 9.75% 9.75% 9.75% 9.75% 9.75% 9.75%
Rate of compensation increase 4%-7% 5%-7% 5%-7% - - -
</TABLE>
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, 1998, measurement date, the
discount rate was decreased to 6.75% to reflect current market conditions.
This change had no impact on 1998 pension income, but will decrease 1999
pension income by approximately $800,000.
The majority of U.S. defined benefit pension plan assets are invested in
common stock, including approximately $26,000,000 and $23,300,000 in CTS
common stock at December 31, 1998, and 1997, respectively. The balance is
invested in corporate bonds, U.S. government backed mortgage securities and
bonds, asset backed securities, a private equity fund, non-U.S. corporate
bonds and convertible issues.
Defined contribution plans
CTS sponsors a 401(k) Plan, as well as several other defined contribution
plans, which cover some of its non-U.S. employees and its domestic hourly
employees not covered by a defined benefit pension plan. Contributions and
costs are generally determined as a percentage of the covered employee's
annual salary. Amounts expensed for the 401(k) Plan and the other plans
totaled $2,457,000 in 1998, $2,351,000 in 1997 and $2,382,000 in 1996.
Multi-Employer Plan
CTS also contributes to a multi-employer plan for the Anemostat Products
divisions included in discontinued operations which provides defined
retirement benefits, as required by collective bargaining agreements.
Information concerning the Company's share of related estimated plan benefit
obligations and assets is not available for the multi-employer plan. Employer
contributions to the Plan were $506,000 in 1998 and $130,000 in 1997.
<PAGE>
NOTE H - Income Taxes
Earnings before income taxes consists of the following:
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Domestic $26,789 $ 3,656 $16,381
Non-U.S. 22,652 32,074 17,221
Total $49,441 $35,730 $33,602
Significant components of income taxes are as follows:
(In thousands)
1998 1997 1996
---- ---- ----
Current:
Federal $1,041 $2,308 $3,105
State 928 1,130 1,012
Non-U.S. 7,654 9,928 5,114
----- ----- -----
Total current 9,623 13,366 9,231
Deferred:
Federal 5,737 (540) 2,761
State 902 (462) 313
Non-U.S. (894) 173 127
---- --- ---
Total deferred 5,745 (829) 3,201
----- ---- -----
Total provision for income taxes $15,368 $12,537 $12,432
====== ======= =======
</TABLE>
<PAGE>
NOTE H - Income Taxes (continued)
Significant components of CTS' deferred tax liabilities and assets at
December 31, 1998, and 1997 are:
(In thousands)
1998 1997
---- ----
Pensions $24,180 $21,685
Depreciation 2,725 1,135
Basis difference-acquired assets 5,025 976
Other 2,037 2,592
Gross deferred tax liabilities 33,967 26,388
Postretirement benefits 1,601 1,618
Inventory reserves 5,194 4,586
Loss carryforwards 12 2,731
Credit carryforwards 192 1,658
Nondeductible accruals 11,388 6,650
Non-recurring compensation charge 3,543 4,664
Other 2,440 882
Gross deferred tax assets 24,370 22,789
Net deferred tax liabilities (9,597) (3,599)
Deferred tax asset valuation allowance (1,175) (2,731)
Total $(10,772) $(6,330)
======== =======
During 1998, the valuation allowance was increased as a result of expenses
incurred in certain jurisdictions where future utilization of such benefits
could not be assured and decreased as a result of the utilization of net
operating loss carryforwards in certain taxing jurisdictions.
<PAGE>
NOTE H - Income Taxes (continued)
<TABLE>
<CAPTION>
A reconciliation from the statutory federal income tax to the Company's
effective income tax follows:
(In thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Taxes at the U.S. statutory rate $17,304 $ 12,506 $11,761
State income taxes, net of federal
income tax benefit 1,191 433 861
Non-U.S. income taxed at rates
different than the U.S. statutory rate 98 (154) (728)
Utilization of net operating loss
carryforwards and benefit of
scheduled tax credits (2,781) (1,552) (279)
Foreign distributions, net of foreign
tax credits 254 156 297
Non-recurring compensation expense (724) 1,006 -
Other 26 142 520
Provision for income taxes $15,368 $12,537 $12,432
======= ======= =======
Undistributed earnings of certain non-U.S. subsidiaries amount to $56,042,000
at December 31, 1998. Prior year earnings are intended to be invested
indefinitely and, accordingly, no provision has been made for non-U.S.
withholding taxes. In the event all undistributed earnings were remitted,
approximately $6,544,000 of withholding tax would be imposed, which would be
substantially offset by foreign tax credits.
</TABLE>
<PAGE>
NOTE I - Business Segments
FASB Statement No. 131, "Disclosures About Segments for Enterprise and
Related Information," requires companies to provide certain information about
their operating segments. The information for 1997 and 1996 has been restated
from prior year's presentation in order to conform to the 1998 presentation.
CTS' reportable segments are based upon the nature of products within the
Company. The products comprising the reportable segments are managed separately
and have differing technology and marketing strategies.
CTS has two reportable segments: Electronic components and electronic
assemblies. Electronic components are products which perform the basic level
electronic function for a given product family for use in customer
assemblies. Electronic components consist principally of automotive sensors
used in commercial or consumer vehicles, frequency control devices such as
crystals and clocks, loudspeakers, resistor networks, switches and variable
resistors. Electronic assemblies are assemblies of electronic or electronic
and mechanical products which, apart from the assembly, may themselves be
marketed as separate stand-alone products. Such assembly represents a
completed, higher-level functional product to be used in customer end
products or assemblies. These products consist principally of flex cable
assemblies used in the disk drive market, hybrid microcircuits used in the
healthcare market, cursor controls for computers and interconnect products
such as backpanel and connector assemblies used in the telecommunications
industry.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Management
evaluates performance based upon operating earnings before interest and
income taxes.
Summarized financial information concerning CTS' reportable segments is shown
in the following table:
(In thousands)
Electronic Electronic
Components Assemblies Total
---------- ---------- -----
1998
- ----
Net sales to external
customers $247,719 $122,722 $370,441
Operating earnings 41,955 7,653 49,608
Total assets 199,068 58,998 258,066
Depreciation and
amortization 15,271 3,884 19,155
Capital expenditures $ 16,032 $ 5,298 $ 21,330
1997
- ----
Net sales to external
customers $237,926 $152,676 $390,602
Operating earnings 34,253 14,920 49,173
Total assets 230,759 50,320 281,079
Depreciation and
amortization 9,823 6,193 16,016
Capital expenditures $ 15,728 $ 6,452 $ 22,180
1996
- ----
Net sales to external
customers $215,596 $105,701 $321,297
Operating earnings 27,583 5,837 33,420
Total assets 183,748 65,624 249,372
Depreciation and amortization 8,822 3,669 12,491
Capital expenditures $ 12,139 $ 5,071 $ 17,210
<PAGE>
NOTE I - Business Segments (continued)
Reconciling information between reportable segments and CTS' consolidated
totals is shown in the following table:
<TABLE>
<CAPTION>
(In thousands)
Operating Earnings
- ------------------
1998 1997 1996
---- ---- ----
Total operating earnings for
<S> <C> <C> <C>
reportable segments $49,608 $49,173 $33,420
Transaction-related compensation charge - (16,200) -
Interest expense (2,194) (2,478) (1,449)
Interest income 1,141 2,397 1,881
Other income (expense) 886 2,838 (250)
Earnings before income taxes $49,441 $35,730 $33,602
Assets
Total assets for reportable segments $258,066 $281,079 $249,372
Investment in discontinued operations 35,123 37,117 -
Total Assets $293,189 $318,196 $249,372
Financial information relating to CTS' operations by geographic area was as
follows:
Net Sales 1998 1997 1996
- --------- ---- ---- ----
United States (U.S.) $221,395 $224,779 $193,474
United Kingdom 92,784 108,145 76,204
Other non-U.S. 56,262 57,678 51,619
Consolidated $370,441 $390,602 $321,297
Sales are attributed to countries based upon the origin of the sale.
Assets
United States $210,778 $229,157 $167,626
United Kingdom 35,683 36,095 36,003
Other non-U.S. 46,728 52,944 45,743
Consolidated $293,189 $318,196 $249,372
</TABLE>
During 1998, revenues from one customer of CTS' electronic components
business segment represents approximately $43,251. Revenues from two
customers of CTS' electronic assemblies business segment during 1998
represents $44,896 and $25,917, respectively.
<PAGE>
NOTE J - Capital Stock
In 1997, CTS shareholders approved an amendment to the Company's articles of
incorporation which increased authorized capitalization from 8,000,000 to
75,000,000 common shares and authorized 25,000,000 preferred shares. The
Corporation also declared a 3-for-1 stock split in the form of a 2-for-1
stock dividend to CTS shareholders of record on October 24, 1997. Under the
split, CTS common shareholders received a stock dividend of two CTS shares
for each CTS share held. All shares outstanding and per share amounts have
been restated to reflect the stock split.
CTS adopted a Shareholder Rights Plan (the "Plan") on August 28, 1998. The
Plan was implemented by declaring a dividend, distributable to shareholders
of record on September 10, 1998, of one common share purchase right ( a
"Right") for each outstanding share of common stock held at the close of
business on that date. Each Right under the Plan will initially entitle
registered holders of common stock to purchase one one-hundredth of a share
of CTS' new Series A Junior Participating Preferred Stock ("Series A
Preferred Stock") for a purchase price of $125 per, subject to adjustment.
The Rights will be exercisable only if a person or group (1) acquires 15% or
more of the common stock or (2) announces a tender offer that would result in
that person or group acquiring 15% or more of the common stock. The Rights
are redeemable for $0.01 per Right (subject to adjustment) at the option of
the Board of Directors. Until a Right is exercised, the holder of the Right,
as such, has no rights as a shareholder of CTS. The Rights will expire on
August 27, 2008, unless redeemed by CTS prior to that date.
<PAGE>
NOTE K - Treasury Stock
Common stock held in treasury at December 31, 1998, totaled 10,562,449 shares
with a value of $275,471,000 compared to 8,873,056 shares with a value of
$218,983,000 at December 31, 1997. The increase results primarily from the
purchase of 1,767,514 shares of CTS common stock with a value of
approximately $56,273,000 during 1998. During 1997, the Company purchased
6,909,300 shares of CTS common stock previously owned by DCA for $196,728,000
in connection with the merger.
On October 16, 1997, CTS announced its intention to reinstitute its common
stock repurchase plan whereby it may, from time to time, depending on market
conditions and other factors, purchase its shares of common stock in open
market or privately negotiated transactions. The remaining shares authorized
for repurchase under the Board of Directors' authorization dated October 30,
1987, and amended on June 25, 1998, is approximately 320,000 shares. There
can be no assurance as to the number of shares CTS may repurchase or the
timing of such purchases.
<PAGE>
NOTE L - Contingencies
Certain processes in the manufacture of CTS' 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; CTS 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 CTS' business or financial condition, based on the
following: 1) CTS' 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 CTS to certain of the sites; and/or 5) CTS'
experience to-date in relation to the determination of its allocable share.
In addition to these non-CTS sites, CTS has an ongoing practice of providing
reserves for probable remediation activities at certain of its manufacturing
locations and for claims and proceedings against CTS with respect to other
environmental matters. Accrued environmental costs as of December 31, 1998,
totaled $7,100,000, compared with $5,900,000 at December 31, 1997. 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 CTS.
Certain claims are pending against CTS 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 CTS'
consolidated financial position or results of operations.
<PAGE>
NOTE M - Earnings Per Share
FASB Statement No. 128, "Earnings per Share," requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted EPS
computations. The calculation below provides net earnings, average common
shares outstanding and the resultant earnings per share for both basic and
diluted EPS for 1998, 1997 and 1996. The other dilutive securities of
approximately 168,000 and 74,000 for the years ended December 31, 1998, and
1997, respectively, consisted primarily of shares of CTS common stock to be
issued to DCA shareholders who have not yet tendered their DCA shares.
(In thousands except
per share amounts)
Earnings Shares Per Share
(Numerator) (Denominator) Amount
1998:
Basic EPS $37,474 14,014 $2.67
Effect of Dilutive
Securities:
Stock Options 432
Other 168
Diluted EPS $37,474 14,614 $2.56
======= ====== =====
1997:
Basic EPS $22,813 15,624 $1.46
Effect of Dilutive
Securities:
Stock Options 278
Other 74
Diluted EPS $22,813 15,976 $1.43
======= ====== =====
1996:
Basic EPS $21,170 15,668 $1.35
Effect of Dilutive
Securities:
Stock Options 92
Other 6
Diluted EPS $21,170 15,766 $1.34
======= ====== =====
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (1996 - 1998)
LIQUIDITY AND CAPITAL RESOURCES
The table below highlights significant comparisons and ratios related to
liquidity and capital resources of CTS for each of the last three years.
(In thousands of dollars)
December 31 December 31 December 31
1998 1997 1996
Net cash provided by
(used in) continuing operations:
Operating activities $ 45,712 $ 59,129 $ 35,103
Investing activities (6,155) (90,560) (16,388)
Financing activities (69,885) 27,298 (12,324)
Cash and equivalents $ 16,273 $ 39,847 $ 44,957
Accounts receivable, net 47,043 51,314 43,984
Inventories, net 33,322 34,683 38,761
Current assets 118,583 146,747 138,201
Accounts payable 17,412 22,593 17,146
Accrued liabilities 50,965 53,192 31,818
Current liabilities 82,377 80,991 51,391
Working capital 36,206 65,756 86,810
Current ratio 1.44 1.81 2.69
Interest-bearing debt $ 56,000 $ 61,206 $ 13,428
Shareholders' equity 123,839 147,496 166,232
Interest-bearing debt
as a percent of
shareholders' equity 45% 41% 8%
Interest-bearing debt
as a percent of
capitalization 31% 29% 7%
The 1998 positive cash flow provided by operating activities from continuing
operations of $45.7 million was lower than the 1997 amount by $13.4 million
or 23%. The lower positive cash flow impact from operating activities in 1998
is primarily caused by reductions in accounts payable and accrued
liabilities. Offsetting these liability reductions were reductions in
receivables and inventories.
The 1997 positive cash flow from operating activities of $59.1 million, an
improvement of $24.0 million, or 68% over 1996, was primarily a result of the
substantial reduction in inventories, and the higher operating earnings after
excluding the effect of the noncash transaction-related compensation charge
of $16.2 million in 1997.
<PAGE>
During 1996, $35.1 million of positive cash flow was generated from operating
activities. This amount, which exceeded 1995 by 31%, or $8.2 million, was
primarily a result of the higher level of earnings and improved management of
working capital, particularly accounts receivable.
During 1998, cash expenditures for investing activities totaled $6.2 million
and were comprised of $21.6 million of proceeds from the sale of property and
equipment, primarily associated with the sale of the Waring Products Division
assets, one of the businesses acquired within the DCA merger, offset by the
capital expenditures of $21.3 million. Approximately one third of this
capital expenditure amount was for selected capacity increases, particularly
in the molding operations within the automotive product lines (electronic
components). Production equipment for newer products was also added in our
resistor product lines (primarily electronic components).
Cash expenditures for investing activities totaled $90.6 million in 1997,
primarily as a result of the purchase of the DCA operating assets. The
Company completed the acquisition of DCA, including the reacquisition of 6.9
million shares of CTS common stock owned by DCA, in October 1997. The total
purchase price of approximately $250 million included total cash expended in
connection with the merger of $78 million. In addition, CTS issued $155
million of common stock in exchange for all of the outstanding common stock
of DCA. Of the total cash consideration, $50 million was obtained from an
unsecured six-year amortizing term loan.
Investment activities during the last three years included capital
expenditures, which totaled $21.3 million in 1998, discussed above, $22.2
million in 1997 and $17.2 million in 1996. During 1997, major capital
additions included capacity expansions in certain key product lines and
expenditures for new product production equipment. The major capital
expenditures in 1996 were for new products and product line enhancements.
Also during 1996, capacity increases were required in our automotive
sensors(electronic components) and European interconnect (electronic
assemblies) product lines. CTS expects to maintain its capital expenditures
at approximately the $20 million level in 1999, excluding any impact from the
Motorola Components Product Division (CPD), as discussed in Note B -- Pending
Acquisition/Acquisition. These capital expenditures will be primarily for new
products and cost reduction programs, as well as selected manufacturing
equipment capacity expansion, particularly in our interconnect (electronic
assemblies), automotive and resistor product lines (primarily electronic
components).
Cash used for financing activities during 1998 amounted to $69.9 million and
was primarily for the repurchase of a portion of the Company's outstanding
stock. During the year, 1.8 million shares were repurchased at a total cost
of $56.3 million. Also included in the 1998 financing activities was the $5.2
million of long-term debt and the acquisition of certain stock options of
$5.3 million.
<PAGE>
Financing activities during 1997 generated $27.3 million and related
primarily to the Company's $50.0 million term loan in connection with the
acquisition of DCA, partially reduced by purchases of treasury stock of $10.1
million and payments of long-term obligations of $8.7 million. During 1996,
total cash used for financing activities amounted to $12.3 million and
resulted primarily from the repayment of debt.
A noncash component of operating earnings during the 1996 to 1998 period was
pension income of $7.3 million, $6.2 million and $5.4 million in 1998, 1997
and 1996, respectively. The annual pension income has increased primarily as
a result of the increase in the value of pension assets, resulting from
favorable market returns. As a result of the Company's overfunded pension
position, no cash contributions are expected to be required in the
foreseeable future.
During 1997, a $125 million Credit Agreement was finalized consisting of an
unsecured six-year amortizing term loan of $50.0 million and an unsecured
six-year revolving credit facility of $75.0 million. On June 16, 1997, the
Company borrowed $50.0 million under the term loan portion of the Credit
Agreement which was used to finance the purchase of 1.2 million DCA shares.
As of December 31, 1998, $47.0 million remains outstanding on this loan.
Dividends paid were $3.4 million in 1998, $3.8 million in 1997 and $3.4
million in 1996. During 1996, as a result of continuing improved earnings
performance and positive cash flow, the Company increased its quarterly
dividend to $0.06 per share (on a post-split basis), effective with the
August payment.
At the end of each of the last three years, cash of various non- U.S.
subsidiaries was invested in U.S.-denominated cash equivalents. Such cash is
generally available to the parent Company. No provision for U.S. income taxes
or withholding taxes on the undistributed earnings at December 31, 1998, has
been made because prior year earnings are indefinitely reinvested in the
subsidiaries. If all non-U.S. earnings were repatriated, approximately $6.5
million of withholding taxes would accrue and would substantially be offset
by foreign tax credits.
Under the Company's common stock repurchase plan, CTS repurchased shares with
a cost of $56.3 million during 1998. Refer to Note K - -Treasury Stock, for a
description of the Company's repurchase plan.
Except as discussed in the following paragraph, the Company's credit
vehicles, together with cash from operations, should adequately fund the
Company's normal future cash needs.
<PAGE>
As described in Note B -- Pending Acquisition/Acquisition, on December 22,
1998, CTS agreed to pay Motorola $94 million at the closing and assume
approximately $51 million of Motorola obligations. In addition, CTS could be
obligated to pay up to an additional $105 million over five years depending
upon increased sales and profitability of CPD. CTS expects to finance a
substantial portion of the purchase price, and related working capital,
through borrowings under a new $225 million bank unsecured credit facility,
which would replace the existing borrowing facility of $125 million. Interest
on these borrowings is expected to be at an initial floating rate of LIBOR
plus one percent, and the facility would have a term of six years. The new
debt agreement will require principal amortization and have financial
covenants consistent with the existing borrowing facility.
RESULTS OF OPERATIONS
Business Segment Data Table (In thousands of dollars)
- ---------------------------
Electronic Components Electronic Assemblies
--------------------- ---------------------
1998
- ----
Sales $247,719 $122,722
Operating earnings 41,955 7,653
Operating earnings %
of sales 16.9% 6.2%
1997
- ----
Sales $237,926 $152,676
Operating earnings 34,253 14,920
Operating earnings %
of sales 14.4% 9.8%
1996
- ----
Sales $215,596 $105,701
Operating earnings 27,583 5,837
Operating earnings %
of sales 12.8% 5.5%
Overview
- --------
In terms of CTS' business segments, as shown in the table above, the 1998
operating earnings from electronic components at $42.0 million comprised the
largest portion of the total earnings, primarily due to the higher volume and
generally higher margins of the products within this segment. For this
business segment, sales increased by $9.8 million, or 4% over 1997, and the
associated operating earnings increase was $7.7 million, or an improvement as
a percent of sales of 2.5% points. The improvement in both sales and earnings
are primarily within the frequency product lines with
<PAGE>
the full-year impact of the former DCA product lines and the efficiencies
realized in both our frequency and electrocomponents operations. The decline
in the electronic assemblies segment was a result of the decrease in disk
drive product sales of $19.5 million, and the 1997 sale of the North American
Interconnect product line, impacting 1998 by $11.3 million.
The 1997 sales of electronic components increased by $22.3 million, or 10%
over 1996, generally across all product lines. The improved 1997 operating
earnings in the amount of $6.7 million, or 24% over 1996, was driven by the
overall volume increase, and was also a result of the operating improvements
and expense control throughout the major products within this segment.
Also during 1997, significant improvement was realized in our electronic
assemblies segment as sales increased by $47.0 million, primarily owing to
the substantially higher sales to the disk drive and telecommunications
markets. The higher 1997 operating earnings in the electronic assemblies
segment was a direct result of the 44% volume increase and further generated
by operating efficiencies and facilities utilization.
Most Recent Three Fiscal Years Discussion
- -----------------------------------------
The following table highlights significant information with regard to the
Company's overall results of operations during the past three fiscal years.
(In thousands of dollars)
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
Net sales $370,441 $390,602 $321,297
Gross earnings 114,597 110,517 87,496
Gross earnings as a percent
of sales 30.9% 28.3% 27.2%
Operating earnings - before
transaction-related
compensation charge $49,608 $ 49,173 $ 33,420
Operating earnings - after
transaction-related
compensation charge 49,608 32,973 33,420
Earnings before income taxes 49,441 35,730 33,602
Earnings from continuing
operations 34,073 23,193 21,170
Net earnings (loss) from
discontinued operations 3,401 (380)
Net earnings $37,474 $22,813 $21,170
Net sales for 1998 are below the 1997 level by $20.2 million, primarily due
to a decrease in electronic assembly products including disk drive product
sales by $19.5 million, and the sale of the North American Interconnect
product line and facilities, impacting 1998 by $11.3 million. Partially
offsetting these decreases in revenue was the full-year impact of the former
DCA frequency control product lines of $11.9 million.
<PAGE>
Within the business segments, as presented in Note I -- Business Segments,
and as presented in the Business Segment Data Table, electronic components
increased by $9.8 million or 4% over 1997, primarily as a result of the
full-year impact of the former DCA frequency control products of $11.9
million. Sales of the electronic assemblies declined by $30.0 million in 1998
as a result of the decreased disk drive product sales by $19.5 million, and
the 1997 sale of our North American Interconnect product line, impacting 1998
sales by $11.3 million.
Net sales for 1997 increased by $69.3 million or 22% over 1996. This 1997
growth to record levels was primarily in our automotive components and
computer equipment assemblies sold domestically and in Europe.
The sales for electronic components increased during 1997 by $22.3 million,
or 10% over the 1996 level, primarily within our automotive sensors product
line by $13.5 million, our resistor network product line by $5.1 million and
our frequency control devices line by $4.6 million. Sales of the electronic
assemblies improved substantially in 1997, increasing by $47.0 million, or
44%, primarily in our flex cable assembly products by $24.6 million, and in
our European sourced interconnect products by $23.9 million.
Net sales for 1996 increased by $21.1 million, or 7% over 1995, principally
due to the increased demand in the domestic and European automotive
components, and the computer and communications equipment assemblies markets.
As a percent of total annual sales, during the three-year period of
1996-1998, sales to the automotive market of electronic component products
decreased slightly from 34% to 32% while our sales into the computer
equipment market of electronic components and assemblies increased
substantially from 21% to 32% as a percent of total sales. The primary reason
for the computer equipment market increase is related to the high growth rate
of the flex cable assembly product, particularly in 1997. The sales of this
particular product declined significantly during 1998 however, as discussed
previously. Within the electronic components segment, significant growth has
also been realized in the communications equipment market, from 17% in 1996
to 25% in 1998, particularly in our frequency control product line, with the
full-year impact in 1998 of the former DCA operating unit.
CTS' 15 largest customers represented approximately 66% of net sales in 1998,
67% of net sales in 1997, and 62% of net sales in 1996. Sales to General
Motors Corporation comprised 11.7% of net sales in 1998 as compared to 12.8%
in 1997 and 15.3% in 1996. Sales to Compaq Computer Corporation and Seagate
Technology, Inc., respectively, comprised 11.7% and 7.5% of net sales in
1998, compared to 12.2% and 11.1% in 1997, and 7.7% and 3.5% in 1996.
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. CTS' products are usually priced with reference to
expected or required profit margins, customer expectations and market
competition. Pricing for most of CTS'
<PAGE>
electronic component and assembly products frequently decreases over time and
also fluctuates in accordance with total industry utilization of
manufacturing capacity.
In 1998, 1997 and 1996, improvements in gross earnings were realized over
each of the preceding years in absolute terms and as a percent of sales,
principally due to favorable product sales mix resulting from focusing on our
most profitable product lines, effective facilities utilization and
production efficiencies, the higher absorption of fixed manufacturing
overhead expenses and overall expense control.
Selling, general and administrative expenses as a percent of sales have
remained relatively constant over the last three years, ranging from 12.4% to
13.9%. In 1998, as in previous years, CTS continued to control these expenses
while filling key management positions required for the growth and
development programs of 1999 and beyond.
The 1998 research and development expenses increased slightly as the new
product development programs continued, particularly for our automotive
products included in the electronic components segment.
During 1997, research and development expenses increased by $2.4 million, or
22% over 1996, though remaining relatively constant as a percent of sales, as
CTS continued to invest in programs for new products and product
improvements. A substantial portion of the research and development efforts
were devoted to additional products and product enhancements within our
automotive, resistor network and frequency control products included in our
electronic components business segment.
During 1996, research and development expenses increased by $2.7 million, or
34% over 1995, as CTS continued investment efforts in new product development
and product improvements, particularly for the automotive, frequency control
and hybrid microcircuit products covering both of our business segments.
The 1998 operating earnings were slightly better than the comparable amount
in 1997, excluding the 1997 transaction-related compensation charge of $16.2
million. In spite of the lower comparable revenue of over $20 million for
continuing operations, 1998 earnings increased as a result of the focus on
the more profitable product lines, production and facilities efficiencies and
overall expense control.
Excluding the nonrecurring compensation charge of $16.2 million related to
the DCA acquisition, 1997 operating earnings increased by $15.8 million, or
47% over 1996. Contributing to this substantial earnings increase was the
overall volume increase, operating improvements and continued expense
control.
During 1996, the primary reasons for the substantial operating earnings
improvement include the higher overall sales and related productivity in our
automotive and resistor products within the electronic components segment,
and the interconnect products within the electronic assemblies segment. Also
contributing to our 1996 improvement was the reduction of losses from our
frequency control
<PAGE>
products within the electronic components segment. These improvements
substantially offset losses from our defense and aerospace products within
our electronic assemblies segment, caused primarily by the declining market
conditions.
The 1998 effective tax rate of 31% decreased from 35% in 1997. This decrease
was primarily due to the utilization of the net operating loss carryforwards
in non-U.S. jurisdictions. The remeasurement of the tax benefit related to a
one-time compensation charge incurred in 1997 based upon the increase in the
CTS stock price also contributed to the lower 1998 tax rates as did the
increased earnings in the lower tax rate jurisdictions in which CTS operates.
The 1997 effective tax rate of 35% was lower than the 1996 tax rate of 37%,
principally due to the utilization of net operating loss carryforwards in
non-U.S. jurisdictions.
Environmental
- -------------
In terms of environmental issues, CTS 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, CTS provides
reserves for probable remediation activities at certain of its manufacturing
locations. These issues are discussed in Note L -- Contingencies.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
CTS is addressing the issues associated with the programming code in existing
computer systems and other equipment which may be affected by the rollover of
the two-digit year value to 00 in the year 2000. Systems that do not properly
recognize such dates could generate erroneous information or cause a system
to fail. The Year 2000 issue creates risk for CTS from unforeseen problems in
its own systems and from worldwide third parties with whom CTS transacts
business. CTS believes that its products are not "time and date" sensitive.
CTS has formed a Company-wide Year 2000 Readiness Project to identify and
resolve Year 2000 issues. This program includes the inventory of financial,
manufacturing, design and other internal systems, hardware, equipment and
embedded chips in industrial control instruments, and the assessment,
remediation and testing of the systems. All systems were inventoried,
reviewed and assessed in 1998, and the majority of systems which were not
Year 2000 ready were remedied or replaced and tested in 1998. The project is
approximately 85% completed and the remaining remediation of systems is
expected to be completed by the end of the second quarter of 1999. Acceptance
testing and certification of these systems are projected for completion by
the third quarter of 1999. A task force, comprised of members from operating
units and executive management, meets regularly and tracks the progress of
the program, prioritizes all the potential risks and develops plans to
eliminate or reduce risks.
CTS also faces risk to the extent that suppliers of products, services and
systems purchased by CTS and others with whom CTS transacts business on a
worldwide basis do not comply with Year 2000 requirements. As part of the
program, Year 2000 Readiness Surveys have been sent to significant service
providers, vendors, suppliers, customers and governmental entities that are
believed to be critical to business operations. CTS is currently in the
process of evaluating responses and sending follow-up requests to the
estimated 20% that have not responded. While Management believes that it will
be able to qualify alternative suppliers as needed, until all supplier and
customer survey responses have been received and evaluated, the Company
cannot fully evaluate the extent of potential problems and the costs
associated with corrective actions. A contingency plan is being evaluated and
reviewed, and will not be formally established until the third quarter of
1999 when the evaluation of suppliers and the remaining remediation of
systems and testing is completed. CTS is unable to determine what effect the
failure of systems due to Year 2000 issues by CTS or its suppliers or
customers may have, but any significant failures could have an adverse
material effect on CTS' results of operations and financial condition.
The cost to complete the program is estimated at $2 million for the costs of
outside consultants, software and hardware applications. There has been $1
million spent to date as of December 31, 1998 with the remainder projected to
be spent in 1999. CTS has not tracked the internal costs incurred for all of
the hours spent on the project.
<PAGE>
EXHIBIT (10) (f)
ASSET SALE AGREEMENT
by and among
MOTOROLA, INC.,
CTS CORPORATION
and
CTS WIRELESS COMPONENTS, INC.,
DATED DECEMBER 22, 1998
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<PAGE>
TABLE OF CONTENTS
(cont'd)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. Certain Definitions......................................................................................1
2. Purchase and Sale of Assets..............................................................................2
2.1. Purchased Assets................................................................................2
2.2. Excluded Assets.................................................................................4
2.3. Intellectual Property...........................................................................5
3. Assumption of Liabilities; Excluded Liabilities..........................................................5
3.1. Assumption of Liabilities.......................................................................5
3.2. Excluded Liabilities............................................................................6
3.3. Bulk Transfer...................................................................................8
3.4. Motorola Customer Purchase Orders...............................................................8
4. Purchase Price...........................................................................................8
4.1. Purchase Price..................................................................................8
4.2. Purchase Price Allocation.......................................................................8
4.3. Sales Tax, Etc..................................................................................9
4.4. Interest........................................................................................9
4.5. Rent Proration..................................................................................9
5. Representations and Warranties of Seller.................................................................9
5.1. Organization, Qualification, Subsidiaries and Address...........................................9
5.2. Due Execution..................................................................................10
5.3. Effect of Agreement............................................................................10
5.4. Taxes..........................................................................................11
5.5. Litigation.....................................................................................11
5.6. Title to and Condition of Tangible Purchased Assets............................................11
5.7. Compliance with Laws...........................................................................12
5.8. Contracts and Commitments......................................................................12
5.9. Employees; Employee Plans......................................................................14
5.10. Environmental Matters..........................................................................15
5.11. Permits........................................................................................15
5.12. Sufficiency of Assets..........................................................................16
5.13. Financial Statements...........................................................................16
5.14. Conduct of the Business Since the Balance Sheet Date...........................................17
5.15. No Undisclosed Liabilities.....................................................................17
5.16. Insurance......................................................................................17
5.17. Real Property..................................................................................17
5.18. Affiliate Agreements and Liabilities...........................................................18
5.19. Certain Limitations on Representations and Warranties..........................................18
5.20. Products Liability.............................................................................18
5.21. Warranty Acknowledgment........................................................................19
5.22. WARN Act.......................................................................................19
6. Representations and Warranties of Buyer.................................................................19
6.1. Organization...................................................................................19
6.2. Due Execution..................................................................................19
6.3. Effect of Agreement............................................................................19
6.4. Litigation.....................................................................................20
</TABLE>
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TABLE OF CONTENTS
(cont'd)
<TABLE>
<CAPTION>
<S> <C> <C>
Page
6.5. Warranty Disclaimer............................................................................20
7. Closing.................................................................................................20
7.1. Closing........................................................................................20
7.2. Deliveries at Closing by Seller................................................................20
7.3. Deliveries at Closing by Buyer.................................................................22
7.4. Consummation of Transactions...................................................................22
8. Conditions Precedent to Buyer's Obligations.............................................................23
8.1. Accuracy of Representations and Fulfillment of Covenants.......................................23
8.2. Litigation.....................................................................................23
8.3. Consents.......................................................................................23
8.4. Delivery of Documents..........................................................................23
8.5. Hart-Scott-Rodino..............................................................................23
8.6. Permits........................................................................................23
9. Conditions Precedent to Obligations of Seller...........................................................24
9.1. Accuracy of Representations and Fulfillment of Covenants.......................................24
9.2. Litigation.....................................................................................24
9.3. Consents.......................................................................................24
9.4. Delivery of Documents..........................................................................24
9.5. Hart-Scott-Rodino..............................................................................24
10. Risk of Loss............................................................................................24
11. Indemnity and Survival of Representations...............................................................24
11.1. Indemnification................................................................................24
11.2. Survival of Representations and Warranties.....................................................28
12. Covenants and Agreements................................................................................28
12.1. Operation of the Business; Buyer's Right to Excluded Assets....................................28
12.2. Contracts and Permits..........................................................................30
12.3. Books and Records..............................................................................32
12.4. Governmental Consents; Injunctions.............................................................32
12.5. Further Assurances.............................................................................33
12.6. Non-Solicitation - Seller......................................................................33
12.7. Covenant Not to Compete........................................................................34
12.8. Customer Billing...............................................................................34
12.9. Investigation by Buyer.........................................................................35
12.10. Collection of Accounts Receivable; Payment of Accounts Payable........................35
12.11. Insurance.............................................................................36
12.12. Warranty and Returns Claim Processing.................................................37
12.13. CTS Employees.........................................................................38
13. Employee Matters........................................................................................38
13.1. Recruiting Transferred Employees...............................................................38
13.2. Employee Benefits..............................................................................39
13.3. WARN Act Compliance............................................................................41
13.4. No Obligation to Continue Employment or Benefits...............................................41
13.5. Immigration Status.............................................................................41
13.6. Secondment.....................................................................................41
</TABLE>
<PAGE>
TABLE OF CONTENTS
(cont'd)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
14. Obligations of Parent...................................................................................41
15. Expenses................................................................................................41
16. Commissions or Finder's Fees............................................................................42
17. Notices.................................................................................................42
18. Termination of Agreement................................................................................43
19. Nondisclosure...........................................................................................43
20. Disputes................................................................................................44
20.1. Amicable Resolution............................................................................44
20.2. Mediation and Alternate Dispute Resolution.....................................................45
20.3. Costs..........................................................................................45
20.4. Jurisdiction...................................................................................45
21. Miscellaneous...........................................................................................46
21.1. Governing Law..................................................................................46
21.2. Entire Agreement; Amendment....................................................................46
21.3. Successors and Assigns.........................................................................46
21.4. Headings.......................................................................................46
21.5. Schedules; Exhibits............................................................................46
21.6. Counterparts...................................................................................46
21.7. Interpretation; Other Definitional Terms.......................................................46
21.8. Partial Invalidity.............................................................................47
21.9. No Third Party Beneficiaries...................................................................47
21.10. No Waiver.............................................................................47
21.11. Authorship............................................................................47
</TABLE>
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<PAGE>
ASSET SALE AGREEMENT
THIS ASSET SALE AGREEMENT ("Agreement") is entered into this 22nd day of
December, 1998, by and among MOTOROLA, INC., a Delaware corporation
("Seller"), CTS WIRELESS COMPONENTS, INC., a Delaware corporation ("Buyer")
and a wholly owned subsidiary of Parent, and CTS CORPORATION, an Indiana
corporation ("Parent").
RECITALS
Seller and its wholly owned subsidiaries, Motorola (China) Electronics Ltd.,
a company organized under the laws of the People's Republic of China ("MCEL")
and Motorola Electronics Taiwan, Ltd., a company organized under the laws of
Taiwan ("METL" and, together with MCEL, "MSubs"), through the Component
Products Division of their Automotive, Component, Computer and Energy Sector
("ACCES"), are currently engaged in the business of designing, manufacturing,
marketing and selling certain electronic component products.
Seller desires to assign, sell, transfer and convey ("Transfer") and to cause
MSubs to Transfer, to Buyer and Buyer desires to purchase and accept from
Seller and MSubs the assets, properties and rights specified herein, on the
terms and subject to the conditions of this Agreement.
Seller desires to and to cause MSubs to Transfer to Buyer, and Buyer desires
to assume, the liabilities and obligations specified herein, on the terms and
subject to the conditions of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and conditions herein contained and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged,
Buyer, Parent and Seller hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms will
have the meanings set forth or referenced below when used herein with initial
capital letters:
"Business" means Seller's and MSubs' business of developing, designing,
manufacturing, marketing and selling the Products as conducted through
Seller's and MSubs' Component Products Division of ACCES and includes the
ceramics, quartz, oscillator, piezoelectric technology and surface acoustic
wave operations thereof. For purposes of this Agreement, the term "Business"
specifically does not include (a) the Ceramic Technology Research Lab
currently located in Albuquerque, New Mexico, (b) design and development work
and manufacturing of multi-layer ceramic integrated circuits (also known as
low temperature co-fired ceramic components) ("MCIC") currently conducted in
Albuquerque, New Mexico and Schaumburg, Illinois, (c) design and development
work and manufacturing of voltage variable capacitors ("VVC's") currently
conducted in Albuquerque, New Mexico, (d) the operations currently conducted
at San Jose,
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Costa Rica and Carlisle, Pennsylvania to the extent that the operations and
assets thereof are not to be transferred to one of the Facilities pursuant to
the Rationalization Plan as described on Schedule 12.1(a) (the
"Rationalization Plan"), and (e) the business of manufacturing and selling
EOL Products (as defined in the Reimbursement Agreement) as contemplated to
be conducted by Seller in the Reimbursement Agreement.
"Facilities" means, collectively, the portion of the following
acilities currently used in the operation of the Business:
(a) 1301 East Algonquin Road, Schaumburg, Illinois 60196;
(b) 4800 Alameda Boulevard N.E., Albuquerque, New Mexico 87113;
(c) 8201 E. McDowell Road, Scottsdale, Arizona 85252;
(d) No. 10 4th Avenue, Teda, Tanggu, Tianjin, P.R. China 300457;
(e) No. 53, Mu Ning Lu, Teda, Tanggu, Tianjin, P.R. China
300457; and
(f) #550, Chung Hwa Road Sec. 1, Chung-Li 32042, Taiwan, R.O.C.
"Products" has the meaning set forth on Schedule 1.
2. Purchase and Sale of Assets.
2.1. Purchased Assets. Upon the terms and subject to the
conditions of this Agreement, including, without limitation, Section 12.2, at
the Closing Seller will Transfer (or cause MSubs to Transfer) to CTS (Tianjin)
Electronics Co., Ltd., a company organized under the laws of the People's
Republic of China ("CTS China"), CTS Components Taiwan, Ltd., a company
organized under the laws of Taiwan ("CTS Taiwan" and together with CTS China,
"Buyer Subs"), or to Buyer, as Buyer may direct, and Buyer (or such Buyer Sub)
will purchase from Seller or MSubs, as applicable, free and clear of any and all
mortgages, liens, security interests or other encumbrances ("Liens"), other than
Permitted Liens, except as otherwise herein expressly provided all of the right,
title and interest of Seller and MSubs in the following assets, properties and
rights of Seller and MSubs wherever located to the extent they exist as of the
Closing Date (collectively, the "Purchased Assets"):
(a) the tangible personal property (including machinery,
equipment, supplies, furniture and vehicles) listed under the heading
"Included Fixed Assets" on Schedule 2.1(a) (the "Included Fixed
Assets") and any such tangible personal property acquired by Seller or
MSubs for use in the Business not in breach of this Agreement between
the date hereof and the Closing but excluding any such property
disposed of by Seller or MSubs not in breach of this Agreement between
the date hereof and the Closing;
(b) (i) the finished inventory of Products as of the Closing
and all work-in-progress, raw materials and packaging materials
inventory used in connection with the manufacture of Products as of the
Closing, wherever located, but not including any of the finished
inventory of EOL Products (as defined in the Reimbursement Agreement)
located
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as of the Closing at Seller's or MSubs' Facilities at Schaumburg,
Illinois; San Jose, Costa Rica; and Carlisle, Pennsylvania and the raw
materials, work-in-progress and materials inventory located as of the
Closing at such Facilities to the extent used in the manufacture by
Seller of EOL Products pursuant to and as defined in the Reimbursement
Agreement and (ii) tools, jigs, molds, dies, masks and mask sets used
or held for use to produce Products as of the Closing, wherever
located;
(c) any and all agreements, contracts, instruments, leases,
guaranties and other similar agreements and arrangements (including
open purchase and sale orders and software licenses) ("Contracts") that
are (i) listed on Schedule 5.8(a), (ii) required to be listed on
Schedule 5.8(a) by the terms of Section 5.8(a), (iii) would have been
required to be listed on Schedule 5.8(a) by the terms of Section 5.8(a)
but for any dollar, time or other exclusion or exception (except those
limiting such item to the Business) in Section 5.8(a), or (iv) entered
into not in breach of this Agreement between the date hereof and the
Closing Date (together with the IP Contracts (as defined in the
Intellectual Property Agreement, the "Acquired Contracts");
(d) any and all claims, causes of action, choses in action,
rights of recovery, rights of set off, and rights of recoupment to the
extent related to the Business or to the extent related to any other
Purchased Asset;
(e) any and all deposits and prepaid assets (other than
corporate guarantees) that would be required by GAAP to be shown on a
balance sheet of the Business as of the Closing Date to the extent
related to the Business or to an Assumed Liability;
(f) any and all Permits that are used primarily in the
operation of the Business (for purposes of this Agreement, "Permits"
means any and all franchises, approvals, authorizations, permits,
licenses, orders, registrations, certificates, variances, and similar
rights obtained from Governmental Entities) to the extent Transferrable
to Buyer or the applicable Buyer Sub;
(g) the rights of Parent under the Intellectual Property
Agreement to be executed and delivered at closing between Seller and
Parent, in the form attached hereto as Exhibit A (the "Intellectual
Property Agreement") including the intellectual property to be
Transferred or licensed to Parent or Buyer or any of their affiliates
pursuant to the Intellectual Property Agreement (the "Acquired
Intellectual Property");
(h) any and all books of account, ledgers, documents,
correspondence, lists, plats, architectural plans, drawings, and
specifications, creative materials, design libraries, studies, reports,
advertising, marketing and sales programs, business and strategic
plans, management systems, customers and suppliers lists, invoices,
general, financial, accounting and personnel records and files, records
and files related to Acquired Intellectual Property and other printed,
written or electronically stored materials and information to the
extent related to the Business, including without limitation, source
codes and passwords for access to computer software and systems
included in the Purchased Assets;
(i) the real property leaseholds in the real property located
at 4800 Alameda Boulevard N.E., Albuquerque, New Mexico pursuant to
that certain Lease Agreement, by
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<PAGE>
and between the City of Albuquerque, a municipal corporation duly
organized and existing under the laws of the State of New Mexico, and
Seller, as amended by a First Amendment to Lease Agreement dated June
1, 1990, and as amended by a Second Amendment to Lease Agreement dated
August 1, 1993 (the "Albuquerque Lease");
(j) petty cash on hand at the Facilities to the extent held by or on behalf of
the Component Products Division of ACCES;
(k) the assets that will be transferred to Buyer's or Parent's 401(k) plan
pursuant to the 401(k) Transfer Agreement in the form attached hereto as
Exhibit B (the "401(k) Transfer Agreement"); and
(l) the assets that will be transferred to Buyer's or Parent's pension plan
pursuant to the Pension Transfer Agreement in the form attached hereto as
Exhibit C (the "Pension Transfer Agreement").
2.2. Excluded Assets. Notwithstanding the foregoing, Seller and MSubs will
retain and not Transfer, and none of Buyer or Buyer Subs will acquire, any
assets or rights of Seller or MSubs not included in the Purchased Assets,
including without limitation, the following assets or rights of Seller or
MSubs (the "Excluded Assets"):
(a) the corporate charter, qualifications to conduct business as a foreign
corporation, arrangements with registered agents relating to foreign
qualifications, taxpayer and other identification numbers, seals, minute
books, stock transfer books, blank stock certificates, and other documents
relating to the organization, maintenance, and existence of Seller or any
MSub as a corporation;
(b) any cash and cash equivalents (other than petty cash on hand at the
Facilities to the extent held by or on behalf of the Component Products
Division of ACCES), including cash on hand or in bank accounts and
marketable securities;
(c) the accounts receivable and trade accounts that would be required by GAAP,
applied on a basis consistent with Seller's accounting practices, policies
and procedures in effect on the date hereof, to be reflected on a balance
sheet of the Business as of the Closing Date;
(d) subject to the relevant provisions of the Intellectual Property Agreement
the "Motorola" name, including any derivations thereof;
(e) corporate accounting journals and corporate books of account which
comprise Seller's permanent accounting or tax records and that do not
relate exclusively to the Business;
(f) refunds pertaining to Taxes to the extent related to the Taxes that are
Seller's or MSubs' responsibility under this Agreement;
(g) any of the rights of Seller or MSubs under this Agreement (or under any
agreements between Seller or any MSub on the one hand and Parent,
NY: 750767v16
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<PAGE>
Buyer or any Buyer Sub on the other hand entered into on or after the date of
this
Agreement);
(h) subject to the Joint Use and Occupancy Agreements and the
Albuquerque Lease Assignment, as applicable, the real property,
leaseholds, subleaseholds, buildings, improvements, fixtures and
fittings thereon (except for such fixtures as are included in the
Included Fixed Assets), and easements, rights-of-way and other
appurtenants thereto located at the Facilities (the "Excluded Real
Property");
(i) the Contracts listed on Schedule 2.2(i) (such Contracts,
together with any lease or sublease agreements relating to the Excluded
Real Property, the "Excluded Contracts");
(j) the assets of the Employee Plans other than assets that
will be transferred to Buyer's or Parent's 401(k) or pension plan
pursuant the 401(k) Transfer Agreement or the Pension Transfer
Agreement;
(k) the tangible personal property listed under the heading
"Excluded Assets" on Schedule 2.1(a) (the "Excluded Fixed Assets"); and
(l) the Shared Assets, subject to Section 11.1(d)(ii).
2.3. Intellectual Property. Except as specifically set forth herein as
applying to Acquired Intellectual Property, the Intellectual Property
Agreement or IP Contracts (as defined in the Intellectual Property Agreement),
the rights and obligations of Parent, Buyer, the Buyer Subs, Seller and the
MSubs with respect to the Acquired Intellectual Property are contained
exclusively in the Intellectual Property Agreement. To the extent that there
is any conflict between a specific provision of this Agreement and the
corresponding provision of the Intellectual Property Agreement with respect to
the matters covered by the Intellectual Property Agreement, the terms and
conditions of the Intellectual Property Agreement will govern, provided,
however, that, to the extent there is a conflict between any of Sections
2.1(c), 3.1(f), 5.8, 5.12, 5.21, 6.5, 11, 12.2, 12.5, 12.7(b) , 15(b) or 19(c)
of this Agreement and any provision of the Intellectual Property Agreement,
the terms and conditions of such Sections of this Agreement will govern.
3. Assumption of Liabilities; Excluded Liabilities.
3.1. Assumption of Liabilities. Upon the terms and subject to the conditions
of this Agreement, effective as of the Closing, Buyer will assume and agree to
discharge promptly as they become due the following liabilities and
obligations of Seller and MSubs relating to or arising out of the operation of
the Business or ownership of the Purchased Assets (collectively, the "Assumed
Liabilities"):
(a) any and all claims, causes of action, liabilities or obligations of any
nature or description, including any environmental liabilities, and
obligations for Taxes, accruing, arising or relating to Buyer's or its
affiliates' operation of the Business or ownership of the Purchased Assets
during any period following the Closing Date;
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(b) any and all obligations, responsibilities and liabilities
relating to, arising out of or incurred in performance, or lack of
performance, under the executory portion of the Acquired Contracts as
of the Closing Date;
(c) any and all claims under express or implied warranties
with respect to the Products for defects in the materials or
workmanship in the manufacture of the Products with respect to Products
sold after the Closing Date, including without limitation, Products
held in finished or work-in-progress inventory as of the Closing;
(d) on and as of the Hire Date for each Transferred Employee,
any and all liabilities and obligations of any nature relating to such
employees that accrue after the Closing, except as otherwise provided
in Section 13.2 and subject to Seller's obligation to reimburse Buyer
pursuant to Section 13.2(d);
(e) any and all liabilities and obligations to be assumed by
Buyer's or Parent's 401(k) plan or pension plan under the 401(k)
Transfer Agreement and the Pension Transfer Agreement;
(f) the obligations of Parent under the Intellectual Property Agreement;
and
(g) the obligations and liabilities of Seller as of the
Closing Date under the executory portion of the Albuquerque Lease.
3.2. Excluded Liabilities. Except as provided in Section 3.1,
none of Buyer or any of its affiliates will assume or otherwise be responsible
for any claim, cause of action, liability or obligation of any nature or
description of Seller or any of its affiliates, whether known or unknown,
contingent or otherwise (such non-assumed liabilities, the "Excluded
Liabilities"), including, without limitation, the following:
(a) all accounts payable that would be required by GAAP to be shown on a
balance sheet of the Business as of the Closing Date;
(b) Indebtedness of Seller or any of its affiliates other than with respect to
the Albuquerque Lease;
(c) any liabilities or obligations of the Business for Taxes
relating to periods ending on or prior to the Closing Date, including
Federal, national, state or local Taxes on income and any Tax accounts
in any form;
(d) any litigation or claims or contingencies in any form, in
each case the basis of which relates to periods ending on or prior to
the Closing Date and any liability or obligation related to any
Environmental Condition existing on or prior to the Closing Date;
(e) any claim, cause of action, liability or obligation in
respect of any of Seller's or MSubs' employees arising out of an event
or circumstances that occurred or existed on
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or prior to the Closing Date or in respect of any of Seller's or MSubs'
past, present and future employees that do not become Transferred
Employees whenever arising;
(f) any and all obligations and liabilities with respect to or
under any Employee Plan for all periods ending on, prior to or after
the Closing Date (except for any and all obligations to be assumed by
Buyer's or Parent's 401(k) plan or pension plan under the 401(k)
Transfer Agreement and the Pension Transfer Agreement), including,
without limitation, the obligations and liabilities that are the
responsibility of Seller pursuant to Section 13;
(g) any obligations or liabilities to the extent attributable to any of the
Excluded Contracts;
(h) any and all obligations or liabilities under any Affiliate
Contracts and with respect to any intercompany receivables, payables,
loans and advances (including intercompany obligations with respect to
foreign currency contracts or other derivative financial contracts)
then existing between Seller or any MSub, on the one hand, and any of
their respective affiliates, on the other hand (except for the
obligations and liabilities pursuant to the executory portion of the
Affiliate Contracts included in Acquired Contracts); and
(i) subject to Buyer's obligations under Section 12.12, any
and all claims under express or implied warranties given by Seller or
MSubs with respect to the Products for defects in the materials or
workmanship in the manufacture of the Products with respect to Products
sold on or prior to the Closing Date.
For purposes of this Agreement, (a) "Indebtedness" means any liability or
obligation (whether primary or secondary as a guarantor or other surety other
than arising out of the endorsement of checks for collection in the ordinary
course of business), for borrowed money, for the deferred purchase price of any
asset (other than inventory in the ordinary course of business), under a
capitalized lease or any other liability or obligation which should be shown as
indebtedness on a balance sheet for the Business prepared in accordance with
GAAP, whether or not evidenced by a note, bond or similar instrument; (b)
"Employee Plan" means each (i) severance or employment agreement with any
current or former director, officer or employee, (ii) severance plan, program,
policy or arrangement, (iii) plan or arrangement relating to its current or
former directors, officers or employees which contains change in control
provisions, (iv) employee pension or welfare plan, as defined in Sections 3(1)
and 3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), (v)
collective bargaining agreement, or (vi) bonus, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
vacation, supplemental unemployment, workers compensation or other plan which
(A) provides benefits for Employees or Former Employees and (B) is maintained by
Seller or any of its affiliates, to which Seller or any of its affiliates
contributes or is obligated to contribute or under which Seller or any of its
affiliates is liable in respect of Employees or Former Employees (but not
including any of the foregoing maintained by Parent or Buyer); (c) "Employees"
means all individuals employed by Seller or any MSub primarily in the conduct of
the Business as of the date hereof or who becomes so employed prior to the
Closing Date in the ordinary course of business and includes, where an Employee
Plan provides benefits for beneficiaries or dependents, the beneficiaries and
dependents of an Employee or Former Employee; and (d) "Former Employees" means
all individuals who
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are, as of the Closing Date, former employees by Seller or any MSubs primarily
in the conduct of the Business.
3.3. Bulk Transfer. Buyer hereby waives compliance by Seller
and MSubs with all applicable bulk transfer, bulk sales and similar Laws and
requirements of all jurisdictions in connection with the transactions
contemplated hereby.
3.4. Motorola Customer Purchase Orders. From and after the
Closing Date, Seller will purchase, and Buyer will sell, Products under the
purchase orders between the Component Products Division of ACCESS and other
business units of Seller that are listed on Schedule 3.4 (the "Motorola Customer
PO's") which Motorola Customer PO's will be deemed to be Contracts for the
purchase and sale of the Products on terms and conditions consistent with
conduct of business in the ordinary course.
4. Purchase Price.
4.1. Purchase Price.
(a) The purchase price (the "Purchase Price") payable by Buyer
and Buyer Subs to Seller and MSubs will be as follows:
(i) $94.0 million payable at Closing, subject to adjustment pursuant to
Section 4.5 (the "Closing Payment");
(ii) assumption of the Assumed Liabilities at Closing; and
(iii) payment of the GMM Earnout Amount and the PBIT Earnout Amount (each as
defined in Exhibit D) pursuant to Exhibit D.
(b) All payments pursuant to this Agreement will be made by
wire transfer of immediately available funds in U.S. dollars (or the
RMB or $NT equivalent as agreed to by Buyer and Seller) to an account
or accounts designated by Seller (which account(s) will be designated
by Seller in writing to Buyer at least two Business Days prior to the
Closing).
(c) The portion of the Closing Payment payable by Buyer to
Seller, CTS China to MCEL, or CTS Taiwan to METL, respectively, will be
as agreed upon by Buyer and Seller prior to the Closing Date but in no
event will such allocation at the Closing Date be deemed to be binding
on the parties as an allocation of the Purchase Price for accounting or
tax purposes.
4.2. Purchase Price Allocation. As promptly as practicable
following the date of this Agreement and prior to Closing, Buyer and Seller will
select a mutually agreeable independent appraiser of national reputation, will
engage such appraiser on mutually agreeable terms and will cause such appraiser
to appraise the Purchased Assets at their fair market values. The Purchase Price
will be allocated for tax purposes by Buyer and Seller based on the results of
such appraisal and as otherwise mutually agreed by Buyer and Seller prior to
Closing. Provided such allocation has been agreed upon by Buyer and Seller prior
to Closing, such allocation will be used for all purposes, including preparation
and filing of Internal Revenue Service Form 8594 and
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none of Seller, Parent or Buyer or any of their respective affiliates will file
any Tax Return or take any other action that is inconsistent with such
allocation.
4.3. Sales Tax, Etc. Seller and Buyer will each pay one-half
of all sales, use, Transfer and other non-income Taxes, if any, arising out of
the Transfer or license of the Purchased Assets, provided that any such Taxes
will be paid by Buyer if Buyer, Parent or the Buyer Subs or any of their
affiliates is eligible for a refund or other credit and there is no reasonable
question as to such eligibility. Seller and Buyer will each use their
commercially reasonable efforts to minimize such Taxes, including by applying
for any applicable exemptions, refunds or other credits. In the event of any
subsequent refund or other credit of such Taxes received by Seller or Buyer (or
any of their respective affiliates), Buyer or Seller, as applicable, will refund
to the other one-half of such refund or other credit unless Buyer paid all of
the Tax to which the refund or other credit relates.
4.4. Interest. Any payments of money to be made under this
Agreement, including Exhibit D, the Intellectual Property Agreement, Transition
Services Agreements, Joint Use and Occupancy Agreements, the Pension Transfer
Agreement and Reimbursement Agreement will accrue interest from the date such
payment is due under such agreement until the date the payment is made at a rate
equal to the lowest interest rate in effect as of the date such payment was due
for new borrowings under Parent's senior credit facilities, calculated on a
basis of actual days and a 360 day year.
4.5. Rent Proration. All amounts due or payable under the
Albuquerque Lease and any leases for real property included in Scheduled
Contracts ("Proratable Items") will be prorated and adjusted between Seller and
Buyer as of the Closing Date so that Seller will be responsible for all
Proratable Items related to or arising out of the period of time on or prior to
the Closing Date and Buyer will be responsible for all Proratable Items related
to or arising out of the period of time after the Closing Date, in each case
regardless of when such Proratable Items shall become due and payable. The
Closing Payment will be increased by the amount by which the Proratable Items
that are Seller's responsibility exceed the Proratable Items that are Buyer's
responsibility or decreased by the amount by which the Proratable Items that are
Buyer's responsibility exceed the Proratable Items that are Seller's
responsibility.
5. Representations and Warranties of Seller. Seller hereby represents
and warrants to Buyer as of the date hereof and as of the Closing the following,
provided however, that the following will not be deemed to apply to the Acquired
Intellectual Property except as specifically provided in Sections 5.8, 5.12 and
5.21:
5.1. Organization, Qualification, Subsidiaries and Address.
(a) Seller is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
Seller has all requisite power to own its properties and carry on the
Business as now conducted by Seller. Seller is duly licensed or
qualified to do business in each jurisdiction in which it is required
to be licensed or qualified, except where the failure to be so licensed
or qualified could not, individually or in the aggregate, be reasonably
expected to have a material adverse effect on the Purchased Assets, the
Business or the financial condition or results of operations of the
Business, taken as a whole (a "Material Adverse Effect").
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(b) In connection with the transactions contemplated hereby,
Seller will cause its subsidiary, MCEL, to, among other things,
Transfer title to the Purchased Assets owned by MCEL to CTS China and
to enter into certain ancillary agreements with CTS China regarding the
operations of the Business located in Tianjin, China. MCEL is a
corporation duly incorporated, validly existing and in good standing
under the laws of China. MCEL has all requisite power to own its
properties and carry on the Business as now conducted by MCEL. MCEL is
duly licensed or qualified to do business in each jurisdiction in which
it is required to be licensed or qualified, except where the failure to
be so licensed or qualified could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(c) In connection with the transactions contemplated hereby,
Seller will cause its subsidiary, METL, to, among other things,
Transfer title to the Purchased Assets owned by METL to CTS Taiwan and
to enter into certain ancillary agreements with CTS Taiwan regarding
the operations of the Business located in Chung-Li, Taiwan. METL is a
corporation duly incorporated, validly existing and in good standing
under the laws of Taiwan. METL has all requisite power to own its
properties and carry on the Business as now conducted by METL. METL is
duly licensed or qualified to do business in each jurisdiction in which
it is required to be licensed or qualified, except where the failure to
be so licensed or qualified could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
5.2. Due Execution. This Agreement and the agreements and
instruments contemplated hereby and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by Seller,
METL and MCEL and each of this Agreement and such other agreements and
instruments has been, or, in the case of agreements and instruments to be
delivered at the Closing, will be as of the Closing, duly and validly executed
and delivered by Seller, METL and MCEL and is, or, in the case of agreements or
instruments to be delivered at the Closing, will be as of the Closing, valid and
binding obligations of Seller, METL and MCEL enforceable against them, to the
extent they are a party, in accordance with their respective terms.
5.3. Effect of Agreement. Except as set forth on Schedule 5.3,
the execution, delivery and performance of this Agreement and the agreements and
instruments contemplated hereby by Seller and the consummation of the
transactions contemplated hereby and thereby will not (i) require the consent,
approval or authorization of any domestic, foreign or other court, government,
governmental agency, authority, entity or instrumentality ("Governmental
Entity"), (ii) violate any Law applicable to Seller, or (iii) conflict with,
violate or constitute a breach of or default (with or without notice or lapse of
time or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or the loss of a benefit, under any (A) Scheduled
Contract that is not an Excluded Contract, (B) any indenture, mortgage, deed of
trust or other agreement or instrument or any other restriction of any kind or
character to which Seller, or any MSub is a party or by which any of them is
bound or with respect to any of the Purchased Assets, or (C) the certificate of
incorporation and bylaws or comparable organizational documents of Seller or any
MSub, except, in each of the foregoing cases, which could not, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect or
have an adverse effect on Seller's ability to consummate the transactions
contemplated hereby.
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5.4. Taxes. (a) Except as set forth on Schedule 5.4, (i)
Seller and MSub have filed or caused to be filed with the appropriate
United States, state, local and foreign Governmental Entities all Tax
Returns required to be filed by them with respect to the Business on or
prior to the Closing Date (taking into account all extensions of due
dates) and Seller and MSub have paid or adequately reserved or provided
for all Taxes shown thereon as owing, except where the failure to file
such Tax Returns or pay any such Taxes would not reasonably be expected
to have a Material Adverse Effect, (ii) there are no Tax Liens,
assessments or Tax liabilities attaching to, or arising from the
Purchased Assets which have not been paid (other than inchoate Tax
Liens), and (iii) to the knowledge of Seller, no Governmental Entity
has proposed any adjustment to any such Tax Return which adjustment
relates to the Business, unless such adjustment has been adequately
provided for or satisfied.
(b) For purposes of this Agreement, (i) "Tax" or "Taxes"
includes all federal, state, local, foreign and other taxes,
assessments, or governmental charges of any kind whatsoever including,
without limitation, income, franchise, capital stock, excise, property,
sales, use, service, service use, leasing, leasing use, gross receipts,
value added, single business, alternative or add-on minimum,
occupation, real and personal property, stamp, workers' compensation,
severance, environmental, transfer, payroll, withholding, employment,
unemployment and social security taxes, or other taxes of the same or
similar nature, together with any interest, penalties or additions
thereon and estimated payments thereof, whether disputed or not, (ii)
"Tax Return" or "Tax Returns" includes all returns, reports,
information returns, forms, declarations, claims for refund, statements
and other documents (including any amendments thereto and including any
schedule or attachment thereto) in connection with Taxes that are
required to be filed with a Governmental Entity or other tax authority,
or sent or provided to another party under applicable Law, and (iii)
"Code" means the Internal Revenue Code of 1986, as amended (all
citations to the Code or to the Treasury Regulations promulgated
thereunder will include any amendments or successor provisions
thereto).
5.5. Litigation. Except as set forth in Schedule 5.5 and
except for matters specifically addressed in Section 5.9, none of Seller or any
of its affiliates is engaged in or a party to any material suit, action, claim,
arbitration or other legal proceeding (equitable, legal or administrative) with
respect to any matter involving the Business or any of the Purchased Assets and,
to Seller's knowledge, no such action, suit, claim, arbitration proceeding or
investigation is pending. Neither Seller nor any of its affiliates is in
material default under the terms of any judgment, order or decree of any
Governmental Entity with respect to the Business or any of the Purchased Assets.
5.6. Title to and Condition of Tangible Purchased Assets.
Except as set forth on Schedule 5.6 and for assets sold not in breach of this
Agreement since the Balance Sheet Date (if this Agreement had been in effect
since the Balance Sheet Date), Seller or MSubs have good and marketable title to
the Included Fixed Assets and any other Purchased Assets that are tangible
personal property (the "Tangible Personal Property"); and at the Closing, Buyer
will receive the Tangible Personal Property free and clear of any Liens except
for (a) Liens which will be discharged upon payment by Buyer of the associated
Assumed Liabilities, (b) Liens which do not detract from the value or interfere
with their present use, or (c) Liens which arise by operation of Law (the items
referred to in clauses (a), (b) and (c), "Permitted Liens"). Except as set forth
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on Schedule 5.6, all of the Tangible Personal Property is in such good operating
condition and repair (normal wear and tear excepted) as is sufficient to operate
the Business as currently operated by Seller and MSubs, is free of any material
defects except such as are normal in the conduct of operations and is suitable
for the purposes for which the Tangible Personal Property is presently used in
the Business.
5.7. Compliance with Laws. Except as set forth on Schedule
5.7, Seller has complied in all material respects with all material state,
federal, domestic, foreign or other statutes, laws, ordinances, rules,
regulations, judgments, orders, injunctions, decrees, rulings and common law
obligations ("Laws") applicable to the operations of the Business. Except as set
forth on Schedule 5.7, neither the operation of the Business nor the ownership
or use of the Purchased Assets materially violates any applicable Law.
5.8. Contracts and Commitments.
(a) Schedule 5.8(a) sets forth a complete and accurate list of
all Contracts to which Seller or any of its affiliates is a party or is
bound that relates primarily to the Business or the Purchased Assets
(other than any of the foregoing that is an Excluded Contract or a
Motorola Customer PO) that is of a type described below (together with
the IP Contracts, as defined in the Intellectual Property Agreement,
the "Scheduled Contracts"):
(i) imposes a purchase right or right of first
refusal or security interest in any Purchased Asset having a
value in excess of $100,000;
(ii) is a warranty or guaranty creating an
obligation, contingent or otherwise, in an amount in excess of
$100,000 in the aggregate given to any customer or other party
by Seller or any of Seller's affiliates with respect to any
Products or to Seller's or any of Seller's affiliates'
performance or the performance of any employees of the
Business (or series of related warranties or guaranties
creating such an obligation) that could reasonably be expected
to result in a liability of Buyer or any of its affiliates in
connection with the Business;
(iii) is a Contract under which Seller or any of
Seller's affiliates has acquired or licensed any real or
personal property or assets of a third party for use in the
Business or under which Seller or any of its affiliates
otherwise uses in the Business any properties or assets of
another party or which are jointly owned by Seller or any of
its affiliates with any other party or parties and used in the
Business, in each case involving property or assets having a
value of more than $100,000, or, aggregate payments of more
than $100,000;
(iv) is a consulting or independent contractor Contract;
(v) is an outstanding customer purchase order;
(vi) is an agreement with an original equipment manufacturer;
(vii) is a distribution, agency or sales representation agreement;
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(viii) requires aggregate annual future payments or
expenditures in excess of $100,000 or having a term of more
than one year that relates to cleanup, abatement or other
actions in connection with environmental liabilities;
(ix) any other Contract which provides for aggregate
annual payments to or from Seller having an aggregate value of
$100,000 or more or having a term of more than one year;
(x) a Contract containing a covenant limiting the
freedom of Seller to engage in any line of business similar to
the Business or to compete with any person or entity in a
business similar to the Business;
(xi) an employment, severance or consulting Contract
with an employee or former employee of the Business that is
not terminable at will by Seller or MSubs, as applicable;
(xii) a collective bargaining agreement relating to Business employees;
(xiii) a Contract for capital expenditures or the
acquisition or construction of fixed assets contemplated to be
used in the Business which requires payments in excess of
$100,000;
(xiv) a license to use computer software (other than
off-the-shelf software marketed to the public generally) used
or held for use in the Business and involving aggregate
payments of more than $100,000;
(xv) a Contract to which Seller or MSubs are a party,
a breach or default under which could reasonably be expected
to have a Material Adverse Effect; or
(xvi) a written or oral Contract pertaining to the
operation of the Business between Seller or any MSub, on the
one hand, and any of their respective affiliates, on the other
hand, including without limitation, any such Contract,
liability or obligation relating to the provision of services
to the Business (which Contracts will be described under the
separate heading "Affiliate Contracts" on Schedule 5.8)
("Affiliate Contracts")
(b) Except as specifically described on Schedule 5.8(b), each
of the Scheduled Contracts was entered into in the ordinary course of
business, is a valid and binding obligation of Seller or a MSub, as
applicable, and, to Seller's knowledge, the other parties thereto, is
freely assignable by Seller or MSubs without the consent of any person,
and is in full force and effect. Except as set forth on Schedule
5.8(b), there is not under any Scheduled Contract (i) any subsisting
default by Seller or, to Seller's knowledge, by any other party thereto
or (ii) to Seller's knowledge, any circumstances which after notice or
lapse of time or both, would constitute a default by Seller or by any
other party, or result in a right to accelerate or terminate or result
in a loss of rights by Seller in each case that could reasonably be
expected to have a Material Adverse Effect. Seller has performed in all
material respects the obligations required to be performed by it
through the date hereof under each of the Scheduled Contracts.
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5.9. Employees; Employee Plans.
(a) Neither Seller nor any of its affiliates has
engaged in a transaction with respect to Seller's Profit Sharing and
Investment Plan or the Motorola, Inc. Pension Plan (together, the
"Retirement Plans") which would reasonably be expected to subject any
Retirement Plan, Parent or Buyer to a material civil or administrative
penalty under ERISA or any other applicable Law or a material tax under
the Code or the tax Laws of any United States jurisdiction in which any
Employee is located. Each of the Retirement Plans has been operated and
administered in all material respects in accordance with applicable
Laws, including without limitation, to the extent applicable, ERISA.
Each Retirement Plan has been administered in accordance with its terms
in all material respects, and each of the Retirement Plans has been
operated, and is in material compliance with the applicable provisions
of ERISA, the Code and all other applicable Legal Requirements. Each
Retirement Plan that is intended to be qualified under Section 401(a)
or 401(k) of the Code is so qualified and has received a favorable
determination letter from the IRS with respect to its qualified status
covering the Tax Reform Act of 1986, and each trust established in
connection with any Retirement Plan that is intended to be exempt from
federal income taxation under Section 501(a) of the Code is so exempt,
and nothing has occurred that has impaired the qualified status of any
such Retirement Plan or tax-exempt status of such trust.
(b) Neither Seller nor any Employee Plan that is a
group health plan within the meaning of Section 5000(b)(1) of the Code
has incurred any material liability under the provisions of Section
4980B(f) of Code. Seller has no liability for contributions to a
multiemployer plan as defined in ERISA Section 3(37) with respect to
any Eligible Employee located in any United States jurisdiction. Except
as set forth on Schedule 5.9(b), no investigation or proceeding is
pending or anticipated by any governmental agency with respect to any
Retirement Plan. Seller has no liability of any kind under Title IV of
ERISA or under Code section 412 that could reasonably be expected to
result in a liability or obligation of Buyer or Parent. Seller is not
engaged in, has no material liability with respect to, and is not a
party to any material suit, action, claim (other than routine claims
for benefits), arbitration or other legal proceeding (equitable, legal
or administrative) with respect to any matter involving any Retirement
Plan or by or on behalf of any Employee, and, to Seller's knowledge, no
such action, suit, claim, arbitration proceeding or investigation is
pending. Except as could not reasonably be expected to have a Material
Adverse Effect, Seller has no liability and is not in default under the
terms of any judgment, order or decree of any Governmental Entity with
respect to any Retirement Plan or any Employee.
(c) Except as set forth on Schedule 5.9(c), as of the
date hereof, neither Seller nor any of its affiliates is a party to any
contract with any union representing Employees and, to the knowledge of
Seller, no union organizational effort relating to Employees is
pending.
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5.10. Environmental Matters.
(a) Except as set forth on Schedule 5.10, Seller is in
compliance in all material respects with all applicable Environmental
Laws with respect to the Business and the Business Real Property. To
the knowledge of Seller, no material violation by Seller is being
alleged of any applicable Environmental Law relating to any of the
Purchased Assets or the use or ownership thereof, or to the operation
of the Business. In respect of the Business, none of Seller or any of
its affiliates has received any written request for information, notice
of violation or noncompliance or notice of the institution or pendency
of any lawsuit, action, proceeding, investigation or claim by any
person or entity alleging any material Environmental Liability or the
existence of an Environmental Condition.
(b) Seller has not caused or taken any action that will result
in, and the Business is not subject to, any material liability or
obligation (including without limitation any obligation to remediate
any Environmental Condition) relating to any Environmental Condition
with respect to the Business, the Purchased Assets or that could
reasonably be expected to be an Assumed Liability. To the knowledge of
Seller, except as set forth on Schedule 5.10, no Environmental
Condition exists with respect to the Business Real Property or the
Business.
(c) For purposes of this Agreement, (i) the term "Environment"
means soil, surface waters, groundwaters, land, surface or subsurface
strata, ambient air or any other environmental medium; (ii) the term
"Environmental Condition" means a condition with respect to the
Environment which is reasonably likely to result in an Indemnifiable
Loss with respect to the Business; (iii) the term "Environmental Law"
means any Law in effect prior to the Closing Date (insofar as they
result in a liability or obligation on or after the Closing Date) or as
of the Closing Date or any order, injunction, judgment, decree, common
law or other enforceable requirement of any Governmental Entity
relating to the protection of the Environment, including without
limitation, any of the foregoing related to (A) any response action,
removal action, remedial action, corrective action, monitoring program,
sampling program, investigation or other cleanup activity pertaining to
any Hazardous Substance, (B) the reporting, licensing, permitting or
investigating of the emission, discharge, release or threatened release
of Hazardous Substances into the air, surface water, groundwater or
land, or (C) the manufacture, release, distribution, use, generation,
treatment, storage, disposal, transport or handling of Hazardous
Substances, (iv) the term "Environmental Liability" means any liability
or obligation arising under Environmental Laws to the extent arising
from any condition existing or any act or omission at or prior to the
Closing Date; and (v) the term "Hazardous Substances" means any
substance or material regulated under applicable Environmental Laws or
gasoline, diesel fuel or other petroleum hydrocarbons or
polychlorinated biphenyls, asbestos or radioactive matter.
5.11. Permits. Except as set forth on Schedule 5.11(a), Seller
and MSubs currently have all the material Permits from all Governmental Entities
as are necessary for the conduct of the Business as currently conducted as of
the date hereof, including without limitation all Permits required under
Environmental Laws, and, except as set forth on Schedule 5.11(b), all such
Permits are assignable to Buyer without the consent, approval, order or
authorization of or registration, declaration or filing with, any Governmental
Entity.
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5.12. Sufficiency of Assets. (a) (i) The assets and properties
listed on Schedule 5.12(a) (the "Shared Assets"), (ii) the Excluded Fixed
Assets, (iii) the assets described in Sections 2.2(a) through 2.2(l), (iv) the
assets and properties the use of which will be provided to Buyer or Buyer Subs,
as applicable, under the Transition Services Agreements and the Joint Use and
Occupancy Agreements, and (v) except for the Permits listed on Schedule 5.11(b),
the assets, properties and rights to be Transferred or licensed to Buyer and
Buyer Subs at the Closing pursuant to this Agreement and the Intellectual
Property Agreement, (A) will constitute all of the properties, assets and rights
used or held for use primarily in the Business and (B) subject to the
acquisition of inventory, equipment and other assets in the ordinary course,
will include all of the properties, assets and rights necessary and sufficient
to permit the continued operation of the Business after the Closing as the
Business is conducted as of the Closing. The Included Fixed Assets, Excluded
Fixed Assets, Shared Assets and the inventories and other tangible personal
property described in Sections 2.1(b) include all of the tangible personal
property of Seller or any of its affiliates that is used or held for use or
relates to the Business (other than assets, properties and rights used by all or
some material portion of the business of Seller other than the Business). Except
for inventory in transit, tools and dies at customer locations, and assets that
are the subject of Section 12.1(b), all tangible property and assets to be
Transferred to Buyer and Buyer Subs pursuant to this Agreement are located at
the Facilities.
(b) The types of Products set forth on Schedule 1, except for
the types of products being discontinued as part of the Rationalization Plan,
MCIC, and VVC's, encompass all of the types of products currently designed,
developed, manufactured, marketed or sold by Seller's and MSubs' Component
Products Division of ACCES.
(c) The individuals providing services specified in Annex A to
the Transition Services Agreements and the Schedules attached thereto and the
Eligible Employees and Seconded Employees will, if employed by Buyer or Buyer
Subs, assuming that Buyer provides corporate-level services of the type
described in the definition of Special Corporate Allocation Amount on Exhibit D,
constitute staffing adequate for Buyer's and Buyer Subs' operation of the
Business as conducted as of the Closing Date.
5.13. Financial Statements. Attached hereto as Schedule 5.13
are an unaudited combined balance sheet of the Business as of September 30, 1998
and the related unaudited combined statements of operations and cash flows of
the Business for the nine months then ended (the "Interim Financial
Statements"). The Interim Financial Statements present fairly, in all material
respects, the consolidated financial position of the Business as of September
30, 1998 and the results of operations and cash flows for the periods specified,
except for the treatment of the real property and fixed assets that are the
subject of the Albuquerque lease and matters related to the treatment of the
Business as a division rather than as a stand-alone entity, in conformity with
United States generally accepted accounting principles, consistently applied
("GAAP"), subject to normal year end adjustments that are not material.
(b) Prior to or on the Closing Date, Seller will deliver to
Buyer audited combined balance sheets of the Business as of December 31, 1996,
December 31, 1997, and December 31, 1998 (such December 31, 1998 balance sheet,
the "Balance Sheet"), the related audited combined statements of operations and
cash flows for the fiscal years then ended, accompanied by the accountant's
reports thereon (collectively, with the related notes, the "Financial
Statements"). The Financial Statements will, as of the Closing Date, present
fairly, in all material
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respects, the consolidated financial position of the Business as of the dates
thereof and the results of operations and cash flows for the periods specified
in conformity with GAAP. (For purposes of this Agreement, "Balance Sheet Date"
means September 30, 1998.)
5.14. Conduct of the Business Since the Balance Sheet Date.
Except as listed or described on Schedule 5.14, and except as a result of
matters required or not prohibited by this Agreement, since the Balance Sheet
Date Seller has not taken any action which would have constituted a violation of
Section 12.1 if Section 12.1 had applied since the Balance Sheet Date and there
has not been any Material Adverse Effect.
5.15. No Undisclosed Liabilities. Seller does not have any
liabilities, whether known, absolute, accrued, contingent or otherwise and
whether due or to become due, including any uninsured liabilities, that would
constitute Assumed Liabilities not otherwise disclosed in this Agreement or the
Schedules hereto, except (i) liabilities incurred in the ordinary course of
business consistent with past practice and not prohibited by this Agreement
which could not reasonably be expected to have a Material Adverse Effect, or
(ii) as set forth in Schedule 5.15.
5.16. Insurance. Seller has made available to Buyer schedules
of all material policies of fire, liability and other forms of insurance
covering occurrences as of, or claims made on, the date hereof and maintained by
Seller to the extent applicable to the Business.
5.17. Real Property. (a) The real property listed on Schedule
5.17 constitutes all of the real property primarily used or held for
use in the Business and owned in fee or leased by Seller or any of its
affiliates, including, without limitation, the real property that is
the subject of the Joint Use and Occupancy Agreements. For purposes of
this Agreement, the "Business Real Property" means the real property
leaseholds included in the Purchased Assets and the portion of the real
property that is the subject of the Joint Use and Occupancy Agreements.
The Business Real Property, and Seller's use of it in the Business,
comply in all material respects with all applicable Laws; and no
condemnation proceedings are pending, or to the knowledge of the
Seller, threatened, with respect to any of the Business Real Property,
nor has any such property been condemned. Seller has access to public
roads or valid easements over private streets or private property for
such ingress to and egress from each parcel of the Business Real
Property as is necessary for the conduct of the Business as conducted
as of the date hereof. All buildings, parking lots, plants and
structures included in the Business Real Property lie wholly within the
boundaries of the real property owned by Seller or MSubs, as
applicable, in each case and do not encroach upon the property, or
otherwise conflict with the property rights, of any other Person.
Seller or a MSub, as applicable, own or hold their interest in the
Business Real Property, free and clear of all Liens other than (i) as
listed or described on Schedule 5.17, (ii) other Permitted Liens, (iii)
Liens that arise under zoning, land use and other similar Laws, which
do not materially impair the continued use of the property subject
thereto in the Business as presently conducted, and (iv) easements,
covenants, rights-of-way and other encumbrances or restrictions,
whether recorded or unrecorded, which do not materially impair the
continued use of the property subject thereto in the Business as
presently conducted.
(b) Each of the interests in the Business Real Property that
is comprised of the tenant's or subtenant's interest in real property
(each, a "Leasehold Property") is
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identified under the heading "Leased Real Properties" on Schedule 5.17.
Seller or a MSub, as applicable, have a valid and subsisting leasehold
estate in and the right to quiet enjoyment of each Leasehold Property
for the full term of the lease or sublease creating such interest.
Seller or a MSub, as applicable, hold all right, title and interest in
and to each right or option, if any, to purchase, expand the premises,
or renew or extend the term with respect to any Leasehold Property set
forth in the applicable lease, sublease or other controlling documents.
Seller or a MSub, as applicable, is in sole possession of each parcel
of Leasehold Property. Each lease, sublease or other controlling
document with respect to each Leasehold Property is in full force and
effect and is the legal, valid and binding agreement, enforceable in
accordance with its terms, with respect to Seller or a MSub, as
applicable, and, to the Seller's knowledge, each other party thereto.
Except as set forth on Schedule 5.17 specifically with respect to an
individual Leasehold Property, (i) there is no default by Seller or a
MSub, as applicable, or, to the best of Seller's knowledge, by any
other party under any lease, sublease or other controlling document
with respect to any Leasehold Property, and Seller and MSubs are not
aware of any fact or circumstance that, with the giving of notice or
lapse of time or both, would constitute a default thereunder, (ii) the
copy of the lease, sublease or other controlling document provided to
Buyer is accurate and complete in all material respects and has not
been amended, and (iii) each Leasehold Property consists of an
independent unit which does not rely upon any drainage, sewer, access,
structural or other facilities located on any property not included in
the Leasehold Property to fulfill (A) any zoning Laws, land use
restrictions, building code or other requirement of any governmental
authority, (B) structural support, (C) to furnish the Leasehold
Property with any essential systems or utilities, or (D) to operate the
Leasehold Property as heretofore operated by Seller and MSubs. Neither
Seller nor MSubs owe any brokerage or similar commissions with respect
to any Leasehold Property.
(c) Seller has good and marketable title to the Business Real
Property identified under the heading "Owned Real Properties" on
Schedule 5.17, subject only to Permitted Liens and the other matters
referred to in the last sentence of Section 5.17(a).
5.18. Affiliate Agreements and Liabilities. Except for the
Affiliate Contracts, Motorola Customer PO's or as expressly contemplated by this
Agreement, there are no written or oral Contracts, relating primarily or in any
material part to the operation of the Business between Seller or any MSub, on
the one hand, and any of their respective affiliates, on the other hand,
including without limitation, any such Contract, relating to the provision of
services to the Business.
5.19. Certain Limitations on Representations and Warranties.
Any representation or warranty made in this Agreement by Seller will be deemed
for all purposes to be qualified by the disclosures made in any schedule
specifically referred to in such representation or warranty and by the
information disclosed in any other schedule if the relevance of such information
to such representation or warranty is reasonably apparent on its face.
5.20. Products Liability. Except as set forth on Schedule
5.20, to the knowledge of Seller, there are no citations or decisions by any
Governmental Entity that any Product manufactured, marketed or distributed by
Seller is defective, fails to meet any standards promulgated by such
Governmental Entity or is misbranded and no Governmental Entity has
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ordered a recall of, or voluntary corrective action with respect to, a Product
manufactured, marketed or distributed by Seller. Except as set forth on Schedule
5.20, to the knowledge of Seller, Seller has no liability for breach of any
express or implied product warranty arising out of a Product design,
manufacturing or process defect.
5.21. Warranty Acknowledgment. The representations and
warranties of Buyer and Parent set forth in this Agreement, the Intellectual
Property Agreement and the other agreements to be executed and delivered at the
Closing are the only representations and warranties made by Buyer, Parent and
Buyer Subs with respect to the transactions contemplated hereby and thereby.
5.22. WARN Act. Since September 30, 1998, to the extent
applicable, Seller has complied in all material respects with the Worker's
Adjustment and Retraining Notification Act of 1988, as amended, including by
furnishing any required notice of any "plant closing" or "mass layoff," as
applicable, in respect of any termination of Employees or Former Employees.
6. Representations and Warranties of Buyer. Buyer hereby represents and
warrants to Seller as of the date hereof and as of the Closing the following:
6.1. Organization. Parent is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Indiana;
Buyer is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware; CTS China will as of the Closing be
duly incorporated, validly existing and in good standing under the laws of the
People's Republic of China; and CTS Taiwan will as of the Closing be duly
incorporated, validly existing and in good standing under the laws of Taiwan.
Each of Parent and Buyer has, and each of CTS China and CTS Taiwan as of the
Closing will have, the requisite corporate power to own its properties and carry
on its business as now conducted or, with respect to CTS China and CTS Taiwan,
as conducted as of the Closing. Each of Parent and Buyer is, and each of CTS
China and CTS Taiwan as of the Closing will be, duly licensed or qualified to do
business in each jurisdiction in which it is required to be licensed or
qualified, except where the failure to be so licensed or qualified could not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on Parent's, Buyer's, CTS China's or CTS Taiwan's ability to
consummate the transactions contemplated hereby.
6.2. Due Execution. This Agreement and the agreements and
instruments contemplated hereby and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of Parent and Buyer and each of this Agreement and such other
agreements and instruments has been or, in the case of agreements and
instruments to be delivered at the Closing, will be as of the Closing, duly and
validly executed and delivered by Parent, Buyer and the Buyer Subs and is, or,
in the case of agreements and instruments to be delivered at the Closing, will
be as of the Closing, valid and binding obligations of each of Parent, Buyer and
the Buyer Subs enforceable against them, to the extent they are a party, in
accordance with their respective terms.
6.3. Effect of Agreement. Except for the consents set forth
Schedule 8.3, the execution, delivery and performance of this Agreement and the
agreements and instruments contemplated hereby by each of Parent, Buyer and the
Buyer Subs and consummation of the transactions contemplated hereby and thereby
will not (i) require the consent, approval or
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authorization of any Governmental Entity, (ii) violate any Law applicable to
Parent, Buyer or any Buyer Sub, or (iii) conflict with, violate or constitute a
breach of or default (with or without notice or lapse of time or both) under the
certificate of incorporation, bylaws, or any indenture, mortgage, deed of trust
or other agreement or instrument, or any order, judgment, award, decree,
statute, ordinance, regulation or any other restriction of any kind or
character, to which Parent, Buyer or any Buyer Sub is a party, or by which
Parent, Buyer or any of their assets or properties is bound.
6.4. Litigation. None of Parent, Buyer or any Buyer Sub is
engaged in or a party to any material suit, action, claim, arbitration or other
legal proceeding (equitable, legal or administrative) that could reasonably be
expected to have a material adverse effect on Parent's, Buyer's or any Buyer
Subs' ability to consummate the transactions contemplated hereby and, to the
knowledge of the senior executives of Parent, no such action, suit, claim,
arbitration proceeding or investigation is pending. Neither Buyer nor any of its
affiliates is in material default under the terms of any judgment, order or
decree of any Governmental Entity that could reasonably be expected to have a
material adverse effect on Parent's, Buyer's or any Buyer Subs' ability to
consummate the transactions contemplated hereby.
6.5. Warranty Disclaimer. The representations and warranties
of Seller set forth in this Agreement, the Intellectual Property Agreement and
the other agreements to be executed and delivered at the Closing are the only
representations and warranties made by Seller or MSubs to Buyer, Parent and
Buyer Subs with respect to the transactions contemplated hereby and thereby.
7. Closing.
7.1. Closing. (a) Subject to the fulfillment or waiver of the
conditions precedent set forth in this Agreement, the consummation of
the transactions contemplated hereby (the "Closing") will take place
10:00 a.m., (Chicago time) at the offices of Seller at the Galvin
Center, Schaumburg, Illinois, on the last day of Seller's accounting
period for the month of February 1999 (the "Closing Date"), or such
other date as provided in Section 7.1(b), provided, however, that such
place and/or time of day may be changed by the mutual consent of Seller
and Buyer. All acts and transactions to be taken or effected at the
Closing will be deemed to have been taken simultaneously and will be
deemed to be effective as of the close of business (Chicago time) on
the Closing Date.
(b) Subject to Sections 7.4, 8 and 9, if the Closing has not
occurred by the date specified in Section 7.1(a) as a result of the
failure of any of the conditions set forth in Sections 8.2, 8.3, 8.5,
9.2, 9.3 or 9.5 to have been satisfied or waived, then the Closing Date
will be extended to the Business Day after the conditions set forth in
Sections 8.2, 8.3, 8.5, 9.2, 9.3 and 9.5 have been satisfied.
7.2. Deliveries at Closing by Seller. At the Closing, Seller
will deliver or cause to be delivered to Buyer the following instruments, duly
executed:
(a) an Assignment and Assumption Agreement in the form attached hereto as
Exhibit E (the "Assignment and Assumption Agreement");
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(b) (i) a Bill of Sale with respect to Purchased Assets
located in the United States in the form attached hereto as Exhibit
F-1; (ii) a Bill of Sale with respect to Purchased Assets located in
China in the form attached hereto as Exhibit F-2; and (iii) a Bill of
Sale with respect to the Purchased Assets located in Taiwan in the form
of Exhibit F-3 (the items referred to in the preceding clauses (i) -
(iii) collectively, the "Evidence of Transfer Agreements");
(c) the Intellectual Property Agreement and the documents to be delivered by
Seller at Closing pursuant thereto;
(d) the (i) Transition Services Agreement (Schaumburg) in the
form attached hereto as Exhibit G-1; (ii) Transition Services Agreement
(Scottsdale) in the form attached hereto as Exhibit G-2; (iii)
Transition Services Agreement (Albuquerque/MCIC) in the form attached
hereto as Exhibit G-3-a and Transition Services Agreement
(Alburquerque/Buyer) G-3-b; (iv) Transition Services Agreement (China)
in the form attached hereto as Exhibit G-4; and (v) Transition Services
Agreement (Taiwan) in the form attached hereto as Exhibit G-5 (the
items referred to in the preceding clauses (i) - (v) collectively, the
"Transition Services Agreements");
(e) the (i) Joint Use and Occupancy Agreements with respect to
the Tainjin China Facilities in the form attached hereto as Exhibit H-1
and Exhibit H-2; (ii) Joint Use and Occupancy Agreement with respect to
the Chung-Li, Taiwan Facility in the form attached hereto as Exhibit
H-3; (iii) Joint Use and Occupancy Agreement with respect to the
Albuquerque, New Mexico Facility in the form attached hereto as Exhibit
H-4; (iv) Joint Use and Occupancy Agreement with respect to the
Schaumburg, Illinois Facility in the form attached hereto as Exhibit
H-5; and (v) Joint Use and Occupancy Agreement with respect to the
Scottsdale, Arizona Facility in the form of Exhibit H-6 (the items
referred to in the preceding clauses (i) - (v) collectively, the "Joint
Use and Occupancy Agreements");
(f) agreement regarding a strategic supplier relationship in
the form attached hereto as Exhibit I (the "Strategic Supplier
Agreement");
(g) the 401(k) Transfer Agreement;
(h) Pension Transfer Agreement;
(i) an Assignment and Assumption Agreement with respect to the
Albuquerque Lease in the form attached hereto as Exhibit J-1 (the
"Albuquerque Assignment"); the Guaranty in the form attached hereto as
Exhibit J-2 (the "Guaranty"), and the Mortgage in the form attached
hereto as Exhibit J-3 (the "Mortgage").
(j) the Secondment Agreements in the form attached as Exhibit
K with respect to the individuals to be seconded pursuant to Section
13.6 (the "Secondment Agreements");
(k) the Sales Representation Agreement in the form attached as Exhibit L (the
"Sales Representation Agreement");
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(l) the Reimbursement Agreement in the form attached as Exhibit M (the
"Reimbursement Agreement");
(m) a certificate of Seller dated the Closing Date, certifying to the
fulfillment of
the conditions specified in Section 8.1 of this Agreement; and
(n) a Co-Hab Agreement substantially in the form attached as
Exhibit N with respect to the sales office locations listed on the
cover page of Exhibit N under the caption "Co-Hab Locations" (the
"Co-Hab Agreements").
7.3. Deliveries at Closing by Buyer. At the Closing,
Buyer will deliver or cause to be delivered to Seller
the following instruments, duly executed:
(a) Evidence reasonably satisfactory to Seller that CTS
Taiwan and CTS China have received the Permits listed
on Schedule 8.6;
(b) the portion of the Purchase Price due at Closing paid
in accordance with Section 4.1(b);
(c) the Assignment and Assumption Agreement;
(d) the Evidence of Transfer Agreements;
(e) the Intellectual Property Agreement;
(f) the Transition Services Agreements;
(g) the Joint Use and Occupancy Agreements;
(h) the Strategic Supplier Agreement;
(i) the 401(k) Transfer Agreement;
(j) the Pension Transfer Agreement;
(k) the Albuquerque Lease Assignment, the Guaranty
and the Mortgage;
(l) the Secondment Agreements;
(m) the Sales Representation Agreement;
(n) the Reimbursement Agreement;
(o) the Co-Hab Agreements; and
(p) a certificate of Buyer dated the Closing Date for
such Closing, certifying to the fulfillment of the
conditions specified in Section 9.1 of this
Agreement.
7.4. Consummation of Transactions. Without limiting the
generality or effect of any provision of Sections 8
and 9, prior to the Closing, each of the parties
hereto agrees to use all
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reasonable efforts with due diligence and good faith to satisfy promptly all
conditions required hereby to be satisfied by such party in order to expedite
the consummation of the transactions contemplated hereby. Parent and Buyer will
use all reasonable efforts to obtain the financing described in Section 8.7.
8. Conditions Precedent to Buyer's Obligations. All obligations of
Buyer hereunder are subject to the fulfillment on or before the Closing Date of
each of the following conditions:
8.1. Accuracy of Representations and Fulfillment of Covenants.
(a) All representations and warranties of Seller contained in this Agreement
that are qualified as to materiality shall be true and correct, and the
representations and warranties of Seller contained in this Agreement that are
not so qualified shall be true and correct in all material respects, in each
case, on and as of, the Closing Date as though such representations and
warranties had been made upon, and as of, such date, (b) Seller shall have
performed and complied in all material respects, in each case with all of its
covenants, agreements, and obligations hereunder required to be performed or
complied with on or before the Closing, and (c) Seller shall have delivered to
Buyer a certificate certifying each of the foregoing, dated the Closing Date and
signed by one of Seller's senior officers to the foregoing effect, provided,
however, that such certificate may disclose specific facts or circumstances
arising after the date hereof which would cause clause (a) of this sentence to
be untrue (a "Disclosed Breach"). If such certificate contains a Disclosed
Breach and Buyer and Parent nonetheless decide to Close, Buyer and Seller will
prior to Closing negotiate in good faith to determine the dollar amount of
indemnification or other resolution, if any, in respect of the Disclosed Breach
and payment by Seller of the dollar amount so determined will, in the event of
an Indemnifiable Loss reasonably foreseeable to relate to, result from or arise
out of such Disclosed Breach, be deemed to be in full satisfaction of Seller's
indemnification obligation under Section 11.1(a)(iii) with respect to such
Indemnifiable Loss .
8.2. Litigation. At the Closing Date, there shall be no
litigation pending or, to the best of Seller's knowledge, threatened, in which
any preliminary or permanent injunction or temporary restraining order or other
judicial or administrative order or decree in any jurisdiction is or may be
sought to prevent the transactions contemplated hereby, declare unlawful the
transactions contemplated hereby or cause such transactions to be rescinded.
8.3. Consents. Seller shall have obtained all consents
identified on Schedule 8.3.
8.4. Delivery of Documents. Seller shall have delivered the
documents, instruments and certificates identified in Section 7.2, in each case
duly executed by Seller and any of its affiliates party thereto.
8.5. Hart-Scott-Rodino. The waiting period under the HSR Act
required to permit the consummation of the transactions provided for herein
shall have expired or been terminated.
8.6. Permits. Buyer shall have obtained the consents and Permits listed on
Schedule 8.6.
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8.7. Financing. Buyer shall have obtained financing on
commercially reasonable terms that is sufficient to fund the payment of the
Purchase Price and shall have received the proceeds thereof.
9. Conditions Precedent to Obligations of Seller. All obligations of
Seller hereunder are subject to the fulfillment on or before the Closing Date of
each of the following conditions:
9.1. Accuracy of Representations and Fulfillment of Covenants.
All representations and warranties of Buyer contained in this Agreement that are
qualified as to materiality shall be true and correct, and the representations
and warranties of Buyer contained in this Agreement that are not so qualified
shall be true and correct, in all material respects, in each case on, and as of,
the Closing Date as though such representations and warranties had been made
upon, and as of, such date, and Parent and Buyer shall have performed and
complied in all material respects with all of its covenants, agreements and
obligations hereunder required to be performed or complied with on or before the
Closing.
9.2. Litigation. At the Closing Date, there shall be no
litigation pending or to the best of Buyer's knowledge, threatened in which any
preliminary or permanent injunction or temporary restraining order or other
judicial or administrative order or decree in any jurisdiction is or may be
sought to prevent the transactions contemplated hereby, declare unlawful the
transactions contemplated hereby or cause such transactions to be rescinded.
9.3.Consents. Buyer shall have obtained all consents identified on Schedule
9.3.
9.4. Delivery of Documents. Buyer shall have delivered the
Closing Payment and the documents, instruments and certificates identified in
Section 7.3, in each case duly executed by Buyer and any of its affiliates party
thereto.
9.5. Hart-Scott-Rodino. The waiting period under the HSR Act
required to permit the consummation of the transactions provided for herein
shall have expired or been terminated.
10. Risk of Loss. Any risk of loss or damage to the Purchased Assets
will be borne by Seller until the Closing at which time risk of loss and title
thereto will pass to Buyer.
11. Indemnity and Survival of Representations.
11.1. Indemnification.
(a) Indemnification Obligation of Seller. Seller hereby agrees
to indemnify, defend and hold harmless Parent, Buyer and their
respective affiliates and their respective directors, officers,
employees, agents and representatives (including any successor to any
of the foregoing) (each of such person, a "Buyer Indemnitee" ) from and
against any and all losses, costs, claims, demands, actions, suits,
proceedings (or settlement or compromise thereof) damages, liabilities
or expenses (including court costs and reasonable attorneys' fees and
expenses) incurred by them ("Indemnifiable Losses") relating to,
resulting from or arising out of (i) any Excluded Liability, (ii) the
breach by Seller of any
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covenant contained herein, or in any other agreement executed in
connection herewith, including, without limitation, the Intellectual
Property Agreement and the Reimbursement Agreement, (iii) the breach of
any representation or warranty of Seller contained in this Agreement,
or in any other agreement executed in connection herewith, including,
without limitation, the Intellectual Property Agreement (until such
representation or warranty has ceased to survive pursuant to Section
11.2), and (iv) any Extraordinary Warranty Claims. For purposes of this
Section 11, "Extraordinary Warranty Claims" means the total amount of
Indemnifiable Losses of the Buyer Indemnitees in excess of $973,000 in
the aggregate with respect to claims (provided such claims are asserted
by a third party prior to the end of the nine month anniversary of the
Closing Date) under Buyer's or Buyers Subs' standard express or implied
warranties (including returns) in respect of Products sold during the
period commencing on the Closing Date and ending on the close of
business on the 75th calendar day after the Closing Date for defects in
materials or workmanship in the manufacture of such Products, including
in connection with any recall of Products; provided that in no event
will Buyer Indemnitees be entitled to indemnification under Section
11.1(a)(iv) for Extraordinary Warranty Claims in excess of $3,000,000
in the aggregate.
(b) Indemnification Obligation of Parent and Buyer. Buyer and
Parent hereby agree to indemnify, defend and hold harmless Seller and
its affiliates and their respective directors, officers, employees,
agents and representatives (including any successor to any of the
foregoing) (each such person, a "Seller Indemnitee") from and against
any and all Indemnifiable Losses relating to, resulting from or arising
out of (i) any Assumed Liability, (ii) the breach by Buyer or Parent of
any covenant contained herein, or in any other agreement executed in
connection herewith, including, without limitation, the Intellectual
Property Agreement, (iii) the breach of any representation or warranty
of Buyer or Parent contained in this Agreement, or in any other
agreement executed in connection herewith, including, without
limitation, the Intellectual Property Agreement (until such
representation or warranty has ceased to survive pursuant to Section
11.2 hereof), and (iv) the operation of the Business and ownership of
the Purchased Assets by Buyer or any of its affiliates, successors or
assigns after the Closing Date.
(c) Limits on Indemnification Obligation. The indemnification
obligations of Seller, Parent and Buyer pursuant to this Section 11 are subject
to the following:
(i) Buyer Indemnitees will not be entitled to be indemnified
under Section 11.1(a)(iii) (other than for breach of the representation
and warranty in Section 5.9(a) with respect to a Third Party Claim or
for breach of the representation and warranty in Section 5.12) until
such time as the aggregate Indemnifiable Losses indemnified under such
Sections exceeds $500,000 (in which event the Buyer Indemnitees will be
entitled only to the excess of such Indemnifiable Losses over
$500,000); and Seller Indemnitees will not be entitled to be
indemnified under Section 11.1(b)(iii) until such time as the aggregate
Indemnifiable Losses indemnified under such Sections exceeds $500,000
(in which event the Seller Indemnitees will be entitled only to the
excess of such Indemnifiable Losses over $500,000); and
(ii) In no event will Buyer Indemnitees be entitled to
indemnification under Section 11.1(a)(ii) (other than for a breach of
Sections 2.1 or 12.7) or Section 11.1(a)(iii)
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(other than for breach of the representation and warranty in Section
5.12) in excess of the sum of $74,800,000 plus 55% of the amount paid
pursuant to Section 4.1(a)(iii) during the previous 24 months (such
sum, the "Indemnification Cap Amount"), and in no event will Seller
Indemnitees be entitled to indemnification under Section 11.1(b)(ii)
(other than for a breach of Section 4.1) or Section 11.1(b)(iii) in
excess of the Indemnification Cap Amount;
(iii) In no event will Buyer Indemnitees be entitled to
indemnification under Section 11.1(a)(iii) for a breach of the
representation and warranty in Section 5.12 or to payments of money
pursuant to Section 11.1(d) in excess in the aggregate of the sum of
$136,000,000 plus the amount paid pursuant to Section 4.1(a)(iii)
during the period for which such representation and warranty survives
pursuant to Section 11.2 (the "Sufficiency Rep Cap");
(iv) (A) in the absence of fraud on the part of the breaching
party, (B) except for Indemnifiable Losses for which a party is
entitled to indemnification pursuant to Section 11.1(a)(i) or
11.1(b)(i), as applicable, and (C) except for indemnification under
Section 11.1(a)(ii) for breach of any of the agreements of Seller in
Sections 2.1 or 12.7, IN NO EVENT WILL SELLER, PARENT, BUYER OR ANY OF
THEIR RESPECTIVE AFFILIATES BE LIABLE FOR SPECIAL, INCIDENTAL,
INDIRECT, COLLATERAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION
WITH ANY INDEMNIFIABLE LOSS ARISING OUT OF THE BREACH OF ANY
REPRESENTATION, WARRANTY OR COVENANT OF THIS AGREEMENT, THE
INTELLECTUAL PROPERTY AGREEMENT OR THE REIMBURSEMENT AGREEMENT (1) in
excess of 50% of the Indemnification Cap or the Sufficiency Rep Cap
that would otherwise apply to the indemnification for such breach or
(2) for which a claim for indemnification is first asserted in
accordance with the last sentence of Section 11.2 after the first
anniversary of the Closing Date (it being understood that any
Indemnifiable Loss that constitutes the type of damages specified in
this Section 11.1(c)(iv) will also be subject to the aggregate
limitations on liability set forth in Section 11.1(c)(ii) or (iii), as
applicable); and
(v) In the absence of intentional and willful fraud by Seller,
Parent and Buyer's sole recourse following the Closing for any breach
by Seller of any representation, warranty or agreement contained in
this Agreement, the Intellectual Property Agreement and the
Reimbursement Agreement will be the provisions of this Section 11.1
and, in the absence of intentional and willful fraud by Parent or
Buyer, Seller's sole recourse following the Closing for any breach by
Parent or Buyer of any representation, warranty or agreement contained
in this Agreement, the Intellectual Property Agreement or the
Reimbursement Agreement will be the provisions of this Section 11.1.
(d) Sufficiency of Assets Remedy. (i) Without limiting the
generality or effect of this Section 11, in the event of a breach of
Section 5.12 (other than Section 5.12(c)), whether discovered prior to,
on or after the Closing Date, Seller will promptly (or if such breach
is discovered prior to the Closing, on the Closing Date) deliver to
Buyer or a Buyer Sub, as Buyer directs, such assets, properties or
rights as are sufficient to cure such breach. In the event of a breach
of Section 5.12(c), Seller will provide the services that would have
been provided by such staff pursuant to the
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Transition Services Agreement as a Transition Service (as defined in
the relevant Transition Services Agreement), and the fee for such
Transition Service will be 130% of such individual's hourly rate,
calculated based on such individual's annual salary and assuming a 40
hour work week.
(ii) On or promptly upon written request from Buyer after the
Closing Date, Seller will reimburse Buyer or Buyer Subs, as applicable,
for the cost of replacing the specific assets identified as "Shared
Assets" on Schedule 5.12(a).
(iii) Buyer will use its reasonable efforts to notify Seller
of any potential claims under this Section 11.1(d), as promptly as is
practicable after Buyer becomes aware of any such claim, provided,
however, that Buyer's failure to so notify Seller will not affect
Seller's obligations pursuant to this Section 11.1(d).
(e) Notice and Defense of Claims. With respect to each third
party claim subject to this Section 11 (a "Third Party Claim"), the
party seeking indemnification (the "Indemnified Party") must give
prompt notice to the indemnifying party (the "Indemnifying Party") of
the Third Party Claim. The Indemnifying Party may, at its sole cost and
expense, upon notice to the Indemnified Party within 30 days after the
Indemnifying Party receives notice of the Third Party Claim, assume the
defense of the Third Party Claim, with counsel of its choice. The
Indemnifying Party will not consent to a settlement of, or the entry of
any judgment arising from, any Third Party Claim, unless (i) the
settlement or judgment is solely for money damages, or (ii) the
Indemnified Party consents thereto, which consent will not be
unreasonably withheld. The Indemnifying Party will provide the
Indemnified Party with 30 days prior notice before it consents to a
settlement of, or the entry of a judgment arising from, any Third Party
Claim. The Indemnified Party will be entitled to participate in the
defense of (but not control) any Third Party Claim, the defense of
which is assumed by the Indemnifying Party, with its own counsel and at
its own expense. The parties will cooperate in the defense of any Third
Party Claim and the relevant records of each party will be made
available on a timely basis. If the Indemnifying Party does not assume
the defense of any such claim or proceeding resulting therefrom in
accordance with the terms hereof, the Indemnified Party may defend such
claim or proceeding in a reasonable manner, including settling such
claim or proceeding on such terms as the Indemnified Party may deem
appropriate after giving 30 days' notice of the same to the
Indemnifying Party and obtaining the consent of the Indemnifying Party,
which consent will not be unreasonably withheld. The Indemnifying Party
will be liable for the reasonable fees and expenses of counsel employed
by the Indemnified Party if the Indemnifying Party has not assumed the
defense thereof. Whether or not the Indemnifying Party chooses to
defend or prosecute any claim involving a third party, all the parties
hereto will cooperate in the defense or prosecution thereof and will
furnish such records, information and testimony, and attend such
conferences, discovery proceedings, hearings, trials and appeals, as
may be reasonably requested in connection therewith.
(f) Offset of Benefits. In determining the amount of any
Indemnifiable Loss recoverable under this Section 11, the parties agree
to take into account any tax savings and insurance recoveries of the
Claiming Party (net of costs, if any, incurred in connection with such
benefits), so that the amount claimed hereunder equals the net amount
thereof.
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If any amounts are recoverable pursuant to this Section 11 are covered
by insurance, the parties will use all reasonable efforts to recover
such amount of such Indemnifiable Loss from the insurer of such
insurance which recovery will reduce the amount hereunder.
(g) Subrogation. Upon making any indemnity payment the
Indemnifying Party will, to the extent of such indemnity payment, be
subrogated to all rights of the Indemnified Party against any third
person that is not an affiliate of the Indemnified Party or an insurer
of the Indemnified Party in respect of the Indemnifiable Loss to which
the indemnity payment relates; provided, however, that (i) the
Indemnifying Party will then be in compliance with its obligations
under this Agreement in respect of such Indemnifiable Loss and (ii)
until the Indemnified Party recovers full payment of its Indemnifiable
Loss, any and all claims of the Indemnifying Party against any such
third person on account of said Indemnity Payment will be subrogated
and subordinated in right of payment to the Indemnified Party's rights
against such third person. Without limiting the generality or effect of
any other provision hereof, each such Indemnified Party and
Indemnifying Party will duly execute upon request all instruments
reasonably necessary to evidence and perfect the above-described
subrogation and subordination rights.
11.2. Survival of Representations and Warranties. Each of the
representations and warranties contained in this Agreement and the Intellectual
Property Agreement will survive the Closing and remain operative and in full
force and effect, regardless of any investigation made by or on behalf of
Parent, Buyer or Seller, until the second anniversary of the Closing Date,
provided, however, the representations and warranties contained in Section 5.4
will survive the Closing and remain in full force and effect until the
expiration of the statute of limitations under the applicable statute and
regulation and the representations and warranties contained in Section 5.12 will
survive the Closing and remain in full force and effect until the later of (a)
the second anniversary of the Closing Date and (b) to the extent a breach of the
representations and warranties contained in Section 5.12 relates to assets
required for use primarily at a particular Facility, the 90th day after Buyer
and Buyer Subs no longer conduct the Business at the Facility. Any claim for
indemnification with respect to any of such matters which is not asserted by a
notice given as herein provided specifically identifying the particular breach
underlying such claim (whether or not the Indemnifiable Loss has been actually
incurred as of the date of such notice) and the facts and Indemnifiable Loss
relating thereto (to the extent reasonably determinable as of the date of such
notice), within such specified periods of survival may not be pursued and is
hereby irrevocably waived.
12. Covenants and Agreements.
12.1. Operation of the Business; Buyer's Right to Excluded
Assets. (a) Except pursuant to the Rationalization Plan as described on Schedule
12.1(a), as expressly contemplated herein or as otherwise consented to by Buyer
in writing, prior to the Closing, Seller will and will cause MSubs to:
(i) Use reasonable efforts to keep the Business intact and not
take or permit to be taken or do or suffer to be done anything other
than in the ordinary course of business of the Business as presently
conducted, and use reasonable efforts to preserve and maintain the
goodwill associated with the Business and the ordinary and customary
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relationships of the Business with the customers, suppliers, distributors,
licensors and others having business relationships with it;
(ii)Continue existing practices relating to the
maintenance of the Purchased Assets;
(iii) Not purchase, sell, lease or dispose of, or enter into
any lease, agreement or other contract for the purchase, sale, lease or
disposition of, or subject to Lien, any of the Purchased Assets other
than (i) Products, (ii) in the ordinary course of business of the
Business, or (iii) pursuant to any Contract listed or described on
Schedule 5.8(a) or that would be listed or described on Schedule 5.8(a)
but for a dollar, time or other exclusion or exception in Section
5.8(a);
(iv) Not increase the rate of compensation of any Employee or
promote any Employee, except (i) as required by Law, (ii) in the
ordinary course of business consistent with past practice, or (iii)
pursuant to a Scheduled Contract;
(v) Not create or incur any Indebtedness or liability other
than in the ordinary course of business, or guarantee any Indebtedness
or other liability of any other person, in each case that would
constitute an Assumed Liability;
(vi) Not enter into any employment Contract with respect to
any Employee that is not either an Excluded Contract or terminable at
will without liability to Buyer or Parent;
(vii) Not enter into any Contract that would have been a
Scheduled Contract or a Motorola Customer PO had it been in existence
on the date of this Agreement or materially modify any Scheduled
Contract, provided however, that for purposes of this Section 12.1(g),
the dollar amounts in Section 5.8 will be deemed to be $250,000 and
provided further that this Section 12.1(a)(vii) will not apply to
purchase orders for Products that are (A) at prices consistent with
Seller's past practices, (B) with customers other than the customers
listed on Schedule 12.1(a)(vii), and (C) reasonably expected to have
expired or been filled within one year;
(viii) Not cancel any debts (other than accounts receivable
that are Excluded Assets) or waive any claims or rights pertaining to
the Business except in the ordinary course of business;
(ix) Not voluntarily take any action that would result in a
breach of any representation or warranty of Seller hereunder that is
qualified by materiality or a material breach of any representation or
warranty of Seller hereunder that is not so qualified;
(x) Not pay accounts payable other than when due and
consistent with past practice except to the extent such account is
subject to a bona fide dispute with the account creditor;
(xi) Not dispose of, permit to lapse or otherwise fail to
preserve any of the rights in the Acquired Intellectual Property, enter
into any Contract with respect to the Acquired Intellectual Property
except for ordinary course non-disclosure Contracts in
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favor of Seller which will be Acquired Contracts, or amend any Contract
relating thereto, or dispose of or disclose to any person other than an
authorized representative of Buyer, any trade secret;
(xii) Not dispose of or permit to lapse any material Permit;
(xiii) Make the capital expenditures as contemplated by Schedule
12.1(a)(xiii);
(xiv) Not settle or compromise or agree to settle any claim
related to the Business which is in excess of $50,000 against any
person unless such claim is an Excluded Liability;
(xv)Not make any change in the accounting methods, principles or practices of
the Business, except as required by GAAP;
(xvi) Not dispose of any assets, properties or rights used or
held for use primarily in the Business (other than Excluded Assets and
inventories of Products in the ordinary course of business to satisfy
customer purchase orders);
(xvii) Not enter into any Contract with any third party
relating to patents, inventions, copyrights, trademarks and know how of
the Business;
(xviii) Timely file, prosecute, maintain and keep in effect
the Assigned Motorola Patents and Inventions (each as defined in the
Intellectual Property Agreement), as it would in the ordinary course of
business, however, if in the ordinary course of business, Seller
determines to drop or abandon any such Assigned Motorola Patent or
Invention, Seller will use reasonable efforts to timely advise Parent,
and Parent will have the right to request Seller to maintain or file
such matter at Parent's sole expense (and Buyer and Parent will not be
entitled to collect from or assert any claims against employees of
Seller for errors in the filing, prosecution, maintenance and keeping
in effect of the Assigned Motorola Patents and Inventions); and
(xix) Not amend any Retirement Plan to change the level of
benefits with respect to Eligible Employees.
(b) From and after the date hereof, Seller will not dispose of
any of the Excluded Fixed Assets without first offering to Transfer
such assets, properties or rights to Buyer or Buyer Sub (as Buyer
elects) without the payment of additional consideration by Buyer, any
Buyer Sub or Parent, provided, however, that Seller will have no
further obligation under this Section 12.1(b) as to assets and
properties not identified by Buyer in writing to Seller within three
months after the date hereof. In the event that Buyer elects to accept
Seller's offer pursuant to this Section 12.1(b), such assets,
properties and rights will be Transferred to Buyer promptly after
Seller receives notice that Buyer has so elected, but in no event prior
to the Closing Date. Buyer will pay all costs of shipping any such
assets from Seller's loading dock.
12.2. Contracts and Permits. (a) Notwithstanding anything to
the contrary in this Agreement, to the extent that (i) any Acquired Contract is
not capable of being assigned to Buyer or a Buyer Sub, as applicable, in
connection with the Closing without the consent or waiver
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of a third person (including without limitation a Governmental Entity) which
consent or waiver has not been obtained on or before the Closing Date, or (ii)
any of the transactions contemplated by this Agreement or the Intellectual
Property Agreement constituted or would constitute a breach of any Acquired
Contract, or a violation of any Law, Seller will be deemed not to have
Transferred, and will not be obligated to Transfer, to Buyer or Buyer Subs any
direct or indirect right, title or interest in or to any such Acquired Contract
without first having obtained all necessary consents and waivers. Seller will
use reasonable efforts to obtain such consents and waivers as may be necessary
to cure such potential breach or violation; provided, however, but without
affecting Seller's obligations under Section 11, Seller will not be obligated to
pay any consideration therefor or incur any liability or obligation to the party
from whom the consent or waiver is requested.
(b) To the extent that the consents and waivers referred to in
the immediately preceding paragraph are not obtained, or until the breaches or
violations referred to in the immediately preceding paragraph are resolved,
Seller will use reasonable efforts, with reasonable costs of Seller and its
affiliates related thereto to be promptly reimbursed by Buyer, to (i) provide to
Buyer or a Buyer Sub, as applicable, at its request, the benefits of any such
Acquired Contract, (ii) cooperate in any reasonable and lawful arrangement
designed to provide such benefits to Buyer, without incurring any financial
obligation to Seller or any of its affiliates, and (iii) enforce, at the request
of Buyer and for the account of Buyer or Buyer Subs, as applicable, any rights
of Seller arising from any such Acquired Contract against the other party or
parties to such Contract (including the right to elect to terminate in
accordance with the terms thereof upon the advice of Buyer) unless Seller
determines in good faith that so enforcing an Acquired Contract would have a
material adverse effect on an important business relationship with the party
against whom enforcement would be sought. To the extent that Buyer or a Buyer
Sub receives the benefits of any such Acquired Contract, such an arrangement is
in effect and Seller has not failed to enforce its rights under any such
Acquired Contract at Buyer's request, then, notwithstanding any provision to the
contrary contained herein, Buyer or Buyer Subs, as applicable, will perform or
pay for the benefit of the other party or parties thereto the obligations of
Seller under or in connection with any such Acquired Contract and will indemnify
and hold Seller and its affiliates harmless from any Indemnifiable Losses
relating to, resulting from or arising out of any failure by Buyer or Buyer Subs
so to perform or pay. Buyer and Buyer Subs will comply with all reasonable
requests of Seller for cooperation in connection with the performance of
Seller's obligations under this Section 12.2(a) and (b).
(c) To the extent that Buyer has not obtained, despite
reasonable efforts to obtain, a replacement for the Permits listed on Schedule
5.11(b) and any other Permits that would be included in the Purchased Assets but
for the fact that such Permits are not assignable or Transferrable to Buyer or
the applicable Buyer Sub (collectively, "Non-Transferrable Permits"), then, on
or prior to the Closing Date, Seller will use reasonable efforts, with
reasonable costs of Seller and its affiliates related thereto to be promptly
reimbursed by Buyer, to (i) provide to Buyer or a Buyer Sub, as applicable, at
its request, the benefits of any such Non- Transferrable Permit and (ii)
cooperate in any reasonable and lawful arrangement designed to provide such
benefits to Buyer, without incurring any financial obligation or incurring any
liability or obligation to Seller or any of its affiliates. To the extent that
Buyer or a Buyer Sub receives the benefits of any such Non-Transferrable Permit,
such an arrangement is in effect, then, notwithstanding any provision to the
contrary contained herein, Buyer or Buyer Subs, as applicable, will perform or
pay for the obligations of Seller under or in connection with any such
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Non-Transferrable Permit and will indemnify and hold Seller and its affiliates
harmless from any Indemnifiable Losses relating to, resulting from or arising
out of any failure by Buyer or Buyer Subs so to perform or pay. Buyer and Buyer
Subs will comply with all reasonable requests of Seller for cooperation in
connection with the performance of Seller's obligations under this Section
12.2(c).
12.3. Books and Records. Seller will have six months from the
Closing Date to enter the Facilities and remove any books, records, ledgers,
files, documents, correspondence, lists or other written material (collectively,
"Pre-Closing Files") which existed prior to the Closing Date and which are not
included in the Purchased Assets. From the Closing Date until the six month
anniversary thereof, such Pre-Closing Files will remain the property of Seller
and will not be copied, removed or destroyed by Parent or Buyer without the
express permission of Seller. On the six month anniversary of the Closing, any
Pre-Closing Files left in the Facilities will be Transferred to Buyer.
Notwithstanding the foregoing, at any time and from time to time after the
Closing Date Buyer will provide Seller (upon reasonable notice and without undue
disruption to the Business) with access to Pre-Closing Files Transferred to the
Buyer in order to facilitate Seller's financial, tax or similar reporting or for
such other purposes as Seller may reasonably request. Similarly, in the event
any Pre-Closing Files removed by Seller are required for the ongoing operation
of the Business by Buyer, Seller will provide Buyer access to such materials
(upon reasonable notice and without undue disruption to Seller's business). If
Buyer elects to dispose of such records, it will first give Seller 60 days'
written notice, during which period Seller will have the right to take such
records without further consideration.
12.4. Governmental Consents; Injunctions.
(a) Buyer and Seller have filed with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice (the "Antitrust Division") a premerger
notification in accordance with the Hart-Scott-Rodino Act (the "HSR
Act") with respect to the transactions contemplated by this Agreement
and the notification period thereunder has expired. Buyer and Seller
will furnish promptly to the FTC and the Antitrust Division any
additional information requested by either of them pursuant to the HSR
Act in connection with such filings. All filings referred to in this
Section 12.4 will comply in all material respects with the requirements
of the respective Laws pursuant to which they are made.
(b) Upon the terms and subject to the conditions set forth in
this Agreement, each of the parties agrees to use their respective
reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other
parties in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated hereby, including (i) the
obtaining of all necessary consents and approvals from Governmental
Entities as described in Sections 5.3 and 6.3, (ii) the obtaining of
all replacements for the Permits listed on Schedule 5.11(b), (iii) the
obtaining of all necessary consents, approvals or waivers from third
parties, and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by
this Agreement.
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(c) Without limiting the generality or effect of Section
12.4(a) or (b) or Section 1, each of the parties will (i) use their
respective reasonable efforts to comply as expeditiously as possible
with all lawful requests of Governmental Entities for additional
information and documents pursuant to the HSR Act or with respect to
the governmental approvals referred to in Sections 5.3 and 6.3, (ii)
not (A) extend any waiting period under the HSR Act or (B) enter into
any agreement with any Governmental Entity not to consummate the
transactions contemplated by this Agreement, except with the prior
consent of Buyer, in the case of Seller or any MSub, or Seller in the
case of Buyer or Parent, and (iii) if any Governmental Entity having
jurisdiction over any party issues or otherwise promulgates any
injunction, decree or similar order prior to the Closing which
prohibits the consummation of the transactions contemplated hereby, the
parties will use their respective reasonable efforts to have such
injunction dissolved or otherwise eliminated as promptly as possible
and, prior to or after the Closing, to pursue the underlying litigation
diligently and in good faith.
12.5. Further Assurances. Each party will cooperate and take
such action as may be reasonably requested by the other party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby. Without limiting the generality or effect of the foregoing,
upon request from time to time, Seller will execute or will cause MSubs to
execute and deliver all documents, take all rightful oaths, and do all other
acts that may be reasonably necessary or desirable (and not reasonably capable
of being done by Buyer or Parent), in the reasonable opinion of Buyer, to
perfect or record the title of Buyer or Buyer Subs, as applicable, or their
respective successors, to the assets, properties and rights Transferred or
licensed or to be Transferred or licensed pursuant to this Agreement or the
Intellectual Property Agreement, or to aid in the prosecution, defense or other
litigation of any rights arising from said Transfer or license (provided that
Buyer will reimburse Seller for all incremental out of pocket costs and expenses
resulting from any such request).
12.6. Non-Solicitation - Seller. For the period beginning on
the Closing Date and ending on the second anniversary of the date thereof,
neither Seller nor any of the Seller Entities will solicit for employment or
employ any Transferred Employee who has not been terminated by Buyer or a Buyer
Sub prior to any such solicitation or employment. Promptly following the Closing
Date, Seller will notify each of its human resources managers of Seller's
obligations under this Section 12.6 and will provide each such manager with a
list of Transferred Employees. If, notwithstanding Seller's compliance with the
immediately preceding sentence, Seller inadvertently employs any Transferred
Employee (without solicitation of such Transferred Employee for employment other
than indirectly through an advertisement in a newspaper or magazine), then (a)
if the Transferred Employee is one of the individuals named on Schedule 12.6 (a
"Key Employee"), Seller will, immediately upon becoming aware that it has hired
or offered to hire a Key Employee in breach of this Section 12.6, terminate such
Key Employee's employment or offer of employment with Seller and will promptly
pay to Buyer an amount equal to one-third of such Key Employee's annual salary
rate as an employee of Buyer or Buyer Sub and (b) if the Transferred Employee is
not a Key Employee, Seller will second such Transferred Employee to Buyer or
Buyer Sub, as applicable, in a manner designed to provide Buyer or Buyer Sub the
full use of such Transferred Employee's services (and Buyer will pay Seller for
such services at an hourly rate based on 130% of such individual's annual salary
and assuming a 40 hour work week) until such time as Buyer or Buyer Sub is able,
using commercially reasonable efforts, to hire another employee having
substantially the same qualifications as such Transferred
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Employee and will promptly pay to Buyer an amount equal to one-third of such
Transferred Employee's annual salary rate as an employee of Buyer or Buyer Sub.
The parties agree that the sole remedy for Seller's inadvertent employment of
any Transferred Employee, provided neither Seller nor any Seller Entity has
solicited such Transferred Employee for employment other than indirectly through
an advertisement in a newspaper or magazine, will be as set forth in this
Section 12.6.
12.7. Covenant Not to Compete. (a) For the period beginning on
the Closing Date and ending on the second anniversary of the date thereof (the
"Non-Compete Period"), except as contemplated by the Reimbursement Agreement,
Seller will not and will cause any entity that is consolidated for accounting
purposes in Seller's audited financial statements included in its Annual Report
on Form 10-K for the year ended December 31, 1998 (such entities, together with
Seller the "Seller Entities") not to, engage directly or indirectly in the
Restricted Business anywhere in the world, including by owning, managing,
controlling, participating in, or permitting its name to be used in connection
with any business that engages in the Restricted Business, provided, however,
that nothing in this Section 12.7 will restrict or prevent any Seller Entity
from maintaining and/or undertaking purely passive investments in companies
primarily engaged in the Restricted Business so long as the aggregate interest
represented by such investments does not exceed (i) 10% of any class of the
outstanding debt or equity securities of any such company, in the case of a
company whose shares are listed on a national securities exchange or the NASDAQ
National Market System or equivalent foreign exchange or quotation system or
(ii) 5% of any class of the outstanding equity or debt securities in the case of
any other company and provided, further, that any Seller Entity may acquire the
stock, business or assets of an entity if the principal operation of such entity
is not the Restricted Business and the purpose of the acquisition is not to
operate a Restricted Business. In the event that any Seller Entity acquires the
stock, business or assets of an entity engaged in the operation of a Restricted
Business, Seller will, or will cause such Seller Entity to, (A) immediately
offer the portion of such business or assets that represents Restricted Business
to Buyer and negotiate in good faith with Buyer as to the terms and conditions
of Buyer's purchase of such business and assets and (B) if Buyer notifies Seller
in writing that it is unwilling to purchase such business or assets or,
following such good faith negotiations, the parties are unable to reach
agreements on the terms of such a purchase, use reasonable efforts to sell the
such business or assets, including, without limitation, by actively marketing
the business or assets at a market price and on such other terms as are
reasonably likely to result in a sale. For purposes of this Agreement
"Restricted Business" means the business of manufacturing, marketing, selling
and distributing the Products and includes the businesses discontinued in the
Rationalization Plan but does not include production of Products that Buyer and
Parent have elected not to produce to the extent such Products are produced
solely for use by Seller as a component of other products of Seller.
(b) Terms used with all capital letters in this Section
12.7(b) have the meaning assigned to them in the Intellectual Property Agreement
and Exhibits referred to in this Section 12.7(b) are attached to the
Intellectual Property Agreement. MOTOROLA shall not make, HAVE MADE, use and/or
sell CFS-ICs which incorporate the function of a CFS that falls within the
issued claims of the ASSIGNED PATENTS and INVENTIONS on Exhibit 1 or LICENSED
MOTOROLA PATENTS and INVENTIONS on Exhibit 2, for the period of the noncompete,
except for those CFS-ICs which MOTOROLA purchases from or are supplied to
MOTOROLA by or through CTS, unless (i) CTS has elected not to produce a specific
CFS-IC as an UNAVAILABLE COMPONENT for MOTOROLA or (ii) an UNAFFILIATED THIRD
PARTY
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produces CFS-ICs that do not fall within the issued claims of the ASSIGNED
PATENTS and INVENTIONS on Exhibit 1 or LICENSED MOTOROLA PATENTS and INVENTIONS
on Exhibit 2, and then only to the extent MOTOROLA purchases said third party
CFS-ICs for use by MOTOROLA solely as a component of other products of MOTOROLA.
12.8. Customer Billing. In the event that Seller or any of its
affiliates receives payment after the Closing Date on invoices issued by Buyer
relating to product sold or services rendered after the Closing Date, Seller
will promptly notify Buyer of such receipt and will promptly remit, or will
cause such affiliate to promptly remit, such payment to Buyer. In the event
that, Buyer or any affiliate of Buyer receives payment after the Closing Date on
invoices issued by Seller relating to product sold or services rendered on or
prior to the Closing Date that have given rise to accounts receivable that are
Excluded Assets, Buyer will promptly notify Seller of such receipt and will
promptly remit, or will cause such affiliate to promptly remit, such payment to
Seller.
12.9. Investigation by Buyer. Prior to the Closing, upon
reasonable notice from Buyer to Seller given in accordance with this Agreement,
Seller will and will cause MSub to afford to the officers, attorneys,
accountants or other authorized representatives of Buyer reasonable access
during normal business hours to the Facilities, assets and the books and records
of the Business so as to afford Buyer a reasonable opportunity to make, at its
sole cost and expense, such review, examination and investigation of the
Business as Buyer may reasonably desire to make. Buyer will be permitted to make
extracts from or to make copies of such books and records as may be reasonably
necessary. Prior to the Closing, Seller will furnish to Buyer, or cause to be
furnished to Buyer, such financial and operating data and other information
pertaining to the Business as Buyer may reasonably request; provided, however,
that nothing in this Agreement will obligate Seller to take actions that would
unreasonably disrupt the normal course of Seller's or MSubs' businesses, violate
the terms of any applicable Law or any Contract to which Seller or any MSub is a
party or by which Seller or any MSub or any of their assets are subject, or
grant access to any proprietary or confidential information.
12.10. Collection of Accounts Receivable; Payment of Accounts Payable.
(a) Effective as of the opening of business on the day after
the Closing Date, Buyer will act as collection agent on behalf of
Seller and MSubs for the accounts receivable that are Excluded Assets
(the "Retained Receivables"). Buyer will deliver to Seller within 10
days after the Closing a list of the Retained Receivables showing each
customer and the age of the account. As such an agent, Buyer will use
such efforts to collect the Retained Receivables as are consistent with
the efforts used by Buyer in the collection of its own accounts
receivable. The amount received from a Retained Receivables customer
will be applied to such customer's accounts according to the invoice
specified by such customer. In the event that any payments are received
from an Accounts Receivable customer without invoice specification,
Buyer will use commercially reasonable efforts to determine the invoice
to which such payment applies. During the term of this agency, all
proceeds of Retained Receivables received by Buyer will be held in
trust for the benefit of Seller and remitted to Seller on or before the
close of business of the last date of each month by wire transfer in
immediately available funds to the account designated by Seller,
together with a statement listing each and the aggregate of all
Retained Receivables collected during and outstanding at the end of
such month. On the
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earlier to occur of 180 calendar days after the Closing Date and the
collection of all of the Retained Receivables, the agency provided for
in this Section 12.10 will terminate. Upon such termination Buyer will
provide Seller with documentation reasonably requested by Seller to
assist Seller in collecting the remaining Retained Receivables.
(b) Seller and MSubs will pay all amounts in respect of
accounts payable that are Excluded Liabilities other than the Taiwan
Payables (the "Retained Payables") promptly when due except to the
extent any such account payable is subject to a bona fide dispute with
the account creditor. Seller will promptly notify Buyer of any disputes
arising between the Retained Payable creditors and Seller or any of its
affiliates.
(c) Effective as of the opening of business on the day after
the Closing Date, Buyer will act as collection agent on behalf of
Seller and MSubs for the accounts payable that are Excluded Liabilities
and that are primarily related to the Business as conducted at the
Facility in Taiwan (the "Taiwan Payables"). Buyer will deliver to
Seller within 10 days after the Closing a list of the Taiwan Payables
showing each customer and the age of the account. As such an agent,
Buyer will pay the Taiwan Payables promptly when due (and will specify
to the account creditor the invoice to which such payment applies)
except to the extent that Seller notifies Buyer in writing that a
particular Taiwan Payable is subject to a bona fide dispute. Buyer will
not be obligated to pay any Taiwan Payable unless Buyer or a Buyer Sub
has received funding therefor from Seller or an MSub. During the term
of this agency, any funding received by Buyer or a Buyer Sub from
Seller or an MSub for payment of a Taiwan Payable will be held in trust
for the benefit of Seller. Buyer will provide Seller with a weekly
statement listing each and the aggregate of all Taiwan Payables paid
during and outstanding at the end of such week and the aggregate of all
Taiwan Payable due within the following week. Promptly upon receipt of
such report, Seller will wire transfer immediately available funds
sufficient to fund the following week's payables to an account
theretofore designated by Buyer. On the earlier to occur of 180
calendar days after the Closing Date and the payment of all of the
Taiwan Payables, the agency provided for in this Section 12.10 will
terminate. Upon such termination Buyer will provide Seller with
documentation reasonably requested by Seller to assist Seller in paying
the remaining Taiwan Payables.
12.11. Insurance. (a) With respect to any loss, liability or
damage suffered after the Closing Date relating to, resulting from or arising
out of the conduct of the Business on or prior to the Closing Date and included
in the Assumed Liabilities for which Seller or any of its affiliates would be
entitled to assert, or cause any other Person to assert, a claim for recovery
under any policy of insurance from a third party that is maintained by or for
the benefit of Seller, in respect of the Business ("Seller's Insurance"), at the
request of Buyer, Seller will assert one or more claims under Seller's Insurance
covering such loss, liability or damage if Buyer is not itself entitled to
assert such claim, but Seller or any of its affiliates is so entitled, provided
that all of Seller's and any of its affiliates' out-of-pocket costs and expenses
incurred in connection with the foregoing, including without limitation any
liability, obligation or expense referred to in the last sentence of this
Section 12.11, are, at the option of the entity incurring such costs and
expenses, paid in advance or promptly reimbursed by Buyer; provided, however,
that, effective as of the Closing Date, Seller may in its sole discretion
terminate or otherwise discontinue any policy of Seller's Insurance but no such
termination or discontinuance will affect Seller's liability under Section
12.11. To the extent required under the terms of Seller's Insurance to give
effect to the
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foregoing, Seller will be deemed, solely for the purpose of asserting claims for
Seller's Insurance pursuant to the immediately preceding sentence, to have
assumed or retained liability for such loss, liability or damage to the extent
of the policy limits of the applicable policy of Seller's Insurance; provided,
however, that (i) Buyer's and Parent's obligations under Section 11 will not be
affected by the provisions of this Section 12.11(a) and (ii) with respect to any
claim made by Seller or any of its affiliates under any Seller's Insurance
pursuant to this Section 12.11(a), Buyer will jointly and severally indemnify,
defend and hold harmless Seller and each of its affiliates and their respective
directors, officers, partners, employees, agents and representatives (including
without limitation any predecessor or successor of any of the foregoing) from
and against any Indemnifiable Loss relating to, resulting from or arising out of
any deductible, policy limit, obligation, indemnity, reinsurance due to the
liquidation or insolvency of the reinsurer, self-insurance retention, or
retroactive or retrospective premium resulting from claims made under this
Section 12.11(a) or other like arrangement by which any such entity, including
without limitation any captive insurance company, retains any liability or
obligation under any such policy of Seller's Insurance or otherwise.
(b) With respect to any loss, liability or damage suffered
after the Closing Date relating to, resulting from or arising out of
the conduct of the Business on or prior to the Closing Date and not
included in the Assumed Liabilities for which Buyer or any of its
affiliates would be entitled to assert, or cause any other Person to
assert, a claim for recovery under any policy of insurance with a third
party that is maintained by or for the benefit of Buyer or any of its
affiliates, in respect of the Business ("Buyer's Insurance"), at the
request of Seller, Buyer will assert one or more claims under Buyer's
Insurance covering such loss, liability or damage if Seller is not
itself entitled to assert such claim, but Buyer or any of its
affiliates is so entitled, provided that all of Buyer's and any of its
affiliates' out-of-pocket costs and expenses incurred in connection
with the foregoing, including without limitation any liability,
obligation or expense referred to in the last sentence of this Section
12.11(b), are, at the option of the entity incurring such costs and
expenses, paid in advance or promptly reimbursed by Seller; provided,
however, nothing herein will obligate Buyer to maintain any policy of
Buyer's Insurance. To the extent required under the terms of Buyer's
Insurance to give effect to the foregoing, Buyer will be deemed, solely
for the purpose of asserting claims for Buyer's Insurance pursuant to
the immediately preceding sentence, to have assumed or retained
liability for such loss, liability or damage to the extent of the
policy limits of the applicable policy of Buyer's Insurance; provided,
however, that (i) Seller's obligations under Section 11 will not be
affected by the provisions of this Section 12.11(b) and (ii) with
respect to any claim made by Buyer or any of its affiliates under any
Buyer's Insurance pursuant to this Section 12.11(b), Seller will
indemnify, defend and hold harmless Buyer and each of its affiliates
and their respective directors, officers, members, managers, partners,
employees, agents and representatives (including without limitation any
predecessor or successor of any of the foregoing) from and against any
Indemnifiable Loss relating to, resulting from or arising out of any
deductible, policy limit, obligation, indemnity, reinsurance due to the
liquidation or insolvency of the reinsurer, self-insurance retention,
or retroactive or retrospective premium resulting from claims made
under this Section 12.11(b) or other like arrangement by which any such
entity, including without limitation any captive insurance company,
retains any liability or obligation under any such policy of Buyer's
Insurance or otherwise.
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12.12. Warranty and Returns Claim Processing. Buyer will
accept all Products sold prior to the Closing Date that are presented
to it on or after the Closing Date for refund, adjustment, allowance,
repair, exchange or warranty ("Warranty Claims"). During the first year
following the Closing, Buyer will honor Warranty Claims in accordance
with Seller's warranty terms or otherwise consistent with Seller's past
practice. If Buyer deems it necessary to honor Warranty Claims other
than in accordance with Seller's warranty terms or consistent with
Seller's past practice in order to maintain an existing relationship
with a customer, Seller will not be required to reimburse Buyer
pursuant to this Section 12.2 for any excess cost of such Warranty
Claim attributable thereto unless and to the extent that the Steering
Committee determines such Warranty Claim was reasonably required to be
honored in order to maintain an existing customer relationship. Buyer
will notify Seller on a monthly basis of all Warranty Claims presented
in the previous month and will maintain records reflecting labor and
materials required to be performed or provided to honor all Warranty
Claims. Seller will reimburse Buyer for the full amount of such
Warranty Claims which represent Excluded Liabilities within 15 days of
receipt of such notice. Nothing in this Section 12.12 will be deemed to
limit Buyer's right to indemnification from Seller pursuant to Section
11.1(a)(i) with respect to the Excluded Liability set forth in Section
3.2(j) and Seller's obligation to reimburse Buyer pursuant to this
Section 12.12 is understood to be part of, but not in addition to, such
indemnification obligation.
12.13. CTS Employees. From time to time after the date hereof,
certain of Buyer's and its affiliates' employees, agents and
contractors will be granted access to the premises of Seller and
certain of its affiliates, including the Facilities. While any such
employee, agent or contractor of Buyer or its affiliates are on any
premises of Seller or any of its affiliates, Buyer will cause such
persons to adhere to Seller's policies regarding confidentiality, use
of Seller's facilities and other rules and regulations disclosed to
Buyer (and to execute such documents as may be necessary to evidence
the same).
13. Employee Matters.
13.1. Recruiting Transferred Employees.
(a) On or promptly after the Closing Date Parent or Buyer will
offer employment to substantially all of the employees associated with
the Business as of the Closing Date and listed on Schedule 13.1 (as
such Schedule is updated and delivered at the Closing) (the "Eligible
Employees") which list will indicate any special status of employment
thereof. Seller will (i) offer to all Employees of the Seller at the
time of the Closing the right to continue their coverage under Seller's
group health plan(s) (as defined in Section 5000(b)(1) of the Code),
such offers to be made in accordance with the continuation coverage
requirements of Part 6 of Subtitle B of Title I of ERISA and Section
4980B of the Code ("COBRA continuation coverage"), and (ii) provide
COBRA continuation coverage to any Employee who became eligible for
such COBRA continuation coverage as of or at any time prior to Closing.
Seller agrees that it will continue in effect on and after Closing for
the maximum required period under ERISA Section 602(2) (but without
regard to ERISA Section 602(2)(B)) a group health plan or individual
medical insurance plan, policy or arrangement for the purpose of
providing medical benefits to any Employee (or eligible spouse or
dependent of such Employee) who
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is eligible to elect or has elected COBRA continuation coverage
pursuant to the preceding sentence. Employees accepting such offer of
employment will be termed "Transferred Employees." A Transferred
Employee's first date of active employment with Parent or Buyer will be
referred to hereinafter as the "Hire Date," which date will not be
prior to the Closing Date.
(b) Seller will cooperate and give Parent and Buyer reasonable
access to the Eligible Employees and Facilities for purposes of
recruiting employees and will use commercially reasonable efforts to
encourage the Eligible Employees to accept employment with Buyer.
13.2. Employee Benefits.
(a) Compensation. Effective on each Transferred Employee's
Hire Date, Buyer or Buyer Sub, as applicable, will commence
compensating each Transferred Employee at the same wage or salary rate
paid by Seller as of Closing and provide employee benefit plans and
programs as set forth on Schedule 13.2(a) ("Buyer's Benefit Plans")
and, for a period of two years following the Closing Date, will provide
employee benefit plans and programs substantially comparable in the
aggregate to the benefits provided under Buyer's Benefit Plans.
Notwithstanding anything to the contrary in the foregoing, in no event
will Buyer be required to provide any post-retirement medical or
post-retirement life benefits for any Employee or Former Employee.
(b) Credited Service. Effective on their applicable Hire Date,
each Transferred Employee will be credited by Parent, Buyer or a Buyer
Sub, as applicable, with credited service for purposes of eligibility,
participation and vesting in Buyer's Benefit Plans equal to the
credited service recognized for such purposes by Seller prior to such
Transferred Employee's Hire Date ("Credited Service").
(c) Health & Welfare/Pre Existing Conditions. Without limiting
the generality of Section 3.2(e) or Section 3.2(f), in no event will
Buyer or Parent be liable before or after Closing with respect to (A)
any medical or dental claim incurred prior to the Closing Date, or (B)
notwithstanding the immediately preceding clause (i), any condition of
any Transferred Employee as of the Closing Date (1) which commenced or
was incurred prior to the Closing Date and for which workers
compensation benefits are payable, or (2) for which the Transferred
Employee is receiving or is eligible to receive disability benefits. A
medical claim for this purpose is incurred when the medical service or
materials are provided. With respect to all Transferred Employees who
are eligible and elect to become participants in any Buyer's Benefit
Plan (except for the applicable waiting period under Parent's long-term
disability plan and except for "flex credits" under the cafeteria plan
maintained by Parent and in which it is anticipated that Transferred
Employees will participate in 2000), Buyer will waive any preexisting
condition exclusion and waiting periods under the applicable Buyer's
Benefit Plan for coverage to be effective on the Hire Date of each such
Transferred Employee.
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(d) Health Care Plan Expenses. Any health care plan expenses
(excluding office visit copayments) incurred by Transferred Employees
on or after the start of the calendar year in which the transfer date
occurs and prior to or on the Closing Date will be recognized by the
Buyer's Benefit Plan which is a group health care plan for purposes of
plan year deductibles and out-of-pocket maximums. Seller agrees to
cooperate with Buyer in a one-time transmission of data to Buyer's
applicable claims administrator.
(e) Continued Employment; Severance. Buyer will not be liable
or responsible for paying or providing any severance benefits to any
employee or former employee of Seller or any bonus or other amount to
any employee or former employee of Seller, that may become payable as
of the Closing Date under any plan, policy or arrangement of Seller or
MSub. For a period of one year after the Closing, Buyer will use its
commercially reasonable efforts to continue to provide employment for
the Transferred Employees (except for any Transferred Employee whose
employment is terminated in connection with the Moves (as defined in
the Reimbursement Agreement). Notwithstanding the foregoing, (i) if
contemplated by or consistent with the Rationalization Plan or
Scottsdale to Albuquerque Move (as defined in the Reimbursement
Agreement), (ii) upon Buyer's determination in good faith that business
conditions warrant, (iii) if Buyer determines in good faith that any
Transferred Employee fails to meet Buyer's performance standards or
(iv) as contemplated by Section 1.4 of the Reimbursement Agreement,
Buyer will no longer be obligated to provide such employment provided
that, if any Transferred Employee is terminated by Buyer (other than
for cause) within one year of the Closing Date, Buyer will provide such
employee a severance payment consistent with the terms and conditions
set forth on Schedule 13.2(e) or, if a higher amount, applicable Law
(such payments, the "Termination Benefit") taking into account service
with Seller for purposes of calculating such Termination Benefit,
except with respect to all Transferred Employees employed in Taiwan and
China who are receiving severance from Seller or any MSub as of the
Closing Date. The amount of such Termination Benefits paid by Buyer
will be reimbursed by Seller to Buyer on a quarterly basis within 45
days of receipt of an invoice from Buyer setting forth in reasonable
detail the Termination Benefits paid during such quarter.
(f) Accrued Vacation. Seller will make any monetary payment
due to any Employee or Former Employee of Seller under applicable Law
in respect of any vacation accrued as of the Closing Date. In no event
will Buyer be required to make any monetary payment to any Employee or
Former Employee in respect of any vacation accrued as of the Closing
Date. Buyer will provide each Transferred Employee with time off for
vacation in accordance with the Seller's vacation policy in effect at
the Closing Date, taking into account for this purpose such Transferred
Employee's service with the Seller and taking into account the amount
of vacation already taken by such Transferred Employee prior to the
Closing Date, provided that any vacation time with the Buyer will be
unpaid to the extent such Transferred Employee received payment for
such accrued vacation from the Seller.
(g) Tuition Reimbursement Program. Seller will be responsible
for reimbursements to Transferred Employees under its tuition
reimbursement program described on Schedule 13.2(g) until the end of
any academic semesters, quarters or similar academic period with
respect to which tuition is payable,
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beginning prior to the Closing Date, whether or not such academic
period ends prior to, on or after the Closing Date. For all such
academic periods beginning after the Closing Date, Buyer will permit
Transferred Employees (but not their spouses, dependants and
beneficiaries) to participate in Parent's tuition reimbursement
program.
(i) Seller and Parent will comply with their respective
obligations under the 401(k) Transfer Agreement and the Pension
Transfer Agreement.
13.3. WARN Act Compliance. Following the Closing, Buyer will
retain full responsibility for compliance with the Worker's Adjustment and
Retraining Notification Act of 1988, as amended, and be solely responsible for
furnishing any required notice of any "plant closing" or "mass layoff," as
applicable and will indemnify Seller for any liability, expense and cost related
thereto, including reasonable attorneys' fees related thereto.
13.4. No Obligation to Continue Employment or Benefits. Except
as specifically provided in Section 13.2(a) and (e), no provision of this
Agreement will limit Parent's, Buyer's or Buyer Subs' right and authority to
discontinue, suspend, terminate or modify the employment of any Transferred
Employee or benefits provided to any or all Transferred Employees, or persons
who subsequently become employees of the Business, after the Closing Date.
13.5. Immigration Status. As a result of the transactions
contemplated by this Agreement, Parent or Buyer will succeed to the rights and
obligations of Seller with respect to the non-immigrant status/work
authorizations for those foreign national employees that are Transferred
Employees (but not including Transferred Employees that are expatriates) and for
whom Seller has obtained non-immigrant status/work authorization or for whom
Seller is in the process of obtaining employment based immigrant status.
13.6. Secondment. As promptly as practicable after the date
hereof and in any event prior to Closing, Seller and Buyer will identify the
individual Employees with respect to whom Seller and Buyer will enter into
Secondment Agreements at the Closing. Such Employees will include (a) certain of
the direct labor Employees at the Scottsdale, Arizona, Facility, (b) any of
Employees listed on Schedule 13.6(b) if Buyer determines to offer employment to
such individuals (in which case the respective Secondment Agreement will provide
that Seller will administer the expatriate arrangements of such Employees with
Buyer reimbursing Seller therefor and will have such other terms as are mutually
acceptable to Buyer and Seller), and (c) certain individuals in the China and
Taiwan Facilities if such an arrangement would mitigate the severance or
termination benefit otherwise payable to such individuals and if and to the
extent Buyer determines that such an arrangement would be appropriate for its
operation of the Business.
14. Obligations of Parent. Parent absolutely and unconditionally
guarantees the due and punctual payment or performance, as applicable, by Buyer
of its obligations, covenants and agreements of Buyer under this Agreement and
each of the agreements executed in connection with the Closing and hereby waives
any defense (other than any defenses that Buyer or Buyer Subs might have),
including any suretyship defenses or offset which it otherwise might have or
assert in the event of enforcement of such guarantee.
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15. Expenses. (a) Except as expressly provided herein (including
Section 4.3), each party to this Agreement will pay its own costs and expenses
in connection with the transactions contemplated hereby; provided, however, that
any recording, filing, permit or license fees payable in connection with the
sale of the Purchased Assets and the transactions contemplated hereby will be
paid one-half by Seller and one-half by Buyer, provided further, however, that
Buyer will pay all fees associated with any new permits or licenses to be
obtained by Buyer or Buyer Subs in connection with the sale of the Purchased
Assets and the transactions contemplated hereby. Seller and Buyer will each use
their commercially reasonable efforts to minimize such recording, filing, permit
or license fees, including by applying for any applicable exemptions.
(b) Notwithstanding anything to the contrary in this Agreement, Seller
will be responsible for payment of all fees and expenses authorized by Seller
prior to the Closing Date for services performed or payment of taxes, annuities,
maintenance fees, and the like for the prosecution and maintenance of Assigned
Motorola Patents and Inventions, Licensed Motorola Patents and Inventions and
Assigned Trademarks (each as defined in the Intellectual Property Agreement).
Buyer will be responsible for all such fees and expenses which Buyer or Parent
specifically requests Seller to incur to prosecute and maintain Patents (as
defined in the Intellectual Property Agreement) in the period between the date
hereof and the Closing Date as provided in Section 12.1(a)(xviii). Buyer will be
responsible for payment of third party invoices that are first due for all fees
owed for services performed (excluding services of Seller employees worldwide)
or taxes, annuities, maintenance fees, and the like for matters authorized by
Buyer or Parent after the date hereof, for the prosecution and maintenance of
Assigned Motorola Patents and Inventions and Assigned Trademarks (each as
defined in the Intellectual Property Agreement).
16. Commissions or Finder's Fees. Seller warrants that it has not made
any commitment or done any other act which would result in any liability on
Parent or Buyer for any brokerage, finder's or similar fee or commission in
connection with the transactions contemplated by this Agreement; and each of
Parent and Buyer warrants that it has not made any commitment or done any other
act which would impose any such liability on Seller.
17. Notices. All notices, requests, demands and other communications
hereunder will be in writing, and will be deemed to have been duly given if
delivered by overnight courier, sent by mail to the respective parties or
personally delivered addressed as follows:
If to Seller:
Motorola, Inc.
Automotive, Component, Computer and Energy Sector
4000 Commercial Avenue
Northbrook, IL 60062
Facsimile No.: (847) 538-4329
Attn: Marios Zenios
With a copy to: Motorola, Inc.
Law Department
1303 E. Algonquin Road
Schaumburg, IL 60196
Facsimile No.: (847) 576-3628
Attn: General Counsel
If to Parent
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or Buyer: CTS Corporation
905 West Boulevard North
Elkhart, Indiana 46514
Facsimile No.: (219) 293-6146
Attn: William J. Kaska
With copies to: CTS Corporation
905 West Boulevard North
Elkhart, Indiana 46514
Facsimile No.: (219) 293-6146
Attn: General Counsel
or to such other address as Parent, Buyer or Seller may designate by written
notice to the other parties hereto. Any such notices, requests, demands or other
communications will be deemed to have been duly given when received if delivered
personally or, if mailed, on the date five days after the date so deposited in
the mails, postage prepaid, return receipt requested or on the day following the
day sent if sent by prepaid overnight delivery service. Notices, requests and
other communications hereunder may be delivered by electronic facsimile
transmission (fax) if confirmation by sender is made within three business days
by mail or personal delivery. All periods of notice will be measured from the
date of deemed delivery thereof.
18. Termination of Agreement. Notwithstanding anything contained in
this Agreement to the contrary, this Agreement may be terminated at any time
prior to the Closing:
(i) By the mutual written consent of Buyer and Seller;
(ii) By either Buyer or Seller if the Closing shall not have
occurred on or before the 90th calendar day after the date hereof;
provided the failure to consummate the transactions contemplated hereby
on or before such date did not result from the failure by the party
seeking termination of this Agreement to fulfill any undertaking or
commitment provided for herein that is required to be fulfilled before
the Closing; and
(iii) By either Buyer or Seller if there shall have been
entered a final, nonappealable order or injunction of any Governmental
Entity restraining or prohibiting the consummation of the transactions
contemplated hereby or any material part thereof.
In the event of the termination of this Agreement under this Section 18, each
party hereto will pay all of its own fees and expenses. There will be no further
liability hereunder on the part of any party hereto if this Agreement is so
terminated, except under Section 19 or by reason of an intentional breach of any
covenant contained in this Agreement.
19. Nondisclosure.
(a) None of Parent, Buyer or Seller will issue any press
release or make any other public disclosure (including disclosure to
public officials) with respect to this Agreement or the transactions
contemplated by this Agreement, except as required by Law, without the
prior approval of the other party, which approval will not be
unreasonably withheld; provided, that either party may, if considered
necessary by its counsel to fulfill its obligations as a publicly
traded corporation, respond to inquiries and
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issue such releases as it considers necessary and appropriate, if it
notifies the other party in advance of the substance of such proposed
response or proposed release and gives such party reasonable
opportunity for comment prior to such response or release. The Non-
Disclosure Agreement, dated July 23, 1998, by and between Seller and
Parent (the "Non- Disclosure Agreement") will be deemed incorporated by
reference herein and, without further action, will be amended to
provide that, from and after the Closing Date, the obligations of
Parent thereunder will apply only to Confidential Information that does
not relate to the Business.
(b) If this Agreement is terminated without consummation of
the transactions contemplated hereunder, promptly after termination,
Parent will, and will cause its affiliates and direct its agents and
representatives to, destroy or return to Seller all such confidential
information, including any copies, extracts or other reproductions in
whole or in part. Such return or destruction will be certified in
writing to Seller by an authorized officer of Parent. The provisions of
this Section 19(b) and the Non-Disclosure Agreement will survive any
termination of this Agreement.
(c) Buyer and Parent will, and will cause Buyer Subs to direct
any Transferred Employee that is an employee of any of them to maintain
confidentiality with respect to confidential information of Seller that
is not related to the Business and will not, and will cause Buyer Subs
not to, ask any Transferred Employee to use or disclose to Buyer,
Parent or any Buyer Sub any such information. Buyer and Parent will,
will cause Buyer Subs, and will use reasonable efforts to cause their
respective employees to, comply with any obligations of confidentiality
and restrictions of use of confidential information in non- disclosure
provisions of agreements in effect as of the Closing Date with parties
who are not under the direction or control of Buyer, Parent or Buyer
Subs.
20. Disputes.
20.1. Amicable Resolution. (a) Seller, Parent and Buyer
mutually desire that friendly collaboration will develop between them.
Accordingly, they will try to resolve in a friendly manner all disagreements and
misunderstandings connected with their respective rights and obligations under
this Agreement and the agreements executed in connection herewith, including any
amendments hereof and thereof. In furtherance thereof, in the event of any
dispute or disagreement between Seller and Parent or Buyer as to the
interpretation of any provision of this Agreement and the agreements executed in
connection herewith (or the performance of obligations hereunder or thereunder),
the matter, upon written request of either party, will be referred for
resolution to a steering committee established pursuant to this Section 20.1
(the "Steering Committee"). The Steering Committee will have between four and
six members, one-half of which will be appointed by Seller and one-half of which
will be appointed by Buyer and each of which will be an officer of Seller or
Parent, respectively. The initial members of the Steering Committee will be the
individuals named on Schedule 20.1(b). Each of Buyer and Seller will use its
good faith reasonable efforts to avoid replacing the initial members of the
Steering Committee with another of their representatives for the first year
after the Closing Date. Thereafter, Buyer and Seller will, to the extent
practicable, honor the other's reasonable objections to any replacements of
Steering Committee members. While any person is serving as a member of the
Steering Committee, such person may not designate any substitute or proxy for
purposes of attending or voting at a Steering Committee meeting. The Steering
Committee will
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make every good faith effort to promptly resolve all disputes or disagreements
referred to it. Buyer's representatives on the Steering Committee will be
entitled collectively to one vote and Seller's representatives on the Steering
Committee will be entitled collectively to one vote and, upon a unanimous vote,
Steering Committee decisions will be binding on Parent, Buyer and Seller. If the
Steering Committee does not agree to a resolution of the dispute or disagreement
within 90 days after the reference of the matter to it, each of Seller, Parent
and Buyer will be free to exercise the remedies available to it under applicable
Law, subject to Section 20.2. Notwithstanding anything to the contrary in this
Section 20.1, no amendment to the terms of this Agreement or the agreements
executed in connection herewith will be effected except in writing signed by an
authorized officer of each of the parties thereto. The Steering Committee will
be self-regulating.
(b) Between the Closing Date and the first anniversary of the
Closing Date, the Steering Committee will hold meetings every six weeks on dates
established at the organizational meeting of the Steering Committee which will
be held as promptly as practicable after the Closing Date. Such meeting dates
may be rescheduled by the Steering Committee if it becomes reasonably
impracticable to hold such a meeting. After the first anniversary of the Closing
Date, the Steering Committee will hold regularly scheduled meetings as
determined by the Steering Committee. At the organizational meeting, the
Steering Committee members will appoint one representative of each of Buyer and
Seller to be Co-Chairman of the Steering Committee. The Co-Chairman will have
such duties and responsibilities as the Steering Committee elects from
time-to-time but it is intended that the Co-Chairman actively administer
Steering Committee matters, including by scheduling meetings and setting meeting
agendas in advance of meetings.
20.2. Mediation and Alternate Dispute Resolution. (a) Except
for issues of validity or infringement of any intellectual property rights under
the Intellectual Property Agreement (unless the parties so consent), to the
extent that any misunderstanding or dispute cannot be resolved agreeably in a
friendly manner, the dispute will be mediated by a mutually- acceptable mediator
to be chosen by Seller and Buyer within 45 days after written notice by one of
the parties demanding mediation. Neither party may unreasonably withhold consent
to the selection of a mediator, however, by mutual agreement Seller and Buyer
may postpone mediation until each has completed specified but limited discovery
with respect to a dispute. The parties may also agree to attempt some other form
of alternative dispute resolution ("ADR") in lieu of mediation, including by way
of example and without limitation neutral fact-finding or a mini-trial.
(b) Any dispute, which the parties cannot resolve through
negotiation, mediation or other form of ADR within six months of the date of the
initial demand for it by one of the parties may then be submitted to the courts
for resolution. The use of any ADR procedures will not be construed under the
doctrines of laches, waiver or estoppel to affect adversely the rights of either
party. Nothing in this Section 20 will prevent either party from resorting to
judicial proceedings if (i) good faith efforts to resolve the dispute under
these procedures have been unsuccessful or (ii) interim relief from a court is
necessary to prevent serious and irreparable injury to one party or to others.
20.3. Costs. Each of the Parent and Seller will bear its costs
of mediation or ADR, but Parent and Seller agree to share the costs of the
mediation or ADR equally.
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20.4. Jurisdiction. In the event a dispute under this
Agreement or the agreements contemplated hereby is to be submitted to judicial
proceedings, each of Seller, Parent and Buyer consents to the exclusive
jurisdiction of the federal courts of Illinois or Indiana for any such legal
action, suit or proceeding and agrees that any such action, suit, or proceeding
may be brought only in such courts, provided however, that in the event that
Seller is a plaintiff and Buyer or Parent is a defendant in any such judicial
proceeding, Seller consents to the exclusive jurisdiction of the federal courts
of the State of Indiana for that proceeding and in the event that Buyer or
Parent is a plaintiff and Seller is a defendant in any such judicial proceeding,
Buyer and Parent consent to the exclusive jurisdiction of the federal courts of
the State of Illinois for that proceeding. Each of Seller, Parent and Buyer
further waives any objection to the laying of venue for any suit, action or
proceeding in such courts. Each party agrees to accept and acknowledge service
of any and all process that may be served in any suit, action or proceeding.
Each party agrees that any service of process upon it mailed by registered or
certified mail, return receipt requested to such party at the address provided
in Section 17 above will be deemed in every respect effective service of process
upon such party in any such suit, action or proceeding. Each party agrees to
waive any right it might have to a trial by jury in any such suit, action or
proceeding.
21. Miscellaneous.
21.1. Governing Law. This Agreement will be governed and
construed under the internal laws (and not the laws of conflicts) of the State
of New York.
21.2. Entire Agreement; Amendment. This Agreement, together
with all exhibits and schedules hereto, and other documents contemplated hereby
to be delivered by the parties, including, the Intellectual Property Agreement,
the Transition Services Agreements, the Joint Use and Occupancy Agreements, the
Strategic Supplier Letter, the 401(k) Transfer Agreement and the Non-Disclosure
Agreement, covers the entire understanding of the parties hereto, superseding
all prior agreements or understandings relating to any of the subject matters
hereof (including the Memorandum of Understanding dated as of September 9, 1998,
by and between Parent and Seller), and no modification or amendment of the terms
and conditions will be effective unless in writing and signed by the parties or
their respective duly authorized agents.
21.3. Successors and Assigns. This Agreement inures to the
benefit of, and is binding upon, the successors, permitted assigns, distributees
and personal representatives of the parties hereto. Neither party may assign its
rights or obligations under this Agreement without the express written consent
of the other party, provided, however, that (a) at or following the Closing,
Buyer may assign its rights or delegate its duties to any affiliate of Buyer,
provided that no such delegation will relieve Buyer or Parent of their
obligations hereunder, (b) Buyer may assign its rights hereunder (or any portion
thereof) to any lender or other person or entity in connection with any
financing, provided that no such assignment will relieve Buyer or Parent of
their obligations hereunder.
21.4. Headings. This Agreement will not be interpreted by
reference to any of the titles or headings to the sections or paragraphs of this
Agreement, which have been inserted for convenience purposes only and are not
deemed a part hereof.
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<PAGE>
21.5. Schedules; Exhibits. This Agreement is deemed to include
all of the schedules and exhibits hereto, which are made a part hereof by this
reference thereto.
21.6. Counterparts. This Agreement may be executed in one or more
counterparts, all of which together will be deemed to constitute one and the
same instrument.
21.7. Interpretation; Other Definitional Terms.
(a) Gender and Number. This Agreement will be construed by the
actual gender and/or number of the person, persons, entity and/or
entities referenced herein, regardless of the gender and/or number used
in such reference.
(b) Other Definitional Matters. Unless the context otherwise
requires, (i) the terms "hereof," "herein," "hereunder" and words of
similar import when used in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement, (ii) the
term "including" means "including, without limitation", (iii) words in
the singular include the plural and in the plural include the singular,
(iv) references to sections, recitals, schedules and exhibits are
references to sections, recitals, schedules and exhibits to this
Agreement, unless otherwise specified, (v) the terms "Dollars" and "$"
mean the lawful currency of the United States of America, (vi) unless
the context clearly indicates otherwise, all monetary references in
this Agreement, or any exhibit, schedule or other agreement executed in
connection herewith, will refer to Dollars, (vii) the term "Business
Day" means any day other than a Saturday, Sunday or legal holiday in
Chicago, Illinois, and (viii) the terms "subsidiary" and "affiliate"
have the meanings given to those terms in Rule 12b-2 of Regulation 12B
under the Securities and Exchange Act of 1934, as amended, (ix) "or" is
injunctive but not necessarily exclusive, (x) each accounting term not
otherwise defined in this Agreement has the meaning assigned to it in
accordance with GAAP, (xi) "knowledge of Seller" or "Seller's
knowledge" means the knowledge of the persons listed on Schedule 21.7,
and (xii) each term defined in this Agreement has the meaning assigned
to it.
21.8. Partial Invalidity. Wherever possible, each provision
hereof will be interpreted in such manner as to be effective and valid under
applicable Law, but in case any one or more of the provisions contained herein
will, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision will be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such invalid, illegal or unenforceable provision or provisions
or any other provisions hereof, unless such a construction would be
unreasonable.
21.9. No Third Party Beneficiaries. This Agreement will not
confer any rights or remedies on any person other than the parties hereto and
their respective successors and permitted assigns.
21.10. No Waiver. Any failure or delay on the part of either
party in the exercise of any right or privilege hereunder will not operate as a
waiver thereof, nor will any single or partial exercise of any such right or
privilege preclude other or further exercise thereof or any other right or
privilege.
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<PAGE>
21.11. Authorship. The parties hereto agree that the terms and
language of this Agreement were the result of negotiations between the parties
and, as a result, there will be no presumption that any ambiguities in this
Agreement will be resolved against either party. Any controversy over
construction of this Agreement will be decided without regard to events of
authorship or negotiation.
[Signatures on following page.]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MOTOROLA, INC.
By:
Name:
Title:
CTS WIRELESS COMPONENTS, INC.
By:
Name:
Title:
CTS CORPORATION
By:
Name:
Title:
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<PAGE>
SCHEDULES AND EXHIBITS
Schedules
Schedule 1 Products
Schedule 2.1(a) Included Fixed Assets
Schedule 2.2(i) Excluded Contracts
Schedule 3.4 Motorola Customer PO's
Schedule 5.3 Consents
Schedule 5.4 Taxes
Schedule 5.5 Litigation
Schedule 5.6 Tangible Personal Property
Schedule 5.7 Compliance with Laws
Schedule 5.8(a) Contracts
Schedule 5.8(b) Contract Defaults
Schedule 5.9(b) Retirement Plans
Schedule 5.9(c) Unions
Schedule 5.10 Environmental Matters
Schedule 5.11(a) Permits Not Held
Schedule 5.11(b) Non-Assignable Permits
Schedule 5.12(a) Shared Assets
Schedule 5.13 Financial Statements
Schedule 5.14 Conduct of Business Since Balance Sheet Date
Schedule 5.15 Undisclosed Liabilities
Schedule 5.17 Real Property
Schedule 5.20 Products Liability
Schedule 8.3 Closing Condition Consents
Schedule 8.6 Closing Condition Buyer/Parent Permits
Schedule 9.3 Closing Condition Consents
Schedule 12.1(a) Rationalization Plan
Schedule 12.1(a)(vii) Certain Key Customers
Schedule 12.1(a)(xiii) Capital Expenditures
Schedule 12.6 Key Employees
Schedule 13.1 Eligible Employees
Schedule 13.2(a) Buyer's Benefit Plans
Schedule 13.2(e) Termination Benefit
Schedule 13.2(g) Seller's Scholarship Program
Schedule 13.6(b) Expatriates
Schedule 20.1(b) Steering Committee Initial Members
Schedule 21.7 Knowledge of Seller
Exhibits
Exhibit A Intellectual Property Agreement
Exhibit B 401(k) Transfer Agreement
Exhibit C Pension Transfer Agreement
Exhibit D Earnout
Exhibit E Assignment and Assumption Agreement
Exhibit F-1 Bill of Sale (US)
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1
<PAGE>
Exhibit F-2 Bill of Sale (China)
Exhibit F-3 Bill of Sale (Taiwan)
Exhibit G-1 Transition Services Agreement (Schaumburg)
Exhibit G-2 Transition Services Agreement (Scottsdale)
Exhibit G-3-a Transition Services Agreement (Albuquerque/MCIC)
Exhibit G-3-b Transition Services Agreement (Albuquerque/Buyer)
Exhibit G-4 Transition Services Agreement (China)
Exhibit G-6 Transition Services Agreement (Taiwan)
Exhibit H-1 Joint Use and Occupancy Agreement (China)
Exhibit H-2 Joint Use and Occupancy Agreement (China)
Exhibit H-3 Joint Use and Occupancy Agreement (Taiwan)
Exhibit H-4 Joint Use and Occupancy Agreement (Albuquerque)
Exhibit H-5 Joint Use and Occupancy Agreement (Schaumburg)
Exhibit H-6 Joint Use and Occupancy Agreement (Scottsdale)
Exhibit I Strategic Supplier Agreement
Exhibit J-1 Albuquerque Assignment
Exhibit J-2 Guaranty
Exhibit J-3 Mortgage
Exhibit K Secondment Agreements
Exhibit L Sales Representation Agreement
Exhibit M Reimbursement Agreement
Exhibit N Co-Hab Agreement
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2
<PAGE>
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
Page
<S> <C>
"$" .............................................................................47
"401(k) Transfer Agreement" ..............................................................................4
"ACCES" ..............................................................................1
"Acquired Contracts" ..............................................................................3
"Acquired Intellectual Property" ..............................................................................3
"ADR" .............................................................................45
"Affiliate Contracts" .............................................................................13
"affiliate" .............................................................................47
"Agreement" ..............................................................................1
"Albuquerque Assignment" .............................................................................21
"Albuquerque Lease" ..............................................................................4
"Antitrust Division" .............................................................................32
"Assignment and Assumption Agreement"............................................................................20
"Assumed Liabilities" ..............................................................................5
"Balance Sheet Date" .............................................................................17
"Balance Sheet" .............................................................................16
"Business Day" .............................................................................47
"Business Real Property" .............................................................................17
"Business" ..............................................................................1
"Buyer Indemnitee" .............................................................................24
"Buyer Subs" ..............................................................................2
"Buyer" ..............................................................................1
"Buyer's Benefit Plans" .............................................................................39
"Buyer's Insurance" .............................................................................37
"Closing Date" .............................................................................20
"Closing Payment" ..............................................................................8
"Closing" .............................................................................20
"COBRA continuation coverage" .............................................................................38
"Code" .............................................................................11
"Contracts" ..............................................................................3
"Credited Service" .............................................................................39
"CTS China" ..............................................................................2
"CTS Taiwan" ..............................................................................2
"Disclosed Breach" .............................................................................23
"Dollars" .............................................................................47
"Eligible Employees" .............................................................................38
"Employee Plan" ..............................................................................7
"Employee" ..............................................................................7
"Employees" ..............................................................................7
"Environment" .............................................................................15
"Environmental Condition" .............................................................................15
"Environmental Law" .............................................................................15
"Environmental Liability" .............................................................................15
"ERISA" ..............................................................................7
"Evidence of Transfer Agreements" .............................................................................21
NY: 750767v16
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
"Excluded Assets" ..............................................................................4
"Excluded Contracts" ..............................................................................5
"Excluded Fixed Assets" ..............................................................................5
"Excluded Liabilities" ..............................................................................6
"Excluded Real Property" ..............................................................................5
"Extraordinary Warranty Claims" .............................................................................25
"Facilities" ..............................................................................2
"Financial Statements" .............................................................................16
"Former Employees" ..............................................................................7
"FTC" .............................................................................32
"GAAP" .............................................................................16
"Governmental Entity" .............................................................................10
"Guaranty" .............................................................................21
"Hazardous Substances" .............................................................................15
"herein" .............................................................................47
"hereof" .............................................................................47
"hereunder" .............................................................................47
"Hire Date" .............................................................................38
"HSR Act" .............................................................................32
"Included Fixed Assets" ..............................................................................2
"including" .............................................................................47
"Indebtedness" ..............................................................................7
"Indemnifiable Losses" .............................................................................24
"Indemnification Cap Amount" .............................................................................25
"Indemnified Party" .............................................................................27
"Indemnifying Party" .............................................................................27
"Intellectual Property Agreement" ..............................................................................3
"Interim Financial Statements" .............................................................................16
"Joint Use and Occupancy Agreements".............................................................................21
"Key Employee" .............................................................................33
"knowledge of Seller" .............................................................................47
"Laws" .............................................................................12
"Leasehold Property" .............................................................................17
"Liens" ..............................................................................2
"Material Adverse Effect" ..............................................................................9
"MCEL" ..............................................................................1
"MCIC" ..............................................................................1
"METL" ..............................................................................1
"Mortgage" .............................................................................21
"Motorola Customer PO's" ..............................................................................8
"Motorola" ..............................................................................4
"MSubs" ..............................................................................1
"Non-Compete Period" .............................................................................34
"Non-Disclosure Agreement" .............................................................................43
"Non-Transferrable Permits" .............................................................................31
"or" .............................................................................47
"Parent" ..............................................................................1
</TABLE>
NY: 750767v16
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
"Pension Transfer Agreement" ....................................4
"Permits" ....................................3
"Permitted Liens" ................ ..................11
"Pre-Closing Files" ...................................32
"Products" ................. ..................2
"Proratable Items" ....................................9
"Purchase Price" ....................................8
"Purchased Assets" ....................................2
"Rationalization Plan" ................. . ................2
"Reimbursement Agreement" ...................................21
"Restricted Business" ...................................34
"Retained Payables" .................... ..............35
"Retained Receivables" ..................... .............35
"Retirement Plans" ...................... ............14
"Sales Representation Agreement" ...................................21
"Scheduled Contracts" ...................................12
"Secondment Agreements" ...................................21
"Seller Entities" ...................................34
"Seller Indemnitee" ...................................25
"Seller" ....................... .........1
"Seller's Insurance" ........................... ......36
"Seller's knowledge" ...................................47
"Shared Assets" ............................. .....16
"Steering Committee" ...................................44
"Strategic Supplier Agreement" .............................. ....21
"subsidiary" ...................................47
"Sufficiency Rep Cap" ...................................26
"Taiwan Payables" ............................... ...36
"Tangible Personal Property" ...................................11
"Tax Return" ................................ ..11
"Tax Returns" ...................................11
"Tax" ...................................11
"Taxes" ................................. .11
"Termination Benefit" ...................................40
"Third Party Claim" ...................................27
"Transfer" .................................. 1
"Transferred Employees" ...................................38
"Transition Services Agreements" ...................................21
"VVC's" ....................................1
"Warranty Claims" ...................................37
</TABLE>
NY: 750767v16
5
<PAGE>
Exhibit D
Earnout
1. Definitions. (a) For purposes of this Exhibit D, the following terms will
have the following meanings:
"Accounting Principles" means GAAP applied on a basis consistent with
the accounting principles, practices and procedures of Seller, as in effect on
September 9, 1998 at the Component Products Division level, with the following
exceptions or clarifications:
(a) The effects of the application of purchase accounting for the
acquisition of the Purchased Assets will be excluded;
(b) Allocations of corporate level expenses and charges of Parent to
the Continuing Business will be on a basis consistent with the treatment of the
Continuing Business as a stand-alone operation and will the Special Corporate
Allocation and allocations for the following:
Legal,
Corporate research and development, Information technology
services, Corporate environmental, health and safety,
Corporate sales and marketing, Intellectual property fees and
administration,
Risk management and insurance, such as liability, property and
casualty, Administration, Internal accounting and external
audit, Tax compliance and internal audit, Treasury and cash
management (excluding interest expense, net of interest
income),
Accounts receivable and accounts payable administration, and
Employee retirement, health and welfare benefit plan
administration and benefits
costs;
(c) Pension expense allocated to the Continuing Business will be
calculated (i) as required by SFAS 87, (ii) using the Parent's assumptions in
connection its defined benefit plan in which the employees of the Continuing
Business participate ("Parent's Plan"), (iii) reflecting benefit levels under
the terms of Parent's Plan, (iv) giving effect to the assets transferred to the
Parent Plan pursuant to the Pension Transfer Agreement plus a $900,000 deemed
asset transfer, and (v) giving effect to any contribution that would be required
to be made to a defined benefit plan by the Continuing Business (after giving
affect the assumptions in clauses (i) through (iv) above) if employees of the
Continuing Business participated in a stand-alone defined benefit plan, rather
than the Parent Plan (such pension expense for any particular period, "Pension
Expense");
(d) The income statement effects of the transactions and reimbursements
under the
NY: 1013024v5
<PAGE>
Reimbursement Agreement will be excluded for purposes of calculating Total
Sales, Cost of Goods Sold and PBIT. For the period from the Closing Date until
September 30, 1999, the exclusion of the income statement effects of EOL
Products that are contract manufactured by Seller pursuant to Section 1.1(a) of
the Reimbursement Agreement will be implemented for each EOL Product listed on
Annex 1 attached hereto by (i) multiplying price per unit listed on Annex 1
under the caption "Difference from Plan" by the number of units of such product
sold to Buyer by Seller during the applicable period and (ii) subtracting the
result from both the dollar amount of Actual Gross Manufacturing Margin (before
dividing by Total Sales and converting to a percentage) and PBIT. For the period
from October 1, 1999, any reimbursements by Buyer to Seller pursuant to the last
sentence of Section 1.1(a) of the Reimbursement Agreement will be subtracted
from both the dollar amount of Actual Gross Manufacturing Margin (before
dividing by Total Sales and converting to a percentage) and PBIT;
(e) Inventory charged to Cost of Goods Sold will be valued on a basis
consistent with Seller's practices and policies in existence on September 9,
1998 at the Component Products Division level;
(f) Depreciation expense will be calculated on a basis consistent with
Seller's practices and policy as of September 9, 1998 at the Component Products
Division level;
(g) Any sales of materials, including Covered Products, between Buyer
and any of its affiliates will be reflected on terms consistent with an
arms-length transaction;
(h) Any amounts paid to Seller pursuant to the Transition Services
Agreements and Joint Use and Occupancy Agreements will be given effect and
amounts paid to Buyer pursuant to the Joint Use and Occupancy Agreement with
respect to the Albuquerque, New Mexico, Facility will be excluded;
(i) Payments of the GMM Earnout Amounts and PBIT Earnout Amounts will
be excluded;
(j) Cost of goods sold and sales will be determined as described in the
definition of Cost of Goods Sold and Total Sales set forth below;
NY: 1013024v5
<PAGE>
(k) Currency adjustments will be as required under SFAS No. 52; and
(l) Amounts paid by Buyer or Parent under the Albuquerque Lease and the
China Lease will be deemed to be rent expense;
"Actual Gross Manufacturing Margin" means, for any fiscal year, (a) the
sum of (i) Total Sales less (ii) Cost of Goods Sold (b) divided by Total Sales,
provided, however, that any royalty revenue and engineering income received by
Buyer or any of its affiliates will be excluded from Total Sales and Cost of
Goods Sold for purposes of calculating the dollar amount of Actual Gross
Manufacturing Margin.
"Continuing Business" means the business of designing, manufacturing,
distributing and selling the Covered Products, as operated after the Closing
Date by Buyer and any subsidiary or affiliate of Buyer or Parent.
"Cost of Good Sold" means, with respect to any fiscal year, the cost of
goods sold related to Total Sales of the Continuing Business in accordance with
GAAP. Cost of Goods Sold will (a) exclude Pension Expense and information
technology costs and (b) will include all production, manufacturing,
warehousing, logistics, manufacturing and production engineering, and freight
costs, including any such costs that are of the type listed below:
Direct labor (including overtime) costs and related health and welfare
employee
benefits costs,
Materials and supplies, Scrap and variances, Utilities and
property taxes, Insurance, Depreciation and lease expense of
equipment and facilities, Indirect overhead, Materials
management and quality costs, Excess and obsolete inventory,
Warranty expense and expense related to product returns and
customer,
remediation costs,
Currency adjustments, and
Amounts paid to Seller under the Transition Services
Agreements and Joint Use and Occupancy Agreements to
the extent related to production, manufacturing,
warehousing, logistics, manufacturing and production
engineering, and freight.consistent with Seller's
accounting principles,
To the extent a cost or expense does not fall within one of the categories
described above, the determination of whether or not such cost or expense will
be included in Cost of Goods Sold will be made by the application of GAAP on a
basis consistent with Seller's practices and procedures
NY: 1013024v5
<PAGE>
as in effect on September 9, 1998 at the Component Products Division level. Cost
of Goods Sold for fiscal year ended December 31, 1999 will be Cost of Goods Sold
for the period beginning on the Closing Date and ending on December 31, 1999.
"Covered Products" means the products listed or falling within a
category listed on Schedule 1 to this Agreement, regardless of the name given to
or used to market such products.
"Final Audited Income Statement" means, with respect to any fiscal
year, the income statement of the Continuing Business for such fiscal year then
ended, as determined pursuant to Section 4 of this Exhibit D.
"Final Audited Earnout Calculation" means, with respect to any fiscal
year, the calculation of the GMM Earnout Amounts and, as applicable, the PBIT
Earnout Amounts payable for the fiscal year then ended, each as finally
determined pursuant Section 4 of this Exhibit D.
"Plan Sales" means, with respect to any fiscal year, the amounts set
forth on Annex 2 attached hereto for the applicable fiscal year, except that the
Plan Sales for fiscal year 1999 will be the amount set forth on Annex 2
multiplied by the number of full fiscal weeks of Seller between the Closing Date
and December 31, 1999, divided by 52.
"Special Corporate Allocation" means $1,000,000 for the fiscal year
ended December 31, 1999, $1,050,000 for the fiscal year ended December 31, 2000,
$1,102,500 for the fiscal year ended December 31, 2001, $1,157,625 for the
fiscal year ended December 31, 2002, $1,215,506 for the fiscal year ended
December 31, 2003:
"Total Sales" means, with respect to any fiscal year as determined
using the Accounting Principles, the total invoiced sales, net of discounts,
allowances and freight, of the Continuing Business determined in accordance with
GAAP, consistent with Parent's accounting principles, practices and procedures
in effect as of September 30, 1998 and including any royalty revenue received by
Buyer or any of its affiliates (other than from Buyer or another Buyer
affiliate) in respect of Intellectual Property but excluding any engineering
income. Total Sales for fiscal year ended December 31, 1999 will be Total Sales
for the period beginning on the Closing Date and ending on December 31, 1999.
2. Gross Manufacturing Margin Earnout. Seller will be eligible to receive from
Buyer annual earnout payments (such annual payment, the "GMM Earnout Amount")
for each of the five fiscal years beginning with fiscal year 1999 through fiscal
year 2003 calculated by the following formula:
Actual Gross Manufacturing Margin
(expressed as a percentage) - 20% x Total Sales x $17,400,000
----------------------------------- -----------
11.5% Plan Sales
Notwithstanding the foregoing, in no event will Buyer be obligated to pay to
Seller pursuant to
NY: 1013024v5
<PAGE>
this Section 2 of this Exhibit D more than $17,400,000 for any fiscal year or
more than $87,000,000 in the aggregate.
3. PBIT Earnout. (a) Seller will be eligible to receive from Buyer annual
earnout payments (such annual payment, the "PBIT Earnout Amount") for each of
the fiscal year ended December 31, 1999 and the fiscal year ended December 31,
2000 equal to 50% of the sum of (A) the total income of the Continuing Business
before interest expense (net of interest income) and income taxes ("PBIT") for
such fiscal year (or portion thereof), (B) less $15,000,000, but in no event
less than zero. For the fiscal year ended December 31, 1999, PBIT will be for
the period beginning on the Closing Date and ending on December 31, 1999.
Notwithstanding anything to the contrary in this Exhibit D, all Pension Expense
and information technology costs for the applicable period will be included for
purposes of calculating PBIT
(b) Notwithstanding the foregoing, in no event will Buyer be obligated
to pay to Seller pursuant to this Section 3 of Exhibit D more than $8,000,000
for the fiscal year ended December 31, 1999 or more than $10,000,000 for the
fiscal year ended December 31, 2000.
4. Procedures for Determining Earnout Amounts.
(a) Not later than 90 days after the end of each fiscal year of the
Continuing Business beginning with fiscal year 1999 and for each fiscal year
thereafter through fiscal year 2003, Buyer will deliver to Seller an audited
income statement with respect to the Continuing Business prepared consistent
with this Exhibit D (each an "Audited Income Statement") and a statement of the
GMM Earnout Amount calculation and, with respect to fiscal years 1999 and 2000
only, the PBIT Earnout Amount, including support in reasonable detail for the
calculation of Actual Gross Manufacturing Margin, Total Sales, Cost of Goods
Sold and PBIT (each, a "Preliminary Earnout Calculation").
(b) Promptly following receipt of any Audited Income Statement and
Preliminary Earnout Calculation, Seller may review the same and, within 60 days
after the date of such receipt, may deliver to Buyer a certificate setting forth
its objections to the Audited Income Statement and Preliminary Earnout
Calculation, together with a summary of the reasons therefor and calculations
which, in its view, are necessary to eliminate such objections. In the event
Seller does not so object within such 60 day period, the Audited Income
Statement and the Preliminary Earnout Calculation will be final and binding as
the Final Audited Income Statement and the Final Audited Earnout Calculation for
purposes of this Agreement.
(c) In the event Seller so objects within such 60 day period, Buyer and
Seller will use their reasonable efforts to resolve by written agreement (the
"Agreed Earnout Adjustments") any differences as to the Audited Income Statement
and the Preliminary Earnout Calculation and, in the event Buyer and Seller so
resolve any such differences, the Audited Income Statement and the Preliminary
Earnout Calculation as adjusted by the Agreed Earnout Adjustments will be final
and binding as the Final Audited Income Statement and the Final Audited Earnout
Calculation for purposes of this Agreement.
NY: 1013024v5
<PAGE>
(d) In the event any objections raised by Seller are not resolved by
Agreed Earnout Adjustments within the 30 day period next following such 60 day
period, then Buyer and Seller will submit the objections that are then
unresolved (the "Disputed Items") to a national accounting firm selected by the
Steering Committee for such purpose and such firm (the "Audit Firm") will be
directed by Buyer and Seller to conduct a special audit of the Audited Income
Statement and the Preliminary Earnout Calculation for the limited purpose of
resolving the Disputed Items as promptly as reasonably practicable and, upon
completion of such audit, to deliver written notice to each of Buyer and Seller
setting forth:
(i) a summary of all adjustments to the Audited Income
Statement and the Preliminary Earnout Calculation necessary to resolve
the Disputed Items; and
(ii) an audit report stating (without qualification) that in
its opinion all adjustments to the Audited Income Statement and the
Preliminary Earnout calculation as are necessary to resolve the
Disputed Items have been made consistent with the Accounting Principles
and otherwise in accordance with this Exhibit D.
The Final Audited Income Statement and the Final Audited Earnout Calculation set
forth in the Additional Accounting Report will be final and binding for purposes
of this Agreement.
(e) The parties hereto will make available to Buyer, Seller and the
Audit Firm, such books, records and other information (including work papers) as
they may reasonably request to audit or review the Audited Income Statement and
the Preliminary Earnout Calculation. If the determination of the Audit Firm
represents an outcome more favorable to either Buyer or Seller than the midpoint
of such parties' last written settlement offers related to all items in dispute,
in the aggregate, submitted to the Audit Firm upon the referral of the matter to
the Audit Firm (each a "Last Offer"), then the party obtaining such favorable
result will be deemed the "Prevailing Party" and the other party will be deemed
the "Non-Prevailing Party". For purposes hereof, all of the fees and expenses of
the Audit Firm, and the reasonable out-of-pocket expenses of the Prevailing
Party related to the dispute, will be borne by the Non-Prevailing Party. No
party will disclose to the Audit Firm, and the Audit Firm will not consider for
any purpose, any settlement offer (other than the Last Offer) made by any party.
(f) Buyer will pay to Seller the GMM Earnout Amount or the PBIT Earnout
Amount, as applicable, for each fiscal year within ten days business days of
determination of the Final Audited Income Statement and the Final Audited
Earnout Calculation with respect to such fiscal year, together with interest
from the 90th calendar day after the end of such fiscal year to the date of such
payment at the interest rate applicable pursuant to Section 4.4 of this
Agreement.
5. Acquisitions or Dispositions. (a) In the event of an acquisition by Buyer,
Parent or any of their majority owned subsidiaries of a business the revenues of
which are all or substantially all from the sale of Covered Products, unless
Buyer elects to exercise its buyout option pursuant to Section 6 of this Exhibit
D, Buyer and Seller will negotiate in good faith through the Steering Committee
to amend this Exhibit D to include the revenues, cost of goods sold and other
expenses of such business in Total Sales, Cost of Goods Sold and PBIT and to
adjust the Plan
NY: 1013024v5
<PAGE>
Sales, GMM Earnout Amount and PBIT Earnout Amount formulas and maximum GMM
Earnout Amounts and PBIT Earnout Amounts to incorporate the results of
operations of the acquired business for the twelve months prior to such
acquisition into such formulas and maximum amounts.
(b) In the event of a sale or other disposition of a material portion
of the Continuing Business by Buyer or any such subsidiary or affiliate (other
than to another subsidiary or affiliate of Buyer), unless Buyer elects to
exercise its buyout option pursuant to Section 6 of this Exhibit D, Buyer and
Seller will negotiate in good faith through the Steering Committee to amend this
Exhibit D so as to place the parties in a substantially similar position with
respect hereto as they would have been but for such sale or disposition.
6. Buyout Option. At any time prior to the December 31, 2003 (with respect to
the GMM Earnout Amount) or December 31, 2000 (with respect to the PBIT Earnout
Amount), Buyer may, at its option upon written notice to Seller, discharge its
entire obligation under this Exhibit D and the Agreement (the "Buyout Option")
(a) with respect to the GMM Earnout Amount, by the payment to Seller of the
present value of the maximum GMM Earnout Amounts payable pursuant to Section 2
of this Exhibit D in each fiscal year for which a GMM Earnout Amount has not yet
been paid or (b) with respect to the PBIT Earnout Amount, by the payment to
Seller of the present value of the maximum PBIT Earnout Amounts payable pursuant
to Section 3 of this Exhibit D in each fiscal year for which a PBIT Earnout
Amount has not yet been paid. The present value for these purposes will be
calculated using a discount rate equal to the lowest interest rate for new
borrowings under Parent's senior credit facilities in effect at the time Buyer
delivers notice of its exercise of the Buyout Option to Seller and assuming that
such maximum amounts are paid on the 90th day after the end of the relevant
fiscal year.
NY: 1013024v5
<PAGE>
Annex 1
to Exhibit D to the Asset Sale Agreement
Transfer Price from
Exhibit A to
Reimbursement Unit Price Difference
EOL Product Agreement per Plan From Plan
Costa Rica
- ----------
PQ Wafers n/a n/a zero
Round Blanks $0.17 $0.28 $0.11
Carlisle
- --------
Saw Wafers $17.50 $17.50 zero
Schaumburg
- ----------
PQ Strips $0.17 (Closing to $0.31 $0.14 (Closing
3/31/99) to 3/31/99
$0.10 (from 4/1/99) $0.10 zero from 4/1/99)
Chronos Oscillators $2.01 $9.05 7.04
Reference
Oscillators $15.25 x .98 $15.25 x .98 zero
Precision Oscillators $228.00 x .98 $228.00 x .98 zero
NY: 1013024v5
Annex 2
to Exhibit D to the Asset Sale Agreement
Plan Sales
(amounts in millions)
Fiscal year ended Fiscal year ended Fiscal year ended
December 31, 1999 December 31, 2000 December 31, 2001
----------------- ----------------- -----------------
Plan Sales $253.0 $279.0 $312.0
Fiscal year ended Fiscal year ended
December 31, 2002 December 31, 2003
Plan Sales $349.4 $391.4
NY: 1013024v5
<PAGE>
EXHIBIT 21
CTS CORPORATION AND SUBSIDIARIES
CTS Corporation (Registrant), an Indiana corporation
Subsidiaries
CTS Corporation (Delaware), a Delaware corporation
CTS of Panama, Inc., a Republic of Panama corporation
CTS Components Taiwan, Ltd., 1 a Taiwan, Republic of
China corporation
CTS Singapore Pte., Ltd., a Republic of Singapore
corporation
CTS Electro de Matamoros, S.A.,1 a Republic of Mexico
corporation
CTS Export Corporation, a Virgin Islands corporation
CTS Japan, Inc., a Japan corporation
CTS of Canada, Ltd., a Province of Ontario (Canada) corporation
CTS Manufacturing (Thailand) Ltd.,1 a Thailand corporation
CTS Electronics Hong Kong Ltd.,1 a Hong Kong corporation
CTS Corporation U.K. Ltd., a United Kingdom corporation
CTS Printex, Inc., a California corporation
CTS Wireless Components, Inc., a Delaware Corporation
Dynamics Corporation of America, a New York corporation
International Electronic Research Corporation, a California
corporation
LTB Investment Corporation, a Delaware corporation
Corporations whose names are indented are subsidiaries of the preceding
non-indented corporations. Except as indicated, each of the above
subsidiaries is wholly-owned by its parent company. Operations of all
subsidiaries and divisions are consolidated in the financial statements
filed.
1 Less than 1% of the outstanding shares of stock is owned of
record by nominee shareholders pursuant to national laws
regarding resident or nominee ownership.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33- 27749 and No. 333-5730) of CTS Corporation of
our report dated January 28, 1999, on page S-2 of CTS Corporation on Form 10-K
for the year ended December 31, 1998.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000026058
<NAME> CTS CORPORATION
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 16,273 39,847
<SECURITIES> 0 0
<RECEIVABLES> 47,595 52,006
<ALLOWANCES> 552 692
<INVENTORY> 33,322 34,683
<CURRENT-ASSETS> 118,583 146,747
<PP&E> 203,897 196,558
<DEPRECIATION> 136,711 130,047
<TOTAL-ASSETS> 293,189 318,196
<CURRENT-LIABILITIES> 82,377 80,991
<BONDS> 0 0
0 0
0 0
<COMMON> 190,347 186,794
<OTHER-SE> (66,508) (39,298)
<TOTAL-LIABILITY-AND-EQUITY> 293,189 318,196
<SALES> 370,441 390,602
<TOTAL-REVENUES> 370,441 390,602
<CGS> 255,844 280,085
<TOTAL-COSTS> 320,833 357,629
<OTHER-EXPENSES> (2,027) (5,235)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,194 2,478
<INCOME-PRETAX> 49,441 35,730
<INCOME-TAX> 15,368 12,537
<INCOME-CONTINUING> 34,073 23,193
<DISCONTINUED> 3,401 (380)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 37,474 22,813
<EPS-PRIMARY> 2.67 1.46
<EPS-DILUTED> 2.56 1.43
</TABLE>
