<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO.1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): February 26, 1999
CTS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Indiana
State or other Jurisdiction
of Incorporation
1-04639 35-0225010
(Commission File Number) (I.R.S. Employer Identification No.)
905 West Boulevard North
Elkhart, Indiana 46514
(Address of Principal Executive Offices)
(219) 293-7511
<PAGE>
This Amendment to the Registrant's Current Report on Form 8-K, dated
February 26, 1999, and filed with the Securities and Exchange Commission
on March 11, 1999 (as amended in a Form 8-K/A filed on March 12, 1999, the
"Form 8-K"), is being filed in order to include the financial statements
and pro forma financial information required with respect to the
acquisition by a subsidiary of Registrant of the Component Products
Division of the Automotive, Component, Computer and Energy Sector ("CPD")
of Motorola, Inc. on February 26, 1999. These financial statements and
financial information were omitted from the disclosure contained in the
Form 8-K pursuant to the instructions to Item 7 thereof. Pursuant to Rule
12b-15 under the Securities Exchange Act of 1934, as amended, the complete
text of Item 7, as amended, is set forth below.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial statements of business acquired. The audited combined balance
sheets of the Component Products Division of Motorola, Inc. as of December 31,
1997 and 1998 and the related combined statements of operations and division
equity and cash flows for each of the years in the three-year period ended
December 31, 1998 can be found at pages F-4 through F-15.
(b) Pro forma financial information. The Unaudited Pro Forma Combined Balance
Sheet as of December 31, 1998 and the Unaudited Pro Forma Combined Statement
of Income for the year ended December 31, 1998 (the "Pro Forma Financial
Statements") can be found at pages F-1 through F-3. The Pro Forma Financial
Statements were prepared based upon historical financial statements of CTS
Corporation (the "Company"), adjusted to give effect to the purchase of the
Component Products Division of Motorola, Inc. ("CPD") effective February 26,
1999, accounted for under the purchase method of accounting. A description of
the transaction, the assumptions applied and explanations for the related pro
forma adjustments are described in the accompanying notes to the Pro Forma
Financial Statements. The Pro Forma Financial Statements should be read in
conjunction with the historical financial statements of CPD included in Item 7
(a) of this Form 8-K/A and the historical financial statements of the Company.
The fiscal year of the Company and CPD ends on December 31.
The Pro Forma Financial Statements exclude any benefits that may be derived
from synergies or the elimination of duplicate efforts as a result of the
acquisition. In addition, the Pro Forma Financial Statements may not be
indicative of the results that actually would have occurred if the acquisition
had been in effect on the date indicated or which may be obtained in the
future.
<PAGE>
(c) Exhibits
2.1 Asset Sale Agreement by and among Motorola, Inc., CTS Wireless Components,
Inc., and CTS Corporation, dated December 22, 1998 (filed as Exhibit (10)
(1) to CTS' Annual Report for 1998 on Form 10-K, filed on February 25,
1999, and incorporated by reference herein).
23 Consent of KPMG to incorporation by reference on Form 8-K/A to Registration
Statement 33-27749 on Form S-8 and Registration Statement 333-5730 on
Form S-8.
99.1 Press Release dated February 26, 1999 (filed as Exhibit 99.1 to CTS'
current report on Form 8-K, filed on March 11, 1999 and incorporated by
reference herein).
99.2 Amended and Restated Credit Agreement, dated as of February 26, 1999, by
and among CTS, the Lenders named therein, and NBD Bank, N.A., as Agent
(filed as Exhibit 99.1 to CTS' current report on Form 8-K, filed on March
11, 1999 and incorporated by reference herein).
99.3 Guaranty, dated as of February 26, 1999, by Buyer, CTS, and any
subsidiaries of the Borrower as defined therein, in favor of the Agent
(filed as Exhibit 99.1 to CTS' current report on Form 8-K, filed on March
11, 1999 and incorporated by reference herein).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CTS CORPORATION
(GRAPHIC OMITTED)
Dated (May 12, 1999) By: /S/_Jeannine M. Davis
Name: Jeannine M. Davis
Title: Senior Vice President
General Counsel and Secretary
<PAGE>
<TABLE>
<CAPTION>
CTS Corporation
Unaudited Pro Forma Combined Statements of Income
(In thousands, except per share data)
Year Ended December 31, 1998
----------------------------
Historical Motorola Historical
Motorola CPD Division Motorola CTS Pro Forma Pro Forma
CPD Division Adjustments(A) CPD Division Corporation Adjustments Combined
------------ -------------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 315,000 $ (9,700) $ 305,300 $ 370,441 $ 0 $675,741
Cost of Sales, exclusive of items listed below 265,000 (16,300) 248,700 255,844 (7,400) (B) 497,144
Selling, general and administrative expenses 58,000 (3,300) 54,700 51,602 3,200 (C) 109,502
Research and development expenses 8,000 0 8,000 13,387 0 21,387
----- ----- ----- ------ ------ ------
Operating earnings (loss) (16,000) 9,900 (6,100) 49,608 (4,200) 47,708
Interest expense, net 3,000 (400) 2,600 1,053 6,200 (D) 9,853
Other expense (income), net 0 (2,600) (2,600) (886) 0 (3,486)
------ ------ ------ ------ ------ ------
Earnings (loss) before income tax (19,000) 12,900 (6,100) 49,441 (2,000) 41,341
Provision for income tax expense (benefit) (5,000) 3,400 (1,600) 15,368 (125) (E) 13,643
------ ----- ------ ------ ------ -----
Net earnings (loss) $ (14,000) $ 9,500 $ (4,500) $ 34,073 $ (1,875) $ 27,698
========= ======= ======== ======== ========= ========
Basic:
Earnings per share from continuing operations $ 2.43 $ 1.98
Weighted-average shares outstanding 14,014 14,014
Diluted:
Earnings per share from continuing operations $ 2.33 $ 1.90
Weighted-average shares outstanding 14,614 14,614
See the accompanying notes to these Unaudited Pro Forma Financial Statements.
F-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CTS Corporation
Unaudited Pro Forma Combined Balance Sheet
December 31, 1998
(In thousands)
Historical Motorola Historical
Motorola CPD Division Motorola CTS Pro Forma Pro Forma
CPD Division Adjustments (A) CPD Division Corporation Adjustments Combined
------------ --------------- ------------ ----------- ----------- --------
ASSETS
Current assets
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents 0 $ 0 $ 0 $ 16,273 $ 0 $ 16,273
Accounts receivable, net 38,000 (38,000) 0 47,043 0 47,043
Inventory, net 33,000 (12,200) 20,800 33,322 0 54,122
Other current assets 3,000 (3,000) 0 21,945 0 21,945
----- ----- ----- ------ ------ ------
Total current assets 74,000 (53,200) 20,800 118,583 0 139,383
Property, plant and equipment 130,000 (57,800) 72,200 67,186 8,800 (F) 148,186
Other intangible assets 0 0 0 0 31,400 (G) 31,400
Other noncurrent assets 0 0 0 107,420 4,300 (H) 111,720
------ ------ ------ ------- ------ -------
130,000 (57,800) 72,200 174,606 44,500 (F) 291,306
------- ------- ------ ------- ------ -------
Total assets $ 204,000 $ (111,000) $ 93,000 $ 293,189 $ 44,500 $430,689
========== =========== ========= ========= ========= ========
LIABILITIES
Current liabilities
Current long-term debt $ 0 $ 0 $ 0 $ 14,000 $ 0 $ 14,000
Other current liabilities 11,000 (11,000) 0 38,133 4,000 (I) 42,133
Accrued payroll liabilities 7,000 (7,000) 0 12,832 0 12,832
Accounts payable 22,000 (22,000) 0 17,412 0 17,412
------ ---- ------ ------ ------ ------
Total current liabilities 40,000 (40,000) 0 82,377 4,000 86,377
Long-term debt 41,000 1,000 42,000 42,000 94,000 (J) 178,000
Postretirement benefits 0 0 0 4,260 0 4,260
Other long-term liabilities 10,000 (3,900) 6,100 40,713 0 46,813
------ ------ ----- ------ ------ ------
Total long-term liabilities 51,000 (2,900) 48,100 86,973 94,000 229,073
Common stock 0 0 0 190,347 0 190,347
Treasury stock 0 0 0 (275,471) 0 (275,471)
Additional paid-in capital 0 0 0 10,872 0 10,872
Retained earnings 0 0 0 198,091 (8,600) (H) 189,491
Division equity 113,000 (68,100) 44,900 0 (44,900) (H) 0
------- ------- ------ ------ ------- -------
Total equity 113,000 (68,100) 44,900 123,839 (53,500) 115,239
------- ------- ------ ------- ------- -------
Total liabilities and equity $ 204,000 $ (111,000) $ 93,000 $ 293,189 $ 44,500 $430,689
========== =========== ========= ========= ========= ========
See the accompanying notes to these Unaudited Pro Forma Financial Statements.
F-2
</TABLE>
<PAGE>
On February 26, 1999, CTS Wireless Components ("Buyer"), a wholly owned
subsidiary of CTS Corporation ("CTS"), pursuant to an Asset Sale Agreement
dated December 22, 1998 acquired certain assets and assumed certain
liabilities of the Component Products Division of the Automotive, Component,
Computer and Energy Sector of Motorola, Inc. ("Motorola"). Buyer paid to
Motorola $94 million cash at the closing and agreed to make additional
contingent payments to Motorola in each of the following five fiscal years
beginning with fiscal year 1999. The amount of these additional payments are
contingent on CPD's results of operations, and will not exceed an aggregate
amount of $105 million. Contingent payments made under this agreement are
capped at $25,400,000 for 1999, $27,400,000 for 2000, and $17,400,000 for each
of the three fiscal years thereafter.
In addition to these payments, Buyer assumed $48 million of debt (including
pension obligation) as part of the CPD acquisition. The Unaudited Pro Forma
Combined Balance Sheet assumes that the acquisition occurred on December 31,
1998, and the Unaudited Pro Forma Statement of Income assumes that the
acquisition occurred on January 1, 1998.
The acquisition has been accounted for under the purchase method of
accounting. The following is a summary of pro forma adjustments reflected in
the Unaudited Pro Forma Combined Balance Sheet and Statement of Income.
(A) The amounts in the Motorola CPD Division Adjustments column in the
Unaudited Pro Forma Combined Statement of Income and Balance Sheet represents
the elimination of CPD operations not acquired by the Company, the elimination
of assets and liabilities not acquired by the Company and the related tax
effect of these adjustments.
(B) The Company has recorded an adjustment to depreciation to conform to the
Company's methodologies. CPD had used the double declining balance method
and CTS uses the straight line method.
(C) The adjustment represents the amortization of intangibles related to the
acquisition. Core technology of $9.5 million is amortized over 4 years and
goodwill of $21.9 million is amortized over 25 years.
D) This amount represents the increase in interest expense resulting from the
additional long-term debt obtained to finance the acquisition.
(E) This adjustment represents the tax effect of the pro forma adjustments
made in the Unaudited Pro Forma Combined Statements of Income.
(F) The Company has recorded a fair value adjustment to property,
plant and equipment.
(G) This amount represents the adjustment required to record the intangible
assets resulting from the acquisition including core technology of $9.5
million and goodwill of $21.9 million.
(H) These adjustments represent the elimination of CPD's historical equity and
the write-off of the acquired in-process research and development of $12.9
million ($8.6 million net of tax).
(I) This amount represents accruals for acquisition costs (legal, investment
banking, etc.) arising from the transaction.
(J) This amount represents the adjustment required to record long-term debt
resulting from the transaction.
F-3
<PAGE>
Independent Auditors' Report
The Board of Directors
Motorola, Inc.:
We have audited the accompanying combined balance sheets of the Component
Products Division (Division) of Motorola, Inc. (Parent) as of December 31,
1997 and 1998 and the related combined statements of operations and division
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These combined financial statements are the responsibility
of the Division's management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Component
Products Division of Motorola, Inc. as of December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Chicago, Illinois
February 24, 1999
F-4
<PAGE>
<TABLE>
<CAPTION>
COMPONENT PRODUCTS DIVISION
OF MOTOROLA, INC.
Combined Balance Sheets
(in thousands)
December 31, 1997 and 1998
Assets 1997 1998
------ ---- ----
Current assets:
Accounts receivable, net of allowance of $400 and
$300 in 1997 and 1998, respectively, including
amounts due from other Motorola, Inc. businesses
<S> <C> <C>
of $32,000 and $18,000 in 1997 and 1998, respectively $ 42,000 $ 38,000
Inventories, net 32,000 33,000
Other current assets 4,000 3,000
----- -----
Total current assets 78,000 74,000
Property, plant and equipment, net 136,000 130,000
------- -------
Total assets $ 214,000 $ 204,000
=========== ===========
Liabilities and Division Equity
Current liabilities:
Accounts payable $ 18,000 $ 22,000
Accrued payroll liabilities 10,000 7,000
Other current liabilities 7,000 11,000
----- ------
Total current liabilities 35,000 40,000
Debt 41,000 41,000
Other noncurrent liabilities 12,000 10,000
Division equity 126,000 113,000
------- -------
Total liabilities and division equity $ 214,000 $ 204,000
=========== ===========
See accompanying notes to combined financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPONENT PRODUCTS DIVISION
OF MOTOROLA, INC.
Combined Statements of Operations and Division Equity
(in thousands)
Years ended December 31, 1996, 1997, and 1998
1996 1997 1998
---- ---- ----
Net sales, including sales to other Motorola, Inc. businesses of $294,000,
$270,000, and $185,000, for the years ended December 31, 1996, 1997, and
1998,
<S> <C> <C> <C>
respectively $ 333,000 $ 343,000 $ 315,000
Costs and expenses:
Cost of goods sold, including expenses allocated from 258,000 267,000 265,000
the Parent of $4,000, $4,000 and $3,000, for the years
ended December 31, 1996, 1997, and 1998, respectively
Selling, general and administrative expenses, including expenses
allocated from the Parent of $8,000, $13,000, and $13,000,
for the years ended December 31, 1996, 1997, and 1998,
respectively 59,000 57,000 58,000
Research and development expenses 16,000 13,000 8,000
------ ------ -----
Operating earnings (loss) - 6,000 (16,000)
Interest expense allocated from the Parent 3,000 2,000 3,000
----- ----- -----
Earnings (loss) before income taxes (3,000) 4,000 (19,000)
Income tax benefit (5,000) (3,000) (5,000)
------ ------ ------
Net earnings (loss) 2,000 7,000 (14,000)
Division equity at beginning of year 136,000 114,000 126,000
Transfers (to) from Parent (24,000) 5,000 1,000
------- ----- -----
Division equity at end of year $ 114,000 $ 126,000 $ 113,000
========== ========== ==========
See accompanying notes to combined financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPONENT PRODUCTS DIVISION
OF MOTOROLA, INC.
Combined Statements of Cash Flows
(in thousands)
Years ended December 31, 1996, 1997, and 1998
1996 1997 1998
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) $ 2,000 $ 7,000 $ (14,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization, including amounts
allocated from Parent of $3,000, $2,000, and
$2,000 in 1996, 1997, and 1998, respectively 43,000 38,000 39,000
Loss on disposition of assets 0 1,000 2,000
Changes in assets and liabilities:
Accounts receivable (4,000) (18,000) 4,000
Inventories, net 2,000 (9,000) (1,000)
Other current assets 2,000 (1,000) 1,000
Accounts payable 4,000 5,000 4,000
Other accrued liabilities 0 0 (1,000)
------ ------ ------
Net cash provided by operating activities 49,000 23,000 34,000
Cash flows from investing activities:
Capital expenditures (21,000) (22,000) (37,000)
Proceeds from disposals 9,000 6,000 3,000
----- ----- -----
Net cash used in investing activities (12,000) (16,000) (34,000)
Cash flows from financing activities -
net cash transferred (to) from Parent 37,000) (7,000) 0
------- ------ -------
Net increase (decrease) in cash 0 0 0
------- ------- -------
Cash at beginning and end of year $ 0 $ 0 $ 0
======== ======== ========
Supplemental disclosure-
transfers of equipment from Parent $ 13,000 $12,000 $ 1,000
======== ======= ========
See accompanying notes to combined financial statements.
F-7
</TABLE>
<PAGE>
COMPONENT PRODUCTS DIVISION
OF MOTOROLA, INC.
Notes to Combined Financial Statements
(in thousands)
December 31, 1996, 1997, and 1998
(1) Description of Business
The Component Products Division (Division) is a division within the
Integrated Electronic Systems Sector (Sector) of Motorola, Inc. (Parent).
The Division designs and manufactures radio frequency generation
components, including quartz crystals and oscillators, ceramic filters,
and multilayer ceramic integrated circuits which are used in the
production of pager devices, cellular handsets, and other radio
equipment.
The Division is headquartered in Schaumburg, Illinois and has operations
in China, Taiwan, Costa Rica, New Mexico, Arizona, and Pennsylvania. The
Division sells primarily to other businesses of the Parent and
third-party customers in the global communications industry.
(2) Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles and present the financial
position, results of operations, and cash flows of the Division.
Intracompany accounts and transactions within the Division have been
eliminated.
The Division's cash is managed by the Parent under a centralized system
whereby cash generated by the Division is accumulated and managed by the
Parent and cash requirements of the Division are funded by the Parent as
needed. Accordingly, net changes in cash balances managed by the Parent
are recorded as transfers to/from the Parent.
(3) Summary of Significant Accounting Policies
(a) Related Party Transactions
The Division manufactures electronic components for other businesses of
the Parent. Resulting sales and related accounts receivable are treated
as "arm's-length" transactions and are reflected as such in the financial
statements. The Division purchases inventory from other businesses of the
Parent, which are also treated as "arm's-length" transactions in the
financial statements. Such purchases are not significant for 1996, 1997,
and 1998.
Certain assets, liabilities, and expenses for common services and
corporate overhead incurred by the Parent have been allocated to the
Division. In management's opinion, the methods employed in allocating the
amounts are reasonable and have been applied on a consistent basis.
However, the amounts disclosed may not represent the amounts that would
have been reported had these transactions occurred with third parties at
"arm's-length."
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(c) Accounts Receivable
Accounts receivable includes amounts owed by customers for
electronic component sales. A provision for uncollectible amounts is
calculated based on management's estimates of amounts, which,
based upon the credit risk associated with the various customer
accounts, are subject to substantial collection risk.
F-8
<PAGE>
(d) Inventories
Inventories are valued at the lower of average cost or market.
Management periodically evaluates the net realizability of its
inventory. Inherent in the estimates of net realizable value
are management estimates related to the Division's future
production schedules, customer demand, and ultimate realization
of potentially excess or obsolete inventory.
(e) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. The Division
shares certain property, plant, and equipment with other
businesses of the Parent. These shared assets have been
allocated to the Division based on the Division's activity
level. Depreciation is computed over the estimated useful lives
of the assets principally on the double-declining balance
method. Useful lives for buildings and related equipment range
from 20-40 years, and furniture, machinery, and equipment from
3-10 years.
(f) Income Taxes
The Division is included in the consolidated income tax returns
of the Parent. The tax benefit of losses and other tax benefits
have been claimed in the statements of operations since the
benefits are used by the Parent. The Division accounts for
income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) 109. Pursuant to SFAS 109, deferred
tax assets and liabilities are recorded for temporary
differences which enter into the determination of taxable
income in different periods for financial reporting and income
tax purposes.
(g) Revenue Recognition
Revenue from the sale of electronic component products is
recognized at the time of shipment.
(h) Business and Credit Concentrations
The Division is dependent upon certain intellectual property
maintained by the Parent to sustain its competitiveness. The
inability of the Parent to defend its stated intellectual
property rights could negatively affect the competitive position
of the Division.
The Division's customers are comprised of device manufacturers
which purchase ceramic and quartz components. Financial
instruments which potentially subject the Division to
concentrations of credit risk consist principally of accounts
receivable. As of December 31, 1997 and 1998 other businesses
of the Parent accounted for 76% and 47% of the total accounts
receivable balance, respectively. For the years ended
December 31, 1996, 1997, and 1998 these other businesses
accounted for 88%, 79%, and 59% of net sales, respectively.
(i) Foreign Currency Translation
The Division's functional currency for all foreign operations
is the U.S. dollar. Accordingly, the net effect of gains and
losses from translation of foreign currency financial
statements into U.S. dollars is included in current operations.
Gains and losses resulting from foreign currency transactions
are included in current operations and are not significant
for 1996, 1997, or 1998.
F-9
<PAGE>
(j) Fair Values of Financial Instruments
The Division believes that the carrying amounts of its financial
assets and liabilities, consisting of accounts receivable, accounts
payable, accrued expenses, and debt, approximates the fair value of
such items.
(4) Inventories
Inventories as of December 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Raw materials $14,000 $21,000
Work in progress 13,000 11,000
Finished goods 6,000 4,000
----- -----
33,000 36,000
(1,000) (3,000)
------ ------
Inventory reserves $32,000 $33,000
======= =======
(5) Property, Plant, and Equipment
Property, plant and equipment as of December 31, 1997 and 1998 consist
of the following:
1997 1998
---- ----
Machinery and equipment $216,000 $208,000
Building 71,000 67,000
Land 1,000 1,000
Allocated property, plant, and equipment 23,000 34,000
------ ------
311,000 310,000
(175,000) (180,000)
-------- --------
Less accumulated depreciation $136,000 $130,000
======== ========
</TABLE>
Allocated property, plant, and equipment are general corporate assets of
the Parent which have been allocated to the Division, through the Sector,
based upon a rational allocation methodology, generally on the basis of
the Division's activity level.
(6) Employee Benefit Plans
Employees of the Division are eligible for health, welfare, and
retirement benefits under programs maintained by the Parent. Costs have
been allocated to the Division based predominantly on headcount and
payroll costs on various proportional allocation formulas. The current
portion of these liabilities is included in accrued payroll liabilities.
F-10
<PAGE>
(7) Debt
The Division entered into an agreement with the City of Albuquerque
(City) under which the Division received the proceeds of industrial
revenue bonds issued by the City to expand a production facility in
Albuquerque. Terms of the agreement are substantially equivalent to the
terms of the bonds. The agreement provides for semi-annual payments of
approximately $1,600, which is equivalent to the interest on the bonds,
and provides for the debt to be secured by the Albuquerque facility. The
weighted average interest rate on the bonds is 7.5%. A balloon principal
payment of $41,000 is due on June 1, 2013, the bonds' maturity date.
(8) Environmental Matters
Under the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended (CERCLA or Superfund), the Parent has been
designated as a potentially responsible party by the United States
Environmental Protection Agency with respect to certain waste sites with
which the Parent may have had direct or indirect involvement. Such
designations are made regardless of the extent of the Parent's
involvement. These claims are in various stages of administrative or
judicial proceedings. They include demands for recovery of past
governmental costs and for future investigations or remedial actions. In
many cases, the dollar amounts of the claims have not been specified, and
have been asserted against a number of other entities for the same cost
recovery or other relief as was asserted against the Parent. The Division
has accrued its proportional share of the estimated costs associated with
environmental matters which amounted to $3,100 as of December 31, 1997
and 1998.
(9) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996,
1997, and 1998 consists of:
F-11
<PAGE>
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
Year ended December 31, 1996
<S> <C> <C> <C>
U.S. Federal $(8,000) $ --- $(8,000)
State and local (2,000) --- (2,000)
Foreign 5,000 --- 5,000
----- ----- -----
(5,000) --- (5,000)
====== ====== ======
Year ended December 31, 1997
U.S. Federal (5,000) (1,000) (6,000)
State and local (1,000) --- (1,000)
Foreign 4,000 --- 4,000
------ ------ ------
(2,000) (1,000) (3,000)
====== ====== ======
Year ended December 31, 1998
U.S. Federal (8,000) --- (8,000)
State and Local (2,000) --- (2,000)
Foreign 5,000 --- 5,000
----- ----- -----
$(5,000) $ --- $(5,000)
======= === =======
F-12
</TABLE>
<PAGE>
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. Federal income tax rate of 35% to earnings (loss) before income tax
expense as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $(1,000) $ 1,000 $(7,000)
Increase (decrease) in tax expense (benefit)
Taxes on non-U.S. earnings (2,000) (3,000) 3,000
State income taxes, net of Federal benefit (1,000) (1,000) (1,000)
Other (1,000) --- ---
------ ------ ------
$(5,000) $(3,000) $(5,000)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1998 are presented below:
1997 1998
---- ----
Deferred tax assets:
Inventory valuation $3,000 $ 2,000
Depreciation 4,000 5,000
Capitalized costs 3,000 4,000
Employee benefits, principally due to accrual for
financial reporting purposes 2,000 ---
Other 2,000 2,000
----- -----
Deferred tax assets $14,000 $13,000
======= =======
F-13
</TABLE>
<PAGE>
There is no valuation allowance at December 31, 1997 and 1998, based upon
management's estimation of taxable income to be generated and other tax
planning strategies employed by the Parent. As the Division is included in the
consolidated tax returns of the Parent, identified tax assets are realized
through Division equity.
(10) Industry and Geographic Segment Information
The Division operates in one industry segment and is engaged in the
design and manufacture of radio frequency generation components.
The following table presents revenues by country based on the product
source.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
United States $157,000 $ 94,000 $ 56,000
China 67,000 126,000 154,000
Taiwan 108,000 122,000 104,000
Other foreign countries 1,000 1,000 1,000
----- ----- -----
Total $333,000 $343,000 $315,000
======== ======== ========
The following table presents property, plant, and equipment by country based
on the location of the asset:
1997 1998
---- ----
United States $153,000 $126,000
China 53,000 65,000
Taiwan 64,000 84,000
Other foreign countries 41,000 35,000
------ ------
Total $311,000 $310,000
======== =======
F-14
</TABLE>
<PAGE>
(11) Asset Sale Agreement
In December 1998, the Parent entered into an Asset Sale Agreement
(Agreement) with CTS Wireless Components, Inc. (CTS) to sell certain
assets, consisting mainly of inventory and fixed assets of its quartz
and ceramics product lines for consideration of $94,000 in cash, and the
assumption by CTS of $41,000 in debt. The Parent will be eligible to
receive an annual earnout payment, limited to $105,000 over a five-year
period, based upon the Division achieving certain future financial
targets.
The Agreement principally includes the transfer of intellectual property
rights, the transfer of employees' accrued benefits in the Parent's
pension and 401k plans, a five-year strategic supplier agreement, and a
covenant not to compete for two years. The Parent will provide
transition services and manufacturing capability to CTS for amounts
approximating fair value to facilitate operating the Division, as its
current manufacturing operations are located within other facilities of
the Parent.
Closing of the Agreement is subject to a number of significant
conditions, including, among others, the ability of CTS to secure
financing to fund this acquisition and the filing of all necessary
reports and documents with the Department of Justice pursuant to the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 and the expiration
and termination of applicable waiting periods thereunder, and other
governmental approvals. There can be no assurance as to whether or when
such approvals will be received or when conditions to close the
Agreement will be met.
F-15
<PAGE>
EXHIBIT 23
CONSENT OF KPMG LLP
We consent to incorporation by reference in the registration statements (Nos.
33-27749 and 333-5730) on Form S-8 of CTS Corporation of our report dated
February 24, 1999 with respect to the combined balance sheets of the Component
Products Division of Motorola, Inc. as of December 31, 1997 and 1998, and the
related combined statements of operations and division equity and cash flows
for each of the years in the three-year period ended December 31, 1998, which
report appears in the Form 8-K/A of CTS Corporation dated May 12, 1999.
/S/KPMG LLP
Chicago, Illinois
May 10, 1999
