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CTS CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
2000
FORM 10-K
ANNUAL REPORT
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
For Fiscal Year Ended December 31, 2000
---------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (1) has 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.
There were 27,783,049 shares of Common Stock, without par value, outstanding on
March 8, 2001. The aggregate market value of the voting stock held by non-
affiliates of CTS Corporation was approximately $690.7 million on March 8, 2001.
1
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the 2001 Proxy Statement to be filed for the
annual meeting of shareholders to be held on April 18, 2001,
incorporated by reference in Part 3.
(2) Certain portions of the CTS Corporation Form 10-K for the
fiscal year ended December 31, 1995, filed with the Commission
on March 21, 1996, 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.
(6) Portions of the CTS Corporation Form 10-K for the fiscal year
ended December 31, 1997, filed with the Commission on March
27, 1998, incorporated by reference in Part 4.
(7) Portions of the CTS Corporation Form 10-K for the fiscal year
ended December 31, 1998, filed with the Commission on February
25, 1999, incorporated by reference in Part 4.
SEE THE EXHIBIT INDEX -- PAGES 16 - 17
2
PART 1
Item 1. Business
--------
CTS Corporation is a global electronic components and electronic assemblies
manufacturer. CTS was established in 1896 as a provider of high-quality
telephone products and was incorporated as an Indiana Corporation in February
1929. The principal executive offices are located in Elkhart, Indiana.
CTS Corporation designs, manufactures, assembles and sells a broad line of
electronic components and custom electronic assemblies primarily for the
communications, computer and automotive markets. CTS operates 19 manufacturing
facilities located throughout North America, Asia and Europe. CTS' product lines
serve major markets globally, including the needs of original equipment
manufacturers (OEMs) by utilizing CTS sales engineers, manufacturers'
representatives and independent distributors.
BUSINESS SEGMENT AND PRODUCTS BY MAJOR MARKET
---------------------------------------------
CTS has two reportable business 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 wireless components, including
crystals and oscillators, ceramic filters and surface acoustic wave (SAW)
filters used in cellular handsets and public infrastructure and networking
communication for the communications equipment market; automotive sensors and
actuators used in the automotive market; ClearONE(TM) terminators used in the
computer equipment market; potentiometers, resistor networks and switches used
to serve multiple markets.
Electronic assemblies are combinations of electronic products or electronic and
mechanical products which, apart from the assembly, may themselves be marketed
as separate stand-alone products. Such assemblies represent completed,
higher-level functional products to be used in customer end products or
assemblies. These products consist principally of interconnect products such as
integrated interconnect systems and backpanels used in the mass data storage
systems, internet access systems and network servers within the computer
equipment market; RF (radio frequency) integrated modules used in cellular
handsets for the communications equipment market; pointing sticks/cursor
controls for personal computers for the computer equipment market; and low
temperature cofired ceramics (LTCC) for Bluetooth communications products for
the communications equipment market.
Within the two business segments, products are also identified by market. CTS
products are principally sold into three primary OEM major markets including
communications equipment, computer equipment and automotive. Other smaller
markets include consumer electronics, instruments and controls and
defense/aerospace, primarily consisting of OEM customers.
3
The following table provides a breakdown of net sales as a percent of net sales
by segment in each segment's major markets:
Electronic Components Electronic Assemblies
--------------------- ---------------------
Markets 2000 1999 1998 2000 1999 1998
- ------- ---- ---- ---- ---- ---- ----
Communications Equipment 37% 45% 17% 15% 10% 6%
Computer Equipment 5% 5% 9% 22% 13% 23%
Automotive 15% 19% 32% -- -- --
Other 5% 6% 9% 1% 2% 4%
--- --- --- --- --- ---
Net Sales by Segment as a %
of Consolidated Net Sales 62% 75% 67% 38% 25% 33%
=== === === === === ===
Net sales to external customers, operating earnings and total assets by segment,
and net sales and long- lived assets by geographic area, are contained in "Note
I - Business Segments" appearing in the financial statements as noted in the
Index appearing under Item 14 (a) (1) and (2).
4
The following table identifies major products by their business segment and
markets. Many products are sold into several OEM markets.
Communications Computer
Product Equipment Equipment Automotive Other
Description Market Market Market Markets
----------- ------ ------ ------ -------
Electronic Components:
- ----------------------
Ceramic and SAW Filters X
Quartz Crystals, Clock and
Precision Oscillators X X X
Automotive Sensors X
Resistor Networks X X X X
ClearONE(TM) Terminators X
DIP Switches and
Potentiometers X X X X
Actuators X
Electronic Assemblies:
- ----------------------
Integrated Interconnect Systems
and Backpanels X X X
RF Integrated Modules X
Pointing Sticks/Cursor Controls X X
Low Temperature Cofired
Ceramics (LTCC) X
5
MARKETING AND DISTRIBUTION
--------------------------
CTS sales engineers and manufacturers' representatives sell CTS electronic
components and electronic assemblies to OEMs. CTS maintains sales offices in
China, Hong Kong, Japan, Korea, Singapore, Taiwan, Scotland and the United
States. Approximately 62% of 2000 sales 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 specific customer requirements.
CTS utilizes the services of independent manufacturers' representatives and
distributors in the United States and other countries for customers not serviced
directly by CTS sales engineers. Independent manufacturers' representatives
receive commissions from CTS. During 2000, approximately 33% of net sales were
attributable to coverage by sales representatives. Additionally, independent
distributors purchase products from CTS for resale to customers. In 2000,
independent distributors and/or dealers accounted for approximately 5% of net
sales.
RAW MATERIALS
-------------
- Raw materials used in many CTS products include steel, copper, brass,
aluminum, certain precious metals, resistive and conductive inks,
piezoceramics, purchased passive electronic components and
semiconductors.
- Ceramic materials are used in ceramic filters, resistor networks and
RF integrated modules.
- Synthetic quartz is used in surface acoustic wave filter products and
frequency control devices, including quartz crystals, clock and
precision oscillators.
- Molding compounds are used in automotive sensors, actuators, DIP
switches and potentiometers.
These raw materials are purchased from several vendors, and except for certain
semiconductors, CTS does not believe it is dependent upon one or a limited
number of vendors. In 2000, substantially 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 CTS 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 ceramic filters, sensors, resistor
networks, switches, backpanels and integrated interconnect systems.
6
WORKING CAPITAL
---------------
Working capital requirements are generally dependent on the overall business
level. During 2000, working capital increased to $102.8 million, primarily due
to the increase in accounts receivable and inventories. These increases were
partially offset by increased accounts payable. Changes in CTS' cash position
during 2000 are shown in the "Consolidated Statement of Cash Flow" included
herein as noted in the Index appearing under Item 14 (a) (1) and (2).
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 "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 particular customers, 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 for 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
neither cyclical nor seasonal.
PATENTS, TRADEMARKS AND LICENSES
--------------------------------
CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents
and trademarks. CTS believes the success of its business is not materially
dependent on the existence or duration of any patent, group of patents or
trademarks. CTS has in excess of 350 U.S. patents with hundreds of foreign
counterpart patents.
CTS licenses the right to manufacture several electronic products to companies
in the United States and non-U.S. countries. In 2000, license and royalty income
was less than 1% of net sales. CTS believes 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 approximately 75% of net sales in 2000,
71% of net sales in 1999 and 66% of net sales in 1998. Sales to Motorola, Inc.,
accounted for 21% of net sales in 2000, 23% of net sales in 1999 and were
minimal in 1998. Sales to Compaq Computer Corporation amounted to 21% of net
sales in 2000, 11% of net sales in 1999 and 12% in 1998. Sales to General
Motors Corporation comprised 12% of net sales in 1998.
7
ORDER BACKLOG
-------------
Order backlog 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. Additionally, large orders from major customers may include
backlog covering 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 February 25, 2001, CTS' backlog of orders was approximately $150
million compared to approximately $190 million at February 27, 2000. This
decrease is largely the result of softening market conditions. Order backlog at
the end of February 2001 will generally be filled during the 2001 fiscal year.
GOVERNMENT CONTRACTS
--------------------
CTS estimates under 1% of its net sales are associated with purchases by the
Government.
COMPETITION
-----------
CTS competes with many U.S. 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 global 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.
CTS believes it competes most successfully in custom products manufactured to
meet specific applications of major OEMs.
8
NON-U.S. REVENUES AND RISKS
---------------------------
In 2000, approximately 52% of net sales to external customers originated from
non-U.S. operations compared to 53% in 1999. At December 31, 2000,
approximately 36% of total CTS assets were non-U.S. A substantial portion of
these assets, other than cash and equivalents, cannot readily be liquidated.
CTS believes the business risks to its non-U.S. operations, though substantial,
are normal risks for non-U.S. businesses. These risks include currency controls
and changes in currency exchange rates, longer collection cycles, political and
transportation risks, economic downturns, government regulations and
expropriation. CTS has manufacturing facilities in Canada, China, Mexico,
Scotland, Singapore and Taiwan.
Net sales to external customers originating from non-U.S. operations for the
electronic components segment were $305.4 million in 2000 compared to $280.4 in
1999, and for the electronic assemblies segment were $146.6 million in 2000
compared to $78.0 in 1999. Additional information about net sales to external
customers, operating earnings and total assets by segment, and net sales to
external customers and long-lived assets by geographic area, is contained in
"Note I - Business Segments" appearing in the financial statements as noted in
the Index appearing under Item 14(a) (1) and (2).
RESEARCH AND DEVELOPMENT ACTIVITIES
-----------------------------------
In 2000, 1999 and 1998, CTS spent $32.6, $25.3 and $13.4 million, respectively,
for research and development. CTS believes a strong commitment to research and
development is required for future growth. 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 employs approximately 1,000 engineers and technicians who
develop new materials, new processes and innovative products. CTS provides its
customers with full systems support to ensure part quality and reliability
through all phases of design, launch and manufacturing to meet or exceed
customer requirements. Many such research and development activities are for
the benefit of one or a limited number of customers or potential customers. CTS
expenses all research and development costs as incurred.
EMPLOYEES
---------
CTS employed 9,060 persons at December 31, 2000, and approximately 62% of these
persons were employed outside the United States. Approximately 350 CTS
employees in the United States were covered by collective bargaining agreements
as of December 31, 2000. There are two collective bargaining agreements at one
location, one agreement will expire in 2003 and the other will expire in 2005.
9
Item 2. Properties
----------
CTS has manufacturing facilities, administrative, research and development and
sales offices in the following locations.
Square Owned/
Manufacturing Facilities Footage Leased Business Segment
------------------------ ------- ------ ----------------
Albuquerque, New Mexico 267,000 Owned (1) Electronic Components
Berne, Indiana 249,000 Owned Electronic Components
and Electronic Assemblies
Burbank, California 9,200 Owned Electronic Components
Burbank, California 4,850 Leased Electronic Components
Carlisle, Pennsylvania 94,000 Leased Electronic Components
Chung-Li, Taiwan 145,000 Leased Electronic Components
and Electronic Assemblies
Dongguan, China 23,000 Leased Electronic Assemblies
Elkhart, Indiana 319,000 Owned Electronic Components
Glasgow, Scotland 75,000 Owned Electronic Components
Glasgow, Scotland 20,000 Leased and Electronic Assemblies
Hudson, New Hampshire 20,000 Leased Electronic Assemblies
Kaohsiung, Taiwan 133,000 Owned Electronic Components
Londonderry, New Hampshire 83,000 Leased Electronic Assemblies
Matamoros, Mexico 51,000 Owned Electronic Components
and Electronic Assemblies
Sandwich, Illinois 94,000 Owned Electronic Components
Singapore 159,000 Owned (2) Electronic Components
Streetsville, Ontario, Canada 112,000 Owned Electronic Components
and Electronic Assemblies
Tianjin, China 160,000 Leased Electronic Components
West Lafayette, Indiana 106,000 Owned Electronic Assemblies
-------
Total Manufacturing 2,124,050
=========
(1) The land and buildings are collateral for certain industrial revenue bonds.
(2) Ground lease through 2039; restrictions on use and transfer apply.
10
Square Owned/
Non-Manufacturing Facilities Footage Leased Description
---------------------------- ------- ------ -----------
Baldwin, Wisconsin 39,000 Owned Storage Facility
Bloomingdale, Illinois 110,000 Leased Administrative Offices and
Research
Brownsville, Texas 85,000 Owned Warehousing Facility
Elkhart, Indiana 93,000 Owned Administrative Offices & Research
Kowloon, Hong Kong 600 Leased Sales Office
New Hartford, Connecticut 212,000 Owned Storage Facility
Seoul, Korea 4,300 Leased Sales Office
Southfield, Michigan 1,700 Leased Sales Office
Taipei, Taiwan 1,250 Leased Sales Office
Yokohama, Japan 1,400 Leased Sales Office
All non-manufacturing facilities are used by both the electronic components and
the electronic assemblies segments.
CTS regularly assesses the adequacy of its manufacturing facilities for
manufacturing capacity, available labor and location to its markets and major
customers. Management believes the Company's manufacturing facilities are
suitable and adequate, and have sufficient capacity to meet its current needs.
The extent of utilization varies from plant to plant and with general economic
conditions. 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 in the process of constructing new facilities in Longtan, Taiwan (owned)
and Tianjin, China (land use right) to replace leased facilities.
Item 3. Legal Proceedings
-----------------
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. CTS 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. 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. In the
opinion of management, based upon presently available information relating to
all such matters, 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 and contracts relating to sales of
property. 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.
11
Item 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
During the fourth quarter of 2000, no matter was submitted to a vote of CTS
security holders.
PART 2
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
----------------------------------------------------------------------
The principal market for CTS common stock is the New York Stock Exchange using
the symbol "CTS." 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 can be located in "Shareholder
Information," appearing herein. On March 8, 2001, there were approximately 1,520
CTS common shareholders of record.
CTS' current practice is to pay dividends at an annual rate of $0.12 per share.
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. Selected Financial Data
-----------------------
A summary of selected financial data for CTS for each of the previous five years
is contained in the "Five-Year Summary," included herein.
Certain acquisitions, divestitures, closures of businesses and certain
accounting reclassifications 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
-------------
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 (1998-2000)," included
herein.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
A discussion of market risk for CTS is contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations (1998 - 2000),"
included herein and "Note A - Financial Instruments" and "Note A - Accounting
Pronouncements" of the financial statements as noted in the Index appearing
under item 14 (a) (1) and (2).
12
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Consolidated financial statements, meeting the requirements of Regulation S-X,
the Report of Independent Accountants, and "Quarterly Results of Operations"
and "Per Share Data" appear in the financial statements and supplementary
financial data included herein as noted in the Index appearing under Item 14
(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART 3
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Information responsive to Items 401(a) and 401(e) of Regulation S-K pertaining
to directors of CTS is contained in the 2001 Proxy Statement, pages 5-6, 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
2001 Proxy Statement, page 12, under the caption "Directors' & Officers' Stock
Ownership", to be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
13
The individuals in the following list were elected as executive officers of CTS
at the annual meeting of the Board of Directors on April 28, 2000, or elected as
indicated. They are expected to serve as executive officers until the next
annual meeting of the Board of Directors, scheduled on April 18, 2001, at which
time the election of officers will be considered again by the Board of
Directors.
LIST OF OFFICERS
----------------
Name Age Position and Offices
---- --- --------------------
Joseph P. Walker 62 Chairman of the Board and Chief
Executive Officer
Donald K. Schwanz 56 President and Chief Operating
Officer
Philip G. Semprevio 50 Executive Vice President
Jeannine M. Davis 52 Executive Vice President
Administration and Secretary
Donald R. Schroeder 52 Executive Vice President
and Chief Technology Officer
H. Tyler Buchanan 49 Vice President
James L. Cummins 45 Vice President Human Resources
George T. Newhart 58 Vice President, Investor Relations
and Interim Chief Financial
Officer
Richard G. Cutter 54 Vice President, General Counsel
and Assistant Secretary
Matthew W. Long 39 Assistant Treasurer
BRIEF HISTORY OF OFFICERS
-------------------------
Joseph P. Walker has served as Chairman of the Board and Chief Executive Officer
of CTS since 1988. From 1988 to January 18, 2001, Mr. Walker also served as
President.
Donald K. Schwanz was elected as President and Chief Operating Officer,
effective January 18, 2001. Prior to joining CTS, he was President of the
industrial control business of Honeywell, Inc., and had been with Honeywell
since 1979, with positions of increasing responsibility.
Philip G. Semprevio was elected as Executive Vice President effective June 29,
1999. In December 1998, Mr. Semprevio was elected as Group Vice President. Prior
to his joining CTS, 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.
14
Jeannine M. Davis was elected as Executive Vice President Administration and
Secretary, effective June 29, 1999. Ms. Davis was elected to the CTS Board of
Directors on June 27, 2000. Previously, she served as Vice President, Secretary
and General Counsel since 1988.
Donald R. Schroeder was elected as Executive Vice President and Chief Technology
Officer, effective December 20, 2000. In January 2000, Mr. Schroeder was elected
as Vice President Business and Chief Technology Officer. From 1995 to January
2000, Mr. Schroeder served as Vice President Sales and Marketing.
H. Tyler Buchanan was elected Vice President on August 25, 2000. Prior to his
promotion, he held the position of Vice President and General Manager, CTS
Automotive Products. He has held positions of varying responsibility with CTS
since 1977.
James L. Cummins has served as Vice President Human Resources since 1994. From
1991 - 1994, he served as Director of Human Resources for CTS Corporation.
George T. Newhart was appointed Interim Chief Financial Officer on January 29,
2001, and was elected Vice President Investor Relations on December 8, 2000.
Prior to this appointment, Mr. Newhart served as Vice President and Corporate
Controller since 1998, and prior to this appointment, from 1989 - 1998, he
served as Corporate Controller.
Richard G. Cutter, III, was elected Vice President and Assistant Secretary on
August 25, 2000. Prior to this appointment, Mr. Cutter was General Counsel since
January 2000, and retains that position. Prior to joining CTS, he was General
Counsel with General Electric - Silicones.
Matthew W. Long was elected as Assistant Treasurer on December 18, 2000. Mr.
Long was Corporate Controller for Morgan Drive Away, Inc. from July through
December 2000. Prior to this, he served as Controller with CTS'
Electrocomponents business and as External Financial Accounting Manager from
1996 - July 2000.
Item 11. Executive Compensation
-----------------------
Information responsive to Item 402 of Regulation S-K pertaining to management
remuneration is contained in the 2001 Proxy Statement under the captions
"Director Compensation," page 12, and "Executive Compensation," pages 14 - 16,
to be filed with the Securities and Exchange Commission, and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information responsive to Item 403 of Regulation S-K pertaining to security
ownership of certain beneficial owners and management, is contained in the 2001
Proxy Statement under the caption "Directors' & Officers' Stock Ownership,"
page 12, to be filed with the Securities and Exchange Commission, and is
incorporated herein by reference.
15
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
None.
PART 4
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
-----------------------------------------------------------------
The list of financial statements and schedules required by Item 14 (a) (1) and
(2) is contained on page S-1 herein.
(a) (3) Exhibits
(3)(i) 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)(ii) 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 1988 Restricted Stock and Cash Bonus Plan
approved by the shareholders on April 28, 1989, as amended
and restated on May 9, 1997, (incorporated by reference to
Exhibit 10(e) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 29, 1997, filed with the
Commission on August 12, 1997).
(10)(d) 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)(e) The CTS Corporation 1997 Stock Option Agreements approved
by the shareholders on October 16, 1997, filed as Exhibit
(10)(l) to the Company's Form 10-K for 1997, filed with the
Commission on March 27, 1998.
(10)(f) Asset Sale Agreement dated December 22, 1998, and Earnout
Exhibit thereto between CTS Wireless Components, Inc. and
Motorola, Inc., under which CTS Wireless Components, Inc.
acquired the assets of Motorola's Components Products
Division, (incorporated by reference to Exhibit 10(f) to
the Company's Annual Report on Form 10-K for 1998, filed
with the Commission on February 25, 1999).
16
(10)(g) Prototype severance agreement between the Company and its
officers, general managers and managing directors filed
herewith.
(10)(h) The CTS Corporation Executive Deferred Compensation Plan
effective September 14, 2000 filed herewith.
(21) Subsidiaries filed herewith.
(23) Consent of PricewaterhouseCoopers LLP to incorporation by
reference of this Annual Report on Form 10-K for the fiscal
year 2000 to Registration Statement 333-90697 on Form S-3,
Registration Statement 33-27749 on Form S-8, Registration
Statement 333-5730 on Form S-8 and Registration Statement
333-91339 on Form S-8.
(b) Reports on Forms 8-K
--------------------
During the three-month period ending December 31, 2000, CTS filed one
report on Form 8-K, dated December 29, 2000, under Item 5., Other
Events, related to the future amendment of the Rights Agreement.
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) and 333-91339 (filed
November 19, 1999):
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.
17
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/George T. Newhart
George T. Newhart
Vice President Investor Relations and
Interim 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/ Walter S. Catlow
Walter S. Catlow, Director
Date By /S/ Lawrence J.. Ciancia
Lawrence J. Ciancia, Director
Date By /S/ Thomas G. Cody
Thomas G. Cody, Director
Date By /S/ Jeannine M. Davis
Jeannine M. Davis, Director
Date By /S/ Gerald H. Frieling, Jr.
Gerald H. Frieling, Jr., Director
Date By /S/ Roger R. Hemminghaus
Roger R. Hemminghaus, Director
Date By /S/ Michael A. Henning
Michael A. Henning, Director
Date By /S/ Robert A. Profusek
Robert A. Profusek, Director
Date By /S/ Joseph P. Walker
Joseph P. Walker, Director
Date By /S/ Randall J. Weisenburger
Randall J. Weisenburger, Director
Date By /S/ Thomas A. Kroll
Thomas A. Kroll,
Controller, Group Accounting
18
Financial Highlights
- --------------------
(In thousands except per share data)
For the Year 2000 1999 1998
==================================================================================================================================
Net sales $866,523 $677,076 $370,441
Earnings, excluding the 1999 $8.6 million after-tax effect of acquired IPR&D 83,802 60,138 37,474
Net earnings 83,802 51,468 37,474
Average common shares outstanding -- diluted 28,675 28,589 29,228
Per share data:
Earnings -- diluted, excluding the 1999 $0.30 after-tax effect of acquired IPR&D $2.92 $2.10 $1.28
Net earnings -- diluted -- Note M 2.92 1.80 1.28
Dividends declared 0.12 0.12 0.12
Capital expenditures 119,216 32,896 21,330
At Year End
==================================================================================================================================
Working capital $102,805 $ 99,836 $ 35,306
Long-term debt (including current maturities) 188,000 167,000 56,000
Shareholders' equity 246,357 164,764 123,839
Equity per outstanding share 8.87 6.00 4.55
19
Consolidated Statements of Earnings
- -----------------------------------
(In thousands of dollars except per share amounts)
Year Ended
----------
December 31 December 31 December 31
2000 1999 1998
----------- ----------- -----------
Net sales $866,523 $677,076 $370,441
Costs and expenses:
Cost of goods sold 605,598 471,543 255,844
Selling, general and administrative expenses 94,501 80,866 51,300
Research and development expenses 32,583 25,348 13,387
Acquired in-process research and development (IPR&D) - Note B -- 12,940 --
Amortization of intangible assets 5,211 3,583 302
------- ------ ------
Operating earnings 128,630 82,796 49,608
------- ------ ------
Other (expense) income:
Interest (13,050) (9,944) (2,194)
Interest income 846 865 1,141
Other 701 338 886
------- ------ ------
Total other expense (11,503) (8,741) (167)
------- ------ ------
Earnings before income taxes 117,127 74,055 49,441
32,796 22,587 15,368
------- ------ ------
Earnings from continuing operations 84,331 51,468 34,073
------- ------ ------
Discontinued operations:
(Loss) earnings from discontinued operations, net
of income tax(benefit) charge of ($355) in 2000
and $2,267 in 1998 -- Note C (529) -- 3,401
------- ------- -------
Net earnings $83,802 $51,468 $37,474
======= ======= =======
Earnings (loss) per share -- Note M
Basic:
Continuing operations $3.05 $1.87 $1.22
Discontinued operations (0.02) -- 0.12
----- ----- -----
Net earnings per share $3.03 $1.87 $1.34
===== ===== =====
Diluted:
Continuing operations $2.94 $1.80 $1.17
Discontinued operations (0.02) -- 0.11
----- ----- -----
Net earnings per share $2.92 $1.80 $1.28
===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
20
Consolidated Balance Sheets
- ---------------------------
(In thousands of dollars)
December 31 December 31
2000 1999
----------- -----------
ASSETS
Current Assets
Cash and equivalents $ 20,564 $ 24,219
Accounts receivable, less allowances (2000 -- $1,837; 1999 -- $2,628) 145,920 124,682
Inventories
Finished goods 29,756 19,399
Work-in-process 16,490 20,288
Raw materials 58,070 39,255
------- -------
Total inventories 104,316 78,942
Other current assets 8,920 4,869
Deferred income taxes -- Note H 25,976 21,585
------- -------
Total current assets 305,696 254,297
Property, Plant and Equipment
Buildings and land 96,690 61,265
Machinery and equipment 317,390 240,619
------- -------
Total property, plant and equipment 414,080 301,884
Accumulated depreciation (189,219) (162,192)
-------- --------
Net property, plant and equipment 224,861 139,692
Other Assets
Prepaid pension expense -- Note G 84,301 68,990
Investment in discontinued operations -- Note C - 9,061
Intangible assets 64,177 53,336
Accumulated amortization (10,571) (5,493)
Other 4,465 2,769
Total other assets 142,372 128,663
-------- --------
Total Assets $672,929 $522,652
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt -- Note E $ 10,000 $ 5,000
Notes payable -- Note D 7,397 7,428
Accounts payable 100,394 68,315
Accrued salaries, wages and vacation 17,016 16,745
Income taxes payable 18,374 12,187
Other accrued liabilities 49,710 44,786
-------- --------
Total current liabilities 202,891 154,461
Long-term debt -- Note E 178,000 162,000
Other long-term obligations -- Note E 6,689 9,846
Deferred income taxes -- Note H 34,612 27,263
Postretirement benefits -- Note G 4,380 4,318
Contingencies -- Note L -- --
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; 48,436,908 shares issued
at December 31, 2000, and 48,419,604 shares issued at December 31, 1999 -- Note J 198,877 193,612
Additional contributed capital 14,558 9,005
Retained earnings 325,850 245,414
Cumulative translation adjustment (1,561) 291
------- -------
537,724 448,322
Cost of common stock held in treasury (2000 -- 20,655,721 shares; 1999
-- 20,957,649 shares) -- Note K (291,367) (283,558)
-------- --------
Total shareholders' equity 246,357 164,764
-------- --------
Total Liabilities and Shareholders' Equity $672,929 $522,652
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
21
Consolidated Statements of Cash Flows
- -------------------------------------
(In thousands of dollars)
Year Ended
----------
December 31 December 31 December 31
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 83,802 $ 51,468 $ 37,474
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net loss (earnings) from discontinued operations 529 -- (3,401)
Depreciation and amortization 44,325 33,907 19,155
Deferred income taxes 3,077 (5,337) 6,176
Income tax benefit related to exercised stock options 6,395 -- --
Acquired in-process research and development -- 12,940 --
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (21,238) (77,639) 4,271
Inventories (26,278) (24,853) 1,924
Prepaid pension asset (15,311) (6,368) (7,336)
Accounts payable and accrued liabilities 30,505 72,126 (7,548)
Income taxes payable 6,187 1,958 (4,088)
Other (1,456) (1,348) (15)
------- ------- -------
Total adjustments 26,735 5,386 9,138
------- ------- -------
Net cash provided by continuing operations 110,537 56,854 46,612
Net cash provided by (used in) discontinued operations 318 (1,161) 6,659
------- ------- -------
Net cash provided by operating activities 110,855 55,693 53,271
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment,
including discontinued operations, net 7,000 28,646 20,691
Payment for purchase of CTS Wireless -- Note B (11,200) (97,445) --
DCA acquisition costs (2,922) (2,932) (6,416)
Capital expenditures (119,216) (32,896) (21,330)
-------- -------- -------
Net cash used in investing activities (126,338) (104,627) (7,055)
Cash flows from financing activities:
Proceeds from issuance of long-term obligations --
CTS Wireless acquisition -- 97,445 --
Proceeds from issuance of long-term obligations -- other 26,000 -- --
Payments of long-term obligations, net (5,000) (28,445) (5,206)
Dividends paid (3,337) (3,301) (3,421)
Purchases of treasury stock (9,284) (9,175) (56,273)
Stock options acquired -- -- (5,273)
Exercise of stock options 4,221 851 336
Other (31) -- (48)
------- -------- --------
Net cash provided by (used in) financing activities 12,569 57,375 (69,885)
Effect of exchange rate changes on cash (741) (495) 95
------- -------- --------
Net (decrease) increase in cash (3,655) 7,946 (23,574)
Cash and equivalents at beginning of year 24,219 16,273 39,847
-------- -------- --------
Cash and equivalents at end of year $ 20,564 $ 24,219 $ 16,273
======== ======== ========
Supplemental cash flow information Cash paid during the year for:
Interest $ 13,094 $ 9,711 $ 4,685
Income taxes -- net 13,914 24,195 17,218
Noncash investing and financing activities
Common stock issued in connection with DCA acquisition $ 199 $ 595 $ 3,059
The accompanying notes are an integral part of the consolidated financial statements.
22
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
------ -------- ------------- ------------- ----------- -------- -----
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 $0.12 per share (3,358) (3,358)
Returned 10,200 shares to treasury forfeited
from restricted stock and cash bonus plan--net (9) 57 (48)
Issued 166,442 shares on exercise
of stock options -- net 503 (167) 336
Stock options acquired--Note F (5,273) (5,273)
Stock compensation 266 266
Acquired 3,535,028 shares for treasury stock (56,273) (56,273)
Issued 266,442 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
Net earnings 51,468 51,468 51,468
Cumulative translation adjustment
(net of tax benefit of $169) (515) (515) (515)
-------
Comprehensive earnings 50,953
=======
Cash dividends of $0.12 per share (3,339) (3,339)
Issued 201,000 shares on restricted
stock and cash bonus plan--net 2,151 (2,893) 742
Issued 169,547 shares on exercise
of stock options -- net 513 338 851
Stock compensation 6 1,026 8 1,040
Acquired 205,800 shares for treasury
stock--Note K (9,175) (9,175)
Issued 51,816 shares to former DCA
shareholders 595 595
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 193,612 245,414 291 9,005 (283,558) 164,764
Net earnings 83,802 83,802 83,802
Cumulative translation adjustment
(net of tax benefit of $556) (1,852) (1,852) (1,852)
------
Comprehensive earnings $81,950
=======
Cash dividends of $0.12 per share (3,366) (3,366)
Returned 41,800 shares to treasury
forfeited from restricted stock and
cash bonus plan -- net 47 123 (170)
Issued 519,247 shares on exercise
of stock option -- net 4,369 4,632 1,615 10,616
Stock compensation 650 798 30 1,478
Acquired 190,000 shares for treasury
stock--Note K (9,284) (9,284)
Issued 17,304 shares to former DCA
shareholders 199 199
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $198,877 $325,850 $(1,561) $14,558 $(291,367)$246,357
===================================================================================================================================
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(In thousands except share and per share data)
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 when title
transfers 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. 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 recognized as other income or
expense.
CTS assesses the recoverability of long-lived assets, including intangible
assets, whenever events or changes in circumstances 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 to fair value.
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
by law.
24
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.
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 the Financial Accounting Standards Board
("FASB") Statement No. 109, "Accounting for Income Taxes."
Translation of Foreign Currencies: The financial statements 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 CTS' United Kingdom subsidiary are translated into U.S. dollars
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
long-term debt. The carrying value for cash and 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, 2000, and 1999 approximates fair value where fair
value is based on market prices for the same or similar debt and maturities.
Concentration of Credit Risk: Trade receivables subject CTS to the potential for
credit risk with major customers. CTS sells its products to customers
principally in the communications, automotive and computer 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. Sales to Motorola, Inc. ("Motorola") and Compaq Computer
Corporation("Compaq") were each approximately 21% of sales for the year ended
December 31, 2000, which exposes CTS to a concentration of credit risk. Sales to
Motorola and Compaq were 23% and 11%, respectively, of sales for the year ended
December 31, 1999. Management believes the likelihood of incurring material
losses due to concentration of credit risk is remote.
Stock-Based Compensation: CTS accounts 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.
25
See Note F for the required pro forma net income and earnings per share
disclosures required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation."
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 reflect a
two-for-one stock split in 1999 (Note J). Basic earnings per share excludes 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 securities.
Refer to Note M 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 reporting and displaying comprehensive earnings and its
components. The components of comprehensive earnings for CTS include foreign
translation adjustments and net earnings and are reported within the Statements
of Shareholders' Equity in the columns titled "Comprehensive Earnings" and
"Accumulated Other Comprehensive Earnings."
Accounting Pronouncements: The FASB issued Statement No. 133, "Accounting for
Derivatives and Hedging Activities," which, as amended, is effective for CTS
January 1, 2001. This statement standardizes the accounting for derivative
instruments by requiring an entity to recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. CTS continues to evaluate the impact of adopting the standard, but does
not expect the impact to be material.
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 2000.
26
NOTE B--Acquisition
- -------------------
On February 26, 1999, CTS completed the acquisition of certain assets and
liabilities of the Component Products Division of Motorola ("CTS Wireless"). CTS
Wireless designs and manufactures electronic components and assemblies including
ceramic filters, quartz crystals, crystal oscillators, surface acoustic wave
components and piezoceramic devices in five facilities in the USA and Asia,
primarily for the wireless communications industry.
The acquisition was accounted for under the purchase method of accounting. As
part of the acquisition, CTS paid Motorola $94 million at the closing and
assumed approximately $49 million of debt (including pension obligations). CTS
may be obligated to pay additional amounts depending upon increased sales and
profitability of CTS Wireless through 2003. The calculation resulted in an
additional payment of $11.2 million for 1999 and an estimated liability of $15.0
million for 2000. The maximum remaining potential payment under the acquisition
agreement was $79.6 million at December 31, 2000. CTS financed a substantial
portion of the purchase price through bank borrowings. CTS incurred
approximately $4 million in costs directly associated with the acquisition which
are included in the overall consideration.
The purchase price has been allocated to the assets acquired based on the
estimated fair values as follows:
(In millions)
Inventory $ 19.9
Property, plant and equipment 78.7
Current technology 12.0
Identifiable intangible assets 49.2
In-process research and development (IPR&D) 12.9
------
Total $172.7
======
Identifiable intangible assets include trademarks, tradenames, technology rights
and customer lists that are amortized over 4 - 30 years. Current technology is
amortized over four years.
In-process research and development represented the value assigned to research
and development projects of CTS Wireless that were commenced but not yet
completed or reached technological feasibility at the date of acquisition and
which, if unsuccessful, have no alternative future use in research and
development activities or otherwise. As of the date of acquisition, the $12.9
million of purchase price allocated to in-process research and development
related to technologies being developed for next-generation products and
represented products that were in the development cycle that had not yet reached
a level of technological feasibility and had no alternative future use. CTS
Wireless' in-process research and development projects were initiated to address
27
the rapid technological change associated with the wireless communications
industry. The incomplete projects included developing technology for the
miniaturization of components such as oscillators, quartz and ceramics. The
calculations of amounts allocated to in-process research and development
projects were based on risk-adjusted future cash flows related to the
incomplete research and development projects. The resulting cash flows were
discounted to their present value using a rate of 18%, which exceeded the
overall cost of capital for CTS.
Estimated net cash inflows from the acquired in-process technology, related
to CTS Wireless, commenced in the latter part of 1999 and are projected to
steadily decline through 2004. As of the date of acquisition, approximately
$10 million had been expended to develop these research and development
projects. Remaining efforts on the projects are significant and include
important phases of project design, development and testing. CTS has reviewed
the assumptions used in the forecasts and continues to believe that the
amount allocated to acquired in-process research and development is
reasonable.
The operating results of CTS Wireless have been included in the consolidated
statements of earnings from the date of acquisition. Pro forma results of
operations as if the acquisition of CTS Wireless had occurred at the
beginning of 1999 follow:
Pro forma
Year ended
December 31, 1999
-----------------
Unaudited
Net sales (In millions) $ 722
Net earnings (In millions) $ 53
Diluted earnings per share $1.84
These unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only and include certain adjustments, such
as additional amortization expense as a result of acquired intangible assets
and increased interest expense on acquisition debt. In management's opinion,
the pro forma consolidated results of operations are not necessarily
indicative of the actual results that would have occurred had the acquisition
been consummated on January 1, 1999, or of future operations of CTS giving
effect to the acquisition.
28
NOTE C--Discontinued Operations
- -------------------------------
During 1998, CTS finalized a plan to sell all of the businesses obtained in the
acquisition of Dynamics Corporation of America ("DCA") not strategic to CTS'
electronic components and electronic assemblies core business segments. During
the first quarter of 2000, the disposition of DCA acquired businesses was
completed resulting in a net loss of $0.5 million.
These noncore businesses are recorded as discontinued operations for all periods
presented in the consolidated financial statements. For the years ended December
31, 2000, 1999 and 1998, CTS received gross proceeds related to the sale of
discontinued operations of $4 million, $31 million and $22 million,
respectively.
Operating results for discontinued operations are summarized as follows:
Discontinued Operations 1999 1998
- ----------------------- ---- ----
Net sales $21,649 $102,984
======= ========
Earnings before income taxes -- 5,668
Income tax provision -- 2,267
------- --------
Total discontinued operations, net of income taxes $ -- $ 3,401
======= ========
Note D--Notes Payable
- ---------------------
CTS had unsecured line of credit arrangements of $18,317 and $20,312 at December
31, 2000, and 1999, respectively. These arrangements are generally subject to
annual renewal and renegotiation, and may be withdrawn at the banks' option.
Average daily short-term borrowings, including borrowings denominated in
non-U.S. currencies, were $3,438 and $3,017 during 2000 and 1999, respectively.
The weighted-average interest rate, computed by relating interest expense to
average daily short-term borrowings, was 8.8% in 2000 and 6.5% in 1999.
29
NOTE E--Long-term Debt and Other Long-term Obligations
- ------------------------------------------------------
Long-term debt and other long-term obligations were comprised of the following:
2000 1999
---- ----
Long-term debt:
Term loan at 6.84% (2000) and 6.82% (1999), due in quarterly
installments through 2004 $ 61,000 $ 66,000
Revolving credit agreement, average interest rate of 7.15% (2000) and
6.23% (1999), due in 2005 85,000 59,000
Industrial revenue bonds at a weighted-average rate of 7.50%, due in 2013 42,000 42,000
-------- --------
188,000 167,000
Less current maturities 10,000 5,000
-------- --------
Total long-term debt $178,000 $162,000
======== ========
Other long-term obligations:
Contractual DCA employee termination benefits, payable ratably
through 2007 $ 3,501 $ 6,423
Untendered shares of DCA 2,941 3,139
Other 247 284
-------- --------
Total other long-term obligations $ 6,689 $ 9,846
======== ========
The $61,000 term loan with nine banks matures as follows: 2001--$10,000;
2002--$15,000; 2003--$15,000 and 2004--$21,000.
CTS also has an unsecured revolving credit agreement totaling $150.0 million
with nine banks, which expires in 2005. Interest rates on these borrowings and
the term loan fluctuate based upon LIBOR, with adjustments based on the ratio of
CTS' consolidated total indebtedness to consolidated earnings before interest,
taxes, depreciation and amortization. CTS 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 0.25 percent
per annum. The credit agreement and term loans require, among other things, that
CTS maintain a minimum net worth, a minimum fixed charge coverage ratio and a
minimum leverage ratio.
Debt relating to the industrial revenue bonds was assumed from Motorola (Note
B), and is collateralized by the land, building and equipment acquired with the
bonds.
30
NOTE F--Stock Plans
- -------------------
At December 31, 2000, CTS had four stock-based compensation plans. CTS applies
APB Opinion No. 25 in determining compensation costs for its plans. Had
compensation cost for CTS' fixed stock-based compensation plans been determined
based on the fair value 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:
2000 1999 1998
---- ---- ----
Net earnings As reported $83,802 $51,468 $37,474
Pro forma $81,914 $50,825 $37,206
Net earnings per share --diluted As reported $2.92 $1.80 $1.28
Pro forma $2.86 $1.78 $1.28
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 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 2000, 1999 and
1998: dividend yield of 0.23%, 0.37% and 0.85%, respectively; expected
volatility of 33.17%, 19.82% and 30.49%, respectively; risk-free interest rate
of 5.12%, 5.86% and 5.30%, respectively and expected life of 5.1, 5.2 and 4.2
years, respectively.
CTS' 1996 Stock Option Plan ("1996 Plan") provides for grants of incentive stock
options or non-qualified stock options to officers and key employees. Under the
1996 Plan, CTS may grant options to its officers and key employees for up to
1,200,000 shares of common stock. Options are granted under the 1996 Plan 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 CTS' common stock or a combination thereof, subject to
certain restrictions as described in the plan document.
Under the 1996 Plan, options to purchase a total of 502,750 shares were
outstanding as of December 31, 2000. At December 31, 2000, 108,050 of these
shares were exercisable.
During 1997, in connection with the acquisition of DCA, CTS granted to certain
officers and key employees 2,400,000 options to acquire common shares. 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 acquisition and
the option price of $10.42 per share, a $16,200 before tax, $10,530 after tax,
or $0.33 per diluted share, charge to expense was recorded. During 1998, CTS
acquired 900,000 of these options at a cost of $5,273. Of the 2,400,000 options
granted, 1,233,447 are exercisable at December 31, 2000.
31
A summary of the status of stock options as of December 31, 2000, 1999 and 1998,
and changes during the years ended on those dates, is presented below. All prior
years' data has been restated to reflect the two-for-one stock split distributed
in August 1999.
2000 1999 1998
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning
of year 2,103,460 $ 12.61 2,138,208 $ 10.05 2,981,084 $ 9.48
Granted 193,500 51.44 213,700 33.61 281,000 14.09
Exercised (533,813) 9.64 (179,848) 6.46 (217,250) 5.45
Acquired -- -- -- -- (900,000) 10.42
Expired or canceled (26,950) 33.79 (68,600) 15.51 (6,626) 10.08
--------- ------- --------- ------ --------- ------
Outstanding at end of year 1,736,197 $ 17.53 2,103,460 $12.61 2,138,208 $10.05
========= ======= ========= ====== ========= ======
Options exercisable at
year end 1,341,497 1,745,360 1,769,708
Weighted-average fair value
of options granted during the year $19.14 $10.05 $ 4.26
The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/00 Life (Years) Price at 12/31/00 Price
--------- ----------- ------------ --------- ----------- ---------
$10.42-15.00 1,375,247 5.96 $10.80 1,293,647 $10.59
24.47-35.97 158,550 8.43 32.04 44,750 32.04
42.69-66.75 197,400 9.42 51.37 1,700 48.89
71.00-79.25 5,000 8.95 71.83 1,400 72.18
32
CTS has a discretionary Restricted Stock and Cash Bonus Plan ("Plan") which
originally reserved 2,400,000 shares of CTS' common stock for sale, at market
price or below, or award to key employees. Effective December 31, 2000, CTS
reduced the number of remaining shares reserved for issuance under the Plan to
500,000 shares. 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. CTS recorded income (expense) of $132, ($3,644) and ($371) in
2000, 1999 and 1998, respectively, under the formula provisions of the Plan
which are based on the fair market value of a share of common stock.
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
compensation expense was $232, $363 and $54 in 2000, 1999 and 1998,
respectively.
NOTE G--Employee Retirement Plans
- ---------------------------------
Defined benefit plans
- ---------------------
CTS has a number of noncontributory defined benefit pension plans ("Pension
Plans") covering approximately 40% of its employees. Plans covering salaried
employees provide pension benefits that are based on the employees' compensation
prior to retirement. Plans covering hourly employees generally provide benefits
of stated amounts for each year of service.
In 1999, CTS amended the Pension Plans to include certain employees of CTS
Wireless. CTS also amended the Pension Plans to improve early retirement
subsidies and to include specific benefits for certain employees.
CTS provides other postretirement benefits consisting of life insurance programs
for retired employees. A majority of CTS' domestic employees are eligible for
life insurance benefits. CTS funds life insurance benefits through term life
insurance policies. CTS plans to continue funding premiums on a pay-as-you-go
basis.
33
The following provides a reconciliation of benefit obligations, plan assets,
and the funded status of the Pension Plans and other postretirement benefits.
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at January 1 $143,747 $124,052 $ 4,130 $ 4,506
Service cost 6,303 5,483 38 42
Interest cost 10,641 9,574 297 293
Acquisitions -- 21,269 -- --
Plan amendments -- 7,997 -- --
Actuarial loss (gain) 2,323 (18,163) 2 (380)
Benefits paid (7,303) (6,465) (271) (331)
-------- -------- ------- -------
Benefit obligation at December 31 $155,711 $143,747 $ 4,196 $ 4,130
-------- -------- ------- -------
Change in plan assets:
Assets at fair value at January 1 $357,973 $245,880 $ -- $ --
Actual return on assets (48,166) 104,397 -- --
Acquisitions -- 14,019 -- --
Company contributions 784 392 271 331
Benefits paid (7,303) (6,465) (271) (331)
Administrative and other (198) (250) -- --
-------- -------- -------- -------
Assets at fair value at December 31 $303,090 $357,973 $ -- $ --
-------- -------- -------- -------
Reconciliation of prepaid (accrued) cost:
Funded status of the plan $147,379 $214,226 $(4,196) $(4,130)
Unrecognized net gain (70,843) (152,380) (442) (197)
Unrecognized prior service cost 9,041 10,047 8 9
Unrecognized transition asset (1,276) (2,903) -- --
-------- -------- ------- -------
Prepaid (accrued) cost $ 84,301 $ 68,990 $(4,630) $(4,318)
======== ======== ======= =======
34
Net pension income/postretirement expense in 2000, 1999 and 1998 includes the
following components:
Other
Postretirement
Pension Benefits Benefits
---------------- --------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Service cost -- benefits earned
during the year $ 6,303 $ 5,483 $ 3,482 $ 38 $ 42 $ 35
Interest cost on projected
benefit obligation 10,641 9,574 7,830 297 293 296
Expected return on plan
assets (26,873) (18,758) (20,203) -- -- --
Net amortization and
deferral (4,598) (2,667) 1,555 (1) 1 (2)
-------- ------- -------- ----- ----- -----
Net (income) expense $(14,527) $(6,368) $ (7,336) $334 $336 $329
======== ======= ======== ===== ===== =====
Actuarial assumptions:
Discount rate as of
December 31 7.50 % 7.50% 6.75% 7.50 % 7.50% 6.75%
Expected return on
plan assets 9.75 % 9.75% 9.75% 9.75 % 9.75% 9.75%
Rate of compensation
increase 5%-7% 5%-7% 4%-7% -- -- --
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.
The majority of U.S. defined benefit pension plan assets are invested in common
stock, including approximately $53 million and $110 million in CTS common stock
at December 31, 2000, and 1999, 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 that covers substantially all of its U.S. employees.
Additionally, CTS sponsors several other defined contribution plans covering
certain non-U.S. employees. 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 $4,082 in 2000, $2,821 in 1999 and
$2,457 in 1998.
35
NOTE H--Income Taxes
- --------------------
Earnings from continuing operations before income taxes consist of the
following:
2000 1999 1998
---- ---- ----
Domestic $ 39,568 $20,770 $26,789
Non-U.S. 77,559 53,285 22,652
-------- ------- -------
Total $117,127 $74,055 $49,441
======== ======= =======
Significant components of income taxes are as follows:
2000 1999 1998
---- ---- ----
Current:
Federal $1,158 $11,736 $ 1,041
State 619 2,975 928
Non-U.S. 27,941 13,079 7,654
------ ------ -----
Total current 29,718 27,790 9,623
------ ------ -----
Deferred:
Federal 4,604 (4,585) 5,737
State 597 (965) 902
Non-U.S. (2,123) 347 (894)
------ ------ ------
Total deferred 3,078 (5,203) 5,745
------- ------- -------
Total provision for income taxes $32,796 $22,587 $15,368
======= ======= =======
36
Significant components of CTS' deferred tax liabilities and assets at December
31, 2000, and 1999 are:
2000 1999
---- ----
Pensions $31,145 $ 26,920
Depreciation 6,698 2,805
Basis difference-acquired assets 2,073 1,385
Other 1,648 1,757
------ ------
Gross deferred tax liabilities 41,564 32,867
------ ------
Postretirement benefits 1,759 594
Inventory reserves 3,173 3,144
Credit carryforward 992 --
Nondeductible accruals 14,287 18,294
Nonrecurring compensation charge 2,913 3,543
Other 9,911 2,324
------ ------
Gross deferred tax assets 33,035 27,899
------ ------
Net deferred tax liabilities (8,529) (4,968)
Deferred tax asset valuation allowance (117) (601)
------ ------
Total $(8,646) $(5,569)
======= =======
During 2000, the valuation allowance was decreased as a result of the
utilization of certain deferred tax assets in non-U.S. jurisdictions.
The overall effective income tax rate (expressed as a percentage of income
before income taxes) varied from the U.S. statutory income tax rate as follows:
2000 1999 1998
---- ---- ----
Taxes at the U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 0.7% 1.8% 2.4%
Non-U.S. income taxed at rates different than the U.S.
statutory rate (2.0%) (4.1%) 0.2%
Tax exempt earnings (1.2%) (1.3%) --
Utilization of net operating loss carryforwards and benefit
of scheduled tax credits (1.3%) (0.8%) (5.6%)
Nonrecurring compensation expense -- -- (1.5%)
Other (3.2%) (0.1%) 0.5%
----- ----- -----
Provision for income taxes 28.0% 30.5% 31.0%
===== ===== =====
37
Undistributed earnings of certain non-U.S. subsidiaries amount to approximately
$140 million at December 31, 2000. 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 $8 million of withholding tax would be imposed.
CTS qualifies for income tax holidays in certain non-U.S. taxing jurisdictions.
As a result, certain earnings of CTS are either tax-exempt or are subject to tax
at reduced rates for a specified period of time. These tax holidays, unless
extended, are scheduled to expire in 2004 and 2005.
NOTE I --Business Segments
- --------------------------
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires companies to provide certain information about their
operating segments. 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 wireless components
used in cellular handsets, automotive sensors used in commercial or consumer
vehicles, frequency control devices such as crystals and clocks, loudspeakers,
resistor networks, switches and potentiometers. 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
integrated interconnect products containing backpanel and connector assemblies
used in the telecommunications industry, RF integrated modules used in cellular
handsets, hybrid microcircuits used in the healthcare market and pointing
sticks/cursor controls for notebook computers.
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.
38
Summarized financial information concerning CTS' reportable segments is shown in
the following table:
Electronic Electronic
Components Assemblies Total
---------- ---------- -----
2000
- ----
Net sales to external customers $536,703 $329,820 $866,523
Operating earnings 98,157 30,473 128,630
Total assets 523,593 149,336 672,929
Depreciation and amortization 36,422 7,903 44,325
Capital expenditures $ 84,791 $ 34,425 $119,216
1999
- ----
Net sales to external customers $507,344 $169,732 $677,076
Operating earnings* 81,025 14,711 95,736
Total assets 407,822 105,769 513,591
Depreciation and amortization 29,266 4,641 33,907
Capital expenditures $ 22,028 $ 10,868 $ 32,896
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
*Excludes the pre-tax effect of a one-time, noncash write-off for acquired
in-process research and development (IPR&D), related to the acquisition of CTS
Wireless of $12,940.
39
Reconciling information between reportable segments and CTS' consolidated totals
is shown in the following table:
2000 1999 1998
---- ---- ----
Pre-tax Earnings
- ----------------
Total operating earnings for reportable segments $128,630 $ 95,736 $ 49,608
Acquired in-process research and development (IPR&D) -- (12,940) --
Interest expense (13,050) (9,944) (2,194)
Interest income 846 865 1,141
Other income 701 338 886
-------- -------- --------
Earnings before income taxes $117,127 $ 74,055 $ 49,441
======== ======== ========
Assets
Total assets for reportable segments $672,929 $513,591 $258,066
Investment in discontinued operations -- 9,061 35,123
-------- -------- --------
Total assets $672,929 $522,652 $293,189
======== ======== ========
Financial information relating to CTS' operations by geographic area was as follows:
2000 1999 1998
---- ---- ----
Net Sales
- ---------
United States $414,571 $318,627 $221,395
United Kingdom 158,018 96,807 92,784
China 145,609 153,222 --
Taiwan 84,166 59,392 8,592
Other non-U.S. 64,159 49,028 47,670
-------- -------- --------
Consolidated $866,523 $677,076 $370,441
======== ======== ========
Sales are attributed to countries based upon the origin of the sale.
2000 1999 1998
---- ---- ----
Long-Lived Assets
- -----------------
United States $162,172 $104,398 $41,431
Taiwan 42,724 36,369 2,858
China 29,771 18,581 --
United Kingdom 18,573 15,583 11,543
Other non-U.S. 25,227 12,604 13,418
-------- -------- -------
Consolidated $278,467 $187,535 $69,250
======== ======== =======
40
Electronic components business segment revenues from Motorola represent
approximately $118,838, or 22%, and $141,501, or 28%, of the segment's revenue
for the year ended December 31, 2000, and 1999, respectively. Electronic
assemblies business segment revenues from Compaq represent approximately
$177,882, or 54%, and $71,986, or 42%, of the segment's revenue for the year
ended December 31, 2000, and 1999, respectively, and from Motorola represent
approximately $65,781, or 20%, for the year ended December 31, 2000.
NOTE J--Capital Stock
- ---------------------
CTS adopted a Shareholder Rights Plan on August 28, 1998. The Shareholder Rights
Plan was implemented by declaring a dividend, distributable to shareholders of
record on September 10, 1998, of one common share purchase right ("Right") for
each outstanding share of common stock held at the close of business on that
date. Each Right under the Shareholder Rights 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 for a purchase price of
$125 per share, 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.
On June 24, 1999, the CTS Board of Directors declared a two-for-one stock split
in the form of a stock dividend to CTS shareholders of record on July 12, 1999.
Under the split, CTS common shareholders received a stock dividend of one CTS
share for each CTS share held. All shares outstanding and per share amounts have
been restated to reflect the stock split.
NOTE K--Treasury Stock
- ----------------------
Common stock held in treasury at December 31, 2000, totaled 20,655,721 shares
with a cost of $291,367, compared to 20,957,649 shares with a cost of $283,558
at December 31, 1999.
During 2000, CTS repurchased 190,000 of its common stock under a common stock
repurchase plan previously authorized by the Board of Directors. The remaining
shares authorized for repurchase were approximately 240,000 shares at December
31, 2000. There can be no assurance as to the number of shares CTS may
repurchase or the timing of such purchases.
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. CTS has been notified by the U.S. Environmental Protection Agency,
state environmental agencies and, in some cases, generator groups, that it is or
41
may be a Potentially Responsible Party("PRP") regarding hazardous waste
remediation at several non-CTS sites. 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. In the
opinion of management, based upon presently available information relating to
all such matters, 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 and contracts relating to sales of
property. 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.
42
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 2000, 1999 and 1998. For the years ended December 31, 2000, 1999 and 1998,
included in other dilutive securities below are approximately 256,000, 308,000
and 336,000 shares, respectively, of CTS common stock to be issued to DCA
shareholders who have not yet tendered their stock certificates for exchange in
the DCA acquisition.
Net Shares
Earnings (In thousands) Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
2000:
- -----
Basic EPS $83,802 27,623 $3.03
Effect of Dilutive Securities:
Stock Options 651
Other 401
------- ------ -----
Diluted EPS $83,802 28,675 $2.92
======= ====== =====
1999:
- -----
Basic EPS $51,468 27,498 $1.87
Effect of Dilutive Securities:
Stock Options 783
Other 308
------- ------ -----
Diluted EPS $51,468 28,589 $1.80
======= ====== =====
1998:
- -----
Basic EPS $37,474 28,028 $1.34
Effect of Dilutive Securities:
Stock Options 864
Other 336
------- ------ -----
Diluted EPS $37,474 29,228 $1.28
======= ====== =====
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(1998-2000)
- ------------------------------------------------------------------------------------------------------
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
2000 1999 1998
----------- ----------- -----------
Net cash provided by (used in):
Operating activities (continuing operations) $110,537 $ 56,854 $ 46,612
Investing activities (126,338) (104,627) (7,055)
Financing activities 12,569 57,375 (69,885)
========================================================================================================================
Cash and equivalents $20,564 $ 24,219 $ 16,273
Accounts receivable, net 145,920 124,682 47,043
Inventories, net 104,316 78,942 33,322
Current assets 305,696 254,297 117,683
Accounts payable 100,394 68,315 17,412
Accrued liabilities 85,100 73,718 50,965
Current liabilities 202,891 154,461 82,377
Working capital 102,805 99,836 35,306
Current ratio 1.51 1.65 1.43
Long-term debt (including current maturities) $188,000 $167,000 $ 56,000
Shareholders' equity 246,357 164,764 123,839
Long-term debt (including current maturities)
as a percent of shareholders' equity 76% 101% 45%
Long-term debt (including current maturities)
as a percent of capitalization 43% 50% 31%
========================================================================================================================
For the year ended December 31, 2000, the net cash from operating activities
provided by continuing operations increased $53.7 million, or 94% from prior
year. This increase was primarily due to increased earnings.
44
The 1999 cash flow provided by operating activities from continuing operations
of $56.9 million was higher than the 1998 amount by $10.2 million, primarily due
to higher net earnings, offset by increases in accounts receivable and
inventories, principally at CTS Wireless. A significant portion of cash was
required to fund an investment of accounts receivable at CTS Wireless as CTS did
not acquire any accounts receivable in the CTS Wireless acquisition. An
investment in inventory was required in both business segments to support the
growth experienced in 1999.
The 2000 use of $126.3 million for investing activities consisted primarily of
$119.2 million of capital expenditures. These capital expenditures included
approximately $80 million for new products, technologies and capacity expansion,
and $35 million for land and building projects in Asia and the U.S. The 1999 use
of $104.6 million for investing activities had two major components. First, the
CTS Wireless acquisition required $94.0 million at the closing plus
approximately $4 million in costs directly associated with the acquisition.
Also, CTS had capital expenditures of $32.9 million for capacity expansion in
the newly acquired CTS Wireless operation and for the pre-acquisition operating
units. Capital expenditures for both the electronic component and electronic
assembly segments were primarily for capacity increases to meet customer demands
for new products to support advancing technologies and for cost reductions.
Also, during 1999, the divestiture of the nonstrategic DCA units acquired in
1997 as a part of the DCA acquisition was substantially completed, generating
$28.6 million in positive cash flow.
During 1998, cash expenditures for investing activities totaled $7.1 million
which included $20.7 million of proceeds from the sale of property and
equipment, primarily associated with the sale of a nonstrategic asset acquired
within the DCA acquisition. These cash proceeds were offset by capital
expenditures of $21.3 million. Approximately one-third of these capital
expenditures were 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).
CTS expects its 2001 capital expenditures to approximate the 2000 level. These
capital expenditures will primarily be for production capacity expansion, new
products and cost reduction programs.
In 2000, CTS' net cash provided by financing activities totaled $12.6 million,
consisting primarily of an increase in borrowings of $26.0 million under the
revolving credit facility and stock options exercised of $4.2 million. This was
offset by the installment repayment of a long-term loan of $5.0 million,
dividend payments of $3.3 million and the repurchase of 190,000 shares of common
stock at a total cost of $9.3 million. Refer to Note K - Treasury Stock, for a
description of CTS' repurchase plan.
45
In 1999, net cash provided by financing activities totaled $57.4 million. This
was primarily related to the $94.0 million required for the CTS Wireless
acquisition, offset by $28.4 million of repayments made possible from sales
proceeds of $28.6 million related to discontinued operations. The CTS Wireless
acquisition required long-term borrowing to fund this purchase, which was
accomplished through a $225.0 million bank unsecured credit facility. The
facility was acquired at LIBOR plus approximately one percent, and had an
original term of six years. During 1999, this loan was paid down by $28.4
million. Also during 1999, CTS repurchased 205,800 shares of its common stock at
a total cost of $9.2 million.
Cash used for financing activities during 1998 amounted to $69.9 million and was
primarily used for the repurchase of a portion of CTS' outstanding stock. During
1998, 3.5 million shares (post-split basis) were repurchased at a total cost of
$56.3 million. Also included in the 1998 financing activities was the repayment
of $5.2 million of long-term debt and the acquisition of certain stock options
at a cost of $5.3 million.
Dividends paid were $3.3 million, $3.3 million and $3.4 million in 2000, 1999
and 1998, respectively. Amounts decreased from the 1998 level due to the
repurchase of outstanding shares.
Undistributed earnings of certain non-U.S. subsidiaries amount to approximately
$140 million at December 31, 2000. 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 $8 million of withholding tax would be imposed.
As described in Note B--Acquisition, on December 22, 1998, CTS agreed to pay
Motorola $94.0 million at closing (which occurred on February 26, 1999) and
assume approximately $49 million of Motorola obligations. In addition, CTS may
be obligated to pay additional amounts depending upon increased sales and
profitability of CTS Wireless through 2003. The calculation resulted in an
additional payment of $11.2 million for 1999 and an estimated liability of $15.0
million for 2000. The maximum remaining potential payment under the acquisition
agreement was $79.6 million at December 31, 2000. CTS financed a substantial
portion of the purchase price, and related working capital, through borrowings
under a $225.0 million bank unsecured credit facility, which replaced the
previous $125.0 million borrowing facility in 1999. Interest on this new
facility was at an initial floating rate of LIBOR plus approximately one
percent, and had a term of six years. The new debt agreement requires principal
amortization and has financial covenants consistent with the replaced borrowing
facility.
On December 10, 1999, CTS filed a shelf registration Statement Form S-3, with
the Securities and Exchange Commission. Under this shelf process, CTS has a
two-year period within which it may elect to offer up to $500.0 million in any
combination of debt securities, common stock, preferred stock or warrants.
46
The Company believes it has sufficient liquidity including cash generated from
operations, available credit facilities, as well as access to public and private
sources of funding through its shelf registration to support its foreseeable
cash needs.
Results of Operations
- ---------------------
Business Segment Data Table:
(In thousands of dollars)
Electronic Components Electronic Assemblies
--------------------- ---------------------
2000
- ----
Sales $536,703 $329,820
Operating earnings 98,157 30,473
Operating earnings % of sales 18.3% 9.2%
1999
- ----
Sales $507,344 $169,732
Operating earnings* 81,025 14,711
Operating earnings % of sales* 16.0% 8.7%
1998
- ----
Sales $247,719 $122,722
Operating earnings 41,955 7,653
Operating earnings % of sales 16.9% 6.2%
*Excludes the effect of a one-time, noncash write-off of $12.9 million pre-tax
for acquired in-process research and development (IPR&D), related to the
acquisition of CTS Wireless.
Overview
- --------
Electronic component sales increased by $29.4 million, or 6% from 1999, while
the operating earnings increased by $17.1 million, or 21%. The 2000 electronic
assembly sales increased $160.1 million, or 94%, while the operating earnings
increased $15.8 million, or 107%. The increase in the electronic assemblies
segment is primarily due to the interconnect integrated assembly products which
serve the computer and communications equipment markets, and RF integrated
modules which serve the communications equipment market.
The 1999 electronic component sales increased by $259.6 million, or about 105%,
from 1998. Although the primary reason for the increase was the result of the
CTS Wireless acquisition and the inclusion of products for the wireless handset
and communications industry for ten months of 1999, growth was also experienced
in automotive and frequency control components. The higher volume contributed to
the 93% increase in operating earnings. Operating earnings as a percent of sales
decreased to 16% in 1999 from 17% in 1998 as a result of wireless product sales,
which had a lower margin than the CTS traditional product lines. In the
electronic assemblies segment, sales and earnings increased substantially, due
to the growth in interconnect and resistor products for the computer and
communications equipment markets.
47
Most Recent Three Fiscal Years Discussion
- -----------------------------------------
The following table highlights significant information with regard to CTS'
overall results of operations during the past three fiscal years.
(In thousands of dollars)
December 31 December 31 December 31
2000 1999 1998
----------- ----------- -----------
Net sales $866,523 $677,076 $370,441
Gross earnings 260,925 205,533 114,597
Gross earnings as a percent of sales 30.1% 30.4% 30.9%
Operating earnings --before acquired IPR&D (1999) $128,630 $ 95,736 $ 49,608
Operating earnings --after acquired IPR&D (1999) 128,630 82,796 49,608
Earnings before income taxes 117,127 74,055 49,441
Earnings from continuing operations 84,331 51,468 34,073
Net (loss) earnings from discontinued operations (529) -- 3,401
Net earnings 83,802 51,468 37,474
The 2000 net sales increased $189.4 million, or 28%. This increase was primarily
due to growth in the electronic assemblies segment driven by both integrated
interconnect assemblies and RF integrated modules. The 1999 net sales rose
$306.6 million, or 83% from 1998, primarily as a result of the CTS Wireless
acquisition in February 1999, as shown in Note I--Business Segments. The largest
1999 sales increase was in the electronic components segment in the amount of
$259.6 million, or 105%. The electronic assemblies segment also grew
substantially over 1998 with sales increasing $47.0 million, or 38%. As a result
of the 1999 CTS Wireless acquisition, the percent of total annual sales in the
communications equipment market has increased to 52% in 2000 from the 23% in
1998. At the same time, our other two major markets served, computer equipment
and automotive, have declined as a percent of total annual sales. Computer
equipment has dropped from 32% in 1998 to 27% in 2000, while automotive has also
declined from 32% in 1998 to 15% in 2000. During this three-year comparative
period, sales into the automotive market actually increased by $13.4 million, or
11%. Sales into the computer equipment market increased by $111.1 million, or
95%, primarily due to the significant increase in interconnect product sales
within the electronic assemblies segment.
Within the electronic components segment, sales into the communications
equipment market comprise 59% of total sales in 2000, compared to 25% in 1998,
as a result of the CTS Wireless acquisition and the increasing demand for
hand-held wireless communications devices. Within the electronic assemblies
segment, sales into the communications equipment market were 40% in 2000,
compared to 17% in 1998, also a result of the rapidly growing demand for
hand-held wireless devices and increased demand for integrated interconnect
products. Sales of electronic components into the computer equipment market were
8% in 2000 versus 13% in 1998. Electronic assemblies sold into the computer
equipment market were 57% in 2000, compared to 68% in 1998, the result of the
decline in the flex cable assembly product sales, partially offset by increased
demand for integrated interconnect products. Sales of electronic components into
the automotive market were 24% in 2000 versus 48% in 1998, although revenue
dollars actually increased by $13.1 million, while electronic assembly sales
into this market were minimal in both periods.
CTS' 15 largest customers represented approximately 75% of net sales in 2000,
71% of net sales in 1999 and 66% of net sales in 1998. Sales to Motorola
accounted for 21% of total net sales in 2000, 23% in 1999 and were minimal in
1998. Also during 2000, sales to Compaq amounted to 21% of total net sales, as
compared to 11% in 1999 and 12% in 1998. Sales to General Motors Corporation
comprised 12% of net sales in 1998.
48
CTS' products are usually priced with reference to expected or required profit
margins, customer expectations and market competition. Pricing for most of CTS'
electronic component and assembly products frequently decreases over time and
also fluctuates in accordance with total industry utilization of manufacturing
capacity.
In 2000, 1999 and 1998, improvements in gross earnings were realized over each
of the preceding years in absolute terms, principally due to effective
facilities utilization and production efficiencies, the higher absorption of
fixed manufacturing overhead expenses and overall expense control. In 2000,
gross earnings dollars were substantially improved over 1999, due primarily to
the higher volume within the interconnect integrated and RF integrated module
product lines. However, gross earnings as a percent of sales in 2000 were
slightly under 1999 and 1998, caused by the lower margins within the
interconnect integrated assembly product lines.
Selling, general and administrative expenses as a percent of sales decreased to
11% in 2000 and compares favorably to the 12% in 1999 and 14% in 1998. In 2000,
as in previous years, CTS continued to control these expenses while filling key
management positions required for the CTS Wireless acquisition and for planned
future growth and development.
Research and development expenses were $32.6 million, an increase of $7.2
million in 2000, to support current and new product applications. Significant
ongoing R&D activities continue in our wireless businesses, as well as
continuing effort in the automotive and resistor network product lines. The 1999
research and development expenses of $25.3 million increased from 1998 by $12.0
million, primarily due to the significant ongoing R&D activities assumed in the
CTS Wireless acquisition, as well as continuing efforts in our pre-acquisition
operations, primarily in the electronic component segment.
The 2000 operating earnings of $128.6 million, or 15% of net sales, represents a
34%, or $32.9 million increase over the 1999 operating earnings (before the
IPR&D charge). The 1999 operating earnings at $95.7 million (before the IPR&D
charge) nearly doubled from the comparable 1998 amount. This increase is due to
higher revenue and management's control over operating expenses.
Operating earnings included a noncash component, pension income, of $14.5
million, $6.4 million and $7.3 million in 2000, 1999 and 1998, respectively. The
pension income in fiscal 2000 increased, primarily as a result of the increase
in the value of pension assets at December 31, 1999, resulting from favorable
market returns.
The 28.0% effective tax rate for 2000 was lower than the 30.5% rate from 1999,
resulting from greater earnings in lower tax rate jurisdictions. The 1999
effective tax rate of 30.5% decreased slightly from 31.0% in 1998, again
resulting from greater earnings in lower rate jurisdictions.
Market Risk
- -----------
CTS is exposed to market risk, including changes in foreign currency exchange
rates and interest rates. As discussed in Note A to the consolidated financial
statements, the financial statements of all 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. The market risk associated with foreign
currency exchange rates is not material in relation to CTS' consolidated
financial position, results of operations or cash flows. As such, CTS does not
utilize a significant number of derivative financial instruments to manage the
exposure in the United Kingdom or its other non-U.S. operations.
As part of CTS' risk management program, CTS performs sensitivity analysis to
assess potential gains and losses in earnings and changes in fair value relating
to hypothetical movements in interest rates. A 70-basis-point increase in
interest rates (approximately 10% of CTS' weighted-average interest rate) on
variable-rate debt instruments would have an immaterial effect on the CTS' 2000
and 1999 earnings before income taxes and the fair value of the debt instruments
as of the end of such fiscal years.
49
Outlook
- -------
In CTS' conference call of January 23, 2001, guidance was given that the growth
experienced over the last several years would not continue due to the declining
economic conditions and in particular, softening within those industries served
by CTS' products. Since our conference call in January, market conditions have
continued to deteriorate with many customers within our served markets, lowering
their revenues and earnings forecasts. The unfavorable trends noted in our year-
end earnings press release and the conference call are becoming more evident as
the year proceeds. The demand for electronic components from wireless handset
manufacturers dropped precipitously after the first of the year. Automotive
production is expected to decrease by two million units compared to 2000. With
economic and our specific business conditions changing daily, it is difficult to
accurately forecast the impact of what appears to be recessionary conditions in
many marketplaces. Demand is expected to be slower in the first half of the year
with a return to more normal levels possible in the second half. However, in
spite of the specified difficulties in the first half of the year, end-user
demand for wireless devices is still strong, the mass data storage and computer
networking areas continue to grow, and the automotive industry is expected to
have an above average year despite lower forecasted volumes compared to 2000.
The statements in this section are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Actual results may
differ materially from those reflected herein due to a variety of factors that
could affect the Company's operating results, liquidity and financial condition.
We have based these forward-looking statements on our current expectations and
projections about future events. Factors that could impact future results
include, among others, the Company's sensitivity to general economic conditions
and events that affect the automotive, computer equipment, and communications
industries; continuing growth of the wireless communications market; product
pricing pressures and demand for the Company's products, especially if economic
conditions worsen in the automotive, computer equipment and/or communications
markets. Investors are directed to examine the Company's SEC filings, which more
fully describe the risks and uncertainties associated with the Company's
business.
50
Shareholder Information
- -----------------------
(In thousands of dollars except per share data)
Quarterly Results of Operations
-------------------------------
(Unaudited)
Earnings from Earnings from
Net Gross Operating Continuing Discontinued Net
Sales Earnings Earnings Operations Operations Earnings
----- -------- -------- ---------- ---------- --------
2000
- ----
1st quarter $204,466 $ 62,826 $ 30,682 $19,776 $(529) $19,247
2nd quarter 206,611 64,515 31,255 20,461 -- 20,461
3rd quarter 222,052 62,758 31,292 21,315 -- 21,315
4th quarter 233,394 70,826 35,401 22,779 -- 22,779
------- ------- ------- ------- ----- ------
$866,523 $260,925 $128,630 $84,331 $(529) $83,802
======== ======== ======== ======= ===== =======
1999
- ----
1st quarter (a) $120,339 $ 37,187 $ 3,332 $ 2,163 $ -- $ 2,163
2nd quarter 177,825 52,686 23,601 14,490 -- 14,490
3rd quarter 180,203 54,967 25,928 15,949 -- 15,949
4th quarter 198,709 60,693 29,935 18,866 -- 18,866
------- ------ ------ ------ ----- ------
$677,076 $205,533 $ 82,796 $51,468 $ -- $51,468
======== ======== ======== ======= ===== =======
Per Share Data (b)
--------------
(Unaudited)
Earnings from Earnings from
Dividends Continuing Operations Discontinued Operations Net earnings
High (c) Low (c) Declared Basic Diluted Basic Diluted Basic Diluted
-------- ------- -------- ----- ------- ----- ------- ----- -------
2000
1st quarter $82.75 $40.00 $0.03 $0.71 $0.68 $(0.02) $(0.02) $0.69 $0.66
2nd quarter 68.00 45.00 0.03 0.74 0.71 -- -- 0.74 0.71
3rd quarter 59.00 40.25 0.03 0.77 0.76 -- -- 0.77 0.76
4th quarter 52.19 31.50 0.03 0.83 0.79 -- -- 0.83 0.79
---- ---- ---- ------ ------ ---- ----
$0.12 $3.05 $2.94 $(0.02) $(0.02) $3.03 $2.92
===== ===== ===== ====== ====== ===== =====
1999
1st quarter (a) $25.50 $20.44 $0.03 $0.08 $0.07 $ -- $ -- $0.08 $0.07
2nd quarter 35.44 22.81 0.03 0.53 0.51 -- -- 0.53 0.51
3rd quarter 60.00 34.75 0.03 0.58 0.56 -- -- 0.58 0.56
4th quarter 86.25 38.75 0.03 0.68 0.66 -- -- 0.68 0.66
---- ---- ---- ----- ----- ---- ----
$0.12 $1.87 $1.80 $ -- $ -- $1.87 $1.80
===== ===== ===== ===== ===== ===== =====
(a) The first quarter 1999 results include a one-time, noncash write-off of
$12.9 million pre-tax, $8.6 million after-tax, or $0.30 per diluted share, for
acquired in-process research and development (IPR&D), related to the acquisition
of CTS Wireless.
(b) Per share data reflects the effect of a two-for-one stock split, which was
distributed in August 1999.
(c) The market prices of CTS common stock presented reflect the highest and
lowest prices on the New York Stock Exchange for each quarter of the last two
years.
51
Five-Year Summary
- -----------------
(In thousands of dollars except per share and other data)
% of % of % of % of % of
2000 Sales 1999 Sales 1998 Sales 1997 Sales 1996 Sales
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
Summary of Operations
- ---------------------
Net sales $866,523 100.0 $677,076 100.0 $370,441 100.0 $390,602 100.0 $321,297 100.0
Cost of goods sold 605,598 69.9 471,543 69.6 255,844 69.1 280,085 71.7 233,801 72.8
Selling, general and administrative
expenses 94,501 10.9 80,866 12.0 51,300 13.8 45,264 11.6 42,621 13.3
Transaction-related compensation
charge -- -- -- -- -- -- 16,200 4.1 -- --
Research and development expenses 32,583 3.8 25,348 3.8 13,387 3.6 13,131 3.4 10,743 3.3
Acquired in-process research and
development (IPR&D) -- -- 12,940 1.9 -- -- -- -- -- --
Amortization of intangible assets 5,211 0.6 3,583 0.5 302 0.1 2,949 0.8 712 0.2
------- ---- ------ ---- ------ ---- ------ --- ------ ----
Operating earnings 128,630 14.8 82,796 12.2 49,608 13.4 32,973 8.4 33,420 10.4
Other (expense) income--net (11,503) (1.3) (8,741) (1.3) (167) (0.1) 2,757 0.7 182 0.1
------- ---- ------ ---- ---- ---- ------ --- ------ ----
Earnings before income taxes 117,127 13.5 74,055 10.9 49,441 13.3 35,730 9.1 33,602 10.5
Income taxes 32,796 3.8 22,587 3.3 15,368 4.1 12,537 3.2 12,432 3.9
Earnings from continuing operations 84,331 9.7 51,468 7.6 34,073 9.2 23,193 5.9 21,170 6.6
------ ---- ------ ---- ------ ---- ------ --- ------ ----
Discontinued operations:
Net (loss) earnings from discontinued
operations (529) -- -- -- 3,401 0.9 (380) (0.1) -- --
------- ---- ------- ---- ------- ---- ---- ---- ------ ----
Net earnings 83,802 9.7 51,468 7.6 37,474 10.1 22,813 5.8 21,170 6.6
Retained earnings--beginning of year 245,414 197,285 163,169 144,112 126,546
Dividends declared (3,366) (3,339) (3,358) (3,756) (3,604)
-------- ------- ------- ------- -------
Retained earnings--end of year $325,850 $245,414 $197,285 $163,169 $144,112
======== ======== ======== ======== ========
Earnings (loss) per share:
Basic:
Continuing operations $3.05 $1.87 $1.22 $0.74 $0.68
Discontinued operations (0.02) -- 0.12 (0.01) --
----- ---- ---- ----- ----
Net earnings per share $3.03 $1.87 $1.34 $0.73 $0.68
Diluted:
Continuing operations $2.94 $1.80 $1.17 $0.73 $0.67
Discontinued operations (0.02) -- 0.11 (0.01) --
----- ---- ---- ----- ----
Net earnings per share $2.92 $1.80 $1.28 $0.72 $0.67
Average basic shares outstanding (000's) 27,623 27,498 28,028 31,248 31,336
Average diluted shares outstanding(000's) 28,675 28,589 29,228 31,952 31,532
Cash dividends per share $0.12 $0.12 $0.12 $0.12 $0.12
Capital expenditures 119,216 32,896 21,330 22,180 17,210
Depreciation and amortization 44,325 33,907 19,155 16,016 12,491
Financial Position at Year End
Current assets $305,696 $254,297 $117,683 $146,747 $138,201
Current liabilities 202,891 154,461 82,377 80,991 51,391
Current ratio 1.5 to 1 1.6 to 1 1.4 to 1 1.8 to 1 2.7 to 1
Working capital $102,805 $ 99,836 $ 35,306 $ 65,756 $ 86,810
Inventories 104,316 78,942 33,322 34,683 38,761
Property, plant and equipment--net 224,861 139,692 68,086 66,511 56,103
Total assets 672,929 522,652 293,189 318,196 249,372
Short-term notes payable 7,397 7,428 -- -- --
Long-term debt 178,000 162,000 42,000 56,000 11,214
Shareholders' equity 246,357 164,764 123,839 147,496 166,232
Common shares outstanding (000's) 27,781 27,462 27,243 30,356 31,350
Equity (book value) per share $8.87 $6.00 $4.55 $4.86 $5.30
Other Data
Stock price range $82.75-$31.50 $86.25-$20.44 $21.94-$11.82 $18.63-$6.79 $7.84-$6.00
Average number of employees 9,008 7,662 4,105 3,954 3,815
Number of shareholders at year end 1,492 1,498 1,379 1,404 986
52
FORM 10-K - ITEM 14(a) (1) AND (2) AND ITEM 14 (d)
CTS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of CTS Corporation and
subsidiaries included in the annual report of the registrant to its
shareholders for the year ended December 31, 2000, are referenced in Item 8 and
incorporated herein:
Consolidated balance sheets - December 31, 2000, and
December 31, 1999
Consolidated statements of earnings - Years ended December 31, 2000,
December 31, 1999, and December 31, 1998
Consolidated statements of shareholders' equity - Years ended December
31, 2000, December 31, 1999, and December 31, 1998
Consolidated statements of cash flows - Years ended December 31, 2000,
December 31, 1999, and December 31, 1998
Notes to consolidated financial statements
Supplementary Financial Data:
Quarterly Results of Operations (Unaudited) - Years ended December
31, 2000 and December 31, 1999
Per Share Data (Unaudited) - Years ended December 31, 2000 and
December 31, 1999
The following consolidated financial statement schedule of CTS Corporation and
subsidiaries is included in item 14(d):
Page
Schedule II - Valuation and qualifying accounts S-3
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are inapplicable, not required or the information is included in the
consolidated financial statements or notes thereto.
S-1
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under item 14(d) on page S-1 presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 22, 2001
S-2
54
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, 2000:
Allowance for
doubtful receivables $2,628 $ (66) $(49) $676 $1,837
====== ====== ==== ==== ======
Year ended December 31, 1999:
Allowance for
doubtful receivables $ 552 $2,081 $ 11 $ 16 $2,628
====== ====== ==== ==== ======
Year ended December 31, 1998:
Allowance for
doubtful receivables $ 692 $ (79) $ 0 $ 61 $ 552
====== ====== ==== ==== ======
(1) Uncollectible accounts written off.
S-3
55
EXHIBIT (10)(g)
---------------
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of
_____________________is made and entered by and between CTS Corporation, an
Indiana corporation (the "Company"), and _____________________(the
"Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive or a key employee
of the Company or one or more of its Subsidiaries and has made and is expected
to continue to make major contributions to the short- and long-term
profitability, growth and financial strength of the Company;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
below) exists;
WHEREAS, the Company desires to assure itself of both present
and future continuity of management and desires to establish certain minimum
severance benefits for certain of its senior executives and key employees,
including the Executive, applicable in the event of a Change in Control;
WHEREAS, the Company wishes to ensure that its senior
executives and key employees are not practically disabled from discharging
their duties in respect of a proposed or actual transaction involving a Change
in Control; and
WHEREAS, the Company desires to provide additional inducement
for the Executive to continue to remain in the ongoing employ of the Company.
NOW, THEREFORE, the Company and the Executive agree as
follows:
1. Certain Defined Terms. In addition to terms defined
elsewhere herein, the following terms have the following meanings
when used in this Agreement with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a
rate not less than the Executive's annual fixed or base compensation as
in effect for Executive immediately prior to the occurrence of a Change
in Control or such higher rate as may be determined from time to time
by the Board or a committee thereof.
56
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant
to Section 3(b), the Executive:
(i) has been convicted of a criminal violation
involving fraud, embezzlement or theft in connection with his duties
or in the course of his employment with the Company or any Subsidiary;
(ii) has intentionally and wrongfully damaged property
of the Company or any Subsidiary;
(iii) has intentionally and wrongfully disclosed
secret processes, trade secrets or confidential information of
the Company or any Subsidiary; or
(iv) has intentionally and wrongfully engaged in any
Competitive Activity;
and any such act has been demonstrably and materially harmful to the
Company. For purposes of this Agreement, no act or failure to act on
the part of the Executive will be deemed to be "intentional" if it was
due primarily to an error in judgment or negligence, and will be deemed
to be "intentional" only if done or omitted to be done by the Executive
not in good faith and without reasonable belief that his action or
omission was in the best interest of the Company. Notwithstanding the
foregoing, the Executive will not be deemed to have been terminated for
"Cause" hereunder unless and until there is delivered to the Executive
a copy of a resolution duly adopted by the affirmative vote of not less
than two-thirds of the Board then in office at a meeting of the Board
called and held for such purpose, after reasonable notice to the
Executive and an opportunity for the Executive, together with his
counsel (if the Executive chooses to have counsel present at such
meeting), to be heard before the Board, finding that, in the good faith
opinion of the Board, the Executive committed an act constituting
"Cause" as herein defined and specifying the particulars thereof in
detail. Nothing herein will limit the right of the Executive or his
beneficiaries to contest the validity or propriety of any such
determination.
(d) "Change in Control" means the occurrence during the
Term of any of the following events:
57
(i) the attainment by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act) (a "Person") of aggregate beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the
combined voting power of the then outstanding Voting Stock of the
Company (including, for this purpose, any Voting Stock of the Company
acquired prior to the Term); provided, however, that for purposes of
this Section 1(d)(i), the following will not be deemed to result in a
Change in Control: (A) any acquisition directly from the Company that
is approved by the Incumbent Board (as defined below), (B) any
acquisition by the Company and any change in the percentage ownership
of Voting Stock of the Company that results from such acquisition, (C)
any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any Subsidiary, or (D) any
acquisition by any Person pursuant to a Business Combination that
complies with clauses (I), (II) and (III) of Section 1(d)(iii); or
(ii) individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a Director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least a majority of the Directors then comprising the
Incumbent Board (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee for
director, without objection to such nomination) will be deemed to have
been a member of the Incumbent Board, but excluding, for this purpose,
any such individual becoming a Director as a result of an actual or
threatened election contest (within the meaning of Rule 14a-11 of the
Exchange Act) with respect to the election or removal of Directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board (collectively, an "Election
Contest"); or
58
(iii) consummation of (A) a reorganization, merger or
consolidation of the Company, or (B) a sale or other disposition of all
or substantially all of the assets of the Company, (such
reorganization, merger, consolidation or sale each, a "Business
Combination"), unless, in each case, immediately following such
Business Combination, (I) all or substantially all of the individuals
and entities who were the beneficial owners of Voting Stock of the
Company immediately prior to such Business Combination beneficially
own, directly or indirectly, more than a majority of the then
outstanding shares of common stock and the combined voting power of the
then outstanding Voting Stock of the Company entitled to vote generally
in the election of Directors of the entity resulting from such Business
Combination (including, without limitation, an entity which as a result
of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries),
(II) no Person (other than the Company, such entity resulting from such
Business Combination, or any employee benefit plan (or related trust)
sponsored or maintained by the Company, any Subsidiary or such entity
resulting from such Business Combination) beneficially owns, directly
or indirectly, 15% or more of the then outstanding shares of Voting
Stock of the entity resulting from such Business Combination, and (III)
at least a majority of the members of the Board of the entity resulting
from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement or of the action of
the Board providing for such Business Combination; provided, however,
that if the Business Combination is initiated by the Company and the
Chief Executive Officer of the Company immediately prior to such
Business Combination constitutes the Chief Executive Officer of the
entity resulting from the Business Combination immediately following
the Business Combination and throughout the twelve-month period
thereafter, this Section 1(d)(iii) will be applied without regard to
clauses (I) and (II); or
(iv) approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company, except pursuant to
a Business Combination that complies with clauses (I), (II) and (III)
of Section 1(d)(iii).
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(e) "Competitive Activity" means the Executive's
participation, without the written consent of an officer of the
Company, in the management of any business enterprise if such
enterprise engages in substantial and direct competition with the
Company and such enterprise's sales of any product or service
competitive with any product or service of the Company amounted to 25%
of such enterprise's net sales for its most recently completely fiscal
year and if the Company's net sales of said product or service amounted
to 25% of the Company's net sales for its most recently completed
fiscal year. "Competitive Activity" does not include (i) the mere
ownership of securities in any such enterprise and the exercise of
rights appurtenant thereto or (ii) participation in the management of
any such enterprise other than in connection with the competitive
operations of such enterprise.
(f) "Employee Benefits" means the perquisites, benefits and
service credit for benefits as provided under any and all employee
benefit, including retirement income and welfare benefit, policies,
plans, programs or arrangements in which Executive is entitled to
participate, including without limitation any stock option, performance
share, performance unit, stock purchase, stock appreciation, restricted
stock, savings, pension, supplemental executive retirement, or other
retirement income or welfare benefit, deferred compensation, incentive
compensation, group or other life (including "split dollar" life),
health, medical/hospital or other insurance (whether funded by actual
insurance or self-insured by the Company), disability, salary
continuation, expense reimbursement and other employee benefit
policies, plans, programs or arrangements that may now exist or any
equivalent successor policies, plans, programs or arrangements that may
be adopted hereafter by the Company, providing perquisites, benefits
and service credit for benefits at least as great in the aggregate as
are payable thereunder prior to a Change in Control.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
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(h) "Incentive Pay" means an annual amount equal to not less
than the average aggregate annual bonus, incentive or other payments of
cash compensation, in addition to Base Pay, made or to be made in
regard to services rendered during the three consecutive fiscal years
immediately preceding the fiscal year in which the Change in Control
occurred pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company, or any successor
thereto (including, without limitation, any matching cash payment made
with respect to restricted stock awards vesting during such three-year
period), providing benefits at least as great as the benefits payable
thereunder prior to a Change in Control.
(i) "Retirement Plans" means the retirement income,
supplemental executive retirement, excess benefits and retiree medical,
life and similar benefit plans providing retirement perquisites,
benefits and service credit for benefits at least as great in the
aggregate as are payable thereunder prior to a Change in Control.
(j) "Severance Period" means the period of time commencing on
the date of the first occurrence of a Change in Control and continuing
until the earlier of (i) the second anniversary of the occurrence of
the Change in Control, or (ii) the Executive's death; provided,
however, that commencing on each anniversary of the Change in Control,
the Severance Period will automatically be extended for an additional
year unless, not later than 90 calendar days prior to such anniversary
date, either the Company or the Executive gives written notice to the
other that the Severance Period is not to be so extended.
(k) "Subsidiary" means an entity in which the Company directly
or indirectly beneficially owns 50% or more of the outstanding Voting
Stock.
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(l) "Term" means the period commencing as of the date hereof
and expiring as of the later of (i) the close of business on December
31, 2002, or (ii) the expiration of the Severance Period; provided,
however, that (A) commencing on January 1, 2001 and each January 1
thereafter, the term of this Agreement will automatically be extended
for an additional year unless, not later than September 30 of the
immediately preceding year, the Company or the Executive gives written
notice that it or the Executive, as the case may be, does not wish to
have the Term extended and (B) subject to the last sentence of Section
9, if, prior to a Change in Control, the Executive ceases for any
reason to be an employee of the Company and any Subsidiary, thereupon
without further action the Term will be deemed to have expired and this
Agreement will immediately terminate and be of no further effect. For
purposes of this Section 1(l), the Executive will not be deemed to have
ceased to be an employee of the Company or any Subsidiary by reason of
the transfer of Executive's employment between the Company and any
Subsidiary, or among any Subsidiaries.
(m) "Termination Date" means the date on which the Executive's
employment is terminated, (the effective date of which will be the date
of termination, or such other date that may be specified by the
Executive if the termination is pursuant to Section 3(b)).
(n) "Voting Stock" means securities entitled to vote generally
in the election of directors.
2. Operation of Agreement. This Agreement will be effective
and binding immediately upon its execution, but, anything in this Agreement to
the contrary notwithstanding, this Agreement will not be operative unless and
until a Change in Control occurs. Upon the occurrence of a Change in Control at
any time during the Term, without further action, this Agreement will become
immediately operative.
3. Termination Following a Change in Control. (a) In
the event of the occurrence of a Change in Control, the Executive's employment
may be terminated by the Company during the Severance Period and the Executive
will be entitled to the benefits provided by Section 4 unless such termination
is the result of the occurrence of one or more of the following events:
(i) The Executive's death;
(ii) The Executive becoming permanently disabled within
the meaning of, and beginning to actually receive disability benefits
pursuant to, the long-term disability plan in effect for, or applicable
to, Executive immediately prior to the Change in Control; or
(iii) Cause.
If, during the Severance Period, the Executive's employment is terminated by the
Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or
3(a)(iii), the Executive will be entitled to the benefits provided by Section 4
hereof.
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(b) In the event of the occurrence of a Change in Control, the
Executive may terminate employment with the Company and any Subsidiary during
the Severance Period with the right to severance compensation as provided in
Section 4 upon the occurrence of one or more of the following events (regardless
of whether any other reason, other than Cause as hereinabove provided, for such
termination exists or has occurred, including without limitation other
employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially equivalent
office or position, of or with the Company and/or a Subsidiary, as the
case may be, which the Executive held immediately prior to a Change in
Control, or the removal of the Executive as a Director of the Company
(or any successor thereto) if the Executive was a Director of the
Company immediately prior to the Change in Control;
(ii) (A) A significant adverse change in the nature or scope
of the authorities, powers, functions, responsibilities or duties
attached to the position with the Company and any Subsidiary which the
Executive held immediately prior to the Change in Control, (B) a
reduction in the aggregate of the Executive's Base Pay and Incentive
Pay received from the Company and any Subsidiary, or (C) the
termination or denial of the Executive's rights to Employee Benefits or
a reduction in the scope or value thereof, any of which is not remedied
by the Company within 10 calendar days after receipt by the Company of
written notice from the Executive of such change, reduction or
termination, as the case may be;
(iii) A determination by the Executive (which determination
will be conclusive and binding upon the parties hereto provided the
determination was made in good faith and, in all events, will be
presumed to have been made in good faith unless otherwise shown by the
Company by clear and convincing evidence) that a change in
circumstances has occurred following a Change in Control, including,
without limitation, a change in the scope of the business or other
activities for which the Executive was responsible immediately prior to
the Change in Control, which has rendered the Executive substantially
unable to carry out, has substantially hindered Executive's performance
of, or has caused Executive to suffer a substantial reduction in, any
of the authorities, powers, functions, responsibilities or duties
attached to the position held by the Executive immediately prior to the
Change in Control, which situation is not remedied within 10 calendar
days after written notice to the Company from the Executive of such
determination;
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(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all
of its business and/or assets unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or
otherwise) to which all or substantially all of its business and/or
assetsb have been transferred (directly or by operation of law) assumed
all duties and obligations of the Company under this Agreement pursuant
to Section 11(a);
(v) The Company requires the Executive to have his principal
location of work changed to any location that is in excess of 35 miles
from the location thereof immediately prior to the Change in Control,
or requires the Executive to travel away from his office in the course
of performing his responsibilities or duties attached to his position
at least 20% more (in terms of aggregate days in any calendar year or
in any calendar quarter when annualized for purposes of comparison to
any prior year) than was required of Executive in any of the three full
years immediately prior to the Change in Control without, in either
case, his prior written consent; or
(vi) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto which is not remedied by the Company within 10
calendar days after receipt by the Company of written notice from the
Executive of such breach.
(c) A termination by the Company pursuant to Section 3(a) or
by the Executive pursuant to Section 3(b) that entitles the Executive to the
benefits provided by Section 4 (a "Qualifying Termination") will not affect any
rights that the Executive may have pursuant to any agreement, policy, plan,
program or arrangement of the Company providing Employee Benefits, which rights
will be governed by the terms thereof; provided, however, that any rights to
severance benefits to which Executive may be entitled upon a Qualifying
Termination under any employment or severance agreement (other than this
Agreement) to which Executive is a party at the time of such Qualifying
Termination will be superseded by this Agreement.
4. Severance Compensation. (a) If, following the occurrence of
a Change in Control, the Executive's employment is terminated during the
Severance Period other than pursuant to Sections 3(a)(i), 3(a)(ii) or 3(a)(iii),
or if the Executive terminates his employment pursuant to Section 3(b), the
Company will pay to the Executive (or other Person as appropriate) as severance
benefits the appropriate amounts described on Annex A within five business days
after the Termination Date and will continue to provide to the Executive the
continuing benefits described on Annex A for the periods described therein.
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(b) Without limiting the rights of the Executive at law or in
equity, if the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will pay
interest on the amount or value thereof at an annualized rate of interest equal
to the so-called composite "prime rate" as quoted from time to time during the
relevant period in the Midwest Edition of The Wall Street Journal. Such interest
will be payable as it accrues on demand. Any change in such prime rate will be
effective on and as of the date of such change.
(c) Notwithstanding any provision of this Agreement to the
contrary, the parties' respective rights and obligations under this Section 4
and under Sections 5 and 7 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control for any reason whatsoever.
5. Certain Additional Payments by the Company. (a) Anything in
this Agreement to the contrary notwithstanding, but subject to Section 5(h), in
the event that this Agreement becomes operative and it is determined (as
hereafter provided) that any payment or distribution by the Company or any of
its affiliates to or for the benefit of the Executive, whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan, program
or arrangement, including without limitation any stock option, performance
share, performance unit, stock appreciation right or similar right, or the lapse
or termination of any restriction on, or the vesting or exercisability of, any
of the foregoing (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or
any successor provision thereto) by reason of being considered "contingent on a
change in ownership or control" of the Company, within the meaning of Section
280G of the Code (or any successor provision thereto) or to any similar tax
imposed by state or local law, or any interest or penalties with respect to such
tax (such tax or taxes, together with any such interest and penalties, being
hereafter collectively referred to as the "Excise Tax"), the Executive will be
entitled to receive an additional payment or payments (collectively, a "Gross-Up
Payment"); provided, however, that no Gross-up Payment will be made with respect
to the Excise Tax, if any, attributable to (i) any incentive stock option, as
defined by Section 422 of the Code ("ISO") granted prior to the execution of
this Agreement, or (ii) any stock appreciation or similar right, whether or not
limited, granted in tandem with any ISO described in clause (i). The Gross-Up
Payment will be in an amount such that, after payment by the Executive of all
taxes (including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payment.
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(b) Subject to the provisions of Section 5(f), all
determinations required to be made under this Section 5, including whether an
Excise Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-Up Payment is required to be paid by the Company to the
Executive and the amount of such Gross-Up Payment, if any, will be made by a
nationally recognized accounting firm (the "Accounting Firm") selected by the
Executive in his sole discretion. The Executive will direct the Accounting Firm
to submit its determination and detailed supporting calculations to both the
Company and the Executive within 30 calendar days after the Termination Date, if
applicable, and any such other time or times as may be requested by the Company
or the Executive. If the Accounting Firm determines that any Excise Tax is
payable by the Executive, the Company will pay the required Gross-Up Payment to
the Executive within five business days after receipt of such determination and
calculations with respect to any Payment to the Executive. If the Accounting
Firm determines that no Excise Tax is payable by the Executive, it will, at the
same time as it makes such determination, furnish the Company and the Executive
an opinion that the Executive has substantial authority not to report any Excise
Tax on his federal, state or local income or other tax return. As a result of
the uncertainty in the application of Section 4999 of the Code (or any successor
provision thereto) and the possibility of similar uncertainty regarding
applicable state or local tax law at the time of any determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts or fails to pursue its remedies pursuant to Section
5(f) and the Executive thereafter is required to make a payment of any Excise
Tax, the Executive will direct the Accounting Firm to determine the amount of
the Underpayment that has occurred and to submit its determination and detailed
supporting calculations to both the Company and the Executive as promptly as
possible. Any such Underpayment will be promptly paid by the Company to, or for
the benefit of, the Executive within five business days after receipt of such
determination and calculations.
(c) The Company and the Executive will each provide the
Accounting Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the determinations and
calculations contemplated by Section 5(b). Any determination by the Accounting
Firm as to the amount of the Gross-Up Payment will be binding upon the Company
and the Executive.
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(d) The federal, state and local income or other tax returns
filed by the Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive will make proper payment of the amount of any
Excise Payment, and at the request of the Company, provide to the Company true
and correct copies (with any amendments) of his federal income tax return as
filed with the Internal Revenue Service and corresponding state and local tax
returns, if relevant, as filed with the applicable taxing authority, and such
other documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive will, within five business days, pay to the Company the amount of such
reduction.
(e) The fees and expenses of the Accounting Firm for its
services in connection with the determinations and calculations contemplated by
Section 5(b) will be borne by the Company. If such fees and expenses are
initially paid by the Executive, the Company will reimburse the Executive the
full amount of such fees and expenses within five business days after receipt
from the Executive of a statement therefor and reasonable evidence of his
payment thereof.
(f) The Executive will notify the Company in writing of any
claim by the Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up Payment. Such
notification will be given as promptly as practicable but no later than 1
business days after the Executive actually receives notice of such claim and the
Executive will further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Executive). The Executive will not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive will:
(i) provide the Company with any written records or documents
in his possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim
as the Company reasonably requests in writing from time to time, including
without limitation accepting legal representation with respect to such claim by
an attorney competent in respect of the subject matter and reasonably selected
by the Company;
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(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company will bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and will indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 5(f), the Company will control all proceedings taken in connection with
the contest of any claim contemplated by this Section 5(f) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company determines; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company will advance the amount of such payment to the Executive on an
interest-free basis and will indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
will be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive will be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
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(g) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), the Executive receives any
refund with respect to such claim, the Executive will (subject to the Company's
complying with the requirements of Section 5(f)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
any taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 5(f), a determination is made
that the Executive will not be entitled to any refund with respect to such claim
and the Company does not notify the Executive in writing of its intent to
contest such denial or refund prior to the expiration of 30 calendar days after
such determination, then such advance will be forgiven and will not be required
to be repaid and the amount of any such advance will offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 5.
(h) Notwithstanding any provision of this Agreement to the
contrary, if (i) but for this sentence, the Company would be obligated to make a
Gross-Up Payment to the Executive, and (ii) the aggregate "present value" of the
"parachute payments" to be paid or provided to the Executive under this
Agreement or otherwise does not exceed 1.12 multiplied by three times the
Executive's "base amount," then the payments and benefits to be paid or provided
under this Agreement will be reduced to the minimum extent necessary (but in no
event to less than zero) so that no portion of any payment or benefit to the
Executive, as so reduced, constitutes an "excess parachute payment." For
purposes of this Section 5(h), the terms "excess parachute payment," "present
value," "parachute payment," and "base amount" will have the meanings assigned
to them by Section 280G of the Code. The determination of whether any reduction
in such payments or benefits to be provided under this Agreement is required
pursuant to the preceding sentence will be made at the expense of the Company,
if requested by the Executive or the Company, by the Accounting Firm. The fact
that the Executive's right to payments or benefits may be reduced by reason of
the limitations contained in this Section 5(h) will not of itself limit or
otherwise affect any other rights of the Executive other than pursuant to this
Agreement. In the event that any payment or benefit intended to be provided
under this Agreement or otherwise is required to be reduced pursuant to this
Section 5(h), the Executive will be entitled to designate the payments and/or
benefits to be so reduced in order to give effect to this Section 5(h). The
Company will provide the Executive with all information reasonably requested by
the Executive to permit the Executive to make such designation. In the event
that the Executive fails to make such designation within 10 business days of the
Termination Date, the Company may effect such reduction in any manner it deems
appropriate.
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6. No Mitigation Obligation. The Company hereby acknowledges
that it will be difficult and may be impossible for the Executive to find
reasonably comparable employment following the Termination Date and that the
non-competition covenant contained in Section 8 will further limit the
employment opportunities for the Executive. Accordingly, the payment of the
severance compensation by the Company to the Executive in accordance with the
terms of this Agreement is hereby acknowledged by the Company to be reasonable,
and the Executive will not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
will any profits, income, earnings or other benefits from any source whatsoever
create any mitigation, offset, reduction or any other obligation on the part of
the Executive hereunder or otherwise, except as expressly provided in the
penultimate sentence of Paragraph 2 set forth on Annex A.
7. Legal Fees and Expenses. It is the intent of the Company
that the Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should appear to the Executive that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel and, in that
connection, the Company and the Executive agree that a confidential relationship
will exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing.
8. Competitive Activity. During a period ending one year
following the Termination Date, if the Executive has received or is receiving
benefits under Section 4, the Executive will not, without the prior written
consent of the Company, which consent will not be unreasonably withheld, engage
in any Competitive Activity.
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9. Employment Rights. Nothing expressed or implied in this
Agreement will create any right or duty on the part of the Company or the
Executive to have the Executive remain in the employment of the Company or any
Subsidiary prior to or following any Change in Control. Any termination of
employment of the Executive or the removal of the Executive from the office or
position in the Company or any Subsidiary following the commencement of any
discussion with a third person that ultimately results in a Change in Control
will be deemed to be a termination or removal of the Executive after a Change in
Control for purposes of this Agreement.
10. Withholding of Taxes. The Company may withhold from
any amounts payable under this Agreement all federal, state, city or other taxes
as the Company is required to withhold pursuant to any law or government
regulation or ruling.
11. Successors and Binding Agreement. (a) The Company will
require any successor (whether direct or indirect, by purchase, merger,
consolidation, reorganization or otherwise) to all or substantially all of the
business or assets of the Company, by agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent the Company would be
required to perform if no such succession had taken place. This Agreement will
be binding upon and inure to the benefit of the Company and any successor to the
Company, including without limitation any persons acquiring directly or
indirectly all or substantially all of the business or assets of the Company
whether by purchase, merger, consolidation, reorganization or otherwise (and
such successor will thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable or delegable by
the Company.
(b) This Agreement will inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the
parties hereto will, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided in Sections 11(a) and 11(b). Without limiting the generality
or effect of the foregoing, the Executive's right to receive payments hereunder
is not assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Executive's will or
by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 11(c), the Company will have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
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12. Notices. For all purposes of this Agreement, all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
five business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or one business day
after having been sent by a nationally recognized overnight courier service such
as Federal Express, UPS, or Purolator, addressed to the Company (to the
attention of the Secretary of the Company) at its principal executive office and
to the Executive at his principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of changes of address will be effective only upon receipt.
13. Governing Law. The validity, interpretation,
construction and performance of this Agreement will be governed by and
construed in accordance with the substantive laws of the State of Indiana,
without giving effect to the principles of conflict of laws of such State.
14. Validity. If any provision of this Agreement or the
application of any provision hereof to any person or circumstances is held
invalid, unenforceable or otherwise illegal, the remainder of this Agreement and
the application of such provision to any other person or circumstances will not
be affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
15. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and the Company. No waiver by
either party hereto at any time of any breach by the other party hereto or
compliance with any condition or provision of this Agreement to be performed by
such other party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. References to Sections are to references to
Sections of this Agreement.
16. Counterparts. This Agreement may be executed in one or
more counterparts, each of which will be deemed to be an original but all of
which together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed and delivered as of the date first above written.
CTS CORPORATION
By:
Joseph P. Walker, Chairman,
President & Chief Executive
Officer
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Annex A
Severance Compensation
(1) A lump sum payment in an amount equal to 3 times the sum of (A)
Base Pay (at the highest rate in effect for any period prior to the Termination
Date), plus (B) Incentive Pay (determined in accordance with the standards set
forth in Section 1(h)).
(2) For a period of 36 months following the Termination Date (the
"Continuation Period"), the Company will arrange to provide the Executive with
Employee Benefits that are welfare benefits (but not stock option, performance
share, performance unit, stock purchase, stock appreciation, restricted stock or
similar compensatory benefits) substantially similar to those that the Executive
was receiving or entitled to receive immediately prior to the Termination Date
(or, if greater, immediately prior to the reduction, termination, or denial
described in Section 3(b)(ii)). During the Continuation Period, the Company will
continue benefits available to Executive under the Company's "split dollar" life
insurance program and will pay the premiums thereon. If and to the extent that
any benefit described in this Paragraph 2 is not or cannot be paid or provided
under any policy, plan, program or arrangement of the Company or any Subsidiary,
as the case may be, then the Company will itself pay or provide for the payment
to the Executive, his dependents and beneficiaries, of such Employee Benefits.
Employee Benefits otherwise receivable by the Executive pursuant to this
Paragraph 2 will be reduced to the extent comparable welfare benefits are
actually received by the Executive from another employer during the Continuation
Period following the Executive's Termination Date, and any such benefits
actually received by the Executive will be reported by the Executive to the
Company. The notification period applicable to Executive under the Consolidated
Omnibus Budget Reconciliation Act of 1986 (COBRA) will not commence until
termination of the Continuation Period.
(3) In addition to the retirement income, supplemental executive
retirement, and other benefits to which Executive is entitled under the
Company's Retirement Plans, a lump sum payment in an amount equal to the
actuarial equivalent of the excess of (x) the retirement pension and the
medical, life and other benefits that would be payable to the Executive under
the Retirement Plans if Executive had continued to be employed through the
Continuation Period given the Executive's Base Pay (at the highest rate in
effect for any period prior to the Termination Date) (without regard to any
amendment to the Retirement Plans made subsequent to a Change in Control which
adversely affects in any manner the computation of retirement or welfare
benefits thereunder), over (y) the retirement pension and the medical, life and
other benefits that the Executive is entitled to receive (either immediately or
on a deferred basis) under the Retirement Plans. For purposes of this
subsection, "actuarial equivalent" will be determined using the same methods and
assumptions utilized under the Company's qualified retirement plan for salaried
employees in effect immediately prior to the Change in Control.
(4) In lieu of Executive's right, if any, to receive benefits
constituting non-cash "perquisites," including annual physicals, tax return
preparation and car allowances, a lump sum payment in an amount equal to the
lesser of (a) $50,000, or (b) 10% of the aggregate of Executive's Base Pay and
Incentive Pay.
(5) An amount up to $15,000 for outplacement services by a firm s
elected by the Executive.
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EXHIBIT (10) (h)
CTS CORPORATION EXECUTIVE
DEFERRED COMPENSATION PLAN
SECTION I
NAME AND PURPOSE
The name of this plan is the CTS Corporation Executive Deferred
Compensation Plan (the "Plan"). Its purpose is to provide certain management and
highly compensated employees of CTS Corporation (the "Company") with the
opportunity to defer the base salary and/or incentive compensation otherwise
payable to them as employees of the Company. This Plan is intended to be
unfunded for tax purposes and for purposes of ERISA Title I.
SECTION II
EFFECTIVE DATE
The Plan is effective as of September 14, 2000 ("Effective Date").
SECTION III
PARTICIPANTS
The Chief Executive Officer of the Company is eligible to participate
in the Plan. The Compensation Committee of the Board of Directors of the Company
may determine and designate other management and highly compensated employees of
the Company as eligible to participate in the Plan. Eligible employees of the
Company who elect to participate in the Plan are hereafter called Participants.
SECTION IV
----------
ADMINISTRATION
This Plan is administered by the Compensation Committee of the Board of
Directors of the Company. The Compensation Committee shall interpret the Plan,
prescribe, amend or rescind rules relating to it, select eligible Participants,
and take all other action necessary for its administration, which actions shall
be final and binding on all Participants.
SECTION V
---------
PLAN YEAR
The Plan Year under this Plan is the calendar year.
SECTION VI
----------
DEFERRALS
A. Before the first day of any Plan Year following the effective date
(or with respect to individuals who first become Participants during a Plan
Year, on or before thirty days from the date on which they become Participants),
each Participant may elect to have the payment of up to fifty percent (50%) of
his or her base salary for the Plan Year commencing immediately thereafter (or,
if later, so much of the Plan Year as commences on the day following the date on
which the individual becomes a Participant) deferred. The election is
irrevocable and must be made on a form prescribed by the Compensation Committee;
provided, however, that before the first day of any subsequent quarter of the
Plan Year, a Participant may modify or revoke his or her base salary deferral
election, which modification or revocation will become effective on the first
day of the subsequent quarter.
B. Before the first day of any Plan Year, each Participant may elect to
have the payment of up to fifty percent (50%) of his or her incentive
compensation to be earned during the Plan Year deferred. The election is
irrevocable and must be made on a form prescribed by the Compensation Committee.
The election applies only to that Plan Year.
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SECTION VII
-----------
MEMORANDUM ACCOUNTS
A. A separate unfunded account will be established and maintained by
the Company for each Participant, which account shall reflect the accrued
balance of all Participant deferrals and all interest credited thereon
("Memorandum Account").
B. On the last business day prior to a Plan Year, the rate of interest
to be applied to Memorandum Accounts under the Plan for the coming Plan Year
will be established as the prime rate plus one percent (1%) in effect at the
close of business on that day (the "Plan Year Interest Rate"), which will remain
in effect for the entire Plan Year.
C. On the first day of each month, the Company will credit each
Participant's Memorandum Account with interest at the Plan Year Interest Rate
plus one percent (1%) on the average daily balance in the Participant's
Memorandum Account throughout the prior month.
SECTION VIII
------------
DISTRIBUTION
A. Any termination of a Participant's employment with the Company,
including without limitation his voluntary or involuntary separation, retirement
or death, will trigger the commencement of distributions under the Plan.
B. Except in the case of a Participant who has exercised the election
provided for in Section VIII. C. below, all distributions under the Plan will
be made in five approximately equal annual installments.
C. A Participant may request in writing to the Compensation Committee
at any time prior to the termination of his employment with the Company that the
distribution of his Memorandum Account be made in one to five approximately
equal installments as the Participant requests. The Compensation Committee in
its sole discretion shall determine whether to grant such a request. A request
under this section may be made only once and shall, if approved by the
Compensation Committee, be irrevocable.
D. Notwithstanding the foregoing provisions of this section, if a
Participant's Memorandum Account has a value of less than $50,000 at the date of
termination of his employment with the Company, the entire balance of the
Memorandum Account will be distributed in one installment.
E. Distributions shall be made as soon as practicable, but in no event
more than sixty (60) days following the end of the Plan Year in which
Participant's employment with the Company is terminated and subsequent Plan
Years until all installments have been paid.
F. A Participant may request in writing to the Compensation Committee at
any time prior to the termination of his employment with the Company that the
distribution of his Memorandum Account, in the event that his employment with
the Company is terminated by reason of his death, to the person or persons
designated in Section VIII. G. or to his estate, as the case may be, be made in
approximately equal installments as the Participant requests not to exceed five
installments. The Compensation Committee in its sole discretion shall determine
whether to grant such request. If no request is made, such distribution will be
made in five installments. In any event, if the beneficiary is an estate or if
the value of the Participant's Memorandum Account is less than $50,000 on the
date of the Participant's death, then the entire balance of the Memorandum
Account will be distributed in one installment.
75
G. Any amounts remaining undistributed at the death of a Participant, shall
be distributed in installments, as provided in this Article VIII, to such person
or persons, or the survivors thereof, as the Participant designates. The
Participant may also designate to his or her surviving spouse the absolute power
to appoint by will one or more persons including his or her estate, to receive
payments distributable to him or her if he or she dies before all distributions
have been received. All such designations shall be made in writing delivered to
the Compensation Committee. The Participant may from time to time revoke or
change any such designation on file with the Compensation Committee. At the time
of the Participant's death, if the person or persons designated therein shall
have all predeceased the Participant or otherwise ceased to exist or if no
beneficiary designation is on file, such distributions will be made to the
Participant's estate. If the person or persons designated therein shall survive
the Participant but shall die before receiving all of such distribution, the
balance thereof payable to such deceased distributee shall, unless the
Participant's designation provides otherwise, be distributed to such deceased
distributee's estate.
H. The distribution of the Memorandum Account of a Participant whose
service is terminated by reason of his or her death shall be made as provided in
Section VIII. F. If the death of the Participant occurs after the termination of
his or her employment with the Company, the number of installments remaining to
be paid shall be the number which otherwise would be distributable to the
Participant, provided that the beneficiary may request, within six months of the
death of the Participant, in writing to the Compensation Committee a smaller
number of installments as to all installments which have not yet become payable.
The Compensation Committee in its sole discretion shall determine whether to
grant such request. In any event, if the beneficiary is an estate, payment shall
be made in one installment.
I. Notwithstanding any other provision of this Plan, upon the occurrence of
an unanticipated emergency caused by an event beyond the control of a
Participant or a beneficiary of a Participant, which will result in a severe
financial hardship in the absence of early withdrawal under the Plan (an
"Unforeseeable Emergency"), the Compensation Committee may approve the
withdrawal of all or a portion of a Participant's or beneficiary's Memorandum
Account; provided, however, that any such early distribution may only be to the
extent required to meet the Unforeseeable Emergency. Distribution shall be made
as soon as practicable following approval of the withdrawal request by the
Compensation Committee. The Participant's deferrals shall be suspended and the
Participant shall not be permitted to again defer until the beginning of the
second Plan Year following the withdrawal.
J. Upon the occurrence of a Change in Control of the Company, as defined in
Appendix A to this Plan, the entire amount of each Participant's Memorandum
Account, together with any uncredited interest due thereon, shall be deposited
by the Company into the Trust for the CTS Corporation Executive Deferred
Compensation Plan, a grantor (rabbi) trust intended to meet the safe harbor
provisions of Rev. Proc. 92-64, within ten (10) business days following the
Change in Control.
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SECTION IX
----------
PARTICIPANTS' RIGHTS
Participants in the Plan have the status of general unsecured
creditors of the Company. The Plan is a mere promise to make benefit payments in
the future. All amounts deferred under this Plan are unfunded obligations of the
Company and shall, until actual payment, continue to be part of the general
funds of the Company except as provided in Section VIII. J. hereof. The Company
is not required to segregate any monies from its general funds, or to create any
trusts or to make any special deposits with respect to these obligations except
as provided in Section VIII. J. hereof. Nothing contained in this Plan shall be
construed to confer upon any Participant any right to continued employment with
the Company or a subsidiary nor interfere in any way with the right of the
Company or a subsidiary to terminate the employment of such Participant at any
time without assigning any reason therefor.
SECTION X
---------
NON-ALIENABILITY AND NON-TRANSFERABILITY
The rights of a Participant to any payment hereunder shall not be
assigned, transferred, pledged or encumbered. No Participant may borrow against
his or her Memorandum Account. No Memorandum Account shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution or levy of any kind, whether
voluntary or involuntary, including but not limited to any liability which is
for alimony or other payments for the support of a spouse or former spouse, or
for any other relative of any Participant.
SECTION XI
----------
GENERAL PROVISIONS
A. The Plan may, at any time or from time to time, be amended, modified
or terminated by the Compensation Committee of the Board of Directors of the
Company. No such amendment, modification or termination of the Plan shall,
without the consent of a Participant, adversely affect such Participant's rights
with respect to amounts then accrued in his or her Memorandum Account.
B. The Plan shall be construed and governed in accordance with the
laws of the State of Indiana.
C. Appropriate payroll taxes shall be withheld from cash payments made
to Participants pursuant to the Plan.
D. All expenses of administering the Plan shall be borne by the Company
and no part thereof shall be charged against any Participant's account or any
amounts distributable hereunder.
77
CTS CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
APPENDIX A
"Change in Control" means the occurrence of any of the following events:
1. the attainment by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of aggregate
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 25% or more of the combined voting power of the then
outstanding securities (the "Voting Stock") of CTS Corporation (the
"Company") entitled to vote generally in the election of directors of the
Company; provided, however, that for purposes of this Section 1, the
following will not be deemed to result in a Change in Control: (A) any
acquisition directly from the Company that is approved by the Incumbent
Board (as defined below), (B) any acquisition by the Company and any change
in the percentage ownership of Voting Stock of the Company that results
from such acquisition, (C) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any Subsidiary,
(D) any acquisition by any Person pursuant to a Business Combination (as
defined below) that complies with clauses (I), (II) and (III) of Section 3;
or
2. individuals who, as of the Effective Date constitute the Board of Directors
of the Company (the "Incumbent Board") cease for any reason to constitute
at least two-thirds of the Board of Directors of the Company; provided,
however, that any individual becoming a Director subsequent to the
Effective Date whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least two-thirds of the
Directors then comprising the Incumbent Board (either by a specific vote or
by approval of the proxy statement of the Company in which such person is
named as a nominee for director, without objection to such nomination) will
be deemed to have been a member of the Incumbent Board, but excluding, for
this purpose, any such individual becoming a Director as a result of an
actual or threatened election contest (within the meaning of Rule 14a-11 of
the Exchange Act) with respect to the election or removal of Directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors of the Company
(collectively, an "Election Contest"); or
3. consummation of (A) a reorganization, merger or consolidation, or (B) a
sale or other disposition of all or substantially all of the assets of the
Company, (such reorganization, merger, consolidation or sale each, a
"Business Combination"), unless, in each case, immediately following such
Business Combination, (I) all or substantially all of the individuals and
entities who were the beneficial owners of Voting Stock of the Company
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than two-thirds of the then outstanding shares of
common stock and the combined voting power of the then outstanding Voting
Stock of the Company entitled to vote generally in the election of
Directors of the entity resulting from such Business Combination
(including, without limitation, an entity which as a result of such
transaction owns the Company, or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions relative to each other as their
ownership, immediately prior to such Business Combination, of the Voting
Stock of the Company, (II) no individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (other than
the Company, such entity resulting from such Business Combination, or any
employee benefit plan (or related trust) sponsored or maintained by the
Company, any Subsidiary or such entity resulting from such Business
Combination) beneficially owns, directly or indirectly, 15% or more of the
then outstanding shares of Voting Stock of the entity resulting from such
Business Combination, and (III) at least two-thirds of the members of the
Board of Directors of the entity resulting from such Business Combination
were members of the Incumbent Board at the time of the execution of the
initial agreement or of the action of the Board of Directors of the Company
providing for such Business Combination; or
4. approval by the shareholders of the Company of a complete liquidation or
dissolution of the Company, except pursuant to a Business Combination that
complies with clauses (I), (II) and (III) of Section 3.
78
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 Electro de Matamoros, S.A., 1 a Republic of Mexico corporation
CTS Export Corporation, a U.S. Virgin Islands corporation
CTS Japan, Inc., a Japan corporation
CTS International B.V., a Netherlands corporation
CTS Singapore Pte., Ltd., a Republic of Singapore 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 (Tianjin) Electronics Company Ltd., a Peoples' Republic of China
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.
79
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333- 90697) and Form S-8 (No. 33-27749, No. 333-5730
and No. 333-91339) of CTS Corporation of our report dated January 22, 2001
relating to the financial statements and financial statement schedule, which
appears in this Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 9, 2001
80