-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VALpKkQTvMn4cuqHfAz/qOfDL2Lb7fO9YNlbgWGTZwnWC5b0/cfhByNlgC5fvAOc Qyl92Us8f7Q598PLsvARyQ== 0000026058-99-000015.txt : 19990513 0000026058-99-000015.hdr.sgml : 19990513 ACCESSION NUMBER: 0000026058-99-000015 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990226 ITEM INFORMATION: FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-04639 FILM NUMBER: 99618371 BUSINESS ADDRESS: STREET 1: 905 W BLVD N CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192937511 MAIL ADDRESS: STREET 1: 905 W BLVD NORTH CITY: ELKHART STATE: IN ZIP: 46514 8-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A (AMENDMENT NO.1) CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): February 26, 1999 CTS CORPORATION (Exact Name of Registrant as Specified in its Charter) Indiana State or other Jurisdiction of Incorporation 1-04639 35-0225010 (Commission File Number) (I.R.S. Employer Identification No.) 905 West Boulevard North Elkhart, Indiana 46514 (Address of Principal Executive Offices) (219) 293-7511 This Amendment to the Registrant's Current Report on Form 8-K, dated February 26, 1999, and filed with the Securities and Exchange Commission on March 11, 1999 (as amended in a Form 8-K/A filed on March 12, 1999, the "Form 8-K"), is being filed in order to include the financial statements and pro forma financial information required with respect to the acquisition by a subsidiary of Registrant of the Component Products Division of the Automotive, Component, Computer and Energy Sector ("CPD") of Motorola, Inc. on February 26, 1999. These financial statements and financial information were omitted from the disclosure contained in the Form 8-K pursuant to the instructions to Item 7 thereof. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the complete text of Item 7, as amended, is set forth below. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial statements of business acquired. The audited combined balance sheets of the Component Products Division of Motorola, Inc. as of December 31, 1997 and 1998 and the related combined statements of operations and division equity and cash flows for each of the years in the three-year period ended December 31, 1998 can be found at pages F-4 through F-15. (b) Pro forma financial information. The Unaudited Pro Forma Combined Balance Sheet as of December 31, 1998 and the Unaudited Pro Forma Combined Statement of Income for the year ended December 31, 1998 (the "Pro Forma Financial Statements") can be found at pages F-1 through F-3. The Pro Forma Financial Statements were prepared based upon historical financial statements of CTS Corporation (the "Company"), adjusted to give effect to the purchase of the Component Products Division of Motorola, Inc. ("CPD") effective February 26, 1999, accounted for under the purchase method of accounting. A description of the transaction, the assumptions applied and explanations for the related pro forma adjustments are described in the accompanying notes to the Pro Forma Financial Statements. The Pro Forma Financial Statements should be read in conjunction with the historical financial statements of CPD included in Item 7 (a) of this Form 8-K/A and the historical financial statements of the Company. The fiscal year of the Company and CPD ends on December 31. The Pro Forma Financial Statements exclude any benefits that may be derived from synergies or the elimination of duplicate efforts as a result of the acquisition. In addition, the Pro Forma Financial Statements may not be indicative of the results that actually would have occurred if the acquisition had been in effect on the date indicated or which may be obtained in the future. (c) Exhibits 2.1 Asset Sale Agreement by and among Motorola, Inc., CTS Wireless Components, Inc., and CTS Corporation, dated December 22, 1998 (filed as Exhibit (10) (1) to CTS' Annual Report for 1998 on Form 10-K, filed on February 25, 1999, and incorporated by reference herein). 23 Consent of KPMG to incorporation by reference on Form 8-K/A to Registration Statement 33-27749 on Form S-8 and Registration Statement 333-5730 on Form S-8. 99.1 Press Release dated February 26, 1999 (filed as Exhibit 99.1 to CTS' current report on Form 8-K, filed on March 11, 1999 and incorporated by reference herein). 99.2 Amended and Restated Credit Agreement, dated as of February 26, 1999, by and among CTS, the Lenders named therein, and NBD Bank, N.A., as Agent (filed as Exhibit 99.1 to CTS' current report on Form 8-K, filed on March 11, 1999 and incorporated by reference herein). 99.3 Guaranty, dated as of February 26, 1999, by Buyer, CTS, and any subsidiaries of the Borrower as defined therein, in favor of the Agent (filed as Exhibit 99.1 to CTS' current report on Form 8-K, filed on March 11, 1999 and incorporated by reference herein). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CTS CORPORATION (GRAPHIC OMITTED) Dated (May 12, 1999) By: /S/_Jeannine M. Davis Name: Jeannine M. Davis Title: Senior Vice President General Counsel and Secretary
CTS Corporation Unaudited Pro Forma Combined Statements of Income (In thousands, except per share data) Year Ended December 31, 1998 ---------------------------- Historical Motorola Historical Motorola CPD Division Motorola CTS Pro Forma Pro Forma CPD Division Adjustments(A) CPD Division Corporation Adjustments Combined ------------ -------------- ------------ ----------- ----------- -------- Net sales $ 315,000 $ (9,700) $ 305,300 $ 370,441 $ 0 $675,741 Cost of Sales, exclusive of items listed below 265,000 (16,300) 248,700 255,844 (7,400) (B) 497,144 Selling, general and administrative expenses 58,000 (3,300) 54,700 51,602 3,200 (C) 109,502 Research and development expenses 8,000 0 8,000 13,387 0 21,387 ----- ----- ----- ------ ------ ------ Operating earnings (loss) (16,000) 9,900 (6,100) 49,608 (4,200) 47,708 Interest expense, net 3,000 (400) 2,600 1,053 6,200 (D) 9,853 Other expense (income), net 0 (2,600) (2,600) (886) 0 (3,486) ------ ------ ------ ------ ------ ------ Earnings (loss) before income tax (19,000) 12,900 (6,100) 49,441 (2,000) 41,341 Provision for income tax expense (benefit) (5,000) 3,400 (1,600) 15,368 (125) (E) 13,643 ------ ----- ------ ------ ------ ----- Net earnings (loss) $ (14,000) $ 9,500 $ (4,500) $ 34,073 $ (1,875) $ 27,698 ========= ======= ======== ======== ========= ======== Basic: Earnings per share from continuing operations $ 2.43 $ 1.98 Weighted-average shares outstanding 14,014 14,014 Diluted: Earnings per share from continuing operations $ 2.33 $ 1.90 Weighted-average shares outstanding 14,614 14,614 See the accompanying notes to these Unaudited Pro Forma Financial Statements. F-1
CTS Corporation Unaudited Pro Forma Combined Balance Sheet December 31, 1998 (In thousands) Historical Motorola Historical Motorola CPD Division Motorola CTS Pro Forma Pro Forma CPD Division Adjustments (A) CPD Division Corporation Adjustments Combined ------------ --------------- ------------ ----------- ----------- -------- ASSETS Current assets Cash and cash equivalents 0 $ 0 $ 0 $ 16,273 $ 0 $ 16,273 Accounts receivable, net 38,000 (38,000) 0 47,043 0 47,043 Inventory, net 33,000 (12,200) 20,800 33,322 0 54,122 Other current assets 3,000 (3,000) 0 21,945 0 21,945 ----- ----- ----- ------ ------ ------ Total current assets 74,000 (53,200) 20,800 118,583 0 139,383 Property, plant and equipment 130,000 (57,800) 72,200 67,186 8,800 (F) 148,186 Other intangible assets 0 0 0 0 31,400 (G) 31,400 Other noncurrent assets 0 0 0 107,420 4,300 (H) 111,720 ------ ------ ------ ------- ------ ------- 130,000 (57,800) 72,200 174,606 44,500 (F) 291,306 ------- ------- ------ ------- ------ ------- Total assets $ 204,000 $ (111,000) $ 93,000 $ 293,189 $ 44,500 $430,689 ========== =========== ========= ========= ========= ======== LIABILITIES Current liabilities Current long-term debt $ 0 $ 0 $ 0 $ 14,000 $ 0 $ 14,000 Other current liabilities 11,000 (11,000) 0 38,133 4,000 (I) 42,133 Accrued payroll liabilities 7,000 (7,000) 0 12,832 0 12,832 Accounts payable 22,000 (22,000) 0 17,412 0 17,412 ------ ---- ------ ------ ------ ------ Total current liabilities 40,000 (40,000) 0 82,377 4,000 86,377 Long-term debt 41,000 1,000 42,000 42,000 94,000 (J) 178,000 Postretirement benefits 0 0 0 4,260 0 4,260 Other long-term liabilities 10,000 (3,900) 6,100 40,713 0 46,813 ------ ------ ----- ------ ------ ------ Total long-term liabilities 51,000 (2,900) 48,100 86,973 94,000 229,073 Common stock 0 0 0 190,347 0 190,347 Treasury stock 0 0 0 (275,471) 0 (275,471) Additional paid-in capital 0 0 0 10,872 0 10,872 Retained earnings 0 0 0 198,091 (8,600) (H) 189,491 Division equity 113,000 (68,100) 44,900 0 (44,900) (H) 0 ------- ------- ------ ------ ------- ------- Total equity 113,000 (68,100) 44,900 123,839 (53,500) 115,239 ------- ------- ------ ------- ------- ------- Total liabilities and equity $ 204,000 $ (111,000) $ 93,000 $ 293,189 $ 44,500 $430,689 ========== =========== ========= ========= ========= ======== See the accompanying notes to these Unaudited Pro Forma Financial Statements. F-2
On February 26, 1999, CTS Wireless Components ("Buyer"), a wholly owned subsidiary of CTS Corporation ("CTS"), pursuant to an Asset Sale Agreement dated December 22, 1998 acquired certain assets and assumed certain liabilities of the Component Products Division of the Automotive, Component, Computer and Energy Sector of Motorola, Inc. ("Motorola"). Buyer paid to Motorola $94 million cash at the closing and agreed to make additional contingent payments to Motorola in each of the following five fiscal years beginning with fiscal year 1999. The amount of these additional payments are contingent on CPD's results of operations, and will not exceed an aggregate amount of $105 million. Contingent payments made under this agreement are capped at $25,400,000 for 1999, $27,400,000 for 2000, and $17,400,000 for each of the three fiscal years thereafter. In addition to these payments, Buyer assumed $48 million of debt (including pension obligation) as part of the CPD acquisition. The Unaudited Pro Forma Combined Balance Sheet assumes that the acquisition occurred on December 31, 1998, and the Unaudited Pro Forma Statement of Income assumes that the acquisition occurred on January 1, 1998. The acquisition has been accounted for under the purchase method of accounting. The following is a summary of pro forma adjustments reflected in the Unaudited Pro Forma Combined Balance Sheet and Statement of Income. (A) The amounts in the Motorola CPD Division Adjustments column in the Unaudited Pro Forma Combined Statement of Income and Balance Sheet represents the elimination of CPD operations not acquired by the Company, the elimination of assets and liabilities not acquired by the Company and the related tax effect of these adjustments. (B) The Company has recorded an adjustment to depreciation to conform to the Company's methodologies. CPD had used the double declining balance method and CTS uses the straight line method. (C) The adjustment represents the amortization of intangibles related to the acquisition. Core technology of $9.5 million is amortized over 4 years and goodwill of $21.9 million is amortized over 25 years. D) This amount represents the increase in interest expense resulting from the additional long-term debt obtained to finance the acquisition. (E) This adjustment represents the tax effect of the pro forma adjustments made in the Unaudited Pro Forma Combined Statements of Income. (F) The Company has recorded a fair value adjustment to property, plant and equipment. (G) This amount represents the adjustment required to record the intangible assets resulting from the acquisition including core technology of $9.5 million and goodwill of $21.9 million. (H) These adjustments represent the elimination of CPD's historical equity and the write-off of the acquired in-process research and development of $12.9 million ($8.6 million net of tax). (I) This amount represents accruals for acquisition costs (legal, investment banking, etc.) arising from the transaction. (J) This amount represents the adjustment required to record long-term debt resulting from the transaction. F-3 Independent Auditors' Report The Board of Directors Motorola, Inc.: We have audited the accompanying combined balance sheets of the Component Products Division (Division) of Motorola, Inc. (Parent) as of December 31, 1997 and 1998 and the related combined statements of operations and division equity and cash flows for each of the years in the three-year period ended December 31, 1998. These combined financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Component Products Division of Motorola, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois February 24, 1999 F-4
COMPONENT PRODUCTS DIVISION OF MOTOROLA, INC. Combined Balance Sheets (in thousands) December 31, 1997 and 1998 Assets 1997 1998 ------ ---- ---- Current assets: Accounts receivable, net of allowance of $400 and $300 in 1997 and 1998, respectively, including amounts due from other Motorola, Inc. businesses of $32,000 and $18,000 in 1997 and 1998, respectively $ 42,000 $ 38,000 Inventories, net 32,000 33,000 Other current assets 4,000 3,000 ----- ----- Total current assets 78,000 74,000 Property, plant and equipment, net 136,000 130,000 ------- ------- Total assets $ 214,000 $ 204,000 =========== =========== Liabilities and Division Equity Current liabilities: Accounts payable $ 18,000 $ 22,000 Accrued payroll liabilities 10,000 7,000 Other current liabilities 7,000 11,000 ----- ------ Total current liabilities 35,000 40,000 Debt 41,000 41,000 Other noncurrent liabilities 12,000 10,000 Division equity 126,000 113,000 ------- ------- Total liabilities and division equity $ 214,000 $ 204,000 =========== =========== See accompanying notes to combined financial statements. F-5
COMPONENT PRODUCTS DIVISION OF MOTOROLA, INC. Combined Statements of Operations and Division Equity (in thousands) Years ended December 31, 1996, 1997, and 1998 1996 1997 1998 ---- ---- ---- Net sales, including sales to other Motorola, Inc. businesses of $294,000, $270,000, and $185,000, for the years ended December 31, 1996, 1997, and 1998, respectively $ 333,000 $ 343,000 $ 315,000 Costs and expenses: Cost of goods sold, including expenses allocated from 258,000 267,000 265,000 the Parent of $4,000, $4,000 and $3,000, for the years ended December 31, 1996, 1997, and 1998, respectively Selling, general and administrative expenses, including expenses allocated from the Parent of $8,000, $13,000, and $13,000, for the years ended December 31, 1996, 1997, and 1998, respectively 59,000 57,000 58,000 Research and development expenses 16,000 13,000 8,000 ------ ------ ----- Operating earnings (loss) - 6,000 (16,000) Interest expense allocated from the Parent 3,000 2,000 3,000 ----- ----- ----- Earnings (loss) before income taxes (3,000) 4,000 (19,000) Income tax benefit (5,000) (3,000) (5,000) ------ ------ ------ Net earnings (loss) 2,000 7,000 (14,000) Division equity at beginning of year 136,000 114,000 126,000 Transfers (to) from Parent (24,000) 5,000 1,000 ------- ----- ----- Division equity at end of year $ 114,000 $ 126,000 $ 113,000 ========== ========== ========== See accompanying notes to combined financial statements. F-6
COMPONENT PRODUCTS DIVISION OF MOTOROLA, INC. Combined Statements of Cash Flows (in thousands) Years ended December 31, 1996, 1997, and 1998 1996 1997 1998 ---- ---- ---- Cash flows from operating activities: Net earnings (loss) $ 2,000 $ 7,000 $ (14,000) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization, including amounts allocated from Parent of $3,000, $2,000, and $2,000 in 1996, 1997, and 1998, respectively 43,000 38,000 39,000 Loss on disposition of assets 0 1,000 2,000 Changes in assets and liabilities: Accounts receivable (4,000) (18,000) 4,000 Inventories, net 2,000 (9,000) (1,000) Other current assets 2,000 (1,000) 1,000 Accounts payable 4,000 5,000 4,000 Other accrued liabilities 0 0 (1,000) ------ ------ ------ Net cash provided by operating activities 49,000 23,000 34,000 Cash flows from investing activities: Capital expenditures (21,000) (22,000) (37,000) Proceeds from disposals 9,000 6,000 3,000 ----- ----- ----- Net cash used in investing activities (12,000) (16,000) (34,000) Cash flows from financing activities - net cash transferred (to) from Parent 37,000) (7,000) 0 ------- ------ ------- Net increase (decrease) in cash 0 0 0 ------- ------- ------- Cash at beginning and end of year $ 0 $ 0 $ 0 ======== ======== ======== Supplemental disclosure- transfers of equipment from Parent $ 13,000 $12,000 $ 1,000 ======== ======= ======== See accompanying notes to combined financial statements. F-7
COMPONENT PRODUCTS DIVISION OF MOTOROLA, INC. Notes to Combined Financial Statements (in thousands) December 31, 1996, 1997, and 1998 (1) Description of Business The Component Products Division (Division) is a division within the Integrated Electronic Systems Sector (Sector) of Motorola, Inc. (Parent). The Division designs and manufactures radio frequency generation components, including quartz crystals and oscillators, ceramic filters, and multilayer ceramic integrated circuits which are used in the production of pager devices, cellular handsets, and other radio equipment. The Division is headquartered in Schaumburg, Illinois and has operations in China, Taiwan, Costa Rica, New Mexico, Arizona, and Pennsylvania. The Division sells primarily to other businesses of the Parent and third-party customers in the global communications industry. (2) Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles and present the financial position, results of operations, and cash flows of the Division. Intracompany accounts and transactions within the Division have been eliminated. The Division's cash is managed by the Parent under a centralized system whereby cash generated by the Division is accumulated and managed by the Parent and cash requirements of the Division are funded by the Parent as needed. Accordingly, net changes in cash balances managed by the Parent are recorded as transfers to/from the Parent. (3) Summary of Significant Accounting Policies (a) Related Party Transactions The Division manufactures electronic components for other businesses of the Parent. Resulting sales and related accounts receivable are treated as "arm's-length" transactions and are reflected as such in the financial statements. The Division purchases inventory from other businesses of the Parent, which are also treated as "arm's-length" transactions in the financial statements. Such purchases are not significant for 1996, 1997, and 1998. Certain assets, liabilities, and expenses for common services and corporate overhead incurred by the Parent have been allocated to the Division. In management's opinion, the methods employed in allocating the amounts are reasonable and have been applied on a consistent basis. However, the amounts disclosed may not represent the amounts that would have been reported had these transactions occurred with third parties at "arm's-length." (b) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Accounts Receivable Accounts receivable includes amounts owed by customers for electronic component sales. A provision for uncollectible amounts is calculated based on management's estimates of amounts, which, based upon the credit risk associated with the various customer accounts, are subject to substantial collection risk. F-8 (d) Inventories Inventories are valued at the lower of average cost or market. Management periodically evaluates the net realizability of its inventory. Inherent in the estimates of net realizable value are management estimates related to the Division's future production schedules, customer demand, and ultimate realization of potentially excess or obsolete inventory. (e) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. The Division shares certain property, plant, and equipment with other businesses of the Parent. These shared assets have been allocated to the Division based on the Division's activity level. Depreciation is computed over the estimated useful lives of the assets principally on the double-declining balance method. Useful lives for buildings and related equipment range from 20-40 years, and furniture, machinery, and equipment from 3-10 years. (f) Income Taxes The Division is included in the consolidated income tax returns of the Parent. The tax benefit of losses and other tax benefits have been claimed in the statements of operations since the benefits are used by the Parent. The Division accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) 109. Pursuant to SFAS 109, deferred tax assets and liabilities are recorded for temporary differences which enter into the determination of taxable income in different periods for financial reporting and income tax purposes. (g) Revenue Recognition Revenue from the sale of electronic component products is recognized at the time of shipment. (h) Business and Credit Concentrations The Division is dependent upon certain intellectual property maintained by the Parent to sustain its competitiveness. The inability of the Parent to defend its stated intellectual property rights could negatively affect the competitive position of the Division. The Division's customers are comprised of device manufacturers which purchase ceramic and quartz components. Financial instruments which potentially subject the Division to concentrations of credit risk consist principally of accounts receivable. As of December 31, 1997 and 1998 other businesses of the Parent accounted for 76% and 47% of the total accounts receivable balance, respectively. For the years ended December 31, 1996, 1997, and 1998 these other businesses accounted for 88%, 79%, and 59% of net sales, respectively. (i) Foreign Currency Translation The Division's functional currency for all foreign operations is the U.S. dollar. Accordingly, the net effect of gains and losses from translation of foreign currency financial statements into U.S. dollars is included in current operations. Gains and losses resulting from foreign currency transactions are included in current operations and are not significant for 1996, 1997, or 1998. F-9 (j) Fair Values of Financial Instruments The Division believes that the carrying amounts of its financial assets and liabilities, consisting of accounts receivable, accounts payable, accrued expenses, and debt, approximates the fair value of such items. (4) Inventories Inventories as of December 31, 1997 and 1998 consist of the following:
1997 1998 ---- ---- Raw materials $14,000 $21,000 Work in progress 13,000 11,000 Finished goods 6,000 4,000 ----- ----- 33,000 36,000 (1,000) (3,000) ------ ------ Inventory reserves $32,000 $33,000 ======= ======= (5) Property, Plant, and Equipment Property, plant and equipment as of December 31, 1997 and 1998 consist of the following: 1997 1998 ---- ---- Machinery and equipment $216,000 $208,000 Building 71,000 67,000 Land 1,000 1,000 Allocated property, plant, and equipment 23,000 34,000 ------ ------ 311,000 310,000 (175,000) (180,000) -------- -------- Less accumulated depreciation $136,000 $130,000 ======== ========
Allocated property, plant, and equipment are general corporate assets of the Parent which have been allocated to the Division, through the Sector, based upon a rational allocation methodology, generally on the basis of the Division's activity level. (6) Employee Benefit Plans Employees of the Division are eligible for health, welfare, and retirement benefits under programs maintained by the Parent. Costs have been allocated to the Division based predominantly on headcount and payroll costs on various proportional allocation formulas. The current portion of these liabilities is included in accrued payroll liabilities. F-10 (7) Debt The Division entered into an agreement with the City of Albuquerque (City) under which the Division received the proceeds of industrial revenue bonds issued by the City to expand a production facility in Albuquerque. Terms of the agreement are substantially equivalent to the terms of the bonds. The agreement provides for semi-annual payments of approximately $1,600, which is equivalent to the interest on the bonds, and provides for the debt to be secured by the Albuquerque facility. The weighted average interest rate on the bonds is 7.5%. A balloon principal payment of $41,000 is due on June 1, 2013, the bonds' maturity date. (8) Environmental Matters Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), the Parent has been designated as a potentially responsible party by the United States Environmental Protection Agency with respect to certain waste sites with which the Parent may have had direct or indirect involvement. Such designations are made regardless of the extent of the Parent's involvement. These claims are in various stages of administrative or judicial proceedings. They include demands for recovery of past governmental costs and for future investigations or remedial actions. In many cases, the dollar amounts of the claims have not been specified, and have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against the Parent. The Division has accrued its proportional share of the estimated costs associated with environmental matters which amounted to $3,100 as of December 31, 1997 and 1998. (9) Income Taxes Income tax expense (benefit) for the years ended December 31, 1996, 1997, and 1998 consists of: F-11
Current Deferred Total ------- -------- ----- Year ended December 31, 1996 U.S. Federal $(8,000) $ --- $(8,000) State and local (2,000) --- (2,000) Foreign 5,000 --- 5,000 ----- ----- ----- (5,000) --- (5,000) ====== ====== ====== Year ended December 31, 1997 U.S. Federal (5,000) (1,000) (6,000) State and local (1,000) --- (1,000) Foreign 4,000 --- 4,000 ------ ------ ------ (2,000) (1,000) (3,000) ====== ====== ====== Year ended December 31, 1998 U.S. Federal (8,000) --- (8,000) State and Local (2,000) --- (2,000) Foreign 5,000 --- 5,000 ----- ----- ----- $(5,000) $ --- $(5,000) ======= === ======= F-12
Income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to earnings (loss) before income tax expense as a result of the following:
1996 1997 1998 ---- ---- ---- Computed "expected" tax expense (benefit) $(1,000) $ 1,000 $(7,000) Increase (decrease) in tax expense (benefit) Taxes on non-U.S. earnings (2,000) (3,000) 3,000 State income taxes, net of Federal benefit (1,000) (1,000) (1,000) Other (1,000) --- --- ------ ------ ------ $(5,000) $(3,000) $(5,000) ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1997 and 1998 are presented below: 1997 1998 ---- ---- Deferred tax assets: Inventory valuation $3,000 $ 2,000 Depreciation 4,000 5,000 Capitalized costs 3,000 4,000 Employee benefits, principally due to accrual for financial reporting purposes 2,000 --- Other 2,000 2,000 ----- ----- Deferred tax assets $14,000 $13,000 ======= ======= F-13
There is no valuation allowance at December 31, 1997 and 1998, based upon management's estimation of taxable income to be generated and other tax planning strategies employed by the Parent. As the Division is included in the consolidated tax returns of the Parent, identified tax assets are realized through Division equity. (10) Industry and Geographic Segment Information The Division operates in one industry segment and is engaged in the design and manufacture of radio frequency generation components. The following table presents revenues by country based on the product source.
1996 1997 1998 ---- ---- ---- United States $157,000 $ 94,000 $ 56,000 China 67,000 126,000 154,000 Taiwan 108,000 122,000 104,000 Other foreign countries 1,000 1,000 1,000 ----- ----- ----- Total $333,000 $343,000 $315,000 ======== ======== ======== The following table presents property, plant, and equipment by country based on the location of the asset: 1997 1998 ---- ---- United States $153,000 $126,000 China 53,000 65,000 Taiwan 64,000 84,000 Other foreign countries 41,000 35,000 ------ ------ Total $311,000 $310,000 ======== ======= F-14
(11) Asset Sale Agreement In December 1998, the Parent entered into an Asset Sale Agreement (Agreement) with CTS Wireless Components, Inc. (CTS) to sell certain assets, consisting mainly of inventory and fixed assets of its quartz and ceramics product lines for consideration of $94,000 in cash, and the assumption by CTS of $41,000 in debt. The Parent will be eligible to receive an annual earnout payment, limited to $105,000 over a five-year period, based upon the Division achieving certain future financial targets. The Agreement principally includes the transfer of intellectual property rights, the transfer of employees' accrued benefits in the Parent's pension and 401k plans, a five-year strategic supplier agreement, and a covenant not to compete for two years. The Parent will provide transition services and manufacturing capability to CTS for amounts approximating fair value to facilitate operating the Division, as its current manufacturing operations are located within other facilities of the Parent. Closing of the Agreement is subject to a number of significant conditions, including, among others, the ability of CTS to secure financing to fund this acquisition and the filing of all necessary reports and documents with the Department of Justice pursuant to the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 and the expiration and termination of applicable waiting periods thereunder, and other governmental approvals. There can be no assurance as to whether or when such approvals will be received or when conditions to close the Agreement will be met. F-15 EXHIBIT 23 CONSENT OF KPMG LLP We consent to incorporation by reference in the registration statements (Nos. 33-27749 and 333-5730) on Form S-8 of CTS Corporation of our report dated February 24, 1999 with respect to the combined balance sheets of the Component Products Division of Motorola, Inc. as of December 31, 1997 and 1998, and the related combined statements of operations and division equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the Form 8-K/A of CTS Corporation dated May 12, 1999. /S/KPMG LLP Chicago, Illinois May 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----