-----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, E3uLoyBeuB7nY4ukHdG48ICMNZWFtqwXTCdF0KzX8PV6xTJwpYTuDwYKfA3z0zB+ p6H37dTPFhWz1+5J/TCdyQ== 0000026058-02-000018.txt : 20020430 0000026058-02-000018.hdr.sgml : 20020430 ACCESSION NUMBER: 0000026058-02-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTS CORP CENTRAL INDEX KEY: 0000026058 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 350225010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04639 FILM NUMBER: 02627306 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 10-Q 1 firstq10-qapril302002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to ________________ Commission File Number 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-0225010 ------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 905 West Boulevard North Elkhart, IN 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (574)293-7511 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 and 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 the number of shares outstanding of each of the issuer's classes of common stock, as of April 26, 2002: 33,342,472. Page 1 CTS CORPORATION AND SUBSIDIARIES INDEX Page PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Earnings (Loss) - For the Three Months ended March 31, 2002, and April 1, 2001 3 Condensed Consolidated Balance Sheets - As of March 31, 2002, and December 31, 2001 4 Condensed Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2002, and April 1, 2001 5 Consolidated Statements of Comprehensive Earnings - For the Three Months Ended March 31, 2002, and April 1, 2001 6 Notes to Condensed Consolidated Financial Statements 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-18 Item 3. Quantitative and Qualitative Disclosure About Market Risk 18 PART II. -- OTHER INFORMATION Item 1. Legal Proceedings 18-19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 19 Page 2 Part 1 -- FINANCIAL INFORMATION Item 1. Financial Statements CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)-UNAUDITED (In thousands of dollars, except per share amounts) Three Months Ended March 31,2002 April 1, 2001 ------------- ------------ Net sales $112,593 $176,988 Costs and expenses: Cost of goods sold 89,915 136,423 Selling, general and administrative expenses 15,317 25,020 Research and development expenses 7,133 9,780 ------ ------- Operating earnings 228 5,765 Other (expense) income: Interest expense (2,670) (3,366) Interest income 82 180 Other (174) (316) ------ ------ Total other expense (2,762) (3,502) ------ ------ Earnings (loss) before income taxes (2,534) 2,263 Income tax expense (benefit) (633) 566 ------ ------ Net earnings (loss) $(1,901) $1,697 ======= ====== Net earnings (loss) per share - Note J Basic ($0.06) $0.06 ====== ===== Diluted ($0.06) $0.06 ====== ===== Cash dividends declared per share $0.03 $0.03 ====== ===== Average common shares outstanding: Basic 31,802 27,671 Diluted 31,802 28,750 See notes to condensed consolidated financial statements. Page 3 Part 1 -- FINANCIAL INFORMATION (Cont'd) CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) March 31, December 31, 2002 2001* -------- ----------- ASSETS (Unaudited) Current Assets Cash $7,672 $13,255 Accounts receivable, less allowances (2002--$1,468; 2001--$1,470) 80,068 81,563 Inventories--Note B 43,721 50,149 Other current assets 4,385 4,371 Deferred income taxes 51,563 51,336 ------- ------- Total current assets 187,409 200,674 Property, plant and equipment, less accumulated depreciation (2002--$214,383; 2001--$207,212) 186,382 191,958 Other Assets Prepaid pension asset 105,803 102,196 Intangible assets - Note F 43,017 44,004 Assets held for sale--Note E 21,799 21,940 Other 6,396 7,159 ------- ------- Total other assets 177,015 175,299 ------- ------- $550,806 $567,931 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt-Note G $12,522 $27,500 Notes payable 1,389 -- Accounts payable 48,826 50,842 Accrued liabilities 64,216 75,515 ------- ------- Total current liabilities 126,953 153,857 Long-term debt--Note G 106,186 125,013 Other long-term obligations 7,178 7,274 Deferred income taxes 39,461 38,914 Shareholders' equity Preferred stock-authorized 25,000,000 shares without par value; none issued -- -- Common stock-authorized 75,000,000 shares without par value; 49,764,102 shares issued at March 31, 2002, and 48,531,936 shares issued at December 31, 2001 230,785 213,947 Additional contributed capital 23,285 24,153 Retained earnings 274,089 276,988 Accumulated other comprehensive loss (2,362) (1,702) ------- ------- 525,797 513,386 Cost of common stock held in treasury 2002--16,647,172 shares; 2001--17,630,192 (254,769) (270,513) ------- ------- Total shareholders' equity 271,028 242,873 ------- ------- $550,806 $567,931 ======== ======== *The balance sheet at December 31, 2001, has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. Page 4 Part 1 -- FINANCIAL INFORMATION (Cont'd) CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED (In thousands of dollars) Three Months Ended March 31, April 1, 2002 2001 ---- ---- Cash flows from operating activities: Net earnings (loss) $(1,901) $ 1,697 Depreciation and amortization 11,228 13,651 Deferred income taxes -- (797) Prepaid pension asset (3,607) (3,820) Changes in assets and liabilities: Accounts receivable 1,495 35,905 Inventories 6,428 7,134 Other current assets (485) (451) Accounts payable and accrued liabilities (12,803) (49,870) Other 341 312 ------ ------ Total adjustments 2,597 2,064 ------ ------ Net cash provided by operations 696 3,761 ------ ------ Cash flows from investing activities: Capital expenditures (4,673) (32,107) Other 135 (228) ------ ------ Net cash used in investing activities (4,538) (32,335) Cash flows from financing activities: Payments of long-term obligations (34,855) (2,500) Proceeds from issuance of long-term obligations 1,050 24,000 Net change in short-term borrowings 1,389 -- Dividend payments (931) (834) Proceeds from issuance of common stock 31,609 -- Other 108 1,484 ------ ------ Net cash provided by (used in) financing activities (1,630) 22,150 Effect of exchange rate changes on cash (111) (17) ------ ------ Net decrease in cash (5,583) (6,441) Cash at beginning of year 13,255 20,564 ------ ------ Cash at end of period $7,672 $14,123 ====== ======= Supplemental cash flow information Cash paid (received) during the period for: Interest $1,294 $3,178 Income taxes--net $ (153) $2,421 See notes to condensed consolidated financial statements. Page 5 Part 1 -- FINANCIAL INFORMATION (Cont'd) CTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - UNAUDITED (In thousands of dollars) Three Months Ended March 31,2002 April 1,2001 ------------- ------------ Net earnings (loss) $(1,901) $1,697 Other comprehensive earnings (loss): Cumulative translation adjustments (410) (980) Deferred gain on forward contract (250) -- ------- ------ Comprehensive earnings (loss) $(2,561) $ 717 ======= ====== See notes to condensed consolidated financial statements. Page 6 Part 1 -- FINANCIAL INFORMATION (Cont'd) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED March 31,2002 NOTE A--BASIS OF PRESENTATION The accompanying condensed consolidated interim financial statements have been prepared by CTS Corporation ("CTS" or "the Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The accompanying unaudited consolidated interim financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance 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. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. Certain reclassifications have been made for the periods presented in the financial statements to conform to the classifications adopted in 2002. NOTE B--INVENTORIES The components of inventory consist of the following: ($ in thousands) March 31, December 31, 2002 2001 -------- ----------- Finished goods $17,072 $19,660 Work-in-process 8,169 8,747 Raw materials 18,480 21,742 ------- ------- $43,721 $50,149 ======= ======= NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES In 2001, CTS recorded $40.0 million of pre-tax restructuring and impairment charges, $14.0 million in the second quarter and $26.0 million in the fourth quarter. The restructuring plan actions were designed to enable the Company to operate more efficiently in the then existing environment and, at the same time, position the Company for success when the economy improves. Major Page 7 Part 1 -- FINANCIAL INFORMATION (Cont'd) NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES (Cont'd) actions under the restructuring plan include closing its Chung-Li, Taiwan, facility in the fourth quarter of 2001 and a decision to dispose of its Longtan, Taiwan, building. The plan also covers ceasing production at its Sandwich, Illinois; and Carlisle, Pennsylvania, facilities in the second quarter of 2002 and discontinuing the manufacture of intermediate frequency surface acoustical wave ("IF SAW") filters. IF SAW filter production was stopped at the end of the second quarter of 2001. Amounts included in the Condensed Consolidated Statement of Earnings (Loss) relating to the manufacture of IF SAW filters were insignificant in 2001. The restructuring plan provides that production formerly completed at its Chung-Li, Taiwan; Sandwich, Illinois; and Carlisle, Pennsylvania, facilities be transferred to other existing CTS manufacturing locations. CTS completed a substantial portion of these consolidations and transfers in fiscal 2001 and the remainder are expected to be completed during the summer of 2002. The following table displays the restructuring activity and restructuring reserve balances as of December 31, 2001 and March 31, 2002: Workforce Other Reductions Exit Costs Total ---------- ---------- ----- ($ in millions) Second quarter charge $6.4 $2.0 $8.4 Fourth quarter charge 3.2 0.4 3.6 --- --- --- Total 2001 restructuring charge 9.6 2.4 12.0 Items paid in 2001 (6.8) (1.4) (8.2) ---- ---- ---- Reserve balance at December 31, 2001 2.8 1.0 3.8 Items paid in first quarter of 2002 (0.7) (0.3) (1.0) ---- ---- ---- Reserve balance at March 31, 2002 $2.1 $0.7 $2.8 ==== ==== ==== The $12.0 million restructuring charge relates to facility consolidations, including plant closures and product consolidations. Included in this amount is $9.6 million of severance benefits associated with the separation of approximately 1,500 employees. Approximately 12% of the employees to be severed are managerial employees and 88% are nonmanagement employees. As of March 31, 2001, $7.5 million of severance benefits, relating to approximately 1,300 employees, had been paid. Of the remaining $2.4 million of other exit costs, which consists primarily of costs associated with the closing of the plants, $1.7 million has been paid as of March 31, 2002. The restructuring plan also includes $31.0 million of asset impairment charges. Approximately $26.9 million of the impairment charge is the adjustment needed to reduce certain assets held for sale to their estimated fair value. See further discussion in Note E, "Assets Held for Sale." An additional $1.2 million relates to the write-off of leasehold improvements, primarily at its Chung-Li, Taiwan, Page 8 Part 1 -- FINANCIAL INFORMATION (Cont'd) NOTE C--RESTRUCTURING AND IMPAIRMENT CHARGES (Cont'd) facility. The remaining $2.9 million relates to impairment of certain intangible assets associated with obsolete products and technology acquired in the acquisition of the Component Products Division of Motorola (see Note D, "Acquisition"). CTS also recognized pension plan curtailment gains of approximately $3.0 million in 2001 resulting from plant closure under the restructuring plan. During the first quarter of 2002, CTS recorded, in cost of sales, $0.8 million of one-time charges, consisting primarily of equipment relocation and other employee-related costs relating to restructuring activities. During the first quarter of 2001, CTS recorded $2.1 million of employee severance in cost of goods sold. NOTE D--ACQUISITION In 1999, CTS Corporation acquired certain assets and liabilities of the Component Products Division ("CTS Wireless") of Motorola, Inc. ("Motorola"). The acquisition was accounted for under the purchase method of accounting. As part of the purchase agreement, CTS may be obligated to pay additional amounts in 2003 and 2004, depending upon increased sales and profitability of CTS Wireless in 2002 and 2003. No amounts were due to Motorola in 2002 under the calculations for 2001. The maximum remaining potential payment under the acquisition agreement was $34.8 million at March 31, 2002. NOTE E--ASSETS HELD FOR SALE Assets held for sale at March 31, 2002 and at December 31, 2001, are comprised of facilities, primarily the Longtan, Taiwan, building, and equipment that have been removed from service and are to be disposed of pursuant to the restructuring activities commenced in fiscal year 2001. Refer to Note C, "Restructuring and Impairment Charges." The Company completed an assessment in the fourth quarter of 2001 of the carrying value of its assets in light of then existing and expected market conditions. The review highlighted certain assets for which no production demand or use currently existed or was forecasted to exist before economic obsolescence of the asset. In accordance with Financial Accounting Standard Board("FASB") Financial Accounting Standard ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," an impairment loss was recorded to reduce these assets to their estimated fair value. These assets are recorded at amounts not in excess of what management currently expects to receive upon sale, less cost of disposal. However, the amounts the Company will ultimately realize are dependent on numerous factors, some of which are beyond management's ability to control, and could differ materially from the amounts currently recorded. Management cannot determine when the sale of these assets will be completed. The assets to be disposed of are held by both the electronic components and electronic assemblies segments. Page 9 Part 1 -- FINANCIAL INFORMATION (Cont'd) NOTE F--Intangible Assets CTS recorded approximately $1 million and $1.6 million of intangible asset amortization in the three month period ended March 31, 2002 and April 1, 2001, respectively. The components of intangible assets as of March 31, 2002, include the following: Gross Weighted Carrying Accumulated Average ($ in thousands) Amount Amortization Life -------- ------------ -------- Amortized intangible assets: Customer Lists $36,405 $ (3,073) 30 Patents 10,319 (2,656) 10 Technology 12,014 (10,565) 4 Other 300 (241) 8 ------- ------- ---- Total $59,038 $(16,535) 21 ------- -------- ---- Unamortized intangible assets: Goodwill 514 - ------- -------- Total intangibles $59,552 $(16,535) ======= ======== NOTE G--LONG-TERM DEBT CTS' amended credit agreement included a revolving credit facility commitment totaling $125 million, expiring in December 2003, and term loans, which expire in December 2004, with outstanding balances of $21.7 million at March 31, 2002. The credit agreement categorizes all debt existing on December 20, 2001, as senior to any future debt. The debt is collaterized by substantially all U.S. assets and a pledge of 65% of the stock of certain non-U.S. subsidiaries. Interest rates on these borrowings fluctuate based upon LIBOR, with adjustments based on the ratio of CTS' consolidated senior 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. At March 31, 2002, that fee was 0.75 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 maximum leverage ratio. These covenants could reduce the borrowing availability under the credit agreement. Additionally, the credit agreement limits the amount allowed for dividends, capital expenditures and acquisitions and requires the proceeds of all asset sales be applied against outstanding borrowings. Furthermore, it requires repayment in an amount of 90% of excess cash flow, as defined therein. NOTE H--BUSINESS SEGMENTS FAS No. 131, "Disclosures about Segments of an Enterprise and Related Page 10 Part 1 -- FINANCIAL INFORMATION (Cont'd) NOTE H--BUSINESS SEGMENTS (Cont'd) 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; quartz crystals and oscillators, and ClearONETM terminators used in the communications and computer markets; and resistor networks, switches and potentiometers used to serve multiple markets. 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 assemblies represent completed, higher-level functional products 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 computer and communications infrastructure markets, RF (radio frequency) integrated modules used in cellular handsets, low temperature cofired ceramics ("LTCC") for global positioning systems ("GPS") and Bluetooth communications products and pointing sticks/cursor controls for notebook computers. Management evaluates performance based upon segment operating earnings before interest and income taxes. Summarized financial information concerning CTS' reportable segments is shown in the following table: ($ in thousands) Electronic Electronic Components Assemblies Total ---------- ---------- ----- First Quarter 2002 Net sales to external customers $ 58,245 $ 54,348 $112,593 Segment operating earnings (loss) $ (2,542) $ 3,552 $ 1,010 Total assets $454,708 $ 96,098 $550,806 First Quarter 2001 Net sales to external customers $ 99,865 $ 77,123 $176,988 Segment operating earnings $ 6,467 $ 1,398 $ 7,865 Total assets $509,892 $136,221 $646,113 Reconciling information between reportable segments and CTS' consolidated totals is shown in the following table: ($ in thousands) First Quarter First Quarter 2002 2001 ------------- ------------- Total segment operating earnings $1,010 $ 7,865 Restructuring related one-time charges - Electronic Components (703) (2,100) Restructuring related one-time charges - Electronic Assemblies (79) -- Interest expense (2,670) (3,366) Other expense (92) (136) ------- ------- Earnings (loss) before income taxes $(2,534) $ 2,263 ======= ======= Page 11 Part 1 -- FINANCIAL INFORMATION (Cont'd) NOTE I--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 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, results of operations or cash flows 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, results of operations or cash flows. NOTE J--EARNINGS PER SHARE FAS No. 128, "Earnings per Share," requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share ("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 the first quarter of 2001. At April 1, 2001, the other dilutive securities include approximately 255,000 shares, of CTS common stock to be issued to DCA shareholders who have not yet tendered their stock certificates for exchange. Approximately 319,000 common stock equivalents, including 155,000 shares of CTS common stock to be issued to DCA shareholders, were excluded from the computation of diluted loss per share as of March 31, 2002, due to their anti-dilutive effect. (In thousands, except per share amounts) Shares Net Earnings (in thousands) Net Earnings (Numerator) (Denominator) Per Share ----------- ------------- ---------- First Quarter 2001: Basic EPS $1,697 27,671 $0.06 Effect of Dilutive Securities Stock Options 715 Other 364 ------ ------ ----- Diluted EPS $1,697 28,750 $0.06 ====== ====== ===== Page 12 Part 1 -- FINANCIAL INFORMATION (Cont'd) NOTE K--RECENT ACCOUNTING PRONOUNCEMENTS In 2001, the FASB issued standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." FAS No. 141 requires business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. FAS No. 142 requires goodwill and certain intangibles no longer be amortized, but instead be tested for impairment at least annually. The FASB also issued standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 defines impairment for long-lived assets and provides guidance on the measurement of asset impairments. CTS had no transitional effect of adopting these statements at January 1, 2002. NOTE L--SUBSEQUENT EVENTS On April 16, 2002, CTS amended its credit agreement with its existing nine banks. The amended agreement adjusts certain financial covenants, reduces the revolving credit facility to $115 million and allows for limited acquisitions. Also on April 16, 2002, the Company issued $25 million of five-year, 6.5% convertible, subordinated debentures. These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. The Company has granted the initial purchasers of the debentures a 90-day option to purchase an additional $5.0 million aggregate principal amount of the debentures. At any time after the three-year anniversary of the issue date, the purchasers may accelerate the maturity of the debentures. CTS also has the right after such three-year anniversary and under certain circumstances, to force conversion of the debentures into common stock. CTS used the net proceeds from the offering to repay the outstanding term loans in full under its existing credit facility, and the balance was applied to its revolving credit facility. Page 13 Part 1 -- FINANCIAL INFORMATION (Cont'd) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Results of Operations The following table highlights changes in significant components of the consolidated statements of earnings for the three-month periods ended March 31, 2002 and April 1, 2001. ($ in thousands) March 31, April 1, Increase 2002 2001 (Decrease) -------- ------- ---------- Net sales $112,593 $176,988 $(64,395) Gross profit 22,678 40,565 (17,887) Gross profit as a percent of sales 20.1% 22.9% (2.8%) Selling, general and administrative expenses 15,317 25,020 (9,703) Selling, general and administrative expenses as a percent of sales 13.6% 14.1% (0.5%) Research and development expenses 7,133 9,780 (2,647) Operating earnings 228 5,765 (5,537) Operating earnings, as a percent of sales 0.2% 3.3% (3.1%) Interest expense 2,670 3,366 (696) Earnings (loss) before income taxes (2,534) 2,263 (4,797) Income tax expense (benefit) (633) 566 (1,199) Income tax rate 25.0% 25.0% -- Net earnings (loss) $(1,901) $1,697 $(3,598) Net sales decreased by $64.4 million, or 36% from the first quarter of 2001. Gross profit is lower due primarily to the lower absorption of fixed manufacturing overhead expenses. Gross profit and operating earnings include $0.8 million and $2.1 million of restructuring-related, one-time charges in the first quarter of 2002 and 2001, respectively. As a percentage of total sales, the first quarter of 2002 sales of electronic components and electronic assemblies were 52% and 48%, respectively. As a percentage of total sales, sales of electronic components and electronic assemblies in the first quarter of 2001 were 56% and 44%, respectively. Refer to Note H, "Business Segments," for a description of the Company's business segments. The electronic components segment experienced a $41.6 million sales decrease, or 42% from the first quarter of 2001. Sales decreases occurred principally as a result of the softness in demand for wireless handset and infrastructure components. Page 14 Part 1 -- FINANCIAL INFORMATION (Cont'd) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) The electronic assemblies segment experienced a 2002 sales decrease of $22.8 million, or 30% from the first quarter of 2001. The revenue decrease was experienced primarily as a result of lower demand for integrated interconnect systems products for the data storage systems for the computer equipment market, and the continued softness in the wireless handset market. Gross profit decreased primarily due to lower sales levels. The lower percent of sales in both segments results principally from lower absorption of fixed manufacturing overhead expenses caused by lower production levels combined with a shift of sales to lower margin products. Gross profit in the first quarter of 2002 also includes $3.1 million of a customer reimbursement for expenses substantially incurred in prior quarters. Selling, general and administrative expenses were $15.3 million, versus $25.0 million in the prior year's quarter. The reduction was primarily due to 2001 restructuring actions and cost reduction programs and lower sales related expenses. Research and development expenses decreased $2.7 million to $7.1 million from the first quarter of 2001. However, as a percent of sales, research and development expense increased to 6.3% in the first quarter of 2002 up from 5.5% in the first quarter of 2001. Significant ongoing R&D activities continue in our wireless, automotive and resistor product lines to support current product and process enhancements, expanded applications and new product development. The decrease in operating earnings dollars, was principally due to lower volume as a result of the overall softness in the served markets, particularly the wireless handset demand within both the electronic components and electronic assemblies segments. During 2001, CTS announced a restructuring plan designed to size the Company to then-existing market realities, while continuing to put a priority on positioning the Company to be successful as the economy recovers and market growth returns. See Note C, "Restructuring and Impairment Charges," for a more detailed explanation of the plan actions. The expected pre-tax profitability improvement associated with the 2001 restructuring and asset impairment charges is estimated to be $15 million. Liquidity and Capital Resources The following table highlights changes in balance sheet items and ratios and other information related to liquidity and capital resources: ($ in thousands) March 31, December 31, Increase 2002 2001 (Decrease) ---- ---- ---------- Cash $ 7,672 $ 13,255 $(5,583) Accounts receivable, net 80,068 81,563 (1,495) Inventories, net 43,721 50,149 (6,428) Current assets 187,409 200,674 (13,265) Accounts payable 48,826 50,842 (2,016) Current portion of debt 13,911 27,500 (13,589) Current liabilities 126,953 153,857 (26,904) Working capital 60,456 46,817 13,639 Current ratio 1.5 1.3 0.2 Long-term debt (including current maturities) 118,708 152,513 (33,805) Shareholders' equity 271,028 242,873 28,155 Long-term debt (including current maturities) as a percent of shareholders' equity 44% 63% (19%) Long-term debt (including current maturities) as a percent of capitalization 30% 39% (9%) Page 15 Part 1 -- FINANCIAL INFORMATION (Cont'd) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The percentage of long-term debt to shareholders' equity decreased to 44% on March 31, 2002, versus 63% on December 31, 2001, due to the repayment of debt primarily with the proceeds from the issuance of common stock. From December 31, 2001, to March 31, 2002, CTS' working capital increased $13.6 million. This increase is primarily attributable to the reduction in the current portion of borrowings at March 31, 2002, compared with December 31, 2001, of $13.6 million. The reductions in cash, accounts receivable and inventory were offset by reductions in accounts payable and accruals. Capital expenditures were $4.7 million during the first quarter, compared with $32.1 million for first quarter 2001. The 2002 capital expenditures were primarily for production equipment for new products. In the first quarter of 2002, cash flows provided by operating activities were $0.7 million. Depreciation and amortization were nearly offset by net working capital reductions and the net loss for the quarter. In the first quarter of 2001, cash flows provided by operating activities were $3.8 million. Cash flows used for investing activities totaled $4.5 million through the first quarter of 2002, including $4.7 million of capital expenditures. In the first quarter of 2001, cash flows used for investing activities totaled $32.3 million, consisting of $32.1 million of capital expenditures. Cash flows used by financing activities were $1.6 million in 2002 consisting primarily of proceeds from the issuance of debt of $31.6 million offset by a net repayment of debt of $32.4 million and dividend payments of $0.9 million. Cash flows provided by financing activities were $22.2 million in 2001, consisting primarily of a net increase in debt of $21.5 million, partially offset by payment of dividends of $0.8 million. CTS' capital expenditures for 2002 are presently expected to total less than $35 million, $4.7 million of which has been spent during the first three months of the year. These capital expenditures are primarily for new products and cost savings initiatives. On April 16, 2002, CTS amended its credit agreement with its existing nine banks. The amended agreement adjusts certain financial covenants, reduces the revolving credit facility to $115 million and allows for limited acquisitions. The agreement includes the revolving credit facility commitment, expiring in December 2003, and term loans, which expire in December 2004, with outstanding balances of $21.7 million at March 31, 2002. Page 16 Part 1 -- FINANCIAL INFORMATION (Cont'd) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) These debt agreements contain financial covenants as described in Note F, "Long-term Debt." Although CTS management currently expects to be in compliance with all financial covenants, there can be no assurance of this. Certain factors, such as forecasted future operating results, are dependent upon future events, some of which are beyond CTS' ability to control. CTS believes cash flows from operations and borrowings under its credit agreement will be adequate to fund its working capital, restructuring activities, capital expenditures and debt service requirements. However, if customer demand decreases significantly from CTS' current forecast, CTS may need to find an alternative funding source. In this event, CTS may choose to pursue additional equity and/or debt financing. CTS cannot assure that additional financing, which would be affected by general economic and market conditions, would be available on terms acceptable to CTS or at all. During 2002, CTS is required to repay $27.5 million term loans under its credit agreement, $15.0 million of which had been paid as of March 31, 2002, and to make $5.9 million of lease payments. CTS has historically been able to fund it capital and operating needs through its cash flows from operations and available credit under its bank credit facilities. On December 14, 1999, CTS' shelf registration statement on Form S-3 was declared effective by the Securities and Exchange Commission. CTS could initially offer up to $500.0 million in any combination of debt securities, common stock, preferred stock or warrants under the registration statement. During the first quarter of 2002, CTS issued $28.2 million of common stock under this registration statement and received net proceeds of $28.1 million. CTS used the net proceeds of these equity issuances to repay term loans under its credit agreement. As of March 31, 2002, CTS could offer up to $445.8 million of additional debt and/or equity securities under this registration statement. Also on April 16, 2002, the Company issued $25 million of five-year, 6.5% convertible, subordinated debentures. These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. The Company has granted the initial purchasers of the debentures a 90-day option to purchase an additional $5.0 million aggregate principal amount of the debentures. At any time after the three-year anniversary of the issue date, the purchasers may accelerate the maturity of the debentures. CTS also has the right after such three-year anniversary and under certain circumstances, to force conversion of the debentures into common stock. CTS used the net proceeds from the offering to repay the outstanding term loans in full under its existing credit facility, and the balance was applied to its revolving credit facility. Page 17 Part 1 -- FINANCIAL INFORMATION (Cont'd) ***** Statements about the Company's earnings outlook and its plans, estimates and beliefs concerning the future are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, based on the Company's current expectations. Actual results may differ materially from those stated in the forward-looking statements due to a variety of factors which could affect the Company's operating results, liquidity and financial condition. We undertake no obligations to publicly update or revise any forward-looking statements. Factors that could impact future results include among others: the general market conditions in the communications, computer and automotive markets, and in the overall economy; whether the Company is able to implement measures to improve its financial condition and flexibility; the Company's successful execution of its restructuring, consolidation and cost-reduction plans; pricing pressures and demand for the Company's products, especially if economic conditions worsen or do not recover in the key markets for the Company's products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political risks. Investors are encouraged to examine the Company's SEC filings, which more fully describe the risks and uncertainties associated with the Company's business. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in CTS' market risk since December 31, 2001. Part 2 -- OTHER INFORMATION Item 1. Legal Proceedings CTS is involved in litigation and in other administrative proceedings with government agencies regarding the protection of the environment, and other matters, the results of which are not yet determinable. In the opinion of management, based upon currently available information, adequate provision for anticipated costs has been made, or the ultimate costs resulting from such litigation or administrative proceedings will not materially affect the consolidated financial position, results of operations or cash flows of CTS. See also Note I, "Contingencies," in the financial statements. Item 6. Exhibits and Reports on Form 8-K a. Exhibits (10) (a) The First Amendment to Third Amended and Restated Credit Agreement Page 18 Part 2 -- OTHER INFORMATION (Cont'd) Item 6. Exhibits and Reports on Form 8-K (Cont'd) b. Reports on Form 8-K During the three-month period ending March 31, 2002, CTS filed the following reports on Form 8-K: o Report dated February 1, 2002, under Item 5., Other Events, announcing a press release containing its financial results and other data for the year and quarter ended December 31, 2001. o Report dated February 5, 2002, under Item 5., Other Events, disclosing the issuance of 1,000,000 shares of its Common Stock to an institutional investor pursuant to a previously filed shelf registration statement on Form S-3. The Form 8-K also filed the opinion of counsel related to this transaction. o Report dated February 7, 2002, under Item 5., Other Events, presenting the December 31, 2001 balance sheet. o Report dated March 1, 2002, under Item 5., Other Events, disclosing the issuance of 1,000,000 shares of its Common Stock to an institutional investor pursuant to a previously filed shelf registration statement on Form S-3. The Form 8-K also filed the opinion of counsel related to this transaction. 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 thereunto duly authorized. CTS CORPORATION CTS CORPORATION /S/Richard G. Cutter /S/Vinod M. Khilnani - ------------------------ ---------------------------- Vice President, Secretary Senior Vice President and and General Counsel Chief Financial Officer Dated: April 30, 2002 Page 19 EX-99 3 exhibit1stq10q.txt EXECUTION COPY FIRST AMENDMENT to THIRD AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT ("Amendment") is made as of April 15, 2002 by and among CTS Corporation, an Indiana corporation (the "Borrower"), the financial institutions listed on the signature pages hereof (the "Lenders") and Bank One, NA, having its principal place of business in Chicago, Illinois, as contractual representative (the "Agent"), under that certain Third Amended and Restated Credit Agreement dated as of December 20, 2001 by and among the Borrower, the Lenders, the Agent, ABN AMRO Bank N.V., as documentation agent and Harris Trust and Savings Bank, as syndication agent (the "Credit Agreement"). Capitalized terms used but not otherwise defined herein shall have the respective meanings given to them in the Credit Agreement. WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit Agreement; WHEREAS, the Borrower has requested that the Required Lenders consent to certain amendments to the Credit Agreement; and WHEREAS, the Lenders and the Agent have agreed to amend the Credit Agreement on the terms and conditions set forth herein; WHEREAS, the Borrower, the Lenders and the Agent have further agreed to reduce the Aggregate Revolving Loan Commitment as provided in Section 8 below; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the Agent have agreed to the following amendment to the Credit Agreement. 1. Amendments. Effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 below, the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended to add the following new defined terms in the appropriate alphabetical locations: "Subordinated Note Documents" means (i) the Subordinated Notes, (ii) the Subordinated Note Purchase Agreement and (iii) any other "Transaction Documents" (under and as defined in the Subordinated Note Purchase Agreement) or other agreements, documents or instruments executed and/or delivered in connection with the Subordinated Notes in form and substance acceptable to the Agent and as the same may be amended, supplemented or modified in accordance with Section 7.2(M) hereof (including, without limitation, the Registration Rights Agreement substantially in the form of the draft dated April 9, 2002 distributed to the Lenders, with such changes thereto as may be acceptable to the Agent). "Subordinated Noteholders" means the "Purchasers" party to the Subordinated Note Purchase Agreement and each of their respective successors and permitted assigns, as the "Holders" of the Subordinated Notes. "Subordinated Note Purchase Agreement" means that certain Securities Purchase Agreement dated on or before April 25, 2002 between the Borrower and each of the Subordinated Noteholders parties thereto, substantially in the form of the draft dated April 9, 2002 distributed to the Lenders (with such changes thereto as may be acceptable to the Agent) and as the same may be amended, supplemented or modified in accordance with Section 7.2(M) hereof. "Subordinated Notes" means those certain five-year 6 1/2% Convertible Debentures to be issued by the Borrower in an original aggregate principal amount of $25,000,000 (which may be increased by up to an additional $5,000,000 within approximately ninety (90) days after the original issuance thereof) and purchased by the Subordinated Noteholders pursuant to the Subordinated Note Purchase Agreement, substantially in the form of the draft dated April 9, 2002 distributed to the Lenders (with such changes thereto as may be acceptable to the Agent) and as the same may be amended, supplemented or modified in accordance with Section 7.2(M) hereof. (b) The definition of "Change of Control" in Section 1.1 of the Credit Agreement is hereby restated in its entirety as follows: "Change of Control" means (I) an event or series of events by which: (a) any Person together with Affiliates of such Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of twenty percent (20%) of the combined voting power of the Borrower's outstanding Capital Stock ordinarily having the right to vote at an election of directors; or (b) during any period of twelve (12) consecutive calendar months, individuals: (i) who were directors of the Borrower on the first day of such period, or (ii) whose election or nomination for election to the board of directors of the Borrower was recommended or approved by at least a majority of the directors then still in office who were directors of the Borrower on the first day of such period, or whose election or nomination for election was so approved, shall cease to constitute a majority of the board of directors of the Borrower; or (II) any "Change of Control Transaction" or event of like import under and as defined in the Subordinated Notes. (c) The definition of "EBITDA" in Section 1.1 of the Credit Agreement is hereby amended to add the following proviso immediately before the period at the end thereof: provided, that upon the consummation of any Acquisition permitted hereunder, for calculations made from and after such Acquisition, EBITDA shall be calculated on a pro forma basis including the target's historical EBITDA for the applicable period using historical financial statements obtained from the seller broken down by fiscal quarter in the Borrower's reasonable judgment (the amounts from which shall be unadjusted unless adjustments thereto have been approved in writing by the Agent) (d) The definition of "Indebtedness" in Section 1.1 of the Credit Agreement is hereby amended to delete clause (i) in its entirety and to substitute the following clause (i) therefor: (i) Off-Balance Sheet Liabilities (excluding liabilities under those certain operating leases of equipment and aircraft sold by the Borrower prior to December 31, 2001 for an aggregate amount of approximately $15,000,000); (e) Section 2.5(B)(i)(e)(III) of the Credit Agreement is hereby restated in its entirety as follows: (III) following the payment in full of the Term Loans and the Supplemental Syndicated Loans, the amount of each Designated Prepayment shall be applied to repay Revolving Loans (without reducing the Revolving Loan Commitments). (f) Article VI of the Credit Agreement is hereby amended to add the following new Section 6.17 thereto: 6.17 Subordinated Indebtedness. The subordination provisions of the Subordinated Note Documents and each of the Subordinated Notes are enforceable against the Subordinated Noteholders and the Obligations constitute "Senior Debt" (or an appropriate equivalent term) under and as defined in the Subordinated Note Documents and each of the Subordinated Notes. (g) Section 7.2(A) of the Credit Agreement is hereby amended to delete the word "and" at the end of clause (iv) thereof and to add the following language immediately after clause (vi) thereof: ; and (vii) Indebtedness evidenced by the Subordinated Note Documents. (h) Section 7.2(C) of the Credit Agreement is hereby restated in its entirety as follows: (C) Merger; Acquisitions; Etc. Purchase or otherwise acquire, whether in one or a series of transactions, all or a substantial portion of the business assets, rights, revenues or property, real, personal or mixed, tangible or intangible, of any Person, or all or a substantial portion of the Capital Stock of or other Equity Interest in any other Person, or merge or consolidate or amalgamate with any other Person or take any other action having a similar effect, nor enter into any joint venture or similar arrangement with any other Person other than an Acquisition which has been approved by the Required Lenders and otherwise meets the following requirements (except as may be waived by the Required Lenders): (a) no Default or Event of Default shall have occurred and be continuing or would result from such Acquisition or the incurrence of any Indebtedness in connection therewith; (b) the purchase is consummated pursuant to a negotiated acquisition agreement on a non-hostile basis and approved by the target company's board of directors (and shareholders, if necessary) prior to the consummation of the Acquisition; and (i) the acquisition documents in respect of such purchase (x) shall have been delivered to the Agent in substantially final form, reasonably in advance of the consummation of the proposed Acquisition to provide the Agent sufficient time to review such documents and (x) are reasonably satisfactory to the Agent (including, without limitation, in respect of representations, indemnities and opinions) and (ii) the results of due diligence in respect of such purchase are reasonably satisfactory to the Agent; (c) the purchase price for all such Acquisitions permitted under this Section 7.3(C) shall not exceed $15,000,000 during the term of this Agreement (including the incurrence or assumption of any Indebtedness in connection therewith and transaction-related contractual payments, including the maximum amounts payable as Contingent Purchase Price Obligations); (d) in the case of an Acquisition of Capital Stock of an entity, the Acquisition shall be of at least ninety percent (90%) of the Capital Stock of such entity, and such acquired entity shall be (x) merged with and into the Borrower or any wholly-owned Subsidiary thereof within ten (10) Business Days following such Acquisition, with the Borrower or such wholly-owned Subsidiary being the surviving corporation following such merger or (y) the results of operations of such entity shall be reported on a consolidated basis with the Borrower and its consolidated Subsidiaries; (e) the Borrower and its Subsidiaries shall have complied with all of the requirements of the Collateral Documents and, to the extent applicable, Sections 7.1(F) and (G) hereof in respect of such Acquisition; (f) the business being acquired shall be substantially similar, related or incidental to the business or activities engaged in by the Borrower and its Subsidiaries on the Effective Date; and (g) prior to such Acquisition, the Borrower shall deliver to the Agent and the Lenders a certificate from one of the Authorized Officers, demonstrating to the satisfaction of the Agent that after giving effect to such Acquisition and the incurrence of any Indebtedness permitted by Section 7.2(A) in connection therewith, on a pro forma basis using historical financial statements obtained from the seller broken down by fiscal quarter in the Borrower's reasonable judgment (the amounts from which shall be unadjusted unless adjustments thereto have been approved in writing by the Agent) in respect of such Acquisition as if the Acquisition and such incurrence of Indebtedness had occurred on the first day of the twelve-month period ending on the last day of the Borrower's most recently completed fiscal quarter, the Borrower would have been in compliance with the financial covenants in Section 7.3. (i) Section 7.2(J) of the Credit Agreement is hereby restated in its entirety as follows: (J) Restricted Payments. Declare or make any Restricted Payment; provided, however, that (i) the Borrower may pay quarterly dividends at a rate not in excess of the declared value per share announced by the Borrower on December 7, 2001 and (ii) the Borrower may issue "Permitted Junior Securities" under and as defined in the Subordinated Note Purchase Agreement to the extent permitted thereunder. (j) The Credit Agreement is hereby amended to add the following new Section 7.2(M) thereto: (M) Other Indebtedness. The Borrower shall not amend, modify or supplement, or permit any Subsidiary to amend, modify or supplement (or consent to any amendment, modification or supplement of), any document, agreement or instrument evidencing the Subordinated Notes or any replacements, substitutions or renewals thereof (including, without limitation, the Subordinated Note Documents) where such amendment, modification or supplement provides for the following or which has any of the following effects: (i) increases the overall principal amount of the Subordinated Notes or increases the amount of any single scheduled installment of principal or interest; (ii) shortens or accelerates the date upon which any installment of principal or interest becomes due or adds any additional mandatory redemption provisions; (iii) shortens the final maturity date of the Subordinated Notes or otherwise accelerates the amortization schedule with respect to the Subordinated Notes; (iv) increases the rate of interest accruing on the Subordinated Notes; (v) provides for the payment of additional fees or increases existing fees; (vi) amends or modifies any financial or negative covenant (or covenant which prohibits or restricts the Borrower or a Subsidiary thereof from taking certain actions) in a manner which is more onerous or more restrictive in any material respect to the Borrower (or any Subsidiary of the Borrower) than the financial or negative covenants contained herein or which is otherwise materially adverse to the Borrower and/or the Lenders or, in the case of adding covenants, which places material additional restrictions on the Borrower (or a Subsidiary of the Borrower) or which requires the Borrower or any such Subsidiary to comply with more restrictive financial ratios or which requires the Borrower to better its financial performance from that set forth in the existing financial covenants; (vii) amends, modifies or adds any affirmative covenant in a manner which, when taken as a whole, is materially adverse to the Borrower and/or the Lenders; or (viii) amends, modifies, suspends or supplements the subordination provisions thereof. (k) Section 7.3(B) of the Credit Agreement is hereby restated in its entirety as follows: (B) Leverage Ratios. (i) The Borrower and its Subsidiaries on a consolidated basis shall not permit the ratio (the "Total Leverage Ratio") of (i) Total Debt to (ii) EBITDA to be greater than the ratio set forth below at the end of the fiscal quarter ending on the corresponding date set forth below: Quarter Ending Total Leverage Ratio -------------- -------------------- December 31, 2001 6.50 to 1.00 March 31, 2002 5.50 to 1.00 June 30, 2002 5.50 to 1.00 September 30, 2002 4.75 to 1.00 December 31, 2002 3.25 to 1.00 March 31, 2003 3.25 to 1.00 June 30, 2003 2.75 to 1.00 September 30, 2003 and each 2.50 to 1.00 quarter thereafter (ii) The Borrower and its Subsidiaries on a consolidated basis shall not permit the ratio (the "Senior Leverage Ratio") of (i) Senior Debt to (ii) EBITDA to be greater than the ratio set forth below at the end of the fiscal quarter ending on the corresponding date set forth below or on such other corresponding date set forth below: Quarter or Date Ending Senior Leverage Ratio ---------------------- --------------------- December 31, 2001 6.50 to 1.00 April 25, 2002 4.50 to 1.00 June 30, 2002 4.50 to 1.00 September 30, 2002 3.75 to 1.00 December 31, 2002 2.50 to 1.00 March 31, 2003 2.00 to 1.00 June 30, 2003 and each 1.50 to 1.00 quarter thereafter The Total Leverage Ratio and, in the case of each fiscal quarter other than the fiscal quarter ending March 31, 2002, the Senior Leverage Ratio, shall be determined as of the last day of each fiscal quarter based upon (i) Total Debt or Senior Debt, as the case may be, as of the last day of such fiscal quarter and (ii) EBITDA for the four fiscal quarter period ending on such day. With respect to the fiscal quarter ending March 31, 2002, the Senior Leverage Ratio shall be determined as of April 25, 2002 based upon (i) Senior Debt as of April 25, 2002 and (ii) EBITDA for the four fiscal quarter period ending on the last day of the fiscal quarter ending March 31, 2002. (l) Section 7.4 of the Credit Agreement is hereby restated in its entirety as follows: 7.4 Sale and Leaseback Transactions and Other Off-Balance Sheet Liabilities. The Borrower will not, nor will it permit any Subsidiary to, enter into or suffer to exist any (i) Sale and Leaseback Transaction or (ii) any other transaction pursuant to which it incurs or has incurred Off-Balance Sheet Liabilities, except for (x) Interest Rate Agreements permitted to be incurred under the terms of Section 7.2(K) hereof and (y) the Sale and Leaseback Transactions with respect to those certain operating leases of equipment and aircraft sold by the Borrower prior to December 31, 2001 for an aggregate amount of approximately $15,000,000. (m) Section 8.1(e) of the Credit Agreement is hereby restated in its entirety as follows: (e) Default as to Other Indebtedness; Subordinated Notes. (i) The Borrower or any of its Subsidiaries shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) with respect to any Indebtedness (other than the Subordinated Notes, which are addressed in clause (ii) below, and other than the Obligations) the outstanding principal amount of which Indebtedness is in excess of $5,000,000; or any breach, default or event of default shall occur, or any other condition shall exist under any instrument, agreement or indenture pertaining to any such Indebtedness, if the effect thereof is to cause an acceleration, mandatory redemption, a requirement that the Borrower offer to purchase such Indebtedness or other required repurchase of such Indebtedness, or permit the holder(s) of such Indebtedness to accelerate the maturity of any such Indebtedness or require a redemption or other repurchase of such Indebtedness; or any such Indebtedness shall be otherwise declared to be due and payable (by acceleration or otherwise) or required to be prepaid, redeemed or otherwise repurchased by the Borrower or any of its Subsidiaries (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof. (ii) The Borrower or any of its Subsidiaries shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) with respect to the Subordinated Notes or any other amounts owing under or pursuant to the Subordinated Note Documents; or any breach, default or event of default shall occur, or any other condition shall exist under any instrument, agreement or indenture pertaining to the Subordinated Notes (including, without limitation, an "Event of Default" or "Change of Control Transaction" under and as defined in the Subordinated Note Documents), if the effect thereof is to cause an acceleration, mandatory redemption, a requirement that the Borrower offer to purchase the Subordinated Notes or other required repurchase of the Subordinated Notes, or permit the Subordinated Noteholders to accelerate the maturity of the Subordinated Notes or require a redemption or other repurchase of the Subordinated Notes; or any amounts owing under or pursuant to the Subordinated Notes or any other Subordinated Note Document shall be otherwise declared to be due and payable (by acceleration or otherwise) or required to be prepaid, redeemed or otherwise repurchased by the Borrower or any of its Subsidiaries (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof. 2. Condition of Effectiveness. The effectiveness of this Amendment is subject to the condition precedent that the Agent shall have received: (a) counterparts of this Amendment duly executed by the Borrower, the Required Lenders and the Agent; (b) counterparts of the Reaffirmation attached hereto duly executed by each Subsidiary Guarantor; (c) for the account of each Lender, a fee in the amount of 20 basis points on the sum of (i) such Lender's Revolving Loan Commitment, (ii) the aggregate outstanding principal amount of such Lender's Supplemental Syndicated Loans and (iii) the aggregate outstanding principal amount of such Lender's Term Loans, in each case, determined as if the prepayment of the Term Loans from the Net Cash Proceeds of the original issuance of Subordinated Notes in the aggregate principal amount of $25,000,000 and the partial termination of the Revolving Credit Commitments described in Section 8 hereto shall have occurred; and (d) for the account of the Arranger, such fees as have been agreed to in a separate letter agreement between the Arranger and the Borrower. 3. Representations and Warranties of the Borrower. The Borrower hereby represents and warrants as follows: (a) This Amendment and the Credit Agreement as modified hereby constitute legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms. (b) As of the date hereof and giving effect to the terms of this Amendment, (i) there exists no Default or Unmatured Default and (ii) the representations and warranties contained in Article VI of the Credit Agreement, as modified hereby, are true and correct, except for changes reflecting events, conditions or transactions permitted or not prohibited by the Credit Agreement. 4. Reference to and Effect on the Credit Agreement and Loan Documents. (a) Upon the effectiveness of Section 1 hereof, each reference to the Credit Agreement in the Credit Agreement or any other Loan Document shall mean and be a reference to the Credit Agreement as modified hereby. (b) The Borrower reaffirms the terms and conditions of the Credit Agreement and the Loan Documents executed by it, including, without limitation, the Security Agreement, the Pledge Agreements, the Mortgages and the other Collateral Documents, as applicable, and acknowledges and agrees that except as specifically modified above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders, nor constitute a waiver of or consent to any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith. 5. Governing Law. ANY DISPUTE BETWEEN THE BORROWER AND THE AGENT, THE ARRANGER, ANY LENDER, OR ANY OTHER HOLDER OF SECURED OBLIGATIONS ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AMENDMENT OR THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK. 6. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 7. Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by means of facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 8. Reduction of Aggregate Revolving Loan Commitment. Effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 above, the Aggregate Revolving Loan Commitment shall be permanently reduced by $10,000,000 (the "Reduction Amount"), and, accordingly, each Lender's Revolving Loan Commitment shall be reduced by its respective Revolving Loan Pro Rata Share of the Reduction Amount. After giving effect to such reduction, the Aggregate Revolving Loan Commitment will be $115,000,000. Signature Page to CTS Corporation First Amendment to Third Amended and Restated Credit Agreement IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written. CTS CORPORATION, as the Borrower /s/ Vinod M. Khilnani ------------------------------------------------------------ Name: Vinod M. Khilnani Title: Senior Vice President and Chief Financial Officer BANK ONE, NA (Main Office Chicago), formerly known as NBD Bank, N.A., as the Agent, as a Lender, as the Issuing Bank and as the Swing Line Bank /s/ Michael B. Kelly ------------------------------------------------------------ Name: Michael B. Kelly Title: Associate ABN AMRO BANK N.V., as Documentation Agent and as a Lender /s/ Lynn R. Schade ------------------------------------------------------------ Name: Lynn R. Schade Title: Group Vice President /s/ Jana Dombrowski ------------------------------------------------------------ Name: Jana Dombrowski Title: Vice President HARRIS TRUST AND SAVINGS BANK, as Syndication Agent and as a Lender /s/ Thad D. Rasche ------------------------------------------------------------ Name: Thad D. Rasche Title: Vice President THE NORTHERN TRUST COMPANY, as a Lender /s/ Mark E. Taylor ------------------------------------------------------------ Name: Mark E. Taylor Title: Vice President KEYBANK NATIONAL ASSOCIATION, as a Lender /s/ Mary K. Young ------------------------------------------------------------ Name: Mary K. Young Title: Vice President NATIONAL CITY BANK OF INDIANA, as a Lender /s/ Robert E. Norell Jr. ----------------------------------------------------------- Name: Robert E. Norell Jr. Title: Vice President THE BANK OF TOKYO-MITSUBISHI, LTD., as a Lender /s/ Shinchiro Munechika ------------------------------------------------------------ Name: Shinchiro Munechika Title: Deputy General Manager SUNTRUST BANK, as a Lender --------------------------------- Name: Title: WACHOVIA BANK, NATIONAL ASSOCIATION (formerly known as Wachovia Bank, N.A.), as a Lender /s/ Donald E. Sellers, Jr. ------------------------------------------------------------ Name: Donald E. Sellers, Jr. Title: Director Signature Page to CTS Corporation Reaffirmation REAFFIRMATION Each of the undersigned (each, a "Guarantor") hereby acknowledges receipt of a copy of the First Amendment dated as of April 15, 2002 (the "Amendment") to the Third Amended and Restated Credit Agreement dated as of December 20, 2001 by and among CTS Corporation, a Delaware corporation (the "Borrower"), the financial institutions from time to time party thereto (the "Lenders"), Bank One, NA, having its principal place of business in Chicago, Illinois, in its individual capacity as a Lender and in its capacity as contractual representative (the "Agent"), ABN AMRO Bank, N.V., as documentation agent and Harris Trust and Savings Bank, as syndication agent (as so modified by the Amendment and as the same may from time to time hereafter be amended, restated, supplemented or otherwise modified, the "Credit Agreement"). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Each Guarantor, by its signature below, without in any way establishing a course of dealing, hereby (i) acknowledges and consents to the execution and delivery of the Amendment by the parties thereto, (ii) agrees that the Amendment and the transactions contemplated thereby shall not limit or diminish the obligations of such Guarantor to guarantee all of the "Obligations" of the Borrower under and as defined in the Credit Agreement, all of the "Guaranteed Obligations" under and as defined in the Subsidiary Guaranty and any other obligations of such Guarantor arising under or pursuant to the Loan Documents, (iii) reaffirms all of its obligations under the Subsidiary Guaranty and the other Loan Documents to which it is a party and (iv) agrees that the Subsidiary Guaranty and each and every other Loan Document executed by it remains in full force and effect and is hereby reaffirmed, ratified and confirmed. All references to the Credit Agreement contained the Subsidiary Guaranty or any of the other Loan Documents shall be a reference to the Credit Agreement as so modified by the Amendment and as the same may from time to time hereafter be amended, modified or restated. Dated: April 15, 2002 CTS WIRELESS COMPONENTS, INC. /s/ Donald K. Schwanz ----------------------------------------------------------------- Name: Donald K. Schwanz Title: President CTS CORPORATION, a Delaware corporation /s/ Donald K. Schwanz ----------------------------------------------------------------- Name: Donald K. Schwanz Title: President DYNAMICS CORPORATION OF AMERICA /s/ Donald K. Schwanz ----------------------------------------------------------------- Name: Donald K. Schwanz Title: President LTB INVESTMENT CORPORATION /s/ Donald K. Schwanz ----------------------------------------------------------------- Name: Donald K. Schwanz Title: President -----END PRIVACY-ENHANCED MESSAGE-----