EXHIBIT 99(b)
RISK FACTORS
Investing in our common stock involves significant risks. Before
making an investment, you should read and carefully consider the risks and
uncertainties described below. The risks and uncertainties we described are
not the only ones we face. Additional risks and uncertainties not currently
known to us or that we currently consider immaterial may also affect our
business operations. If any of the following risks actually occur, our
business, results of operations and financial conditions could be materially
adversely affected, and you could lose all or part of your investment.
We may be unable to keep up with rapid technological changes which could make
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some of our products or processes obsolete before we realize a return
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on our investment.
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The technologies relating to our research and development activities
have undergone rapid and significant technological development. Specifically,
the market for products in the communications industry is characterized by
technological change, frequent new product introductions and enhancements,
changes in customer requirements and emerging industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards could render our existing products obsolete and unmarketable
before we can recover any or all of our research, development and
commercialization expenses. The life cycles of our products are difficult to
estimate.
Our future success will depend upon our ability to develop and
introduce new products and product enhancements on a timely basis that keep pace
with technological developments and emerging industry standards and address
increasingly sophisticated requirements of our customers. We may be unsuccessful
in developing and marketing new products or product enhancements that respond to
technological changes or evolving industry standards. We also cannot assure you
that we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products or
product enhancements, or that our new products or product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. If we are unable, for technological or other reasons, to develop and
market new products or product enhancements in a timely and cost-effective
manner, our business, financial condition and results of operations could be
materially adversely affected.
Because a substantial portion of our sales comes from customers in the
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communications, computer and automotive industries, we are susceptible to trends
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and factors affecting those industries.
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Net sales to the communications, computer and automotive industries
represent a substantial portion of our revenues. Factors negatively affecting
these industries and the demand for their products, including the current
economic slowdown, also negatively affect our business, results of operations
and stock price. Any adverse occurrence, including industry slowdown, recession,
political instability, armed hostilities, terrorism, excessive inflation,
prolonged disruptions in one or more of our customers' production, or labor
disturbances, that results in a significant decline in the volume of sales in
these industries, or in an overall downturn in the business and operations of
our customers in these industries, could have a material adverse effect on our
business, financial condition and results of operations. For example, the trend
toward consolidation in the communications and computer industries could result
in a lower level of acceptance of our products, reduced product requirements,
purchasing delays by the combined entity or the loss of a customer. Also, the
automotive industry is generally highly unionized and some of our customers
have, in the past, experienced labor disruptions. Furthermore, the automotive
industry is highly cyclical in nature and sensitive to changes in general
economic conditions.
Because a significant portion of our sales currently comes from a small number
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of customers, any decrease in sales from these customers could adversely
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affect our operating results.
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We depend on a small number of customers for a large portion of our
business, and changes in the level of our customers' orders have, in the past,
had a significant impact on our operating results. If a major customer reduces
the amount of business it does with us, there would be an adverse impact on our
operating results. Our 15 largest customers represent a substantial portion of
our sales. Our two largest customers in recent periods were Compaq Computer
Corporation and Motorola, Inc.
We expect to continue to depend on sales to our major customers. Some
of our customers are increasingly outsourcing their purchasing activities, with
the result that a greater emphasis is being placed on cost while maintaining an
emphasis on quality. Since it is difficult to replace lost business on a timely
basis, it is likely that our operating results would be adversely affected if
one or more of our major customers were to cancel, delay or reduce a large
amount of business with us in the future. If one or more of our customers were
to become insolvent or otherwise unable to pay for our services, our operating
results and financial condition could be adversely affected.
We face risks resulting from the global economic slowdown.
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The global economic downturn has slowed demand in the CTS-served
automotive, communication and computer markets. These served markets for our
electronic components and assemblies have softened and may continue to soften.
As a result, our revenues and earnings have been negatively affected and this
softening demand may create pricing pressures which could further affect our
revenues and earnings.
Further deterioration of revenues and earnings, beyond current levels,
could have a negative effect on our business, results of operations and
financial condition. This could also have a negative effect on the price of our
common stock and could also make it difficult for us to service our debt and to
comply with the covenants in our credit facility. Violation of the covenants in
our credit facility could require substantial fees to our banks until the
violation is corrected. In the event the violation cannot be corrected, we could
be required to negotiate a new credit facility with a new bank group or raise
equity or additional debt in public or private transactions.
We face risks concerning the success of our restructuring, consolidation and
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cost reduction plan.
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During the second quarter of 2001, we recorded $14 million of
restructuring and impairment charges relating to a plan to realign our
operations. We began to implement the plan during the second quarter of 2001.
The plan was designed to permit us to operate more efficiently in the
then-prevailing environment, and at the same time be well positioned when the
economy improves.
The restructuring plan is proceeding on schedule. However, anticipated
savings were based on revenue volumes and mix experienced during the fourth
quarter of 2000 instead of revenue volumes expected at the time the plan was
implemented. If the expected revenue volumes are not met during the next two
fiscal years, some of the expected savings may be delayed or not achieved.
During the fourth quarter of 2001, we recorded $26 million of
additional restructuring and impairment charges related to real estate and
equipment write downs and additional severance-related expenses. Additional
restructuring activities and related charges may be required in the event that
the business environment deteriorates further or we identify other areas for
cost savings.
Because we have significant non-U.S. operations, our financial condition and
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operating results could be adversely affected by economic, political,
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regulatory and other factors existing in non-U.S. countries in which we operate.
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We have substantial international operations, which are subject to
inherent risks, which may adversely affect us, including:
o political and economic instability in countries in which we have
manufacturing facilities;
o expropriation;
o currency controls;
o changes in government regulation;
o high levels of inflation;
o changes in labor conditions and difficulties in staffing and managing
our non-U.S. operations;
o greater difficulty in collecting our accounts receivable and longer
payment cycles;
o less favorable intellectual property laws;
o increases in the duties and taxes we pay;
o exposure to different legal standards; and
o fluctuations in exchange rates.
In addition, these same factors may also place us at a competitive disadvantage
to some of our non-U.S. competitors.
We face risks relating to the protection of our intellectual property.
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The success of our business depends, in part, upon our ability to
protect trade secrets, copyrights, and patents, obtain or license patents and
operate without infringing on the rights of others. We rely on a combination of
trade secrets, copyrights, patents, nondisclosure agreements and technical
measures to protect our proprietary rights in our products and technology. The
steps taken by us in this regard may not be adequate to prevent misappropriation
of our technology, and our competitors may independently develop technologies
that are substantially equivalent or superior to our technology. In addition,
the laws of some non-U.S. countries do not protect our proprietary rights to the
same extent as do the laws of the United States. Although we continue to
evaluate and implement protective measures, we cannot assure you that these
efforts will be successful.
We believe that patents will play an increasingly important role in our
commercial business. However, we cannot assure you that any issued patent will
provide us with any competitive advantages nor can we assure you that the
patents will not be challenged by third parties or that the patents of others
will not adversely affect our ability to do business.
There is also a risk that infringement claims may be brought against us
or our customers in the future. If someone does successfully assert an
infringement claim, we may be required to spend significant time and money to
develop a product or process that does not infringe upon the rights of that
other person or to obtain licenses for the technology, process or information
from the owner. We may not be successful in the development, or licenses may not
be available on commercially acceptable terms, if at all.
We may be unable to compete effectively against larger competitors.
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We operate in a highly fragmented and competitive industry. We compete
against many domestic and non-U.S. companies, some of which have substantially
greater manufacturing, financial, research and development and marketing
resources than we do. Although no single competitor competes with us along all
product lines, we compete with a variety of suppliers with respect to different
subsets of our products. Additionally, many of our customers are seeking to
consolidate their business among one or more preferred or qualified suppliers.
If any customer becomes dissatisfied with our prices, quality or timeliness of
delivery, among other things, it could award future business or, in an extreme
case, move existing business to our competitors. Moreover, some of our customers
could choose to manufacture and develop particular components themselves rather
than purchase them from us. Increased competition could result in price
reductions, reduced profit margins and loss of market share, each of which could
adversely affect our results of operations and financial condition. In addition,
certain of our competitors have also been engaged in merger and acquisition
transactions. Consolidations by competitors are likely to create entities with
increased market share, customer bases, proprietary technology and marketing
expertise and expanded sales force size. These developments may adversely affect
our ability to compete against these competitors, many of which are
significantly larger and have greater financial and other resources. We cannot
assure you that our products will continue to compete successfully with our
competitors' products.
Customer pressure to reduce prices may cause reductions in sales or profit
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margins.
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Many of our customers are under pressure to reduce the price of their
products or services, and, therefore, we expect to continue to experience
pressure from our customers to reduce the prices of our products. In many of our
markets, average sales prices of established products have declined in the past.
We anticipate that prices will continue to decline, which could negatively
impact our sales and/or gross profit margins. Accordingly, to remain
competitive, we believe that we must continue to develop product enhancements
and new technologies, and improve manufacturing efficiencies, that will slow the
price declines of our products or reduce the cost of producing and delivering
our products. If we fail to do so, our results of operations and financial
condition would be adversely affected.
We are subject to a variety of environmental laws that expose us to potential
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financial liability.
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Our operations are regulated under a number of federal, state and
non-U.S. environmental and safety laws and regulations that govern, among other
things, the discharge of hazardous materials into the air and water as well as
the handling, storage and disposal of these materials. These laws and
regulations include the Clean Air Act, the Clean Water Act, the Resource,
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act, as well as analogous state and foreign laws.
Compliance with these environmental laws is a major consideration for us because
we use hazardous materials in our manufacturing process. In addition, because we
are a generator of hazardous wastes, we, along with any other person who
arranges for the disposal of our wastes, may be subject to financial exposure
for costs associated with an investigation and any remediation of our former and
existing manufacturing sites, as well as sites at which we have arranged for the
disposal of hazardous wastes, even if we fully comply with applicable
environmental laws. If we violate environmental laws, we could be liable for
fines, damages and costs of remedial actions and could also be subject to
revocation of our environmental permits. Any revocation could require us to
cease or limit production at one or more of our facilities, thereby negatively
impacting our revenues and potentially causing our common stock price to
decline. Environmental laws, including environmental laws in the European Union
and other non-U.S. countries, could also become more stringent over time,
imposing greater compliance costs and increasing risks and penalties associated
with any violation, which also could negatively impact our operating results.
The price of our common stock has been volatile and may continue to fluctuate
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significantly.
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The market price for our common stock has been and may continue to be
volatile. From January 3, 2000 to March 14, 2002 the last sale price of our
common stock ranged from a low of $13.30 per share to a high of $82.75 per
share. We expect our stock to continue to be subject to fluctuations as a result
of a variety of factors, including factors beyond our control. These include:
o changes in financial estimates by securities analysts;
o changes in market valuations of related companies;
o announcements by us or our competitors of new products or technical
innovations or of significant acquisitions, strategic partnerships or
joint ventures;
o general and industry stock market conditions, particularly in the
communications industry;
o general U.S. and worldwide economic conditions;
o conditions in our industries such as competition, demand for services
and technological advances;
o changes in our revenues and earnings;
o changes in our customer base, including any loss of a major customer,
and our contracts with customers;
o introduction and market acceptance of our customers' new products and
changes in demand for our customers' existing products;
o effectiveness in managing our manufacturing processes and related
assets, including our inventory and fixed assets;
o adverse or unfavorable publicity regarding us or our products;
o additions or departures of key personnel;
o any deviations in net revenues or in losses from levels expected by
securities analysts; and
o future sales of common stock.
We may fail to meet expectations of our shareholders or of analysts at
some time in the future, and our stock price could decline as a result.
In addition, sales of a substantial number of shares of our common
stock in the public market, or the appearance that such shares are available for
sale, could adversely affect the market price for our common stock.
Our credit facility contains provisions that could materially restrict our
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business.
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Our credit facility contains a number of significant covenants that,
among other things, restrict our ability to:
o dispose of assets;
o incur additional debt;
o guarantee third-party obligations;
o repay other debt or amend other debt instruments;
o create liens on assets;
o enter into capital leases;
o make investments, loans or advances;
o make acquisitions or engage in mergers or consolidations;
o make capital expenditures; and
o engage in certain transactions with our subsidiaries and affiliates.
In addition, under our credit facility, we are required to meet a
number of financial ratios and tests. Our ability to comply with these covenants
may be affected by events beyond our control. If we breach any of these
covenants or restrictions, it could result in an event of default under our
credit facility. Any breach might permit our lenders to declare all amounts
owing thereunder to be due and payable, and our senior lenders could terminate
their commitments to make further extensions of credit under our credit
facility. Additionally, if we were unable to repay debt to our secured lenders,
they could proceed against the collateral securing the debt.
Anti-takeover provisions could delay, deter or prevent a change in control.
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We are an Indiana corporation subject to Indiana state law. Some of
these state laws could interfere with or restrict takeover bids or other
change-in-control events affecting us. One statutory provision prohibits, except
under specified circumstances, us from engaging in certain business
combinations, including any mergers, sale of assets and recapitalizations with
any shareholder who owns 10% or more of our common stock or any affiliate of the
shareholder.
We have opted out of Indiana's "control share acquisition" provisions,
which restrict the voting rights of shares acquired in transactions which cause
the beneficial owner of the shares to exceed specified ownership thresholds. We
could, however, by action of the board of directors, elect to have those
provisions apply.
In addition, our articles of incorporation allow us to issue up to an
additional 26.5 million shares of common stock and 25 million shares of
preferred stock without shareholder approval. The board of directors has the
authority to determine the price and terms under which the additional common or
preferred stock may be issued. Issuance of this common and preferred stock could
make it more difficult for a third party to acquire control of CTS.
Also, provisions in our articles of incorporation, bylaws, and other
agreements to which we are a party, could delay, deter or prevent a change in
control of CTS. These provisions, alone or in combination with each other and
with the rights agreement described below, may discourage transactions involving
actual or potential changes in control, including transactions that otherwise
could involve payment of a premium over the prevailing market price to
shareholders for their common stock.
On August 28, 1998, our board of directors adopted a shareholder rights
agreement, pursuant to which uncertificated stock purchase rights were
distributed to our shareholders at a rate of one right for each share of common
stock held of record as of September 10, 1998. The rights agreement is designed
to enhance the board's ability to prevent an acquirer from depriving
shareholders of the long-term value of their investment and to protect
shareholders against attempts to acquire CTS by means of unfair or abusive
takeover tactics. However, the existence of the rights agreement may impede a
takeover of CTS not supported by the board, including a takeover that may be
desired by a majority of our shareholders or involving a premium over the
prevailing stock price.