SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For this fiscal year ended the Last Day of February, 1998
Commission File Number 0-8955
THE CHERRY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2977756
(State of other jurisdiction of incorporation (I. R. S. Employer
or organization) Identification Number)
3600 Sunset Avenue, Waukegan, IL 60087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (847) 662-9200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
(Title of Class)
Class B Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (paragraph 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to the form 10-K. (X)
The aggregate market value of the registrant's Class A and Class B Common Stock
on April 24, 1998 held by nonaffiliates was approximately $126 million, based on
a calculation that 55% of the shares are owned by nonaffiliates and are valued
at the closing prices as reported on the Nasdaq National Market tier of The
Nasdaq Stock Market on April 24, 1998.
Number of common shares outstanding as of April 24, 1998:
7,718,539 shares of Class A Common
4,762,564 shares of Class B Common
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated: Part of Form 10-K
- --------------------------------------------------------------
Various parts of the Company's Proxy All of Part III
Statement for its 1998 Annual Meeting
<PAGE>
INCLUSION OF FORWARD LOOKING INFORMATION
Certain statements under the captions "BUSINESS", "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and elsewhere in this
report constitute "Forward-Looking Statements" within the meaning of Section 21E
of the Securities Exchange Act. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, changes in the following: general economic and business
conditions, demand for the Company's products, competition, currency
fluctuations, interest rate fluctuations, relationships with strategic or major
customers, suppliers, joint venture partners and product distributors, cost and
availability of raw materials, technology, domestic and international business
legislation and regulations, our ability to obtain adequate financing in the
future, operational capabilities due to natural disasters and other unforeseen
events. Although the Company believes that its expectations with respect to
forward-looking statements are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievement
expressed or implied by such forward-looking statement.
In addition to the risks and uncertainties of ordinary business operations, the
forward looking statements of the Company contained in this Annual Report on
Form 10-K are also subject to the following risks and uncertainties:
FOREIGN CURRENCY TRANSLATION
The Company has substantial operations outside of the United States. For fiscal
1998, international operations provided 36% of consolidated sales, 44% of
operating profit and comprised 39% of identifiable assets. As a result,
fluctuations in currency exchange rates can significantly effect the Company's
sales, profitability and financial position when the foreign currencies,
primarily German marks, of its international operations are translated into U.S.
dollars for financial reporting. Although the Company cannot predict the extent
to which currency fluctuations may or will effect the Company's business and
financial position, there is a risk that such fluctuations will have an adverse
impact on the Company's sales, profits and financial position of the locations
outside the United States.
CYCLICAL DEMAND FOR PRODUCTS OF THE COMPANY AND RELIANCE ON MAJOR CUSTOMERS
Many of the Company's products are sold to industries that are cyclical and
dependent upon economic conditions, consumer confidence or other matters beyond
the control of the Company. In particular, the automotive industry, which is
sensitive to such factors, is currently the Company's largest market and
comprised 51% of consolidated sales in fiscal 1998. The Company believes that
increased market penetration and increased electrical and electronic content per
vehicle will offset a decline in automotive sales to some extent. However, a
significant reduction in automotive production in North America or Western
Europe or a loss of a significant portion of business from either of its major
customers (General Motors or Ford) could have an adverse effect on the Company's
business. Demand in the computer, consumer and commercial markets served by the
Company is also directly related to general economic conditions. Accordingly, a
downturn in U.S. or foreign economies could have a negative impact on the
Company's results of operations.
<PAGE>
THE CHERRY CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
The Cherry Corporation ("Cherry", "Company" or "Corporation") was incorporated
in 1953 in the State of Illinois and reincorporated in the State of Delaware in
1978. The Company and its subsidiaries design, manufacture and sell over 3,000
types of proprietary and custom electrical, electronic and semiconductor
components used by a broad range of original equipment manufacturers (OEM's) and
distributors in the automotive, computer and consumer and commercial markets.
Cherry's executive offices are located in Waukegan, Illinois, which also
contains the operations of two divisions, Cherry Electrical Products and Cherry
Automotive. Its wholly owned subsidiary companies operate in the following
locations: Cherry Semiconductor Corporation, Rhode Island; Cherry GmbH, the
Federal Republic of Germany; Cherry Electrical Products Limited, United Kingdom;
Cherry SARL, France; Cherasia Limited, Hong Kong; Cherry, spol, s r.o., Czech
Republic; Cherry Australia Pty., Ltd., Australia; and Cherry de Mexico S.A. de
C.V., Mexico. Additionally, the Company operates in Japan and India through 50%
owned affiliates, Hirose Cherry Precision Company Limited and TVS Cherry Private
Limited, respectively. The Company operates a branch sales and engineering
office in Japan under the name Cherry Automotive-Japan and a branch technical
support office in South Korea under the name Cherry Semiconductor International,
Inc.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
Refer to the Business Segment and Geographic Area Information contained in Item
8 of this Annual Report on Form 10-K.
NARRATIVE DESCRIPTION OF BUSINESS
Cherry has three major business segments:
The Automotive Market segment designs, manufactures and sells semiconductors,
electronic controls, switch assemblies and sensors for the automobile industry.
Automobile special-use switches and switch assemblies are used in a variety of
applications including power windows and mirrors, central door locks and cruise
controls. The Company's semiconductor devices are integrated circuits used in
power train controls, body electronics, vehicle control and safety,
instrumentation and entertainment electronics. Its electronic control modules
are used as controls for sunroofs, convertible tops and memory power seats.
Hall-effect sensors can be used in applications where a magnetically actuated
solid state device is desirable, such as a position sensor for seat belt
engagement. Automotive products are custom made for major U.S. and European
manufacturers, including Japanese transplants in North America. The Company's
automotive customers generally pay for the tooling and other special
manufacturing requirements.
The Computer Market segment designs, manufactures and sells keyboards and
related products, semiconductors and switches for computer applications. Cherry
sells standard and advanced performance keyboards for use with personal
computers; data entry, point-of-sale and reservation terminals; word processing
systems; and other computer input applications. Advanced performance keyboards
include integrated magnetic-stripe readers, chip-card readers and/or bar code
scanners. Semiconductors are used for power management solutions in the
computer market and applications include uninterruptible power sources, tape
backup and distributed power sources. Selector switches are used in addressing
peripherals in computer networks, among other applications.
The Consumer and Commercial Market segment designs, manufactures and sells
switches, semiconductors, sensors, and electronic controls and displays used in
household appliances, office equipment and cellular telephones. Snap-action
switches are generally manufactured to customer specifications by modifying the
Company's standard products. Switches are used in various appliances, office
equipment and control and measurement device applications. Semiconductor
applications include cellular communications, off-line power supplies and DC/DC
converters. Plasma display products are primarily sold to the entertainment
industry as readouts for electronic games. Electronic controls are used in
office equipment and appliances. Hall-effect sensors are magnetically actuated
solid state devices that can be used in a wide range of office and industrial
equipment applications to measure speed or position involving harsh
environments.
Inflation has not been a material factor in any segment.
MARKETS, MAJOR CUSTOMERS AND SEASONALITY
The Company's sales are made to original equipment manufacturers, Tier 1and Tier
2 suppliers, and to independent distributors. In fiscal 1998, sales to the
Company's five largest customers accounted for 42.6% of consolidated sales. Of
these five largest customers, sales to General Motors and Ford were 18.6% and
12.5%, respectively.
Within the Company's Automotive Market segment, four customers account for 75%
of the segment sales and include General Motors and Ford mentioned above. In
fiscal 1998, the Consumer and Commercial Market segment has one customer that
accounts for 12.2% of that segment's sales.
The Company normally experiences a slowdown in sales during the summer months
from model changeovers and factory vacation shutdowns by its customers.
DISTRIBUTION
Domestic and foreign sales are handled by Company sales personnel, Cherry
foreign sales offices, or through independent sales representatives and
distributors that are supported by the Company's customer service personnel.
The independent sales organizations also sell products for other companies,
although generally not those that compete with Cherry products.
COMPETITION
The Company does business in highly competitive markets. The Company believes
that it is the second or third largest manufacturer of snap-action switches and
automotive special use switches in North America. In addition, the Company
believes it has a significant market position in the other two markets that it
serves. Competitors include a large number of independent domestic and foreign
suppliers. Certain competitors in each of the Company's markets have
substantially greater manufacturing, sales, research and financial resources
than the Company. The Company believes that the principal competitive factors
in its markets are price, product quality and reliability, the ability to meet
customer delivery requirements and to custom design products to customer
specifications.
RAW MATERIALS AND ENERGY
In general, raw materials used by the Company are available from several
sources. The Company has not experienced significant shortages of raw materials
and, to date, sales have not been adversely affected by either raw material or
energy shortages.
BACKLOG
Current backlog figures are considered to be firm, but, because the Company does
not manufacture pursuant to long-term contracts, purchase orders are generally
cancelable - subject to payment by the customer for charges incurred up to the
date of cancellation. Cherry Automotive Division does not report nor maintain a
backlog number because they ship product based on daily releases from their
customers with minimal forecast data. The Automotive Market backlog for Cherry
Semiconductor Corporation is also limited to 16 weeks, which represents
authorized releases for production from automotive customers. Therefore, the
Automotive Market Segment backlog reported below excludes any potential orders
for Cherry Automotive Division and limited orders for Cherry Semiconductor
Corporation. As a result of the above factors, the following figures should not
be considered indicative of sales for an ensuing period.
<TABLE>
Backlog as of
The Last Day of February
<CAPTION>
(000's Omitted) 1998 1997
--------- ---------
<S> <C> <C>
Automotive Market Segment $ 55,428 $ 51,057
Computer Market Segment 47,246 51,727
Consumer and Commercial Market Segment 37,046 40,561
--------- ---------
$ 139,720 $ 143,345
========= =========
</TABLE>
PATENTS
The Company has numerous United States and foreign patents and patent
applications. As the Company develops products for new markets and uses, it
normally seeks patent protection. Many of the Company's products embody some
patent protection. Although patents are important to the Company, Cherry is not
dependent on any single patent or group of related patents. The Company also
owns various trademarks, trade names and proprietary information, some of which
are considered valuable assets.
PRODUCT DEVELOPMENT
During the fiscal years ended the last day of February 1998, 1997 and 1996 the
Company spent approximately $17.8 million, $16.3 million and $14.4 million on
product development, respectively. The customer often pays for the tooling
related to their project. The tooling expense, net of amounts rebilled to the
customer, is reported in other income as tooling gain or loss.
EMPLOYEES
As of February 28, 1998, the Company employed 4,453 persons.
ENVIRONMENTAL PROTECTION
The Company believes that its manufacturing operations and properties are in
material compliance with existing federal, state and local provisions enacted or
adopted to regulate the discharge of materials into the environment, or
otherwise protect the environment. Such compliance has been achieved without
material effect on Cherry's earnings or competitive position.
<PAGE>
ITEM 2. PROPERTIES
Cherry owns and leases manufacturing, warehousing and office space in 16 cities
around the world. The Company owns its major facilities that are located in
Illinois, Rhode Island and Germany that comprise 345,000, 151,000 and 402,000
square feet, respectively. In addition, the Company also owns a 33,000 square
foot facility in England. In August 1997 the Company acquired approximately 15
acres of land in Wisconsin and began construction of a 153,000 square foot
facility. Completion and occupancy is expected in June 1998. All owned
facilities noted above are used for a combination of production, warehousing and
administrative activities. The Company also leases facilities totaling 197,000
square feet, with approximately 82% used for production, assembly and
warehousing and the balance primarily for sales activities. The leases expire
at various dates through December 31, 2007.
The total owned and leased facilities noted above are currently used by the
business segments in the following estimated proportion:
Automotive Market 46%
Computer Market 26%
Consumer & Commercial Market 28%
-------
100%
=======
All facilities are in generally good condition and provide adequate and suitable
space for the operations at each location.
The Company utilizes machinery and equipment necessary to conduct its
operations. Substantially all machinery and equipment is owned by the Company.
Refer to Item 8 of this Annual Report on Form 10-K for information regarding
notes payable secured by real estate.
ITEM 3. LEGAL PROCEEDINGS
The Company is named in various suits and claims that arise in the normal course
of business. Where appropriate, the Company engages legal counsel and disputes
these claims. The Company believes that it has meritorious defenses and that
the final disposition of these matters will not materially affect the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to stockholders during the fourth quarter of the
fiscal year.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the Company's executive officers, their ages,
business experience, and position and offices as of February 28, 1998.
Term as Business Experience During
Name Age Officer the Past Five Years
Peter B. Cherry 50 24 Chairman of the Board since
1992 and President since
1982
Alfred S. Budnick 60 21 Vice President of the
Company and President of
Cherry Semiconductor
Corporation since 1977.
Klaus D. Lauterbach 55 6 Vice President since June
1992; General Manager of
Cherry GmbH since 1990;
Assistant General Manager
prior to 1990.
Dan A. King 48 10 Vice President of Finance
and Administration since
September 1997; V. P. of
Finance since June 1995;
Secretary in 1993; Treasurer
and Corporate Controller
prior to 1993.
Kevin G. Powers 38 2 Corporate Controller and
Assistant Secretary since
June 1995; Assistant
Treasurer in January 1993;
Manager, Corporate
Accounting of Square D
Company prior to 1993.
Robert G. Terwall 44 1 Vice President since June
1997; Vice President and
General Manager of Cherry
Electrical Products
Division since 1986
Dale F. Reichhart 45 1 Vice President since
September 1997; Vice
President and General
Manager of Cherry Automotive
Division since 1997
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Cherry Corporation common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbols CHERA and CHERB. As of May 6, 1998,
there were approximately 2,200 and 1,800 holders of record of the Class A and
Class B common stocks, respectively. The quarterly high and low prices reported
on Nasdaq and the dividends paid per common share in the last two fiscal years
are shown below:
<TABLE>
<CAPTION>
Class A Common Class B Common
Fiscal 1998 High Low Dividend High Low Dividend
Quarters:
<S> <C> <C> <C> <C> <C> <C>
Fourth $17.50 $13.50 $ -- $17.88 $13.25 $ --
Third 19.00 14.88 -- 19.50 14.25 --
Second 16.50 11.50 -- 17.00 12.38 --
First 15.25 10.13 -- 14.50 10.50 --
<CAPTION>
Fiscal 1997
Quarters:
<S> <C> <C> <C> <C> <C> <C>
Fourth $16.75 $10.50 $ -- $16.00 $10.25 $ --
Third 11.50 10.75 -- 11.00 10.00 --
Second 12.00 10.56 -- 13.00 9.81 --
First 12.00 9.25 -- 12.89 9.00 --
</TABLE>
<PAGE>
<TABLE>
Quarterly Results (Unaudited)
(Dollars in thousands except per share data)
<CAPTION>
Gross Net Earnings Per Share
Fiscal Year Net Sales Profit Earnings Basic Diluted
<S> <C> <C> <C> <C> <C>
1998 in Total $ 452,055 $ 127,273 $ 17,403 $ 1.40 $ 1.39
By Quarters
Fourth 111,577 31,108 4,720 .38 .38
Third 120,167 35,639 6,219 .50 .49
Second 105,776 28,001 1,944 .16 .16
First 114,535 32,525 4,520 .36 .36
1997 in Total $ 439,592 $ 119,186 $ 15,914 $ 1.29 1.28
By Quarters
Fourth 108,781 29,276 4,023 .32 .32
Third 116,733 35,097 7,181 .58 .58
Second 102,377 25,438 1,505 .12 .12
First 111,701 29,375 3,205 .26 .26
</TABLE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following summary should be read in conjunction with the consolidated
financial statements and related notes contained in Item 8 of this Annual Report
on Form 10-K:
<TABLE>
(Dollars in thousands except share, per share and employee data)
<CAPTION>
Year ended the last day of February 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 452,055 439,592 424,681 339,237 275,269
Gross profit $ 127,273 119,186 105,189 97,018 80,179
Operating expenses $ 98,166 93,387 89,437 73,620 62,419
Earnings from operations $ 29,107 25,799 15,752 23,398 17,760
Other income, net $ 1,195 2,796 2,862 1,671 1,240
Earnings before interest and taxes $ 30,302 28,595 18,614 25,069 19,000
Interest expense, net $ 2,915 3,787 3,765 3,218 3,817
Earnings before income taxes and
cumulative effect of change in
accounting principle $ 27,387 24,808 14,849 21,851 15,183
Income tax provision $ 9,984 8,894 3,598 7,028 5,692
Earnings before cumulative effect
of change in accounting principle $ 17,403 15,914 11,251 14,823 9,491
Cumulative effect of change in
accounting principle $ -- -- -- -- 1,542
Net earnings $ 17,403 15,914 11,251 14,823 11,033
As a percent of sales 3.8% 3.6% 2.6% 4.4% 4.0%
Return on average stockholders' equity 9.9% 9.8% 7.4% 12.3% 12.6%
OTHER STATISTICS
Average shares outstanding:
Basic 12,445,927 12,366,471 12,287,459 10,882,950 9,299,848
Diluted 12,547,910 12,425,152 12,342,971 10,964,277 9,388,060
Basic earnings per share:
Earnings before cumulative effect
of change in accounting principle $ 1.40 1.29 .92 1.36 1.02
Net earnings per share $ 1.40 1.29 .92 1.36 1.19
Diluted earnings per share:
Earnings before cumulative effect
of change in accounting principle $ 1.39 1.28 .91 1.35 1.01
Net earnings per share $ 1.39 1.28 .91 1.35 1.18
Dividends per share $ -- -- -- -- --
Capital expenditures, net $ 38,228 38,797 50,864 44,736 23,356
Depreciation and amortization $ 29,898 28,049 23,406 18,768 16,720
Net cash provided by operating
activities $ 48,071 45,712 24,340 23,786 28,347
FINANCIAL POSITION
Cash and equivalents $ 9,659 6,215 4,213 5,694 2,697
Working capital $ 63,258 55,220 50,734 46,001 39,395
Current ratio 1.9 1.8 1.6 1.7 1.9
Total assets $ 310,333 295,646 303,339 261,193 193,548
Long-term debt $ 33,393 37,009 44,237 25,863 42,970
Total debt $ 55,803 62,866 73,135 48,658 53,632
Stockholders' equity $ 183,454 168,076 158,292 147,627 93,476
Stockholders' equity per share $ 14.71 13.54 12.83 12.03 10.03
Debt-to-Capital ratio (debt, net of cash) 20.1% 25.2% 30.3% 22.5% 35.3%
PER EMPLOYEE DATA
Average number of employees 4,410 4,383 4,193 3,617 3,048
Net sales $ 102,507 100,295 101,283 93,790 90,311
Average assets employed $ 68,705 68,330 67,318 62,862 61,806
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total sales represented by the line items reflected in the Company's
consolidated statements of operations:
<TABLE>
<CAPTION>
Years ended the last day of February,
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 71.8 72.9 75.2
----- ----- -----
Gross margin 28.2 27.1 24.8
Operating expenses 21.7 21.2 21.1
----- ----- -----
Earnings from operations 6.5 5.9 3.7
Other income, net .2 .6 .7
Interest expense, net .6 .9 .9
------- ------- -------
Earnings before income taxes 6.1 5.6 3.5
Income tax provision 2.2 2.0 .8
------ ------ -------
Net earnings 3.9 3.6 2.7
====== ====== ======
</TABLE>
FISCAL 1998 VS. FISCAL 1997
Sales during fiscal 1998 reached a record $452.1 million surpassing fiscal
1997's previous record of $439.6 million by 2.8%. Domestic sales increased 6.3%
while foreign sales reflect a decrease of 2.7%. Underlying the decline in
foreign sales was a 12% sales increase when measured in the currencies in which
these foreign locations operate. This increase, however, was more than offset
by weakening of these currencies, principally the German mark, against the U. S.
dollar.
Sales of the Automotive segment grew 7.3% to $230.8 million and comprised just
over one-half of total sales. This growth was largely the result of new product
introductions. This increase was lead by sales of our switches and switch
assemblies, which grew $10.7 million to $141.5 million. Also contributing to
the increase were our semiconductor products, which grew 9.9% to $82.8 million.
Sales by our foreign operations grew 12.8% to $54.0 million.
Sales of the Computer segment totaled $115.1 million and decreased .8% from last
year. Sales of keyboard products, which represent 85% of total sales of this
segment, increased in unit volume, but much of this increase which occurred at
our German operation was offset by the stronger dollar. Pricing continues to be
competitive, particularly on standard keyboards and this also served to offset
some of the unit volume increase.
Sales of the Consumer and Commercial segment decreased 2.1% to $106.2 million.
Sales of our switch products, which account for two-thirds of this segment's
total, increased 3.7% to $71.9 million, however, this was offset by a $3.5
million reduction in shipments of our semiconductor products.
Gross profit margins improved to 28.2% of sales in fiscal 1998 from 27.1% last
year. The two primary reasons for the improvement are the increased sales volume
which resulted in improved utilization of manufacturing capacity, particularly
at our foreign and semiconductor operations, and the growth in higher margin
products, particularly power management devices.
Operating expenses of $98.2 million increased 5.1% during fiscal 1998. As a
percent of sales, operating expenses increased to 21.7% in fiscal 1998 from
21.2% last year. The primary cause was increased research and engineering
expenses which increased $3.9 million to 7.3% of sales from 6.6% of sales in
fiscal 1997. This spending is the result of increased efforts to develop power
management devices at our semiconductor operation and the costs associated with
new product launches and designs at our domestic automotive switch business. We
are also continuing our engineering investments to develop a sensor product
line. Distribution and administrative expenses increased in fiscal 1998 but
remained stable as a percent of sales.
Other income was $1.2 million for fiscal 1998 compared with $2.8 million for
fiscal 1997. A decrease in customer tooling income was largely responsible for
this change. Also contributing to the decrease was the recognition in fiscal
1997 of deferred income on a completed keyboard program.
Net interest expense of $2.9 million decreased 23% from the $3.8 million
reported for fiscal 1997. The decrease is primarily due to reduced average
borrowings in fiscal 1998 resulting from the Company's positive cash flow.
Interest rates were relatively stable in the U. S. and Germany, which is where
the Company maintains its borrowings.
The effective tax rate for fiscal 1998 was 36.5% compared with 36% last year.
The increase is primarily due to higher state taxes and slightly lower foreign
tax credits. The higher state taxes result from a shift in our domestic
earnings with an increased portion occurring in states with higher tax rates.
Consolidated net earnings were a record $17.4 million, up 9.4% from fiscal
1997's previous record of $15.9 million. Diluted earnings per share were $1.39
compared with $1.28 for fiscal 1997.
FISCAL 1997 VS. FISCAL 1996
Consolidated net earnings for fiscal 1997 increased 41% to $15.9 million,
setting a new company record. Diluted earnings per share of $1.28 increased 41%
from the prior year but were not a record because of additional shares
outstanding. Annual sales of $439.6 million were also a record, up 3.5% from
last year. Foreign denominated sales were reduced approximately $12 million
from the previous year because of the strengthening dollar during fiscal 1997.
Domestic sales increased 9% and international sales decreased 4%, despite
increasing 3% in local currency.
Consolidated operating profit for fiscal 1997 increased 64% to $25.8 million, or
5.9% of sales, from $15.8 million, or 3.7% of sales, in the prior year. Gross
margins for fiscal 1997 of 27.1% improved significantly from the prior year's
24.8% as the result of improvements in manufacturing efficiency and the
successful resolution of last year's product start-up issues. Operating
expenses, as a percent of sales, increased in fiscal 1997 as the company
increased its product development efforts. In fiscal 1997, the company
developed proprietary integrated circuits for the computer and
telecommunications markets and a new line of proprietary Hall-effect sensors.
Automotive business segment operating profits increased 211% in fiscal 1997 to
$14.5 million, or 6.7% of sales, on a 12% increase in sales. Fiscal 1997
automotive sales of $215 million accounted for 49% of consolidated sales. This
dramatic improvement in operating profit is due to improvements in manufacturing
efficiency and the successful resolution of start-up issues pertaining to new
product and process start-ups.
Computer business segment operating profits increased 30% in fiscal 1997 to $9.0
million, or 7.8% of sales, on a 7% decrease in sales. Approximately 70% of the
fiscal 1997 computer market sales decrease is due to the strengthening of the
dollar. The remainder of the decrease is due to continuing price pressure. The
increase in operating profit on decreasing sales can be attributed to improved
manufacturing efficiencies, improved margins on the new generation keyboards,
and the successful resolution of start-up problems associated with last year's
introduction of a new standard keyboard.
Consumer and commercial business segment operating profits declined 20% in
fiscal 1997 on a 1% increase in sales. The profitability improvements in
domestic electronic controls were offset by increased sensor and integrated
circuit development efforts and decreased profitability on a reduced sales level
of proprietary switches.
Other income of $2.8 million for the current year declined slightly from the
prior year. A $400 thousand decline in earnings from joint venture affiliates
and a nonrecurring $1.3 million gain on the sale of a German facility during the
prior year were partially offset by higher customer tooling income and deferred
income recognition on a completed keyboard program.
Interest expense of $4.1 million for the current year increased slightly from
the $3.9 million in the prior year, primarily as a result of higher borrowing
levels throughout the year.
The effective tax rate for fiscal 1997 was 36% versus 24% in the prior year.
The rate was lower in the prior year primarily from a nonrecurring benefit in
the recognition of pre-merger U.S. loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to strengthen its financial condition. Operating
activities provided the Company with $48.1 million of cash in fiscal 1998. An
increase in trade receivables of $7.4 million was offset by a reduction in
inventories and an increase in current liabilities. As a result, no additional
cash investment in working capital was required for fiscal 1998.
The Company invested $38.4 million in facilities and equipment in its continuing
effort to take advantage of improvements in manufacturing technologies and
increase manufacturing capacities when such expenditures are warranted.
As a result of the positive cash flow in fiscal 1998, the Company was able to
reduce debt to $55.8 million at February 28, 1998. This allowed the Company to
reduce its debt-to-capital ratio, net of cash balances from 25.2% to 20.1%.
At February 28, 1998, the Company had unused lines of credit available of
approximately $63.9 million for domestic operations and $15.9 million for
foreign operations. These credit facilities, together with funds generated from
future earnings should be sufficient to finance the Company's operations.
FUTURE ACCOUNTING CHANGES
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS 131"). SFAS
130 establishes standards for reporting comprehensive income in financial
statements and SFAS 131 expands certain reporting and disclosure requirements
for segments from current standards. The Company is not required to adopt these
Statements until fiscal 1999 and is currently reviewing the impact of these new
standards.
MARKET CONDITIONS AND OUTLOOK
Capital expenditures in fiscal 1999 are expected to continue at a level of 8% to
10% of sales. The capital expenditure rate may be revised further as sales
growth estimates are updated. Operations are expected to generate enough cash
to fund capital expenditures.
Since a significant portion of the Company's manufacturing and sales are
overseas, foreign currency exchange rates can have an impact on future sales,
earnings, and financial position of the Company when translated into U.S.
dollars. The Company selectively enters into forward contracts to hedge certain
firm and anticipated purchase commitments denominated in foreign currencies
(primarily German marks). At February 28, 1998, the U.S. dollar equivalent of
forward contracts outstanding approximated $5.1 million.
The economic conditions in Asia have had a limited impact on the Company to
date. Less than 10% of the Company's sales are in that geographic region,
coming primarily from customers whose products are exported to the U.S. and
Europe. However, the Company does view this as a region of the world that
should be targeted for future growth. Due to the economic uncertainties
surrounding this region as well as the companies in this region, the Company
will evaluate all potential opportunities carefully.
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. Specifically, computational errors are
a known risk with respect to dates after December 31, 1999. The Company is in
the process of assessing its computer equipment, business computer systems,
manufacturing equipment and facilities to prepare for the year 2000.
Additionally, customer and supplier relationships are being reviewed to assess
and address their plans to become Year 2000 compliant. While the Company's
efforts to address Year 2000 issues will involve additional costs, the Company
believes, based upon currently available information, that it will be able to
manage the Year 2000 transition issues within its control without any material
adverse effect on the Company's results of operations, cash flows and financial
position. Although the Company is committed to making its systems year 2000
compliant as soon as practical, it is uncertain as to the extent its customers
and vendors may be affected by year 2000 issues that require commitment of
significant resources and may cause disruptions in the customers' and vendors'
businesses.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
The Cherry Corporation:
We have audited the accompanying consolidated balance sheets of The Cherry
Corporation (a Delaware corporation) and subsidiaries as of the last day of
February, 1998 and 1997, and the related consolidated statements of earnings,
cash flows and stockholders' equity for each of the three years ended the last
day of February, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Cherry
Corporation and subsidiaries as of the last day of February, 1998 and 1997, and
the results of their operations and cash flows for each of the three years ended
the last day of February, 1998, in conformity with generally accepted accounting
principles.
Our audit was made for purposes of forming an opinion on the basic consolidated
financial statements taken as a whole. The schedule listed in Item 14(a) 2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
Arthur Andersen LLP
- -------------------
Arthur Andersen LLP
Chicago, Illinois
March 31, 1998
<PAGE>
<TABLE>
THE CHERRY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except share and per share data)
<CAPTION>
Year ended the last day of February
1998 1997 1996
<S> <C> <C> <C>
SALES AND COSTS
Net sales $ 452,055 $ 439,592 $ 424,681
Cost of products sold 324,782 320,406 319,492
---------- ---------- ----------
Gross profit 127,273 119,186 105,189
---------- ---------- ----------
EXPENSES
Research and engineering 33,069 29,135 27,017
Distribution 32,533 31,679 32,020
Administration 32,564 32,573 30,400
---------- ---------- ----------
Operating expenses 98,166 93,387 89,437
---------- ---------- ----------
EARNINGS
Earnings from operations 29,107 25,799 15,752
Other income, net - Note C 1,195 2,796 2,862
---------- ---------- ----------
Earnings before interest and taxes 30,302 28,595 18,614
Interest expense, net - Note C 2,915 3,787 3,765
---------- ---------- ----------
Earnings before income taxes 27,387 24,808 14,849
Income tax provision - Note B 9,984 8,894 3,598
---------- ---------- ----------
Net earnings $ 17,403 $ 15,914 $ 11,251
========== ========== ==========
EARNINGS PER SHARE - Note L
Basic $ 1.40 $ 1.29 $ .92
========== ========== ==========
Diluted $ 1.39 $ 1.28 $ .91
========== ========== ==========
AVERAGE SHARES OUTSTANDING - Note L
Basic 12,445,927 12,366,471 12,287,459
========== ========== ==========
Diluted 12,547,910 12,425,152 12,342,971
========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and par value data)
<CAPTION>
The last day of February
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 9,659 $ 6,215
Receivables, less allowances of $1,968 and
$2,245, in 1998 and 1997, respectively 63,332 57,118
Inventories - Note D 52,068 54,786
Prepaid expenses and other current assets 9,547 6,734
-------- --------
Total Current Assets 134,606 124,853
Land, Buildings and Equipment at Cost:
Land 3,583 2,461
Buildings and improvements 80,021 81,733
Machinery and equipment 279,765 261,419
Construction in progress 12,871 9,632
-------- --------
376,240 355,245
Less: accumulated depreciation 213,279 195,978
-------- --------
Total Land, Buildings and Equipment, net 162,961 159,267
Investment in affiliates and other assets,
net - Note A 12,766 11,526
-------- --------
Total Assets $310,333 $295,646
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt - Note E $ 20,630 $ 23,806
Accounts payable 22,466 17,803
Payroll related accruals 11,635 11,833
Other accruals 13,452 13,574
Income taxes 1,385 566
Current maturities of long-term debt - Note E 1,780 2,051
-------- --------
Total Current Liabilities 71,348 69,633
Long-term debt - Note E 33,393 37,009
Deferred income taxes, net and deferred credits 22,138 20,928
Stockholders' Equity - Note A:
Class A common stock, $1.00 par value
Authorized 20,000,000 shares; issued and
outstanding 7,713,051 in 1998 and
7,667,119 in 1997 7,713 7,667
Class B common stock, $1.00 par value
Authorized 10,000,000 shares; issued and
outstanding 4,762,564 in 1998 and
4,750,063 in 1997 4,763 4,750
Additional paid-in capital 42,409 41,858
Retained earnings 127,760 110,357
Cumulative translation adjustments 809 3,444
-------- --------
Total Stockholders' Equity 183,454 168,076
-------- --------
Total Liabilities and Stockholders' Equity $310,333 $295,646
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Year ended the last day of February
1998 1997 1996
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $ 17,403 $ 15,914 $ 11,251
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 29,898 28,049 23,406
(Gain) loss on sale of land, buildings,
equipment and intangibles (47) (76) (1,387)
Income from unconsolidated affiliates (254) (62) (511)
Changes in assets and liabilities:
(Increase) in receivables (7,364) (780) (4,943)
Decrease (increase) in inventories 1,283 (3,339) (6,728)
Increase (decrease) in accounts payable 5,024 (1,983) (2,042)
Increase (decrease) in accrued income taxes 1,138 3,455 (1,726)
Increase in deferred income taxes 2,691 3,303 3,568
(Increase) decrease in other working capital,
excluding cash and short-term borrowings (1,701) 1,231 3,452
--------- -------- --------
Total adjustments 30,668 29,798 13,089
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,071 45,712 24,340
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sales of land, buildings and
equipment 229 371 2,014
Expenditures for land, buildings and equipment (38,410) (39,092) (52,169)
Dividend from joint venture affiliate -- 1,050 --
Other (1,468) (198) (701)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (39,649) (37,869) (50,856)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
(Decrease) increase in short-term debt (1,699) 2,720 6,219
Decrease in domestic revolver and
uncommitted credit facilities (7,000) (6,000) (3,000)
Principal payments on long-term debt (1,981) (4,116) (3,863)
Proceeds from long-term debt 5,682 1,935 25,000
Equity and other transactions 610 540 538
-------- -------- --------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (4,388) (4,921) 24,894
-------- -------- --------
Effect of exchange rate changes on cash flows (590) (920) 141
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 3,444 2,002 (1,481)
Cash and equivalents, at beginning of year 6,215 4,213 5,694
-------- -------- --------
CASH AND EQUIVALENTS, AT END OF YEAR $ 9,659 $ 6,215 $ 4,213
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) $ 3,143 $ 3,983 $ 3,702
Income taxes (net of refunds) $ 6,248 $ 2,040 $ 2,143
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<CAPTION>
CLASS A CLASS B ADDITIONAL CUMULATIVE TOTAL
COMMON COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
Year ended the last day of February STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS EQUITY
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, 1995 $7,561 $4,712 $40,924 $ 83,192 $ 11,238 $ 147,627
Employee options and stock
purchase plan 47 15 476 -- -- 538
Net earnings -- -- -- 11,251 -- 11,251
Translation adjustments -- -- -- -- (1,124) (1,124)
------ ------ ------- -------- --------- ---------
BALANCE, 1996 $7,608 $4,727 $41,400 $ 94,443 $ 10,114 $ 158,292
Employee options and stock
purchase plan 59 23 458 -- -- 540
Net earnings -- -- -- 15,914 -- 15,914
Translation adjustments -- -- -- -- (6,670) (6,670)
------ ------ ------- -------- --------- ---------
BALANCE, 1997 $7,667 $4,750 $41,858 $110,357 $ 3,444 $ 168,076
Employee options and stock
purchase plan 46 13 551 -- -- 610
Net earnings -- -- -- 17,403 -- 17,403
Translation adjustments -- -- -- -- (2,635) (2,635)
------ ------ ------- -------- --------- ---------
BALANCE, 1998 $7,713 $4,763 $42,409 $127,760 $ 809 $ 183,454
====== ====== ======= ======== ========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
THE CHERRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share data and as otherwise stated)
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. Actual results could differ from these estimates.
INVESTMENT IN AFFILIATES
The Company accounts for its investments in 50% owned affiliates in Japan and
India by the equity method of accounting. Retained earnings at February 28,
1998 include $7,674 that represents the Company's share of the undistributed
earnings of these unconsolidated affiliates.
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and highly liquid securities with original
maturities of three months or less. The carrying amount approximates fair
value.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method for approximately 31% and 32% of the
Company's inventories as of the last day of February 1998 and 1997,
respectively. For the remaining inventories, cost is determined by the first-
in, first-out (FIFO) method. Inventory costs include material, labor and
manufacturing overhead.
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are carried at cost or, in the case of capitalized
leases, at the lower of the present value of minimum lease payments or the fair
value of the leased property. For financial reporting purposes, depreciation
expense is provided on a straight-line basis using estimated useful lives of 5
to 50 years for buildings and improvements and 3 to 12 years for machinery and
equipment. Depreciation expense was $29,786, $27,907 and $23,406 for fiscal
1998, 1997 and 1996, respectively. Accelerated depreciation methods are
generally used for tax purposes.
Expenditures for maintenance, repairs and renewals of minor items are charged to
expense as incurred. Major renewals and improvements are capitalized. Upon
disposition, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is reflected in earnings for the period.
INCOME TAXES
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
The Company has not recorded deferred income taxes applicable to certain
undistributed earnings of foreign subsidiaries and affiliates that are
indefinitely reinvested. Federal income taxes on distribution of these
earnings, if any, would not be significant.
CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated into U.S. dollars at
year-end rates of exchange. Profit and loss items are translated at the average
exchange rates prevailing during the year. Resulting translation adjustments
are reported separately in Stockholders' Equity, net of interperiod tax
allocations.
RESEARCH AND DEVELOPMENT
Research and development (R&D) costs are expensed as incurred. R&D expense was
$17,831, $16,251 and $14,411 for fiscal 1998, 1997 and 1996, respectively.
EARNINGS PER SHARE AND CAPITAL STOCK
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", that is
effective for periods ending after December 15, 1997. SFAS 128 establishes
standards for computing and presenting earnings per share (EPS) and also
requires restatement of all prior-period earnings per share data presented.
Accordingly, earnings per share data for all periods are presented in accordance
with SFAS 128.
Under SFAS 128, basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
The Company has two classes of common stock: Class A, which is non-voting, and
Class B, which has one vote per share. The Class A common could receive
dividends without Class B receiving the same amount. However, Class B could not
receive dividends without Class A receiving at least the same amount. The
options outstanding at February 28, 1998 are on Class A shares (See Note J).
The weighted average shares outstanding for Class A and Class B common stock for
the year ending February 28, 1998 are 7,685,009 and 4,760,918, respectively. In
the event dividends are declared on one or both classes of common stock, a two-
class calculation of EPS will be presented, per the requirements of SFAS 128.
As there were no dividends declared or paid for any of the years presented, the
EPS for each class of common stock is the same.
LONG-LIVED ASSETS
The Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful lives of its intangibles and other
long-lived assets may warrant revision or that the remaining balance of such
assets may not be recoverable. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the asset to measure whether
the asset is recoverable.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE B: INCOME TAXES
The sources of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended the last day of February 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS BEFORE INCOME TAXES
United States $ 13,678 $ 14,552 $ 8,056
Foreign 13,709 10,256 6,793
PROVISIONS FOR INCOME TAXES
Current: Federal and state $ 2,824 $ 1,990 $ 358
Foreign 4,464 4,257 1,582
-------- -------- -------
Current provision 7,288 6,247 1,940
-------- -------- -------
Deferred: Federal and state 2,064 2,873 657
Foreign 632 (226) 1,001
-------- -------- -------
Deferred provision 2,696 2,647 1,658
-------- -------- -------
Total income tax provision $ 9,984 $ 8,894 $ 3,598
======== ======== =======
</TABLE>
<PAGE>
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and the consolidated provisions for income taxes are as
follows:
<TABLE>
<CAPTION>
Year ended the last day of February 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at federal
statutory tax rates $ 9,585 $ 8,683 $ 5,197
Equity in earnings of unconsolidated
affiliates (89) (22) (179)
Foreign tax rate differentials 387 490 284
Current taxation of foreign earnings,
net of foreign tax credit (100) (281) (504)
Change in valuation allowances, net (117) (14) (610)
State tax provisions, net of federal
benefits 633 218 (211)
Other, net (315) (180) (379)
------- -------- -------
Consolidated provisions $ 9,984 $ 8,894 $ 3,598
======= ======== =======
</TABLE>
For income tax reporting at February 28, 1998, the Company has state tax credit
carryforwards of approximately $1,007 that expire in the years 2002 through
2004. The carryforwards will be available to reduce future income tax
liabilities.
<PAGE>
The tax effects of the significant temporary differences that comprise the
deferred tax liabilities and assets follows:
<TABLE>
<CAPTION>
Year ended the last day of February 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Book versus tax basis of depreciable assets $ 17,868 $ 15,966
Foreign currency translation 1,584 2,990
Other 2,870 2,521
--------- --------
Gross deferred tax liabilities 22,322 21,477
--------- --------
ASSETS
Reserves and nondeductible accruals 1,740 1,662
Undistributed earnings of foreign subsidiaries 1,353 1,425
Compensation related accruals 1,670 1,475
Inventory valuation 1,413 1,459
Other 503 865
Valuation allowance for deferred tax assets (256) (373)
---------- ---------
Net deferred tax assets 6,423 6,513
--------- --------
Net deferred tax liability $ 15,899 $ 14,964
========= ========
</TABLE>
The valuation allowances noted above relate to noncurrent tax assets for net
operating loss carryforwards due to the uncertainty of realizing the benefit of
certain foreign carryforwards. No other valuation allowances are deemed
necessary.
<PAGE>
NOTE C: SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year ended the last day of February 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Other Income (Expense):
Earnings of affiliates $ 254 $ 62 $ 511
Investment grants 278 320 344
Tooling income 408 838 387
Foreign exchange 252 130 (9)
Gain on sale of assets 47 76 1,387
Completed keyboard program -- 277 --
Other, net (44) 1,093 242
-------- -------- -------
OTHER INCOME, NET $ 1,195 $ 2,796 $ 2,862
======= ======== =======
Interest expense $ 3,395 $ 4,109 $ 3,914
Interest income (480) (322) (149)
------- -------- -------
INTEREST EXPENSE, NET $ 2,915 $ 3,787 $ 3,765
======= ======== =======
</TABLE>
NOTE D: INVENTORIES
<TABLE>
<CAPTION>
The last day of February 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES
Raw materials $ 9,633 $10,915
Component parts 10,897 10,244
Work-in-process 18,412 19,121
Finished goods 13,126 14,506
-------- -------
Total inventories $ 52,068 $54,786
======== =======
Excess of replacement cost over the stated
value of LIFO inventories $ 4,696 $ 4,844
</TABLE>
<PAGE>
NOTE E: DEBT
<TABLE>
<CAPTION>
The last day of February 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM DEBT
(With domestic and foreign banks)
Bank loans outstanding $ 20,630 $23,806
Weighted average interest rate 4.1% 3.8%
LONG-TERM DEBT
Foreign obligations:
Construction, mortgage and equipment loans (at
4% to 5.5%, secured by real estate in the
amount of $10,989 in the Federal Republic
of Germany) due in periodic installments
through March 2007 $ 8,846 $ 5,029
Capital lease obligations payable in installments
through December 2000 with a weighted average
interest rate of 8.15% 1,327 2,031
Domestic obligations:
Senior unsecured notes, at 6.99%, due in 2007 25,000 25,000
Borrowings under unsecured revolving credit
agreement with interest at LIBOR plus
.375% to .625%, prime rate or competitive
bid rates -- 7,000
-------- -------
35,173 39,060
Less current maturities 1,780 2,051
-------- -------
Long-term debt $ 33,393 $37,009
======== =======
</TABLE>
The following principal payments, exclusive of capitalized lease payments, are
required during the next five fiscal years: 1999 - $2,446; 2000 - $1,689; 2001 -
$1,346; 2002 - $687; 2003 - $687.
The Company has an unsecured, multicurrency revolving credit agreement for $65
million. The interest rate on this agreement is the prime rate or, depending
upon the Company's financial performance, LIBOR plus .375% to .625%. The
facility has a competitive bid option that can result in interest rates below
the stated facility rates. The facility fee is also dependent upon the
Company's financial performance and ranges from 1/8 of 1% to 2/10 of 1% of the
facility amount. The facility has a maturity of May 12, 2002. The covenants
for this credit facility pertain to consolidated net worth, leverage, cash flow
coverage and cash flow to debt levels, among others.
The Company has three uncommitted, unsecured credit facilities totaling $33
million. These facilities are utilized when the borrowing rates available under
them are below those available under the committed facility. A provision in the
multicurrency revolving credit agreement limits the Company's combined domestic
borrowings under that facility and the uncommitted facilities to $65 million.
On July 28, 1995, the Company completed a $25 million long-term debt placement
with an insurance company in the form of 6.99% Senior Notes, due July 15, 2007
with principal prepayments of $5 million required in years 2003 through 2007.
The notes are unsecured and interest is payable semi-annually each January and
July. Covenants pertain to consolidated net worth and debt-to-capital ratios,
among others.
The Company was in compliance with all covenants under all agreements at
February 28, 1998.
As of February 28, 1998, the Company had unused lines of credit available for
general corporate purposes of approximately $63.9 million for U.S. operations
and $15.9 million for foreign operations.
<PAGE>
NOTE F: DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-
defined interest rate, foreign exchange and commodity price risks.
The Company selectively enters into forward contracts to hedge certain firm and
anticipated purchase commitments denominated in foreign currency (principally
German marks). Gains or losses related to qualifying hedges of foreign currency
transactions are recognized in income when the hedged transaction occurs. Other
foreign exchange transactions are marked-to-market on a current basis through
income. The U. S. dollar equivalent of forward contracts outstanding on the
last day of February 1998 and 1997 approximated $5.1 million and $9.5 million,
respectively.
The Company also uses derivative contracts to reduce the impact of commodity
price changes on the cost of its products. The Company entered into a collar
agreement that effectively sets the minimum and maximum price per pound on 2.0
million pounds of copper ranging from a minimum of $.84 per pound to a maximum
of $1.00 per pound for the period March 1, 1998, through February 28, 1999.
Amounts paid or received under this agreement are recognized as an adjustment to
the purchase price of copper. No premium was paid for this contract.
The Company uses variable rate credit lines to finance a portion of its working
capital requirements. Borrowings under those credit lines fluctuate throughout
the year. Interest rate cap agreements are used to reduce the potential impact
of increases in interest rates on these borrowings. The Company is party to
three separate interest rate cap agreements. Under two agreements, the Company
is protected against interest rate increases above 6.0% LIBOR on $10 million of
floating rate debt through March 1998. Under the other agreement, the Company
is protected against interest rate increases above 7.0% deutsche mark LIBOR on
DM 20 million of floating rate debt through December 1999. Amounts received
under these agreements are recognized as an adjustment to interest expense.
Premiums paid for interest rate cap agreements are amortized to interest expense
over the term of the agreements. Unamortized premiums are included in other
assets, net in the consolidated balance sheet. On the last day of February 1998
and 1997, unamortized premiums amounted to $164 and $328, respectively.
Counterparties to all of these financial instruments are major financial
institutions. Credit loss from counterparty nonperformance is not anticipated.
NOTE G: FAIR VALUE OF FINANCIAL INSTRUMENT
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments.
<TABLE>
<CAPTION>
The last day of February 1998 1997
- -----------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Other assets, net $ 164 $ 22 $ 328 $ 41
Currency contracts (125) (125) (471) (471)
Commodity contracts -- (147) -- 79
FINANCIAL LIABILITIES
Long-term debt $33,846 $34,792 $37,029 $ 36,358
</TABLE>
The carrying amounts shown above are included in the consolidated balance sheet.
The following methods and assumptions were used to estimate fair value of each
class of financial instrument:
OTHER ASSETS, NET: The amounts reported relate to the interest rate caps
reported in Note F. The carrying amount represents the unamortized premiums
paid for the contracts. The fair value is based on its quoted market price as
provided by the financial institutions that are counterparty to the caps.
CURRENCY AND COMMODITY CONTRACTS: The fair value of foreign currency and
commodity contracts (used for hedging) is estimated by obtaining quotes from the
financial institution that is counterparty to the contracts.
LONG-TERM DEBT: The fair value of the Company's long-term debt excludes
capitalized leases. The estimated fair value is based on the current rates
available to the Company for debt with the same remaining maturities, using the
discounted cash flow method.
<PAGE>
NOTE H: LEASES
The Company leases automobiles, machinery and equipment, including computers,
under noncancelable operating leases that expire over the next nineteen years.
Renewal and escalation clauses are not significant. Rent expense was $4,032,
$3,787 and $2,778 for fiscal 1998, 1997 and 1996, respectively.
Land, buildings and equipment include capitalized leases of $5,833 and
$6,245 less accumulated amortization of $4,421 and $4,145 as of the last
day of February 1998 and 1997, respectively.
Future minimum lease payments under capitalized and long-term noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
- ------------------------------------------------------------------------
<S> <C> <C>
1999 $ 526 $ 2,459
2000 526 1,758
2001 438 1,201
2002 -- 695
2003 -- 590
Thereafter -- 5,442
----------- ----------
Total minimum lease payments $ 1,490 $ 12,145
==========
Less amount representing interest 163
-----------
Total obligations under capitalized
leases $ 1,327
===========
</TABLE>
NOTE I: CONTINGENCIES
The Company is named in various suits and claims that arise in the normal course
of business. Where appropriate, the Company engages legal counsel and disputes
these claims. The Company believes that it has meritorious defenses, and,
although the ultimate outcomes cannot be determined at the present time, it
believes the final disposition of these matters will not materially affect the
Company's financial position or results of operations. The Company has no
material off-balance-sheet financial risks.
<PAGE>
NOTE J: STOCK BASED COMPENSATION PLANS
STOCK OPTION PLANS
In June 1995, the stockholders approved the 1995 Stock Incentive Plan and the
1995 Nonemployee Director Stock Option Plan and reserved for distribution
900,000 and 100,000 shares of Class A Common Stock, respectively. The Stock
Incentive Plan also has available for awards 133,560 shares of Class A Common
Stock remaining under the Company's 1982 Stock Option Plan.
The 1995 Stock Incentive Plan provides for grants to key employees of awards in
the form of incentive stock options, non-qualified stock options, stock
appreciation rights (SARs) and stock awards, including restricted stock. The
maximum number of shares that may be awarded to any participant in any year
during the term of the plan is 90,000 shares. The awards may be granted singly,
in combination or in tandem. The stock option exercise price may not be less
than fair market value on the date of the grant. For SARs granted in tandem
with an option, the grant price is equal to the exercise price of the underlying
option. For SARs issued independent of any stock option, the grant price is not
less than the fair market value of the Class A Common Stock on the date the
right is granted. Stock options and SARs are exercisable in installments but
not prior to six months nor later than ten years after the grant date. Stock
awards may be granted to participants of the plan at no cost to them. Stock
awards will be subject to such terms, conditions, restrictions and/or
limitations, if any, as deemed appropriate. No more than 180,000 shares may be
issued as stock awards not based on performance goals during the term of the
plan.
Under the terms of the 1995 Nonemployee Director Stock Option Plan, each
nonemployee director in office on adjournment of the Company's annual meeting
automatically receives a non-qualified stock option to purchase the whole number
of shares of Class A Common Stock equal to the amount of the nonemployee
director's annual retainer divided by the fair market value of a share of Class
A Common Stock on that date. Stock options are exercisable in installments but
not prior to twelve months nor later than ten years after the grant date.
<PAGE>
The following table summarizes the transactions pursuant to the Company's stock
option plans for the three-year period ended February 28, 1998:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
- --------------------------------------------------------------------------
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
February 28, 1995 106,780 $5.43 88,653 $5.01
Granted 122,722 14.97
Exercised (28,472) 5.21
Cancelled (15,334) 14.07
------- -----
February 29, 1996 185,696 11.06 75,794 5.45
------- -----
Granted 285,377 9.42
Exercised (46,972) 4.54
Cancelled (11,596) 10.21
Expired (4,000) 4.13
------- ----
February 28, 1997 408,505 10.76 61,040 11.89
------- -----
Granted 171,006 14.21
Exercised (40,467) 8.33
Cancelled (25,840) 11.22
------- -----
February 28, 1998 513,204 $12.08 145,870 $12.06
======= ======
</TABLE>
<TABLE>
<CAPTION>
Exercisable Options at
Options Outstanding at February 28, 1998 February 28, 1998
- -------------------------------------------------------------------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
- --------------- ------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
$9.25 - 11.625 247,576 8.2 $ 9.42 77,135 $ 9.39
$11.75 - 14.00 134,692 8.9 13.74 5,122 12.52
$14.125-16.50 130,936 7.9 15.40 63,613 15.25
------- --- ------- ------ -------
513,204 8.3 $ 12.08 145,870 $ 12.06
======= === ======= ======= =======
</TABLE>
<PAGE>
EMPLOYEE STOCK PURCHASE PLANS
The Company sponsors an Employee Stock Purchase Plan that allows eligible
employees to contribute a portion of their pay towards the purchase of the
Company's Common Stock. Through December 31, 1996, the program was governed by
the 1980 Employee Stock Purchase Plan. Under the plan, 35,292 and 33,453 shares
of Class A Common Stock were issued at $9.26 and $9.26 per share during fiscal
1997 and 1996, respectively.
In June 1996, the stockholders approved the 1996 Employee Stock Purchase Plan
(1996 Plan) to replace the 1980 Plan, effective January 1, 1997. Under the 1996
Plan, an aggregate of 400,000 shares of Class A Common Stock may be sold plus
29,196 shares remaining under the 1980 Plan. The Compensation Committee of the
Board of Directors administers the plan and has the authority to establish the
annual purchase price and contribution levels within the limitations provided by
the plan. For the initial plan year beginning January 1, 1997, the Compensation
Committee approved 50,000 shares for issuance, set the purchase price at 95% and
limited the maximum employee contribution to five thousand dollars. In fiscal
1998, 17,966 shares were issued at $15.20 per share. At February 28, 1998,
411,230 shares are available for issuance under the plan.
ACCOUNTING
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", applies to the Company for the fiscal year ended the
last day of February 1997. SFAS No. 123 requires a fair value-based method to
determine the costs of such plans. As allowed by the new standard, the Company
continues to account for its stock-based compensation plans under the prior
standard of Accounting Principles Board (APB) Opinion No. 25. Had compensation
costs been determined consistent with SFAS No. 123, the Company's pro forma net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED THE LAST DAY OF FEBRUARY
- ---------------------------------------------------------------------------
(In thousands, except share data) 1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Net earnings
As reported $17,403 $15,914 $11,251
Pro forma 16,566 15,366 11,018
Basic earnings per share
As reported 1.40 1.29 .92
Pro forma 1.33 1.24 .90
Diluted earnings per share
As reported 1.39 1.28 .91
Pro forma 1.32 1.24 .89
</TABLE>
Because SFAS No. 123 does not apply to options granted prior to March 1, 1995,
the resulting pro forma compensation cost may not be representative of that to
be expected in future years.
The weighted average estimated fair value of options granted during fiscal 1998,
1997 and 1996 was $8.58, $5.49 and $7.47, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions used for grants:
<TABLE>
<CAPTION>
Year ended the last day of February 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 6.5% 6.45% 6.33%
Expected lives in years 7.56 7.45 6.70
Expected volatility 48.6% 46.8% 43.8%
Dividend -- -- --
</TABLE>
<PAGE>
NOTE K: EMPLOYEE BENEFIT PLANS
BONUS, DEFERRED COMPENSATION, PROFIT SHARING AND RETIREMENT PLANS
The Company and its operating entities have various bonus, deferred
compensation, profit sharing and retirement plans. The Company's bonus plans
cover qualified management employees. The payouts of these bonus plans are
based on attainment of operating results and other key performance goals. The
established Company profit sharing plan covers substantially all employees for
the domestic operating entities and is qualified under Section 401(k) of the
Internal Revenue Code. It allows for employee and employer contributions.
Certain key foreign employees are eligible for a one-time, lump sum payment on
retirement or involuntary termination, the amounts of which are accrued over the
employee's estimated service. During fiscal 1998, 1997 and 1996, the expenses
for these plans were $4,952, $4,630 and $2,980, respectively.
Effective January 1, 1996, the Company established a non-qualified, unfunded
deferred compensation program. The program allows designated employees to elect
to defer a portion of their annual incentives and base pay for periods of five
years to retirement. Participants are provided the same investment options as
for the separate 401(k) plan. Any distributions payable under the program are
paid from the general assets of the Company. Amounts deferred by participants
as of February 28, 1998 were not significant.
NOTE L: EARNINGS PER SHARE DISCLOSURE
Following is a reconciliation of the numerators and the denominators of the
basic and diluted EPS computation.
<TABLE>
<CAPTION>
Year ended the last day of February 1998 1997 1996
- -------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
Numerator:
Net income available to common stockholders $17,403 $15,914 $11,251
Denominator:
Weighted average shares for basic EPS 12,445,927 12,366,471 12,287,459
Effect of dilutive securities:
Common stock options 101,983 58,681 55,512
---------- ---------- ----------
Adjusted weighted average shares
and assumed conversions for diluted EPS 12,547,910 12,425,152 12,342,971
BASIC EPS $1.40 $1.29 $.92
DILUTED EPS $1.39 $1.28 $.91
</TABLE>
<PAGE>
NOTE M: SEGMENT INFORMATION
BUSINESS SEGMENT INFORMATION
The Company designs and manufactures a wide range of electrical, electronic and
semiconductor components which it sells to original equipment manufacturers and
distributors in three market segments: Automotive, Computer, and Consumer and
Commercial (C&C). Principal products include, but are not limited to, snap-
action switches and switch assemblies, semiconductor devices, keyboards and
related products, and electronic controls and displays.
Principal products sold by business segment are summarized as follows:
Automotive Computer C&C
- -------------------------------------------------------------------
Switches and switch assemblies X X X
Semiconductors X X X
Keyboards and related products X
Electronic controls and displays X X
Two Automotive Market customers individually account for 18.6% and 12.5% of
consolidated net sales in fiscal 1998, 18.4% and 12.9% in fiscal 1997 and 16.4%
and 12.5% in fiscal 1996.
The Company's principal international operations are conducted in Western Europe
with other operations, primarily sales offices, located in Hong Kong, Australia
and Japan. The Company also has a smaller manufacturing operation in Mexico.
In fiscal 1998, 1997 and 1996, export sales from the Company's U.S. operations
to unaffiliated customers were approximately 11%, 11% and 10% of consolidated
sales, respectively. Export sales were to the following geographic areas:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Canada $ 6,579 $ 16,140 $ 13,928
Europe 19,208 13,746 11,612
Far East 11,277 5,744 7,375
Mexico, Central and South America 11,791 12,217 7,302
Other 165 1,420 1,112
-------- --------- ---------
Total export sales $ 49,020 $ 49,267 $ 41,329
======== ========= =========
</TABLE>
In the following tables, intercompany sales between segments and geographic
areas are made at prices approximating market and are eliminated from total net
sales. Identifiable assets report only the assets used in the operation of that
business segment or geographic area. All other assets are shown separately as
corporate assets. Corporate assets include cash, other current and noncurrent
assets and the Company's investment in unconsolidated affiliates.
<PAGE>
<TABLE>
BUSINESS SEGMENT INFORMATION
<CAPTION>
Consumer & Eliminations
Fiscal Year Automotive Computer Commercial & Corporate Consolidated
---------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1998
Sales to unaffiliated customers $ 230,735 $ 115,112 $ 106,208 $ -- $ 452,055
Intersegment sales 2,428 25,019 5,850 (33,297) --
Total net sales 233,163 140,131 112,058 (33,297) 452,055
Earnings from operations 14,775 11,733 4,871 (2,272) 29,107
Identifiable assets 149,266 77,460 63,201 20,406 310,333
Capital expenditures, net 22,750 6,438 9,040 -- 38,228
Depreciation 14,852 8,327 6,607 -- 29,786
1997
Sales to unaffiliated customers $ 215,066 $ 116,051 $ 108,475 $ -- $ 439,592
Intersegment sales 2,705 25,386 6,315 (34,406) --
Total net sales 217,771 141,437 114,790 (34,406) 439,592
Earnings from operations 14,461 9,034 5,977 (3,673) 25,799
Identifiable assets 135,161 82,481 61,841 16,163 295,646
Capital expenditures, net 16,270 13,637 8,890 -- 38,797
Depreciation 13,705 7,667 6,535 -- 27,907
1996
Sales to unaffiliated customers $ 192,655 $ 124,773 $ 107,253 $ -- $ 424,681
Intersegment sales 2,496 22,923 8,197 (33,616) --
Total net sales 195,151 147,696 115,450 (33,616) 424,681
Earnings from operations 4,649 6,930 7,442 (3,269) 15,752
Identifiable assets 124,493 88,652 70,264 19,930 303,339
Capital expenditures, net 24,933 15,367 10,564 -- 50,864
Depreciation 10,693 7,120 5,593 -- 23,406
</TABLE>
<PAGE>
<TABLE>
GEOGRAPHIC AREA INFORMATION
<CAPTION>
United Eliminations
Fiscal Year States International & Corporate Consolidated
---------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Sales to unaffiliated customers $ 287,772 $ 164,283 $ -- $ 452,055
Transfers between areas 5,240 28,057 (33,297) --
Total net sales 293,012 192,340 (33,297) 452,055
Earnings from operations 17,938 13,910 (2,741) 29,107
Identifiable assets 176,132 113,411 20,790 310,333
1997
Sales to unaffiliated customers $ 270,717 $ 168,875 $ -- $ 439,592
Transfers between areas 5,862 28,544 (34,406) --
Total net sales 276,579 197,419 (34,406) 439,592
Earnings from operations 19,630 9,747 (3,578) 25,799
Identifiable assets 164,909 114,074 16,663 295,646
1996
Sales to unaffiliated customers $ 248,911 $ 175,770 $ -- $ 424,681
Transfers between areas 4,480 29,136 (33,616) --
Total net sales 253,391 204,906 (33,616) 424,681
Earnings from operations 12,997 5,758 (3,003) 15,752
Identifiable assets 153,903 129,137 20,299 303,339
<FN>
Net assets, including intercompany balances, of foreign subsidiaries and
affiliates were $75,020 (1998), $70,377 (1997), and $74,662 (1996) at each
respective year end.
</TABLE>
<PAGE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification and information as to Directors is incorporated herein by
reference to the information under the caption "Election of Directors" in the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders.
Information concerning the executive officers is set forth at the end of Item 1
in Part I hereof under the caption" Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation under the caption
"Compensation" in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is set forth under the caption "Stock Ownership Information" in the
Company's Proxy Statement for its 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Employment Contracts and Change of
Control Agreements" and "Loan to Executive Officer" in the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders is incorporated herein by
reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a) 1. FINANCIAL STATEMENTS See Part II
(a) 2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants See Part II
II. Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable, not required
under the instructions, or the information is included in the financial
statements or notes thereto.
Separate financial statements for the Registrant's unconsolidated fifty percent
owned affiliates, accounted for by the equity method, have been omitted because
the affiliates do not constitute significant subsidiaries.
(a) 3. EXHIBITS See Index to Exhibits
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed in the last quarter of the
Registrant's fiscal year ended the last day of February 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE CHERRY CORPORATION
Date May 21, 1998 By /s/ Dan A. King
---------------------------- -----------------------------
Dan A. King
Vice President of Finance and
Administration, Treasurer and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated as of May 20, 1998:
Signature Title
By /s/Peter B. Cherry Chairman of the Board,
----------------------------- President and Director
Peter B. Cherry (principal executive officer)
By /s/ Dan A. King Vice President of Finance
----------------------------- and Administration,
Dan A. King Treasurer and Secretary
(principal financial officer)
By /s/Kevin G. Powers Corporate Controller and
----------------------------- Assistant Secretary
Kevin G. Powers (principal accounting officer)
By /s/Alfred S. Budnick Vice President, President of
----------------------------- Cherry Semiconductor Corporation
Alfred S. Budnick and Director
By /s/Charles W. Denny Director
-----------------------------
Charles W. Denny
By /s/Peter A. Guglielmi Director
-----------------------------
Peter A. Guglielmi
By /s/Thomas L. Martin, Jr. Director
-----------------------------
Dr. Thomas L. Martin, Jr.
By /s/Robert B. McDermott Director
-----------------------------
Robert B. McDermott
By /s/ W. Ed Tyler Director
-----------------------------
W. Ed Tyler
By /s/ Henry J. West Director
-----------------------------
Henry J. West
<PAGE>
<TABLE>
THE CHERRY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED THE LAST DAY OF FEBRUARY 1998, 1997 AND 1996
(Dollars in Thousands)
<CAPTION>
Balance (A) Balance
Beginning Charged to Additions Close of
of Period Expense (Deductions) Period
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
1998 $ 2,245 $ 103 $ (380) $ 1,968
======== ====== ======== ========
1997 $ 1,935 $1,247 $ (937) $ 2,245
======== ====== ======== ========
1996 $ 1,818 $ 301 $ (184) $ 1,935
======== ====== ======== ========
<FN>
(A) Additions (deductions) include the currency translation effects resulting
from applying SFAS No. 52 to our financial statements for all three years in
this schedule.
</TABLE>
S-1
<PAGE>
THE CHERRY CORPORATION
INDEX TO EXHIBITS
3. a. Amended and restated Certificate of Incorporation (incorporated by
reference to 3(a) to Form 8-K dated July 13, 1994).
b. Amended and restated By-laws (incorporated by reference to 3(b) to Form
8-K dated July 6, 1994).
4. a. Multicurrency Credit Agreement as of May 12, 1995 among The Cherry
Corporation, the banks party thereto and Harris Trust and Savings Bank
as agent, filed as Exhibit 4 to Form 8-K dated May 19, 1995 and is
incorporated herein by reference.
Note Agreement as of July 15, 1995 between The Cherry Corporation
and Nationwide Life Insurance Company and Employers Life Insurance
Company of Wasua, filed as Exhibit 4 to Form 8-K dated October 10,
1995 and is incorporated herein by reference.
c. Other instruments defining the rights of holders of other long-
term debt of the Registrant are not filed as exhibits because the debt
authorized under any such instrument does not exceed 10% of
consolidated total assets as of the last day of February 1998. Copies
of debt instruments for which the related debt is less than 10% of
consolidated total assets will be furnished to the Commission upon
request.
10. a. Employee Stock Purchase Plan, filed as Exhibit A to the
Registrant's Proxy Statement for 1980 Annual Meeting of Stockholders
is incorporated herein by reference. (1)
b. 1982 Stock Option Plan, filed as Exhibit A to the Registrant's
Proxy Statement for 1982 Annual Meeting of Stockholders is
incorporated herein by reference. (1)
c. Release and final settlement agreement dated May 4, 1992 on
agreement for purchase and sale of assets dated May 31, 1991 filed as
Exhibit 10.c. to 1992 Form 10-K is incorporated herein by reference.
(1)
d. Executive agreement dated May 26, 1992, between Cherry
Semiconductor Corporation and Alfred S. Budnick filed as Exhibit 4d to
1993 Form 10-K is incorporated herein by reference (1).
e. 1995 Stock Incentive Plan, filed as Exhibit A to the
Registrant's Proxy Statement for 1995 Annual Meeting of Stockholders
is incorporated herein by reference. (1)
f. 1995 Nonemployee Director Stock Option Plan, filed as Exhibit B
to the Registrant's Proxy Statement for 1995 Annual Meeting of
Stockholders is incorporated herein by reference. (1)
g. 1996 Employee Stock Purchase Plan, filed as Exhibit A to the
Registrant's Proxy Statement for the 1996 Annual Meeting of
Stockholders is incorporated herein by reference. (1)
21. Table of Subsidiaries of the Registrant. (2)
23. Consent of independent public accountants. (2)
27. Article 5 Financial Data Schedule (2)
(1) Each exhibit marked constitutes a management contract or compensatory plan
contract or arrangement filed pursuant to Item 601(b)(10)(iii)(A) of
Regulation S-K.
(2) Filed herewith.
<PAGE>
THE CHERRY CORPORATION Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OR COUNTRY
NAME OF SUBSIDIARY/DIVISION OF ORGANIZATION
- -------------------------------------------------------------------
Cherry Electrical Products (1)
Waukegan, Illinois Not Applicable
Cherry Automotive (1)
Waukegan, Illinois Not Applicable
Cherry Semiconductor Corporation
East Greenwich, Rhode Island State of Rhode Island
Cherry Semiconductor International, Inc.
East Greenwich, Rhode Island State of Rhode Island
Cherry GmbH
Auerbach, Germany Federal Republic of Germany
Cherry Electrical Products Limited
Harpenden, England United Kingdom
Cherry SARL
Paris, France France
Cherry spol, s r.o.
Ostrov, Czech Republic Czech Republic
Cherasia Limited
North Point, Hong Kong Hong Kong
Cherry Australia Pty., Ltd.
Victoria, Australia Australia
Cherry de Mexico, S.A. de C.V.
Juarez, Mexico Mexico
(1) Cherry Electrical Products and Cherry Automotive are the only divisions of
The Cherry Corporation. The remaining companies listed above are subsidiaries.
All entities conduct business in the name indicated.
<PAGE>
Consent of Independent Public Accountants Exhibit 23
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-K, into The Cherry Corporation's previously
filed Registration Statements, File Nos. 2-93004 and 33-63881.
Arthur Andersen LLP
-------------------
Arthur Andersen LLP
Chicago, Illinois
May 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated statement of income and condensed consolidated balance
sheet and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> FEB-28-1998 FEB-28-1997<F1> FEB-29-1996<F1>
<PERIOD-END> FEB-28-1998 FEB-28-1997 FEB-29-1996
<CASH> 9,659 6,215 4,213
<SECURITIES> 0 0 0
<RECEIVABLES> 63,332 57,118 58,815
<ALLOWANCES> 0 0 0
<INVENTORY> 52,068 54,786 54,734
<CURRENT-ASSETS> 134,606 124,853 129,938
<PP&E> 376,240 355,245 346,252
<DEPRECIATION> 213,279 195,978 186,944
<TOTAL-ASSETS> 310,333 295,646 303,339
<CURRENT-LIABILITIES> 71,348 69,633 79,204
<BONDS> 33,393 37,009 44,237
0 0 0
0 0 0
<COMMON> 12,476 12,417 12,335
<OTHER-SE> 170,978 155,659 145,957
<TOTAL-LIABILITY-AND-EQUITY> 310,333 295,646 303,339
<SALES> 452,055 439,592 424,681
<TOTAL-REVENUES> 452,055 439,592 424,681
<CGS> 324,782 320,406 319,492
<TOTAL-COSTS> 324,782 320,406 319,492
<OTHER-EXPENSES> 98,166 93,387 89,437
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 3,395 4,109 3,914
<INCOME-PRETAX> 27,387 24,808 14,849
<INCOME-TAX> 9,984 8,894 3,598
<INCOME-CONTINUING> 17,403 15,914 11,251
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 17,403 15,914 11,251
<EPS-PRIMARY> 1.40 1.29 .92
<EPS-DILUTED> 1.39 1.28 .91
<FN>
<F1>Restated
</FN>
</TABLE>
