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, 1999
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 23, 1999 held by nonaffiliates was approximately $62 million, based on
a calculation that 45% 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 23, 1999.
Number of common shares outstanding as of April 23, 1999:
5,984,329 shares of Class A Common
4,193,549 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 1999 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, Year 2000 readiness, 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
1999, international operations provided 41% of consolidated sales, 76% of
operating profit and comprised 35% 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 for 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 50% of consolidated sales in fiscal 1999. The Company believes that
increased market penetration and increased electrical and electronic content per
vehicle would 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. The labor strike at General Motors in fiscal 1999 had an adverse
effect on Company sales. Future labor strikes at General Motors or other major
automotive customers 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 the Cherry Automotive division. The other operating
division, Cherry Electrical Products, is located in Pleasant Prairie, Wisconsin.
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 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 four major business segments:
The Automotive Switches and Modules segment designs, manufactures and sells
switches, switch assemblies, sensors and electronic modules for automotive
manufacturers and suppliers worldwide. Automobile special-use switches and
switch assemblies are used in a variety of applications including latches,
safety and direct operated controls, such as door and trunk electric latches,
cruise control and overdrive applications, central door locks, power windows,
seats and mirrors. Applications for the Company's electronic control modules
include power seat adjustments and hydraulic systems for sunroofs and
convertible tops. Hall-effect sensors can be used in applications where a
magnetically actuated solid state device is desirable, such as a position sensor
for occupant safety systems. Automotive products are custom made for major
U.S., European and Japanese Tier 1 suppliers and original equipment
manufacturers. The Company's automotive customers have generally paid for the
tooling and other special manufacturing requirements.
The Semiconductors segment manufactures and sells custom, semi-custom and
standard integrated circuits designed using Bipolar and BCDMOS technologies.
The Company's semiconductor devices for automotive customers are used in power
train controls, body electronics, vehicle control and safety, instrumentation
and entertainment electronics. Semiconductor devices for computer customers
provide power management solutions for personal computer motherboards, add-on
cards and power supplies. The Company's integrated circuits also provide power
management solutions for portable communication products and industrial
equipment manufacturers.
The Computer Keyboards segment designs, manufactures and sells keyboards and
related products 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.
The Switches and Controls segment designs, manufactures and sells switches,
sensors, electronic controls and displays, infrared controls and multifunction
modules used in appliances, office equipment, postage machines, motorcycle
controls, industrial controls, exercise equipment and personal computers. 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.
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 can be used in a wide range of office,
industrial and exercise 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 sells to three markets; the Automotive market, the Computer market
and the Consumer and Commercial market. The Automotive market is our largest
market and accounts for 50% of total sales while the Computer market and the
Consumer and Commercial markets account for 26% and 24% of total sales,
respectively, for the year ended February 28, 1999.
The Company's sales are made to Tier 1 and Tier 2 suppliers, original equipment
manufacturers, and to independent distributors. In fiscal 1999, sales to the
Company's five largest customers accounted for 41.3% of consolidated sales. Of
these five largest customers, sales to General Motors and Ford were 15.7% and
10.9%, respectively.
Within the Company's Automotive Switches and Modules segment, three customers
account for 63.3% of the segment sales and include General Motors and Ford
mentioned above. Ford and General Motors are also major customers in the
Semiconductors segment. In fiscal 1999, the Computer Keyboards segment has one
customer that accounts for 22.2% of that segment's sales. One customer accounts
for 12.3% of the sales for the Switches and Controls segment.
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. The Company is the largest
non-captive manufacturer of computer keyboards in Europe. 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. Therefore, the backlog reported below for
the Automotive Switches and Modules segment excludes any potential orders for
this domestic operation. The automotive backlog for Cherry Semiconductor
Corporation is also limited to 16 weeks and represents authorized releases for
production from automotive customers. Therefore, the Semiconductor Segment
backlog reported below includes limited automotive orders. 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) 1999 1998
--------- ---------
<S> <C> <C>
Automotive Switches and Modules Segment $ 24,679 $ 22,607
Semiconductors Segment 37,295 41,692
Computer Keyboards Segment 34,918 43,023
Switches and Controls segment 35,836 32,398
--------- ---------
$ 132,728 $ 139,720
========= =========
</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 1999, 1998 and 1997 the
Company spent approximately $21.3 million, $17.8 million and $16.3 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, 1999, the Company employed 4,478 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, Wisconsin, Rhode Island and Germany that comprise 345,000, 153,000,
208,000 and 402,000 square feet, respectively. In addition, the Company also
owns a 33,000 square foot facility in England. All owned facilities noted above
are used for a combination of production, warehousing and administrative
activities. The Company also leases facilities totaling 239,000 square feet,
with approximately 83% used for production, assembly and warehousing and the
balance primarily for sales activities. The leases expire at various dates
through February 2017.
The total owned and leased facilities noted above are currently used by the
business segments in the following estimated proportion:
Automotive Switches and Modules 40%
Semiconductors 16%
Computer Keyboards 23%
Switches and Controls 21%
-------
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 and equipment.
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, 1999.
Term as Business Experience During
Name Age Officer the Past Five Years
Peter B. Cherry 51 25 Chairman of the Board since
1992 and President since 1982
Alfred S. Budnick 61 22 Vice President of the Company
and President of Cherry
Semiconductor Corporation
since 1977.
Klaus D. Lauterbach 56 7 Vice President of the Company
since June 1992; General
Manager of Cherry GmbH since
1990; Assistant General
Manager prior to 1990.
Dan A. King 49 11 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 39 3 Corporate Controller and
Assistant Secretary since June
1995; Assistant Treasurer
1993-1995.
Robert G. Terwall 45 2 Vice President of the Company
since June 1997; General
Manager of Cherry Electrical
Products Division since 1986.
Dale F. Reichhart 46 2 Vice President of the Company
since September 1997; General
Manager of Cherry Automotive
Division since 1997; prior to
1997, Vice President of
Research and Development and
New Business Development at
Huron Plastics.
<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 7, 1999,
there were approximately 900 holders of record of each class of common stock.
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 1999 High Low Dividend High Low Dividend
Quarters:
<S> <C> <C> <C> <C> <C> <C>
Fourth $16.00 $11.50 $ -- $15.50 $12.00 $ --
Third 16.50 9.00 -- 15.38 9.50 --
Second 17.50 11.75 -- 17.31 10.50 --
First 20.00 16.50 -- 19.00 16.25 --
<CAPTION>
Fiscal 1998
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 --
</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>
1999 in Total $ 474,971 $ 137,745 $ 18,852 $ 1.56 $ 1.55
By Quarters
Fourth 113,455 29,525 2,812 .26 .26
Third 131,187 41,207 8,190 .66 .65
Second 107,664 30,282 1,519 .12 .12
First 122,665 36,731 6,331 .51 .50
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
</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 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 474,971 452,055 439,592 424,681 339,237
Gross profit $ 137,745 127,273 119,186 105,189 97,018
Operating expenses $ 107,383 98,166 93,387 89,437 73,620
Earnings from operations $ 30,362 29,107 25,799 15,752 23,398
Other income, net $ 982 1,195 2,796 2,862 1,671
Earnings before interest and taxes $ 31,344 30,302 28,595 18,614 25,069
Interest expense, net $ 2,992 2,915 3,787 3,765 3,218
Earnings before income taxes $ 28,352 27,387 24,808 14,849 21,851
Income tax provision $ 9,500 9,984 8,894 3,598 7,028
Net earnings $ 18,852 17,403 15,914 11,251 14,823
As a percent of sales 4.0% 3.8% 3.6% 2.6% 4.4%
Return on average stockholders' equity 10.7% 9.9% 9.8% 7.4% 12.3%
OTHER STATISTICS
Average shares outstanding:
Basic 12,105,269 12,445,927 12,366,471 12,287,459 10,882,950
Diluted 12,196,670 12,547,910 12,425,152 12,342,971 10,964,277
Earnings per share
Basic $ 1.56 1.40 1.29 .92 1.36
Diluted $ 1.55 1.39 1.28 .91 1.35
Dividends per share $ -- -- -- -- --
Capital expenditures, net $ 48,087 38,228 38,797 50,864 44,736
Depreciation and amortization $ 33,792 29,898 28,049 23,406 18,768
Net cash provided by operating
activities $ 48,776 48,071 45,712 24,340 23,786
FINANCIAL POSITION
Cash and equivalents $ 12,458 9,659 6,215 4,213 5,694
Working capital $ 77,431 63,258 55,220 50,734 46,001
Current ratio 2.2 1.9 1.8 1.6 1.7
Total assets $ 336,491 310,333 295,646 303,339 261,193
Long-term debt $ 75,389 33,393 37,009 44,237 25,863
Total debt $ 95,148 55,803 62,866 73,135 48,658
Stockholders' equity $ 167,669 183,454 168,076 158,292 147,627
Stockholders' equity per share $ 16.47 14.71 13.54 12.83 12.03
Debt-to-Capital ratio (debt, net of cash) 33.0% 20.1% 25.2% 30.3% 22.5%
PER EMPLOYEE DATA
Average number of employees 4,466 4,410 4,383 4,193 3,617
Net sales $ 106,353 102,507 100,295 101,283 93,790
Average assets employed $ 72,416 68,705 68,330 67,318 62,862
</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,
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 71.0 71.9 72.9
----- ----- -----
Gross margin 29.0 28.1 27.1
Operating expenses 22.6 21.7 21.2
----- ----- -----
Earnings from operations 6.4 6.4 5.9
Other income, net .2 .2 .6
Interest expense, net .6 .6 .9
------- ------- -------
Earnings before income taxes 6.0 6.0 5.6
Income tax provision 2.0 2.2 2.0
------ ------ --------
Net earnings 4.0 3.8 3.6
====== ====== ======
</TABLE>
FISCAL 1999 VS. FISCAL 1998
Sales for fiscal 1999 of $475.0 million established a new record and grew 5.1
percent over the prior year. Sales from our international operations grew 17.4
percent and accounted for just over 40 percent of our worldwide sales. Sales
from domestic operations decreased 2 percent and accounted for just under 60
percent of worldwide sales.
Sales for the Automotive Switches and Modules segment increased 7.7 percent to
$159.1 million in fiscal 1999 compared with $147.7 in fiscal 1998. The sales
growth came from foreign operations which now account for 48.1 percent of total
segment sales, up from 36.6 percent last year. In Europe, the Company has
established itself as a leading supplier of electronic switch assemblies to
several door-latch and door-lock manufacturers. Domestically, sales decreased,
largely as a result of the General Motors strike which occurred last summer, but
also as a result of new product introductions being outpaced slightly by
programs which were due to expire.
Sales for the Semiconductors segment were $115.1, an increase of 3.5 percent
over fiscal 1998. Approximately 70 percent of this segment's sales are to
automotive customers where our products are used in such functions as engine
control, ABS brake systems and instrument panel electronics. Sales to automotive
customers decreased 3.5 percent largely as a result of the General Motors
strike. Absent the strike, sales would have been relatively flat year over
year. Sales of our power management products comprise the other 30 percent of
this segment's sales. These circuits which we sell to the computer
communications and power supply markets, grew 23.7 percent over last year's
level.
Sales for the Computer Keyboards segment rose to $103.3 million from $98.2
million, an increase of 5.2 percent. Unit growth occurred for standard
keyboards which are most commonly purchased as computer users upgrade their
desktop systems as well as for advanced performance keyboards which are most
commonly used in commercial applications. Foreign sales account for 78.6
percent of the segment total with the majority of those occurring in Europe.
Sales for the Switches and Controls segment grew 2.7 percent to $97.5 million in
fiscal 1999. Approximately 80 percent of this segment's sales consist of our
traditional switches which are sold to appliance and office equipment
manufacturers. Sales of switch products were up slightly over last year. Our
line of electronic interface controls also had modest growth; however, fiscal
1999 did provide us with some additional design wins for future years.
Gross profit margins increased to 29.0 percent from 28.1 percent. The primary
factors are the increased utilization of our international manufacturing
facilities coupled with cost reductions at all operations.
Consolidated operating expenses increased 9.4 percent to $107.4 million.
Increased engineering spending resulted from the Company's efforts to introduce
additional power management and sensor products to the market. Additional
marketing efforts were also undertaken to increase market awareness of these
product offerings, resulting in higher distribution costs. Administration
expense increased largely as a result of facility relocations and software
conversions as we generally update our facilities and systems.
Other income decreased 17.8 percent to $982 thousand. Increased customer
tooling income and investment grants from the German government were more than
offset by foreign exchange losses on cross currency transactions.
Net interest expense of $3.0 million increased 2.6 percent over fiscal 1998.
Borrowings of $36.6 million were used to finance the Company's Dutch tender
which was completed on December 23, 1998.
The effective tax rate for fiscal 1999 was 33.5 percent compared with 36.5
percent last year. The decreased rate results largely from a nonrecurring tax
credit derived from the payment of a dividend from the Company's subsidiary in
England.
FISCAL 1998 VS. FISCAL 1997
Sales during fiscal 1998 reached a record $452.1 million surpassing fiscal
1997's record of $439.6 million by 2.8 percent. Domestic sales increased 6.3
percent while foreign sales reflected a decrease of 2.7 percent. Underlying the
decline in foreign sales was a 12 percent 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 for the Automotive Switches and Modules segment grew 5.9 percent to $147.7
million and comprised approximately one-third of total sales. This increase was
led by sales of our switches and switch assemblies, which grew $10.7 million to
$141.5 million. Sales by our foreign operations grew 12.8 percent to $54.0
million.
The Semiconductors segment reported sales of $111.3 million, an increase of 11.5
percent over fiscal 1997. A large portion of this increase resulted from power
management products, which represent the fastest growing family of products in
this segment.
Sales for the Computer Keyboards segment totaled $98.2 million and decreased 8.1
percent from last year. Sales increased in unit volume, but much of this
increase which occurred at our German operation was offset by the stronger
dollar. Competitive pricing, particularly on standard keyboards, also served to
offset some of the unit volume increase.
Sales for our Switches and Controls segment increased 1.6 percent to $94.9
million. Sales of our switch products, which account for approximately 80
percent of this segment's total, increased 4.2 percent to $75.9 million.
Gross profit margins improved to 28.1 percent of sales in fiscal 1998 from 27.1
percent 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 percent during fiscal 1998.
As a percent of sales, operating expenses increased to 21.7 percent in fiscal
1998 from 21.2 percent last year. The primary cause was increased research and
engineering expenses which increased $3.9 million to 7.3 percent of sales from
6.6 percent 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 percent 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 percent compared with 36 percent
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 percent from
fiscal 1997's previous record of $15.9 million. Diluted earnings per share were
$1.39 compared with $1.28 for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities, available cash balances and selected
borrowings are the Company's major sources of funds for investments. The
company uses its cash balances and other sources of liquidity to invest in its
current businesses and new market opportunities. These investments, along with
other actions taken to improve the profit margins of current businesses, are
designed to continue the improvement in the Company's financial performance.
Net cash provided by operating activities totaled $48.8 million in fiscal 1999
compared with $48.1 million in fiscal 1998. The primary components of net cash
provided by operating activities include the Company's net earnings adjusted for
non-cash revenues and expenses; the timing of cash flows relating to operating
expenses, sales, and income taxes; and the management of inventory levels.
The Company invested $48.7 million in facilities and equipment in its continuing
effort to take advantage of improvements in manufacturing technologies and
increase manufacturing capacities when such expenditures were warranted.
In December, 1998 the Company completed its Dutch tender offer for 2.3 million
shares of stock at $15.50 per share. The total purchase cost of $36.6 million
was financed with the Company's committed credit facility.
Largely as a result of the tender offer, the Company's debt increased to $95.1
million at February 28, 1999. The Company's debt-to-capital ratio, net of cash
balances increased from 20.1 percent to 33.0 percent.
At February 28, 1999, the Company had unused lines of credit available of
approximately $16 million for domestic operations and $26.7 million for foreign
operations. These credit facilities, together with funds generated from future
earnings should be sufficient to finance the Company's operations.
MARKET CONDITIONS AND OUTLOOK
Capital expenditures in fiscal 2000 are expected to be at a level of 8 percent
to 9 percent 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, 1999, the U.S. dollar equivalent of
forward contracts outstanding approximated $15.9 million.
The economic conditions in Asia have had a limited impact on the Company to
date. Less than 10 percent 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.
MARKET RISK
In the normal course of business, the Company is exposed to market risk,
including changes in interest rates, currency exchange rates and commodity
prices. To manage the volatility relating to these exposures, the Company
selectively enters into derivative transactions. The Company does not hold or
issue derivative financial instruments for trading purposes.
The Company imports product from its German subsidiary and sells them in the U.
S. This arrangement creates a currency exchange exposure between U. S. dollars
and German marks. The Company uses foreign currency forward contracts to manage
this exchange rate exposure.
The Company uses copper as a raw material in many of its products. The Company
uses a collar to manage fluctuations in the price of this commodity by
effectively establishing a maximum (cap) price and a minimum (floor) price for
this metal.
The tables below provide information about the company's derivative instruments
and other financial instruments that are sensitive to changes in interest rates,
currency exchange rates and commodity prices. The financial instruments are
grouped by market risk exposure category. Instrument denominations are
indicated in parentheses. For instruments denominated in currencies other than
the U. S. dollar, the information is presented by its equivalent in U. S.
dollars, the Company's reporting currency.
Interest rate risk sensitive instruments as of February 28, 1999 were:
<TABLE>
(Dollars in thousands except average interest rate)
<CAPTION>
Expected Maturity Date (Fiscal Year)
2000 2001 2002 2003 2004 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed rate ($US)
Principal amount $ 264 $ 140 $ 146 $ 5,152 $20,232 $25,934 $25,825
Average interest rate 4.0% 4.0% 4.0% 6.9% 7.0% 6.9%
Fixed rate (German marks)
Principal amount $ 1,737 $ 1,384 $ 706 $ 706 $706 $ 2,473 $ 7,712 $ 7,616
Average interest rate 4.8% 4.5% 4.8% 4.8% 4.8% 4.8% 4.7%
Variable rate ($US)
Principal amount $43,000 $43,000 $43,000
Average interest rate* 5.3% 5.3%
Short-Term Debt
Variable rate ($US)
Principal amount $ 6,000 $ 6,000 $ 6,000
Average interest rate* 5.2% 5.2%
Variable rate ($US)
Principal amount $11,458 $11,458 $11,458
Average interest rate* 4.3% 4.3%
<FN>
*Average variable rates are based on FY1999 year-end rates. Actual rates may be
higher or lower.
</TABLE>
<PAGE>
<TABLE>
Currency exchange rate risk sensitive instruments as of February 28, 1999
(dollars in thousands, except average exchange rate):
<CAPTION>
Weighted
Average
Notional Exchange Fair
Expected Maturity Fiscal Year 2000 Amount Rate Value
<S> <C> <C> <C>
Forward Contracts
Purchase of German marks $15,900 1.695 $(600)
</TABLE>
<TABLE>
Commodity price risk sensitive instruments as of February 28, 1999 (volume in
thousands of pounds):
<CAPTION>
Expected Fiscal Year Maturity 2000 2001
<S> <C> <C>
Copper collar contract:
Fair value $(98)
Contract volume 1,500 1,500
Cap price per pound $.81 $.81
Floor price per pound $.63 $.63
</TABLE>
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (March 1, 2000, for
the Company). The Company is assessing the effect of SFAS 133 and currently
believes it will not have a material effect on its earnings or financial
position.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
the accounting treatment of costs related to software obtained or developed for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The Company has evaluated the requirements of SOP 98-1 and believes
it will have no material impact on the Company's reported consolidated results
of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs and requires these costs to be expensed as
incurred. SOP 98-5 is effective for years beginning after December 15, 1998.
The company is in the process of evaluating the impact of the financial
reporting requirements.
YEAR 2000 READINESS
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 failures. Specifically, computational errors are a known
risk with respect to dates after December 31, 1999. The Company continues to
assess 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. The Company is using a six-step approach to Year
2000 compliance suggested by the Automotive Industry Action Group: (1) planning
and awareness; (2) inventory; (3) risk evaluation and prioritization; (4)
remediation (repair, replace or retire); (5) testing; and (6) establishment of
post implementation support and reviews, as required. Year 2000 project teams
and leaders are organized at each of the Company's four primary operating
entities, which manage their respective business computer systems, facilities,
customers and suppliers under our decentralized organization structure. Project
teams at each location include representatives from all functions across the
respective entity. Project leaders provide periodic reports to the corporate
headquarters. Steps (1) through (3) above have been completed by all project
teams. Remediation (step 4) and acceptance testing (step 5) of critical
business systems have been completed at three of the four locations with
remaining areas scheduled for completion by June 30, 1999. The fourth location
is installing new business software scheduled for completion by September 1,
1999, with remediation and acceptance testing of remaining critical areas
targeted for completion by June 30, 1999. In case of unforeseen delays in
completing this software conversion on time, repairs to make the existing
business software Year 2000 compliant are part of a contingency plan at the
fourth location. These repairs are also substantially completed.
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 operations Year 2000 compliant,
it is possible that the Company may be adversely affected by problems
encountered by key customers and suppliers. The Company has initiated
correspondence with all suppliers, service providers and financial institutions
in an effort to determine and assess those parties' readiness for Year 2000.
This involves an on-going process of review, evaluation and follow-up, with
priority given to major or critical suppliers. Contingency plans, as needed,
may develop from the results of our surveys and most likely will include
alternative sourcing. The Company is not likely to develop contingency plans
relating to its customers' compliance status. In most cases, our major
customers are much larger entities with greater financial resources than the
Company. Based upon correspondence from them, we believe they are diligently
addressing their Year 2000 issues and will be compliant. However, should
problems arise at our customers that would prevent sales to them, the Company
would likely respond by taking action to reduce costs during the period of
reduced demand. The Company cannot predict the likelihood or extent of a
significant disruption in the business of its customers and suppliers or of the
economy as a whole, either of which could have a material adverse effect on the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to "Market Risk" in Item 7 of this Annual Report on Form 10-K for related
disclosures.
<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, 1999 and 1998, and the related consolidated statements of earnings,
comprehensive income, cash flows and stockholders' equity for each of the three
years ended the last day of February, 1999. 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, 1999 and 1998, and
the results of their operations and cash flows for each of the three years ended
the last day of February, 1999, 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, 1999
<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
1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES AND COSTS
Net sales $ 474,971 $ 452,055 $ 439,592
Cost of products sold 337,226 324,782 320,406
----------- ----------- -----------
Gross profit 137,745 127,273 119,186
----------- ----------- -----------
EXPENSES
Research and engineering 35,297 33,069 29,135
Distribution 34,685 32,533 31,679
Administration 37,401 32,564 32,573
----------- ----------- -----------
Operating expenses 107,383 98,166 93,387
----------- ----------- -----------
EARNINGS
Earnings from operations 30,362 29,107 25,799
Other income, net - Note D 982 1,195 2,796
----------- ----------- -----------
Earnings before interest and taxes 31,344 30,302 28,595
Interest expense, net - Note D 2,992 2,915 3,787
----------- ----------- -----------
Earnings before income taxes 28,352 27,387 24,808
Income tax provision - Note C 9,500 9,984 8,894
----------- ----------- -----------
Net earnings $ 18,852 $ 17,403 $ 15,914
=========== =========== ===========
EARNINGS PER SHARE - Note M
Basic $ 1.56 $ 1.40 $ 1.29
============ =========== ===========
Diluted $ 1.55 $ 1.39 $ 1.28
============ =========== ===========
AVERAGE SHARES OUTSTANDING - Note M
Basic 12,105,269 12,445,927 12,366,471
=========== =========== ===========
Diluted 12,196,670 12,547,910 12,425,152
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands except share and per share data)
<CAPTION>
Year ended the last day of February
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 18,852 $ 17,403 $ 15,914
Other comprehensive income, net of tax - Note N
Foreign currency translation adjustments 1,379 (2,635) (6,670)
----------- ----------- -----------
Other comprehensive income 1,379 (2,635) (6,670)
----------- ----------- -----------
Comprehensive income $ 20,231 $ 14,768 $ 9,244
=========== =========== ===========
<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
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 12,458 $ 9,659
Receivables, less allowances of $2,348 and
$1,968, in 1999 and 1998, respectively 68,021 63,332
Inventories - Note E 53,737 52,068
Prepaid expenses and other current assets 9,467 9,547
------- --------
Total Current Assets 143,683 134,606
Land, Buildings and Equipment at Cost:
Land 3,965 3,583
Buildings and improvements 91,454 80,021
Machinery and equipment 309,688 279,765
Construction in progress 10,147 12,871
------- --------
415,254 376,240
Less: accumulated depreciation 235,937 213,279
------- --------
Total Land, Buildings and Equipment, net 179,317 162,961
Investment in affiliates and other assets,
net - Note A 13,491 12,766
------- -------
TOTAL ASSETS $ 336,491 $ 310,333
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt - Note F $ 17,458 $ 20,630
Accounts payable 19,683 22,466
Payroll related accruals 12,830 11,635
Other accruals 13,622 13,452
Income taxes 358 1,385
Current maturities of long-term debt - Note F 2,301 1,780
------- --------
Total Current Liabilities 66,252 71,348
Long-term debt - Note F 75,389 33,393
Deferred income taxes, net and deferred credits 27,181 22,138
Stockholders' Equity - Note A:
Class A common stock, $1.00 par value
Authorized 20,000,000 shares; issued and
outstanding, including shares in treasury -
7,759,179 in 1999 and 7,713,051 in 1998 7,759 7,713
Class B common stock, $1.00 par value
Authorized 10,000,000 shares; issued and
outstanding, including shares in treasury -
4,762,564 in 1999 and 4,762,564 in 1998 4,763 4,763
Additional paid-in capital 42,994 42,409
Retained earnings 146,612 127,760
Accumulated other comprehensive income 2,188 809
------- --------
204,316 183,454
Less: cost of common stock held in treasury,
1,771,911 shares of Class A and 569,015
shares of Class B in 1999; none in 1998 (36,647) --
------- --------
Total Stockholders' Equity 167,669 183,454
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 336,491 $ 310,333
======== ========
<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
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $ 18,852 $ 17,403 $ 15,914
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 33,792 29,898 28,049
Loss (gain) on sale of land, buildings,
equipment and intangibles 544 (47) (76)
Income from unconsolidated affiliates (271) (254) (62)
Changes in assets and liabilities:
(Increase) in receivables (4,459) (7,364) (780)
(Increase) decrease in inventories (1,053) 1,283 (3,339)
(Decrease) increase in accounts payable (2,963) 5,024 (1,983)
(Decrease) increase in accrued income taxes (1,104) 1,138 3,455
Increase in deferred income taxes 1,966 2,691 3,303
Decrease (increase) in other working capital,
excluding cash and short-term borrowings 3,472 (1,701) 1,231
------- -------- --------
Total adjustments 29,924 30,668 29,798
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,776 48,071 45,712
------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sales of land, buildings
and equipment 34 229 371
Expenditures for land, buildings and equipment (48,665) (38,410) (39,092)
Dividend from joint venture affiliate -- -- 1,050
Other 2 (1,468) (198)
------- ------ -------
NET CASH USED BY INVESTING ACTIVITIES (48,629) (39,649) (37,869)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES
(Decrease) increase in short-term debt (3,822) (1,699) 2,720
Increase (decrease) in domestic revolve 43,000 (7,000) (6,000)
Principal payments on long-term debt (2,167) (1,981) (4,116)
Purchase of treasury shares (36,647) -- --
Proceeds from long-term debt 1,377 5,682 1,935
Equity and other transactions 631 610 540
------- ------- -------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES 2,372 (4,388) (4,921)
-------- ------- -------
Effect of exchange rate changes on cash flows 280 (590) (920)
------- ------- -------
NET INCREASE IN CASH AND EQUIVALENTS 2,799 3,444 2,002
Cash and equivalents, at beginning of year 9,659 6,215 4,213
------- -------- --------
CASH AND EQUIVALENTS, AT END OF YEAR $ 12,458 $ 9,659 $ 6,215
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) $ 3,518 $ 3,143 $ 3,983
Income taxes (net of refunds) $ 8,067 $ 6,248 $ 2,040
<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>
Accumulated
Class A Class B Additional Other
Common Common Paid-In Retained Comprehensive Treasury
Year ended the last day of February Stock Stock Capital Earnings Income Stock Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Foreign currency
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
Foreign currency
translation adjustments -- -- -- -- (2,635) -- (2,635)
------- ------- ------- ------- ------- ------- -------
Balance, 1998 $ 7,713 $ 4,763 $ 42,409 $ 127,760 $ 809 $ -- $ 183,454
Employee options and stock
purchase plan 46 -- 585 -- -- -- 631
Net earnings -- -- -- 18,852 -- -- 18,852
Purchase of common stock -- -- -- -- -- (36,647) (36,647)
Foreign currency
translation adjustments -- -- -- -- 1,379 -- 1,379
------- ------- ------- ------- ------- ------- -------
BALANCE, 1999 $ 7,759 $ 4,763 $ 42,994 $ 146,612 $ 2,188 $(36,647) $ 167,669
======= ======= ======= ======= ======= ======= =======
<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.
REVENUE RECOGNITION
The company recognizes revenue at the date of shipment.
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,
1999 include $7,945 representing 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 30% and 31% of the
Company's inventories as of the last day of February 1999 and 1998,
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 $33,686, $29,786 and $27,907 for fiscal
1999, 1998 and 1997, 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 $21,318, $17,831 and $16,251 for fiscal 1999, 1998 and 1997, respectively.
EARNINGS PER SHARE AND CAPITAL STOCK
Basic earnings per share ("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 Company.
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, 1999 are on Class A shares (See Note K).
The weighted average shares outstanding for Class A and Class B common stock for
the year ending February 28, 1999 are 7,437,801 and 4,667,468 respectively. In
the event dividends are declared on one or both classes of common stock, a two-
class calculation of EPS will be presented. 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.
In December 1998, the Company concluded a "Dutch Auction" self-tender offer and
acquired 1,771,911 Class A shares and 569,015 Class B shares at an aggregate
cost of $36,647. The shares purchased are accounted for as treasury stock and
may be used for general corporate purposes.
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: NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. The
Company has adopted SFAS No. 130 and has incorporated its requirements into this
annual report.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
adopted SFAS No. 131 and has provided the disclosures needed to conform to its
requirements (See note O).
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
the accounting treatment of costs related to software obtained or developed for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The Company has evaluated the requirements of SOP 98-1 and believes
it will have no material impact on the Company's reported consolidated results
of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to
be recorded on the balance sheet at fair value. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. The Company is assessing the effect
of SFAS No. 133 and currently believes it will not have a material effect on its
earnings or financial position.
In April 1998, the AICPA issued SOP 98-5, "Reporting on Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs and requires these costs to be expensed as
incurred. SOP 98-5 is effective for years beginning after December 15, 1998.
The company is in the process of evaluating the impact of the financial
reporting requirements.
NOTE C: INCOME TAXES
The sources of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended the last day of February 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS BEFORE INCOME TAXES
United States $ 4,669 $ 13,678 $ 14,552
Foreign 23,683 13,709 10,256
PROVISIONS FOR INCOME TAXES
Current: Federal and state $ 793 $ 2,824 $ 1,990
Foreign 8,311 4,464 4,257
-------- -------- --------
Current provision 9,104 7,288 6,247
-------- -------- --------
Deferred: Federal and state (276) 2,064 2,873
Foreign 672 632 (226)
-------- -------- --------
Deferred provision 396 2,696 2,647
-------- -------- --------
Total income tax provision $ 9,500 $ 9,984 $ 8,894
======== ======== ========
</TABLE>
<PAGE>
Reconciliation 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 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at federal
statutory tax rates $ 9,923 $ 9,585 $ 8,683
Foreign tax rate differentials 1,396 387 490
Foreign tax rebate coincident with
repatriation of foreign earnings (737) -- --
Research and development tax credit (480) (231) (152)
Current taxation of foreign earnings,
net of foreign tax credit (347) (100) (281)
State tax provisions, net of federal
benefits 48 633 218
Equity in earnings of unconsolidated
affiliates (95) (89) (22)
Other, net (208) (201) (42)
-------- --------- ---------
Consolidated provisions $ 9,500 $ 9,984 $ 8,894
======= ======== ========
</TABLE>
For income tax reporting at February 28, 1999, the Company has state tax credit
carryforwards of approximately $1,344 that expire in the years 2003 through
2006. The carryforwards will be available to reduce future income tax
liabilities.
In fiscal 1999, the Company's subsidiary in England remitted a dividend of
$8,695 that resulted in a net tax benefit of $737.
<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 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Book versus tax basis of depreciable assets $ 20,112 $ 17,868
Foreign currency translation 1,969 1,584
Other 2,978 2,870
--------- --------
Gross deferred tax liabilities 25,059 22,322
--------- --------
ASSETS
Reserves and nondeductible accruals 2,517 1,740
Inventory valuation 2,270 1,413
Compensation related accruals 2,004 1,670
Undistributed earnings of foreign subsidiaries 1,038 1,353
Other 625 503
Valuation allowance for deferred tax assets (233) (256)
---------- ---------
Net deferred tax assets 8,221 6,423
--------- --------
Net deferred tax liability $ 16,838 $ 15,899
========= ========
</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 D: SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year ended the last day of February 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Other Income (Expense):
Earnings of affiliates $ 271 $ 254 $ 62
Investment grants 469 278 320
Tooling income 899 408 838
Foreign exchange (426) 252 130
(Loss) gain on sale of assets (544) 47 76
Completed keyboard program -- -- 277
Other, net 313 (44) 1,093
------- --------- --------
OTHER INCOME, NET $ 982 $ 1,195 $ 2,796
======= ======== ========
Interest expense $ 3,727 $ 3,395 $ 4,109
Interest income (735) (480) (322)
-------- -------- --------
INTEREST EXPENSE, NET $ 2,992 $ 2,915 $ 3,787
======= ======== ========
</TABLE>
NOTE E: INVENTORIES
<TABLE>
<CAPTION>
The last day of February 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES
Raw materials $ 8,171 $ 9,633
Component parts 8,230 10,897
Work-in-process 20,006 18,412
Finished goods 17,330 13,126
-------- --------
Total inventories $ 53,737 $ 52,068
======== ========
Excess of replacement cost over the stated
value of LIFO inventories $ 4,528 $ 4,696
</TABLE>
<PAGE>
NOTE F: DEBT
<TABLE>
<CAPTION>
The last day of February 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM DEBT
(With domestic and foreign banks)
Bank loans outstanding $ 17,458 $ 20,630
Weighted average interest rate 4.6% 4.1%
LONG-TERM DEBT
Foreign obligations:
Construction, mortgage and equipment loans (at
4% to 5.5%, secured by real estate in the
amount of $11,300 in the Federal Republic
of Germany) due in periodic installments
through March 2007 $ 7,712 $ 8,846
Capital lease obligations payable in installments
through December 2000 with a weighted average
interest rate of 1.23% 1,044 1,327
Domestic obligations:
Equipment loans at 4%, secured in the
amount of $1,000, due in periodic
installments through October 2005 934 --
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 43,000 --
-------- --------
77,690 35,173
Less current maturities 2,301 1,780
-------- --------
Long-term debt $ 75,389 $ 33,393
======== ========
</TABLE>
The following principal payments, exclusive of capitalized lease payments, are
required during the next five fiscal years: 2000 - $1,737; 2001 - $1,648; 2002 -
$846; 2003 - $43,852; 2004 - $5,858; thereafter - $22,705.
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.
In conjunction with the construction of a new manufacturing facility in
Wisconsin the Company obtained $1 million in financing from the State of
Wisconsin and the local business development group. The loan agreements are
dated May 19, 1998. The promissory notes have terms of seven years, are
secured by equipment at the new facility, bear interest at a rate of 4% and
require monthly installments through July 2005 and October 2005, respectively.
Covenants pertain to employment guarantees at the new facility, among others.
The Company was in compliance with all covenants under all agreements at
February 28, 1999.
As of February 28, 1999, the Company had unused lines of credit available for
general corporate purposes of approximately $16 million for U.S. operations and
$26.7 million for foreign operations.
<PAGE>
NOTE G: 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 1999 and 1998 approximated $15.9 million and $5.1 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 125
thousand pounds of copper per month ranging from a minimum of $.63 per pound to
a maximum of $.81 per pound for the period March 1, 1999 through February 28,
2001. The Company also has a collar agreement that sets the minimum and maximum
price per ounce on 25 thousand ounces of silver per month ranging from a minimum
of $4.80 per ounce to a maximum of $5.96 per ounce for the period from July I,
1998 through June 30, 1999. Amounts paid or received under these agreements are
recognized as an adjustment to the purchase price of the metal. No premium was
paid for these contracts.
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 one
separate interest rate cap agreement, which protects against interest rate
increases above 7.0% deutsche mark LIBOR on DM 20 million of floating rate debt
through December 1999. Amounts received under this agreement 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 the consolidated balance sheet under the
caption other assets, net. On the last day of February 1999 and 1998,
unamortized premiums amounted to $84 and $164, respectively.
Counterparties to all of these financial instruments are major financial
institutions. Credit loss from counterparty nonperformance is not anticipated.
NOTE H: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments.
<TABLE>
<CAPTION>
The last day of February 1999 1998
- -------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Other assets, net $ 84 $ 21 $ 164 $ 22
Currency contracts (600) (600) (125) (125)
Commodity contracts -- (105) -- (147)
FINANCIAL LIABILITIES
Long-term debt $ 76,646 $ 76,441 $ 33,846 $ 34,792
</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 G. 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 eighteen years.
Renewal and escalation clauses are not significant. Rent expense was $4,379,
$4,280 and $3,787 for fiscal 1999, 1998 and 1997, respectively.
Land, buildings and equipment include capitalized leases of $3,267 and $5,833
less accumulated amortization of $2,293 and $4,421 as of the last day of
February 1999 and 1998, 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>
2000 $ 573 $ 3,374
2001 483 2,614
2002 -- 1,426
2003 -- 1,106
2004 -- 938
Thereafter -- 8,237
---------- ----------
Total minimum lease payments $ 1,056 $ 17,695
==========
Less amount representing interest 12
----------
Total obligations under capitalized
leases $ 1,044
======
</TABLE>
NOTE J: 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 K: 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, 1999:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
- ---------------------------------------------------------------------------
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
------- -----
Granted 276,716 16.34
Exercised (26,578) 10.46
Cancelled (16,031) 14.64
------- -----
February 28, 1999 747,311 $13.66 291,725 $12.18
======= ======
</TABLE>
<TABLE>
<CAPTION>
Exercisable Options at
Options Outstanding at February 28, 1999 February 28, 1999
- -------------------------------------------------------------------------------
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 - 11.625 225,991 7.23 $ 9.44 141,052 $ 9.40
$11.75 - 14.00 133,692 8.04 13.73 46,604 13.64
$14.125-19.00 387,628 8.36 16.09 104,069 15.30
------- ---- ------- ------- -------
747,311 7.96 $ 13.66 291,725 $ 12.18
======= ==== ======= ======= =======
</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 shares of Class A
common stock were issued at $9.26 per share during fiscal 1997.
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. Under the
plan, 19,516 and 17,966 shares were issued at $13.06 and $15.20 per share during
fiscal 1999 and 1998, respectively. At February 28, 1999, 391,680 shares are
available for issuance under the plan.
ACCOUNTING
SFAS No. 123, "Accounting for Stock-Based Compensation", requires a fair value
based method to determine the costs of such plans. As allowed by the 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) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net earnings
As reported $18,852 $17,403 $15,914
Pro forma 17,620 16,566 15,366
Basic earnings per share
As reported 1.56 1.40 1.29
Pro forma 1.46 1.33 1.24
Diluted earnings per share
As reported 1.55 1.39 1.28
Pro forma 1.44 1.32 1.24
</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 1999,
1998 and 1997 was $9.38, $8.58 and $5.49, 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 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.69% 6.5% 6.45%
Expected lives in years 7.07 7.56 7.45
Expected volatility 48.9% 48.6% 46.8%
Dividend -- -- --
</TABLE>
<PAGE>
NOTE L: 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 1999, 1998 and 1997, the expenses
for these plans were $4,500, $4,952 and $4,630, 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, 1999 were not significant.
NOTE M: 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 1999 1998 1997
- ---------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
Numerator:
Net income available to common stockholders $18,852 $17,403 $15,914
Denominator:
Weighted average shares for basic EPS 12,105,269 12,445,927 12,366,471
Effect of dilutive securities:
Common stock options 91,401 101,983 58,681
----------- ----------- -----------
Adjusted weighted average shares
and assumed conversions for diluted EPS 12,196,670 12,547,910 12,425,152
BASIC EPS $1.56 $1.40 $1.29
DILUTED EPS $1.55 $1.39 $1.28
</TABLE>
<PAGE>
NOTE N: OTHER COMPREHENSIVE INCOME
The income tax expense (benefit) allocated to each component of other
comprehensive income follows:
<TABLE>
<CAPTION>
Year ended the last day of February 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation adjustments:
Before tax amount $ 1,722 $ (3,946) $ (9,434)
Tax (expense) benefit (343) 1,311 2,764
------------ ----------- -----------
Net-of-tax amount $ 1,379 $ (2,635) $ (6,670)
=========== =========== ===========
</TABLE>
NOTE O: 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,
Tier 1 suppliers and distributors through four business segments: Automotive
Switches and Modules, Semiconductors, Computer Keyboards, and Switches and
Controls. These business segments also represent the Company's principal
products, which are sold into three markets as follows:
Consumer &
Automotive Computer Commercial
Business Segment Market Market Market
- ---------------- ------ ------ ----------
Automotive Switches and Modules X
Semiconductors X X X
Computer Keyboards X
Switches and Controls X X
Two Automotive Market customers individually accounted for 15.7% and 10.9% of
consolidated net sales in fiscal 1999, 18.6% and 12.5% in fiscal 1998 and 18.4%
and 12.9% in fiscal 1997.
The Company's principal international operations are conducted in Germany.
Other manufacturing operations in Western Europe include smaller facilities in
England and the Czech Republic. Other operations, primarily sales offices, are
located in France, Hong Kong, and Australia. The Company also has a smaller
manufacturing operation in Mexico. In fiscal 1999, 1998 and 1997, export sales
from the Company's U.S. operations to unaffiliated customers were approximately
13.6%, 13.9% and 12.3% of consolidated sales, respectively. Export sales were
to the following geographic areas:
<TABLE>
<CAPTION>
FISCAL 1999 Fiscal 1998 Fiscal 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Europe $ 23,995 $ 25,162 $ 20,946
Canada 16,021 23,966 23,092
Far East 16,441 10,452 5,744
Mexico, Central and South America 7,326 2,900 2,800
Other 618 338 1,420
---------- -------- --------
Total export sales $ 64,401 $ 62,818 $ 54,002
========== ======== ========
</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>
Automotive
Switches Computer Switches Eliminations
Fiscal Year & Modules Semiconductors Keyboards & Controls & Corporate Consolidated
--------- -------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1999
Sales to unaffiliated customers $ 159,069 $ 115,093 $ 103,340 $ 97,469 $ -- $ 474,971
Intersegment sales -- 1,734 -- 1,377 (3,111) --
Total net sales 159,069 116,827 103,340 98,846 (3,111) 474,971
Earnings from operations 6,677 9,793 17,072 1,086 (4,266) 30,362
Identifiable assets 95,919 98,234 62,632 55,468 24,238 336,491
Capital expenditures, net 13,743 16,257 5,582 12,505 -- 48,087
Depreciation 11,518 10,031 6,349 5,770 18 33,686
1998
Sales to unaffiliated customers $ 147,715 $ 111,232 $ 98,242 $ 94,866 $ -- $ 452,055
Intersegment sales -- 1,803 -- 1,643 (3,446) --
Total net sales 147,715 113,035 98,242 96,509 (3,446) 452,055
Earnings from operations 4,510 11,867 11,288 4,583 (3,141) 29,107
Identifiable assets 86,925 89,702 64,053 49,247 20,406 310,333
Capital expenditures, net 14,286 11,321 5,078 7,543 -- 38,228
Depreciation 8,549 8,438 7,308 5,491 -- 29,786
1997
Sales to unaffiliated customers $ 139,471 $ 99,800 $ 106,927 $ 93,394 $ -- $ 439,592
Intersegment sales -- 2,101 -- 1,632 (3,733) --
Total net sales 139,471 101,901 106,927 95,026 (3,733) 439,592
Earnings from operations 5,776 10,509 8,026 5,161 (3,673) 25,799
Identifiable assets 73,083 86,589 73,037 46,774 16,163 295,646
Capital expenditures, net 10,324 7,821 13,169 7,483 -- 38,797
Depreciation 8,050 7,440 7,221 5,196 -- 27,907
</TABLE>
<PAGE>
<TABLE>
GEOGRAPHIC AREA INFORMATION
<CAPTION>
United Other Eliminations
Fiscal Year States Germany International & Corporate Consolidated
------ ------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Sales to unaffiliated customers $ 282,105 $ 163,990 $ 28,876 $ -- $ 474,971
Transfers between areas 1,901 28,051 4,960 (34,912) --
Total net sales 284,006 192,041 33,836 (34,912) 474,971
Earnings from operations 11,575 19,371 3,612 (4,196) 30,362
Identifiable assets 193,471 106,257 12,525 24,238 336,491
1998
Sales to unaffiliated customers $ 287,772 $ 136,161 $ 28,122 $ -- $ 452,055
Transfers between areas 3,442 23,123 4,934 (31,499) --
Total net sales 291,214 159,284 33,056 (31,499) 452,055
Earnings from operations 17,938 9,768 4,542 (3,141) 29,107
Identifiable assets 176,132 101,131 12,280 20,790 310,333
1997
Sales to unaffiliated customers $ 270,717 $ 141,886 $ 26,989 $ -- $ 439,592
Transfers between areas 3,788 23,592 4,952 (32,332) --
Total net sales 274,505 165,478 31,941 (32,332) 439,592
Earnings from operations 19,630 7,517 2,230 (3,578) 25,799
Identifiable assets 164,909 101,671 12,403 16,663 295,646
<FN>
Net assets, including intercompany balances, of foreign subsidiaries and
affiliates were $86,993 (1999), $75,020 (1998), and $70,377 (1997) 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 1999 Annual Meeting of Stockholders.
Information concerning the executive officers is set forth after Item 4 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 1999 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 1999 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 1999 Annual Meeting of Stockholders is incorporated herein by
reference.
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
On December 21, 1998, the Registrant filed a report on Form 8-K under item
5, other events. A press release dated December 17, 1998, announcing third
quarter earnings and the expectation of a greater than normal seasonal decline
in fourth quarter results, was incorporated by reference.
<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 26, 1999 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, 1999:
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 1999, 1998 AND 1997
(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:
1999 $ 1,968 $ 472 $ (92) $ 2,348
======== ====== ======== ========
1998 $ 2,245 $ 103 $ (380) $ 1,968
======== ====== ======== ========
1997 $ 1,935 $1,247 $ (937) $ 2,245
======== ====== ======== ========
<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.
a. 1. First Amendment to Credit Agreement dated June 17, 1996*.
a. 2. Extension Agreement dated September 6, 1996*.
a. 3. Extension Agreement dated August 20, 1997*.
a. 4. Second Amendment to Credit Agreement dated November 13, 1998*.
b. 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.
b. 1. First Amendment to the Note Agreement and the Notes dated
February 15, 1999*.
* Incorporated by reference to Registrant's Form 8-K dated April 19,
1999.
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 1999. 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)
Pleasant Prairie, Wisconsin 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.
Klasterec, 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 26, 1999
<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>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> FEB-28-1999
<CASH> 12,458
<SECURITIES> 0
<RECEIVABLES> 68,021
<ALLOWANCES> 0
<INVENTORY> 53,737
<CURRENT-ASSETS> 143,683
<PP&E> 415,254
<DEPRECIATION> 235,937
<TOTAL-ASSETS> 336,491
<CURRENT-LIABILITIES> 66,252
<BONDS> 75,389
0
0
<COMMON> 12,522
<OTHER-SE> 155,147
<TOTAL-LIABILITY-AND-EQUITY> 336,491
<SALES> 474,971
<TOTAL-REVENUES> 474,971
<CGS> 337,226
<TOTAL-COSTS> 337,226
<OTHER-EXPENSES> 107,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,727
<INCOME-PRETAX> 28,352
<INCOME-TAX> 9,500
<INCOME-CONTINUING> 18,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,852
<EPS-BASIC> 1.56
<EPS-DILUTED> 1.55
</TABLE>
