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 at the Cherry Electrical Products division in Waukegan, Illinois. Its wholly owned subsidiary companies operate in the following locations: Cherry Semiconductor Corporation, Rhode Island; Cherry Mikroschalter GmbH, the Federal Republic of Germany; Cherry Electrical Products Ltd., United Kingdom; Cherry SARL, France; Cherasia Limited, Hong Kong; Cherry SRO, Czech Republic; and Cherry Australia Pty., Ltd., Australia. 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 also operates a branch sales and engineering office in Japan under the name Cherry Automotive-Japan.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Refer to the Business Segment and Geographic Area Information contained in Item 8 of this Annual Report on Form 10-K.
NARRATIVE DESCRIPTION OF BUSINESS
Cherry has three major business segments:
The Automotive Market segment designs, manufactures and sells semiconductors, electronic controls and switch assemblies for the automobile industry. Automobile special-use switches and switch assemblies are used in a variety of applications including power windows and mirrors, central door locks and cruise controls. The Company's semiconductor devices are integrated circuits used in power train controls, body electronics, vehicle control and safety, instrumentation and entertainment electronics. Its electronic control modules are used as controls for sunroofs, convertible tops and memory power seats. These products are custom made for major U.S. and European manufacturers, including Japanese transplants in North America. The Company's automotive customers generally pay for the tooling and other special manufacturing requirements.
The Computer Market segment designs, manufactures and sells keyboards and related products, semiconductors and switches for computer applications. Cherry sells standard and specialty keyboards for use with personal computers; data entry, point-of-sale and reservation terminals; word processing systems; and other computer input applications. Specialty keyboards include integrated magnetic card readers, bar code readers or chip card readers. Semiconductors are used for power management solutions in the computer market and applications include uninterruptible power sources, tape backup and distributed power sources. Selector switches are used in addressing peripherals in computer networks, among other applications.
The Consumer and Commercial Market segment designs, manufactures and sells switches, semiconductors and electronic controls and displays used in household appliances, office equipment and cellular telephones. Snap-action switches are generally manufactured to customer specifications by modifying the Company's standard products. Switches are used in various appliances, office equipment and control and measurement device applications. Semiconductor applications include cellular communications, off-line power supplies and DC/DC converters. Plasma display products are primarily sold to the enterainment industry as readouts for electronic games. Electronic controls are used in office equipment and medical instrumentation.
Inflation has not been a material factor in any segment.
MARKETS, MAJOR CUSTOMERS AND SEASONALITY
Virtually all of the Company's sales are made to original equipment manufacturers and to independent distributors. In fiscal 1996, sales to the Company's five largest customers accounted for 36.4% of consolidated sales. Of these five largest customers, sales to General Motors and Ford were 16.4% and 12.5%, respectively.
Within the Company's Automotive Market segment, four customers account for 73.8% of the segment sales and include General Motors and Ford mentioned above. In fiscal 1996, the Consumer and Commercial Market segment has one customer which accounts for 11.8% of that segment's sales.
The Company normally experiences a slowdown in sales during the summer months from model changeovers and factory vacation shutdowns by its customers.
DISTRIBUTION
The Company's domestic sales are handled by Cherry sales representatives or through independent sales representatives and distributors. All are supported by Company customer service personnel. The independent sales organizations also sell products for other companies, although generally not those which compete with Cherry products.
Cherry Semiconductor Corporation sales outside the United States are handled by Cherry sales representatives or through independent sales representatives and distributors. Cherry Mikroschalter GmbH sells through sales representatives and independent distributors located throughout Europe and the Far East. Cherry Electrical Products Ltd., United Kingdom, under the direction of Cherry Mikroschalter GmbH, is responsible for sales efforts in Great Britain and Ireland through sales representatives and independent distributors. In Japan, the Company's joint venture sales are directed by Hirose Cherry Precision Co., Ltd. through distributors. In India, sales are directed by Cherry's new joint venture, TVS Cherry Private Limited. Cherry SARL sells products in France which are purchased primarily from Cherry Mikroschalter GmbH. Cherasia Limited sells Cherry products throughout the Far East. In Australia, Cherry products are sold through Cherry Australia Pty. Ltd. The Company's automotive sales and engineering center in Japan coordinates selling activities with Japanese automotive manufacturers.
COMPETITION
The Company does business in highly competitive markets. The Company believes that it is the second or third largest manufacturer of snap-action switches and automotive special use switches in North America. In addition, the Company believes it has a significant market position in the other two markets it serves. Competitors include a large number of independent domestic and foreign suppliers. Certain competitors in each of the Company's markets have substantially greater manufacturing, sales, research and financial resources than the Company. The Company believes that the principal competitive factors in its markets are price, product quality and reliability, and 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 materials 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 cancellable - subject to payment by the customer for charges incurred up to the date of cancellation. The following figures, therefore, should not be considered indicative of sales for an ensuing period.
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 year ended the last day of February 1996, the Company spent approximately $20,319,000 on product development. The Company spent approximately $14,841,000 and $10,424,000 on product development in fiscal 1995 and 1994, respectively. The percentage of development expenses reimbursed by customers was not significant in any of the periods discussed.
EMPLOYEES
As of February 29, 1996, the Company employed 4,399 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.
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 29, 1996.
Term as Business Experience During Name Age Officer the Past Five Years
Peter B. Cherry 48 22 Chairman of the Board since 1992 and President since 1982
Alfred S. Budnick 58 19 Vice President of the Company and President of Cherry Semiconductor Corporation since 1977.
Klaus D. Lauterbach 53 4 Vice President since June 1992; General Manager of Cherry Mikro- schalter GmbH since 1990; Assistant General Manager prior to 1990.
Dan A. King 46 8 Vice President of Finance since June 1995; Secretary in 1993; Treasurer and Corporate Controller prior to 1993.
Kevin G. Powers 36 1 Corporate Controller and Assistant Secretary since June 1995; Assistant Treasurer in January 1993; Manager, Corporate Accounting of Square D Company prior to 1993.
ITEM 2.
ITEM 2. PROPERTIES
Cherry owns and leases manufacturing, warehousing and office space in 15 cities around the world. The Company owns its major facilities which are located in Illinois, Rhode Island and Germany and comprise 345,000, 150,000 and 352,000 square feet, respectively. In addition, the Company also owns a 33,000 square foot facility in England. All owned facilities are used for a combination of production, warehousing and administrative activities. The Company also leases facilities totaling 168,000 square feet, with approximately 84% used for production, assembly and warehousing and the balance primarily for sales activities. The leases expire at various dates through December 31, 2000.
The total owned and leased facilities noted above are currently used by the business segments in the following estimated proportion:
Automotive Market 44% Computer Market 27% Consumer & Commercial Market 29% ------
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 of such machinery and equipment is owned by the Company.
Refer to Item 8 of this Annual Report on Form 10-K for information regarding notes payable secured by real estate.
ITEM 3.
ITEM 3.LEGAL PROCEEDINGS
The Company is named in various suits and claims which 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.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to stockholders during the fourth quarter of the fiscal year.
PART II
ITEM 5.
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 16, 1996, there were approximately 2,200 and 1,800 holders of record of the Class A and Class B common stocks, respectively. The Class A Common Stock began trading on Nasdaq in July, 1994. The historical sales price for Class B Common Stock has been restated to reflect the estimated effect of the stock dividend issued on July 14, 1994. 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:
ITEM 6.
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:
ITEM 7.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
FISCAL 1996 VS. FISCAL 1995
Consolidated sales of $424.7 million for fiscal 1996 increased 25% over the prior year. Approximately one-fifth of the increase is attributable to foreign currency translation. Domestic sales increased 27% and international sales increased 23% (10% in local currency). Increases were broad based, resulting from new products, increased market share, the strength of the underlying markets and a weaker dollar.
All business segments recorded increases in current year consolidated sales compared to the prior year. The Automotive Market continues to lead the way with sales increasing 32% , while the Consumer and Commercial (C&C) Market and the Computer Market recorded sales increases of 25% and 16%, respectively. Within the Automotive Market, sales of switch assemblies and semiconductor devices increased 41% and 29%, respectively, while electronic controls decreased 16%. Sales of electronic controls and displays increased 80% in the C&C Market, followed by 34% and 15% higher sales of semiconductor devices and switches, respectively. The Computer Market sales increase came primarily from keyboards and related products. Although current year sales of the Company's semiconductor products to the Automotive Market and the C&C Market (specifically sales to a cellular telephone manufacturer), were higher than the prior year, the sales increases were less than anticipated as a result of general market conditions.
Current year operating profit declined to $15.8 million or 3.7% of sales from $23.4 million or 6.9% of sales in the prior year. The current year gross margin rate declined to 24.8% from 28.6% in the prior year. The decline results from a combination of factors, listed in the order of their significance, as follows: . The Company experienced high production costs. In response, the Company continues to aggressively work to reduce costs associated with product and process introductions made during fiscal 1996 and 1995. . The Company installed greater capacity and staffed its semiconductor operation based on growth estimates. Actual semiconductor sales in the last half of fiscal 1996 were up 16% but below Company expectations. . Selling price reductions and increased material prices have led to margin erosions in many products. Copper and plastic have increased in price this year. The weak dollar has also resulted in higher material costs for foreign sourced purchased materials. These higher costs have not been fully recoverable from the customer. The current year domestic and foreign operating profit margin declined for the reasons noted above. The decline occurred at the gross margin level, since operating expenses were slightly lower as a percent of sales.
Current year operating profit margins by business segment were mixed. The Automotive Market current year operating profit margins declined to 2.4% from 7.3% primarily as a result of high production costs, start-up issues, and selling price reductions discussed earlier. The Computer Market operating profit margins for the current year declined to 5.6% from 9.2% as a result of higher production costs associated with new product and process introductions and increased raw material costs. The C&C Market current year operating profit margins improved slightly from 6.1% to 6.9% primarily from higher sales volume and a better product mix.
Other income of $ 2.9 million for the current year increased $1.2 million from the prior year primarily as a result of a $1.3 million gain on the sale of a German facility.
Interest expense for the current year increased to $3.9 million from $3.4 million primarily as a result of higher debt levels. In fiscal 1995, substantial debt was repaid with the proceeds from the equity offering in August 1994. Debt has increased since then to help finance expansion of production capacity to accommodate sales growth. Interest rates in the current year were generally lower as a result of more favorable credit facilities and general economic conditions.
The effective tax rate for fiscal 1996 was 24.2% versus 32.2% in the prior year. The lower current year tax rate is primarily attributable to state tax credits resulting from the Company's significant capital expenditures and the implementation of a tax planning strategy which resulted in the recognition of pre-merger U.S. loss carryforwards.
Since a significant portion of the Company's manufacturing and sales are overseas, foreign currency translation 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 purchase commitments denominated in foreign currencies (primarily German marks). At February 29, 1996, the U.S. dollar equivalent of forward contracts outstanding approximated $6.1 million.
FISCAL 1995 VS. FISCAL 1994
For fiscal 1995, consolidated sales of $339.2 million and net earnings of $14.8 million were new records for the third consecutive year.
Consolidated sales of $339.2 million increased 23% over fiscal 1994 sales, with domestic sales increasing 26% and international sales increasing 19%. Approximately one fourth of the international sales increase is attributable to foreign currency translation. The domestic sales growth resulted primarily from increased sales to the Automotive Market together with new sales to a cellular phone manufacturer. International sales grew from increasing penetration into the European automotive market, expanding sales of keyboards and the steadily improving European economy.
All business segments recorded fiscal 1995 consolidated sales increases compared to the prior year. The Automotive Market led the way with a 40% increase in sales, while the C&C Market and the Computer Market recorded sales increases of 20% and 8%, respectively. Within the Automotive Market, sales of switch assemblies increased 48%, semiconductor devices 36% and electronic controls 14%. The primary contributor to the sales increase in the C&C Market was semiconductor sales to a new customer that manufactures cellular phones. The Computer Market sales increases came primarily from keyboards and related products, which more than offset a decline from semiconductor sales.
Fiscal 1995 operating profit increased to $23.4 million or 6.9% of sales from $17.8 million or 6.5% of sales in the prior year. Although the operating profit margin improved and current operating expenses as a percentage of sales declined to 21.7% from 22.7%, we did not receive the full benefit from the increased sales volume. The fiscal 1995 gross margin rate declined to 28.6% from 29.1% in the prior year. This decline resulted primarily from higher than anticipated model changeover costs in our domestic automotive power option control business where 70% of our programs in fiscal 1995 were new. The significantly higher than anticipated demand also resulted in increased costs caused by labor inefficiencies, air freight and scrap. The fiscal 1995 domestic operating profit margin declined to 8.4% from 9.9% for the reasons noted above. Whereas, the foreign operating profit margin for fiscal 1995 improved to 6.6% from 4%, as a result of increased sales volume and ongoing cost reductions.
Fiscal 1995 operating profit margins by business segment were mixed. The Automotive Market fiscal 1995 operating profit margins declined to 7.3% from 11.1% primarily as a result of the higher domestic model changeover costs discussed earlier. The Computer Market operating profit margins for fiscal 1995 improved to 9.2% from 5.2% as a result of higher volume, improved product mix and cost reduction programs. The C&C Market fiscal 1995 operating profit margins improved to 6.1% from 4.5% primarily from higher sales to a new cellular phone customer noted above and a better product mix.
Other income of $1.7 million for fiscal 1995 increased $.4 million from the prior year primarily from an increase in customer tooling income.
Interest expense for fiscal 1995 declined to $3.4 million from $3.9 million. The net proceeds from the August 1994 equity offering were used to reduce domestic borrowings, resulting in the lower interest expense in fiscal 1995. In addition, foreign borrowings in local currencies and related interest rates also declined and contributed to the lower interest expense.
The effective tax rate for fiscal 1995 was 32.2% versus 37.5% in the prior year. The lower fiscal 1995 tax rate results primarily from the utilization of foreign tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1996, the Company continued to improve its long-term financial flexibility by arranging new credit facilities and a long-term debt placement. These complement the capital resources obtained from the equity offering in fiscal 1995. On May 15, 1995, a new credit facility for $65 million was consummated. The new facility is unsecured, allows for multicurrency borrowings, provides lower interest rates and commitment fees, and has less restrictive covenants than the previous credit facility. On July 28, 1995, the Company completed a $25 million long-term debt placement with an insurance company. The placement is in the form of 6.99% Senior Notes due July 15, 2007, with principal prepayments of $5 million required in years 8 through 12. The notes are unsecured and interest is payable semi-annually each January and July. Covenants pertain to consolidated net worth and debt to capital ratios, among others. The proceeds from the long-term debt placement were used to repay outstanding debt under the Company's new credit facility and uncommitted domestic facilities. During the second quarter of fiscal 1996, the existing three uncommitted, unsecured credit facilities were reduced from $45 million to $31 million. On November 1, 1995, the Company entered into a fourth uncommitted, unsecured credit facility for $10 million. A provision in the multicurrency revolving credit agreement limits the Company's combined domestic borrowings under the facility and the uncommitted facilities to $65 million.
The consolidated debt to capital ratio increased to 31.6% at February 29, 1996, from 24.8% at the end of the prior fiscal year. The increase in the debt to capital ratio is above expectations due to lower than anticipated earnings. However, 31.6% is still within what the Company considers an acceptable level. An increase in borrowings was expected to help fund production capacity increases in fiscal 1996.
Consolidated operations generated $24.3 million in cash, with an additional $25.0 million coming from the long-term debt issuance, $6.2 million from short- term borrowings and $2.0 million in proceeds from the sale of a German facility. Proceeds from employee stock purchase and stock option transactions also provided $.5 million. The Company invested $52.2 million in facilities and equipment ($32.2 million domestic and $20.0 million foreign) and $.6 million in patents. The Company repaid $3.0 million on the domestic revolver and uncommitted credit facilities and $3.8 million on other long-term debt.
For fiscal 1997, if currently anticipated sales growth materializes, the Company estimates that capital expenditures will average approximately 10% of sales. Operations are expected to generate enough cash to fund capital expenditures and still maintain an acceptable debt to capital ratio in fiscal 1997.
At February 29, 1996, the Company has unused lines of credit available of approximately $45.2 million for domestic operations and $20.4 million for foreign operations. These credit facilities and bank lines should be sufficient, together with internally generated cash, to finance the Company's operations.
FUTURE ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," when adopted in fiscal 1997 is not expected to be material.
SFAS No. 123 "Accounting for Stock Based Compensation" will apply in fiscal 1997. The Company has not completed its analysis to determine the impact of adopting this statement. If not adopted, the Company will be required to provide in a footnote, pro-forma disclosures of what earnings and earnings per share for years beginning with fiscal 1996, would have been had the statement been adopted.
ITEM 8.
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, 1996 and 1995, and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the three years ended the last day of February, 1996. 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, 1996 and 1995, and the results of their operations and cash flows for each of the three years ended the last day of February, 1996, 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 April 3, 1996
THE CHERRY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share data and as otherwise stated)
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Actual results could differ from these estimates.
INVESTMENT IN AFFILIATES The Company accounts for its investments in 50% owned affiliates in Japan and India by the equity method of accounting. Retained earnings at February 29, 1996, include $7,360 which represents the Company's share of the undistributed earnings of these unconsolidated affiliates.
CASH AND EQUIVALENTS Cash and equivalents consist of cash and highly liquid securities with original maturities of three months or less. The carrying amount approximates fair value.
INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 37% and 38% of the Company's inventories as of the last day of February 1996 and 1995, 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 & 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 $23,406, $18,768 and $16,720 for fiscal 1996, 1995 and 1994, 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 undistributed earnings of the United Kingdom subsidiary and the Japanese affiliate will continue to be invested indefinitely. 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 $20,319, $14,841 and $10,424 for fiscal 1996, 1995 and 1994, respectively.
EARNINGS PER SHARE Earnings per share is computed based on the weighted average number of common (Class A and Class B) shares outstanding during the year. Stock options are not materially dilutive and therefore are excluded from the computation of earnings per share. On June 16, 1994, the Board of Directors authorized a stock dividend of one share of Class A Common for each share of Prior Common Stock outstanding on July 11, 1994. The stock dividend had the same effect on the total number of shares of common stock outstanding as a two-for-one stock split. Historical earnings per share and average shares outstanding have been restated to reflect the stock dividend. See Note B.
NOTE B: CAPITAL STOCK
On July 12, 1994, the Company filed with the Delaware Secretary of State an amended and restated certificate of incorporation which (i) increased the number of authorized shares of common stock of the Company from 10,000,000 to 30,000,000 consisting of 20,000,000 shares of Class A Common Stock and 10,000,000 shares of Class B Common Stock, (ii) reclassified the Prior Common Stock as Class B Common Stock, (iii) authorized a new class of non-voting stock designated as Class A Common Stock, and (iv) established the rights, powers and limitations of the Class A Common Stock and the Class B Common Stock. On June 16, 1994, the Board of Directors authorized a stock dividend of one share of Class A Common Stock for each share of Prior Common Stock outstanding on July 11, 1994. The stock dividend had the same effect on the total number of shares of Common Stock outstanding as a two-for-one stock split. The historical earnings per share, average shares outstanding, stock option and employee stock purchase transactions have been restated to reflect the stock dividend.
On July 12, 1994, the Company offered 2,500,000 shares of Class A Common Stock to the public and also granted the underwriters an option to purchase an additional 375,000 shares to cover over-allotments. The offering concluded on August 19 with the entire 2,875,000 shares sold. The $33.2 million of net proceeds was used to repay domestic debt at that time.
On an unaudited, pro-forma basis, earnings per share for the year ended February 28, 1995, would have been $1.26 had the equity offering been made on March 1, 1994, and the domestic debt repaid at that time.
NOTE C: INCOME TAXES
Effective March 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". The cumulative effect of the change was to record a deferred tax benefit of $1,542, or $.17 per share, related primarily to recognition of the benefit of net operating loss(NOL) carryforwards.
At February 29, 1996, the Company has pre-merger U.S. NOL carryforwards of $2,142 which expire in 1999 and 2000. The Company also has state tax credit carryforwards of approximately $720 that expire in the year 2003. The carryforwards will be available to reduce future income tax liabilities.
The valuation allowance of $387 relates to noncurrent tax assets for net operating loss carryforwards due to the uncertainty of realizing the benefit of certain foreign carryforwards. The net change in the valuation allowance for deferred tax assets was a decrease of $610. Of this amount, $838 resulted from recognition of the benefit of pre-merger NOL and credit carryforwards. Due to the implementation of tax planning strategies, management has determined that it is more likely than not that these tax carryforwards will be utilized prior to their expiration.
NOTE D: SUPPLEMENTARY INCOME STATEMENT INFORMATION
NOTE E: INVENTORIES
NOTE F: DEBT
The following payments, exclusive of capitalized lease payments, are required during the next five fiscal years: 1997 - $3,027; 1998 - $1,666; 1999 - $1,666; 2000 - $14,668; 2001 - $817.
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 which 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 an initial maturity of May 12, 2000, but may be extended for an additional year on both the first and second anniversary dates of the facility upon mutual agreement of the Company and the banks. The covenants for this credit facility pertain to consolidated net worth, leverage, cash flow coverage and cash flow to debt levels, among others. Under the most restrictive of these covenants, the Company is required to: . Maintain a leverage ratio, as defined, of 40% or less. The leverage ratio at February 29, 1996, was 31.4%. . Maintain an interest expense coverage ratio, as defined, of 3:1 or greater. The interest expense coverage ratio at February 29, 1996, was 3.3:1. . Maintain an indebtedness to cash flow ratio, as defined, of 2:1 or less. The indebtedness to cash flow ratio at February 29, 1996, was 1.7:1.
The Company has four uncommitted, unsecured credit facilities totaling $41 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 8 through 12. The notes are unsecured and interest is payable semi-annually each January and July. Covenants pertain to consolidated net worth and debt to capital ratios, among others.
The Company was in compliance with all covenants under all agreements at February 29, 1996.
As of February 29, 1996, the Company had unused lines of credit available for working capital of approximately $45.2 million for U.S. operations and $20.4 million for foreign operations.
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 and foreign exchange price risks.
The Company selectively enters into forward contracts to hedge certain firm purchase commitments denominated in foreign currency (principally German marks). Gains or losses on forward contracts designated to hedge a foreign currency transaction are included in the measurement of income when the hedged transaction occurs. On the last day of February, 1996 and 1995 , the U. S dollar equivalent of forward contracts outstanding approximated $6.1 and $2.2 million, respectively.
The Company uses variable rate credit lines to finance a portion of its working capital requirements. Borrowings under those credit lines fluctuate throughout the year. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on these borrowings. The Company is party to three separate interest rate cap agreements. Under two agreements, the Company is protected against interest rate increases above 6.0% LIBOR on $10 million of floating rate debt through March 1998. Under the other agreement, the Company is protected against interest rate increases above 7.0% deutschemark LIBOR on DM 20 million of floating rate debt through December 1999. Premiums paid for interest rate cap agreements are amortized to interest expense over the term of the agreements. Unamortized premiums are included in other assets,net in the consolidated balance sheet. On the last day of February, 1996, and 1995, unamortized premiums amounted to $536 and $922, 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.
The carrying amounts shown above are included in the consolidated balance sheet under the indicated captions.
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 which are counterparty to the caps.
Currency contracts: The fair value of foreign currency contracts (used for hedging) is estimated by obtaining quotes from the financial institution which 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 on the same remaining maturities, using the discounted cash flow method.
NOTE I: LEASES
The Company leases automobiles, machinery and equipment under noncancelable operating leases which expire over the next seven years. Renewal and escalation clauses are not significant. Rent expense was $ 2,778, $2,229 and $1,782 for fiscal 1996, 1995 and 1994, respectively.
During fiscal 1993, the Company's German subsidiary entered into a capital lease agreement for substantially all of its computer equipment valued at $5,337.
Land, buildings and equipment include capitalized leases of $6,279 and $6,279 less accumulated amortization of $4,866 and $4,148 as of the last day of February 1996 and 1995, respectively.
Future minimum lease payments under capitalized and long-term noncancelable operating leases are as follows:
NOTE J: CONTINGENCIES
The Company is named in various suits and claims which 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.
NOTE K: EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
The Company's original incentive stock option plan was established in June 1982 by stockholder approval and reserved 450,000 shares for distribution. This plan may grant only non-qualified stock options after June 1992. In fiscal 1993, 57,400 incentive stock options were granted at $7.50.
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 remaining under the 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 June 15, 1995 Annual meeting automatically received 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 ($15 thousand) divided by the fair market value of a share of Class A Common Stock on June 15, 1995. Thereafter, each nonemployee director in office on adjournment of each subsequent annual meeting of stockholders will receive a stock option using the same formula above except that the fair market value of a share of Class A Common Stock will be determined based on the date of such subsequent annual meeting. Stock options are exercisable in installments but not prior to twelve months nor later than ten years after the grant date.
The following table summarizes the transactions pursuant to the Company's stock option plans for the three-year period ended February 29, 1996:
FUTURE ACCOUNTING CHANGES
Statement of Financial Accounting Standards(SFAS) No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed OF," when adopted in fiscal 1997 is not expected to be material.
SFAS No. 123 "Accounting for Stock Based Compensation" will apply in fiscal 1997. The Company has not completed its analysis to determine the impact of adopting this statement. If not adopted, the Company will be required to provide in a footnote, pro-forma disclosures of what earnings and earnings per share for years beginning with fiscal 1996 would have been had the statement been adopted.
EMPLOYEE STOCK PURCHASE PLAN
Full-time domestic employees as of December 1 of the preceding calendar year are eligible to contribute 10% of their calendar year base pay up to a maximum of five thousand dollars towards the purchase of the Company's common stock. The purchase price is equal to the lower of 95% of the beginning or end-of-calendar- year quoted NASDAQ price. Under the plan, 33,453, 26,689 and 15,360 shares were issued at $9.26, $9.98 and $9.98 per share during fiscal 1996, 1995 and 1994, respectively. At February 29, 1996, 64,488 shares are available for issuance under the plan.
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 1996, 1995 and 1994, the expenses for these plans were $2,980, $4,075 and $3,654, 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 shall be paid from the general assets of the Company. Amounts deferred by participants as of February 29, 1996 was not significant.
NOTE L: SEGMENT INFORMATION
BUSINESS SEGMENT INFORMATION
The Company designs and manufactures a wide range of electrical, electronic and semiconductor components which it sells to original equipment manufacturers and distributors in three market segments: Automotive, Computer, and Consumer and Commercial (C&C). Principal products include, but are not limited to, snap- action switches and switch assemblies, semiconductor devices, keyboards and related products, and electronic controls and displays.
Principal products sold by business segment are summarized as follows:
Automotive Computer C&C ---------- --------- ---
Switches X X X Semiconductors X X X Keyboards and Related Products X Electronic controls and displays X X
Two Automotive Market customers individually account for 16.4% and 12.5% of consolidated net sales in fiscal 1996 and 13.9% and 13.8% of consolidated net sales in fiscal 1995. Prior to fiscal 1995, no customer accounted for more than 10% of net sales.
The Company's principal international operations are conducted in Western Europe with other operations, primarily sales offices, located in Hong Kong, Australia and Japan.
Prior to 1996, export sales were less than 10% of consolidated sales. In fiscal 1996, export sales from the Company's U.S. operations to unaffiliated customers was 10% of consolidated sales. Fiscal 1996 export sales were to the following geographic areas:
Canada $ 13,928 Europe 11,612 Far East 7,375 Mexico, Central and South America 7,302 Other 1,112 -------- Total export sales $ 41,329 ========
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.
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10.
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 1996 Annual Meeting of Stockholders.
Information concerning the executive officers is set forth at the end of Item 1 in Part I hereof under the caption "Executive Officers of the Registrant."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation under the caption "Compensation" in the Company's Proxy Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
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 1996 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Peter B. Cherry, the Chairman of the Board and President, is the son of Mr. and Mrs. Walter L. Cherry. There are no other family relationships.
The information set forth under the captions "Employment Contracts and Change of Control Agreements" and "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a) 1. FINANCIAL STATEMENTS See Part II (a) 2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants See Part II
II. Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable, not required under the instructions, or the information is included in the financial statements or notes thereto.
Separate financial statements for the Registrant's unconsolidated fifty percent owned affiliates, accounted for by the equity method, have been omitted because the affiliates do not constitute significant subsidiaries.
(a) 3. EXHIBITS See Index to Exhibits
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed in the last quarter of the Registrant's fiscal year ended the last day of February 1996.
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
By Peter B. Cherry By Dan A. King ---------------------------- ---------------------------- Peter B. Cherry Dan A. King Chairman of the Board, Vice President of Finance, President and Director Treasurer and Secretary
By Walter L. Cherry By Thomas L. Martin, Jr. ----------------------------- ---------------------------- Walter L. Cherry Dr. Thomas L. Martin, Jr. Director Director
By Alfred S. Budnick By Robert B. McDermott ---------------------------- ---------------------------- Alfred S. Budnick Robert B. McDermott Vice President, President Director Cherry Semiconductor Corporation and Director
By Charles W. Denny By W. Ed Tyler ----------------------------- ---------------------------- Charles W. Denny W. Ed Tyler Director Director
By Peter A. Guglielmi By Henry J. West ----------------------------- ---------------------------- Peter A. Guglielmi Henry J. West Director Director
Dated May 17, 1996 --------------------
S-1
THE CHERRY CORPORATION INDEX TO EXHIBITS
3. a.Amended and restated Certificate of Incorporation (incorporated by reference to 3(a) to Form 8-K dated July 13, 1994). b.Amended and restated By-laws (incorporated by reference to 3(b) to Form 8-K dated July 6, 1994).
4. a.Multicurrency Credit Agreement as of May 12, 1995 among The Cherry Corporation, the banks party thereto and Harris Trust and Savings Bank as agent, filed as Exhibit 4 to Form 8-K dated May 19, 1995 and is incorporated herein by reference. Note Agreement as of July 15, 1995 between The Cherry Corporation and Nationwide Life Insurance Company and Employers Life Insurance Company of Wasua, filed as Exhibit 4 to Form 8-K dated October 10, 1995 and is incorporated herein by reference. c.Other instruments defining the rights of holders of other long-term debt of the Registrant are not filed as exhibits because the debt authorized under any such instrument does not exceed 10% of consolidated total assets as of the last day of February, 1996. 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)
11. Statement of Computation of earnings per share. (2)
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.
THE CHERRY CORPORATION Exhibit 21 SUBSIDIARIES OF THE REGISTRANT
STATE OR COUNTRY NAME OF SUBSIDIARY/DIVISION OF ORGANIZATION --------------------------- -------------------
Cherry Electrical Products (1) Waukegan, Illinois Not Applicable
Cherry Semiconductor Corporation East Greenwich, Rhode Island State of Rhode Island
Cherry Mikroschalter GmbH Auerbach, Germany Federal Republic of Germany
Cherry Electrical Products Limited Harpenden, England United Kingdom
Cherry SARL Paris, France France
Cherry SRO Ostrov, Czech Republic Czech Republic
Cherasia Limited North Point, Hong Kong Hong Kong
Cherry Australia Pty., Ltd. Victoria, Australia Australia
(1) Cherry Electrical Products is the only division of The Cherry Corporation. The remaining company's listed above are subsidiaries. All entities conduct business in the name indicated.
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, 2-68204 and 033-63881.
Arthur Andersen LLP ------------------- Arthur Andersen LLP
Chicago, Illinois