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, develop, manufacture and market over 3,000 types of electromechanical devices, electronic assemblies and displays, and semiconductor devices for 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; Plastech GmbH, the Federal Republic of Germany; Cherry Electrical Products Ltd., United Kingdom; Cherry SARL, France; Cherasia Limited, Hong Kong; Cherry SRO, Czech Republic; Cherry Australia Pty., Ltd., Australia; and Cherry Systems Corporation, Texas. 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 Electromechanical Devices Segment designs, manufactures and markets snap-action, selector and automobile special-use switches, all of which control or regulate the flow of electrical current. Snap-action switches are used in appliances, office and business equipment, vending machines, industrial controls, computer peripherals and other end products. They are generally manufactured to customer specifications by modifying the Company's standard products. Selector switches are designed for use in various computer, commercial and industrial control applications. Automobile special-use switches are used in power windows, mirrors and seats; in the engine compartment for various control applications; and in various safety applications. These products are custom made for major U.S. and European automobile manufacturers, including Japanese transplants in North America. The Company's automotive customers generally pay for the tooling and other special manufacturing requirements.
The Electronic Assemblies and Displays Segment designs, manufactures and markets keyboards, keyboard switches, gas discharge displays and systems, and automotive electronic products. Electronic keyboards are used in personal computers; data entry, point-of-sale and reservation terminals; word processing systems; and other computer input applications. Gas discharge displays and systems are used as readouts for business machines, amusement products, medical equipment and industrial instrumentation. Automotive electronics include power seat and sunroof applications.
The Semiconductor Devices Segment designs, manufactures and markets linear and linear to digital integrated circuits and transistor and gate arrays which are packaged in a variety of configurations. Examples of these products include integrated circuits for use in automotive ignition systems, spindle speed control in disk drives, and power supplies for office equipment and telephones. The Company's semiconductor products are used primarily in automobiles, computer products and industrial controls. Generally this segment's customers pay the major portion of the design and development costs of a custom semiconductor device. Cherry also manufactures an increasing number of proprietary and semi-custom integrated circuits that perform standardized functions or can be adapted for a specific application. To service its two largest markets, the Company has developed a high speed bipolar process and a low voltage mixed signal process for the computer market, and a high voltage mixed signal process for the automotive market.
The Company feels inflation has not been a material factor in any segment.
MARKET AND DISTRIBUTION
The distribution of the Company's sales by market is as follows:
Each of the Company's Product Segments sell into these three markets. The percentage of market sales by each product segment for the last three fiscal years are as follows:
A discussion of the markets served by Cherry follows:
AUTOMOTIVE MARKET
Cherry's growth in fiscal 1994 was fueled by sales to the automotive industry, which now represents the Company's single largest market. The Company's products can be found in ignition and sunroof controls, power seats, power windows, anti-theft systems, air bag and ABS controls, and other areas of the car.
Switches, used primarily for power options, continue to represent the largest volume of products sold to this market; however, sales of semiconductors and electronic controls grew as a percent of total automotive sales in fiscal 1994.
The fiscal 1994 growth in sales to the automotive market can be attributed to the expanding available market, increased market penetration and continued customer outsourcing. Cars and light trucks are using more electronics and power options per vehicle than ever before. The number of Cherry products used per vehicle is increasing as well. The Company's semiconductors are being used in more advanced car applications. In addition, the Company now provides complete armrest assemblies rather than solely the power option switches, and produces more electronic control modules for sunroofs and power seats.
The Company's North American sales currently account for the majority of the Company's sales to the automotive market; however, European business is expanding significantly. To improve the Company's penetration in the Japanese automotive market, it is working closely with Japanese facilities in North America and Europe, and has established a sales and engineering office in Japan.
COMPUTER MARKET
The dynamics of the computer market - severe price erosion, huge shifts in demand and realignment of the worldwide personal computer manufacturers - have been a continual challenge over the last several years. Cherry has worked hard to anticipate and respond to these global market changes, and continues to profitably supply keyboards and keyboard components to this market, as well as semiconductors and switches.
In response to this changing industry, the Company has implemented new distribution channels for its European keyboard business. In Europe, the Company continues to hold the No. 1 position for non-captive keyboard production, and the Cherry keyboard has achieved name recognition among European consumers.
The Company has also expanded its line of standard value-added keyboards to better serve specialty markets that require integrated magnetic card readers, bar code readers or smart card readers. In addition, manufacturing cost reductions have kept pace with price reductions.
The Company sells semiconductors to this marketplace for use in hard disk drives, tape backup and power supplies. The Company has secured significant market position in the semiconductor niches served. Future sales of the Company to this marketplace will depend on new market technology requirements. The Company intends to continue to serve this market with creative semiconductor solutions.
The switch sales to this marketplace are a small and mature part of the market. Any growth will come from increased requirements for computer interfacing, networking and expanded uses of peripheral products.
CONSUMER AND COMMERCIAL MARKET
The consumer and commercial market is the most stable market served by Cherry, with sales increasing 4% in fiscal 1994. Cherry products sold to this market are primarily used in home appliances and office equipment.
The majority of the Company's business in this market is in manufacturing traditional standard switches with some customization. The Company has established its leadership in switches domestically and in Europe by providing advanced engineering and customization capabilities.
The Company believes future switch growth opportunities exist internationally. In recent years, the Company has increased selling efforts in Eastern Europe, Central and South America and Australia. In 1994, the Company established a joint venture in India to engineer, manufacture and market switches for India's growing appliance and office equipment markets.
Although electronic controls currently represent a relatively small portion of the Company's sales to this market, the Company believes the opportunities for growth are considerable. Many of the Company's customers are looking to outside vendors to supply increasingly sophisticated electronic controls for their products. Plasma displays, for example, are now used in a variety of new applications, such as medical, fitness and test equipment, in addition to their long-time gaming applications.
Semiconductors are another currently small but growing part of the Company's sales to this market. In the current year, semiconductor sales to this market increased 34%. By using the Company's expertise in power conversion technology, the potential for future growth of semiconductor sales to this marketplace is significant.
MAJOR CUSTOMERS AND SEASONALITY
Virtually all of the Company's sales are made to original equipment manufacturers and independent distributors. In fiscal 1994, the Company's five largest customers accounted for approximately 30% of sales, including amounts subcontracted from other customers. No single customer accounts for more than 10% of sales.
The Company's Semiconductor Devices Segment has two major customers which combined accounted for 33% of its total sales in fiscal 1994. The four major customers of the Company's Electromechanical Devices Segment accounted for 30% of the segment's sales in fiscal 1994. The Company's Electronic Assemblies and Displays Segment had three major customers which together accounted for 27% of the segment's sales in fiscal 1994.
The Company normally experiences a slowdown in sales during the summer months from model changeovers and factory vacation shutdowns.
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 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 will be 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 various businesses in which the Company engages are highly competitive. In the Electromechanical Devices Segment, the Company considers itself the second largest producer of the various switching devices it manufactures. Cherry's largest competitor in this segment is a division of a corporation with substantially larger resources. Cherry is an emerging player in the products marketed by its Electronic Assemblies and Displays Segment in large part because of its German subsidiary's strength in the keyboard and keyswitch markets and The Company's recent successes with electronic controls. The Company's competitors in this segment range from companies smaller than Cherry, to divisions of corporations and corporations with larger resources than the Company.
The Semiconductor Devices Segment of the Company's business has competitors, including large manufacturers of standard semiconductor devices, that have been established longer and have substantially greater manufacturing, sales, research and financial resources than Cherry. Few of these manufacturers, however, have concentrated on custom designed linear bipolar semiconductor products as has the Company. A limited number of Cherry's semiconductor customers have the technological expertise and the financial resources to manufacture these devices themselves.
To compete sucessfully, the Company believes that meeting customer delivery requirements, maintaining product reliability and offering custom design of its products to customer specifications are as important as pricing products competitively.
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. Patents are important but the Company 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 1994, the Company spent approximately $10,424,000 on product development. The Company spent approximately $9,102,000 and $8,083,000 on product development in fiscal 1993 and 1992, respectively. The percentage of development expenses reimbursed by customers was not significant in any of the periods discussed.
EMPLOYEES
As of February 28, 1994, the Company employed approximately 3,248 persons.
ENVIRONMENTAL PROTECTION
The Company is confident that its manufacturing operations and properties are in 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. 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 28, 1994.
Term as Business Experience During Name Age Officer the Past Five Years
Peter B. Cherry 46 20 Chairman of the Board,(1992), and President, 1982; and Chief Executive Officer, 1986; and (prior to 1986) Chief Operating Officer.
Alfred S. Budnick 56 17 Vice President of the Company and President of Cherry Semiconductor Corporation since 1977.
Grant T. Hollett, Jr. 51 2 Vice President since June 1992; President of Cherry Electrical Products Division since 1990; Executive Vice President prior to 1990.
Klaus D. Lauterbach 51 2 Vice President since June 1992; General Manager of Cherry Mikro- schalter GmbH since 1990; Assistant General Manager prior to 1990.
Dan A. King 44 6 Secretary (in 1993); Treasurer and Corporate Controller since 1990; and prior to 1990, Corporate Controller since 1984.
ITEM 2.
ITEM 2. PROPERTIES.
The following is a summary description of the principal land and buildings owned or leased by the Company and its subsidiaries, setting forth the location, square footage of building area and acreage of land owned. All buildings are in generally good condition and provide adequate and suitable space for the operations at each location.
Building Site Location Acreage (sq. ft.) Leased or Owned - - -------------------------- ------ -------- ------- Electromechanical Devices and Electronic Assemblies and Displays Segments:
1. Waukegan, Illinois 26.6 324,000 Owned
2. Bayreuth, Federal Republic 1.9 18,000 Owned of Germany .5 13,000 Leased, expiring Dec.1997
3. Auerbach, Federal 22.1 352,000 Owned Republic of Germany 5,000 Leased, expiring Dec.2000
4. Ostrov, Czech Republic - 20,000 Leased, expiring Dec.1995
5. Paris, France - 13,600 Leased, expiring Feb.1996
6. Harpenden, England 1.0 28,000 Owned
7. North Point, Hong Kong - 5,000 Leased, expiring Apr.1996
Semiconductor Devices Segment - (Exclusively):
8. East Greenwich, Rhode Island 20.6 101,000 Owned
Other
9. El Paso, Texas 4.8 62,000 Capital lease payable through Dec.1995
Properties 1, 2, 3, 6 and 8 are used for a combination of administration, production and warehousing. Properties 5 and 7 are used for sales and warehousing activities. Property 4 is used for assembly operations.
Refer to Item 8 of this Annual Report on Form 10-K for information regarding notes payable secured by real estate.
Property 9, in El Paso, Texas is an idle building which the Company is seeking to sell or lease.
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's common stock is traded on the NASDAQ National Market System under NASDAQ symbol CHER. As of May 16, 1994, there were approximately 2,100 holders of record of the Company's common stock. The high and low sales prices reported on NASDAQ and the dividends paid per common share for each quarter 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 1994 VS. FISCAL 1993
In fiscal 1994, the Company established new sales and earnings records of $275.3 million and $11 million, respectively. Earnings before extraordinary tax credit and the cumulative effect of change in accounting principle were also a new record of $9.5 million. This is the Company's second consecutive year of record sales and earnings.
Consolidated current year net sales of $275.3 million increased 3.4% from the prior year. Current year domestic sales increased 18% from the prior year, while international sales decreased 11%. The current year domestic sales growth is attributable to a stronger overall domestic market, especially in automotive, and the Company's increased penetration into the domestic automotive market. On the international front, approximately half of the 11% current year sales decrease is attributable to foreign currency translation. The remaining foreign sales decline is attributable to a slow European economy and price pressures in the computer marketplace.
Fiscal 1994 sales performance from a business segment perspective is mixed. Current year sales of the Semiconductor Devices Segment increased 24% from the prior year, also fueled by the Company's increased penetration into a stronger domestic automotive market. Electromechanical Segment current year sales increased 6% from the prior year. A 43% sales increase of electromechanical products to the automotive market in 1994 was offset by a 14% sales decline of electromechanical products to the non-automotive markets served. This non-automotive market decline is related to international operations: 18% related to foreign currency translation and 82% related to a slow European economy. Current year sales of the Electronic Assemblies and Displays Segment declined 8% from the prior year. Approximately half of this decline is related to foreign currency translation since the majority of these products are manufactured and sold in Europe. The other half of this segment's decline is related to the slow European economy and the price pressures in the computer market as previously mentioned.
From a profit perspective, current year operating profit margins remained virtually unchanged at 6.5% of sales. The current year $1.1 million increase in operating profit is therefore the result of increased sales.
By examining the components making up operating profit (gross margin and operating expenses), it is apparent that both components as a percent of sales are virtually unchanged from the prior year. This steadiness is evident in both domestic and international operations. On the international front, gross margin and operating expenses as a percent of sales remained virtually unchanged despite slow sales and price pressures. On the domestic front, the gross margin and operating expenses as a percent of sales were maintained despite start-up costs associated with increased production levels, higher engineering demands, and changes in the market and product mix, as the Company moves more into the automotive market.
Operating profit margins from a business segment perspective were also virtually unchanged. Operating profit margins in the Electronic Assemblies and Displays Segment declined to 2.2% versus 2.7% in the prior year. This decline is the result of an 8% current year sales decline and severe price pressures.
The Semiconductor Devices Segment continues to be the Corporation's leader in sales growth, operating profit margins and return on investment. In the current year, operating profit margins reached 12.6% of sales, compared to last year's record 12.1% of sales. High factory utilization and productivity improvements are largely responsible for these strong results. This segment continues to produce at close to capacity and is currently expanding its capacity to meet future demands.
The 7.2% current year operating profit margins for the Electromechanical Segment are virtually unchanged from the prior year. This was accomplished in the face of dramatic changes in the markets this business segment serves and in geographic sales. As previously mentioned , this segment's current year sales to the automotive market increased 43%, while the non-automotive market sales declined 14%.
Other income of $1.3 million in the current year increased $.7 million from the prior year. This increase is primarily attributable to foreign currency transaction gains. The Corporation has significant activity in different currencies. Although the Corporation manages the currency risk associated with this activity, some foreign currency transaction gains and losses can be expected.
Current year interest expense of $3.9 million is down $1.5 million from last year. This is attributable to lower domestic and foreign borrowing rates and reduced overall borrowing. Borrowing rates are lower because of the overall environment and the Corporation's continually improving performance.
The ordinary effective tax rate for fiscal 1994 is 37.5%, versus 35.3% for fiscal 1993. The change in rate is primarily due to higher domestic state income taxes.
In the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." In accordance with the provisions of SFAS 109, the Company recognized tax assets principally related to the expected benefit of future tax deductions for expenses previously recorded for financial reporting purposes. The resulting $1.5 million benefit was recorded in the income statement and is reported as a cumulative effect of a change in accounting principle.
The extraordinary tax credit for fiscal 1993 and 1992 resulted from the utilization of net operating loss carryforwards, primarily from domestic operations, in accordance with the provisions of Accounting Principles Board Opinion No. 11.
FISCAL 1993 VS. FISCAL 1992
Consolidated fiscal 1993 net sales increased approximately 16% and set a new record of $266.2 million for the Corporation. The sales increase by segment was 25% for the Semiconductor Devices Segment, 16% for the Electromechanical Segment and 14% for the Electronic Assemblies and Displays Segment. By geographic areas the Corporation experienced a 25% increase domestically and a 9% increase internationally. The significant domestic increase is primarily attributable to the automotive market, although all domestic markets showed improvement over the prior year. The automotive market increase is the result of increased market penetration and greater content per vehicle. The other market increases are due to improved markets and increased market share. Foreign currency translation effects also contributed to approximately 60% of the 9% increase in international sales. International sales continue to suffer from the recession in Europe. This is especially true in the appliance and automotive markets. The computer market, however, has shown improvement even in the face of this recession.
Consolidated gross margins improved from the prior year by 2%. This can be attributed to increased volume, continued cost control and improved manufacturing execution. This margin improvement occurred in the face of price pressure, especially on the computer keyboard front.
Consolidated operating expenses increased 11% while sales improved 16%. The lower percentage increase in operating expenses is attributable to economies of scale and continued efforts at more efficient means of administration. This is evidenced by the fact that the administrative expense increase was only 7%, while the engineering expense increase was 14% and the sales expense increase was 13%. With the new business the Corporation has been awarded in fiscal 1993, increases to sales and engineering were needed to meet customers' expectations and to maintain our momentum of new product introductions. If the effects of changes from currency translation were eliminated, the consolidated operating expense increase would have been 8% not 11%.
As a result of these factors, operating profit increased to 6.3% of sales from the prior year's 2.9%. From a business segment standpoint, operating profit improved in both amount and percent of sales. The Semiconductor Devices Segment achieved an operating profit of 12.1% of sales for fiscal 1993, compared to 8.3% for the prior year. The Electronic Assemblies and Displays Segment achieved an operating profit of 2.7% of sales from a loss of 3.4%. The Electromechanical Devices Segment achieved an operating profit of 7.4% which approximated the prior year's 7.3%. The significant improvement in the Semiconductor Devices Segment operating profit is attributable to volume and improved production efficiencies. The improvement in the Electronic Assemblies and Displays Segment profitability is due to volume, cost control and improved designs.
On a geographic basis, operating profit increased both domestically and internationally in amount and as a percent of sales. On the domestic front, the Corporation achieved an operating profit of $11.7 million or 9% of sales. This represents a 110% increase from the prior year. This is primarily attributable to the significant domestic sales increase and continued emphasis on cost control and improved efficiencies.
The international operating profit was $6.8 million or 5% of sales and represents a 275% increase from the prior year. This improvement was accomplished on only a modest increase in sales and results from the continued emphasis on cost reduction and cost control programs.
Consolidated other income, net of expense, decreased $1.6 million in fiscal 1993. This results from discontinuance of the investment grant tax law in Germany, the decrease in income from customer tooling, and the increase in currency exchange losses.
Consolidated interest expense decreased 9% in fiscal 1993 as a result of declining international debt and reduced domestic interest rates.
The ordinary effective income tax rate for fiscal 1993 was 35.3%, versus an ordinary tax benefit of 27.7% in fiscal 1992. In fiscal 1992, the Corporation recognized a tax benefit when declaring a dividend from its German subsidiary as a result of a reduction in the dividend withholding rates.
The extraordinary income tax benefit in fiscal 1993 and 1992 is primarily the result of domestic net operating loss carryforward usage. The fiscal 1993 income tax benefit increase is the result of an improvement in domestic profitability.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1994, the Company continued to reduce its debt to capital ratio from 41.5% to 36.5%. This was accomplished by a $3.3 million repayment of consolidated debt and an $11 million increase in stockholders' investment from current year earnings. The debt reduction resulted from improved profitability and working capital management. From a geographic perspective, $1.3 million of the net debt reduction for fiscal 1994 occurred domestically and $2 million internationally.
Domestic operating activities were able to generate sufficient cash to fund the higher capital needs created by the 18% domestic sales increase in fiscal 1994. Despite difficult operating conditions, the foreign facilities also continued to generate sufficient cash from operations to finance their capital needs.
The Company's capital needs for the immediate future will be working capital and equipment to support growth, cost reductions and new products. In addition, more facility space is needed domestically; construction will begin in the first quarter of fiscal 1995 at both U.S. facilities.
Domestically, the Company amended its revolving credit agreement with its banks subsequent to year end. The amendments were made to increase borrowing capacity, improve interest rates and reduce collateral. The domestic credit facility was increased from $35 million to $45 million. Interest is at the prime rate or, depending upon the Company's financial performance, LIBOR plus .75% to 1.25%. The Company also implemented four separate interest rate cap agreements that protect the Company from interest rate increases above 5.5% LIBOR on $15 million of floating rate debt through November 1997 and above 6% LIBOR on $10 million of floating rate debt through March 1998. The Company also entered into three uncommitted, unsecured credit facilities totaling $35 million, which are used when rates available under them are below those available under the committed facility. With these bank lines of credit and internally generated cash, the Company should have sufficient funds to finance its domestic operations for the next several years.
Internationally, the Company's debt is primarily long-term, asset- based financing at favorable interest rates. In the next few years, significant amounts of this debt will be coming due. The Company will be evaluating the merits of refinancing some of these principal repayments on a long-term basis. At present, the $25 million of short-term, uncommitted banks lines are sufficient, together with internally generated cash, to meet these principal repayments and finance the cash needs of the international operations.
An equity offering is presently under consideration as a means to increase the Company's financial flexibility. Any decision regarding an equity offering is subject to further analysis and stock market conditions.
FUTURE ACCOUNTING CHANGES
Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits," when adopted is not expected to be material.
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, 1994 and 1993, and the related consolidated statements of earnings, cash flows and stockholders' investment for each of the three years ended the last day of February 1994. 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 acccounting 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 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, 1994 and 1993, and the results of their operations and cash flows for each of the three years ended the last day of February, 1994, in conformity with generally accepted accounting principles.
As discussed in Note B to the consolidated financial statements, effective March 1, 1993, the Company changed its method of accounting for income taxes.
Our audit was made for purposes of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in Item 14(a) 2 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state 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 & Co. --------------------- Arthur Andersen & Co.
Chicago, Illinois May 3, 1994
THE CHERRY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per 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. Investments in 50% owned affiliates are accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Investment in Affiliates The investment in a 50% owned affiliate in Japan is accounted for on the equity method. Retained earnings at February 28, 1994, includes $ 6,221 which represents the Company's share of the undistributed earnings of this unconsolidated affiliate. On February 15, 1994, the Company announced the formation of a 50-50 joint venture in India. The investment, to be made in fiscal 1995, will be accounted for on the equity method.
Cash and Equivalents Cash and equivalents consist of cash and highly liquid securities with 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 34% of the Company's inventories as of the last day of February 1994 and 1993, 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. Accelerated methods have been used for tax purposes when appropriate. 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 Effective March 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." Provision is made for the income tax effects of all transactions in the consolidated statements of earnings to the extent required.
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 Japanese affiliate will continue to be invested indefinitely. Federal income taxes on distribution of these earnings, if any, would not be significant.
Currency Translation Foreign entity financial statements are translated to U.S. dollars in accordance with SFAS No. 52 "Foreign 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' Investment, net of interperiod tax allocations. The Company selectively enters into forward contracts in its management of foreign currency transaction exposures. Gains or losses on forward contracts designated to hedge a foreign currency transaction are included in the measurement of income. At February 28, 1994, the Company had no forward contracts outstanding.
Earnings Per Share Earnings per share is computed based on the average number of shares of common stock outstanding during each year. Stock options are not dilutive and therefore were excluded from the computation of earnings per share.
Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation.
NOTE B: INCOME TAXES
Effective March 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which requires the use of the liability method of accounting for deferred income taxes. As of March 1, 1993, the cumulative effect of the change was a deferred tax benefit of $1,542, or $.33 per share, related primarily to recognition of the benefit of net operating loss carryforwards. The results presented for 1993 and 1992 are prepared under Accounting Principles Board Opinion No. 11, using the deferred method.
Reconciliations of the differences between income taxes computed at federal statutory tax rates and the consolidated provisions for income taxes are as follows:
The income tax provision (benefit) for the years ended the last day of February 1993 and 1992 represent the charge (benefit) for income taxes that would have been required had the Company not been able to utilize operating loss carryforwards. The tax benefits of $2,539 and $891 for 1993 and 1992, respectively, resulting from utilizing loss carryforwards, are presented as extraordinary items.
At February 28, 1994, the Company has pre-merger U.S. NOL carryforwards of $2,142 which expire in 1999 and 2000. The Company also has foreign tax credit carryforwards of $1,250 which expire in the years 1995 to 1998, and are available to reduce future taxes.
In fiscal 1993, the Company's German subsidiary declared a stock dividend of $19,760 which resulted in a tax benefit from refundable taxes of $6,372 from the German government partially offset by withholding taxes of $1,087. In fiscal 1992, the Company realized a book benefit of $1,976 as a result of the reduction in the Treaty withholding tax rate. Also in 1992, the Company realized a German tax benefit of $1,208 from net operating loss carrybacks to 1991.
The net current and noncurrent components of deferred income taxes recognized in the balance sheet at February 28, 1994 follows:
The amounts above include a valuation allowance of $2,253 relating primarily to noncurrent tax assets for net operating loss and foreign tax credit carryforwards due to the uncertainty of realizing the benefit of the carryforwards. The net change in the valuation allowance for deferred tax assets was a decrease of $324 which relates primarily to benefits arising from the use of foreign tax credit carryforwards.
The tax effects of the significant temporary differences which comprise the deferred tax liabilities and assets at February 28, 1994, follows:
NOTE C: SUPPLEMENTARY INCOME STATEMENT INFORMATION
- - --------------------------------------------------------------------------- NOTE D: INVENTORIES
- - --------------------------------------------------------------------------- NOTE E: DEBT
The following payments, exclusive of capitalized lease payments, are required during the next five fiscal years: 1995 - $ 3,694; 1996 - $ 11,151; 1997 - $ 24,387; 1998 - $ 1,424; 1999 - $ 1,424.
Terms of the German long-term debt agreements contain certain provisions restricting payment of dividends to the parent. Included in retained earnings are $29,022 of undistributed earnings of the German subsidiaries.
Subsequent to year end, the Company amended its domestic credit facility and increased the borrowing limit from $35 million to $45 million. The facility is secured by domestic accounts receivable and inventory; however, borrowings are not dependent upon the level of collateral. The interest rate on this amended agreement is the prime rate or, depending upon the Company's financial performance, LIBOR plus .75% to 1.25%. The commitment fee is also dependent upon the Company's financial performance and ranges from 1/5 of 1% to 3/10 of 1% on the unused portion. The facility has an initial maturity of March 31, 1997, but may be extended for an additional year on both the first and second anniversary dates upon mutual agreement of the Company and the banks.
The covenants for this amended credit facility pertain to consolidated and domestic net worth levels, consolidated and domestic debt to capital ratios, domestic cash flow coverage and domestic cash flow to debt levels, among others. Additionally, this facility limits the Company's domestic borrowings to $45 million. The Company was in compliance with all covenants under all credit agreements at February 28, 1994.
During the current fiscal year, the Company entered into three uncommitted, unsecured credit facilities totaling $35 million. These facilities are utilized when the borrowing rates available under them are below those available under the committed facility. Borrowings under these facilities, which by their terms are due within one year, have been classified as long-term. These obligations are supported by unused commitments under the domestic credit facility, and it is the Company's intent to maintain them as long-term.
The Company is party to four separate interest rate cap agreements. Under two agreements, the Company is protected against interest rate increases above 5.5% LIBOR on $15 million of floating rate debt through November 1997. Under the other agreement, the Company is protected against interest rate increases above 6.0% LIBOR on $10 million of floating rate debt through March 1998. The aggregate cost of these four agreements was $600.
As of February 28, 1994, the Company had unused lines of credit available for working capital of approximately $13.2 million for U.S. operations and $19.2 million for foreign operations.
The fair value of the Company's long-term debt, excluding capital leases, at February 28, 1994, was estimated to be $43.8 million. This estimate is based on the current rates available to the Company for debt of the same remaining maturities, using the discounted cash flow method. - - --------------------------------------------------------------------------
NOTE F: LEASES
The Company leases land, automobiles, machinery and equipment under non- cancellable operating leases which expire over the next twenty-six years. Renewal and escalation clauses are not significant.
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 $7,419 and $7,662 less accumulated amortization of $3,244 and $2,289 as of the last day of February 1994 and 1993, respectively.
Future minimum lease payments under capitalized and long-term non- cancellable operating leases are as follows:
- - --------------------------------------------------------------------------- NOTE G: 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 H: EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Company's existing incentive stock option plan was established in June 1982 by stockholder approval and reserved 225,000 shares for distribution. Under United States tax law, this plan's capability to grant new incentive stock options has expired. As a result, this plan may grant only non- qualified stock options after June 1992. Prior to the expiration of the incentive option granting capability, 28,700 options were granted at $15.00 in fiscal 1993. As of February 28, 1994, 65,613 shares are available for grant.
The following table summarizes the transactions pursuant to the Company's stock option plan for the three-year period ended February 28, 1994:
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, 7,680, 18,718 and 12,027 shares were issued at $19.95, $5.46 and $5.46 per share during fiscal 1994, 1993 and 1992, respectively. At February 28, 1994, 124,630 shares are available for issuance under the plan.
Bonus, Profit Sharing and Retirement Plans
The Company and its operating entities have various bonus, 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 plans cover substantially all employees for an operating entity. Domestically, the profit sharing plan is qualified under Section 401(k) of the Internal Revenue Code. It allows for employee contributions and employer contributions. For foreign operations, the profit sharing plans provide for the payment of a defined percent of wages. 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 1994, 1993 and 1992, the expenses for these plans were $3,654, $2,717 and $1,712, respectively.
Future Accounting Changes
Statement of Financial Accounting Standards (SFAS) No. 112 "Employers' Accounting for Postemployment Benefits," when adopted is not expected to be material.
- - ---------------------------------------------------------------------------
NOTE I: SEGMENT INFORMATION
Business Segment Information
The Company manufactures and distributes a wide range of industrial component parts.
Identifiable assets report only the assets used in the operation of that business segment. All other assets are shown separately as corporate assets. Corporate assets include cash, other current and noncurrent assets and the Company's investment in the unconsolidated affiliate.
The principal segments are:
Electromechanical Devices:
Snap-action, selector and automobile special use switches principally for use in automobiles, home appliances, office and industrial equipment, and vending machines.
Electronic Assemblies and Displays:
Keyboards, keyboard switches, gas discharge displays, and automotive electronics for use in a variety of products, including data entry terminals, automobiles, industrial and commercial control devices, business machines and amusement products.
Semiconductor Devices:
Principally linear integrated circuits for use in automotive, computer and industrial control equipment.
Geographic Area Information
Intercompany sales between geographic areas are made at prices approximating market and are eliminated from total net sales. No single customer accounts for more than 10% of net sales. The Company's international operations are conducted principally in Western Europe through wholly owned subsidiaries and in Hong Kong and Australia through sales offices.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Identification and information as to Directors is incorporated by reference to the information under the caption "Election of Directors" in the Company's Proxy Statement for its 1994 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 1994 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" in the Company's Proxy Statement for its 1994 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 1994 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
V. Land, Buildings and Equipment S-2 VI. Accumulated Depreciation and Amortization of Buildings and Equipment S-3 VIII. Valuation and Qualifying Accounts S-4 IX. Short-term Bank Borrowings S-5
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 affiliate, accounted for by the equity method, have been omitted because the affiliate does not constitute a significant subsidiary.
(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 1994.
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, President Treasurer, Secretary and and Director Corporate Controller
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 Peter A. Guglielmi By Charles W. Denny -------------------------------- ------------------------------- Peter A. Guglielmi Charles W. Denny Director Director
Dated May 20, 1994 -------------------------
S-1
S-2
S-3
S-4
THE CHERRY CORPORATION INDEX TO EXHIBITS
3. a. Certificate of Incorporation as amended and restated (1).
b. By-laws (1).
4. a. Second Amended and Restated Credit Agreement as of May 9, 1994 among The Cherry Corporation, Continental Bank N.A., Harris Trust and Savings Bank and Harris Trust and Savings Bank as agent, filed as Exhibit 4.a. to Form 8-K dated May 18, 1994 and is incorporated herein by reference.
b. Other instruments defining the rights of holders of other long- term 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, 1994. 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. (2)
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. (2)
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. (2)
d. Executive agreement dated May 26, 1992, between Cherry Semiconductor Corporation and Alfred S. Budnick. filed at Exhibit 4d to 1993 Form 10-K is incorporated herein by reference. (2)
11. Statement of Computation of earnings per share. (3)
21. Table of Subsidiaries of the Registrant. (3)
23. Consent of independent public accountants. (3)
(1) Included respectively as exhibits 3(b) and 3(c) to Form S-1 (Second Amendment File No. 2-62065) filed in August, 1978 and is incorporated herein by reference. (2) 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. (3) Filed herewith.
THE CHERRY CORPORATION Exhibit 21 SUBSIDIARIES OF THE REGISTRANT
STATE OR COUNTRY NAME OF SUBSIDIARY/DIVISION(1) OF ORGANIZATION - - --------------------------------- ---------------------- Cherry Electrical Products Waukegan, Illinois State of Delaware
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
Plastech GmbH Bayreuth, Germany Federal Republic of Germany
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
Cherry Systems Corporation Waukegan, Illinois State of Texas
(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 Statement, File Nos. 2-93004 and 2-68204.
Arthur Andersen & Co. --------------------- Arthur Andersen & Co.
Chicago, Illinois May 20, 1994