SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission file number: 333-82713
CHEROKEE INTERNATIONAL, LLC
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0696451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2841 DOW AVENUE
TUSTIN, CALIFORNIA 92780
(Address of principal executive offices)
(714) 544-6665
(Registrant's telephone number, including area code)
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
CHEROKEE INTERNATIONAL, LLC
TABLE OF CONTENTS
PAGE
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets--
June 30, 2000 and December 31, 1999. . . . . . . . . . . . . . 3
Consolidated Statements of Income--
For the Three and Six Months Ended June 30, 2000 and 1999 . . . 4
Consolidated Statements of Cash Flows--
For the Six Months Ended June 30, 2000 and 1999. . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 10
PART II--OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 11
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
------------- -------------
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 769,707 $ 7,968,576
Accounts receivable, net of allowance for doubtful accounts
of $250,000 and $175,000 as of June 30, 2000 and December 31,
1999, respectively........................................... 29,030,507 14,108,596
Inventories, net ............................................... 34,790,646 18,911,652
Prepaid expenses and other current assets ...................... 647,421 50,475
------------- -------------
Total current assets ........................................ 65,238,281 41,039,299
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $7,732,610 and $6,374,122 as of
June 30, 2000 and December 31, 1999, respectively ........... 14,838,611 8,761,516
DEPOSITS ....................................................... 246,429 274,697
DEFERRED FINANCING COSTS, net of accumulated amortization
of $1,024,782 and $555,919 as of June 30, 2000 and
December 31, 1999, respectively ............................. 4,678,625 4,800,504
GOODWILL, net of accumulated amortization of $117,000........... 41,834,000 0
------------- -------------
$ 126,835,946 $ 54,876,016
============= =============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................... $ 18,954,548 $ 5,468,043
Accrued liabilities ............................................ 6,926,318 1,085,686
Accrued compensation and benefits .............................. 6,890,364 2,211,193
Accrued interest payable ....................................... 2,503,533 2,406,054
Accrued distribution payable ................................... 3,196,000 1,730,000
Current portion of long-term debt .............................. 11,615,034 4,545,004
Current portion of capital lease obligations ................... 746,282 835,947
------------- -------------
Total current liabilities ................................... 50,832,079 18,281,927
LONG-TERM DEBT, net of current portion ......................... 145,461,666 141,458,228
CAPITAL LEASE OBLIGATIONS, net of current portion .............. 2,434,449 2,811,367
MEMBERS' EQUITY (DEFICIT)
Class A units: 347,671 and 300,000 units issued and
outstanding in 2000 and 1999, respectively .................. 354,371 14,000
Class B units: 35,950,264 and 30,002,000 units issued and
outstanding in 2000 and 1999, respectively .................. 36,553,627 2,594,000
Paid-in capital ................................................ 5,330,000 5,330,000
Retained Earnings (Deficit) ................................... (114,130,246) (115,613,506)
------------- -------------
Total members' equity (deficit) ............................. (71,892,248) (107,675,506)
------------- -------------
$ 126,835,946 $ 54,876,016
============= =============
See notes to consolidated financial statements.
3
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
------------ ------------ ------------ ------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET SALES ...................................... $ 28,664,226 $ 31,685,305 $ 54,095,589 $ 66,496,348
COST OF SALES .................................. 18,495,011 19,842,554 35,127,762 41,499,182
------------ ------------ ------------ ------------
GROSS PROFIT ................................... 10,169,215 11,842,751 18,967,827 24,997,166
OPERATING EXPENSES:
Engineering and development .................... 1,232,232 1,116,534 2,369,853 2,061,629
Selling and marketing .......................... 794,308 700,933 1,409,784 1,294,107
General and administrative ..................... 1,595,641 1,019,846 2,623,765 1,883,029
Special bonus distribution ..................... 0 5,330,000 0 5,330,000
------------ ------------ ------------ ------------
Total operating expenses .................... 3,622,181 8,167,313 6,403,402 10,568,765
------------ ------------ ------------ ------------
OPERATING INCOME ............................... 6,547,034 3,675,438 12,564,425 14,428,401
OTHER INCOME (EXPENSE):
Interest expense ............................... (4,073,838) (2,732,523) (7,994,941) (2,775,613)
Other income (expense) ......................... 67,515 (666,771) 109,776 (654,375)
------------ ------------ ------------ ------------
Total other (expense) income ................. (4,006,323) (3,399,294) (7,885,165) (3,429,988)
------------ ------------ ------------ ------------
NET INCOME ..................................... $ 2,540,711 $ 276,144 $ 4,679,260 $ 10,998,413
============ ============ ============ ============
NET INCOME PER UNIT:
Basic ........................................ $ 0.08 $ 0.01 $ 0.15 $ 0.37
============ ============ ============ ============
Diluted ...................................... $ 0.08 $ 0.01 $ 0.15 $ 0.37
============ ============ ============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING:
Basic ........................................ 31,606,075 30,000,000 30,954,037 30,000,000
============ ============ ============ ============
Diluted ...................................... 31,951,211 30,000,000 31,209,895 30,000,000
============ ============ ============ ============
See notes to consolidated financial statements
4
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
------------- -------------
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 4,679,260 $ 10,998,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................ 1,475,488 1,123,523
Amortization of deferred financing costs ..................... 468,863 163,310
Net change in operating assets and liabilities:
Accounts receivable, net .................................. (3,119,911) (2,827,681)
Inventories, net .......................................... 630,006 (4,094,809)
Prepaid expenses and other current assets ................. (307,946) (80,492)
Deposits .................................................. (20,508) (53,669)
Accounts payable .......................................... (562,495) (1,941,993)
Accrued liabilities ....................................... 1,494,632 221,276
Accrued compensation and benefits ......................... (946,829) (527,060)
Accrued interest payable .................................. 97,479 1,904,700
------------- -------------
Net cash provided by operating activities .............. 3,888,039 4,885,518
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .......................... (825,583) (482,570)
Investment in ITS, net of cash acquired ...................... (51,355,224) 0
------------- -------------
Net cash used in investing activities ............... (52,180,807) (482,570)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit ....................... 5,000,000 4,579,003
Payments on revolving line of credit and term loan ........... (2,477,974) (2,579,003)
Payments on obligations under capital leases ................. (466,583) (648,737)
Borrowings on long-term debt ................................. 8,000,000 150,000,000
Payments on long-term debt ................................... (1,184,558) (502,934)
Deferred financing costs ..................................... (346,984) (4,878,345)
Proceeds from sale of units .................................. 34,299,998 0
Capital contribution to fund special bonus distribution ...... 0 5,330,000
Equity distribution .......................................... (1,730,000) (157,140,000)
------------- -------------
Net cash provided by (used in) financing activities .. 41,093,899 (5,840,016)
------------- -------------
NET DECREASE IN CASH ......................................... (7,198,869) (1,437,068)
CASH AND CASH EQUIVALENTS, beginning of period ............... 7,968,576 2,784,828
------------- -------------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 769,707 $ 1,347,760
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,428,599 $ 870,913
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
During the six months ended June 30, 1999, the company financed the purchase of
$2,310,314 of fixed assets through a capital equipment lease.
As of June 30, 2000, the Company had accrued equity distributions payable of
$3,196,000.
On June 15, 2000, the Company acquired Industrial and Telecommunication
Systems and related entities ("ITS") for approximately $43.2 million in cash,
plus $1.0 million in acquisition costs, and paid off $9.7 million of ITS's
debt. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of tangible assets acquired ............. $ 37,186,000
Fair value of goodwill ............................. 41,952,000
Cash paid for ITS's stock .......................... (43,150,000)
Repayment of certain assumed debt at closing ....... (9,722,000)
------------
Liabilities assumed ................................ $ 26,266,000
============
See notes to consolidated financial statements.
5
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
1. Basis of Presentation
The information set forth in the accompanying consolidated financial
statements is unaudited and may be subject to normal year-end
adjustments. In the opinion of management, the unaudited financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position,
results of operations and cash flows of Cherokee International, LLC
(the "Company") for the periods indicated.
Results of operations for the interim three and six months ended June 30,
2000 and 1999 are not necessarily indicative of the results of operations
for the full fiscal year. The Company's second quarter represented the
13-week period ended on July 2 in 2000 and July 4 in 1999. For
presentation purposes, these fiscal quarters have been referred to as
June 30.
The consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiaries. One such subsidiary,
Cherokee International Finance, Inc., was formed in April 1999 as a
wholly-owned finance subsidiary to act as a co-obligor of the 10 1/2%
Senior Subordinated Notes and has no independent assets or operations.
All material intercompany accounts and transactions have been eliminated.
Certain information normally included in footnote disclosure to the
financial statements has been condensed or omitted in accordance with
the rules and regulations of the Securities and Exchange Commission, and
do not include all the information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America. These
unaudited consolidated financial statements should be read in
conjunction with the other disclosures contained herein and with the
Company's audited consolidated financial statements and notes thereto
contained in the Company's Form 10-K for the year ended December 31,
1999.
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from these estimates.
2. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventory costs include the cost of material, labor and
manufacturing overhead and consist of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Raw Material $ 22,159,745 $ 16,630,304
Work-in-process 10,269,680 2,699,689
Finished goods 3,657,531 577,969
Reserve for obsolescence (1,296,310) (996,310)
------------- -----------------
$ 34,790,646 $ 18,911,652
============= =================
3. Income Taxes
The Company is taxed as a limited liability company under the
provisions of the United States federal and state tax codes. Under
United States federal law, taxes based on income of a limited liability
company are payable by the Company's members individually. Accordingly,
no provision for United States federal income taxes or for California
franchise taxes has been provided in the accompanying financial
statements.
6
4. Long-term debt
In June 2000, the Company amended its credit agreement to provide for
additional term loan borrowings of $8 million, the proceeds of which
were used to finance a portion of the purchase price of an acquisition
(see Note 7).
5. Comprehensive Income
Comprehensive income is defined as all changes in a company's net assets
except changes resulting from transactions with shareholders. It differs
from net income in that certain items currently recorded through equity
are included in comprehensive income. The Company's net income was the
same as comprehensive income for all periods presented.
6. Income Per Unit
The following table sets forth the computation of basic and diluted
income per unit:
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
Net Income...................................... $ 2,540,711 $ 276,144 $ 4,679,260 $ 10,998,413
============= ============= ============= =============
Units:
Weighted-average units outstanding - basic...... 31,606,075 30,000,000 30,954,037 30,000,000
Effect of dilutive options...................... 345,136 0 255,858 0
------------- ------------- ------------- -------------
Weighted-average units outstanding - diluted.... 31,951,211 30,000,000 31,209,895 30,000,000
============= ============= ============= =============
Net income per unit:
Basic........................................... $ 0.08 $ 0.01 $ 0.15 $ 0.37
============= ============= ============= =============
Diluted......................................... $ 0.08 $ 0.01 $ 0.15 $ 0.37
============= ============= ============= =============
7. Acquisition
On June 15, 2000, the Company completed its acquisition of
Industrial and Telecommunication Systems and related entities ("ITS"), one
of Europe's leading designers and manufacturers of custom power supplies
for OEM's primarily in the telecommunications industry. The Company paid
approximately $43 million in cash, acquired net assets (excluding debt)
at fair value of approximately $13 million, assumed debt of approximately
$12 million, of which approximately $10 million was repaid at closing, and
incurred transaction costs of approximately $1 million. The company
recorded goodwill of approximately $42 million in the transaction, which
is being amortized over 15 years.
The acquisition, including the repayment of certain assumed debt
at closing, was financed with approximately $34 million of cash proceeds
from the issuance and sale of new members' equity units, approximately
$13 million of borrowings under the Company's existing bank credit
agreement, as amended, and utilization of available cash.
The Company's unaudited pro forma net sales, net income, and diluted
income per share as if the acquisition of ITS had occurred as of the
beginning of the six months ended June 30, 2000 and 1999, are as follows:
Six Months Ended
June 30,
-------------------------------
Dollars in millions, except per share amounts 2000 1999
--------------------------------------------------------------------------------
Net sales $ 78,891,000 $ 91,131,000
==============================
Net income $ 4,577,000 $ 5,232,000
==============================
Diluted income per share $ 0.12 $ 0.15
==============================
The pro forma operating results above include the results of
operations for ITS for the six months ended June 30, 2000 and 1999 with
goodwill amortization along with other relevant adjustments to reflect
fair value of the acquired assets. Additionally, the pro forma operating
results include pro forma interest expense on the assumed acquisition
borrowings and pro forma issuance of the Company's membership units
reflected in the weighted average number of units outstanding for the
computations of pro forma diluted income per share.
The results of operations reflected in the pro forma information
above are not necessarily indicative of the results which would have been
reported if the acquisition had been effected at the beginning of the
respective six month periods.
The amounts recorded for the ITS acquisition, which has been
accounted for as a purchase for financial reporting purposes, are subject
to change after final valuation information is obtained.
8. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which the Company is required to adopt effective in its fiscal year
2001. SFAS No. 133 will require the Company to record all derivatives
on the balance sheet at fair value. The Company has not completed its
evaluation of the effect of adopting SFAS No. 133.
In December 1999, the Securities and Exchange Committee issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101
summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues
in financial statements. Implementation of SAB 101, which was delayed
by the issuance of SAB 101A on March 27, 2000 and SAB 101B on June 26,
2000, is required by the fourth quarter of 2000. The Company is
currently in the process of evaluating the impact, if any, SAB 101 will
have on its consolidated financial position or results of operations.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
Cherokee is a leading designer and manufacturer of a broad range of
switch mode power supplies for original equipment manufacturers (OEM's)primarily
in the high growth telecommunications, networking and high-end workstation
industries. The Company produces its products and related components in
sophisticated manufacturing facilities located in Tustin and Irvine, California;
Guadalajara, Mexico; Bombay, India; and its recently acquired operation in
Wavre, Belgium.
The Company's net sales are principally driven by growth in its
customers' industries, including the telecommunications, networking and
high-end workstation segments, which are benefiting from the proliferation of
internet/intranet, wireless and other communications.
The principal elements comprising cost of sales are raw materials,
labor and manufacturing overhead. During 2000 and 1999, raw materials accounted
for a large majority of cost of sales. Raw materials include magnetic
subassemblies, sheet metal, electronic and other components, mechanical parts
and electrical wires. Labor costs include employee costs of salaried and hourly
employees. Manufacturing overhead includes lease costs, depreciation on
property, plant and equipment, utilities, property taxes and repairs and
maintenance.
Operating expenses include engineering costs, selling and marketing
costs and administrative expenses. Engineering costs primarily include salaries
and benefits of engineering personnel, safety approval and quality certification
fees, depreciation on equipment and subcontract costs for third party
contracting services. Selling and marketing expenses primarily include salaries
and benefits to account managers and commissions to independent sales
representatives. Administrative expenses primarily include salaries and benefits
for certain management and administrative personnel, professional fees and
information system costs.
On June 15, 2000, the Company acquired Industrial and Telecommunication
Systems and related entities ("ITS") for approximately $55 million, including
assumption of debt. ITS, based in Belgium, is one of Europe's leading designers
and manufacturers of custom power supplies for OEM's primarily in the
telecommunications industry. The acquisition was accounted for using the
purchase method of accounting, and the fair market value of ITS's assets and
liabilities has been included in the Company's balance sheet as of June 30,
2000. For the three and six month periods ended June 30, 2000, the Company's
statements of income are consolidated to include ITS's operations from June 16
to June 30, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1999
NET SALES
Net sales decreased by approximately 9.5% or $3.0 million to $28.7
million for the three months ended June 30, 2000 from last year's $31.7 million
for the three months ended June 30, 1999.
The lower sales were primarily attributable to decreased demand from
certain major customers in the current year's second quarter compared to
relatively stronger demand from those same customers in the prior year's
second quarter. A decline in sales to IBM, the Company's largest customer,
accounted for the majority of the total sales decrease from last year.
GROSS PROFIT
Gross profit decreased by approximately 14.1% to $10.2 million for
the three months ended June 30, 2000 from $11.8 million for the three months
ended June 30, 1999. Gross margin for the quarter decreased to 35.5% from
37.4% in the prior year.
The decrease in gross profit was primarily due to the decrease in
sales. The decrease in gross margin compared to the prior year was primarily
due to an increase in factory overhead expenses as a percentage of net sales due
to having certain fixed manufacturing resources in place to support higher sales
levels commensurate with those achieved in the prior year.
OPERATING EXPENSES
Operating expenses in last year's second quarter included a $5.3
million special bonus distribution. Excluding the effect of the special bonus
distribution in the prior year, operating expenses for the three months ended
June 30, 2000 increased by approximately 27.7% to $3.6 million from $2.8
million for the three months ended June 30, 1999. As a percentage of sales,
operating expenses increased to 12.6% from 9.0% in the second quarter of the
prior year, before the special bonus distribution.
The increase in operating expenses, as expressed in dollars as well as a
percentage of net sales, was primarily attributable to having the resources in
place to support sales levels commensurate with those achieved in the prior
year.
8
OPERATING INCOME
Operating income increased by approximately 78.1% to $6.5 million
for the three months ended June 30, 2000 from $3.7 million for the three
months ended June 30, 1999. Excluding the effect of the special bonus
distribution in the prior year, operating income decreased by approximately
27.3% or $2.5 million. Operating margin, before the effect of last year's
special bonus distribution, decreased to 22.8% for the current quarter from
28.4% in the prior year.
The decrease in operating income was primarily due to the decrease
in gross profit, along with higher operating expenses. The decrease in
operating margin was primarily attributable to the decrease in gross margin
combined with higher operating expenses as a percentage of sales discussed
above.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2000 was
$4.1 million compared to $2.7 million for the three months ended June 30, 1999.
This increase was primarily due to the issuance of $100 million of 10 1/2%
senior subordinated notes and a new $50 million term loan, all of which occurred
on April 30, 1999, resulting in two months of interest expense reflected in the
prior year's quarter.
NET INCOME
Net income increased to $2.5 million for the three months ended June
30, 2000 from approximately $276,000 for the three months ended June 30,
1999. Excluding the effect of the special bonus distribution in the prior
year, net income decreased by approximately 54.7% or $3.1 million. Net income
margin for the current quarter was 8.9% compared to 17.7% in the prior
period, before the special bonus distribution.
The decreases in net income and net income margin were primarily due to
the lower sales, higher operating expenses, and higher interest expense
discussed above.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999
NET SALES
Net sales decreased by approximately 18.6% or $12.4 million to $54.1
million for the six months ended June 30, 2000 from last year's $66.5 million
for the six months ended June 30, 1999.
The lower sales were primarily attributable to decreased demand from
certain major customers in the current year's six month period compared to
particularly strong demand from those same customers in the prior year. A
decline in sales to IBM, the Company's largest customer, accounted for the
majority of the total sales decrease from last year's six-month period.
GROSS PROFIT
Gross profit decreased by approximately 24.1% or $6.0 million to
$19.0 million for the six months ended June 30, 2000 from $25.0 million for
the six months ended June 30, 1999. Gross margin for the six months ended
June 30, 2000 decreased to 35.1% from 37.6% in the prior year.
The decrease in gross profit was primarily due to the decrease in
sales. The decrease in gross margin compared to the prior year was primarily
due to an increase in factory overhead expenses as a percentage of net sales
due to having certain fixed manufacturing resources in place to support
higher sales levels commensurate with those achieved in the prior year.
9
OPERATING EXPENSES
Operating expenses in last year's six-month period included a $5.3
million special bonus distribution. Excluding the effect of this special bonus
distribution in the prior year, operating expenses increased by approximately
22.2% or $1.2 million to $6.4 million for the six months ended June 30, 2000
from $5.2 million for the six months ended June 30, 1999. As a percentage of
sales, operating expenses increased to 11.8% from 7.9% in the prior year.
The increase in operating expenses, as expressed in dollars as well as a
percentage of net sales, was primarily attributable to having the resources in
place to support sales levels commensurate with those achieved in the prior
year.
OPERATING INCOME
Operating income decreased by approximately 12.9% to $12.6 million
for the six months ended June 30, 2000 from $14.4 million for the six months
ended June 30, 1999. Excluding the effect of the special bonus distribution
in the prior year, operating income decreased by approximately 36.4% or $7.2
million. Operating margin decreased to 23.2% for the current year from 29.7%
in the prior year, before the special bonus distribution.
The decrease in operating income was primarily due to the decrease in
gross profit, along with by higher operating expenses. The decrease in operating
margin was primarily attributable to the decrease in gross margin combined with
higher operating expenses as a percentage of sales discussed above.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 2000 was $8.0
million compared to $2.8 million for the six months ended June 30, 1999. This
substantial increase was primarily due to the issuance of $100 million of 10
1/2% senior subordinated notes and a new $50 million term loan, all of which
occurred on April 30, 1999, resulting in only two months of interest expense
reflected in the prior year's period.
NET INCOME
Net income decreased to $4.7 million for the six months ended June
30, 2000 from $11.0 million for the six months ended June 30, 1999. Excluding
the effect of the special bonus distribution last year, net income decreased
71.3% or $11.6 million. Net income margin for the current year was 8.6%
compared to 24.6% in the prior period, before the special bonus distribution.
The decreases in net income and net income margin were primarily due
to the lower sales, higher operating expenses, and substantially higher
interest expense discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Net cash provided by operating activities was $3.9 million for the
six months ended June 30, 2000 compared to $4.9 million for the six months
ended June 30, 1999. Cash provided by operating activities for 2000 reflects
net income of $4.7 million and a $1.5 million increase in accrued
liabilities, offset by an increase of $3.1 million in accounts receivable.
Cash provided by operating activities for 1999 reflects net income of $11.0
million and a $1.9 million increase in accrued interest payable, offset by
increases of $2.8 million in accounts receivable and $4.1 million in
inventory. Net income for 1999 includes the negative cash flow effect of a
$5.3 million special bonus distribution, which was funded by capital
contributions from the existing members.
Net cash used in investing activities for the six months ended June
30, 2000 primarily consists of $51.4 million for the purchase of ITS, net of
acquired cash.
Net cash provided by financing activities of $41.1 million for the
six months ended June 30, 2000 primarily reflects proceeds from bank
borrowings aggregating $13.0 million and $34.3 million from the sale of
units, which was used to finance the purchase of ITS.
Net cash used in financing activities was $5.8 million for the six
months ended June 30, 1999. Equity distributions of $157.1 million and
deferred financing costs of $4.9 million were partially offset by proceeds
from borrowings aggregating $154.6 million and capital contributions of $5.3
million.
LIQUIDITY
Historically, the Company has financed its operations with cash from
operations supplemented by borrowings from credit facilities. As a result of
certain transactions in 1999, the Company's current and future liquidity
needs primarily arise from debt service on indebtedness, working capital
requirements, capital expenditures and distributions to pay taxes. In
connection with the acquisition of ITS in June 2000, the Company sold equity
units for $34.3 million in cash proceeds, borrowed $13.0 million under its
credit agreement, as amended, and utilized available cash to finance the
purchase price and the repayment of certain assumed debt at closing of the
transaction.
As of June 30, 2000, the Company's borrowings consisted of $100 million
of senior subordinated notes, $52.2 million of term loan borrowings under its
credit facility, $3.2 million under capital leases, and $1.7 million of debt
assumed in connection with the ITS acquisition. The Company had $3.1 million
of borrowings outstanding under its $25 million revolving credit facility.
The Company is not subject to any amortization requirements under the notes
prior to maturity in 2009, but it is required to make scheduled repayments
under the term loan facility.
Management believes that cash flow from operations and available borrowing
capacity will be adequate to meet the Company's anticipated cash requirements,
including operating requirements, planned capital expenditures, debt service and
distributions to pay taxes, for the next twelve months.
The Company's historical capital expenditures have substantially resulted
from investments in equipment to increase manufacturing capacity and improve
manufacturing efficiencies. For fiscal 2000, the Company expects capital
expenditures to be between $4-5 million.
FORWARD-LOOKING STATEMENTS
Statements in this report containing the words "believes,"
"anticipates,", "expects," and words of similar meaning, and any other
statements which may be construed as a prediction of future performance or
events, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance, or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, (1) restrictions imposed by the
Company's substantial leverage and restrictive covenants in its debt agreements,
(2) reductions in sales to any of the Company's significant customers or in
customer capacity generally, (3) changes in the Company's sales mix to lower
margin products, (4) increased competition, (5) disruptions of the Company's
established supply channels, and (6) the additional risk factors identified in
the Company's Registration Statement on Form S-4 (No. 333-82713) and those
described from time to time in the Company's other filings with the SEC, press
releases and other communications. The Company disclaims any obligations to
update any such factors or to announce publicly the result of any revisions to
any of the forward-looking statements contained or incorporated by reference
herein to reflect future events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from
changes in short-term interest rates. The Company does not have significant
foreign exchange or other market risk. The Company did not have any
derivative financial instruments at June 30, 2000.
The Company's exposure to market risk for changes in interest rates
relates primarily to its current credit facility. In accordance with the
credit facility, the Company enters into variable rate debt obligations to
support general corporate purposes, including capital expenditures and
working capital needs. The Company continuously evaluates its level of
variable rate debt with respect to total debt and other factors, including
assessment of the current and future economic environment.
The Company had approximately $52.2 million and $46.0 million in
variable rate debt outstanding at June 30, 2000 and December 31, 1999,
respectively. Based upon these variable rate debt levels, a hypothetical 10%
adverse change in interest rates would increase interest expense by
approximately $0.5 million on an annual basis, and likewise decrease our
earnings and cash flows. The Company cannot predict market fluctuations in
interest rates and their impact on its variable rate debt, nor can there be
any assurance that fixed rate long-term debt will be available to the Company
at favorable rates, if at all. Consequently, future results may differ
materially from the estimated adverse changes discussed above.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to disputes and potential claims by third
parties that are incidental to the conduct of its business. The Company does
not believe that the outcome of any such matters, pending at June 30, 2000,
will have a material adverse effect on its financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2.1** Stock Purchase Agreement, dated as of May 24, 2000, between
Cherokee International, LLC, and Panta Electronics B.V.
3.1* Second Amended and Restated Operating Agreement of Cherokee
International, LLC, dated as of April 30, 1999.
3.2* Amendment No. 1 to the Second Amended and Restated Operating
Agreement of Cherokee International, LLC, dated as of
June 28, 1999.
3.3* Amendment No. 2 to the Second Amended and Restated Operating
Agreement of Cherokee International, LLC, dated as of
June 28, 1999.
3.4 Amendment No. 3 to the Second Amended and Restated Operating
Agreement of Cherokee International, LLC, dated as of
June 12, 2000.
3.5 Amendment No. 4 to the Second Amended and Restated Operating
Agreement of Cherokee International, LLC, dated as of
June 14, 2000.
10.1 Consent, Waiver and First Amendment to Credit Agreement,
dated as of June 15, 2000, by and between Cherokee
International, LLC, Heller Financial, Inc., and the Lenders
signatory thereto.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
On June 30, 2000, the Company filed a Current Report on Form 8-K,
announcing under Item 2 the acquisition of Industrial and
Telecommunication Systems and related entities ("ITS").
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* Incorporated by reference to designated exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-82713).
** Incorporated by reference to designated exhibit to the Company's Current
Report on Form 8-K, dated June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Cherokee International, LLC
Date: August 21, 2000 /s/ R. Van Ness Holland, Jr.
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R. Van Ness Holland, Jr.
Chief Financial Officer
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