SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) JUNE 15, 2000
CHEROKEE INTERNATIONAL, LLC
(Exact Name of Registrant as Specified in Charter)
CALIFORNIA 333-82713 33-0696451
- ------------------------------- ------------ -------------------
(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation) File Number) Identification No.)
2841 DOW AVENUE, TUSTIN, CALIFORNIA 92780
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (714) 544-6665
----------------
This Current Report on Form 8-K/A amends the Current Report on Form 8-K of
Cherokee International, LLC (the "Company") dated June 15, 2000, filed in
connection with the completion of the Company's acquisition of Industrial and
Telecommunication Systems and related entities ("ITS"). This Amendment
provides the financial statements of ITS and the unaudited pro forma
financial information required in accordance with Item 7 of the General
Instructions for the Current Report on Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial statements and pro forma financial information
are filed as part of this report:
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Consolidated balance sheets of Industrial and Telecommunication Systems
S.C.A. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
then ended.
(b) PRO FORMA FINANCIAL INFORMATION.
Unaudited pro forma combined statements of operations for the year ended
December 31, 1999 and for the six months ended June 30, 2000 and explanatory
notes.
INDEPENDENT AUDITORS' REPORT
To the Members of
Cherokee International, LLC
Tustin, California, USA
We have audited the accompanying consolidated balance sheets of Industrial
and Telecommunication Systems S.C.A. and subsidiaries (the Company), a
subsidiary wholly owned together by Panta Electronics B.V. and Panta
Electronics Holdings B.V., as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years then ended. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
August 22, 2000
/s/ Deloitte & Touche
Brussels, Belgium
INDUSTRIAL AND TELECOMMUNICATION SYSTEMS S.C.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands of USD, except share data)
DECEMBER 31,
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 1,762 $ 3,467
Accounts receivable, net of allowance for doubtful accounts
of $32 in 1999 and $25 in 1998.................................. 9,240 9,247
Inventories, net ....................................................... 10,117 9,119
Prepaid expenses and other current assets .............................. 371 399
--- ---
Total current assets ........................................... 21,490 22,232
PROPERTY AND EQUIPMENT, net ........................................... 7,066 8,323
GOODWILL, net of accumulated amortization of $649 in
1999 and $333 in 1998 .......................................... 3,930 4,905
----- -----
Total assets ........................................................... $ 32,486 $ 35,460
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................................... $ 9,190 $ 5,844
Accounts payable to shareholders ....................................... 298 167
Accrued liabilities .................................................... 1,241 1,737
Accrued compensation and benefits ...................................... 3,082 3,877
Accrued interest payable ............................................... 922 732
Accrued restructuring costs ............................................ 1,400 -
Deferred tax liability ................................................. - 124
Revolving straight loan ................................................ 1,304 -
Current portion of long-term debt payable to Panta...................... 5,670 13,284
----- ------
Total current liabilities ...................................... 23,107 25,765
LONG-TERM DEBT PAYABLE TO PANTA, net of current portion ................ 3,336 3,867
ACCRUED RESTRUCTURING COSTS ............................................ 1,440 -
LONG-TERM LIABILITIES FOR EMPLOYEE BENEFITS ............................ 2,701 3,487
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock at $25 par value, 219,067 and 74,067 shares
issued and outstanding in 1999 and 1998,
respectively ................................................... 5,565 1,946
Retained earnings (deficit) ............................................ (3,715) 195
Accumulated other comprehensive income ................................. 52 200
-- ---
Total shareholders' equity 1,902 2,341
------ ------
Total liabilities and shareholders' equity ............................. $ 32,486 $ 35,460
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
INDUSTRIAL AND TELECOMMUNICATION SYSTEMS S.C.A.
AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands of USD)
YEARS ENDED
DECEMBER 31,
1999 1998
---- ----
NET SALES................................................ $49,270 $47,527
COST OF SALES............................................ 33,390 30,061
------- -------
GROSS PROFIT............................................. 15,880 17,466
OPERATING EXPENSE:
Engineering and development.............................. 2,953 2,584
Selling and marketing.................................... 3,037 3,144
General and administrative............................... 8,768 10,380
Restructuring charges ................................... 4,324 -
------- -------
Total operating expenses....................... 19,082 16,108
------- -------
OPERATING INCOME (LOSS) ................................ (3,202) 1,358
OTHER INCOME (EXPENSE):
Interest expense......................................... (993) (1,122)
Other income, net ....................................... 173 77
------- -------
Total other expense, net....................... (820) (1,045)
------- -------
INCOME (LOSS) BEFORE INCOME TAXES........................ (4,022) 313
INCOME TAX PROVISION (BENEFIT)........................... (112) 118
------- -------
NET INCOME (LOSS)........................................ $(3,910) $ 195
======== =======
The accompanying notes are an integral part of
these consolidated financial statements.
INDUSTRIAL AND TELECOMMUNICATION SYSTEMS S.C.A.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands of USD, except share data)
Accumulated
Retained Other Total
Common Stock Earnings Comprehensive Comprehensive
shares amount (deficit) Income Total Income (loss)
------ ------ ------ ---------- ----- ------------
BALANCE AT JANUARY 1, 1998 2,500 $68 $- $- $68 $-
- - Issuance of 71,567 shares, January
18, 1998, net of issuance costs 71,567 1,878 - - 1,878 -
- - Net income - - 195 - 195 195
- - Foreign currency translation - - - 200 200 200
------- ------ ------- ---- ------ ----
BALANCE AT DECEMBER 31, 1998 74,067 1,946 195 200 2,341 $ 395
====
- - Issuance of 145,000 shares, in
exchange for extinguishment of debt,
December 17, 1999, net of issuance costs 145,000 3,619 - - 3,619 $ -
- - Net loss - - (3,910) - (3,910) (3,910)
- - Foreign currency translation - - - (148) (148) (148)
------- ------ ------- ---- ------ ----
BALANCE AT DECEMBER 31, 1999 219,067 $5,565 $(3,715) $ 52 $1,902 $(4,058)
======= ====== ======== ==== ====== =======
The accompanying notes are an integral part of
these consolidated financial statements.
INDUSTRIAL AND TELECOMMUNICATION SYSTEMS S.C.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands of USD)
YEARS ENDED
DECEMBER 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ (3,910) $ 195
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................... 1,225 1,074
Deferred tax provision (benefit) ............................ (112) 118
Net change in operating assets and liabilities, net of
assets acquired:
Accounts receivable, net .................................... (1,327) (2,705)
Inventories, net ............................................ (2,366) (429)
Prepaid expenses and other current assets ................... (28) 80
Accounts payable ............................................ 4,363 1,197
Accounts payable related to shareholders .................... 162 159
Accrued liabilities ......................................... (270) (124)
Accrued compensation and benefits ........................... (277) 1,780
Accrued interest payable .................................... 305 696
Accrued restructuring costs ................................. 2,986 -
Long-term liabilities for employee benefits ................. (323) 363
---- -------
Net cash provided by operating activities ................... 428 2,404
---- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............................. (788) (1,407)
Acquisition of PITS, net of cash acquired ....................... - (16,883)
Proceeds from sale of land ...................................... - 851
---- -------
Net cash used in investing activities .................. (788) (17,439)
---- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt to parent .................................... 240 18,095
Payments on debt to parent ...................................... (2,463) (1,766)
Borrowings on revolving straight loan ........................... 1,312 -
Payments on revolving straight loan ............................. - -
Proceeds from issuance of common shares, net of costs ........... - 1,999
Cost of conversion from debt to equity .......................... (21) -
---- -------
Net cash (used in) provided by financing activities ............. (932) 18,328
----- ------
Cash effect of exchange rate changes ............................ (413) 174
---- ----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................................... (1,705) 3,467
CASH AND CASH EQUIVALENTS, beginning of period................... 3,467 -
-------- -------
CASH AND CASH EQUIVALENTS, end of period ........................ $ 1,762 $ 3,467
======= =======
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest....................... $ 660 $338
Income taxes paid............................................ - -
NON CASH TRANSACTIONS:
Conversion of debt to equity................................. $3,619 -
DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES.
On January 1, 1998, the Company acquired a business in a transaction summarized
as follows:
Fair value of assets acquired $ 22,886
Goodwill 5,004
Cash paid, net of cash acquired (16,883)
----------
Liabilities assumed $ 11,007
========
The accompanying notes are an integral part of
these consolidated financial statements
INDUSTRIAL AND TELECOMMUNICATION SYSTEMS S.C.A.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands of USD, except share data)
1. GENERAL
a. INCORPORATION
Industrial and Telecommunication Systems, S.C.A. and subsidiaries ("ITS" or
the "Company") was incorporated on December 23, 1997 as a Belgian company,
subject to the Belgian legislation and reporting requirements of Belgian
Generally Accepted Accounting Principles. The Company's principal operations
are located in Wavre, Belgium. On June 15, 2000, 100% of the outstanding
shares of ITS were purchased by Cherokee International LLC. See Note 13 for
further information. Prior to the acquisition by Cherokee International LLC,
Panta Electronics B.V. and Panta Electronics Holding B.V. (jointly the
"Parent" or "Panta") held a combined 99.9% ownership of the share capital in
ITS. Industrial and Telecommunication Systems Sprl held the remaining 0.1% of
the share capital. After the acquisition described below, principal
operations commenced on January 23, 1998.
b. ACQUISITIONS
On January 23, 1998, ITS and Philips Industrial and Telecommunication Systems
S.A. ("PITS") entered into an asset purchase agreement whereby ITS purchased
certain assets of $22,886 and assumed certain liabilities of $11,007 of PITS
for a total cash payment of $16,883. The acquisition was accounted for under
the purchase method of accounting. Costs were allocated to the net assets
acquired based on management's estimate of the fair value of the acquired
assets and liabilities at the effective date of the acquisition which was
January 1, 1998. The excess of purchase price paid over the fair value of net
assets acquired has been recorded as goodwill (Note 4). Goodwill is amortized
over 15 years.
c. LINE OF BUSINESS
The Company designs and manufactures sophisticated, custom-designed power
supplies for original equipment manufacturers (OEMs) of telecommunications
systems, Internet infrastructure, and medical and industrial applications.
Products include rectifiers for outdoor base stations for PCN networks and
central exchange telecom systems, DC/DC converters for wireless base
stations, and energy systems used to power fiber optic networks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
financial statements of ITS and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
The financial statements for 1998 represent the operations of the acquired PITS
business from January 1, 1998, the effective date of the acquisition.
The accompanying consolidated financial statements are presented in
accordance with accounting principles generally accepted in the United States
of America (US GAAP) and are presented in thousands of US Dollars (USD).
These principles differ from the statutory financial statements of the
Company, which are presented in accordance with Belgian generally accepted
accounting principles (Belgian GAAP).
GOING CONCERN The financial statements have been prepared assuming that the
Company is a going concern. The Company has incurred a net loss for 1999 of
$ 3,910 and net income in 1998 of $ 195, respectively. The loss for the year
1999 includes provisions for restructuring in amount of $ 4,324.
During 1999 Panta agreed to contribute $ 3,619 to the capital of the Company
through the issuance of shares, in exchange for extinguishment of debt. Panta
has also confirmed to the directors that, while the Company remains a
subsidiary, it will not require repayment of loans provided to the Company
and it will continue to support the Company by ensuring that sufficient funds
are available to meet its working capital needs. This parent company support
covers the period until the shareholders general meeting in 2001.
In view of the above, it is the opinion of the Company's management and
directors that the Company will be able to meet its obligations and continue
as a going concern for the foreseeable future.
TRANSLATION OF FOREIGN CURRENCIES The functional currency of the Company is the
Belgian Franc. Assets and liabilities denominated in other than the Belgian
Franc are translated into Belgian Francs at the exchange rate on the balance
sheet date and revenues, costs and expenses are translated using the exchange
rate at the transaction date. Resulting transaction gains and losses are
included in operations. The accompanying financial statements are presented in
the Company's reporting currency of the U.S. dollar. Assets and liabilities of
the Company, which are denominated in Belgian Francs, are translated into U.S.
dollars at the exchange rate on the balance sheet date, and revenues, costs and
expenses are translated at the weighted average exchange rate during the year.
Resulting translation adjustments are reflected in other comprehensive income in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
Foreign Currency Translation.
FAIR VALUE OF FINANCIAL INSTRUMENTS Pursuant to SFAS No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, the Company is required to disclose the
fair value of all financial instruments included on its consolidated balance
sheets. The Company considers the carrying value of such amounts in the
financial statements to approximate their fair value due to (1) the relatively
short period of time between origination of the instruments and their expected
realization, (2) interest rates which approximate current market rates, or (3)
the overall immateriality of the amounts.
ACCOUNTING FOR PENSION PLANS In 1998, the Company adopted SFAS No. 132,
EMPLOYERS' DISCLOSURE ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS. SFAS
No. 132 expands required disclosure about pensions and other postretirement
benefits. Adoption of this statement had no impact on the consolidated financial
position or the results of operations of the Company.
EMPLOYEE BENEFITS The Company provides a defined contribution plan for all
salaried employees and key managers for which the amount contributed is
determined as a percentage of the employees' salaries and is expensed in the
year in which the related service is provided. The plan is partly financed by
the Company and partly by the plan members. The Company also provides a
defined benefit pension plan for all employees. The funds are valued each
year by professionally qualified independent actuaries. The obligation and
costs of pension benefits are determined using a projected unit credit
method, whereby each unit is measured separately to build up the final
obligation. Past service costs are recognized on a straight-line basis over
the average period until the amended benefits become vested. Gains or losses
on the curtailment or settlement of pension benefits are recognized when the
curtailment or settlement
occurs. Actuarial gains or losses are amortized based on the expected average
remaining working lives of the employees. The pension obligation is measured at
the present value of estimated future cash flows using a discount rate that is
similar to the interest rate on government bonds where the currency and terms of
the government bonds are consistent with the currency and estimated terms of the
defined benefit obligation.
CASH AND CASH EQUIVALENTS For presentation purposes in the consolidated
financial statements, all highly liquid debt instruments purchased with an
original maturity date of three months or less are considered to be cash
equivalents. Cash equivalents are carried at cost, which approximates fair
market value.
INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventory costs include cost of material, labor, and manufacturing
overhead and consist of the following at December 31:
1999 1998
---- ----
Raw material $ 5,544 $ 4,273
Work-in-process 3,141 3,680
Finished goods 1,919 1,915
Reserve for obsolescence (487) (749)
----- -----
$ 10,117 $ 9,119
======== =======
PROPERTY AND EQUIPMENT Depreciation and amortization of property and
equipment are provided using the straight-line method over the following
estimated useful lives:
Buildings and improvements 20 years
Machinery and equipment 6 years
Office equipment and furniture 3 years
Leasehold improvements 10 years
The Company accounts for the impairment and disposition of long-lived assets
in accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. In accordance with SFAS No.
121, long-lived assets to be held are reviewed for events or changes in
circumstances which indicate that their carrying value may not be
recoverable. Based on management's estimates, there was no impairment of the
value of such assets for the years ended December 31, 1999 and 1998.
ACCRUED LIABILITIES Certain engineering and development activities of the
Company are partly financed through grants from the Walloon Region. Advances
received are recorded as accrued liabilities at the time of grant totaling
$ 942 and $ 1,056 at December 31, 1999 and 1998, respectively. The grants are
repayable to the Walloon Region unless production and commercialization of
the related products are discontinued. In the event a product is
discontinued, the liability relating to the grant is recognized as income in
that period. Management of the Company has no intention to discontinue the
production and commercialization of the products related to the grants as of
December 31, 1999.
INCOME TAXES The Company accounts for income taxes in accordance with SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. In accordance with SFAS No. 109,
deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the carrying value of assets and
liabilities for financial reporting and their tax basis, and carry-forwards
to the extent they are realizable. A deferred tax provision or benefit
results from the net change in deferred tax assets and
liabilities during the year. A deferred tax valuation allowance is recorded if
it is more likely than not that all or a portion of the recorded deferred tax
assets will not be realized.
REVENUE RECOGNITION Revenues from product sales are recognized upon shipment of
the products to customers.
CREDIT AND EXCHANGE RATE RISK The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. The Company
maintains reserves for estimated credit losses. The foreign currency exchange
rate exposure on the related accounts receivable is limited due to the fact
that the primary customers are in European countries, where the exchange
rates between certain of these countries are fixed.
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 (loss).
NEW ACCOUNTING PRONOUNCEMENT 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 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 Commission 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 in the United States of America 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.
USE OF ESTIMATES The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the amounts of revenues and expenses
during the reporting period. Actual results could differ from such estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1999 1998
---- ----
Land, building and improvements $ 5,349 $ 5,921
Machinery and equipment 3,045 2,841
Office equipment and furniture 393 279
Leasehold improvements 280 600
--- ---
9,067 9,641
Less accumulated depreciation and amortization (2,001) (1,318)
------- -------
$ 7,066 $ 8,323
======= =======
Depreciation expense for the year ended December 31, 1999 and 1998 was $ 909 and
$741 respectively.
4. GOODWILL
On January 23, 1998, the Company acquired certain assets and assumed certain
liabilities related to the PITS business from Philips for a total cash
payment of $16,883. The acquisition was accounted for under the purchase
method of accounting. The excess of purchase price paid over the fair market
value of net tangible assets acquired in the amount of $ 5,004 was recorded
as goodwill. Goodwill is amortized on a straight-line basis with an estimated
useful life of 15 years. Amortization expense for the years ended December 31,
1999 and 1998 was $ 317 and $ 333, respectively. The Company periodically
evaluates the recoverability of goodwill based on an undiscounted
profitability analysis related to the acquired product sales. Based on this
analysis, no impairment was identified at December 31, 1999 and 1998.
5. DEBT
Long-term debt consists of the following at December 31:
1999 1998
---- ----
- - Senior debt from Panta, bearing interest
at 8%, principal and interest payable
on January 23, 2006 $ 3,336 $ 3,867
- - Working capital loan from Panta, bearing
interest at 6.5%, due on demand 5,670 13,284
----- ------
9,006 17,151
Less current portion of long term debt (5,670) (13,284)
------- --------
Total long-term debt $ 3,336 $ 3,867
======= =======
As of December 31, 1999, maturities of long-term debt are as follows:
Year ending December 31
2000 $ 5,670
2001 -
2002 -
2003 -
2004 -
Thereafter 3,336
-----
$ 9,006
=======
The amounts due to Panta are denominated in Dutch Guilders and are not
collateralized. The revolving straight loan from a Belgian bank, BBL, is
denominated in Belgian Francs and is collateralized by a pledge in second
rank over accounts receivable and guaranteed by a support letter from the
Parent company.
The revolving straight loan of $1,304 at December 31, 1999 is due on demand
and bears interest based on variable market rates (4.2% at December 31, 1999)
and requires the Company to maintain a certain specific net assets ratio. The
Company is in compliance with all loan requirements as of December 31, 1999.
Interest expense for the years ended December 31, 1999 and 1998 was $993 and
$1,122 respectively.
During 1999, the Company converted $ 3,619 of the working capital loan into
share capital, net of issuance costs. Management estimates that the face value
of the debt was equal to the issuance price of the shares issued on the date of
exchange.
6. RELATED PARTIES
Pursuant to a "Services Agreement" dated March 10, 1998, Panta Electronics
Holdings B.V. provides certain advice and assistance to the Company in
relation to business planning and budgeting, development and execution of
commercial and marketing strategies, treasury and cash management,
accounting, financing, insurance, taxation, legal, information technology and
human resources. Management fees related to these services were $ 522 in both
1999 and 1998, respectively.
In December 1999, Panta sold certain assets and liabilities of its
subsidiaries at book value to Mitra Power Systems Sprl, Mitra Power Systems
GmbH, and Mitra Power Systems BV, which are 100 % owned by ITS. The
subsidiaries perform sales functions in France, Germany and The Netherlands.
In the fourth quarter of 1999, Panta sold certain assets and liabilities related
to certain of these sales organizations to subsidiaries wholly owned by ITS, and
the related agency agreements were terminated.
7. EMPLOYEE BENEFITS
Long-term liabilities for employee benefits as of December 31, 1999 and 1998
consist of the following:
1999 1998
---- ----
Retirement plans $ 1,646 $ 1,683
Long service award 1,055 1,804
----- -----
$ 2,701 $ 3,487
====== =====
a) RETIREMENT PLANS
The Company has three different pension plans in place:
1. A combination of a defined contribution plan with a defined pension and
death benefit plan, insured through group insurance with an external
insurance company, for certain levels of staff and management with a
contract of indefinite duration and who are subject to the social security
system in Belgium.
The benefits upon retirement are based on the number of years of service
(with a ceiling of 40 years) and on the level of annual compensation. Upon
leaving the Company before retirement, the employee is entitled to the
accrued benefits. The accrued benefits are financed by the defined
contribution plan and are immediately 100 % vested. The plan also includes
death benefits for married employees or single employees with dependant
children.
This plan is partly financed by the employee and partly by the employer.
The employee pays a personal contribution equal to 1% of pensionable
salary limited to the salary ceiling plus 8% of pensionable salary above
the ceiling. The employer pays a contribution of 1% of the pensionable
salary limited to the salary ceiling and 8% of the pensionable salary
above the salary ceiling. If necessary, the employer will finance the
remainder of the plan cost and the excess return above the guaranteed
insurance return (4.5% before January 1, 1999 and 3.25% after January 1,
1999) in the form of profit sharing granted on the employee and employer
financed reserves is used to finance the benefits.
2. An additional defined contribution plan was established on January 1,
1998 for all salaried employees and certain levels of staff and
management with a contract of indefinite duration who are subject to the
social security system in Belgium. The plan is partially insured through
group insurance with an external insurance company. In case of death or
retirement of the employee, the balance of the savings account is paid.
The employer pays a monthly contribution equal to 0.6 % of pensionable
salary, the employee pays a personal contribution of 0.2 % of pensionable
salary.
3. A further additional defined contribution plan insured through group
insurance with an external insurance company for all members of management.
This plan is completely financed by the Company. The employer pays an
annual contribution equal to 8.5% of pensionable salary. There are no
employee contributions under this plan.
The amounts expensed for the employer's portion of the two defined
contribution plans described above were approximately $70 and $62 in 1999 and
1998, respectively.
The following represents the amounts related to the defined benefit plan
described above:
1999 1998
---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 5,141 $ 3,974
Effect of exchange rate changes (661) 329
Service cost 314 271
Interest cost 210 222
Actuarial (gain) loss (655) 381
Benefits paid (733) (36)
---------------- ----------------
Benefit obligation, end of year $ 3,616 $ 5,141
================ ================
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $3,028 $2,592
Effect of exchange rate changes (392) 202
Actual return on plan assets 120 112
Employer contribution 89 79
Plan participants' contributions 89 79
Benefits paid (733) (36)
---------------- ----------------
Fair value of plan assets, end of year $ 2,201 $ 3,028
================ ================
Funded (unfunded) status $(1,415) $ (2,113)
Unrecognized net actuarial (loss) gain (231) 430
---------------- ----------------
Accrued pension liability $ (1,646) $ (1,683)
================ ================
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 314 $ 271
Interest cost 210 222
Expected return on plan assets (142) (141)
Employee contributions (89) (79)
---------------- ----------------
Net periodic benefit cost $ 293 $ 273
================ ================
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were 6.0% and 3.5%, respectively, in 1999 and
4.5% and 3.5%, respectively, in 1998. The expected long-term rate of return
on assets was 5.5% and 5.0% in 1999 and 1998, respectively.
b) LONG SERVICE AWARD
The Company provides a lump-sum payment to its employees and workers at the time
they have a seniority of 25 years at the Company and increases the premium when
they have 40 years of seniority. The Company accrues the net present value of
the expected amount to be paid under this arrangement, pro rata the number of
years of seniority since date of employment and taking into account expected
personnel rotation numbers and annual salary increases. The Company starts to
accrue for the "40 year seniority" premium when the employee or worker has
received the "25 year seniority" premium.
The premiums amount to one (after 25 years) and two (after 40 years) months of
gross salary, paid as a net salary. An average gross-up multiplier is used to
calculate the gross employer's cost of the premium.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under non-cancelable operating leases for
an aggregate monthly rental of approximately $ 12. These leases expire at
various dates through 2002. Rental expense for the year ended December 31, 1999
and 1998 totaled approximately $ 104 and $ 11 respectively.
A summary of lease commitments is as follows:
For the year ending
December 31:
2000 $ 146
2001 133
2002 41
---
Total minimum lease payments $ 320
=======
Certain debts of Panta group companies against an external bank (Deutsche Bank)
are collateralized by (1) an irrevocable right of the beneficiary to take a
mortgage on the land and buildings of ITS, in amount of $ 6,027, and (2) a
pledge on the business of ITS in amount of $ 12,708.
As at December 31, 1999 the Company had commitments to buy capital equipment of
approximately $73.
Under a certain grant from the Walloon region, the Company has a commitment to
reimburse an amount equal to 5 % of annual sales of the related products
discovered and developed with the grant funding up to a maximum of $297. In the
case the Company stops the production and commercialization of the related
products, the commitment to reimburse the grant stops. The annual reimbursements
are recorded as a charge in the statement of operation when the amount is known.
9. BUSINESS RESTRUCTURING CHARGES
During the first quarter of 1999, the Company approved a restructuring plan,
which involved the termination of 55 employees. Total estimated costs of the
plan were $4,324 and are included as restructuring charges in 1999. The
provision recorded is for indemnity pay and pre-retirement pay associated with
the termination of the identified employees.
Actual payments made in 1999 were $ 1,484. Accrued restructuring costs at
December 31, 1999 were $2,840, of which approximately $1,400 will be payable in
2000 and the remaining balance is payable from 2001 to 2010 pursuant to
pre-pension agreements with the terminated employees.
10. CONCENTRATION OF SALES
For the years ended December 31, 1999 and 1998, two customers in each year
individually represented 25% and 19% of net sales and 37% and 16% of accounts
receivable in 1999 and 17% and 16% of net sales and 21% and 12% of accounts
receivable in 1998. Although not anticipated, a decision by a major customer
to decrease the amount purchased from the Company or to cease purchasing the
Company's products could have a material adverse affect on the Company's
financial position and results of operations.
For the years ended December 31, 1999 and 1998, net sales by region were as
follows :
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
---- ----
France $14,612 $12,139
Germany 12,100 11,895
Netherlands 10,991 11,025
Belgium 4,279 5,719
Other 7,288 6,749
------- -------
Total $49,270 $47,527
======= =======
Substantially all of the Company's long-lived assets were located in Belgium as
of December 31, 1999 and 1998, respectively.
11. INCOME TAXES
A summary of income tax provision (benefit) for the years ended December 31:
1999 1998
---- ----
DEFERRED
Statutory $1,452 $118
Change in Valuation Allowance (1,564) -
------ ----
Income tax provision (benefit) $ (112) $118
====== ====
The net deferred tax asset (liability) consisted of the following as of
December 31:
1999 1998
---- ----
Net operating loss carryforwards $ 990 $360
Employee benefit accruals (46) (42)
Inventories 480 (338)
Property and equipment 26 (88)
Accrued restructuring costs 122 -
Goodwill (177) (205)
Other 91 189
Valuation allowance (1,486) -
------ -----
Net deferred tax asset (liability) $ - $(124)
====== =====
As of December 31, 1999, the Company had net operating loss carry-forwards of
approximately $3,200 available to reduce future corporate income taxes, if
any. These carry-forwards can be offset against future income for an
indefinite period.
The effective tax rate differs from the Belgian statutory tax rate of 40.17%
in 1999 because of the valuation allowance.
12. SHAREHOLDERS' EQUITY
The share capital of the Company is fully paid in and is represented by 219,067
ordinary register shares, with a par value of $25 each. Each share is entitled
to one vote.
The Company has never declared or paid dividends on its shares and does not
anticipate paying any dividends in the foreseeable future. Under Belgian Law,
the Company is required to set aside at least 5% of its net profits during each
financial year and contribute such sum to the statutory reserve until such
reserve has reached an amount equal to 10% of the Company's share capital. As of
December 31, 1999, there were no profits available for distribution under
Belgian Law.
In the event of a dissolution of the Company, the assets and the proceeds from
the sale of the assets remaining after payment of all debts, liquidation
expenses and preferences, and taxes are to be distributed among the shareholders
on a pro rata basis to their shareholding, after deduction of any amounts that
are still to be paid up with regard to their shares.
On December 23, 1997 (the incorporation date of the Company), 2500 common
shares were issued for an amount of $68, net of issuance costs. On January
18, 1998, 71,567 common shares were issued for an amount of $ 1,878, net of
issuance costs, which were utilized to fund the acquisition of the PITS
business from Philips. On December 17, 1999, 145,000 common shares were
issued to Parent, in exchange for extinguishment of debt, for an amount of
$3,619, net of issuance costs.
13. SUBSEQUENT EVENTS
On June 15, 2000, Cherokee International LLC, a leading manufacturer of power
supplies based in Tustin, California, acquired all the outstanding shares of the
Company from Panta pursuant to a stock purchase agreement and paid certain
intercompany debt.
As a result of this transaction, the collaterals and guarantees provided to
Deutsche Bank described in Note 8 have been canceled. Also, the credit
facilities with BBL (see Note 5) are now collateralized by a first ranking
pledge over receivables of the Company.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined statements of operations for the year
ended December 31, 1999 and six months ended June 30, 2000 give effect to the
acquisition of ITS by Cherokee International LLC ("Cherokee") as if it had
occurred at the beginning of the period presented. No adjustments have been
included in the pro forma amounts for any anticipated cost savings or other
synergies.
The unaudited pro forma combined statements of operations are based on
available information and on certain assumptions and adjustments described in
the accompanying notes which Cherokee believes are reasonable. The unaudited
pro forma combined statements of operations are provided for informational
purposes only and do not purport to present the results of operations of
Cherokee had the transaction assumed therein occurred on or as of the date
indicated, nor is it necessarily indicative of the results of operations
which may be achieved in the future. The unaudited pro forma combined
statements of operations and related notes should be read in conjunction with
the consolidated financial statements of Cherokee filed on its Form 10-K and
Form 10-Q and the consolidated financial statements of ITS including the
notes thereto.
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share data)
(Unaudited)
Historical(2)
---------------------------
Cherokee Pro Forma Pro Forma
International, LLC ITS Adjustments Combined
(1) (3)
------------------ ------- -------------- ---------
NET SALES $121,458 $49,270 $ 170,728
COST OF SALES 77,593 33,390 110,983
-------- ------- -------
GROSS PROFIT 43,865 15,880 59,745
OPERATING EXPENSES:
Engineering and development 4,118 2,953 7,071
Selling and marketing 2,609 3,037 5,646
General and administrative 3,872 8,768 $2,479 15,119(4)
Restructuring charges - 4,324 4,324
Special bonus distribution 5,330 - 5,330
-------- ------- ------- -------
Total operating expenses 15,929 19,082 2,479 37,490
-------- ------- ------- -------
OPERATING INCOME (LOSS) 27,936 (3,202) (2,479) 22,255
OTHER INCOME (EXPENSE):
Interest expense (10,675) (993) (727) (12,395)(5)(6)
Other income (expense) (709) 173 (536)
-------- ------- ------- -------
Total other (expense) income (11,384) (820) (727) (12,931)
-------- ------- ------- -------
PRE-TAX INCOME (LOSS) 16,552 (4,022) (3,206) 9,324
Income tax benefit - (112) (112)
-------- ------- ------- -------
Net income (loss) $ 16,552 $(3,910) $(3,206) $ 9,436
======== ======= ======= =======
NET INCOME PER UNIT
Basic $ 0.55 $ 0.26
======== =======
Diluted $ 0.55 $ 0.26
======== =======
WEIGHTED AVERAGE UNITS OUTSTANDING
Basic 30,124 5,996 36,120 (7)
======== ======= =======
Diluted 30,211 5,996 36,207 (7)
======== ======= =======
See accompanying notes.
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(In thousands, except per share data)
(Unaudited)
Historical(2)
---------------------------
Cherokee Pro Forma Pro Forma
International, LLC ITS Adjustments Combined
(1) (3)
------------------ ------- -------------- ---------
NET SALES $54,096 $24,795 $78,891
COST OF SALES 35,128 15,706 50,834
------- ------- ------- -------
GROSS PROFIT 18,968 9,089 28,057
OPERATING EXPENSES:
Engineering and development 2,370 2,919 5,289
Selling and marketing 1,410 1,539 2,949
General and administrative 2,624 2,491 $ 1,249 6,364(4)
------- ------- ------- --------
Total operating expenses 6,404 6,949 1,249 14,602
------- ------- ------- --------
OPERATING INCOME 12,564 2,140 (1,249) 13,455
OTHER INCOME (EXPENSE):
Interest expense (7,995) (468) (525) (8,988)(5)(6)
Other income (expense) 110 -- 110
------- ------- ------- --------
Total other (expense) income (7,885) (468) (525) (8,878)
------- ------- ------- --------
NET INCOME $ 4,679 $ 1,672 $(1,774) $ 4,577
======= ======= ======= ========
NET INCOME PER UNIT:
Basic $ 0.15 $ 0.13
======= ========
Diluted $ 0.15 $ 0.13
======= ========
WEIGHTED AVERAGE UNITS OUTSTANDING:
Basic 30,954 5,496 36,450 (7)
======= ======= ========
Diluted 31,210 5,496 36,706 (7)
======= ======= ========
See accompanying notes.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATION
1. The accompanying unaudited pro forma combined statements of operations do
not include any transition costs and expenses which are expected to be
incurred in connection with integrating the operations of Cherokee
and ITS. It is not feasible to determine the actual amount of these
costs and expenses until the related operational and transitional plans
are complete. Additionally, the pro forma combined statements of operations
do not reflect any anticipated cost savings or other synergies that may be
achieved by the combination.
2. These columns represent historical results of operations. Financial
results for ITS relating to the period from June 16 to June 30, 2000 are
included in Cherokee's results of operations for the six months ended
June 30, 2000.
3. On June 15, 2000, Cherokee 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. Cherokee paid
approximately $43 million in cash, acquired net assets (excluding debt)
at fair value of approximately $12 million, assumed debt of
approximately $12 million, of which approximately $10 million was repaid
at closing, and incurred costs of approximately $1 million. Cherokee
recorded goodwill of approximately $42 million in the transaction, which
is being amortized over 15 years. The unaudited pro forma combined results
of operations for the year ended December 31, 1999 and for the six months
ended June 30, 2000 give effect to the acquisition of ITS as if it had
occurred at the beginning of the period presented.
4. Represents pro forma adjustment to record amortization of goodwill for
the period presented, which relates to the ITS acquisition and assumes
an amortization period of 15 years, and is net of a reversal of the
amortization of goodwill as previously reflected in the historical ITS
statements of operations.
5. Includes pro forma adjustment to record interest expense related to the
assumed additional borrowings to finance the ITS acquisition. For the
year ended December 31, 1999, the acquisition, including acquisition
costs, is assumed to be financed with approximately $34 million of cash
proceeds from the issuance and sale of new members' equity units of
Cherokee, approximately $15 million of borrowings under Cherokee's
existing bank credit agreement, as amended, and utilization of available
cash.
The pro forma adjustment to interest expense for the year ended
December 31, 1999 was based on credit facility advances of approximately
$15 million at an assumed interest rate of 10%, net of the effect of
repaying approximately $10 million of ITS's debt at closing.
For the six months ended June 30, 2000, the acquisition is assumed to
have been financed as described above, except for an increase in
available cash of approximately $2 million. The pro forma adjustment to
interest expense for the six months ended June 30, 2000 was based on
credit facility advances of approximately $13 million at an assumed
interest rate of 10%, net of the effect of repaying approximately $10
million of ITS's debt at closing.
6. Includes pro forma adjustment to record a decrease in interest income
earned on cash and short-term investments used to finance the acquisition,
assuming an interest rate of 5.0% for the year ended December 31, 1999
and 6.0% for the six months ended June 30, 2000.
7. Represents pro forma adjustment to reflect the issuance and sale of new
members' equity units in connection with financing the ITS acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Dated: August 28, 2000
CHEROKEE INTERNATIONAL, LLC
By: /s/ R. Van Ness Holland, Jr.
-----------------------------
Name: R. Van Ness Holland, Jr.
Title: Chief Financial Officer