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 October 1, 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--
September 30, 2000 and December 31, 1999. . . . . . . . . . . . . . . 3
Consolidated Statements of Income--
For the Three and Nine Months Ended September 30, 2000 and 1999 . . . 4
Consolidated Statements of Cash Flows--
For the Nine Months Ended September 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)
SEPTEMBER 30, DECEMBER 31,
------------- -------------
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 136,802 $ 7,968,576
Accounts receivable, net of allowance for doubtful accounts
of $165,640 and $175,000 as of September 30, 2000 and
December 31, 1999, respectively.............................. 31,073,722 14,108,596
Inventories, net ............................................... 37,396,743 18,911,652
Prepaid expenses and other current assets ...................... 781,535 50,475
------------- -------------
Total current assets ........................................ 69,388,802 41,039,299
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $8,601,259 and $6,374,122 as of
September 30, 2000 and December 31, 1999, respectively ...... 14,280,828 8,761,516
DEPOSITS ....................................................... 303,508 274,697
DEFERRED FINANCING COSTS, net of accumulated amortization
of $1,266,219 and $555,919 as of September 30, 2000 and
December 31, 1999, respectively ............................. 4,437,188 4,800,504
GOODWILL, net of accumulated amortization of $840,000........... 42,315,000 0
------------- -------------
$ 130,725,326 $ 54,876,016
============= =============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................... $ 18,747,842 $ 5,468,043
Accrued liabilities ............................................ 4,850,124 1,085,686
Accrued compensation and benefits .............................. 8,130,078 2,211,193
Accrued interest payable ....................................... 5,208,353 2,406,054
Accrued distribution payable ................................... 3,298,000 1,730,000
Current portion of long-term debt .............................. 15,776,583 4,545,004
Current portion of capital lease obligations ................... 759,741 835,947
------------- -------------
Total current liabilities ................................... 56,770,721 18,281,927
LONG-TERM DEBT, net of current portion ......................... 143,631,465 141,458,228
CAPITAL LEASE OBLIGATIONS, net of current portion .............. 2,239,391 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) ................................... (113,326,698) (115,613,506)
Accumulated other comprehensive loss............................ (827,551) 0
------------- -------------
Total members' equity (deficit) ............................. (71,916,251) (107,675,506)
------------- -------------
$ 130,725,326 $ 54,876,016
============= =============
See notes to consolidated financial statements.
3
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------ ------------ ------------ ------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET SALES ...................................... $ 43,205,357 $ 27,601,575 $ 97,300,946 $ 94,097,923
COST OF SALES .................................. 28,385,364 18,070,263 63,513,126 59,569,445
------------ ------------ ------------ ------------
GROSS PROFIT ................................... 14,819,993 9,531,312 33,787,820 34,528,478
OPERATING EXPENSES:
Engineering and development .................... 1,855,283 1,009,742 4,225,136 3,071,371
Selling and marketing .......................... 1,667,600 687,540 3,077,384 1,981,647
General and administrative ..................... 3,235,008 954,834 5,741,773 2,837,863
Amortization of goodwill ....................... 723,000 0 840,000 0
Special bonus distribution ..................... 0 0 0 5,330,000
------------ ------------ ------------ ------------
Total operating expenses .................... 7,480,891 2,652,116 13,884,293 13,220,881
------------ ------------ ------------ ------------
OPERATING INCOME ............................... 7,339,102 6,879,196 19,903,527 21,307,597
OTHER INCOME (EXPENSE):
Interest expense ............................... (4,363,326) (3,938,596) (12,358,267) (6,849,719)
Other income (expense) ......................... 42,772 (196,222) 152,548 (715,087)
------------ ------------ ------------ ------------
Total other (expense) income ................. (4,320,554) (4,134,818) (12,205,719) (7,564,806)
------------ ------------ ------------ ------------
NET INCOME ..................................... $ 3,018,548 $ 2,744,378 $ 7,697,808 $ 13,742,791
============ ============ ============ ============
NET INCOME PER UNIT:
Basic ........................................ $ 0.08 $ 0.09 $ 0.24 $ 0.46
============ ============ ============ ============
Diluted ...................................... $ 0.08 $ 0.09 $ 0.23 $ 0.46
============ ============ ============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING:
Basic ........................................ 36,297,935 30,195,143 32,735,337 30,065,047
============ ============ ============ ============
Diluted ...................................... 36,643,071 30,195,143 33,020,954 30,065,047
============ ============ ============ ============
See notes to consolidated financial statements
4
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 7,697,808 $ 13,742,791
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................ 3,067,137 1,746,284
Amortization of deferred financing costs ..................... 710,300 338,774
Net change in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable, net .................................. (6,022,126) (3,078,323)
Inventories, net .......................................... (2,896,091) (3,604,548)
Prepaid expenses and other current assets ................. (463,060) (37,592)
Deposits .................................................. (77,587) (73,977)
Accounts payable .......................................... 253,799 (2,112,714)
Accrued liabilities ....................................... 384,438 607,334
Accrued compensation and benefits ......................... (137,115) (130,696)
Accrued interest payable .................................. 2,592,299 5,106,986
------------- -------------
Net cash provided by operating activities .............. 5,109,802 12,504,319
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .......................... (1,558,449) (971,937)
Investment in ITS, net of cash acquired ...................... (51,895,775) 0
------------- -------------
Net cash used in investing activities ............... (53,454,224) (971,937)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit ....................... 15,585,894 4,699,935
Payments on revolving line of credit ......................... (8,477,974) (4,699,935)
Payments on obligations under capital leases ................. (648,182) (588,564)
Borrowings on long-term debt ................................. 8,000,000 150,000,000
Payments on long-term debt ................................... (3,823,104) (2,022,188)
Deferred financing costs ..................................... (346,984) (5,188,345)
Proceeds from sale of units .................................. 34,299,998 0
Capital contribution to fund special bonus distribution ...... 0 5,330,000
Equity distribution .......................................... (3,843,000) (157,856,000)
------------- -------------
Net cash provided by (used in) financing activities .. 40,746,648 (10,325,097)
Cash effect of exchange rate ................................. (234,000) 0
------------- -------------
NET (DECREASE) INCREASE IN CASH .............................. (7,831,774) 1,207,285
CASH AND CASH EQUIVALENTS, beginning of period ............... 7,968,576 2,784,828
------------- -------------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 136,802 $ 3,992,113
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 8,845,668 $ 1,382,749
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY: During the
nine months ended September 30, 1999, the company financed the purchase of
$2,310,314 of fixed assets through a capital equipment lease.
As of September 30, 2000, the Company had accrued equity distributions payable
of $3,298,000.
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 ............................. 43,155,000
Cash paid for ITS's stock .......................... (43,150,000)
Repayment of certain assumed debt at closing ....... (9,722,000)
------------
Liabilities assumed ................................ $ 27,469,000
============
See notes to consolidated financial statements.
5
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended
September 30, 2000 and 1999 are not necessarily indicative of the results
of operations for the full fiscal year. The Company's third quarter
represented the 13-week period ended on October 1 in 2000 and October 3 in
1999. For presentation purposes, these fiscal quarters have been referred
to as September 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.
Accordingly, these financial statements 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:
September 30, 2000 December 31, 1999
------------------ -----------------
Raw Material $ 24,702,231 $ 15,633,994
Work-in-process 8,619,669 2,699,689
Finished goods 4,074,843 577,969
------------- ------------
$ 37,396,743 $ 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 U.S.
federal law, taxes based on U.S. income of a limited liability company
are payable by the Company's members individually. Accordingly, no
provision for U.S. federal income taxes or for California franchise
taxes has been provided in the accompanying financial statements.
The Company's operations in Mexico and Belgium are subject to various
income taxes on earnings generated in those countries, which are
accounted for in accordance with SFAS No. 109, ACCOUNTING FOR INCOME
TAXES.
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. Comprehensive income, including
net income and a loss from foreign currency exchange adjustments, was
$2,190,997 for the three months ended September 30, 2000 and $6,870,257
for the nine months ended September 30, 2000. Comprehensive income for
the three and nine months ended September 30, 1999 was the same as net
income for those periods of $2,744,378 and $13,742,791, respectively.
6. Income Per Unit
The following table sets forth the computation of basic and diluted income
per unit:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Net Income........................... $ 3,018,548 $ 2,744,378 $ 7,697,808 $ 13,742,791
============= ============= ============= =============
Units:
Weighted-average units outstanding - basic...... 36,297,935 30,195,143 32,735,337 30,065,047
Effect of dilutive options...................... 345,136 0 285,617 0
------------- ------------- ------------- -------------
Weighted-average units outstanding - diluted.... 36,643,071 30,195,143 33,020,954 30,065,047
============= ============= ============= =============
Net income per unit:
Basic.......................................... . $ 0.08 $ 0.09 $ 0.24 $ 0.46
============= ============= ============= =============
Diluted......................................... $ 0.08 $ 0.09 $ 0.23 $ 0.46
============= ============= ============= =============
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 $12 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 $43 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 nine months ended September 30, 2000 and 1999, are as
follows:
Nine Months Ended
September 30,
-------------------------------
Dollars in millions, except per share amounts 2000 1999
--------------------------------------------------------------------------------
Net sales $122,096,000 $131,050,000
==============================
Net income $ 7,596,000 $ 7,323,000
==============================
Diluted income per share $ 0.21 $ 0.20
==============================
The pro forma operating results above include the results of
operations for ITS for the nine months ended September 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 nine 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 expects that the
adoption of SFAS No. 133 will not have a material effect on its
financial statements.
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 were included in the Company's
balance sheet as of the acquisition date. For the three and nine month periods
ended September 30, 2000, the Company's statements of income are consolidated
to include ITS's operations from July 1, 2000 to September 30, 2000 and from
June 16, 2000 to September 30, 2000, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES
Net sales increased by approximately 56.5% or $15.6 million to $43.2
million for the three months ended September 30, 2000 from last year's $27.6
million for the three months ended September 30, 1999.
The higher sales were primarily attributable to the inclusion of
ITS's operations, which contributed $13.8 million of sales for the three
months ended September 30, 2000.
GROSS PROFIT
Gross profit increased by approximately 55.5% to $14.8 million for
the three months ended September 30, 2000 from $9.5 million for the three
months ended September 30, 1999. Gross margin for the quarter decreased
slightly to 34.3% from 34.5% in the prior year.
The increase in gross profit was primarily due to the increase in
sales. Increased gross margins for the North American operations compared to
last year were offset by the inclusion in the current year of the ITS
operations, which had lower gross margins than the North American operations.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2000
increased to $7.5 million from $2.7 million for the three months ended
September 30, 1999. As a percentage of sales, operating expenses increased to
17.3% from 9.6% in the third quarter of the prior year.
The increase in operating expenses, as expressed in dollars as well as a
percentage of net sales, was primarily attributable to the inclusion of ITS's
operations for the three months ended September 30, 2000, along with the
amortization of goodwill during the current quarter related to the ITS
acquisition.
8
OPERATING INCOME
Operating income increased by approximately 6.7% to $7.3 million for
the three months ended September 30, 2000 from $6.9 million for the three months
ended September 30, 1999. Operating margin, decreased to 17.0% for the current
quarter from 24.9% in the prior year.
The increase in operating income was primarily due to increased
operating income contributed by the North American operations, partially
offset by the amortization of goodwill in the current quarter related to the
ITS acquisition. The decrease in operating margin was primarily attributable
to the higher operating expenses as a percentage of sales discussed above.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2000 was
$4.4 million compared to $3.9 million for the three months ended September
30, 1999. This increase was primarily due to the additional debt incurred in
June 2000 in connection with the ITS acquisition.
NET INCOME
As a result of the items discussed above, net income increased to
$3.0 million for the three months ended September 30, 2000 from approximately
$2.7 million for the three months ended September 30, 1999. Net income margin
for the current quarter was 7.0% compared to 9.9% in the prior period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES
Net sales increased by approximately 3.4% or $3.2 million to $97.3
million for the nine months ended September 30, 2000 from last year's $94.1
million for the nine months ended September 30, 1999.
The inclusion of ITS's operations from June 16, 2000 to September
30, 2000 contributed approximately $17.1 million of sales for the current
year's period. This was partially offset by lower sales for the North
American operations primarily due to decreased demand for certain major
customers in the current year's nine month period compared with particularly
strong demand from those same customers in the prior year. A decline in sales
to IBM, one of the Company's largest customers, accounted for the majority of
the North American sales decrease from last year's nine-month period.
GROSS PROFIT
Gross profit decreased by approximately 2.1% or $741,000 to $33.8
million for the nine months ended September 30, 2000 from $34.5 million for the
nine months ended September 30, 1999. Gross margin for the nine months ended
September 30, 2000 decreased to 34.7% from 36.7% in the prior year.
The decrease in gross profit was primarily due to lower gross profit
from the North American operations due to decreased sales as discussed above,
partially offset by gross profit contributed from inclusion of ITS in the
current year. The decrease in gross margin compared to the prior year was
primarily due to the inclusion in the current year of the ITS operations,
which had lower gross margins than the North American operations.
9
OPERATING EXPENSES
Operating expenses in last year's nine-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
76.0% or $6.0 million to $13.9 million for the nine months ended September 30,
2000 from $7.9 million for the nine months ended September 30, 1999. As a
percentage of sales, operating expenses increased to 14.3% from 8.4% 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 the inclusion of
ITS's operations from June 16, 2000 to September 30, 2000 in the current
period, amortization of goodwill related to the ITS acquisition, and having
the resources in place at the North American operations to support sales
levels commensurate with those achieved in the prior year.
OPERATING INCOME
Operating income decreased by approximately 6.6% to $19.9 million for
the nine months ended September 30, 2000 from $21.3 million for the nine months
ended September 30, 1999. Excluding the effect of the special bonus distribution
in the prior year, operating income decreased by approximately 25.3% or $6.7
million. Operating margin decreased to 20.5% for the current year from 28.3% in
the prior year, before the special bonus distribution.
The decrease in operating income was primarily due to the decrease
in gross profit and the higher operating expenses discussed above. The
decrease in operating margin was primarily attributable to the higher
operating expenses as a percentage of sales discussed above.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2000 was
$12.4 million compared to $6.8 million for the nine months ended September
30, 1999. This substantial increase was primarily due to the issuance of $100
million of 10 1/2% senior subordinated notes and a $50 million term loan, all
of which occurred on April 30, 1999, resulting in only five months of
interest expense reflected in the prior year's period. The current year's
period also reflects interest expense relating to additional debt incurred in
connection with the ITS acquisition.
NET INCOME
As a result of the items discussed above, net income decreased to
$7.7 million for the nine months ended September 30, 2000 from $13.7 million
for the nine months ended September 30, 1999. Excluding the effect of the
special bonus distribution last year, net income decreased 59.6% or $11.4
million. Net income margin for the current year was 7.9% compared to 20.3% in
the prior period, before the special bonus distribution.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Nine months ended September 30, 2000 Compared to nine months ended September 30,
1999
Net cash provided by operating activities was $5.1 million for the
nine months ended September 30, 2000 compared to $12.5 million for the nine
months ended September 30, 1999. Cash provided by operating activities for
2000 reflects net income of $7.7 million, depreciation and amortization of
$3.1 million, and a $2.6 million increase in accrued interest payable, offset
by increases of $6.0 million in accounts receivable and $2.9 million in
inventory. Cash provided by operating activities for 1999 reflects net income
of $13.7 million, depreciation and amortization of $1.7 million, and a $5.1
million increase in accrued interest payable, offset by increases of $3.1
million in accounts receivable and $3.6 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 nine months ended
September 30, 2000 primarily consists of $51.9 million for the purchase of ITS,
net of acquired cash.
Net cash provided by financing activities of $40.7 million for the
nine months ended September 30, 2000 primarily reflects proceeds from bank
borrowings and the sale of units aggregating $13.0 million and $34.3 million,
respectively, which was used to finance the purchase of ITS. This was
partially offset by payments on long-term debt of $3.8 million and equity
distributions of $3.8 million.
Net cash used in financing activities was $10.3 million for the nine
months ended September 30, 1999. Equity distributions of $157.9 million and
deferred financing costs of $5.2 million were partially offset by proceeds
from borrowings on long-term debt of $150 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 September 30, 2000, the Company's borrowings consisted of $100
million of senior subordinated notes, $49.6 million of term loan borrowings
under its credit facility, $3.0 million under capital leases, and $9.8
million of other bank debt, which includes $6.0 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 did not have any derivative
financial instruments at September 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 $55.6 million and $46.0 million in
variable rate debt outstanding at September 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.
As a result of the ITS acquisition in June 2000, the Company has
European operations and is, therefore, subject to a certain degree of market
risk associated with changes in foreign currency exchange rates. The Company
has not actively engaged in exchange rate hedging activities.
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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 September 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:
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.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
On August 29, 2000, the Company filed a Current Report on Form 8-K/A
providing the financial statements of Industrial and
Telecommunication Systems and related entities ("ITS") and the
unaudited proforma financial information required in accordance with
Item 7 of the General Instructions for the Current Report on Form
8-K.
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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 Quarterly
Report on Form 10-Q, dated July 2, 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: November 15, 2000 /s/ R. Van Ness Holland, Jr.
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R. Van Ness Holland, Jr.
Chief Financial Officer
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