**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K**

**(mark one)**
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

** **

**For thefiscal year ended December 31, 2001**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition period from                        to                       .**

 

**CHEROKEEINTERNATIONAL, LLC**

(Exact name of registrantas specified in its charter)

 

| **CALIFORNIA**                                                                      |   | **33-0696451**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                     |   | (I.R.S. Employer  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 theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the past 12 months (or forsuch 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 ý No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.o

 

The voting membership units of the registrantare not publicly traded. All of the voting membership units are held byaffiliates of the registrant.

 

The number of the registrant’s outstandingvoting and non-voting membership units was 36,382,736 as of March 15, 2002.

 

 

PART I

 

ITEM 1. BUSINESS

 

Cherokee International, LLC is a leadingdesigner and manufacturer of a broad range of switch mode power supplies fororiginal equipment manufacturers, or OEMs, in the telecommunications,networking, high-end workstation and other electronic equipment industries.Power supplies perform many essential functions relating to the supply,distribution and regulation of electrical power and are used in virtually allelectronic equipment. Basic power supplies convert AC from a utility sourcesuch as a wall outlet, into the DC required for electronic systems.

 

STRATEGIC ADVANTAGES

 

We believe that our strategic advantagesinclude the following:

 

•   TIME TO MARKET: A critical factorin a customer’s selection of a power supply manufacturer is the time to marketof the power supply. Time to market is the time required to design, engineer,manufacture and deliver the product to a customer. We have established a trackrecord of consistently providing high quality products with short times tomarket. We streamline the design and production processes by employingexperienced personnel, providing them with sophisticated state of the artequipment and tools and encouraging our engineers to communicate directly withour customers’ engineers throughout the design and manufacturing process. Inaddition, we are one of the few companies in the industry with the ability toself certify our products for virtually all safety agencies. Our unique designand production methodologies, along with strategically located operations inNorth America and Europe, help increase production efficiency, enhance ourcustomer relationships and avoid delays in communication and the exchange ofdesigns and prototypes that burden many of our competitors that depend on theiroverseas manufacturing facilities.

 

•   STRONG PARTNERSHIPS WITH BLUE CHIPCUSTOMER BASE: We provide products to leading OEMs such as Alcatel, Brocade,Cisco, Hewlett-Packard, IBM, Juniper, Lucent, Motorola, Network Appliance,Nortel, Riverstone and Silicon Graphics. We have been doing business with manyof our customers for over 10 years. We believe that our customers continue toseek long-term partnerships with a small number of core suppliers likeCherokee. Our relationships are strengthened by the fact that we work jointlywith many of our customers in the design and development of new products, whichour customers partially fund. We believe that as a result of these factors wehave been successful in building our share with many of these customers overthe last several years.

 

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•   RECURRING SALES: Our products aregenerally used for the entire life cycle of a customer’s end products,providing a base of recurring sales from year to year. We have found that OEMsgenerally prefer not to change suppliers once a power supply has been designedinto a product, due to the fact that such a change often requirestime-consuming and costly re-testing and re-certification by the customer andone or more regulatory agencies. It is also very difficult for anothermanufacturer to precisely and economically replicate a power supply unit whichis already incorporated into a product. The life cycle of our customers’products range from approximately 2 to 10 years.

 

•   LOW COST STATE OF THE ARTOPERATIONS: Our sophisticated engineering capabilities, in-house production ofcertain critical components, highly automated manufacturing processes and stateof the art testing equipment enable us to operate extremely efficiently,thereby enhancing profitability, flexibility and competitiveness. The followinginitiatives have lowered our overall cost of production and enhanced profitmargins:

 

•   in-house manufacturing of laborintensive magnetic sub-assemblies at our facilities in India;

 

•   use of common componentry in ourproduct designs, including in our highly customized products, thereby reducingdevelopment and production costs;

 

•   procurement of raw materials andcomponents directly from manufacturers, rather than distributors;

 

•   use of continuous flowmanufacturinglines and computer controlledsurface mount assembly, or SMT, machines to improve quality and yield rates;

 

•   procurement and maintenance ofstate of the art equipment resulting in limited maintenance capitalexpenditures; and

 

•   refinement of our systems andprocesses to increase overall operational efficiency.

 

•   COMMITMENT TO QUALITY AND SERVICE:We believe that in addition to short lead times and competitive prices, ourcommitment to provide consistent, high quality products and services forms thebasis of our strong customer relationships. We manufacture high qualityproducts using advanced testing methods to monitor our sophisticated design andmanufacturing techniques (such as Computer Aided Design and Computer AidedEngineering). In addition to testing performed during the design andmanufacturing process, we test 100% of our finished products using automatedtest equipment.

 

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With the exception of a facility in India,all of our facilities and manufacturing processes are ISO 9000 certified.

 

•   EXPERIENCED MANAGEMENT: Pat Patel,our Chairman, founded Cherokee Corporation in 1978, formed CherokeeInternational, LLC as a California limited liability company on March 28, 1996,and has over 30 years experience in the industry. Jeff Frank, our President andChief Executive Officer, joined Cherokee in September 2001 and has over 18years experience in the electronics industry. Mr. Frank is supported by a seniormanagement team including Bud Patel (no relationship to Pat Patel), DennisPouliot, Howard Ribaudo and Van Holland who have combined industry experienceof over 100 years.

 

BUSINESS STRATEGY

 

Our objective is to be the supplier of choiceto a targeted group of industry leading OEMs who require sophisticated powersupply solutions and who are likely to have substantial volume requirements. Toachieve this objective, our strategy is to continue to differentiate ourselvesthrough advanced design and engineering, shorter time to market and superiorproduct performance, quality and service. Our strategy focuses on maximizingprofitability and expanding the business through:

 

•   FOCUSING ON HIGH GROWTH, HIGHMARGIN, MARKETS: A substantial majority of our 2001 sales were to thenetworking, telecommunications and high-end workstations markets, which areexpected to grow over the long term primarily due to the increase in demand forinternet/intranet, wireless and other communications. We achieve higher marginsin these markets due to their highly sophisticated design and engineeringrequirements and the high demands for technical expertise required to servethem. Focusing on these high growth areas also allows us to work with the mostsophisticated customers, which further improves our technological and knowledgebase and enables us to create products that can form the basis for an expandingand more sophisticated product catalog.

 

•   LEVERAGING CUSTOMER RELATIONSHIPS:We have strong relationships with industry leaders in the high growthnetworking, telecommunications and high-end workstations. We plan to leverageour in-depth knowledge of our customers and

 

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their needs and continue to increase ourshare of our customers’ business. We believe that our long-standing customerrelationships, coordinated engineering services and flexible manufacturingcapabilities provide us with a significant advantage when bidding for newbusiness.

 

•     EXPANDING PRODUCT OFFERING AND MARKET APPLICATIONS: We plan tocontinue to broaden our existing product line to attract new customers and tocapture a larger portion of our existing customers’ business. Although we mayat any time decide otherwise, products we presently plan to offer in the futureinclude a larger catalog of higher margin product offerings for multipleapplications, higher power range products for the increased requirements ofinternet/intranet, telecommunications and wireless and other applications andnew DC to DC products to provide more complete power solutions forcommunication systems such as telecommunication switches.

 

•   EXPANDING CUSTOMER BASE: We haveleveraged our reputation and success with our existing blue chip customer baseto attract new customers with significant growth prospects and high-marginproduct requirements. We plan to continue expanding our customer base throughincreased marketing, heightened use of our network of independent salesrepresentatives and further development of collaborative relationships indesign and engineering. To help achieve this expansion, we compensate ourindependent sales representatives with additional incentives to attract newcustomers and provide them with a significant level of support.

 

•   CONTINUALLY REDUCING COSTS THROUGH DISCIPLINEDDESIGN AND LOW COST PROCUREMENT: We seek to remain a low cost provider throughcontinued disciplined design techniques that incorporate common componentry andcircuitry and through the negotiation of long-term contracts for theprocurement of raw materials and components directly with certain suppliersrather than purchasing through distributors. In addition, where appropriate wewill continue to invest in new technologies to increase automation and lowercosts.

 

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POWER SUPPLY INDUSTRY

 

OVERVIEW

 

Power supplies perform many essentialfunctions relating to the supply, regulation and distribution of electricalpower in electronic equipment. Electronic systems require a precise andconstant supply of electrical power at one or more voltage levels. TraditionalAC/DC power supplies convert alternating current, or AC, from a primary powersource, such as a utility company, into a precisely controlled direct current,or DC. Virtually every electronic device that plugs into an AC wall socketrequires some type of AC/DC power supply. DC/DC converters modify one DCvoltage level to other DC levels to meet the needs of various electronicsubsystems and components. Power supplies are also used to regulate and monitorvoltages to protect the electronic components from surges or drops in voltage,to perform functions that prevent electronic equipment from being damaged bytheir own malfunction, or to provide back-up power in the event that a primarypower source fails.

 

The latest technology now used in powersupplies is higher frequency switch mode topology. Switch mode power supplies,which comprise our entire product line, are preferred over linear powersupplies, with comparable power outputs, due to their higher energy efficiency,considerably smaller size and lighter weight. The market for switch mode powersupplies is the fastest growing segment of the overall external powerconversion product market, according to industry sources.

 

CAPTIVE VERSUS MERCHANT MANUFACTURERS

 

Captive power supply manufacturers design andmanufacture power supplies for in-house use for their own products. Merchantpower supply manufacturers design and manufacture power supplies for use bythird parties. According to industry sources, the merchant segment of themarket is expected to grow faster than the captive segment as OEMs increasinglyfocus on core competencies and outsource power supply products to moreefficient suppliers. As a leading merchant manufacturer, we expect to significantlybenefit from this shift.

 

PRODUCT TYPES—CUSTOM, STANDARD AND MODIFIEDSTANDARD

 

Custom power supplies are designed for aspecific customer to meet the exact form, fit and function for a specificapplication. Custom products are characterized by (1) lead times of 4 to 12months from initial prototype to full

 

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production; (2) up-front engineering costs; and (3) relatively highvolume production requirements. They are attractive to OEMs because theyprovide maximum design flexibility and allow the use of special features.Standard “off-the-shelf” power supplies are products designed to appeal to awide range of customers for use in a variety of different applications.Standard power supplies offer benefits to the OEM because there are no up-frontengineering charges or minimum order quantities and the product is readilyavailable, which allows the OEM to reduce its time-to-market for new products.In addition, standard products have lower risks associated with technology,production ramps, and customer product qualification. Modified standard powersupplies are standard products that have been altered in a way that does notchange the basic product architecture. Modified standard products, as comparedwith custom products, are characterized by (1) shorter lead times; (2) lowerup-front engineering costs; and (3) smaller minimum order quantities.

 

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PRODUCT LINE

 

Over our more than 20-year history, we havedeveloped an extensive range of switch mode power supply products. Theseproducts, containing magnetic assemblies, circuits and components, convert ACpower to DC power and maintain voltage levels within specific limits. Ourproducts cover a broad range of applications, from 10 to 14,000 watts for AC/DCpower supplies, and from 20 to 1,000 watts for DC/DC converters. Our powersupplies are self-contained units, range in weight from one half of a pound tothirty pounds and are normally incorporated inside our customers’ end products.

 

We plan to continue to broaden our existingproduct line to include a larger

 

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catalog of higher margin product offerings for multiple applications,higher power range products for the increased requirements of internet/intranet,wireless and other communications applications and new DC to DC products toprovide distributed power architecture capability for telecommunicationsystems.

 

CUSTOMERS AND APPLICATIONS

 

Our base of OEM customers are in diversemarkets such as telecommunications, networking, high-end workstations(excluding PCs), industrial process controls and other electronic equipmentindustries. Many of the OEMs are Fortune 500 companies and leaders in theirrespective industries.

 

During 2001, our top 10 customers accountedfor approximately 54% of our sales.

 

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SALES AND MARKETING

 

We market our products and services in NorthAmerica through an integrated sales approach involving account managers andindependent sales representatives with active support from design, engineeringand production personnel. Our in-house account managers supervise customerrelationships and oversee a nation-wide network of commission-based independentsales representatives whose main purpose is to source new customers. We marketour products in Europe primarily using our in-house account managers.

 

We focus our efforts on expandingrelationships with existing customers and aggressively targeting emerging OEMindustry leaders with whom the opportunity exists to provide products andservices across a number of product families and through successive productgenerations. We focus our resources on markets that are growing relativelyquickly and have the potential for significant profit margins. Potentialcustomers are assigned to our in-house account managers who evaluate thecustomer against our customer selection criteria.

 

On an ongoing basis, our engineeringpersonnel provide technical support to customers in the areas of product designchanges, field performance and testing. Our collaborative relationships allowus to gain valuable knowledge about an existing customer and its processes,which we believe gives us an advantage in obtaining future business from thatcustomer. Historically, we have had substantial recurring sales from existingcustomers.

 

BACKLOG

 

Backlog consists of purchase orders on handgenerally having delivery dates scheduled within the next four months. Ourbacklog was approximately $25.1million at December 31, 2001, $75.0 million at December 31, 2000, and$35.1 million at December 31, 1999. In addition, we are currently working onnumerous customer initiated engineering and design projects, which we expectwill result in additional future revenue.

 

Although customers are generally able tocancel or reschedule deliveries, subject to cancellation fees or carrying costcharges in certain circumstances, our backlog has historically been a reliableindicator of our future revenues. However, subsequent to December 31, 2000, webegan to experience an industry-wide slowdown which caused many of ourcustomers to reschedule or cancel certain orders with us. As a result, revenuesfor 2001 were adversely affected by these deferrals or cancellations of orders.We believe unstable and unpredictable economic and industry conditions maycontinue. If these conditions persist, our operating results and financialcondition could be adversely affected.

 

MANUFACTURING PROCESS AND QUALITY CONTROL

 

A typical power supply consists primarily ofone or more printed circuit boards, electronic and electromagnetic componentsand a sheet metal chassis. The production of our power supplies entails theassembly of structural hardware combined with a sophisticated assembly ofcircuit boards encompassing highly automated SMT.

 

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In response to market demands for increasedquality and reliability, design complexity, and sophisticated technology, wehave automated many electronic assembly and testing processes which weretraditionally performed manually and we have standardized our manufacturingprocesses to efficiently utilize our resources and optimize our capacities. Wehave seven SMT lines located throughout our facilities. SMT permits reductionin board size by eliminating the need for holes in the printed circuit boardsand by allowing components to be placed on both sides of a board. Each SMT lineis capable of placing as many as 40,000 parts per hour, with each machine hourequating to approximately 50 labor hours.

 

In addition to increasing automation of ourfacilities, we have standardized our operations to include self-containedcontinuous flow manufacturing lines, which incorporate flow solder machines,in-circuit test machines, highly advanced computer controlled burn-inequipment, automated final test machines, ongoing reliability test equipment,standardized processes and measurements on all lines.

 

Most of our customers require that theirpower supplies meet or exceed established international safety and qualitystandards. In response to this need, we design and manufacture power suppliesin accordance with the certification requirements of many internationalagencies, including Underwriters Laboratories Incorporated (UL) in the UnitedStates; the Canadian Standards Association (CSA) in Canada; TechnischerUberwachungs-Verein (TUV) and Verband Deutscher Electrotechniker (VDE), both inGermany; the British Approval Board for Telecommunications (BABT) in the UnitedKingdom; and International Electrotechnical Committee (IEC), a Europeanstandards organization.

 

Quality and reliability are emphasized inboth the design and manufacture of our products. In addition to testingthroughout the design and manufacturing process, we test and burn-in 100% ofall products using automated equipment and customer-approved processes. Anadditional out-of-box test or pre-ship audit is performed on randomly selectedunits, which are ready for shipment, further ensuring manufacturing quality andintegrity.

 

Our sophisticated manufacturing facilities inTustin, California; Irvine, California; Guadalajara, Mexico; and Wavre,Belgium, are ISO 9000 certified. Our facilities in India manufacturelabor-intensive magnetic sub-assemblies that are distributed to our other facilitiesfor incorporation into many of our final products.

 

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SUPPLIERS

 

Our high quality products and reducedtime-to-market are the result of a well managed supply chain network. Wetypically design products using common components thereby increasing ourpurchasing power and reducing inventory risk. Most of our raw materials,including electronic and other components, sheet metal, transistors, mechanicalparts and electrical wires, are readily available from several sources.Although some of our raw materials are sourced from only one manufacturer, theyare generally available in large quantities from a number of differentsuppliers.

 

COMPETITION

 

The merchant power supply manufacturingindustry is highly fragmented and characterized by intense competition. Nosingle company dominates the overall power supplies market and our competitorsvary depending upon the particular power conversion product category. Ourcompetition includes companies located throughout the world, including Delta,Astec, Tyco, Artesyn, Power One and many smaller companies. We also view ascompetitive threats the potential that our customers may decide to producetheir own power supplies and that OEMs with captive manufacturing capabilitiesmay compete in the merchant market. However, several large OEMs have divestedtheir captive power supply manufacturing operations, including IBM, Nortel,NCR, TRW and Digital Equipment.

 

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ENGINEERING AND PRODUCT DEVELOPMENT

 

Our engineering and product developmentactivities are principally directed to the development of new power supplies tosatisfy customer needs. As part of the collaborative relationships establishedby us with our key customers, we work closely with our customers to develop newproducts. Product development is performed by a group of approximately 80engineers and technicians located primarily in Tustin, California and Wavre,Belgium.

 

Our total expenditures for engineering andproduct development were $6.5 million, $6.1 million, and $4.1 million for theyears ended December 31, 2001, 2000, and 1999, respectively.

 

INTELLECTUAL PROPERTY MATTERS

 

We do not believe that intellectual propertyor branding is a significant competitive factor in the power supply industry.As a result, we do not rely to a significant extent upon proprietary rights inthe conduct of our business.

 

EMPLOYEES

 

At December 31, 2001, we employedapproximately 973 full-time employeesat our facilities in the following capacities:

 

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|                   | **INDIVIDUALS  EMPLOYED** |   |
|------------------------|---------------------------|--------|
| Manufacturing          | 751                       |   |
| Engineering            | 88                        |   |
| Quality                | 37                        |   |
| Marketing              | 34                        |   |
| General Administrative | 63                        |   |
| Total                  | 973                       |   |

 

None of our domestic employees is representedby a labor organization. Some of our employees who work in our Guadalajara,Mexico Facility are represented by a union as required under Mexican law. Someof our employees who work in our Wavre, Belgium facility are represented bytrade unions and work subject to a collective bargaining agreement. We believethat our relations with our employees, including in our Mexico and Belgiumfacilities, are excellent.

 

ITS ACQUISITION

 

On June 15, 2000, we completed theacquisition of Industrial and Telecommunication Systems, or ITS, which we havesubsequently named Cherokee Europe. The acquisition of ITS substantiallyincreased our European presence and strengthened our capabilities in thetelecommunications system market. ITS is primarily a leading designer andmanufacturer of custom designed power supplies for OEMs of telecommunicationssystems, Internet infrastructure, and medical and industrial applications.

 

RISK FACTORS

 

                We are subject to a variety of risks in ourbusiness, including the following:

 

OUR SUBSTANTIAL INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS COULD IMPEDEOUR OPERATIONS AND FLEXIBILITY

 

We have a large amount of outstanding debtcompared to the net book value of our assets and we have substantial repaymentobligations and interest expense. As of December 31, 2001, we had:

 

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•   total consolidated debt ofapproximately $158.1 million; and

 

•   members’ deficit of approximately$76.1  million.

 

Our level of debt and the limitations imposedon us by our debt agreements could have other important consequences to us,including the following:

 

•   we have less ability to satisfy ourobligations with respect to our 10 1/2% Senior Subordinated Notes due 2009;

 

•   we have to use a substantialportion of our cash flow from operations for debt service rather than for ouroperations;

 

•   we may not be able to obtainadditional debt financing for future working capital, capital expenditures orother corporate purposes;

 

•   we could be less able to takeadvantage of significant business opportunities, such as acquisitionopportunities, and react to changes in market or industry conditions;

 

•   we are more vulnerable to generaladverseeconomic and industry conditions;and

 

•   we are disadvantaged compared tocompetitors with lower levels of outstanding debt compared to net book value ofassets.

 

OUR BUSINESS OPERATIONS ARE RESTRICTED BY PROVISIONS OF OUR DEBTAGREEMENTS; FAILURE TO COMPLY COULD RESULT IN ACCELERATION OF INDEBTEDNESS

 

The indenture governing our 10 1/2% SeniorSubordinated Notes due 2009, the notes, and our credit agreements contain anumber of covenants that significantly restrict our ability to dispose ofassets, incur additional indebtedness, incur guarantee obligations, repay otherindebtedness or amend other debt instruments, pay dividends, create liens onassets, enter into capital leases, make investments, loans or advances, makeacquisitions, engage in mergers or consolidations, make capital expenditures,engage in certain transactions with subsidiaries and affiliates and otherwiserestrict business operations. In addition, under our credit agreement, we arerequired to meet a number of financial ratios and tests.

 

Our ability to comply with these agreementsmay be affected by events beyond our control, including prevailing economic,financial and industry conditions. The breach of any of these covenants orrestrictions could result in an event of default under our credit agreement orthe indenture. In either case, certain lenders could declare all amounts borrowedunder those agreements to be immediately due and payable, together with accruedand unpaid interest. Additionally, the senior lenders could terminate theircommitments to make 

 

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further extensions of credit under our credit agreement.If we are unable to repay indebtedness to our senior lenders, they can proceedagainst the collateral securing indebtedness under our credit agreement.

 

WE MAY FAIL TO COMPLY WITH CERTAIN FINANCIAL COVENANTS AND MAY HAVE ASHORTAGE IN LIQUIDITY, EITHER OF WHICH COULD MATERIALLY ADVERSELY AFFECT OURBUSINESS AND OUR FINANCIAL RESULTS

 

                On September 26, 2001, our credit agreementwith our lenders was amended to include provisions that specify among otherthings, (1) that some of our unitholders, or their equity members, willguarantee $10.5 million of our senior debt principal until specific financialratios are attained, (2) that we will be restricted from making cashdistributions to our unitholders until specific financial ratios are attained,(3) that we will be permitted to make our interest payments due in November2002 relating to our $100 million of senior subordinated notes so long asspecific financial ratios are attained, (4) that the maximum availability underour revolving line of credit is reduced until approximately April 30, 2002, (5)that LIBOR and base rate margins have been increased for revolver borrowingsand term loans, and (6) that financial covenant ratios required in futureperiods have been modified, including provisions allowing our unitholders tomake capital contributions to us which will be treated as earnings (as defined)for purposes of calculating debt covenants.

 

                Based upon our present expectations, weanticipate that we may not be in compliance with certain financial covenantsunder our credit agreement at June 30, 2002, or earlier, without additionalfinancing from our majority unitholders. In addition, we believe that cash flowfrom operations and available borrowing capacity may not be adequate to meetour anticipated cash requirements, including operating requirements, plannedcapital expenditures and debt service, for the last six months of the year, orearlier, without additional financing from our majority unitholders.

 

                We are currently considering alternatives toaddress these issues, which may include (i) an amendment or restructuring ofour credit agreement to provide additional liquidity and room under certainfinancial covenants, (ii) a refinancing of our credit agreement, (iii) theinfusion of additional equity by our unitholders, or (iv) some combination ofthe above.  Based upon the Company'scurrent business plans and prospects, management expects that its restructuringalternatives, the $10.5 million guaranty by certain unitholders and fundingfrom its unitholders, if necessary, will enable the Company to meet itsobligations and comply with its debt covenants through December 31, 2002.

 

                We cannot provide any assurances that we willbe successful in obtaining any desired results on satisfactory terms or as towhat effect any of the foregoing, if obtained, may have on our future businessoperations. In the event that we do not succeed in improving our liquidity andavoiding a covenant or payment default under our credit agreement or a paymentdefault under the indenture governing our senior subordinated notes, thelenders under the credit agreement would become entitled to certain rights,including the right to accelerate the debt and require our unitholders, ortheir equity members, to contribute $10.5 million to our senior debt principalunder the terms of the guaranty they provided. The guarantors would besubrogated to rights of the lenders under the credit agreement, on a basissenior to the senior subordinated notes. In the event of a payment defaultunder the indenture or the credit agreement or in the event of an accelerationof amounts due under our credit agreement, the holders of the seniorsubordinated notes could also accelerate the maturity of the outstanding seniorsubordinated notes.

 

 

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THE LOSS OF ONE OR MORE MAJOR CUSTOMERS COULD MATERIALLY AND ADVERSELYAFFECT OUR RESULTS OF OPERATIONS

 

During 2001, our top ten customers accountedfor approximately 54% of our sales. The loss of any of our major customerscould have a material adverse effect on our financial condition or results ofoperations. We do not have long-term contracts with our customers. As a result,we cannot assure that a customer will not transfer, reduce the volume of, orcancel a purchase order, each of which could adversely affect our financialcondition or results of operations. In addition, as a provider of powersupplies to OEMs, our sales are dependent upon the success of the underlyingproducts of which our power supplies are a component.

 

WE COULD LOSE BUSINESS IF WE FAIL TO KEEP UP WITH RAPID TECHNOLOGICALCHANGE IN THE ELECTRONIC EQUIPMENT INDUSTRY

 

Many of our existing customers are in theelectronic equipment industry, especially telecommunications and networking,and produce products that are subject to rapid technological change,obsolescence and large fluctuations in world-wide product demand. Theseindustries are characterized by intense competition and end-user demand forincreased product performance at lower prices. Our customers make similardemands on us. We cannot assure that we will properly assess developments inthe electronic equipment industries and identify product groups and customerswith the potential for continued and future growth. Factors affecting theelectronic equipment industries, in general, or any of our major customers ortheir products, in particular, could have a material adverse effect on ourfinancial condition or results of operations.

 

The markets for our products arecharacterized by:

 

•   rapidly changing technologies;

 

•   increasing customer demands;

 

•   evolving industry standards;

 

•   frequent new product introductions; and

 

•   in some cases, shortening product life cycles.

 

Generally, our customers purchase power supplies from us for the lifecycle of a 

 

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product. The development of new, technologically advanced products is acomplex and uncertain process requiring high levels of innovation and cost, aswell as the accurate anticipation of technological and market trends. As thelife cycle of our customers’ products shorten, we will be required to bid oncontracts for replacement or next generation products to replace revenuesgenerated from discontinued products more frequently. We cannot assure that wewill successfully develop, introduce or manage the transition of new products.The failure of or the delay in anticipating technological advances ordeveloping and marketing product enhancements or new products that respond toany significant technological change or change in customer demand could have amaterial adverse effect on our financial condition or results of operations.

 

WE FACE SIGNIFICANT COMPETITION; OUR FAILURE TO EFFECTIVELY COMPETECOULD MATERIALLY AND ADVERSELY AFFECT RESULTS OF OPERATIONS AND MARKET SHARE

 

The design, manufacture and sale of powersupplies is highly competitive. Our competition includes numerous companieslocated throughout the world, some of which have advantages over us in terms oflabor and component costs and technology. Many of our competitors havesubstantially greater resources and geographic presence than we do. We cannotassure that competition from existing competitors or new market entrants willnot increase. We also face competition from current and prospective customersthat may design and manufacture their own power supplies. In times of aneconomic downturn, or when dealing with high-volume orders, price may become anincreasingly important competitive factor, which could cause us to reduceprices and thereby adversely affect our results of operations. Some of ourmajor competitors have also been engaged in merger and acquisitiontransactions. Such consolidations by competitors are likely to create entitieswith increased market share, customer bases, technology and marketingexpertise, and/or sales force size. These developments may adversely affect ourability to compete. We cannot assure that we will continue to be able tocompete successfully against current or future competitors in the market.

 

OUR DEPENDENCE ON INTERNATIONAL OPERATIONS SUBJECTS US TO VARIOUS RISKSASSOCIATED WITH, AMONG OTHER THINGS, FOREIGN LAWS, POLICIES, ECONOMIES ANDEXCHANGE RATE FLUCTUATIONS

 

We have manufacturing operations located inMexico, Belgium and India. These operations are subject to inherent risks,including variations in tariffs, quotas, taxes and other market barriers,political and economic instability, work stoppages or strikes, unexpectedchanges in regulatory requirements,

 

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restrictions on the export or import of technology, and difficulties instaffing and managing international operations, which could have a materialadverse effect on our financial condition or results of operations. Although wetransact business primarily in United States dollars, a portion of our salesand/or expenses, including labor costs, are denominated in the Mexican peso,the Indian rupee, the Euro and other European currencies. Fluctuations in thevalue of the U.S. dollar relative to these foreign currencies, or increasedimport duties, the imposition of tariffs or import quotas or interruptions intransportation, could affect our revenues, costs of goods sold and operatingmargins and could result in exchange losses or delays in shipments.Historically, we have not actively engaged in substantial exchange rate hedgingactivities and do not intend to do so in the future.

 

AN INTERRUPTION IN DELIVERY OF COMPONENT SUPPLIES COULD LEAD TO SUPPLYSHORTAGES OR A SIGNIFICANT INCREASE IN PRICES OF COMPONENT SUPPLIES, WHICHCOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS

 

We are dependent on our suppliers for timelyshipments of components. We typically use a primary source of supply for eachcomponent used in our products. Establishing alternate primary sources ofsupply, if needed, could take a significant period of time which could resultin supply shortages and could result in increased prices. In some casescomponents are sourced from only one manufacturer and an interruption in supplycould materially adversely affect our operations. Any shortages of particularcomponents, including components manufactured in our India facilities, couldincrease product delivery times and/or costs associated with manufacturing,reducing gross margins. For more details, see the heading “Our Dependence onInternational Operations Subjects us to Various Risks Associated With, AmongOther Things, Foreign Laws, Policies, Economies and Exchange Rate Fluctuations”above. Additionally, such shortages could cause a substantial loss of businessdue to shipment delays. Any significant shortages or price increases ofcomponents could have a material adverse effect on our financial condition orresults of operations.

 

OUR QUARTERLY SALES MAY FLUCTUATE WHILE OUR EXPENDITURES REMAINRELATIVELY FIXED, POTENTIALLY RESULTING IN LOWER GROSS MARGINS

 

Our quarterly results of operations havefluctuated in the past and may continue to fluctuate in the future. Variationsin volume production orders and in the mix of products sold by us havesignificantly affected sales and gross profit. Sales generally may also beaffected by other factors. These factors include:

 

•   the receipt and shipment of largeorders;

 

•   raw material availability and pricing;

 

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•   product and price competition; and

 

•   the length of sales cycles andeconomic conditions in the electronics industry.

 

Many of these factors are outside ourcontrol.

 

We do not obtain long term purchase orders orcommitments from our customers, and a substantial portion of sales in a givenquarter may depend on obtaining orders for products to be manufactured andshipped in the same quarter in which those orders are received. Sales forfuture quarters may be difficult to predict. We rely on our estimates ofanticipated future volumes when making commitments regarding the level ofbusiness that we will seek and accept, the mix of products that we intend tomanufacture, the timing of production schedules and the levels and utilizationof personnel, inventory and other resources.

 

A variety of conditions, both specific to theindividual customer and generally affecting the customer’s industry, may causecustomers to cancel, reduce or delay orders that were previously made oranticipated. At any time, a significant portion of our backlog may be subjectto cancellation or postponement. We cannot assure that we will be able totimely replace cancelled, delayed or reduced orders. Significant or numerous cancellations,as well as reductions or delays in orders by a customer or group of customers,could materially adversely affect our financial condition or results ofoperations.

 

Our expense levels are relatively fixed andare based, in part, on expectations of future revenues. Consequently, ifrevenue levels are below expectations, our financial condition or results ofoperations could be materially adversely affected. Due to all of the precedingfactors, in some future quarter or quarters our financial condition or resultsof operations may be below our expectations and our gross margins may decrease.For details concerning our financial condition, see Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

OUR ABILITY TO MAINTAIN AND ENHANCE PRODUCT AND MANUFACTURINGTECHNOLOGIES AND TO SUCCESSFULLY OPERATE OUR BUSINESS IS DEPENDENT UPON OURCONTINUED ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL

 

Our success depends to a significant degreeon the efforts of Pat Patel, our Chairman, and Jeff Frank, our President andChief Executive Officer, and the other members of our senior management team.We have no employment agreements with our key management executives and do notmaintain key person life insurance for any of our officers or ManagementCommittee members other than Mr. Patel. We believe that the loss of service of 

 

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any of these executives could havea material adverse effect on our business.

 

Our ability to maintain and enhance productand manufacturing technologies and to manage any future growth will also dependon our success in attracting and retaining personnel with highly technicalskills. The competition for these qualified technical personnel may be intense ifthe relatively limited number of qualified and available power engineerscontinues. We cannot assure that we will be able to attract and retainqualified management or other highly technical personnel.

 

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CHANGES IN GOVERNMENT REGULATIONS OR PRODUCT CERTIFICATION COULD RESULTIN DELAYS IN SHIPMENT OR IN LOST SALES, THEREBY MATERIALLY AND ADVERSELYAFFECTING OUR RESULTS OF OPERATIONS

 

Our operations are subject to general laws,regulations and government policies in the United States and abroad relating toitems such as minimum wage, employee safety and other health and welfareregulations. Additionally, our product standards are certified by agencies invarious countries including the United States, Canada, Germany and the UnitedKingdom among others. As many customers will not order uncertified products,changes in such certification standards could negatively affect the demand forour products, result in the need to modify our existing products or affect thedevelopment of new products, each of which may involve substantial costs ordelays in sales and could have a material adverse effect on our financialcondition or results of operations.

 

ENVIRONMENTAL COMPLIANCE COULD REQUIRE SIGNIFICANT EXPENDITURES,THEREBY MATERIALLY AND ADVERSELY AFFECTING OUR RESULTS OF OPERATIONS

 

We are subject to federal, state and localenvironmental laws and regulations (in both the United States and abroad) thatgovern the handling, transportation and discharge of materials into theenvironment, including into the air, water and soil. Environmental laws couldbecome more stringent over time, imposing greater compliance costs andincreasing risks and penalties associated with violation. Should there be anenvironmental occurrence, incident

 

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or violation, our financial condition or results of operations may beadversely affected. We could be held liable for significant damages forviolation of environmental laws and could also be subject to a revocation oflicenses or permits, thereby materially and adversely affecting our financialcondition or results of operations.

 

ITEM 2.        PROPERTIES

 

The following table identifies ourfacilities.

 
| **FACILITIES**      |   | **PRIMARY  ACTIVITY**                       |   | **APPROX  SQUARE  FOOTAGE** |   | **OWNED  VS.  LEASED** |   | **LEASE  EXPIRATION  DATE** |
|---------------------|--------|---------------------------------------------|--------|-----------------------------|--------|------------------------|--------|-----------------------------|
| Tustin, CA          |   | Administrative,  Manufacturing  Engineering |   | 86,000                      |   | Leased                 |   | April 30, 2009              |
|                |   |                                        |   |                        |   |                   |   |                        |
| Tustin, CA          |   | Storage                                     |   | 14,000                      |   | Leased                 |   | November 30, 2002           |
|                |   |                                        |   |                        |   |                   |   |                        |
| Irvine, CA          |   | Manufacturing,  Engineering                 |   | 31,000                      |   | Leased                 |   | December 31, 2003           |
|                |   |                                        |   |                        |   |                   |   |                        |
| Wavre, Belgium      |   | Manufacturing                               |   | 178,000                     |   | Owned                  |   | —                      |
|                |   |                                        |   |                        |   |                   |   |                        |
| Guadalajara, Mexico |   | Manufacturing                               |   | 35,000                      |   | Owned                  |   | —                      |
|                |   |                                        |   |                        |   |                   |   |                        |
| Bombay, India       |   | Manufacturing                               |   | 14,000                      |   | Leased                 |   | March 31, 2003              |
|                |   |                                        |   |                        |   |                   |   |                        |
| Bombay, India       |   | Manufacturing                               |   | 17,000                      |   | Leased                 |   | April 15, 2004              |

 

 

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ITEM 3.       LEGAL PROCEEDINGS

 

 Weare subject to disputes and potential claims by third parties that areincidental to the conduct of our business. We do not believe that the outcomeof any such matters, pending at December 31, 2001, will have a material adverseeffect on our financial condition or results of operations.

 

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

None.

 

PART II

 

ITEM 5.       MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED UNITHOLDER MATTERS

 

There is no established public trading marketfor our membership units.

 

As of March 15, 2002, there were 23 holdersof record of our membership units.

 

Pursuant to our Second Amended and RestatedOperating Agreement, as amended, subject to certain qualifications, we may makedistributions of cash on our membership units at times, and in amounts,determined by our Management Committee. Subject to compliance with our amendedcredit agreement, however, we must make quarterly tax distributions on ourmembership units to enable our members to pay taxes on our income. For thefiscal years ended December 31, 2001 and 2000, we made the followingdistributions:

 
| **FISCAL 2001** |
|-----------------|
| **DATE PAID**   |   | **DISTRIBUTION  PER UNIT** |
| April 9, 2001   |   | $ | 0.06 |

 
| **FISCAL 2000**   |
|-------------------|
| **DATE PAID**     |   | **DISTRIBUTION  PER UNIT** |
| February 1, 2000  |   | $ | 0.06 |
| July 25, 2000     |   | $ | 0.07 |
| November 28, 2000 |   | $ | 0.10 |

 

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On June 14, 2000, we consummated an offeringof an aggregate of 47,671 of our Class A Voting Units and an aggregate of5,948,264 of our Class B Non-voting Units, pursuant to exemptions from, ortransactions not subject to the registration requirements of the Securities Actof 1933, as amended, and applicable state securities laws. The net proceeds ofthe offering were approximately $34 million. The offering was effected pursuantto Section 4(2) of the Securities Act and Rule 506 promulgated thereunder, andthe purchasers were those holders of our membership units who were on the dateof purchase Accredited Investors, as that term is defined by Securities ActRule 501, and who elected to participate in the offering.

 

We used the net proceeds together withborrowings under our credit facility to fund the purchase for approximately $55million, including assumption of debt, of all of the outstanding stock of ITS.For more information regarding the purchase of ITS, see “Business—ITSAcquisition.”

 

On April 30, 1999, we consummated an offeringof $100 million aggregate principal amount of notes, pursuant to exemptionsfrom, or transactions not subject to, the registration requirements of theSecurities Act and applicable state securities laws. The net proceeds of theoffering were approximately $96.4 million. The offering was effected pursuantto Section 4(2) of the Securities Act and Rule 144A promulgated thereunder, andthe initial purchaser was Credit Suisse First Boston Corporation. Following theoffering, we effected an exchange offer, registered under the Securities Act,pursuant to which the 10 1/2% Series A Senior Subordinated Notes due 2009 wereexchanged for 10 1/2% Series B Senior Subordinated Notes due 2009 withsubstantially the same terms and conditions as the 10 1/2% Series A SeniorSubordinated Notes due 2009.

 

We used the net proceeds together withborrowings under our credit facility to fund a $150 million cash distributionto our members made in connection with the acquisition by Cherokee InvestorPartners, LLC of 60% of our then outstanding membership units. Collectively, werefer to the issuance of the notes, the entrance into our current creditfacility, the acquisition by Cherokee Investors of 60% of our then outstandingmembership units and the $150 million cash distribution as the “Transactions.”

 

ITEM6.    SELECTED FINANCIAL DATA

 

You should read the following selectedhistorical consolidated financial information in conjunction with our auditedconsolidated financial statements beginning on page F-1 of this Annual Reporton Form 10-K. We derived our selected historical consolidated financialinformation from our audited consolidated financial statements.

 

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|                                                  |   | **CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES** |   |
|-------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                  |   | **YEAR ENDED DECEMBER 31**                       |   |
|                                                  |   | **1997**                                         |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
|                                                  |   | **(IN THOUSANDS, EXCEPT  PER UNIT DATA)**        |   |
| STATEMENT OF OPERATIONS DATA                          |   |                                             |   |   |   |   |   |   |   |
|                                                  |   |                                             |   |   |   |   |   |   |   |   |   |
| Net sales                                             |   | $                                                | 77,022 |   | $ | 87,553 |   | $ | 121,458 |   | $ | 143,175 |   | $ | 121,994 |   |
| Cost of sales                                         |   | 48,990                                           |   | 54,824 |   | 77,593 |   | 94,517 |   | 87,319 |   |
| Gross profit                                          |   | 28,032                                           |   | 32,729 |   | 43,865 |   | 48,658 |   | 34,675 |   |
| Operating expenses                                    |   | 9,520                                            |   | 8,794 |   | 10,599 |   | 20,526 |   | 24,160 |   |
| Special bonus  distribution                           |   | —                                           |   | — |   | 5,330 |   | — |   | — |   |
| Operating income                                      |   | 18,512                                           |   | 23,935 |   | 27,936 |   | 28,132 |   | 10,515 |   |
| Interest expense                                      |   | (1,065                                           | )      | (373 | ) | (10,675 | ) | (16,779 | )  | (16,470 | ) |
| Other income (expense)                                |   | 377                                              |   | 338 |   | (709 | ) | 342 |   | (270 | )  |
| Income (loss) before  extraordinary item              |   | 17,824                                           |   | 23,900 |   | 16,552 |   | 11,695 |   | (6,225 | ) |
| Extraordinary gain on  early extinguishment of debt   |   | 714                                              |   | — |   | — |   | — |   | — |   |
| Income (loss) before  income taxes                    |   | $                                                | 18,538 |   | 23,900 |   | 16,552 |   | 11,695 |   | $ | (6,225 | ) |
| Provision for income  taxes                           |   | —                                           |   | — |   | — |   | 32 |   | 268 |   |
| Net income (loss)                                     |   | $                                                | 18,538 |   | $ | 23,900 |   | $ | 16,552 |   | $ | 11,663 |   | $ | (6,493 | )  |
| Basic and diluted income (loss) per unit:             |   |                                             |   |   |   |   |   |   |   |
| Income (loss) before  extraordinary item              |   | $                                                | .59    |   | $ | .80 |   | $ | .55 |   | $ | .35 |   | $ | (.18) |   |
| Net income (loss)                                     |   | $                                                | .62    |   | $ | .80 |   | $ | .55 |   | $ | .34 |   | $ | (.18) |   |
|                                                  |   |                                             |   |   |   |   |   |   |   |   |   |
| Weighted Average Units  Outstanding:                  |   |                                             |   |   |   |   |   |   |   |   |   |
| Basic                                                 |   | 30,000                                           |   | 30,000 |   | 30,124 |   | 33,647 |   | 36,383 |   |
| Diluted                                               |   | 30,000                                           |   | 30,000 |   | 30,211 |   | 33,985 |   | 36,383 |   |
|                                                  |   |                                             |   |   |   |   |   |   |   |   |   |
| BALANCE SHEET DATA (AT  PERIOD END):                  |   |                                             |   |   |   |   |   |   |   |   |   |
| Working capital                                       |   | $                                                | 14,398 |   | $ | 23,698 |   | $ | 22,757 |   | $ | 10,337 |   | $ | (48 | )  |
| Total assets                                          |   | 30,654                                           |   | 40,846 |   | 54,876 |   | 137,020 |   | 103,645 |   |
| Total debt                                            |   | 4,463                                            |   | 2,042 |   | 149,651 |   | 169,133 |   | 158,061 |   |
| Members’ equity  (deficit)                       |   | 19,118                                           |   | 30,029 |   | (107,676 | ) | (69,061 | ) | (76,132 | ) |
|                                                  |   |                                             |   |   |   |   |   |   |   |   |   |
| OTHER FINANCIAL DATA:                                 |   |                                             |   |   |   |   |   |   |   |   |   |
| EBITDA(a)                                             |   | $                                                | 20,015 |   | $ | 25,606 |   | $ | 35,656 |   | $ | 32,959 |   | $ | 17,209 |   |
| EBITDA margin(b)                                      |   | 26.0                                             | %      | 29.2 | % | 29.4 | % | 23.0 | % | 14.1 | % |
| Cash flow provided by  (used in) operating activities |   | $                                                | 20,078 |   | $ | 20,066 |   | $ | 19,152 |   | $ | 6,730 |   | $ | 17,009 |   |
| Cash flow used in  investing activities               |   | (1,355                                           | )      | (1,898 | ) | (1,137 | ) | (56,660 | ) | (2,000 | ) |
| Cash flow provided by  (used in) financing activities |   | (18,416                                          | )      | (16,256 | ) | (13,436 | )  | 43,528 |   | (13,197 | ) |
| Depreciation and  amortization                        |   | 1,503                                            |   | 1,671 |   | 2,390 |   | 4,827 |   | 6,694 |   |
| Capital expenditures                                  |   | 1,355                                            |   | 1,898 |   | 532 |   | 4,873 |   | 1,745 |   |
|                                                       |        |                                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

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(a) EBITDA represents operating income plus depreciation andamortization and, for the year ended December 31, 1999, plus a special bonus of$5,330,000 made by Cherokee in connection with the Transactions. We considerEBITDA to be a widely accepted financial indicator of our company’s ability toservice debt, fund capital expenditures and expand its business; however,EBITDA is not calculated in the same way by all companies and is neither ameasurement required, nor represents cash flow from operations as defined, bygenerally accepted accounting principles. You should not consider EBITDA to bean alternative to net income, an indicator of operating performance or an alternativeto cash flow as a measure of liquidity.

 

(b) EBITDA Margin represents EBITDA as a percentage of net sales.

 

 

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ITEM 7.          MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

You should read the following discussion andanalysis of our results of operations, financial condition and liquidity inconjunction with the audited consolidated financial statements beginning onpage F-1 of this Annual Report on Form 10-K.

 

OVERVIEW

 

We are a leading designer and manufacturer ofa broad range of switch mode power supplies for OEMs primarily in thetelecommunications, networking and high-end workstation industries. We produceour products and related components in sophisticated manufacturing facilitieslocated in Tustin and Irvine, California; Wavre, Belgium; Guadalajara, Mexico;and Bombay, India.

 

The principal elements comprising cost ofsales are raw materials, labor and manufacturing overhead. Raw materialsaccount for a large majority of cost of sales. Raw materials include magneticsubassemblies, sheet metal, electronic and other components, mechanical partsand electrical wires. Labor costs include employee costs of salaried and hourlyemployees. Manufacturing overhead includes lease costs, depreciation onproperty, plant and equipment, utilities, property taxes and repairs andmaintenance.

 

Operating expenses include engineering costs,selling and marketing costs and administrative expenses. Engineering costs primarilyinclude salaries and benefits of engineering personnel, safety approval andquality certification fees, depreciation on equipment and subcontract costs forthird party contracting services. Selling and marketing expenses primarilyinclude salaries and benefits to account managers and commissions toindependent sales representatives. Administrative expenses primarily includesalaries and benefits for certain management and administrative personnel,professional fees and information system costs.

 

 

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Cherokee is organized as a California limitedliability company and treated as a partnership for United States federal incometax purposes. Under this treatment, Cherokee is not itself subject to United Statesfederal income taxation. Each member of Cherokee, however, is subject to tax onits allocable share of Cherokee’s income. In general, Cherokee makesdistributions to its members in an amount sufficient to pay their United Statesfederal and state income taxes resulting from their allocable share ofCherokee’s income.

 

 

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On June 15, 2000, the Company acquiredIndustrial and Telecommunication Systems and related entities (“ITS”) forapproximately $55 million, including assumption of debt. The acquisition wasaccounted for using the purchase method of accounting.

 

During 2001, the Company continued togenerate the majority of its sales from the communications market segment,particularly the networking and telecommunications sectors. As a result ofunfavorable economic conditions and reduced capital spending by communicationservice providers that purchase our customers’ products, the Company’s saleshave decreased in each quarter of 2001, compared to the immediately precedingquarter. The Company believes unstable and unpredictable economic and industryconditions may continue. If these conditions persist, the Company’s operatingresults and financial condition could be adversely affected.

 

CRITICAL ACCOUNTING POLICIES

 

The Company's consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. As such, management isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent liabilities at the date ofthe financial statements and the amounts of revenues and expenses during thereporting period. Actual results could differ from such estimates.

 

The accounting policies which the Companybelieves are the most critical to aid in fully understanding and evaluating ourreported financial results include the following:

 

Revenue Recognition:         The Company recognizes revenue from product sales uponshipment to the customer provided that persuasive evidence of an arrangementexists, the price is fixed, title has transferred, collection of resultingreceivables is reasonably assured, there are no customer acceptancerequirements, and there are no remaining significant obligations.

 

Credit Risk:            TheCompany performs ongoing credit evaluations of its customers and generally doesnot require collateral. The Company continuously monitors collections andpayments from its customers and maintains a provision for estimated creditlosses based on any specific customer collection issues identified, as well ashistorical experience.

 

Inventories:           Inventoriesare valued at the lower of cost ( first-in, first out) or market. The Companyregularly reviews inventory quantities on hand and writes down excess andobsolete inventories to net realizable value based on forecasted demand andmarket conditions. Actual demand and market conditions may be different fromthose projected by management.

 

Long-Lived Assets:             The Company accounts for the impairment and dispositionof long-lived assets in accordance with SFAS No. 121, "Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposedof." In accordance with SFAS No 121, long-lived assets to be held arereviewed for events or changes in circumstances that indicate that theircarrying value may not be recoverable. In August 2001, FASB issued SFAS No.144, "Accounting for Impairment or Disposal of Long-Lived Assets."This statement addresses financial accounting and reporting for the impairmentof long-lived assets and for the disposal of long-lived assets. SFAS No. 144supersedes SFAS No. 121 and is effective for fiscal years beginning afterDecember 15, 2001. The Company evaluates the carrying value of intangible assetsfor impairment based on undiscounted future cash flows. While the Company hasnot experienced impairment of intangible assets in prior periods, the Companycannot guarantee that there will not be impairment in the future.

 

RESULTS OF OPERATIONS

 

FISCAL 2001 COMPARED TO FISCAL 2000

 

NET SALES

 

Net sales decreased by approximately 14.8% or$21.2 million to $122.0 million for the year ended December 31, 2001 from$143.2 million for the year ended December 31, 2000.

 

Sales of our North American operationsdecreased by approximately 38.1% or $42.5 million primarily due to lowercustomer demand as a result of unfavorable economic conditions and reducedcapital spending by communication service providers. This was partially offsetby increased sales attributable to the acquisition of ITS, which contributed$52.8 million of sales for 2001, compared to $31.5 million of sales contributedfor the period June 16 to December 31, 2000.

 

GROSS PROFIT

 

Gross profit decreased by approximately 28.7%or $14.0 million to $34.7 million for the year ended December 31, 2001 from$48.7 million for the year ended December 31, 2000. Gross margin for the yearended December 31, 2001 decreased to 28.4% from 34.0% in the prior year. 

 

The decrease in gross profit was primarilydue to a decrease in gross profit contributed by the North American operationsresulting primarily from lower sales, partially offset by an increase in grossprofit contributed by the European operations acquired in June 2000. Thedecrease in gross margin compared to the prior year was primarily due to lowergross margin for the North American operations mainly as a result of a changein product mix and increased factory overhead expenses as a percentage of netsales.

 

 

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OPERATING EXPENSES

 

Operating expenses for the year endedDecember 31, 2001 increased by approximately 17.6% or $3.6 million to $24.2million from $20.5 million for the year ended December 31, 2000. As apercentage of sales, operating expenses increased to 19.8% from 14.3% in theprior year.

 

The increase in operating expenses, asexpressed in dollars as well as a percentage of net sales, was primarilyattributable to the inclusion in 2001 of a full year of ITS operations andamortization of goodwill and other related intangibles associated with the ITSacquisition. Partially offsetting the increase in dollars relating to the ITSoperations was a decrease in operating expenses for the North Americanoperations resulting primarily from reductions in our workforce and other costcontrol measures implemented during 2001.

 

OPERATING INCOME

 

Operating income decreased by approximately62.6% or $17.6 million to $10.5 million for the year ended December 31, 2001from $28.1 million for the year ended December 31, 2000. Operating margindecreased to 8.6% for 2001 from 19.6% in 2000.

 

The decrease in operating income wasprimarily attributable to a decrease in the operating income of the NorthAmerican operations resulting mainly from lower sales and decreased grossmargin. Operating income contributed by ITS in 2001 was offset by amortizationof goodwill and other related intangibles associated with the ITS acquisition.The decrease in operating margin was primarily attributable to the decrease ingross margin combined with higher operating expenses as a percentage of salesdiscussed above.

 

INTEREST EXPENSE

 

Interest expense for the year ended December31, 2001 was $16.5 million compared to $16.8 million for the year endedDecember 31, 2000. This decrease was primarily due to lower interest rates onthe Company’s revolver borrowings and term loans in 2001 compared to 2000.

 

NET INCOME

 

As a result of the items discussed above, theCompany reported a net loss of $6.5 million for the year ended December 31, 2001compared to net income of $11.7 million for the year ended December 31, 2000.

 

 

FISCAL 2000 COMPARED TO FISCAL 1999

 

NET SALES

 

Net sales increased by approximately 17.9% or$21.7 million to $143.2 million for the year ended December 31, 2000 from $121.5million for the year ended December 31, 1999.

 

The inclusion of ITS operations from June 16,2000 to December 31, 2000 contributed approximately $31.5 million of sales for2000. This was partially offset by lower sales for the North Americanoperations primarily due to decreased demand from certain major customers in2000 compared with particularly strong demand from those same customers in theprior year. A decline in sales to IBM, one of the Company’s largest customers,accounted for substantially all of the North American sales decrease from 1999.

 

GROSS PROFIT

 

Gross profit increased by approximately 10.9%or $4.8 million to $48.7 million for the year ended December 31, 2000 from$43.9 million for the year ended December 31, 1999. Gross margin for 2000decreased to 34.0% from 36.1% in the prior year.

 

The increase in gross profit was primarilydue to inclusion of ITS in the current year, partially offset by lower grossprofit from the North American operations due to decreased sales as discussedabove. The decrease in gross margin compared to 1999 was primarily due to theinclusion in 2000 of the ITS operations, which had lower gross margins than theNorth American operations.

 

 

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OPERATING EXPENSES

 

Operating expenses for the year endedDecember 31, 1999 of $15.9 million included a $5.3 million special bonusdistribution. This bonus payment was in addition to our discretionary annualmanagement bonus plan and was funded by capital contributions made by our thenexisting members. No such special bonus distribution was made for the yearended December 31, 2000.

 

Operating expenses increased by approximately93.7% or $9.9 million to $20.5 million for the year ended December 31, 2000from $10.6 million, excluding the special bonus distribution, for the yearended December 31, 1999. As a percentage of sales, operating expenses, beforethe special bonus distribution, increased to 14.3% from 8.7% in the prior year.

 

The increase in operating expenses, asexpressed in dollars as well as a percentage of net sales, was primarilyattributable to the inclusion of ITS’s operations from June 16, 2000 toDecember 31, 2000, and amortization of goodwill and other related intangiblesrelated to the ITS acquisition. The increase in operating expenses as expressedas a percentage of net sales was also attributable to having the resources inplace at the North American operations to support sales levels commensuratewith those achieved in 1999.

 

OPERATING INCOME

 

Operating income decreased by approximately15.4% or $5.1 million to $28.1 million for the year ended December 31, 2000from $33.3 million, excluding the special bonus distribution, for the yearended December 31, 1999. Operating margin for the year ended December 31, 2000,declined to 19.6% from 27.4% in the prior year.

 

The decrease in operating income wasprimarily due to the same factors contributing to our decrease in gross profitand increase in operating expenses as discussed above.

 

INTEREST EXPENSE

 

Interest expense for the year ended December31, 2000 was $16.8 million compared to $10.7 million for the year endedDecember 31, 1999. This substantial increase was primarily due to the issuanceof $100 million of 10 1/2% senior subordinated notes and a $50 million termloan, all of which occurred in April 1999 in connection with the Transactions,and $8.0 million of new term debt in connection with the ITS acquisition inJune 2000.

 

NET INCOME

 

Net income for the year ended December 31,2000 was $11.7 million. Net income decreased by approximately 46.7% or $10.2million from $21.9 million, excluding the effect of the special bonusdistribution, for the year ended December 31, 1999. Net income margin for 2000was 8.1% compared to 18.0% for 1999.

 

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The decrease in net income and net incomemargin was primarily due to the factors discussed above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

CASH FLOWS

 

FISCAL 2001 COMPARED TO FISCAL 2000

 

Net cash provided by operating activities was$17.0 million for the year ended December 31, 2001 compared to $6.7 million forthe year ended December 31, 2000. Cash provided by operating activities for2001 reflects net loss of approximately $6.5 million, depreciation andamortization of $6.7 million, decreases of $14.4 million in accounts receivableand $14.1 million in inventories and an increase in accrued liabilities of $2.2million, partially offset by decreases of $12.6 million in accounts payable and$1.3 million in accrued compensation and benefits. Cash provided by operatingactivities for 2000 reflects net income of $11.7 million, depreciation andamortization of $4.8 million, partially offset by increases of $7.0 million inaccounts receivable and $4.7 million in inventory.

 

Net cash used in investing activities for theyear ended December 31, 2001 primarily consists of $1.7 million of additions toproperty and equipment. The amount for 2000 reflects $4.9 million of additionsto property and equipment and $51.5 million invested in the ITS acquisition,net of cash acquired.

 

Net cash used in financing activities of$13.2 million for the year ended December 31, 2001 primarily reflects a netreduction of $3.2 million in revolving credit borrowings, $6.4 million ofpayments on long-term debt and an equity distribution of $2.1million. Net cash provided by financing activities of $43.5 million for theyear ended December 31, 2000 primarily reflects proceeds from bank borrowingsaggregating $13.0 million and $34.8 million from the sale of units, which wereused to finance the purchase of ITS, partially offset by payments on long-termdebt of $5.2million and equity distributions of $7.2 million.

 

FISCAL 2000 COMPARED TO FISCAL 1999

 

Net cash provided by operating activities was$6.7 million for the year ended December 31, 2000 compared to $19.2 million forthe year ended December 31, 1999. Cash provided by operating activities for2000 reflects increased depreciation and amortization, partially offset byincreases in accounts receivable of $7.0 million and inventories of $4.7million. Cash provided by operating activities for 1999 reflects increaseddepreciation and amortization as well as increased accrued interest payable of$2.4 million, partially offset by increased inventories of $3.4 million.

 

Net cash used in investing activities was$56.7 million for the year ended December 31, 2000 compared to $1.1 million forthe year ended December 31, 1999. The amount for 2000 reflects $4.9 million ofadditions to property and equipment and $51.5 million invested in the ITSacquisition, net of cash acquired.

 

 

 

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Net cash provided by financing activities was$43.5 million for the year ended December 31, 2000 compared to $13.4 millionused for the year ended December 31, 1999. The amount for 2000 reflects $34.8million of cash proceeds from the sale and issuance of new members’ equityunits and $8.0 million of borrowings under a new term loan, both done primarilyin connection with the ITS acquisition. A net increase in revolving creditborrowings of $14.4 million was offset by payments on long-term debt of $5.2million and equity distributions of $7.2 million. The amount for 1999 includesthe favorable cash flow effect of a $5.3 million capital contribution made bythe existing members to fund the special bonus distribution discussed above.This was partially offset by payment in 1999 of $5.4 million of deferredfinancing costs.

 

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LIQUIDITY

 

Historically, we have financed our operationswith cash from operations supplemented by borrowings from our creditfacilities. Our liquidity needs primarily arise from debt service on ourindebtedness, working capital requirements, capital expenditures anddistributions to our members so that they may satisfy their obligations to paytaxes on our income. Our liquidity in 2000 was also affected by the acquisitionof ITS. As of December 31, 2001, our borrowings consisted of $100 million ofsenior subordinated notes and $55.0 million of borrowings under our variouscredit facilities, including $41.8 million under the term loan facilities and$10.5 million drawn under the $25 million revolving credit facility. We are notsubject to any amortization requirements under the notes prior to maturity butwe are required to make scheduled repayments under the term loan facilities.

 

Our historical capital expenditures havesubstantially resulted from investments in equipment to increase ourmanufacturing capacity and improve manufacturing efficiencies. Our cash capitalexpenditures were $1.7 million, $4.9 million and $0.5 million for fiscal 2001,2000 and 1999, respectively. Capital expenditures under capital leases were$0.0 million in 2001, $1.3 million in 2000 and $3.2 million in 1999. For fiscal2002, we expect capital expenditures to be approximately $1-2 million, whichwill relate principally to investments in manufacturing equipment.

 

                On September 26, 2001, our credit agreementwith our lenders was amended to include provisions that specify among otherthings, (1) that some of our unitholders, or their equity members, willguarantee $10.5 million of our senior debt principal until specific financialratios are attained, (2) that we will be restricted from making cashdistributions to our unitholders until specific financial ratios are attained,(3) that we will be permitted to make our interest payments due in November2002 relating to our $100 million of senior subordinated notes so long asspecified financial ratios are attained, (4) that the maximum availabilityunder our revolving line of credit is reduced until approximately April 30,2002, (5) that LIBOR and base rate margins have been increased for revolverborrowings and term loans, and (6) that financial covenant ratios required infuture periods have been modified, including provisions allowing ourunitholders to make capital contributions to us which will be treated asearnings (as defined) for purposes of calculating debt covenants.

 

                Based upon our present expectations, we anticipatethat we may not be in compliance with certain financial covenants under ourcredit agreement at June 30, 2002, or earlier, without additional financingfrom our unitholders. In addition, we believe that cash flow from operationsand available borrowing capacity may not be adequate to meet our anticipatedcash requirements, including operating requirements, planned capitalexpenditures and debt service, for the last six months of the year, or earlier,without additional financing from our unitholders.

 

                We are currently considering alternatives toaddress these issues, which may include (i) an amendment or restructuring ofour credit agreement to provide additional liquidity and room under certainfinancial covenants, (ii) a refinancing of our credit agreement, (iii) theinfusion of additional equity by our unitholders, or (iv) some combination ofthe above. Basedupon the Company's current business plans and prospects, management expectsthat its restructuring alternatives, the $10.5 million guaranty by certainunitholders and funding from its unitholders, if necessary, will enable theCompany to meet its obligations and comply with its debt covenants throughDecember 31, 2002.

 

                We cannot provide any assurances that we willbe successful in obtaining any desired results on satisfactory terms or as towhat effect any of the foregoing, if obtained, may have on our future businessoperations. In the event of a covenant or payment default under our creditagreement or a payment default under the indenture governing our seniorsubordinated notes, the lenders under the credit agreement would becomeentitled to certain rights, including the right to accelerate the debt and torequire our unitholders, or their equity members, to contribute $10.5 millionto our senior debt principal under the terms of the guaranty they provided. Theguarantors would be subrogated to rights of the lenders under the creditagreement, on a basis senior to the senior subordinated notes. In the event ofa payment default under the indenture or the credit agreement or in the eventof an acceleration of amounts due under our credit agreement, the holders ofthe senior subordinated notes could also accelerate the maturity of theoutstanding senior subordinated notes.

 

                The maturities of our long-term debt,including capital leases, and future payments under our operating leases as ofDecember 31, 2001 are as follows (in millions):

 
| **Contractual  obligation** |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|
| Term loans                  |   | $        | 7.7    |     | $      | 9.1      |   | $        | 11.2   |     | $      | 13.8           |   | $         | 3⁄4 |   | $ | 3⁄4 |   | $ | 41.8 |   |
| Senior subordinated notes   |   | 3⁄4   |   | 3⁄4   |   | 3⁄4   |   | 3⁄4   |   | 3⁄4   |   | 100.0          |   | 100.0     |   |
| Capital leases              |   | 1.3      |   | 1.4      |   | .7       |   | 3⁄4   |   | 3⁄4   |   | 3⁄4         |   | 3.4       |   |
| Operating leases            |   | 1.4      |   | 1.3      |   | 1.0      |   | 1.0      |   | 1.0      |   | 2.5            |   | 8.2       |   |
|                        |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |
| Total                       |   | $        | 10.4   |     | $      | 11.8     |   | $        | 12.9   |     | $      | 14.8           |   | $         | 1.0    |   | $ | 102.5 |   | $ | 153.4 |   |

 

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                We are organized as a California limited liability company andtreated as a partnership for United States federal income tax purposes. Underthis treatment,we are not subject to United States federal income taxation; however, ourforeign subsidiaries are subject to income tax. Each of our members, however,is subject to tax on its allocable share of our income. In general, we makedistributions to our members in an amount sufficient to pay their United Statesfederal and state income taxes resulting from their allocable share of ourincome. During 2001, 2000 and 1999, we made distributions to our members ofapproximately $0.0 million, $7.6 million and $160.8 million, respectively. The1999 distribution included the $150 million distribution made in connectionwith the Transactions.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” is effective for all fiscal yearsbeginning after June 15, 2000. SFAS No. 133, as amended, establishes accountingand reporting standards for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activities.Under SFAS No. 133, certain contracts that were not formerly consideredderivatives may now meet the definition of a derivative and all derivatives areto be reported on the balance sheet at fair market value. The Company adoptedSFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did nothave a significant impact on the financial position, results of operations, orcash flows of the Company.

 

In June 2001, FASB issued two newpronouncements: SFAS No. 141, “Business Combinations,” and SFAS No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 141 prohibits the use of thepooling-of-interest method for business combinations initiated after June 30,2001 and also applies to all business combinations accounted for by thepurchase method that are completed after June 30, 2001. There are alsotransition provisions that apply to business combinations completed before July1, 2001, that were accounted for by the purchase method. SFAS No. 142 iseffective for fiscal years beginning after December 15, 2001 to all goodwilland other intangible assets recognized in an entity’s statement of financialposition at that date, regardless of when those assets were initiallyrecognized. SFAS No. 142 requires that goodwill and otherintangible assets with indefinite useful lives no longer be amortized, butinstead be tested for impairment at least annually. The Company will no longeramortize intangible assets but will evaluate their carrying value on an annualbasis or when events or circumstances indicate that their carrying value may beimpaired. The Company expects the adoption of SFAS No. 142 to result in reducedamortization expense of approximately $3.0 million in 2002. The Company is currently evaluatingall the provisions of SFAS No. 141 and SFAS No. 142.

 

In August 2001, FASB issued SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets.” This statementaddresses financial accounting and reporting for the impairment of long-livedassets and for the disposal of long-lived assets. SFAS No. 144 supersedes SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of,” and is effective for fiscal years beginning afterDecember 15, 2001. The Company is currently evaluating the impact that the adoptionof this standard will have on its financial position and results of operations.

 

 

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ITEM 7A.              QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risks relating to our operations resultprimarily from changes in short-term interest rates. We do not have significantforeign exchange or other market risk. We did not have any derivative financialinstruments at December 31, 2001.

 

Our exposure to market risk for changes ininterest rates relates primarily to our credit facility. In accordance with thecredit facility, we enter into variable rate debt obligations to supportgeneral corporate purposes, including capital expenditures and working capitalneeds. We continuously evaluate our level of variable rate debt with respect tototal debt and other factors, including assessment of the current and futureeconomic environment.

 

We had approximately $55 million in variablerate debt outstanding at December 31, 2001. Based upon this year-end variablerate debt level, a hypothetical 10% adverse change in interest rates wouldincrease interest expense by approximately $0.4 million on an annual basis, andlikewise decrease our earnings and cash flows. We cannot predict marketfluctuations in interest rates and their impact on our variable rate debt, norcan there be any assurance that fixed rate long-term debt will be available tous at favorable rates, if at all. Consequently, future results may differmaterially from the estimated adverse changes discussed above.

 

As a result of the ITSacquisition in June 2000, the Company has European operations and is,therefore, subject to a certain degree of market risk associated with changesin foreign currency exchange rates. The Company has not actively engaged inexchange rate hedging activities.

 

ITEM 8.                  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATE

 

                                See the Index to Financial Statements on pageF-1.

 

ITEM 9.                  CHANGESAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

                                AND FINANCIAL DISCLOSURE

 

                                None.

 

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PART III

ITEM 10. MANAGEMENT

 

EXECUTIVE OFFICERS AND MANAGEMENT COMMITTEE MEMBERS

 

Pursuant to our Second Amended and RestatedOperating Agreement, as amended, we are managed by an eight-member ManagementCommittee.

 

Set forth below is certain informationconcerning our executive officers and members of our Management Committee.

 
| **NAME**       |   | **AGE** |   | **POSITION(S) WITH CHEROKEE**                                             |
|----------------|--------|---------|--------|---------------------------------------------------------------------------|
| Pat Patel      |   | 57      |   | Chairman, Founder and member of Management  Committee                     |
|           |   |    |   |                                                                      |
| Jeff Frank     |   | 47      |   | President and Chief Executive Officer and  member of Management Committee |
|           |   |    |   |                                                                      |
| Bud Patel      |   | 66      |   | Executive Vice President and member of  Management Committee              |
|           |   |    |   |                                                                      |
| Dennis Pouliot |   | 54      |   | Vice President of Sales                                                   |
|           |   |    |   |                                                                      |
| Howard Ribaudo |   | 43      |   | Vice President of Global Accounts                                         |
|           |   |    |   |                                                                      |
| Van Holland    |   | 48      |   | Chief Financial Officer                                                   |
|           |   |    |   |                                                                      |
| Ken King       |   | 73      |   | Member of Management Committee                                            |
|           |   |    |   |                                                                      |
| Ian Schapiro   |   | 44      |   | Vice President and member of Management  Committee                        |
|           |   |    |   |                                                                      |
| Stephen Kaplan |   | 43      |   | Member of Management Committee                                            |
|           |   |    |   |                                                                      |
| Tony Bloom     |   | 63      |   | Member of Management Committee                                            |
|           |   |    |   |                                                                      |
| Chris Brothers |   | 36      |   | Member of Management Committee                                            |

 

PAT PATEL founded Cherokee Corporation in1978, and served as President of Cherokee and its successor since itsinception. In April 1999, he became Chairman of the Management Committee. InSeptember 2001, he resigned as President and Chief Executive Officer. Prior tofounding Cherokee Corporation, Mr. Patel served as a Senior Project Engineer atBurroughs Corp. (now Unisys) for four years. Mr. Patel also serves as Presidentand Chief Executive Officer of, and is a director of, Cherokee Finance.

 

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JEFF FRANK joined Cherokee in September 2001as President and Chief Executive Officer. Prior to joining Cherokee, Mr. Frankwas President of Lamda LEI for two years. In addition, Mr. Frank has over 18years of experience in the electronics industry.

 

BUD PATEL has served as our Executive VicePresident since April 1996 and was a Vice President of Engineering of CherokeeCorporation from 1987 to 1993. Mr. Patel served as President of Bikor from June1993 through March 1996 when we acquired substantially all of the assets ofBikor. Prior to joining the Company in 1987, Mr. Patel was a Director ofEngineering at Leland Electro Systems for over 25 years. Mr. Patel also servesas a director of Cherokee Finance. Bud Patel is not related to Pat Patel.

 

DENNIS POULIOT has served as Vice Presidentin the sales and marketing departments of Cherokee and its predecessor since March1991. Prior to joining us, Mr. Pouliot was a sales manager at Lambda Qualidynefrom June 1989 to March 1991 and a Director of International Sales andMarketing from September 1978 through June 1989. 

 

HOWARD RIBAUDO has served as Vice Presidentin the sales and marketing departments since March 1996 and served us invarious other capacities for Cherokee from 1988 through September 1993. Mr.Ribaudo served as Vice President of Sales and Marketing for Bikor fromSeptember 1993 through March 1996.

 

VAN HOLLAND became our Chief FinancialOfficer in August 1999. Prior to joining Cherokee, Mr. Holland served asExecutive Vice President and Chief Financial Officer of Wyle Electronics, a$1.5 billion electronics distributor. From 1979 to May 1999, Mr. Holland servedin various senior financial management positions at Wyle. Prior to that, Mr.Holland was an auditor with Arthur Andersen & Co.

 

KEN KING served as Executive Vice Presidentof Cherokee and its predecessor from September 1982 until April 2000. Mr. Kingjoined us after serving as the President of Delphi Communications Corp. fromSeptember 1972 until September 1982.

 

IAN SCHAPIRO became our Vice President and amember of our Management Committee in April 1999. Mr. Schapiro became afounding principal of GFI Energy Ventures in June 1995. From November 1985 toJune 1995 he was a partner of Venture Associates and of Arthur Andersen &Co. following that firm’s acquisition of Venture Associates. From 1984 to 1985,Mr. Schapiro was Chief Financial Officer of a technology company, and beforethat, a commercial banker with The Bank of California whose portfolio wasconcentrated in the energy sector. Mr. Schapiro is a member of the board ofdirectors of UtiliQuest Holdings, Inc., Linesoft Corporation, and Xantrex Technology,Inc. Mr. Schapiro also serves as Vice President and Secretary of, and is adirector of, Cherokee Finance.

 

STEPHEN KAPLAN became a member of ourManagement Committee in April 1999. Mr. Kaplan is a principal of Oaktree. Priorto joining Oaktree in June 1995, Mr. Kaplan was a Managing Director of TrustCompany of the

 

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West, or TCW. Prior to joining TCW in 1993, Mr. Kaplan was a partner inthe law firm of Gibson, Dunn & Crutcher. Mr. Kaplan serves on the boards ofdirectors of Collagenex Pharmaceuticals, Inc., General Maritime Corporation,Forest Oil Corporation and various other private companies.

 

TONY BLOOM became a member of our ManagementCommittee in April 1999. Mr. Bloom is an international investor now based inLondon. Prior to his relocation to London in July 1988, he lived in SouthAfrica where he was the Chairman and Chief Executive of The Premier Group (amulti-billion dollar conglomerate involved in agribusiness, retail, andconsumer products), and a member of the boards of directors of Barclays Bank,Liberty Life Assurance, and South African Breweries. Since moving to the UnitedKingdom, Mr. Bloom has been a member of the board of directors of Rothschild,Deputy Chairman of Sketchley plc. Mr. Bloom is currently a director of RIONarcea Gold Mines Ltd., Afri-Can Marine Minerals Corporation, XantrexTechnology, Inc., Power Measurement, Inc., Caminus Corporation and is Chairmanof Cine-UK Ltd. Mr. Bloom’s association with GFI goes back to its inception in1995.

 

CHRIS BROTHERS became a member of ourManagement Committee in April 1999. Mr. Brothers is a Managing Director ofOaktree. Prior to joining Oaktree in 1996, Mr. Brothers worked at the New Yorkheadquarters of Salomon Brothers Inc, where he served as a Vice President inthe Mergers and Acquisitions group. Prior to 1992, Mr. Brothers was a Managerin the Valuation Services group of Price Waterhouse. Mr. Brothers serves on theboards of directors of National Mobile Television, Inc, Caminus Corporation,Power Measurement, Inc., Ltd. and Xantrex Technology, Inc.

 

Our Second Amended and Restated OperatingAgreement, as amended, provides that Cherokee Investors has the right todesignate four members of our Management Committee. OCM/GFI CherokeeInvestments II, Inc. has the right to designate one member of our ManagementCommittee and our other members have the right to designate three members ofour Management Committee.

 

The individuals serving as members of ourManagement Committee serve indefinite terms, and may be removed only by themembers that appointed that individual to the Management Committee.

 

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NON-COMPETITION AGREEMENTS

 

In connection with the Transactions, each ofMessrs. Pat Patel, Bud Patel, Amrit Patel and Mukesh Patel, all of whom are notdirectly related to each other, entered into Non-Competition andConfidentiality Agreements. The Non-Competition Agreements are effective forthe longer of five years or the period during which the executive directly orindirectly holds any equity interest in Cherokee.

 

Each Non-Competition Agreement prohibits theapplicable executive from directly or indirectly taking any action orencouraging others to take any action, which advances or is intended to advancethe interest of any existing or potential competitor of ours or that wouldotherwise affect the Company’s relationship with any existing or potentialcustomer in a manner that is not in our interest. Each Non-CompetitionAgreement also contains confidentiality and non-solicitation provisions.

 

ITEM 11. COMPENSATION OF NAMED EXECUTIVE OFFICERS

 

The summary compensation table below setsforth information concerning compensation paid in the fiscal year endedDecember 31, 1999, 2000 and 2001 to our Chief Executive Officer and our fourother most highly compensated executive officers, referred to in thisprospectus as our named executive officers.

 

SUMMARY COMPENSATION TABLE

 
|                                       |   |     | ** ** | **ANNUAL COMPENSATION** | ** ** |               | ** ** |                                    |   |
|--------------------------------------------|--------|----------|------------|-------------------------|------------|--------------------|------------|-----------------------------------------|--------|
| **NAME AND PRINCIPAL POSITION**            |   | **YEAR** |       | **SALARY**

**($)**     |       | **BONUS**

**($)** |       | **OTHER ANNUAL  COMPENSATION (1)  ($)** |   | **SECURITIES  UNDERLYING  OPTIONS (#) (5)** |   | **ALL OTHER  COMPENSATION (2)  ($)** |   |
| Pat Patel                                  |   | 2001     |       | 352,281                 |       | 94,000             |       | —                                  |   | — |   | 5,250 |   |
| Chairman and Chief  Executive              |   | 2000     |       | 316,196                 |       | 250,000            |       | —                                  |   | 150,000 |   | 5,250 |   |
| Officer (4)                                |   | 1999     |       | 319,732                 |       | 175,000            |       | —                                  |   | 150,000 |   | 5,000 |   |
|                                       |   |     |       |                    |       |               |       |                                    |   |   |   |   |   |
| Jeff Frank                                 |   | 2001     |       | 63,000                  |       | —             |       | —                                  |   | — |   | — |   |
| President and Chief  Executive Officer (4) |   |     |       |                    |       |               |       |                                    |   |   |   |   |   |
|                                       |   |     |       |                    |       |               |       |                                    |   |   |   |   |   |
| Bud Patel                                  |   | 2001     |       | 214,140                 |       | 47,000             |       | —                                  |   | — |   | 5,250 |   |
| Executive Vice President                   |   | 2000     |       | 216,256                 |       | 125,000            |       | —                                  |   | 75,000 |   | 5,250 |   |
|                                       |   | 1999     |       | 202,384                 |       | 110,000            |       | —                                  |   | 75,000 |   | 5,000 |   |
|                                       |   |     |       |                    |       |               |       |                                    |   |   |   |   |   |
| Dennis Pouliot                             |   | 2001     |       | 143,673                 |       | 20,000             |       | —                                  |   | — |   | 4,310 |   |
| Vice President of Sales                    |   | 2000     |       | 150,020                 |       | 60,000             |       | —                                  |   | 40,000 |   | 4,500 |   |
|                                       |   | 1999     |       | 150,020                 |       | 50,000             |       | —                                  |   | 75,000 |   | 1,004,500 | (3) |
|                                       |   |     |       |                    |       |               |       |                                    |   |   |   |   |   |
| Howard Ribaudo                             |   | 2001     |       | 130,500                 |       | 20,000             |       | —                                  |   | — |   | 3,915 |   |
| Vice President of Global                   |   | 2000     |       | 124,098                 |       | 50,000             |       | —                                  |   | 30,000 |   | 3,723 |   |
| Accounts                                   |   | 1999     |       | 124,770                 |       | 30,000             |       | —                                  |   | 37,500 |   | 3,552 |   |
|                                       |   |     |       |                    |       |               |       |                                    |   |   |   |   |   |
| Van Holland                                |   | 2001     |       | 152,615                 |       | 25,000             |       | —                                  |   | — |   | 4,578 |   |
| Chief Financial Officer                    |   | 2000     |       | 158,769                 |       | 65,000             |       | —                                  |   | 50,000 |   | 3,600 |   |
|                                       |   | 1999     |       | 64,615                  |       | 25,000             |       | —                                  |   | 75,000 |   | — |   |

 

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(1) For each named executive officer, the aggregate dollar amount ofother

 

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annual compensation not properly categorized as salary or bonus did notexceed the lesser of (1) $50,000 and (2) 10% of the total salary and bonusreported by such named executive officer for such fiscal year.

 

(2) Represents matching contributions made by us on behalf of the namedexecutive officers under our 401(k) plan.

 

(3) $1,000,000 represents a special bonus paid by the Company’s membersin connection with the Transactions in 1999.

 

(4) Jeff Frank was hired as the Company’s new President and ChiefExecutive Officer in September 2001 and his compensation as shown consists ofthe last four months of 2001. Pat Patel agreed to remain in his position toprovide for a smooth transition.

 

(5) These options are currently in the process of being cancelled andwill be reissued at a later date.

 

UNIT OPTION PLAN

 

1999 UNIT OPTION PLAN. The ManagementCommittee adopted the 1999 Unit Option Plan (the “Plan”) on June 28, 1999,which has been approved by a majority of our members holding Class A Units, forthe benefit of our officers, Management Committee members, employees, advisorsand consultants. The Plan covers an aggregate of 2,970,000 non-voting Class BUnits and provides for the issuance of unit options.

 

The Plan may be administered by theManagement Committee or a committee designated by the Management Committee(either such committee sometimes referred to as the “plan administrator”). Theplan administrator may interpret the Plan and, subject to its provisions, mayprescribe, amend and rescind rules and make all other determinations necessaryor desirable for the administration of the Plan. The Plan permits the planadministrator to select the officers, Management Committee representatives,employees, advisors and consultants of the Company (including ManagementCommittee representatives who are also employees) who will receive unit optionsand generally to determine the terms and conditions of such unit options.

 

The unit price of each unit option grantedunder the Plan may generally not be less than 85% of the fair market value of aClass B Unit on the date a unit option is granted. Unit options generally vestat the rate of 25% per year over four years.

 

In the event that we (i) become incorporated(or merged into a corporation or transfer all or substantially all of ourassets to a corporation) or (ii) become a publicly traded corporation (each, a“Conversion Transaction”), the plan administrator will, prior to suchConversion Transaction, take such action as it shall determine to beappropriate with respect to the Plan and the outstanding unit options granted,so as to equitably treat such options and the participants and to enable themto retain the benefits of the unit options following such ConversionTransaction. Such actions may, but need not, include adopting a new plan andconverting the unit options into comparable awards under that plan.

 

 

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In connection with any proposed (i)liquidation or dissolution of us, (ii) a sale of all or substantially all ofour assets other than in the ordinary course of our business or (iii) a mergeror consolidation involving us in which we are not the surviving entity or webecome a subsidiary of another corporation, excluding, however, any ConversionTransaction, the plan administrator shall determine the appropriate treatment,if any, of outstanding unit options and may make such amendments to the Plan asare necessary to reflect such determination.

 

Except as otherwise provided, in the event ofany merger, reorganization, consolidation or other change in corporatestructure affecting the Class B Units, an equitable substitution orproportionate adjustment, if any, as determined by the plan administrator, maybe made in (i) the aggregate number of Class B Units reserved for issuanceunder the Plan, and (ii) the kind, numberand exercise price of Class B Unitssubject to outstanding unit options granted under the Plan.

 

Except as otherwise provided, in the event ofany unit split, reverse unit split, distribution of units, recapitalization,combination or reclassification of units, an equitable substitution orproportionate adjustment, as determined by the plan administrator, shall bemade in (i) the aggregate number of Class B Units reserved for issuance underthe Plan, and (ii) the kind, number and exercise price of Class B Units subjectto outstanding unit options granted under the Plan.

 

In connection with any such event, the planadministrator may provide for the cancellation of any outstanding unit optionsthat are vested but unexercised, or any portion thereof. In connection with anysuch cancellation, we will make a payment to the participant in cash or otherproperty equal to the difference between the aggregate fair market value of theClass B Units subject to the cancelled unit options, or portion thereof, andthe aggregate exercise price of the cancelled unit options, or portion thereof.

 

The terms of the Plan provide that the planadministrator may amend, suspend 

 

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or terminate the Plan at any time,provided, however, that certain amendments require approval of a majority ofthe members holdingClass A Units. Further, no such action may be taken which adversely affects anyrights under outstanding unit options without the holder’s consent.

 

OPTION/SAR GRANTS IN LAST FISCAL YEAR

 

                There were no unit options granted to orexercised by any of our executive officers in 2001.

 

COMPENSATION OF DIRECTORS

 

The individuals serving on the ManagementCommittee who are not employees of Cherokee will receive no compensation solong as they are affiliated with, or have a financial interest in, Cherokee. Allof our Management Committee members currently have these affiliations. TheManagement Committee has sole discretion to determine to what extent, if any,to compensate any individuals serving on the Management Committee.

 

No director of Cherokee Finance receives anycompensation with respect to his or her position as a director.

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

After we completed the Transactions, ourManagement Committee formed a compensation committee comprised of Pat Patel, IanSchapiro and Chris Brothers. No member of the compensation committee willparticipate in the determination of his or her own compensation.

 

ITEM 12.                 SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT

 

The following table sets forth the beneficialownership of our outstanding membership units as of March 15, 2002 by:

 

•             each person who is known by us toown beneficially more than 5% of our outstanding Class A Units;

 

•             each of our Management Committeemembers and named executive officers; and

 

•             all of our Management Committeemembers and named executive officers as a group.

 

 

43

----

 
|                                                                                            |   | **MEMBERSHIP UNITS BENEFICIALLY OWNED(1)** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                            |   | **CLASS A**                                |   | **CLASS B** |   |
|                                                                                            |   | **(VOTING)**                               |   | **(NON-VOTING)** |   |
| **NAME**                                                                                        |   | **NUMBER**                                 |   | **PERCENT** |   | **NUMBER** |   | **PERCENT** |   |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Cherokee Investor  Partners, LLC(2)(3)                                                          |   | 242,275                                    |   | 69.69 | % | 24,637,454 |   | 68.37 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Bikor Corporation(4)                                                                            |   | 23,719                                     |   | 6.82 | % | 2,415,486 |   | 6.70 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| OCM/GFI Cherokee  Investors II (2)(3)                                                           |   | 10,520                                     |   | 3.03 | % | 1,299,987 |   | 3.61 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Manju Patel(4)(5)                                                                               |   | 71,157                                     |   | 20.47 | % | 1,756,717 |   | 4.88 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Ganpat Patel(4)(6)(12)                                                                          |   | 71,157                                     |   | 20.47 | % | 1,756,717 |   | 4.88 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Jeff Frank(4)                                                                                   |   | —                                     |   | 0.00 | % | — |   | 0.00 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Bud Patel(4)(7)(12)                                                                             |   | 23,719                                     |   | 6.82 | % | 2,415,486 |   | 6.70 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Dennis Pouliot(4)(12)                                                                           |   | —                                     |   | 0.00 | % | 50,000 |   | 0.14 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Howard Ribaudo(4)(12)                                                                           |   | —                                     |   | 0.00 | % | 87,139 |   | 0.24 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Van Holland (4)(12)                                                                             |   | —                                     |   | 0.00 | % | 98,873 |   | 0.27 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Ian Schapiro(3)(8)                                                                              |   | 252,795                                    |   | 72.71 | % | 25,937,441 |   | 71.98 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Stephen Kaplan(9)(10)                                                                           |   | 252,795                                    |   | 72.71 | % | 25,937,441 |   | 71.98 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Tony Bloom (3)(11)                                                                              |   | 252,795                                    |   | 72.71 | % | 25,937,441 |   | 71.98 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Chris Brothers(9)(10)                                                                           |   | 252,795                                    |   | 72.71 | % | 25,937,441 |   | 71.98 | % |
|                                                                                            |   |                                       |   |   |   |   |   |   |   |
| Ken King(4)                                                                                     |   | —                                     |   | 0.00 | % | 12,500 |   | 0.03 | % |
|  

All Management Committee  members and named executive officers as a group (11 persons). |   | 347,671                                    |   | 100.00 |  % | 30,358,156 |   | 84.25 | %  |

 

----

(1) The Class A Units andClass B Units are identical except that Class A Units have voting rights andClass B Units have no voting rights.

 

(2) The owners of CherokeeInvestors Partners, LLC and OCM/GFI Cherokee Investors II include an affiliateof GFI, an affiliate of Oaktree, Rothschild and an affiliate of the initialpurchaser of the outstanding notes. By virtue of their ownership of equity ofCherokee Investors, these entities may be deemed to share beneficial ownershipof the membership units owned by Cherokee Investors. GFI, Oaktree, Rothschild andthe initial purchaser, and their affiliates, if appropriate, expressly disclaimbeneficial ownership of such units.

 

(3) c/o GFI Energy Ventures LLC, 11611 San Vicente Boulevard, Suite710, Los Angeles, CA 90049.

 

(4) c/o Cherokee International, LLC, 2841 Dow Avenue, Tustin,California 92780.

 

(5) Consists entirely ofmembership units that Manju Patel holds jointly with her husband, Pat Patel, astrustees of the Patel Family Trust (see note 6). Manju Patel expresslydisclaims beneficial ownership of any units beneficially owned by her astrustee of that trust.

 

(6) Consists entirely ofmembership units that Mr. Patel holds jointly with his wife, Manju Patel, astrustees of the Patel Family Trust (see note 5). Mr. Patel expressly disclaimsbeneficial ownership of any units beneficially 

 

 

44

----

 

 

       owned by him as trustee of that trust.

 

(7) Bud Patel may bedeemed to share beneficial ownership of the 23,719 Class A Units and 2,415,486Class B Units owned by Bikor, by virtue of his ownership of Bikor’s commonstock. Bud Patel expressly disclaims beneficial ownership of any unitsbeneficially owned by him by virtue of his ownership of Bikor’s common stock.

 

(8) Ian Schapiro may bedeemed to share beneficial ownership of the 252,795 Class A Units and25,937,441 Class B Units owned by Cherokee Investors and OCM/GFI CherokeeInvestors II by virtue of his status as a principal of GFI, which, through anaffiliate holds an equity interest in Cherokee Investors. Mr. Schapiroexpressly disclaims beneficial ownership of any units beneficially owned by himby virtue of his status as a principal of GFI.

 

(9) c/o Oaktree CapitalManagement, LLC, 333 South Grand Avenue, Los Angeles, California 90071.

 

(10) Stephen Kaplan andChris Brothers may be deemed to share beneficial ownership of the 252,795 ClassA Units and 25,937,441 Class B Units owned by Cherokee Investors and OCM/GFICherokee Investors II by virtue of their status as principals of Oaktree,which, through an affiliate holds an equity interest in Cherokee Investors. Mr.Kaplan and Mr. Brothers expressly disclaim beneficial ownership of any unitsbeneficially owned by them by virtue of their status as principals of Oaktree.

 

(11) Tony Bloom may bedeemed to share beneficial ownership of the 252,795 Class A Units and25,937,441 Class B Units owned by Cherokee Investors and OCM/GFI CherokeeInvestors II by virtue of his status as a principal of Rothschild, which holdsan equity interest in Cherokee Investors. Mr. Bloom expressly disclaimsbeneficial ownership of any units beneficially owned by him by virtue of hisstatus as a principal of Rothschild.

 

(12) Effective March 15,2002, these employees accepted the Company's offer to cancel all of theiroutstanding options to purchase Class B Units with an exercise price equal toor greater than $4.00 per unit in reliance on the Company's intent to grant tothe employee an option to purchase the same number of Class B Units sometime inthe future.

 

Our current credit facility is secured by anon-recourse pledge of 100% of our outstanding membership units (other thanthose issued to certain of our employees upon exercise of options or otherrights to purchase in the aggregate up to ten percent (10%) of our outstandingmembership units).

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

We lease our facility located at 2841 DowAvenue in Tustin, California from Patel/King Investment, or PKI. The Principalsof PKI are Pat Patel and Ken King, our Chairman and our Management CommitteeMember, respectively. Pursuant to the lease, we paid PKI $927,378 in 1999,$975,382 in 2000, $1,004,446 in 2001,and $253,665 for the first three months of 2002.

 

Our lease with PKI will run through April 30,2009, with an extension for an additional 60 months at our option. Pursuant tothe lease, we will pay rent of approximately $84,555 per month to PKI, subjectto certain periodic adjustments.

 

 

45

----

PART IV

 

ITEM 14.                EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

 

(a) Documents filed as part of this report:

 

(1) and (2) FinancialStatements and Financial Statement Schedules - The consolidated financialstatements and consolidated financial statement schedules of CherokeeInternational, LLC and subsidiaries as of December 31, 2001 and 2000 and foreach of the three years in the period ended December 31, 2001 are included inPart II, Item 8.

 
| (3) 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  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.                                                                                                                                                                                 |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 3.6*          |   | Certificate of Incorporation of Cherokee  International,Finance, Inc.                                                                                                                                                                                                                                               |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 3.7*          |   | Bylaws of Cherokee International Finance,  Inc.                                                                                                                                                                                                                                                                     |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 4.1*          |   | Indenture, dated as of April 30, 1999,  among the Issuers and Firstar Bank of Minnesota, N.A., as trustee, relating  to the notes                                                                                                                                                                                   |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 4.2*          |   | Form of 10 1/2% Series A Senior  Subordinated Notes due 2009 (included in Exhibit 4.1)                                                                                                                                                                                                                              |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 4.3*          |   | Form of 10 1/2% Series B Senior  Subordinated Notes due 2009 (included in Exhibit 4.1)                                                                                                                                                                                                                              |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 4.4*          |   | Registration Rights Agreement, dated as of  April 30, 1999 among the Issuers and Credit Suisse First Boston, Corporation                                                                                                                                                                                            |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.1*         |   | Credit Agreement, dated as of April 30, 1999,  among Cherokee International, LLC, as borrower, Heller Financial, Inc., as  agent and lender, and Bank Austria Creditanstalt Corporate Finance, Inc.,  Fleet Capital Corporation, Finova Capital Corporation, Key Corporate Capital  Inc. and U.S. Bank, as lenders. |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.2*         |   | Security Agreement, dated as of April 30,  1999, between Cherokee International, LLC and Heller Financial, Inc., as  agent.                                                                                                                                                                                         |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.3*         |   | Security Agreement, dated as of April 30,  1999, between Cherokee International Finance, Inc. and Heller Financial,  Inc., as agent                                                                                                                                                                                 |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.4*         |   | Cherokee International, LLC 1999 Unit  Option Plan.                                                                                                                                                                                                                                                                 |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.5*         |   | Form of Unit Option Agreement.                                                                                                                                                                                                                                                                                      |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.6*         |   | Cherokee International, LLC 1999 Unit  Purchase Plan.                                                                                                                                                                                                                                                               |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.7*         |   | Noncompetition and Confidentiality  Agreement, dated as of April 30, 1999, between Cherokee International, LLC  and Mukesh Patel.                                                                                                                                                                                   |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.8*         |   | Noncompetition and Confidentiality  Agreement, dated as April 30, 1999, between Cherokee International, LLC and  Bud Patel.                                                                                                                                                                                         |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.9*         |   | Noncompetition and Confidentiality  Agreement, dated as of April 30, 1999, between Cherokee International, LLC  and Pat Patel.                                                                                                                                                                                      |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.10*        |   | Noncompetition and Confidentiality  Agreement, dated as of April 30, 1999, between Cherokee International, LLC  and Amrit Patel.                                                                                                                                                                                    |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.11***      |   | 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.                                                                                                                       |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.12****     |   | Subscription Agreement, dated as of June  14, 2000, by and among Cherokee International, LLC and Cherokee Investor  Partners,LLC.                                                                                                                                                                                   |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.13****     |   | Schedule of additional Subscription  Agreements, each dated as of June 14, 2000, by and among Cherokee  International, LLC and certain of its Members.                                                                                                                                                              |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.14*****    |   | Second Amendment to Credit Agreement dated  as of March 30, 2001, by and between Cherokee International, LLC, Heller  Financial, Inc. and the Lenders signatory thereto.                                                                                                                                            |   |
|          |   |                                                                                                                                                                                                                                                                                                                |   |
| 10.15*****    |   | Waiver and Third Amendment to Credit  Agreement dated as of September 26, 2001, by and between Cherokee  International, LLC, Heller Financial, Inc. and the Lenders signatory thereto.                                                                                                                              |   |

 

 

46

----

 
| 12.1   |   | Statement regarding the computation of  ratio of earnings to fixed charges for the Company. |   |
|--------|--------|---------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                        |   |
| 21.1   |   | List of Subsidiaries                                                                        |   |
|   |   |                                                                                        |   |
| 23.1   |   | Independent Auditors’ Consent                                                          |   |
|   |   |                                                                                        |   |
| 24.1   |   | Powers of Attorney for each registrant.  (Included in Signature Page)                       |   |

 

(b) Reports on Form 8-K

On October 4, 2001, theCompany filed a Current Report on Form 8-K, announcing under Item 5 anamendment to the Company's credit agreement.

----

*              Incorporated by reference to designated exhibit to ourRegistration Statement on Form S-4, filed with the Securities and ExchangeCommission on July 13, 1999 (File No. 333-82713).

 

**           Incorporated byreference to designated exhibit to the Company’s Current Report on Form 8-K,dated June 30, 2000.

 

***         Incorporated byreference to designated exhibit to the Company’s Quarterly Report on Form 10-Q,dated July 2, 2000.

 

****       Incorporated byreference to designated exhibit to the Company's Annual Report on Form 10-K,dated December 31, 2000.

 

*****    Incorporated by referenceto designated exhibit to the Company's Current Report on Form 8-K, datedOctober 4, 2001.

 

FORWARD-LOOKING STATEMENTS

 

Statements in this report containing thewords “believes,” “anticipates,” “expects,” and words of similar meaning, andany other statements which may be construed as a prediction of futureperformance or events, constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements involve known and unknown risks, uncertainties, andother factors that may cause the actual results, performance, or achievementsof the Company, or industry results, to be materially different from any futureresults, performance, or achievements expressed or implied by suchforward-looking statements. Such factors include, among others, (1)restrictions imposed by the Company’s substantial leverage and restrictivecovenants in its debt agreements, (2) reductions in sales to any of theCompany’s significant customers or in customer capacity generally, (3) changesin the Company’s sales mix to lower margin products, (4) increased competition,(5) disruptions of the Company’s established supply channels, and (6) theadditional risk factors identified under the heading “Risk Factors” in theSection “Business”, and those described from time to time in the Company’sother filings with the SEC, press releases and other communications. TheCompany disclaims any obligations to update any such factors or to announcepublicly the result of any revision to any of the forward-looking statementscontained or incorporated by reference herein to reflect future events ordevelopments.

 

 

47

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
| CHEROKEE INTERNATIONAL,  LLC |
|------------------------------|
|                         |   |
| April 1, 2002                | By: | /s/ R. VAN NESS HOLLAND, JR. |   |
|                         |   | R. Van Ness Holland, Jr. |
|                         |   | Chief Financial Officer |
|                         |   | (Principal Financial and |
|                         |   | Accounting Officer) |
|                              |  |  |  |  |  |

 

We, the undersigned officers and ManagementCommittee Members of Cherokee International, LLC, hereby severally constituteRita Patel and R. Van Ness Holland, Jr. and each of them singly, our true andlawful attorneys with full power to them, and each of them singly, to sign forus and in our names in the capacities indicated below, any and all amendmentsto this Annual Report on Form10-K, and generally do all such things in our nameand behalf in such capacities to enable Cherokee International, LLC to complywith the applicable provisions of the Securities Exchange Act of 1934, and allrequirements of the Securities and Exchange Commission, and we hereby ratifyand confirm our signatures as they may be signed by our said attorneys, oreither of them, to any and all such amendments.

 

Pursuant to the requirements of theSecurities Act of 1934, this report has been signed by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Name**                      |   | **Title**                                                                 |   | **Date**      |
|-------------------------------|--------|---------------------------------------------------------------------------|--------|---------------|
| /s/ GANPAT I. PATEL           |   | Chairman and member of Management Committee                               |   | April 1, 2002 |
| Ganpat I. Patel               |   |                                                                      |   |          |
|                          |   |                                                                      |   |          |
| /s/ JEFFREY M. FRANK          |   | President and Chief Executive Officer and  member of Management Committee |   | April 1, 2002 |
| Jeffrey M. Frank              |
|                          |   | (Principal Executive Officer)                                             |   |          |
|                          |   |                                                                      |   |          |
| /s/ R. VAN NESS HOLLAND,  JR. |   | Chief Financial Officer                                                   |   | April 1, 2002 |
| R. Van Ness Holland, Jr.      |   | (Principal Financial and Accounting  Officer)                             |   |          |
|                          |   |                                                                      |   |          |
| /s/ KENNETH KING              |   | Member of Management Committee                                            |   | April 1, 2002 |
| Kenneth King                  |   |                                                                      |   |          |
|                          |   |                                                                      |   |          |
| /s/ BAHECHAR S. PATEL         |   | Executive Vice President and member                                       |   | April 1, 2002 |
| Bahechar S. Patel             |   | of Management Committee                                                   |   |          |
|                          |   |                                                                      |   |          |
| /s/ IAN A. SCHAPIRO           |   | Member of Management Committee                                            |   | April 1, 2002 |
| Ian A. Schapiro               |   |                                                                      |   |          |
|                          |   |                                                                      |   |          |
| /s/ STEPHEN KAPLAN            |   | Member of Management Committee                                            |   | April 1, 2002 |
| Stephen Kaplan                |   |                                                                      |   |          |
|                          |   |                                                                      |   |          |
| /s/ TONY BLOOM                |   | Member of Management Committee                                            |   | April 1, 2002 |
| Tony Bloom                    |   |                                                                      |   |          |
|                          |   |                                                                      |   |          |
| /s/ CHRISTOPHER BROTHERS      |   | Member of Management Committee                                            |   | April 1, 2002 |
| Christopher Brothers          |   |                                                                      |   |          |

 

48

----

 

INDEX TO FINANCIALSTATEMENTS

 
|                                                                                                                         |
|------------------------------------------------------------------------------------------------------------------------------|
| Independent Auditors’ Report                                                                                            |
| Consolidated Balance Sheets as of December 31, 2001 and 2000                                                                 |
| Consolidated Statements of Operations for  each of the three years in the period ended December 31, 2001                     |
| Consolidated Statements of Members’ Equity  (Deficit) for each of the three years in the period ended December 31, 2001 |
| Consolidated Statements of Cash Flows for  each of the three years in the period ended December 31, 2001                     |
| Notes to Consolidated Financial Statements                                                                                   |
| Independent Auditors’ Report on Schedule                                                                                |
| Schedule of valuation and qualifying  accounts for each of the three years in the period ended December 31, 2001             |

 

 

F-1

----

 

INDEPENDENT AUDITORS’ REPORT

 

 

To the Members of

 Cherokee International, LLC

 

We have audited the accompanying consolidatedbalance sheets of Cherokee International, LLC and subsidiaries (the Company) asof December 31, 2001 and 2000 and the related consolidated statements ofoperations, members’ equity (deficit) and cash flows for each of the threeyears in the period ended December 31, 2001. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits. 

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 financialstatements present fairly, in all material respects, the financial position ofCherokee International, LLC and subsidiaries as of December 31, 2001 and 2000and the results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2001 in conformity with accountingprinciples generally accepted in the United States of America.

 

DELOITTE & TOUCHE LLP

 

Costa Mesa, California

March 20, 2002

 

F-2

----

 

CHEROKEE INTERNATIONAL,LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                  |   | **DECEMBER 31,** |        |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                  |   | **2001**         |        | **2000** |   |
| ASSETS                                                                                                                                |   |             |        |   |   |
| CURRENT  ASSETS:                                                                                                                      |   |             |        |   |   |
| Cash  and cash equivalents                                                                                                            |   | $                | 2,592,489   |   | $ | 852,966 |   |
| Short-term  investments                                                                                                               |   | 1,155,096        |        | 899,860 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $237,307 and $259,886  in 2001 and 2000, respectively                 |   | 17,587,062       |        | 32,819,473 |   |
| Inventories,  net                                                                                                                     |   | 21,291,787       |        | 36,275,745 |   |
| Prepaid  expenses and other current assets                                                                                            |   | 1,108,833        |        | 628,512 |   |
|                                                                                                                                  |   |             |        |   |   |
| Total  current assets                                                                                                                 |   | 43,735,267       |        | 71,476,556 |   |
| PROPERTY  AND EQUIPMENT, net                                                                                                          |   | 14,690,370       |        | 17,062,279 |   |
| DEPOSITS                                                                                                                              |   | 402,990          |        | 306,046 |   |
| DEFERRED  INCOME TAXES                                                                                                                |   | 316,237          |        | — |   |
| DEFERRED  FINANCING COSTS, net of accumulated amortization of $2,530,698 and $1,510,504  in 2001 and 2000, respectively               |   | 3,583,480        |        | 4,219,184 |   |
| GOODWILL  AND OTHER RELATED INTANGIBLES, net of accumulated amortization of $4,691,078  and $1,648,000 in 2001 and 2000, respectively |   | 40,916,922       |        | 43,956,000 |   |
|                                                                                                                                  |   | $                | 103,645,266 |   | $ | 137,020,065 |   |
|                                                                                                                                  |   |             |        |   |   |
| LIABILITIES  AND MEMBERS’ EQUITY (DEFICIT)                                                                                       |   |             |        |   |   |
| CURRENT  LIABILITIES:                                                                                                                 |   |             |        |   |   |
| Accounts  payable                                                                                                                     |   | $                | 6,325,785   |   | $ | 19,616,135 |   |
| Accrued  liabilities                                                                                                                  |   | 6,758,971        |        | 4,818,026 |   |
| Accrued  compensation and benefits                                                                                                    |   | 6,044,568        |        | 7,688,487 |   |
| Accrued  interest payable                                                                                                             |   | 2,214,097        |        | 2,707,091 |   |
| Accrued  distribution payable                                                                                                         |   | —           |        | 2,118,000 |   |
| Revolving  lines of credit                                                                                                            |   | 13,182,146       |        | 16,598,138 |   |
| Current  portion of long-term debt                                                                                                    |   | 7,728,098        |        | 6,415,703 |   |
| Current  portion of capital lease obligations                                                                                         |   | 1,156,795        |        | 1,178,446 |   |
| Deferred  income taxes                                                                                                                |   | 372,505          |        | — |   |
| Total  current liabilities                                                                                                            |   | 43,782,965       |        | 61,140,026 |   |
| LONG-TERM  DEBT, net of current portion                                                                                               |   | 134,073,166      |        | 141,801,265 |   |
| CAPITAL  LEASE OBLIGATIONS, net of current portion                                                                                    |   | 1,921,018        |        | 3,139,813 |   |
| COMMITMENTS  (Note 5)                                                                                                                 |   |             |        |   |   |
| MEMBERS’  EQUITY (DEFICIT):                                                                                                      |   |             |        |   |   |
| Class  A units; 347,671 units issued and outstanding in 2001 and 2000                                                                 |   | 354,371          |        | 354,371 |   |
| Class  B units; 36,035,065 units issued and outstanding in 2001 and 2000                                                              |   | 37,037,827       |        | 37,037,827 |   |
| Paid-in  capital                                                                                                                      |   | 5,330,000        |        | 5,330,000 |   |
| Retained  earnings (deficit)                                                                                                          |   | (118,064,169     | )           | (111,570,983 | ) |
| Accumulated  other comprehensive loss                                                                                                 |   | (789,912         | )           | (212,254 | ) |
|                                                                                                                                  |   |             |        |   |   |
| Total  members’ deficit                                                                                                          |   | (76,131,883      | )           | (69,061,039 | ) |
|                                                                                                                                  |   |             |        |   |   |
|                                                                                                                                  |   | $                | 103,645,266 |   | $ | 137,020,065 |   |

 

See notes to consolidatedfinancial statements.

 

 

F-3

----

 

CHEROKEE INTERNATIONAL,LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

 
|                                                    |   | **YEARS ENDED DECEMBER 31,** |        |
|---------------------------------------------------------|--------|------------------------------|-------------|
|                                                    |   | **2001**                     |        | **2000** |   | **1999** | ** ** |
| NET SALES                                               |   | $                            | 121,993,699 |   | $ | 143,174,588 |   | $ | 121,457,537 |   |
| COST OF SALES                                           |   | 87,318,823                   |        | 94,517,124 |   | 77,592,619 |   |
|                                                    |   |                         |        |   |   |   |   |
| GROSS PROFIT                                            |   | 34,674,876                   |        | 48,657,464 |   | 43,864,918 |   |
| OPERATING EXPENSES:                                     |   |                         |        |   |   |   |   |
| Engineering and  development                            |   | 6,480,630                    |        | 6,081,351 |   | 4,118,124 |   |
| Selling and marketing                                   |   | 3,557,434                    |        | 4,379,312 |   | 2,609,261 |   |
| General and  administrative                             |   | 11,078,794                   |        | 8,416,986 |   | 3,871,526 |   |
| Amortization of goodwill  and other related intangibles |   | 3,043,078                    |        | 1,648,000 |   | — |   |
| Special bonus  distribution                             |   | —                       |        | — |   | 5,330,000 |   |
|                                                    |   |                         |        |   |   |   |   |
| Total operating expenses                                |   | 24,159,936                   |        | 20,525,649 |   | 15,928,911 |   |
|                                                    |   |                         |        |   |   |   |   |
| OPERATING INCOME                                        |   | 10,514,940                   |        | 28,131,815 |   | 27,936,007 |   |
| OTHER INCOME (EXPENSE):                                 |   |                         |        |   |   |   |   |
| Interest expense                                        |   | (16,470,122                  | )           | (16,779,018 | ) | (10,675,340 | ) |
| Other income (expense)                                  |   | (269,900                     | )      | 341,726 |   | (708,702 | ) |
|                                                    |   |                         |        |   |   |   |   |
| Total other income  (expense)                           |   | (16,740,022                  | )           | (16,437,292 | ) | (11,384,042 | ) |
|                                                    |   |                         |        |   |   |   |   |
| Income (loss) before  income taxes                      |   | (6,225,082                   | )           | 11,694,523 |   | 16,551,965 |   |
| Provision for income  taxes                             |   | 268,104                      |        | 32,000 |   | – |   |
|                                                    |   |                         |        |   |   |   |   |
| NET INCOME (LOSS)                                       |   | $                            | (6,493,186  | )  | $ | 11,662,523 |   | $ | 16,551,965 |   |
|                                                    |   |                         |        |   |   |   |   |
| NET INCOME (LOSS) PER  UNIT:                            |   |                         |        |   |   |   |   |   |
| BASIC                                                   |   | $                            | (.18        | ) | $ | .35 |   | $ | .55 |   |
|                                                    |   |                         |        |   |   |   |   |
| DILUTED                                                 |   | $                            | (.18        | )  | $ | .34 |   | $ | .55 |   |
|                                                    |   |                         |        |   |   |   |   |
| WEIGHTED AVERAGE UNITS  OUTSTANDING:                    |   |                         |        |   |   |   |   |
| BASIC                                                   |   | 36,382,736                   |        | 33,646,953 |   | 30,124,286 |   |
|                                                    |   |                         |        |   |   |   |   |
| DILUTED                                                 |   | 36,382,736                   |        | 33,985,106 |   | 30,210,779 |   |

 

See notes to consolidatedfinancial statements.

 

F-4

----

 

CHEROKEE INTERNATIONAL,LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFMEMBERS’ EQUITY (DEFICIT)

 
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |
|----------------------------------------------------------|-------------|---------------|-----------|---------|------------|-----------------------|------------|-------------------------------------------|--------|-------------------------------------------|--------|--------------|-----------|
|                                                     |        |          |      |    |       | **PAID-IN   CAPITAL** |       | **RETAINED EARNINGS (DEFICIT)** |   | **ACCUMULATED OTHER  COMPREHENSIVE LOSS** |   | **TOTAL**    |      |
| **CLASS A**                                              | **CLASS B** |
| **UNITS**                                                |        | **AMOUNT**    | **UNITS** |    | **AMOUNT** |
| BALANCE,  December 31,1998                               |        | 300,000       |      | $       | 14,000     |                  | 29,700,000 |                                      | $      | 1,386,000                                 |   | $            | —    |   | $ | 28,628,529 |   | $ | — |   | $ | 30,028,529 |   |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Units  issued under Unit Purchase Plan                   |        |          |      |    |       | 302,000               |       | 1,208,000                                 |   |                                      |   |         |      |   |   | 1,208,000 |   |
| Equity  distribution                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   | (160,794,000 | )         |   |   | (160,794,000 | ) |
| Capital contribution to  fund special bonus distribution |        |          |      |    |       |                  |       |                                      |   | 5,330,000                                 |   |         |      |   |   | 5,330,000 |   |
| Net income                                               |        |          |      |    |       |                  |       |                                      |   |                                      |   | 16,551,965   |      |   |   | 16,551,965 |   |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| BALANCE, December 31,  1999                              |        | 300,000       |      | 14,000  |       | 30,002,000            |       | 2,594,000                                 |   | 5,330,000                                 |   | (115,613,506 | )         | — |   | (107,675,506 | ) |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Units issued in  connection with ITS acquisition         |        | 47,671        |      | 340,371 |       | 5,948,264             |       | 33,959,627                                |   |                                      |   |         |      |   |   | 34,299,998 |   |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Units issued under Unit  Purchase Plan                   |        |          |      |    |       | 84,801                |       | 484,200                                   |   |                                      |   |         |      |   |   | 484,200 |   |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Equity distribution                                      |        |          |      |    |       |                  |       |                                      |   |                                      |   | (7,620,000   | )         |   |   | (7,620,000 | ) |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Net income                                               |        |          |      |    |       |                  |       |                                      |   |                                      |   | 11,662,523   |      |   |   | 11,662,523 |   |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Foreign currency  translation                            |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      | (212,254 | ) | (212,254 | ) |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Total comprehensive  income                              |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   | 11,450,269 |   |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| BALANCE, December 31,  2000                              |        | 347,671       |      | 354,371 |       | 36,035,065            |       | 37,037,827                                |   | 5,330,000                                 |   | (111,570,983 | )         | (212,254 | ) | (69,061,039 | ) |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Net loss                                                 |        |          |      |    |       |                  |       |                                      |   |                                      |   | (6,493,186   | )    |   |   | (6,493,186 | )  |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Foreign currency  translation                            |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      | (577,658 | ) | (577,658 | )  |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| Total comprehensive loss                                 |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   | (7,070,844 | )  |
|                                                     |        |          |      |    |       |                  |       |                                      |   |                                      |   |         |      |   |   |   |   |
| BALANCE, December 31,  2001                              |        | 347,671  |      | $       | 354,371    |                  | 36,035,065 |                                      | $      | 37,037,827                                |   | $            | 5,330,000 |   | $(118,064,169 | ) | $(789,912 | ) | $(76,131,883 | )  |
|                                                          |             |               |           |         |            |                       |            |                                           |        |                                           |        |              |           |  |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

F-5

----

 

CHEROKEE INTERNATIONAL,LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

 
|                                                                                        |   | **YEARS ENDED DECEMBER 31,** |        |
|---------------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                                        |   | **2001**                     | ** **  | **2000** | ** ** | **1999** | ** ** |
| CASH FLOWS FROM  OPERATING   ACTIVITIES:                                                    |   |                         |        |   |   |   |   |
|                                                                                        |   |                         |        |   |   |   |   |
| Net income (loss)                                                                           |   | $                            | (6,493,186) |   | $ | 11,662,523 |   | $ | 16,551,965 |   |
| Adjustments to reconcile  net income (loss) to net cash   provided by operating activities: |   |                         |        |   |   |   |   |
| Depreciation and  amortization                                                              |   | 6,693,892                    |        | 4,827,164 |   | 2,389,877 |   |
| Amortization of deferred  financing costs                                                   |   | 1,020,194                    |        | 954,585 |   | 555,919 |   |
| Deferred income taxes                                                                       |   | 56,268                       |        | — |   | — |   |
| Net change in operating  assets and liabilities, net of effects of acquisition:             |   |                         |        |   |   |   |   |
| Accounts receivable, net                                                                    |   | 14,428,411                   |        | (6,986,877 | ) | 753,220 |   |
| Inventories, net                                                                            |   | 14,149,958                   |        | (4,692,093 | ) | (3,444,469 | ) |
| Prepaid expenses and  other current assets                                                  |   | (495,321                     | )           | (293,037 | ) | 17,101 |   |
| Deposits                                                                                    |   | (96,944                      | )           | (31,349 | ) | (67,171 | ) |
| Accounts payable                                                                            |   | (12,570,930                  | )           | 547,092 |   | (427,973 | ) |
| Accrued liabilities                                                                         |   | 2,151,945                    |        | 306,340 |   | 260,573 |   |
| Accrued compensation and  benefits                                                          |   | (1,342,919                   | )           | 134,294 |   | 156,457 |   |
| Accrued interest payable                                                                    |   | (491,994                     | )           | 301,037 |   | 2,406,054 |   |
| Net cash provided by  operating activities                                                  |   | 17,009,374                   |        | 6,729,679 |   | 19,151,553 |   |
|                                                                                        |   |                         |        |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                       |   |                         |        |   |   |   |   |
| Additions to property  and equipment                                                        |   | (1,744,983                   | )           | (4,872,630 | ) | (532,095 | ) |
| Net purchases of  short-term investments                                                    |   | (255,236                     | )           | (294,605 | ) | (605,255 | ) |
| Acquisition of ITS, net  of cash acquired                                                   |   | —                       |        | (51,492,551 | ) | — |   |
| Net cash used in  investing activities                                                      |   | (2,000,219                   | )           | (56,659,786 | ) | (1,137,350 | ) |
|                                                                                        |   |                         |        |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                       |   |                         |        |   |   |   |   |
| Borrowings on revolving  lines of credit                                                    |   | 23,908,008                   |        | 31,852,187 |   | 5,770,937 |   |
| Payments on revolving  lines of credit                                                      |   | (27,111,000                  | )           | (17,469,559 | ) | (5,185,427 | ) |
| Payments on obligations  under capital leases                                               |   | (1,075,446                   | )           | (833,055 | ) | (776,519 | ) |
| Payments on long-term  debt                                                                 |   | (6,415,704                   | )           | (5,200,754 | ) | (5,362,278 | ) |
| Borrowings on long-term  debt                                                               |   | —                       |        | 8,000,000 |   | 150,000,000 |   |
| Deferred financing costs                                                                    |   | (384,490                     | )           | (373,265 | ) | (5,356,423 | ) |
| Proceeds from sale of  units                                                                |   | —                       |        | 34,784,198 |   | 1,208,000 |   |
| Equity distribution                                                                         |   | (2,118,000                   | )           | (7,232,000 | ) | (159,064,000 | ) |
| Capital contribution to  fund special bonus distribution                                    |   | —                       |        | — |   | 5,330,000 |   |
| Net cash provided by  (used in) financing activities                                        |   | (13,196,632                  | )           | 43,527,752 |   | (13,435,710 | ) |
| Cash effect of exchange  rate changes                                                       |   | (73,000                      | )           | (108,000 | ) | — |   |
|                                                                                        |   |                         |        |   |   |   |   |
| NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS                                       |   | 1,739,523                    |        | (6,510,355 | ) | 4,578,493 |   |
|                                                                                        |   |                         |        |   |   |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                             |   | 852,966                      |        | 7,363,321 |   | 2,784,828 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                   |   | $                            | 2,592,489   |   | $ | 852,966 |   | $ | 7,363,321 |   |
| SUPPLEMENTAL INFORMATION                                                                    |   |                         |        |   |   |   |   |
| Cash paid during the  year for interest                                                     |   | $                            | 15,944,055  |   | $ | 15,309,313 |   | $ | 7,628,151 |   |
| SUPPLEMENTAL DISCLOSURE  OF NONCASH  TRANSACTIONS                                           |   |                         |        |   |   |   |   |
| Assets acquired under  capital lease obligations                                            |   | $                            | —      |   | $ | 1,338,000 |   | $ | 3,161,202 |   |
|                                                                                             |        |                              |             |  |  |  |  |  |  |  |  |

 

On June 15, 2000, the Company acquired Industrial and TelecommunicationSystems 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        |   | $           | 33,435,000 |   |
|-----------------------------------------------|--------|-------------|------------|--------|
| Goodwill and other related intangibles        |   | 45,604,000  |       |
| Cash paid for ITS’s  stock               |   | (43,150,000 | )          |
| Repayment of certain  assumed debt at closing |   | (9,722,000  | )          |
| Liabilities assumed                           |   | $           | 26,167,000 |   |

 

See notes to consolidatedfinancial statements.

 

F-6

----

CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

 

1. GENERAL

 

FORMATION Cherokee International, LLC (theCompany) was formed on February 21, 1996, under the California Beverly-KilleaLimited Liability Company Act. After the acquisition described below, principaloperations commenced on March 30, 1996.

 

ACQUISITIONS On March 29, 1996, the Companyand Cherokee International, Inc., a California corporation, entered into anasset purchase agreement whereby the Company purchased certain assets andassumed certain liabilities of Cherokee International, Inc. for a total cashpayment of $15,264,383 and issuance of a subordinated note payable of$5,885,218. The acquisition was accounted for under the purchase method ofaccounting, with the total purchase price allocated to net tangible assets. 

 

On March 29, 1996, the Company and BikorCorporation, a California corporation, entered into an asset transfer agreementand operations transfer agreement whereby Bikor Corporation transferred alloperations and assets and certain liabilities to the Company in exchange for75,000 Class A units of the Company with a fair market value of $400,000 and asubordinated note payable of $476,166. The acquisition was accounted for underthe purchase method of accounting, with the total purchase price allocated tonet tangible assets.

 

On June 15, 2000, the Company completed itsacquisition of Industrial and Telecommunication Systems and related entities(“ITS” or “Cherokee Europe”). The Company paid approximately $43 million incash, acquired net assets (excluding debt) at fair value of approximately $9million, assumed debt of approximately $12 million, of which approximately $10million was repaid at closing, and incurred transaction costs of approximately$1 million. The Company accounted for the acquisition using the purchase methodof accounting and recorded goodwill and other related intangibles ofapproximately $46 million in the transaction, which is being amortized over 15years. The Company’s statements of operations are consolidated to includeCherokee Europe’s operations from the date of acquisition.

 

LINE OF BUSINESS The Company designs,develops, assembles and sells switch mode power supplies for original equipmentmanufacturers (OEMs) in the telecommunications, data networking and high-endworkstation markets primarily in the United States and Europe.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION The accompanyingconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America.

 

FINANCIAL CONDITION As shown in theconsolidated financial statements, the Company incurred a net loss of$6,493,186 for the year ended December 31, 2001 and had negative workingcapital of $47,698 at December 31, 2001. In addition, the Company was not incompliance with certain debt covenants at June 30, 2001; however, suchnoncompliance was waived upon execution of a Waiver and Third Amendment to theCredit Agreement on September 26, 2001 (see Note 4). These negative trends haveresulted from unfavorable economic conditions and reduced capital spending byindustries in which the Company operates. The Company's sales have decreased ineach quarter of 2001, compared to the immediately preceding quarter. If theunfavorable economic conditions continue, the Company's financial condition andoperating results could be adversely affected. Based on the Company's presentexpectations, it anticipates that it may not be in compliance with certainfinancial covenants under its credit agreement at June 30, 2002, or earlier,without additional financing from its majority unitholders. In addition,management believes that cash flow from operations and available borrowingcapacity may not be adequate to meet its anticipated cash requirements,including operating requirements, planned capital expenditures and debtservice, for the last six months of fiscal year 2002, or earlier.

 

Management is currently consideringalternatives to address these issues, which include (a) an amendment orrestructuring of its credit agreement (b) a refinancing of its credit agreement(c) the infusion of additional equity by its unitholders, or (d) somecombination of the above. Based upon the Company's current business plans andprospects, management expects that its restructuring alternatives, the $10.5million guaranty by certain unitholders and funding from its unitholders, ifnecessary, will enable the Company to meet its obligations and comply with itsdebt covenants through December 31, 2002. (See Note 4).

 

PRINCIPLES OF CONSOLIDATION The consolidatedfinancial statements include the financial statements of the Company and itswholly-owned subsidiaries Cherokee Europe and related entities, (Note 10),Cherokee Electronica, S.A. DE C.V., (Electronica), Cherokee India Pvt. Ltd.(India), Powertel India Pvt. Ltd. (Powertel) and Cherokee InternationalFinance, Inc. (Finance). Finance was formed in April 1999 as a wholly-ownedfinance subsidiary to act as a co-obligor of the 10 1/2% Senior SubordinatedNotes (see Note 4) and has no independent assets or operations. All materialintercompany accounts and transactions have been eliminated.

 

FISCAL YEAR The Company’s fiscal years 2001,2000, and 1999 ended on December 30, 2001, December 31, 2000 and January 2,2000, respectively. For convenience, the accompanying consolidated financialstatements have been shown as ending on the last day of the calendar month.

 

TRANSLATION OF FOREIGN CURRENCIES: Foreignsubsidiary assets and liabilities denominated in foreign currencies aretranslated at the exchange rate on the balance sheet date. Revenues, costs andexpenses are translated at the average exchange rate during the year. Resultingtransaction gains and losses are included in results of operations. Thefunctional currency of Cherokee Europe is the Belgium Franc. The functionalcurrency of Electronica, Powertel and India is the U.S. dollar as the majorityof transactions are denominated in U.S. dollars. Translation adjustmentsrelated to Cherokee Europe are reflected in other comprehensive income inaccordance with Statement of Financial Accounting Standards (SFAS) No. 130,REPORTING COMPREHENSIVE INCOME. Transaction gains and losses were notsignificant for the periods presented.

 

CASH AND CASH EQUIVALENTS For presentationpurposes in the consolidated financial statements, all highly liquid debtinstruments purchased with an original maturity date of three months or lessare considered to be cash equivalents.

 

SHORT-TERM INVESTMENTS Short-terminvestments, which approximate fair value, consist principally of bankcertificates of deposit with original maturity dates of approximately 3-12months.

 

F-7

----

 

INVENTORIES Inventories are valued at thelower of cost (first-in, first-out) or market. Inventory costs include the costof material, labor, and manufacturing overhead and consist of the following atDecember 31:

 
|            |   | **2001**  |       | **2000**  |   |
|-----------------|--------|-----------|------------|-----------|--------|
| Raw material    |   | $         | 14,061,789 |      | $      | 26,593,294 |   |
| Work-in-process |   | 3,526,256 |       | 6,495,045 |   |
| Finished goods  |   | 3,703,742 |       | 3,187,406 |   |
|            |   | $         | 21,291,787 |      | $      | 36,275,745 |   |

 

PROPERTY AND EQUIPMENT Depreciation andamortization of property and equipment are provided using the straight-linemethod over the following estimated useful lives:

 
| Buildings  and improvements     |   | 5-20  years |   |
|---------------------------------|--------|-------------|--------|
| Machinery and equipment.        |   | 5-10 years  |   |
| Dies, jigs and fixtures         |   | 3 years     |   |
| Office equipment and  furniture |   | 3-5 years   |   |
| Automobiles and trucks          |   | 5 years     |   |
| Leasehold improvements          |   | 5 years     |   |

 

DEFERRED FINANCING COSTS During 1999, theCompany incurred approximately $6.2 million of costs related to the issuance ofsenior subordinated notes and the execution of a new term loan and creditfacility. Approximately $5.4 million of such costs were capitalized as deferredfinancing costs and approximately $.8 million of such costs were directlyexpensed in 1999 and included in other income (expense) in the accompanyingconsolidated statements of operations. During 2000, the Company incurredapproximately $0.4 million of costs related to additional borrowings associatedwith the acquisition of ITS. During 2001, the Company incurred approximately$0.4 million of costs relating to an amendment of the credit agreement with itslenders. Deferred financing costs are being amortized over the term of therelated debt.

 

LONG-LIVED ASSETS The Company accounts forthe impairment and disposition of long-lived assets in accordance with SFAS No.121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETSTO BE DISPOSED OF. In accordance with SFAS No. 121, long-lived assets to beheld are reviewed for events or changes in circumstances which indicate thattheir carrying value may not be recoverable. There was no impairment of thevalue of such assets for the years ended December 31, 2001 and 2000.

 

DERIVATIVE INSTRUMENTS Statement of FinancialAccounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS ANDHEDGING ACTIVITIES, is effective for all fiscal years beginning after June 15,2000. SFAS 133, as amended, establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities. Under SFAS 133, certain contractsthat were not formerly considered derivatives may now meet the definition of aderivative and all derivatives are to be reported on the balance sheet at fairvalue. The Company adopted SFAS 133 effective January 1, 2001. The adoption ofSFAS 133 did not have a significant impact on the financial position, resultsof operations, or cash flows of the Company.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS Theamounts recorded for accounts receivable, accounts payable and accrued expensesapproximate their fair values based on their short-term nature. The amountsrecorded for long-term debt and capital lease obligations approximate fairvalue, as interest is tied to or approximates market rates.

 

INCOME TAXES The Company is a limitedliability company under the provisions of the federal and state tax codes.Under federal laws, taxes based on income of a limited liability company arepayable by the Company’s individual members. Accordingly, no provision forfederal income taxes has been provided in the accompanying financialstatements. Provisions for California franchise tax and fees are notsignificant for any period presented. The Company’s operations in Mexico, Indiaand Belgium are subject to income taxes on earnings generated in thosecountries.

 

The Company accounts for income taxes inaccordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. In accordance withSFAS No. 109, deferred tax assets and liabilities are recorded for theestimated future tax effects of temporary differences between the carrying valueof assets and liabilities for financial reporting and their tax basis, andcarry-forwards to the extent they are realizable. A deferred tax provision orbenefit results from the net change in deferred tax assets and liabilitiesduring the year. A deferred tax asset valuation allowance is recorded if it ismore likely than not that all or a portion of the recorded deferred tax assetswill not be realized.

 

REVENUE RECOGNITION Revenues from productsales are recognized upon passage of title and shipment of products tocustomers. In December 1999, the Securities and Exchange Commission issuedStaff Accounting Bulletin 101, Revenue Recognition (“SAB 101”). SAB 101summarizes certain of the SEC staff’s views in applying generally acceptedaccounting principles to selected revenue recognition issues in financialstatements. Implementation of SAB 101 was required by the fourth quarter of2000. The adoption of SAB 101 did not have an impact on the Company’sconsolidated financial statements.

 

CREDIT RISK The Company performs ongoingcredit evaluations of its customers and generally does not require collateral.The Company maintains reserves for estimated credit losses.

 

STOCK-BASED COMPENSATION The Company accountsfor unit-based awards to employees using the intrinsic value method inaccordance with Accounting Principles Board (APB) Opinion No. 25, ACCOUNTINGFOR STOCK ISSUED TO EMPLOYEES.

 

F-8

----

 

INCOME PER UNIT In accordance with SFAS No.128, EARNINGS PER SHARE, basic income per unit calculations are determined bydividing net income by the weighted average Class A and B units outstanding.Diluted income per unit reflects the potential dilutive effect, determined bythe treasury stock method, of additional Class B units that are issuable uponexercise of outstanding unit options:

 
|                                           |   | **YEARS ENDED DECEMBER 31** |       |
|------------------------------------------------|--------|-----------------------------|------------|
|                                           |   | **2001**                    | ** ** | **2000** | ** ** | **1999** | ** ** |
| Net Income (Loss)                              |   | $                           | (6,493,186 | )  | $ | 11,662,523 |   | $ | 16,551,965 |   |
| Units:                                         |   |                        |       |   |   |   |   |
| Weighted-average units   outstanding - basic   |   | 36,382,736                  |       | 33,646,953 |   | 30,124,286 |   |
| Effect of dilutive  options                    |   | —                      |       | 338,153 |   | 86,493 |   |
| Weighted-average units   outstanding - diluted |   | 36,382,736                  |       | 33,985,106 |   | 30,210,779 |   |
|                                           |   |                        |       |   |   |   |   |
| Net income (loss) per  unit:                   |   |                        |       |   |   |   |   |
| Basic                                          |   | $                           | (.18       | )  | $ | .35 |   | $ | .55 |   |
|                                           |   |                        |       |   |   |   |   |
| Diluted                                        |   | $                           | (.18       | )  | $ | .34 |   | $ | .55 |   |

 

In calculating net loss per unit for 2001,the effect of dilutive options is excluded because it is antidilutive.

 

SEGMENT INFORMATION The Company has adoptedSFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATEDINFORMATION. SFAS No. 131 established standards for reporting information aboutoperating segments in financial reports issued to stockholders. It alsoestablished standards for related disclosures about products and services, geographicareas and major customers. The Company is a leading designer and manufacturerof a broad range of power supplies for original equipment manufacturers in thetelecommunications, data networking, high-end workstations and other electronicindustries. The Company's operating segments consist of Cherokee International,LLC and its wholly owned subsidiaries located in Europe, Mexico and India.These operating segments have been aggregated into a single reporting segmentbased on their common operating characteristics.

 

COMPREHENSIVE INCOME (LOSS) Comprehensiveincome (loss) is defined as all changes in a company’s net assets exceptchanges resulting from transactions with shareholders. It differs from netincome (loss) in that certain items currently recorded through equity areincluded in comprehensive income (loss). Comprehensive income (loss), includingnet income (loss) and losses from foreign currency translation adjustments, was$(7,070,844) and $11,450,269 for the years ended December 31, 2001 and 2000,respectively. Comprehensive income for the year ended December 31, 1999 was thesame as net income.

 

USE OF ESTIMATES The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent liabilities at the date of the financial statements and the amountsof revenues and expenses during the reporting period. Actual results coulddiffer from such estimates.

 

RECLASSIFICATIONS Certain items in the priorperiod consolidated financial statements have been reclassified to conform tothe current period presentation.

 

RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial AccountingStandards Board (FASB) issued two new pronouncements: SFAS No. 141, *Business Combinations*, andSFAS No. 142, *Goodwill and Other Intangible Assets*. SFASNo. 141 prohibits the use of the pooling-of-interest method forbusiness combinations initiated after June 30, 2001 and also applies toall business combinations accounted for by the purchase method that arecompleted after June 30, 2001. There are also transition provisions thatapply to business combinations completed before July 1, 2001, that wereaccounted for by the purchase method. SFAS No. 142 is effective for fiscalyears beginning after December 15, 2001 to all goodwill and otherintangible assets recognized in an entity’s statement of financial position atthat date, regardless of when those assets were initially recognized. SFASNo. 142 requires that goodwill and other intangible assets with indefiniteuseful lives no longer be amortized, but instead be tested for impairment atleast annually. The Company will no longer amortize intangible assets but willevaluate their carrying value on an annual basis or when events orcircumstances indicate that their carrying value may be impaired. The Companyexpects the adoption of SFAS No. 142 to result in reduced amortization expenseof approximately $3.0 million in 2002. TheCompany is currently evaluating the impact that the adoption of all provisionsof these standards will have on its financial position and results ofoperations on January 1, 2002.

 

In August 2001, the FASB issued SFAS No. 144, *Accounting for Impairment or Disposalof Long-Lived Assets*. This statement addresses financial accounting and reporting for the impairment of long-livedassets and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of*, andis effective for fiscal years beginning after December 15, 2001. TheCompany is currently evaluating the impact that the adoption of this standardwill have on its financial position and results of operations onJanuary 1, 2002.

 

3. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at December 31:

 
|                                            |   | **2001**    |       | **2000**   |   |
|-------------------------------------------------|--------|-------------|------------|------------|--------|
| Land                                            |   | $           | 1,331,028  |       | $      | 1,373,335 |   |
| Building and  improvements                      |   | 4,020,048   |       | 4,049,660  |   |
| Machinery and equipment                         |   | 15,672,286  |       | 14,655,865 |   |
| Dies, jigs and fixtures                         |   | 426,757     |       | 415,141    |   |
| Office equipment and  furniture                 |   | 1,710,022   |       | 1,762,181  |   |
| Automobiles and trucks                          |   | 191,547     |       | 245,879    |   |
| Leasehold improvements                          |   | 3,514,275   |       | 1,783,115  |   |
| Construction in progress                        |   | 970,625     |       | 2,351,389  |   |
|                                            |   | 27,836,588  |       | 26,636,565 |   |
| Less accumulated  depreciation and amortization |   | (13,146,218 | )          | (9,574,286 | )      |
|                                            |   | $           | 14,690,370 |       | $      | 17,062,279 |   |

 

Included in property and equipment are assetsunder capital leases of $5,344,992 and $6,493,278 as of December 31, 2001 and2000, respectively. Accumulated amortization ofassets under capital leases was $2,385,902and $2,465,190 as of December 31, 2001 and 2000, respectively.

 

F-9

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4. DEBT

Long-term debt consists of the following atDecember 31:

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **2001**    |        | **2000**    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
| 10.5% unsecured senior  subordinated notes, interest due semi-annually, redeemable   at the Company’s option beginning May 2004 at a rate of 105.25% of the original    principal amount decreasing to 100% of the original principal amount at May  2007  and thereafter, the Company may also redeem up to 35% of the original  principal   amount prior to May 2002 at 110.5% of the original principal amount, matures  in   May 2009 |   | $           | 100,000,000 |        | $      | 100,000,000 |   |
| Term loans, bearing  interest at LIBOR plus 3.50% and LIBOR plus 4.00% (5.44% to  6.63% as of December 31, 2001). Interest rates subject to change based on the    Company’s leverage ratio as defined, aggregate quarterly principal amounts  due at  amounts ranging from $1,830,201 to $3,074,714, remaining unpaid principal and    interest due April 30, 2005                                                                       |   | 41,801,264  |        | 48,216,968  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 141,801,264 |        | 148,216,968 |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (7,728,098  | )           | (6,415,703  | )      |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                           |   | $           | 134,073,166 |        | $      | 141,801,265 |   |

 

As of December 31, 2001, maturities oflong-term debt are as follows:

 
| **Year ending December 31:** |   |        |        |
|------------------------------|--------|-------------|-------------|
| 2002                         |   | $           | 7,728,098   |   |   |
| 2003                         |   | 9,085,749   |        |
| 2004                         |   | 11,167,480  |        |
| 2005                         |   | 13,819,937  |        |
| 2006                         |   | 3⁄4      |        |
| Thereafter                   |   | 100,000,000 |        |
|                         |   | $           | 141,801,264 |   |   |

 

In June 2000, the Company amended its creditagreement to provide for additional term loan borrowings of $8 million, theproceeds of which were used to finance a portion of the purchase price of anacquisition (see Note 10). The term loans are collateralized by substantiallyall of the Company’s assets and contain certain financial covenants includingcapital expenditures limitations, minimum fixed charge coverage and interestcoverage ratios, minimum debt to equity ratio requirements and restrictions ondividends.

 

During April 1999, the Company entered into arevolving line of credit agreement, which provides for borrowings, based on apercentage of certain receivables and inventory, not to exceed $25,000,000.Borrowings bear interest at LIBOR plus 3.50% or prime plus 2.25% (7.00% to7.25% as of December 31, 2001). Interest rates are subject to change over timebased on the Company’s leverage ratio as defined. This revolving line of creditis collateralized by substantially all of the Company’s assets and is subjectto the same financial covenants as the term loan discussed above. Thisrevolving line of credit required payment of commitment fees and expires in2005. Outstanding borrowings under this line of credit were $10,535,146 and $11,827,138 at December 31,2001 and 2000, respectively.

 

                In September 2001, the Company’s creditagreement with its lenders was amended to include provisions that specify amongother things, (1) that some of the Company’s unitholders, or their equitymembers, will guarantee $10.5 million of the Company’s senior debt principaluntil specific financial ratios are attained, (2) that the Company will berestricted from making cash distributions to its equity members until specificfinancial ratios are attained, (3) that the Company will be permitted to makeits interest payment due in November 2002 relating to its $100 million ofsenior subordinated notes so long as specified financial ratios are attained,(4) that the maximum availability under the revolving line of credit is reduceduntil approximately April 30, 2002, (5) that LIBOR and base rate margins havebeen increased for revolver borrowings and term loans, and (6) that financialcovenant ratios required in future periods have been modified, including provisionsallowing the Company's unitholders to make capital contributions to the Companywhich will be treated as earnings (as defined) for purposes of calculatingcertain debt covenants. Under the terms of the $10.5 million guaranty, theguarantors would be subrogated to rights of the lenders under the creditagreement, on a basis senior to the senior subordinated notes. As of December31, 2001, the Company was in compliance with its debt covenants.

 

                Based upon the Company's current businessplans and prospects, management expects that its restructuring alternatives,the $10.5 million guaranty by certain unitholders and funding from itsunitholders, if necessary, will enable the Company to meet its obligations andcomply with its debt covenants through December 31, 2002.

 

                Foreign credit facilities of $2,647,000 and$4,771,000 at December 31, 2001 and 2000, respectively, included a workingcapital line of credit with a Belgian bank, BBL, which is denominated inBelgian Francs and is collateralized by a pledge in first rank over accountsreceivable. The loan is due on demand and bears interest based on variablemarket rates (4.51% as of December 31, 2001) and requires ITS to maintain acertain specific net assets ratio. ITS is in compliance with all loan requirementsas of December 31, 2001.

 

F-10

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5. COMMITMENTS

 

The Company leases certain of itsmanufacturing facilities under non-cancelable operating leases for an aggregatemonthly rental of approximately $112,600. These leases expire at various datesthrough 2009. One of the manufacturing facilities is leased from an entitycontrolled by two members of the Company’s management committee. Rental expensefor the years ended December 31, 2001, 2000, and 1999 totaled approximately $1,756,760, $1,433,243, and $1,375,845 ($1,004,446, $975,382, and $927,378 to arelated entity), respectively.

 

The Company has two capital lease contracts,bearing interest ranging from 5.60% to 8.03%. The total monthly principal andinterest payments related to these capital leases are approximately $111,521.The leases expire between November 2003 and December 2004.

 

A summary of lease commitments as of December31, 2001 is as follows:

 
|                                            |   | **CAPITAL  LEASES** |      | **OPERATING  LEASES** |      |
|-------------------------------------------------|--------|---------------------|-----------|-----------------------|-----------|
| Year ending December 31:                        |   |                |      |                  |      |
| 2002                                            |   | $                   | 1,329,121 |                  | $         | 1,380,629 |   |
| 2003                                            |   | 1,435,301           |      | 1,275,016             |      |
| 2004                                            |   | 723,017             |      | 1,019,727             |      |
| 2005                                            |   | —              |      | 1,014,666             |      |
| 2006                                            |   | —              |      | 1,014,666             |      |
| Thereafter                                      |   | —              |      | 2,452,108             |      |
|                                            |   |                |      |                  |      |
| Total minimum lease  payments                   |   | 3,487,439           |      | $                     | 8,156,812 |   |
| Less amount representing  interest              |   | (409,626            | )         |                  |      |
| Present value of future  minimum lease payments |   | 3,077,813           |      |                  |      |
| Less current portion                            |   | (1,156,795          | )         |                  |      |
|                                            |   | $                   | 1,921,018 |                  |      |   |

 

Of the $8,156,812 total minimum payments for operating leases,$7,525,438 is payable to a related entity.

 

F-11

----

 

6. MEMBERS’ EQUITY (DEFICIT)

 

CAPITALIZATION The Company’s members’ equity(deficit) consists of Class A and Class B units. Class A units are entitled toone vote per unit and Class B Units are not entitled to vote.

 

UNIT OPTION PLAN In June 1999, the Company adopted the 1999 Unit OptionPlan (the Plan) which provides for the issuance to officers and key employeesof up to 2,970,000 options to purchase Class B units at an exercise price perunit of not less than 85% of fair market value at the date of grant. AtDecember 31, 2001, 534,500 options were available for grant. Options expire nolater than ten years from the date of grant and generally become exercisableover a four-year period.

 

As permitted by SFAS No. 123, ACCOUNTING FORSTOCK-BASED COMPENSATION, the Company accounts for its employee unit-basedcompensation plan using the intrinsic value method under APB Opinion No. 25 andprovides the expanded disclosures specified in SFAS No. 123. On January 3,2001, the Company granted 170,000 unit options at an exercise price of $5.71.The exercise price represented the fair value of the Company’s Class B units atthe date of grant as determined by the Company’s Management Committee usinginformation contained in an independent appraisal. Accordingly, no compensationexpense was recorded for these unit option grants pursuant to APB Opinion No.25.

 

Had compensation cost been determined usingthe provisions of SFAS No. 123, the difference between net income (loss) andnet income (loss) per unit as reported and pro forma net income (loss) and netincome (loss) per unit would have been as follows:

 
|                        |   | **2001**        |       | **2000**      |   | **1999**        |    |
|-----------------------------|--------|-----------------|------------|---------------|--------|-----------------|---------|
|                        |   | **AS REPORTED** |       | **PRO FORMA** |   | **AS REPORTED** |    | **PRO FORMA** |   | **AS REPORTED** |   | **PRO FORMA** |   |
| Net income (loss)           |   | $               | (6,493,186 | **)**         | $      | (7,213,244      | )  | $ | 11,662,523 |   | $ | 11,229,165 |   | $ | 16,551,965 |   | $ | 16,416,974 |   |
| Net income(loss)  per unit: |   |            |       |          |   |            |    |   |   |   |   |   |   |
| Basic                       |   | $               | (.18       | )        | $      | (.20            | )  | $ |  .35 |   | $ |  .33 |   | $ |  .55 |   | $ |  .54 |   |
| Diluted                     |   | $               | (.18       | )        | $      | (.20            | )  | $ |  .34 |   | $ |  .33 |   | $ |  .55 |   | $ |  54 |   |
|                             |        |                 |            |               |        |                 |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For purposes of estimating the compensationcost of the Company’s option grants in accordance with SFAS No. 123, the fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model, with the following weighted averageassumptions used for grants during the years ended December 31, 2001, 2000, and1999: expected volatility of zero; risk-free interest rate of 5% in 2001 and 6%in 2000 and 1999; no dividends; and expected lives of five years.

 

A summary of activity for the Unit OptionPlan is presented below:

 
|                                                                                                   |   | **FISCAL YEAR ENDED  DECEMBER 31, 2001** |            | **FISCAL YEAR ENDED  DECEMBER 31, 2000** |         | **FISCAL YEAR ENDED  DECEMBER 31, 1999** |         |
|--------------------------------------------------------------------------------------------------------|--------|------------------------------------------|-----------------|------------------------------------------|--------------|------------------------------------------|--------------|
|                                                                                                   |   | **UNITS**                                | ** **      | **WEIGHTED-  AVG EXERCISE  PRICE**       | ** **   | **UNITS**                                | ** **   | **WEIGHTED-  AVG EXERCISE  PRICE** | ** ** | **UNITS** | ** ** | **WEIGHT-AVG  EXERCISE   PRICE** | ** ** |
| Outstanding at   beginning of   year                                                                   |   |                                     |  2,424,500 |                                     | $            |  4.90                               |         | 1,130,000 |   | $ |  4.00 |   | — |   | $ |  — |   |
|                                                                                                   |   |                                     |            |                                     |         |                                     |         |   |   |   |   |   |   |
| Granted   (weighted-  average fair   value of $1.25   for 2001, $1.44   for 2000 and   $0.96 for 1999) |   | 170,000                                  |            | $                                        |  5.71   |                                     | 1,340,000    |   | $ | 5.63 |   | 1,155,000 |   | $ | 4.00 |   |
| Exercised                                                                                              |   | —                                   |            | $                                        |  — |                                     |  — |   | $ | — |   | — |   | $ | — |   |
| Cancelled                                                                                              |   | (159,000                                 | )               | $                                        | 4.95         |                                     | (45,500      | ) | $ | 4.11 |   | (25,000 | ) | $ | 4.00 |   |
|                                                                                                   |   |                                     |            |                                     |         |                                     |         |   |   |   |   |   |   |
| Outstanding at end  of year                                                                            |   | 2,435,500                                |            | $                                        | 4.95         |                                     | 2,424,500    |   | $ | 4.90 |   | 1,130,000 |   | $ | 4.00 |   |
|                                                                                                   |   |                                     |            |                                     |         |                                     |         |   |   |   |   |   |   |
| Exercisable at   end of year                                                                           |   | 822,000                                  |            | $                                        | 4.62         |                                     | 271,875      |   | $ | 4.00 |   | — |   | $ | — |   |
|                                                                                                        |        |                                          |                 |                                          |              |                                          |              |  |  |  |  |  |  |  |  |  |  |

 

F-12

----

 

The following table summarizes informationabout options as of December 31, 2001:

 
|                |   |                          |      | **OPTIONS OUTSTANDING**                   |   | **OPTIONS EXERCISABLE**                  |   |
|---------------------|--------|-------------------------------|-----------|-------------------------------------------|--------|------------------------------------------|--------|
| **EXERCISE  PRICE** |   | **OPTION UNITS  OUTSTANDING** |      | **WEIGHTED   AVERAGE  REMAINING   YEARS** |   | **WEIGHTED   AVERAGE  EXERCISE   PRICE** |   | **NUMBER  EXERCISABLE** |   | **WEIGHTED   AVERAGE  EXERCISE   PRICE** |   |
| $                   | 4.00   |                          | 947,500   |                                      | 7.50   |                                     | $      | 4.00 |   | 473,750 |   | $ | 4.00 |   |
| $                   | 4.00   |                          | 75,000    |                                      | 7.66   |                                     | $      | 4.00 |   | 37,500 |   | $ | 4.00 |   |
| $                   | 4.70   |                          | 100,000   |                                      | 8.36   |                                     | $      | 4.70 |   | 25,000 |   | $ | 4.70 |   |
| $                   | 5.71   |                          | 1,143,000 |                                      | 8.70   |                                     | $      | 5.71 |   | 285,750 |   | $ | 5.71 |   |
| $                   | 5.71   |                          | 170,000   |                                      | 9.00   |                                     | $      | 5.71 |   | — |   | $ | 5.71 |   |
|                |   | 2,435,500                     |      | 8.21                                      |   | $                                        | 4.95   |   | 822,000 |   | $ | 4.62 |   |
|                     |        |                               |           |                                           |        |                                          |        |  |  |  |  |  |  |  |  |

 

                Effective March 15, 2002, the Company hasmade an offer to all option holders to cancel all outstanding options topurchase Class B Units with an exercise price equal to or greater than $4.00per unit in reliance on the Company's intent to grant new options of an equalnumber at the fair market value after six months and a day followingcancellation.

 

UNIT PURCHASE PLAN In June 1999, the Companyadopted the 1999 Unit Purchase Plan covering an aggregate of 1,500,000 sharesof Class B units. The purpose of the 1999 Unit Purchase Plan is to enableselected officers, management committee members, employees, consultants andadvisors of the Company to purchase Class B units. The price of the Class Bunits under the plan shall not be less than 85% of the fair market value of theClass B units at the date of grant. No units were granted during 2001. During2000 and 1999, the Company granted 84,801 units at $5.71 per unit and 302,000units at $4.00 per unit, respectively, representing fair value consistent withthe unit option grants described above. At December 31, 2001, the Company had1,113,199 units available for future grant.

 

7. RETIREMENT PLANS

 

In March 1996, the managers and members ofthe Company approved the adoption of a supplemental retirement plan (the 401(k)Plan) in which substantially all domestic employees are eligible to participateafter completing six months of employment. The 401(k) Plan allows participatingemployees to contribute up to 15% of the employee’s pretax compensation, withthe Company making discretionary matching contributions. Company contributionsfully vest and are non-forfeitable after the participant has completed fiveyears of service. For the years ended December 31, 2001, 2000, and 1999, theCompany elected to contribute approximately $207,756, $276,833, and $237,764respectively, to the 401(k) Plan. Administrative costs associated with the401(k) Plan are paid by participants.

 

Cherokee Europe maintains a pension plan for certain levels of staffand management that includes a defined benefit feature. The followingrepresents the amounts related to this defined benefit plan:

 
|                                                    |   | **Year ended  December 31,  2001** |      | **June 15, 2000  to  December 31, 2000** |   |
|---------------------------------------------------------|--------|------------------------------------|-----------|------------------------------------------|--------|
| CHANGE IN BENEFIT  OBLIGATION:                          |   |                               |      |                                     |   |
| Benefit obligation,  beginning of year                  |   | $                                  | 2,678,515 |                                     | $      | — |   |
| Benefit obligation  acquired                            |   | —                             |      | 2,872,757                                |   |
| Benefits paid                                           |   | (136,308                           | )         | —                                   |   |
| Effect of exchange rate  changes                        |   | (168,490                           | )         | (42,295                                  | )      |
| Service cost and plan  participants’ contributions |   | 152,400                            |      | 86,968                                   |   |
| Interest cost                                           |   | 145,524                            |      | 87,654                                   |   |
| Actuarial (gain) loss                                   |   | 84,202                             |      | (326,569                                 | )      |
| Benefit obligation, end  of year                        |   | $                                  | 2,755,843 |                                     | $      | 2,678,515 |   |
|                                                    |   |                               |      |                                     |   |
| CHANGE IN PLAN ASSETS:                                  |   |                               |      |                                     |   |
| Fair value of plan  assets, beginning of year           |   | $                                  | 2,061,298 |                                     | $      | — |   |
| Fair value of plan  assets acquired                     |   | —                             |      | 1,977,183                                |   |
| Benefits paid                                           |   | (136,308                           | )         | —                                   |   |
| Effect of exchange rate  changes                        |   | (125,580                           | )         | (30,770                                  | )      |
| Actual return on plan  assets                           |   | 17,123                             |      | 24,753                                   |   |
| Employer contribution                                   |   | 109,736                            |      | 54,079                                   |   |
| Plan participants’  contributions                  |   | 66,683                             |      | 36,053                                   |   |
| Fair value of plan  assets, end of year                 |   | $                                  | 1,992,952 |                                     | $      | 2,061,298 |   |
|                                                    |   |                               |      |                                     |   |
| Funded (unfunded) status                                |   | $                                  | (762,891  | )                                   | $      | (617,217 | ) |
| Unrecognized net  actuarial gain                        |   | (99,411                            | )         | (290,058                                 | )      |
| Accrued pension  liability                              |   | $                                  | (862,302  | )                                   | $      | (907,275 | ) |
|                                                    |   |                               |      |                                     |   |
| COMPONENTS OF NET  PERIODIC BENEFIT COST:               |   |                               |      |                                     |   |
| Service cost                                            |   | $                                  | 85,717    |                                     | $      | 50,915 |   |
| Interest cost                                           |   | 145,524                            |      | 87,654                                   |   |
| Expected return on plan  assets                         |   | (109,886                           | )         | (59,053                                  | )      |
| Net periodic benefit  cost                              |   | $                                  | 121,355   |                                     | $      | 79,516 |   |

 

The weighted-average discount rate and rate of increase in futurecompensation levels used in determining the actuarial present value of theprojected benefit obligations were 5.25% and 3.45% for the year endedDecember 31, 2001 and 5.75% and 3.65% for the period June 16, 2000 (dateof acquisition) to December 31, 2000. The expected long-term rate of return onassets was 5.5% for the year ended December 31, 2001 and for the period fromJune 16, 2000 (date of acquisition) to December 31, 2000.

 

F-13

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8. CONCENTRATION OF NET SALES

 

For the years ended December 31, 2001, 2000,and 1999 approximately 40%, 48%, and 53%, respectively, of the Company’s netsales were derived from six customers, of which zero, two and one customers,respectively, individually exceeded 10%. For the years ended December 31, 2000,and 1999, the Company’s largest customer accounted for approximately 13% and27%, respectively, of net sales. A single customer in 2000 accounted for 11% ofnet sales. Although not anticipated, a decision by a major customer to decreasethe amount purchased from the Company or to cease purchasing the Company’sproducts would have an adverse effect on the Company’s financial position andresults of operations.

 

The Company sells its power supply productsto OEMs in the telecommunications, networking, high-end workstations and otherelectronic industries. The Company uses information based on customers andgeographic location; however, these activities are managed as a single businessand have been aggregated into a single reportable operating segment. For theyears ended December 31, 2001, 2000 and 1999, net sales by region were asfollows:

 
|          |   | **YEARS ENDED DECEMBER 31,** |        |
|---------------|--------|------------------------------|-------------|
|          |   | **2001**                     | ** **  | **2000** | ** ** | **1999** | ** ** |
| United States |   | $                            | 58,936,151  |   | $ | 89,636,075 |   | $ | 99,882,529 |   |
| Europe        |   | 61,179,149                   |        | 46,276,587 |   | 18,882,707 |   |
| Other         |   | 1,878,399                    |        | 7,261,926 |   | 2,692,301 |   |
|          |   | $                            | 121,993,699 |   | $ | 143,174,588 |   | $ | 121,457,537 |   |

 

The Company’s long-lived assets locatedoutside of the United States were $9,360,047 and $10,922,432 as of December 31,2001 and 2000, respectively.

 

9. SPECIAL BONUS DISTRIBUTION

 

During 1999, the Company’s managementcommittee authorized approximately $5,330,000 of special bonus payments tocertain key employees for their role in the Company’s growth and success overthe previous years. These bonus payments were entirely funded by capitalcontributions made by the Company’s then existing members.

 

10. ACQUISITION

 

On June 15, 2000, the Company completed its acquisition of Industrialand Telecommunication Systems and related entities (“ITS), one of Europe’sleading designers and manufacturers of custom power supplies for OEM’sprimarily in the telecommunications industry. The Company paid approximately$43 million in cash, acquired net assets (excluding debt) at fair value ofapproximately $9 million, assumed debt of approximately $12 million, of whichapproximately $10 million was repaid at closing, and incurred transaction costsof approximately $1 million. The company recorded goodwill and other relatedintangibles of approximately $46 million in the transaction, which is beingamortized over 15 years.

 

The acquisition, including the repayment of certain assumed debt atclosing, was financed with approximately $34 million of cash proceeds from theissuance and sale of new members’ equity units, approximately $13 million ofborrowings under the Company’s existing bank credit agreement, as amended, andutilization of available cash.

 

The Company’s unaudited pro forma net sales, net income, and dilutedincome per share as if the acquisition of ITS had occurred as of the beginningof the years ended December 31, 2000 and 1999, are as follows:

 
|                         |   | **YEAR ENDED DECEMBER 31** |        |
|------------------------------|--------|----------------------------|-------------|
|                         |   | **2000**                   |        | **1999** |   |
| Net sales                    |   | $                          | 167,970,000 |   | $ | 170,728,000 |   |
|                         |   |                       |        |   |   |
| Net income                   |   | $                          | 11,439,000  |   | $ | 9,192,000 |   |
|                         |   |                       |        |   |   |
| Diluted net income per  unit |   | $                          | .31         |   | $ | .25 |   |

 

The pro forma operating results above includethe results of operations for ITS for the years ended December 31, 2000 and1999 with goodwill and other related intangibles amortization along with otherrelevant adjustments to reflect fair value of the acquired assets.Additionally, the pro forma operating results include pro forma interestexpense on the assumed acquisition borrowings and pro forma issuance of theCompany’s membership units reflected in the weighted average number of unitsoutstanding for the computations of pro forma diluted net income per unit.

 

The results of operations reflected in thepro forma information above are not necessarily indicative of the results whichwould have been reported if the acquisition had been effected at the beginningof 1999.

 

11. INCOME TAXES

 

Income (loss) before income taxes consists of the following components:

 

|          |   | **2001**   |       | **2000**   |    |
|---------------|--------|------------|------------|------------|---------|
| United States |   | $          | 96,471     |       | $       | 14,011,298 |   |
| Foreign       |   | (6,321,553 | )     | (2,316,775 | )  |
|          |   | $          | (6,225,082 | )     | $       | 11,694,523 |   |

 

The provision for current and deferred income taxes consists of thefollowing:

 

|            |   | **2001** |    | **2000** |   |
|-----------------|--------|----------|---------|----------|--------|
| Current:        |   |     |    |     |   |
| Federal         |   | $        | —  |     | $      | — |   |
| State           |   | —   |    | —   |   |
| Foreign         |   | 211,836  |    | 32,000   |   |
|            |   |     |    |     |   |
| Total current   |   | 211,836  |    | 32,000   |   |
|            |   |     |    |     |   |
| Deferred:       |   |     |    |     |   |
| Federal         |   | —   |    | —   |   |
| State           |   | —   |    | —   |   |
| Foreign         |   | 56,268   |    | —   |   |
|            |   |     |    |     |   |
| Total deferred  |   | 56,268   |    | —   |   |
|            |   |     |    |     |   |
| Total provision |   | $        | 268,104 |     | $      | 32,000 |   |

 

As described in Note 1, no federal income tax provision has beenprovided because the Company is a limited liability company for U.S. income taxpurposes and is not subject to tax. State minimum franchise taxes and fees areinsignificant and have been recorded in general and administrative expenses. Foreignincome taxes have been provided for all applicable juridictions. Any U.S. orstate income tax liability on undistributed earnings of foreign subsidiarieswould accrue to the Company’s members.

 

Our effective tax rate differs from the Federal statutory rate of 35%as follows:

 
|                                   |   | **2001** |        | **2000**   |    |
|----------------------------------------|--------|----------|-------------|------------|---------|
| Worldwide pre-tax income  (loss) @ 35% |   | $        | (2,178,779) |       | $       | 4,093,083 |   |
| US income not subject to  federal tax  |   | (33,765) |        | (4,903,954 | )  |
| Foreign taxes                          |   | 268,104  |        | 32,000     |    |
| Goodwill amortization                  |   | 842,450  |        | 456,246    |    |
| Change in valuation  allowance         |   | 958,000  |        | 570,000    |    |
| Other                                  |   | 412,094  |        | (215,375   | )  |
| Total                                  |   | $        | 268,104     |       | $       | 32,000 |   |

 

Deferred income taxes are provided for net operating losses (NOL) ofall applicable European subsidiaries. As of December 31, 2001, this amount is$8,097,000. The NOLs have an indefinite carry over period. In the opinion ofmanagement, it is more likely than not that these NOLs will not be realized inthe foreseeable future. Accordingly, management has determined that a fullvaluation allowance was required as of December 31, 2001 and 2000 for thedeferred tax assets related to the European subsidiaries.

 

The Company's deferred income taxes are comprised of the following atDecember 31:

 
|                                  |   | **2001**   |    | **2000**   |   |
|---------------------------------------|--------|------------|---------|------------|--------|
| Employee benefit accrual              |   | $          | 221,000 |       | $      | 227,000 |   |
| Pension liability                     |   | 305,000    |    | 363,000    |   |
| Inventories                           |   | (320,440   | )  | 720,000    |   |
| Fixed assets                          |   | 316,237    |    | —     |   |
| Other reserves                        |   | 108,935    |    | —     |   |
| Net operating loss  carryforwards     |   | 3,049,000  |    | 1,468,000  |   |
| Less:   Valuation Allowance |   | (3,736,000 | )       | (2,778,000 | )      |
| Net deferred tax asset  (liability)   |   | $          | (56,268 | )     | $      | — |   |

 

The change in the valuation allowance for the year ended December 31,2001 is an increase of $958,000 and an increase of $570,000 for the period fromJune 16, 2000 (date of acquisition of ITS) to December 31, 2000. Approximately$2,217,000 of the Company’s valuation allowance relates to acquired deferredtax assets at December 31, 2001 and 2000. If these acquired deferred tax assetsare realized in the future, the tax benefit will be credited to goodwill.

 

12. SELECTED QUARTERLY DATA (UNAUDITED)

 
|                                |   | **2 0 0 1**        |   | **2 0 0 0** |
|-------------------------------------|--------|--------------------|--------|-------------|
|                                |   | **March 31**       |   | **June 30** |   | **Sept.30** |   | **Dec. 31** |   | **March 31** |   | **June 30** |   | **Sept.30** |   | **Dec. 31** |
|                                |   | **(In Thousands)** |
| Net sales                           |   | $                  | 39,420 |        | $ | 32,863 |   | $ | 25,995 |   | $ | 23,716 |   | $ | 25,431 |   | $ | 28,664 |   | $ | 43,205 |   | $ | 45,875 |   |
|                                |   |               |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                        |   | 12,079             |   | 9,014       |   | 7,155 |   | 6,427 |   | 8,799 |   | 10,169 |   | 14,820 |   | 14,869 |   |
|                                |   |               |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                   |   | 962                |   | (932        | ) | (2,816 | ) | (3,707 | ) | 2,139 |   | 2,541 |   | 3,019 |   | 3,964 |   |
|                                |   |               |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted net income  (loss) per unit |   | $                  | .03    |        | $ | (.03 | ) | $ | (.08 | ) | $ | (.10 | ) | $ | .07 |   | $ | .08 |   | $ | .08 |   | $ | .11 |   |
|                                     |        |                    |        |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-14

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INDEPENDENT AUDITORS’REPORT ON SCHEDULE

 

To the Members of 

Cherokee International, LLC:

 

We have audited the consolidated financialstatements of Cherokee International, LLC and subsidiaries (the Company) as ofDecember 31, 2001 and 2000 and for each of the three years in the period endedDecember 31, 2001, and have issued our report thereon dated March 20, 2002.Such consolidated financial statements and report are included elsewhere inthis Form 10-K. Our audits also included the consolidated financial statementschedule of the Company listed in Item 14a. This consolidated financialstatement schedule is the responsibility of the Company’s management. Our responsibilityis to express an opinion based on our audits. In our opinion, such consolidatedfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

DELOITTE & TOUCHE LLP

 

Costa Mesa, California

March 20, 2002

 

 

F-15

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CHEROKEE INTERNATIONAL,LLC

SCHEDULE II VALUATION ANDQUALIFYING ACCOUNTS

 
|                                 |   | **BALANCE AT   BEGINNING OF  PERIOD** | ** ** | **CHARGED  (CREDITED) TO  COST AND EXPENSES** | ** ** | **ACQUIRED  BALANCE** | ** ** | **DEDUCTIONS** | ** ** | **BALANCE AT  END OF PERIOD** | ** ** |
|--------------------------------------|--------|---------------------------------------|------------|-----------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------------------------|------------|
| ALLOWANCE FOR DOUBTFUL   ACCOUNTS:   |   |                                  |       |                                          |       |                  |       |           |       |                          |       |
| Year ended December 31,  1999        |   | $                                     | 175,000    |                                          | $          | —                |       | $              | —     |                          | $          | — |   | $ | 175,000 |   |
| Year ended December 31, 2000         |   | 175,000                               |       | 96,299                                        |       | 72,947                |       | (84,360        | )          | 259,886                       |       |
| Year ended December 31,  2001        |   | 259,886                               |       | 113,333                                       |       | —                |       | (135,912       | )          | 237,307                       |       |
|                                 |   |                                  |       |                                          |       |                  |       |           |       |                          |       |
| RESERVE FOR INVENTORY  OBSOLESCENCE: |   |                                  |       |                                          |       |                  |       |           |       |                          |       |
| Year ended December 31,  1999        |   | $                                     | 578,310    |                                          | $          | 418,000               |       | $              | —     |                          | $          | — |   | $ | 996,310 |   |
| Year ended December 31,  2000        |   | 996,310                               |       | 997,269                                       |       | 990,101               |       | (516,316       | )          | 2,467,364                     |       |
| Year ended December 31,  2001        |   | 2,467,364                             |       | 1,713,916                                     |       | 3⁄4                |       | (604,952       | )          | 3,576,328                     |       |

 

F-16

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