<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1999
REGISTRATION NO 333-82713
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT
NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CHEROKEE INTERNATIONAL, LLC
(Exact name of registrant as specified in its charter)
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CALIFORNIA 3679 33-0696451
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
2841 DOW AVENUE
TUSTIN, CALIFORNIA 92780
TELEPHONE: (714) 544-6665
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
R. VAN NESS HOLLAND, JR.
CHIEF FINANCIAL OFFICER
2841 DOW AVENUE
TUSTIN, CALIFORNIA 92780
TELEPHONE: (714) 544-6665
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code of
Agent for Service)
--------------------------
COPIES TO:
JEFFREY H. COHEN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE, SUITE 3400
LOS ANGELES, CALIFORNIA 90071
(213) 687-5000
--------------------------
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JURISDICTION PRIMARY STANDARD I.R.S. EMPLOYER
OF INDUSTRIAL IDENTIFICATION
INCORPORATION CLASSIFICATION NUMBER NUMBER
------------- -------------------------- --------------------
NAME OF ADDITIONAL REGISTRANT*
- -----------------------------------
Cherokee International Finance, Delaware 3679 95-4745032
Inc.
</TABLE>
- ------------------------------
* Address and telephone number of principal executive offices are the same as
those of Cherokee International, LLC.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the effective date of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
October 28, 1999
OFFER TO EXCHANGE
10 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2009 FOR
10 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2009
OF
CHEROKEE INTERNATIONAL, LLC
CHEROKEE INTERNATIONAL FINANCE, INC.
---------------
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 6, 1999, UNLESS EXTENDED,
TERMS OF THE EXCHANGE OFFER
- We will exchange all outstanding notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.
- You may withdraw tendered outstanding notes at any time prior to the
expiration of the exchange offer.
- The exchange of outstanding notes will not be a taxable exchange for
United States federal income tax purposes, but you should see the section
entitled "Material United States Federal Income Tax Consequences" on
page 106 for more information.
- The terms of the exchange notes to be issued are substantially identical
to the terms of the outstanding notes, except for transfer restrictions
and registration rights relating to the outstanding notes.
- There is no existing market for the exchange notes to be issued, and we do
not intend to apply for their listing on any securities exchange.
------------------------
A DISCUSSION OF RISKS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO
TENDERING THEIR OUTSTANDING NOTES IS SET FORTH UNDER "RISK FACTORS" BEGINNING ON
PAGE 12.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
TABLE OF CONTENTS
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PAGE
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Where You Can Find Additional Information.................................................................. 1
Prospectus Summary......................................................................................... 2
Risk Factors............................................................................................... 12
Forward-Looking Statements................................................................................. 19
Our History................................................................................................ 20
The Transactions........................................................................................... 21
Use of Proceeds............................................................................................ 22
Capitalization............................................................................................. 23
Pro Forma Financial Information............................................................................ 24
Selected Consolidated Financial Information................................................................ 28
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 30
The Exchange Offer......................................................................................... 40
Business................................................................................................... 49
Management................................................................................................. 58
Compensation of Named Executive Officers................................................................... 61
Security Ownership of Certain Beneficial Owners and Management............................................. 63
Description of Certain Other Indebtedness.................................................................. 65
Description of the Notes................................................................................... 67
Certain Relationships and Related Transactions............................................................. 106
Material United States Federal Income Tax Consequences..................................................... 106
Backup Withholding And Information Reporting............................................................... 107
Plan of Distribution....................................................................................... 108
Legal Matters.............................................................................................. 109
Experts.................................................................................................... 109
Future Additional Information.............................................................................. 109
Index to Financial Statements.............................................................................. F-1
Independent Auditors' Report............................................................................... F-2
</TABLE>
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Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of exchange notes. The letter of transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of exchange
notes received in exchange for outstanding notes where those outstanding notes
were acquired by the broker-dealer as a result of market-making activities or
other trading activities. The issuers have agreed that, for a period of 180 days
after the expiration date of the exchange offer (or such shorter period during
which such broker-dealers are required by law to deliver this prospectus), they
will make this prospectus available to any broker-dealer for use in connection
with any such resale. For more details, see the section "Plan of Distribution."
This Prospectus references certain trademarks and trade names of other
companies.
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form S-4 (together
with all amendments and exhibits, the "Registration Statement") under the
Securities Act, with respect to our offering of the exchange notes in the
exchange offer. This prospectus does not contain all of the information in the
Registration Statement. You will find additional information about us and the
exchange notes in the Registration Statement. Any statements made in this
prospectus concerning the provisions of legal documents are not necessarily
complete and you should read the documents that are filed as exhibits to the
Registration Statement.
WE WILL PROVIDE THESE DOCUMENTS WITHOUT CHARGE UPON ORAL OR WRITTEN REQUEST
TO SECRETARY, CHEROKEE INTERNATIONAL, LLC, 2841 DOW AVENUE, TUSTIN, CALIFORNIA
92780, (714) 544-6665. TO ENSURE THE TIMELY DELIVERY OF DOCUMENTS, ANY REQUEST
MUST BE MADE BY NOVEMBER 25, 1999.
1
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY ALONG WITH THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THE FINANCIAL STATEMENTS, APPEARING
ELSEWHERE IN THIS PROSPECTUS. WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT. YOU
SHOULD PAY SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION BEGINNING ON PAGE 12
OF THIS PROSPECTUS TO DETERMINE WHETHER TO EXCHANGE YOUR OUTSTANDING NOTES FOR
EXCHANGE NOTES.
CHEROKEE INTERNATIONAL FINANCE, INC. WAS RECENTLY INCORPORATED AS OUR
WHOLLY-OWNED SUBSIDIARY WITH THE SOLE PURPOSE OF SERVING AS CO-ISSUER OF THE
NOTES IN ORDER TO FACILITATE THE OFFERING OF THE NOTES. ALL REFERENCES TO
"CHEROKEE," "WE," "US" OR "OUR" REFER TO CHEROKEE INTERNATIONAL, LLC AND OUR
CONSOLIDATED SUBSIDIARIES (INCLUDING CHEROKEE FINANCE), EXCEPT WHERE IT IS CLEAR
THAT SUCH TERMS MEAN ONLY CHEROKEE INTERNATIONAL, LLC.
CHEROKEE INTERNATIONAL, LLC
We are a leading designer and manufacturer of a broad range of switch mode
power supplies for original 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 electric power and are used in
virtually all electric equipment. Basic power supplies convert alternating
power, or AC, from a utility source such as a wall outlet, into the stable
direct power, or DC, required for electronic systems.
We believe we are well positioned to take advantage of the growth in our
target markets, which includes the telecommunications, networking and high-end
workstation markets. Our sophisticated engineering capabilities, highly
automated manufacturing processes and state of the art testing equipment enable
us to differentiate ourselves from our competition by enhancing the quality of
our products and decreasing our "time to market," the time it takes us to get
our products to our customers.
Our customers include several industry leaders, many of whom we have been
doing business with for over 10 years. Further, because our customers
incorporate our products into their end products, they generally use our
products for the entire life cycle of their end products. As a result, we enjoy
a strong base of recurring sales from year to year.
Our principal executive offices are located at 2841 Dow Avenue, Tustin,
California 92780 and our telephone number is (714) 544-6665.
CHEROKEE INVESTOR PARTNERS, LLC
The proceeds of the offering of the outstanding notes was used to finance,
in part, the acquisition of 60% of our membership units by Cherokee Investor
Partners, LLC, an entity owned by investors including an affiliate of Oaktree
Capital Management, LLC, an affiliate of GFI Energy Ventures LLC, RIT Capital
Partners plc (also known as "Rothschild"), and an affiliate of the initial
purchaser of the outstanding notes. For a detailed description of this
transaction, see the Section "The Transactions."
Oaktree is a Los Angeles based investment management company with
approximately $12 billion of assets under or committed for management. Oaktree
manages money on behalf of private and state pension plans, private foundations,
educational endowment funds and high net worth individuals in various asset
classes including private equities, high yield bonds, convertible securities
(domestic and international), real estate, distressed opportunities, and
emerging markets. Oaktree is the general partner of the OCM Principal
Opportunities Fund, L.P., or the Fund, which provides capital primarily to
sponsor management buyouts and other private equity investments. The Fund is
managed by Oaktree's Principal Activities Group, which manages approximately $1
billion in committed capital for the purpose of investing in well-run companies
that are in need of growth capital, recapitalization, or financial
restructuring.
GFI is a Los Angeles based firm specializing exclusively in investments in
the power industry. Since 1995, GFI, including its predecessor entities under
common control, has completed 19 transactions totaling
2
<PAGE>
over $180 million in this sector. GFI's three principals possess 56 years
experience investing in, consulting to, and directing companies in the power
industry. For the past 13 years, the GFI principals have worked together in
businesses they founded and/or directed which were focused exclusively on
anticipating and capitalizing on the changes in the way power is generated,
transmitted, distributed, traded, marketed, priced, measured, stored, and
consumed.
Rothschild is a publicly-traded investment trust in the United Kingdom
chaired by Lord Rothschild. Rothschild invests in quoted securities, unquoted
holdings, and specialist funds.
The Transactions (as defined in the section "The Transactions") represent
the fifth opportunity in which Oaktree and GFI have coinvested.
ABOUT THIS TRANSACTION
On April 30, 1999, we privately placed $100 million of 10 1/2% Senior
Subordinated Notes due 2009.
Simultaneously with the private placement, we entered into a registration
rights agreement with the initial purchaser of the outstanding notes, in which
we agreed to initially file the Registration Statement on or before July 14,
1999 and to use our best efforts to have the Registration Statement declared
effective on or before December 27, 1999. If we do not, we must pay additional
interest until we accomplish the specified task. In this exchange offer, you may
exchange your outstanding notes for exchange notes which have substantially the
same terms. You should read the discussion under the heading "The Exchange
Offer" and "Description of Notes" for further information regarding the exchange
notes.
We issued the outstanding notes to facilitate the acquisition of a 60%
equity interest in Cherokee International, LLC by Cherokee Investors from our
existing Members. For more details concerning the acquisition, read the
discussion in the section "The Transactions."
ABOUT THE EXCHANGE OFFER
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Securities Offered....................... $100 million in principal amount of new 10 1/2%
Series B Senior Subordinated Notes due 2009,
which have been registered under the Securities
Act. The terms of the exchange notes are
substantially identical to those of the
outstanding notes, except that certain transfer
restrictions, registration rights and additional
interest provisions relating to the outstanding
notes do not apply to the exchange notes.
The Exchange Offer....................... We are offering to issue registered exchange
notes in exchange for a like principal amount of
our outstanding notes. We are offering to issue
these registered exchange notes to satisfy our
obligations under a registration rights
agreement that we entered into with the initial
purchaser of the outstanding notes when we sold
them in a transaction exempt from the
registration requirements of the Securities Act.
You may tender your outstanding notes for
exchange by following the procedures described
in the section "The Exchange Offer."
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3
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Tenders; Expiration Date; Withdrawal..... The exchange offer will expire at 5:00 p.m., New
York City time, on December 6, 1999, unless we
extend it. If you decide to exchange your
outstanding notes for exchange notes, you must
acknowledge that you are not engaging in, and do
not intend to engage in, a distribution of the
exchange notes. You may withdraw any outstanding
notes that you tender for exchange at any time
prior to December 6, 1999. If we decide for any
reason not to accept any outstanding notes you
have tendered for exchange, those notes will be
returned to you without cost promptly after the
expiration or termination of the exchange offer.
See the section "The Exchange Offer" under the
heading "Terms of the Exchange Offer" for a more
complete description of the tender and
withdrawal provisions.
Certain Conditions to the Exchange The Exchange Offer is subject to customary
Offer.................................... conditions, which we may waive. Please read the
section "The Exchange Offer" under the heading
"Certain Conditions to the Exchange Offer" for
more information regarding conditions to the
Exchange Offer.
Material United States Federal Income Tax
Consequences............................. Your exchange of outstanding notes for exchange
notes will not result in any gain or loss to you
for United States federal income tax purposes.
For more details, see the section "Material
United States Federal Income Tax Consequences"
for a general summary of the material United
States federal income tax consequences
associated with the exchange of outstanding
notes for the exchange notes and the ownership
and disposition of those notes.
Use of Proceeds.......................... We will not receive any cash proceeds from the
exchange offer.
Exchange Agent........................... Firstar Bank of Minnesota, N.A.
</TABLE>
CONSEQUENCES OF NOT EXCHANGING YOUR OUTSTANDING NOTES
If you do not exchange your outstanding notes in the exchange offer, they
will continue to be subject to the restrictions on transfer that are described
in the legend on the outstanding notes. In general, you may offer or sell your
outstanding notes only if they are registered under, or offered or sold under an
exemption from, the Securities Act and applicable state securities laws. We do
not currently intend to file a registration statement covering resales of
outstanding notes under the Securities Act, other than pursuant to the exchange
offer.
If outstanding notes are tendered and accepted in the exchange offer, it may
become more difficult for you to sell or transfer your unexchanged notes. In
addition, if you do not exchange your outstanding notes in the exchange offer,
you will no longer be entitled to have resales of those outstanding notes
registered under the Securities Act.
4
<PAGE>
CONSEQUENCES OF EXCHANGING YOUR OUTSTANDING NOTES
Based on interpretations of the staff of the SEC, we believe that you may
offer for resale, resell or otherwise transfer the exchange notes without
complying with the registration and prospectus delivery requirements of the
Securities Act if:
- you acquire the exchange notes in the ordinary course of your business;
- you are not participating, do not intend to participate, and have no
arrangement or undertaking with anyone to participate, in the distribution
of the exchange notes; and
- you are not an "affiliate" of Cherokee, as defined in Rule 405 of the
Securities Act.
If any of these conditions are not satisfied and you transfer any exchange
notes without registration and delivery of a proper prospectus or without
qualifying for a registration exemption, you may incur liability under the
Securities Act. We will not be responsible for or indemnify you against any
liability you may incur.
Any broker-dealer that acquires exchange notes for its own account in
exchange for outstanding notes, which it acquired through market-making or other
trading activities, must acknowledge that it will deliver a prospectus when it
resells or transfers any exchange notes. See the section "Plan of Distribution"
for a description of the prospectus delivery obligations of broker-dealers in
the exchange offer.
ABOUT THE NOTES
The terms of the exchange notes and the outstanding notes are identical in
all material respects, except:
(1) the issuance of the exchange notes will have been registered under the
Securities Act;
(2) the exchange notes will not contain transfer restrictions and
registration rights that relate to the outstanding notes; and
(3) the exchange notes will not contain provisions relating to the payment
of additional interest to be made to the holders of the outstanding notes
under circumstances related to the timing of the exchange offer.
A brief description of the material terms of the outstanding notes and the
exchange notes offered hereby, referred to in this prospectus collectively as
the notes, follows:
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<S> <C>
Outstanding Notes............... $100,000,000 aggregate principal amount of 10 1/2%
Series A Senior Subordinated Notes due 2009.
Exchange Notes.................. $100,000,000 aggregate principal amount of 10 1/2%
Series B Senior Subordinated Notes due 2009.
Issuers......................... Cherokee International, LLC and Cherokee International
Finance, Inc.
Maturity........................ May 1, 2009.
Interest Rate................... 10 1/2% per year.
Interest Payment Dates.......... May 1 and November 1 of each year, beginning November 1,
1999.
</TABLE>
5
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Ranking......................... The notes are unsecured senior subordinated obligations
and rank junior to our existing and future Senior
Indebtedness. The notes rank equally with our existing and
future Senior Subordinated Indebtedness and rank senior to
our subordinated indebtedness. The notes effectively rank
junior to all liabilities of our subsidiaries. The terms
"Senior Indebtedness" and "Senior Subordinated
Indebtedness" are defined in the section "Description of
the Notes" under the heading "Certain Definitions." As of
June 30, 1999, we had outstanding approximately
$55.2 million of Senior Indebtedness.
Future Guarantees............... Our subsidiaries that guarantee certain of our other debt
will be required to guarantee the notes with unconditional
guarantees of payment that will rank below their senior
debt, but will rank equal to their other senior
subordinated debt in right of payment. As of the date of
this prospectus, the notes are not guaranteed.
Optional Redemption............. We cannot redeem the notes until May 1, 2004, except as
described immediately below. Thereafter, we can redeem
some or all of the notes at the redemption prices listed
in the section "Description of the Notes" under the
heading "Optional Redemption" plus accrued interest.
Optional Redemption after Public
Equity Offerings.............. At any time (which may be more than once) before May 1,
2002, we can choose to redeem up to 35% of the original
principal amount of the notes (including the original
principal amount of any additional notes issued under the
indenture) with money that we raise in certain equity
offerings, as long as:
- we pay to holders of the notes a redemption price of
110.500% on the face amount of the notes we redeem, plus
accrued interest;
- we redeem the notes within 120 days of completing such
equity offering; and
- at least 65% of the original aggregate principal amount
of notes (including the original principal amount of any
additional notes issued under the indenture) issued
remains outstanding afterwards.
Change of Control Offer......... If we experience a Change of Control, we must give holders
of the notes the opportunity to sell to us their notes at
a purchase price of 101% of their face amount, plus
accrued interest. The term Change of Control is defined in
the Section "Description of the Notes" under the heading
"Change of Control."
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6
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Certain Covenants............... The indenture governing the notes contains covenants that
limit our ability and that of certain of our subsidiaries
to:
- incur additional indebtedness;
- pay dividends or distributions on, or redeem or
repurchase, our capital stock;
- make investments;
- engage in transactions with affiliates;
- transfer or sell assets;
- guarantee indebtedness;
- restrict dividend or other payments to us;
- consolidate, merge or transfer all or substantially all
of our assets and the assets of our subsidiaries; and
- engage in unrelated businesses.
These covenants are subject to important exceptions and
qualifications, which are described in the Section
"Description of the Notes" under the heading "Certain
Covenants."
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7
<PAGE>
RISK FACTORS
You should carefully consider all of the information set forth in this
prospectus and, in particular, the information under "Risk Factors" before
deciding to tender your outstanding notes in the exchange offer.
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
You should read the following summary unaudited pro forma consolidated
financial information in conjunction with our consolidated financial statements
and other financial information included elsewhere in this prospectus. We
derived the following information from our consolidated financial information,
which we adjusted to give effect to the Transactions. Our audited historical
consolidated balance sheet, as of June 30, 1999, gives effect to the
Transactions, as the Transactions were consummated prior to that date. Our
historical statement of income and other financial data are adjusted as if the
Transactions had occurred on the first day of the applicable period presented.
We do not represent that the information presented below indicates what our
results of operations or financial condition would actually have been had the
Transactions in fact occurred on the assumed dates or our results of operations
or financial condition for any future period or date.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
UNIT DATA)
<S> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................................................... $ 87,553 $ 66,496
Cost of sales........................................................... 54,824 41,499
------------- --------------
Gross profit............................................................ 32,729 24,997
Operating expenses...................................................... 8,794 5,239
Special bonus distribution.............................................. -- 5,330
------------- --------------
Operating income........................................................ 23,935 14,428
Interest expense........................................................ (15,655) (7,867)
Other income (expense).................................................. 338 (519)
------------- --------------
Pretax income........................................................... $ 8,618 $ 6,042
============= ==============
Pro forma basic and diluted income per unit............................. $ .29 $ .20
Weighted average units outstanding...................................... 30,000,000 30,000,000
BALANCE SHEET DATA (END OF PERIOD):
Working capital......................................................... $ 24,979
Total assets............................................................ 52,850
Total debt.............................................................. 155,200
Total members' deficit.................................................. (110,783)
OTHER FINANCIAL DATA:
EBITDA(a)............................................................... $ 25,606 $ 20,882
EBITDA margin(b)........................................................ 29.2% 31.4%
Depreciation and amortization........................................... $ 1,671 $ 1,124
Capital expenditures.................................................... 1,898 483
Ratio of total debt to EBITDA(c)........................................ -- 4.4x
Ratio of EBITDA to cash interest expense(d)............................. 1.7x 2.8x
Ratio of earnings to fixed charges(e)................................... 1.5x 1.7x
</TABLE>
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(a) EBITDA represents operating income plus depreciation and amortization and,
for the six months ended June 30, 1999, plus a special bonus of $5,330,000
made by Cherokee in connection with the
8
<PAGE>
Transactions. We consider EBITDA to be a widely accepted financial indicator
of a company's ability to service debt, fund capital expenditures and expand
its business; however, EBITDA is not calculated in the same way by all
companies and is neither a measurement required, nor represents cash flow
from operations as defined, by generally accepted accounting principles. You
should not consider EBITDA to be an alternative to net income, an indicator
of operating performance or an alternative to cash flow as a measure of
liquidity.
(b) EBITDA Margin represents EBITDA as a percentage of net sales.
(c) For purposes of computing the ratio of total debt to EBITDA, EBITDA is for
the twelve months ended June 30, 1999.
(d) Cash interest expense represents total interest expense less amortization of
issuance costs of the notes and of Senior Indebtedness.
(e) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes plus fixed charges. Fixed charges consist
of interest expense and that portion of lease expense considered to
represent interest cost (assumed to be one-third).
9
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
You should read the following summary historical consolidated financial
information in conjunction with our consolidated financial statements and the
other financial information included elsewhere in this prospectus. We derived
the summary historical consolidated financial information as of December 31,
1996, 1997 and 1998 and as of June 30, 1999 and for the nine months ended
December 31, 1996, the years ended December 31, 1997 and 1998 and the six months
ended June 30, 1999 from our audited consolidated financial statements.
Effective March 29, 1996, we entered into an asset purchase agreement with
Cherokee International, Inc., a wholly-owned subsidiary of Core Industries, and
an asset transfer agreement with Bikor Corporation whereby we purchased assets
and assumed liabilities for a total purchase price of $26,536,888. The
acquisition was accounted for under the purchase method of accounting with the
total purchase price allocated to net tangible assets. No goodwill was recorded
as the fair market value of assets acquired and liabilities assumed approximated
historical cost. We continued the businesses of Cherokee International, Inc. and
Bikor Corporation subsequent to the acquisitions and incurred a significant
increase in interest expense in 1996 and 1997 due to additional borrowings
incurred as a result of the acquisitions. We derived the summary historical
consolidated financial information for the year ended December 31, 1996 by
combining financial information from our audited consolidated financial
statements for the nine months ended December 31, 1996 with such financial
information from our unaudited consolidated financial statements for the three
months ended March 31, 1996. We derived the summary historical consolidated
financial information for the years ended December 31, 1994 and 1995 and the six
months ended June 30, 1998 from our unaudited consolidated financial statements
which, along with the unaudited consolidated financial statements for the three
months ended March 31, 1996, have been prepared by us on a basis consistent with
our audited financial statements and, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of our results of operations for such periods and financial
condition as of the date presented. Results of interim periods are not
necessarily indicative of results for the full year.
10
<PAGE>
Our fiscal quarters end on the Sunday that results in a thirteen week
quarter. For presentation purposes, each fiscal period is referred to by
reference to the nearest calender month end.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- --------------------
1994 1995 1996(A) 1997(A) 1998(A) 1998(A) 1999(A)
--------- --------- ------------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................... $ 41,548 $ 38,074 $ 62,372 $ 77,022 $ 87,553 $ 38,102 $ 66,496
Cost of sales....................... 33,957 30,552 43,488 48,990 54,824 23,531 41,499
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 7,591 7,522 18,884 28,032 32,729 14,571 24,997
Operating expenses.................. 5,705 6,680 9,012 9,520 8,794 4,096 5,239
Special bonus distribution.......... -- -- -- -- -- -- 5,330
--------- --------- --------- --------- --------- --------- ---------
Operating income.................... 1,886 842 9,872 18,512 23,935 10,475 14,428
Interest expense.................... (465) (509) (1,790) (1,065) (373) (210) (2,911)
Other income (expense).............. 21 195 176 377 338 10 (519)
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item.... 1,442 528 8,258 17,824 23,900 10,275 10,998
Extraordinary gain on early
extinguishment of debt............ -- -- -- 714 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Pretax income(b).................... $ 1,442 $ 528 $ 8,258 $ 18,538 $ 23,900 $ 10,275 $ 10,998
========= ========= ========= ========= ========= ========= =========
Basic and Diluted Income Per Unit:
Income before extraordinary item.... $ .59 $ .80 $ .34 $ .37
Net income.......................... $ .62 $ .80 $ .34 $ .37
========= ========= ========= =========
Weighted average units outstanding.... 30,000 30,000 30,000 30,000
BALANCE SHEET DATA:
(AT PERIOD END)
Working capital..................... $ 5,414 $ 10,202 $ 16,445 $ 14,398 $ 23,698 $ 14,682 $ 24,979
Total assets........................ 23,275 26,065 28,756 30,654 40,846 31,940 52,850
Total debt.......................... 5,340 6,307 15,520 4,463 2,042 12,387 155,200
OTHER FINANCIAL DATA:
EBITDA(c)............................. $ 2,894 $ 1,890 $ 11,661 $ 20,015 $ 25,606 $ 11,265 $ 20,882
EBITDA margin(d)...................... 7.0% 5.0% 18.7% 26.0% 29.2% 29.6% 31.4%
Depreciation and amortization......... $ 1,008 $ 1,048 $ 1,789 $ 1,503 $ 1,671 $ 790 $ 1,124
Capital expenditures.................. 575 718 2,013 1,355 1,898 545 483
Ratio of earnings to fixed
charges(e).......................... 3.1x 1.7x 4.1x 13.3x 28.8x 23.5x 4.4x
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(a) Includes financial statements of Bikor, the assets of which we acquired on
March 29, 1996. The financial statements of Bikor are not included for
periods prior to such acquisition. For more details, see the section "Our
History."
(b) For the years ended December 31, 1994 and 1995 and the period ended
March 31, 1996, the income of our predecessor was subject to tax on a
consolidated basis with its parent which amounted to $714,000, $248,000 and
$232,000, respectively. For subsequent periods, pretax income represents net
income for a limited liability company that is not subject to income tax.
(c) EBITDA represents operating income plus depreciation and, for the six months
ended June 30, 1999, plus a special bonus of $5,330,000 made by Cherokee in
connection with the Transactions. We consider EBITDA to be a widely accepted
financial indicator of a company's ability to service debt, fund capital
expenditures and expand its business, however, EBITDA is not calculated in
the same way by all companies and is neither a measurement required, nor
represents cash flow from operations as defined by generally accepted
accounting principles. You should not consider EBITDA to be an alternative
to net income, an indicator of operating performance or an alternative to
cash flow as a measure of liquidity.
(d) EBITDA Margin represents EBITDA as a percentage of net sales.
(e) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes plus fixed charges. Fixed charges consist
of interest expense and that portion of lease expense considered to
represent interest cost (assumed to be one-third).
11
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE DECIDING TO TENDER YOUR
OUTSTANDING NOTES IN THE EXCHANGE OFFER.
OUR SUBSTANTIAL INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS COULD IMPEDE OUR
OPERATIONS AND FLEXIBILITY
We have a large amount of outstanding debt compared to the net book value of
our assets and we have substantial repayment obligations and interest expense.
As of June 30, 1999, which reflects the consummation of the Transactions, we
had:
- total consolidated debt of approximately $155.2 million; and
- members' deficit of approximately $110.8 million.
Our level of debt and the limitations imposed on us by our debt agreements
could have other important consequences to you, including the following (for
more details, see the sections "Description of Certain Other Indebtedness" and
"Description of the Notes"):
- we have less ability to satisfy our obligations with respect to the notes;
- we have to use a substantial portion of our cash flow from operations for
debt service rather than for our operations;
- we may not be able to obtain additional debt financing for future working
capital, capital expenditures or other corporate purposes;
- some or all of the debt under our new credit agreement may be at a
variable interest rate, making us vulnerable to increases in interest
rates;
- we could be less able to take advantage of significant business
opportunities, such as acquisition opportunities, and react to changes in
market or industry conditions;
- we are more vulnerable to general adverse economic and industry
conditions; and
- we are disadvantaged compared to competitors with lower levels of
outstanding debt compared to net book value of assets.
OUR BUSINESS OPERATIONS ARE RESTRICTED BY PROVISIONS OF THE INDENTURE AND OUR
NEW CREDIT AGREEMENT; FAILURE TO COMPLY COULD RESULT IN ACCELERATION OF THAT
INDEBTEDNESS
The indenture and our New Credit Agreement (as defined below in the section
"The Transactions") contain a number of covenants that significantly restrict
our ability to dispose of assets, incur additional indebtedness, incur guarantee
obligations, repay other indebtedness or amend other debt instruments, pay
dividends, create liens on assets, enter into capital leases, make investments,
loans or advances, make acquisitions, engage in mergers or consolidations, make
capital expenditures, engage in certain transactions with subsidiaries and
affiliates and otherwise restrict business operations. In addition, under the
New Credit Agreement, we are required to meet a number of financial ratios and
tests.
Our ability to comply with these agreements may be affected by events beyond
our control, including prevailing economic, financial and industry conditions.
The breach of any of these covenants or restrictions could result in an event of
default under the New Credit Agreement or the indenture. In either case, certain
lenders could declare all amounts borrowed under those agreements to be
immediately due and payable, together with accrued and unpaid interest.
Additionally, the senior lenders could terminate their commitments to make
further extensions of credit under the New Credit Agreement. If we are unable to
repay indebtedness to our senior lenders, they can proceed against the
collateral securing indebtedness under the New Credit Agreement.
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THE LOSS OF ONE OR MORE MAJOR CUSTOMERS COULD MATERIALLY AND ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS
During 1998 and 1997, our top ten customers accounted for approximately 71%
and 70%, respectively, of our sales, including IBM and Silicon Graphics each of
which accounted for more than 10% of our sales. The loss of any of our major
customers could have a material adverse effect on our financial condition or
results of operations. 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, or cancel a purchase order, each of which could adversely affect our
financial condition or results of operations. In addition, as a provider of
power supplies to OEMs, our sales are dependent upon the success of the
underlying products of which our power supplies are a component.
WE COULD LOSE BUSINESS IF WE FAIL TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE IN
THE ELECTRONIC EQUIPMENT INDUSTRY
Many of our existing customers are in the electronic 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. These industries are characterized by intense
competition and end-user demand for increased product performance at lower
prices. Our customers make similar demands on us. We cannot assure that we will
properly assess developments in the electronic equipment industries and identify
product groups and customers with the potential for continued and future growth.
Factors affecting the electronic equipment industries, in general, or any of our
major customers or their products, in particular, could have a material adverse
effect on our financial condition or results of operations. For more details,
see the section "Business" under the heading "Customers and Applications."
The markets for our products are characterized 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 life cycle of a
product. The development of new, technologically advanced products is a complex
and uncertain process requiring high levels of innovation and cost, as well as
the accurate anticipation of technological and market trends. As the life cycle
of our customers' products shorten, we will be required to bid on contracts for
replacement or next generation products to replace revenues generated from
discontinued products more frequently. We cannot assure that we will
successfully develop, introduce or manage the transition of new products. The
failure of or the delay in anticipating technological advances or developing and
marketing product enhancements or new products that respond to any significant
technological change or change in customer demand could have a material adverse
effect on our financial condition or results of operations.
WE FACE SIGNIFICANT COMPETITION; OUR FAILURE TO EFFECTIVELY COMPETE COULD
MATERIALLY AND ADVERSELY AFFECT RESULTS OF OPERATIONS AND MARKET SHARE
The design, manufacture and sale of power supplies is highly competitive.
Our competition includes numerous companies located throughout the world, some
of which have advantages over us in terms of labor and component costs and
technology. Many of our competitors have substantially greater resources and
geographic presence than we do. We cannot assure that competition from existing
competitors or new market entrants will not increase. We also face competition
from current and prospective customers that
13
<PAGE>
may design and manufacture their own power supplies. In times of an economic
downturn, or when dealing with high-volume orders, price may become an
increasingly important competitive factor, which could cause us to reduce prices
and thereby adversely affect our results of operations. Some of our major
competitors have also been engaged in merger and acquisition transactions. Such
consolidations by competitors are likely to create entities with increased
market share, customer bases, technology and marketing expertise, and/or sales
force size. These developments may adversely affect our ability to compete. We
cannot assure that we will continue to be able to compete successfully against
current or future competitors in the market. For more details, see the section
"Business" under the heading "Competition."
OUR DEPENDENCE ON INTERNATIONAL OPERATIONS SUBJECTS US TO VARIOUS RISKS
ASSOCIATED WITH, AMONG OTHER THINGS, FOREIGN LAWS, POLICIES, ECONOMIES AND
EXCHANGE RATE FLUCTUATIONS
We have manufacturing operations located in Mexico 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, unexpected changes in regulatory requirements,
restrictions on the export or import of technology, and difficulties in staffing
and managing international operations, which could have a material adverse
effect on our financial condition or results of operations. In addition, while
we transact business predominantly in United States dollars and most of our
revenues are generated in the United States and collected in United States
dollars, a portion of our labor costs are denominated in the Mexican peso and
the Indian rupee. Fluctuations in the value of the U.S. dollar relative to these
foreign currencies, or increased import duties, the imposition of tariffs or
import quotas or interruptions in transportation, will affect our costs of goods
sold and operating margins and could result in exchange losses or delays in
shipments. Historically, we have not actively engaged in substantial exchange
rate hedging activities and do not intend to do so in the future.
AN INTERRUPTION IN DELIVERY OF COMPONENT SUPPLIES COULD LEAD TO SUPPLY SHORTAGES
OR A SIGNIFICANT INCREASE IN PRICES OF COMPONENT SUPPLIES, WHICH COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
We are dependent on our suppliers for timely shipments of components. We
typically use a primary source of supply for each component used in our
products. Establishing alternate primary sources of supply, if needed, could
take a significant period of time which could result in supply shortages and
could result in increased prices. In some cases components are sourced from only
one manufacturer and an interruption in supply could materially adversely affect
our operations. Any shortages of particular components, including components
manufactured in our India Facilities, could increase product delivery times
and/or costs associated with manufacturing, reducing gross margins. For more
details, see the heading "Our Dependence on International Operations Subjects us
to Various Risks Associated With, Among Other Things, Foreign Laws, Policies,
Economies and Exchange Rate Fluctuations" above. Additionally, such shortages
could cause a substantial loss of business due to shipment delays. Any
significant shortages or price increases of components could have a material
adverse effect on our financial condition or results of operations. For more
details, see the section "Business" under the heading "Suppliers."
OUR QUARTERLY SALES MAY FLUCTUATE WHILE OUR EXPENDITURES REMAIN RELATIVELY
FIXED, POTENTIALLY RESULTING IN LOWER GROSS MARGINS
Our quarterly results of operations have fluctuated in the past and may
continue to fluctuate in the future. Variations in volume production orders and
in the mix of products sold by us have significantly affected sales and gross
profit. Sales generally may also be affected by other factors. These factors
include:
- the receipt and shipment of large orders;
- raw material availability and pricing;
14
<PAGE>
- product and price competition; and
- the length of sales cycles and economic conditions in the electronics
industry.
Many of these factors are outside our control.
We do not obtain long term purchase orders or commitments from our
customers, and a substantial portion of sales in a given quarter may depend on
obtaining orders for products to be manufactured and shipped in the same quarter
in which those orders are received. Sales for future quarters may be difficult
to predict. We rely on our estimates of anticipated future volumes when making
commitments regarding the level of business that we will seek and accept, the
mix of products that we intend to manufacture, the timing of production
schedules and the levels and utilization of personnel, inventory and other
resources.
A variety of conditions, both specific to the individual customer and
generally affecting the customer's industry, may cause customers to cancel,
reduce or delay orders that were previously made or anticipated. At any time, a
significant portion of our backlog may be subject to cancellation or
postponement without penalty. We cannot assure that we will be able to timely
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 of operations.
Our expense levels are relatively fixed and are based, in part, on
expectations of future revenues. Consequently, if revenue levels are below
expectations, our financial condition or results of operations could be
materially adversely affected. Due to all of the preceding factors, in some
future quarter or quarters our financial condition or results of operations may
be below our expectations and our gross margins may decrease. For details
concerning our financial condition, see the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OUR ABILITY TO MAINTAIN AND ENHANCE PRODUCT AND MANUFACTURING TECHNOLOGIES AND
TO SUCCESSFULLY OPERATE OUR BUSINESS IS DEPENDENT UPON OUR CONTINUED ABILITY
TO ATTRACT AND RETAIN KEY PERSONNEL
Our success depends to a significant degree on the efforts of Mr. Pat Patel,
our Chief Executive Officer, and the other members of our senior management
team. We have no employment agreements with our key management executives and do
not maintain key person life insurance for any of our officers or Management
Committee members other than Mr. Patel. We believe that the loss of service of
any of these executives could have a material adverse effect on our business.
Our ability to maintain and enhance product and manufacturing technologies
and to manage any future growth will also depend on our success in attracting
and retaining personnel with highly technical skills. The competition for these
qualified technical personnel may be intense if the relatively limited number of
qualified and available power engineers continues. We cannot assure that we will
be able to attract and retain qualified management or other highly technical
personnel. For more details, see the section "Management."
IF WE ARE UNABLE TO SUSTAIN OUR RAPID GROWTH OR EFFECTIVELY INTEGRATE ACQUIRED
BUSINESSES OUR LONG TERM COMPETITIVE POSITION MAY SUFFER
We believe that our long-term competitive position depends in part on our
ability to continue to increase manufacturing capacity, and we cannot assure
that we will be able to acquire or build sufficient capacity or successfully
integrate and manage such expanded facilities. The failure to obtain sufficient
capacity or to successfully integrate and manage additional or expanded
manufacturing facilities could adversely impact our relationships with customers
and suppliers and materially adversely affect our financial condition or results
of operations.
15
<PAGE>
The growth of our business, through acquisition or otherwise, requires
substantial additional capital, and we cannot assure that such capital will be
available on acceptable terms, or at all. In addition, such growth is expected
to place significant demands on our financial and management resources,
including:
- diversion of management's attention from day to day operations;
- requiring us to develop further the management skills of our managers and
supervisors; and
- requiring additional personnel at all levels, including highly technical
personnel and management.
Moreover, our ability to make successful acquisitions depends on numerous
other factors, including our ability to identify acceptable acquisition
opportunities and consummate acquisition transactions. We cannot assure that we
will be successful in making future acquisitions or, once one or more
acquisitions have been completed, that we will be able to effectively manage
expansion of our operations and attract and retain necessary personnel. Failure
to effectively integrate acquired businesses could adversely affect our
financial condition or results of operations. For more details, see the section
"Business" under the heading "Business Strategy."
THE FAILURE OF OUR COMPUTER SYSTEMS OR THOSE OF OUR CUSTOMERS OR SUPPLIERS TO
RECOGNIZE THE YEAR 2000 COULD ADVERSELY AFFECT OUR OPERATIONS
The Year 2000 issue refers to the potential problems arising from computer
programs written to store and identify years in only two digits instead of four.
As a result, any of our computerized equipment or that of our customers or our
suppliers which is date sensitive may be unable to distinguish between the year
1900 and 2000. This may potentially result in system failures or errors that may
produce disruptions in our normal business operations and those of our suppliers
and customers. We continue to monitor our own systems and to contact our
customers and suppliers to ensure that our and their systems are Year 2000
compliant. However, we cannot assure you that our systems or those of our
customers and suppliers will be Year 2000 compliant. Our failure or the failure
of any of our customers or suppliers to become Year 2000 compliant may have an
adverse effect on our operations.
CHANGES IN GOVERNMENT REGULATIONS OR PRODUCT CERTIFICATION COULD RESULT IN
DELAYS IN SHIPMENT OR IN LOST SALES, THEREBY MATERIALLY AND ADVERSELY
AFFECTING OUR RESULTS OF OPERATIONS
Our operations are subject to general laws, regulations and government
policies in the United States and abroad relating to items such as minimum wage,
employee safety and other health and welfare regulations. Additionally, our
product standards are certified by agencies in various countries including the
United States, Canada, Germany and the United Kingdom among others. As many
customers will not order uncertified products, changes in such certification
standards could negatively affect the demand for our products, result in the
need to modify our existing products or affect the development of new products,
each of which may involve substantial costs or delays in sales and could have a
material adverse effect on our financial condition 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 local environmental laws and
regulations (in both the United States and abroad) that govern the handling,
transportation and discharge of materials into the environment, including into
the air, water and soil. Environmental laws could become more stringent over
time, imposing greater compliance costs and increasing risks and penalties
associated with violation. Should there be an environmental occurrence, incident
or violation, our financial condition or results of operations may be adversely
affected. We could be held liable for significant damages for violation of
environmental laws and could also be subject to a revocation of licenses or
permits, thereby materially and adversely affecting our financial condition or
results of operations.
16
<PAGE>
A CHANGE IN CONTROL WOULD REQUIRE US TO MAKE AN OFFER TO REPURCHASE THE NOTES,
WHICH WE MAY NOT HAVE THE RESOURCES TO SATISFY, AND COULD RESULT IN OUR
DEFAULT UNDER THE INDENTURE AND THE NEW CREDIT AGREEMENT
The indenture provides that, upon the occurrence of a change in control of
Cherokee, we will be required to make an offer to purchase all of the notes at a
price in cash equal to 101% of their principal amount, plus accrued and unpaid
interest. Events involving a change in control could result in acceleration of,
or a similar repurchase obligation with respect to, the New Credit Agreement or
other indebtedness of ours. We cannot assure that in the event of a change in
control, we would have sufficient funds to purchase all notes tendered.
The New Credit Agreement also prohibits us from repurchasing any notes until
the indebtedness under the New Credit Agreement is paid in full. Our failure to
purchase notes would result in a default under the indenture and the New Credit
Agreement which would permit our lenders to accelerate our obligations under the
notes and the New Credit Agreement.
Likewise, the failure to repay the indebtedness under the New Credit
Agreement, if accelerated, would also constitute an event of default under the
indenture, which could cause an acceleration of our indebtedness under the
indenture. In the event of a change in control, we cannot assure that we would
have the ability to refinance the New Credit Agreement or have sufficient assets
to satisfy all of our obligations under the New Credit Agreement and the notes.
The provisions relating to a change in control included in the indenture may
increase the difficulty of a potential acquirer to obtain control of us. For
more details, see the sections "Description of Certain Other Indebtedness" and
"Description of the Notes" under the heading "Change of Control."
CLAIMS BY HOLDERS OF THE NOTES WILL BE SUBORDINATED TO CLAIMS BY HOLDERS OF
SENIOR INDEBTEDNESS
The notes rank behind all of our existing and future Senior Indebtedness and
effectively all existing and future liabilities (including trade payables) of
our subsidiaries. As a result, if we declare bankruptcy, liquidate, reorganize,
dissolve or otherwise wind up our affairs or are subjected to similar
proceedings, we must repay all Senior Indebtedness before we will be able to
make any payments on the notes. Likewise, upon a default in payment with respect
to any of our indebtedness or an event of default with respect to this
indebtedness resulting in its acceleration, our assets will be available to pay
the amounts due on the notes only after all Senior Indebtedness has been paid in
full. For more details, see the section "Description of the Notes." At June 30,
1999, we had outstanding $55.2 million of Senior Indebtedness.
IF YOU DO NOT EXCHANGE OUTSTANDING NOTES, YOU WILL CONTINUE TO BE SUBJECT TO
TRANSFER RESTRICTIONS
The outstanding notes have not been registered under the Securities Act or
any other securities laws of any jurisdiction and, therefore, may not be
offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities Act and any other applicable
securities laws or pursuant to exemptions from, or in transactions not subject
to, those requirements and, in each case, in compliance with certain other
conditions and restrictions. Holders of outstanding notes who do not exchange
their outstanding notes for exchange notes will continue to be subject to such
restrictions on transfer of such outstanding notes as set forth in the legend
thereon. In addition, upon consummation of the exchange offer, holders of
outstanding notes which remain outstanding will not be entitled to any rights to
have resales of those outstanding notes registered under the Securities Act or
to any similar rights under the registration rights agreement (subject to
certain limited exceptions). We do not currently anticipate that we will
register or qualify the resale of any outstanding notes which remain outstanding
after consummation of the exchange offer for offer or sale in any jurisdiction
(subject to limited exceptions, if applicable). As a result of these factors, to
the extent that outstanding notes are not tendered and accepted in the exchange
offer, a holder's ability to sell such outstanding notes could be adversely
affected.
17
<PAGE>
The exchange notes and any outstanding notes which remain outstanding after
consummation of the exchange offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage thereof have
taken certain actions or exercised certain rights under the indenture.
Upon consummation of the exchange offer, holders of outstanding notes will
not be entitled to any additional interest or any further registration rights
under the registration rights agreement, except under limited circumstances. See
the section "Description of the Notes" under the heading "Registered Exchange
Offer; Registration Rights."
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR THE NOTES ISSUED IN THIS EXCHANGE
OFFER.
While the outstanding notes are eligible for trading in PORTAL, the Private
Offering, Resale and Trading through Automated Linkages Market of the National
Association of Securities Dealers, Inc., a screen based automated market for
trading securities for qualified institutional buyers, there is no public market
for the exchange notes. The initial purchaser has informed us that it intends to
make a market in the exchange notes, but it may cease its market-making at any
time.
We do not intend to apply for a listing of any of the notes on any
securities exchange. We do not know if an active public market will develop for
the notes or, if developed, will continue. If an active market is not developed
or maintained, the market price and the liquidity of the notes may be adversely
affected.
In addition, the liquidity and the market price of the exchange notes may be
adversely affected by changes in the overall market for high yield securities
and by changes in our financial performance or prospects, or in the prospects
for companies in our industry. As a result, you cannot be sure that an active
trading market will develop for these notes.
FRAUDULENT TRANSFER CONSIDERATIONS
If we become a debtor in a case under the United States Bankruptcy Code or
encounter other financial difficulty, under federal or state fraudulent transfer
law a court might cancel our obligations under the notes. The court might do so
if it found that when we issued the notes and consummated the Transactions:
- we were or were rendered insolvent;
- we were left with inadequate capital to conduct our business; or
- we believed or should have believed that we would incur debts beyond our
ability to pay as they became due.
The court might also avoid our obligations, without regard to the factors above,
if it found that we issued the notes with actual intent to hinder, delay, or
defraud creditors.
If a court avoided our obligations under the notes, you would no longer have
a claim against us for repayment of the notes. In addition, the court might
direct you to repay any amounts already received under the notes to us or to a
fund for the benefit of our other creditors.
The test for determining solvency for purposes of the foregoing may vary
depending on the law of the jurisdiction being applied. In general, a court
would consider us insolvent either if the sum of our existing debts exceeded the
fair value of all our property, or if our assets' present fair saleable value
was less than the amount required to pay the probable liability on our existing
debts as they become due. In the preceding sentence, "debts" includes an
allowance for contingent and unliquidated debts.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These statements relate
to, among other things, analyses and other information that are based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments and business
strategies.
In some cases you can identify forward-looking statements by words like
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "will" or the negative of these and similar terms.
Our forward-looking statements in this prospectus include, among others:
- expectations regarding future sales based on current backlog;
- expectations regarding sales growth, sales mix, gross margins,
manufacturing productivity, capital expenditures and effective tax rates;
- expectations regarding industry trends;
- expectations regarding our financial condition and liquidity, as well as
future cash flows and earnings; and
- the impact of the Year 2000 issue, the estimated costs associated with
becoming Year 2000 compliant and the estimated target date for substantial
completion of remediation.
Our forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, among others, the risk and other factors set
forth in the section "Risk Factors" as well as the following:
- restrictions imposed by our substantial leverage and restrictive
covenants;
- changes in general economic and business conditions;
- changes in current pricing levels;
- changes in political, social and economic conditions and local
regulations;
- foreign currency fluctuations;
- reductions in sales to any of our significant customers or in customer
capacity generally;
- changes in our sales mix to lower margin products;
- increased competition;
- our ability to keep up with technological change and changes in customer
demands;
- disruptions of our established supply channels;
- limitations of our manufacturing capacity;
- the availability, terms and deployment of capital; and
- our ability to accurately estimate the cost of successful systems
preparation and implementation for Year 2000 compliance.
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, our actual results may vary materially from those
expected, estimated or projected. Because of these uncertainties, you should not
place undue reliance on forward-looking statements.
We will not update forward-looking statements or risk factors, whether as a
result of new information, future events or otherwise.
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OUR HISTORY
Over the 20 year period since Cherokee's founding, we have evolved from a
small manufacturing entity serving local California markets and operating from a
home-office into a company serving customers worldwide with annual sales of
approximately $116 million for the 12 month period ended June 30, 1999.
Mr. Pat Patel founded Cherokee International, Inc., or Cherokee Corporation,
in 1978 to manufacture made to order power supplies for local California
customers. In September 1982, Ken King, previously the President of one of
Cherokee Corporation's customers, joined Mr. Patel, taking a one third interest
in Cherokee Corporation. In January 1984 and August 1988 we opened our
facilities in India and Mexico, respectively. In November of 1987, Cherokee
moved into its current main office and principal manufacturing facility in
Tustin, California.
In 1986, after having built Cherokee Corporation into a successful power
supply manufacturer, Mr. Patel and Mr. King sold the company to Core Industries,
Inc., or Core. Mr. Patel and Mr. King retained their senior management positions
with Cherokee Corporation after the sale. On March 28, 1996, Mr. Patel formed
Cherokee International, LLC and purchased substantially all of the assets of
Cherokee Corporation from a subsidiary of Core. Concurrently, Bikor Corporation,
or Bikor, the principals of which had formerly worked for Cherokee Corporation,
contributed substantially all of its assets to us in exchange for a 25%
ownership interest.
On April 30, 1999, we consummated the Transactions, including the sale of
60% of Cherokee to Cherokee Investors. Mr. Patel and Mr. King still retain their
senior management positions.
20
<PAGE>
THE TRANSACTIONS
Pursuant to the Unit Purchase Agreement, dated as of March 31, 1999, on
April 30, 1999, Cherokee Investors acquired 60% of our issued and outstanding
membership units from our then existing investors who held all of our
outstanding membership units. The aggregate consideration paid by Cherokee
Investors pursuant to the Unit Purchase Agreement was $180.0 million. Of the
$180.0 million, $160.0 million was paid in cash and $20.0 million was in the
form of promissory notes. Using the proceeds of the offering and the Term Loan
Facility referred to below, we then made a distribution on the date of the
offering of $150.0 million to all of the holders of our membership units,
including $90 million to Cherokee Investors.
In total, as a result of the Transactions, our existing investors received
$220 million in cash and $20.0 million in promissory notes from Cherokee
Investors and retained a 40% ownership interest in the Company. The
$220 million was funded from our borrowing of $150 million and payment of
$70 million by Cherokee Investors.
Concurrently with the closing of the sale of the outstanding notes, we
entered into a new Credit Agreement with Heller Financial, Inc., Bank Austria
Creditanstalt Corporate Finance, Inc., Fleet Capital Corporation, Finova Capital
Corporation, Key Corporate Capital Inc., and U.S. Bank. The New Credit Agreement
included a Term Loan Facility providing for $50.0 million of term loan
borrowings and a $25.0 million Revolving Credit Facility of which approximately
$4.6 million was initially drawn in connection with the Transactions. For a
description of the New Credit Agreement, see the section "Description of Certain
Other Indebtedness."
For ease of reference, we will sometimes refer to the Acquisition, the
offering of the outstanding notes, the execution of the New Credit Agreement and
drawdown of the Term Loan Facility and a portion of the Revolving Credit
Facility, and the payment of the distribution referred to above, collectively,
as the "Transactions."
21
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. All outstanding
notes that are tendered in the exchange offer will be retired and cancelled.
Accordingly, the issuance of the exchange notes will not result in any proceeds
to us. We used the aggregate net proceeds from the offering of the outstanding
notes (approximately $96.4 million after deducting fees and expenses), together
with the net proceeds of our $50.0 million borrowing under the Term Loan
Facility and a drawdown of approximately $4.6 million under our Revolving Credit
Facility, to make a $150 million distribution to our members. For more details,
see the section "The Transactions."
The following table sets forth the sources and uses of the funds that were
used to consummate the Transactions:
<TABLE>
<CAPTION>
SOURCES
-----------
(DOLLARS IN
MILLIONS)
<S> <C>
Sources of Funds:
Existing Cash............................. $ 1.6
Revolving Credit Facility................. 4.6
Term Loan Facility........................ 50.0
Notes..................................... 100.0
Equity Contribution from Cherokee
Investors(1)(2).......................... 90.0
---------
Total Sources............................. $ 246.2
=========
<CAPTION>
USES
---------
(DOLLARS IN
MILLIONS)
<S> <C>
Uses of Funds:
Distribution to Our Existing
Investors(3)............................. $ 150.0
Cash from Cherokee Investors to Our
Existing Investors....................... 70.0
Repayment of Existing Debt................ 0.7
Promissory Notes to Existing
Investors(2)............................. 20.0
Fees and Expenses......................... 5.5
---------
Total Uses................................ $ 246.2
=========
</TABLE>
- ------------------------
(1) Includes $70.0 million in cash and $20.0 million of deferred payment notes
issued by Cherokee Investors to our existing investors.
(2) The promissory notes, which are the obligations of Cherokee Investors and
not our obligations, represent an additional equity contribution from
Cherokee Investors to the existing investors, and are payable two years
after the close of the Transactions.
(3) Represents a $60.0 million distribution by us to our existing investors and
a $90.0 million distribution by us to Cherokee Investors that was
immediately paid by Cherokee Investors to our existing investors as part of
the purchase price for the Acquisition.
22
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of June 30, 1999, which reflects the consummation of the
Transactions. You should read this table in conjunction with our consolidated
financial statements and the other financial information included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
JUNE 30,
1999
--------------
<S> <C>
(IN THOUSANDS)
Cash and cash equivalents......................................................................... $ 1,348
============
Debt (including current portion):
Senior Indebtedness:
New Credit Agreement.......................................................................... $ 52,000
Capital lease obligations..................................................................... 3,200
Other......................................................................................... --
------------
Total Senior Indebtedness................................................................... 55,200
Senior Subordinated Notes Due 2009.............................................................. 100,000
------------
Total debt........................................................................................ 155,200
Members' equity (deficit):
Class A Membership Units........................................................................ 14
Class B Membership Units........................................................................ 1,386
Paid-in capital................................................................................. 5,330
Accumulated deficit............................................................................. (117,513)
------------
Total members' deficit............................................................................ (110,783)
------------
Total capitalization.............................................................................. $ 44,417
============
</TABLE>
23
<PAGE>
PRO FORMA FINANCIAL INFORMATION
You should read the following unaudited pro forma consolidated financial
information in conjunction with our consolidated financial statements and other
financial information included elsewhere in this prospectus. We derived the
following information from our consolidated financial information which we
adjusted to give effect to some of the Transactions including the offering of
the outstanding notes, the execution of the New Credit Agreement and drawdown of
the $50 million term loan facility and a portion of the $25 million revolving
credit facility, and payment of a $150 million distribution to holders of our
membership units. See the section "The Transactions" for further discussion. Our
audited historical consolidated balance sheet, as of June 30, 1999, as included
herein, gives effect to the Transactions, as the Transactions were consummated
prior to that date. We adjusted our historical statement of income and other
financial data as if the Transactions had occurred on the first day of the
applicable period presented. We do not represent that the information presented
below indicates what our results of operations or financial condition would
actually have been had the Transactions in fact occurred on the assumed dates or
our results of operations or financial condition for any future period or date.
PRO FORMA STATEMENT OF INCOME AND OTHER FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------- -------------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.......................................................................... $ 87,553 $ 66,496
Cost of sales...................................................................... 54,824 41,499
------------- -------------
Gross profit....................................................................... 32,729 24,997
Operating expenses................................................................. 8,794 5,239
Special bonus distribution......................................................... -- 5,330
------------- -------------
Operating income................................................................... 23,935 14,428
Interest expense(a)................................................................ (15,655) (7,867)
Other income (expense)............................................................. 338 (519)
------------- -------------
Pretax income...................................................................... $ 8,618 $ 6,042
============= =============
Pro forma basic and diluted income per unit........................................ $ .29 $ .20
Weighted average units outstanding................................................. 30,000,000 30,000,000
OTHER FINANCIAL DATA:
EBITDA(b).......................................................................... $ 25,606 $ 20,882
EBITDA margin(c)................................................................... 29.2% 31.4%
Depreciation and amortization...................................................... $ 1,671 $ 1,124
Capital expenditures............................................................... 1,898 483
Ratio of total debt to EBITDA(d)................................................... -- 4.4x
Ratio of EBITDA to cash interest expense(e)........................................ 1.7x 2.8x
Ratio of earnings to fixed charges(f).............................................. 1.5x 1.7x
</TABLE>
24
<PAGE>
- ------------------------
(a) Represents historical consolidated interest expense related to ongoing
capital lease obligations adjusted by interest expense related to the
Transactions as if the Transactions had occurred on the first day of the
applicable period presented as follows:
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Ongoing capital lease obligations.................................. $ 58 $ 70
Issuance of the $100.0 million notes (at an interest rate of
10.50%).......................................................... 10,500 5,250
$50.0 million drawn under Term Loan Facility (at an assumed
interest rate of 7.75%) (1)...................................... 3,827 1,913
$4.6 million drawn under the $25.0 million Revolving Credit
Facility (at an assumed interest rate of 7.75% plus .50% unused
line fee) (1).................................................... 457 228
Amortization of issuance costs of the $100.0 million notes (2)..... 568 284
Amortization of issuance costs of Senior Indebtedness (3).......... 245 122
---------- ---------
Pro forma interest expense......................................... $ 15,655 $ 7,867
========== =========
</TABLE>
- ------------------------
(1) Borrowings under the New Credit Agreement bear interest at a rate per
annum equal (at our option) to: (i) the reserve-adjusted LIBOR rate as
determined by the agent in accordance with the New Credit Agreement or
(ii) a base rate equal to the prime rate, in each case plus an applicable
margin. Initially, the applicable margin was 2.75% per annum for LIBOR
loans and 1.50% per annum for base rate loans. The applicable margins are
subject to change based on our leverage ratio. The pro forma interest
expense assumed an estimated interest rate of 7.75% based on the initial
interest rate information. A change in the interest rate of 0.125% would
result in an adjustment to 1998 interest expense of approximately $62,000
and $6,000 for the Term Loan Facility and Revolving Credit Facility,
respectively.
(2) Issuance costs of the $100.0 million notes consists of a 3% fee and
other direct costs of approximately $0.4 million. The costs of
approximately $3.4 million are amortized on a straight-line basis over 6
years.
(3) Issuance costs of the Senior Indebtedness consists of a 1.75% fee on
$75.0 million of debt and other direct costs of approximately
$0.2 million. These costs of approximately $1.5 million are amortized on
a straight-line basis over the 6 year term of the senior indebtedness.
(b) EBITDA represents operating income plus depreciation and amortization and,
for the six months ended June 30, 1999, plus a special bonus of $5,330,000
made by Cherokee in connection with the Transactions. We consider EBITDA to
be a widely accepted financial indicator of a company's ability to service
debt, fund capital expenditures and expand its business; however, EBITDA is
not calculated in the same way by all companies and is neither a measurement
required, nor represents cash flow from operations as defined, by generally
accepted accounting principles. You should not consider EBITDA to be an
alternative to net income, an indicator of operating performance or an
alternative to cash flow as a measure of liquidity.
(c) EBITDA Margin represents EBITDA as a percentage of net sales.
(d) For purposes of computing the ratio of total debt to EBITDA, EBITDA is for
the twelve months ended June 30, 1999.
25
<PAGE>
(e) Cash interest expense represents total interest expense less amortization of
issuance costs of the notes and of Senior Indebtedness.
(f) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes plus fixed charges. Fixed charges consist
of interest expense and that portion of lease expense considered to
represent interest cost (assumed to be one-third).
26
<PAGE>
HISTORICAL BALANCE SHEET AS OF JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 1,348
Accounts receivable, net......................................................... 17,689
Inventories, net................................................................. 19,562
Prepaid expenses and other current assets........................................ 148
---------
Total current assets........................................................... 38,747
Property and equipment, net...................................................... 9,127
Deposits......................................................................... 261
Deferred financing costs, net.................................................... 4,715
---------
$ 52,850
=========
CURRENT LIABILITIES:
Accounts payable................................................................. $ 3,954
Accrued liabilities.............................................................. 4,478
Current portion of long-term debt................................................ 4,500
Current portion of capital lease obligations..................................... 836
---------
Total current liabilities...................................................... 13,768
Long-term debt, net of current portion........................................... 147,500
Capital lease obligations, net of current portion................................ 2,365
---------
Total debt, net of current portion............................................... 149,865
Members' equity (deficit):
Membership units................................................................. 1,400
Retained earnings (deficit) (a).................................................. (112,183)
---------
Total members' equity (deficit)................................................ (110,783)
---------
$ 52,850
=========
</TABLE>
- ------------------------
(a) Reflects a $150 million distribution to members made in connection with the
Transactions.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
You should read the following selected historical consolidated financial
information in conjunction with our consolidated financial statements and the
other financial information included elsewhere in this prospectus. We derived
our selected historical consolidated financial information as of December 31,
1997 and 1998 and as of June 30, 1999 and for the nine months ended
December 31, 1996, the years ended December 31, 1997 and 1998, and the six
months ended June 30, 1999 from our consolidated financial statements, which
were audited by Deloitte & Touche LLP, our independent auditors. Effective
March 29, 1996 we entered into an asset purchase agreement with Cherokee
International, Inc. a wholly-owned subsidiary of Core Industries and an asset
transfer agreement with Bikor Corporation whereby we purchased assets and
assumed liabilities for a total purchase price of $26,536,888. The acquisition
was accounted for under the purchase method of accounting with the total
purchase price allocated to net tangible assets. No goodwill was recorded as the
fair market value of assets acquired and liabilities assumed approximated
historical cost. We continued the businesses of Cherokee International, Inc. and
Bikor Corporation subsequent to the acquisitions and incurred a significant
increase in interest in 1996 and 1997 due to additional borrowings incurred as a
result of the acquisitions. We derived our selected historical consolidated
financial information for the years ended December 31, 1994 and 1995, and for
the three months ended March 31, 1996 and the six months ended June 30, 1998
from our unaudited consolidated financial statements which have been prepared by
us on a basis consistent with our audited financial statements and, in our
opinion, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of our results of operations for
such periods and financial condition as of the dates presented. Results of
interim periods are not necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
PREDECESSOR CHEROKEE INTERNATIONAL, LLC
------------------------------------- -------------------------------------
3 MONTHS 9 MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DEC. 31 DEC. 31 MAR. 31 DEC. 31 DEC. 31 DEC. 31
1994 1995 1996 1996(A) 1997(A) 1998(A)
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................................. $ 41,548 $ 38,074 $ 12,175 $ 50,197 $ 77,022 $ 87,553
Cost of sales.............................. 33,957 30,552 9,587 33,901 48,990 54,824
--------- --------- --------- --------- --------- ---------
Gross profit............................... 7,591 7,522 2,588 16,296 28,032 32,729
Operating expenses......................... 5,705 6,680 1,927 7,085 9,520 8,794
Special bonus distribution................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Operating income........................... 1,886 842 661 9,211 18,512 23,935
Interest expense........................... (465) (509) (152) (1,638) (1,065) (373)
Other income (expense)..................... 21 195 135 41 377 338
--------- --------- --------- --------- --------- ---------
Income before extraordinary item........... 1,442 528 644 7,614 17,824 23,900
Extraordinary gain on early extinguishment
of debt.................................. -- -- -- -- 714 --
--------- --------- --------- --------- --------- ---------
Pretax income(b)........................... $ 1,442 $ 528 $ 644 $ 7,614 $ 18,538 $ 23,900
========= ========= ========= ========= ========= =========
Basic and diluted income per unit:
Income before extraordinary item........... -- -- -- $ .25 $ .59 $ .80
Net income................................. -- -- -- $ .25 $ .62 $ .80
========= ========= =========
Weighted average units outstanding......... -- -- -- 30,000 30,000 30,000
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................ $ 5,414 $ 10,202 $ 5,671 $ 16,445 $ 14,398 $ 23,698
Total assets............................... 23,275 26,065 27,611 28,756 30,654 40,846
Total debt................................. 5,340 6,307 6,784 15,520 4,463 2,042
Shareholder's equity/members' equity
(deficit)(c)............................. 15,594 15,874 16,287 8,654 19,118 30,029
OTHER FINANCIAL DATA:
EBITDA(d).................................. $ 2,894 $ 1,890 $ 1,086 $ 10,575 $ 20,015 $ 25,606
EBITDA margin(e)........................... 7.0% 5.0% 8.9% 21.1% 26.0% 29.2%
Cash flow provided by (used in) operating
activities............................... $ 4,506 $ (119) $ (1,675) $ 9,839 $ 20,078 $ 20,066
Cash flow used in investing activities..... (575) (718) (78) (17,199) (1,355) (1,898)
Cash flow provided by (used in) financing
activities............................... (4,259) 719 246 6,927 (18,416) (16,256)
Depreciation and amortization.............. $ 1,008 $ 1,048 $ 425 $ 1,364 $ 1,503 $ 1,671
Capital expenditures....................... 575 718 78 1,935 1,355 1,898
Ratio of earnings to fixed charges(f)...... 3.1x 1.7x 4.1x 4.9x 13.3x 28.8x
<CAPTION>
6 MONTHS ENDED
JUNE 30 JUNE 30
1998(A) 1999(A)
----------- ---------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................................. $ 38,102 $ 66,496
Cost of sales.............................. 23,531 41,499
--------- ---------
Gross profit............................... 14,571 24,997
Operating expenses......................... 4,096 5,239
Special bonus distribution................. -- 5,330
--------- ---------
Operating income........................... 10,475 14,428
Interest expense........................... (210) (2,911)
Other income (expense)..................... 10 (519)
--------- ---------
Income before extraordinary item........... 10,275 10,998
Extraordinary gain on early extinguishment
of debt.................................. -- --
--------- ---------
Pretax income(b)........................... $ 10,275 $ 10,998
========= =========
Basic and diluted income per unit:
Income before extraordinary item........... $ .34 $ .37
Net income................................. $ .34 $ .37
========= =========
Weighted average units outstanding......... 30,000 30,000
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................ $ 14,682 $ 24,979
Total assets............................... 31,940 52,850
Total debt................................. 12,387 155,200
Shareholder's equity/members' equity
(deficit)(c)............................. 19,553 (110,783)
OTHER FINANCIAL DATA:
EBITDA(d).................................. $ 11,265 $ 20,882
EBITDA margin(e)........................... 29.6% 31.4%
Cash flow provided by (used in) operating
activities............................... $ 4,580 $ 4,886
Cash flow used in investing activities..... (545) (483)
Cash flow provided by (used in) financing
activities............................... (7,103) (5,840)
Depreciation and amortization.............. $ 790 $ 1,124
Capital expenditures....................... 545 483
Ratio of earnings to fixed charges(f)...... 23.5x 4.4x
</TABLE>
28
<PAGE>
- ----------------------------------
(a) Includes financial statements of Bikor, the assets of which we acquired on
March 29, 1996. The financial statements of Bikor are not included for
periods prior to such acquisition. For more details, see the section "Our
History."
(b) For the years ended December 31, 1994 and 1995 and the period ended
March 31, 1996, the income of our predecessor was subject to tax on a
consolidated basis with its parent which amounted to $714,000, $248,000 and
$232,000, respectively. For subsequent periods, pretax income represents net
income for a limited liability company that is not subject to income tax.
(c) For the years ended December 31, 1994 and 1995, and for the three months
ended March 31, 1996, the term "Shareholders' Equity" applies. For the nine
months ended December 31, 1996, the years ended December 31, 1997 and 1998,
and the six months ended June 30, 1998 and 1999 the term "Members' Equity"
applies.
(d) EBITDA represents operating income plus depreciation and amortization and,
for the six months ended June 30, 1999, plus a special bonus of $5,330,000
made by Cherokee in connection with the Transactions. We consider EBITDA to
be a widely accepted financial indicator of a company's ability to service
debt, fund capital expenditures and expand its business; however, EBITDA is
not calculated in the same way by all companies and is neither a measurement
required, nor represents cash flow from operations as defined, by generally
accepted accounting principles. You should not consider EBITDA to be an
alternative to net income, an indicator of operating performance or an
alternative to cash flow as a measure of liquidity.
(e) EBITDA Margin represents EBITDA as a percentage of net sales.
(f) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes plus fixed charges. Fixed charges consist
of interest expense and that portion of lease expense considered to
represent interest cost (assumed to be one-third).
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
You should read the following discussion and analysis of our results of
operations, financial condition and liquidity in conjunction with the
consolidated financial statements contained elsewhere in this prospectus.
OVERVIEW
We are a leading designer and manufacturer of a broad range of switch mode
power supplies for OEMs primarily in the high growth telecommunications,
networking and high-end workstation industries. We produce our products and
related components in four sophisticated manufacturing facilities located in
Tustin, California, Irvine, California, Guadalajara, Mexico and Bombay, India.
Our net sales are principally driven by growth in our customers' industries.
The telecommunications, networking and high-end workstation markets are
benefitting from the proliferation of internet/intranet, wireless and other
communications.
The principal elements comprising cost of sales are raw materials, labor and
manufacturing overhead. During 1998 and 1999, raw materials accounted for a
large majority of cost of sales. Raw materials include magnetic subassemblies,
sheet metal, electronic and other components, mechanical parts and electrical
wires. Labor costs include employee costs of salaried and hourly employees.
Manufacturing overhead includes lease costs, depreciation on property, plant and
equipment, utilities, property taxes and repairs and maintenance.
Operating expenses include engineering costs, selling and marketing costs
and administrative expenses. Engineering costs primarily include salaries and
benefits of engineering personnel, safety approval and quality certification
fees, depreciation on equipment and subcontract costs for third party
contracting services. Selling and marketing expenses primarily include salaries
and benefits to account managers and commissions to independent sales
representatives. Administrative expenses primarily include salaries and benefits
for certain management and administrative personnel, professional fees and
information system costs.
Our backlog consists of purchase orders received from customers with
delivery dates usually scheduled within approximately four months of the receipt
of the order. Our backlog has grown significantly over the last three years
which we believe demonstrates strong momentum within the business. Our backlog
at June 30, 1999 was approximately $37.3 million. We believe that our backlog is
a strong indication of growth in our targeted markets and, more specifically,
our future revenue. The number of new engineering and design projects has also
served as a good indicator of demand for our products and services and future
backlog.
Cherokee is organized as a California limited liability company and treated
as partnership for United States federal income tax purposes. Under this
treatment, Cherokee is not itself subject to United States federal income
taxation. Each member of Cherokee, however, is subject to tax on its allocable
share of Cherokee's income. In general, Cherokee makes distributions to its
members in an amount sufficient to pay their United States federal and state
income taxes resulting from their allocable share of Cherokee's income.
In addition to statement of income data in accordance with generally
accepted accounting principles (GAAP), this Management's Discussion and Analysis
of Financial Condition and Results of Operations includes a discussion of the
Company's EBITDA, which is defined as operating income plus depreciation and
amortization and, for the six months ended June 30, 1999, plus a special bonus
of $5,330,000 made by Cherokee in connection with the Transactions. We have
provided information regarding EBITDA because
30
<PAGE>
we believe that it assists in understanding our operating results. EBITDA is not
intended to represent cash flow from operations as defined by GAAP and should
not be considered as an alternative to cash flow as a measure of liquidity or as
an alternative to net earnings as an indicator of operating performance.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------- --------------- ----------------------------------------------------------------
1996 1996 1996 1997 1998
------------- --------------- -------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $ 12.2 $ 50.2 $ 62.4 100.0% $ 77.0 100.0% $ 87.6 100.0%
Cost of sales............. 9.6 33.9 43.5 69.7 49.0 63.6 54.8 62.6
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.............. 2.6 16.3 18.9 30.3 28.0 36.4 32.8 37.4
Operating expenses........ 1.9 7.1 9.0 14.4 9.5 12.4 8.8 10.0
--------- --------- --------- --------- --------- --------- --------- ---------
Special bonus distribution -- -- -- -- -- -- -- --
Operating income.......... 0.7 9.2 9.9 15.9 18.5 24.0 24.0 27.4
Interest expense.......... (0.2) (1.6) (1.8) (2.9) (1.1) (1.4) (0.4) (0.4)
Other income (expense).... 0.1 0.1 0.2 0.3 0.4 0.5 0.3 0.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income before
extraordinary item...... 0.6 7.7 8.3 13.3% 17.8 23.1 $ 23.9 27.3%
--------- --------- --------- --------- --------- --------- --------- ---------
Extraordinary gain on
early extinguishment of
debt.................... -- -- -- -- 0.7 0.9 -- --
Pretax income............. $ 0.6 $ 7.7 $ 8.3 13.3% 18.5 24.0% $ 23.9 27.3%
========= ========= ========= ========= ========= ========= ========= =========
EBITDA(1)................. $ 1.1 $ 10.6 $ 11.7 18.7% $ 20.0 26.0% $ 25.6 29.2%
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------
1998 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales................. $ 38.1 100% $ 66.5 100%
Cost of sales............. 23.5 61.7% 41.5 62.4%
--------- --------- --------- ---------
Gross profit.............. 14.6 38.3% 25.0 37.6%
Operating expenses........ 4.1 10.8% 5.3 8.0%
--------- --------- --------- ---------
Special bonus distribution -- -- 5.3 6.0%
Operating income.......... 10.5 27.5% 14.4 21.6%
Interest expense.......... (0.2) (0.5%) (2.9) (4.4%)
Other income (expense).... -- -- (0.5) (0.7%)
--------- --------- --------- ---------
Income before
extraordinary item...... $ 10.3 27.0% $ 11.0 16.5%
--------- --------- --------- ---------
Extraordinary gain on
early extinguishment of
debt.................... -- -- -- --
Pretax income............. $ 10.3 27.0% $ 11.0 16.5%
========= ========= ========= =========
EBITDA(1)................. $ 11.3 29.6% $ 20.9 31.4%
</TABLE>
- ------------------------------
(1) For more details regarding the components of EBITDA, see footnote "d" to our
"Selected Consolidated Financial Information."
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET SALES
Net sales increased by approximately 74.5% or $28.4 million to $66.5 million
for the six months ended June 30, 1999 from $38.1 million for the six months
ended June 30, 1998.
This increase in net sales was primarily attributable to:
- broadening of our customer base resulting in additional sales from
projects with new customers; and
- growth in business with existing customers.
GROSS PROFIT
Gross Profit increased by approximately 71.6% or $10.4 million to $25.0
million for the six months ended June 30, 1999 from $14.6 million for the six
months ended June 30, 1998. Gross margin for the six-month period decreased to
37.6% from 38.2% in the prior year.
The increase in gross profit was primarily due to the increase in sales. The
decrease in gross margin compared to the prior year was primarily due to:
- increased pricing pressure from certain key existing customers; and
- a change in product mix.
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This decrease was partially offset by:
- improved operating leverage due to higher sales volume; and
- improved operating efficiencies due to increased automation.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 1999 of $10.6 million
included a $5.3 million special bonus distribution. This bonus payment was in
addition to our discretionary annual management bonus plan and was funded by
capital contributions made by the Existing Members. No such special bonus
distribution was made in the prior year.
Operating expenses, excluding the special bonus distribution, increased by
approximately 27.9% or $1.1 million to $5.2 million for the six months ended
June 30, 1999 from $4.1 million for the six months ended June 30, 1998. As a
percentage of sales, operating expenses, before the special bonus distribution,
declined to 7.9% from 10.8% in the prior year.
The increase in operating expenses was primarily due to the increased costs
to support the higher sales volume. The decline in operating expenses as a
percentage of net sales was primarily attributable to increased operating
leverage as a result of the higher sales volume.
OPERATING INCOME
Operating income for the six months ended June 30, 1999 of $14.4 million
includes the $5.3 million special bonus distribution. Excluding the effect of
the special bonus distribution, operating income increased by approximately
88.6% or $9.3 million to $19.8 million for the six months ended June 30, 1999
from $10.5 million for the six months ended June 30, 1998. Operating margin for
the six months ended June 30, 1999, before the special bonus distribution,
improved to 29.7% from 27.5% in the prior year.
The increase in operating income and operating margin was primarily due to
the same factors contributing to our increase in gross profit as discussed above
and improved operating leverage due to increased sales volume.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 1999 was $2.9 million
compared to $0.2 million for the six months ended June 30, 1998. This
substantial increase was primarily due to the issuance of $100 million of
10 1/2% senior subordinated notes and a new $50 million term loan, all of which
occurred in April 1999 in connection with the Transactions.
PRETAX INCOME
Pretax income for the six months ended June 30, 1999 was $11.0 million,
which includes the effect of the $5.3 million special bonus distribution.
Excluding the effect of the special bonus distribution, pretax income increased
by approximately 58.9% or $6.1 million to $16.3 million for the six months ended
June 30, 1999 from $10.3 million for the six months ended June 30, 1998. Pretax
income margin for the current six-month period, before the special bonus
distribution, was 24.6% compared to 27.0% in the prior period.
The increase in pretax income was primarily due to the same factors
contributing to the increase in operating income as discussed above, partially
offset by the substantially higher interest expense discussed above.
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EBITDA
EBITDA increased by approximately 85.4% or $9.6 million to $20.9 million
for the six months ended June 30, 1999 from $11.3 million for the six months
ended June 30, 1998. EBITDA margin improved to 31.4% from 29.6% in the prior
year.
The increases in EBITDA and EBITDA margin were attributable to the same
factors that contributed to the improvement in operating income and operating
margin.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales increased approximately 13.8% or $10.6 million to $87.6 million in
fiscal 1998 from $77.0 million in fiscal 1997.
This increase in net sales was primarily attributable to:
- projects with new customers;
- new projects with existing customers;
- growth in recurring business with existing customers; and
- a shift in product mix to higher margin products.
The average price of power supplies sold increased by 34%. Our shipment per
employee in 1998 for our domestic operations was at a record level of $206,625
compared to $179,979 per employee in 1997. In addition, our target markets, in
particular the telecommunications and networking markets, experienced
significant growth due to the increased use of internet/intranet, wireless and
other communications. The increase in sales discussed herein was partially
offset by price reductions to certain existing customers.
GROSS PROFIT
Gross profit increased by approximately 17.1% or $4.8 million to
$32.8 million for fiscal 1998 from $28.0 million in fiscal 1997. Gross margin
for this period increased to 37.4% from 36.4%.
The increase in gross profit and gross margin was primarily attributable to:
- increased sales volume;
- decrease in material costs due to increased purchasing power and better
negotiation of volume discounts;
- continued automation contributing to a reduction in labor costs; and
- lower manufacturing overhead due to increased operating leverage.
OPERATING EXPENSES
Operating expenses decreased by approximately 7.4% or $0.7 million to
$8.8 million in fiscal 1998 from $9.5 million in fiscal 1997. Operating expenses
as a percentage of net sales declined to 10.0% in fiscal 1998 from 12.4% in
fiscal 1997.
The decrease in operating expenses was primarily attributable to lower
commission expense due to (a) a change in the commission structure in 1998 to a
flat commission from a sliding scale in 1997 and (b) increased sales to certain
existing customers. Also, our improved operating leverage due to higher sales
volume contributed to the decline in operating expenses as a percentage of
sales.
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OPERATING INCOME
Operating income increased by approximately 29.7% or $5.5 million to
$24.0 million in fiscal 1998 from $18.5 million in fiscal 1997. Operating margin
improved to 27.4% in 1998 from 24.0% in 1997.
The increases in operating income and operating margin were attributable to
the same factors contributing to the increase in gross profit and the reduction
in operating expenses as discussed above.
INTEREST EXPENSE
Interest expense decreased by approximately 63.6% or $0.7 million to
$0.4 million in fiscal 1998 from $1.1 million in fiscal 1997 as we continued to
repay our outstanding indebtedness.
OTHER INCOME
Other income decreased by approximately 25.0% or $0.1 million to
$0.3 million in fiscal 1998 from $0.4 million in fiscal 1997. Other income in
1997 included $0.4 million relating to a contract cancellation fee received from
a customer.
EXTRAORDINARY GAIN
The extraordinary gain in 1997 included $0.7 million relating to a gain from
early repayment of a subordinated note due to Core Industries.
PRETAX INCOME
Pretax income increased by approximately 29.2% or $5.4 million to
$23.9 million in fiscal 1998 from $18.5 million in fiscal 1997. Pretax income
margin improved to 27.3% from 24.0%.
The increases in pretax income and pretax income margin were primarily due
to the same factors that contributed to the improvement in operating income and
operating margin and the decline in interest expense, partially offset by the
decrease in other income in 1998, all as discussed above.
EBITDA
EBITDA increased by approximately 28.0% or $5.6 million to $25.6 million in
fiscal 1998 from $20.0 million in fiscal 1997. EBITDA margin improved to 29.2%
from 26.0%.
The increases in EBITDA and EBITDA margin were attributable to the same
factors that contributed to the increase in operating income and operating
margin as discussed above.
FISCAL 1997 COMPARED TO FISCAL 1996
Effective March 29, 1996 the Company entered into an asset purchase
agreement with Cherokee International, Inc., a wholly-owned subsidiary of
Core Industries, and an asset transfer agreement with Bikor Corporation whereby
the Company purchased certain assets and assumed certain liabilities for a total
purchase price of $26,536,888. The acquisition was accounted for under the
purchase method of accounting with the total purchase price allocated to net
tangible assets. No goodwill was recorded as the fair market value of assets
acquired and liabilities assumed approximated historical cost. The Company
continued the businesses of Cherokee International, Inc. and Bikor Corporation
subsequent to the acquisitions and incurred a significant increase in interest
expense in 1996 and 1997 due to additional borrowings incurred as a result of
the acquisitions.
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NET SALES
Net sales increased by approximately 23.4% or $14.6 million to
$77.0 million in fiscal 1997 from $62.4 million in fiscal 1996.
This increase in net sales was primarily attributable to:
- broadening of the customer base resulting in additional sales from
projects with new customers;
- new projects with existing customers; and
- growth in recurring business from existing customers.
Also, 1997 was the first full year of operations after Mr. Pat Patel acquired
Cherokee Corporation from Core Industries in March 1996 and combined Bikor
Corporation with Cherokee. This resulted in the following benefits:
(a) increased liquidity for making additional investments in the business which
was a constraint under Core; and (b) greater engineering resources to service
increased demands from customers.
GROSS PROFIT
Gross profit increased by approximately 48.1% or $9.1 million to
$28.0 million in 1997 from $18.9 million in 1996. Gross margin improved to 36.4%
from 30.3%.
The increase in gross margin was primarily attributable to:
- increased orders for new and existing products and a shift in product mix
to higher margin products;
- a decrease in labor costs due to increased automation (we operated two
surface mount technology, or SMT, lines for the full year in 1997 compared
to one SMT line for nine months in 1996); and
- a decrease in factory overhead due to improved operating leverage and
production efficiencies. Material costs as a percentage of sales were
approximately the same in both years.
For a description of SMT, see the section "Business" under the heading
"Manufacturing Process and Quality Control."
OPERATING EXPENSES
Operating expenses increased by approximately 5.6% or $0.5 million to
$9.5 million in fiscal 1997 from $9.0 million in fiscal 1996. Operating expenses
as a percentage of net sales decreased to 12.4% from 14.4%.
Operating expenses increased as a result of an increase in net sales. The
decline in operating expenses as percentage of net sales was primarily due to
improved operating leverage. Engineering and selling expenses as a percentage of
net sales were approximately the same in both years. However, administrative
expenses as a percentage of net sales declined due to the higher sales volume in
1997.
OPERATING INCOME
Operating income increased by approximately 86.9% or $8.6 million to
$18.5 million in fiscal 1997 from $9.9 million in fiscal 1996. Operating margin
improved to 24.0% from 15.9%.
The improvement in operating income and operating margin was due to the
factors that contributed to the increase in gross margin as discussed above and
our improved operating leverage due to higher sales volume in 1997.
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INTEREST EXPENSE
Interest expense decreased by approximately 38.9% to $1.1 million in fiscal
1997 from $1.8 million in fiscal 1996 due to the continued repayment of
outstanding indebtedness.
OTHER INCOME
Other income increased by $0.2 million to $0.4 million in fiscal 1997 from
$0.2 million in fiscal 1996. The increase in 1997 was primarily due to
$0.4 million relating to a contract cancellation fee received from a customer in
1997 partially offset by $0.2 million in other income in 1996 that did not recur
in 1997.
EXTRAORDINARY GAIN
The extraordinary gain in 1997 included $0.7 million relating to a gain from
early repayment of a subordinated note due to Core Industries.
PRETAX INCOME
Pretax income more than doubled to $18.5 million in fiscal 1997 from $8.3
million in fiscal 1996 and pretax income margins improved to 24.0% from 13.3%.
The improvement in pretax income was primarily due to the factors that
contributed to the increase in operating income, other income and decrease in
interest expense as discussed above.
EBITDA
EBITDA increased by 70.9% or $8.3 million to $20.0 million in fiscal 1997
from $11.7 million in fiscal 1996. EBITDA margin improved to 26.0% in 1997 from
18.7% in 1996.
The increases in EBITDA and EBITDA margin were attributable to the same
factors that contributed to the increase in operating income and operating
margin as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net cash provided by operating activities was $4.9 million for the six
months ended June 30, 1999 compared to $4.6 million for the six months ended
June 30, 1998. The amount for 1999 includes the negative cash flow effect of a
$5.3 million special bonus distribution which was funded by a capital
contribution made by the existing members. Excluding the effect of the special
bonus distribution, cash provided by operating activities was $10.2 million for
the six months ended June 30, 1999, which increased 123.0% or $5.6 million from
the same period in the prior year. This increase was primarily the result of
higher net income in the current year's period, after excluding the effect of
the special bonus. The aggregate net changes in operating assets and liabilities
did not vary significantly between periods.
Net cash used in financing activities was $5.8 million for the six months
ended June 30, 1999 compared to $7.1 million for the six months ended June 30,
1998. The amount for 1999 includes the favorable cash flow effect of a
$5.3 million capital contribution made by the existing members to fund the
special bonus distribution discussed above. This was partially offset by payment
in 1999 of $4.9 million of deferred financing costs.
FISCAL 1998 COMPARED TO FISCAL 1997
Net cash provided by operating activities was $20.1 million for fiscal 1998
and 1997. Cash earnings from operations (net income plus depreciation and
amortization) in 1998 were $25.6 million compared to
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$20.0 million in 1997. Net cash used in working capital increased in 1998 by
$5.5 million primarily attributable to an increase in accounts receivable and
inventories by $5.4 million due to 43.0% higher sales in the fourth quarter of
1998 compared to 1997.
Net cash used in investing activities was $2.7 million for fiscal 1998
compared to $1.4 million for fiscal 1997. This increase of $1.3 million was
primarily attributable to additional purchases of equipment.
Net cash used in financing activities was $15.4 million for fiscal 1998
compared to $18.4 million for fiscal 1997. This decrease of $3.0 million was
attributable to a net decrease on long term debt, term loans and revolving
credit facility by $7.1 million and a net decrease in payment on capital leases
by $0.8 million offset by an increase of $4.9 million in equity distributions to
members for the purpose of paying income taxes on earnings.
FISCAL 1997 COMPARED TO FISCAL 1996
Net cash provided by operating activities was $20.1 million for fiscal 1997
compared to $8.2 million for fiscal 1996. The increase of $11.9 million was
attributable to an increase in cash earnings from operations of $9.3 million and
net cash provided by working capital of $2.6 million. The increase in cash
earnings from operations and net cash provided by working capital was primarily
attributable to expanded operating activities resulting from the acquisition of
assets from Bikor.
Net cash used in investing activities was $1.4 million for fiscal 1997
compared to $17.3 million for fiscal 1996. This decrease of $15.9 million was
primarily attributable to cash paid for the acquisition of Cherokee Corporation
in 1996.
Net cash used in financing activities was $18.4 million for fiscal 1997
compared to net cash provided by financing activities of $7.2 million for fiscal
1996. This increase of $25.6 million was attributable to $7.7 million of
additional distributions to members for tax payments and a $17.9 million net
decrease in borrowings under long-term debt and our revolving credit facility.
LIQUIDITY
Historically, we have financed our operations with cash from operations
supplemented by borrowings from our credit facilities. Now that we have
consummated the Transactions, our liquidity needs primarily arise from debt
service on our indebtedness, working capital requirements, capital expenditures
and distributions to our members so that they may satisfy their obligations to
pay taxes on our income. As of June 30, 1999, our borrowings consisted of
$100 million of senior subordinated notes and $52 million of borrowings under
the New Credit Agreement, including $50 million under the Term Loan Facility and
$2 million drawn under the $25 million Revolving Credit Facility. Interest
expense will have a greater proportionate impact on net income in subsequent
periods in comparison with the periods before these transactions. We are not
subject to any amortization requirements under the notes prior to maturity but
we are required to make scheduled repayments under the Term Loan Facility. For
more details, see the section "Description of Certain Other Indebtedness."
We believe that cash flow from operations and available borrowing capacity
will be adequate to meet our anticipated cash requirements, including operating
requirements, planned capital expenditures, debt service and distributions to
pay taxes, for the next twelve months.
Our historical capital expenditures have substantially resulted from
investments in equipment to increase our manufacturing capacity and improve
manufacturing efficiencies. Our capital expenditures were $2.0 million,
$1.4 million and $1.9 million for fiscal 1996, 1997 and 1998, respectively.
Capital expenditures for the six months ended June 30, 1999 were $0.5 million.
For fiscal 1999, we expect capital expenditures to be approximately
$1.0 million. We expect capital expenditures for fiscal 1999 to relate
principally to continuing investments in equipment to expand manufacturing
capacity as well as automation and test equipment to lower production costs.
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We expensed approximately $0.2 million annually for plant and equipment
maintenance for the years ended December 31, 1998 and 1997. These maintenance
costs are not treated as capital expenditures.
We are organized as a California limited liability company and treated as a
partnership for United States federal income tax purposes. Under this treatment,
we are not subject to United States federal income taxation. Each of our
members, however, is subject to tax on its allocable share of our income. In
general, we make distributions to our members in an amount sufficient to pay
their United States federal and state income taxes resulting from their
allocable share of our income. During 1996, 1997, 1998, and the six months ended
June 30, 1999, we made distributions to our members of $360,000, $8,074,000,
$12,990,000 and $157,140,000. The 1999 distribution included the $150 million
distribution made in connection with the Transactions.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software or hardware may recognize a date using "00" as the year
1900 rather than the year 2000. Use of non-Year 2000 compliant programs could
result in system failures, miscalculations or errors causing disruptions of
operations or other business problems, including, among others, a temporary
inability to process transactions and invoices or an inability to engage in
similar normal business activities.
CHEROKEE INTERNATIONAL, LLC INITIATIVES PROGRAM. Essentially all of our
locations have operated on separate information systems, using different
software platforms. In calendar 1997, we analyzed our systems, for Year 2000
compliance with a view to replacing non-compliant systems and creating an
integrated Year 2000 compliant system. In addition, we have developed a
comprehensive program to address the Year 2000 issue with respect to the
following non-system areas: (1) network switching; (2) our non-information
technology systems (such as buildings, plant, equipment and other infrastructure
systems that may contain embedded microprocessor technology); and (3) the status
of major vendors, third-party network service providers and other material
service providers (insofar as they relate to our business). As explained below,
our effort to assess our systems as well as non-system areas related to Year
2000 compliance involve: (1) a wide-ranging assessment of the Year 2000 problems
that may affect us, (2) the development of remedies to address the problems
discovered in the assessment phase and (3) testing of the remedies.
ASSESSMENT PHASE. We have identified substantially all of our major
hardware and software platforms in use as well as the relevant non-system areas
described above. We have determined our system requirements on a company-wide
basis and begun the implementation of an enterprise resource planning ("ERP")
system, which is intended to be a single system database onto which all of our
individual systems will be migrated. In relation thereto, we have obtained
written verification from the hardware, software and other equipment vendors and
third-party network service providers relating to Year 2000 compliance.
REMEDIATION AND TESTING PHASE. In implementing the ERP system, we undertook
and completed a remediation and testing phase of all internal systems, LANs,
WANs, and PBXs. This phase was intended to address potential Year 2000 problems
of the ERP system in relation to both information technology and non-information
technology systems and then to demonstrate that the ERP software was Year 2000
compliant. ERP system software was selected and applications implemented by a
team of internal users and outside ERP application experts. The ERP system was
tested from July 1998 to present by this team of experts. We have fully
implemented the ERP system at all four of our locations.
PROGRAM TO ASSESS AND MONITOR PROGRESS OF THIRD PARTIES. As noted above, we
have also undertaken an action plan to assess and monitor the progress of
third-party vendors in resolving Year 2000 issues. To date, we have sent a "Y2K"
questionnaire to our vendors and are currently following up on non-responsive
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vendors. We believe that the majority of the required compliance and remediation
with respect to these vendors will be completed prior to January 1, 2000.
CONTINGENCY PLANS. We have begun to analyze contingency plans to handle the
worst-case Year 2000 scenarios that we reasonably believe could occur and, if
necessary, intend to develop a timetable for completing such contingency plans.
COSTS RELATED TO THE YEAR 2000 ISSUE. Through June 30, 1999, we have
incurred approximately $180,000 in costs related to the implementation of the
ERP system. We currently estimate the total ERP implementation will cost
approximately $200,000 and a portion of the costs have and will be capitalized
to the extent permitted under generally accepted accounting principles.
RISKS RELATED TO THE YEAR 2000 ISSUE. Although our efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
our business and operations, the actual effects of the issue will not be known
until the Year 2000. Failure of our major vendors, third-party network service
providers and other material service providers and customers to adequately
address their respective Year 2000 issues in a timely manner could have a
material adverse effect on our business, results of operations and financial
condition. See "Risk Factors--The Failure of Our Computer Systems or Those of
Our Customers or Suppliers to Recognize the Year 2000 Could Adversely Effect Our
Operations."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
When we sold the outstanding notes in April 1999, we entered into a
registration rights agreement with the initial purchaser of those notes. Under
the registration rights agreement, we agreed to file a registration statement
regarding the exchange of the outstanding notes for notes which are registered
under the Securities Act of 1933. We also agreed to use our best efforts to
cause the registration statement to become effective with the SEC, and to
conduct this exchange offer after the registration statement is declared
effective. We will use our best efforts to keep this registration statement
effective until the exchange offer is completed. The registration rights
agreement provides that we will be required to pay additional interest to the
holders of the outstanding notes if:
(1) the registration statement is not filed by July 14, 1999; or
(2) the exchange offer has not been completed by December 27, 1999.
A copy of the registration rights agreement is filed as an exhibit to the
registration statement to which this prospectus is a part.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where the outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any sale of those exchange notes. For more details, see the section "Plan
of Distribution."
TERMS OF THE EXCHANGE OFFER
This prospectus and the accompanying letter of transmittal together
constitute the exchange offer. Upon the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal, we will accept for
exchange outstanding notes which are properly tendered on or before the
expiration date and are not withdrawn as permitted below. The expiration date
for this exchange offer is 5:00 p.m., New York City time, on December 6, 1999,
or such later date and time to which we, in our sole discretion, extend the
exchange offer.
The form and terms of the exchange notes being issued in the exchange offer
are the same as the form and terms of the outstanding notes, except that:
(1) the issuance of the exchange notes will have been registered under
the Securities Act;
(2) the exchange notes will not bear the restrictive legends restricting
their transfer under the Securities Act; and
(3) the exchange notes will not contain the registration rights and
additional interest provisions contained in the outstanding notes.
Notes tendered in the exchange offer must be in the denominations of the
principal amount of $1,000 and any integral multiple thereof.
We expressly reserve the right, in our sole discretion:
(1) to extend the expiration date;
(2) to delay accepting any outstanding notes;
(3) if any of the conditions set forth below under "--Conditions to the
Exchange Offer" have not been satisfied, to terminate the exchange offer and
not accept any notes for exchange; or
(4) to amend the exchange offer in any manner.
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We will give oral or written notice of any extension, delay, non-acceptance,
termination or amendment as promptly as practicable by a public announcement,
and in the case of an extension, no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
During an extension, all outstanding notes previously tendered will remain
subject to the exchange offer and may be accepted for exchange by us. Any
outstanding notes not accepted for exchange for any reason will be returned
without cost to the holder that tendered them as promptly as practicable after
the expiration or termination of the exchange offer.
HOW TO TENDER NOTES FOR EXCHANGE
When a holder of outstanding notes tenders, and we accept outstanding notes
for exchange, a binding agreement between us and the tendering holder is
created, subject to the terms and conditions set forth in this prospectus and
the accompanying letter of transmittal. Except as set forth below, a holder of
outstanding notes who wishes to tender outstanding notes for exchange must on or
prior to the expiration date:
(1) transmit a properly completed and duly executed letter of
transmittal, including all other documents required by the letter of
transmittal, to Firstar Bank of Minnesota, N.A., or the exchange agent, at
the address set forth below under the heading "Exchange Agent"; or
(2) if outstanding notes are tendered pursuant to the book-entry
procedures set forth below, the tendering holder must transmit an agent's
message to the exchange agent at the address set forth below under the
heading "Exchange Agent."
In addition, either:
(1) the exchange agent must receive the certificates for the outstanding
notes and the letter of transmittal;
(2) the exchange agent must receive, prior to the expiration date, a
timely confirmation of the book-entry transfer of the outstanding notes
being tendered into the exchange agent's account at The Depository Trust
Company, or DTC, along with the letter of transmittal or an agent's message;
or
(3) the holder must comply with the guaranteed delivery procedures
described below.
The term "agent's message" means a message, transmitted to DTC and received by
the exchange agent and forming a part of a book-entry transfer (a "book-entry
confirmation"), which states that the DTC has received an express acknowledgment
that the tendering holder agrees to be bound by the letter of transmittal and
that we may enforce the letter of transmittal against such holder.
THE METHOD OF DELIVERY OF THE OUTSTANDING NOTES, THE LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF
SUCH DELIVERY IS BY MAIL, WE RECOMMEND REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE
SENT DIRECTLY TO US.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the outstanding notes surrendered for exchange
are tendered:
(1) by a holder of outstanding notes who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions"
on a letter of transmittal; or
(2) for the account of an eligible institution.
An "eligible institution" is a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
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If signatures on a letter of transmittal or notice of withdrawal are
required to be guaranteed, the guarantor must be an eligible institution. If
outstanding notes are registered in the name of a person other than the signer
of the letter of transmittal, the outstanding notes surrendered for exchange
must be endorsed by, or accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by us in our sole
discretion, duly executed by the registered holder with the holder's signature
guaranteed by an eligible institution.
If a person or persons other than the registered holder or holders of the
outstanding notes tendered for exchange signs the letter of transmittal, the
tendered notes must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names of the registered
holder or holders that appear on the outstanding notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any outstanding notes or any power of
attorney, such persons should so indicate when signing, and you must submit
proper evidence satisfactory to us of such person's authority to so act unless
we waive this requirement.
We will determine all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of outstanding notes tendered for
exchange in our sole discretion. Our determination will be final and binding. We
reserve the absolute right to:
(1) reject any and all tenders of any outstanding note improperly
tendered;
(2) refuse to accept any outstanding note if, in our judgment or the
judgment of our counsel, acceptance of the outstanding note may be deemed
unlawful; and
(3) waive any defects or irregularities or conditions of the exchange
offer as to any particular outstanding note either before or after the
expiration date, including the right to waive the ineligibility of any
holder who seeks to tender outstanding notes in the exchange offer.
Our interpretation of the terms and conditions of the exchange offer as to any
particular outstanding notes either before or after the expiration date,
including the letter of transmittal and the instructions to it, will be final
and binding on all parties. Holders must cure any defects and irregularities in
connection with tenders of outstanding notes for exchange within a reasonable
period of time as we will determine, unless we waive the defects or
irregularities. Neither we, the exchange agent nor any other person shall be
under any duty to give notification of any defect or irregularity with respect
to any tender of outstanding notes for exchange, nor shall any of us incur any
liability for failure to give such notification.
By tendering, each holder will represent to us that, among other things, the
person acquiring exchange notes in the exchange offer is obtaining them in the
ordinary course of its business, whether or not that person is the holder, and
that neither the holder nor the other person has any arrangement or
understanding with any person to participate in the distribution of the exchange
notes issued in the exchange offer. If any holder or any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of Cherokee, or is
engaged in or intends to engage in or has an arrangement or understanding with
any person to participate in a distribution of the exchange notes to be acquired
in the exchange offer, such holder or any such other person:
(1) may not rely on the applicable interpretations of the staff of the
SEC; and
(2) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where the outstanding notes were acquired by
that broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. For more details, see the section "Plan
of Distribution."
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ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES ISSUED
IN THE EXCHANGE OFFER
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all outstanding notes
properly tendered and will issue exchange notes. For purposes of the exchange
offer, we shall be deemed to have accepted properly tendered outstanding notes
for exchange when, as and if we have given oral or written notice to the
exchange agent, with written confirmation of any oral notice to be given
promptly thereafter. See "--Conditions to the Exchange Offer" below for a
discussion of the conditions that must be satisfied before we accept any notes
for exchange.
For each outstanding note accepted for exchange, the holder will receive an
exchange note having a principal amount equal to that of the surrendered
outstanding note. Accordingly, registered holders of exchange notes on the
relevant record date for the first interest payment date following the
consummation of the exchange offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid on
the outstanding notes, from April 30, 1999. Outstanding notes that we accept for
exchange will cease to accrue interest from and after the date of consummation
of the exchange offer. Under the registration rights agreement, we may be
required to make additional payments in the form of additional interest to the
holders of the outstanding notes under circumstances relating to the time of the
exchange offer.
In all cases, we will issue exchange notes in the exchange offer for
outstanding notes that are accepted for exchange only after the exchange agent
timely receives:
(1) certificates for outstanding notes or a timely book-entry
confirmation of those outstanding notes into the exchange agent's account at
DTC;
(2) a properly completed and duly executed letter of transmittal or an
agent's message; and
(3) all other required documents.
If for any reason set forth in the terms and conditions of the exchange
offer we do not accept any tendered outstanding notes, or if a holder submits
outstanding notes for a greater principal amount than the holder desires to
exchange, we will return the unaccepted or non-exchanged notes without cost to
the tendering holder. In the case of notes tendered by book-entry transfer into
the exchange agent's account at DTC, the non-exchanged notes will be credited to
an account maintained with DTC. We will return the notes or have them credited
to the exchange agent's account at DTC as promptly as practicable after the
expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFERS
The exchange agent will make a request to establish an account with respect
to the outstanding notes at DTC for purposes of the exchange offer within 2
business days after the date of this prospectus. Any financial institution that
is a participant in DTC's systems must make book-entry delivery of outstanding
notes by causing DTC to transfer such outstanding notes into the exchange
agent's account at DTC in accordance with DTC's procedures for transfer. Each
participant should transmit its acceptance to DTC on or prior to the expiration
date or comply with the guaranteed delivery procedures described below. DTC will
verify such acceptance, execute a book-entry transfer of the tendered
outstanding notes into the exchange agent's account at DTC and then send to the
exchange agent confirmation of such book-entry transfer. The confirmation of
such book-entry transfer will include an agent's message confirming that DTC has
received an express acknowledgment from such participant that such participant
has received and agrees to be bound by the letter of transmittal and that we may
enforce the letter of transmittal against such participant. Delivery of notes
issued in the exchange offer may be effected through book-entry
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transfer at DTC. However, the letter of transmittal or facsimile thereof or an
agent's message, with any required signature guarantees and any other required
documents, must:
(1) be transmitted to and received by the exchange agent at the address
set forth below under "--Exchange Agent" on or prior to the expiration date;
or
(2) comply with the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a holder of outstanding notes desires to tender such notes and the
holder's notes are not immediately available, or time will not permit such
holder's notes or other required documents to reach the exchange agent before
the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if:
(1) the holder tenders the outstanding notes through an eligible
institution;
(2) prior to the expiration date, the exchange agent receives from that
eligible institution a properly completed and duly executed notice of
guaranteed delivery, substantially in the form we have provided, by
telegram, telex, facsimile transmission, mail or hand delivery, setting
forth the name and address of the holder of the outstanding notes being
tendered and the amount of the outstanding notes being tendered. The notice
of guaranteed delivery shall state that the tender is being made and
guarantee that within three New York Stock Exchange trading days after the
date of execution of the notice of guaranteed delivery, the certificates for
all physically tendered outstanding notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, together with a properly
completed and duly executed letter of transmittal or agent's message with
any required signature guarantees and any other documents required by the
letter of transmittal, will be deposited by the eligible institution with
the exchange agent; and
(3) the exchange agent receives the certificates for all physically
tendered outstanding notes, in proper from for transfer, or a book-entry
confirmation, as the case may be, together with a properly completed and
duly executed letter of transmittal or agent's message with any required
signature guarantees and any other documents required by the letter of
transmittal, within 3 New York Stock Exchange trading days after the date of
execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
You may withdraw tenders of your outstanding notes at any time prior to 5:00
p.m., New York City time, on the expiration date.
For a withdrawal to be effective, you must send a written notice of
withdrawal to the exchange agent at one of the addresses set forth below under
the heading "--Exchange Agent." Any such notice or withdrawal must:
(1) specify the name of a person having tendered the outstanding notes
to be withdrawn;
(2) identify the outstanding notes to be withdrawn, including the
principal amount of those outstanding notes; and
(3) where certificates for outstanding notes are transmitted, specify
the name in which outstanding notes are registered, if different from that
of the withdrawing holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of those
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and signed notice of withdrawal with
signatures guaranteed by an eligible institution unless the holder is an
eligible institution. If outstanding notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
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specify the name and number of the account at DTC to be credited with the
withdrawn notes and otherwise comply with the procedures of such facility. We
will determine all questions as to the validity, form and eligibility (including
time of receipt) of those notices and our determination will be final and
binding on all parties. Any tendered outstanding notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
exchange offer. Any outstanding notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to the holder thereof
without cost to that holder. In the case of outstanding notes tendered by
book-entry transfer into the exchange agent's account at DTC, the notes
withdrawn will be credited to an account maintained with DTC for the outstanding
notes. The outstanding notes will be returned or credited to the exchange
agent's account at DTC as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn notes may be
re-tendered by following one of the procedures described above under the heading
"--How to Tender Notes for Exchange" at any time on or prior to 5:00 p.m., New
York City time, on the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we are not
required to accept for exchange, or to issue exchange notes in exchange for, any
outstanding notes and may terminate or amend the exchange offer, if at any time
before the acceptance of outstanding notes for exchange or the exchange of
exchange notes for such outstanding notes, any of the following events shall
occur:
- there shall be threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree shall have been issued by, any
court or governmental agency or other governmental regulatory or
administrative agency or commission (1) seeking to restrain or prohibit
the making or consummation of the exchange offer or any other transaction
contemplated by the exchange offer, or assessing or seeking any damages as
a result of those transactions, or (2) resulting in a material delay in
our ability to accept for exchange or exchange some or all of the
outstanding notes pursuant to the exchange offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the exchange offer or any of
the transactions contemplated by the exchange offer by any government,
governmental authority, agency or court, domestic or foreign, or any
action shall have been taken, proposed or threatened, by any government,
governmental authority, agency or court, domestic or foreign, that in our
sole judgment might directly or indirectly result in any of the
consequences referred to in clauses (1) or (2) above or, in our sole
judgment, might result in the holder of exchange notes having obligations
with respect to resales and transfers of exchange notes which are greater
than those described in the interpretation of the SEC referred to above,
or would otherwise make it inadvisable to proceed with the exchange offer;
or
- there shall have occurred:
(1) any general suspension of or general limitation on prices for, or
trading in, securities on any national securities exchange or in the
over-the-counter market;
(2) any limitation by a governmental agency or authority which may adversely
affect our ability to complete the transactions contemplated by the
exchange offer;
(3) a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States or any limitation by any
governmental agency or authority which adversely affects the extension of
credit;
(4) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or, in the case of any of the foregoing existing at the time of
the commencement of the exchange offer, a material acceleration or
worsening of those calamities; or
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(5) a change in the current interpretation by staff of the SEC which permits
the exchange notes issued in the exchange offer in exchange for the
outstanding notes to be offered for resale, resold and otherwise
transferred by the holders, other than broker-dealers and any holder
which is an "affiliate" of Cherokee within the meaning of Rule 405 under
the Securities Act, without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that
exchange notes acquired in the exchange offer are acquired in the
ordinary course of the holder's business and that holder has no
arrangement or understanding with any person to participate in the
distribution of the exchange notes issued in the exchange offer; or
- any change, or any development involving a prospective change, shall have
occurred or be threatened in our business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects and those of our subsidiaries taken as a whole that, in our sole
judgment, is or may be adverse to us, or we shall have become aware of
facts that, in our sole judgment, have or may have adverse significance
with respect to the value of the outstanding notes or the exchange notes;
which in our sole judgment in any case, and regardless of the
circumstances, including any action by us, giving rise to any such
condition, makes it inadvisable to proceed with the exchange offer and/or
with the acceptance of outstanding notes for exchange or with the
exchange.
In addition, we will not accept for exchange any outstanding notes tendered,
and no exchange notes will be issued in exchange for any such outstanding notes,
if at such time any stop order shall be threatened or in effect with respect to
the Registration Statement or the qualification of the indenture under the Trust
Indenture Act of 1939.
The preceding conditions are for our sole benefit and we may assert them
regardless of the circumstances giving rise to any such condition. We may waive
the preceding conditions in whole or in part at any time and from time to time
in our sole discretion. Our failure at any time to exercise the foregoing rights
shall not be deemed a waiver of any right and each right shall be deemed an
ongoing right which we may assert at any time and from time to time.
THE EXCHANGE AGENT
Firstar Bank of Minnesota, N.A. has been appointed as our exchange agent for
the exchange offer. All executed letters of transmittal should be directed to
our exchange agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notice of guaranteed delivery should be directed
to the exchange agent addressed as follows:
Firstar Bank of Minnesota, N.A.
<TABLE>
<S> <C>
By mail, hand or overnight courier to: By Facsimile (for eligible institutions
only):
(651) 229-6415
Firstar Bank of Minnesota, N.A.
101 East Fifth Street Confirm by telephone:
Saint Paul, Minnesota 55101 (651) 229-2600
Attn: Frank Leslie
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THE LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptance of the exchange offer except for reimbursement of mailing expenses.
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We estimate cash expenses to be incurred in connection with the exchange
offer to be paid by us are, in the aggregate, approximately $350,000.
TRANSFER TAXES
Holders who tender their outstanding notes for exchange will not be
obligated to pay any transfer taxes in connection with the exchange. If,
however, notes issued in the exchange offer are to be delivered to, or are to be
issued in the name of, any person other than the holder of the notes tendered,
or if a transfer tax is imposed for any reason other than the exchange of
outstanding notes in connection with the exchange offer, then the holder must
pay any such transfer taxes, whether imposed on the registered holder or on any
other person. If satisfactory evidence of payment of, or exemption from, such
taxes is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to the tendering holder.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OUTSTANDING NOTES
Holders who desire to tender their outstanding notes in exchange for
exchange notes should allow sufficient time to ensure timely delivery. Neither
the exchange agent nor Cherokee is under any duty to give notification of
defects or irregularities with respect to the tenders of outstanding notes for
exchange.
Outstanding notes that are not tendered or are tendered but not accepted
will, following the consummation of the exchange offer, continue to be subject
to the provisions in the indenture regarding the transfer and exchange of the
outstanding notes and the existing restrictions on transfer set forth in the
legend on the outstanding notes and in the offering circular, dated April 27,
1999, relating to the outstanding notes. Except in limited circumstances with
respect to specific types of holders of outstanding notes, we will have no
further obligation to provide for the registration under the Securities Act of
resales of their outstanding notes. In general, outstanding notes may not be
offered or sold except pursuant to a registration statement or an exemption from
registration or in a transaction not subject to, the Securities Act and
applicable state securities laws. We do not currently anticipate that we will
take any action to register resales of the outstanding notes under the
Securities Act or under any state securities laws.
Upon completion of the exchange offer, holders of the outstanding notes will
not be entitled to any further registration rights under the registration rights
agreement, except under limited circumstances.
Holders of the exchange notes issued in the exchange offer and any
outstanding notes which remain outstanding after consummation of the exchange
offer will vote together as a single class for purposes of determining whether
holders of the requisite percentage of the class have taken certain actions or
exercised certain rights under the indenture.
Based on interpretations of the staff of the SEC, as set forth in no-action
letters to third parties, we believe that the exchange notes may be offered for
resale, resold or otherwise transferred by holders of those exchange notes,
other than by any holder which is an "affiliate" of Cherokee within the meaning
of Rule 405 under the Securities Act. Exchange notes held by persons who are not
affiliates may be offered for resale, resold or otherwise transferred without
compliance with the registration and prospectus delivery provisions of the
Securities Act, if:
(1) the exchange notes are acquired in the ordinary course of the holder's
business; and
(2) the holder, other than broker-dealers, has no arrangement or
understanding with any person to participate in the distribution of the
exchange notes.
However, the SEC has not considered the exchange offer in the context of a
no action letter, and we cannot guarantee that the staff of the SEC would make a
similar determination with respect to the exchange offer as in those other
circumstances.
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Each holder, other than a broker-dealer, must furnish a written
representation, at our request, that:
- any exchange notes received by that holder will be acquired in the
ordinary course of business;
- the holder will have no arrangements or understanding with any person to
participate in the distribution of outstanding notes or the exchange notes
within the meaning of the Securities Act;
- the holder is not an "affiliate," as defined in Rule 405 of the Securities
Act, of Cherokee or, if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to
the extent applicable; and
- the holder is not a broker-dealer, and is not engaged in, and does not
intend to engage in, the distribution of the exchange notes.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes must acknowledge that its outstanding notes were
acquired by it as a result of market-making or other trading activities and that
it will deliver a prospectus in connection with any resale of exchange notes.
See "Plan of Distribution" for a discussion of the exchange and resale
obligations of broker-dealer in connection with the exchange offer.
In addition, to comply with state securities laws of certain jurisdictions,
the exchange notes may not be offered or sold in any state unless they have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and complied with by the holders selling the
exchange notes. We have agreed in the registration rights agreement that, prior
to any public offering of the notes, we will register or qualify, or cooperate
with the holders of notes in connection with the registration or qualification
of, the notes for offer and sale under the securities laws of such states of the
United States as any holder of notes reasonably requests in writing. Unless a
holder requests, we currently do not intend to register or qualify the sale of
the notes in any state where an exemption from registration or qualification is
required and not available.
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BUSINESS
OVERVIEW
We are a leading designer and manufacturer of a broad range of switch mode
power supplies for 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 all electronic equipment. Basic power
supplies convert AC from a utility source such as a wall outlet, into the DC
required for electronic systems.
STRATEGIC ADVANTAGES
We believe that our strategic advantages include the following:
- - TIME TO MARKET: A critical factor in a customer's selection of a power supply
manufacturer is the time to market of 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 track record of consistently providing high
quality products with short times to market. We streamline the design and
production processes by employing experienced personnel, providing them with
sophisticated state of the art equipment and tools and encouraging our
engineers to communicate directly with our customers' engineers throughout the
design and manufacturing process. In addition, we are one of the few companies
in the industry with the ability to self certify our products for virtually
all safety agencies. Our unique design and production methodologies and North
American based operations increase production efficiency, enhance our customer
relationships and avoid delays in communication and the exchange of designs
and prototypes that burden many of our overseas competitors.
- - STRONG PARTNERSHIPS WITH BLUE CHIP CUSTOMER BASE: We provide products to
leading OEMs such as IBM, Cisco, Hewlett-Packard, Motorola, Lucent, Alcatel,
Nortel, Silicon Graphics and Honeywell. We have been doing business with many
of our customers for over 10 years. We believe that our customers continue to
seek long-term partnerships with a small number of core suppliers like
Cherokee. Our relationships are strengthened by the fact that we work jointly
with many of our customers in the design and development of new products,
which our customers partially fund. We believe that as a result of these
factors we have been successful in building our share with many of these
customers over the last several years.
- - RECURRING SALES: Our products are generally 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 OEMs generally prefer not to change suppliers once a
power supply has been designed into a product, due to the fact that such a
change often requires time-consuming and costly re-testing and
re-certification by the customer and one or more regulatory agencies. It is
also very difficult for another manufacturer to precisely and economically
replicate a power supply unit which is already incorporated into a product.
The life cycle of our customers' products range from approximately 2 to 10
years.
- - LOW COST STATE OF THE ART OPERATIONS: Our sophisticated engineering
capabilities, in-house production of certain critical components, highly
automated manufacturing processes and state of the art testing equipment
enable us to operate extremely efficiently, thereby enhancing profitability,
flexibility and competitiveness. The following initiatives have lowered our
overall cost of production and enhanced profit margins:
- in-house manufacturing of labor intensive magnetic sub-assemblies at our
facilities in India;
- use of common componentry in our product designs, including in our highly
customized products, thereby reducing development and production costs;
- procurement of raw materials and components directly from manufacturers,
rather than distributors;
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- use of continuous flow manufacturing lines and computer controlled surface
mount assembly machines to improve quality and yield rates;
- procurement and maintenance of state of the art equipment resulting in
limited maintenance capital expenditures; and
- refinement of our systems and processes to increase overall operational
efficiency.
- - COMMITMENT TO QUALITY AND SERVICE: We believe that in addition to short lead
times and competitive prices, our commitment to provide consistent, high
quality products and services forms the basis of our strong customer
relationships. We manufacture high quality products using advanced testing
methods to monitor our sophisticated design and manufacturing techniques (such
as Computer Aided Design and Computer Aided Engineering). In addition to
testing performed during the design and manufacturing process, we test 100% of
our finished products using automated equipment and customer-approved tests.
All of our facilities and manufacturing processes are ISO 9000 certified.
- - EXPERIENCED MANAGEMENT AND STRONG EQUITY SPONSORSHIP: Mr. Pat Patel, our
Chairman and Chief Executive Officer, founded Cherokee Corporation in 1978 and
has over 30 years experience in the industry. Mr. Patel is supported by a
senior management team including Ken King, Bud Patel (no relationship to Pat
Patel), Dennis Pouliout and Howard Ribaudo, who have combined industry
experience of over 100 years, and 8 other individuals, with an average of 22
years of industry experience, including an average of 7 years at Cherokee. Our
equity sponsors include an affiliate of GFI and an affiliate of Oaktree. GFI
specializes exclusively in investments in the power industry and since 1995
has completed 19 transactions totalling over $180 million. Oaktree is an
investment management company founded in 1995 and has approximately $12
billion of assets under or committed for management.
BUSINESS STRATEGY
Our objective is to be the supplier of choice to a targeted group of
industry leading OEMs who require sophisticated power supply solutions and who
are likely to have substantial volume requirements. To achieve this objective,
our strategy is to continue to differentiate ourselves through advanced design
and engineering, shorter time to market and superior product performance,
quality and service. Our strategy focuses on maximizing profitability and
expanding the business through:
- - FOCUSING ON HIGH GROWTH, HIGH MARGIN, MARKETS: Approximately 88% of our 1998
sales were to the networking, telecommunications and high-end workstations
markets, which are expected to grow primarily due to the tremendous increase
in demand for internet/intranet, wireless and other communications. We achieve
higher margins in these markets due to their highly sophisticated design and
engineering requirements and the high demands for technical expertise required
to serve them. Focusing on these high growth areas also allows us to work with
the most sophisticated customers, which further improves our technological and
knowledge base and enables us to create products that can form the basis for
an expanding and more sophisticated product catalog.
- - LEVERAGING CUSTOMER RELATIONSHIPS: We have strong relationships with industry
leaders in the high growth networking, telecommunications and high-end
workstations. We plan to leverage our in-depth knowledge of our customers and
their needs and continue to increase our share of our customers' business. We
believe that our long-standing customer relationships, coordinated engineering
services and flexible manufacturing capabilities provide us with a significant
advantage when bidding for new business.
- - EXPANDING PRODUCT OFFERING AND MARKET APPLICATIONS: We plan to continue to
broaden our existing product line to attract new customers and to capture a
larger portion of our existing customers' business. Although we may at any
time decide otherwise, products we presently plan to offer in the future
include a larger catalog of higher margin product offerings for multiple
applications, higher power range products for the increased requirements of
internet/intranet, telecommunications and wireless and other
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applications and new DC to DC products to provide more complete power
solutions for communication systems such as telecommunication switches.
- - EXPANDING CUSTOMER BASE: We plan to leverage our reputation and success with
our existing demanding blue chip customer base to attract new customers with
significant growth prospects and high-margin product requirements. We plan to
expand our customer base through increased marketing, heightened use of our
network of independent sales representatives and further development of
collaborative relationships in design and engineering. To help achieve this
expansion, we compensate our independent sales representatives with valuable
incentives to attract new customers and provide them with a significant level
of support.
- - CONTINUALLY REDUCING COSTS THROUGH DISCIPLINED DESIGN AND LOW COST
PROCUREMENT: We seek to remain a low cost provider through continued
disciplined design techniques that incorporate common componentry and
circuitry and through the negotiation of long-term contracts for the
procurement of raw materials and components directly with certain suppliers
rather than purchasing through distributors. In addition, where appropriate we
will continue to invest in new technologies to increase automation and lower
costs.
- - PURSUING SELECTED STRATEGIC ACQUISITIONS: The power supply industry is a
highly fragmented industry according to industry sources. We intend to pursue
strategic add-on acquisitions to add products and capabilities that are
complementary to our existing operations.
POWER SUPPLY INDUSTRY
OVERVIEW
Power supplies perform many essential functions relating to the supply,
regulation and distribution of electrical power in electronic equipment.
Electronic systems require a precise and constant supply of electrical power at
one or more voltage levels. Traditional AC/DC power supplies convert alternating
current, or AC, from a primary power source, such as a utility company, into a
precisely controlled direct current, or DC. Virtually every electronic device
that plugs into an AC wall socket requires some type of AC/DC power supply.
DC/DC converters modify one DC voltage level to other DC levels to meet the
needs of various electronic subsystems and components. Power supplies are also
used to regulate and monitor voltages to protect the electronic components from
surges or drops in voltage, to perform functions that prevent electronic
equipment from being damaged by their own malfunction, or to provide back-up
power in the event that a primary power source fails.
The most prevalent technology now used in power supplies is switch mode
technology. Switch mode power supplies, which comprise our entire product line,
are preferred over linear power supplies, with comparable power outputs, due to
their higher energy efficiency, considerably smaller size and lighter weight.
The market for switch mode power supplies is the fastest growing segment of the
overall external power conversion product market, according to industry sources.
CAPTIVE VERSUS MERCHANT MANUFACTURERS
Captive power supply manufacturers design and manufacture power supplies for
in-house use for their own products. Merchant power supply manufacturers design
and manufacture power supplies for use by third parties. According to industry
sources, the merchant segment of the market is expected to grow faster than the
captive segment as OEMs increasingly focus on core competencies and outsource
power supply products to more efficient suppliers. As a leading merchant
manufacturer, we expect to significantly benefit from this shift.
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PRODUCT TYPES--CUSTOM, STANDARD AND MODIFIED STANDARD
Custom power supplies are designed for a specific customer to meet the exact
form, fit and function for a specific application. Custom products are
characterized by (1) lead times of 4 to 12 months from initial prototype to full
production; (2) up-front engineering costs; and (3) relatively high volume
production requirements. They are attractive to OEMs because they provide
maximum design flexibility and allow the use of special features. Standard
"off-the-shelf" power supplies are products designed to appeal to a wide range
of customers for use in a variety of different applications. Standard power
supplies offer benefits to the OEM because there are no up-front engineering
charges or minimum order quantities and the product is readily available, 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 power supplies are
standard products that have been altered in a way that does not change the basic
product architecture. Modified standard products, as compared with custom
products, are characterized by (1) shorter lead times; (2) lower up-front
engineering costs; and (3) smaller minimum order quantities.
PRODUCT TYPES--POWER RANGES, CHARACTERISTICS AND END USERS
The power supply market can be segmented by power supply output range as
demonstrated in the table below:
<TABLE>
<CAPTION>
POWER TYPICAL % OF REPRESENTATIVE
RANGE CHARACTERISTICS MARKET(1) CUSTOMER TYPES APPLICATIONS
- --------- ---------------------------- --------------- ---------------------------- ----------------------------
<C> <S> <C> <C> <C>
Low - Less than 150 Watts 28.8% - PC Companies - PCs
- Lower Technology - Consumer Electronics - Consumer Electronics
- Higher Volume - Desk Top Printers
- Lower Margin
Mid - 150-750 Watts 56.4% - Internet Companies - Routers, Hubs
- Higher Technology - Computer Companies - Workstations
- Moderate Volume - Medical Companies - Blood Analyzers
- Higher Margin
High - More than 750 Watts 14.8% - Computer Companies - Main-frame
- Higher Technology - Industrial Companies Computers and
- Lower Volume - Internet Companies High-end workstations
- Higher Margin - Telecommunications - Industrial Process Control
Companies - High-end Routers
- Communication
Switches
</TABLE>
- ------------------------
(1) Source: Micro-Tech Consultants, North American Estimated Consumption of
AC/DC Switches in 1998
KEY MARKET TRENDS
Industry sources highlight the following trends:
- THE MERCHANT MARKET IS GROWING FASTER THAN THE CAPTIVE MARKET GIVEN THE
INCREASING TREND TOWARD OUTSOURCING BY CAPTIVE MANUFACTURERS. We expect to
benefit from such outsourcing trends due to our reputation of providing
low cost, high quality products.
- THE MODIFIED STANDARD SEGMENT IS EXPECTED TO EXPERIENCE ACCELERATED
GROWTH. The modified standard segment is expected to grow faster than the
custom segment and the standard segment. One of the
52
<PAGE>
reasons for this growth is the shorter time to market that modified
standard products generally offer. As most of the products we manufacture
are modified standard, we expect to benefit from this trend.
- THE HIGHLY FRAGMENTED POWER SUPPLIES INDUSTRY IS CONSOLIDATING. There are
over 300 merchant power supply manufacturers in North America, of which
approximately 200 had annual revenues of less than $5 million. Numerous
opportunities exist for consolidation. We expect to pursue select
acquisitions to add products and capabilities that are complementary to
our existing operations.
PRODUCT LINE
Over our 20-year history, we have developed an extensive range of switch
mode power supply products. These products, containing magnetic assemblies,
circuits and components, convert AC power to DC power and maintain voltage
levels within specific limits. Our products cover a broad range of applications,
from 10 to 14,000 watts for AC/DC power supplies, and from 20 to 1,000 watts for
DC/DC converters. Our power supplies are self-contained units, range in weight
from one half of a pound to thirty pounds and are normally incorporated inside
our customers' end products.
We plan to continue to broaden our existing product line to include a larger
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 to
provide more complete power solutions for telecommunication systems.
Most of our power supplies are modified standard, although we produce some
custom and standard products. We approach our custom and modified standard
products differently than our competitors in that even in our customized
products we incorporate our existing engineering and designs to expedite design
and time to market.
CUSTOMERS AND APPLICATIONS
Our base of OEM customers are in diverse markets such as telecommunications,
networking, high-end workstations (excluding PCs), industrial process controls
and other electronic equipment industries. Many of the OEMs are Fortune 500
companies and leaders in their respective industries.
We are benefitting from the proliferation of electronic products and
services, from the increasing demand for electronic equipment and from the
shorter product life cycles brought about by today's changing technology. In
many cases, our customers are experiencing rapid growth in their own markets,
and this translates directly into increased sales opportunities for us. In the
networking market, which encompasses power supplies for bridges, hubs, routers
and similar products, our customers are benefitting from growth in
internet/intranet traffic and from the convergence of voice, video and data
communication. Dramatic reductions in the price of workstations are driving
demand for new workstations and, in turn, power supply sales in the workstation
segment. Because of the low margins and very high volumes associated with the PC
market, we have elected not to target this market of the computing market. Over
the past 3 years, we have actively pursued the telecommunications power supply
segment. This market, encompassing switching products, cell sites, wireless
communication towers and other telecommunications-related equipment, has
experienced rapid growth from the increase in wireline and wireless
communications.
During 1998 and 1997, our top 10 customers accounted for approximately 71%
and 70%, respectively, of our sales. During such periods, sales to each of IBM
and Silicon Graphics represented more than 10% of our sales. For more details,
see the section "Risk Factors" under the heading "The Loss of One or More Major
Customers Could Materially Adversely Affect Our Business."
53
<PAGE>
SALES AND MARKETING
We market our products and services through an integrated sales approach
involving account managers and independent sales representatives with active
support from design, engineering and production personnel. Our in-house account
managers supervise customer relationships and oversee a nation-wide network of
commission-based independent sales representatives whose main purpose is to
source new customers.
We focus our efforts on expanding relationships with existing customers and
aggressively targeting emerging OEM industry leaders with whom the opportunity
exists to provide products and services across a number of product families and
through successive product generations. We focus our resources on markets that
are growing relatively quickly and have the potential for significant profit
margins. Potential customers are assigned to our in-house account managers who
evaluate the customer against our customer selection criteria.
On an ongoing basis, our engineering personnel provide technical support to
customers in the areas of product design changes, field performance and testing.
Our collaborative relationships allow us to gain valuable knowledge about an
existing customer and its processes, which we believe gives us an advantage in
obtaining future business from that customer. Historically, we have had
substantial recurring sales from existing customers.
BACKLOG
Backlog consists of purchase orders on hand generally having delivery dates
scheduled within the next four months. Our backlog was approximately
$37.3 million at June 30, 1999, $42.8 million at December 31, 1998,
$23.4 million at December 31, 1997 and $22.3 million at December 31, 1996. In
addition, we are currently working on numerous customer initiated engineering
and design projects, which we expect will result in increased future revenue.
Although customers are generally able to cancel or reschedule deliveries
without penalty, our backlog has historically been a reliable indicator of our
future revenues.
MANUFACTURING PROCESS AND QUALITY CONTROL
A typical power supply consists primarily of one or more printed circuit
boards, electronic and electromagnetic components and a sheet metal chassis. The
production of our power supplies entails the assembly of structural hardware
combined with a sophisticated assembly of circuit boards encompassing highly
automated SMT.
In response to market demands for increased quality and reliability, design
complexity, and sophisticated technology, we have automated many electronic
assembly and testing processes which were traditionally performed manually and
we have standardized our manufacturing processes to efficiently utilize our
resources and optimize our capacities. Since the beginning of 1997, we have
acquired three SMT lines, including our most recent purchase in January of 1999.
SMT permits reduction in board size by eliminating the need for holes in the
printed circuit boards and by allowing components to be placed on both sides of
a board. Each SMT line places as many as 40,000 parts per hour, with each
machine hour equating to approximately 55 labor hours. The new SMT lines have
allowed us to significantly increase throughput and capacity which together with
higher demand has resulted in increased sales.
In addition to increasing automation of our facilities, we have standardized
our operations to include 19 self-contained continuous flow manufacturing lines,
which incorporate flow solder machines, in-circuit test machines, highly
advanced computer controlled burn-in equipment, automated final test machines,
ongoing reliability test equipment, standardized processes and measurements on
all lines.
54
<PAGE>
Most of our customers require that their power supplies meet or exceed
established international safety and quality standards. In response to this
need, we design and manufacture power supplies in accordance with the
certification requirements of many international agencies, including
Underwriters Laboratories Incorporated (UL) in the United States; the Canadian
Standards Association (CSA) in Canada; Technischer Uberwachungs-Verein (TUV) and
Verband Deutscher Electrotechniker (VDE), both in Germany; the British Approval
Board for Telecommunications (BABT) in the United Kingdom; and International
Electrotechnical Committee (IEC), a European standards organization.
Quality and reliability are emphasized in both the design and manufacture of
our products. In addition to testing throughout the design and manufacturing
process, we test and burn-in 100% of all products using automated equipment and
customer-approved processes. An additional out-of-box test or pre-ship audit is
performed on randomly selected units, which are ready for shipment, further
ensuring manufacturing quality and integrity.
Our four sophisticated manufacturing facilities in Tustin, California,
Irvine, California, Guadalajara, Mexico and Bombay, India are ISO 9000
certified. Our facility in India manufactures labor-intensive magnetic
sub-assemblies that are distributed to our other facilities for incorporation
into many of our final products.
We believe that the power supply manufacturing industry has remained
fragmented partly because it traditionally has been a labor intensive, low
investment industry. We believe that our high level of automation and advanced
engineering provide us with one of the lowest cost structures in the industry.
SUPPLIERS
Our high quality products and reduced time-to-market are the result of a
well managed supply chain network. We typically design products using common
components thereby increasing our purchasing power and reducing inventory risk.
Most of our raw materials, including electronic and other components, sheet
metal, transistors, mechanical parts and electrical wires, are readily available
from several sources. Although some of our raw materials are sourced from only
one manufacturer, they are generally available in large quantities from a number
of different suppliers. For more details, see the section "Risk Factors" under
the heading "An Interruption in Delivery of Component Supplies Could Lead to
Supply Shortages or a Significant Increase in Prices of Component Supplies,
Which Could Materially Adversely Affect Our Business."
Through centralized purchasing, we have negotiated a number of discount
volume purchase agreements to realize economies of scale at each facility. No
supplier accounted for more than 4% of raw materials purchased. Also, we
generally purchase raw materials and components directly from manufacturers and
not from distributors to get the most current materials available at the lowest
cost thereby further reducing our overall cost of production. We have never had
a supply shortage that has materially adversely affected us.
COMPETITION
The merchant power supply manufacturing industry is highly fragmented and
characterized by intense competition. No single company dominates the overall
power supplies market and our competitors vary depending upon the particular
power conversion product category. Our competition includes companies located
throughout the world, including Delta, Astec, Artesyn and Lucent Technologies.
We also view as competitive threats the potential that our customers may decide
to produce their own power supplies and that OEMs with captive manufacturing
capabilities may compete in the merchant market. However, several large OEMs
have divested their captive power supply manufacturing operations, including
IBM, Nortel, NCR, TRW and Digital Equipment.
55
<PAGE>
We believe that the principal competitive factors in our targeted markets
are time to market, manufacturing flexibility, technical knowledge, quality and
cost. We believe that, compared to our competition, we sell products with
comparable or better quality characteristics at the same or lower prices. For
more details, see the section "Risk Factors" under the heading "We Face
Significant Competition; Our Failure to Effectively Compete Could Materially
Adversely Affect Our Results of Operations and Market Share."
ENGINEERING AND PRODUCT DEVELOPMENT
Our engineering and product development activities are principally directed
to the development of new power supplies to satisfy customer needs. As part of
the collaborative relationships established by us with our key customers, we
work closely with our customers to develop new products. Product development is
performed by a group of 27 engineers located in Tustin, California and Irvine,
California.
Our total expenditures for engineering and product development were $3.4
million, $4.1 million and $3.8 million for the years ended December 31, 1996,
1997, and 1998, respectively.
INTELLECTUAL PROPERTY MATTERS
We do not believe that intellectual property or branding is a significant
competitive factor in the power supply industry. As a result, we do not rely
upon proprietary rights in the conduct of our business.
LITIGATION
We are subject to disputes and potential claims by third parties that are
incidental to the conduct of our business. We do not believe that the outcome of
any such matters will have a material adverse effect on our financial condition
or results of operations.
EMPLOYEES
At June 30, 1999, we employed approximately 981 full-time employees at our
facilities in the following capacities:
<TABLE>
<CAPTION>
INDIVIDUALS
EMPLOYED
-------------
<S> <C>
Manufacturing........................................................... 831
Engineering............................................................. 60
Quality................................................................. 30
Marketing............................................................... 10
General Administrative.................................................. 50
---------
Total............................................................... 981
=========
</TABLE>
None of our domestic employees are represented by a labor organization. The
approximately 130 employees who work in our Mexican Facility are represented by
a union as required under Mexican law. We have never experienced a work
stoppage or interruption due to a labor dispute. We believe that our relations
with our employees, including in our Mexican facility, are excellent. Over the
last several years, we have given annual bonuses to all of our employees.
56
<PAGE>
FACILITIES
The following table identifies our facilities.
<TABLE>
<CAPTION>
APPROX. OWNED
PRIMARY SQUARE VS. LEASE
FACILITIES ACTIVITY FOOTAGE LEASED EXPIRATION DATE
- ------------------------- ------------------------- ----------- ----------- -------------------------
<S> <C> <C> <C> <C>
Tustin, CA Administrative, 86,000 Leased April 30, 2009
Manufacturing,
Engineering
Tustin, CA Storage 14,000 Leased November 30, 2001
Irvine, CA Manufacturing, 31,000 Leased December 31, 2000
Engineering
Guadalajara, Mexico Manufacturing 35,000 Owned --
Bombay, India Manufacturing 14,000 Leased March 31, 2003
Bombay, India Manufacturing 17,000 Leased April 15, 2004
</TABLE>
57
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND MANAGEMENT COMMITTEE MEMBERS
Pursuant to our second amended and restated operating agreement, we are
managed by an eight-member Management Committee.
Set forth below is certain information concerning our executive officers and
members of our Management Committee.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH CHEROKEE
- --------------------------------------------- --------- --------------------------------------------------
<S> <C> <C>
Pat Patel.................................... 54 Chairman, Chief Executive Officer and member of
Management Committee
Ken King..................................... 70 Executive Vice President and member of Management
Committee
Bud Patel.................................... 63 Executive Vice President and member of Management
Committee
Dennis Pouliot............................... 51 Vice President of Marketing
Howard Ribaudo............................... 40 Vice President of Sales
Van Holland.................................. 46 Chief Financial Officer
Ian Schapiro................................. 42 Vice President and member of Management Committee
Stephen Kaplan............................... 40 Member of Management Committee
Tony Bloom................................... 60 Member of Management Committee
Raymond Meyer................................ 58 Member of Management Committee
Chris Brothers............................... 33 Member of Management Committee
</TABLE>
PAT PATEL founded Cherokee Corporation in 1978, and served as President of
Cherokee and its successor since its inception. In connection with the
Acquisition, he became Chairman of the Management Committee and Chief Executive
Officer and resigned as President. Prior to founding Cherokee Corporation,
Mr. Patel served as a Senior Project Engineer at Burroughs Corp. (now Unisys)
for four years. Mr. Patel also serves as President and Chief Executive Officer
of, and is a director of, Cherokee Finance.
KEN KING has served as Executive Vice President of Cherokee and its
predecessor since September 1982. Mr. King joined us after serving as the
President of Delphi Communications Corp. from September 1972 until
September 1982.
BUD PATEL has served as our Executive Vice President since April 1996 and
was a Vice President of Engineering of Cherokee Corporation from 1987 to 1993.
Mr. Patel served as President of Bikor from June 1993 through March 1996 when we
acquired substantially all of the assets of Bikor. Prior to joining the Company
in 1987, Mr. Patel was a Director of Engineering at Leland Electro Systems for
over 25 years. Mr. Patel also serves as a director of Cherokee Finance. Bud
Patel is not related to Pat Patel.
DENNIS POULIOT has served as Vice President of Marketing of Cherokee and its
predecessor since March 1991. Prior to joining us, Mr. Pouliot was a sales
manager at Lambda Qualidyne from June 1989 to March 1991 and a Director of
International Sales and Marketing from September 1978 through June of 1989.
58
<PAGE>
HOWARD RIBAUDO has served as our Vice President of Sales since March 1996
and served us in various other marketing capacities for Cherokee Corporation
from 1988 through September 1993. Mr. Ribaudo served as Vice President of Sales
and Marketing for Bikor from September 1993 through March 1996.
VAN HOLLAND became our Chief Financial Officer in August 1999. Prior to
joining Cherokee, Mr. Holland served as Executive Vice President and Chief
Financial Officer of Wyle Electronics, a $1.5 billion electronics distributor.
From 1979 to May 1999, Mr. Holland served in various senior financial management
positions at Wyle. Prior to that, Mr. Holland was an auditor with Arthur
Andersen & Co.
IAN SCHAPIRO became our Vice President and a member of our Management
Committee upon consummation of the Transactions. Mr. Schapiro became a founding
principal of GFI in June 1995. From November 1985 to June 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 before that, a commercial banker
with The Bank of California whose portfolio was concentrated in the energy
sector. Mr. Schapiro is a widely quoted author of numerous articles regarding
the financial management of energy utilities. He is a member of the board of
directors of Trace Holdings, LLC. Mr. Schapiro also serves as Vice President and
Secretary of, and is a director of, Cherokee Finance.
STEPHEN KAPLAN became a member of our Management Committee upon consummation
of the Transactions. Mr. Kaplan is a principal of Oaktree. Prior to joining
Oaktree in June 1995, Mr. Kaplan was a Managing Director of Trust Company of the
West, or TCW. Prior to joining TCW in 1993, Mr. Kaplan was a partner in the law
firm of Gibson, Dunn & Crutcher. Mr. Kaplan serves on the boards of directors of
Acorn Products, Inc., Geologistics Corporation, KinderCare Learning
Centers, Inc., Roller Bearing Holding Company, Inc. and various other private
companies.
TONY BLOOM became a member of our Management Committee upon consummation of
the Transactions. Mr. Bloom is an international investor now based in London.
Prior to his relocation to London in July 1988, he lived in South Africa where
he was the Chairman and Chief Executive of The Premier Group (a multi-billion
dollar conglomerate involved in agribusiness, retail, and consumer products),
and a member of the boards of directors of Barclays Bank, Liberty Life
Assurance, and South African Breweries. Since moving to the United Kingdom, he
has been a member of the board of directors of Rothschild, Deputy Chairman of
Sketchley plc and is currently Chairman of Cine-UK Ltd. Mr. Bloom's association
with GFI goes back to its inception in 1995.
RAYMOND MEYER became a member of our Management Committee upon consummation
of the Transactions. Mr. Meyer has served as a Group Executive of GFI since
August 1998, providing experienced advice to select GFI portfolio companies
which are active in the power supply, back-up power, and power measurement
fields. From 1984 through 1997, Mr. Meyer was President of Deltec Corporation, a
leading supplier of uninterruptible power systems primarily to the computer
industry. Before joining Deltec, Mr. Meyer held executive management positions
in the ACDC Division of Emerson Electric (OEM power supplies) and Intech/FMI
(data acquisition products).
CHRIS BROTHERS, CPA CFA, became a member of our Management Committee upon
consummation of the Transactions. Mr. Brothers is a Senior Vice President of
Oaktree. Prior to joining Oaktree in 1996, Mr. Brothers worked at the New York
headquarters of Salomon Brothers Inc., where he served as a Vice President in
the Mergers and Acquisitions group. Prior to 1992, Mr. Brothers was a Manager in
the Valuation Services group of Price Waterhouse. Mr. Brothers serves on the
boards of directors of National Mobile Television, Inc., Caminus LLC, Power
Measurement, Ltd. and Trace Holdings, LLC.
Our second amended and restated operating agreement provides that Cherokee
Investors has the right to designate five members of our Management Committee
and our other members as of April 30, 1999, have the right to designate three
members of our Management Committee.
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<PAGE>
The individuals serving as members of our Management Committee serve
indefinite terms, and may be removed only by the members that appointed that
individual to the Management Committee.
NON-COMPETITION AGREEMENTS
In connection with the Acquisition, each of Messrs. Pat Patel, Bud Patel,
Amrit Patel and Mukesh Patel entered into Non-Competition and Confidentiality
Agreements. The Non-Competition Agreements are effective for the longer of five
years or the period during which the executive directly or indirectly holds any
equity interest in Cherokee.
Each Non-Competition Agreement prohibits the applicable executive from
directly or indirectly taking any action or encouraging others to take any
action, which advances or is intended to advance the interest of any existing or
potential competitor of ours or that would otherwise affect the Company's
relationship with any existing or potential customer in a manner that is not in
our interest. Each Non-Competition Agreement also contains confidentiality and
non-solicitation provisions.
60
<PAGE>
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The summary compensation table below sets forth information concerning
compensation paid in the fiscal year ended December 31, 1998 to our Chief
Executive Officer and our four other most highly compensated executive officers,
referred to in this prospectus as our named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION(1) COMPENSATION(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)
- --------------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Pat Patel ....................... 1998 276,216 125,000 -- 5,000
Chairman and President(3)
Bud Patel ....................... 1998 186,829 72,376 -- 5,000
Executive Vice President
Dennis Pouliot .................. 1998 150,020 50,000 -- 4,500
Vice President of Marketing
Ken King ........................ 1998 116,328 40,626 -- 3,490
Executive Vice President
Howard Ribaudo .................. 1998 109,999 30,000 -- 3,300
Vice President of Sales
</TABLE>
- ------------------------
(1) For each named executive officer, the aggregate dollar amount of other
annual compensation received during fiscal 1998 not properly categorized as
salary or bonus did not exceed the lesser of (1) $50,000 and (2) 10% of the
total salary and bonus reported by such named executive officer for such
fiscal year.
(2) Represents matching contributions made by us on behalf of the named
executive officers under our 401(k) plan.
(3) Pat Patel's title was changed to "Chief Executive Officer" in April 1999. We
did not have a Chief Executive Officer during 1998.
UNIT OPTION PLAN
1999 UNIT OPTION PLAN. The Management Committee 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, for the benefit of our officers, Board
members, employees, advisors and consultants. The Plan covers an aggregate of
2,970,000 non-voting Class B Units and provides for the issuance of unit
options.
The Plan may be administered by the Management Committee or a committee
designated by the Management Committee (either such committee sometimes referred
to as the "plan administrator"). The plan administrator may interpret the Plan
and, subject to its provisions, may prescribe, amend and rescind rules and make
all other determinations necessary or desirable for the administration of the
Plan. The Plan permits the plan administrator to select the officers, Management
Committee representatives, employees, advisors and consultants of the Company
(including Management Committee representatives who are also employees) who will
receive unit options and generally to determine the terms and conditions of such
unit options.
The unit price of each unit option granted under the Plan may generally not
be less than 85% of the fair market value of a Class B Unit on the date a unit
option is granted. Unit options generally vest at 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 our assets to a corporation) or
(ii) become a publicly traded corporation (each, a
61
<PAGE>
"Conversion Transaction"), the plan administrator will, prior to such Conversion
Transaction, take such action as it shall determine to be appropriate with
respect to the Plan and the outstanding unit options granted, so as to equitably
treat such options and the participants and to enable them to retain the
benefits of the unit options following such Conversion Transaction. Such actions
may, but need not, include adopting a new plan and converting the unit options
into comparable awards under that plan.
In connection with any proposed (i) liquidation or dissolution of us,
(ii) a sale of all or substantially all of our assets other than in the ordinary
course of our business or (iii) a merger or consolidation involving us in which
we are not the surviving entity or we become a subsidiary of another
corporation, excluding, however, any Conversion Transaction, the plan
administrator shall determine the appropriate treatment, if any, of outstanding
unit options and may make such amendments to the Plan as are necessary to
reflect such determination.
Except as otherwise provided, in the event of any merger, reorganization,
consolidation or other change in corporate structure affecting the Class B
Units, an equitable substitution or proportionate adjustment, if any, as
determined by the plan administrator, may be made in (i) the aggregate number of
Class B Units reserved for issuance under the Plan, and (ii) the kind, number
and exercise price of Class B Units subject to outstanding unit options granted
under the Plan.
Except as otherwise provided, in the event of any unit split, reverse unit
split, distribution of units, recapitalization, combination or reclassification
of units, an equitable substitution or proportionate adjustment, as determined
by the plan administrator, shall be made in (i) the aggregate number of Class B
Units reserved for issuance under the Plan, and (ii) the kind, number and
exercise price of Class B Units subject to outstanding unit options granted
under the Plan.
In connection with any such event, the plan administrator may provide for
the cancellation of any outstanding unit options that are vested but
unexercised, or any portion thereof. In connection with any such cancellation,
we will make a payment to the participant in cash or other property equal to the
difference between the aggregate fair market value of the Class B Units subject
to the cancelled unit options, or portion thereof, and the aggregate exercise
price of the cancelled unit options, or portion thereof.
The terms of the Plan provide that the plan administrator may amend, suspend
or terminate the Plan at any time, provided, however, that certain amendments
require approval of a majority of the members holding Class A Units. Further, no
such action may be taken which adversely affects any rights under outstanding
unit options without the holder's consent.
COMPENSATION OF DIRECTORS
The individuals serving on the Management Committee will receive no
compensation so long as they are affiliated with, or have a financial interest
in, Cherokee. All of our Management Committee members currently do have these
affiliations. The Management 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 any compensation with respect to
his or her position as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Pat Patel and Bud Patel each participated in the determination of officers'
compensation during 1998. After we completed the Transactions, our Management
Committee formed a compensation committee comprised of Pat Patel, Ken King, Ian
Schapiro and Chris Brothers. No member of the compensation committee will
participate in the determination of his or her own compensation.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our outstanding
membership units as of October 1, 1999 by:
- each person who is known by us to own beneficially more than 5% of our
outstanding Class A Units;
- each of our Management Committee members and named executive officers; and
- all of our Management Committee members and named executive officers as a
group.
<TABLE>
<CAPTION>
MEMBERSHIP UNITS BENEFICIALLY OWNED(1)
-------------------------------------------------
CLASS A CLASS B
(VOTING) (NON-VOTING)
---------------------- -------------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ---------------------------------------------------------------------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Cherokee Investor Partners, LLC(2)(3)................................. 180,000 60.0% 17,820,000 59.4%
Bikor Corporation(4).................................................. 30,000 10.0% 2,970,000 9.9%
Manju Patel(4)(5)..................................................... 90,000 30.0% 2,160,000 7.2%
Pat Patel(4)(6)....................................................... 90,000 30.0% 2,160,000 7.2%
Ken King(4)........................................................... -- -- 12,500 *
Bud Patel(4)(7)....................................................... 30,000 10.0% 2,970,000 9.9%
Dennis Pouliot(4)..................................................... -- -- 50,000 *
Howard Ribaudo(4)..................................................... -- -- 75,000 *
Ian Schapiro(3)(8).................................................... 180,000 60.0% 17,820,000 59.4%
Stephen Kaplan(9)(10)................................................. 180,000 60.0% 17,820,000 59.4%
Tony Bloom(3)(11)..................................................... 180,000 60.0% 17,820,000 59.4%
Raymond Meyer(3)...................................................... -- -- -- --
Chris Brothers(9)..................................................... -- -- -- --
All Management Committee members and named executive officers as a
group (10 persons).................................................. 300,000 100.0% 23,087,500 77.0%
</TABLE>
- ------------------------
* Less than 1.0%
(1) The Class A Units and Class B Units are identical except that Class A Units
have voting rights and Class B Units have no voting rights.
(2) The owners of Cherokee Investors include an affiliate of GFI, an affiliate
of Oaktree, Rothschild and an affiliate of the initial purchaser of the
outstanding notes. By virtue of their ownership of equity of Cherokee
Investors, these entities may be deemed to share beneficial ownership of the
membership units owned by Cherokee Investors. GFI, Oaktree, Rothschild and
the initial purchaser, and their affiliates, if appropriate, expressly
disclaim beneficial ownership of such units.
(3) c/o GFI Energy Ventures LLC, 11611 San Vicente Boulevard, Suite 710, Los
Angeles, CA 90049.
(4) c/o Cherokee International, LLC, 2841 Dow Avenue, Tustin, California 92780.
(5) Consists entirely of membership units that Manju Patel holds jointly with
her husband, Pat Patel, as trustees of the Patel Family Trust (see note 6).
Manju Patel expressly disclaims beneficial ownership of any units
beneficially owned by her as trustee of that trust.
(6) Consists entirely of membership units that Mr. Patel holds jointly with his
wife, Manju Patel, as trustees of the Patel Family Trust (see note 5).
Mr. Patel expressly disclaims beneficial ownership of any units beneficially
owned by him as trustee of that trust.
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(7) Bud Patel may be deemed to share beneficial ownership of the 30,000 Class A
Units and 2,970,000 Class B Units owned by Bikor, by virtue of his ownership
of Bikor's common stock. Bud Patel expressly disclaims beneficial ownership
of any units beneficially owned by him by virtue of his ownership of Bikor's
common stock.
(8) Ian Schapiro may be deemed to share beneficial ownership of the 180,000
Class A Units and 17,820,000 Class B Units owned by Cherokee Investors by
virtue of his status as a principal of GFI, which, through an affiliate
holds an equity interest in Cherokee Investors. Mr. Schapiro expressly
disclaims beneficial ownership of any units beneficially owned by him by
virtue of his status as a principal of GFI.
(9) c/o Oaktree Capital Management, LLC, 333 South Grand Avenue, Los Angeles,
California 90071.
(10) Stephen Kaplan may be deemed to share beneficial ownership of the 180,000
Class A Units and 17,820,000 Class B Units owned by Cherokee Investors by
virtue of his status as a principal of Oaktree, which, through an affiliate
holds an equity interest in Cherokee Investors. Mr. Kaplan expressly
disclaims beneficial ownership of any units beneficially owned by him by
virtue of his status as a principal of Oaktree.
(11) Tony Bloom may be deemed to share beneficial ownership of the 180,000
Class A Units and 17,820,000 Class B Units owned by Cherokee Investors by
virtue of his status as a principal of Rothschild, which holds an equity
interest in Cherokee Investors. Mr. Bloom expressly disclaims beneficial
ownership of any units beneficially owned by him by virtue of his status as
a principal of Rothschild.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
At the time of the offering of the outstanding notes, we entered into the
New Credit Agreement among Cherokee, Heller Financial, Inc., as agent and the
other lenders. The following is a summary description of the principal terms of
the New Credit Agreement and the other loan documents related thereto. The
following description is only a summary of the material provisions of the New
Credit Agreement. We have filed the New Credit Agreement as an exhibit to the
Registration Statement of which this prospectus is a part. You may obtain a copy
of the New Credit Agreement by following any of the procedures described in the
section "Where You Can Find More Information." Our obligations under the New
Credit Agreement constitute Senior Indebtedness and Designated Senior
Indebtedness with respect to the notes.
STRUCTURE. The lenders have provided us with (i) a Term Loan Facility of
$50.0 million and (ii) a Revolving Credit Facility of $25.0 million.
We borrowed the full amount of the Term Loan on the date we consummated the
Transactions to finance the distribution described above in the section "The
Transactions." We may use the Revolving Credit Facility to fund our working
capital requirements, including issuance of stand-by and trade letters of
credit, and for other general corporate purposes and, to the extent permitted by
the New Credit Agreement, to fund acquisitions. We drew down approximately $4.6
million under the Revolving Credit Facility at the closing of the offering of
the outstanding notes to pay transaction fees and expenses related to the
Transactions.
The Term Loan Facility and Revolving Credit Facility each have a maturity of
six years. The Term Loan Facility will amortize over its six-year term, with
annual principal payments ranging from $2.5 million to $13.5 million. In
addition, we are required to make annual prepayments on the Term Loan based on
excess available cash flow. Loans and letters of credit under the Revolving
Credit Facility are available, subject to a borrowing base, subject to the
fulfillment of customary conditions precedent, including the absence of a
default under the New Credit Agreement.
SECURITY; GUARANTY. The New Credit Agreement is secured by a perfected
first priority security interest in substantially all of our assets and the
assets of our subsidiaries (other than foreign subsidiaries), including:
(1) all owned real property and (2) all accounts receivable, inventory and
intangibles. The New Credit Agreement is also secured by a non-recourse pledge
of 100% of the membership interests in Cherokee (other than those issued to
certain of our employees upon exercise of options or other rights to purchase in
the aggregate up to ten percent (10%) of our outstanding membership units).
INTEREST, MATURITY. Borrowings under the New Credit Agreement bear interest
at a rate per annum equal (at our option) to: (i) the reserve-adjusted LIBOR
rate as determined by the agent in accordance with the New Credit Agreement or
(ii) a base rate equal to the prime rate, in each case plus an applicable
margin. Initially, the applicable margin was 2.75% per annum for LIBOR loans and
1.50% per annum for base rate loans. The applicable margins are subject to
change based on our leverage ratio.
FEES. Cherokee is required to pay the lenders, quarterly in arrears, a
commitment fee on the undrawn portion of the Revolving Credit Facility at a rate
equal to 0.50% per annum. We are also obligated to pay customary agent and
closing fees.
COVENANTS. The New Credit Agreement contains a number of covenants that,
among other things, restrict our ability and the ability of our subsidiaries to:
- dispose of assets;
- incur additional indebtedness;
- prepay other indebtedness (including the notes) or amend certain debt
instruments (including the indenture);
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- pay distributions;
- create liens on assets;
- enter into sale and leaseback transactions;
- make investments, loans or advances;
- make acquisitions;
- engage in mergers or consolidations;
- make capital expenditures;
- change the business conducted by us or our subsidiaries; or
- engage in certain transactions with affiliates and otherwise restrict
certain corporate activities.
In addition, under the New Credit Agreement, we are required to maintain
specific financial ratios and satisfy specified financial tests, including a
debt to EBITDA ratio, a fixed charge coverage ratio and an interest coverage
ratio. See the section "Risk Factors" under the headings "Our Substantial
Leverage and Debt Service Obligations Could Impede Our Operations and
Flexibility" and "The Indenture and Our New Credit Agreement Will Contain
Provisions That Could Materially Restrict Our Business" for a description of the
impact of these covenants on Cherokee.
EVENTS OF DEFAULT. The New Credit Agreement contains events of default
customary for facilities of this nature, including:
- nonpayment of principal, interest or fees;
- material inaccuracy of representations and warranties;
- violation of covenants;
- cross-default to certain other indebtedness;
- certain events of bankruptcy and insolvency;
- material judgments against us and our subsidiaries;
- invalidity of any guarantee or security interest; and
- a change of control of Cherokee in certain circumstances.
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DESCRIPTION OF THE NOTES
GENERAL
The outstanding notes were, and the exchange notes will be, issued under an
indenture, dated as of April 30, 1999, among Cherokee and Cherokee Finance,
referred to in this section as the Issuers, and Firstar Bank of Minnesota, N.A.,
as trustee. A copy of the indenture is filed as an exhibit to the registration
statement which includes this prospectus and is available to you upon request by
following the procedures described in the section "Where You Can Find More
Information."
The terms of the outstanding notes and the exchange notes include those
stated in the indenture and those made part of the indenture by reference to the
Trust Indenture Act of 1939, as amended. You can find the definitions of some of
the terms used in this description under the subheading "Definitions" below.
Other terms that are not defined in this section are defined in the indenture.
For purposes of this section, the word "Company" refers only to Cherokee
International, LLC and not to any of its subsidiaries, including Cherokee
International Finance, Inc.
The terms of the exchange notes are identical in all material respects to
the terms of the outstanding notes, except for transfer restrictions and
registration rights relating to the outstanding notes. Any outstanding notes
that remain outstanding after the exchange offer, together with the exchange
notes, will be treated as a single class of securities under the indenture for
voting purposes. When we refer to the term "note" or "notes" in this
"Description of Notes" section, we are referring to both the outstanding notes
and the exchange notes. When we refer to "holders" of the notes, we are
referring to those persons who are registered holders of the notes on the books
of the registrar appointed under the indenture.
The indenture also contains provisions which would allow us to issue up to
$150 million of additional notes having the same terms as the notes described in
this section if we comply with the requirements contained in the indenture.
Additional notes must be issued in an aggregate principal amount of not less
than $25 million per series. If any additional notes are issued, they will be
considered part of the same issue as the notes, and will vote on all matters
with these notes. For purposes of this "Description of Notes" section, however,
reference to the "notes" does not include the "additional notes."
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of these notes.
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are unsecured senior subordinated obligations of the Issuers;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Issuers;
- are senior in right of payment to any future Subordinated Obligations of
the Issuers;
- are effectively subordinated to all existing and future debts of our
subsidiaries (other than Cherokee International Finance, Inc. and any
future Guarantor), including trade payables; and
- will entitle you to certain benefits pursuant to the registration rights
agreement.
PRINCIPAL, MATURITY AND INTEREST
We have issued outstanding notes in the aggregate principal amount of
$100,000,000. Any notes that remain outstanding after the completion of the
exchange offer, together with the exchange notes, will be treated as a single
class of securities under the indenture. The notes and any additional notes
issued under
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the indenture are limited in aggregate principal amount to $250 million,
$150 million of which can only be issued in compliance with the covenant
described below under the heading "Certain Covenants--Limitation on
Indebtedness." The Issuers have issued and will issue the notes in denominations
of $1,000 and any integral multiple of $1,000. The notes will mature on May 1,
2009.
Interest on the notes will accrue at the rate of 10 1/2% per year and will
be payable semiannually in arrears on May 1 and November 1 of each year,
beginning on November 1, 1999. The Issuers will make each interest payment to
the holders of record of the notes on the immediately preceding April 15 and
October 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the notes at
our option prior to May 1, 2004. On and after May 1, 2004, we will be entitled
at our option to redeem all or a portion of the notes upon not less than 30 nor
more than 60 days' notice at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon, if
any, to the applicable redemption date, if redeemed during the 12-month period
beginning on May 1 in the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------- -----------
<S> <C>
2004................................................................... 105.250%
2005................................................................... 103.500
2006................................................................... 101.750
2007 and thereafter.................................................... 100.000
</TABLE>
In addition, before May 1, 2002, we may at our option on one or more
occasions redeem up to 35% of the original principal amount of notes (including
the original principal amount of any additional notes issued under the
indenture) at a redemption price of 110.500% of the principal amount thereof,
plus accrued and unpaid interest to the redemption date, with the net cash
proceeds from one or more Public Equity Offerings; PROVIDED that:
(1) at least 65% of the aggregate principal amount of notes originally
issued pursuant to the indenture (including the original principal amount
of any additional notes issued under the indenture) remain outstanding
immediately after the occurrence of each such redemption; and
(2) each such redemption occurs within 120 days after the date of the
related Public Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the notes at any time, the trustee will
select notes on a pro rata basis, by lot or by such other method as the trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. We will issue a new note in principal amount equal to the
unredeemed portion of the original note in the name of the holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
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RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the notes
will be subordinate in right of payment to the prior payment in full of all
Senior Indebtedness, including our obligations under the New Credit Agreement.
As of June 30, 1999 (following the consummation of the Transactions), the
Issuers' Senior Indebtedness, on a consolidated basis, was $55.2 million.
Although the indenture contains limitations on the amount of additional
Indebtedness that the Issuers may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "--Certain Covenants--Limitation on
Indebtedness" below.
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
A portion of our operations are conducted through our subsidiaries. Claims
of creditors of such subsidiaries generally will have priority with respect to
the assets and earnings of such subsidiaries over the claims of creditors of the
Issuers, including holders of the notes. Accordingly, the notes will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders, if any, of subsidiaries of the Issuers.
At June 30, 1999 (following the consummation of the Transactions), the total
liabilities of the Company's subsidiaries (other than Cherokee International
Finance, Inc.) were approximately $0.4 million, including trade payables.
Although the indenture limits the incurrence of Indebtedness and preferred stock
of certain of our subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness under the indenture. For more details, see the covenant
described below under the heading "Certain Covenants--Limitation on
Indebtedness."
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Only Indebtedness of the Issuers that is Senior Indebtedness will rank
senior to the notes in accordance with the provisions of the indenture. The
notes will in all respects rank PARI PASSU with all other Senior Subordinated
Indebtedness of the Issuers. As of June 30, 1999, we had no outstanding Senior
Subordinated Indebtedness other than the outstanding notes.
We have agreed in the indenture that we will not Incur, directly or
indirectly, any Indebtedness that is subordinate or junior in ranking in right
of payment to our Senior Indebtedness, unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness. The indenture does not treat unsecured
Indebtedness as subordinated or junior to Secured Indebtedness merely because it
is unsecured.
PAYMENT OF NOTES
We are not permitted to pay principal of, premium, if any, or interest on
the notes or make any deposit pursuant to the provisions described below under
the heading "Defeasance" and may not repurchase, redeem or otherwise retire any
notes (collectively, "pay the notes") if:
(1) any Designated Senior Indebtedness is not paid when due; or
(2) any other default on Designated Senior Indebtedness occurs and the
maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms;
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Designated Senior Indebtedness has been
paid in full. Regardless of the foregoing, we are
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permitted to pay the notes if we and the trustee receive written notice
approving such payment from the Representative of any Designated Senior
Indebtedness with respect to which either of the events set forth in clause
(1) or (2) above has occurred and is continuing.
During the continuance of any default (other than a default described in
clause (1) or (2) above) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, we are not
permitted to pay the notes for a period (a "Payment Blockage Period") commencing
upon the receipt by the trustee (with a copy to us) of written notice (a
"Blockage Notice") of such default from the Representative of the holders of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter. The Payment Blockage Period will
end earlier if such Payment Blockage Period is terminated:
(1) by written notice to the trustee and to us from the Person or Persons
who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is cured, waived
or no longer continuing; or
(3) because such Designated Senior Indebtedness has been discharged or paid
in full.
Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness, we are
permitted to pay all sums not paid to the holders of the notes during the
Payment Blockage Period due to the foregoing prohibitions and to resume paying
the notes after the end of such Payment Blockage Period. The notes shall not be
subject to more than one Payment Blockage Period in any consecutive 360-day
period and no default that existed upon the commencement of a Payment Blockage
Period (whether or not such event of default is on the same issue of Designated
Senior Indebtedness) shall be made the basis for the commencement of any other
Payment Blockage Period.
Upon any payment or distribution of the assets of the Issuers upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Issuers or their property:
(1) the holders of Senior Indebtedness will be entitled to receive payment
in full of such Senior Indebtedness before the holders of the notes are
entitled to receive any payment;
(2) until the Senior Indebtedness is paid in full, any payment or
distribution to which holders of the notes would be entitled but for the
subordination provisions of the indenture will be made to holders of such
Senior Indebtedness as their interests may appear; and
(3) if a distribution is made to holders of the notes that, due to the
subordination provisions, should not have been made to them, such holders
of the notes are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default, the
Issuers or the trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration.
No provision contained in the indenture or the notes will affect our
obligation, which is absolute and unconditional, to pay the notes when due. The
subordination provisions of the indenture and the notes will not prevent the
occurrence of any Default or Event of Default under the indenture or limit the
rights of the trustee or any holder to pursue any other rights or remedies with
respect to the notes.
By reason of the subordination provisions contained in the indenture, in the
event of a liquidation, bankruptcy, reorganization, insolvency, receivership or
similar proceeding, or an assignment for the benefit of our creditors or a
marshalling of our assets or liabilities, holders of the notes may recover less,
ratably than our other creditors.
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The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the trustee for the payment of principal of and interest on the notes
pursuant to the provisions described below under "--Defeasance".
BOOK-ENTRY; DELIVERY AND FORM
We initially issued the outstanding notes in fully registered global form
without interest coupons (the "Global Note" which term, for purposes hereof,
includes any notes issued in exchange therefor, including, in whole or in part,
the exchange notes). The Global Note was deposited with the trustee as custodian
for The Depository Trust Company ("DTC") and registered in the name of a nominee
of DTC. Except as set forth below, the Global Note may be transferred, in whole
and not in part, only to DTC or another nominee of DTC. You may hold your
beneficial interests in the Global Note directly through DTC if you have an
account with DTC or indirectly through organizations which have accounts with
DTC.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and "a clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities of institutions that have accounts with DTC ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchaser), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's
book-entry system is also available to others such as banks, brokers, dealers
and trust companies (collectively, the "indirect participants") that clear
through or maintain a custodial relationship with a participant, whether
directly or indirectly.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the Global Note will be shown on, and the transfer of
those ownership interests will be effected only through, records maintained by
DTC (with respect to participants' interests), the participants and the indirect
participants (with respect to the owners of beneficial interests in the Global
Note other than participants). The laws of some jurisdictions may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Note.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by such Global Note for all
purposes under the indenture and the notes. In addition, no beneficial owner of
an interest in the Global Note will be able to transfer that interest except in
accordance with the applicable procedures of DTC and, if applicable, Morgan
Guaranty Trust Company of New York, as operator of the Euroclear system
("Euroclear"). Except as set forth below, as an owner of a beneficial interest
in the Global Note, you will not be entitled to have the notes represented by
the Global Note registered in your name, will not receive or be entitled to
receive physical delivery of certificated notes and will not be considered to be
the owner or holder of any notes under the Global Note. We understand that under
existing industry practice, in the event an owner of a beneficial interest in
the Global Note desires to take any action that DTC, as the holder of the Global
Note, is entitled to take, DTC would authorize the participants to take such
action, and the participants would authorize beneficial owners owning through
such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
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We will make payments of principal of, premium, if any, and interest on the
notes represented by the Global Note registered in the name of and held by DTC
or its nominee to DTC or its nominee, as the case may be, as the registered
owner and holder of the Global Note. Neither we, the trustee nor any paying
agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Global Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
of, premium, if any, or interest on the Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records of
DTC or its nominee. We also expect that payments by participants or indirect
participants to owners of beneficial interests in the Global Note held through
such participants or indirect participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants or indirect participants. We will not have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between DTC and its
participants or indirect participants or the relationship between such
participants or indirect participants and the owners of beneficial interests in
the Global Note owning through such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear will be effected in the ordinary way in
accordance with its rules and operating procedures.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes (including the presentation of notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in the Global Note is credited and only in respect of such portion
of the aggregate principal amount of notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the notes, DTC will exchange the Global Note for certificated
notes which it will distribute to its participants.
DTC has further advised us that management of DTC is aware that some
computer applications, systems, and the like for processing data that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems." DTC has informed its participants and
other members of the financial community that it has developed and is
implementing a program so that its systems, as the same relate to the timely
payment of distributions (including principal and interest payments) to security
holders, book-entry deliveries, and settlement of trades, within DTC, continue
to function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's direct and indirect participants and third party vendors from whom
DTC licenses software and hardware, and third party vendors on whom DTC relies
for information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
industry that it is contacting (and will continue to contact) third party
vendors from whom DTC acquires services to: (i) impress upon them the importance
of such services being Year 2000 compliant; and (ii) determine the extent of
their efforts for Year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing such contingency
plans as it deems appropriate.
Although DTC and Euroclear are expected to follow the foregoing procedures
in order to facilitate transfers of interests in the Global Note among
participants of DTC and Euroclear, they are under no obligation to perform or
continue to perform such procedures, and such procedures may be discontinued
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at any time. Neither we nor the trustee will have any responsibility or
liability for the performance by DTC, Euroclear or the participants or indirect
participants of their respective obligations under the rules and procedures
governing their respective operations.
CERTIFICATED SECURITIES
Subject to certain conditions, the notes represented by the Global Note are
exchangeable for certificated notes in definitive form of like tenor in
denominations of $1,000 and integral multiples if:
(1) DTC or any successor depositary notifies us in writing that it is no
longer willing or able to act as a depositary and we are unable to locate
a qualified successor within 90 days or if at any time the Depositary
ceases to be a clearing agency registered under the Exchange Act;
(2) we in our discretion at any time determine not to have all the notes
represented by the Global Note; or
(3) a default entitling the holders of the notes to accelerate the maturity
thereof has occurred and is continuing.
Any note that is exchangeable as above is exchangeable for certificated
notes issuable in authorized denominations and registered in such names as DTC
shall direct. Subject to the foregoing, the Global Note is not exchangeable,
except for a Global Note of the same aggregate denomination to be registered in
the name of DTC or its nominee.
Neither we nor the trustee will be liable for any delay by the related
holder of a Global Note (a "Global Note Holder") or the Depositary in
identifying the beneficial owners of the related notes, and we and the trustee
may conclusively rely on, and will be protected in relying on, instructions from
such Global Note Holder or of the Depositary for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the exchange notes).
SAME DAY PAYMENT
The indenture requires us to make payments in respect of notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address.
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate the registration rights
agreement in its entirety. We urge you to read the registration rights agreement
because it, and not this description, defines your rights as holders of the
notes.
We have agreed pursuant to the registration rights agreement that we will,
at our cost:
(1) within 75 days after the Issue Date, file a registration statement (the
"Exchange Offer Registration Statement") with the SEC with respect to a
registered offer (the "Registered Exchange Offer") to exchange the
outstanding notes for the exchange notes having terms substantially
identical in all material respects to the outstanding notes except that
the notes will not contain terms with respect to transfer restrictions;
(2) use all reasonable efforts to cause the Exchange Offer Registration
Statement to be declared effective under the Securities Act within 210
days after the Issue Date;
(3) as soon as practicable after the effectiveness of the Exchange Offer
Registration Statement (the "Effectiveness Date"), offer the exchange
notes in exchange for surrender of the outstanding notes; and
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(4) keep the Registered Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date notice of the
Registered Exchange Offer is mailed to the holders of the outstanding
notes.
This exchange offer is being made in compliance with the provisions of the
registration rights agreement.
Under existing SEC interpretations, the exchange notes will be freely
transferable by holders other than our affiliates after the Registered Exchange
Offer without further registration under the Securities Act if the holder of
those notes represents to us in the Registered Exchange Offer that it is
acquiring those notes in the ordinary course of its business, that it has no
arrangement or understanding with any person to participate in the distribution
of those notes and that it is not an affiliate of ours, as such terms are
interpreted by the SEC; PROVIDED, HOWEVER, that broker-dealers ("Participating
Broker-Dealers") receiving notes in the Registered Exchange Offer will have a
prospectus delivery requirement with respect to resales of those notes. The SEC
has taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to exchange notes (other than a
resale of an unsold allotment from the original sale of the outstanding notes)
with the prospectus contained in the Exchange Offer Registration Statement.
Under the Registration Rights Agreement, we are required to allow
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of the exchange notes for
180 days following the effective date of such Exchange Offer Registration
Statement (or such shorter period during which Participating Broker Dealers are
required by law to deliver such prospectus).
In the event that applicable interpretations of the staff of the SEC do not
permit us to effect such a Registered Exchange Offer, or if for any other reason
we do not consummate the Registered Exchange Offer within 240 days of the date
of the Registration Rights Agreement, or if any holder of outstanding notes
shall notify us that:
(1) such holder is prohibited by law or SEC policy from participating in the
Registered Exchange Offer;
(2) such holder may not resell the exchange notes acquired by it in the
Registered Exchange Offer to the public without delivering a prospectus
and the prospectus contained in the Exchange Offer Registration Statement
is not appropriate or available for such resales by such holder; or
(3) such holder is a broker-dealer and holds outstanding notes that are part
of an unsold allotment from the original sale of the outstanding notes,
then, we will, at our cost,
(1) as promptly as practicable, file a shelf registration statement (the
"Shelf Registration Statement") with the SEC covering resales of the
outstanding notes or the exchange notes as the case may be;
(2) use all reasonable efforts to cause the Shelf Registration Statement to
be declared effective under the Securities Act; and
(3) keep the Shelf Registration Statement effective until the earlier of
(a) the time when the notes covered by the Shelf Registration Statement
can be sold pursuant to Rule 144 without any limitations under clauses
(c), (e), (f) and (h) of Rule 144 and (b) two years from the Issue Date.
We will, in the event a Shelf Registration Statement is filed, among other
things, provide to each holder for whom such Shelf Registration Statement was
filed copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the notes. A holder selling notes pursuant to the Shelf
Registration Statement generally would be required to be named as a
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selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
We will pay additional interest (as described below) if:
(1) neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement has been filed with the SEC on or before the date
specified for such filing;
(2) neither the Registered Exchange Offer is consummated nor the Shelf
Registration Statement is declared effective on or before the date
specified for such consummation or effectiveness as applicable; or
(3) the Shelf Registration Statement is declared effective but thereafter
ceases to be effective or usable during the period of effectiveness
specified above (subject to certain exceptions);
(each such event referred to in clauses (1) through (3) above a "Registration
Default") from and including the date on which any such Registration Default
shall occur to, but excluding the date on which all Registration Defaults have
been cured or waived.
Upon consummation of this exchange offer, except as described above, holders
of exchange notes will not be entitled to additional interest.
The rate of the additional interest will be 0.50% per annum following the
occurrence of such Registration Default, until all Registration Defaults have
been cured; PROVIDED, HOWEVER, that
(1) no holder of notes who is not entitled to the benefits of a Shelf
Registration Statement shall be entitled to receive additional interest
by reason of a Registration Default that pertains to a Shelf Registration
Statement; and
(2) no holder of outstanding notes constituting an unsold allotment from the
original sale of the outstanding notes or any other holder of notes who
is entitled to the benefits of a Shelf Registration Statement shall be
entitled to receive additional interest by reason of a Registration
Default that pertains to a Registered Exchange Offer.
We will pay any additional interest on regular interest payment dates.
All references in the indenture, in any context, to any payment of
principal, purchase prices in connection with a purchase of notes, and interest
or any other amount payable on or with respect to any of the notes shall be
deemed to include payment of any additional interest pursuant to the
registration rights agreement.
If we effect the Registered Exchange Offer, we will be entitled to close the
Registered Exchange Offer 30 days after the commencement thereof provided that
we have accepted all notes theretofore validly tendered in accordance with the
terms of the Registered Exchange Offer and except as required by applicable law.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder shall have the right to require that we purchase such
holder's notes at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, thereon to the date of
purchase (subject to the right of holders of record on the relevant record date
to receive interest due on the relevant interest payment date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3
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and 13d-5 under the Exchange Act), except that for purposes of this
clause (1) such person shall be deemed to have beneficial ownership of
all shares that such person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time), directly
or indirectly, of more than 35% of the total voting power of the then
outstanding Voting Stock of the Company; PROVIDED, HOWEVER, that no
Change of Control shall be deemed to have occurred under this paragraph
(1) if the Permitted Holders either (a) beneficially own (as defined
above), directly or indirectly, (x) in the aggregate more than 40% of the
total voting power of the then outstanding Voting Stock of the Company
and (y) a greater percentage of the total voting power of the then
outstanding Voting Stock of the Company than any other person or
(b) have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors
(which, as defined, includes our Management Committee);
(2) after an initial Public Equity Offering, during any period of two
consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
members of the Board of Directors whose election by such Board of
Directors or whose nomination for election by the equityholders of the
Company was approved by a vote of the majority of the members of the
Board of Directors of the Company then still in office who were either
members of the Board of Directors at the beginning of such period or
whose election or nomination for election was previously so approved
including new members of the Board of Directors designated in or provided
for in an agreement regarding the merger, consolidation or sale, transfer
or other conveyance, of all or substantially all of our assets, if such
agreement was approved by a vote of such majority of members of the Board
of Directors) cease for any reason to constitute a majority of the Board
of Directors then in office;
(3) the adoption by the holders of Capital Stock of either Issuer of any
plan or proposal for the liquidation or dissolution of either Issuer
(whether or not otherwise in compliance with the Indenture) except in
connection with converting the Company into a corporation, by way of
merger, consolidation or otherwise; or
(4) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale of
all or substantially all the assets of the Company and its Subsidiaries,
taken as a whole, to another Person (other than to a Restricted
Subsidiary of the Company or to one or more Permitted Holders or any
entity controlled by one or more Permitted Holders), in which, in the
case of any such merger, consolidation or sale, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate Voting Stock of the Company are
changed into or exchanged for cash, securities or property; provided,
however, that no Change of Control shall be deemed to have occurred under
this paragraph (4) if pursuant to such transaction the securities of the
Company are changed into or exchanged for, in addition to any other
consideration, securities of the surviving Person that represent
immediately after such transaction, (a) at least 30% of the aggregate
voting power of the Voting Stock of the surviving Person and (b) a
greater percentage of the Voting Stock of the surviving Person than the
percentage of such Voting Stock beneficially owned by any other person
(as defined in paragraph (1) above).
Prior to the mailing of the notice referred to below, but in any event
within 30 days following the date on which a Change of Control occurs, the
Issuers covenant to (1) repay in full all Indebtedness under the New Credit
Agreement (and terminate all commitments thereunder) or offer to repay in full
all such Indebtedness (and terminate all such commitments) and to repay the
Indebtedness owed to (and terminate the commitments of) each lender which has
accepted such offer or (2) obtain the requisite consents under the New Credit
Agreement to permit the repurchase of the notes as provided below. The Issuers
will first comply with the covenant in the preceding sentence before they will
be required to repurchase notes pursuant to the provisions described below;
PROVIDED that the Issuers failure to comply with the covenant
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described in the preceding sentence shall constitute an Event of Default
described below under clause (5) under the heading "Events of Default" and not
under clause (2) thereof.
Within 30 days following any Change of Control, unless notice of redemption
of the notes has been given pursuant to the provisions of the indenture
described under "--Optional Redemption" above, the Issuers shall mail a notice
to each holder with a copy to the trustee (the "Change of Control Offer")
stating:
(1) that a Change of Control has occurred and that such holder has the right
to require the Issuers to purchase such holder's notes at a purchase
price in cash equal to 101% of the principal amount thereof plus accrued
and unpaid interest, if any, thereon to the date of purchase (subject to
the right of holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of Control;
(3) the purchase date (which shall be no earlier than 30 days nor later than
60 days from the date such notice is mailed); and
(4) the instructions determined by the Issuers, consistent with the covenant
described hereunder, that a holder must follow in order to have its notes
purchased.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by the Issuers and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Issuers shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Issuers and the initial purchaser of the outstanding notes. Management has
no present intention to engage in a transaction involving a Change of Control,
although it is possible that the Issuers would decide to do so in the future.
Subject to the limitations discussed below, the Issuers could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Issuers' capital structure or credit ratings.
Restrictions on the ability of the Issuers and their Restricted Subsidiaries to
incur additional Indebtedness are contained in the covenant described below
under "Certain Covenants--Limitation on Indebtedness." Such restrictions can
only be waived with the consent of the holders of a majority in principal amount
of the notes then outstanding. Except for the limitations contained in such
covenants, however, the indenture will not contain any covenants or provisions
that may afford holders of the notes protection in the event of a highly
leveraged transaction.
The New Credit Agreement contains, and future indebtedness of the Issuers
may contain, prohibitions on the occurrence of certain events that would
constitute a Change of Control or require such indebtedness to be repurchased
upon a Change of Control. Moreover, the exercise by the holders of their right
to require the Issuers to purchase the notes could cause a default under such
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such purchase on the Issuers. Finally, the Issuers' ability
to pay cash to the holders of the notes following the occurrence of a Change of
Control may be limited by the Issuers' then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases. For more details, see the section "Risk Factors"
under the heading "Limitations on Repurchases of Notes Upon a Change of
Control."
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The provisions under the indenture relating to the Issuers' obligation to
make an offer to purchase the notes as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
principal amount of the notes.
The Change of Control purchase feature of the notes may make more difficult
or discourage a takeover of us, and, thus, the removal of incumbent management.
The phrase "all or substantially all" of our assets will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of our
assets has occurred.
CERTAIN COVENANTS
The indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS
(a) The Issuers will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; PROVIDED, HOWEVER, that the
Issuers and their Restricted Subsidiaries may Incur Indebtedness, if, on the
date of such Incurrence and after giving effect thereto, the Consolidated
Coverage Ratio would be at least 2.00 to 1.00 if the date of such Incurrence is
on or before May 1, 2002 and 2.25 to 1.00 thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Issuers and any
Restricted Subsidiary, as applicable, may Incur any or all of the following
Indebtedness:
(1) Indebtedness of the Issuers or any Restricted Subsidiary Incurred
pursuant to the New Credit Agreement in an aggregate principal amount
outstanding at any time of up to (x) with respect to the Term Loan
Facility (or any replacement term loan facility, as the case may be),
$50 million and (y) with respect to the Revolving Loan Facility (or any
replacement revolving loan facility, as the case may be), the greater of
(A) $25 million and (B) the sum of (I) 50% of the net book value of the
inventory of the Company and its Restricted Subsidiaries and (II) 85% of
the net book value of the accounts receivable of the Company and its
Restricted Subsidiaries, in each case less the aggregate amount of Net
Available Cash from any Asset Disposition applied to permanently reduce
the outstanding amounts or the commitments with respect to such
Indebtedness pursuant to the covenant "Limitation on Sales of Assets and
Subsidiary Stock;" PROVIDED, HOWEVER, that the maximum amount permitted
to be outstanding under this clause (1) of this paragraph (b) shall not
be deemed to limit additional Indebtedness under the New Credit Agreement
to the extent such additional Indebtedness is permitted pursuant to the
Consolidated Coverage Ratio or otherwise under this covenant;
(2) Indebtedness owed to and held by either Issuer or a Restricted
Subsidiary; PROVIDED, HOWEVER, that (A) any subsequent issuance or
transfer of any Capital Stock which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to an Issuer or a Restricted
Subsidiary) shall be deemed, in each case, to constitute the Incurrence
of such Indebtedness by the obligor thereon and (B) if either Issuer is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations with
respect to the Notes and the Indenture and the New Credit Agreement;
(3) the notes;
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
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(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Restricted Subsidiary was acquired by an
Issuer (other than Indebtedness Incurred in connection with, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by an Issuer); PROVIDED, HOWEVER, that on the date of
acquisition, and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of additional Indebtedness pursuant to
clause (a);
(6) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to
paragraph (a) or pursuant to clause (3), (4) or (5) of this paragraph
(b);
(7) Indebtedness of an Issuer or a Restricted Subsidiary in respect of bids,
performance bonds, letters of credit and surety or appeal bonds and
obligations entered into by an Issuer or any Restricted Subsidiary in the
ordinary course of business;
(8) Indebtedness of an Issuer or any Restricted Subsidiary which constitutes
Hedging Obligations consisting of either (A) Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the Issuers
or a Restricted Subsidiary pursuant to the Indenture or (B) Currency
Agreements for the purpose of limiting exchange rate risks in connection
with a Related Business;
(9) Indebtedness of the Issuers or a Restricted Subsidiary which constitutes
Capital Lease Obligations or Purchase Money Indebtedness, and Refinancing
Indebtedness thereof, in an aggregate principal amount not exceeding
$7.5 million at any one time outstanding;
(10) Indebtedness incurred by the Company constituting reimbursement
obligations with respect to letters of credit issued in the ordinary
course of business, including, without limitation, letters of credit in
respect of customs duties, equipment leases, workers' compensation claims
or self-insurance, or other Indebtedness with respect to reimbursement
obligations regarding workers' compensation claims; PROVIDED, HOWEVER,
that upon the drawing of such letters of credit or the Incurrence of such
Indebtedness, such obligations are reimbursed or refinanced within 30
days following such drawing or Incurrence; and
(11) Indebtedness of an Issuer or any Restricted Subsidiary in an aggregate
principal amount which does not, together with all other outstanding
Indebtedness incurred pursuant to this clause (11), exceed $25 million at
any one time outstanding.
(c) Notwithstanding the foregoing, neither the Issuers nor any Restricted
Subsidiary shall Incur any Indebtedness pursuant to the foregoing paragraph
(b) if the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations unless such Indebtedness shall be subordinated to the
notes or the Guarantees, as applicable, to at least the same extent as such
Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(1) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Issuers, in their sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(2) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above. A guarantee of Indebtedness permitted
by this covenant to be Incurred by the Issuers or a Restricted Subsidiary
otherwise permitted to be Incurred pursuant to this covenant is not considered a
separate Incurrence for purposes of this covenant.
(e) Notwithstanding paragraphs (a) and (b) above, neither the Guarantors nor
the Issuers shall Incur (1) any Indebtedness if such Indebtedness is subordinate
or junior in ranking in any respect to any Guarantor Senior Indebtedness or
Senior Indebtedness, respectively, unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated
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Indebtedness or (2) any Secured Indebtedness that is not Guarantor Senior
Indebtedness or Senior Indebtedness, respectively, unless contemporaneously
therewith effective provision is made to secure the Guarantees or the notes,
respectively, equally and ratably with such Secured Indebtedness for so long as
such Secured Indebtedness is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS.
(a) the Issuers shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, make a Restricted Payment if at the time the Issuers
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Issuers are not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described above under the
heading "--Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income of the Company accrued during the
period (treated as one accounting period) beginning on the first day
of the fiscal quarter commencing immediately following the Issue Date
and ending on the last day of the most recent full fiscal quarter for
which financial statements are available prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be
a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from capital
contributions or the issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the Issue Date or any options,
warrants or rights to purchase its Capital Stock (other than
Disqualified Stock) together with the aggregate cash received by the
Company at the time of the exercise of such options, warrants or
rights (other than an issuance or sale to a Subsidiary of the
Company);
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than
by a Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company convertible into or exchangeable or
exercisable for Capital Stock (other than Disqualified Stock) of the
Company (less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or
exchange); and
(D) an amount equal to the sum of (x) the net amount of any Investments
made after the Issue Date constituting a Restricted Payment that are
returned to either Issuer or any Restricted Subsidiary by way of
dividend, distribution, repayment of loans or advances or otherwise
and (y) the portion (proportionate to the Company's equity interest
in such Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary (other than Unrestricted Subsidiaries
referred to in clause (1) of the definition thereof, except to the
extent of Investments made or deemed made in such Unrestricted
Subsidiaries on or after the Issue Date) at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary;
PROVIDED, HOWEVER, that the foregoing sum shall not exceed the
aggregate amount of Investments previously made (and treated as a
Restricted Payment) by either Issuer or any Restricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any redemption, repurchase or other acquisition of any Capital Stock of
the Company made out of the proceeds of the substantially concurrent sale
of, or made by exchange for, Capital Stock of
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the Company (other than (A) Disqualified Stock or, (B) Capital Stock
issued or sold to a Subsidiary of the Company) or out of the proceeds of
a substantially concurrent capital contribution to the Company; PROVIDED,
HOWEVER, that the Net Cash Proceeds from such sale of Capital Stock or
capital contribution shall be excluded from clause (3)(B) of paragraph
(a) above;
(2) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations made by exchange for, or
out of the proceeds of the substantially concurrent sale of, Indebtedness
of an Issuer which is permitted to be Incurred pursuant to the covenant
described above under the heading "--Limitation on Indebtedness";
(3) dividends or distributions paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend or
distributions would have complied with this covenant;
(4) the declaration or payment of Permitted Tax Distributions or Permitted
Distributions for Pre-Closing Tax Liabilities;
(5) any repurchase or other acquisition of shares of, or options to
purchase, Capital Stock of the Company from directors (or similar
persons), officers or employees of the Company pursuant to the terms of
an employee benefit plan or employment or other agreement approved by the
Board of Directors; PROVIDED, HOWEVER, that the aggregate amount of all
such repurchases shall not exceed $1 million in any fiscal year and
$5 million in the aggregate;
(6) Investments in Unrestricted Subsidiaries, or joint ventures in which the
Company has at least a 25% economic ownership interest in an aggregate
amount not to exceed $7.5 million at any time outstanding;
(7) other Restricted Payments in an amount not to exceed $3 million at any
time outstanding; and
(8) The $150 million distribution made to the members of the Company on the
Issue Date as described above in the section "The Transactions."
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (a)(3) above, amounts expended
pursuant to clauses (3), (6) and (7) (but not pursuant to clause (1), (2), (4),
(5) or (8)) of the immediately preceding paragraph shall be included in such
calculation.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The Issuers will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to
(a) pay dividends or make any other distributions on its Capital Stock to the
Issuers or a Restricted Subsidiary or pay any Indebtedness owed to the Issuers,
(b) make any loans or advances to the Issuers or (c) transfer any of its
property or assets to the Issuers, except:
(1) any encumbrance or restriction in respect of any Restricted Subsidiary
(x) pursuant to an agreement in effect at or entered into on the Issue
Date as in effect on the Issue Date (including the New Credit Agreement)
or (y) no more restrictive on such Restricted Subsidiary than under
clause (x);
(2) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by an Issuer (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by an Issuer and outstanding on
such date;
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(3) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (1) or (2) of this covenant or this clause (3) or contained in
any amendment to an agreement referred to in clause (1) or (2) of this
covenant or this clause (3); PROVIDED, HOWEVER, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any
such refinancing agreement or amendment are no less favorable to the
noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
(4) any such encumbrance or restriction (A) consisting of customary
non-assignment provisions in leases to the extent such provisions
restrict the subletting, assignment or transfer of the lease or the
property leased thereunder or in purchase money financings or (B) by
virtue of any Indebtedness, transfer, option or right with respect to, or
any Lien on, any property or assets of an Issuer or any Restricted
Subsidiary not otherwise prohibited by the indenture;
(5) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary
to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary imposed pursuant
to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition;
(7) encumbrances or restrictions imposed by operation of any applicable law,
rule, regulation or order;
(8) Capital Lease Obligations that are otherwise permitted hereunder;
PROVIDED, HOWEVER, that such encumbrance or restriction does not extend
to any property other than that subject to the underlying lease;
(9) any encumbrance or restriction under or relating to an agreement
relating to the acquisition of assets or property so long as such
encumbrances and restriction relate solely to the assets so acquired (and
any improvements thereon); and
(10) restrictions imposed by the notes or the indenture or by our other
indebtedness ranking senior or PARI PASSU with the notes; PROVIDED, that
such restrictions are no more restrictive taken as a whole than those
imposed by the indenture and the notes.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK.
(a) The Issuers shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, consummate any Asset Disposition unless:
(1) the Issuers or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value
(including the value of all non-cash consideration), as determined in
good faith by such Issuer's Board of Directors, of the shares and assets
subject to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Issuers or
such Restricted Subsidiary in connection with such Asset Disposition
consists of cash, Temporary Cash Investments or other cash equivalents;
and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Issuers (or such Restricted Subsidiary, as
the case may be):
(A) to either (x) prepay, repay, redeem or purchase (and permanently
reduce the commitments under) Senior Indebtedness or Indebtedness
(other than any Disqualified Stock) of a
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Restricted Subsidiary (in each case other than Indebtedness owed to
the Issuers or an Affiliate of the Issuers or Indebtedness, other
than Senior Indebtedness, of the Company) or (y) to the extent an
Issuer elects, to acquire Additional Assets, in each case within one
year from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; or
(B) to make an offer pursuant to paragraph (b) below to the holders to
purchase notes pursuant to and subject to the conditions contained in
the indenture and to repurchase or redeem our other Indebtedness
ranking on a parity with the notes and with similar provisions
requiring us to repurchase or redeem such Indebtedness with the
proceeds from such Asset Disposition, pro rata in proportion to the
respective principal amounts (or accreted values in the case of
Indebtedness issued with an original issue discount) of the notes and
such other Indebtedness then outstanding; and
(C) to the extent of the balance of such Net Available Cash after
application in accordance with clause (A) or (B), to any other
application or use not prohibited by the Indenture.
Notwithstanding the foregoing provisions of this paragraph, the Issuers and
the Restricted Subsidiaries shall not be required to apply any Net Available
Cash in accordance with this paragraph except to the extent that the aggregate
Net Available Cash from all Asset Dispositions which is not applied in
accordance with this paragraph exceeds $5 million (at which time, the entire
unutilized Net Available Cash, and not just the amount in excess of $5 million,
shall be applied pursuant to this paragraph).
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Issuers or any
Restricted Subsidiary and the release of the Issuers or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by the Issuers or any Restricted
Subsidiary from the transferee that are converted by the Issuers or such
Restricted Subsidiary into cash within 90 days of closing the transaction.
(b) In the event of an Asset Disposition that requires the purchase of the
notes pursuant to clause (a)(3)(B) above, the Issuers will be required to
purchase notes tendered pursuant to an offer by the Issuers for the notes at a
purchase price of 100% of their principal amount (without premium) plus accrued
but unpaid interest, if any, thereon in accordance with the procedures
(including prorating in the event of over subscription) set forth in the
indenture.
(c) The Issuers shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuers shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES.
(a) The Issuers shall not, and shall not permit any Restricted Subsidiary
to, enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with, or for
the benefit of, any Affiliate of the Issuers (an "Affiliate Transaction") unless
the terms thereof:
(1) are no less favorable to the Issuers or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in a
comparable transaction in arm's-length dealings with a Person who is not
such an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of
$2.5 million, have been approved by a majority of the members of the
Company's Board of Directors having no material personal financial stake
in such Affiliate Transaction; and
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(3) if such Affiliate Transaction involves an amount in excess of
$10 million, have been determined by a nationally recognized investment
banking firm or nationally recognized independent appraisal firm
qualified to perform such task, to be fair, from a financial standpoint,
to the Company or such Restricted Subsidiary, as the case may be.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any Permitted Investment or Restricted Payment permitted to be made
pursuant to the covenant described above under the heading "--Limitation
on Restricted Payments," or any payment or transaction specifically
excepted from the definition of Restricted Payment;
(2) transactions exclusively between or among an Issuer and one or more
Restricted Subsidiaries or exclusively between or among Restricted
Subsidiaries;
(3) customary directors' (or similar persons') fees, indemnification and
similar arrangements (and payments pursuant thereto), employee salaries,
bonuses or employment agreements, compensation or retirement or employee
benefit arrangements and incentive arrangements with any officer,
director (or similar person), employee or member of an Issuer or any
Restricted Subsidiary entered into in the ordinary course of business;
(4) agreements (and transactions pursuant to agreements), in effect on the
Issue Date, as such agreements are in effect on such date or as
thereafter amended in a manner not materially adverse to holders of the
notes in the good faith judgment of the Company's Board of Directors;
(5) issuances of Capital Stock (other then Disqualified Stock) of the
Company;
(6) loans and advances to officers, directors (and similar persons) and
employees of an Issuer or any Restricted Subsidiary for travel,
entertainment, moving and other relocation expenses, in each case made in
the ordinary course of business; or
(7) agreements (and transactions pursuant to agreements) making
manufacturing capacity of other Persons available to the Company or
making the Company's manufacturing capacity available to other Persons;
provided, the Company complies with the requirements of clauses
(a)(1) and (2) above in connection with any such agreement.
MERGER AND CONSOLIDATION.
Neither of the Issuers shall consolidate with or merge with or into, or
convey, transfer or lease, in one transaction or a series of transactions, all
or substantially all its assets to, any Person, unless:
(1) such Issuer shall be the surviving Person, or the resulting, surviving
or transferee Person (the "Successor Company") shall be a Person
organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company
(if not such Issuer) shall expressly assume, by an indenture supplemental
thereto, executed and delivered to the trustee, in form satisfactory to
the trustee, all the obligations of such Issuer under the notes, the
indenture and the registration rights agreement; PROVIDED that at any
time such Issuer or its successor is a limited partnership, there shall
be a co-issuer of the notes that is a corporation;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by
such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing; and
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described above under the
heading "--Limitation on Indebtedness."
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The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the indenture, and, except in the case of a lease, the Company
shall not be released from the obligations under the notes and the indenture.
Notwithstanding the foregoing, (1) any Restricted Subsidiary may consolidate
with, merge into or transfer all or part of its properties and assets to the
Company, (2) the Company may merge with or transfer all or substantially all of
its assets to an Affiliate incorporated (or, in the case of a limited liability
company, formed) for the purpose of reincorporating (or, in the case of a
limited liability company, reforming) the Company to realize tax or other
benefits and (3) the Company may merge into, or transfer its assets
substantially as an entity to, a newly formed corporation that prior to such
merger has no liabilities and conducts no business for the purpose of
reorganizing the Company as or into a corporation; PROVIDED, in each case, the
surviving entity will assume all the obligations of such Person under the notes
and the indenture.
The Issuers will not permit any Guarantor to consolidate with or merge with
or into, or convey, transfer, lease, in one transaction or a series of
transactions, all or substantially all of its assets to, any Person unless:
(1) the resulting, surviving or transferee Person shall be a Person
organized and existing under the laws of the jurisdiction under which the
Guarantor was organized or under the laws of the United States of
America, any State thereof or the District of Columbia, and such Person
(if not the Guarantor) shall expressly assume, by a Guaranty Agreement,
executed and delivered to the trustee, in a form satisfactory to the
trustee, all the obligations of the Guarantor, if any, under its
Guarantee; and
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been issued
by such Person at the time of such transaction), no Default shall have
occurred and be continuing.
The provision of clauses (1) and (2) shall not apply to any transactions
that constitute an Asset Disposition if the Issuers complied with the applicable
provisions of the covenant described above under the heading "--Limitation on
Sales of Assets and Subsidiary Stock." The foregoing shall not prohibit any
consolidation or merger of, or transfer of all or part of the property and
assets of, any Restricted Subsidiary with or to the Company.
LIMITATION ON BUSINESS ACTIVITIES
The Issuers will not, and will not permit any Restricted Subsidiary to,
engage in any business other than in businesses conducted by the Issuers and
their Restricted Subsidiaries on the Issue Date and businesses which, in the
good faith determination of the Company's Board of Directors, are reasonably
related, ancillary or complementary thereto.
FUTURE GUARANTORS
The Issuers will not permit any Restricted Subsidiary that is not a
Guarantor to Guarantee any other Indebtedness of the Company or any Guarantor
unless such Restricted Subsidiary simultaneously executes a supplemental
indenture to the indenture providing for the Guarantee of the payment of the
notes by such Restricted Subsidiary, which Guarantee of the payment of the notes
shall be subordinated to the Guarantee of such other Indebtedness to the same
extent as the notes or the Guarantees, as applicable, are subordinated to such
other Indebtedness. Such Restricted Subsidiary shall be deemed released from its
obligations under the Guarantee of the payment of the notes at any such time
that such Restricted Subsidiary is released from all of its obligations under
its Guarantee of such other Indebtedness.
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The obligations of the Issuers pursuant to the notes, including the
repurchase obligation resulting from a Change of Control, will be
unconditionally guaranteed, on a senior subordinated unsecured basis, by the
Guarantors. The Guarantors will agree to pay, in addition to the amount stated
above, any and all expenses (including reasonable counsel fees and expenses)
incurred by the trustee and the holders in enforcing any rights under the
Guarantees. The Guarantees will be limited in amount to an amount not to exceed
the maximum amount that can be guaranteed by the Guarantors, after giving effect
to all of its other contingent and fixed liabilities (including, without
limitation, any guarantees under the New Credit Agreement) without rendering the
Guarantees voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
If any Guarantee were to be rendered voidable, it could be subordinated by a
court to all other indebtedness (including guarantees and other contingent
liabilities) of the relevant Guarantor, and, depending on the amount of such
indebtedness, the Guarantor's liability on its Guarantee could be reduced to
zero.
Pursuant to the indenture, a Guarantor may consolidate with, merge with or
into, or transfer all or substantially all its assets to any other Person to the
extent described above under the heading "--Merger and Consolidation;" PROVIDED,
HOWEVER, that if such other Person is not an Issuer, the Guarantors' obligations
under its Guarantee must be expressly assumed by such other Person. However,
upon the sale or other disposition (including by way of consolidation or merger)
of all the Capital Stock, or the sale or disposition of all or substantially all
the assets, of a Guarantor (in each case other than to the Company or an
Affiliate of the Company) permitted by the indenture, such Guarantor will be
released and relieved from all its obligations under the indenture and its
Guarantee and such Guarantee shall terminate.
The obligations of the Guarantors under their Guarantees are senior
subordinated obligations. As such, the rights of holders of notes to receive
payment by the Guarantors pursuant to their Guarantees will be subordinated in
right of payment to the rights of holders of Guarantors' Senior Indebtedness.
The terms of the subordination provisions described above with respect to the
Company's obligations under the notes apply equally to the Guarantors and its
obligations under the Guarantees.
SEC REPORTS
Whether or not the Issuers are then subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the indenture requires the Issuers to
file with the SEC (unless the SEC will not accept the filing, in which case the
Issuers must provide to the trustee) and provide within 15 days to the trustee
and noteholders such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. limited liability company or corporation subject to such
Sections. The SEC has informed us that if the Issuers are not subject to the
reporting requirements, the Issuers will not be entitled to file reports with
the SEC. In any case, such information, documents and other reports will be
filed or provided, as the case may be, at the times specified for the filing of
such information, documents and reports under such Sections. In addition, for so
long as any notes remain outstanding, the Issuers shall furnish to the holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial owner of notes, if not obtainable from
the SEC, information of the type that would be filed with the SEC pursuant to
the foregoing provisions, upon the request of any such holder.
EVENTS OF DEFAULT
Each of the following is an Event of Default:
(1) a default in the payment of interest on the notes when due, continued
for 30 days,
(2) a default in the payment of principal of any note when due at its Stated
Maturity, upon optional redemption, upon required repurchase (except as
provided above under the heading "Change of Control"), upon acceleration
or otherwise,
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(3) the failure by either of the Issuers to comply with its obligations
described above under the heading "Certain Covenants--Merger and
Consolidation,"
(4) the failure by either of the Issuers to comply for 30 days after notice
with any of its obligations in the covenants described above under the
headings "Change of Control" (other than a failure to purchase notes),
"Certain Covenants--Limitation on Indebtedness," "Certain
Covenants--Limitation on Restricted Payments," "Certain
Covenants--Limitation on Restrictions on Distributions from Restricted
Subsidiaries," "Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock," or "Certain Covenants--Limitation on Transactions with
Affiliates,"
(5) the failure by either of the Issuers to comply for 60 days after notice
with its other agreements contained in the indenture,
(6) Indebtedness of either Issuer or any Significant Subsidiary is not paid
within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5 million (the "cross-
acceleration provision"),
(7) certain events of bankruptcy, insolvency or reorganization of either
Issuer or any Significant Subsidiary (the "bankruptcy provisions"),
(8) any judgment or decree for the payment of money (except to the extent
that a solvent insurance carrier has admitted in writing that such
judgment or decree is covered by its applicable policy) in excess of
$5 million is entered against either Issuer or any Significant
Subsidiary, remains outstanding for a period of 60 days following entry
of such judgment and is not discharged, bonded, waived or stayed within
30 days after notice (the "judgment default provision"), or
(9) a Guarantee ceases to be in full force and effect or is declared to be
null and void and unenforceable or the Guarantee is found to be invalid
or a Guarantor denies its liability under its Guarantee (other than by
reason of release of the Guarantor in accordance with the terms of the
indenture).
However, a default under clause (4), (5), (6) or (8) will not constitute an
Event of Default until the trustee or the holders of 25% in principal amount of
the notes (including any additional notes issued under the indenture) then
outstanding notify the Issuers of the default and the Issuers do not cure such
default within the time specified after receipt of such notice.
If an Event of Default (other than an Event of Default resulting from
certain events of bankruptcy, insolvency or reorganization) occurs and is
continuing, the trustee or the holders of at least 25% in principal amount of
the notes (including any additional notes issued under the indenture) then
outstanding may declare the principal of and accrued but unpaid interest on all
the notes to be due and payable. Upon such a declaration, such principal and
interest shall be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization occurs and is
continuing, the principal of and interest on all the notes will IPSO FACTO
become and be immediately due and payable without any declaration or other act
on the part of the trustee or any holders. Under certain circumstances, the
holders of a majority in principal amount of the notes (including any additional
notes issued under the indenture) then outstanding may rescind any such
acceleration with respect to the notes and their consequences.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an Event of Default occurs and is continuing, the trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders unless such holders
have offered to the trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder of a note may pursue
any remedy with respect to the indenture or the notes unless:
(1) such holder has previously given the trustee notice that an Event of
Default is continuing;
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(2) holders of at least 25% in principal amount of the notes (including any
additional notes issued under the indenture) then outstanding have
requested the trustee to pursue the remedy;
(3) such holders have offered the trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the notes (including
any additional notes issued under the indenture) then outstanding have
not given the trustee a direction inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the notes (including any additional notes issued under the indenture)
then outstanding are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or of
exercising any trust or power conferred on the trustee. The trustee, however,
may refuse to follow any direction that conflicts with law or the indenture or
that the trustee determines is unduly prejudicial to the rights of any other
holder or that would involve the trustee in personal liability.
The indenture provides that if a Default occurs and is continuing and is
known to the trustee, the trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of or interest on any note, the trustee may withhold notice if and
so long as a committee of its trust officers determines that withholding notice
is not opposed to the interest of the holders. In addition, the Issuers are
required to deliver to the trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Issuers also are required to deliver
to the trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Issuers are taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture may be amended with the consent
of the holders of a majority in principal amount of the notes (including any
additional notes issued under the indenture) then outstanding (including
consents obtained in connection with a tender offer or exchange for the notes)
and any past default or compliance with any provisions may also be waived with
the consent of the holders of a majority in principal amount of the notes
(including any additional notes issued under the indenture) then outstanding.
However, without the consent of each holder of a note affected thereby, no
amendment may, among other things,
(1) reduce the amount of notes whose holders must consent to an amendment or
waiver,
(2) reduce the rate of or extend the time for payment of interest on any
note,
(3) reduce the principal of or extend the Stated Maturity of any note,
(4) reduce the amount payable upon the redemption of any note or change the
time at which any note may be redeemed as described above under the
heading "Optional Redemption,"
(5) make any note payable in money other than that stated in the note,
(6) impair the right of any holder to receive payment of principal of and
interest on such holder's notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to
such holder's notes, or
(7) make any change to the subordination provisions of the indenture that
would adversely effect the holders in any material respect.
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Without the consent of any holder, the Issuers and the trustee may amend the
indenture to (1) cure any ambiguity, omission, defect or inconsistency,
(2) provide for the assumption by a successor Person of the obligations of the
Issuers and the Guarantors under the indenture in accordance with the covenant
described above under the heading "Certain Covenants--Merger and Consolidation,"
(3) provide for uncertificated notes in addition to or in place of certificated
notes (PROVIDED that the uncertificated notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated notes are described in Section 163(f)(2)(B) of the Code),
(4) add guarantees with respect to the notes, (5) secure the notes, (6) add to
the covenants of the Issuers for the benefit of the holders or surrender any
right or power conferred upon the Issuers, (7) make any change that does not
adversely affect the rights of any holder or (8) comply with any requirement of
the SEC in connection with the qualification of the indenture under the Trust
Indenture Act.
The consent of the holders is not necessary under the indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, the Issuers are
required to mail to holders a notice briefly describing such amendment. However,
the failure to give such notice to all holders, or any defect therein, will not
impair or affect the validity of the amendment.
TRANSFER
The notes will be issued in registered form and will be transferable only
upon the surrender of the notes being transferred for registration of transfer.
The Issuers may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Issuers at any time may terminate all their obligations under the notes
and the indenture ("legal defeasance"), and the Guarantors may terminate their
obligations under the Guarantees, except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes
and to maintain a registrar and paying agent in respect of the notes. In
addition, the Issuers at any time may elect to have their obligations released
with respect to certain covenants and Events of Default under the indenture,
except as described otherwise in the indenture ("covenant defeasance"), and
thereafter any omission to comply with such obligations shall not constitute an
Event of Default.
The Issuers may exercise their legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuers exercise their
legal defeasance option, payment of the notes may not be accelerated because of
an Event of Default with respect thereto. If the Issuers exercise their covenant
defeasance option, payment of the notes may not be accelerated because of an
Event of Default specified in clause (3), (4), (5), (6), (7) (with respect only
to Significant Subsidiaries), (8) or (9) as set forth above under the heading
"Events of Default."
In order to exercise either defeasance option, the Issuers must irrevocably
deposit in trust (the "defeasance trust") with the trustee money or U.S.
Government Obligations, or a combination thereof, for the payment of principal
of, premium, if any, and interest on the notes to redemption or maturity, as the
case may be, and must comply with certain other conditions, including delivery
to the trustee of an opinion of counsel to the effect that holders will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit and defeasance and will be subject to Federal income tax on the
same amounts and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such opinion of counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law).
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SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the notes, as expressly
provided for in the indenture) as to all outstanding notes when:
(1) either (a) all the notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid) have
been delivered to the trustee for cancellation or (b) all notes not
theretofore delivered to the trustee for cancellation have become due and
payable or shall become due and payable within one year and the Issuers
have irrevocably deposited or caused to be deposited with the trustee an
amount in U.S. dollars sufficient to pay and discharge the entire
indebtedness on the notes not theretofore delivered to the trustee for
cancellation, for the principal of, premium, if any, and interest to the
date of deposit;
(2) the Issuers have paid or caused to be paid all other sums payable under
the indenture by the Issuers; and
(3) the Issuers have delivered to the trustee an officers' certificate and
an opinion of counsel each stating that all conditions precedent under
the indenture relating to the satisfaction and discharge of the indenture
have been complied with.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND EQUITYHOLDERS
No recourse for the payment of the principal of, premium, if any, or
interest on any of the notes or for any claim based thereon or otherwise in
respect thereof, and no recourse under or upon any obligation, covenant or
agreement of the Issuers in the indenture, or in any of the notes or because of
the creation of any Indebtedness represented thereby, shall be had against any
incorporator, equityholder, officer, director (or similar person), employee or
controlling person of the Issuers or any successor Person thereof. Each holder,
by accepting the notes, waives and releases all such liability. Such waiver may
not be effective to waive liabilities under the federal securities laws and it
is the view of the SEC that such waiver is against public policy.
CONCERNING THE TRUSTEE
Firstar Bank of Minnesota, N.A., is to be the trustee under the indenture
and has been appointed by the Issuers as Registrar and Paying Agent with regard
to the notes.
The indenture contains certain limitations on the rights of the trustee,
should it become a creditor of the Issuers, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the SEC for permission to
continue or resign.
The holders of a majority in principal amount of notes (including any
additional notes issued under the indenture) then outstanding will have the
right to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the trustee, subject to certain exceptions.
The indenture provides that if an Event of Default occurs (and is not cured),
the trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of notes,
unless such holder shall have offered to the trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the indenture.
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GOVERNING LAW
The indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"ADDITIONAL ASSETS" means:
(1) any property or assets (other than Indebtedness and Capital Stock) in a
Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or a
Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary; PROVIDED, HOWEVER, that any such
Restricted Subsidiary described in clause (2) above or this clause
(3) is primarily engaged in a Related Business.
"AFFILIATE" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"ASSET DISPOSITION" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Issuers or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary),
(2) all or substantially all the assets of any division or line of business
of the Issuers or any Restricted Subsidiary, or
(3) any other assets of the Issuers or any Restricted Subsidiary outside of
the ordinary course of business of the Issuers or such Restricted
Subsidiary
(other than, in the case of (1), (2) and (3) above, (u) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Restricted Subsidiary, (v) for purposes of the covenant
described above under the heading "Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock" only, a disposition that constitutes a Restricted
Payment permitted by the covenant described above under the heading "Certain
Covenants--Limitation on Restricted Payments" or a disposition specifically
excepted from the definition of Restricted Payment), (w) a transaction or series
of related transactions for which the Issuers or its Restricted Subsidiaries
receive aggregate consideration less than or equal to $1 million, (x) the sale,
lease, conveyance, disposition or other transfer of all or substantially all of
the assets of the Issuers as permitted by the covenant described above under the
heading "Certain Covenants--Merger and Consolidation", (y) the disposition of
Temporary Cash Investments or (z) an exchange of assets by the Issuers or any
Restricted Subsidiary for like or similar assets held by any Person; PROVIDED
that (I) the assets received by the Issuers or such Restricted Subsidiary in any
such exchange in the good faith reasonable judgment of the Board of Directors of
the Company will immediately constitute, be a part of, or be used in, a Related
Business of the Issuers or such Restricted Subsidiary, (II) the Board of
Directors of the Company has determined that the terms of any exchange are fair
and
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reasonable, and (III) any such exchange shall be deemed to be an Asset
Disposition to the extent of any cash or cash equivalents received by the
Issuers or any Restricted Subsidiary that exceed $1 million.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (x) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (y) the sum of all such payments.
"BOARD OF DIRECTORS" means:
(a) in the case of a Person that is a limited partnership, the board of
directors of its corporate general partner or any committee authorized to
act therefor (or, if the general partner is itself a limited partnership,
the board of directors of such general partner's corporate general
partner or any committee authorized to act therefor);
(b) in the case of a Person that is a corporation, the board of directors of
such Person or any committee authorized to act therefor; and
(c) in the case of any other Person, the board of directors, management
committee or similar governing body or any authorized committee thereof
responsible for the management of the business and affairs of such
Person.
"BUSINESS DAY" means each day which is not a Legal Holiday.
"CAPITAL LEASE OBLIGATIONS" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (x) the aggregate amount of Consolidated EBITDA for the period of the
most recent four consecutive fiscal quarters for which financial information is
available ending prior to the date of such determination to (y) the aggregate
amount of Consolidated Interest Expense for such four fiscal quarters; PROVIDED,
HOWEVER, that
(1) if either Issuer or any Restricted Subsidiary (x) has Incurred any
Indebtedness since the beginning of such period that remains outstanding
or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
Consolidated EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day
of such period (and, if such Indebtedness is revolving Indebtedness, the
amount of Indebtedness deemed to be outstanding for such period shall be
the average outstanding amount of such Indebtedness during such period)
and the discharge of any other Indebtedness repaid, repurchased, defeased
or otherwise discharged with the proceeds of such new Indebtedness as if
such discharge had occurred on the first day of such period or (y) has
repaid, repurchased, defeased or otherwise discharged any Indebtedness
since the beginning of the period (including, without limitation,
Indebtedness that has been repaid, repurchased, defeased or otherwise
discharged in connection with an Asset Disposition) that is no longer
outstanding on
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such date of determination, or if the transaction giving rise to the need
to calculate the Consolidated Coverage Ratio involves a discharge of
Indebtedness (other than Indebtedness Incurred for working capital
purposes unless such Indebtedness has been permanently repaid and has not
been replaced), Consolidated EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving effect to such discharge of
such Indebtedness, including with the proceeds of such new Indebtedness,
as if such discharge had occurred on the first day of such period,
(2) if since the beginning of such period the Issuers or any Restricted
Subsidiary shall have made any Asset Disposition, the Consolidated EBITDA
for such period shall be reduced by an amount equal to the Consolidated
EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an
amount equal to the Consolidated EBITDA (if negative) directly
attributable thereto for such period,
(3) if since the beginning of such period the Issuers or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction requiring a calculation
to be made hereunder, which constitutes all or substantially all of an
operating unit of a business, Consolidated EBITDA for such period shall
be calculated after giving pro forma effect thereto as if such Investment
or acquisition occurred on the first day of such period,
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Issuers or
any Restricted Subsidiary since the beginning of such period) shall have
made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (2) or (3) above if
made by the Issuers or a Restricted Subsidiary during such period,
Consolidated EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such
Asset Disposition, Investment or acquisition occurred on the first day of
such period.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be made in
accordance with Article 11 of Regulation S-X promulgated under the Securities
Act. If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest on such Indebtedness shall be calculated as if
the average rate in effect during the period had been the applicable rate for
the entire period (taking into account any fixed rate established by an Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months, in which case such fixed rate shall
be used).
"CONSOLIDATED EBITDA" for any period means the sum of Consolidated Net
Income plus the following to the extent deducted in calculating such
Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) all income tax expense of the Company and its Restricted Subsidiaries;
(3) depreciation expense of the Company and its Restricted Subsidiaries;
(4) amortization expense of the Company and its Restricted Subsidiaries; and
(5) all other non-cash items reducing such Consolidated Net Income
(excluding any non-cash item to the extent it represents an accrual of,
or reserve for, cash disbursement for any subsequent period) less all
non-cash items increasing such Consolidated Net Income (such amount
calculated pursuant to this clause (5) not to be less than zero), in each
case for such period.
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Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization of, a Subsidiary of the
Company shall be added to Consolidated Net Income to compute Consolidated EBITDA
only to the extent (and in the same proportion) that the net income of such
Subsidiary was included in calculating Consolidated Net Income. For purposes of
this definition, Cherokee International Finance, Inc. shall be deemed to be a
Restricted Subsidiary of the Company.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense of the Issuers and their consolidated Restricted Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP, plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Issuers or their Restricted Subsidiaries and attributable to such period,
without duplication:
(1) interest expense attributable to Capital Lease Obligations (which shall
be deemed to accrue at an interest rate reasonably determined in good
faith by us to be the rate of interest implicit in such Capital Lease
Obligation in accordance with GAAP);
(2) amortization of debt discount and debt issuance costs;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(6) net costs associated with Hedging Obligations (including amortization of
fees);
(7) dividends paid or payable in respect of any Disqualified Stock of the
Company;
(8) cash dividends paid or payable by the Issuers and all dividends paid or
payable by Restricted Subsidiaries, in each case in respect of all
Preferred Stock of a Restricted Subsidiary held by Persons other than the
Company or a Wholly Owned Subsidiary; and
(9) interest accruing on any Indebtedness of any other Person to the extent
such Indebtedness is guaranteed by the Issuers or any Restricted
Subsidiary.
"CONSOLIDATED NET INCOME" means, for any period, the net income of the
Company and its consolidated Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income to the extent included in
computing such net income (without duplication):
(1) any net income, if positive, of any Person if such Person is not a
Restricted Subsidiary, except that subject to the exclusion contained in
clause (4) below, the Company's equity in the net income of any such
Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or
other distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (3) below); PROVIDED that for purposes of this clause
(1), Cherokee International Finance, Inc. will be deemed to be a
Restricted Subsidiary of the Company;
(2) any net income (or loss) of any Person acquired by the Company or a
Subsidiary of the Company in a pooling of interests transaction for any
period prior to the date of such acquisition;
(3) any net income, if positive, of any Restricted Subsidiary to the extent
that such Restricted Subsidiary is subject to restrictions, directly or
indirectly, prohibiting the payment of dividends, the repayment of
intercompany debt and the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that subject
to the exclusion contained in clause (4) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of
cash
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actually distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to another Restricted Subsidiary, to the limitation contained in
this clause); PROVIDED THAT for purposes of this clause (3), Cherokee
International Finance, Inc. will be deemed to be a Restricted Subsidiary
of the Company;
(4) any gain or loss realized upon the sale or other disposition of any
assets of the Company or its consolidated Subsidiaries (including
pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Capital Stock of
any Person;
(5) extraordinary gains or losses;
(6) the amount of any Permitted Tax Distributions (to the extent such
Permitted Tax Distributions are made); and
(7) the cumulative effect of a change in accounting principles.
"CURRENCY AGREEMENT" means in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DEPOSITORY" means The Depository Trust Company, its nominees and their
respective successors.
"DESIGNATED SENIOR INDEBTEDNESS" means
(1) Indebtedness under or in respect of the New Credit Agreement and
(2) any other Senior Indebtedness of either Issuer which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25 million and is specifically designated by the
Board of Directors of the applicable Issuer or in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the indenture.
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock,
or
(3) is redeemable or must be repurchased, in either case, at the option of
the holder thereof, in whole or in part,
in each case on or prior to the Stated Maturity of the Notes; PROVIDED, HOWEVER,
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or
"change of control" occurring prior to the Stated Maturity of the Notes shall
not constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions described above under the
headings "Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock"
and "Change of Control."
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants,
(2) statements and pronouncements of the Financial Accounting Standards
Board,
(3) such other statements by such other entity as approved by a significant
segment of the accounting profession, and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in
periodic reports required to be filed pursuant to Section 13 of the
Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
SEC.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue
of agreements to keep-well, to purchase assets, goods, securities or
services, to take-or-pay or to maintain financial statement conditions or
otherwise); or
(2) entered into for the purpose of assuring in any other manner the obligee
of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"GUARANTOR SENIOR INDEBTEDNESS," with respect to any Guarantor, means the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of such Guarantor,
whether outstanding on the Issue Date or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the notes.
Without limiting the generality of the foregoing, "Guarantor Senior Debt"
shall include the principal of, premium, if any, interest (including any
interest accruing subsequent to the filing of a petition of bankruptcy at the
rate provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing by the Guarantors in respect of, (x) all monetary obligations of every
nature of the Guarantors under the New Credit Agreement, including, without
limitation, obligations to pay principal and interest, reimbursement obligations
under letters of credit, fees, expenses and indemnities, (y) all Interest Rate
Agreements (including guarantees thereof) and (z) all obligations under Currency
Agreements (including guarantees thereof), in each case whether outstanding on
the Issue Date or thereafter incurred, except, in the case of clauses (y) and
(z), for obligations or agreements that provide otherwise.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include:
(1) any Indebtedness of a Guarantor to a Subsidiary of a Guarantor;
(2) Indebtedness to, or guaranteed on behalf of, any director, officer or
employee of a Guarantor or any Subsidiary of the Guarantor (including,
without limitation, amounts owed for compensation);
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(3) Indebtedness to trade creditors and other amounts incurred in connection
with obtaining goods, materials or services;
(4) Indebtedness represented by Disqualified Stock;
(5) any liability for Federal, state, local or other taxes owed or owing by
the Guarantors;
(6) that portion of any Indebtedness incurred in violation of the covenant
described above under the heading "Certain Covenants--Limitation on
Indebtedness" (but, as to any such obligation, no such violation shall be
deemed to exist for purposes of this clause (6) if the holder(s) of such
obligation or their representative and the trustee shall have received an
officers' certificate of the Company to the effect that the incurrence of
such Indebtedness does not (or, in the case of revolving credit
Indebtedness, that the incurrence of the entire committed amount thereof
at the date on which the initial borrowing thereunder is made would not)
violate such covenant);
(7) Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without
recourse to the Guarantors; and
(8) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of the Guarantors.
"GUARANTORS" means each of the Issuers' Restricted Subsidiaries that in the
future executes a Guarantee pursuant to and in accordance with the requirements
of the indenture in which such Restricted Subsidiary unconditionally guarantees
on a senior subordinated basis the Issuers' obligations under the notes and the
indenture; PROVIDED that any Person constituting a Guarantor as described above
shall cease to constitute a Guarantor when its respective Guarantee is released
in accordance with the terms of the indenture.
"HEDGING OBLIGATIONS" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"HOLDER" OR "NOTEHOLDER" means the Person in whose name a note is registered
on the Registrar's books.
"INCUR" means issue, assume, guarantee, incur or otherwise become liable;
PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall not be deemed the Incurrence of
Indebtedness.
"INDEBTEDNESS" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of
(A) indebtedness of such Person for money borrowed, and
(B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or
liable;
(2) all Capital Lease Obligations of such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property (which purchase price is due more than one
year after taking title of such property), all conditional sale
obligations of such Person and all obligations of such Person under any
title retention agreement;
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of
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credit securing obligations (other than obligations described in clauses
(1) through (3) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon, or,
if and to the extent drawn upon, such drawing is reimbursed no later than
the tenth Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, any Preferred Stock (but
excluding, in each case, any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5) of
other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
guarantee (but only to the extent of the amount actually guaranteed);
(7) all obligations of the type referred to in clauses (1) through (6) of
other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
For purposes of the preceding sentence, the maximum fixed repurchase price
of any Disqualified Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were repurchased on any date on which Indebtedness shall be
required to be determined pursuant to the indenture; PROVIDED, HOWEVER, that if
such Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. Indebtedness shall not
include (1) undrawn commitments under the New Credit Agreement or other
revolving credit facilities and (2) trade accounts payable arising in the
ordinary course of business.
"INTEREST RATE AGREEMENT" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"INVESTMENT" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the Person making the advance or
loan) or other extensions of credit (including by way of guarantee or similar
arrangement) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, Indebtedness
or other similar instruments issued by such Person. For purposes of the
definition of "Unrestricted Subsidiary," the definition of "Restricted Payment"
and the covenant described above under the heading "Certain
Covenants--Limitation on Restricted Payments,"
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value as
determined in good faith by the Board of Directors of the Company of the
net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER,
that if such designation is made in connection with the acquisition of
such Subsidiary or the assets owned by such Subsidiary, the "Investment"
in such Subsidiary shall be deemed to be the consideration paid in
connection with such acquisition, and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value as determined in good faith by the Board
of Directors of the Company at the time of such transfer.
"ISSUE DATE" means April 30, 1999.
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"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or required by law to
close. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record
shall not be affected.
"LIEN" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"MOODY'S" means Moody's Investors Service, Inc.
"NET AVAILABLE CASH" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of
(1) all legal, title and recording tax expenses, brokerage commissions,
underwriting discounts or commissions or sales commissions and other
reasonable fees and expenses (including, without limitation, fees and
expenses of counsel, accountants and investment bankers) related to such
Asset Disposition or converting to cash any other proceeds received, and
any relocation and severance expenses as a result thereof, and all
Federal, state, provincial, foreign and local taxes required to be
accrued or paid as a liability under GAAP, as a consequence of such Asset
Disposition,
(2) all payments made on any Indebtedness or other obligations which is
secured by any assets subject to such Asset Disposition or made in order
to obtain a necessary consent to such Asset Disposition or to comply with
applicable law,
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition, and
(4) appropriate amounts provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the property or other
assets disposed of in such Asset Disposition and retained by the Company
or any Restricted Subsidiary after such Asset Disposition, including,
without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset
Disposition. Further, with respect to an Asset Disposition by a
Subsidiary which is not a Wholly Owned Subsidiary, Net Available Cash
shall be reduced pro rata for the portion of the equity of such
Subsidiary which is not owned by the Company.
The amounts in clauses (1) through (4) above, to the extent estimates are
necessary, shall be estimated reasonably and in good faith by us.
"NET CASH PROCEEDS," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"NEW CREDIT AGREEMENT" means, collectively, the Term Loan Facility and the
Revolving Credit Facility and any other bank credit agreement or similar
facility entered into in the future by either Issuer or any Restricted
Subsidiary and all documents, instruments and agreements ancillary thereto,
including security agreements and financing statements, as any of the same, in
whole or in part, may be amended, renewed, extended, increased (but only so long
as such increase is permitted under the terms of the indenture), substituted,
refinanced, restructured or replaced (including, without limitation, any
successive renewals,
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extensions, increases, substitutions, refinancings, restructurings,
replacements, supplements or other modifications of the foregoing).
"PERMITTED DISTRIBUTIONS FOR PRE-CLOSING TAX LIABILITIES" means
distributions in accordance with the Cherokee Unit Purchase Agreement made by
the Company to certain of its members to cover such member's income tax
liability attributable to income of the Company for the period from January 1,
1999 through the Issue Date.
"PERMITTED HOLDERS" means Cherokee Investors, GFI, OCM Principal
Opportunities Fund, L.P., Rothschild and their respective Affiliates.
"PERMITTED INVESTMENT" means an Investment by the Company or any Restricted
Subsidiary in:
(1) a Restricted Subsidiary or a Person that will, upon the making of such
Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER, that the
primary business of such Restricted Subsidiary is a Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such Person's primary business is a Related
Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if created
or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms
as the Company or any such Restricted Subsidiary deems reasonable under
the circumstances;
(5) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business;
(6) loans or advances to (x) employees made in the ordinary course of
business of the Company or such Restricted Subsidiary or (y) to executive
officers of the Company to purchase Capital Stock of the Company not to
exceed in the aggregate $3 million at any time outstanding;
(7) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments or pursuant to a
plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of trade debtors or customers of the Company or any Restricted
Subsidiary or upon the foreclosure, perfection or enforcement of a Lien
in favor of the Company or any Restricted Subsidiary that arose in the
ordinary course of business of the Company or such Restricted Subsidiary;
and
(8) any Person to the extent such Investment represents the non-cash portion
of the consideration received for a disposition of Assets as permitted
pursuant to the covenant described above under the heading "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock."
"PERMITTED TAX DISTRIBUTIONS" means, for any calendar year (or portion
thereof), a pro rata cash distribution by the Company to the members (the
"Members") equal to (i) the amount of taxable income allocated to the Member of
the Company (the "Reference Member") with the greatest share of the Company's
taxable income (taking into consideration any prior losses of the Company
allocated to such Member to the extent such losses have not been previously used
to reduce such Member's allocable share of taxable income of the Company for
purposes of determining a Permitted Tax Distribution) for such period multiplied
by (ii) the applicable income tax rate (as defined below) and, thereafter,
(iii) divided by the Reference Member's Percentage Interest (the "Tax Amount"),
minus any aggregate amounts previously distributed to the Members under this
definition for such period. Permitted Tax Distributions for
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estimated taxes of the Members may be made on or about the last day of March,
May, August, and December of each year in an amount not to exceed twenty-five
percent (25%) of the Tax Amount for the calendar year as estimated, from time to
time, in writing by the Chief Financial Officer of the Company or other person
serving in a similar capacity. Notwithstanding the foregoing, to the extent
Permitted Tax Distributions for estimated taxes for any calendar year (or
portion thereof) exceed the Tax Amount for such period (an "Excess Tax
Distribution"), Permitted Tax Distributions (including Permitted Tax
Distributions for estimated taxes) shall be reduced until the Excess Tax
Distribution is recovered. For purposes of this definition, "applicable income
tax rate" shall mean the highest marginal individual Federal income tax rate
imposed on ordinary income plus the highest marginal individual California
income tax rate; PROVIDED, HOWEVER, that the highest marginal individual
California income tax rate shall be appropriately reduced to reflect the
deductibility of such taxes from Federal taxable income.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"PREFERRED STOCK," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"PRINCIPAL" of a note means the principal of the note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"PUBLIC EQUITY OFFERING" means an underwritten primary public offering of
common stock of the Company (or a corporate successor thereof created in
accordance with the covenant described above under the heading "Certain
Covenants--Merger and Consolidation") pursuant to an effective registration
statement under the Securities Act that results in gross proceeds of at least
$25 million to the Company.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of assets (including in the case of a Capital Lease
Obligation, the lease) which is incurred concurrently with (or within 270 days
following) such acquisition and is secured only by the assets so financed.
"REFINANCE" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means Indebtedness that Refinances any
Indebtedness of the Issuers or any Restricted Subsidiary, including Indebtedness
that Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that
(1) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced,
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced, and
(3) such Refinancing Indebtedness has an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding
or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced;
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PROVIDED, FURTHER, HOWEVER, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the
Issuers or (y) Indebtedness of the Issuers or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"RELATED BUSINESS" means any business, in the good faith judgment of the
Board of Directors of the Company, reasonably related, ancillary or
complementary to the businesses of the Company on the Issue Date.
"REPRESENTATIVE" means any trustee, agent or representative (if any) for an
issue of Designated Senior Indebtedness.
"RESTRICTED PAYMENT" with respect to any Person means:
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person), other
than (w) dividends or distributions payable solely in its Capital Stock
(other than Disqualified Stock), (x) Permitted Tax Distributions, (y)
dividends or distributions payable to the Company or a Restricted
Subsidiary, and (z) pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders
(or owners of an equivalent interest in the case of a Subsidiary that is
an entity other than a corporation);
(2) the purchase, redemption or other acquisition or retirement for value of
any Capital Stock of an Issuer held by any Person or of any Capital Stock
of a Restricted Subsidiary held by any Affiliate of the Issuers (other
than a Restricted Subsidiary), including the exercise of any option to
exchange any Capital Stock (other than into Capital Stock of the Company
that is not Disqualified Stock);
(3) other than with the proceeds from the substantially concurrent sale of,
or in exchange for, Refinancing Indebtedness, the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any Subordinated Obligations (other than the purchase,
repurchase or other acquisition or Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the
date of acquisition); or
(4) the making of any Investment in any Person (other than a Permitted
Investment), including by designating any Subsidiary as an Unrestricted
Subsidiary.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Issuers that is not an
Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITY" means the revolving credit portion of the New
Credit Agreement with initial aggregate commitments of $25 million.
"SEC" means the Securities and Exchange Commission.
"SECURED INDEBTEDNESS" means any Indebtedness of the Company or a Guarantors
secured by a Lien.
"SENIOR INDEBTEDNESS" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of either Issuer, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the notes. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall include the principal of, premium,
if any, interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing by
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the Issuers in respect of, (x) all monetary obligations of every nature of
either Issuer under the New Credit Agreement, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities, (y) all Interest Rate
Agreements (including guarantees thereof) and (z) all obligations under Currency
Agreements (including guarantees thereof), in each case whether outstanding on
the Issue Date or thereafter incurred except, in the case of clauses (y) and
(z), for obligations or agreements that provide otherwise. Notwithstanding the
foregoing, "Senior Indebtedness" shall not include
(1) any Indebtedness of the Company to a Subsidiary of the Company,
(2) Indebtedness to, or guaranteed on behalf of, any director, officer or
employee of the Company or any Subsidiary of the Company (including,
without limitation, amounts owed for compensation),
(3) Indebtedness to trade creditors and other amounts incurred in connection
with obtaining goods, materials or services,
(4) Indebtedness represented by Disqualified Stock,
(5) any liability for federal, state, local or other taxes owed or owing by
the Company,
(6) that portion of any Indebtedness incurred in violation of the covenant
described above under the heading "Certain Covenants--Limitation on
Indebtedness" (but, as to any such obligation, no such violation shall be
deemed to exist for purposes of this clause (6) if the holder(s) of such
obligation or their representative and the trustee shall have received an
officers' certificate of the Company to the effect that the incurrence of
such Indebtedness does not (or, in the case of revolving credit
Indebtedness, that the incurrence of the entire committed amount thereof
at the date on which the initial borrowing thereunder is made would not)
violate such provisions of the indenture),
(7) Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company, and
(8) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of the Issuers.
"SENIOR SUBORDINATED INDEBTEDNESS" means the notes and any other
Indebtedness of an Issuer or any Guarantor that specifically provides that such
Indebtedness is to rank pari passu with the notes or the Guarantees, as the case
may be, in right of payment and is not subordinated by its terms in right of
payment to any Indebtedness or other obligation of either Issuer or the
Guarantor, as the case may be, which is not Senior Indebtedness or Guarantor
Senior Indebtedness.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"STATED MATURITY" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"SUBORDINATED OBLIGATION" means any Indebtedness of the Issuers or a
Guarantor (whether outstanding on the Issue Date or thereafter Incurred) which
is subordinate or junior in right of payment to the notes or the Guarantees,
respectively, pursuant to a written agreement to that effect.
"SUBSIDIARY" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
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vote in the election of directors (or similar persons), managers, general
partners or trustees thereof is at the time owned or controlled, directly or
indirectly, by
(1) such Person,
(2) such Person and one or more Subsidiaries of such Person or
(3) one or more Subsidiaries of such Person.
"S&P" means Standard & Poor's Ratings Service.
"TEMPORARY CASH INVESTMENTS" means any of the following:
(1) any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed by the United States of
America or any agency thereof,
(2) investments in time deposit accounts, certificates of deposit, and money
market deposits maturing within one year of the date of acquisition
thereof, issued by a bank or trust company which is organized under the
laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of
$50,000,000 (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating)
or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor,
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause
(2) above,
(4) investments in commercial paper, maturing not more than one year after
the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein
is made of "P-2" (or higher) according to Moody's or "A-2" (or higher)
according to S&P,
(5) investments in securities with maturities of one year or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and having one of the three
highest ratings obtainable by either S&P or Moody's, and
(6) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (1) through
(5) above.
"TERM LOAN FACILITY" means the term loan portion of the New Credit Agreement
equal to $50 million.
"UNRESTRICTED SUBSIDIARY" means:
(1) any Subsidiary of the Company that at the time of determination shall be
designated an Unrestricted Subsidiary by the Company's Board of Directors
in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless at the time of designation such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Restricted Subsidiary of the Company; PROVIDED,
HOWEVER, that either (A) the Subsidiary to be so designated has total assets of
$1,000 or less or (B) if such Subsidiary has
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assets greater than $1,000, such designation would be permitted under the
covenant described above under the heading "Certain Covenants--Limitation on
Restricted Payments."
The Company's Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving
effect to such designation (x) if such Unrestricted Subsidiary at such time has
Indebtedness, the Issuers could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described above under the heading "Certain
Covenants--Limitation on Indebtedness" and (y) no Default shall have occurred
and be continuing. Any such designation by the Company's Board of Directors
shall be evidenced by the Company to the trustee by promptly filing with the
trustee a copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing provisions.
"U.S. GOVERNMENT OBLIGATIONS" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt; PROVIDED that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"VOTING STOCK" of a Person means all classes of Capital Stock or other
interests (including limited liability company or partnership interests) of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors (or similar persons),
managers or trustees thereof and, in the case of the Company, includes Class A
Units.
"WHOLLY OWNED SUBSIDIARY" means (1) Cherokee International Finance, Inc. and
(2) each Restricted Subsidiary, in each case all the Capital Stock of which
(other than directors' qualifying shares and shares held by other Persons to the
extent such shares are required by applicable law to be held by a Person other
than the Company or a Restricted Subsidiary) is owned by the Company or one or
more Wholly Owned Subsidiaries.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease our facility located at 2841 Dow Avenue in Tustin, California from
Patel/King Investment, or PKI. The Principals of PKI are Pat Patel and Ken King,
our Chairman and CEO and our Executive Vice President, respectively. Pursuant to
the lease, we paid PKI $740,851 in 1996, $783,740 in 1997, $862,280 in 1998 and
$448,310 for the first six months of 1999.
We have signed a new lease with PKI that will run from May 1, 1999 through
April 30, 2009, with an extension for an additional 60 months at our option.
Pursuant to the new lease, we will pay rent of approximately $79,840 per month
to PKI, subject to certain periodic adjustments.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the United States federal income tax
consequences of the exchange of outstanding notes for the exchange notes and the
ownership and disposition of the exchange notes which are anticipated to be
material to holders who acquired the outstanding notes at the initial offering
from the initial purchaser of the outstanding notes for the original offering
price and who acquire exchange notes in the exchange offer. This discussion is
based upon current United States federal income tax law which is subject to
change, possibly with retroactive effect. This discussion assumes that holders
hold the notes as capital assets, which generally means property held for
investment. This discussion does not address all aspects of United States
federal income taxation that may be relevant to holders in light of their
particular circumstances, or to holders subject to special treatment under
United States federal income tax law, including, without limitation, financial
institutions, insurance companies, tax-exempt entities, dealers in securities,
persons who hold outstanding notes or exchange notes as part of a straddle,
hedge, short sale, or conversion transaction or persons whose functional
currency is not the United States dollar. This discussion also does not address
the United States federal income tax consequences to Non-U.S. Holders (as
defined below) whose ownership of the notes is effectively connected with the
conduct of a United States trade or business. In addition, this discussion does
not address any aspect of state, local or foreign taxation.
EACH HOLDER IS URGED TO CONSULT ITS TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES OF THE EXCHANGE, ACQUISITION, OWNERSHIP, SALE OR OTHER DISPOSITION
OF NOTES INCLUDING THE UNITED STATES FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES.
THE EXCHANGE OFFER
The exchange of outstanding notes for exchange notes will not be treated as
a taxable "exchange" for United States federal income tax purposes. Rather, the
exchange notes will be treated as a continuation of the outstanding notes. As a
result, there will be no United States federal income tax consequences to
holders exchanging their outstanding notes for exchange notes, and an exchanging
holder of outstanding notes will have the same adjusted tax basis and holding
period in the exchange notes as such holder had in the outstanding notes
surrendered in the exchange.
TAX TREATMENT OF THE EXCHANGE NOTES TO NON-U.S. HOLDERS
For purposes of this discussion, a "NON-U.S. HOLDER" means a holder of an
exchange note who is a person other than:
- an individual citizen or resident of the United States;
- a corporation, partnership or other entity created or organized under the
laws of the United States or any political subdivision thereof;
- an estate the income of which is includible in gross income for United
States federal income tax purposes regardless of its source; and
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- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust.
GENERAL
Under current United States federal income tax law and subject to the
discussion of backup withholding below:
(1) payments of principal and interest on the exchange notes to a Non-U.S.
Holder will not be subject to United States federal income or withholding
tax, provided that in the case of interest:
<TABLE>
<C> <S> <C>
A. - the Non-U.S. Holder does not actually or constructively own 10 percent or more
of our capital or profits interests within the meaning of Section 871(h)(3) of
the Internal Revenue Code;
- the Non-U.S. Holder is not a controlled foreign corporation that is related to
us through stock ownership;
- the Non-U.S. Holder is not a bank described in Section 881(c)(3)(A) of the
Internal Revenue Code; and
- either:
</TABLE>
(a) the Non-U.S. Holder certifies to us or our agent on IRS Form W-8
or IRS Form W-8BEN, or a suitable substitute form, that it is not
a "United States person," as defined in the Internal Revenue Code
and provides its name and address, an "OWNER'S STATEMENT;" or
(b) a securities clearing organization, bank or other financial
institution that holds the exchange notes on behalf of the
Non-U.S. Holder certifies to us or our agent that an owner's
statement has been received from the Non-U.S. Holder and
furnishes us or our agent with a copy thereof; or
<TABLE>
<C> <S> <C>
B. - the Non-U.S. Holder is entitled to the benefits of an income tax treaty under
which interest on the exchange notes is exempt from United States federal
withholding tax and the Non- U.S. Holder provides a properly executed IRS Form
1001 or IRS Form W-8BEN claiming the exemption; and
</TABLE>
(2) a Non-U.S. Holder will not be subject to United States federal income
tax on gain realized on the sale, exchange or other disposition of an
exchange note unless the Non-U.S. Holder is an individual who is present
in the United States for a period or periods aggregating 183 or more days
in the taxable year of disposition and specified other conditions are
met.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding generally will not apply to payments made to a Non-U.S.
Holder that certifies its foreign status by providing us or our agent with a
properly completed IRS Form W-8 or IRS Form W-8BEN or that otherwise establishes
an exemption from backup withholding. Payments by a United States office of a
broker of the proceeds from a disposition of the exchange notes by a Non-U.S.
Holder generally will be subject to backup withholding at a rate of 31% unless
the non-U.S. Holder certifies its foreign status by providing us or our agent
with a properly completed IRS Form W-8 or IRS Form W-8BEN or otherwise
establishing an exemption.
Any amount withheld from a payment to a holder under the backup withholding
rules may be credited against such holder's United States federal income tax
liability, or if withholding results in an overpayment
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of taxes, a refund may be claimed, provided that the required information is
furnished to the IRS. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO ITS
QUALIFICATION FOR EXEMPTION FROM BACKUP WITHHOLDING AND THE PROCEDURE FOR
OBTAINING SUCH AN EXEMPTION.
The United States Treasury Department issued final Treasury regulations
governing information reporting and the certification procedures regarding
withholding and backup withholding on certain amounts paid to non-U.S. Holders
after December 31, 2000. These Treasury regulations generally would not alter
the treatment of non-U.S. Holders described above. The Treasury regulations
would, however, alter the procedures for claiming the benefits of an income tax
treaty and may change the certification procedures relating to the receipt by
intermediaries of payments on behalf of a beneficial owner of an exchange note.
EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR CONCERNING THE EFFECT TO THE HOLDER,
IF ANY, OF THESE TREASURY REGULATIONS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of those exchange notes. This prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for outstanding
notes where the outstanding notes were acquired as a result of market-making
activities or other trading activities. The Issuers have agreed that, for a
period of 180 days after the expiration date of the exchange offer (or such
shorter period during which such broker-dealer are required by law to deliver
this prospectus), they will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1999, all dealers effecting transactions in the exchange
notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any of the exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date of the exchange offer (or
such shorter period during which such broker-dealers are required by law to
deliver this prospectus) the Issuers will promptly send additional copies of
this prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests such documents in the letter of transmittal. We have
agreed to pay all expenses incident to this exchange offer (including the
expenses of one counsel for the holders of the outstanding notes) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
108
<PAGE>
LEGAL MATTERS
The validity of the exchange notes offered will be passed upon for Cherokee
by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, or Skadden
Arps. Skadden Arps from time to time provides legal services to the initial
purchaser of the outstanding notes.
EXPERTS
The consolidated financial statements of Cherokee International, LLC as of
December 31, 1997 and 1998 and June 30, 1999 and for the nine months ended
December 31, 1996, the years ended December 31, 1997 and 1998, and the six
months ended June 30, 1999, included in this prospectus and the related
financial statement schedule included elsewhere in the Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
FUTURE ADDITIONAL INFORMATION
Following the effective date of the Registration Statement, we will be
subject to the information requirements of Section 15(d) of the Securities
Exchange Act of 1934 and will be required to file annual, quarterly and current
reports and other information with the SEC. Our obligation to file the reports
required by Section 15(d) will be suspended as to any fiscal year, other than
the fiscal year in which the exchange notes are registered, if, among other
things, at the beginning of that fiscal year the exchange notes are held by less
than 300 holders of record. We have agreed that whether or not we are subject to
the reporting requirements of the Securities Exchange Act of 1934, we will file
with the SEC (unless the SEC will not accept such a filing), and furnish to our
noteholders the annual reports and such information, documents and other reports
as are specified in the Securities Exchange Act of 1934. The SEC has informed us
that if we are not subject to the reporting requirements, we will not be
entitled to file reports with the SEC. You may read and copy any reports or
other information on file at the public reference facilities maintained by the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 or at its regional offices located at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New
York, New York 10048. You can obtain copies of such material from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. The SEC maintains an Internet "website" that contains
reports, registration, proxy and information statements and other information at
http://www.sec.gov.
109
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and as of June 30, 1999....................... F-3
Consolidated Statements of Income for the nine months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1998 (unaudited) and 1999................... F-4
Consolidated Statements of Members' Equity for the nine months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1999........................................ F-5
Consolidated Statements of Cash Flows for the nine months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1998 (unaudited) and 1999................... F-6
Notes to Consolidated Financial Statements................................................................. F-8
Independent Auditors' Report............................................................................... F-17
Schedule of valuation and qualifying accounts for the nine months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1999........................................ F-18
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Manager and Members of
Cherokee International, LLC and subsidiaries:
We have audited the accompanying consolidated balance sheets of Cherokee
International, LLC and subsidiaries (the Company) as of December 31, 1997 and
1998 and June 30, 1999, and the related consolidated statements of income,
members' equity (deficit) and cash flows for the nine months ended December 31,
1996, the years ended December 31, 1997 and 1998 and the six months ended June
30, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cherokee International, LLC and
subsidiaries as of December 31, 1997 and 1998 and June 30, 1999, and the results
of their operations and their cash flows for the nine months ended December 31,
1996, the years ended December 31, 1997 and 1998 and the six months ended June
30, 1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
September 15, 1999
F-2
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 873,410 $ 2,784,828 $ 1,347,760
Accounts receivable, net of allowances for doubtful accounts of $400,000, $175,000,
and $175,000 as of December 31, 1997 and 1998, and June 30, 1999, respectively..... 9,666,507 14,861,816 17,689,497
Inventories, net (Note 2)............................................................ 13,371,362 15,467,183 19,561,992
Prepaid expenses and other current assets............................................ 200,033 67,576 148,068
----------- ----------- -------------
Total current assets............................................................... 24,111,312 33,181,403 38,747,317
PROPERTY AND EQUIPMENT, net (Notes 2, 3, and 4)...................................... 6,384,690 7,457,096 9,126,457
DEPOSITS............................................................................. 157,926 207,526 261,195
DEFERRED FINANCING COSTS, net of accumulated amortization of $163,310 as of June 30,
1999 (Note 2)...................................................................... -- -- 4,715,035
----------- ----------- -------------
$30,653,928 $40,846,025 $ 52,850,004
=========== =========== =============
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 3,428,590 $ 5,896,016 $ 3,954,023
Accrued liabilities.................................................................. 1,224,745 825,113 2,951,089
Accrued compensation and benefits (Note 7)........................................... 2,419,254 2,054,736 1,527,676
Current portion of long-term debt (Note 4)........................................... 2,350,715 240,000 4,500,000
Current portion of capital lease obligations (Notes 3 and 5)......................... 290,043 467,694 835,676
----------- ----------- -------------
Total current liabilities.......................................................... 9,713,347 9,483,559 13,768,464
LONG-TERM DEBT, net of current portion (Note 4)...................................... 1,389,058 540,000 147,500,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Notes 3 and 5).................... 433,247 793,937 2,364,598
COMMITMENTS (Note 5)
MEMBERS' EQUITY (DEFICIT)(Note 6):
Class A units; 600,000 units authorized; 300,000 units issued and outstanding........ 14,000 14,000 14,000
Class B units; 30,000,000 units authorized; 29,700,000 units issued and outstanding.. 1,386,000 1,386,000 1,386,000
Paid-in capital...................................................................... -- -- 5,330,000
Retained earnings (deficit).......................................................... 17,718,276 28,628,529 (117,513,058)
----------- ----------- -------------
Total members' equity (deficit).................................................... 19,118,276 30,028,529 (110,783,058)
----------- ----------- -------------
$30,653,928 $40,846,025 $ 52,850,004
=========== =========== =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
ENDED YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------ --------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
NET SALES (Note 8)............................................ $50,197,550 $77,022,168 $87,553,056 $38,102,681 $ 66,496,348
COST OF SALES................................................. 33,901,142 48,990,442 54,824,150 23,531,329 41,499,182
----------- ----------- ----------- ------------ ------------
GROSS PROFIT.................................................. 16,296,408 28,031,726 32,728,906 14,571,352 24,997,166
OPERATING EXPENSES:
Engineering expenses.......................................... 2,740,276 4,057,255 3,798,767 1,873,922 2,061,629
Selling and marketing expenses................................ 1,587,032 2,194,493 1,916,442 907,274 1,294,107
General and administrative expenses (Notes 5 and 7)........... 2,758,078 3,267,937 3,079,007 1,314,906 1,883,029
Special bonus distribution (Note 9)........................... -- -- -- -- 5,330,000
----------- ----------- ----------- ------------ ------------
Total operating expenses.................................... 7,085,386 9,519,685 8,794,216 4,096,102 10,568,765
----------- ----------- ----------- ------------ ------------
OPERATING INCOME.............................................. 9,211,022 18,512,041 23,934,690 10,475,250 14,428,401
OTHER INCOME (EXPENSE):
Interest expense.............................................. (1,638,138) (1,064,914) (372,870) (209,745) (2,911,123)
Other income (expense)........................................ 41,248 376,581 338,433 9,607 (518,865)
----------- ----------- ----------- ------------ ------------
Total other income (expense)................................ (1,596,890) (688,333) (34,437) (200,138) (3,429,988)
----------- ----------- ----------- ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM.............................. 7,614,132 17,823,708 23,900,253 10,275,112 10,998,413
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
(Note 4).................................................... -- 714,436 -- -- --
----------- ----------- ----------- ------------ ------------
NET INCOME.................................................... $ 7,614,132 $18,538,144 $23,900,253 $10,275,112 $ 10,998,413
=========== =========== =========== ============ ============
BASIC AND DILUTED INCOME PER UNIT:
Income before extraordinary item.............................. $ .25 $ .59 $ .80 $ .34 $ .37
Net income.................................................... $ .25 $ .62 $ .80 $ .34 $ .37
=========== =========== =========== ============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING............................ 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
=========== =========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A CLASS B RETAINED
---------------------- ------------------------ PAID-IN EARNINGS
UNITS AMOUNT UNITS AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ----------- ----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 30, 1996........ 225,000 $ 1,000,000 -- $ -- $ -- $ -- $ 1,000,000
Issuance of units in
conjunction with purchase of
business (Note 1)............ 75,000 400,000 400,000
Equity distribution............ (360,000) (360,000)
Net income..................... 7,614,132 7,614,132
--------- ----------- ----------- ----------- ----------- -------------- --------------
BALANCE, December 31, 1996..... 300,000 1,400,000 7,254,132 8,654,132
Unit issuance (Note 6)......... (1,386,000) 29,700,000 1,386,000
Equity distribution............ (8,074,000) (8,074,000)
Net income..................... 18,538,144 18,538,144
--------- ----------- ----------- ----------- ----------- -------------- --------------
BALANCE, December 31, 1997..... 300,000 14,000 29,700,000 1,386,000 17,718,276 19,118,276
Equity distribution............ (12,990,000) (12,990,000)
Net income..................... 23,900,253 23,900,253
--------- ----------- ----------- ----------- ----------- -------------- --------------
BALANCE, December 31, 1998..... 300,000 14,000 29,700,000 1,386,000 28,628,529 30,028,529
Equity distribution............ (157,140,000) (157,140,000)
Capital contribution to fund
special bonus distribution
(Note 9)..................... 5,330,000 5,330,000
Net income..................... 10,998,413 10,998,413
--------- ----------- ----------- ----------- ----------- -------------- --------------
BALANCE, June 30, 1999......... 300,000 $ 14,000 29,700,000 $ 1,386,000 $ 5,330,000 $ (117,513,058) $ (110,783,058)
========= =========== =========== =========== =========== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
ENDED YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------- ---------------------------
1996 1997 1998 1998 1999
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 7,614,132 $ 18,538,144 $ 23,900,253 $ 10,275,112 $ 10,998,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 1,364,000 1,503,315 1,670,586 790,404 1,123,523
Amortization of deferred financing costs....... -- -- -- -- 163,310
Interest accrual............................... 458,598 -- -- -- --
Deferred rental payments....................... 264,000 -- -- -- --
Gain on extinguishment of debt................. -- (714,436) -- -- --
Net change in operating assets and liabilities:
Accounts receivable, net..................... 517,578 (136,167) (5,195,309) (2,753,289) (2,827,681)
Inventories, net............................. 1,397,561 (1,789,652) (2,095,821) (1,914,813) (4,094,809)
Prepaid expenses and other current assets.... (17,004) (58,055) 132,457 104,614 (80,492)
Deposits..................................... 36,158 244,183 (49,600) (36,157) (53,669)
Accounts payable............................. (3,302,619) 1,794,719 2,467,426 (629,534) (1,941,993)
Accrued liabilities.......................... 494,857 (3,495) (399,632) (171,424) 2,125,976
Accrued compensation and benefits............ 1,011,909 699,122 (364,518) (1,084,799) (527,060)
------------- ------------ ------------ ------------ -------------
Net cash provided by operating activities.. 9,839,170 20,077,678 20,065,842 4,580,114 4,885,518
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash
received....................................... (15,264,383) -- -- -- --
Additions to property and equipment.............. (1,935,372) (1,354,914) (1,898,202) (544,703) (482,570)
------------- ------------ ------------ ------------ -------------
Net cash used in investing activities...... (17,199,755) (1,354,914) (1,898,202) (544,703) (482,570)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit........... 9,291,376 10,655,388 -- 3,097,520 4,699,935
Payments on revolving line of credit and Term
Loan A......................................... (9,074,345) (8,835,354) (2,739,773) (99,325) (2,699,935)
Payments on obligations under capital leases..... (161,793) (263,203) (306,449) (2,699,935) (371,671)
Payments on long-term debt....................... (136,200) (12,892,138) (220,000) -- (780,000)
Borrowings on long-term debt..................... 7,368,250 993,250 -- -- 150,000,000
Deferred financing cost.......................... -- -- -- -- (4,878,345)
Equity distribution.............................. (360,000) (8,074,000) (12,990,000) (9,840,000) (157,140,000)
Capital contribution to fund special bonus
distribution................................... -- -- -- -- 5,330,000
------------- ------------ ------------ ------------ -------------
Net cash provided by (used in) financing
activities............................... 6,927,288 (18,416,057) (16,256,222) (7,103,306) (5,840,016)
------------- ------------ ------------ ------------ -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.................................... (433,297) 306,707 1,911,418 (3,067,895) (1,437,068)
CASH, AND CASH EQUIVALENTS, beginning of
period......................................... 1,000,000 566,703 873,410 873,410 2,784,828
------------- ------------ ------------ ------------ -------------
CASH, AND CASH EQUIVALENTS, end of period........ $ 566,703 $ 873,410 $ 2,784,828 $ (2,194,485) $ 1,347,760
============= ============ ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
ENDED YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------- --------------------------
1996 1997 1998 1998 1999
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
SUPPLEMENTAL INFORMATION--
Cash paid during the year for interest.......... $ 1,179,540 $ 1,064,914 $ 372,870 $ 209,745 $ 870,913
============= ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS--On March 29, 1996, the Company
acquired certain businesses in transactions
summarized as follows (Note 1):
Fair value of tangible assets acquired............ $ 26,536,888
Fair value of Class A units issued................ (400,000)
Issuance of subordinated notes to previous
owners.......................................... (6,361,384)
Cash paid, net of cash acquired................... (15,264,383)
-------------
Liabilities assumed............................... $ 4,511,121
=============
Assets acquired under capital lease obligations... $ 1,148,286 $ 844,790 $ 2,310,314
============= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
1. GENERAL
INCORPORATION--Cherokee International LLC (the Company) was incorporated on
February 21, 1996, under the California Beverly-Killea Limited Liability Company
Act. After the acquisition described below, planned principal operations
commenced on March 30, 1996.
ACQUISITIONS--On March 29, 1996, the Company and Cherokee
International, Inc., a California corporation, entered into an asset purchase
agreement whereby the Company purchased certain assets and assumed certain
liabilities of Cherokee International, Inc. for a total cash payment of
$15,264,383 and issuance of a subordinated note payable of $5,885,218. The
acquisition was funded with cash borrowed from an asset-based lender and
subordinated note payable to the previous owner (Note 4). The acquisition was
accounted for under the purchase method of accounting, with the total purchase
price allocated to net tangible assets.
On March 29, 1996, the Company and Bikor Corporation, a California
corporation, entered into an asset transfer agreement and operations transfer
agreement whereby Bikor Corporation transferred all operations and assets and
certain liabilities to the Company in exchange for 75,000 Class A units of the
Company with a fair market value of $400,000 and a subordinated note payable of
$476,166. The acquisition was accounted for under the purchase method of
accounting, with the total purchase price allocated to net tangible assets.
LINE OF BUSINESS--The Company designs, develops, assembles and sells switch
mode power supplies for original equipment manufacturers (OEMs) in the
telecommunications, data networking and high-end workstation markets.
INTERIM FINANCIAL INFORMATION--In the opinion of management, the
accompanying unaudited financial statements for the six months ended June 30,
1998 contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the Company's financial position, results of
operations and cash flows. The consolidated financial position at June 30, 1999
is not necessarily indicative of the financial position to be expected at
December 31, 1999 and the consolidated results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the consolidated results
of operations to be expected for the year ending December 31, 1999. The
Company's fiscal six-month period ended on July 4 in 1999 and July 5 in 1998.
For presentation purposes, these fiscal quarters have been referred to as
June 30.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the financial statements of the Company and its wholly-owned subsidiaries
Cherokee Electronica, S.A. DE C.V., (Electronica), Cherokee India Pvt. Ltd.
(India), Powertel India Pvt. Ltd. (Powertel) and Cherokee International Finance,
Inc. (Finance). Finance was formed in April 1999 as a wholly-owned finance
subsidiary to act as a co-obligor of the 10 1/2% Senior Subordinated Notes (see
Note 4) and has no independent assets or operations. All material intercompany
accounts and transactions have been eliminated.
TRANSLATION OF FOREIGN CURRENCIES--Foreign subsidiary financial statements
are translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, FOREIGN CURRENCY TRANSLATIONS. The
functional currency of Electronica and India is the U.S. dollar because the
majority of transactions are denominated in U.S. dollars; therefore, translation
gains and losses are included in results of operations. Transaction and
translation gains and losses were not significant for the periods presented.
F-8
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--For presentation purposes in the consolidated
financial statements, all highly liquid debt instruments purchased with an
original maturity date of three months or less are considered to be cash
equivalents.
INVENTORIES--Inventories are valued at the lower of cost (first-in,
first-out) or market. Inventory costs include the cost of material, labor, and
manufacturing overhead and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Raw material.................................... $ 11,411,464 $ 13,223,720 $ 16,682,358
Work-in-process................................. 1,664,956 2,369,463 3,026,052
Finished goods.................................. 480,312 452,310 431,892
------------- ------------- -------------
13,556,732 16,045,493 20,140,302
Reserve for obsolescence........................ (185,370) (578,310) (578,310)
------------- ------------- -------------
$ 13,371,362 $ 15,467,183 $ 19,561,992
============= ============= =============
</TABLE>
PROPERTY AND EQUIPMENT--Depreciation and amortization of property and
equipment are provided using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements......................................... 5 years
Machinery and equipment............................................ 5 years
Dies, jigs and fixtures............................................ 3 years
Office equipment and furniture..................................... 5 years
Automobiles and trucks............................................. 5 years
Leasehold improvements............................................. 5 years
</TABLE>
DEFERRED FINANCING COSTS--During the six months ended June 30, 1999, the
Company incurred approximately $5.5 million of fees and expenses related to the
issuance of senior subordinated notes and the execution of a new term loan and
credit facility. Of such fees and expenses approximately $4.9 million was
capitalized as deferred financing costs and approximately $0.6 million was
directly expensed and included in other income (expense) in the accompanying
consolidated statements of income. Deferred financing costs are being amortized
over 6 years.
LONG-LIVED ASSETS--The Company accounts for the impairment and disposition
of long-lived assets in accordance with SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. In
accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. There was no impairment of the value of such assets for the
six months ended June 30, 1999.
INCOME TAXES--The Company is taxed as a limited liability company under the
provisions of the federal and state tax codes. Under federal laws, taxes based
on income of a limited liability company are payable by the company members
individually. Accordingly, no provision for federal income taxes has been
F-9
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provided in the accompanying financial statements. Provisions for California
franchise tax and fees are not significant for any period presented.
REVENUE RECOGNITION--Revenue from product sales are recognized upon shipment
of the products to customers.
CREDIT RISK--The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
INCOME PER UNIT--In accordance with SFAS No. 128, EARNINGS PER SHARE, basic
income per unit calculations are determined by dividing net income by the
weighted average Class A and B units outstanding. There are no significant
dilutive units outstanding for any period presented.
SEGMENT INFORMATION--The Company has adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 established
standards for reporting information about operating segments in financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company currently operates in a single business segment as a leading
designer and manufacturer of a broad range of power supplies for original
equipment manufacturers in the telecommunications, data networking, high-end
workstations and other electronic industries.
COMPREHENSIVE INCOME--During fiscal 1998, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, which establishes standards for the reporting
and display of comprehensive income. Comprehensive income is defined as all
changes in a company's net assets except changes resulting from transactions
with shareholders. It differs from net income in that certain items currently
recorded through equity are included in comprehensive income. The Company's net
income was the same as comprehensive income for all periods presented.
NEW ACCOUNTING PRONOUNCEMENT--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, which the Company is required to adopt effective in its
fiscal year 2001. SFAS No. 133 will require the Company to record all
derivatives on the balance sheet at fair value. The Company has not completed
its evaluation of the effect of adopting SFAS No. 133.
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the amounts of revenues and expenses during the reporting period. Actual results
could differ from such estimates.
RECLASSIFICATIONS--Certain items in the prior period consolidated financial
statements have been reclassified to conform to the current period presentation.
F-10
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Land............................................ $ 398,919 $ 398,919 $ 398,919
Building and improvements....................... 790,622 793,752 793,752
Machinery and equipment......................... 5,298,440 6,706,506 9,866,244
Dies, jigs and fixtures......................... 211,839 293,568 345,948
Office equipment and furniture.................. 728,212 852,830 954,882
Automobiles and trucks.......................... 89,177 138,625 138,625
Leasehold improvements.......................... 1,028,887 1,261,888 1,323,166
Construction in progress........................ 152,253 995,253 412,689
------------- ------------- -------------
8,698,349 11,441,341 14,234,225
Less accumulated depreciation and
amortization.................................. (2,313,659) (3,984,245) (5,107,768)
------------- ------------- -------------
$ 6,384,690 $ 7,457,096 $ 9,126,457
============= ============= =============
</TABLE>
Included in property and equipment are assets under capital leases of
$2,471,827 and $3,030,908 as of December 31, 1997 and 1998, respectively, and
$4,131,273 as of June 30, 1999. Accumulated amortization of assets under capital
leases was $757,589 and $1,279,264 as of December 31, 1997 and 1998,
respectively, and $1,668,779 as of June 30, 1999.
F-11
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
----------- --------- -------------
<S> <C> <C> <C>
10.5% senior subordinated notes, interest due semi-annually beginning on
November 1, 1999, 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
Term loan, bearing interest at either LIBOR plus 2.75% at inception or
prime plus 1.50% at inception, interest rates subject to change based on
the Company's leverage ratio as defined, quarterly principal amounts due
beginning September 30, 1999 at amounts ranging from $625,000 to
$3,375,000, remaining unpaid principal and interest due April 30, 2005... -- -- 50,000,000
Three-year term loan, payable in monthly principal installments of $16,554,
paid in full during 1998................................................. 827,708 -- --
Five-year credit facility, bearing interest at 8.13%, payable in monthly
principal installments of $20,000 beginning April 1, 1997, collaterized
by certain property and equipment, paid in full during May 1999.......... 1,000,000 780,000 --
Revolving lines of credit.................................................. 1,912,065 -- 2,000,000
----------- --------- -------------
3,739,773 780,000 152,000,000
Less current portion....................................................... (2,350,715) (240,000) (4,500,000)
----------- --------- -------------
Total long-term debt....................................................... $ 1,389,058 $ 540,000 $ 147,500,000
=========== ========= =============
</TABLE>
As of June 30, 1999, maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 (subsequent to June 30)........................................ $ 3,250,000
2000................................................................ 4,250,000
2001................................................................ 7,000,000
2002................................................................ 8,450,000
2003................................................................ 9,950,000
Thereafter.......................................................... 119,100,000
--------------
$ 152,000,000
==============
</TABLE>
The term loan is collateralized by substantially all of the Company's assets
and contains certain financial covenants including capital expenditures
limitations, minimum fixed charge coverage and interest coverage ratios, minimum
debt to equity ratio requirements and restrictions on dividends. The Company was
in compliance with these financial covenants as of June 30, 1999.
The Company restructured its credit facility in March 1997, which resulted
in the payment in full of a subordinated note to the previous owner of the
Company. Payment of the subordinated note resulted in a gain of approximately
$714,000 or $0.03 per unit. This gain on early extinguishment of debt has been
included as an extraordinary item in the accompanying consolidated statements of
income.
F-12
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
During April 1999, the Company entered into a revolving line of credit
agreement, which provides for borrowings, based on a percentage of certain
receivables and inventory, not to exceed $25,000,000. Borrowings bear interest
at LIBOR plus 2.75% at inception or prime plus 1.50% at inception. Interest
rates are subject to change over time based on the Company's leverage ratio as
defined. This revolving line of credit is collateralized by substantially all of
the Company's assets and is subject to the same financial covenants as the term
loan discussed above. This revolving line of credit expires in 2005. Outstanding
borrowings under this line of credit were $2,000,000 at June 30, 1999.
During March 1997, and as part of the restructuring of its credit facility
with an asset-based lender, the Company entered into a revolving line of credit
which provided for maximum borrowings not to exceed $13,000,000. Borrowings
under this revolving line of credit were tied to availability formulas as
follows: 85% of eligibile trade receivables; 25% of eligible raw materials; and
60% of eligible finished goods. Inventory borrowings were capped at $2,600,000.
This revolving line of credit was collateralized by all of the Company's assets
and required the Company to comply with certain financial covenants such as
certain financial ratios and maximum capital expenditures. This line of credit
was paid off in full and terminated in 1998.
5. COMMITMENTS
The Company leases certain of its manufacturing facilities under
noncancelable operating leases for an aggregate monthly rental of approximately
$107,000. These leases expire at various dates through 2009. One of the
manufacturing facilities is leased from an entity controlled by an officer and a
principal member of the Company. During the nine months ended December 31, 1996,
the Company incurred rent expense of approximately $548,000 for the use of this
location. Of this amount, $264,000 was deferred by the Company and recorded as
subordinated notes payable as of December 31, 1996. The subordinated note was
paid in full in 1997. Rental expense totaled approximately $693,000, $982,700
and $1,072,700 ($680,780, $783,740, and $862,280 to a related entity) for the
nine months ended December 31, 1996 and the years ended December 31, 1997 and
1998, respectively. Rental expense for the six-month periods ended June 30, 1998
(unaudited) and 1999 totaled approximately $544,873 and $624,952 ($429,355 and
$448,310 to a related entity), respectively.
The Company has two capital lease contracts, bearing interest at 6.41% and
9.75%. The total monthly principal and interest payments related to these
capital leases are approximately $91,000. The leases expire between March 2000
and January 2004.
F-13
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
5. COMMITMENTS (CONTINUED)
A summary of lease commitments as of June 30, 1999 is as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ -------------
<S> <C> <C>
1999 (subsequent to June 30)..................................... $ 546,247 $ 711,723
2000............................................................. 860,607 1,433,091
2001............................................................. 744,663 1,200,540
2002............................................................. 744,663 1,012,790
2003............................................................. 711,851 998,682
Thereafter....................................................... 45,649 5,189,902
------------ -------------
Total minimum lease payments..................................... 3,653,680 $ 10,546,728
=============
Less amount representing interest................................ (453,406)
------------
Present value of future minimum lease payments................... 3,200,274
Less current portion............................................. (835,676)
------------
$ 2,364,598
============
</TABLE>
Of the $10,546,728 total minimum payments for operating leases, $9,501,513 is
payable to a related entity.
6. MEMBERS' EQUITY (DEFICIT)
CAPITALIZATION--The Company's members' equity consists of Class A and
Class B units. Class A units are entitled to one vote per unit and Class B units
are not entitled to vote.
On November 3, 1997, the members and managers authorized a dividend
distribution of Class B units in the ratio of 99 Class B units for every
Class A unit issued and outstanding to members as of November 3, 1997.All Unit A
and Unit B stated values have been restated to reflect this transaction.
UNIT SPLIT--Effective June 28, 1999, the Company's management committee
approved a 75-for-1 split of the outstanding Class A units and Class B units
from 4,000 to 300,000 and from 396,000 to 29,700,000, respectively. Accordingly,
all unit and income per unit figures included in the accompanying consolidated
financial statements and footnotes have been restated to reflect this unit split
for all periods presented.
UNIT OPTION PLAN--In June 1999, the Company adopted the 1999 Unit Option
Plan (the Plan) which provides for the issuance to officers and key employees of
up to a total of 2,970,000 options to purchase Class B units at an exercise
price per unit of not less than 85% of fair market value. At June 30, 1999,
1,915,000 options were available for grant. Options expire no later than ten
years from the date of grant and generally become exercisable over a five-year
period.
As permitted by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company accounts for its employee stock-based compensation plan using the
intrinsic value method under APB Opinion No. 25 and provides the expanded
disclosures specified in SFAS No. 123. On June 28, 1999, the Company granted
1,055,000 unit options at an exercise price of $4.00, which represented the fair
value of the Company's Class B units as determined by the Company's Management
Committee utilizing the arms-length equity
F-14
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
6. MEMBERS' EQUITY (DEFICIT) (CONTINUED)
transaction which occurred on April 30, 1999, whereby a new member acquired a
60% majority equity interest from the then existing members. Accordingly, no
compensation expense was recorded for these unit option grants pursuant to APB
Opinion No. 25.
Had compensation cost been determined using the provisions of SFAS No. 123,
the difference between net income as reported and pro forma net income would
have been insignificant, as the options were granted on June 28, 1999.
For purposes of estimating the compensation cost of the Company's option
grants in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions used for grants during the six
months ended June 30, 1999: expected volatility of zero; risk-free interest rate
of 6%; and expected lives of five years.
A summary of activity for the 1999 Unit Option Plan is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
UNITS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding, January 1, 1999....................................................... -- $ --
Granted (weighted average fair value of $1.02)..................................... 1,055,000 4.00
Exercised.......................................................................... -- --
Canceled........................................................................... -- --
----------
Balance, June 30, 1999............................................................. 1,055,000 $ 4.00
==========
</TABLE>
The following table summarizes information about options as of June 30,
1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------- ----------- -------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
$4.00 1,055,000 10 $4.00 -- $4.00
=========== ==========
</TABLE>
UNIT PURCHASE PLAN--In June 1999, the Company adopted the 1999 Unit Purchase
Plan covering an aggregate of 1,500,000 shares of Class B membership units. The
purpose of the 1999 Unit Purchase Plan is to enable selected officers,
management committee members, employees, consultants and advisors of the Company
to purchase Class B units. The price of the Class B units under the plan shall
not be less than 85% of the fair market value of the Class B units. At June 30,
1999, the Company had granted 302,000 Class B units at $4.00 per unit,
representing fair value consistent with the unit option grants described above,
and had 1,198,000 units available to grant.
7. RETIREMENT PLANS
In March 1996, the managers and members of the Company approved the adoption
of a supplemental retirement plan (the 401(k) Plan) in which substantially all
employees are eligible to participate after completing six months of employment.
The 401(k) Plan allows participating employees to contribute up to
F-15
<PAGE>
CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996,
THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (CONTINUED)
7. RETIREMENT PLANS (CONTINUED)
15% of the employee's pretax compensation, with the Company making discretionary
matching contributions. Company contributions fully vest and are nonforfeitable
after the participant has completed five years of service. For the nine months
ended December 31, 1996, and the years ended December 31, 1997 and 1998, the
Company elected to contribute approximately $131,000, $184,100, and $201,700,
respectively, to the 401(k) Plan. For the six-month periods ended June 30, 1998
(unaudited) and 1999, the Company accrued employer contributions of $101,802 and
$123,423, respectively, for the 401(k) Plan. Administrative costs associated
with the 401(k) Plan are paid by participants.
8. CONCENTRATION OF NET SALES
For the nine months ended December 31, 1996 and the years ended
December 31, 1997 and 1998, approximately 55%, 53%, and 59%, respectively, of
the Company's net sales were derived from four, five, and six customers,
respectively. For the six months ended June 30, 1999, approximately 57% of the
Company's net sales were derived from four customers. Although not anticipated,
a decision by a major customer to decrease the amount purchased from the Company
or to cease purchasing the Company's products would have a material adverse
effect on the Company's financial position and results of operations.
The Company sells its power supply products to OEMs in the
telecommunications, networking, high-end workstations and other electronic
industries. The Company uses information based on customers and geographic
location; however, the business activities are managed as a single segment. For
the nine months ended December 31, 1996, the years ended December 31, 1997 and
1998, and the six months ended June 30, 1998 and 1999, net sales by region were
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ------ ---------- ------------SIX MONTHS ENDED
ENDED YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31,
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States........................ $ 48,979,763 $ 72,717,181 $ 75,583,826 $ 34,114,316 $ 53,976,306
Europe............................... 1,023,237 3,732,732 10,832,647 3,702,983 10,414,324
Other................................ 194,550 572,255 1,136,583 285,382 2,105,718
------------- ------------- ------------- ------------- -------------
$ 50,197,550 $ 77,022,168 $ 87,553,056 $ 38,102,681 $ 66,496,348
============= ============= ============= ============= =============
</TABLE>
The Company's long-lived assets located outside of the United States were
$2,030,640, $1,896,971, and $1,860,156 as of December 31, 1997 and 1998 and June
30, 1999, respectively.
9. SPECIAL BONUS DISTRIBUTION
During the six months ended June 30, 1999, the Company's management
committee authorized approximately $5,330,000 of special bonus payments to
certain key employees for their role in the Company's growth and success over
the previous years. These bonus payments were entirely funded by capital
contributions made by the Company's then existing members.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Manager and Members of
Cherokee International, LLC and subsidiaries:
We have audited the consolidated financial statements of Cherokee
International, LLC and subsidiaries (the Company) as of December 31, 1997 and
1998 and June 30, 1999, and for the nine months ended December 31, 1996, the
years ended December 31, 1997 and 1998 and the six months ended June 30, 1999,
and have issued our report thereon dated September 15, 1999 (included elsewhere
in this Registration Statement). Our audits also included the financial
statement schedule on page F-18 of this Registration Statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
September 15, 1999
F-17
<PAGE>
CHEROKEE INTERNATIONAL, LLC
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
BALANCE AT (CREDITED) BALANCE AT
BEGINNING TO COST AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Nine months ended December 31, 1996............................ $ 349,391 $ 214,319 $ -- $ 563,710
Year ended December 31, 1997................................... 563,710 (98,710) (65,000) 400,000
Year ended December 31, 1998................................... 400,000 (150,771) (74,229) 175,000
Six months ended June 30, 1999................................. 175,000 -- -- 175,000
RESERVE FOR INVENTORY OBSOLESCENCE:
Nine months ended December 31, 1996............................ $ 134,835 $ 50,535 $ -- $ 185,370
Year ended December 31, 1997................................... 185,370 -- -- 185,370
Year ended December 31, 1998................................... 185,370 392,940 -- 578,310
Six months ended June 30, 1999................................. 578,310 -- -- 578,310
</TABLE>
F-18
<PAGE>
CHEROKEE INTERNATIONAL, LLC
CHEROKEE INTERNATIONAL FINANCE, INC.
10 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2009
---------------------
PROSPECTUS
---------------------
October 28, 1999
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE UNDER THIS PROSPECTUS AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE
AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR OUR AFFAIRS HAVE NOT
CHANGED SINCE THE DATE HEREOF.
UNTIL JUNE 5, 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CHEROKEE INTERNATIONAL, LLC.
Cherokee International, LLC ("Cherokee International") is a California
Limited Liability Company governed by the Beverly-Killea Limited Liability
Company Act ("BKLLCA").
Section 17155 of the BKLLCA empowers a California limited liability company
to indemnify any person, including, without limitation, any manager, member,
officer, employee, or agent of the limited liability company, against judgments,
settlements, penalties, fines or expenses of any kind incurred as a result of
acting in that capacity, except that indemnification of managers for a breach of
any fiduciary duty owed to the limited liability company and its members is not
permitted under the BKLLCA.
Article 12.2 of the Amended and Restated Operating Agreement of Cherokee
International (the "Operating Agreement") provides, among other things, that to
the fullest extent permitted by applicable law, Cherokee International shall
indemnify and defend each member, Management Committee representative, officer,
or other agent of the company, and the affiliates and partners of each of the
foregoing, who was or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the fact that such
person is or was a member, Management Committee representative, officer or other
agent of the Company, except that no such person shall be entitled to
indemnification for any act or omission constituting gross negligence, willful
misconduct or material breach of the Operating Agreement.
The Operating Agreement facilitates the enforcement of indemnification
rights by establishing the indemnification right as a contract right pursuant to
which the person entitled thereto may bring suit as if the indemnification
provisions of the Operating Agreement were set forth in a separate written
contract between Cherokee International and the indemnified party. Therefore,
any amendment or repeal of the indemnification provisions contained in the
Operating Agreement or the BKLLCA shall only be prospective and will not affect
the indemnification rights under such provision in effect at the time of the
alleged occurrence of any action or omission to act.
In addition, Cherokee International maintains insurance on behalf of its
officers and Management Committee representatives against any liability asserted
against or incurred by any such person acting in that capacity.
CHEROKEE INTERNATIONAL FINANCE, INC.
Cherokee International Finance, Inc. ("Cherokee Finance") is a Delaware
Corporation governed by the General Corporation Law of the State of Delaware
(the "Delaware General Corporation Law").
Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify any persons who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person is or was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided that such officer or director acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and for criminal proceedings, had no reasonable
cause to believe his conduct was unlawful. A Delaware corporation may indemnify
officers and directors against expenses (including attorneys' fees) in an action
by or in the right of the
II-1
<PAGE>
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
Article VIII of the bylaws of Cherokee Finance provide, among other things,
that Cherokee Finance shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that such person is or was a director or officer of Cherokee
Finance, or is or was a director or officer of Cherokee Finance serving at the
request of Cherokee Finance as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of Cherokee Finance, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
The Delaware General Corporation Law permits a Delaware corporation to
include a provision in its certificate of incorporation eliminating or limiting
the personal liability of any director to the corporation or its stockholders
for monetary damages for a breach of the director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, which
concerns unlawful payments of dividends, stock purchases or redemptions or (iv)
for any transaction from which the director derived an improper personal
benefit. The certificate of incorporation of Cherokee Finance contains such a
provision limiting the personal liability of its directors for monetary damages
for a breach of the director's fiduciary duty, to the fullest extent currently
permitted by the Delaware General Corporation Law.
In addition, Cherokee Finance maintains insurance on behalf of its officers
and directors against any liability asserted against or incurred by any such
person acting in that capacity.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
(a) Exhibits:
*3.1 Second Amended and Restated Operating Agreement of Cherokee International,
LLC, dated as of April 30, 1999.
*3.2 Amendment No. 1 to the Second Amended and Restated Operating Agreement of
Cherokee International, LLC, dated as of June 28, 1999.
*3.3 Amendment No. 2 to the Second Amended Restated Operating Agreement of
Cherokee International, LLC, dated as of June 28, 1999.
*3.4 Certificate of Incorporation of Cherokee International Finance, Inc.
*3.5 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 Note 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.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the
Issuers.
*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 of 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
*12.1 Statement regarding the computation of ratio of earnings to fixed charges
for the Company.
*23.1 Consent of Deloitte & Touche LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the
Issuers (included in Exhibit 5.1).
*24.1 Powers of Attorney for each registrant.
*25.1 Statement of Eligibility and Qualification on Form T-1 of Firstar Bank of
Minnesota, N.A., as trustee under the indenture relating to the Company's
10 1/2% Series B Senior Subordinated Notes due 2009.
*27.1 Financial Data Schedule for the six months ended June 30, 1998 and 1999.
*27.2 Financial Data Schedule for fiscal years ended December 31, 1996, 1997 and
1998.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter of Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- ------------------------
* Previously filed.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrants have duly caused this Amendment to Registration Statement to be
signed on their behalf by the undersigned, thereunto duly authorized, in the
City of Tustin, State of California on October 28, 1999.
<TABLE>
<S> <C> <C>
CHEROKEE INTERNATIONAL, LLC
By: /s/ GANPAT I. PATEL
-----------------------------------------
Ganpat I. Patel
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CHEROKEE INTERNATIONAL FINANCE, INC.
By: /s/ GANPAT I. PATEL
-----------------------------------------
Ganpat I. Patel
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
<PAGE>
CHEROKEE INTERNATIONAL, LLC
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman, Chief Executive
* Officer and member of
- ------------------------------ Management Committee October 28, 1999
Ganpat I. Patel (Principal Executive
Officer)
/s/ R. VAN NESS HOLLAND, JR. Chief Financial Officer
- ------------------------------ (Principal Financial and October 28, 1999
R. Van Ness Holland, Jr. Accounting Officer)
* Executive Vice President
- ------------------------------ and member of Management October 28, 1999
Kenneth King Committee
* Executive Vice President
- ------------------------------ and member of Management October 28, 1999
Bahechar S. Patel Committee
*
- ------------------------------ Member of Management October 28, 1999
Ian A. Schapiro Committee
*
- ------------------------------ Member of Management October 28, 1999
Stephen Kaplan Committee
*
- ------------------------------ Member of Management October 28, 1999
Tony Bloom Committee
*
- ------------------------------ Member of Management October 28, 1999
Raymond Meyer Committee
*
- ------------------------------ Member of Management October 28, 1999
Christopher Brothers Committee
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ RITA PATEL
-------------------------
Rita Patel
ATTORNEY-IN-FACT
</TABLE>
<PAGE>
CHEROKEE INTERNATIONAL FINANCE, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE* DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer,
++ President and Director
- ------------------------------ (Principal Executive October 28, 1999
Ganpat I. Patel Officer)
++
- ------------------------------ Vice President, Secretary October 28, 1999
Ian A. Schapiro and Director
++
- ------------------------------ Director October 28, 1999
Bahechar S. Patel
</TABLE>
- ------------------------
* Cherokee International Finance, Inc. has no principal financial or
accounting officers, other than its Chief Executive Officer.
<TABLE>
<S> <C> <C> <C>
++By: /s/ RITA PATEL
-------------------------
Rita Patel
ATTORNEY-IN-FACT
</TABLE>
