10-Q 1 a2030088z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 1, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ______________ Commission file number: 333-82713 CHEROKEE INTERNATIONAL, LLC (Exact name of registrant as specified in its charter) CALIFORNIA 33-0696451 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2841 DOW AVENUE TUSTIN, CALIFORNIA 92780 (Address of principal executive offices) (714) 544-6665 (Registrant's telephone number, including area code) N/A ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- CHEROKEE INTERNATIONAL, LLC TABLE OF CONTENTS

~~JUNE~~PAGE ~~30,~~PART ~~DECEMBER 31,~~ I--~~-----------~~FINANCIAL ~~-------------~~INFORMATION ~~2000~~Item ~~1999~~1. ~~-------------~~Consolidated ~~-------------~~Financial ~~ASSETS CURRENT ASSETS~~Statements: ~~Cash~~Consolidated ~~and~~Balance ~~cash~~Sheets-- ~~equivalents~~September ~~...................................... $ 769,707 $ 7,968,576 Accounts receivable, net of allowance for doubtful accounts of $250,000 and $175,000 as of June~~ 30, 2000 and December 31, 1999,. ~~respectively~~. . . . . . . . . . .~~................................~~ ~~29,030,507 14,108,596 Inventories, net~~ .~~..............................................~~ ~~34,790,646 18,911,652 Prepaid expenses and other current assets~~ .~~.....................~~ ~~647,421 50,475 ------------- ------------- Total current assets~~ .~~.......................................~~ ~~65,238,281~~3 ~~41,039,299~~Consolidated ~~PROPERTY~~Statements ~~AND EQUIPMENT, net~~ of ~~accumulated~~Income-- ~~depreciation~~For ~~and~~the ~~amortization~~Three ~~of $7,732,610~~ and ~~$6,374,122~~Nine asMonths ofEnded ~~June~~September 30, 2000 and ~~December 31,~~ 1999, ~~respectively~~. .~~..........~~ ~~14,838,611 8,761,516 DEPOSITS~~ .~~......................................................~~ ~~246,429~~4 ~~274,697~~Consolidated ~~DEFERRED~~Statements ~~FINANCING COSTS, net~~ of ~~accumulated~~Cash ~~amortization~~Flows-- ofFor ~~$1,024,782~~the ~~and~~Nine ~~$555,919~~Months asEnded ofSeptember ~~June~~ 30, 2000 and ~~December 31,~~ 1999,. ~~respectively~~. . . . . . . .~~......................~~5 ~~4,678,625~~Notes ~~4,800,504~~to ~~GOODWILL,~~Consolidated ~~net~~Financial ofStatements ~~accumulated~~. ~~amortization~~. of. ~~$117,000~~. . . . . . . . . . . ~~41,834,000~~. 0. ~~-------------~~6 ~~-------------~~Item $2. ~~126,835,946~~Management's $Discussion ~~54,876,016~~and ~~=============~~Analysis ~~=============~~of ~~LIABILITIES~~Financial ~~AND~~Condition ~~MEMBERS'~~and ~~EQUITY~~Results ~~CURRENT~~of ~~LIABILITIES:~~Operations. ~~Accounts~~. ~~payable~~. . . . . . . . . . . . . . . . . . . . . . . .~~........................~~ $8 ~~18,954,548~~Item ~~$ 5,468,043 Accrued liabilities~~ 3.~~...........................................~~ ~~6,926,318~~Quantitative ~~1,085,686 Accrued compensation~~ and ~~benefits~~Qualitative ~~..............................~~Disclosures ~~6,890,364~~About ~~2,211,193~~Market ~~Accrued~~Risk ~~interest~~. ~~payable~~. .~~......................................~~ ~~2,503,533 2,406,054 Accrued distribution payable~~ .~~..................................~~ ~~3,196,000 1,730,000 Current portion of long-term debt~~ ..~~............................~~ ~~11,615,034 4,545,004 Current portion of capital lease obligations~~ .~~..................~~ ~~746,282~~10 ~~835,947~~PART II--~~-----------~~OTHER ~~-------------~~INFORMATION ~~Total~~Item ~~current~~1. ~~liabilities~~Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . .~~........~~ ~~50,832,079 18,281,927 LONG-TERM DEBT, net of current portion~~ .~~........................~~11 ~~145,461,666~~Item ~~141,458,228 CAPITAL LEASE OBLIGATIONS, net of current portion~~ 6.~~.............~~ ~~2,434,449~~Exhibits ~~2,811,367 MEMBERS' EQUITY (DEFICIT) Class A units: 347,671~~ and ~~300,000~~Reports ~~units~~on ~~issued~~Form ~~and~~8-K ~~outstanding~~. in. ~~2000~~. ~~and~~. ~~1999,~~. ~~respectively~~. . . . . . . . . . . . . . .11 SIGNATURES. . . . ~~354,371~~. ~~14,000~~. ~~Class~~. B. ~~units:~~. ~~35,950,264~~. ~~and~~. ~~30,002,000~~. ~~units~~. ~~issued~~. ~~and~~. ~~outstanding~~. in. ~~2000~~. ~~and~~. ~~1999,~~. ~~respectively~~. . . . . . . . . . . .~~.......~~ ~~36,553,627 2,594,000 Paid-in capital~~ .~~...............................................~~ ~~5,330,000 5,330,000 Retained Earnings (Deficit)~~ .~~..................................~~ ~~(114,130,246) (115,613,506) ------------- ------------- Total members' equity (deficit)~~ .~~............................~~ ~~(71,892,248) (107,675,506) ------------- ------------- $ 126,835,946 $ 54,876,016 ============= =============~~.12

2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)

~~THREE~~SEPTEMBER ~~MONTHS ENDED SIX MONTHS ENDED JUNE~~ 30, ~~JUNE~~DECEMBER 3031, ~~JUNE 30, JUNE 30,~~ ------------ -~~-----------~~ ------------ -~~-----------~~ 2000 1999 ~~2000 1999~~ ------------ -~~-----------~~ ------------ -~~-----------~~ ~~NET~~ASSETS ~~SALES~~CURRENT ASSETS: Cash and cash equivalents ...................................... $ 28136,~~664,226~~802 $ 317,~~685~~968,~~305~~576 $Accounts 54receivable,~~095~~ net of allowance for doubtful accounts of $165,~~589~~640 and $175,000 66as of September 30,~~496~~ 2000 and December 31,~~348~~ ~~COST~~1999, OFrespectively.............................. ~~SALES~~31,073,722 14,108,596 Inventories, net ............................................... 1837,~~495~~396,~~011~~743 1918,~~842~~911,~~554~~652 35Prepaid expenses and other current assets ...................... 781,~~127,762~~535 4150,~~499,182~~475 ------------ -~~-----------~~ ------------ -~~-----------~~ ~~GROSS~~Total ~~PROFIT~~current assets ........................................ 1069,~~169~~388,~~215~~802 1141,~~842~~039,~~751~~299 18PROPERTY AND EQUIPMENT,~~967~~ net of accumulated depreciation and amortization of $8,~~827~~601,259 24and $6,~~997~~374,~~166~~122 ~~OPERATING~~as ~~EXPENSES:~~of ~~Engineering~~September 30, 2000 and ~~development~~December 31, 1999, respectively ...... 14,280,828 8,761,516 DEPOSITS .............. ~~1,232,232 1,116,534 2,369,853 2,061,629 Selling and marketing~~ ......................................... ~~794~~303,~~308~~508 ~~700~~274,~~933~~697 DEFERRED FINANCING COSTS, net of accumulated amortization of $1,~~409~~266,~~784~~219 1and $555,~~294~~919 as of September 30,~~107~~ ~~General~~2000 and ~~administrative~~December 31, 1999, respectively ............................. 14,~~595~~437,~~641~~188 14,~~019~~800,~~846~~504 2GOODWILL,~~623,765~~ ~~1,883,029~~net ~~Special~~of ~~bonus~~accumulated ~~distribution~~amortization of $840,000...........~~..........~~ ~~0 5~~42,~~330~~315,000 0 ~~5,330,000~~ ------------ -~~-----------~~ ------------ -~~-----------~~ ~~Total~~$ ~~operating~~130,725,326 ~~expenses~~$ 54,876,016 ============= ============= LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................... ~~3,622,181~~$ 818,~~167~~747,~~313~~842 ~~6,403,402~~$ 105,~~568~~468,~~765~~043 ~~------------~~Accrued ~~------------~~liabilities ~~------------ ------------ OPERATING INCOME~~ ............................................ 64,~~547~~850,~~034~~124 31,~~675~~085,~~438~~686 12Accrued compensation and benefits .............................. 8,~~564~~130,~~425~~078 142,~~428~~211,~~401~~193 ~~OTHER~~Accrued ~~INCOME~~interest ~~(EXPENSE):~~payable ~~Interest expense~~ ....................................... (45,~~073~~208,~~838)~~353 (2,~~732~~406,~~523)~~054 (7Accrued distribution payable ................................... 3,~~994~~298,~~941)~~000 (21,~~775~~730,~~613)~~000 ~~Other~~Current ~~income~~portion ~~(expense)~~of long-term debt .............................. 6715,~~515~~776,583 ~~(666~~4,~~771)~~545,004 ~~109~~Current portion of capital lease obligations ................... 759,~~776~~741 ~~(654~~835,~~375)~~947 ------------ -~~-----------~~ ------------ -~~-----------~~ Total ~~other~~current ~~(expense)~~liabilities ~~income~~ ................................... (456,~~006~~770,~~323)~~721 (318,~~399~~281,~~294)~~927 ~~(7,885,165)~~LONG-TERM (3DEBT,~~429,988)~~ ~~------------~~net ~~------------~~of ~~------------~~current ~~------------~~portion ~~NET INCOME~~ ......................... 143,631,465 141,458,228 CAPITAL LEASE OBLIGATIONS, net of current portion .............. $2,239,391 2,~~540~~811,~~711~~367 $MEMBERS' ~~276,144~~EQUITY $(DEFICIT) 4Class A units: 347,~~679,260~~671 $and 10300,~~998,413~~000 ~~============~~units ~~============~~issued ~~============~~and ~~============~~outstanding ~~NET~~in ~~INCOME~~2000 ~~PER~~and ~~UNIT:~~1999, ~~Basic~~respectively .................. 354,371 14,000 Class B units: 35,950,264 and 30,002,000 units issued and outstanding in 2000 and 1999, respectively ..................~~....~~ $36,553,627 ~~0.08~~2,594,000 $Paid-in ~~0.01~~capital ~~$ 0~~.~~15 $ 0~~.~~37 ============ ============ ============ ============ Diluted~~ ...................................... ~~$ 0~~.~~08 $ 0~~.~~01 $ 0~~.~~15 $ 0~~.37.... ~~============~~5,330,000 ~~============~~5,330,000 ~~============~~Retained ~~============~~earnings ~~WEIGHTED~~(deficit) ~~AVERAGE UNITS OUTSTANDING: Basic~~ ...................................~~.....~~ 31(113,~~606~~326,~~075~~698) 30(115,~~000~~613,~~000~~506) ~~30,954,037~~Accumulated ~~30,000,000~~other ~~============~~comprehensive ~~============ ============ ============ Diluted~~ loss............................ (827,551) 0 ------------- ------------- Total members' equity (deficit) ............................. 31(71,~~951~~916,~~211~~251) 30(107,~~000~~675,~~000~~506) 31------------- ------------- $ 130,~~209~~725,~~895~~326 30$ 54,~~000~~876,~~000~~016 ============ =~~===========~~ ============ =~~===========~~

See notes to consolidated financial statements. 3 CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

~~SIX~~THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ------------ ------------ ------------ ~~JUNE~~------------ ~~30,~~2000 ~~JUNE~~1999 ~~30,~~2000 1999 ------------- ------------- ~~2000 1999~~ ------------- ------------- ~~CASH~~NET ~~FLOWS~~SALES ~~FROM OPERATING ACTIVITIES: Net income~~ ......................................~~.............~~ $ 443,~~679~~205,~~260~~357 $ 1027,~~998~~601,~~413~~575 ~~Adjustments~~$ to97,300,946 ~~reconcile~~$ ~~net~~94,097,923 ~~income~~COST toOF ~~net~~SALES ~~cash provided by operating activities: Depreciation and amortization~~ .................................. 128,~~475~~385,~~488~~364 118,~~123~~070,~~523~~263 ~~Amortization of deferred financing costs ..................... 468~~63,~~863~~513,126 ~~163~~59,~~310~~569,445 ~~Net~~------------ ~~change~~------------ in------------ ~~operating~~------------ ~~assets~~GROSS ~~and~~PROFIT ~~liabilities: Accounts receivable, net~~ ................................... (314,~~119~~819,~~911)~~993 (29,~~827~~531,~~681)~~312 ~~Inventories~~33, ~~net .......................................... 630~~787,~~006~~820 (434,~~094~~528,~~809)~~478 ~~Prepaid~~OPERATING ~~expenses~~EXPENSES: Engineering and ~~other~~development ~~current assets~~ .................... ~~(307~~1,~~946)~~855,283 ~~(80~~1,~~492)~~009,742 ~~Deposits .................................................. (20~~4,~~508)~~225,136 ~~(53~~3,~~669)~~071,371 ~~Accounts~~Selling ~~payable~~and marketing ..........................~~................~~ ~~(562~~1,~~495)~~667,600 (687,540 3,077,384 1,~~941~~981,~~993)~~647 ~~Accrued~~General ~~liabilities~~and administrative .....................~~..................~~ 13,~~494~~235,~~632~~008 ~~221~~954,~~276~~834 ~~Accrued~~5,741,773 ~~compensation~~2,837,863 ~~and~~Amortization ~~benefits~~of goodwill ......................... ~~(946~~723,~~829)~~000 ~~(527~~0 840,~~060)~~000 ~~Accrued~~0 ~~interest~~Special ~~payable~~bonus distribution .....................~~.............~~ ~~97,479~~0 10 0 5,~~904~~330,~~700~~000 ------------- ------------- ~~Net cash provided by operating activities .............. 3,888,039 4,885,518~~ ------------- ------------- ~~CASH~~Total ~~FLOWS~~operating ~~FROM~~expenses ~~INVESTING ACTIVITIES: Additions to property and equipment~~ ....................~~......~~ ~~(825~~7,~~583)~~480,891 ~~(482~~2,~~570)~~652,116 ~~Investment in ITS~~13,884,293 ~~net of cash acquired ...................... (51~~13,~~355~~220,~~224)~~881 0 ------------- ------------- ~~Net cash used in investing activities ............... (52,180,807) (482,570)~~ ------------- ------------- ~~CASH~~OPERATING ~~FLOWS~~INCOME ~~FROM FINANCING ACTIVITIES: Borrowings on revolving line of credit~~ ............................... 57,~~000~~339,~~000~~102 46,~~579~~879,~~003~~196 ~~Payments~~19,903,527 on21,307,597 ~~revolving~~OTHER ~~line~~INCOME of(EXPENSE): ~~credit~~Interest ~~and~~expense ~~term loan~~ ........... ~~(2,477,974) (2,579,003) Payments on obligations under capital leases~~ .................... (~~466~~4,~~583~~363,326) (~~648~~3,~~737~~938,596) ~~Borrowings~~(12,358,267) on(6,849,719) ~~long-term~~Other ~~debt~~income (expense) .........................~~........~~ 842,~~000~~772 (196,~~000~~222) ~~150~~152,~~000~~548 (715,~~000~~087) ~~Payments~~------------ on------------ ~~long~~-~~term~~----------- ~~debt~~------------ Total other (expense) income .................~~..................~~ (14,~~184~~320,~~558~~554) (~~502~~4,~~934~~134,818) ~~Deferred~~(12,205,719) ~~financing~~(7,564,806) ~~costs~~------------ ------------ ------------ ------------ NET INCOME ..................................... ~~(346~~$ 3,~~984)~~018,548 (4$ 2,~~878~~744,~~345)~~378 ~~Proceeds~~$ ~~from~~7,697,808 ~~sale~~$ of13,742,791 ~~units~~============ ============ ============ ============ NET INCOME PER UNIT: Basic ........................................ ~~34,299,998~~$ 0.08 ~~Capital~~$ ~~contribution~~0.09 to$ ~~fund~~0.24 ~~special~~$ ~~bonus distribution~~ 0.~~.....~~46 0============ ~~5,330,000~~============ ~~Equity~~============ ~~distribution~~============ Diluted ......................................~~....~~ ~~(1,730,000)~~$ ~~(157,140,000)~~0.08 ~~-------------~~$ ~~-------------~~0.09 ~~Net~~$ ~~cash~~0.23 ~~provided~~$ ~~by (used in) financing activities~~ 0..46 ~~41,093,899~~============ ~~(5,840,016)~~============ ~~-------------~~============ ~~-------------~~============ ~~NET~~WEIGHTED ~~DECREASE~~AVERAGE INUNITS ~~CASH~~OUTSTANDING: Basic ......................................... (736,~~198~~297,~~869)~~935 (130,~~437~~195,~~068)~~143 ~~CASH~~32,735,337 ~~AND~~30,065,047 ~~CASH~~============ ~~EQUIVALENTS,~~============ ~~beginning~~============ of============ ~~period~~Diluted ............... ~~7,968,576 2,784,828 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period~~ ....................... $36,643,071 ~~769~~30,~~707~~195,143 $33,020,954 130,~~347~~065,~~760~~047 ============= ============= ~~SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 7,428,599 $ 870,913~~ ============= =============

See notes to consolidated financial statements 4 CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

~~Three~~NINE ~~Months~~MONTHS ~~Ended~~ENDED ~~Six~~--------------------------------- ~~Months~~SEPTEMBER ~~Ended June~~ 30, ~~2000~~SEPTEMBER ~~June~~ 30, ~~1999 June 30, 2000 June 30, 1999~~ ------------- ------------- 2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net ~~Income~~income ................................................... $ 27,~~540~~697,~~711~~808 $ ~~276~~13,~~144~~742,791 $Adjustments 4to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................ 3,~~679~~067,~~260~~137 $1,746,284 10Amortization of deferred financing costs ..................... 710,~~998~~300 338,~~413~~774 ~~=============~~Net ~~=============~~change ~~=============~~in ~~=============~~operating ~~Units~~assets and liabilities, net of effects of acquisition: ~~Weighted-average~~Accounts ~~units~~receivable, ~~outstanding~~net -.................................. ~~basic~~(6,022,126) (3,078,323) Inventories, net .......................................... 31(2,~~606~~896,~~075~~091) 30(3,~~000~~604,~~000~~548) 30Prepaid expenses and other current assets ................. (463,~~954~~060) (37,~~037~~592) 30Deposits .................................................. (77,~~000~~587) (73,~~000~~977) ~~Effect~~Accounts ofpayable ~~dilutive~~.......................................... ~~options~~253,799 (2,112,714) Accrued liabilities ....................................... ~~345~~384,~~136~~438 0607,334 ~~255~~Accrued compensation and benefits ......................... (137,~~858~~115) 0(130,696) Accrued interest payable .................................. 2,592,299 5,106,986 ------------- ------------- Net cash provided by operating activities .............. 5,109,802 12,504,319 ------------- ------------- ~~Weighted~~CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment .......................... (1,558,449) (971,937) Investment in ITS, net of cash acquired ...................... (51,895,775) 0 -~~average~~------------ ~~units~~------------- ~~outstanding~~Net cash used in investing activities ............... (53,454,224) (971,937) ------------- ~~diluted~~------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on revolving line of credit ....................... 3115,~~951~~585,~~211~~894 304,~~000~~699,~~000~~935 31Payments on revolving line of credit ......................... (8,~~209~~477,~~895~~974) 30(4,699,935) Payments on obligations under capital leases ................. (648,182) (588,564) Borrowings on long-term debt ................................. 8,000,000 ~~=============~~150,000,000 ~~=============~~Payments ~~=============~~on ~~=============~~long-term ~~Net~~debt ~~income~~................................... ~~per~~(3,823,104) ~~unit:~~(2,022,188) ~~Basic~~Deferred financing costs ..................................... (346,984) (5,188,345) Proceeds from sale of units .................................. $34,299,998 0~~.08~~ $Capital ~~0.01~~contribution $to fund special bonus distribution ...... 0 5,330,000 Equity distribution .15......................................... $(3,843,000) 0(157,856,000) ------------- ------------- Net cash provided by (used in) financing activities .37. ~~=============~~40,746,648 ~~=============~~(10,325,097) ~~=============~~Cash ~~=============~~effect ~~Diluted~~of exchange rate ................................. (234,000) 0 ------------- ------------- NET (DECREASE) INCREASE IN CASH .............................. $(7,831,774) 01,207,285 CASH AND CASH EQUIVALENTS, beginning of period .08.............. $7,968,576 02,784,828 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period .01.................... $ ~~0.15~~136,802 $ ~~0.37~~3,992,113 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 8,845,668 $ 1,382,749 ============= =============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY: During the nine months ended September 30, 1999, the company financed the purchase of $2,310,314 of fixed assets through a capital equipment lease. As of September 30, 2000, the Company had accrued equity distributions payable of $3,298,000. On June 15, 2000, the Company acquired Industrial and Telecommunication Systems and related entities ("ITS") for approximately $43.2 million in cash, plus $1.0 million in acquisition costs, and paid off $9.7 million of ITS's debt. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of tangible assets acquired ............. $ 37,186,000 Fair value of goodwill ............................. 43,155,000 Cash paid for ITS's stock .......................... (43,150,000) Repayment of certain assumed debt at closing ....... (9,722,000) ------------ Liabilities assumed ................................ $ 27,469,000 ============

See notes to consolidated financial statements. 5 CHEROKEE INTERNATIONAL, LLC AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) 1. Basis of Presentation The information set forth in the accompanying consolidated financial statements is unaudited and may be subject to normal year-end adjustments. In the opinion of management, the unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows of Cherokee International, LLC (the "Company") for the periods indicated. Results of operations for the interim three and nine months ended September 30, 2000 and 1999 are not necessarily indicative of the results of operations for the full fiscal year. The Company's third quarter represented the 13-week period ended on October 1 in 2000 and October 3 in 1999. For presentation purposes, these fiscal quarters have been referred to as September 30. The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. One such subsidiary, Cherokee International Finance, Inc., was formed in April 1999 as a wholly-owned finance subsidiary to act as a co-obligor of the 10 1/2% Senior Subordinated Notes and has no independent assets or operations. All material intercompany accounts and transactions have been eliminated. Certain information normally included in footnote disclosure to the financial statements has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all the information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. These unaudited consolidated financial statements should be read in conjunction with the other disclosures contained herein and with the Company's audited consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended December 31, 1999. The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. 2. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Inventory costs include the cost of material, labor and manufacturing overhead and consist of the following:

~~Six~~September ~~Months~~30, ~~Ended~~2000 ~~June~~December 3031, 1999 ------------------ ----------------- ~~Dollars~~Raw inMaterial ~~millions~~$ 24,702,231 ~~except~~$ ~~per~~15,633,994 ~~share~~Work-in-process ~~amounts~~8,619,669 ~~2000~~2,699,689 ~~1999~~Finished goods 4,074,843 577,969 ------------- ------------~~-------------------------------------------------------~~ ~~Net sales~~ $ 7837,~~891~~396,~~000~~743 $ 9118,~~131~~911,~~000~~652 =============~~=================~~ ~~Net income $ 4,577,000 $ 5,232,000~~ ============~~================== Diluted income per share $ 0.12 $ 0.15 ==============================~~

3. Income Taxes The Company is taxed as a limited liability company under the provisions of the United States federal and state tax codes. Under U.S. federal law, taxes based on U.S. income of a limited liability company are payable by the Company's members individually. Accordingly, no provision for U.S. federal income taxes or for California franchise taxes has been provided in the accompanying financial statements. The Company's operations in Mexico and Belgium are subject to various income taxes on earnings generated in those countries, which are accounted for in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. 6 4. Long-term debt In June 2000, the Company amended its credit agreement to provide for additional term loan borrowings of $8 million, the proceeds of which were used to finance a portion of the purchase price of an acquisition (see Note 7). 5. Comprehensive Income Comprehensive income is defined as all changes in a company's net assets except changes resulting from transactions with shareholders. It differs from net income in that certain items currently recorded through equity are included in comprehensive income. Comprehensive income, including net income and a loss from foreign currency exchange adjustments, was $2,190,997 for the three months ended September 30, 2000 and $6,870,257 for the nine months ended September 30, 2000. Comprehensive income for the three and nine months ended September 30, 1999 was the same as net income for those periods of $2,744,378 and $13,742,791, respectively. 6. Income Per Unit The following table sets forth the computation of basic and diluted income per unit:

7. Acquisition On June 15, 2000, the Company completed its acquisition of Industrial and Telecommunication Systems and related entities ("ITS"), one of Europe's leading designers and manufacturers of custom power supplies for OEM's primarily in the telecommunications industry. The Company paid approximately $43 million in cash, acquired net assets (excluding debt) at fair value of approximately $12 million, assumed debt of approximately $12 million, of which approximately $10 million was repaid at closing, and incurred transaction costs of approximately $1 million. The company recorded goodwill of approximately $43 million in the transaction, which is being amortized over 15 years. The acquisition, including the repayment of certain assumed debt at closing, was financed with approximately $34 million of cash proceeds from the issuance and sale of new members' equity units, approximately $13 million of borrowings under the Company's existing bank credit agreement, as amended, and utilization of available cash. The Company's unaudited pro forma net sales, net income, and diluted income per share as if the acquisition of ITS had occurred as of the beginning of the nine months ended September 30, 2000 and 1999, are as follows:

The pro forma operating results above include the results of operations for ITS for the nine months ended September 30, 2000 and 1999 with goodwill amortization along with other relevant adjustments to reflect fair value of the acquired assets. Additionally, the pro forma operating results include pro forma interest expense on the assumed acquisition borrowings and pro forma issuance of the Company's membership units reflected in the weighted average number of units outstanding for the computations of pro forma diluted income per share. The results of operations reflected in the pro forma information above are not necessarily indicative of the results which would have been reported if the acquisition had been effected at the beginning of the respective nine month periods. The amounts recorded for the ITS acquisition, which has been accounted for as a purchase for financial reporting purposes, are subject to change after final valuation information is obtained. 8. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which the Company is required to adopt effective in its fiscal year 2001. SFAS No. 133 will require the Company to record all derivatives on the balance sheet at fair value. The Company expects that the adoption of SFAS No. 133 will not have a material effect on its financial statements. In December 1999, the Securities and Exchange Committee issued Staff Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues in financial statements. Implementation of SAB 101, which was delayed by the issuance of SAB 101A on March 27, 2000 and SAB 101B on June 26, 2000, is required by the fourth quarter of 2000. The Company is currently in the process of evaluating the impact, if any, SAB 101 will have on its consolidated financial position or results of operations. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW Cherokee is a leading designer and manufacturer of a broad range of switch mode power supplies for original equipment manufacturers (OEM's)primarily in the high growth telecommunications, networking and high-end workstation industries. The Company produces its products and related components in sophisticated manufacturing facilities located in Tustin and Irvine, California; Guadalajara, Mexico; Bombay, India; and its recently acquired operation in Wavre, Belgium. The Company's net sales are principally driven by growth in its customers' industries, including the telecommunications, networking and high-end workstation segments, which are benefiting from the proliferation of internet/intranet, wireless and other communications. The principal elements comprising cost of sales are raw materials, labor and manufacturing overhead. During 2000 and 1999, raw materials accounted for a large majority of cost of sales. Raw materials include magnetic subassemblies, sheet metal, electronic and other components, mechanical parts and electrical wires. Labor costs include employee costs of salaried and hourly employees. Manufacturing overhead includes lease costs, depreciation on property, plant and equipment, utilities, property taxes and repairs and maintenance. Operating expenses include engineering costs, selling and marketing costs and administrative expenses. Engineering costs primarily include salaries and benefits of engineering personnel, safety approval and quality certification fees, depreciation on equipment and subcontract costs for third party contracting services. Selling and marketing expenses primarily include salaries and benefits to account managers and commissions to independent sales representatives. Administrative expenses primarily include salaries and benefits for certain management and administrative personnel, professional fees and information system costs. On June 15, 2000, the Company acquired Industrial and Telecommunication Systems and related entities ("ITS") for approximately $55 million, including assumption of debt. ITS, based in Belgium, is one of Europe's leading designers and manufacturers of custom power supplies for OEM's primarily in the telecommunications industry. The acquisition was accounted for using the purchase method of accounting, and the fair market value of ITS's assets and liabilities were included in the Company's balance sheet as of the acquisition date. For the three and nine month periods ended September 30, 2000, the Company's statements of income are consolidated to include ITS's operations from July 1, 2000 to September 30, 2000 and from June 16, 2000 to September 30, 2000, respectively. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES Net sales increased by approximately 56.5% or $15.6 million to $43.2 million for the three months ended September 30, 2000 from last year's $27.6 million for the three months ended September 30, 1999. The higher sales were primarily attributable to the inclusion of ITS's operations, which contributed $13.8 million of sales for the three months ended September 30, 2000. GROSS PROFIT Gross profit increased by approximately 55.5% to $14.8 million for the three months ended September 30, 2000 from $9.5 million for the three months ended September 30, 1999. Gross margin for the quarter decreased slightly to 34.3% from 34.5% in the prior year. The increase in gross profit was primarily due to the increase in sales. Increased gross margins for the North American operations compared to last year were offset by the inclusion in the current year of the ITS operations, which had lower gross margins than the North American operations. OPERATING EXPENSES Operating expenses for the three months ended September 30, 2000 increased to $7.5 million from $2.7 million for the three months ended September 30, 1999. As a percentage of sales, operating expenses increased to 17.3% from 9.6% in the third quarter of the prior year. The increase in operating expenses, as expressed in dollars as well as a percentage of net sales, was primarily attributable to the inclusion of ITS's operations for the three months ended September 30, 2000, along with the amortization of goodwill during the current quarter related to the ITS acquisition. 8 OPERATING INCOME Operating income increased by approximately 6.7% to $7.3 million for the three months ended September 30, 2000 from $6.9 million for the three months ended September 30, 1999. Operating margin, decreased to 17.0% for the current quarter from 24.9% in the prior year. The increase in operating income was primarily due to increased operating income contributed by the North American operations, partially offset by the amortization of goodwill in the current quarter related to the ITS acquisition. The decrease in operating margin was primarily attributable to the higher operating expenses as a percentage of sales discussed above. INTEREST EXPENSE Interest expense for the three months ended September 30, 2000 was $4.4 million compared to $3.9 million for the three months ended September 30, 1999. This increase was primarily due to the additional debt incurred in June 2000 in connection with the ITS acquisition. NET INCOME As a result of the items discussed above, net income increased to $3.0 million for the three months ended September 30, 2000 from approximately $2.7 million for the three months ended September 30, 1999. Net income margin for the current quarter was 7.0% compared to 9.9% in the prior period. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES Net sales increased by approximately 3.4% or $3.2 million to $97.3 million for the nine months ended September 30, 2000 from last year's $94.1 million for the nine months ended September 30, 1999. The inclusion of ITS's operations from June 16, 2000 to September 30, 2000 contributed approximately $17.1 million of sales for the current year's period. This was partially offset by lower sales for the North American operations primarily due to decreased demand for certain major customers in the current year's nine month period compared with particularly strong demand from those same customers in the prior year. A decline in sales to IBM, one of the Company's largest customers, accounted for the majority of the North American sales decrease from last year's nine-month period. GROSS PROFIT Gross profit decreased by approximately 2.1% or $741,000 to $33.8 million for the nine months ended September 30, 2000 from $34.5 million for the nine months ended September 30, 1999. Gross margin for the nine months ended September 30, 2000 decreased to 34.7% from 36.7% in the prior year. The decrease in gross profit was primarily due to lower gross profit from the North American operations due to decreased sales as discussed above, partially offset by gross profit contributed from inclusion of ITS in the current year. The decrease in gross margin compared to the prior year was primarily due to the inclusion in the current year of the ITS operations, which had lower gross margins than the North American operations. 9 OPERATING EXPENSES Operating expenses in last year's nine-month period included a $5.3 million special bonus distribution. Excluding the effect of this special bonus distribution in the prior year, operating expenses increased by approximately 76.0% or $6.0 million to $13.9 million for the nine months ended September 30, 2000 from $7.9 million for the nine months ended September 30, 1999. As a percentage of sales, operating expenses increased to 14.3% from 8.4% in the prior year. The increase in operating expenses, as expressed in dollars as well as a percentage of net sales, was primarily attributable to the inclusion of ITS's operations from June 16, 2000 to September 30, 2000 in the current period, amortization of goodwill related to the ITS acquisition, and having the resources in place at the North American operations to support sales levels commensurate with those achieved in the prior year. OPERATING INCOME Operating income decreased by approximately 6.6% to $19.9 million for the nine months ended September 30, 2000 from $21.3 million for the nine months ended September 30, 1999. Excluding the effect of the special bonus distribution in the prior year, operating income decreased by approximately 25.3% or $6.7 million. Operating margin decreased to 20.5% for the current year from 28.3% in the prior year, before the special bonus distribution. The decrease in operating income was primarily due to the decrease in gross profit and the higher operating expenses discussed above. The decrease in operating margin was primarily attributable to the higher operating expenses as a percentage of sales discussed above. INTEREST EXPENSE Interest expense for the nine months ended September 30, 2000 was $12.4 million compared to $6.8 million for the nine months ended September 30, 1999. This substantial increase was primarily due to the issuance of $100 million of 10 1/2% senior subordinated notes and a $50 million term loan, all of which occurred on April 30, 1999, resulting in only five months of interest expense reflected in the prior year's period. The current year's period also reflects interest expense relating to additional debt incurred in connection with the ITS acquisition. NET INCOME As a result of the items discussed above, net income decreased to $7.7 million for the nine months ended September 30, 2000 from $13.7 million for the nine months ended September 30, 1999. Excluding the effect of the special bonus distribution last year, net income decreased 59.6% or $11.4 million. Net income margin for the current year was 7.9% compared to 20.3% in the prior period, before the special bonus distribution. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Nine months ended September 30, 2000 Compared to nine months ended September 30, 1999 Net cash provided by operating activities was $5.1 million for the nine months ended September 30, 2000 compared to $12.5 million for the nine months ended September 30, 1999. Cash provided by operating activities for 2000 reflects net income of $7.7 million, depreciation and amortization of $3.1 million, and a $2.6 million increase in accrued interest payable, offset by increases of $6.0 million in accounts receivable and $2.9 million in inventory. Cash provided by operating activities for 1999 reflects net income of $13.7 million, depreciation and amortization of $1.7 million, and a $5.1 million increase in accrued interest payable, offset by increases of $3.1 million in accounts receivable and $3.6 million in inventory. Net income for 1999 includes the negative cash flow effect of a $5.3 million special bonus distribution, which was funded by capital contributions from the existing members. Net cash used in investing activities for the nine months ended September 30, 2000 primarily consists of $51.9 million for the purchase of ITS, net of acquired cash. Net cash provided by financing activities of $40.7 million for the nine months ended September 30, 2000 primarily reflects proceeds from bank borrowings and the sale of units aggregating $13.0 million and $34.3 million, respectively, which was used to finance the purchase of ITS. This was partially offset by payments on long-term debt of $3.8 million and equity distributions of $3.8 million. Net cash used in financing activities was $10.3 million for the nine months ended September 30, 1999. Equity distributions of $157.9 million and deferred financing costs of $5.2 million were partially offset by proceeds from borrowings on long-term debt of $150 million and capital contributions of $5.3 million. LIQUIDITY Historically, the Company has financed its operations with cash from operations supplemented by borrowings from credit facilities. As a result of certain transactions in 1999, the Company's current and future liquidity needs primarily arise from debt service on indebtedness, working capital requirements, capital expenditures and distributions to pay taxes. In connection with the acquisition of ITS in June 2000, the Company sold equity units for $34.3 million in cash proceeds, borrowed $13.0 million under its credit agreement, as amended, and utilized available cash to finance the purchase price and the repayment of certain assumed debt at closing of the transaction. As of September 30, 2000, the Company's borrowings consisted of $100 million of senior subordinated notes, $49.6 million of term loan borrowings under its credit facility, $3.0 million under capital leases, and $9.8 million of other bank debt, which includes $6.0 million of borrowings outstanding under its $25 million revolving credit facility. The Company is not subject to any amortization requirements under the notes prior to maturity in 2009, but it is required to make scheduled repayments under the term loan facility. Management believes that cash flow from operations and available borrowing capacity will be adequate to meet the Company's anticipated cash requirements, including operating requirements, planned capital expenditures, debt service and distributions to pay taxes, for the next twelve months. The Company's historical capital expenditures have substantially resulted from investments in equipment to increase manufacturing capacity and improve manufacturing efficiencies. For fiscal 2000, the Company expects capital expenditures to be between $4-5 million. FORWARD-LOOKING STATEMENTS Statements in this report containing the words "believes," "anticipates,", "expects," and words of similar meaning, and any other statements which may be construed as a prediction of future performance or events, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, (1) restrictions imposed by the Company's substantial leverage and restrictive covenants in its debt agreements, (2) reductions in sales to any of the Company's significant customers or in customer capacity generally, (3) changes in the Company's sales mix to lower margin products, (4) increased competition, (5) disruptions of the Company's established supply channels, and (6) the additional risk factors identified in the Company's Registration Statement on Form S-4 (No. 333-82713) and those described from time to time in the Company's other filings with the SEC, press releases and other communications. The Company disclaims any obligations to update any such factors or to announce publicly the result of any revisions to any of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to our operations result primarily from changes in short-term interest rates. The Company did not have any derivative financial instruments at September 30, 2000. The Company's exposure to market risk for changes in interest rates relates primarily to its current credit facility. In accordance with the credit facility, the Company enters into variable rate debt obligations to support general corporate purposes, including capital expenditures and working capital needs. The Company continuously evaluates its level of variable rate debt with respect to total debt and other factors, including assessment of the current and future economic environment. The Company had approximately $55.6 million and $46.0 million in variable rate debt outstanding at September 30, 2000 and December 31, 1999, respectively. Based upon these variable rate debt levels, a hypothetical 10% adverse change in interest rates would increase interest expense by approximately $0.5 million on an annual basis, and likewise decrease our earnings and cash flows. The Company cannot predict market fluctuations in interest rates and their impact on its variable rate debt, nor can there be any assurance that fixed rate long-term debt will be available to the Company at favorable rates, if at all. Consequently, future results may differ materially from the estimated adverse changes discussed above. As a result of the ITS acquisition in June 2000, the Company has European operations and is, therefore, subject to a certain degree of market risk associated with changes in foreign currency exchange rates. The Company has not actively engaged in exchange rate hedging activities. 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is subject to disputes and potential claims by third parties that are incidental to the conduct of its business. The Company does not believe that the outcome of any such matters, pending at September 30, 2000, will have a material adverse effect on its financial condition or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 3.1* Second Amended and Restated Operating Agreement of Cherokee International, LLC, dated as of April 30, 1999. 3.2* Amendment No. 1 to the Second Amended and Restated Operating Agreement of Cherokee International, LLC, dated as of June 28, 1999. 3.3* Amendment No. 2 to the Second Amended and Restated Operating Agreement of Cherokee International, LLC, dated as of June 28, 1999. 3.4** Amendment No. 3 to the Second Amended and Restated Operating Agreement of Cherokee International, LLC, dated as of June 12, 2000. 3.5** Amendment No. 4 to the Second Amended and Restated Operating Agreement of Cherokee International, LLC, dated as of June 14, 2000. 27.1 Financial Data Schedule. (b) REPORTS ON FORM 8-K On August 29, 2000, the Company filed a Current Report on Form 8-K/A providing the financial statements of Industrial and Telecommunication Systems and related entities ("ITS") and the unaudited proforma financial information required in accordance with Item 7 of the General Instructions for the Current Report on Form 8-K. ---------------------- * Incorporated by reference to designated exhibit to the Company's Registration Statement on Form S-4 (File No. 333-82713). ** Incorporated by reference to designated exhibit to the Company's Quarterly Report on Form 10-Q, dated July 2, 2000. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Cherokee International, LLC Date: November 15, 2000 /s/ R. Van Ness Holland, Jr. ------------------------------------- R. Van Ness Holland, Jr. Chief Financial Officer 12

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