CHEROKEE INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2007, DECEMBER 31, 2006 AND JANUARY 1, 2006
1. ORGANIZATION
Cherokee International Corporation reorganized from a California limited liability company and consummated a debt restructuring (the "Restructuring") through a
series of transactions collectively referred to as the "Transactions" in November 2002. On November 26, 2002, Cherokee International, LLC, a California limited liability company (the
"LLC"), merged with and into Cherokee International Corporation, a Delaware Corporation (the "Company"), with the Company as the surviving entity pursuant to the Agreement and Plan of Merger ("Merger
Agreement"). References herein to "Cherokee" and the "Company" refer to Cherokee International, LLC and its consolidated subsidiaries prior to the reorganization and Cherokee International
Corporation and its consolidated subsidiaries after the reorganization, and all references to common stock for periods before the reorganization mean our then-issued and outstanding
membership interests. As a result of the Transactions, the former unit holders of the LLC became stockholders of the Company, with each of them receiving a number of shares based on their
percentage ownership in the LLC. Prior to this exchange, the Company had no operating assets or liabilities and had not yet conducted any operations. On November 27, 2002, as part of the
Transactions, the Company amended its previous credit facility, issued $41.0 million of Second Lien Notes, and completed an exchange offer with respect to $100.0 million of its
10
1
/
2
% Senior Subordinated Notes for $53.4 million of 12% Pay-In-Kind Senior Convertible Notes, $46.6 million of 5.25% Senior Notes and warrants to
purchase shares of the Company's common stock.
The Company completed its initial public offering of 6,600,000 shares of its common stock, par value $0.001 per share ("Common Stock"), on February 25,
2004, at a price of $14.50 per share. The net proceeds to the Company from this offering after paid and accrued offering costs of $9.2 million were $86.5 million. The Company used
approximately $73.2 million of the net proceeds to repay certain outstanding indebtedness and accrued interest. Immediately prior to the consummation of the offering, the Company completed a
1-for-3.9 reverse stock split of its outstanding Common Stock. All shares, per share and conversion amounts relating to common stock, warrants and stock options included in the
accompanying consolidated financial statements and footnotes have been restated to reflect the reverse stock split for all periods presented. Also in connection with the offering, the Company issued
6,283,796 shares of Common Stock upon conversion of the original principal amount of its outstanding senior convertible notes of $53.4 million, and issued 4,071,114 shares of Common Stock upon
the exercise of outstanding warrants.
2. LINE OF BUSINESS
The Company is a designer and manufacturer of power supplies for original equipment manufacturers ("OEMs"). Its advanced power supply products are typically
custom designed into mid- to high-end commercial applications in the computing and storage, wireless infrastructure, enterprise networking, telecom, medical and industrial
markets.
48
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
On
November 1, 2008, the $46.6 million aggregate principal amount outstanding under our 5.25% Senior Notes will become due and payable. We do not expect to have sufficient
cash available at the time of maturity to repay this indebtedness and are currently working with an investment banker to extend the maturity of these notes. We also cannot be certain that we will have
sufficient assets or cash flow available to support refinancing these notes at current market rates or on terms that are satisfactory to us. If we are unable to refinance on terms satisfactory to us,
we may be forced to refinance on terms that are materially less favorable, seek funds through other means such as a sale of some of our assets, or otherwise significantly alter our operating plan, any
of which could have a material adverse effect on our business, financial condition and results of operation.
In
February 2008, the Company engaged Houlihan Lokey to work with our bondholders to extend the maturity of our $46.6 million in senior bond obligations beyond November 2008. At
the time of filing this Annual Report on Form 10-K, unequivocal commitments with defined terms were not available from the majority of our bondholders agreeing to extend the
maturity date. Current conditions in the U.S. financial markets have not helped us complete this extension. However, we, through our investment bankers, have been, and continue to be in; active
negotiations with a majority of the bondholders and expect resolution in the near future. It is possible to receive an agreement of the majority by obtaining commitment from several combinations of
two holders. An extended agreement is expected to result in higher than existing interest rates and other terms that the Company has adequate liquidity to handle.
The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries, Cherokee Europe SCA and related entities
("Cherokee Europe"), Cherokee India Pvt. Ltd. ("India"), Powertel India Pvt. Ltd. ("Powertel"), and Cherokee International (China) Power Supply LLC ("Cherokee China"), and its
formerly owned subsidiary Cherokee Electronica, S.A. DE C.V. ("Cherokee Mexico") included in the year ended December 30, 2007 and prior years. Inter-company accounts and transactions
have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the amounts of revenues and
expenses during the reporting period. Actual results could differ from such estimates.
The Company's fiscal years 2007, 2006, and 2005 ended on December 30, 2007, December 31, 2006, and January 1, 2006, respectively. The fiscal
year ended December 30, 2007 included 52 weeks,
49
the
fiscal year ended December 31, 2006 included 52 weeks, and the fiscal year ended January 1, 2006 included 52 weeks.
Foreign subsidiary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect on the balance sheet date. Revenues,
costs and expenses are translated at the
average exchange rate during the period. Transaction gains and losses are included in results of operations and have not been significant for the periods presented. The functional currency of Cherokee
Europe is the Euro. The functional currency of Cherokee Mexico, India, Powertel and Cherokee China is the U.S. dollar, as the majority of transactions are denominated in U.S. dollars. Translation
adjustments related to Cherokee Europe are reflected as a component of stockholders' equity in other comprehensive income (loss).
All highly liquid debt instruments purchased with an original maturity date of three months or less are considered to be cash equivalents.
Inventories are valued at the lower of weighted average cost or market. Inventory costs include the cost of material, labor and manufacturing overhead and consist
of the following amounts, net of reserves for surplus and obsolescence (in thousands):
|
|
December 30, 2007
|
|
December 31, 2006
|
Raw material
|
|
$
|
16,547
|
|
$
|
20,991
|
Work-in-process
|
|
|
4,696
|
|
|
4,034
|
Finished goods
|
|
|
6,778
|
|
|
4,966
|
|
|
|
|
|
|
|
$
|
28,021
|
|
$
|
29,991
|
|
|
|
|
|
As
of December 30, 2007 and December 31, 2006, the reserve for excess inventory and obsolescence was $3.1 million and $4.4 million, respectively, including
management's assessment of reserves for surplus and obsolescence for non-compliant material related to the Restriction of Hazardous Substances in Electrical and Electronic Equipment
directive.
During
the year ended December 30, 2007, the Company wrote off $2.1 million of inventory reserved under the excess inventory and obsolescence reserve account, of which
$1.4 million was related to excess and obsolete materials with no current or future usage in product demands. In addition, $0.7 million was related to the decrease in future customer
demand of product as a result of the restructuring and closure of the Company's Guadalajara, Mexico facility. For the year ended December 31, 2006, the Company wrote off $1.2 million of
inventory reserved under the excess inventory and obsolescence reserve account.
50
Depreciation and amortization of property and equipment are provided using the straight-line method over the following estimated useful lives:
Buildings and improvements
|
|
5-50 years
|
Machinery and equipment
|
|
5-10 years
|
Dies, jigs and fixtures
|
|
3 years
|
Computers, software, office equipment and furniture
|
|
3-5 years
|
Automobiles and trucks
|
|
5 years
|
Leasehold improvements
|
|
Lesser of 5 years
or lease term
|
The Company capitalizes costs directly related to financing agreements and certain qualified debt restructuring costs, and amortizes these costs as additional
interest expense over the terms of the related debt.
Net
deferred financing costs are comprised of the following as of December 30, 2007 and December 31, 2006 (in thousands):
|
|
December 30, 2007
|
|
December 31, 2006
|
|
Deferred financing costs
|
|
$
|
580
|
|
$
|
580
|
|
Accumulated amortization
|
|
|
(494
|
)
|
|
(364
|
)
|
|
|
|
|
|
|
Deferred financing costs, net
|
|
$
|
86
|
|
$
|
216
|
|
|
|
|
|
|
|
During
the years ended December 30, 2007 and December 31, 2006, the Company amortized deferred financing costs of $0.1 million and $0.1 million, respectively.
The Company adopted Statement of Financial Accounting Standard ("SFAS") 142,
Goodwill And Other Intangible Assets
,
effective January 1, 2002. SFAS 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment annually,
or more frequently, when events or circumstances indicate that their carrying value may be impaired. The Company performs its impairment test annually at the end of the third quarter.
In
compliance with the requirements of SFAS 142, the Company has determined that its reporting units consist of two operating segments: Cherokee North America which consists of
the United States, India and China operations, and Cherokee Europe, which consists of the European operations. All goodwill has been assigned to the Cherokee Europe reporting unit. Based on our annual
assessment of the fair value of our Cherokee Europe subsidiary in accordance with SFAS 142, we recorded a goodwill impairment charge of $5.2 million during the year ended
December 30, 2007 to properly report goodwill at its fair value. This required evaluation includes the application of discounted cash flow analysis with fair market assessments. There were no
events or circumstances for the years ended December 31, 2006, and January 1, 2006 that indicated impairment.
The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS 144,
Accounting
for Impairment or Disposal of Long-Lived Assets
. In accordance with SFAS 144, long-lived assets to be held and used are reviewed for events or
changes in circumstances, which
51
indicate
that their carrying value may not be recoverable. For the years ended December 30, 2007 and January 1, 2006 there were no charges. For the year ended December 31, 2006,
the Company recorded $0.3 million of impairment charges on the value of such assets. In 2006, the Company identified certain long-lived assets associated with the restructuring and
closure of the Mexico Facility whose carrying value would not be recoverable from future cash flows and recorded an impairment charge. These assets consisted of machinery and equipment, computer
technology and equipment, and office furniture and equipment. The majority of these assets were written off because the Company considered them to have no market value. None of the impairment charges
included cash components.
The amounts recorded for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The amounts recorded for long-term debt and borrowings under our revolving lines of credit approximate fair value, as
interest is tied to, or approximates, current market rates.
The Company accounts for income taxes in accordance with SFAS 109,
Accounting for Income Taxes
. In
accordance with SFAS 109, deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for
financial reporting and their tax basis and carry-forwards to the extent they are realizable. A deferred tax provision or benefit results from the net change in deferred tax assets and liabilities
during the period. A deferred tax asset valuation allowance is recorded if it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized.
As
of December 30, 2007, deferred tax assets include $27.8 million relating to a tax basis step up from a re-capitalization transaction in 1999 and
$22.8 million of net operating loss (NOL) carry-forwards. The Company has recorded a valuation allowance against a significant portion of its deferred tax assets.
The
income tax benefit of $2.5 million for the year ended December 30, 2007, reflects the following: $0.5 million benefit from the release of a FIN48 liability
related to audits settled during the year and cash refunds received, $0.2 million provision for foreign withholding and income taxes incurred during the year, and $2.2 million income tax
benefit from the net operating loss generated in the current year by Cherokee Europe that is expected to be realized in 2009 and 2010.
Belgium taxes for unrealized foreign exchange gains on an intercompany loan considered permanently re-invested are provided for as a component of
other comprehensive income (loss).
We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and
collectibility is probable. We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition
. Sales are recorded
net of discounts, which are estimated at the time of shipment based upon historical data. Changes in assumptions regarding the rate of sales discounts earned by our customers could impact our results.
We
generally recognize revenue at the time of shipment because this is the point at which revenue is earned and realizable and the earnings process is complete. For most shipments, title
to shipped goods transfers at the shipping point, so the risks and rewards of ownership transfer once the product
52
leaves
our facility or third-party hub. Revenue is only recognized when collectibility is reasonably assured. Shipping and handling fees are included in revenue with related costs recorded to cost of
sales.
The
Company has entered into arrangements with certain customers whereby products are delivered to a third-party warehouse location for interim storage until subsequently shipped and
accepted by our customers. Revenues from these sales are recognized upon shipment from the third-party warehouse location to the customers, when title has passed. The Company generally offers a
one-year warranty for defective products. Warranty charges have been insignificant during the periods presented.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit
losses. The Company generally does not charge interest on customer balances.
In December 2004, SFAS 123R,
Share-Based Payment
, was issued. SFAS 123R is a revision of
SFAS 123,
Accounting for Stock Based Compensation
, and supersedes APB 25. Among other items, SFAS 123R eliminates the use of
APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant
date fair value of those awards, in the financial statements. The Company was required to adopt SFAS 123R effective on January 2, 2006. SFAS 123R permits companies to adopt its
requirements using either a "
modified prospective
" method, or a "
modified retrospective
" method. Under
the "
modified prospective
" method, compensation cost is recognized in the financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of
SFAS 123R. Under the "
modified retrospective
" method, the requirements are the same as under the "
modified
prospective
" method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123.
The
Company currently uses the Black-Scholes standard option-pricing model to measure the fair value of stock options granted to employees and nonemployees. While SFAS 123R
permits the Company to continue to use such a model, the standard also permits the use of a "
lattice
" model. The Company is continuing to use the
Black-Scholes model to measure the fair value of employee stock options upon the adoption of SFAS 123R.
SFAS 123R
also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an
operating cash flow as required under prior literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.
The
Company adopted SFAS 123R on January 2, 2006 using the "modified prospective" method as permitted by SFAS 123R. Under this transition method, stock compensation
cost recognized beginning in the first quarter of fiscal year 2006 includes: (a) compensation cost for all share-based payments granted subsequent to February 25, 2004 and prior to
January 1, 2006 but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R, and
(b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of
SFAS 123R. In accordance with the modified prospective method of adoption, the Company's results of operations and financial position for prior periods have not been restated. At the date of
the adoption, the
53
unamortized
expense for options issued prior to January 2, 2006 was $2.3 million, which will be amortized as stock compensation costs through December 2010. Stock based compensation
costs expensed during the year ended December 30, 2007 were $0.9 million, and $0.7 million was recorded during the year ended December 31, 2006. No stock compensation costs
were recorded during the year ended January 1, 2006.
All
grants are made at prices based on the fair market value of the stock on the date of grant. Outstanding options generally vest over periods ranging from two to four years from the
grant date and generally expire up to ten years after the grant date.
The
Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option pricing formula
with the assumptions included in the table below. The Company uses historical data, among other factors, to estimate the expected price volatility and the expected forfeiture rate. For options granted
prior to January 2, 2006, the Company used the expected option life of 5 years. For options granted following the Company's adoption of SFAS 123R, the expected life was increased
to 6.25 years using the "simplified method" under SAB 107 (an expected term based on the mid-point between the vesting date and the end of the contractual term). The use of
the simplified method requires our option plan to be consistent with a "plain vanilla" plan and was originally permitted through December 31, 2007 under SAB 107. In December 2007, the
SEC issued SAB 110,
Share-Based Payment
, to amend the SEC's views discussed in SAB 107 regarding the use of the simplified method in
developing an estimate of expected life of share options in accordance with SFAS 123R. SAB 110 is effective for the Company beginning December 31, 2007. The Company will continue
to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life, in accordance with SAB 107, as amended by SAB 110. The options
have a maximum contractual term of 10 years and generally vest pro-rata over four years. The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of grant for the estimated life of the option.
The
following weighted-average assumptions were used to estimate the fair value of options granted during the years ended December 30, 2007, December 31, 2006, and
January 1, 2006 using the Black-Scholes option pricing formula.
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Expected volatility
|
|
54.8
|
%
|
58.3
|
%
|
52.6
|
%
|
Risk free interest rate
|
|
4.97
|
%
|
4.78
|
%
|
3.97
|
%
|
Expected lives
|
|
6.25 years
|
|
6.25 years
|
|
5.0 years
|
|
Forfeiture rates
|
|
12.64% - 22.79
|
%
|
15.79% - 16.35
|
%
|
|
|
Since
its inception on February 16, 2004, a total of 400,000 shares of common stock had been reserved for issuance under the 2004 Employee Stock Purchase Plan ("ESPP"). Under the
terms of the ESPP, the Company's U.S. employees, nearly all of whom are eligible to participate, can choose to have up to a maximum of 15% of their eligible annual base earnings withheld, subject to
an annual maximum of $25,000 or 2,100 shares per offering period, to purchase our common stock. The purchase price of the stock is 85% of the lower of the closing price at the beginning of each
six-month offering period or at the end of each six-month offering period. The Company recognizes compensation cost for its ESPP under SFAS 123R.
54
In
accordance with SFAS 148, and as required by SFAS 123R, the required pro forma disclosure, for periods prior to adoption of SFAS 123R, is shown below (in
thousands except per share amounts):
|
|
|
|
Year Ended
|
|
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
Net income (loss), as reported
|
|
|
|
$
|
(8,973
|
)
|
$
|
83
|
|
$
|
(3,232
|
)
|
Stock-based employee compensation related to stock options included in net income (loss), as reported, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under the fair value based method for all awards (under provisions of APB 25), net of tax
|
|
(a)
|
|
|
(381
|
)
|
|
(610
|
)
|
|
(1,147
|
)
|
|
|
|
|
|
|
|
|
|
|
Net losspro forma
|
|
|
|
$
|
(9,354
|
)
|
$
|
(527
|
)
|
$
|
(4,379
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, as reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
(0.46
|
)
|
$
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
$
|
(0. 46
|
)
|
$
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
(0.48
|
)
|
$
|
(0.03
|
)
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
$
|
(0.48
|
)
|
$
|
(0.03
|
)
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
During
2007 and 2006 the Company accounted for stock-based compensation for options granted prior to February 25, 2004, the date of our initial public offering, to employees
and directors using the intrinsic value method prescribed in APB 25 and adopted the disclosure-only alternative of SFAS 123, as amended by SFAS 148 for these options.
The Company is a designer and manufacturer of power supplies for OEMs in the computing and storage, wireless infrastructure, enterprise networking, medical
and industrial markets. Operating segments are defined as components of the Company's business for which separate financial information is available that is evaluated by the Company's chief operating
decision maker (its Chief Executive Officer) in deciding how to allocate resources and in assessing performance. The Company's operating segments consist of its United States, India, and China
operations, which constitute Cherokee North America, and Cherokee Europe. These operating segments have been aggregated into a single reporting segment based on their similar economic characteristics
and common operating characteristics, including comparable gross profit margins and common products, production processes, customers, distribution channels and regulatory requirements.
The Company presents both basic and diluted earnings (loss) per share ("EPS") amounts. Basic EPS is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period. The
Company uses the treasury stock method to calculate the impact of stock compensation. Common equivalent shares are excluded from the computation in periods in which they have an
anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are
excluded from the calculation of diluted EPS. Dilutive stock options have an
55
anti-dilutive
effect on EPS in a period with a net loss; therefore, are excluded from the EPS computation.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
("SAB 108"). SAB 108 was issued in order to eliminate the diversity of practice surrounding how
public companies quantify financial statement misstatements.
Historically
Cherokee evaluated uncorrected differences using the "roll-over" method, which focused primarily on the impact of uncorrected differences, including the reversal
of prior-year uncorrected differences, on the current-year consolidated statement of operations. As required by SAB 108, Cherokee must now evaluate misstatements under a
"dual approach" method, which requires quantification under both the "roll-over" and the "iron curtain" methods. The "iron curtain" method quantifies misstatements based on the effects of
correcting the period-end consolidated balance sheet.
In
accordance with the transition provisions of SAB 108, Cherokee recorded adjustments totaling $0.6 million to the beginning accumulated deficit for the year ended
December 31, 2006 and $0.7 million to accumulated other comprehensive income. These adjustments were considered to be immaterial to our consolidated statements of operations and our
other comprehensive income (loss) in prior years, under the "roll-over" method. The components of the adjustment are detailed in the tables below:
|
|
|
|
Year Ended (in thousands)
|
|
|
|
|
|
January 1, 2006
|
|
January 2, 2005
|
|
December 28, 2003 and prior years
|
|
January 2, 2006 Cumulative Effect
|
|
Debit (Credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico cost of sales
|
|
(a)
|
|
$
|
(284
|
)
|
$
|
286
|
|
$
|
789
|
|
$
|
791
|
|
U.S. cost of sales
|
|
(b)
|
|
|
(211
|
)
|
|
957
|
|
|
(1,034
|
)
|
|
(288
|
)
|
China cost of sales
|
|
(c)
|
|
|
117
|
|
|
|
|
|
|
|
|
117
|
|
India cost of sales
|
|
(d)
|
|
|
98
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
$
|
(280
|
)
|
$
|
1,243
|
|
$
|
(245
|
)
|
$
|
718
|
|
Provision for income taxes
|
|
(g)
|
|
$
|
(17
|
)
|
$
|
(434
|
)
|
$
|
291
|
|
$
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(297
|
)
|
$
|
809
|
|
$
|
46
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
Balance at
January 1, 2006
|
|
SAB 108 Adjustment
|
|
Balance at
January 2, 2006
|
|
|
|
|
|
(in thousands)
|
|
Debit (Credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
$
|
|
|
$
|
(7
|
)
|
$
|
|
|
|
|
|
(e)
|
|
|
|
|
|
1,051
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
|
$
|
26,851
|
|
$
|
1,334
|
|
$
|
28,185
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
(c)
|
|
$
|
19,268
|
|
$
|
(117
|
)
|
$
|
19,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
$
|
|
|
$
|
(784
|
)
|
$
|
|
|
|
|
|
(d)
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
(e)
|
|
|
|
|
|
(1,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
$
|
(11,658
|
)
|
$
|
(1,933
|
)
|
$
|
(13,591
|
)
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
(g)
|
|
$
|
(6,028
|
)
|
$
|
(220
|
)
|
$
|
(6,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
|
$
|
|
|
$
|
(476
|
)
|
$
|
|
|
|
|
|
(h)
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
$
|
(4,790
|
)
|
$
|
(316
|
)
|
$
|
(5,106
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
(f)
|
|
$
|
(1,470
|
)
|
$
|
694
|
|
$
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
$
|
168,898
|
|
$
|
558
|
|
$
|
169,456
|
|
|
|
|
|
|
|
|
|
|
|
Notes (a)
through (h) refer to one or both of the two tables above.
-
(a)
-
The
Company determined that accounts payable for inventory at our Mexico Facility had been inaccurately reported for fiscal years 2005 and 2004 and certain periods prior to 2004.
-
(b)
-
Internationally
produced finished goods were incorrectly included in U.S. inventory capitalization calculations. As a result, cost of sales in the U.S. with respect to fiscal years
2005 and 2004 and certain periods before 2004 were inaccurate.
-
(c)
-
In
2005, previously used equipment was internally transferred to our newly completed China Facility. The value added tax charged by the Chinese government associated with the transfer
of this equipment was capitalized in 2005 as part of the asset, whereas the tax should have been expensed to moving costs.
-
(d)
-
This
is an accrual misstatement related to raw materials received in 2005 from our India Facility.
-
(e)
-
In-transit
materials were not accrued in 2005, 2004, and prior to 2004 for all third-party suppliers of our Mexico Facility.
-
(f)
-
Deferred
taxes and other comprehensive income (loss) were not recorded for the tax impact of unrealized foreign exchange gains taxable in Europe and deferred under U.S. generally
accepted accounting principles ("GAAP") for the loans made to our European subsidiary. This error occurred in 2000 through 2005.
-
(g)
-
Income
Taxes Payable were not recorded for the tax impact of realized exchange gains taxable in Europe and deferred under U.S. GAAP for the repayment of a portion of loans made
to our European subsidiary. This error occurred in 2005.
-
(h)
-
Deferred
taxes were not recorded in the purchase accounting relating to the acquisition of our European business in 2000. The errors included the deferred tax impact of basis
differences in assets acquired and timing differences of acquired pension obligations.
57
In June 2006, the FASB issued FIN 48,
Accounting for Uncertainty in Income Taxes
. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109,
Accounting for Income
Taxes
, by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. Under FIN 48, the financial statement effects of a tax position should initially be recognized when it is more likely than not, based on the technical merits, that the position
will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially, and subsequently, be measured as the
largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority. FIN 48 was effective for fiscal years
beginning after December 15, 2006.
In
accordance with the adoption of FIN 48 on January 1, 2007, we recognized a cumulative-effect adjustment of less than $0.1 million to the opening balance of
accumulated deficit. See Notes 3 and 14, "Income Taxes," for additional information.
In
September 2006, the FASB issued SFAS 157,
Fair Value Measurements
. This Statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies to accounting pronouncements that require or
permit fair value measurements, except for share-based payments transactions under FASB Statement No. 123 (Revised)
Share-Based Payment
. This
Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, except for non-financial assets and liabilities, for which this Statement
will be effective for years beginning after November 15, 2008. The Company has evaluated the effect of implementing the Statement on its financial position and operations and has determined
that the impact of implementing the Statement will increase (or decrease) the fair value of its derivative financial instruments by an immaterial amount. The Company will consider the application of
this Statement when computing fair value for financial reporting purposes beginning in 2008.
In
February 2007, the FASB issued SFAS 159
The Fair Value Option for Financial Assets and Financial Liabilities
. This Statement
permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159
is effective for financial statements issued for fiscal years beginning after November 15, 2007, although early application is allowed. The Company will not be electing the fair value option
for financial assets or liabilities existing on the December 31, 2007 adoption date. The Company will consider the applicability of the fair value option for assets acquired or liabilities
incurred in future transactions.
In
December 2007, the FASB issued SFAS 141(R),
Business Combinations
, and SFAS 160,
Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
. These pronouncements are required to be adopted concurrently and are effective for business
combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited,
thus the provisions of these pronouncements will be effective for us in fiscal year 2009. We do not have any minority interests and do not expect the adoption of SFAS 160 to have a material
effect on our financial position or consolidated financial statements.
In
December 2007, the SEC published SAB 110,
Share-Based Payment
. The interpretations in SAB 110 express the SEC staff's
views regarding the acceptability of the use of a "simplified" method, as discussed in SAB 107, in developing an estimate of expected term of share options in accordance with FASB Statement
No. 123 (Revised)
Share-Based Payment
. The use of the simplified method
58
requires
our option plan to be consistent with a "plain vanilla" plan and was originally permitted through December 31, 2007 under SAB 107. In December 2007, the SEC issued
SAB 110,
Share-Based Payment
, to amend the SEC's views discussed in SAB 107 regarding the use of the simplified method in developing an
estimate of expected life of share options in accordance with FAS No. 123(R). SAB 110 is effective for the Company beginning December 31, 2007. The Company will continue to use
the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life, in accordance with SAB 107, as amended by SAB 110.
In
March 2008, the FASB issued SFAS 161,
Disclosures about Derivative Instruments and Hedging Activities,
an amendment of
SFAS 133. This statement requires enhanced disclosures about derivative instruments and hedging activities within an entity by requiring the disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format. It provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit
riskrelated, and it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. The Company is evaluating the impact of the adoption of
SFAS 161 and believes there will be no material impact on our consolidated financial statements or financial operations.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
|
|
December 30, 2007
|
|
December 31, 2006
|
|
Land
|
|
$
|
1,665
|
|
$
|
1,891
|
|
Buildings and improvements
|
|
|
7,100
|
|
|
7,294
|
|
Machinery and equipment
|
|
|
26,787
|
|
|
26,834
|
|
Dies, jigs and fixtures
|
|
|
1,464
|
|
|
1,198
|
|
Computers, software, office equipment and furniture
|
|
|
3,762
|
|
|
3,784
|
|
Automobiles and trucks
|
|
|
170
|
|
|
181
|
|
Leasehold improvements
|
|
|
9,147
|
|
|
8,682
|
|
Construction in progress
|
|
|
851
|
|
|
602
|
|
|
|
|
|
|
|
|
|
$
|
50,946
|
|
$
|
50,466
|
|
Less accumulated depreciation and amortization
|
|
|
(31,752
|
)
|
|
(30,578
|
)
|
|
|
|
|
|
|
|
|
$
|
19,194
|
|
$
|
19,888
|
|
|
|
|
|
|
|
As
of December 30, 2007 and December 31, 2006, none of the Company's assets were under capital lease agreements. Depreciation and amortization expense for the years ended
December 30, 2007, December 31, 2006, and January 1, 2006 was $3.1 million, $3.4 million, and $3.1 million, respectively.
In
May 2007, the Company completed the sale of the Mexico building and in December 2007 the Company completed the sale of the Mexico corporation. See further discussion in Note 10
to the accompanying consolidated financial statements.
5. NET INCOME (LOSS) PER SHARE
In accordance with SFAS 128,
Earnings Per Share
, basic income (loss) per share is based upon the weighted
average number of common shares outstanding. For the year ended December 30, 2007, all 2,791,579 of outstanding stock options were excluded from the calculation of diluted income (loss) per
share as their effect would have been anti-dilutive due to the net loss for the year. For the year ended December 31, 2006, 2,297,054 of outstanding stock options were excluded from
the calculation of
59
diluted
income (loss) per share as their exercise prices would render them anti-dilutive. For the year ended January 1, 2006, all 2,270,115 shares subject to outstanding stock
options were excluded from the calculation of diluted income (loss) per share as their effect would have been anti-dilutive due to the net loss for the year.
The
following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1 2006
|
|
Net income (loss)
|
|
$
|
(8,973
|
)
|
$
|
83
|
|
$
|
(3,232
|
)
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingbasic
|
|
|
19,387
|
|
|
19,286
|
|
|
19,230
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingdiluted
|
|
|
19,387
|
|
|
19,298
|
|
|
19,230
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.46
|
)
|
$
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.46
|
)
|
$
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
6. DEBT
Debt consists of the following at December 30, 2007 and December 31, 2006 (in thousands):
|
|
December 30, 2007
|
|
December 31, 2006
|
5.25% senior notes, current portion
|
|
$
|
46,630
|
|
$
|
|
5.25% senior notes, long-term portion
|
|
|
|
|
|
46,630
|
|
|
|
|
|
Total debt
|
|
$
|
46,630
|
|
$
|
46,630
|
|
|
|
|
|
Presented
below is the Company's debt and debt payable to affiliates at December 30, 2007 and December 31, 2006 (in thousands):
|
|
December 30, 2007
|
|
December 31, 2006
|
Debt:
|
|
|
|
|
|
|
|
Current
|
|
$
|
24,485
|
|
$
|
|
|
Long-term debt
|
|
|
|
|
|
24,485
|
Debt payable to affiliates:
|
|
|
|
|
|
|
|
Current
|
|
|
22,145
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
22,145
|
|
|
|
|
|
Total debt
|
|
$
|
46,630
|
|
$
|
46,630
|
|
|
|
|
|
As
of December 30, 2007, all of the Company's debt is scheduled to be repaid in 2008.
60
The debt includes the Company's senior notes, which mature on November 1, 2008. Interest on the senior notes is payable in cash on May 1 and November 1 of each year.
The senior notes are secured by a second-priority lien on substantially all of the Company's domestic assets and by a pledge of 65% of the equity of certain of the Company's foreign subsidiaries. As
of December 30, 2007, the Company was in compliance with all of the covenants set forth in the principal agreements governing the 5.25% senior secured notes due in 2008. The Company does not
currently have sufficient funds to repay these notes and is actively seeking to refinance this obligation; however, given the current credit market conditions the Company acknowledges that it may not
be able to refinance this obligation at comparable interest rates to the 5.25% annual interest rate in the past, and any refinancing may be on terms that are materially less favorable. In addition, if
the Company is not able to obtain satisfactory financing, the Company may be forced to sell some of its assets or to otherwise significantly alter its operating plan.
The
Company's primary line of credit is its senior revolving credit facility with General Electric Capital Corporation (the "Credit Facility"). In order to increase borrowing capacity
that was in effect lowered by historical earnings before interest, taxes, depreciation and amortization expense ("EBITDA") covenant, the Company approached General Electric Capital Corporation on
re-negotiating our Credit Facility. On November 1, 2007, the Company and General Electric Capital Corporation amended the credit agreement for the revolving line of credit dated
February 24, 2004. The amended Credit Facility provides for borrowings of up to the lesser of $7.5 million or 85% of eligible domestic accounts receivable. As of December 30,
2007, our borrowing base was $7.5 million, our eligible accounts receivable was $10.3 million. The Credit Facility matures in August 2008. Prior to November 1, 2007, the
borrowings bore interest, at the Company's option, at a rate per annum equal to LIBOR plus 2.5% or the agent bank's base rate plus 1.0%. Effective November 1, 2007, the borrowings bear
interest, at the Company's option, at a rate per annum equal to LIBOR plus 3.5% or the agent bank's base rate plus 2.0%. In addition to paying interest on outstanding principal, the Company is
required to pay a commitment fee to the lenders under the credit facility in respect of the average daily balance of unused loan commitments at a rate of 1.0% per annum effective November 1,
2007. Prior to November 1, 2007 the rate was 0.5% per annum. In lieu of a maximum senior leverage multiple covenant, the new amended Credit Facility effective November 1, 2007 includes a
minimum EBITDA target for the fourth quarter of 2007, which the Company was in compliance with at December 30, 2007. In 2008, quarterly minimum EBITDA targets will be established. Prior to
November 1, 2007, the EBITDA covenant limited our borrowing to the lower of the borrowing base or two times our EBITDA as defined by the prior credit agreement. The Credit Facility is secured
by a first-priority lien, subject to permitted encumbrances, on substantially all of the Company's domestic assets and by a pledge of 65% of the equity of certain of the Company's foreign
subsidiaries. The Credit Facility contains certain restrictive covenants including the minimum EBITDA target. In March 2008, General Electric Capital Corporation modified the amended credit agreement
effective as of December 30, 2007 for a balance sheet covenant issue resulting from the capitalization of intercompany debt with our Dutch holding company during 2007. As of December 30,
2007, there were no borrowings outstanding under the Credit Facility, and the Company was in compliance with all of the covenants under the Credit Facility.
Cherokee
Europe maintains a working capital line of credit of approximately $4.5 million, expressed as Euros 3.0 million, with Bank Brussels Lambert, a subsidiary of ING
Belgie NV, a bank in Brussels, which is denominated in Euros, collateralized by a pledge in first and second rank over a specific amount of business assets, requires Cherokee Europe to maintain
a certain specific minimum solvency ratio and is cancelable at any time. Our access to the line is limited to $4.0 million because $0.5 million is committed to minimum guarantees on
specific collections and payments. In November 2007, ING Belgie NV restricted the Company from transferring funds from Europe to the U.S. in the form of management and dividend fees. During the
quarter ended September 30, 2007, Cherokee Europe borrowed $2.1 million from the line of credit which remained outstanding as of December 30, 2007. As of December 30, 2007,
Cherokee Europe was in compliance with all covenants.
61
In
January 2007, Cherokee China entered into a loan contract with Industrial and Commercial Bank of China Ltd. ("ICBC") for a working capital line of credit. Pursuant to the
contract, ICBC agreed to make advances up to the equivalent of approximately $3.4 million, expressed as RMB 25.0 million. The line of credit is collateralized by the Company's building
in Shanghai, China. The first term ended January 29, 2008, and was renewed and extended for an additional year, until January 2009. The contract is renewable annually, but is cancelable at any
time. Interest is payable monthly at a fixed rate based on the transaction date of our borrowings, the rates vary according to the specific dates and are announced by the People's Bank of China, which
was 6.55% at January 29, 2007 and 6.04% at March 20, 2007, based on dates amounts were borrowed. Beginning with its initial borrowing under the contract, Cherokee China has agreed to
deposit in the ICBC Shanghai Branch at least 90% of the operating revenue it collects. The cash from these deposits made into our bank account are not restricted from our usage of these funds. As of
December 30, 2007, Cherokee China had $1.3 million of borrowings under the line of credit and was in compliance with all covenants.
In
July 2007, Cherokee Europe borrowed short-term funds of $0.6 million from ING Belgie NV, and repaid the amount as of December 25, 2007. The loan
arrangement was over six months, with monthly payments of $96,000 to be repaid by December 25, 2007. The loan bore a 5.3% interest rate.
7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following (in thousands):
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
1999 Europe restructuring liabilities
|
|
$
|
561
|
|
$
|
676
|
|
2003 Europe restructuring liabilities
|
|
|
1,330
|
|
|
1,421
|
|
Long service award liabilities
|
|
|
963
|
|
|
818
|
|
Pension liability-SFAS 158
|
|
|
1,748
|
|
|
2,671
|
|
Deferred compensation
|
|
|
1,356
|
|
|
1,105
|
|
Advances for research and development
|
|
|
668
|
|
|
597
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
6,626
|
|
$
|
7,288
|
|
Less current portion
|
|
|
(2,092
|
)
|
|
(573
|
)
|
|
|
|
|
|
|
|
|
$
|
4,534
|
|
$
|
6,715
|
|
|
|
|
|
|
|
Estimated
payments required under other long-term obligations as of December 30, 2007 are as follows (in thousands):
|
|
1999 Europe
Restructuring
|
|
2003 Europe
Restructuring
|
|
Long Service
Award
|
|
2008
|
|
|
164
|
|
|
266
|
|
|
53
|
|
2009
|
|
|
342
|
|
|
259
|
|
|
107
|
|
2010
|
|
|
55
|
|
|
238
|
|
|
204
|
|
2011
|
|
|
|
|
|
195
|
|
|
25
|
|
2012
|
|
|
|
|
|
151
|
|
|
20
|
|
Thereafter
|
|
|
|
|
|
221
|
|
|
554
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
561
|
|
$
|
1,330
|
|
$
|
963
|
|
Less current portion
|
|
|
(164
|
)
|
|
(266
|
)
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
397
|
|
$
|
1,064
|
|
$
|
910
|
|
|
|
|
|
|
|
|
|
62
The
Company's long term pension liability is greatly affected by the prevailing discount rate when calculating its liability under SFAS 158. The lower prevailing rates in 2006
resulted in the increase in the liability while the higher prevailing rate in 2007 significantly decreased the liability.
As
of December 30, 2007, the Company has a recorded liability of $1.4 million, for employee and non-employee director contributions and investment activity to
date under the deferred compensation plan, the current portion of $1.1 million is recorded under accrued compensation and benefits and the long-term portion of $0.2 million
is recorded in other long-term liabilities.
8. CHEROKEE EUROPE RESTRUCTURING
Prior to the Company's acquisition of Cherokee Europe, the facility implemented a restructuring plan (the "1999 Europe Restructuring"). The
1999 Europe Restructuring liability of $2.2 million assumed by the Company was comprised entirely of termination benefits to be paid through 2010. The Company paid $0.2 million,
$0.2 million, and $0.2 million in benefits during the years ended December 30, 2007, December 31, 2006, and January 1, 2006, respectively, under the
1999 Europe Restructuring.
In
June 2003, the Company received approval for a restructuring plan (the "2003 Europe Restructuring") of its operations in Europe from the Workers Union and the appropriate
governmental authorities in Belgium. The 2003 Europe Restructuring involved the elimination of 61 operational and administrative positions at the Cherokee Europe facility in Belgium due to
unfavorable economic conditions in that market. All of the terminations were completed in 2003. Pursuant to the 2003 Europe Restructuring, the Company recorded a termination benefits charge of
$4.5 million for the year ended December 28, 2003, to be paid through 2016. The Company paid $0.4 million, $0.3 million, and $0.4 million in benefits during the
years ended December 30, 2007, December 31, 2006, and January 1, 2006, respectively, under the 2003 Europe Restructuring.
63
A
reconciliation of the 1999 Europe Restructuring and 2003 Europe Restructuring liabilities for the year ended December 30, 2007 and prior years is as follows (in
thousands):
|
|
1999 Europe Restructuring
|
|
2003 Europe Restructuring
|
|
Balance as of December 29, 2002
|
|
$
|
1,052
|
|
$
|
|
|
|
Provision
|
|
|
|
|
|
4,474
|
|
|
Payments
|
|
|
(206
|
)
|
|
(1,942
|
)
|
|
Foreign exchange rate effect
|
|
|
182
|
|
|
282
|
|
|
|
|
|
|
|
Balance as of December 28, 2003
|
|
|
1,028
|
|
|
2,814
|
|
|
Provision
|
|
|
165
|
|
|
(54
|
)
|
|
Payments
|
|
|
(231
|
)
|
|
(1,122
|
)
|
|
Foreign exchange rate effect
|
|
|
66
|
|
|
129
|
|
|
|
|
|
|
|
Balance as of January 2, 2005
|
|
|
1,028
|
|
|
1,767
|
|
|
Provision
|
|
|
27
|
|
|
259
|
|
|
Payments
|
|
|
(163
|
)
|
|
(368
|
)
|
|
Foreign exchange rate effect
|
|
|
(122
|
)
|
|
(206
|
)
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
770
|
|
|
1,452
|
|
|
Provision
|
|
|
50
|
|
|
99
|
|
|
Payments
|
|
|
(224
|
)
|
|
(285
|
)
|
|
Foreign exchange rate effect
|
|
|
80
|
|
|
155
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
676
|
|
|
1,421
|
|
|
Provision
|
|
|
50
|
|
|
117
|
|
|
Payments
|
|
|
(193
|
)
|
|
(362
|
)
|
|
Foreign exchange rate effect
|
|
|
28
|
|
|
154
|
|
|
|
|
|
|
|
Balance as of December 30, 2007
|
|
$
|
561
|
|
$
|
1,330
|
|
Less current portion
|
|
|
(164
|
)
|
|
(266
|
)
|
|
|
|
|
|
|
Due after one year
|
|
$
|
397
|
|
$
|
1,064
|
|
|
|
|
|
|
|
The
provision under the restructuring liability is updated annually to adjust for the expected future obligations.
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its manufacturing facilities under non-cancelable operating leases through 2055. One of the manufacturing facilities is
leased from an entity controlled by a former director of the Company. Rental expense for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 totaled
approximately $1.7 million, $1.7 million and $1.6 million (including $1.2 million, $1.2 million and $1.1 million to an entity controlled by a former
director), respectively.
64
As
of December 30, 2007, the Company has no capital lease contracts. A summary of the Company's operating lease commitments as of December 30, 2007 is as follows (in
thousands):
Year ending December 30:
|
|
|
2008
|
|
$
|
1,611
|
2009
|
|
|
568
|
2010
|
|
|
43
|
2011
|
|
|
18
|
2012
|
|
|
6
|
Thereafter
|
|
|
103
|
|
|
|
Total minimum lease payments
|
|
$
|
2,349
|
|
|
|
As
of December 30, 2007, total future minimum payments for operating leases aggregated to $2.3 million, of which $1.6 million is payable to an entity controlled by a
former director of the Company.
The Company has agreed to indemnify the former owners of Cherokee Europe for product liability, environmental hazard and employment practice claims relating
solely to post-acquisition business. The Company also indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware, and various lessors in
connection with facility leases for certain claims arising from such facility or lease. The maximum amount of potential future payments under such indemnifications is not determinable.
The
Company has not incurred significant amounts related to these guarantees and indemnifications, and no liability has been recorded in the consolidated financial statements for
guarantees and indemnifications as of December 30, 2007, and December 31, 2006.
The Company adopted a cash incentive program for certain executives, which provides for cash incentive payments of up to 120% of base salary subject to attainment
of corporate goals and objectives approved by the Company's board of directors. In addition, the Company has entered into severance agreements with certain executives and managers, which provide
payments to the executive or manager if they are, terminated other than for cause or because of a change in control, as defined in the applicable severance agreement. Certain of the severance
agreements provide additional benefits, including acceleration of stock options, in the event of termination in connection with a change of control, as defined in the applicable severance agreement.
On
February 29, 2008, the Company entered into an amendment to the Company's existing severance agreements for the Company's President and Chief Executive Officer, Vice President,
Chief Financial Officer and Secretary, and Executive Vice President of Global Operations. Also, on February 29, 2008, the Company entered into a new severance agreement with its Vice President
of Engineering. See further discussion in Note 16 to the accompanying consolidated financial statements.
In the first quarter of 2006, we executed a mutual release agreement with a former business partner. The agreement released both parties from obligations arising
from past transactions. As a result of this agreement, we made a one-time adjustment to reduce our selling and marketing expense by $0.4 million during the quarter ended
April 2, 2006.
65
In late March 2006, the Company learned that employees of its Indian subsidiary manufacturing operations had made certain unauthorized payments that may have been
in violation of the Foreign Corrupt Practices Act and local laws. The facility in India is used for the sole purpose of manufacturing products for other Company locations and, as such, does not
generate revenue or issue invoices to external customers. It manufactures approximately 6% (by volume) of the products offered by the Company.
The
subject payments, in the aggregate, amounted to approximately $40,000 in each of the years ended January 2, 2005 and January 1, 2006, and less than $10,000 in the year
ended December 31, 2006. The Company retained outside counsel who conducted an internal investigation into these payments. In January 2007, the Company's outside counsel met with the SEC to
discuss the results of the internal investigation.
On November 16, 2007, SynQor announced that it had filed a lawsuit against several of its competitors, including Cherokee International Corporation who was
named in the complaint, for infringement of two patents relating to bus converters and/or non-isolated point of load converters used in intermediate bus architectures. The patents at issue
are U.S. patents 7,072,190 and 7,272,021. The suit was filed in Federal Court in the Eastern District of Texas. The Company intends to vigorously defend this lawsuit. Although the ultimate aggregate
amount of monetary liability or financial impact with respect to this lawsuit is subject to many uncertainties and is therefore not predictable with assurance, the final outcome of this lawsuit, if
adverse, could have a material adverse effect on our financial position, results of operations or cash flows.
10. RESTRUCTURING COSTS AND ASSET IMPAIRMENT CHARGES FOR CLOSURE OF GUADALAJARA, MEXICO FACILITY
During the quarter ended October 1, 2006, the Company announced the planned closure of its Mexican facilities and a related restructuring plan, which was
accounted for in accordance with SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities
. The Mexico Facility encompassed
35,000 square feet in one building and had been in operation since 1988, employing approximately 250 full-time and temporary employees in the production of power supplies.
The
restructuring and closure of our Mexico Facility was completed by the end of the second quarter of 2007. The cumulative costs for the closure of the Mexico Facility were
$1.5 million ($1.3 million of which were recorded in 2006). This was made up of $0.9 million restructuring, $0.3 million asset impairment and $0.3 million additional
excess and obsolescence reserve. During the third quarter ended July 1, 2007, there was a reversal of $38,000 to severance costs due to the transfer and relocation of an employee from the
Mexico Facility to our Tustin Facility. The remaining accrued balance for severance and stay bonuses was paid on July 1, 2007 to the remaining employees.
The Company began actively searching for a buyer for the Mexico Facility building during the quarter ended October 1, 2006; however, in accordance with
SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
, the related assets were not classified as assets held for
sale in the condensed consolidated balance sheets prior to April 1, 2007, because the Company did not meet the criterion that "the asset (disposal group) is available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets", due to our continued utilization of assets in our ongoing operations at our Mexico Facility.
66
The
Company ceased operations in Mexico in March 2007, and reclassified the net book value of $0.7 million for the building and the related assets to
assets held for sale
on the condensed consolidated
balance sheet as of April 1, 2007, in accordance with SFAS 144. In addition,
depreciation of the assets related to this sale was suspended as of April 1, 2007. There was no impairment charge to the related assets because management determined that the measurement value,
the net book value, was lower than the estimated fair value less cost to sell.
On
February 22, 2007, Cherokee Electronica, S.A. de C.V. ("Cherokee Mexico"), a subsidiary of Cherokee International Corporation, a Delaware corporation (the "Company"),
entered into a Purchase and Sale Agreement (the "Agreement") with Inmobiliaria Hondarribia, S.A. de C.V. (the "Buyer") for the sale of Cherokee Mexico's 35,000-foot manufacturing
facility in Guadalajara, Mexico. The Agreement provided that the Buyer pay Cherokee Mexico an aggregate purchase price of approximately US $1.2 million of which a 15% deposit, approximately US
$182,000, was paid on February 22, 2007. On May 24, 2007, the sale of the building was completed, and the remaining 85% of the sales price was transferred into the Company's bank
account. The Company also collected the value added tax on the building in addition to the sales price and paid the taxes collected to the Mexican government in June 2007. The net gain of the sale
recorded during the quarter ended July 1, 2007, was $0.4 million, net of $0.1 million related to the cost to sell the assets which was deducted from the gain.
On December 12, 2007 Cherokee International Corporation sold Cherokee Electronica, S.A. de C.V. corporation and capital stock. The Company received
the proceeds from the sale on December 13, 2007. The net gain of the sale was $0.4 million.
During the quarter ended October 1, 2006, the Company performed an impairment review in accordance with SFAS 144,
Accounting
for the Impairment and Disposal of Long-Lived Assets,
to determine whether any of its long-lived assets located at the Mexico Facility were impaired.
The Company identified certain long-lived assets associated with the restructuring and closure of the Mexico Facility whose carrying value would not be recoverable from future cash flows
and recorded an impairment charge of $0.3 million for these assets. These assets consisted of machinery and equipment, computer technology and equipment, and office furniture and equipment. The
majority of these assets were written off because the Company considered them to have no market value. None of the impairment charges included cash components.
In accordance with SFAS 146, employee severance, contract termination and other exit costs are recorded at their estimated fair value when they are
incurred. During the quarter ended July 1, 2007,
there was a reversal of $38,000 to severance costs due to the transfer and relocation of an employee from the Mexico Facility to our Tustin Facility.
There
were $0.2 million of employee severance and stay bonus costs during the first six months of 2007, which included a pro-rata portion from August 10, 2006,
the communication date, through July 1, 2007, of an estimated amount of statutorily required severance payments and management performance stay-on bonuses incurred for employees at
the Mexico Facility. The Company paid $0.6 million of severance and related expenses to the remainder of employees terminated during the quarter ended July 1, 2007. All severance charges
were settled with cash as of July 1, 2007.
67
A
summary of the restructuring costs and reserve activity for the year ended December 30, 2007 is as follows (in thousands):
|
|
Restructuring Liabilities at December 31, 2006
|
|
Restructuring Charges
|
|
Cash Paid
|
|
Restructuring Liabilities at December 30, 2007
|
Severance and bonuses
|
|
$
|
429
|
|
$
|
155
|
|
$
|
(584
|
)
|
$
|
|
Total Restructuring Costs
|
|
$
|
429
|
|
$
|
155
|
|
$
|
(584
|
)
|
$
|
|
11. STOCKHOLDERS' EQUITY
In July 2003, the Company adopted the Cherokee International Corporation 2002 Stock Option Plan (the "2002 Stock Option Plan") under which up to 1,410,256 shares
of the Company's common stock may be issued pursuant to the grant of non-qualified stock options to the directors, officers, employees, consultants and advisors of the Company and its
subsidiaries. In connection with the adoption of the 2002 Stock Option Plan, the Company granted 1,087,327 stock options. The options typically vest over a four-year period, have a
ten-year contractual life, range in exercise price from $5.85 to $10.34 per share and were granted with exercise prices at or above fair value as determined by Cherokee's Board of
Directors based on income and market valuation methodologies. In February 2004, the Company granted options to purchase 328,320 shares of common stock at an exercise price of $14.50 and terminated the
2002 Stock Option Plan. As of December 30, 2007, the Company had granted a total of 1,415,647 options to purchase shares of common stock under the 2002 Stock Option Plan, which includes options
to purchase shares that were cancelled and subsequently re-granted.
On February 16, 2004, the Company adopted the 2004 Omnibus Stock Incentive Plan (the "2004 Plan"), which provided for the issuance of 800,000 shares of
common stock. The 2004 Plan also provides for an annual increase to be added on the first day of the Company's fiscal year equal to the lesser of (i) 450,000 shares or (ii) 2% of the
number of outstanding shares on the last day of the immediately preceding fiscal year. As of December 30, 2007 a total of 2,926,070 shares of the Company's common stock were reserved for
issuance under the 2004 Plan. Any officer, director, employee, consultant or advisor of the Company is eligible to participate in the 2004 Plan. The 2004 Plan provides for the issuance of stock-based
incentive awards, including stock options, stock appreciation rights, restricted stock, deferred stock, and performance shares. As of December 30, 2007, the Company had granted options to
purchase 2,329,489 shares of common stock under the 2004 Plan, which included 308,153 options issued as partial compensation to non-employee directors. During the year ended
December 30, 2007, the Company granted a total of 745,500 options to purchase shares of common stock under the 2004 Plan, which includes options to purchase shares that were cancelled and
subsequently re-granted. The aggregate fair value for options granted during 2007 was $2,143,000, which will be amortized as stock compensation costs over 6.25 years.
68
Information
with respect to stock option activity and stock options outstanding under both stock option plans is as follows:
|
|
Number of Shares
|
|
Option Exercise Price Per Share
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted-Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
|
Options outstanding, January 1, 2003
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
Options granted (weighted average fair value of $0.59 per share)
|
|
1,087,327
|
|
$
|
5.85 - 10.34
|
|
$
|
6.74
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
(6,410
|
)
|
$
|
5.85 - 10.34
|
|
$
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 28, 2003
|
|
1,080,917
|
|
$
|
5.85 - 10.34
|
|
$
|
6.78
|
|
|
|
|
|
Options granted (weighted average fair value of $6.57 per share)
|
|
527,320
|
|
$
|
6.96 - 14.50
|
|
$
|
13.32
|
|
|
|
|
|
Options exercised
|
|
(6,056
|
)
|
$
|
5.85 - 10.34
|
|
$
|
6.42
|
|
|
|
|
|
Options forfeited
|
|
(167,417
|
)
|
$
|
5.85 - 14.50
|
|
$
|
7.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, January 2, 2005
|
|
1,434,764
|
|
$
|
5.85 - 14.50
|
|
$
|
9.05
|
|
|
|
|
|
Options granted (weighted average fair value of $2.12 per share)
|
|
1,227,489
|
|
$
|
2.97 - 7.26
|
|
$
|
4.56
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
(392,138
|
)
|
$
|
3.89 - 14.50
|
|
$
|
9.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, January 1, 2006
|
|
2,270,115
|
|
$
|
2.97 - 14.50
|
|
$
|
6.47
|
|
|
|
|
|
Options granted (weighted average fair value of $2.22 per share)
|
|
157,500
|
|
$
|
3.18 - 6.76
|
|
$
|
3.69
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
(130,561
|
)
|
$
|
3.19 - 14.50
|
|
$
|
7.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2006
|
|
2,297,054
|
|
$
|
2.97 - 14.50
|
|
$
|
6.23
|
|
|
|
|
|
Options granted (weighted average fair value of $2.87 per share)
|
|
745,500
|
|
$
|
4.40 - 5.54
|
|
$
|
4.95
|
|
|
|
|
|
Options exercised
|
|
(30,000
|
)
|
$
|
2.97 - 3.75
|
|
$
|
3.19
|
|
|
|
|
|
Options forfeited
|
|
(220,975
|
)
|
$
|
3.19 - 14.50
|
|
$
|
5.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 30, 2007
|
|
2,791,579
|
|
$
|
2.97 - 14.50
|
|
$
|
5.97
|
|
7.49
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest in the future at December 30, 2007
|
|
2,463,011
|
|
|
|
|
$
|
6.14
|
|
7.29
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 30, 2007
|
|
1,464,005
|
|
|
|
|
$
|
6.75
|
|
6.42
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise
Prices
|
|
Number of Shares
|
|
Weighted Average Remaining Contractual Life in Years
|
|
Weighted Average Exercise Price
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
$2.97 - 3.18
|
|
112,500
|
|
8.07
|
|
$
|
3.01
|
|
43,750
|
|
$
|
2.99
|
$3.19
|
|
498,900
|
|
7.94
|
|
$
|
3.19
|
|
271,950
|
|
$
|
3.19
|
$3.49 - 4.77
|
|
177,500
|
|
8.33
|
|
$
|
3.86
|
|
54,375
|
|
$
|
3.75
|
$4.94
|
|
625,500
|
|
9.50
|
|
$
|
4.94
|
|
|
|
$
|
|
$4.97 - 5.54
|
|
80,000
|
|
9.49
|
|
$
|
5.13
|
|
|
|
$
|
|
$5.85
|
|
627,930
|
|
5.58
|
|
$
|
5.85
|
|
627,930
|
|
$
|
5.85
|
$7.26
|
|
284,000
|
|
7.20
|
|
$
|
7.26
|
|
142,000
|
|
$
|
7.26
|
$8.07
|
|
30,000
|
|
6.93
|
|
$
|
8.07
|
|
22,500
|
|
$
|
8.07
|
$10.34
|
|
140,249
|
|
5.58
|
|
$
|
10.34
|
|
140,249
|
|
$
|
10.34
|
$14.50
|
|
215,000
|
|
6.13
|
|
$
|
14.50
|
|
161,251
|
|
$
|
14.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,791,579
|
|
7.49
|
|
$
|
5.97
|
|
1,464,005
|
|
$
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 16, 2004, the Company adopted the 2004 Employee Stock Purchase Plan (the "ESPP"). The ESPP provides for an annual increase to be added on the
first day of the Company's fiscal year equal to the lesser of (i) 250,000 shares or (ii) 1% of the number of outstanding shares on the last day of the immediately preceding fiscal year.
As of December 30, 2007, a total of 742,019 shares of common stock were reserved for issuance under the plan. The ESPP, which is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, is implemented utilizing six-month offerings with purchases occurring at six-month intervals, with a new offering
period commencing on the first trading day on or after May 15 and November 15 and ending on the last trading day on or before November 14 or May 14, respectively. The
Compensation Committee of the Company's Board of Directors oversees administration of the ESPP. Employees are eligible to participate if they are employed for at least 20 hours per week and
more than 5 months in a calendar year by the Company, subject to certain restrictions. The ESPP permits eligible employees to purchase common stock through payroll deductions, which may not
exceed 15% of an employee's compensation. The price of common stock purchased under the ESPP is 85% of the lower of the fair market value of the common stock at the beginning of each
six-month offering period or on the applicable purchase date. Employees may end their participation in an offering at any time during the offering period, and participation ends
automatically upon termination of employment. The Compensation Committee may at any time amend or terminate the ESPP, except that no such amendment or termination may adversely affect shares
previously issued under the ESPP. As of December 30, 2007, 236,016 shares of common stock had been issued under the ESPP.
On February 16, 2004, the Company adopted two executive deferred compensation plans for the benefit of certain designated employees and
non-employee directors of the Company. The plans were amended on January 1, 2008 to comply with the regulations for nonqualified deferred compensation arrangements under Internal
Revenue Code (IRC) Section 409A. The plans allow participating employees and non-employee directors to make pre-tax deferrals of up to 100% of their annual base salary
and bonuses, and retainer fees and meeting fees, respectively. The plans allow the Company to make matching contributions and employer profit sharing credits at the sole discretion of the Company. A
participant's interest in each matching contribution and employer profit sharing credit, if any, vests in full no later than after 3 years.
70
As of December 30, 2007, the Company has a recorded liability of $1.4 million, for employee and non-employee director contributions and investment activity to
date, the current portion of $1.1 million is recorded under accrued compensation and benefits and the long-term portion of $0.2 million is recorded in other
long-term liabilities. As of December 31, 2006 the Company had a recorded liability of $1.1 million which was recorded in other long-term liabilities. The Company
has provided no matching contributions during the year ended December 30, 2007 and prior years.
In
January 2008, we paid $0.6 million of scheduled distributions to participants from the deferred compensation plan.
12. RETIREMENT PLANS
Cherokee Europe maintains a pension plan for certain levels of staff and management that includes a defined benefit feature. The following represents the amounts
related to this defined benefit plan (in thousands):
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of period
|
|
$
|
9,002
|
|
$
|
5,112
|
|
$
|
5,986
|
|
|
Benefits paid
|
|
|
(682
|
)
|
|
(546
|
)
|
|
(934
|
)
|
|
Effect of exchange rate changes
|
|
|
889
|
|
|
744
|
|
|
(744
|
)
|
|
Service cost
|
|
|
364
|
|
|
238
|
|
|
152
|
|
|
Plan participant's contributions
|
|
|
137
|
|
|
124
|
|
|
125
|
|
|
Interest cost
|
|
|
417
|
|
|
200
|
|
|
247
|
|
|
Actuarial loss
|
|
|
(2,681
|
)
|
|
3,130
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of period
|
|
$
|
7,446
|
|
$
|
9,002
|
|
$
|
5,112
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of period
|
|
$
|
5,030
|
|
$
|
2,722
|
|
$
|
3,698
|
|
|
Benefits paid
|
|
|
(682
|
)
|
|
(546
|
)
|
|
(934
|
)
|
|
Effect of exchange rate changes
|
|
|
585
|
|
|
407
|
|
|
(437
|
)
|
|
Actual return on plan assets
|
|
|
332
|
|
|
1,864
|
|
|
13
|
|
|
Employer contribution
|
|
|
296
|
|
|
459
|
|
|
257
|
|
|
Plan participants' contributions
|
|
|
137
|
|
|
124
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of period
|
|
$
|
5,698
|
|
$
|
5,030
|
|
$
|
2,722
|
|
|
|
|
|
|
|
|
|
|
Unfunded status
|
|
$
|
(1,748
|
)
|
$
|
(3,972
|
)
|
$
|
(2,390
|
)
|
|
Unrecognized net actuarial gain
|
|
|
|
|
|
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
|
Accrued pension liability
|
|
$
|
(1,748
|
)
|
$
|
(3,972
|
)
|
$
|
(1,249
|
)
|
|
|
|
|
|
|
|
|
Information for pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
7,446
|
|
$
|
9,002
|
|
$
|
5,112
|
|
|
Accumulated benefit obligation
|
|
$
|
5,992
|
|
$
|
6,921
|
|
$
|
3,919
|
|
|
Fair value of assets
|
|
$
|
5,698
|
|
$
|
5,030
|
|
$
|
2,722
|
|
Components of Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
364
|
|
$
|
238
|
|
$
|
152
|
|
|
Interest cost
|
|
|
417
|
|
|
200
|
|
|
247
|
|
|
Expected return on plan assets
|
|
|
(236
|
)
|
|
(127
|
)
|
|
(141
|
)
|
|
Amortization of net (gain)/loss
|
|
|
182
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
727
|
|
$
|
372
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
71
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
Weighted average assumptions used:
|
|
|
|
|
|
|
|
For determining benefit obligations at the years ended:
|
|
|
|
|
|
|
|
Discount rate
|
|
5.50
|
%
|
4.50
|
%
|
4.00
|
%
|
Salary increase
|
|
3.75
|
%
|
3.75
|
%
|
3.50
|
%
|
For determining net periodic cost for years ended:
|
|
|
|
|
|
|
|
Discount rate
|
|
4.50
|
%
|
4.00
|
%
|
4.00
|
%
|
Salary increase
|
|
3.75
|
%
|
3.50
|
%
|
3.50
|
%
|
Expected return on assets
|
|
4.50
|
%
|
4.50
|
%
|
4.50
|
%
|
Pension plan assets:
|
|
|
|
|
|
|
|
Guaranteed insurance contracts
|
|
100
|
%
|
100
|
%
|
100
|
%
|
All
plan funds are invested with Fortis AG, an insurance company in Europe, which guarantees the plan a fixed rate of return based on rates in effect at the time of deposit. Returns may
be higher than the fixed rates due to a profit sharing provision and are dependent on the overall investment results of Fortis AG. In general, the assets of the insurance contracts are primarily
invested in Euro bonds with only a small portion in equities.
The
Company expects to contribute approximately $400,000 to the pension plan in fiscal 2008.
Estimated future pension benefit payments (in thousands):
|
|
|
2008
|
|
$
|
411
|
2009
|
|
|
827
|
2010
|
|
|
1,769
|
2011
|
|
|
645
|
2012
|
|
|
347
|
Years 2013 - 2017
|
|
$
|
2,708
|
The
Company maintains a retirement plan (the "401(k) Plan") in which substantially all domestic employees as of January 1, 2008 are eligible to participate in after completing
three months of employment. Prior to January 1, 2008, employees were eligible to participate in the plan after six months of employment. The Company adopted the safe harbor method in operating
the 401(k) Plan effective January 1, 2008. As of January 1, 2008, under the safe harbor method, the 401(k) Plan allows participating employees to contribute up to 50% of the employee's
pretax compensation, with the Company matching up to 3.5% of the first 6% of employee contributions. Company contributions fully vest and are non-forfeitable after the participant has
completed two years of service. Prior to January 1, 2008, the Company allowed participating employees to contribute up to 15% of the employee's pretax compensation, with the Company making
discretionary matching contributions. Company contributions were fully vested and non-forfeitable after the participant completed five years of service. For the years ended
December 30, 2007, December 31, 2006, and January 1, 2006, the Company elected to contribute approximately $361,000, $312,000, and $280,000, respectively, to the 401(k) Plan.
Beginning with the year ended December 31, 2006, the Company made quarterly employer contributions to the 401(k) Plan. Prior to January 2, 2006, employer contributions were generally
made after the calendar year end. Participants pay administrative costs associated with the 401(k) Plan.
72
13. CONCENTRATIONS
The Company recorded net sales of greater than 10% of total net sales from the following customers:
|
|
Years Ended
|
|
Customer
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
A
|
|
*
|
|
*
|
|
10.4
|
%
|
B
|
|
11.6
|
%
|
*
|
|
*
|
|
-
*
-
Customer
net sales were less than 10% of total net sales.
The
Company has outstanding accounts receivable balances of greater than 10% of total net receivables from the following customers:
|
|
As of
|
Customer
|
|
December 30, 2007
|
|
December 31, 2006
|
A
|
|
*
|
|
*
|
B
|
|
10.6
|
%
|
*
|
-
*
-
Customer
accounts receivable balance was less than 10% of total accounts receivable, net.
Although
not anticipated, a decision by a major customer to decrease the amount purchased from the Company or to cease purchasing the Company's products could have an adverse effect on
the Company's future financial position and results of operations.
The
Company sells its power supply products to OEMs in the computing and storage, wireless infrastructure, enterprise networking, medical and industrial markets. These activities
are managed as a single business and have been aggregated into a single reportable operating segment. For the years ended December 30, 2007, December 31, 2006, and January 1,
2006, net sales by region were as follows (in thousands):
|
|
Years Ended
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
North America (primarily United States)
|
|
$
|
64,116
|
|
$
|
75,264
|
|
$
|
63,157
|
Europe
|
|
|
45,193
|
|
|
53,201
|
|
|
50,399
|
Asia
|
|
|
18,833
|
|
|
16,182
|
|
|
8,051
|
Other
|
|
|
354
|
|
|
381
|
|
|
472
|
|
|
|
|
|
|
|
|
|
$
|
128,496
|
|
$
|
145,028
|
|
$
|
122,079
|
|
|
|
|
|
|
|
The
Company's long-lived assets located outside of the United States were $17.6 million and $18.2 million as of December 30, 2007 and December 31,
2006, respectively.
14. INCOME TAXES
Income (loss) before income taxes consists of the following components (in thousands):
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
United States
|
|
$
|
3,785
|
|
$
|
7,218
|
|
$
|
4,604
|
|
Foreign
|
|
|
(15,210
|
)
|
|
(7,218
|
)
|
|
(6,959
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,425
|
)
|
$
|
|
|
$
|
(2,355
|
)
|
|
|
|
|
|
|
|
|
73
The
provision for current and deferred income taxes consists of the following (in thousands):
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
(51
|
)
|
|
State
|
|
|
11
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(227
|
)
|
|
653
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$
|
(216
|
)
|
$
|
653
|
|
$
|
352
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(2,236
|
)
|
|
(736
|
)
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
$
|
(2,236
|
)
|
$
|
(736
|
)
|
$
|
525
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(2,452
|
)
|
$
|
(83
|
)
|
$
|
877
|
|
|
|
|
|
|
|
|
|
The
Company's effective tax rate differs from the federal statutory rate of 34% as follows (in thousands):
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
January 1, 2006
|
|
Worldwide pre-tax income (loss) at 34%
|
|
$
|
(3,885
|
)
|
$
|
|
|
$
|
(801
|
)
|
State tax, net of federal benefit
|
|
|
159
|
|
|
168
|
|
|
|
|
Foreign income not subject to U.S. tax (benefit)
|
|
|
3,327
|
|
|
935
|
|
|
847
|
|
Goodwill impairment
|
|
|
1,767
|
|
|
|
|
|
|
|
Foreign taxes
|
|
|
(2,590
|
)
|
|
(305
|
)
|
|
769
|
|
Disposal of foreign subsidiary
|
|
|
(3,272
|
)
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
1,501
|
|
|
(782
|
)
|
|
248
|
|
Other
|
|
|
541
|
|
|
(99
|
)
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(2,452
|
)
|
$
|
(83
|
)
|
$
|
877
|
|
|
|
|
|
|
|
|
|
74
The
Company's deferred income taxes are comprised of the following (in thousands):
|
|
Years Ended
|
|
|
|
December 30, 2007
|
|
December 31, 2006
|
|
Net deferred income taxes
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
813
|
|
$
|
1,487
|
|
Nondeductible reserves
|
|
|
423
|
|
|
607
|
|
Net operating loss carry-forwards
|
|
|
22,870
|
|
|
24,223
|
|
Fixed assets
|
|
|
673
|
|
|
418
|
|
Tax basis step up from 1999 re-capitalization
|
|
|
27,825
|
|
|
32,653
|
|
Other
|
|
|
21
|
|
|
326
|
|
Compensation and pension
|
|
|
1,841
|
|
|
2,997
|
|
Credits
|
|
|
579
|
|
|
954
|
|
Capital loss carryforward
|
|
|
3,892
|
|
|
|
|
Foreign exchange gain
|
|
|
(534
|
)
|
|
(4,597
|
)
|
Deferred fire gain
|
|
|
(653
|
)
|
|
(661
|
)
|
Deferred state taxes
|
|
|
(3,458
|
)
|
|
(3,537
|
)
|
|
|
|
|
|
|
|
|
|
54,292
|
|
|
54,870
|
|
Valuation allowance
|
|
|
(52,672
|
)
|
|
(54,587
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,620
|
|
$
|
283
|
|
|
|
|
|
|
|
In
the opinion of management, it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. Accordingly, management has determined that a
full valuation allowance was required as of December 30, 2007 and December 31, 2006 for U.S. and certain foreign deferred tax assets. At December 30, 2007, we had
$1.6 million of tax benefits from our European operations on the balance sheet. There is no reserve against this tax asset. These benefits were created in fiscal year 2007 from tax losses. The
years immediately preceding 2007 were profitable and our business plans project future profitable years that will utilize this asset. Cherokee Europe operations have a history of profits and in the
opinion of management, it is more likely than not that the Company will realize the deferred tax assets. Cherokee Europe has a long term deferred tax liability related to a prior year gain which is
recognized over several years for Belgium tax purposes.
Federal
and state NOL carry-forwards at December 30, 2007, are $50.0 million and $39.6 million, respectively. Federal NOL carry-forwards begin expiring in 2022 and
state NOL carry-forwards begin expiring in 2014. Foreign NOL carry-forwards are $10.5 million at December 30, 2007, the majority of which have an infinite carryforward period.
Our
China operation is not subject to taxes for five years beginning in 2008 due to a tax holiday.
U.S.
deferred income taxes were not provided for on undistributed earnings from non-U.S. subsidiaries. Those earnings are considered to be permanently reinvested in
accordance with Accounting Principles Board (APB) Opinion 23.
The
Company adopted FIN 48,
Accounting for Uncertainty in Income Taxes
on January 1, 2007. As a result of adoption, the
Company recognized a cumulative effect adjustment of less than $0.1 million to the January 1, 2007 accumulated deficit balance. At January 1, 2007, we had $1.8 million of
gross unrecognized tax benefits, of which $0.6 million would reduce our effective tax rate if recognized. Of the total unrecognized tax benefits at the adoption date, $1.2 million was
recorded as a reduction to deferred tax assets, which caused a corresponding reduction in our valuation allowance of $1.2 million. To the extent such portion of unrecognized tax benefits is
recognized at a time such valuation allowance no longer exists, the recognition would impact our effective tax rate. During the second quarter of 2007 the Company effectively settled a Netherlands
examination of the years 2002 through
75
2006.
As a result of the Netherlands settlement, the Company reduced the liability for unrecognized tax benefits by $0.3 million during the second quarter of 2007. The Company received
$0.2 million of refunds from the Dutch government during the third quarter of 2007. In the fourth quarter of 2007 the Company received a favorable ruling on one of three tax years in India and
as a result reduced the liability for unrecognized tax benefits by approximately $0.1 million. At December 30, 2007, we have $0.3 million of gross unrecognized tax benefits, of
which $0.3 million would reduce our effective tax rate if recognized. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in income tax
expense. As of December 30, 2007, we have less than $0.1 million of accrued interest and penalties related to uncertain tax positions.
A
reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits including accrued interest and penalties is as follows (in millions):
Gross unrecognized tax benefits at January 1, 2007
|
|
$
|
1.8
|
|
Gross increases for tax positions of prior years
|
|
|
|
|
Gross decreases for tax positions of prior years
|
|
|
(0.6
|
)
|
Current year tax positions
|
|
|
|
|
Settlements
|
|
|
|
|
Lapse of statute of limitations
|
|
|
|
|
Disposition of legal entity
|
|
|
(0.9
|
)
|
|
|
|
|
Gross unrecognized tax benefits at December 30, 2007
|
|
$
|
0.3
|
|
|
|
|
|
The
tax years 1997 to 2006 remain open to examination by the major taxing jurisdictions to which we are subject. The Company is currently under examination in India for certain years
between 2000 and 2005 and in the United States for the year 2005. In the fourth quarter of 2007 we sold our Mexican subsidiary and are no longer subject to examinations in Mexico. The Company is
scheduled to begin an audit of 2005 and 2006 in Belgium beginning in the first quarter of fiscal 2008. Due to the potential resolution of the examinations, it is reasonably possible that the
unrecognized tax benefits at December 30, 2007, may change within the next twelve months by a range of $0 to $0.3 million.
15. GAIN FROM INSURANCE PROCEEDS (CHEROKEE EUROPE FIRE)
On January 19, 2004, the Company experienced a fire in part of its facility in Belgium, which destroyed certain inventory, property and equipment. The
Company was fully insured for the replacement value of the destroyed items, subject to a $5,000 deductible. As of January 2, 2005, the Company had received $3.4 million in insurance
proceeds. Within operating expenses for the year ended January 2, 2005, the Company recorded a loss related to the destroyed inventory, property and equipment.
During
the year ended January 1, 2006 we received additional insurance proceeds to compensate us for the replacement value of the assets destroyed. The total recoveries of
$6.7 million resulted in a $2.9 million gain reported in the year ending January 1, 2006. As of December 31, 2006, the Company had been reimbursed for the values of the
damaged property.
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The
following amounts were recorded in our consolidated financial statements for the year ended January 1, 2006 (in thousands):
Write-off of destroyed assets:
|
|
|
|
Inventory
|
|
$
|
2,437
|
Warehouse and equipment, net book value
|
|
|
158
|
Supplies and other expenses
|
|
|
1,203
|
|
|
|
Total destroyed assets
|
|
$
|
3,798
|
|
|
|
Insurance proceeds:
|
|
|
|
Proceeds received in year ended December 31, 2004
|
|
$
|
3,385
|
Proceeds received in year ended December 31, 2005
|
|
|
3,311
|
|
|
|
Total recoveries
|
|
$
|
6,696
|
|
|
|
16. SUBSEQUENT EVENTS
On February 1, 2008 the Company engaged an investment banker to work on securing the extension of the maturity date of the Senior Notes currently due on
November 1, 2008.
On February 29, 2008, the Company entered into an amendment to the Company's existing severance agreement with each of Jeffrey M. Frank, the Company's
President and Chief Executive Officer, Linster W. Fox, the Company's Executive Vice President, Chief Financial Officer and Secretary, and Mukesh Patel, the Company's Executive Vice President of Global
Operations. These executives' existing severance agreements provide for certain severance payments to be made in the event that the
executive's employment is terminated by the Company without cause. The amendments provide that, if severance is triggered under the executive's severance agreement, the executive's severance benefit
will consist of a cash payment equal to two times the executive's current base salary at the time of termination and continued medical benefits for up to two years. In the case of Mr. Patel,
the amendment further amends his severance agreement to provide that if he terminates his employment with the Company for good reason within one year following a change in control event, he will be
entitled to the severance benefits described above. The amendments further amend Mr. Frank's and Mr. Fox's severance agreements to provide that each of them may terminate employment for
any reason within two years following a change in control of the Company and, in such event, they will be entitled to: a cash payment equal to two times the executive's current base salary at the time
of termination; a prorata cash payment equal to the executive's annual bonus at the time of termination (calculated as if the Company achieved financial performance equal to that set forth in the
then-most current budget approved by the Company's Board of Directors); immediate vesting of all outstanding stock options; continued medical benefits for up to two years; a cash payment
equal to the amount forfeited by the executive under the Company's 401(k) or similar plan; use of an executive outplacement service in an amount not to exceed $50,000 or a lump-sum cash
payment in lieu thereof; and any additional benefits then due or earned under applicable plans or programs of the Company.
On
February 29, 2008, the Company also entered into a severance agreement with Alex Patel, the Company's Vice President of Engineering. The severance agreement provides that, in
the event Mr. Patel's employment is terminated either by the Company without cause or by Mr. Patel for good reason within one year following a change in control event, Mr. Patel
will be entitled to receive a cash payment equal to one times his then current annual base salary and continued medical benefits for up to one year. Mr. Patel's right to receive severance
benefits under the severance agreement is subject to his execution of a release of claims in favor of the Company upon the termination of his employment. The severance agreement also includes certain
confidentiality, non-solicitation and inventions covenants in favor of the Company.
77