<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 2, 1995 Commission file number 0-18640
CHEROKEE INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4182437
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
6835 Valjean Avenue, Van Nuys, CA 91406
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(Address of principal executive Zip Code
offices)
Registrant's telephone number, including area code (818) 908-9868
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 60 days.
Yes X No
---- ---
Indicate by check mark whether the registrant has filed all documents and
reports to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 12, 1996
- --------------------------------------- -------------------------------
Common Stock, $.02 par value per share [ 6,457,766 ] (1)
_________________________________
(1) Includes, 589,800 shares held by Cherokee's Disbursing Agent for
distribution to holders of trade claims under its Plan of
Reorganization. Upon resolution of such claims under the Plan of
Reorganization, some of these shares may be returned to Cherokee for
cancellation.
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CHEROKEE INC.
INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets
December 2, 1995 (Unaudited) and June 3, 1995
Statements of Operations (Unaudited)
Three Months and Six Months ended
December 2, 1995 and November 26, 1994
(Predecessor Company)
Statements of Cash Flow (Unaudited)
Six months ended December 2, 1995 and
November 26, 1994 (Predecessor Company)
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
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CHEROKEE INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
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DECEMBER 2,1995 JUNE 3,1995
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (includes Restricted cash of $308,000) $ 5,388,000 $ 285,000
Receivables, net 1,354,000 11,553,000
Inventories 250,000 11,530,000
Other current assets 340,000 506,000
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Total current assets 7,332,000 23,874,000
Property and equipment, net 25,000 37,000
Assets held for sale-Building 3,576,000 3,665,000
Notes receivable and other, net 2,236,000 684,000
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Total assets $ 13,169,000 $ 28,260,000
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----------------------- ---------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Short-term revolving credit and other $ 14,213,000
Accounts payable and accrued expenses 993,000 1,360,000
Accrued payroll and related expenses 139,000 1,559,000
Other accrued liabilities 57,000 2,306,000
Income taxes payable 88,000 100,000
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Total current liabilities 1,277,000 19,538,000
Deferred income taxes payable 1,500,000 1,500,000
STOCKHOLDERS' EQUITY:
Common stock, $.02 par value,20,000,000 shares authorized,
6,096,000 Shares issued and outstanding at June 3, 1995 and
6,457,766 shares issued and outstanding at December 2, 1995 129,000 122,000
Additional paid-in capital 11,696,000 11,703,000
Accumulated deficit (1,234,000) (4,411,000)
Note receivable from stockholder (199,000) (192,000)
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Stockholders' equity 10,392,000 7,222,000
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Total liabilities and stockholders' equity $ 13,169,000 $ 28,260,000
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</TABLE>
See accompanying notes.
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CHEROKEE INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
Company Company Company Company
--------------- ----------------- --------------- -------------
Three months ended Six months ended
------------------------------------ --------------------------------
December 2,1995 November 26, 1994 December 2,1995 November 26,
1994
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<S> <C> <C> <C> <C>
Net sales $2,155,000 $18,906,000 $12,910,000 $45,148,000
Cost of goods sold 1,807,000 18,380,000 10,445,000 37,886,000
--------------- ----------------- --------------- -------------
Gross profit 348,000 526,000 2,465,000 7,262,000
Selling, general and administrative expenses 425,000 6,592,000 3,066,000 14,440,000
--------------- ----------------- --------------- -------------
Operating loss (77,000) (6,066,000) (601,000) (7,178,000)
Other expenses (income):
Interest expense 31,000 2,251,000 345,000 4,881,000
Investment and Interest income (148,000) (30,000) (203,000) (57,000)
Gain on sale of Uniform division & Other assets (245,000) - (3,708,000) -
Other (51,000) 794,000 (212,000) 999,000
--------------- ----------------- --------------- -------------
Total other (income) expenses, net (413,000) 3,015,000 (3,778,000) 5,823,000
Income (loss) before income taxes 336,000 (9,081,000) 3,177,000 (13,001,000)
Income tax (benefit) - (3,653,000) - (5,230,000)
--------------- ----------------- --------------- -------------
Net income (loss) $ 336,000 $(5,428,000) $ 3,177,000 $(7,771,000)
--------------- ----------------- --------------- -------------
--------------- ----------------- --------------- -------------
Net income per common and common equivalent shares $ .05 * $ .49 *
Weighted average common and common equivalent
shares outstanding 6,673,893 * 6,473,989 *
--------------- ----------------- --------------- -------------
--------------- ----------------- --------------- -------------
Net income per common shares-fully diluted $ .05 * $ .49 *
Weighted average common and common equivalent
shares outstanding-fully diluted 6,673,893 * 6,473,989 *
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</TABLE>
* Per share results are not presented due to the general lack of
comparability as a result of the revised capital structure of the Company.
See accompanying notes.
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CHEROKEE INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
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Six months ended
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December 2,1995 November 26, 1994
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,177,000 $ (7,771,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,000 457,000
Amortization of goodwill and trademarks - 546,000
Provision for bad debts 212,000 341,000
Benefit from deferred taxes - (5,230,000)
Amortization of deferred financing costs and debt discount (33,000) 57,000
Interest income on note receivable from stockholder (7,000) -
Changes in current assets and liabilities:
Decrease in accounts receivable 9,987,000 671,000
Decrease (increase) in inventories 11,280,000 (5,433,000)
Decrease in other current assets 166,000 122,000
(Decrease) increase in accounts payable and accrued liabilities (4,048,000) 4,558,000
--------------- -----------------
Net cash provided by (used in) operating activities 20,746,000 (11,682,000)
INVESTING ACTIVITIES
Purchases of property, plant and equipment - (306,000)
Proceeds from sales of property and equipment 89,000 -
Decrease (increase) in notes receivable and other (1,519,000) 172,000
--------------- -----------------
Net cash used in investing activities (1,430,000) (134,000)
FINANCING ACTIVITIES
Decrease in long-term debt - (5,596,000)
(Decrease) increase in short-term revolving credit and other (14,213,000) 16,997,000
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Net cash used in financing activities (14,213,000) 11,401,000
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Increase(decrease) in cash and cash equivalents 5,103,000 (415,000)
Cash and cash equivalents at beginning of period 285,000 501,000
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Cash and cash equivalents at end of period $ 5,388,000 $ 86,000
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</TABLE>
See accompanying notes.
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CHEROKEE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 2, 1995 (UNAUDITED) AND JUNE 3, 1995
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulations S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
and six month period ended December 2, 1995 are not necessarily indicative
of the results that may be expected for the year ended June 1, 1996. For
further information, refer to the financial statements and footnotes thereto
included in Cherokee, Inc.'s ("Cherokee" or the "Company") annual report on
Form 10-K for the period ended June 3, 1995.
(2) SIGNIFICANT TRANSACTIONS
(a) On December 1, 1995, Cherokee sold its patents and trademarks
related to the "Rockers" brand footwear to Strategic Partners, Inc., for
$250,000. A royalty will be paid to Cherokee if the "Rocker's" Trademark is
used in connection with the sale of Cherokee footwear to the uniform trade.
(b) During the Second Quarter Cherokee signed Retail Direct
Licensing agreements with Mervyn's, Modern Woman/Woman's World, J. Byrons
and Pamida. These agreements provide for monthly royalty payments on net
sales of merchandise and their terms extend to December 31, 1999.
(c) On November 27, 1995, the Company entered into a Master
License Agreement for the Philippines with Mondragon International. During
the term of the agreement, which expires on December 31, 2000, Mondragon
International has guaranteed minimum royalties of $582,000.
(3) PER SHARE INFORMATION
Earnings per share for the six month period ended December 2, 1995 (the "Six
Months") and the three month period ended December 2, 1995 (the "Second
Quarter") are computed by dividing net income by the weighted average number
of common shares, including those yet to be distributed by the Disbursing
Agent (See form 10-K) and common equivalent shares outstanding, assuming the
use of the treasury stock method and using the average market price of the
common stock for the Six Months
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and the Second Quarter, respectively. Included in common equivalent shares
are various stock options and warrants which for the purpose of these
computations are considered outstanding from the beginning of the period or
time of issuance, if later.
In connection with the Company's December 23, 1994 prepackaged plan of
reorganization, pursuant to Chapter 11 of the United States Bankruptcy Code,
one million shares were issued to Cherokee's Disbursing Agent, to be
distributed to holders of trade claims. As of the Second Quarter, 410,200
shares have been distributed. Most of the bankruptcy claims have been
settled; consequently, the Company currently estimates, that of the
remaining shares held by the Disbursing Agent, 475,000 shares will be
returned for cancellation.
Per share data is not presented for the periods ended November 26, 1994, due
to the general lack of comparability as a result of the revised capital
structure of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Historically, the Company's principal business was manufacturing, importing
and wholesaling casual apparel and footwear primarily under the Cherokee
brand, and licensing the Cherokee trademark to unaffiliated manufacturers
for the productions and marketing of apparel, footwear, and accessories that
the Company did not manufacture, import or market. In May 1995, the Company
set in motion a new strategy which resulted in the Company's principal
business being a marketer and licensor of the Cherokee brand and other
brands it owns or may acquire in the future. The Company has terminated
manufacturing and importing apparel and footwear, has sold most of its
inventories and on July 28, 1995 sold the assets of its uniform division.
The Company's new operating strategy now emphasizes retail direct licensing
whereby the Company grants retailers the license to use the Cherokee
trademark on certain categories of merchandise, including those products
that the Company previously manufactured. Under this new operating strategy
the Company has been able to significantly reduce its overhead and ongoing
operating costs.
As a result of this newly adopted strategy, Cherokee today is no longer
comparable to the former Cherokee.
Net Sales for the six months ended December 2, 1995 (the "Six Months") and
the three months ended December 2, 1995 (the "Second Quarter") were
$12,910,000 and $2,155,000, respectively. As a percentage of total Six
Month and Second Quarter sales, licensing revenues represented 4% and 17%
respectively, and the terminated businesses represented 96% and 83%
respectively. Sales will continue to decrease as compared to
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previous periods, as revenue will be generated primarily through the
licensing of the Company's trademarks.
The Company's gross profit margin for the Six Months and Second Quarter were
$2,465,000 and $348,000 or 19% and 16% of net sales, respectively. The
gross profit percentage has declined from historical levels as a result of
the Company ceasing to manufacture and import apparel and footwear and
selling its inventories.
Selling, general, and administrative expenses for the Six Months and Second
Quarter were $3,066,000 and $425,000 or 24% and 20% of net sales,
respectively. In the Six Months, selling, general and administrative
expenses have declined from historical levels and will continue to decrease
primarily as a result of the termination of the manufacturing and importing
of apparel and footwear. This action enabled the Company to reduce its work
force, space requirements and other operating expenses.
The Company's interest expense for the Six Months and the Second Quarter was
$345,000 and $31,000 respectively. The Company's investment and interest
income for the Six Months and the Second Quarter was $203,000 and $148,000
respectively. The Company has no debt and anticipates having interest
income from investing its excess cash.
Based on the Company's anticipated results for fiscal 1996, management
believes that it has available sufficient net operating loss carry forwards
to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
On December 23, 1994, the Company refinanced its then outstanding revolving
credit facility and term loan with The CIT Group ("CIT"). At September
1995, borrowings under the revolving credit facility and the term loan were
fully paid. The Company terminated its borrowing agreements with CIT
effective September 30, 1995.
On January 3, 1996, the Company had $4,726,000 in cash and cash equivalents
and $553,000 in factored accounts receivables. Cash to repay the line of
credit and term loan was generated from approximately $9,565,000 in cash
proceeds from the sale of the Uniform Division and the liquidation of
inventories and receivables of the apparel and footwear businesses. Cash
flow needs over the next 12 months are expected to be met through the
continued liquidation of the apparel and shoe division inventories and
receivables, and operating cash flows generated from licensing revenues, and
the Company's cash.
Cash provided by operations during the Six Months of $20,746,000 resulted
from the reduction of inventories and receivables associated with the
closure of the apparel and footwear divisions, and sale of the assets of the
uniform division, partially offset by cash utilized in connection with the
operational restructuring. Cash used in financing activities during the Six
Months of $14,213,000 represented the pay-down of the Company's
<PAGE>
revolving credit facility and term loan with cash generated from the
reduction of inventories and receivables. Investing activity over the first
Six Months of Fiscal 1996 was relatively insignificant.
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the actions described below, there are no material legal
proceedings pending by or against the Company.
BANKRUPTCY PROCEEDINGS: Cherokee, Inc. has reached agreement in
principle to settle all remaining unsecured creditors claims arising from
its 1994 Chapter 11 proceedings. These claims are payable in shares of
common stock of the Company, and therefore payment of these claims will not
have a material adverse effect on the financial condition of the Company.
The settlements include Cherokee's agreement to an allowed claim of
$1,239,000 on an outstanding $33 million claim filed by a jeans importer who
will receive 75,000 common shares in accordance with the Company's 1994
reorganization plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1995, the Company held its annual meeting of
stockholders. At the meeting, the Company's 1995 Incentive Stock Option
Plan (the "Plan"), was approved. 4,381,463 shares were voted for approval of
the Plan, 67,574 shares were voted against approval of the Plan, and 73,705
shares abstained from voting.
ITEM 5. OTHER INFORMATION
The Board of Directors has approved a plan to repurchase up to one
million shares of the Company's common stock, subject to the approval of a
three-member committee of the Board. During the period December 15, 1995 to
January 3, 1996, the Company repurchased 21,134 shares.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: January 12, 1996
CHEROKEE INC.
BY: ROBERT MARGOLIS
____________________________
ROBERT MARGOLIS
CHIEF EXECUTIVE OFFICER
BY: CAROL GRATZKE
____________________________
CAROL GRATZKE
CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR QUARTER ENDED DECEMBER 2, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-01-1996
<PERIOD-START> JUN-04-1995
<PERIOD-END> DEC-02-1995
<CASH> 5,388
<SECURITIES> 0
<RECEIVABLES> 2,458
<ALLOWANCES> 1,104
<INVENTORY> 250
<CURRENT-ASSETS> 7,332
<PP&E> 40
<DEPRECIATION> 15
<TOTAL-ASSETS> 13,169
<CURRENT-LIABILITIES> 1,277
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 10,263
<TOTAL-LIABILITY-AND-EQUITY> 13,169
<SALES> 12,357
<TOTAL-REVENUES> 12,910
<CGS> 10,445
<TOTAL-COSTS> 10,445
<OTHER-EXPENSES> 345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 378
<INCOME-PRETAX> 3,177
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,177
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
