<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 March 2, 1996 Commission file number 0-18640
CHEROKEE INC.
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(Exact name of registrant as specified in its charter)
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Delaware 95-4182437
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(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
6835 Valjean Avenue, VAn Nuys, CA 91406
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(Address of principal executive offices) Zip Code
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
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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 April 12, 1996
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Common Stock, $.02 par value per share [ 6,441,533 (1)]
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(1) INCLUDES 509,439 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.
<PAGE>
CHEROKEE INC.
INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets
March 2, 1996 (Unaudited) and June 3, 1995
Statements of Operations (Unaudited)
Three Months and Nine Months ended
March 2, 1996 and February 25, 1995
(Predecessor Company)
Statements of Cash Flow (Unaudited)
Nine months ended March 2, 1996 and
February 25, 1995 (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 5. OTHER INFORMATION
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CHEROKEE INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
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March 2,1996 June 3,1995
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(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (includes Restricted cash of $311,000) $ 5,439,000 $ 285,000
Receivables, net 624,000 11,553,000
Inventories 251,000 11,530,000
Other current assets 326,000 506,000
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Total current assets 6,640,000 23,874,000
Property and equipment, net 26,000 37,000
Assets held for sale 3,576,000 3,665,000
Notes receivable and other, net 1,989,000 684,000
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Total assets $ 12,231,000 $ 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 20,000 1,360,000
Accrued payroll and related expenses 37,000 1,559,000
Other accrued liabilities 74,000 2,306,000
Income taxes payable 74,000 100,000
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Total current liabilities 205,000 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
6,441,533 shares issued and outstanding at March 2, 1996 129,000 122,000
Additional paid-in capital 11,657,000 11,703,000
Accumulated deficit (1,058,000) (4,411,000)
Note receivable from stockholder (202,000) (192,000)
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Stockholders' equity 10,526,000 7,222,000
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Total liabilities and stockholders' equity $ 12,231,000 $ 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
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Three months ended Nine months ended
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March 2, 1996 February 25, 1995 March 2,1996 February 25, 1995
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<S> <C> <C> <C> <C>
Net sales $ 387,000 $ 20,475,000 $ 13,297,000 $ 45,148,000
Cost of goods sold 17,108,000 10,445,000 37,886,000
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Gross profit 387,000 3,367,000 2,852,000 7,262,000
Selling, general and administrative expenses 346,000 5,488,000 3,412,000 14,440,000
------------- ---------------- --------------- -----------------
Operating loss 41,000 (2,121,000) (560,000) (7,178,000)
Other expenses(income):
Interest expense (8,000) (585,000) (354,000) 4,881,000
Investment and Interest income (164,000) (50,000) (367,000) (57,000)
Gain on sale of Uniform division & Other assets (15,000) -- (3,840,000) --
Other (178,000) (96,000) 999,000
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Total other (income) expenses, net (171,000) (357,000) (3,949,000) 5,823,000
Income (loss) before income taxes 212,000 (2,478,000) 3,389,000 (13,001,000)
Income tax(benefit) -- (3,653,000) -- (5,230,000)
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Net income(loss) $ 212,000 $ 1,175,000 $ 3,389,000 $ (7,771,000)
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Net income per common and common equivalent shares $ 0.03 * $ 0.52 *
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Weighted average common and common equivalent
shares outstanding 6,574,961 * 6,476,487 *
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Net income per common shares-fully diluted $ 0.03 * $ 0.52 *
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Weighted average common and common equivalent
shares outstanding-fully diluted 6,635,708 * 6,524,608 *
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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.
<PAGE>
CHEROKEE INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
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Nine months ended
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March 2,1996 February 25, 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,389,000 $ (7,771,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 15,000 457,000
Amortization of goodwill and trademarks - (546,000)
Provision for bad debts 112,000 341,000
Benefit from deferred taxes - (5,230,000)
Amortization of deferred financing costs and debt discount 76,000 57,000
Interest income on note receivable from stockholder (10,000) -
Changes in current assets and liabilities:
Decrease in accounts receivable 10,817,000 671,000
Decrease (increase) in inventories 11,279,000 (5,433,000)
Decrease in other current assets 180,000 122,000
(Decrease) increase in accounts payable and accrued liabilities (5,120,000) 4,558,000
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Net cash provided by (used in) operating activities 20,738,000 (11,682,000)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,000) (306,000)
Purchase of Treasury Stock (75,000)
Proceeds from sales of Assets held for sale 89,000 -
(Increase) decrease in notes receivable and other (1,381,000) 172,000
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Net cash used in investing activities (1,371,000) (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 5,154,000 (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 $ 5,439,000 $ 86,000
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</TABLE>
See accompanying notes.
<PAGE>
CHEROKEE INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 2, 1996 (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 nine month period ended March 2,
1996 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) During the Third Quarter Cherokee signed Retail Direct Licensing
agreements with Venture Stores, Inc. and The Caldor Corporation. These
agreements provide for royalty payments on net sales of merchandise and their
terms extend to January 31, 1999.
(3) PER SHARE INFORMATION
Earnings per share for the nine month period ended March 2, 1996 (the "Nine
Months") and the three month period ended March 2, 1996 (the "Third 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 Nine Months and the Third 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 Third Quarter, 490,561 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.
<PAGE>
Per share data is not presented for the periods ended February 25, 1995, 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 Nine Months ended March 2, 1996 (the "Nine Months") and the
three months ended March 2, 1996 (the "Third Quarter") were $13,297,000 and
$387,000, respectively. As a percentage of total Nine Month and Third Quarter
sales, licensing revenues represented 6% and 76% respectively, and the
terminated businesses represented 94% and 24% respectively. Sales will continue
to decrease as compared to previous periods, as revenue will be generated
primarily through the licensing of the Company's trademarks.
The Company's gross profit margin for the Nine Months and Third Quarter was
$2,852,000 and $387,000 or 21% and 100% of net sales, respectively. The gross
profit percentage is not comparable to historical levels as a result of the
Company ceasing to manufacture and import apparel and footwear and selling its
inventories.
<PAGE>
Selling, general, and administrative expenses for the Nine Months and Third
Quarter were $3,412,000 and $346,000 or 26% and 89% of net sales, respectively.
In the Nine 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 Nine Months and the Third Quarter was
$354,000 and $8,000 respectively. The Company's investment and interest income
for the Nine Months and the Third Quarter was $367,000 and $164,000
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 April 12, 1996, the Company had $5,146,000 in cash and cash equivalents and
$214,000 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 and cash equivalents.
Cash provided by operations during the Nine Months of $20,738,000 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 Nine Months of
$14,213,000 represented the pay-down of the Company's revolving credit facility
and term loan with cash generated from the reduction of inventories, receivables
and the sale of the uniform division. Investing activity over the first Nine
Months of Fiscal 1996 was primarily related to a $1,400,000 increase due to a
note receivable received in connection with the sale of the uniform division.
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's operations.
<PAGE>
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, results of operations and cash flows 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 has
received 75,000 common shares as final settlement in accordance with the
Company's 1994 reorganization plan.
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 April 1, 1996,
the Company re-purchased 31,593 shares at a total cost of $116,981,of which
21,134 of the repurchased shares were pruchased and retired during Third
Quarter. As a result of the retirement, Additional Paid in Capital and
Retained Earnings were reduced by $38,000 and $36,000 respectively.
At the February 26, 1996 Board meeting, the Board of Directors resolved
that steps be taken on behalf of Cherokee to authorize the Disbursing Agent to
return to Cherokee 475,000 shares of Common Stock and to cause these returned
shares to be returned to the status of authorized and unissued 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: April 12, 1996
CHEROKEE INC.
BY:
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ROBERT MARGOLIS
CHIEF EXECUTIVE OFFICER
BY:
----------------------------
CAROL GRATZKE
CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-01-1996
<PERIOD-START> JUN-04-1995
<PERIOD-END> MAR-02-1996
<CASH> 5,439
<SECURITIES> 0
<RECEIVABLES> 1,388
<ALLOWANCES> 764
<INVENTORY> 251
<CURRENT-ASSETS> 6,640
<PP&E> 44
<DEPRECIATION> 18
<TOTAL-ASSETS> 12,231
<CURRENT-LIABILITIES> 205
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 10,397
<TOTAL-LIABILITY-AND-EQUITY> 12,231
<SALES> 12,437
<TOTAL-REVENUES> 13,297
<CGS> 10,445
<TOTAL-COSTS> 10,445
<OTHER-EXPENSES> 354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354
<INCOME-PRETAX> 3,389
<INCOME-TAX> 0
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<NET-INCOME> 3,389
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
