<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended August 31, 1996.
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[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _____________________ to __________________.
Commission file number 0-18640
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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 number)
incorporation or organization)
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
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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 October 10, 1996
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Common Stock, $.02 par value per share [7,650,813/1/]
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/1/INCLUDES 7,205 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.
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets
August 31, 1996 (Unaudited) and June 1, 1996
Statements of Operations (Unaudited)
Three Months ended August 31, 1996 and
September 2, 1995
Statements of Cash Flow (Unaudited)
Three months ended August 31, 1996 and
September 2, 1995
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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<TABLE>
<CAPTION>
CHEROKEE INC.
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BALANCE SHEETS
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AUGUST 31,1996 JUNE 1,1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,532,000 $ 1,207,000
Restricted Cash - 310,000
Receivables, net 1,034,000 694,000
Inventories 256,000 256,000
Other current assets 118,000 10,000
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Total current assets 2,940,000 2,477,000
Property and equipment, net 43,000 44,000
Assets held for sale 3,576,000 3,576,000
Notes receivable 1,993,000 1,961,000
Other assets 335,000 262,000
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Total assets $ 8,887,000 $ 8,320,000
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LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 80,000 $ 112,000
Other accrued liabilities 359,000 288,000
Customer deposits 350,000 350,000
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Total current liabilities 789,000 750,000
Other liabilities 1,500,000 1,500,000
STOCKHOLDERS' EQUITY:
Common stock, $.02 par value,20,000,000 shares authorized,
7,650,813 shares issued and outstanding at June 1, 1996
and at August 31, 1996 153,000 153,000
Additional paid-in capital 11,969,000 11,977,000
Accumulated deficit (5,378,000) (5,916,000)
Note receivable from stockholder (146,000) (144,000)
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Stockholders' equity 6,598,000 6,070,000
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Total liabilities and stockholders' equity $ 8,887,000 $ 8,320,000
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</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
CHEROKEE INC.
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STATEMENTS OF OPERATIONS
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(UNAUDITED)
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THREE MONTHS ENDED
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AUGUST 31,1996 SEPTEMBER 2, 1995
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<S> <C> <C>
Product sales $ 41,000 $10,561,500
Royalty revenues 1,113,000 193,500
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Net revenues 1,154,000 10,755,000
Cost of goods sold - 8,638,000
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Gross profit 1,154,000 2,117,000
Selling, general and administrative expenses 723,000 2,641,000
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Operating income 431,000 (524,000)
Other expenses(income) :
Interest expense 1,000 314,000
Investment and Interest income (108,000) (55,000)
Gain on sale of Uniform division & Other assets - (3,463,000)
Other - (161,000)
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Total other (income) expenses, net (107,000) (3,365,000)
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Income before income taxes 538,000 2,841,000
Income tax(benefit) - -
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Net income $ 538,000 $ 2,841,000
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Net income per common and common equivalent shares $ 0.07 $ 0.45
Weighted average common and common equivalent
shares outstanding-primary 8,027,324 6,273,757
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Net income per common shares-fully diluted $ 0.07 $ 0.44
Weighted average common and common equivalent
shares outstanding-fully diluted 8,027,324 6,415,760
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</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
CHEROKEE INC.
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STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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THREE MONTHS ENDED
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AUGUST 31,1996 SEPTEMBER 2, 1996
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<S> <C> <C>
OPERATING ACTIVITIES
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Net income $ 538,000 $ 2,841,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,000 4,000
Provision for bad debts - 212,000
Amortization of discount on note receivable (32,000) (12,000)
Interest income on note receivable from stockholder (2,000) (3,000)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (340,000) 4,649,000
Decrease (increase) in inventories - 9,425,000
(Increase) decrease in other current assets (108,000) 74,000
Increase (decrease) in accounts payable and accrued liabilities 39,000 (2,227,000)
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Net cash provided by operating activities 98,000 14,963,000
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INVESTING ACTIVITIES
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Proceeds from restricted cash investment 310,000 -
Purchase of long term assets (2,000) -
Proceeds from sales of Assets held for sale - 58,000
(Increase) decrease in notes receivable and other assets (73,000) (2,000,000)
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Net cash provided by (used for) investing activities 235,000 (1,942,000)
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FINANCING ACTIVITIES
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(Decrease) increase in short-term revolving credit and other - (13,216,000)
Dividends payment adjustment (8,000) -
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Net cash used in financing activities (8,000) (13,216,000)
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Increase (decrease) in cash and cash equivalents 325,000 (195,000)
Cash and cash equivalents at beginning of period 1,207,000 285,000
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Cash and cash equivalents at end of period $1,532,000 $ 90,000
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Total paid during period:
Income taxes $ - $ 17,000
Interest $ 1,000 $ 314,000
</TABLE>
See accompanying notes.
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CHEROKEE INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 (UNAUDITED) AND JUNE 1, 1996
(1) Basis of Presentation
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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 month period ended August 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended May 31, 1997. 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 1, 1996.
(2) Significant Transactions
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(a) During the three months ended August 31, 1996, Cherokee signed Retail
Direct Licensing agreements with Brylane and Huck Finn Stores Inc. and a
Wholesale Licensing agreement with Outlook Eyewear Company. These agreements
provide for royalty payments on net sales of merchandise and their terms extend
to various dates.
(3) Per Share Information
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Earnings per share for the three months ended August 31, 1996 is 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 First Quarter.
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. During First Quarter, 27,234 shares were distributed
and the remaining shares held by the Disbursing Agent total 7,205 shares, most
of which will be returned for cancellation.
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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
production 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 substantially all of its inventories and on July 28, 1995
sold the assets of its uniform division.
The Company's current operating strategy emphasizes wholesale and retail direct
licensing whereby the Company grants wholesalers and retailers the license to
use the Cherokee trademark on certain categories of merchandise, including those
products that the Company previously manufactured. The Company's license
agreements are either international masters or category specific exclusives or
non-exclusives and provide the Company with final approval of pre-agreed upon
quality standards, packaging and marketing of licensed products. The Company
has the right to conduct periodic quality control inspections to ensure that the
image and quality of licensed products remain consistent. Currently, the
Company has 28 continuing license agreements; seven of which are with retailers,
ten of which are with domestic licensees and eleven of which are with
international licensees. The Company will continue to solicit new licensees
through a small number of executive employees and may retain the services of
outside consultants to assist the Company in this regard.
As a result of the Company's current operating strategy, Cherokee today is no
longer comparable to the former Cherokee.
Net revenues for the three months ended August 31, 1996 (the "First Quarter")
were $1,154,000, generated primarily through the licensing of the Company's
trademarks. As a percentage of total First Quarter sales, licensing revenues
represented 96% and terminated businesses represented 4%.
The Company's gross profit margin for the First Quarter was $1,154,000 or 100%
of net revenues. 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.
Selling, general, and administrative expenses for the First Quarter were
$723,000 or 62% of net revenues. In the First Quarter, selling, general and
administrative expenses have
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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 First Quarter was $1,000. The Company's
investment and interest income for the First Quarter was $108,000. The Company
has no debt and anticipates having interest income from investing its excess
cash.
Based on the Company's anticipated results for fiscal year ending May 31,1997
("Fiscal 1997"), management believes that it has available sufficient net
operating loss carry forwards to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
On August 31, 1996, the Company had $1,532,000 in cash and cash equivalents.
Cash flow needs over the next 12 months are expected to be met through the
operating cash flows generated from licensing revenues, and the Company's cash
and cash equivalents.
Cash provided by operations during the First Quarter of $98,000 resulted from an
increase in accounts receivables and other current assets. Cash used in
financing activities during the First Quarter of $8,000 represented a capital
dividend reimbursement payment. Investing activity over the First Quarter of
Fiscal 1997 was primarily related to a $310,000 increase due to the receipt of
restricted cash previously held as collateral for a stand by letter of credit
("LC"). The LC was returned and the cash was released to the Company on August
23, 1996.
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's operations.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
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In the ordinary course of business, the Company becomes involved in certain
legal claims and litigation. In the opinion of Management, based upon
consultations with legal counsel, the disposition of litigation currently
pending against the Company will not have, individually or in the aggregate, a
materially adverse effect on its consolidated financial position or results of
operations.
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ITEM 4. Submission of Matters to a Vote of Security Holders
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The Company did not submit any matters to a vote of holders of Common Stock
during the First Quarter of Fiscal 1997.
ITEM 5. Other Information
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Having settled all claims arising from its 1994 Chapter 11 proceedings, the
Company sent in a Final Decree to close the 1994 Chapter 11 Bankruptcy, which
was signed and approved by the Bankruptcy Judge on August 15, 1996.
SIGNATURES
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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: October 10, 1996
CHEROKEE INC.
By: /s/ Robert Margolis
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Robert Margolis
Chief Executive Officer
By: /s/ Carol Gratzke
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Carol Gratzke
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> JUN-02-1996
<PERIOD-END> AUG-31-1996
<CASH> 1,532
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<ALLOWANCES> 369
<INVENTORY> 256
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<OTHER-SE> 6,445
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</TABLE>
