<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 November 30, 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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<TABLE>
<S> <C>
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 offices) Zip Code
Registrant's telephone number, including area code (818) 908-9868
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</TABLE>
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 December 20, 1996
- -------------------------------------- --------------------------------
Common Stock, $.02 par value per share [7,655,813/1/]
- ----------------------------
/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.
<PAGE>
CHEROKEE INC.
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets
November 30, 1996 (Unaudited) and June 1, 1996
Statements of Operations (Unaudited)
Three Months and Six Months ended November 30, 1996 and
December 2, 1995
Statements of Cash Flow (Unaudited)
Six months ended November 30, 1996 and
December 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
<PAGE>
CHEROKEE INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
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November 30,1996 June 1,1996
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(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,830,000 $ 1,207,000
Restricted Cash - 310,000
Receivables, net 979,000 694,000
Inventories 142,000 256,000
Other current assets 75,000 10,000
------------------- -----------------
Total current assets 4,026,000 2,477,000
Property and equipment, net 49,000 44,000
Assets held for sale 3,576,000 3,576,000
Notes receivable 2,010,000 1,961,000
Other assets 411,000 262,000
------------------- -----------------
Total assets $ 10,072,000 $ 8,320,000
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Liabilities and Common Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 32,000 $ 112,000
Other accrued liabilities 105,000 288,000
Customer deposits 285,000 350,000
------------------- -----------------
Total current liabilities 422,000 750,000
Other liabilities 756,000 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 7,655,813 shares issued and outstanding at November 30, 1996 153,000 153,000
Additional paid-in capital 12,026,000 11,977,000
Accumulated deficit (3,136,000) (5,916,000)
Note receivable from stockholder (149,000) (144,000)
------------------- -----------------
Stockholders' equity 8,894,000 6,070,000
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Total liabilities and stockholders' equity $ 10,072,000 $ 8,320,000
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</TABLE>
See accompanying notes.
<PAGE>
CHEROKEE INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
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Three months ended Six months ended
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November 30,1996 December 2, 1995 November 30,1996 December 2, 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Product sales $ 220,000 $ 1,795,000 $ 261,000 $ 12,357,000
Royalty revenues 2,296,000 360,000 3,409,000 553,000
---------------- ---------------- ---------------- ----------------
Net revenues 2,516,000 2,155,000 3,670,000 12,910,000
Cost of goods sold 117,000 1,807,000 117,000 10,445,000
---------------- ---------------- ---------------- ----------------
Gross profit 2,399,000 348,000 3,553,000 2,465,000
Selling, general and administrative expenses 266,000 425,000 990,000 3,066,000
---------------- ---------------- ---------------- ----------------
Operating income (loss) 2,133,000 (77,000) 2,563,000 (601,000)
Other income (expenses):
Interest expense (1,000) (31,000) (2,000) (345,000)
Investment and Interest income 110,000 148,000 219,000 203,000
Gain on sale of Uniform division & Other assets - 245,000 3,708,000
Other - 51,000 212,000
---------------- ---------------- ---------------- ----------------
Total other income, net 109,000 413,000 217,000 3,778,000
Income before income taxes 2,242,000 336,000 2,780,000 3,177,000
Income tax provision (benefit) - - -
---------------- ---------------- ---------------- ----------------
Net income $ 2,242,000 $ 336,000 $ 2,780,000 $ 3,177,000
================ ================ ================ ================
Net income per common and common equivalent shares $ 0.28 $ 0.05 $ 0.35 $ 0.49
---------------- ---------------- ---------------- ----------------
Weighted average common and common equivalent
shares outstanding-primary 8,058,725 6,673,893 8,041,608 6,473,989
================ ================ ================ =================
</TABLE>
See accompanying notes.
<PAGE>
CHEROKEE INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
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Six months ended
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November 30, 1996 December 2, 1995
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<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net income $ 2,780,000 $ 3,177,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,000 12,000
Provision for bad debts - 212,000
Change in other liabilities (744,000) -
Amortization of discount on note receivable (64,000) (33,000)
Interest income on note receivable from stockholder (5,000) (7,000)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (285,000) 9,987,000
Decrease in inventories 114,000 11,280,000
(Increase) decrease in other current assets (65,000) 166,000
Decrease in accounts payable and accrued liabilities (328,000) (4,048,000)
------------------ ------------------
Net cash provided by operating activities 1,409,000 20,746,000
INVESTING ACTIVITIES
- --------------------
Proceeds from restricted cash investment 310,000 -
Purchase of long term assets (11,000) -
Proceeds from sales of Assets held for sale - 89,000
Increase in notes receivable and other assets (134,000) (1,519,000)
------------------ ------------------
Net cash provided by (used for) investing activities 165,000 (1,430,000)
FINANCING ACTIVITIES
- --------------------
(Decrease) in short-term revolving credit and other - (14,213,000)
Proceeds from exercise of stock options 45,000 -
Proceeds from exercise of warrants 12,000 -
Dividends payment adjustment (8,000) -
------------------- ------------------
Net cash provided by (used in) financing activities 49,000 (14,213,000)
------------------- ------------------
Increase in cash and cash equivalents 1,623,000 5,103,000
Cash and cash equivalents at beginning of period 1,207,000 285,000
------------------- ------------------
Cash and cash equivalents at end of period $ 2,830,000 $ 5,388,000
=================== ==================
Supplemental disclosures:
- -------------------------
Income taxes $ 4,600 $ 17,000
Interest $ 2,000 $ 314,000
</TABLE>
See accompanying notes.
<PAGE>
CHEROKEE INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 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 and six month period ended November
30, 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) Per Share Information
---------------------
Earnings per share for the six month period ended November 30, 1996 (the "Six
Months") and the three month period ended November 30, 1996 (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 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. During the Second Quarter, no shares were distributed
and the remaining shares held by the Disbursing Agent total 7,205 shares, most
of which will be returned for cancellation.
<PAGE>
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 27 continuing license agreements; seven of which are with retailers,
nine of which are with domestic licensees and eleven of which are with
international licensees. The Company will continue to solicit new licensees and
may, from time to time, 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 six months ended November 30, 1996 (the "Six Months") and
the three months ended November 30, 1996 (the "Second Quarter") were $3,670,000
and $2,516,000, respectively, generated primarily through the licensing of the
Company's trademarks. As a percentage of total Six Month and Second Quarter
sales, licensing revenues represented 93% and 91% respectively and terminated
businesses represented 7% and 9% respectively.
The Company's gross profit margin for the Six Months and Second Quarter were
$3,553,000 and $2,399,000 or 97% and 95% of net revenues, 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 Six Months and Second
Quarter were $990,000 and $266,000 or 27% or 11% of net revenues, respectively.
During the Second Quarter ended November 30, 1996, certain other liabilities
totaling $700,000 were deemed no longer required. 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 Second Quarter was $2,000
and $1,000 respectively. The Company's investment and interest income for the
Six Months and Second Quarter was $219,000 and $110,000 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 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 November 30, 1996, the Company had $2,830,000 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 Six Months of $1,409,000 resulted from an
increase in accounts receivables and other current assets and a decrease in
liabilities. Cash provided by financing activities during the Six Months of
$49,000 represented the proceeds received from the exercise of warrants and
stock options netted with a capital dividend reimbursement payment. Investing
activity over the Six Months 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
-----------------
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.
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 14, 1996, the Company held its annual meeting of stockholders. At
the meeting, the board of directors were re-elected by an overwhelming margin.
ITEM 5. Other Information
-----------------
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.
On October 21, 1996, the Company filed with the Securities and Exchange
Commission a Form S-8 Registration Statement under the Securities Act of 1933,
for the purpose of registering shares in the following plans: 1995 Incentive
Stock Option Plan, Director warrants, Wilstar Options and Director Options. On
November 5, 1996, the Company filed with the Securities and Exchange Commission
a Form S-3 Registration Statement under the Securities Act of 1993 for the
purpose of registering shares of Cherokee Inc. Common Stock which were
previously issued but not registered under another registration statement.
<PAGE>
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: January 10, 1997
CHEROKEE INC.
BY: /s/ Robert Margolis
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Robert Margolis
Chief Executive Officer
BY: /s/ Carol Gratzke
-----------------------
Carol Gratzke
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-02-1996
<PERIOD-END> NOV-30-1996
<CASH> 2,830
<SECURITIES> 0
<RECEIVABLES> 1,235
<ALLOWANCES> 256
<INVENTORY> 142
<CURRENT-ASSETS> 4,026
<PP&E> 7
<DEPRECIATION> 27
<TOTAL-ASSETS> 10,072
<CURRENT-LIABILITIES> 422
<BONDS> 0
0
0
<COMMON> 153
<OTHER-SE> 8,741
<TOTAL-LIABILITY-AND-EQUITY> 10,072
<SALES> 2,516
<TOTAL-REVENUES> 2,516
<CGS> 117
<TOTAL-COSTS> 117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 2,242
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,242
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
