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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 30, 1997.
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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
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 [_]
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 6, 1997
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Common Stock, $.02 par value per share [7,793,653]
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CHEROKEE INC.
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets
August 30, 1997 (Unaudited) and May 31, 1997
Statements of Operations (Unaudited)
Three Months ended August 30, 1997 and
August 31, 1996
Statements of Cash Flow (Unaudited)
Three months ended August 30, 1997 and
August 31, 1996
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 6. EXHIBITS AND REPORTS ON 8-K
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CHEROKEE INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 30, 1997 MAY 31, 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,375,000 $ 9,391,000
Receivables, net 820,000 1,024,000
Inventories 45,000 80,000
Other current assets 77,000 30,000
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Total current assets 10,317,000 10,525,000
Deferred tax assets 2,408,000 2,408,000
Other assets 686,000 668,000
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Total assets $13,411,000 $13,601,000
=========== ===========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 104,000 $ 210,000
Other accrued liabilities 47,000 392,000
Customer deposits 20,000 25,000
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Total current liabilities 171,000 627,000
Other liabilities 750,000 750,000
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 20,000,000
shares authorized, 7,746,986 and
7,726,986 shares issued and
outstanding August 30, 1997 and at
May 31, 1997, respectively 155,000 155,000
Additional paid-in capital 9,866,000 11,334,000
Retained earnings 2,469,000 735,000
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Stockholders' equity 12,490,000 12,224,000
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Total liabilities and stockholders' equity $13,411,000 $13,601,000
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</TABLE>
See accompanying notes.
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CHEROKEE INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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AUGUST 30, 1997 AUGUST 31, 1996
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<S> <C> <C>
Product sales $ - $ 41,000
Royalty revenues 2,188,000 1,113,000
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Net revenues 2,188,000 1,154,000
Selling, general and administrative
expenses 984,000 723,000
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Operating income 1,204,000 431,000
Other income (expenses):
Interest expense - (1,000)
Investment and interest income 141,000 108,000
Other 389,000 -
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Total other income, net 530,000 107,000
Income before income taxes 1,734,000 538,000
Income tax - -
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Net income $1,734,000 $ 538,000
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Net income per common and common
equivalent shares $ 0.21 $ 0.07
Weighted average common and common
equivalent shares outstanding-primary 8,320,322 8,027,324
========== ==========
Net income per common shares-fully
diluted $ 0.21 $ 0.07
Weighted average common and common
equivalent shares outstanding-fully
diluted 8,350,097 8,027,324
========== ==========
</TABLE>
See accompanying notes.
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CHEROKEE INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 30, 1997 AUGUST 31, 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,734,000 $ 538,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,000 3,000
Amortization of discount on note receivable -- (32,000)
Interest income on note receivable from stockholder -- (2,000)
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable 204,000 (340,000)
Decrease (increase) in inventories 35,000 --
(Increase) in other current assets (47,000) (108,000)
(Decrease) increase in accounts payable and accrued liabilities (451,000) 39,000
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Net cash provided by operating activities 1,491,000 98,000
INVESTING ACTIVITIES
Proceeds from restricted cash investment -- 310,000
Purchase of long term assets -- (2,000)
(Increase) in notes receivable and other assets (39,000) (73,000)
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Net cash provided by (used for) investing activities (39,000) 235,000
FINANCING ACTIVITIES
Cash distributions (1,549,000) --
Proceeds from exercise of warrants 81,000 --
Dividends payment adjustment -- (8,000)
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Net cash used in financing activities (1,468,000) (8,000)
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Increase (decrease) in cash and cash equivalents (16,000) 325,000
Cash and cash equivalents at beginning of period 9,391,000 1,207,000
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Cash and cash equivalents at end of period $ 9,375,000 $ 1,532,000
=============== ===============
Total paid during period:
Income taxes $ -- $ --
Interest $ -- $ 1,000
</TABLE>
See accompanying notes.
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CHEROKEE INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 30, 1997 (UNAUDITED) AND MAY 31, 1997
(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 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended May 30, 1998. 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 May 31, 1997.
(2) Significant Transactions
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During the three months ended August 30, 1997, Cherokee extended its retail
license agreement with Brylane Inc. The term of the new agreement is through
June 2002 and Brylane has added its men's catalog, King Size, to the agreement.
Additionally, the Company executed two amendments to other retail direct non-
exclusive agreements whereby the product categories were further expanded.
(3) Per Share Information
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Primary earnings per common share amounts were computed by dividing earnings by
the average number of common and dilutive equivalent shares outstanding. Fully
diluted per common share amounts assume the issuance of common stock for all
other potentially dilutive equivalents outstanding. The weighted average number
of shares used in the calculation of primary and fully diluted earnings per
share were 8,320,322 and 8,350,097, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 is effective for financial statements for periods ending after December 15,
1997. The Company will adopt SFAS 128 and reflect its disclosures in the
Company's fiscal year ended May 30, 1998 financial statements. SFAS 128
requires dual presentation of basic and diluted earnings per share, as defined.
This statement requires prior period earnings per share data be restated.
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Under SFAS 128, earnings per share as of August 30, 1997 would reflect basic and
diluted earnings per share of $0.22 and $0.21, respectively. The weighted
average number of shares used in the calculation of basic and diluted earnings
per share were 7,736,764 and 8,320,322 shares, respectively.
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 licenser of the Cherokee brand and other brands it owns or may acquire in
the future.
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 domestic 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 19 continuing license agreements; seven of which are
with retailers, six of which are with domestic licensees and six 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.
Net revenues for the three months ended August 30, 1997 (the "First Quarter")
were $2,188,000, generated 100 percent through the licensing of the Company's
trademarks. In comparison, net revenues for the three months ended August 31,
1996 were $1,154,000, of which $1,113,000 or 96% represented licensing revenues.
Selling, general, and administrative expenses for the First Quarter were
$984,000 or 45% of net revenues compared to $723,000 or 62% of net revenues for
the three months ended August 31, 1996. In the First Quarter, selling, general
and administrative expenses increased with the addition of marketing staff to
intensify the Company's international efforts to negotiate contracts and with
the development of creative advertising materials
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to expand the Company's global marketing and to maintain the synergy of the
Cherokee brand image on a worldwide basis.
During the First Quarter, the Company did not incur any interest expenses and
its investment and interest income was $141,000. Also, during the quarter, the
Company received $397,000, which represents unclaimed distributions from the
Chapter 11, returned to the Company by the indentured trustee. 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 30,1998
("Fiscal 1998"), management believes that it has available sufficient net
operating loss carry forwards to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
On August 30, 1997, the Company had $9,375,000 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.
During the First Quarter, cash provided by operations was $1,491,000 and cash
used in financing activities was $1,468,000, which represented the net from the
proceeds received from the exercise of options and warrants and the cash
dividend distribution which was paid on August 29, 1997.
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's operations.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
This Form 10-Q contains forward-looking statements regarding revenue and
earnings trends, domestic and international expansion. Such statements are
subject to risks and uncertainties. Actual results could vary materially from
these statements or current trends. Forward-looking information provided by the
Company pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 should be evaluated in the context of these
factors. In addition, the Company disclaims any intent or obligation to update
these forward-looking statements.
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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On September 15, 1997, the Company held its annual meeting of stockholders.
At the meeting, the board of directors were elected by an overwhelming margin
and the Third Amendment to the Wilstar Management Agreement (the "Agreement")
was approved by the shareholders, 5,501,743 shares were voted for approval of
the Agreement, 3,233 shares were voted against approval of the Agreement, 6,748
shares abstained from voting and 1,709,453 shares were broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
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No reports on Form 8-K were filed during the quarter ended August 30, 1997.
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 6, 1997
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
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-30-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-30-1997
<CASH> 9,375
<SECURITIES> 0
<RECEIVABLES> 820
<ALLOWANCES> 0
<INVENTORY> 45
<CURRENT-ASSETS> 10,317
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,411
<CURRENT-LIABILITIES> 171
<BONDS> 0
0
0
<COMMON> 155
<OTHER-SE> 12,335
<TOTAL-LIABILITY-AND-EQUITY> 13,411
<SALES> 2,188
<TOTAL-REVENUES> 2,188
<CGS> 0
<TOTAL-COSTS> 984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,734
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,734
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
