<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 March 1, 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 .
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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
incorporation or organization) identification number)
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
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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
--- ---
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 10, 1997
- -------------------------------------- -----------------------------
Common Stock, $.02 par value per share [ 7,726,986 ]
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CHEROKEE INC.
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets
March 1, 1997 (Unaudited) and June 1, 1996
Statements of Operations (Unaudited)
Three Months and Nine Months ended March 1, 1997 and
March 2, 1996
Statements of Cash Flow (Unaudited)
Nine months ended March 1, 1997 and
March 2, 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 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 8-K
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CHEROKEE INC.
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BALANCE SHEETS
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<TABLE>
<CAPTION>
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MARCH 1,1997 JUNE 1,1996
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<S> <C> <C>
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 4,854,000 $ 1,207,000
Restricted Cash - 310,000
Receivables, net 519,000 694,000
Inventories 77,000 256,000
Other current assets 106,000 10,000
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Total current assets 5,556,000 2,477,000
Property and equipment, net 43,000 44,000
Assets held for sale 3,576,000 3,576,000
Notes receivable 2,042,000 1,961,000
Other assets 473,000 262,000
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Total assets $ 11,690,000 $ 8,320,000
============ ============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 116,000 $ 112,000
Other accrued liabilities 1,322,000 288,000
Customer deposits 106,000 350,000
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Total current liabilities 1,544,000 750,000
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 7,726,986 shares issued and
outstanding at March 1, 1997 154,000 153,000
Additional paid-in capital 11,171,000 11,977,000
Accumulated deficit (1,935,000) (5,916,000)
Note receivable from stockholder - (144,000)
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Stockholders' equity 9,390,000 6,070,000
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Total liabilities and stockholders' equity $ 11,690,000 $ 8,320,000
============ ============
</TABLE>
See accompanying notes.
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CHEROKEE INC.
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STATEMENTS OF OPERATIONS
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(UNAUDITED)
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<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
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MARCH 1, 1997 MARCH 2, 1996 MARCH 1, 1997 MARCH 2, 1996
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<S> <C> <C> <C> <C>
Product sales $ 105,000 $ - $ 367,000 $ 12,357,000
Royalty revenues 1,826,000 387,000 5,234,000 940,000
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Net revenues 1,931,000 387,000 5,601,000 13,297,000
Cost of goods sold 67,000 - 184,000 10,445,000
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Gross profit 1,864,000 387,000 5,417,000 2,852,000
Selling, general and administrative expenses 828,000 346,000 1,818,000 3,412,000
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Operating income (loss) 1,036,000 41,000 3,599,000 (560,000)
Other income (expenses):
Interest expense (1,000) (8,000) (3,000) (354,000)
Investment and Interest income 125,000 164,000 344,000 367,000
Gain on sale of Uniform division & Other assets 40,000 15,000 40,000 3,840,000
Other - - - 96,000
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Total other income, net 164,000 171,000 381,000 3,949,000
Income before income taxes 1,200,000 212,000 3,980,000 3,389,000
Income tax - - - -
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Net income $ 1,200,000 $ 212,000 $ 3,980,000 $ 3,389,000
============= ============= ============= =============
Net income per common and common
equivalent shares $ 0.15 $ 0.03 $ 0.49 $ 0.52
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Weighted average common and common
equivalent shares outstanding-primary 8,177,711 6,574,961 8,127,021 6,476,487
============= ============= ============= =============
</TABLE>
See accompanying notes.
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CHEROKEE INC.
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STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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<TABLE>
<CAPTION>
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NINE MONTHS ENDED
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MARCH 1, 1997 MARCH 2, 1996
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<S> <C> <C>
OPERATING ACTIVITIES
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Net income $ 3,980,000 $ 3,389,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,000 15,000
Provision for bad debts - 112,000
Change in other liabilities (744,000) -
Amortization of discount on note receivable (96,000) 76,000
Interest income on note receivable from
stockholder - (10,000)
Changes in current assets and liabilities:
Decrease in accounts receivable 175,000 10,817,000
Decrease in inventories 179,000 11,279,000
(Increase) decrease in other current assets (96,000) 180,000
Decrease in accounts payable and
accrued liabilities (365,000) (5,120,000)
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Net cash provided by operating activities 3,045,000 20,738,000
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INVESTING ACTIVITIES
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Proceeds from restricted cash investment 310,000 -
Purchase of Treasury Stock - (75,000)
Purchase of long term assets (11,000) (4,000)
Proceeds from sales of Assets held for sale 40,000 89,000
Increase in notes receivable and other assets (196,000) (1,381,000)
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Net cash provided by (used for) investing
activities 143,000 (1,371,000)
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FINANCING ACTIVITIES
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(Decrease) in short-term revolving credit and
other - (14,213,000)
Proceeds from exercise of stock options 236,000 -
Proceeds from repayment of stockholder 151,000 -
note receivable
Proceeds from exercise of warrants 69,000 -
Dividends payment adjustment 3,000 -
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Net cash (used in) financing activities 459,000 (14,213,000)
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Increase in cash and cash equivalents 3,647,000 5,154,000
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 $ 4,854,000 $ 5,439,000
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Supplemental disclosures:
- ------------------------
Income taxes $ 4,600 $ 17,000
Interest $ 3,000 $ 367,000
Non-cash transaction- Declaration
of cash dividend $ 1,159,000
</TABLE>
See accompanying notes.
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CHEROKEE INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 1, 1997 (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 nine month period ended March 1,
1997 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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During the three months ended March 1, 1997, Cherokee signed a Wholesale
licensing agreement with Joosung Enterprises Co., Ltd. for the development and
distribution of handbags and related product categories in South Korea. The
agreement provides for royalty payments on net sales of merchandise and the term
is for five years.
Cherokee entered into a sales agreement to sell the Wentworth facility (Assets
held for sale) for $3,900,000. Escrow is expected to close on or before April
21, 1997.
At the January 15th, 1997 Board Meeting, the Board of Directors declared a
minimum cash dividend of $0.15 per share per quarter. The first distribution
was paid on March 17, 1997 to the Company's shareholders of record as of the
close of business on February 25, 1997.
(3) Per Share Information
---------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 128, Earnings Per Share. The impact of
implementing this standard has yet to be determined by management. In the
interim, earnings per share for the nine month period ended March 1, 1997 (the
"Nine Months") and the three month period ended March 1, 1997 (the "Third
Quarter") have been computed by dividing net income by the weighted average
number of common shares 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,
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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 Third Quarter, no shares were distributed
and the remaining shares held by the Disbursing Agent total 7,205 shares, all of
which were returned and canceled as of February 24, 1997. Shares held for
distribution to holders of old notes and old common stock were also returned and
canceled, which shares were 10,954 and 668, 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 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.
<PAGE>
Net revenues for the nine months ended March 1, 1997 (the "Nine Months") and the
three months ended March 1, 1997 (the "Third Quarter") were $5,601,000 and
$1,931,000, respectively, generated primarily through the licensing of the
Company's trademarks. As a percentage of total Nine Month and Third Quarter
sales, licensing revenues represented 93% and 95% respectively and terminated
businesses represented 7% and 5% respectively.
The Company's gross profit for the Nine Months and Third Quarter was $5,417,000
and $1,864,000 or 97% and 96% 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.
Selling, general, and administrative expenses for the Nine Months and Third
Quarter were $1,818,000 and $828,000 or 32% and 43% of net revenues,
respectively. In the Nine Months, certain other liabilities totaling $700,000
were deemed no longer required. 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 Third Quarter was $3,000
and $1,000 respectively. The Company's investment and interest income for the
Nine Months and Third Quarter was $344,000 and $125,000 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 March 1, 1997, the Company had $4,854,000 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 Nine Months of $3,045,000 resulted from
an decrease in accounts receivables and other current assets and a decrease in
liabilities. Cash provided by financing activities represented the proceeds
received from the exercise of warrants and stock options netted against a
dividends payment adjustment. Investing activity over the Nine 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.
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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, sales of assets, dividend distributions 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.
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
---------------------------------------------------
The Company did not submit any matters to a vote of holders of Common Stock
during the Third Quarter of Fiscal 1997.
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. The
remaining shares held by the Disbursing Agent for distribution to trade
creditors, totaling 7,205 shares, were returned and canceled as of February 24,
1997. Shares held for distribution to holders of old notes and old common stock
were also returned and canceled as of February 24, 1997, which shares were
10,954 and 668, respectively.
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ITEM 6. Exhibits and Reports on 8-K
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No reports on Form 8-K were filed during the quarter ended March 1, 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: April 10, 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
<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> MAR-01-1997
<CASH> 4,854
<SECURITIES> 0
<RECEIVABLES> 771
<ALLOWANCES> 252
<INVENTORY> 77
<CURRENT-ASSETS> 5,556
<PP&E> 77
<DEPRECIATION> 34
<TOTAL-ASSETS> 11,690
<CURRENT-LIABILITIES> 1,544
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 9,236
<TOTAL-LIABILITY-AND-EQUITY> 11,690
<SALES> 1,931
<TOTAL-REVENUES> 1,931
<CGS> 67
<TOTAL-COSTS> 67
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 1,200
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,200
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
