<PAGE>
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 quarterly period ended May 2, 1998.
[ ] 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
-------
CHEROKEE INC.
-------------
(Exact name of registrant as specified in its charter)
------------------------------------------------------
Delaware 95-4182437
-------- ----------
(State or other jurisdiction of (IRS employer identification number)
Incorporation or organization)
6835 Valjean Avenue, Van Nuys, CA 91406
- --------------------------------- -----
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (818) 908-9868
--------------
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 90 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 May 2, 1998
----- --------------------------
Common Stock, $.02 par value per share 8,695,428
<PAGE>
CHEROKEE INC.
-------------
INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
May 2, 1998 and January 31, 1998
Consolidated Statements of Operations
Three Months ended May 2, 1998 and
May 3, 1997
Consolidated Statements of Cash Flow
Three months ended May 2, 1998 and
May 3, 1997
Notes to Consolidated 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 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 8-K
<PAGE>
CHEROKEE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 2, 1998 January 31, 1998
------------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,896,000 $ 10,275,000
Receivables, net 4,596,000 2,347,000
Inventories 45,000 45,000
Other current assets 196,000 220,000
------------------- -----------------
Total current assets 12,733,000 12,887,000
Deferred tax asset 6,224,000 7,576,000
Asset held for sale - -
Notes receivable - -
Securitization fees 1,166,000 1,218,000
Trademarks and other assets 2,808,000 2,790,000
------------------- -----------------
Total assets $ 22,931,000 $ 24,471,000
=================== =================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses $ 480,000 $ 645,000
Other accrued liabilities 936,000 522,000
Notes payable 6,750,000 6,525,000
------------------- -----------------
Total current liabilities 8,166,000 7,692,000
Other liabilities 750,000 750,000
Notes Payable - long term 41,450,000 41,675,000
Stockholders' Deficit:
Common stock, $.02 par value, 20,000,000 shares authorized,
8,695,428 and 8,612,657 shares issued and outstanding
May 2, 1998 and at January 31, 1998, respectively 174,000 173,000
Additional paid-in capital (27,222,000) (23,806,000)
Note receivable from stockholder (2,044,000) (2,013,000)
Retained earnings 1,657,000 -
------------------- -----------------
Stockholders' deficit (27,435,000) (25,646,000)
------------------- -----------------
Total liabilities and stockholders' deficit $ 22,931,000 $ 24,471,000
=================== =================
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
<PAGE>
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
May 2, 1998 May 3, 1997
---------------------------------------
<S> <C> <C>
Royalty revenues $ 5,296,000 $ 2,175,000
Selling, general and administrative expenses 1,240,000 997,000
------------------- -----------------
Operating income 4,056,000 1,178,000
Other income (expenses) :
Interest expense (863,000) -
Investment and Interest income 186,000 138,000
Gain on Sale of Assets - 119,000
Other - 75,000
------------------- -----------------
Total other income (expenses), net (677,000) 332,000
Income before income taxes 3,379,000 1,510,000
Income tax provision 1,352,000 -
------------------- -----------------
Net income $ 2,027,000 $ 1,510,000
=================== =================
Basic earnings per share $ 0.23 $ 0.20
------------------- -----------------
Diluted earnings per share $ 0.23 $ 0.18
------------------- -----------------
Weighted average shares outstanding
Basic 8,626,452 7,743,313
=================== =================
Diluted 8,657,353 8,173,073
=================== =================
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
<PAGE>
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
May 2, 1998 May 3, 1997
---------------------------------------
<S> <C> <C>
Operating activities
Net income $ 2,027,000 $ 1,510,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,000 6,000
Amortization of goodwill and trademarks 69,000 -
Amortization of discount on note receivable - (31,000)
Amortization of securitization fees and debt discount 915,000 -
Change in deferred taxes 1,352,000
Interest income on note receivable from stockholder (30,000) -
Changes in current assets and liabilities:
Increase in accounts receivable (2,249,000) (21,000)
Increase in inventories - (1,000)
Decrease in other current assets 24,000 23,000
Decrease in accounts payable and accrued liabilities (614,000) (155,000)
------------------- -----------------
Net cash provided by operating activities 1,502,000 1,331,000
Investing activities
Repayment on note receivable from stockholder - 150,000
Proceeds from sale of assets held for sale - 3,576,000
Purchase trademarks and other assets (96,000) (121,000)
------------------- -----------------
Net cash (used in) provided by investing activities (96,000) 3,605,000
Financing activities
Cash distributions (4,348,000) (1,075,000)
Proceeds from exercise of stock options 563,000 55,000
Proceeds from exercise of warrants - 13,000
Net cash used in financing activities (3,785,000) (1,007,000)
------------------- -----------------
(Decrease) increase in cash and cash equivalents (2,379,000) 3,929,000
Cash and cash equivalents at beginning of period 10,275,000 3,139,000
------------------- -----------------
Cash and cash equivalents at end of period $ 7,896,000 $ 7,068,000
=================== =================
Total paid during period:
Income taxes $ - $ 64,000
Interest $ - $ -
Non-cash transactions:
Utilization of pre-bankruptcy NOL
carryforwards $ - $ 1,727,000
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND JANUARY 31, 1998
(1) Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements for the three
months ended May 2, 1998 and May 3, 1997 have been prepared in accordance with
generally accepted accounting principles ("GAAP"). These consolidated financial
statements have not been audited by independent public accountants but include
all adjustments, consisting of normal, recurring accruals, and certain
reclassifications from prior quarter, which in the opinion of management of
Cherokee Inc. ("Cherokee" or the "Company") are necessary for a fair
presentation of the financial position and the results of operations for the
periods presented. The accompanying consolidated balance sheet as of January
31, 1998 has been derived from audited consolidated financial statements, but
does not include all disclosures required by GAAP. The results of operations for
the three months ended May 2, 1998 are not necessarily indicative of the results
to be expected for the fiscal year ended January 30, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the eight month
period ended January 31, 1998 (the "Form 10-K").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, SPELL C. LLC, a Delaware limited liability
corporation ("Spell C"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Company Year End
On December 19, 1997, the Company determined to change its fiscal year to a 52
or 53 week fiscal year ending on the Saturday nearest to January 31 in order to
better align the Company with its licensees who also generally operate and plan
using a fiscal year ending nearest to January 31. Prior to this change, the
Company's fiscal year was a 52 or 53 week fiscal year ending on the Saturday
nearest to May 31.
Earnings per Share Computation
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" for the eight month period ended January 31, 1998, and has
restated earnings per common share for all periods presented in accordance with
the new standard. Earnings per common share is computed by dividing net income
by the weighted average number of shares of
<PAGE>
common stock outstanding during the period. Earnings per common share assuming
dilution is computed by dividing net income by the weighted average number of
shares of common stock outstanding plus the number of additional common shares
that would have been outstanding if all dilutive potential common shares had
been issued. Potential common shares related to stock options are excluded from
the computation when their effect is antidilutive.
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share (EPS) computations for the quarters ended May 2,
1998 and May 3, 1997:
<TABLE>
<CAPTION>
1998 1997
____ ____
<S> <C> <C>
Numerator:
Net income-numerator for net income
per common share and net income per
common share assuming dilution $2,027,000 $1,510,000
Denominator:
Denominator for net income per
common share-weighted average shares 8,626,452 7,743,313
Effect of dilutive securities:
Stock options 30,901 429,760
Denominator for net income per
common share, assuming dilution:
Adjusted weighted average shares
and assumed conversions 8,657,353 8,173,073
</TABLE>
Common shares related to stock options that are antidilutive amounted to
approximately 240,042 and zero for the quarters ended May 2, 1998 and May 3,
1997, respectively.
(3) Year 2000 Compliance
--------------------
The Year 2000 issue is a result of computer programs being written using two
digits, e.g. "98", to define a year. Date-sensitive software may recognize the
year "00" as the year 1900 rather than the year 2000. This would result in
errors and miscalculations or even system failure causing disruptions in
everyday business activities and transactions. Software is termed "Year 2000
compliant" when it is capable of performing transactions correctly in the year
2000.
Based on a recent assessment of the Company's computer systems software, it has
been determined that more than 95% of the Company's hardware and software
systems are either currently Year 2000 compliant or have an existing upgrade
available from the software vendor that is Year 2000 compliant. All systems
that are not currently Year 2000 compliant will either
<PAGE>
be upgraded to be Year 2000 compliant or replaced with alternative systems that
are Year 2000 compliant over the next eighteen months.
The Company does not expect the achieving of Year 2000 compliance to have a
material impact on its financial condition or results of operations.
(4) New Accounting Standards
------------------------
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," which changes current practice and
established a new framework, referred to as the "management" approach, on which
to base segment reporting. The management approach requires that management
identify the "operating segments" based on the way that management disaggregates
the entity for internal operating decisions. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and is not required for interim
statements in the first year of adoption. Management believes that the adoption
of this new standard will not have any material impact on the Company's
financial position or results of operations because the Company does not have
operating segments.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting standards ("SFAS") No. 130 "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. Comprehensive income includes net
income and other comprehensive income components which under GAAP bypass the
income statement and are reported in the balance sheet as a separate component
of equity. For the quarters ended May 2, 1998 and May 3, 1997, the Company had
no other comprehensive income components as defined in SFAS No. 130.
(5) Long-Term Debt
--------------
In September 1997, the Company's Board authorized Libra Investments, Inc.
("Libra") to explore ways to maximize shareholder value, including a
recapitalization or sale of the Company. On December 23, 1997, the Company
completed the recapitalization described below and publicly announced that it
would declare a special dividend of $5.50 per share, which was subsequently paid
on January 15, 1998.
As part of the recapitalization, the Company, in exchange for the proceeds from
the Secured Notes (as defined below), sold to its wholly-owned subsidiary, Spell
C, all its rights to the Cherokee brand and related trademarks in the United
States and assigned to Spell C all of its rights in an amended licensing
agreement (the "Amended Target Agreement") with Target Stores, a division of
Dayton Hudson Corporation ("Target"). Spell C issued for gross proceeds of
$47.9 million, privately placed Zero Coupon Secured Notes (the "Secured Notes"),
yielding 7.0% interest per annum and maturing on February 20, 2004. The Secured
Notes amortize quarterly from May 20, 1998 through February 20, 2004. The
Secured Notes are secured by the Amended Target Agreement and the domestic
Cherokee brand name and trademarks. The Secured Notes indenture (the
"Indenture") requires that any proceeds due to Spell C under the Amended Target
Agreement must be deposited directly into a collection account controlled by the
trustee under the Indenture. The trustee will distribute from the collection
account the
<PAGE>
amount of principal due and payable on the Secured Notes to the holders thereof
on quarterly note payment dates. Excess amounts on deposit in the collection
account may only be distributed to Spell C if the amount on deposit in the
collection account exceeds the aggregate amount of principal due and payable on
the next quarterly note payment date. Such excess amounts, if any, may then be
distributed by Spell C to the Company. The minimum guaranteed royalty under the
Amended Target Agreement is $9.0 million per year for each of the two fiscal
years ending January 29, 1999 and 2000 and $10.5 million per year for each of
the four fiscal years ending January 31, 2001 through 2004, therefore, the
aggregate scheduled amortization under the Secured Notes ($60.0 million) equals
the aggregate minimum guaranteed royalty payable under the Amended Target
Agreement ($60.0 million).
<TABLE>
<CAPTION>
Maturity Schedule of Secured Notes
FACE VALUE
<S> <C>
1999 ............................................. $ 6,750,000
2000 ............................................. 9,000,000
2001 ............................................. 10,125,000
2002 ............................................. 10,500,000
2003 ............................................. 10,500,000
Thereafter ....................................... 13,125,000
-----------
Total ....................................... 60,000,000
Less unamortized Note Discount ................... 11,800,000
-----------
48,200,000
Less current portion of long term debt ........... 6,750,000
-----------
LONG TERM OBLIGATION ............................. $41,450,000
</TABLE>
(6) Significant Events
------------------
On March 3, 1998, the Company announced the resignation of Patricia Warren as
President of the Company. She will continue to work with the Company through
1998 in selected special projects. Mr. Margolis will assume Ms. Warren's
responsibilities until a new president is chosen.
On April 6, 1998, the Company' Board of Directors declared a cash dividend of
$0.50 per share to be distributed on May 1, 1998 to the Company's shareholders
of record on the close of business on April 17, 1998. Assuming the Company's
cash position continues to be favorable, the Company intends to maintain a
quarterly cash dividend of $0.25 per share for the balance of the fiscal year
ending January 30, 1999; however, the declaration of such dividends remains
subject to the discretion of the Company's Board of Directors.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is in the business of marketing and licensing the Cherokee and
Sideout brands and related trademarks and other brands it owns. The Company is
one of the leading licensors of brand names and trademarks for apparel, footwear
and accessories in the United States. The Company and its wholly-owned
subsidiary, SPELL C. LLC ("Spell C"), hold several trademarks including
Cherokee(TM), Sideout(TM), Sideout Sport(TM), King of the Beach(TM) and others.
The Cherokee brand, which began as a footwear brand in 1973, has been positioned
to connote quality, comfort, fit and a "Casual American" lifestyle with
traditional wholesome values. The Sideout brand and related trademarks, which
represent a beach-oriented, active, "Ca1ifornia" lifestyle, were acquired by the
Company in November 1997.
The Company's operating strategy emphasizes retail direct, wholesale and
international licensing whereby the Company grants retailers and wholesalers the
license to use the trademarks held by the Company on certain categories of
merchandise, and the licensees are responsible for designing and manufacturing
the merchandise. The Company's license agreements generally provide the Company
with final approval of pre-agreed upon quality standards, packaging and
marketing of licensed products and the Company has the right to conduct periodic
quality control inspections to ensure that the image and quality of licensed
products remain consistent. As of May 2, 1998, the Company had 25 continuing
license agreements for the Company's various trademarks, covering both domestic
and international markets. 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. In November 1997 the Company reaffirmed its
relationship with Target Stores, a division of Dayton Hudson Corporation
("Target"), by entering into an amended licensing agreement (the "Amended Target
Agreement") which grants Target the exclusive right in the United States to use
the Cherokee trademarks on certain specified categories of merchandise. Under
the Amended Target Agreement, Target is obligated to pay a royalty based upon a
percentage of its net sales of Cherokee brand products, with a minimum
guaranteed royalty of $60.0 million over the six-year initial term of the
agreement.
As previously discussed in some detail in the Company's Form 10-K for the
transition period from June 1, 1997 to January 31, 1998 (the "Form 10-K"), in
December 1997 the Company completed a series of transactions whereby it sold its
rights to the Cherokee brand and related trademarks in the United States to
Spell C, its wholly-owned subsidiary, and also assigned to Spell C its rights in
the Amended Target Agreement. In return the Company received the gross proceeds
resulting from the sale by Spell C, for an aggregate of $47.9 million, of
privately placed Zero Coupon Secured Notes (the "Secured Notes"), which yield
7.0% interest per annum, amortize quarterly from May 20, 1998 through February
20, 2004 and are secured by the Amended Target Agreement and by the Untied
States Cherokee trademarks. The aggregate scheduled amortization under the
Secured Notes ($60.0 million) equals the aggregate minimum guaranteed royalty
payable under the Amended Target Agreement ($60.0 million).
<PAGE>
RESULTS OF OPERATIONS
Net revenues for the three months ended May 2, 1998 (the "First Quarter") were
$5,296,000, in comparison to net revenues for the three months ended May 3,
1997, which were $2,175,000. Revenues for both periods were generated 100%
through the licensing of the Company's trademarks. For the quarters ended May
2, 1998 and May 3, 1997, royalty revenues of $4,456,000 and $1,677,000 were
recognized from Target Stores, which accounts for 84% and 77% of total revenues,
respectively. The increase in revenues is due to the expansion by Target Stores
of the Cherokee mark over a broader range of categories, including men's and
boys' apparel, women's intimate apparel and certain accessory categories. All
of the $4,456,000 of the Target revenues went into the collection account for
the Secured Notes.
Selling, general, and administrative expenses for the First quarter were
$1,240,000 or 23% of net revenues. In comparison, net selling, general and
administrative expenses were $997,000 or 46% of net revenues during the three
months ended May 3, 1997. In the First Quarter, selling, general and
administrative expenses increased mainly due to expenses of approximately
$70,000 in amortization of the Cherokee trademarks, $100,000 in salaries for
additional marketing staff hired to intensify the Company's domestic and
international efforts to negotiate contracts and $50,000 in amortization of the
securitization fees, which were incurred by Spell C., the Company's wholly-owned
subsidiary, in completing the recapitalization.
During the First Quarter, the Company's interest expense was $863,000 and its
investment and interest income was $186,000. The interest expense is
attributable to the Secured Notes.
LIQUIDITY AND CAPITAL RESOURCES
On May 2, 1998, the Company had $7,896,000 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, net cash provided by operations was $1,502,000, net
cash used in investing activities was $96,000 and net cash used in financing
activities was $3,785,000, which represented the net from the proceeds received
from the exercise of options and the cash dividend distribution, which was paid
on May 1, 1998.
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
- -------------------------------------------------
This Form 10-Q contains certain forward-looking statements, including without
limitation, statements containing the words, "believes," "anticipates,"
"estimates," "expects," and words of similar import. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These risks and
<PAGE>
uncertainties include, but are not limited to, restrictions on distributions by
Spell C, uncertainty regarding the Sideout brand, competition, dependence on a
single licensee, dependence on intellectual property rights, and other factors
referenced in this Form 10-Q and/or discussed further in the Company's Form 10-
K. The 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 conjunction with the risk factors listed in the Company's
Form 10-K under "Certain Business Considerations and Risk Factors." Given the
known and unknown risks and uncertainties, undue reliance should not be placed
on the forward-looking statements contained herein. In addition, the Company
disclaims any intent or obligation to update any of the forward-looking
statements contained herein to reflect future events and developments.
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.
ITEM 2. Changes in Securities
---------------------
None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
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 First Quarter ended May 2, 1998.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on 8-K
---------------------------
The Company filed no reports on Form 8-K during the First Quarter ended May
2, 1998.
<PAGE>
List of Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
3.1 Amendment to Section 1 of Article 2 of the
By-laws of Cherokee Inc. dated May 1, 1998.
27.1 Article 5 of Regulation S-X-Financial Data Schedule - 1998
27.2 Article 5 of Regulation S-X-Financial Data Schedule - 1997
27.3 Article 5 of Regulation S-X-Financial Data Schedule - 1996
<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: June 2, 1998
CHEROKEE INC.
BY: /S/ ROBERT MARGOLIS
-------------------
ROBERT MARGOLIS
CHIEF EXECUTIVE OFFICER
BY: /S/ CAROL GRATZKE
------------------
CAROL GRATZKE
CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT 3.1
MINUTES OF ACTION
OF THE BOARD OF DIRECTORS
OF CHEROKEE INC.
TAKEN WITHOUT A MEETING
BY UNANIMOUS WRITTEN CONSENT
The following action is taken by the Board of Directors of Cherokee Inc., a
Delaware corporation (the "Corporation"), by unanimous written consent, without
a meeting, as of May 1, 1998.
WHEREAS, Section 1 of Article 2 of the By-laws of this Corporation provides
for seven (7) directors;
WHEREAS, the By-laws provide that the Board of Directors can amend this
provision:
WHEREAS, it is deemed to be in the best interest of this Corporation to amend
Section 1 of Article 2 of the By-laws to decrease the number of directors from
seven to not less than three (3) or more than nine (9).
NOW THEREFORE BE IT RESOLVED: That Section 1 of Article 2 of the By-laws of
this Corporation is hereby amended in its entirety and as amended reads as
follows:
"The Board of Directors shall consist of not less than three (3) or more than
nine (9) directors, the exact number of directors to be determined from time to
time by resolution adopted by the affirmative vote of a majority of the Board of
Directors then in office. If the number of directors is changed, any vacancy on
the Board of Directors that results from an increase in the number of directors
shall be filled pursuant to Article III, Section 4. In no case will a decrease
in the number of directors shorten the term of any incumbent director. The
directors need not be stockholders."
The undersigned, constituting all of the directors of the Corporation, do
hereby consent to the foregoing action as of the 1st day of May 1998.
/s/ Avi Dan /s/ Timothy Ewing
- ----------- -----------------
Avi Dan Timothy Ewing
/s/ Keith Hull /s/ Douglas Weitman
- --------------- --------------------
Keith Hull Douglas Weitman
/s/ Jess Ravich /s/ Robert Margolis
- --------------- -------------------
Jess Ravich Robert Margolis
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-31-1998 JAN-31-1998
<PERIOD-START> FEB-01-1998 JUN-01-1997 JUN-01-1997
<PERIOD-END> MAY-02-1998 NOV-29-1997 AUG-30-1997
<CASH> 7,896 9,315 9,375
<SECURITIES> 0 0 0
<RECEIVABLES> 4,596 2,544 820
<ALLOWANCES> 0 0 0
<INVENTORY> 45 45 45
<CURRENT-ASSETS> 12,733 12,023 10,317
<PP&E> 112 124 89
<DEPRECIATION> 71 55 47
<TOTAL-ASSETS> 22,931 19,782 13,411
<CURRENT-LIABILITIES> 7,303 541 171
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 174 156 155
<OTHER-SE> (27,261) 18,335 12,335
<TOTAL-LIABILITY-AND-EQUITY> 22,931 19,782 13,411
<SALES> 5,296 4,177 2,188
<TOTAL-REVENUES> 5,296 4,177 2,188
<CGS> 0 0 0
<TOTAL-COSTS> 1,240 1,031 984
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 863 0 0
<INCOME-PRETAX> 3,379 3,270 1,734
<INCOME-TAX> 1,352 (867) 0
<INCOME-CONTINUING> 2,027 4,137 1,734
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,027 4,137 1,734
<EPS-PRIMARY> 0.23 0.53 0.22
<EPS-DILUTED> 0.23 0.49 0.21
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> MAY-31-1997 MAY-31-1997 MAY-31-1997 MAY-31-1997
<PERIOD-START> JUN-02-1996 JUN-02-1996 JUN-02-1996 JUN-02-1996
<PERIOD-END> MAY-31-1997 MAR-01-1997 NOV-30-1996 AUG-31-1996
<CASH> 9,391 4,854 2,830 1,532
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,024 519 979 1,034
<ALLOWANCES> 0 252 256 369
<INVENTORY> 80 77 142 256
<CURRENT-ASSETS> 10,525 5,556 4,026 2,940
<PP&E> 89 76 76 67
<DEPRECIATION> 40 43 27 24
<TOTAL-ASSETS> 13,601 11,690 10,072 8,887
<CURRENT-LIABILITIES> 627 1,544 422 789
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 155 154 153 153
<OTHER-SE> 12,069 9,236 8,741 6,445
<TOTAL-LIABILITY-AND-EQUITY> 13,601 11,690 10,072 8,887
<SALES> 8,718 1,931 2,516 1,154
<TOTAL-REVENUES> 8,718 1,931 2,516 1,154
<CGS> 184 67 117 0
<TOTAL-COSTS> 3,406 828 266 723
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 3 1 1 1
<INCOME-PRETAX> 5,880 1,200 2,242 538
<INCOME-TAX> (771) 0 0 0
<INCOME-CONTINUING> 6,651 1,200 2,242 538
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 6,651 1,200 2,242 538
<EPS-PRIMARY> 0.87 0.16 0.29 0.07
<EPS-DILUTED> 0.82 0.15 0.28 0.07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> JUN-01-1996 JUN-01-1996 JUN-01-1996 JUN-01-1996
<PERIOD-START> JUN-04-1995 JUN-04-1995 JUN-04-1995 JUN-04-1995
<PERIOD-END> JUN-01-1996 MAR-02-1996 DEC-02-1995 SEP-02-1995
<CASH> 1,517 5,439 5,388 90
<SECURITIES> 0 0 0 0
<RECEIVABLES> 694 624 1,354 6,692
<ALLOWANCES> 591 764 1,104 1,115
<INVENTORY> 256 251 250 2,105
<CURRENT-ASSETS> 2,477 6,640 7,332 9,319
<PP&E> 65 44 40 40
<DEPRECIATION> 21 18 15 7
<TOTAL-ASSETS> 8,320 12,231 13,169 15,655
<CURRENT-LIABILITIES> 750 205 1,277 4,095
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 153 129 129 129
<OTHER-SE> 5,917 10,397 10,263 9,931
<TOTAL-LIABILITY-AND-EQUITY> 8,320 12,231 13,169 15,655
<SALES> 13,899 13,297 12,910 10,755
<TOTAL-REVENUES> 13,899 13,297 12,910 10,755
<CGS> 10,445 10,445 10,445 8,638
<TOTAL-COSTS> 9,027 3,412 3,066 2,641
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 355 354 345 314
<INCOME-PRETAX> (1,449) 3,389 3,177 2,841
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (1,449) 3,389 3,177 2,841
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,449) 3,389 3,177 2,841
<EPS-PRIMARY> (0.22) 0.53 0.51 0.47
<EPS-DILUTED> (0.21) 0.52 0.49 0.46
</TABLE>
