<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 October 31, 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
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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
- ------------------------------------ ------------------------------------
(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 December 1, 1998
- ---------------------------------------- -------------------------------
Common Stock, $.02 par value per share 8,705,428
<PAGE>
CHEROKEE INC.
-------------
INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
October 31, 1998 and January 31, 1998
Consolidated Statements of Operations
Three Months and Nine Months ended October 31, 1998 and
November 1, 1997
Consolidated Statements of Cash Flow
Three Months and Nine Months ended October 31, 1998 and
November 1, 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>
UNAUDITED
OCTOBER 31, 1998 JANUARY 31, 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,752,000 $ 10,275,000
Receivables, net 4,367,000 2,347,000
Inventories - 45,000
Other current assets 347,000 220,000
------------ ------------
Total current assets 14,466,000 12,887,000
Deferred tax asset 4,303,000 7,576,000
Securitization fees 1,064,000 1,218,000
Trademarks and other assets 3,045,000 2,790,000
------------ ------------
Total assets $ 22,878,000 $ 24,471,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 23,000 $ 196,000
Dividends payable 2,176,000 -
Other accrued liabilities 2,551,000 971,000
Notes payable 9,000,000 6,525,000
------------ ------------
Total current liabilities 13,750,000 7,692,000
Other liabilities 750,000 750,000
Notes payable - long term 37,249,000 41,675,000
STOCKHOLDERS' DEFICIT:
Common stock, $.02 par value,20,000,000 shares authorized,
8,705,428 and 8,612,657 shares issued and outstanding at
October 31, 1998 and at January 31, 1998, respectively 174,000 173,000
Note receivable from stockholder (2,104,000) (2,013,000)
Accumulated deficit (26,941,000) (23,806,000)
------------ ------------
Stockholders' deficit (28,871,000) (25,646,000)
------------ ------------
Total liabilities and stockholders' deficit $ 22,878,000 $ 24,471,000
============ ============
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
<PAGE>
CHEROKEE INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
OCTOBER 31, 1998 NOVEMBER 1, 1997 OCTOBER 31, 1998 NOVEMBER 1, 1997
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Royalty revenues $5,133,000 $2,368,000 $15,308,000 $6,874,000
Selling, general and administrative expenses 1,768,000 1,328,000 5,092,000 3,362,000
---------- ---------- ----------- ----------
Operating income 3,365,000 1,040,000 10,216,000 3,512,000
Other income (expenses):
Interest expense (920,000) - (2,549,000) -
Investment and Interest income 196,000 139,000 506,000 393,000
Gain on sale of assets - - 219,000
Other - 390,000 - 465,000
---------- ---------- ----------- ----------
Total other income (expenses), net (724,000) 529,000 (2,043,000) 1,077,000
Income before income taxes 2,641,000 1,569,000 8,173,000 4,589,000
Income tax provision (benefit) 1,059,000 - 3,271,000 (771,000)
---------- ---------- ----------- ----------
Net income $1,582,000 $1,569,000 $ 4,902,000 $5,360,000
========== ========== =========== ==========
Basic earnings per share $ 0.18 $ 0.20 $ 0.56 $ 0.69
---------- ---------- ----------- ----------
Diluted earnings per share $ 0.18 $ 0.19 $ 0.56 $ 0.64
---------- ---------- ----------- ----------
Weighted average shares outstanding
Basic 8,705,428 7,775,813 8,676,325 7,756,091
========== ========== =========== ==========
Diluted 8,803,074 8,384,091 8,776,873 8,364,369
========== ========== =========== ==========
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
<PAGE>
CHEROKEE INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
OCTOBER 31, 1998 NOVEMBER 1, 1997
--------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net income $ 4,902,000 $ 5,360,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,000 20,000
Amortization of goodwill and trademarks 205,000 14,000
Amortization of securitization fees 154,000 -
Amortization of debt discount 2,549,000 -
Change in deferred taxes 3,271,000 (926,000)
Interest income on note receivable from stockholder (91,000) -
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (2,020,000) 206,000
Decrease in inventories 45,000 32,000
(Increase) decrease in other current assets (127,000) 31,000
Increase (decrease) in accounts payable and accrued liabilities 1,407,000 (429,000)
------------ -----------
Net cash provided by operating activities 10,319,000 4,308,000
------------ -----------
INVESTING ACTIVITIES
- --------------------
Repayment on note receivable from stockholder - 144,000
Proceeds from sale of assets held for sale - 3,576,000
Collection of notes receivable - 1,961,000
Purchase trademarks and other assets (486,000) (301,000)
------------ -----------
Net cash (used in) provided by investing activities (486,000) 5,380,000
------------ -----------
FINANCING ACTIVITIES
- --------------------
Cash distributions (6,524,000) (4,081,000)
Proceeds from exercise of stock options and warrants 668,000 289,000
Payment on notes (4,500,000) -
------------ -----------
Net cash used in financing activities (10,356,000) (3,792,000)
------------ -----------
(Decrease) increase in cash and cash equivalents (523,000) 5,896,000
Cash and cash equivalents at beginning of period 10,275,000 3,139,000
------------ -----------
Cash and cash equivalents at end of period $ 9,752,000 $ 9,035,000
============ ===========
Total paid during period:
- -------------------------
Income taxes $ - $ 64,000
Interest $ 162,000 $ -
Non-cash transactions:
- ----------------------
Utilization of pre-bankruptcy NOL
carryforwards $ - $ 1,727,000
Declaration of dividend $ 2,176,000 $ -
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND JANUARY 31, 1998
(1) Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements for the three and
nine months ended October 31, 1998 and November 1, 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 and nine months ended October 31, 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) Significant Transactions
------------------------
During the three months ended October 31, 1998, Cherokee entered into two new
non-exclusive retail direct licensing agreements with (1) Connecticut-based
Bob's Stores, and (2) Calgary, Canada-based The Forzani Group Ltd. to
manufacture, promote, sell and distribute products bearing the Company's Sideout
brand. Both are multi-year agreements and cover a broad range of categories of
merchandise, including women's, men's and children's activewear, bags, hats and
other accessory items. The Company also entered into an exclusive three year
wholesale licensing agreement for the Sideout brand in sunglasses with Denver-
based Outlook Eyewear, a division of Bausch & Lomb Incorporated.
The Company entered into an exclusive ten-year international licensing agreement
with China-based Shanghai Eesli Trading Company, a corporation organized under
the laws of the People's Republic of China, to manufacture, promote, sell and
distribute products bearing the Company's Cherokee brand within the territories
of the People's Republic of China, including Shanghai, Jiangsu, Beijing,
Tianjin, Sichuan, Hubei, Gansu, Shanxi, Liaoning, Chongqing and Guangdong. The
agreement covers a broad range of product categories including women's
sportswear and intimate apparel, children's apparel, women and children's
footwear, women's fashion accessories and cosmetics.
<PAGE>
On October 9, 1998, the Company' Board of Directors declared a cash dividend of
$0.25 per share which was distributed on November 5, 1998 to the Company's
shareholders of record on the close of business on October 20, 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
current fiscal year ending January 30, 1999; however, the declaration of such
dividend remains subject to the discretion of the Company's Board of Directors.
On October 29, 1998, the Company's common stock, formerly trading on the Nasdaq
Small-Cap Market, began trading on the Nasdaq National Market System. The
Company's Nasdaq trading symbol remains CHKE.
(3) Subsequent Events
-----------------
On November 3, 1998, the Company entered into a three-year licensing agreement
with South Africa-based A M Moolla Group Limited, the second largest clothing
manufacturer in South Africa. Under the terms of the agreement, A M Moolla
Group Ltd. will manufacture, promote, sell and distribute products bearing the
Company's Sideout brand, covering a wide range of categories for all genders and
ages. In addition to South Africa, the agreement covers the following
countries, which are all members of the Southern African Development Community:
Botswana, Zimbabwe, Namibia, Mozambique, Angola, Swaziland, Lesotho, Tanzania
and the Democratic Republic of Congo.
On November 23, 1998, the Company entered into a three-year licensing agreement
with Mexico-based Bravo Enterprises, a leading manufacturer distributor and
marketer of prestige brands in Mexico. Under the terms of the agreement, Bravo
Enterprises will manufacture, promote, sell and distribute products bearing the
Company's Cherokee brand in Mexico, covering a wide range of categories for all
genders and ages.
As of November 23, 1998, including the A M Moolla Group Limited and Bravo
Enterprises license agreements, the Company had 30 continuing license agreements
for the Company's various trademarks, covering both domestic and international
markets.
(4) 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.
<PAGE>
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 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 three and nine months
ended October 31, 1998 and November 1, 1997:
<TABLE>
<CAPTION>
1998 1997
3 Months 9 Months 3 Months 9 Months
----------------------- -----------------------
<S> <C> <C> <C> <C>
Numerator:
Net income-numerator for
net income per common share
and net income per common
share assuming dilution $1,582,000 $4,902,000 $1,569,000 $5,360,000
========== ========== ========== ==========
Denominator:
Denominator for net income
Per common share-weighted
average shares 8,705,428 8,676,325 7,775,813 7,756,091
Effect of dilutive securities:
Stock options 97,646 100,548 608,278 608,278
---------- ---------- ---------- ----------
Denominator for net income
per common share, assuming
dilution: Adjusted weighted
average shares and assumed
conversions 8,803,074 8,776,873 8,384,091 8,364,369
========== ========== ========== ==========
</TABLE>
Common shares related to stock options that are antidilutive amounted to 182,268
and zero for the quarters ended October 31, 1998 and November 1, 1997,
respectively.
Reclassifications
Certain previously reported financial information has been reclassified to
conform to current year presentation.
<PAGE>
(5) 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 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is the type of hedge
transaction. The new rules will be effective the first quarter of 2000. The
Company does not believe that the new standard will have a material impact on
the Company's financial statements because the Company is not involved in
derivative instruments and hedging activities.
(6) Long Term Debt
--------------
In September 1997, the Company's Board authorized Libra Investments, Inc. 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 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
<PAGE>
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). Of the $12,129,000 in royalty revenues received from Target pursuant
to the Amended Target Agreement during the nine months ended October 31, 1998,
$9,186,000 were deposited into the collection account for the Secured Notes.
Maturity Schedule of Secured Notes is as follows:
<TABLE>
<CAPTION>
AS OF: FACE VALUE
<S> <C>
October 31, 1999 .............................................$ 9,000,000
October 31, 2000 ............................................. 9,750,000
October 31, 2001 ............................................. 10,500,000
October 31, 2002 ............................................. 10,500,000
October 31, 2003 ............................................. 10,500,000
Thereafter ......................................... 5,250,000
-------------
Total ............................................. 55,500,000
Less unamortized Note Discount...................... 9,251,000
-------------
46,249,000
Less current portion of long term debt.............. 9,000,000
-------------
Long term obligation...............................$ 37,249,000
=============
</TABLE>
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, Sideout, Sideout Sport, King of the Beach 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 November 23, 1998, the Company had 30
continuing license agreements for the Company's various trademarks, covering
both domestic and international markets. The Company will
<PAGE>
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).
RESULTS OF OPERATIONS
Net revenues for the nine months ended October 31, 1998 (the "Nine Months") and
the three months ended October 31, 1998 (the "Third Quarter") were $15,308,000
and $5,133,000, respectively, in comparison to net revenues for the nine months
and three months ended November 1, 1997 of $6,874,000 and $2,368,000,
respectively. Revenues for both periods were generated 100% through the
licensing of the Company's trademarks. For the Nine Months and for the
comparable period ended November 1, 1997, royalty revenues of $12,129,000 and
$4,937,000 were recognized from Target, which accounts for 79% and 72% of total
revenues, respectively. The increase in revenues is due to the expansion by
Target of the Cherokee mark over a broader range of categories, including men's
and boys' apparel, women's intimate apparel and certain accessory categories.
Of the $12,129,000 in royalty revenues from Target, $9,186,000 were deposited
into the collection account for the Secured Notes.
Selling, general, and administrative expenses for the Nine Months and Third
Quarter were $5,092,000 and $1,768,000 or 33% and 34% of net revenues. In
comparison, net selling, general and administrative expenses were $3,362,000 and
$1,328,000 or 49% and 56% of net revenues during the nine months and three
months ended November 1, 1997. In the Nine Months, selling, general and
administrative expenses increased mainly due to expenses of approximately
$205,000 in amortization of the Company's trademarks, $195,000 in salaries for
additional marketing staff hired to intensify the Company's domestic and
international efforts to negotiate contracts, $154,000 in amortization of the
securitization fees, which were incurred by Spell C., the Company's wholly-owned
subsidiary, in completing the recapitalization and $1,216,000 in management
bonus accrual.
During the Nine Months and Third Quarter, the Company's interest expense was
$2,549,000 and $920,000, respectively compared to zero interest expense for the
period ended November 1,
<PAGE>
1997. For the Nine Months and Third Quarter, the Company's investment and
interest income was $506,000 and $196,000, respectively, in comparison to
$393,000 and $139,000, respectively, for the similar periods ended November 1,
1997. The interest expense is attributable to the Secured Notes.
During the Nine Months and Third Quarter, the Company's net income was
$4,902,000 and $1,582,000, respectively, whereas for the similar periods ended
November 1, 1997, net income was $5,360,000 and $1,569,000, respectively. For
the Nine Months and Third Quarter, the Company booked for GAAP purposes a tax
provision of $3,271,000 and $1,059,000, respectively, which amounts were offset
against the Company's deferred tax asset account.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1998, the Company had $9,752,000 in cash and cash equivalents. In
the second quarter ended August 1, 1998 one of the Company's licensees reported
an overpayment of royalty revenues of $1,245,000, which will be deducted from
the licensee's royalty payments to the Company in the fourth quarter. 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 Nine months, net cash provided by operations was $10,319,000, net
cash used in investing activities was $486,000 and net cash used in financing
activities was $10,356,000, which represented the net from the proceeds received
from the exercise of options, the quarterly payment on the Secured Notes and the
cash dividend distributions, which were paid during the Nine Months.
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's operations.
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.
Because the Company's primary business is marketing and licensing its
trademarks, the Company has only modest information technology requirements and
resources, none of which is critical to the Company's day to day operations.
Based on a recent assessment of the Company's computer hardware and 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 be upgraded to be Year
2000 compliant or replaced with alternative systems that are Year 2000 compliant
over the next fourteen months. The Company expects the costs to upgrade or
replace such systems will not exceed approximately $12,000.
<PAGE>
The Company does not expect that the achievement of Year 2000 compliance by the
Company will have a material impact on its financial condition or results of
operations. However, the Company's financial condition or results of operations
could be materially adversely effected if its significant licensees fail to
adequately address and correct Year 2000 problems and such failures result in
the interruption of royalty payments or lower royalty payments. The Company has
no control over its licensees' Year 2000 compliance and as a result the Company
cannot develop a contingency plan resolution thereto. The Company has contacted
its most significant licensees in an effort to determine the status of their
Year 2000 compliance efforts. The Company has received information that these
licensees are in the process of evaluating the impact and assessing the
potential problems of Year 2000 and that they expect to be in compliance in a
timely manner. Notwithstanding, there can be no assurance that the Company's
significant licensees will be Year 2000 compliant in a timely manner, and as
discussed above, their failure to do so could materially adversely effect the
Company
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
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, Year 2000
readiness, 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
---------------------
<PAGE>
None
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
ITEM 5. Other Information
-----------------
New Securities and Exchange Commission ("SEC") rules regarding shareholder
proposals became effective on June 29, 1998. Pursuant to these new rules, if
the Company has not received notice on or before March 24, 1999 of any matter a
shareholder intends to propose for a vote at the 1999 annual meeting of
shareholders, then a proxy solicited by the board of directors may be voted on
such matter in the discretion of the proxy holder, without discussion of the
matter in the proxy statement soliciting such proxy and without such matter
appearing as a separate matter on the proxy card. As previously disclosed in
the Company's proxy statement for the annual meeting of shareholders held
earlier this year on June 8, 1998, a shareholder who wishes to include a
proposal and the shareholder's statement in support thereof in the Company's
proxy statement must send such material in accordance with SEC rules to the
Company at its principal executive offices for receipt no later than January 8,
1999.
ITEM 6. Exhibits and Reports on 8-K
---------------------------
The Company filed no reports on Form 8-K during the Nine Months.
List of Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
27.1 Article 5 of Regulation S-X -- Financial Data Schedule
<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: December 7, 1998
CHEROKEE INC.
BY: /s/ ROBERT MARGOLIS
-------------------
ROBERT MARGOLIS
CHIEF EXECUTIVE OFFICER
BY: /s/ CAROL GRATZKE
------------------
CAROL GRATZKE
CHIEF FINANCIAL OFFICER
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