<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarter Ended November 29, 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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<S> <C>
Delaware 95-4182437
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(State or other jurisdiction of (IRS employer identification number)
Incorporation or organization)
6835 Valjean Avenue, Van Nuys, CA 91406
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(Address of principal executive offices) Zip Code
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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
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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 January 12, 1998
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Common Stock, $.02 par value per share [8,612,657]
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CHEROKEE INC.
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Balance Sheets
November 29, 1997 and May 31, 1997
Statements of Operations
Three Months and Six Months ended November 29, 1997 and
November 30, 1996
Statements of Cash Flow
Six months ended November 29, 1997 and
November 30, 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
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<CAPTION>
November 29, 1997 May 31, 1997
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,315,000 $ 9,391,000
Receivables, net 2,544,000 1,024,000
Inventories 45,000 80,000
Other current assets 119,000 30,000
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Total current assets 12,023,000 10,525,000
Deferred tax asset 5,000,000 2,408,000
Trademarks and other assets 2,759,000 668,000
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Total assets $19,782,000 $13,601,000
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 23,000 $ 210,000
Other accrued liabilities 518,000 417,000
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Total current liabilities 541,000 627,000
Other liabilities 750,000 750,000
Stockholders' Equity:
Common stock, $.02 par value, 20,000,000 shares authorized,
7,793,653 and 7,726,986 shares issued and outstanding
November 29, 1997 and at May 31, 1997, respectively 156,000 155,000
Additional paid-in capital 13,280,000 11,334,000
Retained earnings 5,055,000 735,000
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Stockholders' equity 18,491,000 12,224,000
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Total liabilities and stockholders' equity $19,782,000 $13,601,000
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</TABLE>
See accompanying notes.
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CHEROKEE INC.
STATEMENTS OF OPERATIONS
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<CAPTION>
Three months ended Six months ended
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November 29, 1997 November 30, 1996 November 29, 1997 November 30, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Product sales $ - $ 220,000 $ - $ 261,000
Royalty revenues 4,177,000 2,296,000 6,365,000 3,409,000
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Net revenues 4,177,000 2,516,000 6,365,000 3,670,000
Cost of goods sold - 117,000 - 117,000
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Gross profit - 2,399,000 - 3,553,000
Selling, general and administrative expenses 1,031,000 266,000 2,015,000 990,000
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Operating income 3,146,000 2,133,000 4,350,000 2,563,000
Other income (expenses):
Interest expense - (1,000) - (2,000)
Investment and interest income 124,000 110,000 265,000 219,000
Other - - 389,000 -
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Total other (income) expenses, net 124,000 109,000 654,000 217,000
Income before income taxes 3,270,000 2,242,000 5,004,000 2,780,000
Income tax benefit (867,000) - (867,000) -
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Net income $4,137,000 $2,242,000 $5,871,000 $2,780,000
========== ========== ========== ==========
Net income per share $ 0.49 $ 0.28 $ 0.70 $ 0.35
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Weighted average common and common
equivalent shares outstanding 8,365,806 8,058,725 8,331,653 8,041,608
========== ========== ========== ==========
</TABLE>
See accompanying notes.
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CHEROKEE INC.
STATEMENTS OF CASH FLOWS
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<CAPTION>
Six Months Ended
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November 29, 1997 November 30, 1996
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<S> <C> <C>
Operating Activities
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Net income $ 5,871,000 $2,780,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 44,000 6,000
Change in other liabilities - (744,000)
Deferred taxes (2,592,000) -
Amortization of discount on note
receivable - (64,000)
Interest income on note receivable
from stockholder - (5,000)
Changes in current assets and
liabilities:
(Increase) in accounts receivable (1,520,000) (285,000)
Decrease in inventories 35,000 114,000
(Increase) in other current assets (89,000) (65,000)
(Decrease) in accounts payable and
accrued liabilities (86,000) (328,000)
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Net cash provided by operating
activities 1,663,000 1,409,000
Investing Activities
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Proceeds from restricted cash
investment - 310,000
Purchase trademarks and other assets (2,136,000) (145,000)
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Net cash (used in) provided by
investing activities (2,136,000) 165,000
Financing Activities
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Cash distributions (1,549,000) -
Proceeds from exercise of stock
options 140,000 45,000
Utilization of pre-bankruptcy NOL
carryforwards 1,725,000 -
Proceeds from exercise of warrants 81,000 12,000
Dividends payment adjustment - (8,000)
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Net cash (used in) provided by
financing activities 397,000 49,000
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(Decrease) increase in cash and
cash equivalents (76,000) 1,623,000
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 $ 9,315,000 $2,830,000
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Total paid during period:
Income taxes $ 64,000 $ 4,600
Interest $ - $ 2,000
</TABLE>
See accompanying notes.
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CHEROKEE INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 29, 1997 AND MAY 31, 1997
(1) Basis of Presentation
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The accompanying condensed financial statements for the six months ended
November 29, 1997 and November 30, 1996 have been prepared in accordance with
generally accepted accounting principles ("GAAP"). These 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. are necessary for a fair presentation of the financial position
and the results of operations for the periods presented. The accompanying
balance sheet as of May 31, 1997 has been derived from audited financial
statements, but does not include all disclosures required by GAAP. The results
of operations for the nine months ended November 29, 1997 are not necessarily
indicative of the results to be expected for the period ended January 31, 1998,
the Company's new year end. 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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On November 7, 1997, Cherokee entered into an Agreement of Purchase and Sale of
Trademarks and Licenses (the "Sideout Agreement") with Sideout Sport, Inc.
("Sideout"), pursuant to which Cherokee agreed to purchase all of Sideout's
trademarks, copyright, trade secrets and license agreements with respect thereto
(the "Assets"). Pursuant to the Sideout Agreement, Cherokee agreed to pay
Sideout $1.5 million at the closing of the acquisition and $500,000 upon release
of certain liens on the Assets. Under the terms of the Sideout Agreement,
Cherokee will pay to Sideout 40% of the first $10.0 million of gross revenues
(royalties and license fees received by Cherokee through licensing of the
Sideout trademark), 10% of the next $5.0 million of gross revenues and 5% of the
next $20.0 million of gross revenues, amounts to be paid on a quarterly basis.
Under the terms of this agreement, Cherokee will pay up to $7.5 million or the
amount paid through October 23, 2004. Thereafter, Cherokee will have no further
obligation to pay royalties.
On November 12, 1997, Cherokee entered into a new licensing agreement with
Dayton Hudson Corporation (the "Licensee"), the owner of Target Stores (the
"Amended Target Agreement"). The Amended Target Agreement has an initial term
commencing on February 1, 1998 and ending on January 31, 2004, with automatic
annual extensions thereafter unless terminated by the Licensee. The Amended
Target Agreement covers a broad range of categories of merchandise, including
women's, men's and children's apparel and footwear, women's intimate apparel,
fashion accessories, home textiles, cosmetics and others (the "Merchandise").
Under the terms of the Amended Target
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Agreement, the Licensee will pay Cherokee a royalty each fiscal year for the
fiscal years ending January 29, 1999 through 2004 equal to the greater of (i)
the Minimum Guaranteed Royalty for such year or (ii) 2% of the Licensee's net
sales of Merchandise during such fiscal year, up to $300.0 million, 1 1/2% of
net sales greater than $300.0 million and up to $700.0 million, .8% of net sales
greater than $700.0 million and up to $1.0 billion and .7% of net sales greater
than $1.0 billion.
In connection with the signing of the Amended Target Agreement, the Company
believes, based on expected future profitability, that it is more likely than
not to realize a substantial portion of its net deferred tax asset.
Accordingly, the Company reduced its valuation allowance related to net
operating loss carryforwards and reversal of certain temporary differences.
(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 common stock equivalent shares
outstanding. Fully diluted per common share amounts assume the issuance of
common stock for all other potentially dilutive equivalents outstanding.
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 January 31, 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. It is
not expected that the adoption of SFAS No. 128 will have a material impact on
the earnings per share results reported by the Company under the Company's
current capital structure.
(4) Subsequent Events
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On December 19, 1997, Cherokee determined to change its fiscal year to a 52 or
53 week fiscal year ending on the Saturday nearest to January 31. Prior to this
change, Cherokee's fiscal year was a 52 or 53 week fiscal year ending on the
Saturday nearest to May 31. As a result of this change, the last day of
Cherokee's current fiscal year will be January 31, 1998. Cherokee will file
information regarding the transition period in its Annual Report on Form 10-K
for the fiscal year ending January 31, 1998.
On December 23, 1997, Cherokee declared a cash distribution of $5.50 per share
on its Common Stock, payable on January 15, 1998. The Company will pay the
distribution to stockholders of record as of the close of business on January 2,
1998.
The distribution will be paid from the proceeds of a recently completed $48.0
million securitization transaction. In the transaction, Cherokee assigned its
rights under its Amended Target Agreement with Dayton Hudson's Target Stores to
a newly-formed limited liability corporation, which in turn pledged the
licensing agreement as collateral for notes issued in a private offering.
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Pursuant to the declared dividend, on December 29, 1997 and January 2, 1998,
certain directors, officers, employees and related parties exercised options and
purchased 819,004 shares of Cherokee common stock.
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 Company's various trademarks 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 31 continuing license agreements
for the Company's various trademarks, seven of which are with retailers, twelve
of which are with domestic licensees and twelve 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 six months ended November 29, 1997 (the "Six Months") and
the three months ended November 29, 1997 (the "Second Quarter") were $6,365,000
and $4,177,000, respectively, generated 100 percent through the licensing of the
Company's trademarks. In comparison, net revenues for the six months and the
three months ended November 29, 1996 were $3,670,000 and $2,516,000,
respectively, of which 93% and 91%, respectively, represented licensing
revenues.
Selling, general, and administrative expenses for the Six Months and Second
Quarter were $2,015,000 and $1,031,000 or 32% or 25% of net revenues,
respectively. In comparison, selling, general and administrative expenses were
$990,000 and $266,000, (net of certain other liabilities totaling $700,000 which
were deemed no longer necessary), or 27% or 11%, respectively, of net revenues
during the six and three months ended November 30, 1996. In the Six Months and
Second Quarter, selling, general and
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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 to expand the Company's global
marketing and to maintain the synergy of the Cherokee brand image on a worldwide
basis.
During the Six Months and Second Quarter, the Company did not incur any interest
expenses and its investment and interest income was $265,000 and $124,000,
respectively. Also during the Six Months, the Company received $397,000, which
represents unclaimed distributions returned to the Company by the indentured
trustee from the 1994 Chapter 11 finalized August 15, 1996. The Company has no
debt and anticipates having interest income from investing its excess cash.
LIQUIDITY AND CAPITAL RESOURCES
On November 29, 1997, the Company had $9,315,000 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 Six Months, cash provided by operations was $1,663,000, cash used in
investing activities was $2,136,000, due to the initial payment made in the
Sideout Agreement and cash provided by financing activities was $397,000, which
represented the net from the proceeds received from the exercise of options and
warrants, the utilization of pre-bankruptcy net operating loss carryforwards 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
---------------------------------------------------
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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Two Forms 8-K, with appropriate exhibits attached, were filed during
the quarter ended November 29, 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: January 12, 1998
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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<PERIOD-END> NOV-29-1997
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