<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 30, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From _____________________ to __________________.
Commission file number 0-18640
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CHEROKEE INC.
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(Exact name of registrant as specified in its charter)
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Delaware 95-4182437
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(State or other jurisdiction of (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
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 October 30, 1999
------------------------------------ -------------------------------
Common Stock, $.02 par value per share 8,472,428
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CHEROKEE INC.
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. Consolidated Financial Statements
Consolidated Balance Sheets
October 30, 1999 and January 30, 1999 2
Consolidated Statements of Operations 3
Three and Nine Month periods ended October 30, 1999 and
October 31, 1998
Consolidated Statements of Cash Flows 4
Nine Month periods ended October 30, 1999 and
October 31, 1998
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosure
about Market Risk 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 2. Changes in Securities 11
ITEM 3. Defaults Upon Senior Securities 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 5. Other Information 12
ITEM 6. Exhibits and Reports on 8-K 12
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Part 1. Financial Information
-----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CHEROKEE INC.
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CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
October 30, 1999 January 30, 1999
---------------- ----------------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,508,000 $ 2,847,000
Restricted cash 2,321,000 4,500,000
Receivables, net 4,997,000 3,232,000
Prepaid expenses and other current assets 162,000 29,000
Deferred tax asset 826,000 861,000
---------------- ----------------
Total current assets 9,814,000 11,469,000
Deferred tax asset 442,000 3,527,000
Securitization fees, net of accumulated amortization
of $377,000 and $223,000, respectively 864,000 1,018,000
Property and equipment, net of accumulated
depreciation of $132,000 and $95,000, respectively 226,000 233,000
Trademarks, net of accumulated amortization of
$432,000 and $243,000, respectively 4,027,000 3,176,000
Other assets 15,000 106,000
---------------- ----------------
Total assets $ 15,388,000 $ 19,529,000
================ ================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 289,000 $ 280,000
Dividends payable - 2,176,000
Other accrued liabilities 1,994,000 1,755,000
Notes payable 9,750,000 9,000,000
---------------- ----------------
Total current liabilities 12,033,000 13,211,000
Other liabilities 250,000 500,000
Notes payable - long term 30,359,000 35,697,000
---------------- ----------------
Total liabilities 42,642,000 49,408,000
================ ================
Stockholders' Deficit:
Common stock, $.02 par value,20,000,000 shares authorized,
8,472,428 and 8,705,428 shares issued and outstanding at
October 30, 1999 and at January 30, 1999, respectively 170,000 174,000
Note receivable from stockholder (2,225,000) (2,134,000)
Accumulated deficit (25,199,000) (27,919,000)
Stockholders' deficit (27,254,000) (29,879,000)
---------------- ----------------
Total liabilities and stockholders' deficit $ 15,388,000 $ 19,529,000
================ ================
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
2
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CHEROKEE INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
<TABLE>
<CAPTION>
Three months ended Nine months ended
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October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Royalty revenues $ 5,674,000 $ 5,133,000 $ 18,973,000 $ 15,308,000
Selling, general and administrative expenses 1,688,000 1,768,000 5,760,000 5,092,000
--------------- ---------------- ---------------- ----------------
Operating income 3,986,000 3,365,000 13,213,000 10,216,000
Other income (expenses):
Interest expense (689,000) (920,000) (2,163,000) (2,549,000)
Investment and Interest income 104,000 196,000 287,000 506,000
--------------- ---------------- ---------------- ----------------
Total other income (expenses), net (585,000) (724,000) (1,876,000) (2,043,000)
Income before income taxes 3,401,000 2,641,000 11,337,000 8,173,000
Income tax provision 1,363,000 1,059,000 4,538,000 3,271,000
--------------- ---------------- ---------------- ----------------
Net income $ 2,038,000 $ 1,582,000 $ 6,799,000 $ 4,902,000
=============== ================ ================ ================
Basic earnings per share $ 0.24 $ 0.18 $ 0.78 $ 0.56
--------------- ---------------- ---------------- ----------------
Diluted earnings per share $ 0.24 $ 0.18 $ 0.78 $ 0.56
--------------- ---------------- ---------------- ----------------
Weighted average shares outstanding
Basic 8,588,928 8,705,428 8,666,595 8,676,325
=============== ================ ================ ================
Diluted 8,590,614 8,803,074 8,668,281 8,776,873
=============== ================ ================ ================
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
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CHEROKEE INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Unaudited
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<TABLE>
<CAPTION>
Nine months ended
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October 30, 1999 October 31, 1998
---------------- ----------------
<S> <C> <C>
Operating activities
- --------------------
Net income $ 6,799,000 $ 4,902,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 37,000 24,000
Amortization of trademarks 189,000 205,000
Amortization of securitization fees 154,000 154,000
Amortization of debt discount 2,163,000 2,549,000
Decrease in deferred taxes 3,120,000 3,271,000
Interest income on note receivable from stockholder (91,000) (91,000)
Changes in current assets and liabilities:
Increase in accounts receivable (1,765,000) (2,020,000)
Decrease in inventories - 45,000
Increase in prepaid expenses and other current assets (133,000) (127,000)
(Decrease) increase in accounts payable and accrued liabilities (2,000) 1,407,000
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Net cash provided by operating activities 10,471,000 10,319,000
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Investing activities
- --------------------
Purchase of trademarks (1,041,000) (486,000)
Purchase of property and equipment (30,000) -
Decrease in other assets 91,000 -
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Net cash used in investing activities (980,000) (486,000)
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Financing activities
- --------------------
Cash distributions (4,352,000) (6,524,000)
Decrease in restricted cash 2,179,000 -
Repurchase of common stock (1,907,000) -
Proceeds from exercise of stock options and warrants - 668,000
Payment on notes (6,750,000) (4,500,000)
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Net cash used in financing activities (10,830,000) (10,356,000)
-------------- ----------------
Decrease in cash and cash equivalents (1,339,000) (523,000)
Cash and cash equivalents at beginning of period 2,847,000 10,275,000
-------------- ----------------
Cash and cash equivalents at end of period $ 1,508,000 $ 9,752,000
============== ================
Total paid during nine month period:
- ------------------------------------
Income taxes $ 1,289,000 $ -
Interest $ 657,000 $ 162,000
Non-cash transactions:
- ----------------------
Declaration of dividend $ - $ 2,176,000
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
4
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CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements as of October 30,
1999 and for the three and nine month periods ended October 30, 1999 and October
31, 1998 have been prepared in accordance U.S. generally accepted accounting
principles ("GAAP"). These consolidated financial statements have not been
audited by independent accountants but include all adjustments, consisting of
normal recurring accruals, which in the opinion of management of Cherokee Inc.
("Cherokee" or the "Company") are necessary for a fair statement of the
financial position and the results of operations for the periods presented. The
accompanying consolidated balance sheet as of January 30, 1999 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
month periods ended October 30, 1999 and October 31, 1998 are not necessarily
indicative of the results to be expected for the fiscal year ended January 29,
2000. 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 fiscal year ended January 30, 1999.
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.
Earnings Per Share Computation
The following table provides a reconciliation of the numerator and denominator
of the basic and diluted per-share computations for the three and nine month
periods ended October 30, 1999 and October 31, 1998:
<TABLE>
<CAPTION>
1999 1998
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 $ 2,038,000 $6,799,000 $1,582,000 $4,902,000
=========== ========== ========== ==========
</TABLE>
5
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<TABLE>
<S> <C> <C> <C> <C>
Denominator:
Denominator for net income
Per common share-weighted
average shares 8,588,928 8,666,595 8,705,428 8,676,325
Effect of dilutive securities:
Stock options 1,713 1,686 97,646 100,548
--------- --------- --------- ---------
Denominator for net income
per common share, assuming
dilution: Adjusted weighted
average shares and assumed
exercises 8,590,641 8,668,281 8,803,074 8,776,873
========= ========= ========= =========
</TABLE>
Common shares issuable upon exercise of stock options that are antidilutive
amounted to 503,702 and 182,268 for the nine month periods ended October 30,
1999 and October 31, 1998, respectively.
(3) Long Term Debt
--------------
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 United States
Cherokee brand name and trademarks. The Secured Notes 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 years ending January 31, 2001 through 2004. The aggregate
scheduled amortization under the Secured Notes is $60.0 million and equals the
aggregate minimum guaranteed royalty payable under the Amended Target Agreement
which is also $60.0 million. Of the $12.3 million payment in royalty revenues
actually received from Target pursuant to the Amended Target Agreement during
the nine months ended October 30, 1999, $6.75 million was paid to the holders of
the Secured Notes and approximately $2.3 million remains in a collection account
for the benefit of the holders of Secured Notes. Excess amounts totaling
approximately $8.1 million (which amount includes royalty revenues received
during
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both the fiscal year ended January 31, 1999 and the nine month period ended
October 30, 1999 as well as interest on the same) were distributed to Spell C.
Spell C distributed approximately $8.6 million to the Company at various times
during the nine month period ended October 30, 1999.
The maturity schedule of Secured Notes is as follows:
For the year ending: Face Value
October 30, 2000.................................. $ 9,750,000
October 30, 2001.................................. 10,500,000
October 30, 2002.................................. 10,500,000
October 30, 2003.................................. 10,500,000
October 30, 2004.................................. 5,250,000
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Total........................................ 46,500,000
Less unamortized Note Discount................ 6,391,000
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40,109,000
Less current portion of long term debt........ 9,750,000
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Long term obligation.......................... $ 30,359,000
=============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Cherokee Inc. (the "Company" or "Cherokee") 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 December 1, 1999, the Company had 32
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
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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.
During the three months ended October 30, 1999 (the "Third Quarter"), the
Company's Sideout licensing partners continued to achieve stronger than
anticipated results from selling merchandise bearing the Sideout brand. Mervyn's
achieved sales of young men's, juniors and children's apparel and accessories
bearing the Sideout brand of approximately $15.7 million during the Third
Quarter.
During the Third Quarter, sales of merchandise bearing the Cherokee brand
continued to increase, with total retail sales exceeding $364.0 million versus
$292.0 million in total retail sales for the comparative period last year.
Zellers sales of merchandise bearing the Cherokee brand were in excess of
$39.4 million during the Third Quarter.
During the Third Quarter, the Company entered into a non-exclusive retail direct
licensing agreement with JBI Apparel, Inc., The Casual Male, Inc. and TCMB & T
Inc., all subsidiaries of J. Baker Inc., to manufacture, promote, sell and
distribute products bearing the Company's Sideout brand. The Company also
entered into a non-exclusive licensing agreement with California based Nirve,
Inc., for the online-only sale of Sideout brand merchandise to the Generation Y
consumer.
Pursuant to the Company's Board of Directors directive to repurchase its
outstanding common stock, the Company repurchased and retired 233,000 shares of
its common stock during the Third Quarter. Continued repurchases of the
Company's stock, if any, will be made from time to time in the open market at
prevailing market prices or privately negotiated transactions.
As previously discussed in footnote 3 to the Notes to Consolidated Financial
Statements included in this Form 10-Q, 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 United States Cherokee trademarks. The
aggregate scheduled amortization under the Secured Notes which is $60.0 million
equals the aggregate minimum guaranteed royalty payable under the Amended Target
Agreement which is also $60.0 million. As of the end of the Third Quarter,
approximately $46.5 million remains outstanding under the Secured Notes.
Results of Operations
Net revenues for the Third Quarter and the nine month period ended October 30,
1999 (the "Nine Months") were $5.7 million and $19.0 million, respectively, in
comparison to net revenues for the three and nine month periods ended October
31, 1998 of $5.1 million and $15.3 million, respectively. For the Nine Months
and the comparable period ended October 31, 1998, royalty revenues of $13.4
million and $12.1 million were recognized from Target, which accounted for 70%
and 79% of total revenues, respectively. The increase in revenues is mainly due
to the
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continued expansion by Target of the Cherokee trademark over a broader range of
categories, the continued success of Zellers' launch of the Cherokee brand in
Canada and the addition of the Sideout brand revenues from retail direct
licensees.
Selling, general, and administrative expenses for the Third Quarter and the Nine
Months were $1.7 million and $5.8 million or 30% of net revenues. In comparison,
selling, general and administrative expenses were $1.8 million and $5.1 million
or 34% and 33% of net revenues during the three and nine month periods ended
October 31, 1998. In the Nine Months, selling, general and administrative
expenses increased mainly due to the increase in accrued management bonus.
During the Third Quarter and the Nine Months, the Company's interest expense was
$689,000 and $2.2 million compared to $920,000 and $2.5 million for the three
and nine month periods ended October 31, 1998. The interest expense is
attributable to the Secured Notes. For the Third Quarter and the Nine Months,
the Company's investment and interest income was $104,000 and $287,000 in
comparison to $196,000 and $506,000 for the three and nine month periods ended
October 31, 1998. The decrease in interest income is due to less cash being
available to invest this year.
During the Third Quarter and the Nine Months, the Company's net income was $ 2.0
million and $6.8 million or $0.24 and $0.78 per share whereas for the three and
nine month periods ended October 31, 1998, net income was $1.6 million and $4.9
million or $0.18 and $0.56 per share. For the Third Quarter and the Nine Months,
the Company incurred a charge for income taxes of $1.4 million and $4.5 million
in comparison to $1.1 million and $3.3 million for the three and nine month
periods ended October 31, 1998. Prior and current year charges for federal
income taxes were primarily offset against the Company's deferred tax asset
account. The Company has been utilizing its net operating losses ("NOLs") to
reduce its federal tax liabilities since emerging from bankruptcy. Once the
Company has utilized its NOLs, it will be required to pay federal income taxes,
thus reducing the Company's liquidity.
Liquidity and Capital Resources
On October 30, 1999, the Company had approximately $3.8 million in cash and cash
equivalents, which includes $2.3 million held in the collection account for
distribution to the Secured Note holders. 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 $10.5 million. Net
cash used in investing activities was $980,000 relating primarily to the
purchase of trademarks. Net cash used in financing activities was $10.8 million
which was comprised of quarterly payments on the Secured Notes totaling $6.75
million, the repurchase of Cherokee common stock of $1.9 million and cash
dividends of $4.3 million, partially offset by a reduction in restricted cash of
$2.2 million held in the collection account.
Inflation and Changing Prices
Inflation did not have a significant effect on the Company's operations during
the Third Quarter or the prior year period.
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Year 2000 Compliance
The Year 2000 issue is a result of computer programs being written using two
digits, e.g. "99", 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. As
a result of a recent upgrade on the Company's computer hardware and software,
the Company's hardware and software systems are currently Year 2000 compliant.
The costs to upgrade such systems did not exceed $5,000.
The Company's achievement of Year 2000 compliance did not 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 to address their noncompliance, if any. 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 have evaluated the impact, assessed the potential problems of
Year 2000 and they are currently taking steps 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 and adversely effect
the Company.
Subsequent event
The Company has retained Financo, Inc. as its exclusive financial advisor to
review and analyze the financial and strategic alternatives available to
Cherokee Inc., with a view towards meeting its long-term strategic objectives,
maximizing its shareholder value and further developing and growing its
businesses and brand names. Strategic alternatives that are being evaluated may
include the sale of Cherokee Inc., a merger or combination with a strategic
operator, the formation of strategic alliances or joint ventures, the
acquisition of another company, and other similar opportunities.
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. The Company is subject
to certain risk factors, which 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 and other filings with the
Securities and
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Exchange Commission (the "SEC"). 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 "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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
Interest: From time to time the Company invests its excess cash in interest-
bearing temporary investments of high-quality issuers. Due to the short time the
investments are outstanding and their general liquidity, these instruments are
classified as cash equivalents in the consolidated balance sheet of the Company
and do not represent a material interest rate risk to the Company. The Company's
only long-term debt obligations are the Secured Notes, which are zero-coupon
secured notes yielding interest of 7.0% per annum. This long-term debt
obligation does not represent a material interest rate risk to the Company.
Foreign Currency: The Company conducts business in various parts of the world.
The Company is exposed to fluctuations in exchange rates to the extent that the
foreign currency exchange rate fluctuates in countries where the Company's
licensees do business. For the Third Quarter, a hypothetical 10% strengthening
of the US dollar relative to the foreign currencies of countries where the
Company operates was not material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company from time to time becomes
involved in legal claims and litigation. In the opinion of management, based
upon consultations with legal counsel, the disposition of litigation currently
pending against the Company is unlikely to have, individually or in the
aggregate, a materially adverse effect on its consolidated business financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES
None
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Any proposal relating to a proper subject which a stockholder may intend to be
presented for action at the 2000 Annual Meeting of Stockholders must be received
by the Company no later than January 17, 2000, to be considered for inclusion in
the proxy material to be disseminated by the Board of Directors in accordance
with the provisions of Rule 14a (8) (e) (1) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Copies of such proposals
should be sent to the Corporate Secretary at the Company's principal executive
offices. To be eligible for inclusion in such proxy materials, such proposals
must conform to the requirements set forth in Regulation 14A under the Exchange
Act.
In addition, if the Company has not received notice on or before March 30, 2000
of any matter a stockholder intends to propose for a vote at the 2000 Annual
Meeting of Stockholders, then a proxy solicited by the Board of Directors may be
voted on such matter in the discretion of the proxy holder, without a discussion
of the matter in the proxy statement soliciting such proxy and without such
matter appearing as a separate matter on the proxy card.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
The Company filed no reports on Form 8-K during the Third Quarter.
List of Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
27.1 Article 5 of Regulation S-X - Financial Data Schedule
12
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 6, 1999
CHEROKEE INC.
By: /s/ Robert Margolis
-------------------
Robert Margolis
Chief Executive Officer
By: /s/ Carol Gratzke
-----------------
Carol Gratzke
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> AUG-01-1999 JAN-31-1999
<PERIOD-END> OCT-30-1999 OCT-30-1999
<CASH> 3,829 3,829
<SECURITIES> 0 0
<RECEIVABLES> 4,997 4,997
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,814 9,814
<PP&E> 358 358
<DEPRECIATION> 132 132
<TOTAL-ASSETS> 15,388 15,388
<CURRENT-LIABILITIES> 12,033 12,033
<BONDS> 0 0
0 0
0 0
<COMMON> 170 170
<OTHER-SE> (25,369) (25,369)
<TOTAL-LIABILITY-AND-EQUITY> 15,388 15,388
<SALES> 6,574 18,973
<TOTAL-REVENUES> 6,574 18,973
<CGS> 0 0
<TOTAL-COSTS> 1,688 5,760
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 689 2,163
<INCOME-PRETAX> 3,401 11,337
<INCOME-TAX> 1,363 4,538
<INCOME-CONTINUING> 2,038 6,799
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,038 6,799
<EPS-BASIC> 0.24 0.78
<EPS-DILUTED> 0.24 0.78
</TABLE>
