<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 July 31, 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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<TABLE>
<CAPTION>
<S> <C>
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
--------------
</TABLE>
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 August 31, 1999
- ------------------------------------------ --------------------------------
Common Stock, $.02 par value per share 8,705,428
<PAGE>
CHEROKEE INC.
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM I. Consolidated Financial Statements
Consolidated Balance Sheets
July 31, 1999 and January 30, 1999 2
Consolidated Statements of Operations 3
Three and Six Month periods ended July 31, 1999 and
August 1, 1998
Consolidated Statements of Cash Flows 4
Six Month periods ended July 31, 1999 and
August 1, 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 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 2. Changes in Securities 11
ITEM 3. Defaults Upon Senior Securities 11
ITEM 4. Submission of Matters to a Vote of Security Holders 11
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.
-------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
July 31, 1999 January 30, 1999
-------------- ----------------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,407,000 $ 2,847,000
Restricted cash 2,288,000 4,500,000
Receivables, net 5,831,000 3,232,000
Prepaid expenses and other current assets 727,000 29,000
Deferred tax asset - 861,000
-------------- ----------------
Total current assets 10,253,000 11,469,000
Deferred tax asset 1,524,000 3,527,000
Securitization fees, net of accumulated amortization of $326,000
and $223,000, respectively 915,000 1,018,000
Property and equipment, net of accumulated depreciation of
$125,000 and $95,000, respectively 233,000 233,000
Trademarks, net of accumulated amortization of
$364,000 and $243,000, respectively 3,691,000 3,176,000
Other assets 15,000 106,000
-------------- ----------------
Total assets $ 16,631,000 $ 19,529,000
============== ================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 220,000 $ 280,000
Dividends payable - 2,176,000
Other accrued liabilities 1,535,000 1,755,000
Notes payable 9,375,000 9,000,000
-------------- ----------------
Total current liabilities 11,130,000 13,211,000
Other liabilities 500,000 500,000
Notes payable - long term 32,296,000 35,697,000
-------------- ----------------
Total liabilities 43,926,000 49,408,000
-------------- ----------------
Stockholders' Deficit:
Common stock, $.02 par value,20,000,000 shares authorized,
8,705,428 shares issued and outstanding at
July 31, 1999 and at January 30, 1999 174,000 174,000
Note receivable from stockholder (2,195,000) (2,134,000)
Accumulated deficit (25,274,000) (27,919,000)
-------------- ----------------
Stockholders' deficit (27,295,000) (29,879,000)
-------------- ----------------
Total liabilities and stockholders' deficit $ 16,631,000 $ 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 Six months ended
------------------ ----------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Royalty revenues $ 6,382,000 $ 4,879,000 $ 13,300,000 $ 10,175,000
Selling, general and administrative expenses 2,128,000 2,084,000 3,973,000 3,324,000
------------- -------------- ------------- --------------
Operating income 4,254,000 2,795,000 9,327,000 6,851,000
Other income (expenses):
Interest expense (724,000) (766,000) (1,474,000) (1,629,000)
Investment and Interest income 100,000 124,000 183,000 310,000
------------- -------------- ------------- --------------
Total other income (expenses), net (624,000) (642,000) (1,291,000) (1,319,000)
Income before income taxes 3,630,000 2,153,000 8,036,000 5,532,000
Income tax provision 1,452,000 861,000 3,215,000 2,213,000
------------- -------------- ------------- --------------
Net income $ 2,178,000 $ 1,292,000 $ 4,821,000 $ 3,319,000
============= ============== ============= ==============
Basic earnings per share $ 0.25 $ 0.15 $ 0.55 $ 0.38
------------- -------------- ------------- --------------
Diluted earnings per share $ 0.25 $ 0.15 $ 0.55 $ 0.38
------------- -------------- ------------- --------------
Weighted average shares outstanding
Basic 8,705,428 8,697,095 8,705,428 8,661,773
============= ============== ============= ==============
Diluted 8,705,937 8,794,740 8,705,428 8,762,321
============= ============== ============= ==============
</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
-------------------------------------
Unaudited
---------
<TABLE>
<CAPTION>
Six months ended
----------------
July 31, 1999 August 1, 1998
------------------------------------
<S> <C> <C>
Operating activities
- --------------------
Net income $ 4,821,000 $ 3,319,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,000 16,000
Amortization of goodwill and trademarks 121,000 85,000
Amortization of securitization fees 103,000 52,000
Amortization of debt discount 1,474,000 1,670,000
Decrease in deferred taxes 2,864,000 2,213,000
Interest income on note receivable from stockholder (61,000) (60,000)
Changes in current assets and liabilities:
Increase in accounts receivable (2,599,000) (1,728,000)
Decrease (increase) in prepaid expenses and other current assets (698,000) (37,000)
Decrease in accounts payable and accrued liabilities (280,000) (210,000)
------------- -------------
Net cash provided by operating activities 5,775,000 5,320,000
------------- -------------
Investing activities
- --------------------
Purchase of trademarks (636,000) (144,000)
Purchase of property and equipment (30,000) -
Decrease in other assets 91,000 -
------------- -------------
Net cash used in investing activities (575,000) (144,000)
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Financing activities
- --------------------
Cash distributions (4,352,000) (4,348,000)
Decrease in restricted cash 2,212,000 -
Proceeds from exercise of stock options and warrants - 668,000
Payment on notes (4,500,000) (2,250,000)
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Net cash used in financing activities (6,640,000) (5,930,000)
------------- -------------
Decrease in cash and cash equivalents (1,440,000) (754,000)
Cash and cash equivalents at beginning of period 2,847,000 10,275,000
------------- -------------
Cash and cash equivalents at end of period $ 1,407,000 $ 9,521,000
============= =============
Total paid during period:
- ------------------------
Income taxes $ 905,000 $ -
Interest $ 380,000 $ 62,000
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 July 31, 1999
and for the three and six month periods ended July 31, 1999 and August 1, 1998
have been prepared in accordance with 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 presentation 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 six
month periods ended July 31, 1999 and August 1, 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 six month
periods ended July 31, 1999 and August 1, 1998:
<TABLE>
<CAPTION>
1999 1998
3 Months 6 Months 3 Months 6 Months
----------------------- ---------------------
<S> <C> <C> <C> <C>
Numerator:
Net income-numerator for
net income per common share
and net income per common
share assuming dilution $ 2,178,000 $4,821,000 $1,292,000 $3,319,000
=========== ========== ========== ==========
</TABLE>
5
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<TABLE>
<S> <C> <C> <C> <C>
Denominator:
Denominator for net income
Per common share-weighted
average shares 8,705,428 8,705,428 8,697,095 8,661,773
Effect of dilutive securities:
Stock options 509 - 97,645 100,548
----------- ---------- ---------- ----------
Denominator for net income
per common share, assuming
dilution: Adjusted weighted
average shares and assumed
exercises 8,705,937 8,705,428 8,794,740 8,762,321
=========== ========== ========== ==========
</TABLE>
Common shares issuable upon exercise of stock options that are antidilutive
amounted to 484,536 and zero for the six month periods ended July 31, 1999 and
August 1, 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 $7.8 million payment in royalty revenues
actually received from Target pursuant to the Amended Target Agreement during
the six months ended July 31, 1999, $4.5 million was paid to the holders of the
Secured Notes and approximately $2.2 million remains in a collection account for
the benefit of the holders of Secured Notes. Excess amounts totaling
approximately $5.9 million (which amount includes royalty revenues received
during both the fiscal year ended January 31, 1999 and the six month period
ended July 31, 1999 as well as interest on the same) were distributed to Spell
C. Spell C distributed approximately $3.7 million of such excess amounts to the
Company at various times during the six month period ended July 31, 1999.
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The maturity schedule of Secured Notes is as follows:
For the year ending: Face Value
July 31, 2000 ...................................... $ 9,375,000
July 31, 2001 ...................................... 10,500,000
July 31, 2002 ...................................... 10,500,000
July 31, 2003....................................... 10,500,000
July 31, 2004 ...................................... 7,875,000
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Total ..................................... 48,750,000
Less unamortized Note Discount.............. 7,079,000
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41,671,000
Less current portion of long term debt ....... 9,375,000
-------------
Long term obligation .................... $ 32,296,000
=============
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, "California" 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 September 1, 1999, the Company had 30
continuing license agreements for the Company's various trademarks, covering
both domestic and international markets. The Company will continue to solicit
new licensees and may, from time to time, retain the services of outside
consultants to assist the Company in this regard. In November 1997 the Company
reaffirmed its relationship with Target Stores, a division of Dayton Hudson
Corporation ("Target"), by entering into an amended licensing agreement (the
"Amended Target Agreement") which grants Target
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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 July 31, 1999 (the "Second Quarter"), all six of
the Company's Sideout retail licensing partners, Mervyn's California, Uptons,
Sportmart, Gart Sport, Bob's Stores and The Forzani Group, Ltd. were selling
merchandise bearing the Sideout brand. Stronger than anticipated results have
been achieved. Mervyn's achieved sales of young men's, juniors and children's
apparel and accessories bearing the Sideout brand of approximately $16.6 million
during the Second Quarter. During the Second Quarter, the Company was advised
that one of its licensees, Uptons, is expected to close all of its retail stores
at the end of December 1999. Uptons' parent company, American Retail Group, has
indicated that it will continue to pay when due the quarterly minimum guaranteed
royalties under the terms of Uptons' licensing agreement.
During the Second Quarter, sales of merchandise bearing the Cherokee brand
continued to increase, with total retail sales exceeding $319.0 million versus
$268.0 million in total retail sales for the comparative period. Zellers sales
of merchandise bearing the Cherokee brand contributed over $25.6 million during
the Second Quarter.
During the Second Quarter, the Company entered into an agreement with Metro-
Goldwyn-Mayer Home Entertainment Inc. to consult on the development of their
consumer products program and assist them in engineering strategic licensing
agreements. Compensation to Cherokee is subject to the successful completion of
an MGM license in accordance with the terms of the agreement.
During the Second Quarter, the Company's Board of Directors authorized the
repurchase of up to one million shares or approximately 11.5% of its outstanding
common stock. 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. The Company did not declare a dividend on its common
stock for the Second Quarter.
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.
Results of Operations
Net revenues for the Second Quarter and the six month period ended July 31, 1999
(the "Six Months") were $6.4 million and $13.3 million, respectively, in
comparison to net revenues for the three and six month periods ended August 1,
1998 of $4.9 million and $10.2 million, respectively. For the Six Months and the
comparable period ended August 1, 1998, royalty revenues of $9.8 million and
$8.4 million were recognized from Target, which accounted for 74% and 83% of
total revenues, respectively. The increase in revenues is mainly due to the
continued
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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 Second Quarter and the Six
Months were $2.1 million and $4.0 million or 33% and 30% of net revenues. In
comparison, selling, general and administrative expenses were $2.1 million and
$3.3 million or 43% and 33% of net revenues during the three and six month
periods ended August 1, 1998. In the Six Months, selling, general and
administrative expenses increased mainly due to the increase in accrued
management bonus.
During the Second Quarter and the Six Months, the Company's interest expense was
$724,000 and $1.5 million compared to $766,000 and $1.6 million for the three
and six month periods ended August 1, 1998. The interest expense is attributable
to the Secured Notes. For the Second Quarter and the Six Months, the Company's
investment and interest income was $100,000 and $183,000 in comparison to
$124,000 and $310,000 for the three and six month periods ended August 1, 1998.
During the Second Quarter and the Six Months, the Company's net income was $ 2.2
million and $4.8 million or $0.25 and $0.55 earnings per share whereas for the
three and six month periods ended August 1, 1998, net income was $1.3 million
and $3.3 million or $0.15 and $0.38 earnings per share. For the Second Quarter
and the Six Months, the Company incurred a charge for income taxes of $1.4
million and $3.2 million in comparison to $861,000 and $2.2 million for the
three and six month periods ended August 1, 1998. Prior and current year charges
for income taxes were offset against the Company's deferred tax asset account.
Liquidity and Capital Resources
On July 31, 1999, the Company had approximately $3.7 million in cash and cash
equivalents, including amounts 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 Six Months, net cash provided by operations was $5.8 million. Net
cash used in investing activities was $575,000 relating primarily to the
purchase of trademarks and equipment. Net cash used in financing activities was
$6.6 million which was comprised of quarterly payments on the Secured Notes
totaling $4.5 million and cash dividends of $4.3 million offset by a reduction
in restricted cash of $2.2 million.
Inflation and Changing Prices
Inflation did not have a significant effect on the Company's operations during
the Second Quarter or the prior year period.
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
9
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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 Company 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.
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 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
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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 Second 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
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
On June 14, 1999, the Company held its annual meeting of stockholders. At the
meeting, all five directors on the board of directors were re-elected. The
results of the voting were as follows: 7,688,434 votes for and 25,479
abstentions for directors Timothy Ewing, Douglas Weitman and Jess Ravich and
7,689,634 votes for and 24,579 abstentions for directors Robert Margolis and
Keith Hull.
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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 Second 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: Aqugust 31, 1999
CHEROKEE INC.
By: /s/ Robert Margolis
-------------------
Robert Margolis
Chief Executive Officer
By: /s/ Carol Gratzke
------------------
Carol Gratzke
Chief Financial Officer
13
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> MAY-02-1999 JAN-31-1999
<PERIOD-END> JUL-31-1999 JUL-31-1999
<CASH> 3,695 3,695
<SECURITIES> 0 0
<RECEIVABLES> 5,831 5,831
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,253 10,253
<PP&E> 348 348
<DEPRECIATION> 125 125
<TOTAL-ASSETS> 16,631 16,631
<CURRENT-LIABILITIES> 11,130 11,130
<BONDS> 0 0
0 0
0 0
<COMMON> 174 174
<OTHER-SE> (27,469) (27,469)
<TOTAL-LIABILITY-AND-EQUITY> 16,631 16,631
<SALES> 6,382 13,300
<TOTAL-REVENUES> 6,382 13,300
<CGS> 0 0
<TOTAL-COSTS> 2,128 3,973
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 724 1,474
<INCOME-PRETAX> 3,630 8,036
<INCOME-TAX> 1,452 3,215
<INCOME-CONTINUING> 2,178 4,821
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,178 4,821
<EPS-BASIC> .25 .55
<EPS-DILUTED> .25 .55
</TABLE>
