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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 April 29, 2000.
[ ] 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
Incorporation or organization) identification number)
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
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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 90 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 April 29, 2000
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Common Stock, $.02 par value per share 8,480,705
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CHEROKEE INC.
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INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
April 29, 2000 and January 29, 2000 2
Consolidated Statements of Operations 3
Three Month period ended April 29, 2000 and
May 1, 1999
Consolidated Statements of Cash Flows 4
Three Month period ended April 29, 2000 and
May 1, 1999
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 10
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 11
ITEM 6. Exhibits and Reports on 8-K 11
</TABLE>
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Part 1. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CHEROKEE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 29, 2000 January 29, 2000
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Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,429,000 $ 2,253,000
Restricted cash 2,327,000 2,324,000
Receivables, net 8,379,000 4,841,000
Prepaid expenses and other current assets 9,000 28,000
Deferred tax asset 807,000 1,579,000
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Total current assets 14,951,000 11,025,000
Deferred tax asset 797,000 797,000
Securitization fees, net of accumulated amortization of $480,000
and $429,000, respectively 761,000 812,000
Property and equipment, net of accumulated depreciation of
$163,000 and $156,000, respectively 204,000 203,000
Trademarks, net of accumulated amortization of
$594,000 and $503,000, respectively 5,101,000 4,666,000
Other assets 15,000 15,000
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Total assets $ 21,829,000 $ 17,518,000
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,514,000 $ 600,000
Other accrued liabilities 3,139,000 2,286,000
Notes payable 10,500,000 10,125,000
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Total current liabilities 15,153,000 13,011,000
Other liabilities 250,000 250,000
Notes payable - long term 26,395,000 28,389,000
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Total liabilities 41,798,000 41,650,000
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Stockholders' Deficit:
Common stock, $.02 par value,20,000,000 shares authorized,
8,480,705 and 8,472,428 shares issued and outstanding at
April 29, 2000 and at January 29, 2000 170,000 170,000
Note receivable from stockholder (370,000) (365,000)
Accumulated deficit (19,769,000) (23,937,000)
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Stockholders' deficit (19,969,000) (24,132,000)
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Total liabilities and stockholders' deficit $ 21,829,000 $ 17,518,000
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</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
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CHEROKEE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
Three months ended
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April 29, 2000 May 1, 1999
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<S> <C> <C>
Royalty revenues $ 9,603,000 $ 6,917,000
Selling, general and administrative expenses 2,141,000 1,845,000
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Operating income 7,462,000 5,072,000
Other income (expenses) :
Interest expense (632,000) (750,000)
Investment and Interest income 99,000 84,000
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Total other income (expenses), net (533,000) (666,000)
Income before income taxes 6,929,000 4,406,000
Income tax provision 2,772,000 1,763,000
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Net income $ 4,157,000 $ 2,643,000
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Basic earnings per share $ 0.49 $ 0.30
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Diluted earnings per share $ 0.49 $ 0.30
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Weighted average shares outstanding
Basic 8,476,567 8,705,428
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Diluted 8,476,567 8,705,428
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</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
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CHEROKEE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
Three months ended
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April 29, 2000 May 1, 1999
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<S> <C> <C>
Operating activities
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Net income $ 4,157,000 $ 2,643,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,000 15,000
Amortization of goodwill and trademarks 91,000 58,000
Amortization of securitization fees 51,000 52,000
Amortization of debt discount 632,000 750,000
Decrease in deferred taxes 772,000 1,498,000
Interest income on note receivable from stockholder (5,000) (31,000)
Changes in current assets and liabilities:
Increase in accounts receivable (3,538,000) (3,157,000)
Decrease in other current assets 19,000 22,000
Increase in accounts payable and accrued liabilities 1,767,000 800,000
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Net cash provided by operating activities 3,953,000 2,650,000
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Investing activities
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Purchase of trademarks (528,000) (307,000)
Purchase of property and equipment (8,000) (30,000)
Decrease in other assets - 91,000
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Net cash used in investing activities (536,000) (246,000)
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Financing activities
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Cash distributions - (2,176,000)
(Increase) decrease in restricted cash (3,000) 1,691,000
Proceeds from exercise of stock options and warrants 12,000 -
Payment on notes (2,250,000) (2,250,000)
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Net cash used in financing activities (2,241,000) (2,735,000)
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Increase in cash and cash equivalents 1,176,000 (331,000)
Cash and cash equivalents at beginning of period 2,253,000 2,847,000
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Cash and cash equivalents at end of period $ 3,429,000 $ 2,516,000
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Total paid during period:
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Income taxes $ 228,525 $ 240,000
Interest $ 310,499 $ 172,000
Non-cash transactions:
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Declaration of dividend $ - $ 2,176,000
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
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CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
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The accompanying condensed consolidated financial statements as of April 29,
2000 and for the three month periods ended April 29, 2000 and May 1, 1999 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 29, 2000 has been derived
from audited consolidated financial statements, but does not include all
disclosures required by GAAP. The results of operations for the three month
periods ended April 29, 2000 and May 1, 1999 are not necessarily indicative of
the results to be expected for the fiscal year ended February 3, 2001. 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 29, 2000.
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
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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 weighted average number of shares excludes 511,203 and 561,060 shares of
common stock issuable on the exercise of stock options for the three-month
periods ended April 29, 2000 and May 1, 1999, respectively, because the exercise
price is less than the average market price of the common stock during the
period.
(3) Long Term Debt
Long term debt is comprised of Zero-Coupon Secured Notes ("Secured Notes")
yielding 7% interest per annum and maturing on February 20, 2004. The Secured
Notes amortize quarterly from May 20, 1998 through February 20, 2004. The
following table summarizes the maturity of the long-term debt:
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For the year ending: Face Value
April 29, 2001 ............................................ $ 10,500,000
April 29, 2002 ............................................ 10,500,000
April 29, 2003 ............................................ 10,500,000
April 29, 2004............................................. 10,500,000
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Total ........................................... 42,000,000
Less unamortized Note Discount.................... 5,105,000
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36,895,000
Less current portion of long term debt ........... 10,500,000
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Long term obligation ............................. $ 26,395,000
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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 domestic and international,
retail direct and wholesale 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 also grant the Company the
right to conduct periodic quality control inspections to ensure that the image
and quality of licensed products remain consistent. As of April 29, 2000, 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 Target Corporation ("Target"), by entering into an amended
licensing agreement (the "Amended Target Agreement") which grants Target the
exclusive right in the United States to use the Cherokee trademarks on certain
specified categories of merchandise. Under the Amended Target Agreement, Target
is obligated to pay a royalty based upon a percentage of its net sales of
Cherokee brand products, with a minimum guaranteed royalty of $60.0 million over
the six-year initial term of the agreement.
During the three months ended April 29, 2000 (the "First Quarter"), sales
of merchandise bearing the Cherokee brand continued to increase, with total
retail sales exceeding $392.0 million versus $297.0 million in total retail
sales for the first quarter of last year. Zellers sales of merchandise bearing
the Cherokee brand were in excess of $29.7 million during the First Quarter
compared to $22.3 million for the first quarter of last year. Additionally,
ShopKo Stores Inc. acquired Pamida, Inc. in July 1999. As part of its
integration of the Pamida operations into those of ShopKo, ShopKo made the
decision to discontinue use of the Cherokee brand in its merchandise assortments
and requested a termination of the Pamida licensing agreement with the Company.
The Company agreed to terminate the licensing agreement with Pamida in return
for a cash payment of $375,000 as settlement in full of the remaining minimum
royalties due under the existing licensing agreement.
During the First Quarter, the Company's Sideout licensing partners
continued to achieve positive results from sales of merchandise bearing the
Sideout brand. Sales of Mervyn's young
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men's, junior's and children's apparel and accessories bearing the Sideout brand
were approximately $18.5 million during the First Quarter in comparison to $10.0
million for the first quarter of last year.
In addition to licensing its own brands, the Company is seeking to represent
and manage, as an exclusive agent, other brands with respect to domestic and
international marketing, licensing and distribution. Generally, as an exclusive
agent, the Company will perform a range of services including marketing of
brands, solicitation of licensees, contract negotiations and administration and
maintenance of license or distribution agreements. In return for its services
the Company will normally charge a certain percentage of the net royalties
generated by the brands it represents and manages. In March 2000, the Company
entered into an agreement to act as the exclusive agent for Mossimo Inc. With
the assistance of the Company, Mossimo entered into a multi-year licensing
agreement with Target. Pursuant to a finder's agreement with Mossimo, the
Company is entitled to 15% of all royalties paid to Mossimo by Target. The
Company does not expect to derive any revenues from this arrangement until June
2001 at the earliest. In May 2000, creditors of Mossimo filed a petition to
force Mossimo into involuntary bankruptcy. It is unclear what effect, if any,
this action will have on the agreement between Mossimo and Target and the
Company's rights to receive a percentage of the royalties. Additionally, in
April 2000, the Company entered into an exclusive agreement to represent Maui
and Sons Inc. in the United States and Canada, and in May 2000 it entered into
an exclusive agreement with Aspen Licensing International Inc. to represent its
Aspen brand both domestically and internationally.
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, amortized 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 is $60.0 million which equals the aggregate minimum guaranteed
royalty payable under the Amended Target Agreement which is also $60.0 million.
As of the end of the First Quarter, approximately $42.0 million remains
outstanding under the Secured Notes.
Results of Operations
Net revenues were $9.6 million during the First Quarter as compared to $6.9
million during the three month period ended May 1, 1999, which represents an
increase of 39%. Revenues for the Cherokee brand were $8.7 million for the
First Quarter compared to $6.5 million for the three month period ended May 1,
1999. During the First Quarter and the comparable three months ended May 1,
1999, royalty revenues of $6.9 million and $5.3 million were recognized from
Target, which accounted for 72% and 77% of total revenues, respectively. For
the First Quarter, Sideout brand revenues were $800,000 compared to $428,000 for
the three month period ended May 1, 1999. The increase in net revenues is
mainly due to the continued expansion by Target, in the United States, and
Zellers, in Canada, of the Cherokee trademark over a broader range of
categories, the $375,000 payment by Pamida and the increased sales of the
Sideout brand at Mervyn's and other retail direct licensees.
The Company's royalty recognition policy provides for recognition of
royalties in the quarter earned, although a large portion of such royalties are
actually received during the month
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following the end of a quarter. The Company's receivable balance included the
accrual of Target, Zellers and Mervyn's royalty revenues earned during the First
Quarter and subsequently received in May 2000.
Selling, general, and administrative expenses for the First Quarter were
$2.1 million or 22% of net revenues. In comparison, selling, general and
administrative expenses were $1.8 million or 27% net revenues during the three
month period ended May 1, 1999.
During the First Quarter, the Company's interest expense was $632,000
compared to $750,000 for the three month period ended May 1, 1999. The interest
expense is attributable to the Secured Notes. For the First Quarter, the
Company's investment and interest income was $99,000 in comparison to $84,000
for the three month period ended May 1, 1999. The increase in interest income is
due to larger amounts of cash being available to invest in the First Quarter.
During the First Quarter, the Company's net income was $4.1 million or
$0.49 per share whereas for the three month period ended May 1, 1999, net income
was $2.6 million or $0.30 per share. For the First Quarter, the Company
incurred a charge for income taxes of $2.8 million in comparison to $1.8 million
for the three month period ended May 1, 1999. Prior year charges for federal
income taxes were primarily offset against the Company's deferred tax asset
account. The Company has fully utilized the net operating losses generated
subsequent to the Company's 1994 reorganization, which were not subject to
Section 382 limitations. For fiscal year ended February 3, 2001, the Company
expects to utilize $780,450 of its limited Section 382(1)(b) net operating
losses for both federal and state and is making quarterly estimated tax payments
for its federal and state income tax liabilities.
Liquidity and Capital Resources
On April 29, 2000, the Company had approximately $5.7 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 First Quarter, net cash provided by operations was $3.9 million.
Net cash used in investing activities was $536,000 relating primarily to the
purchase of trademarks. Net cash used in financing activities was $2.2 million,
which was the quarterly payment on the Secured Notes.
Inflation and Changing Prices
Inflation did not have a significant effect on the Company's operations
during the First Quarter or the prior year period.
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
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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, 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 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 First 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.
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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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
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27.1 Article 5 of Regulation S-X - Financial Data Schedule
(b) Reports on Form 8-K
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The Company filed no reports on Form 8-K during the First Quarter.
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SIGNATURES
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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: June 6, 2000
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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