<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 28, 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 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
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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
--- ---
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 28, 2000
-------------------------------------- -------------------------------
Common Stock, $.02 par value per share 8,231,705
<PAGE>
CHEROKEE INC.
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
October 28, 2000 and January 29, 2000 2
Consolidated Statements of Operations 3
Three and Nine Month periods ended October 28, 2000 and
October 30, 1999
Consolidated Statements of Cash Flows 4
Nine Month periods ended October 28, 2000 and
October 30, 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 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 12
ITEM 2. Changes in Securities 12
ITEM 3. Defaults Upon Senior Securities 12
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on 8-K 13
1
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Part 1. Financial Information
-----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CHEROKEE INC.
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CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
October 28, 2000 January 29, 2000
---------------- ----------------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,235,000 $ 2,253,000
Restricted cash 2,721,000 2,324,000
Receivables, net 4,770,000 4,841,000
Prepaid expenses and other current assets 833,000 28,000
Deferred tax asset 807,000 1,579,000
------------ ------------
Total current assets 11,366,000 11,025,000
Deferred tax asset 797,000 797,000
Securitization fees, net of accumulated amortization of $583,000
and $429,000, respectively 658,000 812,000
Property and equipment, net of accumulated depreciation of
$178,000 and $156,000, respectively 243,000 203,000
Trademarks, net of accumulated amortization of
$766,000 and $503,000, respectively 5,914,000 4,666,000
Other assets 15,000 15,000
------------ ------------
Total assets $ 18,993,000 $ 17,518,000
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 330,000 $ 600,000
Other accrued liabilities 2,711,000 2,286,000
Notes payable 10,500,000 10,125,000
------------ ------------
Total current liabilities 13,541,000 13,011,000
Other liabilities 250,000 250,000
Notes payable - long term 22,320,000 28,389,000
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Total liabilities 36,111,000 41,650,000
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Stockholders' Deficit:
Common stock, $.02 par value,20,000,000 shares authorized,
8,231,705 and 8,472,428 shares issued and outstanding at
October 28, 2000 and at January 29, 2000, respectively 165,000 170,000
Note receivable from stockholder - (365,000)
Accumulated deficit (17,283,000) (23,937,000)
------------ ------------
Stockholders' deficit (17,118,000) (24,132,000)
------------ ------------
Total liabilities and stockholders' deficit $ 18,993,000 $ 17,518,000
============ ============
</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
------------------ -----------------
October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Royalty revenues $4,986,000 $5,674,000 $22,275,000 $18,973,000
Selling, general and administrative expenses 1,620,000 1,688,000 6,236,000 5,760,000
---------- ---------- ----------- -----------
Operating income 3,366,000 3,986,000 16,039,000 13,213,000
Other income (expenses):
Interest expense (568,000) (689,000) (1,806,000) (2,163,000)
Investment and Interest income 109,000 104,000 332,000 287,000
---------- ---------- ----------- -----------
Total other income (expenses), net (459,000) (585,000) (1,474,000) (1,876,000)
Income before income taxes 2,907,000 3,401,000 14,565,000 11,337,000
Income tax provision 1,163,000 1,363,000 5,827,000 4,538,000
---------- ---------- ----------- -----------
Net income $1,744,000 $2,038,000 $ 8,738,000 $ 6,799,000
========== ========== =========== ===========
Basic earnings per share $ 0.21 $ 0.24 $ 1.04 $ 0.78
---------- ---------- ----------- -----------
Diluted earnings per share $ 0.21 $ 0.24 $ 1.04 $ 0.78
---------- ---------- ----------- -----------
Weighted average shares outstanding
Basic 8,231,705 8,588,928 8,368,659 8,666,595
========== ========== =========== ===========
Diluted 8,279,548 8,590,641 8,377,423 8,668,281
========== ========== =========== ===========
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
3
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CHEROKEE INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
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<TABLE>
<CAPTION>
Nine months ended
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October 28, 2000 October 30, 1999
----------------- ----------------
<S> <C> <C>
Operating activities
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Net income $ 8,738,000 $ 6,799,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 22,000 37,000
Amortization of goodwill and trademarks 263,000 189,000
Amortization of securitization fees 154,000 154,000
Amortization of debt discount 1,806,000 2,163,000
Decrease in deferred taxes 772,000 3,120,000
Interest income on note receivable from stockholder (8,000) (91,000)
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable 71,000 (1,765,000)
Increase in prepaid expenses and other current assets (805,000) (133,000)
Increase (decrease) in accounts payable and accrued liabilities 155,000 (2,000)
----------- ------------
Net cash provided by operating activities 11,168,000 10,471,000
----------- ------------
Investing activities
--------------------
Purchase of trademarks (1,511,000) (1,041,000)
Purchase of property and equipment (62,000) (30,000)
Decrease in other assets - 91,000
Repayment on note receivable from stockholder 373,000 -
----------- ------------
Net cash used in investing activities (1,200,000) (980,000)
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Financing activities
--------------------
Cash distributions - (4,352,000)
(Increase) decrease in restricted cash (397,000) 2,179,000
Repurchase of common stock (2,101,000) (1,907,000)
Proceeds from exercise of warrants 12,000 -
Payment on notes (7,500,000) (6,750,000)
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Net cash used in financing activities (9,986,000) (10,830,000)
----------- ------------
Decrease in cash and cash equivalents (18,000) (1,339,000)
Cash and cash equivalents at beginning of period 2,253,000 2,847,000
----------- ------------
Cash and cash equivalents at end of period $ 2,235,000 $ 1,508,000
=========== ============
Total paid during period:
-------------------------
Income taxes $ 4,713,000 $ 1,289,000
Interest $ 1,150,000 $ 657,000
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
4
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements as of October 28,
2000 and for the three and nine month periods ended October 28, 2000 and October
30, 1999 have been prepared in accordance with 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 and nine month periods ended October 28, 2000 and October 30, 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
------------------------------------------
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 28, 2000 and October 30, 1999:
<TABLE>
<CAPTION>
2000 1999
3 Months 9 Months 3 Months 9 Months
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income-numerator for
net income per common share
and net income per common
share assuming dilution $1,744,000 $8,738,000 $2,038,000 $6,799,000
========== ========== ========== ==========
Denominator:
Denominator for net income
Per common share-weighted
average shares 8,231,705 8,368,659 8,588,928 8,666,595
Effect of dilutive securities:
Stock options 47,843 8,764 1,713 1,686
---------- ---------- ---------- ----------
Denominator for net income
per common share, assuming
dilution: Adjusted weighted
average shares and assumed
exercises 8,279,548 8,377,423 8,590,641 8,668,281
========== ========== ========== ==========
</TABLE>
5
<PAGE>
Common shares issuable upon exercise of stock options that are anti-dilutive
amounted to 435,068 and 503,702 for the nine month periods ended October 28,
2000 and October 30, 1999, respectively.
(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:
<TABLE>
<CAPTION>
For the year ending: Face Value
<S> <C>
October 28, 2001 ............................................ $10,500,000
October 28, 2002 ............................................ 10,500,000
October 28, 2003 ............................................ 10,500,000
October 28, 2004 ............................................ 5,250,000
-----------
Total ............................................... 36,750,000
Less unamortized Note Discount ......................... 3,930,000
-----------
32,820,000
Less current portion of long term debt ................. 10,500,000
-----------
Long term obligation ................................... $22,320,000
===========
</TABLE>
6
<PAGE>
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 or represents. 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 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 October 28, 2000, the
Company had 26 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 October 28, 2000 (the "Third Quarter"), sales
of merchandise bearing the Cherokee brand continued to increase, with total
retail sales exceeding $452.7 million versus $364.0 million in total retail
sales for the third quarter of last year. Zellers Inc.'s sales of merchandise
bearing the Cherokee brand were in excess of $45.2 million during the Third
Quarter compared to $39.4 million for the third quarter of last year.
During the Third 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 men's, junior's and children's apparel
and accessories bearing the Sideout brand were approximately $22.7 million
during the Third Quarter in comparison to $15.7 million for the third quarter of
last year.
7
<PAGE>
During the Third Quarter, the Company entered into an exclusive retail
direct licensing agreement with Paris, France based Carrefour Group, granting
the Carrefour Group the exclusive right to manufacture, promote, sell and
distribute a wide range of products bearing the Company's Cherokee brand in
Spain, Mexico and Brazil. The Carrefour Group is obligated to pay the Company a
royalty based upon a percentage of its net sales of Cherokee branded products in
those countries. The Company does not expect to receive royalties until November
2001 under this agreement, and even then there can be no guarantee that any
royalties will be significant in amount. If the Carrefour Group exceeds certain
retail sales thresholds for Cherokee branded product then the scope of the
agreement will be automatically expanded to grant the Carrefour Group the
exclusive right to manufacture, promote, sell and distribute products bearing
the Cherokee brand in certain other European and South American countries not
already covered by the agreement, including, among others, Italy, Greece,
Poland, Argentina, Chile, Colombia, Turkey , France, the United Kingdom,
Portugal and Germany. Even if the retail sales thresholds are not met, during
the term of the agreement, the Carrefour Group also has a right of first refusal
to add any of the European or South American countries to the territory covered
by the agreement. Further, with respect to Japan, China and several other Asian
countries, the Carrefour Group may elect to add any of those countries to the
territory covered by the agreement, provided that at the time of such election
the Company does not already have an existing license agreement covering the
country to be added. The initial term of the agreement expires December 31,
2003, however, if the Carrefour Group meets certain retail sales thresholds with
respect to Cherokee branded products the agreement may be extended indefinitely
by the Carrefour Group for successive three year terms. The Company expects to
continue to solicit additional licensees for the Cherokee brand in Asia, Europe
and South America, subject to the Carrefour Group's rights under the agreement.
As an incentive for the Company's licensees to achieve higher retail sales
of Cherokee or Sideout branded products, many of the Company's existing license
agreements, including the Amended Target Agreement, are structured to provide
royalty rate reductions for the licensees after they achieve certain levels of
retail sales of Cherokee or Sideout branded products during each fiscal year. As
a result, the Company's royalty revenues as a percentage of its licensees'
retail sales of branded products are highest at the beginning of each fiscal
year and decrease throughout each fiscal year as licensees reach certain retail
sales thresholds contained in their respective license agreements. Therefore,
the amount of royalty revenue received by the Company in any quarter is
dependent not only on retail sales of branded products in such quarter, but also
on the level of retail sales, and the resulting attainment of royalty rate
reductions in any preceding quarters in the same fiscal year. The size of the
royalty rate reductions and the level of retail sales at which they are achieved
varies in each licensing agreement.
In addition to licensing its own brands, the Company assists other
companies in identifying licensees for their brands. As previously disclosed,
earlier this year the Company assisted Mossimo Inc. in locating Target as a
licensee of the Mossimo brand and entered into a finders agreement with Mossimo
Inc. which provides that the Company will receive a percentage of the royalties
paid to Mossimo Inc. by Target. Mossimo Inc.'s filings with the Securities and
Exchange Commission indicate that there is currently substantial doubt about
Mossimo Inc.'s ability to continue as a growing concern. If Mossimo Inc. should
enter into bankruptcy proceedings, under bankruptcy law there is a possibility
Mossimo Inc. could reject the finders agreement and prevent the Company from
receiving any of the royalties paid by Target to Mossimo Inc.
8
<PAGE>
The Company's Board of Directors has authorized and approved the extension
of the expiration date of the Company's stock repurchase program to July 31,
2001. From July 1999 until the Third Quarter, the Company repurchased and
retired 482,000 shares of its common stock. The Company did not repurchase any
shares of its common stock during Third Quarter. The Company is currently
authorized to repurchase up to an aggregate of 518,000 shares of its common
stock. 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 in privately
negotiated transactions.
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 Third Quarter, approximately $36.7 million remains
outstanding under the Secured Notes.
Results of Operations
As reflected by the increase in year-to-date revenues by the Company's
licensees, sales of Cherokee and Sideout branded merchandise by the Company's
licensees has continued continue to grow, exceeding $1.25 billion for the nine
months ended October 28, 2000 (the "Nine Months") in comparison to $1.02 billion
for the nine months ended October 30, 1999, a 23% increase in retail sales
volume. The Company's royalty revenues for the Third Quarter were less than the
three month period ended October 30, 1999, primarily because the Company's
primary licensees, such as Target, reached the maximum royalty rate reductions
allowed by their license agreements earlier this fiscal year than last fiscal
year as a result of the continued growth of retail sales of Cherokee and Sideout
branded merchandise. It was not until during the fourth quarter of fiscal year
ended January 29, 2000 that many of the Company's licensees realized reductions
in royalty rates. The maximum royalty rate reductions will also be in effect for
the Company's primary licensees during the fourth quarter of this fiscal year.
If retail sales of Cherokee and Sideout branded merchandise during the initial
portion of any subsequent fiscal year of the Company exceed retail sales during
the initial portion of the current fiscal year, then the maximum royalty rate
reductions for the Company's licensees will occur even earlier in such fiscal
year and could result in a decrease in royalties received by the Company in both
the third quarter and the second quarter of any such fiscal year.
Net revenues for the Third Quarter and the nine month period ended October
28, 2000 (the "Nine Months") were $5.0 million and $22.3 million, respectively,
in comparison to net revenues for the three and nine month periods ended October
30, 1999 of $5.7 million and $19.0 million, respectively. Revenues for the
Cherokee brand were $4.2 million and $19.9 million, respectively, for the Third
Quarter and Nine Months compared to $5.1 million and $17.2 million,
respectively, for the three and nine month periods ended October 30, 1999. For
the Third Quarter and Nine Months, royalty revenues of $3.1 million and $15.4
million were recognized from Target, which accounted for 63% and 69% of total
revenues, respectively, compared to $3.6 million and $13.4 million, or 63% and
70% of total revenues, respectively, for the three and nine months ended October
30, 1999. For the Third Quarter and Nine Months, Sideout brand
9
<PAGE>
revenues were $738,000 and $2.4 million compared to $580,000 and $1.8 million
for the three and nine month periods ended October 30, 1999. The increase in net
revenues during the Nine Months as compared to the nine months ended October 30,
1999 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 increased sales of the Sideout brand at Mervyn's and other
retail direct licensees and does not yet include any contributions from either
Mossimo Inc. or the Carrefour Group.
The Company's royalty recognition policy provides for recognition of
royalties in the quarter earned, although a large portion of such royalty
payments are actually received during the month 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 Third Quarter and subsequently
received in November 2000.
Selling, general, and administrative expenses for the Third Quarter and the
Nine Months were $1.6 million and $6.2 million or 32.5% and 28% of net revenues.
In comparison, selling, general and administrative expenses were $1.7 million
and $5.8 million or 30% of net revenues during the three and nine month periods
ended October 30, 1999. The increase in administrative expenses in absolute
terms is primarily due to an increase in salaries due to the addition of
marketing staff, an increase in trademark amortization and an increase in
accrued management bonus of $300,000 based on profitability in the Nine Months
as compared to the nine months ended October 30, 1999.
During the Third Quarter and the Nine Months, the Company's interest
expense was $568,000 and $1.8 million compared to $689,000 and $2.2 million for
the three and nine month periods ended October 30, 1999. The interest expense is
attributable to the Secured Notes. The decrease in interest expense is due to
the reduction in the Secured Note balance. During the Nine months, the Company
paid down $7.5 million of the Secured Notes. For the Third Quarter and the Nine
Months, the Company's investment and interest income was $109,000 and $332,000
in comparison to $104,000 and $287,000 for the three and nine month periods
ended October 30, 1999. The increase in interest income is due to larger amounts
of cash being available to invest in the Third Quarter.
During the Third Quarter and the Nine Months, the Company's net income was
$1.7 million and $8.7 million or $0.21 and $1.04 per share whereas for the three
and nine month periods ended October 30, 1999, net income was $2.0 million and
$6.8 million or $0.24 and $.78 per share. For the Third Quarter and the Nine
Months, the Company incurred a charge for income taxes of $1.2 million and $5.8
million in comparison to $1.4 million and $4.5 million for the three and nine
month periods ended October 30, 1999. During the Nine Months, the effective tax
rate was 40%. As of fiscal year ended January 29, 2000, the Company had fully
utilized the net operating losses generated subsequent to the Company's 1994
reorganization, which were not subject to limitations under the Internal Revenue
Code. For fiscal year ended February 3, 2001, the Company expects to utilize,
approximately $780,000 of its limited 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 October 28, 2000, the Company had approximately $4.96 million in cash
and cash equivalents, which includes $2.7 million held in the collection account
for distribution to the
10
<PAGE>
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 $11.2 million.
Net cash used in investing activities during the Nine Months equaled $1.2
million, which was comprised of $959,000 in contingent payments made by the
Company under the Sideout Purchase Agreement and $550,000 in trademark purchases
and registration fees for the Cherokee and Sideout brands, partially offset by
the repayment of a $373,000 stockholder note receivable. Net cash used in
financing activities was $9.97 million, which was comprised of three quarterly
payments on the Secured Notes totaling $7.5 million, an increase of $397,000 in
restricted cash and the repurchase of Cherokee common stock totaling $2.1
million.
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.
Special Note Regarding Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements can be identified by the fact that they do not relate
strictly to historic or current facts. The words, "expect", "believe",
"anticipate", "may", "estimate", "plan", "future", "intent", "will", "should",
"continue" and similar expression, variations of such terms or the negative of
such terms when used in this document are intended to identify such forward-
looking statements. In particular, these include statements relating to future
actions, expenses, the outcome of contingencies and financial results. Forward-
looking statements are based on the current expectations of the Company's
management and are subject to numerous risks, uncertainties and assumptions.
Should one or more risks or uncertainties materialize, or should underlying
assumptions prove incorrect, the Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by such
forward-looking statements. The Company's future operations, financial
performance, business and share price may be affected by a number of risks and
uncertainties, including, but not limited to, changes in consumer demands and
preferences, shifting trends in the overall retail and apparel retailing
markets, the impact of royalty rate reductions provided to the Company's primary
licensees, restriction on distributions by Spell C, uncertainty regarding
consumer acceptance of the Sideout brand, competition from other brands,
dependence on a single licensee, dependence on intellectual property rights, and
other factors listed in "Risk Factors" in the Company's Form 10-K for the year
ending January 29, 2000 or discussed in that Form 10-K, this Form 10-Q and in
the Company's other filings with the Securities and Exchange Commission. It is
not possible for the Company to predict all risks and uncertainties, therefore
the preceding list should not be considered a complete set of all the potential
risks and uncertainties involving the Company. Given the known and unknown risks
and uncertainties involving the Company, undue reliance should not be placed on
the forward-looking statements contained herein. Any or all of the forward-
looking statements contained herein may turn out to be wrong. In addition, the
Company disclaims any intent or obligation to update any of the forward-looking
statements contained herein to reflect new information, future events or
otherwise.
11
<PAGE>
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
During the Third Quarter, the Company was not involved in any legal claims
or litigation and management is not aware of any current pending litigation
involving the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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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
--------
3.1 Amended and Restated Certificate of Incorporation of Cherokee Inc.
3.2 Bylaws of Cherokee Inc.
27.1 Article 5 of Regulation S-X - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The Company filed no reports on Form 8-K during the Third Quarter.
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: November 29, 2000
CHEROKEE INC.
By: /s/ Robert Margolis
-------------------
Robert Margolis
Chief Executive Officer
By: /s/ Carol Gratzke
------------------
Carol Gratzke
Chief Financial Officer
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