-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ECSDPxD/VlIwg8YhmnM+2Sf2sOdJ58kbvzoowzFZpOV+S3KfF0DC1s6IQ5rfs7pU 825I+x07wkMcjvFcoMJ03Q== 0000898430-01-502292.txt : 20010907 0000898430-01-502292.hdr.sgml : 20010907 ACCESSION NUMBER: 0000898430-01-502292 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010804 FILED AS OF DATE: 20010906 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEROKEE INC CENTRAL INDEX KEY: 0000844161 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 954182437 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18640 FILM NUMBER: 1731774 BUSINESS ADDRESS: STREET 1: 6835 VALJEAN AVE CITY: VAN NUYS STATE: CA ZIP: 91406-4713 BUSINESS PHONE: 8189511002 MAIL ADDRESS: STREET 1: 6835 VALJEAN AVE CITY: VAN NUYS STATE: CA ZIP: 91406-4713 FORMER COMPANY: FORMER CONFORMED NAME: GREEN ACQUISITION CO DATE OF NAME CHANGE: 19900814 10-Q 1 d10q.txt FORM 10-Q 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 August 4, 2001. [_] 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 ------- CHEROKEE INC. ------------- (Exact name of registrant as specified in its charter) ------------------------------------------------------ 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 -------------- 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 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 4, 2001 - -------------------------------------- ----------------------------- Common Stock, $.02 par value per share 8,181,705
CHEROKEE INC. ------------- INDEX PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements Consolidated Balance Sheets August 4, 2001 and February 3, 2001 2 Consolidated Statements of Operations 3 Three and Six Month periods ended August 4, 2001 and July 29, 2000 Consolidated Statements of Cash Flows 4 Six Month periods ended August 4, 2001 and July 29, 2000 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 13 ITEM 2. Changes in Securities 13 ITEM 3. Defaults Upon Senior Securities 13 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 14
1 Part 1. Financial Information ----------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CHEROKEE INC. ------------- CONSOLIDATED BALANCE SHEETS ---------------------------
August 4, 2001 February 3, 2001 -------------- ---------------- Unaudited Assets Current assets: Cash and cash equivalents $ 3,195,000 $ 2,598,000 Restricted cash 2,653,000 2,724,000 Receivables, net 8,122,000 5,893,000 Prepaid expenses and other current assets 74,000 37,000 Deferred tax asset 713,000 713,000 -------------- ---------------- Total current assets 14,757,000 11,965,000 Deferred tax asset 493,000 493,000 Securitization fees, net of accumulated amortization of $737,000 and $634,000, respectively 504,000 606,000 Property and equipment, net of accumulated depreciation of $233,000 and $202,000, respectively 188,000 219,000 Trademarks, net of accumulated amortization of $1,152,000 and $899,000, respectively 6,624,000 6,115,000 Other assets 15,000 15,000 -------------- ---------------- Total assets $22,581,000 $ 19,413,000 ============== ================ Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 330,000 $ 302,000 Other accrued liabilities 3,199,000 3,176,000 Notes payable 10,500,000 10,500,000 -------------- ---------------- Total current liabilities 14,029,000 13,978,000 Other liabilities 250,000 250,000 Notes payable - long term 15,967,000 20,255,000 -------------- ---------------- Total liabilities 30,246,000 34,483,000 -------------- ---------------- Stockholders' Deficit: Common stock, $.02 par value, 20,000,000 shares authorized, 8,181,705 and 8,231,705 shares issued and outstanding at August 4, 2001 and at February 3, 2001 164,000 165,000 Accumulated deficit (7,829,000) (15,235,000) -------------- ---------------- Stockholders' deficit (7,665,000) (15,070,000) -------------- ---------------- Total liabilities and stockholders' deficit $22,581,000 $ 19,413,000 ============== ================ See the accompanying notes which are an integral part of these consolidated financial statements.
CHEROKEE INC. ------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- Unaudited ---------
Three months ended Six months ended -------------------------------- -------------------------------- August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 -------------- ------------- -------------- ------------- Royalty revenues $8,348,000 $7,686,000 $18,852,000 $17,289,000 Selling, general and administrative expenses 2,551,000 2,476,000 4,963,000 4,616,000 ------------- ------------ ------------- ------------ Operating income 5,797,000 5,210,000 13,889,000 12,673,000 Other income (expenses): Interest expense (462,000) (606,000) (962,000) (1,238,000) Investment and interest income 84,000 124,000 165,000 223,000 ------------- ------------ ------------- ------------ Total other income (expenses), net (378,000) (482,000) (797,000) (1,015,000) Income before income taxes 5,419,000 4,728,000 13,092,000 11,658,000 Income tax provision 2,168,000 1,891,000 5,242,000 4,664,000 ------------- ------------ ------------- ------------ Net income $3,251,000 $2,837,000 $ 7,850,000 $ 6,994,000 ============= ============ ============= ============ Basic earnings per share $ 0.40 $ 0.34 $ 0.95 $ 0.83 ------------- ------------ ------------- ------------ Diluted earnings per share $ 0.39 $ 0.34 $ 0.95 $ 0.83 ------------- ------------ ------------- ------------ Weighted average shares outstanding Basic 8,223,372 8,397,705 8,227,538 8,437,136 ============= ============ ============= ============ Diluted 8,246,835 8,402,400 8,266,389 8,439,787 ============= ============ ============= ============
See the accompanying notes which are an integral part of these consolidated financial statements. 3 CHEROKEE INC. ------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited ---------
Six months ended ------------------------------------- August 4, 2001 July 29, 2000 -------------- ------------- Operating activities - -------------------- Net income $ 7,850,000 $ 6,994,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 32,000 14,000 Amortization of goodwill and trademarks 253,000 181,000 Amortization of securitization fees 103,000 103,000 Amortization of debt discount 962,000 1,238,000 Decrease in deferred taxes - 772,000 Changes in current assets and liabilities: Increase in accounts receivable (2,229,000) (2,260,000) Increase in prepaid expenses and other current assets (37,000) (21,000) Increase in accounts payable and accrued liabilities 51,000 113,000 ----------- ----------- Net cash provided by operating activities 6,985,000 7,134,000 ----------- ----------- Investing activities - -------------------- Purchase of trademarks (764,000) (1,164,000) Purchase of property and equipment - (60,000) Repayment on note receivable from stockholder - 373,000 ----------- ----------- Net cash used in investing activities (764,000) (851,000) ----------- ----------- Financing activities - -------------------- Decrease (increase) in restricted cash 71,000 (386,000) Repurchase of common stock (445,000) (2,101,000) Proceeds from exercise of warrants - 12,000 Payment on notes (5,250,000) (4,875,000) ----------- ----------- Net cash used in financing activities (5,624,000) (7,350,000) ----------- ----------- Increase (decrease) in cash and cash equivalents 597,000 (1,067,000) Cash and cash equivalents at beginning of period 2,598,000 2,253,000 ----------- ----------- Cash and cash equivalents at end of period $ 3,195,000 $ 1,186,000 =========== ===========
See the accompanying notes which are an integral part of these consolidated financial statements. 4 CHEROKEE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation --------------------- The accompanying condensed consolidated financial statements as of August 4, 2001 and for the three and six month periods ended August 4, 2001 and July 29, 2000 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 February 3, 2001 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 August 4, 2001 and July 29, 2000 are not necessarily indicative of the results to be expected for the fiscal year ended February 2, 2002. 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 February 3, 2001. 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. Revenue Recognition Revenues from royalty and finders agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from our licensees. Revenues are not recognized unless collectibility is reasonably assured. 5 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 August 4, 2001 and July 29, 2000:
2001 2000 3 Months 6 Months 3 Months 6 Months ----------------------- --------------------- Numerator: Net income-numerator for net income per common share and net income per common share assuming dilution $3,251,000 $7,850,000 $2,837,000 $6,994,000 ========== ========== ========== ========== Denominator: Denominator for net income Per common share-weighted average shares 8,223,372 8,227,538 8,397,705 8,437,136 Effect of dilutive securities: Stock options 23,463 38,851 4,695 2,651 --------- --------- --------- --------- Denominator for net income per common share, assuming dilution: Adjusted weighted average shares and assumed exercises 8,246,835 8,266,389 8,402,400 8,439,787 ========= ========= ========= =========
Common shares issuable upon exercise of stock options that are anti-dilutive amounted to 291,735 and 588,703 for the six month periods ended August 4, 2001 and July 29, 2000, respectively. Significant Contracts In 1997, we entered into an agreement with Target Stores that grants Target Stores the exclusive right in the United States to use the Cherokee trademarks in certain categories of merchandise. Under the Target Stores agreement, Target Stores will pay a royalty each fiscal year, up to and including the fiscal year ending January 31, 2004, based on percentages, specified in the agreement, of Target Stores' net sales of Cherokee branded merchandise during each fiscal year, which percentages vary based on the volume of sales of merchandise. In any event, Target Stores has agreed to pay a minimum guaranteed royalty of $9.0 million for each of the two fiscal years ended January 31, 1999 and 2000 and $10.5 million for each of the four fiscal years ending January 31, 2001 through 2004. The agreement will automatically renew for successive one-year periods, providing Target Stores is current in its minimum guaranteed payments, unless Target Stores provides one-year notice to terminate the agreement In 2001, Mervyn's agreed to renew its licensing agreement for certain merchandise categories of the Sideout brand for an additional three years on the same terms and conditions as the existing license agreement. The renewal term will commence on February 1, 2002 and continue through January 31, 2005. Under the Mervyn's agreement, Mervyn's will pay a royalty each fiscal year based on a percentage of Mervyn's net sales of Sideout branded merchandise during each fiscal year, subject to a guaranteed minimum royalty. Trademarks During the three months ended August 4, 2001 (the "Second Quarter") and the six months ended August 4, 2001 (the "Six Months"), the Company did not purchase trademarks, other than the 6 contingent purchase payments to Sideout Inc., in comparison to zero and $52,000, respectively, for the three and six months ended July 29, 2000. These purchases relate to acquisitions of foreign trademark registrations for the words Cherokee and Sideout. Under the terms of the Sideout Agreement, we capitalized $390,000 and $624,000, respectively, for the Second Quarter and the Six Months in comparison to $369,000 and $664,000, respectively, for the three and six months ended July 29, 2000. Trademark registration and renewal fees capitalized for the Second Quarter and the Six months totaled $70,000 and $140,000, respectively, in comparison to $267,000 and $448,000, respectively, for the three and six months ended July 29, 2000. (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:
For the year ending: Face Value August 4, 2002 ............................................ $ 10,500,000 August 4, 2003 ............................................ 10,500,000 August 4, 2004 ............................................ 7,875,000 ------------ Total ........................................... 28,875,000 Less unamortized note discount................... 2,408,000 ------------ 26,467,000 Less current portion of long term debt .......... 10,500,000 ------------ Long term obligation ............................ $ 15,967,000 ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Cherokee Inc. (the Company, which may be referred to as we, us, or our) is in the business of marketing and licensing the Cherokee and Sideout brands and related trademarks and other brands it owns or represents. We are one of the leading licensors of brand names and trademarks for apparel, footwear and accessories in the United States. We and our wholly-owned subsidiary, SPELL C. LLC ("Spell C"), hold several trademarks including Cherokee(TM), Sideout(TM), Sideout Sport(TM), King of the Beach(TM) 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 an active lifestyle, were acquired by us in November 1997. 7 Our operating strategy emphasizes domestic and international, retail direct and wholesale licensing whereby we grant retailers and wholesalers the license to use the trademarks held by us on certain categories of merchandise, and the licensees are responsible for designing and manufacturing the merchandise. We provide design direction and collaborate with our retailers on pre-approved packaging, graphics and quality control standards. The retailer is responsible for manufacturing the merchandise. Our retail, wholesale and international license agreements generally provide us with final approval of pre-agreed upon quality standards, packaging and marketing of licensed products and also grant us the right to conduct periodic quality control inspections to ensure that the image and quality of licensed products remain consistent. As of August 4, 2001, we had 19 continuing license agreements for our various trademarks, covering both domestic and international markets. We will continue to solicit new licensees and may, from time to time, retain the services of outside consultants to assist us in this regard. In November 1997, we reaffirmed our relationship with Target Stores, a division of Target Corporation, by entering into an amended licensing agreement (the "Amended Target Agreement") which grants Target Stores the exclusive right in the United States to use the Cherokee trademarks on certain specified categories of merchandise. Under the Amended Target Agreement, Target Stores 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 Second Quarter, Target Stores opened an additional 34 stores, bringing its total store count to approximately 1,019 stores. We believe the new stores had a positive impact on our licensing revenues from Target Stores in the three and six months ended August 4, 2001 as sales of Cherokee branded products by Target Stores approached $442.3 million and $868.4 million, respectively, compared to $362.0 million and $722.8 million, respectively, for the three and six months ended July 29, 2000. Target Stores expects to open an additional 39 stores prior to the end of this current fiscal year. We expect that the opening of these additional stores in the second half of the year will also contribute to growth in the overall sales volume of Cherokee branded products sold by Target Stores; however, there can be no assurance that overall sales volume will increase. Target Stores pays royalty revenues to us based on a percentage of its sales of Cherokee branded products. As explained below, the Amended Target Agreement, like several of our license agreements, is structured to provide royalty rate reductions for Target Stores after it has achieved certain levels of retail sales of Cherokee branded products during each fiscal year. Additional stores are expected to cause Target Stores to reach the maximum royalty rate reduction even earlier in this fiscal year ended February 2, 2002, which may have an impact on our licensing revenues in our third quarter ended November 3, 2001. During the Second Quarter, sales of merchandise bearing the Cherokee brand continued to increase, with total retail sales approaching $489.3 million versus $401.7 million in total retail sales for the second quarter of last year. Zellers Inc.'s sales of merchandise bearing the Cherokee brand were in excess of $40.5 million during the Second Quarter compared to $33.5 million for the second quarter of last year. Second Quarter sales do not reflect any sales from Carrefour, whose anticipated launch of Cherokee branded merchandise in selected European and South American territories is planned for Spring 2002. During the Second Quarter, sales of Mervyn's young men's, junior's and children's apparel and accessories bearing the Sideout brand were approximately $25.8 million in comparison to $21.6 million for the second quarter of last year. 8 As an incentive for our licensees to achieve higher retail sales of Cherokee or Sideout branded products, many of our 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, our royalty revenues as a percentage of our 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 us 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. During the Second Quarter, increased retail sales by Target Stores resulted in another royalty rate reduction earlier in the Second Quarter than in the second quarter of the previous year. We are frequently approached by parties seeking to sell their brands and related trademarks. Should an established and marketable brand become available on favorable terms, we would be interested in pursuing such an acquisition. In addition to acquiring and licensing our own brands, we assist other companies in identifying licensees for their brands. Generally, as an exclusive consultant, we 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 our services we will normally receive a certain percentage of net royalties generated by the brands we represent and/or manage. During the Second Quarter, we announced the signing of an exclusive agreement with Mrs. Fields' Original Cookies, Inc. to represent the Mrs. Fields' brand and engineer strategic licensing agreements for its growth and category expansion in the United States and throughout the world. Our goal is to leverage Mrs. Fields' brand equity and, initially, our focus will be across a broad spectrum of food products, housewares, cookware, bakeware and baking accessories. We will not receive any revenues from this agreement unless we succeed in finding licensees for the Mrs. Fields' brands. During the fiscal year ended February 3, 2001, we assisted Mossimo Inc. in locating Target Stores as a licensee of the Mossimo brand and entered into a finder's agreement with Mossimo, which provides that we will receive 15% of the royalties paid to Mossimo by Target Stores. Under Mossimo's agreement with Target Stores, Target Stores is obligated to pay Mossimo a royalty based on a percentage of net sales of Mossimo branded products, with a minimum guaranteed royalty, beginning in 2001, of approximately $27.8 million over the initial three year term of the agreement. Mossimo's agreement with Target Stores is subject to early termination under certain circumstances. Products bearing the Mossimo brand began selling at Target Stores in late December 2000. During the Second Quarter, we recognized revenues from Mossimo of approximately $684,000. In the past, Mossimo's filings with the Securities and Exchange Commission indicated that there was substantial doubt about Mossimo's ability to continue as a growing concern. If Mossimo should enter into bankruptcy proceedings, under bankruptcy law there is a possibility Mossimo could reject the finder's agreement and prevent us from receiving any of the royalties paid by Target Stores to Mossimo. Additionally, we have five active exclusive consulting agreements, one to represent Maui and Sons Inc. in the United States and Canada, one to represent Pritikin worldwide, one to represent B.U.M. Equipment in Mainland China, Hong Kong and Macao, one to represent 9 Rampage in the Philippines, Mainland China, Hong Kong, Macao, Korea, Taiwan, Singapore, Malaysia, Indonesia, Thailand, Vietnam and Cambodia and one to represent Candies in Asia. We will not receive any revenues from such agreements unless we succeed in finding licensees for the brands owned by the companies we consult for. Our Board of Directors has authorized and approved the extension of the expiration date of our stock repurchase program to July 31, 2002. During Second Quarter, we repurchased and retired 50,000 shares of our common stock. From July 1999 through the Second Quarter, we have repurchased and retired 532,000 shares of our common stock. We are currently authorized to repurchase up to an aggregate of 468,000 shares of our common stock. Continued repurchases of our 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, we completed a series of transactions whereby we sold our rights to the Cherokee brand and related trademarks in the United States to Spell C, our wholly-owned subsidiary, and also assigned to Spell C our rights in the Amended Target Agreement. In return we 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 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 Second Quarter, approximately $28.875 million remains outstanding under the Secured Notes. Results of Operations Net revenues for the Second Quarter and the Six Months were $8.3 million and $18.9 million, respectively, in comparison to net revenues for the three and six month periods ended July 29, 2000 of $7.7 million and $17.3 million, respectively, which represents an increase of 9% for both the Second Quarter and the Six Months. Revenues for the Cherokee brand for the Second Quarter and the Six Months were $6.8 million and $15.9 million, respectively, compared to $6.9 and $15.7 million, respectively, for the three and six month periods ended July 29, 2000. Due to the termination in prior periods of several Cherokee wholesale licensing agreements, Cherokee wholesale licensing revenues for both the Second Quarter and the Six Months were $47,000 and $73,000, respectively, in comparison to Cherokee wholesale licensing revenues for the three and six month periods ended July 29, 2000 of $257,000 and $688,000, respectively. Increased revenues from Target Stores and Zellers partially offset the decrease in Cherokee wholesale licensing revenues for the Second Quarter and the Six Months. During the Second Quarter and the Six Months, royalty revenues of $5.5 million and $13.4 million, respectively, were recognized from Target Stores, which accounted for 66% and 71% of total revenues, respectively. In comparison for the three and six month periods ended July 29, 2000, royalty revenues of $5.3 million and $12.2 million, respectively, were recognized from Target Stores, which accounted for 69% and 70% of total revenues, respectively. For the Second Quarter and the Six Months, Sideout brand revenues were $875,000 and $1.56 million compared to $837,000 and $1.6 million for the three and six month periods ended July 29, 2000. For the Second Quarter and the Six Months, our net revenues include $684,000 and $1.4 million from Mossimo Inc. compared to zero dollars in the comparative periods ended July 29, 2000. 10 Our 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. Our receivable balance included the accrual of Mossimo's second quarter payment under our consulting agreement and Target, Zeller and Mervyn's royalty revenues earned during the Second Quarter and subsequently received in August 2001. Selling, general, and administrative expenses for the Second Quarter and the Six Months were $2.6 million and $5.0 million or 31% and 26% of net revenues in comparison to selling, general and administrative expenses of $2.5 million and $4.6 million or 32% and 27% of net revenues for the three and six month periods ended July 29, 2000. The increase in expenses is attributable to an increase in trademark amortization and accrued management bonuses. During the Second Quarter and the Six Months, our interest expense was $462,000 and $962,000 compared to $606,000 and $1.2 million for the three and six month periods ended July 29, 2000. The interest expense is attributable to the Secured Notes. The decrease in interest expense is due to the reduction in the outstanding principal amount of the Secured Notes. For the Second Quarter and the Six Months, our investment and interest income was $84,000 and $165,000 in comparison to $124,000 and $223,000 for the three and six month periods ended July 29, 2000. The decrease in interest income is due to lower interest rates and smaller amounts of cash available for investment in the Second Quarter and the Six Months. During the Second Quarter and the Six Months, our net income was $3.3 million and $7.8 million or $0.39 and $0.95 per diluted share whereas for the three and six month periods ended July 29, 2000, net income was $2.8 million and $7.0 million or $0.34 and $0.83 per diluted share. For the Second Quarter and the Six Months, we incurred a charge for income taxes of $2.2 million and $5.2 million in comparison to $1.9 million and $4.7 million for the three and six month periods ended July 29, 2000. For fiscal year ended February 2, 2002, we expect to utilize approximately $780,000 of our limited net operating losses for both federal and state and we are making quarterly estimated tax payments for our federal and state income tax liabilities. Liquidity and Capital Resources On August 4, 2001, we had approximately $5.8 million in cash and cash equivalents, which includes $2.7 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 royalty revenues, and our cash and cash equivalents. During the Six Months, cash provided by operations was $7.0 million, compared to $7.1 million for the six months ended July 29, 2000. Cash used in investing activities during the Six Months was $764,000 comprised of $624,000 in contingent purchase payments made to Sideout Sport, Inc. and the remainder in trademark registration fees for the Cherokee and Sideout brands. In comparison, during the six months ended July 29, 2000, cash used in investing activities was $851,000 comprised of $664,000 in contingent purchase payments to Sideout Sport, Inc. with the remainder in trademark registration fees. Cash used in financing activities was $5.6 million for the Six Months, which was comprised of two quarterly payments on the Secured Notes totaling $5.25 million, a decrease of $71,000 in restricted cash and the repurchase of Cherokee common stock totaling $445,000. In comparison, cash used in financing activities for the six months ended July 29, 2000 was $7.4 million, which was comprised of two quarterly payments on the Secured Notes totaling $4.9 million, an increase of $386,000 in restricted cash and the repurchase of Cherokee common stock totaling $2.1 million. 11 Inflation and Changing Prices Inflation did not have a significant effect on our operations during the Second Quarter or the prior year period. Special Note Regarding Forward-Looking Statements This quarterly report on Form 10-Q and other filings, which we make with the Securities and Exchange Commission, as well as press releases and other written or oral statements we may make may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used, the words "anticipates", "believes," "estimates," "objectives", "goals", "aims", "hopes", "may", "likely", "should" and similar expressions are intended to identify such forward-looking statements. In particular, the forward-looking statements in this Form 10-Q include, among others, statements regarding our goals or expectations regarding our future revenues and earnings, the likelihood of increased retail sales by certain of our current and future licensees, such as Target Stores, the likelihood in the achievement of certain royalty rate reductions, our prospects for obtaining new licensees and our prospects for obtaining new brands to acquire or represent. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements. Such risks and uncertainties, include, but are not limited to, the effect of national and regional economic conditions, the financial condition of the apparel industry and the retail industry, the overall level of consumer spending, the effect of intense competition in the industry in which we operate, adverse changes in licensee or consumer acceptance of products bearing the Cherokee or Sideout brands as a result of fashion trends or otherwise, the ability and/or commitment of our licensees to design, manufacture and market Cherokee and Sideout branded products, our dependence on a single licensee for most of our revenues, our dependence on our key management personnel and the effect of a breach or termination by us of the management agreement with our Chief Executive Officer. Several of these risks and uncertainties are discussed in more detail under "Item 1. Business-Rick Factors" in our Form 10-K for the fiscal year ended February 3, 2001. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially effect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no 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. We do not enter into derivatives or other financial instruments for trading or speculative purposes. 12 Interest From time to time we invest our 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 our consolidated balance sheet and do not represent a material interest rate risk to us. Our 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 us. Foreign Currency We conduct business in various parts of the world. We are 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 and the Six Months, a hypothetical 10% strengthening of the US dollar relative to the foreign currencies of countries where we operate was not material. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not currently involved in any legal claims or litigation and we are not aware of any current pending litigation involving us. 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. 13 ITEM 6. EXHIBITS AND REPORTS ON 8-K (a) Exhibits -------- None. (b) Reports on Form 8-K ------------------- We filed no reports on Form 8-K during the Second 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: September 6, 2001 CHEROKEE INC. By: /s/ Robert Margolis ------------------- Robert Margolis Chief Executive Officer By: /s/ Carol Gratzke ------------------ Carol Gratzke Chief Financial Officer 14 -----END PRIVACY-ENHANCED MESSAGE-----