-----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, JuGes7vT+MCmvcyI3ImASgWumCDMqjABhi+MhIhRBxiM6Zmr1Hllb5gRZlgMiBgs 9NdR9kT9bxpN2teBmocQNQ== 0000944209-98-000082.txt : 19980114 0000944209-98-000082.hdr.sgml : 19980114 ACCESSION NUMBER: 0000944209-98-000082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971129 FILED AS OF DATE: 19980113 SROS: NASD 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: SEC FILE NUMBER: 033-26165 FILM NUMBER: 98506001 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 FORM 10-Q UNITED STATES 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 Quarter Ended November 29, 1997. ------------------ [_] 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 60 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 January 12, 1998 - -------------------------------------- ------------------------------- Common Stock, $.02 par value per share [8,612,657] CHEROKEE INC. ------------- INDEX PART 1. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS Balance Sheets November 29, 1997 and May 31, 1997 Statements of Operations Three Months and Six Months ended November 29, 1997 and November 30, 1996 Statements of Cash Flow Six months ended November 29, 1997 and November 30, 1996 Notes to Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 6. EXHIBITS AND REPORTS ON 8-K CHEROKEE INC. BALANCE SHEETS
November 29, 1997 May 31, 1997 ----------------- -------------- Assets Current assets: Cash and cash equivalents $ 9,315,000 $ 9,391,000 Receivables, net 2,544,000 1,024,000 Inventories 45,000 80,000 Other current assets 119,000 30,000 ----------- ----------- Total current assets 12,023,000 10,525,000 Deferred tax asset 5,000,000 2,408,000 Trademarks and other assets 2,759,000 668,000 ----------- ----------- Total assets $19,782,000 $13,601,000 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 23,000 $ 210,000 Other accrued liabilities 518,000 417,000 ----------- ----------- Total current liabilities 541,000 627,000 Other liabilities 750,000 750,000 Stockholders' Equity: Common stock, $.02 par value, 20,000,000 shares authorized, 7,793,653 and 7,726,986 shares issued and outstanding November 29, 1997 and at May 31, 1997, respectively 156,000 155,000 Additional paid-in capital 13,280,000 11,334,000 Retained earnings 5,055,000 735,000 ----------- ----------- Stockholders' equity 18,491,000 12,224,000 ----------- ----------- Total liabilities and stockholders' equity $19,782,000 $13,601,000 =========== ===========
See accompanying notes. CHEROKEE INC. STATEMENTS OF OPERATIONS
Three months ended Six months ended ------------------------------------ ------------------------------------ November 29, 1997 November 30, 1996 November 29, 1997 November 30, 1996 ----------------- ----------------- ----------------- ----------------- Product sales $ - $ 220,000 $ - $ 261,000 Royalty revenues 4,177,000 2,296,000 6,365,000 3,409,000 ---------- ---------- ---------- ---------- Net revenues 4,177,000 2,516,000 6,365,000 3,670,000 Cost of goods sold - 117,000 - 117,000 ---------- ---------- ---------- ---------- Gross profit - 2,399,000 - 3,553,000 Selling, general and administrative expenses 1,031,000 266,000 2,015,000 990,000 ---------- ---------- ---------- ---------- Operating income 3,146,000 2,133,000 4,350,000 2,563,000 Other income (expenses): Interest expense - (1,000) - (2,000) Investment and interest income 124,000 110,000 265,000 219,000 Other - - 389,000 - ---------- ---------- ---------- ---------- Total other (income) expenses, net 124,000 109,000 654,000 217,000 Income before income taxes 3,270,000 2,242,000 5,004,000 2,780,000 Income tax benefit (867,000) - (867,000) - ---------- ---------- ---------- ---------- Net income $4,137,000 $2,242,000 $5,871,000 $2,780,000 ========== ========== ========== ========== Net income per share $ 0.49 $ 0.28 $ 0.70 $ 0.35 ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding 8,365,806 8,058,725 8,331,653 8,041,608 ========== ========== ========== ==========
See accompanying notes. CHEROKEE INC. STATEMENTS OF CASH FLOWS
Six Months Ended -------------------------------------- November 29, 1997 November 30, 1996 ----------------- ----------------- Operating Activities - -------------------- Net income $ 5,871,000 $2,780,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 44,000 6,000 Change in other liabilities - (744,000) Deferred taxes (2,592,000) - Amortization of discount on note receivable - (64,000) Interest income on note receivable from stockholder - (5,000) Changes in current assets and liabilities: (Increase) in accounts receivable (1,520,000) (285,000) Decrease in inventories 35,000 114,000 (Increase) in other current assets (89,000) (65,000) (Decrease) in accounts payable and accrued liabilities (86,000) (328,000) ----------- ---------- Net cash provided by operating activities 1,663,000 1,409,000 Investing Activities - -------------------- Proceeds from restricted cash investment - 310,000 Purchase trademarks and other assets (2,136,000) (145,000) ----------- ---------- Net cash (used in) provided by investing activities (2,136,000) 165,000 Financing Activities - -------------------- Cash distributions (1,549,000) - Proceeds from exercise of stock options 140,000 45,000 Utilization of pre-bankruptcy NOL carryforwards 1,725,000 - Proceeds from exercise of warrants 81,000 12,000 Dividends payment adjustment - (8,000) ----------- ---------- Net cash (used in) provided by financing activities 397,000 49,000 ----------- ---------- (Decrease) increase in cash and cash equivalents (76,000) 1,623,000 Cash and cash equivalents at beginning of period 9,391,000 1,207,000 ----------- ---------- Cash and cash equivalents at end of period $ 9,315,000 $2,830,000 =========== ========== Total paid during period: Income taxes $ 64,000 $ 4,600 Interest $ - $ 2,000
See accompanying notes. CHEROKEE INC. NOTES TO FINANCIAL STATEMENTS NOVEMBER 29, 1997 AND MAY 31, 1997 (1) Basis of Presentation --------------------- The accompanying condensed financial statements for the six months ended November 29, 1997 and November 30, 1996 have been prepared in accordance with generally accepted accounting principles ("GAAP"). These financial statements have not been audited by independent public accountants but include all adjustments, consisting of normal, recurring accruals, and certain reclassifications from prior quarter, which in the opinion of management of Cherokee Inc. are necessary for a fair presentation of the financial position and the results of operations for the periods presented. The accompanying balance sheet as of May 31, 1997 has been derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the nine months ended November 29, 1997 are not necessarily indicative of the results to be expected for the period ended January 31, 1998, the Company's new year end. For further information, refer to the financial statements and footnotes thereto included in Cherokee Inc.'s ("Cherokee" or the "Company") annual report on Form 10-K for the period ended May 31, 1997. (2) Significant Transactions ------------------------ On November 7, 1997, Cherokee entered into an Agreement of Purchase and Sale of Trademarks and Licenses (the "Sideout Agreement") with Sideout Sport, Inc. ("Sideout"), pursuant to which Cherokee agreed to purchase all of Sideout's trademarks, copyright, trade secrets and license agreements with respect thereto (the "Assets"). Pursuant to the Sideout Agreement, Cherokee agreed to pay Sideout $1.5 million at the closing of the acquisition and $500,000 upon release of certain liens on the Assets. Under the terms of the Sideout Agreement, Cherokee will pay to Sideout 40% of the first $10.0 million of gross revenues (royalties and license fees received by Cherokee through licensing of the Sideout trademark), 10% of the next $5.0 million of gross revenues and 5% of the next $20.0 million of gross revenues, amounts to be paid on a quarterly basis. Under the terms of this agreement, Cherokee will pay up to $7.5 million or the amount paid through October 23, 2004. Thereafter, Cherokee will have no further obligation to pay royalties. On November 12, 1997, Cherokee entered into a new licensing agreement with Dayton Hudson Corporation (the "Licensee"), the owner of Target Stores (the "Amended Target Agreement"). The Amended Target Agreement has an initial term commencing on February 1, 1998 and ending on January 31, 2004, with automatic annual extensions thereafter unless terminated by the Licensee. The Amended Target Agreement covers a broad range of categories of merchandise, including women's, men's and children's apparel and footwear, women's intimate apparel, fashion accessories, home textiles, cosmetics and others (the "Merchandise"). Under the terms of the Amended Target Agreement, the Licensee will pay Cherokee a royalty each fiscal year for the fiscal years ending January 29, 1999 through 2004 equal to the greater of (i) the Minimum Guaranteed Royalty for such year or (ii) 2% of the Licensee's net sales of Merchandise during such fiscal year, up to $300.0 million, 1 1/2% of net sales greater than $300.0 million and up to $700.0 million, .8% of net sales greater than $700.0 million and up to $1.0 billion and .7% of net sales greater than $1.0 billion. In connection with the signing of the Amended Target Agreement, the Company believes, based on expected future profitability, that it is more likely than not to realize a substantial portion of its net deferred tax asset. Accordingly, the Company reduced its valuation allowance related to net operating loss carryforwards and reversal of certain temporary differences. (3) Per Share Information --------------------- Primary earnings per common share amounts were computed by dividing earnings by the average number of common and dilutive common stock equivalent shares outstanding. Fully diluted per common share amounts assume the issuance of common stock for all other potentially dilutive equivalents outstanding. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Account Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for financial statements for periods ending after December 15, 1997. The Company will adopt SFAS 128 and reflect its disclosures in the Company's fiscal year ended January 31, 1998 financial statements. SFAS 128 requires dual presentation of basic and diluted earnings per share, as defined. This statement requires prior period earnings per share data be restated. It is not expected that the adoption of SFAS No. 128 will have a material impact on the earnings per share results reported by the Company under the Company's current capital structure. (4) Subsequent Events ----------------- On December 19, 1997, Cherokee determined to change its fiscal year to a 52 or 53 week fiscal year ending on the Saturday nearest to January 31. Prior to this change, Cherokee's fiscal year was a 52 or 53 week fiscal year ending on the Saturday nearest to May 31. As a result of this change, the last day of Cherokee's current fiscal year will be January 31, 1998. Cherokee will file information regarding the transition period in its Annual Report on Form 10-K for the fiscal year ending January 31, 1998. On December 23, 1997, Cherokee declared a cash distribution of $5.50 per share on its Common Stock, payable on January 15, 1998. The Company will pay the distribution to stockholders of record as of the close of business on January 2, 1998. The distribution will be paid from the proceeds of a recently completed $48.0 million securitization transaction. In the transaction, Cherokee assigned its rights under its Amended Target Agreement with Dayton Hudson's Target Stores to a newly-formed limited liability corporation, which in turn pledged the licensing agreement as collateral for notes issued in a private offering. Pursuant to the declared dividend, on December 29, 1997 and January 2, 1998, certain directors, officers, employees and related parties exercised options and purchased 819,004 shares of Cherokee common stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Historically, the Company's principal business was manufacturing, importing and wholesaling casual apparel and footwear primarily under the Cherokee brand, and licensing the Cherokee trademark to unaffiliated manufacturers for the production and marketing of apparel, footwear and accessories that the Company did not manufacture, import or market. In May 1995, the Company set in motion a new strategy, which resulted in the Company's principal business being a marketer and licenser of the Cherokee brand and other brands it owns or may acquire in the future. The Company's current operating strategy emphasizes wholesale and retail direct licensing whereby the Company grants wholesalers and retailers the license to use the Company's various trademarks on certain categories of merchandise, including those products that the Company previously manufactured. The Company's license agreements are either international masters or domestic category specific exclusives or non-exclusives and provide the Company with final approval of pre-agreed upon quality standards, packaging and marketing of licensed products. The Company has the right to conduct periodic quality control inspections to ensure that the image and quality of licensed products remain consistent. Currently, the Company has 31 continuing license agreements for the Company's various trademarks, seven of which are with retailers, twelve of which are with domestic licensees and twelve of which are with international licensees. 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. Net revenues for the six months ended November 29, 1997 (the "Six Months") and the three months ended November 29, 1997 (the "Second Quarter") were $6,365,000 and $4,177,000, respectively, generated 100 percent through the licensing of the Company's trademarks. In comparison, net revenues for the six months and the three months ended November 29, 1996 were $3,670,000 and $2,516,000, respectively, of which 93% and 91%, respectively, represented licensing revenues. Selling, general, and administrative expenses for the Six Months and Second Quarter were $2,015,000 and $1,031,000 or 32% or 25% of net revenues, respectively. In comparison, selling, general and administrative expenses were $990,000 and $266,000, (net of certain other liabilities totaling $700,000 which were deemed no longer necessary), or 27% or 11%, respectively, of net revenues during the six and three months ended November 30, 1996. In the Six Months and Second Quarter, selling, general and administrative expenses increased with the addition of marketing staff to intensify the Company's international efforts to negotiate contracts, and with the development of creative advertising materials to expand the Company's global marketing and to maintain the synergy of the Cherokee brand image on a worldwide basis. During the Six Months and Second Quarter, the Company did not incur any interest expenses and its investment and interest income was $265,000 and $124,000, respectively. Also during the Six Months, the Company received $397,000, which represents unclaimed distributions returned to the Company by the indentured trustee from the 1994 Chapter 11 finalized August 15, 1996. The Company has no debt and anticipates having interest income from investing its excess cash. LIQUIDITY AND CAPITAL RESOURCES On November 29, 1997, the Company had $9,315,000 in cash and cash equivalents. Cash flow needs over the next 12 months are expected to be met through the operating cash flows generated from licensing revenues, and the Company's cash and cash equivalents. During the Six Months, cash provided by operations was $1,663,000, cash used in investing activities was $2,136,000, due to the initial payment made in the Sideout Agreement and cash provided by financing activities was $397,000, which represented the net from the proceeds received from the exercise of options and warrants, the utilization of pre-bankruptcy net operating loss carryforwards and the cash dividend distribution, which was paid on August 29, 1997. INFLATION AND CHANGING PRICES Inflation has not had a significant effect on the Company's operations. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. This Form 10-Q contains forward-looking statements regarding revenue and earnings trends, domestic and international expansion. Such statements are subject to risks and uncertainties. Actual results could vary materially from these statements or current trends. 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 the context of these factors. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- In the ordinary course of business, the Company becomes involved in certain legal claims and litigation. In the opinion of Management, based upon consultations with legal counsel, the disposition of litigation currently pending against the Company will not have, individually or in the aggregate, a materially adverse effect on its consolidated financial position or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On September 15, 1997, the Company held its annual meeting of stockholders. At the meeting, the board of directors were elected by an overwhelming margin and the Third Amendment to the Wilstar Management Agreement (the "Agreement") was approved by the shareholders, 5,501,743 shares were voted for approval of the Agreement, 3,233 shares were voted against approval of the Agreement, 6,748 shares abstained from voting and 1,709,453 shares were broker non-votes. ITEM 6. Exhibits and Reports on 8-K --------------------------- Two Forms 8-K, with appropriate exhibits attached, were filed during the quarter ended November 29, 1997. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: January 12, 1998 CHEROKEE INC. BY: /S/ ROBERT MARGOLIS ----------------------- ROBERT MARGOLIS CHIEF EXECUTIVE OFFICER BY: /S/ CAROL GRATZKE ----------------------- CAROL GRATZKE CHIEF FINANCIAL OFFICER EX-27 2 FINANCIAL DATA SCHEDULE--ARTICLE 5
5 1,000 6-MOS JAN-31-1998 JUN-01-1997 NOV-29-1997 9,315 0 2,544 0 45 12,023 124 55 17,190 541 0 0 0 156 15,743 17,190 6,365 6,365 0 2,015 0 0 0 5,004 0 5,004 0 0 0 5,004 .60 .60
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