-----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, NY8oU0YpjMY76DXa9CeVM8XDvWwVi7ah7UCz4ugNelgWcUu7uvnQeXu4toxWFiWv K+ZaXnXluPgUfFyg5JLOOA== /in/edgar/work/20000606/0000944209-00-000994/0000944209-00-000994.txt : 20000919 0000944209-00-000994.hdr.sgml : 20000919 ACCESSION NUMBER: 0000944209-00-000994 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000429 FILED AS OF DATE: 20000606 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEROKEE INC CENTRAL INDEX KEY: 0000844161 STANDARD INDUSTRIAL CLASSIFICATION: [2330 ] IRS NUMBER: 954182437 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18640 FILM NUMBER: 649712 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 0001.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 April 29, 2000. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From _________ to __________. Commission file number 0-18640 ------- CHEROKEE INC. ------------- (Exact name of registrant as specified in its charter) ------------------------------------------------------ Delaware 95-4182437 -------- ---------- (State or other jurisdiction of (IRS employer Incorporation or organization) identification number) 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 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 April 29, 2000 ----- ----------------------------- Common Stock, $.02 par value per share 8,480,705 CHEROKEE INC. ------------- INDEX PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements Consolidated Balance Sheets April 29, 2000 and January 29, 2000 2 Consolidated Statements of Operations 3 Three Month period ended April 29, 2000 and May 1, 1999 Consolidated Statements of Cash Flows 4 Three Month period ended April 29, 2000 and May 1, 1999 Notes to Consolidated Financial Statements 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 10 ITEM 2. Changes in Securities 11 ITEM 3. Defaults Upon Senior Securities 11 ITEM 4. Submission of Matters to a Vote of Security Holders 11 ITEM 5. Other Information 11 ITEM 6. Exhibits and Reports on 8-K 11
1 Part 1. Financial Information ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CHEROKEE INC. CONSOLIDATED BALANCE SHEETS
April 29, 2000 January 29, 2000 -------------- ---------------- Unaudited Assets Current assets: Cash and cash equivalents $ 3,429,000 $ 2,253,000 Restricted cash 2,327,000 2,324,000 Receivables, net 8,379,000 4,841,000 Prepaid expenses and other current assets 9,000 28,000 Deferred tax asset 807,000 1,579,000 ------------ ------------ Total current assets 14,951,000 11,025,000 Deferred tax asset 797,000 797,000 Securitization fees, net of accumulated amortization of $480,000 and $429,000, respectively 761,000 812,000 Property and equipment, net of accumulated depreciation of $163,000 and $156,000, respectively 204,000 203,000 Trademarks, net of accumulated amortization of $594,000 and $503,000, respectively 5,101,000 4,666,000 Other assets 15,000 15,000 ------------ ------------ Total assets $ 21,829,000 $ 17,518,000 ============ ============ Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 1,514,000 $ 600,000 Other accrued liabilities 3,139,000 2,286,000 Notes payable 10,500,000 10,125,000 ------------ ------------ Total current liabilities 15,153,000 13,011,000 Other liabilities 250,000 250,000 Notes payable - long term 26,395,000 28,389,000 ------------ ------------ Total liabilities 41,798,000 41,650,000 ------------ ------------ Stockholders' Deficit: Common stock, $.02 par value,20,000,000 shares authorized, 8,480,705 and 8,472,428 shares issued and outstanding at April 29, 2000 and at January 29, 2000 170,000 170,000 Note receivable from stockholder (370,000) (365,000) Accumulated deficit (19,769,000) (23,937,000) ------------ ------------ Stockholders' deficit (19,969,000) (24,132,000) ------------ ------------ Total liabilities and stockholders' deficit $ 21,829,000 $ 17,518,000 ============ ============
See the accompanying notes which are an integral part of these consolidated financial statements. 2 CHEROKEE INC. CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited
Three months ended ---------------------------------------- April 29, 2000 May 1, 1999 -------------- ----------- Royalty revenues $ 9,603,000 $ 6,917,000 Selling, general and administrative expenses 2,141,000 1,845,000 ----------- ----------- Operating income 7,462,000 5,072,000 Other income (expenses) : Interest expense (632,000) (750,000) Investment and Interest income 99,000 84,000 ----------- ----------- Total other income (expenses), net (533,000) (666,000) Income before income taxes 6,929,000 4,406,000 Income tax provision 2,772,000 1,763,000 ----------- ----------- Net income $ 4,157,000 $ 2,643,000 =========== =========== Basic earnings per share $ 0.49 $ 0.30 ----------- ----------- Diluted earnings per share $ 0.49 $ 0.30 ----------- ----------- Weighted average shares outstanding Basic 8,476,567 8,705,428 =========== =========== Diluted 8,476,567 8,705,428 =========== ===========
See the accompanying notes which are an integral part of these consolidated financial statements. 3 CHEROKEE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Three months ended ---------------------------------------- April 29, 2000 May 1, 1999 -------------- ----------- Operating activities - -------------------- Net income $ 4,157,000 $ 2,643,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,000 15,000 Amortization of goodwill and trademarks 91,000 58,000 Amortization of securitization fees 51,000 52,000 Amortization of debt discount 632,000 750,000 Decrease in deferred taxes 772,000 1,498,000 Interest income on note receivable from stockholder (5,000) (31,000) Changes in current assets and liabilities: Increase in accounts receivable (3,538,000) (3,157,000) Decrease in other current assets 19,000 22,000 Increase in accounts payable and accrued liabilities 1,767,000 800,000 ----------- ----------- Net cash provided by operating activities 3,953,000 2,650,000 ----------- ----------- Investing activities - -------------------- Purchase of trademarks (528,000) (307,000) Purchase of property and equipment (8,000) (30,000) Decrease in other assets - 91,000 ----------- ----------- Net cash used in investing activities (536,000) (246,000) ----------- ----------- Financing activities - -------------------- Cash distributions - (2,176,000) (Increase) decrease in restricted cash (3,000) 1,691,000 Proceeds from exercise of stock options and warrants 12,000 - Payment on notes (2,250,000) (2,250,000) ----------- ----------- Net cash used in financing activities (2,241,000) (2,735,000) ----------- ----------- Increase in cash and cash equivalents 1,176,000 (331,000) Cash and cash equivalents at beginning of period 2,253,000 2,847,000 ----------- ----------- Cash and cash equivalents at end of period $ 3,429,000 $ 2,516,000 =========== =========== Total paid during period: - ------------------------ Income taxes $ 228,525 $ 240,000 Interest $ 310,499 $ 172,000 Non-cash transactions: - --------------------- Declaration of dividend $ - $ 2,176,000
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 April 29, 2000 and for the three month periods ended April 29, 2000 and May 1, 1999 have been prepared in accordance U.S. generally accepted accounting principles ("GAAP"). These consolidated financial statements have not been audited by independent accountants but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee Inc. ("Cherokee" or the "Company") are necessary for a fair statement of the financial position and the results of operations for the periods presented. The accompanying consolidated balance sheet as of January 29, 2000 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The results of operations for the three month periods ended April 29, 2000 and May 1, 1999 are not necessarily indicative of the results to be expected for the fiscal year ended February 3, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended January 29, 2000. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. (2) Summary of Significant Accounting Policies ------------------------------------------ Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SPELL C. LLC, a Delaware limited liability corporation ("Spell C"). All significant intercompany accounts and transactions have been eliminated in consolidation. Earnings Per Share Computation The weighted average number of shares excludes 511,203 and 561,060 shares of common stock issuable on the exercise of stock options for the three-month periods ended April 29, 2000 and May 1, 1999, respectively, because the exercise price is less than the average market price of the common stock during the period. (3) Long Term Debt Long term debt is comprised of Zero-Coupon Secured Notes ("Secured Notes") yielding 7% interest per annum and maturing on February 20, 2004. The Secured Notes amortize quarterly from May 20, 1998 through February 20, 2004. The following table summarizes the maturity of the long-term debt: 5 For the year ending: Face Value April 29, 2001 ............................................ $ 10,500,000 April 29, 2002 ............................................ 10,500,000 April 29, 2003 ............................................ 10,500,000 April 29, 2004............................................. 10,500,000 ---------- Total ........................................... 42,000,000 Less unamortized Note Discount.................... 5,105,000 ---------- 36,895,000 Less current portion of long term debt ........... 10,500,000 ---------- Long term obligation ............................. $ 26,395,000 ========== 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Cherokee Inc. (the "Company" or "Cherokee") is in the business of marketing and licensing the Cherokee and Sideout brands and related trademarks and other brands it owns. The Company is one of the leading licensors of brand names and trademarks for apparel, footwear and accessories in the United States. The Company and its wholly-owned subsidiary, SPELL C. LLC ("Spell C"), hold several trademarks including Cherokee, Sideout, Sideout Sport, King of the Beach and others. The Cherokee brand, which began as a footwear brand in 1973, has been positioned to connote quality, comfort, fit and a "Casual American" lifestyle with traditional wholesome values. The Sideout brand and related trademarks, which represent a beach-oriented, active, "Ca1ifornia" lifestyle, were acquired by the Company in November 1997. The Company's operating strategy emphasizes domestic and international, retail direct and wholesale licensing whereby the Company grants retailers and wholesalers the license to use the trademarks held by the Company on certain categories of merchandise, and the licensees are responsible for designing and manufacturing the merchandise. The Company's license agreements generally provide the Company with final approval of pre-agreed upon quality standards, packaging and marketing of licensed products and also grant the Company the right to conduct periodic quality control inspections to ensure that the image and quality of licensed products remain consistent. As of April 29, 2000, the Company had 30 continuing license agreements for the Company's various trademarks, covering both domestic and international markets. The Company will continue to solicit new licensees and may, from time to time, retain the services of outside consultants to assist the Company in this regard. In November 1997, the Company reaffirmed its relationship with Target Stores, a division of Target Corporation ("Target"), by entering into an amended licensing agreement (the "Amended Target Agreement") which grants Target the exclusive right in the United States to use the Cherokee trademarks on certain specified categories of merchandise. Under the Amended Target Agreement, Target is obligated to pay a royalty based upon a percentage of its net sales of Cherokee brand products, with a minimum guaranteed royalty of $60.0 million over the six-year initial term of the agreement. During the three months ended April 29, 2000 (the "First Quarter"), sales of merchandise bearing the Cherokee brand continued to increase, with total retail sales exceeding $392.0 million versus $297.0 million in total retail sales for the first quarter of last year. Zellers sales of merchandise bearing the Cherokee brand were in excess of $29.7 million during the First Quarter compared to $22.3 million for the first quarter of last year. Additionally, ShopKo Stores Inc. acquired Pamida, Inc. in July 1999. As part of its integration of the Pamida operations into those of ShopKo, ShopKo made the decision to discontinue use of the Cherokee brand in its merchandise assortments and requested a termination of the Pamida licensing agreement with the Company. The Company agreed to terminate the licensing agreement with Pamida in return for a cash payment of $375,000 as settlement in full of the remaining minimum royalties due under the existing licensing agreement. During the First Quarter, the Company's Sideout licensing partners continued to achieve positive results from sales of merchandise bearing the Sideout brand. Sales of Mervyn's young 7 men's, junior's and children's apparel and accessories bearing the Sideout brand were approximately $18.5 million during the First Quarter in comparison to $10.0 million for the first quarter of last year. In addition to licensing its own brands, the Company is seeking to represent and manage, as an exclusive agent, other brands with respect to domestic and international marketing, licensing and distribution. Generally, as an exclusive agent, the Company will perform a range of services including marketing of brands, solicitation of licensees, contract negotiations and administration and maintenance of license or distribution agreements. In return for its services the Company will normally charge a certain percentage of the net royalties generated by the brands it represents and manages. In March 2000, the Company entered into an agreement to act as the exclusive agent for Mossimo Inc. With the assistance of the Company, Mossimo entered into a multi-year licensing agreement with Target. Pursuant to a finder's agreement with Mossimo, the Company is entitled to 15% of all royalties paid to Mossimo by Target. The Company does not expect to derive any revenues from this arrangement until June 2001 at the earliest. In May 2000, creditors of Mossimo filed a petition to force Mossimo into involuntary bankruptcy. It is unclear what effect, if any, this action will have on the agreement between Mossimo and Target and the Company's rights to receive a percentage of the royalties. Additionally, in April 2000, the Company entered into an exclusive agreement to represent Maui and Sons Inc. in the United States and Canada, and in May 2000 it entered into an exclusive agreement with Aspen Licensing International Inc. to represent its Aspen brand both domestically and internationally. In December 1997, the Company completed a series of transactions whereby it sold its rights to the Cherokee brand and related trademarks in the United States to Spell C, its wholly-owned subsidiary, and also assigned to Spell C its rights in the Amended Target Agreement. In return the Company received the gross proceeds resulting from the sale by Spell C, for an aggregate of $47.9 million, of privately placed Zero Coupon Secured Notes (the "Secured Notes"), which yield 7.0% interest per annum, amortized quarterly from May 20, 1998 through February 20, 2004 and are secured by the Amended Target Agreement and by the United States Cherokee trademarks. The aggregate scheduled amortization under the Secured Notes is $60.0 million which equals the aggregate minimum guaranteed royalty payable under the Amended Target Agreement which is also $60.0 million. As of the end of the First Quarter, approximately $42.0 million remains outstanding under the Secured Notes. Results of Operations Net revenues were $9.6 million during the First Quarter as compared to $6.9 million during the three month period ended May 1, 1999, which represents an increase of 39%. Revenues for the Cherokee brand were $8.7 million for the First Quarter compared to $6.5 million for the three month period ended May 1, 1999. During the First Quarter and the comparable three months ended May 1, 1999, royalty revenues of $6.9 million and $5.3 million were recognized from Target, which accounted for 72% and 77% of total revenues, respectively. For the First Quarter, Sideout brand revenues were $800,000 compared to $428,000 for the three month period ended May 1, 1999. The increase in net revenues is mainly due to the continued expansion by Target, in the United States, and Zellers, in Canada, of the Cherokee trademark over a broader range of categories, the $375,000 payment by Pamida and the increased sales of the Sideout brand at Mervyn's and other retail direct licensees. The Company's royalty recognition policy provides for recognition of royalties in the quarter earned, although a large portion of such royalties are actually received during the month 8 following the end of a quarter. The Company's receivable balance included the accrual of Target, Zellers and Mervyn's royalty revenues earned during the First Quarter and subsequently received in May 2000. Selling, general, and administrative expenses for the First Quarter were $2.1 million or 22% of net revenues. In comparison, selling, general and administrative expenses were $1.8 million or 27% net revenues during the three month period ended May 1, 1999. During the First Quarter, the Company's interest expense was $632,000 compared to $750,000 for the three month period ended May 1, 1999. The interest expense is attributable to the Secured Notes. For the First Quarter, the Company's investment and interest income was $99,000 in comparison to $84,000 for the three month period ended May 1, 1999. The increase in interest income is due to larger amounts of cash being available to invest in the First Quarter. During the First Quarter, the Company's net income was $4.1 million or $0.49 per share whereas for the three month period ended May 1, 1999, net income was $2.6 million or $0.30 per share. For the First Quarter, the Company incurred a charge for income taxes of $2.8 million in comparison to $1.8 million for the three month period ended May 1, 1999. Prior year charges for federal income taxes were primarily offset against the Company's deferred tax asset account. The Company has fully utilized the net operating losses generated subsequent to the Company's 1994 reorganization, which were not subject to Section 382 limitations. For fiscal year ended February 3, 2001, the Company expects to utilize $780,450 of its limited Section 382(1)(b) net operating losses for both federal and state and is making quarterly estimated tax payments for its federal and state income tax liabilities. Liquidity and Capital Resources On April 29, 2000, the Company had approximately $5.7 million in cash and cash equivalents, which includes $2.3 million held in the collection account for distribution to the Secured Note holders. Cash flow needs over the next 12 months are expected to be met through the operating cash flows generated from licensing revenues, and the Company's cash and cash equivalents. During the First Quarter, net cash provided by operations was $3.9 million. Net cash used in investing activities was $536,000 relating primarily to the purchase of trademarks. Net cash used in financing activities was $2.2 million, which was the quarterly payment on the Secured Notes. Inflation and Changing Prices Inflation did not have a significant effect on the Company's operations during the First Quarter or the prior year period. Special Note Regarding Forward-Looking Statements This Form 10-Q contains certain forward-looking statements, including without limitation, statements containing the words, "believes," "anticipates," "estimates," "expects," and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements 9 expressed or implied by such forward-looking statements. The Company is subject to certain risk factors, which include, but are not limited to, restrictions on distributions by Spell C, uncertainty regarding the Sideout brand, competition, dependence on a single licensee, dependence on intellectual property rights, and other factors referenced in this Form 10-Q and/or discussed further in the Company's Form 10-K and other filings with the Securities and Exchange Commission. The forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in conjunction with the risk factors listed in the Company's Form 10-K under "Risk Factors." Given the known and unknown risks and uncertainties, undue reliance should not be placed on the forward-looking statements contained herein. In addition, the Company disclaims any intent or obligation to update any of the forward-looking statements contained herein to reflect future events and developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. Interest From time to time the Company invests its excess cash in interest-bearing temporary investments of high-quality issuers. Due to the short time the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in the consolidated balance sheet of the Company and do not represent a material interest rate risk to the Company. The Company's only long-term debt obligations are the Secured Notes, which are zero- coupon secured notes yielding interest of 7.0% per annum. This long-term debt obligation does not represent a material interest rate risk to the Company. Foreign Currency The Company conducts business in various parts of the world. The Company is exposed to fluctuations in exchange rates to the extent that the foreign currency exchange rate fluctuates in countries where the Company's licensees do business. For the First Quarter, a hypothetical 10% strengthening of the US dollar relative to the foreign currencies of countries where the Company operates was not material. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of business, the Company from time to time becomes involved in legal claims and litigation. In the opinion of management, based upon consultations with legal counsel, the disposition of litigation currently pending against the Company is unlikely to have, individually or in the aggregate, a materially adverse effect on its consolidated business financial position or results of operations. 10 ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON 8-K (a) Exhibits -------- 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 First Quarter. 11 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: June 6, 2000 CHEROKEE INC. By: /s/ Robert Margolis ----------------------- Robert Margolis Chief Executive Officer By: /s/ Carol Gratzke ----------------------- Carol Gratzke Chief Financial Officer 12 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 1,000 3-MOS FEB-03-2001 JAN-30-2000 APR-29-2000 5,756 0 8,379 0 0 14,951 367 163 21,829 15,153 0 0 0 170 (20,139) 21,829 9,603 9,603 0 2,141 0 0 632 6,929 2,772 4,157 0 0 0 4,157 .49 .49
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