-----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, GwUDcAMAzI4Cz8WxdRiLz5520jmqdvIfmv9e1s6QZPCZv2qZMx2f/jM0rVM14qvB aoh2TX9hXQS+7/BSVgYzow== 0000944209-98-002007.txt : 19981208 0000944209-98-002007.hdr.sgml : 19981208 ACCESSION NUMBER: 0000944209-98-002007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981207 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: 000-18640 FILM NUMBER: 98764595 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 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 31, 1998. [ ] 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 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 December 1, 1998 - ---------------------------------------- ------------------------------- Common Stock, $.02 par value per share 8,705,428 CHEROKEE INC. ------------- INDEX PART 1. FINANCIAL INFORMATION ITEM I. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets October 31, 1998 and January 31, 1998 Consolidated Statements of Operations Three Months and Nine Months ended October 31, 1998 and November 1, 1997 Consolidated Statements of Cash Flow Three Months and Nine Months ended October 31, 1998 and November 1, 1997 Notes to Consolidated 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 2. CHANGES IN SECURITIES ITEM 3. DEFAULTS UPON SENIOR SECURITIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON 8-K CHEROKEE INC. ------------- CONSOLIDATED BALANCE SHEETS ---------------------------
UNAUDITED OCTOBER 31, 1998 JANUARY 31, 1998 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 9,752,000 $ 10,275,000 Receivables, net 4,367,000 2,347,000 Inventories - 45,000 Other current assets 347,000 220,000 ------------ ------------ Total current assets 14,466,000 12,887,000 Deferred tax asset 4,303,000 7,576,000 Securitization fees 1,064,000 1,218,000 Trademarks and other assets 3,045,000 2,790,000 ------------ ------------ Total assets $ 22,878,000 $ 24,471,000 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 23,000 $ 196,000 Dividends payable 2,176,000 - Other accrued liabilities 2,551,000 971,000 Notes payable 9,000,000 6,525,000 ------------ ------------ Total current liabilities 13,750,000 7,692,000 Other liabilities 750,000 750,000 Notes payable - long term 37,249,000 41,675,000 STOCKHOLDERS' DEFICIT: Common stock, $.02 par value,20,000,000 shares authorized, 8,705,428 and 8,612,657 shares issued and outstanding at October 31, 1998 and at January 31, 1998, respectively 174,000 173,000 Note receivable from stockholder (2,104,000) (2,013,000) Accumulated deficit (26,941,000) (23,806,000) ------------ ------------ Stockholders' deficit (28,871,000) (25,646,000) ------------ ------------ Total liabilities and stockholders' deficit $ 22,878,000 $ 24,471,000 ============ ============
See the accompanying notes which are an integral part of these consolidated financial statements. CHEROKEE INC. ------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- UNAUDITED ---------
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- OCTOBER 31, 1998 NOVEMBER 1, 1997 OCTOBER 31, 1998 NOVEMBER 1, 1997 ------------------------------------- ------------------------------------ Royalty revenues $5,133,000 $2,368,000 $15,308,000 $6,874,000 Selling, general and administrative expenses 1,768,000 1,328,000 5,092,000 3,362,000 ---------- ---------- ----------- ---------- Operating income 3,365,000 1,040,000 10,216,000 3,512,000 Other income (expenses): Interest expense (920,000) - (2,549,000) - Investment and Interest income 196,000 139,000 506,000 393,000 Gain on sale of assets - - 219,000 Other - 390,000 - 465,000 ---------- ---------- ----------- ---------- Total other income (expenses), net (724,000) 529,000 (2,043,000) 1,077,000 Income before income taxes 2,641,000 1,569,000 8,173,000 4,589,000 Income tax provision (benefit) 1,059,000 - 3,271,000 (771,000) ---------- ---------- ----------- ---------- Net income $1,582,000 $1,569,000 $ 4,902,000 $5,360,000 ========== ========== =========== ========== Basic earnings per share $ 0.18 $ 0.20 $ 0.56 $ 0.69 ---------- ---------- ----------- ---------- Diluted earnings per share $ 0.18 $ 0.19 $ 0.56 $ 0.64 ---------- ---------- ----------- ---------- Weighted average shares outstanding Basic 8,705,428 7,775,813 8,676,325 7,756,091 ========== ========== =========== ========== Diluted 8,803,074 8,384,091 8,776,873 8,364,369 ========== ========== =========== ==========
See the accompanying notes which are an integral part of these consolidated financial statements. CHEROKEE INC. ------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- UNAUDITED ---------
NINE MONTHS ENDED ----------------- OCTOBER 31, 1998 NOVEMBER 1, 1997 -------------------------------------- OPERATING ACTIVITIES - -------------------- Net income $ 4,902,000 $ 5,360,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,000 20,000 Amortization of goodwill and trademarks 205,000 14,000 Amortization of securitization fees 154,000 - Amortization of debt discount 2,549,000 - Change in deferred taxes 3,271,000 (926,000) Interest income on note receivable from stockholder (91,000) - Changes in current assets and liabilities: (Increase) decrease in accounts receivable (2,020,000) 206,000 Decrease in inventories 45,000 32,000 (Increase) decrease in other current assets (127,000) 31,000 Increase (decrease) in accounts payable and accrued liabilities 1,407,000 (429,000) ------------ ----------- Net cash provided by operating activities 10,319,000 4,308,000 ------------ ----------- INVESTING ACTIVITIES - -------------------- Repayment on note receivable from stockholder - 144,000 Proceeds from sale of assets held for sale - 3,576,000 Collection of notes receivable - 1,961,000 Purchase trademarks and other assets (486,000) (301,000) ------------ ----------- Net cash (used in) provided by investing activities (486,000) 5,380,000 ------------ ----------- FINANCING ACTIVITIES - -------------------- Cash distributions (6,524,000) (4,081,000) Proceeds from exercise of stock options and warrants 668,000 289,000 Payment on notes (4,500,000) - ------------ ----------- Net cash used in financing activities (10,356,000) (3,792,000) ------------ ----------- (Decrease) increase in cash and cash equivalents (523,000) 5,896,000 Cash and cash equivalents at beginning of period 10,275,000 3,139,000 ------------ ----------- Cash and cash equivalents at end of period $ 9,752,000 $ 9,035,000 ============ =========== Total paid during period: - ------------------------- Income taxes $ - $ 64,000 Interest $ 162,000 $ - Non-cash transactions: - ---------------------- Utilization of pre-bankruptcy NOL carryforwards $ - $ 1,727,000 Declaration of dividend $ 2,176,000 $ -
See the accompanying notes which are an integral part of these consolidated financial statements. CHEROKEE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 AND JANUARY 31, 1998 (1) Basis of Presentation --------------------- The accompanying condensed consolidated financial statements for the three and nine months ended October 31, 1998 and November 1, 1997 have been prepared in accordance with generally accepted accounting principles ("GAAP"). These consolidated 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. ("Cherokee" or the "Company") are necessary for a fair presentation of the financial position and the results of operations for the periods presented. The accompanying consolidated balance sheet as of January 31, 1998 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 months ended October 31, 1998 are not necessarily indicative of the results to be expected for the fiscal year ended January 30, 1999. 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 eight-month period ended January 31, 1998 (the "Form 10-K"). 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) Significant Transactions ------------------------ During the three months ended October 31, 1998, Cherokee entered into two new non-exclusive retail direct licensing agreements with (1) Connecticut-based Bob's Stores, and (2) Calgary, Canada-based The Forzani Group Ltd. to manufacture, promote, sell and distribute products bearing the Company's Sideout brand. Both are multi-year agreements and cover a broad range of categories of merchandise, including women's, men's and children's activewear, bags, hats and other accessory items. The Company also entered into an exclusive three year wholesale licensing agreement for the Sideout brand in sunglasses with Denver- based Outlook Eyewear, a division of Bausch & Lomb Incorporated. The Company entered into an exclusive ten-year international licensing agreement with China-based Shanghai Eesli Trading Company, a corporation organized under the laws of the People's Republic of China, to manufacture, promote, sell and distribute products bearing the Company's Cherokee brand within the territories of the People's Republic of China, including Shanghai, Jiangsu, Beijing, Tianjin, Sichuan, Hubei, Gansu, Shanxi, Liaoning, Chongqing and Guangdong. The agreement covers a broad range of product categories including women's sportswear and intimate apparel, children's apparel, women and children's footwear, women's fashion accessories and cosmetics. On October 9, 1998, the Company' Board of Directors declared a cash dividend of $0.25 per share which was distributed on November 5, 1998 to the Company's shareholders of record on the close of business on October 20, 1998. Assuming the Company's cash position continues to be favorable, the Company intends to maintain a quarterly cash dividend of $0.25 per share for the balance of the current fiscal year ending January 30, 1999; however, the declaration of such dividend remains subject to the discretion of the Company's Board of Directors. On October 29, 1998, the Company's common stock, formerly trading on the Nasdaq Small-Cap Market, began trading on the Nasdaq National Market System. The Company's Nasdaq trading symbol remains CHKE. (3) Subsequent Events ----------------- On November 3, 1998, the Company entered into a three-year licensing agreement with South Africa-based A M Moolla Group Limited, the second largest clothing manufacturer in South Africa. Under the terms of the agreement, A M Moolla Group Ltd. will manufacture, promote, sell and distribute products bearing the Company's Sideout brand, covering a wide range of categories for all genders and ages. In addition to South Africa, the agreement covers the following countries, which are all members of the Southern African Development Community: Botswana, Zimbabwe, Namibia, Mozambique, Angola, Swaziland, Lesotho, Tanzania and the Democratic Republic of Congo. On November 23, 1998, the Company entered into a three-year licensing agreement with Mexico-based Bravo Enterprises, a leading manufacturer distributor and marketer of prestige brands in Mexico. Under the terms of the agreement, Bravo Enterprises will manufacture, promote, sell and distribute products bearing the Company's Cherokee brand in Mexico, covering a wide range of categories for all genders and ages. As of November 23, 1998, including the A M Moolla Group Limited and Bravo Enterprises license agreements, the Company had 30 continuing license agreements for the Company's various trademarks, covering both domestic and international markets. (4) 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. Company Year End On December 19, 1997, the Company determined to change its fiscal year to a 52 or 53 week fiscal year ending on the Saturday nearest to January 31 in order to better align the Company with its licensees who also generally operate and plan using a fiscal year ending nearest to January 31. Prior to this change, the Company's fiscal year was a 52 or 53 week fiscal year ending on the Saturday nearest to May 31. Earnings per Share Computation The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" for the eight month period ended January 31, 1998, and has restated earnings per common share for all periods presented in accordance with the new standard. Earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Earnings per common share assuming dilution is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Potential common shares related to stock options are excluded from the computation when their effect is antidilutive. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations for the three and nine months ended October 31, 1998 and November 1, 1997:
1998 1997 3 Months 9 Months 3 Months 9 Months ----------------------- ----------------------- Numerator: Net income-numerator for net income per common share and net income per common share assuming dilution $1,582,000 $4,902,000 $1,569,000 $5,360,000 ========== ========== ========== ========== Denominator: Denominator for net income Per common share-weighted average shares 8,705,428 8,676,325 7,775,813 7,756,091 Effect of dilutive securities: Stock options 97,646 100,548 608,278 608,278 ---------- ---------- ---------- ---------- Denominator for net income per common share, assuming dilution: Adjusted weighted average shares and assumed conversions 8,803,074 8,776,873 8,384,091 8,364,369 ========== ========== ========== ==========
Common shares related to stock options that are antidilutive amounted to 182,268 and zero for the quarters ended October 31, 1998 and November 1, 1997, respectively. Reclassifications Certain previously reported financial information has been reclassified to conform to current year presentation. (5) New Accounting Standards ------------------------ In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," which changes current practice and established a new framework, referred to as the "management" approach, on which to base segment reporting. The management approach requires that management identify the "operating segments" based on the way that management disaggregates the entity for internal operating decisions. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and is not required for interim statements in the first year of adoption. Management believes that the adoption of this new standard will not have any material impact on the Company's financial position or results of operations because the Company does not have operating segments. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is the type of hedge transaction. The new rules will be effective the first quarter of 2000. The Company does not believe that the new standard will have a material impact on the Company's financial statements because the Company is not involved in derivative instruments and hedging activities. (6) Long Term Debt -------------- In September 1997, the Company's Board authorized Libra Investments, Inc. to explore ways to maximize shareholder value, including a recapitalization or sale of the Company. On December 23, 1997, the Company completed the recapitalization described below and publicly announced that it would declare a special dividend of $5.50 per share, which was subsequently paid on January 15, 1998. As part of the recapitalization, the Company, in exchange for the proceeds from the Secured Notes (as defined below), sold to its wholly-owned subsidiary, Spell C, all its rights to the Cherokee brand and related trademarks in the United States and assigned to Spell C all of its rights in an amended licensing agreement (the "Amended Target Agreement") with Target Stores, a division of Dayton Hudson Corporation ("Target"). Spell C issued for gross proceeds of $47.9 million, privately placed Zero Coupon Secured Notes (the "Secured Notes"), yielding 7.0% interest per annum and maturing on February 20, 2004. The Secured Notes amortize quarterly from May 20, 1998 through February 20, 2004. The Secured Notes are secured by the Amended Target Agreement and the domestic Cherokee brand name and trademarks. The Secured Notes indenture (the "Indenture") requires that any proceeds due to Spell C under the Amended Target Agreement must be deposited directly into a collection account controlled by the trustee under the Indenture. The trustee will distribute from the collection account the amount of principal due and payable on the Secured Notes to the holders thereof on quarterly note payment dates. Excess amounts on deposit in the collection account may only be distributed to Spell C if the amount on deposit in the collection account exceeds the aggregate amount of principal due and payable on the next quarterly note payment date. Such excess amounts, if any, may then be distributed by Spell C to the Company. The minimum guaranteed royalty under the Amended Target Agreement is $9.0 million per year for each of the two fiscal years ending January 29, 1999 and 2000 and $10.5 million per year for each of the four fiscal years ending January 31, 2001 through 2004, therefore, the aggregate scheduled amortization under the Secured Notes ($60.0 million) equals the aggregate minimum guaranteed royalty payable under the Amended Target Agreement ($60.0 million). Of the $12,129,000 in royalty revenues received from Target pursuant to the Amended Target Agreement during the nine months ended October 31, 1998, $9,186,000 were deposited into the collection account for the Secured Notes. Maturity Schedule of Secured Notes is as follows:
AS OF: FACE VALUE October 31, 1999 .............................................$ 9,000,000 October 31, 2000 ............................................. 9,750,000 October 31, 2001 ............................................. 10,500,000 October 31, 2002 ............................................. 10,500,000 October 31, 2003 ............................................. 10,500,000 Thereafter ......................................... 5,250,000 ------------- Total ............................................. 55,500,000 Less unamortized Note Discount...................... 9,251,000 ------------- 46,249,000 Less current portion of long term debt.............. 9,000,000 ------------- Long term obligation...............................$ 37,249,000 =============
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company 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 retail direct, wholesale and international 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 the Company has the right to conduct periodic quality control inspections to ensure that the image and quality of licensed products remain consistent. As of November 23, 1998, 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 Dayton Hudson 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. As previously discussed in some detail in the Company's Form 10-K for the transition period from June 1, 1997 to January 31, 1998 (the "Form 10-K"), 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, amortize quarterly from May 20, 1998 through February 20, 2004 and are secured by the Amended Target Agreement and by the Untied States Cherokee trademarks. The aggregate scheduled amortization under the Secured Notes ($60.0 million) equals the aggregate minimum guaranteed royalty payable under the Amended Target Agreement ($60.0 million). RESULTS OF OPERATIONS Net revenues for the nine months ended October 31, 1998 (the "Nine Months") and the three months ended October 31, 1998 (the "Third Quarter") were $15,308,000 and $5,133,000, respectively, in comparison to net revenues for the nine months and three months ended November 1, 1997 of $6,874,000 and $2,368,000, respectively. Revenues for both periods were generated 100% through the licensing of the Company's trademarks. For the Nine Months and for the comparable period ended November 1, 1997, royalty revenues of $12,129,000 and $4,937,000 were recognized from Target, which accounts for 79% and 72% of total revenues, respectively. The increase in revenues is due to the expansion by Target of the Cherokee mark over a broader range of categories, including men's and boys' apparel, women's intimate apparel and certain accessory categories. Of the $12,129,000 in royalty revenues from Target, $9,186,000 were deposited into the collection account for the Secured Notes. Selling, general, and administrative expenses for the Nine Months and Third Quarter were $5,092,000 and $1,768,000 or 33% and 34% of net revenues. In comparison, net selling, general and administrative expenses were $3,362,000 and $1,328,000 or 49% and 56% of net revenues during the nine months and three months ended November 1, 1997. In the Nine Months, selling, general and administrative expenses increased mainly due to expenses of approximately $205,000 in amortization of the Company's trademarks, $195,000 in salaries for additional marketing staff hired to intensify the Company's domestic and international efforts to negotiate contracts, $154,000 in amortization of the securitization fees, which were incurred by Spell C., the Company's wholly-owned subsidiary, in completing the recapitalization and $1,216,000 in management bonus accrual. During the Nine Months and Third Quarter, the Company's interest expense was $2,549,000 and $920,000, respectively compared to zero interest expense for the period ended November 1, 1997. For the Nine Months and Third Quarter, the Company's investment and interest income was $506,000 and $196,000, respectively, in comparison to $393,000 and $139,000, respectively, for the similar periods ended November 1, 1997. The interest expense is attributable to the Secured Notes. During the Nine Months and Third Quarter, the Company's net income was $4,902,000 and $1,582,000, respectively, whereas for the similar periods ended November 1, 1997, net income was $5,360,000 and $1,569,000, respectively. For the Nine Months and Third Quarter, the Company booked for GAAP purposes a tax provision of $3,271,000 and $1,059,000, respectively, which amounts were offset against the Company's deferred tax asset account. LIQUIDITY AND CAPITAL RESOURCES On October 31, 1998, the Company had $9,752,000 in cash and cash equivalents. In the second quarter ended August 1, 1998 one of the Company's licensees reported an overpayment of royalty revenues of $1,245,000, which will be deducted from the licensee's royalty payments to the Company in the fourth quarter. 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 $10,319,000, net cash used in investing activities was $486,000 and net cash used in financing activities was $10,356,000, which represented the net from the proceeds received from the exercise of options, the quarterly payment on the Secured Notes and the cash dividend distributions, which were paid during the Nine Months. INFLATION AND CHANGING PRICES Inflation has not had a significant effect on the Company's operations. YEAR 2000 COMPLIANCE The Year 2000 issue is a result of computer programs being written using two digits, e.g. "98", to define a year. Date-sensitive software may recognize the year "00" as the year 1900 rather than the year 2000. This would result in errors and miscalculations or even system failure causing disruptions in everyday business activities and transactions. Software is termed "Year 2000 compliant" when it is capable of performing transactions correctly in the year 2000. Because the Company's primary business is marketing and licensing its trademarks, the Company has only modest information technology requirements and resources, none of which is critical to the Company's day to day operations. Based on a recent assessment of the Company's computer hardware and software, it has been determined that more than 95% of the Company's hardware and software systems are either currently Year 2000 compliant or have an existing upgrade available from the software vendor that is Year 2000 compliant. All systems that are not currently Year 2000 compliant will either be upgraded to be Year 2000 compliant or replaced with alternative systems that are Year 2000 compliant over the next fourteen months. The Company expects the costs to upgrade or replace such systems will not exceed approximately $12,000. The Company does not expect that the achievement of Year 2000 compliance by the Company will have a material impact on its financial condition or results of operations. However, the Company's financial condition or results of operations could be materially adversely effected if its significant licensees fail to adequately address and correct Year 2000 problems and such failures result in the interruption of royalty payments or lower royalty payments. The Company has no control over its licensees' Year 2000 compliance and as a result the Company cannot develop a contingency plan resolution thereto. The Company has contacted its most significant licensees in an effort to determine the status of their Year 2000 compliance efforts. The Company has received information that these licensees are in the process of evaluating the impact and assessing the potential problems of Year 2000 and that they expect to be in compliance in a timely manner. Notwithstanding, there can be no assurance that the Company's significant licensees will be Year 2000 compliant in a timely manner, and as discussed above, their failure to do so could materially adversely effect the Company 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 expressed or implied by such forward-looking statements. These risks and uncertainties 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, Year 2000 readiness, and other factors referenced in this Form 10-Q and/or discussed further in the Company's Form 10-K. 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 "Certain Business Considerations and 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. 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 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 ----------------- New Securities and Exchange Commission ("SEC") rules regarding shareholder proposals became effective on June 29, 1998. Pursuant to these new rules, if the Company has not received notice on or before March 24, 1999 of any matter a shareholder intends to propose for a vote at the 1999 annual meeting of shareholders, then a proxy solicited by the board of directors may be voted on such matter in the discretion of the proxy holder, without discussion of the matter in the proxy statement soliciting such proxy and without such matter appearing as a separate matter on the proxy card. As previously disclosed in the Company's proxy statement for the annual meeting of shareholders held earlier this year on June 8, 1998, a shareholder who wishes to include a proposal and the shareholder's statement in support thereof in the Company's proxy statement must send such material in accordance with SEC rules to the Company at its principal executive offices for receipt no later than January 8, 1999. ITEM 6. Exhibits and Reports on 8-K --------------------------- The Company filed no reports on Form 8-K during the Nine Months. List of Exhibits Exhibit Number Description of Exhibit - -------------- ---------------------- 27.1 Article 5 of Regulation S-X -- Financial Data Schedule 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: December 7, 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
5 1,000 3-MOS 9-MOS JAN-30-1999 JAN-30-1999 AUG-02-1998 FEB-01-1998 OCT-31-1998 OCT-31-1998 9,752 9,752 0 0 4,367 4,367 0 0 0 0 14,466 14,466 256 256 87 87 22,878 22,878 13,750 13,750 0 0 0 0 0 0 174 174 (29,045) (29,045) 22,878 22,878 5,133 15,308 5,133 15,308 0 0 1,768 5,092 0 0 0 0 920 2,549 2,641 8,173 1,059 3,271 1,582 4,902 0 0 0 0 0 0 1,582 4,902 0.18 0.56 0.18 0.56
EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS JAN-31-1998 JAN-31-1998 AUG-03-1997 FEB-01-1997 NOV-01-1997 NOV-01-1997 9,035 9,035 0 0 1,502 1,502 0 0 45 45 10,650 10,650 124 124 77 77 13,824 13,824 140 140 0 0 0 0 0 0 156 156 12,778 12,778 13,824 13,824 2,368 6,874 2,368 6,874 0 0 1,328 3,362 0 0 0 0 0 0 1,569 4,589 0 (771) 1,569 5,360 0 0 0 0 0 0 1,569 5,360 0.20 0.69 0.19 0.64
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