-----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, E6/bB0IDT8Gf7puVaAcFqlLrsS5/4mm9hpyCQ2IYUHe+SgcO2puUbYtwb4CdGNlT wbQIB33B2qIn3+dWNc9M9Q== 0000944209-99-001868.txt : 19991208 0000944209-99-001868.hdr.sgml : 19991208 ACCESSION NUMBER: 0000944209-99-001868 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991207 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: 99769671 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 30, 1999. [ ] 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 October 30, 1999 ------------------------------------ ------------------------------- Common Stock, $.02 par value per share 8,472,428 CHEROKEE INC. ------------- INDEX PART 1. FINANCIAL INFORMATION ITEM I. Consolidated Financial Statements Consolidated Balance Sheets October 30, 1999 and January 30, 1999 2 Consolidated Statements of Operations 3 Three and Nine Month periods ended October 30, 1999 and October 31, 1998 Consolidated Statements of Cash Flows 4 Nine Month periods ended October 30, 1999 and October 31, 1998 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 11 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 11 ITEM 2. Changes in Securities 11 ITEM 3. Defaults Upon Senior Securities 12 ITEM 4. Submission of Matters to a Vote of Security Holders 12 ITEM 5. Other Information 12 ITEM 6. Exhibits and Reports on 8-K 12 1 Part 1. Financial Information ----------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CHEROKEE INC. ------------- CONSOLIDATED BALANCE SHEETS ---------------------------
October 30, 1999 January 30, 1999 ---------------- ---------------- Unaudited Assets Current assets: Cash and cash equivalents $ 1,508,000 $ 2,847,000 Restricted cash 2,321,000 4,500,000 Receivables, net 4,997,000 3,232,000 Prepaid expenses and other current assets 162,000 29,000 Deferred tax asset 826,000 861,000 ---------------- ---------------- Total current assets 9,814,000 11,469,000 Deferred tax asset 442,000 3,527,000 Securitization fees, net of accumulated amortization of $377,000 and $223,000, respectively 864,000 1,018,000 Property and equipment, net of accumulated depreciation of $132,000 and $95,000, respectively 226,000 233,000 Trademarks, net of accumulated amortization of $432,000 and $243,000, respectively 4,027,000 3,176,000 Other assets 15,000 106,000 ---------------- ---------------- Total assets $ 15,388,000 $ 19,529,000 ================ ================ Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 289,000 $ 280,000 Dividends payable - 2,176,000 Other accrued liabilities 1,994,000 1,755,000 Notes payable 9,750,000 9,000,000 ---------------- ---------------- Total current liabilities 12,033,000 13,211,000 Other liabilities 250,000 500,000 Notes payable - long term 30,359,000 35,697,000 ---------------- ---------------- Total liabilities 42,642,000 49,408,000 ================ ================ Stockholders' Deficit: Common stock, $.02 par value,20,000,000 shares authorized, 8,472,428 and 8,705,428 shares issued and outstanding at October 30, 1999 and at January 30, 1999, respectively 170,000 174,000 Note receivable from stockholder (2,225,000) (2,134,000) Accumulated deficit (25,199,000) (27,919,000) Stockholders' deficit (27,254,000) (29,879,000) ---------------- ---------------- Total liabilities and stockholders' deficit $ 15,388,000 $ 19,529,000 ================ ================
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 Nine months ended ------------------ ----------------- October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998 ---------------- ---------------- ---------------- ---------------- Royalty revenues $ 5,674,000 $ 5,133,000 $ 18,973,000 $ 15,308,000 Selling, general and administrative expenses 1,688,000 1,768,000 5,760,000 5,092,000 --------------- ---------------- ---------------- ---------------- Operating income 3,986,000 3,365,000 13,213,000 10,216,000 Other income (expenses): Interest expense (689,000) (920,000) (2,163,000) (2,549,000) Investment and Interest income 104,000 196,000 287,000 506,000 --------------- ---------------- ---------------- ---------------- Total other income (expenses), net (585,000) (724,000) (1,876,000) (2,043,000) Income before income taxes 3,401,000 2,641,000 11,337,000 8,173,000 Income tax provision 1,363,000 1,059,000 4,538,000 3,271,000 --------------- ---------------- ---------------- ---------------- Net income $ 2,038,000 $ 1,582,000 $ 6,799,000 $ 4,902,000 =============== ================ ================ ================ Basic earnings per share $ 0.24 $ 0.18 $ 0.78 $ 0.56 --------------- ---------------- ---------------- ---------------- Diluted earnings per share $ 0.24 $ 0.18 $ 0.78 $ 0.56 --------------- ---------------- ---------------- ---------------- Weighted average shares outstanding Basic 8,588,928 8,705,428 8,666,595 8,676,325 =============== ================ ================ ================ Diluted 8,590,614 8,803,074 8,668,281 8,776,873 =============== ================ ================ ================
See the accompanying notes which are an integral part of these consolidated financial statements. 3 CHEROKEE INC. ------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited ---------
Nine months ended ----------------- October 30, 1999 October 31, 1998 ---------------- ---------------- Operating activities - -------------------- Net income $ 6,799,000 $ 4,902,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,000 24,000 Amortization of trademarks 189,000 205,000 Amortization of securitization fees 154,000 154,000 Amortization of debt discount 2,163,000 2,549,000 Decrease in deferred taxes 3,120,000 3,271,000 Interest income on note receivable from stockholder (91,000) (91,000) Changes in current assets and liabilities: Increase in accounts receivable (1,765,000) (2,020,000) Decrease in inventories - 45,000 Increase in prepaid expenses and other current assets (133,000) (127,000) (Decrease) increase in accounts payable and accrued liabilities (2,000) 1,407,000 -------------- ---------------- Net cash provided by operating activities 10,471,000 10,319,000 -------------- ---------------- Investing activities - -------------------- Purchase of trademarks (1,041,000) (486,000) Purchase of property and equipment (30,000) - Decrease in other assets 91,000 - -------------- ---------------- Net cash used in investing activities (980,000) (486,000) -------------- ---------------- Financing activities - -------------------- Cash distributions (4,352,000) (6,524,000) Decrease in restricted cash 2,179,000 - Repurchase of common stock (1,907,000) - Proceeds from exercise of stock options and warrants - 668,000 Payment on notes (6,750,000) (4,500,000) -------------- ---------------- Net cash used in financing activities (10,830,000) (10,356,000) -------------- ---------------- Decrease in cash and cash equivalents (1,339,000) (523,000) Cash and cash equivalents at beginning of period 2,847,000 10,275,000 -------------- ---------------- Cash and cash equivalents at end of period $ 1,508,000 $ 9,752,000 ============== ================ Total paid during nine month period: - ------------------------------------ Income taxes $ 1,289,000 $ - Interest $ 657,000 $ 162,000 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 October 30, 1999 and for the three and nine month periods ended October 30, 1999 and October 31, 1998 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 30, 1999 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The results of operations for the three and nine month periods ended October 30, 1999 and October 31, 1998 are not necessarily indicative of the results to be expected for the fiscal year ended January 29, 2000. 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 30, 1999. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. (2) Summary of Significant Accounting Policies ------------------------------------------ Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SPELL C. LLC, a Delaware limited liability corporation ("Spell C"). All significant intercompany accounts and transactions have been eliminated in consolidation. Earnings Per Share Computation The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three and nine month periods ended October 30, 1999 and October 31, 1998:
1999 1998 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 $ 2,038,000 $6,799,000 $1,582,000 $4,902,000 =========== ========== ========== ==========
5 Denominator: Denominator for net income Per common share-weighted average shares 8,588,928 8,666,595 8,705,428 8,676,325 Effect of dilutive securities: Stock options 1,713 1,686 97,646 100,548 --------- --------- --------- --------- Denominator for net income per common share, assuming dilution: Adjusted weighted average shares and assumed exercises 8,590,641 8,668,281 8,803,074 8,776,873 ========= ========= ========= =========
Common shares issuable upon exercise of stock options that are antidilutive amounted to 503,702 and 182,268 for the nine month periods ended October 30, 1999 and October 31, 1998, respectively. (3) Long Term Debt -------------- 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 United States Cherokee brand name and trademarks. The Secured Notes 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. The aggregate scheduled amortization under the Secured Notes is $60.0 million and equals the aggregate minimum guaranteed royalty payable under the Amended Target Agreement which is also $60.0 million. Of the $12.3 million payment in royalty revenues actually received from Target pursuant to the Amended Target Agreement during the nine months ended October 30, 1999, $6.75 million was paid to the holders of the Secured Notes and approximately $2.3 million remains in a collection account for the benefit of the holders of Secured Notes. Excess amounts totaling approximately $8.1 million (which amount includes royalty revenues received during 6 both the fiscal year ended January 31, 1999 and the nine month period ended October 30, 1999 as well as interest on the same) were distributed to Spell C. Spell C distributed approximately $8.6 million to the Company at various times during the nine month period ended October 30, 1999. The maturity schedule of Secured Notes is as follows: For the year ending: Face Value October 30, 2000.................................. $ 9,750,000 October 30, 2001.................................. 10,500,000 October 30, 2002.................................. 10,500,000 October 30, 2003.................................. 10,500,000 October 30, 2004.................................. 5,250,000 ------------- Total........................................ 46,500,000 Less unamortized Note Discount................ 6,391,000 ------------- 40,109,000 Less current portion of long term debt........ 9,750,000 ------------- Long term obligation.......................... $ 30,359,000 ============= 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 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 December 1, 1999, the Company had 32 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 7 into an amended licensing agreement (the "Amended Target Agreement") which grants Target the exclusive right in the United States to use the Cherokee trademarks on certain specified categories of merchandise. Under the Amended Target Agreement, Target is obligated to pay a royalty based upon a percentage of its net sales of Cherokee brand products, with a minimum guaranteed royalty of $60.0 million over the six-year initial term of the agreement. During the three months ended October 30, 1999 (the "Third Quarter"), the Company's Sideout licensing partners continued to achieve stronger than anticipated results from selling merchandise bearing the Sideout brand. Mervyn's achieved sales of young men's, juniors and children's apparel and accessories bearing the Sideout brand of approximately $15.7 million during the Third Quarter. During the Third Quarter, sales of merchandise bearing the Cherokee brand continued to increase, with total retail sales exceeding $364.0 million versus $292.0 million in total retail sales for the comparative period last year. Zellers sales of merchandise bearing the Cherokee brand were in excess of $39.4 million during the Third Quarter. During the Third Quarter, the Company entered into a non-exclusive retail direct licensing agreement with JBI Apparel, Inc., The Casual Male, Inc. and TCMB & T Inc., all subsidiaries of J. Baker Inc., to manufacture, promote, sell and distribute products bearing the Company's Sideout brand. The Company also entered into a non-exclusive licensing agreement with California based Nirve, Inc., for the online-only sale of Sideout brand merchandise to the Generation Y consumer. Pursuant to the Company's Board of Directors directive to repurchase its outstanding common stock, the Company repurchased and retired 233,000 shares of its common stock during the Third Quarter. Continued repurchases of the Company's stock, if any, will be made from time to time in the open market at prevailing market prices or privately negotiated transactions. As previously discussed in footnote 3 to the Notes to Consolidated Financial Statements included in this Form 10-Q, 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 United States Cherokee trademarks. The aggregate scheduled amortization under the Secured Notes which is $60.0 million equals the aggregate minimum guaranteed royalty payable under the Amended Target Agreement which is also $60.0 million. As of the end of the Third Quarter, approximately $46.5 million remains outstanding under the Secured Notes. Results of Operations Net revenues for the Third Quarter and the nine month period ended October 30, 1999 (the "Nine Months") were $5.7 million and $19.0 million, respectively, in comparison to net revenues for the three and nine month periods ended October 31, 1998 of $5.1 million and $15.3 million, respectively. For the Nine Months and the comparable period ended October 31, 1998, royalty revenues of $13.4 million and $12.1 million were recognized from Target, which accounted for 70% and 79% of total revenues, respectively. The increase in revenues is mainly due to the 8 continued expansion by Target of the Cherokee trademark over a broader range of categories, the continued success of Zellers' launch of the Cherokee brand in Canada and the addition of the Sideout brand revenues from retail direct licensees. Selling, general, and administrative expenses for the Third Quarter and the Nine Months were $1.7 million and $5.8 million or 30% of net revenues. In comparison, selling, general and administrative expenses were $1.8 million and $5.1 million or 34% and 33% of net revenues during the three and nine month periods ended October 31, 1998. In the Nine Months, selling, general and administrative expenses increased mainly due to the increase in accrued management bonus. During the Third Quarter and the Nine Months, the Company's interest expense was $689,000 and $2.2 million compared to $920,000 and $2.5 million for the three and nine month periods ended October 31, 1998. The interest expense is attributable to the Secured Notes. For the Third Quarter and the Nine Months, the Company's investment and interest income was $104,000 and $287,000 in comparison to $196,000 and $506,000 for the three and nine month periods ended October 31, 1998. The decrease in interest income is due to less cash being available to invest this year. During the Third Quarter and the Nine Months, the Company's net income was $ 2.0 million and $6.8 million or $0.24 and $0.78 per share whereas for the three and nine month periods ended October 31, 1998, net income was $1.6 million and $4.9 million or $0.18 and $0.56 per share. For the Third Quarter and the Nine Months, the Company incurred a charge for income taxes of $1.4 million and $4.5 million in comparison to $1.1 million and $3.3 million for the three and nine month periods ended October 31, 1998. Prior and current year charges for federal income taxes were primarily offset against the Company's deferred tax asset account. The Company has been utilizing its net operating losses ("NOLs") to reduce its federal tax liabilities since emerging from bankruptcy. Once the Company has utilized its NOLs, it will be required to pay federal income taxes, thus reducing the Company's liquidity. Liquidity and Capital Resources On October 30, 1999, the Company had approximately $3.8 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 Nine Months, net cash provided by operations was $10.5 million. Net cash used in investing activities was $980,000 relating primarily to the purchase of trademarks. Net cash used in financing activities was $10.8 million which was comprised of quarterly payments on the Secured Notes totaling $6.75 million, the repurchase of Cherokee common stock of $1.9 million and cash dividends of $4.3 million, partially offset by a reduction in restricted cash of $2.2 million held in the collection account. Inflation and Changing Prices Inflation did not have a significant effect on the Company's operations during the Third Quarter or the prior year period. 9 Year 2000 Compliance The Year 2000 issue is a result of computer programs being written using two digits, e.g. "99", 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. As a result of a recent upgrade on the Company's computer hardware and software, the Company's hardware and software systems are currently Year 2000 compliant. The costs to upgrade such systems did not exceed $5,000. The Company's achievement of Year 2000 compliance did not 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 to address their noncompliance, if any. 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 have evaluated the impact, assessed the potential problems of Year 2000 and they are currently taking steps 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 and adversely effect the Company. Subsequent event The Company has retained Financo, Inc. as its exclusive financial advisor to review and analyze the financial and strategic alternatives available to Cherokee Inc., with a view towards meeting its long-term strategic objectives, maximizing its shareholder value and further developing and growing its businesses and brand names. Strategic alternatives that are being evaluated may include the sale of Cherokee Inc., a merger or combination with a strategic operator, the formation of strategic alliances or joint ventures, the acquisition of another company, and other similar opportunities. 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. 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, Year 2000 readiness, 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 10 Exchange Commission (the "SEC"). 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 Third Quarter, a hypothetical 10% strengthening of the US dollar relative to the foreign currencies of countries where the Company operates was not material. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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. ITEM 2. CHANGES IN SECURITIES None 11 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION Any proposal relating to a proper subject which a stockholder may intend to be presented for action at the 2000 Annual Meeting of Stockholders must be received by the Company no later than January 17, 2000, to be considered for inclusion in the proxy material to be disseminated by the Board of Directors in accordance with the provisions of Rule 14a (8) (e) (1) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Copies of such proposals should be sent to the Corporate Secretary at the Company's principal executive offices. To be eligible for inclusion in such proxy materials, such proposals must conform to the requirements set forth in Regulation 14A under the Exchange Act. In addition, if the Company has not received notice on or before March 30, 2000 of any matter a stockholder intends to propose for a vote at the 2000 Annual Meeting of Stockholders, then a proxy solicited by the Board of Directors may be voted on such matter in the discretion of the proxy holder, without a discussion of the matter in the proxy statement soliciting such proxy and without such matter appearing as a separate matter on the proxy card. ITEM 6. EXHIBITS AND REPORTS ON 8-K The Company filed no reports on Form 8-K during the Third Quarter. List of Exhibits Exhibit Number Description of Exhibit - -------------- ---------------------- 27.1 Article 5 of Regulation S-X - Financial Data Schedule 12 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: December 6, 1999 CHEROKEE INC. By: /s/ Robert Margolis ------------------- Robert Margolis Chief Executive Officer By: /s/ Carol Gratzke ----------------- Carol Gratzke Chief Financial Officer 13 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS JAN-29-2000 JAN-29-2000 AUG-01-1999 JAN-31-1999 OCT-30-1999 OCT-30-1999 3,829 3,829 0 0 4,997 4,997 0 0 0 0 9,814 9,814 358 358 132 132 15,388 15,388 12,033 12,033 0 0 0 0 0 0 170 170 (25,369) (25,369) 15,388 15,388 6,574 18,973 6,574 18,973 0 0 1,688 5,760 0 0 0 0 689 2,163 3,401 11,337 1,363 4,538 2,038 6,799 0 0 0 0 0 0 2,038 6,799 0.24 0.78 0.24 0.78
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