UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 13, 2015
CHEROKEE INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
1-18640 |
|
95-4182437 |
(State or Other Jurisdiction of |
|
(Commission |
|
(I.R.S. Employer |
5990 Sepulveda Boulevard
Sherman Oaks, California 91411
(Address of Principal Executive Offices) (Zip Code)
(818) 908-9868
(Registrants telephone number, including area code)
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
EXPLANATORY NOTE
This Amendment No. 1 on Form 8-K/A (this Form 8-K/A) amends and supplements the Current Report on Form 8-K of Cherokee Inc. (the Company) filed with the Securities and Exchange Commission (the SEC) on October 19, 2015 (the Initial Form 8-K). The Initial Form 8-K reported that, on October 13, 2015, the Company, FFS Holdings, LLC (FFS), the sole owner and holding company of Flip Flop Shops Franchise Company, LLC (FFS Franchise Company), and FFS Merger Sub LLC, a wholly owned subsidiary of the Company (Merger Sub), entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which Merger Sub merged with and into FFS, with FFS continuing as the surviving corporation and a wholly owned subsidiary of the Company (the Merger). The Merger closed on October 13, 2015.
This Form 8-K/A is being filed to provide the financial statements and pro forma financial information required by Item 9.01 of Form 8-K, and no other modification to the Initial Form 8-K is being made by this Form 8-K/A. The financial statements and information filed herewith should be read in conjunction with the Initial Form 8-K and this Form 8-K/A, and the information previously reported in or filed with the Initial Form 8-K is hereby incorporated by reference into this Form 8-K/A.
The description of the Merger Agreement set forth in this Form 8-K/A is not intended to be complete and is qualified in its entirety by the full text of the Merger Agreement, which will be filed as Exhibit 2.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended October 31, 2015.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited financial statements of FFS Franchise Company as of December 31, 2014 and for the year then ended, and the notes related thereto, are attached hereto as Exhibit 99.1 and incorporated herein by reference.
The unaudited financial statements of FFS Franchise Company as of June 30, 2015 and for the six months ended June 30, 2015 and 2014, and the notes related thereto, are attached hereto as Exhibit 99.2 and incorporated herein by reference.
(b) Pro Forma Financial Information.
The unaudited pro forma combined financial information of the Company and FFS Franchise Company as of August 1, 2015 and for the year ended January 31, 2015 and the six months ended August 1, 2015, and the notes related thereto, is attached hereto as Exhibit 99.3 and incorporated herein by reference.
(d) Exhibits.
Exhibit |
|
Description |
|
|
|
23.1* |
|
Consent of Independent Auditor of Flip Flop Shops Franchise Company, LLC. |
|
|
|
99.1* |
|
Audited Financial Statements (Restated) of Flip Flop Shops Franchise Company, LLC, consisting of the following: (i) Independent Auditors Report; (ii) Balance Sheet (Restated) as of December 31, 2014; (iii) Statement of Income and Members Capital (Restated) for the year ended December 31, 2014; (iv) Statement of Cash Flows (Restated) for the year ended December 31, 2014; and (v) Notes to Audited Financial Statements (Restated). |
99.2* |
|
Unaudited Financial Statements (Restated) of Flip Flop Shops Franchise Company, LLC, consisting of the following: (i) Balance Sheets (Restated) as of June 30, 2015 and December 31, 2014; (ii) Statements of Income and Members Capital (Restated) for the six months ended June 30, 2015 and 2014; (iii) Statements of Cash Flows (Restated) for the six months ended June 30, 2015 and 2014; and (iv) Notes to Unaudited Financial Statements (Restated). |
|
|
|
99.3* |
|
Unaudited Pro Forma Financial Information of Cherokee Inc., consisting of the following: (i) Unaudited Pro Forma Condensed Combined Balance Sheet as of August 1, 2015; (ii) Unaudited Pro Forma Condensed Combined Statement of Income for the year ended January 31, 2015; (iii) Unaudited Pro Forma Condensed Combined Statement of Income for the six months ended August 1, 2015; and (iv) Notes to Unaudited Pro Forma Condensed Combined Financial Statements. |
* Filed herewith.
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 hereunto duly authorized.
|
CHEROKEE INC. | |
|
| |
December 9, 2015 |
By: |
/s/ Jason Boling |
|
|
Jason Boling |
|
|
Chief Financial Officer |
EXHIBIT INDEX
Exhibit |
|
Description |
|
|
|
23.1* |
|
Consent of Independent Auditors. |
|
|
|
99.1* |
|
Audited Financial Statements (Restated) of Flip Flop Shops Franchise Company, LLC for the year ended December 31, 2014, consisting of the following: (i) Independent Auditors Report; (ii) Balance Sheet (Restated) as of December 31, 2014; (iii) Statement of Income and Members Capital (Restated) for the year ended December 31, 2014; (iv) Statement of Cash Flows (Restated) for the year ended December 31, 2014; and (v) Notes to Audited Financial Statements (Restated). |
|
|
|
99.2* |
|
Unaudited Financial Statements (Restated) of Flip Flop Shops Franchise Company, LLC for the six months ended June 30, 2015 and 2014, consisting of the following: (i) Balance Sheets (Restated) as of June 30, 2015 and 2014; (ii) Statements of Income and Members Capital (Restated) for the six months ended June 30, 2015 and 2014; (iii) Statements of Cash Flows (Restated) for the six months ended June 30, 2015 and 2014; and (iv) Notes to Unaudited Financial Statements (Restated). |
|
|
|
99.3* |
|
Unaudited Pro Forma Financial Information of Cherokee Inc., consisting of the following: (i) Unaudited Pro Forma Condensed Combined Balance Sheet as of August 1, 2015; (ii) Unaudited Pro Forma Condensed Combined Statement of Income for the year ended January 31, 2015; (iii) Unaudited Pro Forma Condensed Combined Statement of Income for the six months ended August 1, 2015; and (iv) Notes to Unaudited Pro Forma Condensed Combined Financial Statements. |
* Filed herewith.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Cherokee Inc. Registration Statement Nos. 333-190795, 333-168273, 333-135773, 333-107470, 333-14533, 333-57503 and 333-49865 on Form S-8 and in Registration Statement Nos. 333-172359 and 333-205175 on Form S-3 of our report dated November 5, 2015, with respect to the restated financial statements of Flip Flop Shops Franchise Company, LLC as of and for the year ended December 31, 2014, which appear in this Current Report on Form 8-K/A of Cherokee Inc.
|
/s/ ROBIN BROWN & ASSOCIATES, LLC |
Alpharetta, Georgia
December 9, 2015
Exhibit 99.1
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
FINANCIAL STATEMENTS
(Restated)
For the Year Ended December 31, 2014
12850 Highway 9 Suite 600-330 · Alpharetta, GA 30004 | office: 770-932-9875 fax: 866-611-7150 | www.RobinBrownCPA.com
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
TABLE OF CONTENTS
|
PAGE NO. |
INDEPENDENT AUDITORS REPORT |
1 |
|
|
FINANCIAL STATEMENTS (RESTATED) |
|
|
|
Balance Sheet (Restated) |
2 |
Statement of Income and Members Capital (Restated) |
3 |
Statement of Cash Flows (Restated) |
4 |
Notes to Financial Statements (Restated) |
5-9 |
INDEPENDENT AUDITORS REPORT
To the Member
Flip Flop Shops Franchise Company, LLC
Kennesaw, Georgia
We have audited the accompanying balance sheet (restated) of Flip Flop Shops Franchise Company, LLC (a limited liability company) as of December 31, 2014, and the related statements of income and members capital (restated), and cash flows (restated) for the year then ended.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements (restated) referred to above present fairly, in all material respects, the financial position of Flip Flop Shops Franchise Company, LLC as of December 31, 2014, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 8 to the financial statements (restated), the 2014 financial statements have been restated to reflect a change in accounting principle. We previously audited the financial statements of Flip Flop Shops Franchise Company, LLC as of December 31, 2014, and for the year then ended and we issued an unqualified opinion on those audited financial statements in our report dated March 25, 2015. Our opinion is not modified with respect to this matter.
ROBIN BROWN & ASSOCIATES, LLC
Certified Public Accountants
November 5, 2015
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
BALANCE SHEET
DECEMBER 31, 2014
(RESTATED)
|
|
2014 |
| |
ASSETS |
|
|
| |
Cash - Operating and Money Market Accounts |
|
$ |
290,830 |
|
Cash - Restricted |
|
11,431 |
| |
Total Cash - Note 1 |
|
302,261 |
| |
Accounts Receivable - Note 1 |
|
63,930 |
| |
Affiliate Loan Receivable - Note 6 |
|
78,798 |
| |
Other Receivables |
|
29,052 |
| |
Total Current Assets |
|
474,041 |
| |
Computers and Equipment, net of accumulated depreciation of $29,233 - Notes 1 & 2 |
|
5,865 |
| |
Total Assets |
|
$ |
479,906 |
|
LIABILITIES AND MEMBERS CAPITAL |
|
|
| |
Accounts Payable |
|
$ |
156,336 |
|
Brand Building Fund Obligations |
|
11,431 |
| |
Affiliate Notes Payable - Note 6 |
|
|
| |
Deferred Revenue - short term - Note 1 |
|
342,000 |
| |
Total Current Liabilities |
|
509,767 |
| |
Deferred Revenue - long term - Note 1 |
|
2,128,000 |
| |
Total Long-Term Liabilities |
|
2,128,000 |
| |
Total Liabilities |
|
2,637,767 |
| |
Members Capital - Note 3 |
|
(2,157,861 |
) | |
Total Liabilities and Members Capital |
|
$ |
479,906 |
|
See Accompanying Notes and Independent Auditors Report
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
STATEMENT OF INCOME AND MEMBERS CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2014
(RESTATED)
|
|
2014 |
| |
Revenue |
|
|
| |
Franchise Fees |
|
$ |
918,430 |
|
Royalty Fees |
|
1,239,945 |
| |
Total Revenue |
|
2,158,375 |
| |
Expenses |
|
|
| |
Selling and Marketing |
|
516,380 |
| |
General and Administrative |
|
1,602,594 |
| |
Depreciation |
|
5,055 |
| |
Legal and Professional Fees |
|
179,171 |
| |
Operating Expenses |
|
2,303,200 |
| |
Net Income (Loss) from Operations |
|
(144,825 |
) | |
Other Income (Expense) |
|
|
| |
Other Income |
|
57,500 |
| |
Gain/Loss on Sale of Fixed Assets |
|
|
| |
Total Other Income (Expense) |
|
57,500 |
| |
Net Income (Loss) |
|
(87,325 |
) | |
Members Capital, Beginning of Year |
|
25,464 |
| |
Cumulative Effect of Change in Accounting Principle - Note 8 |
|
(1,996,000 |
) | |
Members Contributions |
|
|
| |
Members Distributions |
|
(100,000 |
) | |
Members Capital, End of Year |
|
$ |
(2,157,861 |
) |
See Accompanying Notes and Independent Auditors Report
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2014
(RESTATED)
|
|
2014 |
| |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
| |
Net Income (Loss) |
|
$ |
(87,325 |
) |
Adjustments: |
|
|
| |
Depreciation |
|
5,055 |
| |
(Increase) decrease in accounts receivable |
|
7,217 |
| |
(Increase) decrease in other receivables |
|
(28,340 |
) | |
Increase (decrease) in accounts payable |
|
41,333 |
| |
Increase (decrease) in deferred revenue |
|
474,000 |
| |
Net cash provided (used) by operating activities |
|
411,940 |
| |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
| |
Purchase of computers and equipment |
|
(4,266 |
) | |
Sale of computers and equipment |
|
|
| |
Net cash used by investing activities |
|
(4,266 |
) | |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
| |
Loan Receivables |
|
(605 |
) | |
Proceeds from (repayments of) notes payable |
|
(65,065 |
) | |
Contributions from Member |
|
|
| |
Distributions to Member |
|
(100,000 |
) | |
Net cash provided (used) by financing activities |
|
(165,670 |
) | |
NET INCREASE (DECREASE) IN CASH |
|
242,004 |
| |
CASH, BEGINNING |
|
48,826 |
| |
CASH, ENDING |
|
$ |
290,830 |
|
RESTRICTED CASH, BEGINNING |
|
$ |
43,344 |
|
Proceeds from Restricted Brand Building Fees |
|
164,731 |
| |
Use of Restricted Brand Building Fees |
|
(196,644 |
) | |
RESTRICTED CASH, ENDING |
|
$ |
11,431 |
|
Cash paid for Interest Expense |
|
$ |
|
|
Cash paid for Income Taxes |
|
$ |
|
|
See Accompanying Notes and Independent Auditors Report
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2014
(RESTATED)
NOTE 1 ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
Organization
Flip Flop Shops Franchise Company, LLC (the Company) was established on August 24, 2007 in Delaware. The Company is a single member LLC engaged in offering and selling franchises throughout the United States and internationally for the operation of franchised stores focused on high-end flip flops and sandals with seasonal variety, including but not limited to, slippers and related accessories. The Company is owned by FFS Holdings, LLC which is owned by active and passive members.
The Company completed a uniform franchise offering circular and commenced selling franchises during 2007. As of December 31, 2014, the Company had 93 franchise stores in operation and an additional 50 franchise agreements effective for a total of 143 franchise agreements currently effective. In addition, there are four master franchise agreements: one master franchise agreement covers Canada, one covers South Africa, Zimbabwe, and Mauritius; one covers various jurisdictions in the Middle East, and one covers the Caribbean.
Basis of Presentation
The Company prepares its financial statements in accordance with generally accepted accounting principles. This basis of accounting involves the application of accrual accounting; consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred.
These financial statements are prepared in conformity with accounting principles generally accepted in the United States which comply, in all material respects, with Canadian generally accepted accounting principles.
Cash
Cash consists of a business checking account maintained at one financial institution. The account is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At December 31, 2014, the Companys cash balance exceeded the FDIC insurance limits by $40,830.
The Company considers all cash in bank and investments in highly liquid debt instruments with maturities of three months or less to be cash equivalents.
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2014
(RESTATED)
NOTE 1 ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)
Restricted Cash
The Company collects one half of one percent (0.5%) of the franchisees monthly gross revenue for brand building expenses. This money is maintained in a separate bank account from the Companys general operating account and is disbursed only for brand building expenditures approved by the franchisor to maximize general public recognition and acceptance of the Licensed Marks for the benefit of the Flip Flop Shops system.
Accounts Receivable
Accounts receivable consist of amounts management expects to collect from franchisees for royalties and franchise fees, net of any allowance for uncollectible accounts. On a periodic basis, the Company evaluates its accounts receivable and when deemed necessary, establishes an allowance for doubtful accounts. The allowance is based on its perceived collectability of customer balances, history of collections and current credit conditions. For amounts that become uncollectible, the Company uses the allowance method to recognize bad debts. Accounts receivable as of December 31, 2014 was $63,930. The Company considers accounts receivable to be fully collectible. Accordingly, no allowance for doubtful accounts was required to be recorded at December 31, 2014.
Property and Equipment
Property and equipment are carried at cost. For financial reporting purposes, property and equipment are depreciated using the straight-line method at rates based upon the following estimated useful lives:
Computers and Equipment |
|
3 Years |
Furniture and Fixtures |
|
7 Years |
Revenue Recognition
The Company derives its income from franchise fees and royalty agreements with the franchisees stores bearing the name Flip Flop Shops. Revenue from franchise fees is recognized as deferred revenue when the franchise agreement is executed. Franchise fee revenue is recognized in income when earned which is deemed to be when the franchise operations commence for individual franchises and over the life of the franchise agreement for master franchises. Deferred revenue as of December 31, 2014 was $2,470,000 with $342,000 classified as short-term liabilities and $2,128,000 as long-term liabilities.
Royalties from individual franchisees are based upon a percentage of each franchisees sales and are recognized as franchise revenues as the fees are earned and become receivable from the franchisee.
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2014
(RESTATED)
NOTE 1 ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)
Organizational Expense
The Company incurred various expenses during the formation of the Company. These expenses relate to the legal assistance in organizing franchise documents and the initial Uniform Franchise Offering Circular, currently referred to as the Franchise Disclosure Document.
Income Tax
The Company itself is not a taxpaying entity for purposes of federal and state income taxes. Federal and state income taxes of the Company are computed on the owners total income from all sources; accordingly; no provision for income taxes is made in these statements.
Advertising Costs
Advertising costs are expensed in the period in which they are incurred. Advertising expense for the year ended December 31, 2014 was $93,025.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2 PROPERTY AND EQUIPMENT
The following illustrates activity in the property and equipment accounts for the year ended December 31, 2014:
|
|
Cost as of |
|
Additions |
|
Disposals |
|
Cost as of |
|
Accumulated |
|
Net |
| ||
Computer and equipment |
|
23,298 |
|
4,266 |
|
|
|
27,564 |
|
21,699 |
|
5,865 |
| ||
Furniture and fixtures |
|
7,534 |
|
|
|
|
|
7,534 |
|
7,534 |
|
|
| ||
Net property and equipment |
|
$ |
30,832 |
|
4,266 |
|
|
|
35,098 |
|
29,233 |
|
$ |
5,865 |
|
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2014
(RESTATED)
NOTE 3 MEMBERS CAPITAL
The member initially contributed $1,000 cash for 100% equity and profit sharing interests. The member contributed additional cash equal to $100,000 in 2010. There were no contributions in 2014.
NOTE 4 FRANCHISE AGREEMENTS
As of December 31, 2014, the Company had 143 franchise agreements and four master franchise agreements effective.
NOTE 5 - SUBSEQUENT EVENTS
In accordance with the FASB issued Accounting Standard Codification (ASC) 855-10 (formerly known as Statement of Financial Accounting Standards No. 165), subsequent events have been evaluated through November 5, 2015, the date the financial statements have been issued. On October 13, 2015, all of the issued and outstanding equity interests of the sole member of the Company, FFS Holdings, LLC, were acquired by Cherokee Inc. Upon consummation of the merger agreement, FFS Holdings, LLC became a wholly owned subsidiary of Cherokee Inc., a publicly-traded company. No other subsequent events outside of the normal scope of operations were noted through that date.
NOTE 6 RELATED PARTIES
The Company is a single member LLC owned by FFS Holdings, LLC. FFS Holdings, LLC is owned by active and passive members, including FFS, Inc. One of the active members provides office space for himself along with storage space for company files and documents at no charge for rent or reimbursements for overhead. The other active members work from virtual offices also provided at no charge for rent or reimbursements for overhead.
The Company had a related party receivable as of December 31, 2014 of $78,798, respectively, due from active members of FFS Holdings, LLC, the majority of which represents federal income taxes paid by the Company on behalf of a member.
NOTE 7 CONTINGENCIES
A search for commitments and contingencies was performed in accordance with the FASB issued Accounting Standard Codification (ASC) 450 (formerly known as Statement of Financial Accounting Standards No. 5) noting that the Company is engaged in ongoing litigation which is common in the franchise industry. The results of the ongoing litigation are not known at this time and according to Generally Accepted Auditing Standards no contingent liability is included in the financial statements based upon the opinion of the counsel for the Company in this ongoing litigation. Additional information on any matters of litigation involving the Company can be found in the Franchise Disclosure Document.
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2014
(RESTATED)
NOTE 8 CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2014, the Company elected to change its revenue recognition policy to recognize franchise fee revenue when operations commence for individual franchises and over the life of the franchise agreement for master franchises; whereas, in prior years revenue was recognized when the franchise agreement was executed. The new method of accounting for revenue was adopted to comply with SEC regulations due to the acquisition of the sole member of the Company by Cherokee Inc., a publicly-traded company, as discussed in Note 5.
The following table reflects the effect of the change in accounting principle on previously issued financial statements as of and for the year ended December 31, 2014:
|
|
As Previously |
|
Change |
|
Restated |
| |||
Balance Sheet |
|
|
|
|
|
|
| |||
Deferred Revenue short term |
|
$ |
|
|
|
342,000 |
|
$ |
342,000 |
|
Current Liabilities |
|
$ |
167,767 |
|
342,000 |
|
$ |
509,767 |
| |
Deferred Revenue long term |
|
$ |
|
|
|
2,128,000 |
|
$ |
2,128,000 |
|
Long-Term Liabilities |
|
$ |
|
|
|
2,128,000 |
|
$ |
2,128,000 |
|
Total Liabilities |
|
$ |
167,767 |
|
2,470,000 |
|
$ |
2,637,767 |
| |
Members Capital |
|
$ |
312,139 |
|
(2,470,000 |
) |
$ |
(2,157,861 |
) | |
Total Liabilities & Members Capital |
|
$ |
479,906 |
|
|
|
$ |
479,906 |
| |
Statement of Income & Members Capital |
|
|
|
|
|
|
| |||
Franchise Fee Revenue |
|
$ |
1,392,430 |
|
(474,000 |
) |
$ |
918,430 |
| |
Total Revenue |
|
$ |
2,632,375 |
|
(474,000 |
) |
$ |
2,158,375 |
| |
Net Income (Loss) |
|
$ |
386,675 |
|
(474,000 |
) |
$ |
(87,325 |
) | |
Members Capital, beginning of year |
|
$ |
25,464 |
|
(1,996,000 |
) |
$ |
(1,970,536 |
) | |
Members Capital, end of year |
|
$ |
312,139 |
|
(2,470,000 |
) |
$ |
(2,157,861 |
) |
Exhibit 99.2
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
BALANCE SHEET
JUNE 30, 2015 AND DECEMBER 31, 2014
(RESTATED)
|
|
June 30, 2015 |
|
December 31, 2014 |
| ||
ASSETS |
|
|
|
|
| ||
Cash - Operating and Money Market Accounts |
|
$ |
270,344 |
|
$ |
290,830 |
|
Cash - Restricted |
|
49,763 |
|
11,431 |
| ||
Total Cash |
|
320,107 |
|
302,261 |
| ||
|
|
|
|
|
| ||
Accounts Receivable |
|
44,277 |
|
63,930 |
| ||
Affiliate Loan Receivable |
|
86,081 |
|
78,798 |
| ||
Other Receivables |
|
29,052 |
|
29,052 |
| ||
|
|
|
|
|
| ||
Total Current Assets |
|
479,517 |
|
474,041 |
| ||
|
|
|
|
|
| ||
Computers and Equipment, net of accumulated depreciation of $31,078 and $29,233 |
|
6,712 |
|
5,865 |
| ||
|
|
|
|
|
| ||
Total Assets |
|
$ |
486,229 |
|
$ |
479,906 |
|
|
|
|
|
|
| ||
LIABILITIES AND MEMBERS CAPITAL |
|
|
|
|
| ||
Accounts Payable |
|
$ |
137,781 |
|
$ |
156,336 |
|
Brand Building Fund Obligations |
|
49,763 |
|
11,431 |
| ||
Affiliate Notes Payable |
|
|
|
|
| ||
Deferred Revenue - short term |
|
290,000 |
|
342,000 |
| ||
|
|
|
|
|
| ||
Total Current Liabilities |
|
477,544 |
|
509,767 |
| ||
|
|
|
|
|
| ||
Deferred Revenue - long term |
|
2,339,000 |
|
2,128,000 |
| ||
|
|
|
|
|
| ||
Total Long-Term Liabilities |
|
2,339,000 |
|
2,128,000 |
| ||
|
|
|
|
|
| ||
Total Liabilities |
|
2,816,544 |
|
2,637,767 |
| ||
|
|
|
|
|
| ||
Members Capital |
|
(2,330,315 |
) |
(2,157,861 |
) | ||
|
|
|
|
|
| ||
Total Liabilities and Members Capital |
|
$ |
486,229 |
|
$ |
479,906 |
|
See Accompanying Notes and Independent Auditors Report
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
STATEMENT OF INCOME AND MEMBERS CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(RESTATED)
|
|
June 30, 2015 |
|
June 30, 2014 |
| ||
Revenue |
|
|
|
|
| ||
Franchise Fees |
|
$ |
261,000 |
|
$ |
609,960 |
|
Royalty Fees |
|
640,463 |
|
639,947 |
| ||
Total Revenue |
|
901,463 |
|
1,249,907 |
| ||
Expenses |
|
|
|
|
| ||
Selling and Marketing |
|
240,807 |
|
342,557 |
| ||
General and Administrative |
|
745,052 |
|
897,719 |
| ||
Depreciation |
|
1,845 |
|
2,528 |
| ||
Legal and Professional Fees |
|
102,865 |
|
36,243 |
| ||
Operating Expenses |
|
1,090,569 |
|
1,279,047 |
| ||
Net Income (Loss) from Operations |
|
(189,106 |
) |
(29,140 |
) | ||
Other Income (Expense) |
|
|
|
|
| ||
Other Income |
|
16,652 |
|
26,000 |
| ||
Gain/Loss on Sale of Fixed Assets |
|
|
|
|
| ||
Total Other Income (Expense) |
|
16,652 |
|
26,000 |
| ||
Net Income (Loss) |
|
(172,454 |
) |
(3,140 |
) | ||
Members Capital, Beginning of Year |
|
312,139 |
|
25,464 |
| ||
Cumulative Effect of Change in Accounting Principle |
|
(2,470,000 |
) |
(1,996,000 |
) | ||
Members Contributions |
|
|
|
|
| ||
Members Distributions |
|
|
|
(50,000 |
) | ||
Members Capital, End of Year |
|
$ |
(2,330,315 |
) |
$ |
(2,023,676 |
) |
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(RESTATED)
|
|
June 30, 2015 |
|
June 30, 2014 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
| ||
Net Income (Loss) |
|
|
|
|
| ||
Adjustments: |
|
$ |
(172,454 |
) |
$ |
(3,140 |
) |
Depreciation |
|
1,845 |
|
2,528 |
| ||
(Increase) decrease in accounts receivable |
|
19,653 |
|
27,539 |
| ||
(Increase) decrease in other receivables |
|
|
|
712 |
| ||
Increase (decrease) in accounts payable |
|
(18,555 |
) |
(54,096 |
) | ||
Increase (decrease) in deferred revenue |
|
159,000 |
|
525,000 |
| ||
Net cash provided (used) by operating activities |
|
(10,511 |
) |
498,543 |
| ||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
| ||
Purchase of computers and equipment |
|
(2,692 |
) |
(2,041 |
) | ||
Sale of computers and equipment |
|
|
|
|
| ||
Net cash used by investing activities |
|
(2,692 |
) |
(2,041 |
) | ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
| ||
Loan Receivables |
|
(7,283 |
) |
|
| ||
Proceeds from (repayments of) notes payable |
|
|
|
(65,065 |
) | ||
Contributions from Member |
|
|
|
|
| ||
Distributions to Member |
|
|
|
(50,000 |
) | ||
Net cash provided (used) by financing activities |
|
(7,283 |
) |
(115,065 |
) | ||
NET INCREASE (DECREASE) IN CASH |
|
(20,486 |
) |
381,437 |
| ||
CASH, BEGINNING |
|
290,830 |
|
48,826 |
| ||
CASH, ENDING |
|
$ |
270,344 |
|
$ |
430,263 |
|
RESTRICTED CASH, BEGINNING |
|
$ |
11,431 |
|
$ |
43,344 |
|
Proceeds from Restricted Brand Building Fees |
|
62,084 |
|
73,505 |
| ||
Use of Restricted Brand Building Fees |
|
(23,752 |
) |
(104,597 |
) | ||
RESTRICTED CASH, ENDING |
|
$ |
49,763 |
|
$ |
12,252 |
|
Cash paid for Interest Expense |
|
$ |
|
|
$ |
|
|
Cash paid for Income Taxes |
|
$ |
|
|
$ |
|
|
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
Organization
Flip Flop Shops Franchise Company, LLC (the Company) was established on August 24, 2007 in Delaware. The Company is a single member LLC engaged in offering and selling franchises throughout the United States and internationally for the operation of franchised stores focused on high-end flip flops and sandals with seasonal variety, including but not limited to, slippers and related accessories. The Company is owned by FFS Holdings, LLC which is owned by active and passive members.
The Company completed a uniform franchise offering circular and commenced selling franchises during 2007. There are four master franchise agreements: one master franchise agreement covers Canada, one covers South Africa, Zimbabwe, and Mauritius; one covers various jurisdictions in the Middle East, and one covers the Caribbean.
Basis of Presentation
The Company prepares its financial statements in accordance with generally accepted accounting principles. This basis of accounting involves the application of accrual accounting; consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred.
These financial statements arc prepared in conformity with accounting principles generally accepted in the United States.
Cash
Cash consists of a business checking account maintained at one financial institution. The account is insured by the Federal Deposit Insurance Corpora tion (FDIC) up to $250,000.
The Company considers all cash in bank and investments in highly liquid debt instruments with maturities of three months or less to be cash equivalents.
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)
Restricted Cash
The Company collects one half of one percent (0.5%) of the franchisees monthly gross revenue for brand building expenses. This money is maintained in a separate bank account from the Companys general operating account and is disbursed only for brand building expenditures approved by the franchisor to maximize general public recognition and acceptance of the Licensed Marks for the benefit of the Flip Flop Shops system.
Accounts Receivable
Accounts receivable consist of amounts management expects to collect from franchisees for royalties and franchise fees, net of any allowance for uncollectible accounts. On a periodic basis, the Company evaluates its accounts receivable and when deemed necessary, establishes an allowance for doubtful accounts. The allowance is based on its perceived collectability of customer balances, history of collections and current credit conditions. For amounts that become uncollectible, the Company uses the allowance method to recognize bad debts. Accounts receivable as of June 30, 2015 was $44,277. The Company considers accounts receivable to be fully collectible. Accordingly, no allowance for doubtful accounts was required to be recorded at June 30, 2015.
Property and Equipment
Property and equipment arc carried at cost. For financial reporting purposes, property and equipment are depreciated using the straight-line method at rates based upon the following estimated useful lives:
Computers and Equipment |
|
3 Years |
Furniture and Fixtures |
|
7 Years |
Revenue Recognition
The Company derives its income from franchise fees and royalty agreements with the franchisees stores bearing the name Flip Flop Shops. Revenue from franchise fees is recognized as deferred revenue when the franchise agreement is executed. Franchise fee revenue is recognized in income when earned which is deemed to be when the franchise operations commence for individual franchises and over the life of the franchise agreement for master franchises
Royalties from individual franchisees are based upon a percentage of each franchisees sales and are recognized as franchise revenues as the fees are earned and become receivable from the franchisee.
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)
Organizational Expense
The Company incurred various expenses during the formation of the Company. These expenses relate to the legal assistance in organizing franchise documents and the initial Uniform Franchise Offering Circular, currently referred to as the Franchise Disclosure Document.
Income Tax
The Company itself is not a taxpaying entity for purposes of federal and state income taxes. Federal and state income taxes of the Company are computed on the owners total income from all sources; accordingly; no provision for income taxes is made in these statements.
Advertising Costs
Advertising costs are expensed in the period in which they are incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FLIP FLOP SHOPS FRANCHISE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - MEMBERS CAPITAL
The member initially contributed $1,000 cash for 100% equity and profit sharing interests. The member contributed additional cash equal to $100,000 in 2010. There were no contributions in 2014.
NOTE 3 - SUBSEQUENT EVENTS
On October 13, 2015, all of the issued and outstanding equity interests of the sole member of the Company, FFS Holdings, LLC, were acquired by Cherokee Inc. Upon consummation of the merger agreement, FFS Holdings, LLC became a wholly owned subsidiary of Cherokee Inc., a publicly-traded company. No other subsequent events outside of the normal scope of operations were noted through that date.
NOTE 4 RELATED PARTIES
The Company is a single member LLC owned by FFS Holdings, LLC. FFS Holdings, LLC is owned by active and passive members, including FFS, Inc. One of the active members provides office space for himself along with storage space for company files and documents at no charge for rent or reimbursements for overhead. The other active members work from virtual offices also provided at no charge for rent or reimbursements for overhead.
The Company had a related party receivable as of June 30, 2015 of $86,081, respectively, due from active members of FFS Holdings, LLC, the majority of which represents federal income taxes paid by the Company on behalf of a member.
NOTE 5 - CONTINGENCIES
The Company is engaged in ongoing litigation which is common in the franchise industry. The results of the ongoing litigation are not known at this time and according to Generally Accepted Auditing Standards no contingent liability is included in the financial statements.
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 13, 2015, Cherokee Inc. (the Company) and FFS Holdings, LLC (FFS), the sole owner and holding company of Flip Flop Shops Franchise Company, LLC (FFS Franchise Company), completed a merger (the Merger). Pursuant to the terms of the Agreement and Plan of Merger, dated October 13, 2015, (the Merger Agreement), by and among the Company, FFS, FFS Merger Sub LLC, a wholly owned subsidiary of the Company (Merger Sub) and certain other parties, Merger Sub merged with and into FFS, with FFS continuing as the surviving corporation and a wholly owned subsidiary of the Company.
The unaudited pro forma information of the Company and FFS is presented for informational purposes only, as an aid to understanding the entities combined financial results. This unaudited pro forma condensed combined financial information should not be considered a substitute for the historical financial information prepared in accordance with generally accepted accounting principles (GAAP), as presented in the Companys reports on Form 10-Q and Form 10-K and other filings with the Securities and Exchange Commission (the SEC). The unaudited pro forma condensed combined financial information disclosed in this report is for illustrative purposes only and is not indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or of the Companys future consolidated results of operations.
The unaudited pro forma condensed combined financial information is based on the preliminary information available and managements preliminary valuation of the fair values of intangible assets acquired at the acquisition date. A final determination of these estimated fair values will be made in due course. The finalization of the Companys acquisition accounting assessment may result in changes to the valuation of assets acquired, which changes could be material.
The unaudited pro forma condensed combined balance sheet at August 1, 2015 is presented as if the Merger had been completed on August 1, 2015. The unaudited pro forma condensed combined statements of income for the year ended January 31, 2015 and six months ended August 1, 2015 are presented as if the Merger had been completed on February 2, 2014. The unaudited pro forma condensed combined financial information is derived from and should be read in conjunction with historical consolidated financial statements and related notes of the Company, which are included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2015, and its Quarterly Report on Form 10-Q for the fiscal period ended August 1, 2015, as previously filed with the SEC, and the historical financial information of FFS Franchise Company as of and for the year ended December 31, 2014 and the six months ended June 30, 2015, which are filed as Exhibits 99.1 and 99.2 to the Current Report on Form 8-K/A to which this is an exhibit. The unaudited pro forma condensed combined balance sheet as of August 1, 2015, and the unaudited pro forma condensed combined statements of income for the year ended January 31, 2015 and the six months ended August 1, 2015, are presented herein.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
August 1, 2015
(amounts in thousands)
|
|
Cherokee Inc. |
|
Flip Flop Shops |
|
Pro Forma |
|
Notes |
Pro Forma |
| ||
Assets |
|
|
|
|
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
9,797 |
|
320 |
|
(6,000 |
) |
(2) |
$ |
4,117 |
|
Receivables |
|
8,317 |
|
159 |
|
|
|
|
8,476 |
| ||
Income taxes receivable |
|
1,291 |
|
|
|
|
|
|
1,291 |
| ||
Prepaid expenses and other current assets |
|
446 |
|
|
|
|
|
|
446 |
| ||
Deferred tax asset |
|
412 |
|
|
|
44 |
|
(3) |
456 |
| ||
Total current assets |
|
20,263 |
|
479 |
|
(5,956 |
) |
|
14,786 |
| ||
Intangible Assets, net |
|
40,706 |
|
|
|
7,000 |
|
(4) |
47,706 |
| ||
Goodwill |
|
|
|
|
|
5,979 |
|
(5) |
5,979 |
| ||
Deferred tax asset |
|
272 |
|
|
|
535 |
|
(3) |
807 |
| ||
Property and equipment, net |
|
1,251 |
|
7 |
|
|
|
|
1,258 |
| ||
Other assets |
|
44 |
|
|
|
|
|
|
44 |
| ||
Total assets |
|
$ |
62,536 |
|
486 |
|
7,558 |
|
|
$ |
70,580 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||
Accounts payable and other accrued payables |
|
$ |
1,624 |
|
187 |
|
|
|
|
$ |
1,811 |
|
Current portion of long term debt |
|
7,308 |
|
|
|
1,200 |
|
(6) |
8,508 |
| ||
Income taxes payable |
|
|
|
|
|
|
|
|
|
| ||
Deferred revenuecurrent |
|
38 |
|
290 |
|
(75 |
) |
(7) |
253 |
| ||
Accrued compensation payable |
|
556 |
|
|
|
|
|
|
556 |
| ||
Total current liabilities |
|
9,526 |
|
477 |
|
1,125 |
|
|
11,128 |
| ||
Long term liabilities: |
|
|
|
|
|
|
|
|
|
| ||
Long term debt |
|
14,182 |
|
|
|
4,800 |
|
(6) |
18,982 |
| ||
Income taxes payable |
|
399 |
|
|
|
|
|
|
399 |
| ||
Other non-current |
|
356 |
|
2,339 |
|
(921 |
) |
(7) |
1,774 |
| ||
Total liabilities |
|
24,463 |
|
2,816 |
|
5,004 |
|
|
32,283 |
| ||
Total stockholders equity |
|
38,073 |
|
(2,330 |
) |
2,554 |
|
|
38,297 |
| ||
Total liabilities and stockholders equity |
|
$ |
62,536 |
|
486 |
|
7,558 |
|
|
$ |
70,580 |
|
See the accompanying notes, which are an integral part of this unaudited pro forma condensed combined financial information.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year ended January 31, 2015
(amounts in thousands, except per share amounts)
|
|
Cherokee |
|
Flip Flop Shops |
|
|
|
|
|
| ||
|
|
Inc. |
|
Company, LLC |
|
|
|
|
Pro Forma |
| ||
|
|
January 31, |
|
December 31, |
|
Pro Forma |
|
|
Condensed |
| ||
|
|
2015 |
|
2014 (1) |
|
Adjustments |
|
Notes |
Combined |
| ||
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues |
|
$ |
34,968 |
|
2,158 |
|
(296 |
) |
(8) |
36,830 |
| |
Selling, general and administrative expenses |
|
18,648 |
|
2,303 |
|
|
|
|
20,951 |
| ||
Amortization of trademarks |
|
932 |
|
|
|
118 |
|
(9) |
1,050 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
15,388 |
|
(145 |
) |
(414 |
) |
|
14,829 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Other income (expense): |
|
|
|
|
|
|
|
|
|
| ||
Interest expense |
|
(854 |
) |
|
|
(180 |
) |
(10) |
(1,034 |
) | ||
Interest income and other income (expense), net |
|
|
|
58 |
|
|
|
|
58 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Total other income (expense), net |
|
(854 |
) |
58 |
|
(180 |
) |
|
(976 |
) | ||
|
|
|
|
|
|
|
|
|
|
| ||
Income before income taxes |
|
14,534 |
|
(87 |
) |
(594 |
) |
|
13,853 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Income tax provision |
|
4,714 |
|
|
|
(229 |
) |
(11) |
4,485 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Net income |
|
$ |
9,820 |
|
(87 |
) |
(365 |
) |
|
9,368 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
Net income per common share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Basic earnings per share |
|
$ |
1.17 |
|
|
|
|
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Diluted earnings per share |
|
$ |
1.15 |
|
|
|
|
|
|
$ |
1.10 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Weighted average common shares outstanding attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
| ||
Basic |
|
8,429 |
|
|
|
|
|
|
8,429 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Diluted |
|
8,543 |
|
|
|
|
|
|
8,543 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Dividends declared per common share |
|
$ |
0.10 |
|
|
|
|
|
|
$ |
0.10 |
|
See the accompanying notes, which are an integral part of this unaudited pro forma condensed combined financial information.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Six Months Ended August 1, 2015
(amounts in thousands, except per share amounts)
|
|
|
|
Flip Flop Shops |
|
|
|
|
|
| ||
|
|
|
|
Franchise |
|
|
|
|
Pro Forma |
| ||
|
|
Cherokee Inc. |
|
Company, LLC |
|
Pro Forma |
|
|
Condensed |
| ||
|
|
August 1, 2015 |
|
June 30, 2015 (1) |
|
Adjustments |
|
Notes |
Combined |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Royalty revenues |
|
$ |
18,712 |
|
901 |
|
(83 |
) |
(8) |
$ |
19,530 |
|
Selling, general and administrative expenses |
|
9,361 |
|
1,090 |
|
|
|
|
10,451 |
| ||
Amortization of trademarks |
|
421 |
|
|
|
59 |
|
(9) |
480 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
8,930 |
|
(189 |
) |
(142 |
) |
|
8,599 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Other income (expense): |
|
|
|
|
|
|
|
|
|
| ||
Interest (expense) |
|
(340 |
) |
|
|
(90 |
) |
(10) |
(430 |
) | ||
Interest income and other income (expense), net |
|
(2 |
) |
17 |
|
|
|
|
15 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Total other income (expense), net |
|
(342 |
) |
17 |
|
(90 |
) |
|
(415 |
) | ||
|
|
|
|
|
|
|
|
|
|
| ||
Income before provision for income taxes |
|
8,588 |
|
(172 |
) |
(232 |
) |
|
8,184 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Income tax provision |
|
3,087 |
|
|
|
(90 |
) |
(11) |
2,997 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Net income |
|
$ |
5,501 |
|
(172 |
) |
(142 |
) |
|
$ |
5,187 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Basic earnings per share |
|
$ |
0.64 |
|
|
|
|
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Diluted earnings per share |
|
$ |
0.62 |
|
|
|
|
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
| ||
Basic |
|
8,631 |
|
|
|
|
|
|
8,631 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Diluted |
|
8,875 |
|
|
|
|
|
|
8,875 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Dividends declared per share |
|
$ |
0.00 |
|
|
|
|
|
|
$ |
0.00 |
|
See the accompanying notes, which are an integral part of this unaudited pro forma condensed combined financial information.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(amounts in thousands, except percentages)
Note 1 Basis of Presentation
The unaudited pro forma condensed combined balance sheet as of August 1, 2015 and the unaudited pro forma condensed combined statements of income for the year ended January 31, 2015 and the six months ended August 1, 2015 are based on the Companys unaudited historical financial statements as of and for the six months ended August 1, 2015 and its historical audited financial statements for the year ended January 31, 2015, and FFS Franchise Companys unaudited historical financial statements as of and for the six months ended June 30, 2015 and historical audited financial statements for the year ended December 31, 2014, after giving effect to the Merger on October 13, 2015 and the assumptions and adjustments described in these accompanying notes to the unaudited pro forma financial information.
The Company is required to recognize the assets acquired and liabilities assumed, measured at their fair values as of the date of the Merger. Significant assumptions and estimates have been made in determining the allocation of the purchase price in the accompanying unaudited pro forma condensed combined financial information. These preliminary estimates and assumptions are subject to change as the Company finalizes the valuations of the intangible assets acquired. These changes could result in material variances between the Companys future financial results and the amounts presented in this unaudited pro forma condensed combined financial information, including variances in fair values recorded.
Note 2 Financing transactions
The Company completed the acquisition of FFS for the base purchase price of $12,000, consisting of $6,000 in cash and the remaining $6,000 in debt. The Company financed the purchase by incurring a new term loan under the amended JP Morgan credit agreement of $6,000, net of $30 in debt issuance costs, bearing interest equal to either: (i) an adjusted annual LIBOR rate reset monthly, bi-monthly or quarterly, plus 2.75% or 3.00% depending on the applicable senior funded debt ratio or (ii) JP Morgan Chase Bank N.A.s annual prime rate or such annual prime rate plus 0.25% depending on the applicable senior funded debt ratio, with a floor equal to the 1 month LIBOR Rate plus 2.5%. Refer to the Current Report on Form 8-K of Cherokee Inc. filed with the Securities and Exchange Commission (the SEC) on October 19, 2015 for further information.
Note 3 Preliminary Purchase Price Allocation
Preliminary Purchase Price Allocation
Cash paid to seller by Cherokee |
|
$ |
12,000 |
|
Allocation of purchase price to trademarks |
|
5,700 |
| |
Allocation of purchase price to goodwill |
|
5,979 |
| |
Allocation of purchase price to franchise agreements |
|
1,300 |
| |
Allocation of purchase price to deferred revenue |
|
(1,600 |
) | |
Allocation of purchase price to deferred tax asset |
|
579 |
| |
Allocation of purchase price to working capital |
|
42 |
|
Note 4 Pro Forma Adjustments
The unaudited pro forma condensed combined financial information presented is based on the assumptions and adjustments described in the accompanying notes. The historical financial data has been adjusted in this unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Merger, (2) factually supportable, and (3) with respect to the statements of income, expected to have a continuing impact on the combined results of the Company and FFS. However, this unaudited pro forma condensed combined financial information does not reflect any revenue enhancements, anticipated synergies or dis-synergies, operating efficiencies, or cost savings that may be achieved as a result of the Merger. The unaudited pro forma condensed combined balance sheet as of August 1, 2015, gives effect to the preliminary purchase price allocation of approximately $12,000, based upon the Companys payment of $12,000 in cash upon completion of the Merger. The unaudited pro forma condensed combined statements of income for the year ended January 31, 2015 and the six months ended August 1, 2015 give effect to amortization of the value assigned to the acquired franchise agreements and incremental interest expense related to the incremental debt incurred by the Company in order to fund the purchase price for the Merger.
The following describes the pro forma adjustments related to the Merger that have been made in the accompanying unaudited pro forma condensed combined balance sheet as of August 1, 2015 and unaudited pro forma condensed combined statements of income for the year ended January 31, 2015 and the six months ended August 1, 2015, giving effect to the acquisition as if it had been consummated at the beginning of the periods presented, all of which are based on preliminary estimates that could change significantly as additional information is obtained:
(1) In accordance with applicable the SEC rules and guidelines, the Company has used FFS Franchise Companys balance sheet as of June 30, 2015 and statements of income for the year ended December 31, 2014 and for the six months ended June 30, 2015. Certain amounts included in Flip Flop Shops selling, general and administrative expenses will not continue going forward.
(2) To reflect the cash purchase price paid by the Company in connection with the Merger with FFS.
(3) To reflect the expected deferred tax asset related to the difference between the book and tax values of deferred revenue.
(4) To record the fair value of FFSs identifiable intangible assets. Based on the preliminary purchase price allocation, $5,700 has been allocated to trademarks, which has been treated as indefinite lived, and $1,300 has been allocated to Franchise Agreements, which will be amortized over an 11 year life.
(5) To record goodwill associated with the fair value allocation of net assets acquired from FFS.
(6) To reflect new debt issuance to fund a portion of the cash purchase price for the Merger.
(7) To reflect an adjustment to the fair value of FFSs deferred revenue, as required by applicable acquisition accounting.
(8) To reflect an adjustment to the fair value of FFSs deferred revenue recognized as revenue, as required by applicable acquisition accounting.
(9) To record amortization of identified intangible assets acquired from FFS.
(10) To reflect interest expense associated with the new debt incurred to fund a portion of the cash purchase price for the Merger.
(11) To reflect the tax effects of adjustments using an estimated effective tax rate of 38.6%.
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