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Table of Contents
 
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 August 3, 2002.
 
¨
 
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
Incorporation or organization)
     
(IRS employer identification number)
6835 Valjean Avenue, Van Nuys, CA
     
91406
(Address of principal executive offices)
     
Zip Code
 
Registrant’s telephone number, including area code (818) 908-9868
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x         No ¨             
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
     
Outstanding at August 3, 2002
Common Stock, $.02 par value per share
     
8,289,764
 

Table of Contents
 
CHEROKEE INC.
 
INDEX
 
    
    
  
2
  
3
  
4
  
5
  
8
  
16
    
  
16
  
17
  
17
  
18
  
18
  
18
 

1

Table of Contents
 
Part 1. Financial Information
 
ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS
 
CHEROKEE INC.
CONSOLIDATED BALANCE SHEETS
 
    
August 3, 2002
   
February 2, 2002
  
    
(unaudited)
       
Assets
                
Current assets:
                
Cash and cash equivalents
   
$
6,099,000
   
$
4,394,000
 
Restricted cash
   
 
2,651,000
   
 
2,645,000
 
Receivables
   
 
9,236,000
   
 
6,232,000
 
Prepaid expenses and other current assets
   
 
142,000
   
 
62,000
 
Deferred tax asset
   
 
886,000
   
 
886,000
 
    
  
Total current assets
   
 
19,014,000
   
 
14,219,000
 
Deferred tax asset
   
 
2,100,000
   
 
2,100,000
 
Securitization fees, net of accumulated amortization of $943,000
and $840,000, respectively
   
 
298,000
   
 
401,000
 
Property and equipment, net of accumulated depreciation of
$297,000 and $265,000, respectively
   
 
124,000
   
 
156,000
 
Trademarks, net of accumulated amortization of
$1,762,000 and $1,433,000, respectively
   
 
7,412,000
   
 
7,365,000
 
Other assets
   
 
15,000
   
 
15,000
 
    
  
Total assets
   
$
28,963,000
   
$
24,256,000
 
    
  
Liabilities and Stockholders' Equity (Deficit)
                
Current liabilities:
                
Accounts payable
   
$
51,000
   
$
400,000
 
Income taxes payable
   
 
1,356,000
   
 
22,000
 
Other accrued liabilities
   
 
2,292,000
   
 
3,584,000
 
Notes payable
   
 
10,500,000
   
 
10,500,000
 
    
  
Total current liabilities
   
 
14,199,000
   
 
14,506,000
 
Notes payable—long term
   
 
6,914,000
   
 
11,510,000
 
    
  
Total liabilities
   
 
21,113,000
   
 
26,016,000
 
    
  
Commitments and Contingencies (note 4)
                
Stockholders' Equity (Deficit):
                
Common stock, $.02 par value, 20,000,000 shares authorized,
8,289,764 and 8,163,405 shares issued and outstanding at
August 3, 2002 and at February 2, 2002, respectively
   
 
165,000
   
 
164,000
 
Additional paid-in capital
   
 
2,491,000
   
 
1,252,000
 
Retained earnings/(deficit)
   
 
5,194,000
   
 
(3,176,000
)
    
  
Stockholders' equity (deficit)
   
 
7,850,000
   
 
(1,760,000
)
    
  
Total liabilities and stockholders' equity (deficit)
   
$
28,963,000
   
$
24,256,000
 
    
  
 
See the accompanying notes which are an integral part of these consolidated financial statements.

2

Table of Contents
 
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
 
    
Three months ended
     
Six months ended
  
    
August 3, 2002
     
Aug 4, 2001
     
August 3, 2002
     
Aug 4, 2001
  
Royalty revenues
   
$
8,562,000
 
   
$
8,348,000
 
   
$
20,020,000
 
   
$
18,852,000
 
Selling, general and administrative expenses
   
 
2,905,000
 
   
 
2,551,000
 
   
 
5,494,000
 
   
 
4,963,000
 
    
  
  
  
Operating income
   
 
5,657,000
 
   
 
5,797,000
 
   
 
14,526,000
 
   
 
13,889,000
 
Other income (expenses) :
                                    
Interest expense
   
 
(307,000
)
   
 
(462,000
)
   
 
(655,000
)
   
 
(962,000
)
Investment and Interest income
   
 
45,000
 
   
 
84,000
 
   
 
77,000
 
   
 
165,000
 
    
  
  
  
Total other income (expenses), net
   
 
(262,000
)
   
 
(378,000
)
   
 
(578,000
)
   
 
(797,000
)
Income before income taxes
   
 
5,395,000
 
   
 
5,419,000
 
   
 
13,948,000
 
   
 
13,092,000
 
Income tax provision
   
 
2,139,000
 
   
 
2,168,000
 
   
 
5,579,000
 
   
 
5,242,000
 
    
  
  
  
Net income
   
$
3,256,000
 
   
$
3,251,000
 
   
$
8,369,000
 
   
$
7,850,000
 
    
  
  
  
Basic earnings per share
   
$
0.39
 
   
$
0.40
 
   
$
1.02
 
   
$
0.95
 
    
  
  
  
Diluted earnings per share
   
$
0.38
 
   
$
0.39
 
   
$
0.99
 
   
$
0.95
 
    
  
  
  
Weighted average shares outstanding
                                    
Basic
   
 
8,274,379
 
   
 
8,223,372
 
   
 
8,222,470
 
   
 
8,227,538
 
    
  
  
  
Diluted
   
 
8,534,656
 
   
 
8,246,835
 
   
 
8,448,393
 
   
 
8,266,389
 
    
  
  
  
 
See the accompanying notes which are an integral part of these consolidated financial statements.

3

Table of Contents
 
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
    
Six months ended
  
    
August 3, 2002
     
Aug 4, 2001
  
Operating activities
                  
Net income
   
$
8,369,000
 
   
$
7,850,000
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
32,000
 
   
 
32,000
 
Amortization of trademarks
   
 
329,000
 
   
 
253,000
 
Amortization of securitization fees
   
 
103,000
 
   
 
103,000
 
Amortization of debt discount
   
 
655,000
 
   
 
962,000
 
Stock option tax benefit
   
 
342,000
 
   
 
—  
 
Changes in current assets and liabilities:
                  
Increase in accounts receivable
   
 
(3,004,000
)
   
 
(2,229,000
)
Increase in prepaid expenses and other current assets
   
 
(80,000
)
   
 
(37,000
)
(Decrease) increase in accounts payable, income taxes payable and accrued liabilities
   
 
(307,000
)
   
 
51,000
 
    
  
Net cash provided by operating activities
   
 
6,439,000
 
   
 
6,985,000
 
    
  
Investing activities
                  
Purchase of trademarks
   
 
(378,000
)
   
 
(764,000
)
    
  
Net cash used in investing activities
   
 
(378,000
)
   
 
(764,000
)
    
  
Financing activities
                  
(Increase) decrease in restricted cash
   
 
(6,000
)
   
 
71,000
 
Proceeds from exercise of stock options
   
 
1,028,000
 
   
 
—  
 
Repurchase of common stock
   
 
(128,000
)
   
 
(445,000
)
Payment on notes
   
 
(5,250,000
)
   
 
(5,250,000
)
    
  
Net cash used in financing activities
   
 
(4,356,000
)
   
 
(5,624,000
)
    
  
Increase in cash and cash equivalents
   
 
1,705,000
 
   
 
597,000
 
Cash and cash equivalents at beginning of period
   
 
4,394,000
 
   
 
2,598,000
 
    
  
Cash and cash equivalents at end of period
   
$
6,099,000
 
   
$
3,195,000
 
    
  
 
See the accompanying notes which are an integral part of these consolidated financial statements.
 

4

Table of Contents
 
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1)    Basis of Presentation
 
The accompanying condensed consolidated financial statements as of August 3, 2002 and for the three and six month periods ended August 3, 2002 and August 4, 2001 have been prepared in accordance with 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. (which may be referred to as the Company, we, us, or our) are necessary for a fair statement of the financial position and the results of operations for the periods presented. Certain previously reported amounts have been reclassified to conform to current year presentation. The accompanying consolidated balance sheet as of February 2, 2002 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 six month period ended August 3, 2002 are not necessarily indicative of the results to be expected for the fiscal year ended February 1, 2003. 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 February 2, 2002.
 
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.
 
Revenue Recognition
 
Revenues from royalty and finders agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from our licensees. Revenues are not recognized unless collectibility is reasonably assured.
 
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 six month periods ended August 3, 2002 and August 4, 2001:

5

Table of Contents
 
 
    
2002
   
2001
    
3 Months
   
6 Months
   
3 Months
   
6 Months
Numerator:
                            
Net income-numerator for net income per common share and net income per common share assuming dilution
   
$
3,256,000
   
$
8,369,000
   
$
3,251,000