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 May 3, 2003.
| ¨ | 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 May 30, 2003 | |
| Common Stock, $.02 par value per share |
8,232,264 |
CHEROKEE INC.
1
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CHEROKEE INC.
| May 3, 2003 |
February 1, 2003 | |||||
| (unaudited) |
||||||
| Assets |
||||||
| Current assets: |
||||||
| Cash and cash equivalents |
$ |
1,207,000 |
$ |
2,852,000 | ||
| Restricted cash |
|
2,632,000 |
|
2,637,000 | ||
| Receivables, net |
|
15,127,000 |
|
9,896,000 | ||
| Prepaid expenses and other current assets |
|
387,000 |
|
425,000 | ||
| Deferred tax asset |
|
964,000 |
|
964,000 | ||
| Total current assets |
|
20,317,000 |
|
16,774,000 | ||
| Deferred tax asset |
|
1,832,000 |
|
1,832,000 | ||
| Securitization fees, net of accumulated amortization of $1,098,000 and $1,046,000, respectively |
|
143,000 |
|
195,000 | ||
| Property and equipment, net of accumulated depreciation of $317,000 and $311,000, respectively |
|
123,000 |
|
120,000 | ||
| Trademarks, net of accumulated amortization of $2,344,000 and $2,100,000, respectively |
|
10,071,000 |
|
10,127,000 | ||
| Other assets |
|
15,000 |
|
15,000 | ||
| Total assets |
$ |
32,501,000 |
$ |
29,063,000 | ||
| Liabilities and Stockholders’ Equity |
||||||
| Current liabilities: |
||||||
| Accounts payable |
$ |
366,000 |
$ |
203,000 | ||
| Other accrued liabilities |
|
1,480,000 |
|
4,452,000 | ||
| Income taxes payable |
|
3,387,000 |
||||
| Notes payable |
|
10,205,000 |
|
10,500,000 | ||
| Total current liabilities |
|
15,438,000 |
|
15,155,000 | ||
| Notes payable—long term |
|
— |
|
2,141,000 | ||
| Total liabilities |
|
15,438,000 |
|
17,296,000 | ||
| Commitments and Contingencies (note 4) |
||||||
| Stockholders’ Equity: |
||||||
| Common stock, $.02 par value, 20,000,000 shares authorized, 8,232,264 and 8,232,264 shares issued and outstanding at May 3, 2003 and at February 1, 2003, respectively |
|
165,000 |
|
165,000 | ||
| Additional paid-in capital |
|
1,760,000 |
|
1,760,000 | ||
| Retained earnings |
|
15,138,000 |
|
9,842,000 | ||
| Stockholders’ equity |
|
17,063,000 |
|
11,767,000 | ||
| Total liabilities and stockholders’ equity |
$ |
32,501,000 |
$ |
29,063,000 | ||
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 |
||||||||
| May 3, 2003 |
May 4, 2002 |
|||||||
| Royalty revenues |
$ |
12,057,000 |
|
$ |
11,458,000 |
| ||
| Selling, general and administrative expenses |
|
2,942,000 |
|
|
2,588,000 |
| ||
| Operating income |
|
9,115,000 |
|
|
8,870,000 |
| ||
| Other income (expenses): |
||||||||
| Interest expense |
|
(189,000 |
) |
|
(348,000 |
) | ||
| Investment and Interest income |
|
91,000 |
|
|
31,000 |
| ||
| Total other income (expenses), net |
|
(98,000 |
) |
|
(317,000 |
) | ||
| Income before income taxes |
|
9,017,000 |
|
|
8,553,000 |
| ||
| Income tax provision |
|
3,721,000 |
|
|
3,440,000 |
| ||
| Net income |
$ |
5,296,000 |
|
$ |
5,113,000 |
| ||
| Basic earnings per share |
$ |
0.64 |
|
$ |
0.63 |
| ||
| Diluted earnings per share |
$ |
0.63 |
|
$ |
0.61 |
| ||
| Weighted average shares outstanding |
||||||||
| Basic |
|
8,232,264 |
|
|
8,170,561 |
| ||
| Diluted |
|
8,418,241 |
|
|
8,368,556 |
| ||
See the accompanying notes which are an integral part of these consolidated financial statements.
3
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
| Three months ended |
||||||||
| May 3, 2003 |
May 4, 2002 |
|||||||
| Operating activities |
||||||||
| Net income |
$ |
5,296,000 |
|
$ |
5,113,000 |
| ||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
|
7,000 |
|
|
16,000 |
| ||
| Amortization of trademarks |
|
244,000 |
|
|
163,000 |
| ||
| Amortization of securitization fees |
|
52,000 |
|
|
51,000 |
| ||
| Amortization of debt discount |
|
189,000 |
|
|
348,000 |
| ||
| Stock option tax benefit |
|
— |
|
|
181,000 |
| ||
| Changes in current assets and liabilities: |
||||||||
| Increase in accounts receivable |
|
(5,231,000 |
) |
|
(5,032,000 |
) | ||
| Decrease in prepaid expenses and other current assets |
|
38,000 |
|
|
34,000 |
| ||
| Increase in accounts payable, income taxes payable and accrued liabilities |
|
578,000 |
|
|
546,000 |
| ||
| Net cash provided by operating activities |
|
1,173,000 |
|
|
1,420,000 |
| ||
| Investing activities |
||||||||
| Purchase of property and equipment |
|
(8,000 |
) |
|
— |
| ||
| Purchase of trademarks |
|
(190,000 |
) |
|
(274,000 |
) | ||
| Net cash used in investing activities |
|
(198,000 |
) |
|
(274,000 |
) | ||
| Financing activities |
||||||||
| Decrease in restricted cash |
|
5,000 |
|
|
15,000 |
| ||
| Proceeds from exercise of stock options |
|
— |
|
|
770,000 |
| ||
| Payment on notes |
|
(2,625,000 |
) |
|
(2,625,000 |
) | ||
| Net cash used in financing activities |
|
(2,620,000 |
) |
|
(1,840,000 |
) | ||
| Decrease in cash and cash equivalents |
|
(1,645,000 |
) |
|
(694,000 |
) | ||
| Cash and cash equivalents at beginning of period |
|
2,852,000 |
|
|
4,394,000 |
| ||
| Cash and cash equivalents at end of period |
$ |
1,207,000 |
|
$ |
3,700,000 |
| ||
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 May 3, 2003 and for the three month periods ended May 3, 2003 and May 4, 2002 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. (“Cherokee” or the “Company”) 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 1, 2003 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The results of operations for the three month period ended May 3, 2003 are not necessarily indicative of the results to be expected for the fiscal year ended January 31, 2004. 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 1, 2003.
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
For the three month periods ended May 3, 2003 and May 4, 2002, diluted weighted average number of shares includes the dilutive effect of 185,977 and 197,995 options, respectively, computed using the treasury stock method.
The diluted weighted average number of shares excludes 30,464 and 210,601 shares of common stock issuable on the exercise of stock options for the three-month periods ended May 3, 2003 and May 4, 2002, respectively.
5
Significant Contracts
In 1997, we entered into an agreement with Target Stores that grants Target Stores the exclusive right in the United States to use the Cherokee trademarks in certain categories of merchandise. Under the Target Stores agreement, Target Stores will pay a royalty each fiscal year, up to and including the fiscal year ending January 30, 2005, based on percentages, specified in the agreement, of Target Stores’ net sales of Cherokee branded merchandise during each fiscal year, which percentages vary based on the volume of sales of merchandise. In any event, Target Stores has agreed to pay a minimum guaranteed royalty of $9.0 million for each of the two fiscal years ended January 31, 1999 and 2000, $10.5 million for each of the four fiscal years ending January 31, 2001 through 2004 and $9.0 million for the fiscal year ending January 31, 2005. The agreement will automatically renew for successive one-year periods, providing Target Stores is current in its minimum guaranteed payments, unless Target Stores provides one-year notice to terminate the agreement.
In 2001, Mervyn’s renewed its licensing agreement for certain merchandise categories of the Sideout brand for an additional three years on the same terms and conditions as the existing license agreement. The renewal term commenced on February 1, 2002 and continues through January 31, 2005. Under the Mervyn’s agreement, Mervyn’s will pay a royalty each fiscal year based on a percentage of Mervyn’s net sales of Sideout branded merchandise during each fiscal year, subject to a guaranteed minimum royalty. As of the First Quarter, our non-exclusive United States retail direct licensees for the Sideout brand included Mervyn’s, Bob’s Stores and Marshall Fields. The term of our agreements with Mervyn’s, Bob’s Stores and Marshall Field’s all continue until January 31, 2005.
On August 22, 1997, we entered into an international retail direct licensing agreement with Zellers Inc., a Canadian corporation, which is a division of Hudson’s Bay Company. Zellers was granted the exclusive right in Canada to use the Cherokee brand and related trademarks in certain categories of merchandise. The term of the agreement is for five years, with automatic renewal options, provided that specified minimums are met each contract year. Under the agreement, Zellers agreed to pay us a minimum guaranteed royalty of $10.0 million over the five-year initial term of the agreement. In 2002, Zellers renewed their agreement for an additional five year period, through January 31, 2008. Under the terms of the renewal, Zellers agreed to pay us a minimum guaranteed royalty of $15.6 million over the five-year term under the same conditions of the original agreement. Zellers has the option to renew this agreement for an additional five years beyond the most recent renewal.
In early September 2000, we entered into an exclusive international retail direct licensing agreement for the Cherokee brand with France based Carrefour, the second largest retailer in the world. The Carrefour Group was granted the exclusive right