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 1, 2004.
| ¨ | 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 June 2, 2004 | |
| Common Stock, $.02 par value per share | 8,661,653 |
INDEX
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
| May 1, 2004 |
January 31, 2004 | |||||
| (unaudited) | ||||||
| Assets | ||||||
| Current assets: |
||||||
| Cash and cash equivalents |
$ | 11,729,000 | $ | 5,850,000 | ||
| Restricted cash |
— | 2,627,000 | ||||
| Receivables, net |
11,851,000 | 12,992,000 | ||||
| Prepaid expenses and other current assets |
211,000 | 747,000 | ||||
| Deferred tax asset |
954,000 | 954,000 | ||||
| Total current assets |
24,745,000 | 23,170,000 | ||||
| Deferred tax asset |
1,589,000 | 1,589,000 | ||||
| Property and equipment, net of accumulated depreciation of $354,000 and $342,000, respectively |
97,000 | 108,000 | ||||
| Trademarks, net of accumulated amortization of $3,345,000 and $3,091,000, respectively |
9,584,000 | 9,726,000 | ||||
| Other assets |
45,000 | 34,000 | ||||
| Total assets |
$ | 36,060,000 | $ | 34,627,000 | ||
| Liabilities and Stockholders’ Equity | ||||||
| Current liabilities: |
||||||
| Accounts payable |
$ | 331,000 | $ | 529,000 | ||
| Other accrued liabilities |
2,827,000 | 4,315,000 | ||||
| Income taxes payable |
2,819,000 | — | ||||
| Dividends payable |
7,969,000 | — | ||||
| Notes payable |
— | 2,625,000 | ||||
| Total current liabilities |
13,946,000 | 7,469,000 | ||||
| Commitments and Contingencies (note 4) | ||||||
| Stockholders’ Equity: | ||||||
| Common stock, $.02 par value, 20,000,000 shares authorized, 8,634,832 and 8,595,916 shares issued and outstanding at May 1, 2004 and at January 31, 2004, respectively |
172,000 | 171,000 | ||||
| Additional paid-in capital |
6,811,000 | 6,207,000 | ||||
| Retained earnings |
15,131,000 | 20,780,000 | ||||
| Stockholders’ equity |
22,114,000 | 27,158,000 | ||||
| Total liabilities and stockholders’ equity |
$ | 36,060,000 | $ | 34,627,000 | ||
See the accompanying notes which are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
| Three months ended |
||||||||
| May 1, 2004 |
May 3, 2003 |
|||||||
| Royalty revenues |
$ | 12,231,000 | $ | 12,057,000 | ||||
| Selling, general and administrative expenses |
2,969,000 | 2,890,000 | ||||||
| Operating income |
9,262,000 | 9,167,000 | ||||||
| Other income (expense): |
||||||||
| Interest expense |
(4,000 | ) | (241,000 | ) | ||||
| Investment and interest income |
178,000 | 91,000 | ||||||
| Total other income (expense), net |
174,000 | (150,000 | ) | |||||
| Income before income taxes |
9,436,000 | 9,017,000 | ||||||
| Income tax provision |
3,893,000 | 3,721,000 | ||||||
| Net income |
$ | 5,543,000 | $ | 5,296,000 | ||||
| Basic earnings per share |
$ | 0.64 | $ | 0.64 | ||||
| Diluted earnings per share |
$ | 0.64 | $ | 0.63 | ||||
| Weighted average shares outstanding |
||||||||
| Basic |
8,603,936 | 8,232,264 | ||||||
| Diluted |
8,667,188 | 8,418,241 | ||||||
See the accompanying notes which are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Unaudited
| Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Total |
|||||||||||||
| Shares |
Par Value |
|||||||||||||||
| Balance at January 31, 2004 |
8,595,916 | $ | 171,000 | $ | 6,207,000 | $ | 20,780,000 | $ | 27,158,000 | |||||||
| Stock option tax benefit |
210,000 | 210,000 | ||||||||||||||
| Proceeds from exercise of stock options |
38,916 | 1,000 | 394,000 | 395,000 | ||||||||||||
| Accrued and paid dividends |
(11,192,000 | ) | (11,192,000 | ) | ||||||||||||
| Net income |
5,543,000 | 5,543,000 | ||||||||||||||
| Balance at May 1, 2004 |
8,634,832 | $ | 172,000 | $ | 6,811,000 | $ | 15,131,000 | $ | 22,114,000 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
| Three months ended |
||||||||
| May 1, 2004 |
May 3, 2003 |
|||||||
| Operating activities | ||||||||
| Net income |
$ | 5,543,000 | $ | 5,296,000 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
12,000 | 7,000 | ||||||
| Amortization of trademarks |
254,000 | 244,000 | ||||||
| Amortization of debt issue costs and securitization fees |
4,000 | 52,000 | ||||||
| Amortization of debt discount |
— | 189,000 | ||||||
| Stock option tax benefit |
210,000 | — | ||||||
| Changes in current assets and liabilities: |
||||||||
| Decrease (increase) in accounts receivable |
1,141,000 | (5,231,000 | ) | |||||
| Decrease in prepaid expenses and other assets |
525,000 | 38,000 | ||||||
| Increase in accounts payable, income taxes payable and accrued liabilities |
1,133,000 | 578,000 | ||||||
| Net cash provided by operating activities |
8,822,000 | 1,173,000 | ||||||
| Investing activities | ||||||||
| Decrease in restricted cash |
2,627,000 | 5,000 | ||||||
| Purchase of property and equipment |
(3,000 | ) | (8,000 | ) | ||||
| Purchase of trademarks |
(114,000 | ) | (190,000 | ) | ||||
| Net cash provided by (used in) investing activities |
2,510,000 | (193,000 | ) | |||||
| Financing activities | ||||||||
| Proceeds from exercise of stock options |
395,000 | — | ||||||
| Dividends |
(3,223,000 | ) | — | |||||
| Payment on notes |
(2,625,000 | ) | (2,625,000 | ) | ||||
| Net cash used in financing activities |
(5,453,000 | ) | (2,625,000 | ) | ||||
| Increase (decrease) in cash and cash equivalents |
5,879,000 | (1,645,000 | ) | |||||
| Cash and cash equivalents at beginning of period |
5,850,000 | 2,852,000 | ||||||
| Cash and cash equivalents at end of period |
$ | 11,729,000 | $ | 1,207,000 | ||||
| Non cash financing activities: |
||||||||
| Declaration of dividends |
$ | 7,969,000 | — | |||||
See the accompanying notes which are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying condensed consolidated financial statements as of May 1, 2004 and for the three month periods ended May 1, 2004 and May 3, 2003 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 January 31, 2004 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 1, 2004 are not necessarily indicative of the results to be expected for the fiscal year ended January 29, 2005. 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 31, 2004.
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 1, 2004 and May 3, 2003, diluted weighted average number of shares includes the dilutive effect of 63,252 and 185,977 options, respectively, computed using the treasury stock method.
The diluted weighted average number of shares excludes the impact of stock options which are anti-dilutive. The number of such shares for the three-month periods ended May 1, 2004 and May 3, 2003 were 104,690 and 30,464, respectively.
Significant Contracts
Our most significant retail relationship in the United States is with Target Stores. The terms of our relationship with Target Stores are set forth in an amended licensing agreement (the “Amended Target Agreement”) between Cherokee and Target Stores entered into on November 12, 1997. The Amended Target Agreement grants Target Stores the exclusive right in the United States to use the Cherokee trademarks in certain specified categories of merchandise.
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The initial term of the Amended Target Agreement commenced on February 1, 1998 through January 31, 2004. The Amended Target Agreement provides that if Target Stores is current in its payments of the minimum guaranteed royalty under the agreement, then the term of the agreement will automatically renew for the fiscal year ending in January 2005, and will continue to automatically renew for successive fiscal year terms provided that Target Stores has paid a minimum guaranteed royalty equal to or greater than $9.0 million for the preceding fiscal year and Target Stores does not give notice of its intention to terminate the agreement. In February 2004, Target Stores elected to allow the term of the Amended Target Agreement to be renewed for one additional year. As a result, the term of the Amended Target Agreement currently continues through January 2006 and remains subject to the automatic renewal provisions described above. Target Stores may terminate the Amended Target Agreement effective February 2006 if it gives us written notice of its intent to do so by February 28, 2005, and may terminate at the end of any fiscal year thereafter, if it gives us written notice of its intent to do so during February of the calendar year prior to termination.
We also have other significant contracts, including with: (i) Mervyn’s for our Sideout brand in the U.S.; (ii) Tesco for our Cherokee brand in certain specified countries; (iii) Zeller’s for our Cherokee brand in Canada; (iv) TJX Companies for our Carole Little, CLII and Saint Tropez-West brands in the U.S., (v) Carrefour for our Cherokee brand in certain specified countries, and (vi) Mossimo, in which we receive a stated percentage of all revenues that Mossimo receives from Target. For a more complete description of our significant contracts, please see our most recently filed Form 10-K for our fiscal year ended January 31, 2004.
Stock-Based Compensation
The Company currently maintains two compensation plans, the Cherokee 1995 Incentive Stock Option Plan (the “1995 Plan”), and the 2003 Incentive Award Plan (the “2003 Plan”). During the three months ended May 1, 2004, the Company granted stock options to purchase 125,000 shares of common stock at a weighted average per share exercise price of $22.71.
Cherokee accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.
In accordance with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosures” the following table illustrates the effect on stock-based compensation, net income and earnings per share if Cherokee had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.
| Quarter Ended |
||||||||
| May 1, 2004 |
May 3, 2003 |
|||||||
| Net income: |
$ | 5,543,000 | $ | 5,296,000 | ||||
| As reported |
||||||||
| Stock-based compensation expense determined under the fair value method |
(84,000 | ) | (46,000 | ) | ||||
| Pro forma |
$ | 5,459,000 | $ | 5,250,000 | ||||
| Net income per share—basic: |
||||||||
| As reported |
$ | 0.64 | $ | 0.64 | ||||
| Per share effect of stock-based compensation expense determined under the fair value method |
(0.01 | ) | (0.01 | ) | ||||
| Pro forma |
$ | 0.63 | $ | 0.63 | ||||
| Net income per share—diluted: |
||||||||
| As reported |
$ | 0.64 | $ | 0.63 | ||||
| Per share effect of stock-based compensation expense determined under the fair value method |
(0.01 | ) | (0.01 | ) | ||||
| Pro forma |
$ | 0.63 | $ | 0.62 | ||||
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