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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 2, 2002 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to _______________
Commission file No. 0-18640
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CHEROKEE INC.
(Exact name of registrant as specified in charter)
Delaware 95-4182437
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6835 Valjean Avenue
Van Nuys, CA (818) 908-9868 91406
(Address of principal (Registrant's telephone number, (Zip Code)
executive office) including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.02 par value per share
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 27, 2002, the registrant had 8,163,405 shares of its common
stock, par value $.02 per share, issued and outstanding.
As of March 27, 2002, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $72,562,000 (computed on
the basis of the last trade of the common stock on the Nasdaq National Market
System on March 27, 2002).
Documents Incorporated by Reference:
Certain portions of the registrant's proxy statement for the Annual Meeting
of Stockholders to be held on June 5, 2002, are incorporated by this reference
into Part III as set forth herein.
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CHEROKEE INC.
INDEX
Page
PART I
Item 1. Business................................................................................................. 1
Item 2. Properties............................................................................................... 10
Item 3. Legal Proceedings........................................................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................ 10
Item 6. Selected Financial Data.................................................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation..................... 11
Item 7A. Qualitative and Quantitative Disclosures of Market Risk.................................................. 19
Item 8. Consolidated Financial Statements and Supplementary Data................................................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant....................................................... 21
Item 11. Executive Compensation................................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 22
Item 13. Certain Relationships and Related Transactions........................................................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 22
PART I
Item 1. BUSINESS
Introduction
Cherokee Inc. (which may be referred to as we, us or our) is in the
business of marketing and licensing the Cherokee and Sideout brands and related
trademarks and other brands it owns or represents. We are one of the leading
licensors of brand names and trademarks for apparel, footwear and accessories in
the United States. Our operating strategy emphasizes domestic and international
retail direct and wholesale licensing whereby we grant retailers and wholesalers
the license to use the trademarks held by us on certain categories of
merchandise in their respective territories.
We and our wholly owned subsidiary, SPELL C. LLC ("Spell C") own several
trademarks, including Cherokee(R), Sideout(R), Sideout Sport(R), King of the
Beach(R) and others. The Cherokee brand, which began as a footwear brand in
1973, has been positioned to connote quality, comfort, fit, and a "Casual
American" lifestyle with traditional wholesome values. The Sideout brand and
related trademarks, which represent a young active lifestyle, were acquired by
us in November 1997. As of February 2, 2002, we had fourteen continuing license
agreements, covering both domestic and international markets.
Our retail direct licensing strategy is premised on the proposition that in
the United States nearly all aspects of the moderately priced apparel, footwear
and accessories business can be sourced most effectively by large retailers, who
not only command significant economies of scale, but also interact daily with
the end consumer. In addition, we believe that these retailers in general may be
able to obtain higher gross margins on sales and increase store traffic by
directly sourcing, stocking and selling licensed products bearing widely
recognized brand names, such as our brands, than through carrying strictly
private label goods or branded products from third-party vendors. Our strategy
in the United States is to capitalize on these ideas by licensing our portfolio
of brands primarily to strong and growing retailers, who, working in conjunction
with us, develop merchandise for their stores.
Beginning in 1995, we took a number of important steps designed to
implement our retail direct licensing strategy. On August 15, 1995, we entered
into a strategic alliance with one of the largest retailers in the United
States, Target Stores, a division of Target Corp. In November 1997, we
reaffirmed our relationship with Target Stores by entering into an amended
licensing agreement (the "Amended Target Agreement") which grants Target Stores
the exclusive right in the United States to use the Cherokee trademarks on
certain specified categories of merchandise. Under the Amended Target Agreement,
Target Stores is obligated to pay royalties based upon a percentage of its net
sales of Cherokee branded merchandise, with a minimum guaranteed royalty of
$60.0 million over the six-year initial term of the agreement. During the fiscal
year ended February 2, 2002 ("Fiscal 2002"), a wide range of Cherokee branded
merchandise was sold at over 1,053 Target stores. Due to the strong presence and
sales of Cherokee branded products in Target Stores during Fiscal 2002, royalty
revenues from Target Stores totalled approximately $20.7 million, which is 197%
of the guaranteed minimum royalty for Fiscal 2002 under the Amended Target
Agreement.
In August 1997, we entered into a licensing agreement with one of Canada's
largest retailers, Zellers Inc., a division of the Hudson's Bay Company, under
which Zellers was granted the exclusive right in Canada to use the Cherokee
trademarks in connection with a broad range of categories of merchandise. Under
the Zellers licensing agreement, Zellers is obligated to pay royalties based
upon a percentage of its net sales of Cherokee branded merchandise, with a
minimum guaranteed royalty of $10.0 million over the five-year initial term of
the agreement. Zellers commenced the initial sales of Cherokee branded
merchandise in over 350 stores in July 1998, and during Fiscal 2002 royalty
revenues from Zellers totalled approximately $3.8 million, which is 145% of the
guaranteed minimum royalty for Fiscal 2002 under the Zellers license agreement.
To increase our licensing potential, we purchased all of Sideout Sport
Inc.'s trademarks, copyrights, trade secrets and associated license agreements
on November 7, 1997. The trademarks acquired from Sideout Sport Inc. included,
among others, Sideout, Sideout Sport and King of the Beach. Royalty revenues
derived from the Sideout brands have grown from $585,000 during our fiscal year
ended January 30, 1999, to approximately $3.3 million during Fiscal 2002.
We are frequently approached by parties seeking to sell their brands and
related trademarks. Should an established and marketable brand or equity become
available on favorable terms, we would be interested in pursuing such an
acquisition. In addition to acquiring brands and licensing our own brands, we
assist other companies, wholesalers and retailers, in identifying licensees or
licensors for their brands or stores. Generally, as an exclusive consultant, we
perform a range of services, including marketing of brands, solicitation of
licensees, contract negotiations and administration and maintenance of license
or distribution agreements. In return for our services we normally charge a
certain percentage of the net royalties generated by the brands we represent and
manage.
Cherokee was incorporated in Delaware in 1988. Our principal executive
offices are located at 6835 Valjean Avenue, Van Nuys, California 91406,
telephone (818) 908-9868.
Overview of Licensing Business
The Cherokee brand, which began as a footwear brand in 1973, has been
positioned to connote quality, comfort, fit, and a "Casual American" lifestyle
with traditional, wholesome values. The Sideout brand and related trademarks,
which represent a young active lifestyle, were acquired by us in November 1997.
See "Sideout Agreement" below. Our primary emphasis for the past six years has
been directed toward domestic and international retail direct and wholesale
licensing. As of February 2, 2002, we had fourteen continuing license
agreements, covering both domestic and international markets, five of which
pertained to the Cherokee brand.
Our license agreements are with retailers and wholesalers and are either
international master agreements or category-specific exclusive or non-exclusive
agreements. Of the fourteen licensing agreements, four are with retailers, two
are with domestic wholesalers and eight are with international wholesalers or
retailers. In retail direct licensing, we grant retailers a license to use the
trademarks on certain categories of merchandise. Although we provide design
direction, most of our licensees modify or amplify the designs to suit their
seasonal, regional and category needs. In all cases, all products are subject to
our pre-approved packaging, graphics and quality control standards. The retailer
is responsible for manufacturing the merchandise. We refer to this practice as
our "retail direct" licensing strategy. Wholesale licensees manufacture and
import various categories of footwear and accessories under our trademarks and
sell the licensed products to retailers. Our retail, wholesale and international
license agreements provide us with final approval of pre-agreed upon quality
standards, packaging and, in most cases, marketing of licensed products. We have
the right to conduct periodic quality control inspections to ensure that the
image and quality of licensed products remain consistent. We will continue to
solicit new licensees through a small number of executive employees and may
retain the services of outside consultants to assist us in this effort.
Our current business strategy is to maximize the value of our existing and
future brands by exploiting them in a manner that recognizes the relative
market power, in different areas of the world, of the various
participants--manufacturer, wholesaler and retailer--in the chain of supply to
the ultimate consumer. In the United States, market power and accompanying
economies of scale, are generally held by a few dominant retailers of moderately
priced merchandise, and, accordingly, in the United States we have pursued our
retail direct licensing strategy. In contrast to the retail market in the United
States, as well as in Canada, in selected international markets we have sought
to develop our brands through wholesale licenses with manufacturers or other
companies who have market power and economies of scale in their respective
markets. Finally, in some countries, we believe that an owner or licensee of one
or more well-known U.S. brands has the opportunity to become a dominant,
vertically integrated manufacturer or retailer or both of branded apparel,
footwear and accessories. Accordingly, in those countries we have begun to
pursue licensing or strategic alignments whereby our brands can become the basis
for such a vertically integrated manufacturer/retailer. These various licensing
strategies permit us to operate with minimal working capital, virtually no
capital expenditures (other than those associated with acquiring new brands and
related trademarks), no production costs, significantly reduced design,
marketing, distribution and other operating expenses, and a small group of core
employees.
United States Retail Direct Licensing
Our retail direct licensing strategy is premised on the proposition that in
the United States nearly all aspects of the moderately priced apparel, footwear
and accessories business, from product development and design, to merchandising,
to sourcing and distribution, can be executed most effectively by large
retailers, who not only command significant economies of scale, but also
interact daily with the end consumer. We believe that these retailers in general
may be able to obtain higher gross margins on sales and increase store traffic
by directly sourcing, stocking and selling licensed products bearing widely
recognized brand names (such as our brands) than through carrying strictly
private label goods or branded products from third-party vendors. We also expect
that the enhanced profitability to retailers of private label products and
in-store brands, coupled with the substantial marketing costs to establish and
maintain a widely recognized apparel brand, will continue to increase the
desirability to retailers of well-established brands with broad appeal. Our
strategy in the United States is to capitalize on these trends by licensing our
portfolio of brand names to retailers, who, working in conjunction with us,
develop merchandise for their stores, and to augment that portfolio by acquiring
additional brands which have high consumer awareness, broad appeal and
applicability to a range of merchandise categories.
On November 12, 1997, we reaffirmed our relationship with Target Stores by
entering into the Amended Target Agreement. This agreement was subsequently
assigned to Spell C and pledged as collateral for the Zero Coupon Secured Notes
issued by Spell C. See "Recapitalization; Sale of Cherokee Trademarks to Spell
C; Issuance of Secured Notes" below. The Amended Target
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Agreement grants Target Stores the exclusive right in the United States to use
the Cherokee trademarks in certain specified categories of merchandise
including:
. men's, women's and children's apparel, including intimate apparel,
foundations and sleepwear;
. men's, women's and children's fashion accessories;
. bed and bath products and accessories;
. luggage, sports bags and backpacks;
. home textiles;
. domestics and home decor products;
. home furnishings;
. sporting goods; and
. cosmetics, bath and body products.
Some of the above-listed categories were subject to license agreements between
us and third parties, which have expired during Fiscal 2002 or earlier. The
Amended Target Agreement provides that upon the expiration or termination of
such agreements, the categories of merchandise subject to such agreements will
become exclusive to Target Stores in the United States. Due to the broad nature
of the rights granted to Target Stores in the United States, and the
restrictions contained in the Amended Target Agreement, we can not enter into
new retail or wholesale licensing agreements in the United States with respect
to the Cherokee brand, except for retail license agreements for cosmetics, bath
and body products with several drug store chains.
Under the Amended Target Agreement, Target Stores has agreed to pay a
royalty each fiscal year, up to and including the fiscal year ending January 31,
2004, based on a percentage of Target Stores' net sales of Cherokee branded
merchandise during each fiscal year, which percentage varies according to 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
ending January 31, 1999 and 2000, and $10.5 million for each of the four fiscal
years ending January 31, 2001 through 2004.
The initial term of the Amended Target Agreement commenced on February 1,
1998 and ends January 31, 2004. If Target Stores is current in its payments of
the minimum guaranteed royalty, the Amended Target Agreement will automatically
renew for the fiscal year ending in 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. Target Stores may terminate the Amended Target Agreement
effective January 31, 2004, if it gives us written notice of its intent to do so
during February 2003, 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. Target Stores commenced the initial
sales of Cherokee branded merchandise in July 1996. Royalty revenues from Target
Stores were $6.4 million during our eight-month fiscal period ended January 31,
1998, $14.6 million during our fiscal year ended January 30, 1999, $16.3 million
during our fiscal year ended January 29, 2000, $19.3 million during our fiscal
year ended February 3, 2001 ("Fiscal 2001") and $20.7 million during Fiscal
2002, which accounted for 75%, 76%, 66%, 68% and 67%, respectively, of our
consolidated revenues during such periods. See "Risk Factors."
Our retail direct licensees for the Sideout brand continued to achieve
positive results from sales of merchandise bearing the Sideout brand. Categories
of merchandise under license include men's, women's and children's sportswear,
accessories, luggage, sports bags and backpacks, skin care products and hats.
During Fiscal 2002, royalty revenues from retail direct licensees for the
Sideout brand totaled $2.97 million as compared to $2.6 million during Fiscal
2001. During Fiscal 2001, Mervyn's exercised its right to renew its licensing
agreement for the Sideout brand for an additional term of three years on the
same terms and conditions. The renewal term will commence on February 1, 2002
and continue through January 31, 2005. We intend to continue to actively pursue
our retail direct licensing strategy to further develop the Sideout brand in the
United States.
During Fiscal 2002, our non-exclusive United States retail direct licensees
included Mervyn's, Gart Bros., Bob's Stores and Casual Male. Generally,
royalties on non-exclusive domestic retail licenses begin at 3% of the
retailer's net sales of licensed products and may decrease depending on the
retailer's annual sales of licensed products and the retailer's guaranteed
annual sales of licensed products. During Fiscal 2002, our license agreements
with Casual Male and Gart Bros. expired and were not renewed.
As an incentive for our licensees to achieve higher retail sales of
Cherokee or Sideout branded products, many of our existing license agreements,
including the Amended Target Agreement, are structured to provide royalty rate
reductions for the licensees after they achieve certain levels of retail sales
of Cherokee or Sideout branded products during each fiscal year. As a result,
our
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royalty revenues as a percentage of our licensees' retail sales of branded
products are highest at the beginning of each fiscal year and decrease
throughout each fiscal year as licensees reach certain retail sales thresholds
contained in their respective license agreements. Therefore, the amount of
royalty revenue received by us in any quarter is dependent not only on retail
sales of branded products in such quarter, but also on the cumulative level of
retail sales, and the resulting attainment of royalty rate reductions in any
preceding quarters in the same fiscal year. The size of the royalty rate
reductions and the level of retail sales at which they are achieved vary in each
licensing agreement.
During Fiscal 2002, we and Spell C received $23.7 million in aggregate
royalties from the United States retail direct license agreements, which
accounted for 77.4% of our consolidated revenues during such period.
United States Wholesale Licensing
We currently have two wholesale license agreements that grant unaffiliated
manufacturers the license to manufacture and market sunglasses and footwear
under our Sideout trademarks in the United States. The agreements have various
expiration dates and contain three-to-five-year renewal options. Our wholesale
license agreements typically require the wholesale licensee to pay royalties on
revenues against a guaranteed minimum royalty that generally increases over the
term of the agreement.
During Fiscal 2002, the wholesale license agreement with Genender expired
and was not renewed. Also, during Fiscal 2002, the last two remaining wholesale
licensing agreements for the Cherokee brand, which included Creative Optics for
prescription glasses and Golden State International for watches were terminated
and the categories of merchandise subject to such terminated license agreements
became exclusive to Target Stores in the United States. Due to the broad nature
of the rights granted to Target Stores in the United States, and the
restrictions contained in the Amended Target Agreement, we cannot enter into any
new wholesale licensing agreements in the United States with respect to the
Cherokee brand.
During Fiscal 2002, we received $274,000 in aggregate royalties from
our wholesale licensing agreements, which accounted for .9% of our consolidated
revenues during such period.
International Licensing
We will continue to seek to develop in several international markets both
our Cherokee and Sideout brands and other brands we represent through retail
direct, master or wholesale licenses with manufacturers or other companies that
have market power and economies of scale in their respective markets.
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 connection with a
broad range of categories of merchandise, including women's, men's and
children's apparel and footwear, women's intimate apparel, fashion accessories,
home textiles, cosmetics and recreational products. 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. Zellers commenced the initial sales of Cherokee branded
merchandise in July 1998, and royalty revenues to us from Zellers totaled $3.6
million during the fiscal year ended January 29, 2000, $3.7 million during
Fiscal 2001 and $3.8 million during Fiscal 2002. During Fiscal 2002, Zellers
exercised its right to renew its licensing agreement for the Cherokee brand for
an additional term of five years on the same terms and conditions. The renewal
term will commence on February 1, 2003 and continue through January 31, 2008.
In early September 2000, we entered into an exclusive retail direct
licensing agreement for the Cherokee brand with Paris, France based Carrefour,
the second largest retailer in the world. The Carrefour Group was granted the
exclusive right to manufacture, promote, sell and distribute a wide range of
products bearing our Cherokee brand in Spain, Portugal, Mexico and Brazil. The
Carrefour Group is obligated to pay us a royalty based upon a percentage of its
net sales of Cherokee branded products in those countries. We received a
quarterly minimum payment of $50,000 in December 2001 under the terms of the
agreement; however, there can be no guarantee that future royalties will be
significant in amount. If the Carrefour Group exceeds certain retail sales
thresholds for Cherokee branded products then the scope of the agreement will be
automatically expanded to grant the Carrefour Group the exclusive right to
manufacture, promote, sell and distribute products bearing the Cherokee brand in
certain other European and South American countries not already covered by the
agreement, including, among others, Italy, Greece, Poland, Argentina, Chile,
Colombia, Turkey, France and Germany. Even if the retail sales thresholds are
not met, during the term of the agreement, the Carrefour Group also has a right
of first refusal to add any of the European or South American countries to the
territory covered by the agreement. During Fiscal 2002, we amended the license
agreement with the Carrefour Group to obtain the territory rights to the United
Kingdom and Ireland. In exchange, we added the territories of Taiwan and China
to the license agreement, and as an incentive to expand into other countries, we
agreed to waive the royalty commitment during the initial six-
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month start-up period for any added countries. Further, with respect to Japan
and several other Asian countries, the Carrefour Group may elect to add any of
those countries to the territory covered by the agreement, provided that at the
time of such election we do not already have an existing license agreement
covering the country to be added. The initial term of the agreement expires
December 31, 2003; however, if the Carrefour Group meets certain retail sales
thresholds with respect to Cherokee branded products, the agreement may be
extended indefinitely by the Carrefour Group for successive three-year terms.
On August 1, 2001, we entered into an exclusive retail direct licensing
agreement for the Cherokee brand with Great Britian's Tesco Stores Limited.
Tesco was granted the exclusive right to manufacture, promote, sell and
distribute a wide range of products bearing our Cherokee brand in the United
Kingdom and Ireland and is obligated to pay us a royalty based upon a percentage
of its net sales of Cherokee branded products in those countries. Tesco paid an
initial licensing fee of $75,000, which is a deposit against the first contract
year's guaranteed annual minimum royalties. We do not expect to receive
royalties until May 20, 2002 under this agreement, and even then there can be no
guarantee that any royalties will be significant in amount. Tesco also has a
right to add certain territories covered by the agreement subject to
availability by us and the existing rights given to the Carrefour Group. The
initial term of the agreement expires on January 31, 2005; however, if Tesco
meets certain retail sales thresholds with respect to Cherokee branded products,
the agreement may be renewed for successive terms of three years each.
Including the Carrefour Group and Tesco agreements, as of February 2, 2002,
we had four international retail license agreements for the Cherokee brand.
Other international licensees include DongKwang International Co. LTD for South
Korea. During Fiscal 2002, our master licensing agreement with Japan-based
Itochu Corporation and its sub-licensees Takaya, Okudo, and Takaishi expired and
we terminated our licensing agreement with China-based Shanghai Eesli Trading
Company and incurred no costs in connection with the termination. We expect to
continue to solicit additional licensees for the Cherokee brand in Asia, Europe
and South America, subject to the Carrefour Group's rights and Tesco's rights
under their respective agreements.
During Fiscal 2002, with respect to the Sideout brand and related
trademarks, we have four international licensing agreements, including Chori,
The Forzani Group, Sport Scheck and Matienzo. Our international licensing
agreements for the Sideout and King of the Beach brands are all exclusive and
cover countries including Japan, Canada, Mexico, Germany, Switzerland and
Austria and product categories including men's, boy's and women's apparel and
footwear. Matienzo Mexico, our Mexican licensee, currently distributes to
department and specialty stores and has six Sideout stores throughout Mexico.
During Fiscal 2002, we received $4.5 million in aggregate royalties from
our international license agreements, which accounted for 14.6% of our
consolidated revenues during such period.
Other Business Opportunities
We are frequently approached by parties seeking to sell their brands and
related trademarks. Should an established and marketable brand or equity become
available on favorable terms, we would be interested in pursuing such an
acquisition. In addition to acquiring brands and licensing our own brands, we
assist other companies in identifying licensees for their brands. Generally, as
an exclusive consultant, we perform a range of services including marketing of
brands, solicitation of licensees, contract negotiations and administration and
maintenance of license or distribution agreements. In return for our services we
normally receive a certain percentage of the net royalties generated by the
brands we represent and manage.
During Fiscal 2001, we assisted Mossimo Inc. in locating Target Stores as a
licensee of the Mossimo brand and entered into a finder's agreement with
Mossimo, which provides that we will receive 15% of the royalties paid to
Mossimo by Target Stores. Under Mossimo's agreement with Target Stores, Target
Stores is obligated to pay Mossimo a royalty based on a percentage of net sales
of Mossimo branded products, with a minimum guaranteed royalty, beginning in
2001, of approximately $27.8 million over the initial three year term of the
agreement. Mossimo's agreement with Target Stores is subject to early
termination under certain circumstances. During Fiscal 2002, we received
revenues from Mossimo of $2.2 million.
Additionally, in Fiscal 2002, we entered into four other exclusive
consulting agreements, one to represent Hot Kiss in Europe, Asia and South
America, one to represent DIC Entertainment's Liberty Kid's for certain
categories in the United States, one to represent Candie's for certain
categories in Asia, and one to represent Mrs. Fields both domestically and
internationally. Other active consulting agreements include one to represent Bum
in Mainland China, Hong Kong and Macao and one to represent Rampage in the
Philippines, Mainland China, Hong Kong, Macao, Korea, Taiwan, Singapore,
Malaysia, Indonesia, Thailand, Vietnam and Cambodia. Our consulting agreements
with Maui and Sons Inc. and Pritikin expired during Fiscal 2002.
During Fiscal 2002, we received $2.2 million in aggregate royalties from
other business opportunities, which accounted for 7.1% of our consolidated
revenues during such period.
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Recapitalization; Sale of Cherokee Trademarks to Spell C; Issuance of Secured
Notes
On December 23, 1997, we completed a recapitalization that resulted in the
issuance of a special dividend of $5.50 per share on January 15, 1998. To
facilitate the recapitalization, we formed Spell C. LLC, a special purpose,
bankruptcy remote, single member Delaware limited liability company, wholly
owned by us. We assigned to Spell C all of our right, title and interest in the
Amended Target Agreement and sold to Spell C all of our right, title and
interest in the Cherokee brand name and related trademarks in the United States.
The sale of the rights to the Cherokee trademarks in the United States was
subject to certain exceptions which allow us to continue to use the trademarks
in the United States in conjunction with our then-existing license agreements
and allow us to use the trademarks in the United States in conjunction with
retail license agreements in the category of cosmetics, bath and body products.
Except for these exceptions, we no longer have the right to license the Cherokee
brand and related trademarks in the United States, but retain all rights to do
so outside of the United States.
On December 23, 1997, Spell C issued for gross proceeds of $47.9 million,
privately placed Zero Coupon Secured Notes (the "Secured Notes"), yielding 7.0%
interest per annum and maturing on February 20, 2004. The proceeds from the sale
of the Secured Notes were used to pay the special dividend described above. The
Secured Notes amortize quarterly from May 20, 1998 through February 20, 2004, in
the amount of $9.0 million per year the first two years and $10.5 million per
year the third through sixth years. The Secured Notes are secured by the Amended
Target Agreement and the United States Cherokee trademarks and brand names. The
Secured Notes indenture requires that any proceeds due to Spell C under the
Amended Target Agreement and several other license agreements must be deposited
directly into a collection account controlled by the trustee under the
indenture. The trustee distributes from the collection account the amount of
principal due and payable to the holders of the Secured Notes on quarterly note
payment dates. Excess amounts on deposit in the collection account may only be
distributed to Spell C if the amount on deposit in the collection account
exceeds the amount of principal due and payable on the next quarterly note
payment date. Such excess amounts, if any, may then be distributed by Spell C to
us. During Fiscal 2002, of the $20.7 million in royalty revenues from Target
Stores, $10.5 million was paid to the holders of the Secured Notes. At various
times during Fiscal 2002, Spell C distributed a total of $10.9 million to us
(which amount includes royalty revenues received from Target Stores during both
Fiscal 2001 and Fiscal 2002 and interest income earned on royalty revenues). The
minimum guaranteed royalty under the Amended Target Agreement is $9.0 million
for each of the two fiscal years ending January 31, 1999 and 2000 and $10.5
million for each of the four fiscal years ending January 31, 2001 through 2004.
The aggregate scheduled amortization under the Secured Notes is $60.0 million
and equals the aggregate minimum guaranteed royalty payable under the Amended
Target Agreement, which is also $60.0 million. While we believe that royalties
payable under the Amended Target Agreement may continue to exceed the minimum
guaranteed royalties payable in upcoming fiscal years, we cannot predict with
accuracy whether such royalties will exceed the minimum guaranteed royalties
payable during such years, and if they do not, we will not receive further
distributions from Spell C during the term of the Amended Target Agreement. See
"Risk Factors."
Sideout Agreement
On November 7, 1997, we entered into an Agreement of Purchase and Sale of
Trademarks and Licenses (the "Sideout Agreement") with Sideout Sport Inc.,
pursuant to which we agreed to purchase all of Sideout Sport Inc.'s trademarks,
copyrights, trade secrets and associated license agreements. Steven Ascher, our
Executive Vice President, beneficially owns 37.2% of Sideout Sport Inc. and Mr.
Ascher's father and father-in-law beneficially own 8.9% and 5.0%, respectively,
of Sideout Sport Inc. The trademarks acquired from Sideout Sport Inc. include,
among others, Sideout(R), Sideout Sport(R) and King of the Beach(R). Pursuant to
the Sideout Agreement, we paid $1.5 million at the closing of the acquisition
and agreed to pay an additional $500,000 upon release of liens on the assets
that were purchased. Most of the liens have since been released and $495,000 of
the $500,000 holdback has been paid. Under the terms of the Sideout Agreement,
we will also pay Sideout Sport Inc., on a quarterly basis, contingent payments
of 40% of the first $10.0 million, 10% of the next $5.0 million and 5% of the
next $20.0 million, of royalties and license fees received by us through
licensing of the Sideout trademarks. Upon the earlier of such time as we have
paid Sideout total contingent payments of $5.5 million or October 22, 2004, we
will have no further obligation to pay Sideout Sport Inc. During Fiscal 2002, we
made payments exceeding $1.3 million under the Sideout Agreement, and since
January 1999 we have paid in total over $3.98 million in contingent payments
under the Sideout Agreement.
Trademarks
Spell C and we hold various trademarks including Cherokee(R), Sideout(R),
Sideout Sport(R), King of the Beach(R) and others, in connection with numerous
categories of apparel and other goods. These trademarks are registered with the
United States Patent and Trademark Office and in a number of other countries. We
intend to renew these registrations as appropriate prior to expiration. We also
hold trademark applications for Cherokee, Sideout, Sideout Sport and King of the
Beach in numerous countries. We monitor on an ongoing basis unauthorized filings
of our trademarks, and we rely primarily upon a combination of trademark,
know-how, trade secrets, and contractual restrictions to protect our
intellectual property rights both domestically and internationally. See "Risk
Factors."
6
Marketing
We have positioned the Cherokee name to connote quality, comfort, fit and a
"Casual American" lifestyle with traditional, wholesome values. The Sideout
brand and related trademarks represent a young active lifestyle. We integrate
our advertising, product, labeling and presentation to reinforce these brand
images. We intend to continue to promote a positive image in marketing the
Cherokee and Sideout brands through licensee-sponsored advertising. Our retail,
wholesale and international license agreements provide us with final approval of
pre-agreed upon quality standards, packaging and marketing of licensed products.
We principally rely on our licensees to advertise the Cherokee and Sideout
brands, and as a result our advertising costs have been minimal.
We developed a website (www.cherokeegroup.com), which utilizes a
business-to-business E-commerce strategy. The information regarding our website
address is provided for convenience and is not a hyperlink. Our goal in
developing the website is to enhance communication, information flow and
networking with existing and prospective licensees. The website currently
includes our profiles and our brands, certain of our financial statements and
press releases, as well as a secured area to support our licensees with
graphics, packaging and trim items, design concepts, new developments and other
administrative needs.
Internationally, we intend to continue to seek to develop both of our
principal brands through license agreements and strategic alliances with
manufacturers or other companies who have market power and economies of scale in
their respective markets. We are also seeking to assist other companies in
identifying licensees for their brands. We will continue to market our brands
and solicit new licensees through a small number of executive employees and may
retain the services of outside consultants to assist us in this effort.
Competition
Royalties paid to us under our licensing agreements are generally based on
a percentage of the licensee's net sales of licensed products. Cherokee and
Sideout brand footwear, apparel, and accessories, which are manufactured and
sold by both domestic and international wholesalers and retail licensees, are
subject to extensive competition by numerous domestic and foreign companies.
Such competitors with respect to the Cherokee brand include Levi Strauss & Co.,
The Gap, Old Navy, Liz Claiborne and VF Corp. and private labels, such as Faded
Glory, Arizona, and Route 66, developed by retailers. Competitors with respect
to the Sideout brand include Quicksilver, Mossimo, Nike and other activewear
companies. Factors which shape the competitive environment include quality of
garment construction and design, brand name, style and color selection, price
and the manufacturer's ability to respond quickly to the retailer on a national
basis. In recognition of the increasing trend towards consolidation of retailers
and greater emphasis by retailers on the manufacture of directly sourced
merchandise, in the United States our business plan focuses on creating
strategic alliances with major retailers for their sale of products bearing our
brands through the licensing of our trademarks directly to retailers. Therefore,
our success is dependent on our licensees' ability to design, manufacture and
sell products bearing our brands and to respond to ever-changing consumer
demands. Companies such as Mossimo have entered into, and other companies owning
established trademarks could also enter into, similar arrangements with
retailers. See "Risk Factors."
Employees
As of February 2, 2002, we employed 14 persons. None of our employees are
represented by labor unions and we believe that our employee relations are
satisfactory.
Risk Factors
In addition to the other information contained herein or incorporated
herein by reference, the risks and uncertainties and other factors described
below could have a material adverse effect on our business, financial condition,
results of operations and share price and could also cause our future business,
financial condition and results of operations to differ materially from the
results contemplated by any forward-looking statement we may make herein, in any
other document we file with the Securities and Exchange Commission, or in any
press release or other written or oral statement we may make. Please also see
"Item 7. Management's Discussion and Analysis of Financial Condition And Results
of Operations - Cautionary Note Regarding Forward-Looking Statements" for
additional risks and uncertainties applicable to us.
Payments to us from our subsidiary, Spell C, are subject to a number of
restrictions under the Amended Target Agreement.
We cannot assure you that our subsidiary, Spell C, will continue to
distribute any significant amount of cash or property to us until after the
maturity of the Secured Notes, if then. The Secured Notes indenture provides
that any royalties payable under the Amended Target Agreement will be deposited
directly into a collection account controlled by the trustee under the Secured
Notes indenture. The trustee will distribute from the collection account the
amount of principal due and payable to the holders on the
7
Secured Notes on quarterly note payment dates. Excess amounts in the collection
account may only be distributed to Spell C if the amount in the collection
account exceeds the aggregate amount of principal due and payable on the next
quarterly note payment date. Such excess amounts, if any, may then be
distributed by Spell C to us. The aggregate scheduled amortization under the
Secured Notes is $60.0 million and equals the aggregate minimum guaranteed
royalty payable under the Amended Target Agreement, which is also $60.0 million.
See "Recapitalization; Sale of Cherokee Trademarks to Spell C; Issuance of
Secured Notes" and "United States Retail Direct Licensing." There is no
assurance, therefore, that in the future there will be any excess amounts
available to be distributed to us. We do not expect revenues deposited in the
collateral account from sources other than the Amended Target Agreement to be
significant during fiscal year 2003. We cannot predict with accuracy whether
payments under the Amended Target Agreement will exceed the minimum guaranteed
royalty, and if they do not, no distribution will be made to Spell C from the
collateral account, and in turn, Spell C will have no funds available to
distribute to us. If Spell C does not distribute any funds to us during the
balance of the initial term of the Amended Target Agreement it could have a
material adverse effect on our business, financial condition and results of
operations.
Our business is subject to intense competition.
Royalties paid to us under our licensing agreements are generally based on
a percentage of our licensee's net sales of licensed products. Cherokee and
Sideout brand footwear, apparel, and accessories, which are manufactured and
sold by both domestic and international wholesalers and retail licensees, are
subject to extensive competition by numerous domestic and foreign companies.
Such competitors with respect to the Cherokee brand include Levi Strauss & Co.,
The Gap, Old Navy, Liz Claiborne and VF Corp. and private labels, such as Faded
Glory, Arizona and Route 66, developed by retailers. Competitors with respect to
the Sideout brand include Quicksilver, Mossimo, Nike and other activewear
companies. Factors which shape the competitive environment include quality of
garment construction and design, brand name, style and color selection, price
and the manufacturer's ability to respond quickly to the retailer on a national
basis. In recognition of the increasing trend towards consolidation of retailers
and greater emphasis by retailers on the manufacture of private label
merchandise, in the United States our business plan focuses on creating
strategic alliances with major retailers for their sale of products bearing our
brands through the licensing of our trademarks directly to retailers. Therefore,
our success is dependent on our licensees' ability to design, manufacture and
sell products bearing our brands and to respond to ever-changing consumer
demands, and any significant failure by our licensees to do so could have a
material adverse effect on our business, financial condition and results of
operations. Other companies owning established trademarks could also enter into
similar arrangements with retailers. See "Competition."
Our business is dependent on Target Stores, which accounted for 67% of our
consolidated licensing revenues in Fiscal 2002.
During Fiscal 2002, 67% of our and Spell C's licensing revenues were
generated from a single source, Target Stores, a division of Target Corp. See
"United States Retail Direct Licensing." We have assigned all our rights in the
Amended Target Agreement to Spell C, which has in turn pledged the Amended
Target Agreement as collateral for the Secured Notes. Spell C will be dependent
on revenues from the Amended Target Agreement for most, if not all, of its
revenues. Although the Amended Target Agreement provides for minimum annual
royalty payments, if for any reason Target Stores does not pay the minimum
royalties, Spell C will likely be unable to meet, and will default on, its
payment obligations under the indenture for the Secured Notes. We are not
guarantors of the Secured Notes; however, the United States Cherokee trademarks
have been pledged as security for the Secured Notes, and the permanent loss of
such trademarks as a result of a default would have a material adverse effect on
our business, financial condition and results of operations. The Secured Notes
mature and the initial term of the Amended Target Agreement expires at
approximately the same time. At such time, payments from the Amended Target
Agreement, if extended or renewed, may be distributed by Spell C to us. If
Target Stores elects not to extend or renew the Amended Target License Agreement
beyond the expiration of its initial term on January 31, 2004, it would have a
material adverse effect on our business, financial condition and results of
operations. There can be no guarantee that we would be able to replace the
Target Stores royalty payments from other sources.The Amended Target Agreement,
however, requires one year's advance notice of termination by Target Stores,
during which period we believe we could enter into one or more licensing
agreements for the Cherokee brand with either retailers and/or wholesalers,
which we expect would enable us to replace some of the lost revenues from Target
Stores.
We are dependent on our intellectual property and we cannot assure you that
we will be able to successfully protect our rights.
We and Spell C hold various trademarks including Cherokee, Sideout, King of
the Beach and others in connection with apparel, footwear and accessories. These
trademarks are vital to the success and future growth of our business. These
trademarks are registered with the United States Patent and Trademark Office and
in several other countries. We and Spell C also hold several trademark
applications for Cherokee, Sideout, and King of the Beach in several countries.
We monitor on an ongoing basis unauthorized filings of our trademarks, and we
rely primarily upon a combination of trademark, know-how, trade secrets, and
contractual restrictions to protect our intellectual property rights. We believe
that such measures afford only limited protection and, accordingly, there can be
no assurance that the actions taken by us to establish and protect our
trademarks and other
8
proprietary rights will prevent imitation of our products or infringement of our
intellectual property rights by others, or prevent the loss of licensing revenue
or other damages caused thereby. In addition, the laws of several countries in
which we have licensed our intellectual property may not protect our
intellectual property rights to the same extent as the laws of the United
States. Despite our efforts to protect our intellectual property rights,
unauthorized parties may attempt to copy aspects of our intellectual property,
which could have a material adverse effect on our business, financial condition
and results of operations. In the future we may be required to assert
infringement claims against third parties, and there can be no assurance that
one or more parties will not assert infringement claims against us. While we
currently have the resources to pursue or defend most infringement claims, any
resulting litigation could result in significant expense and divert the efforts
of our management personnel whether or not such litigation is determined in our
favor.
We are dependent on our key management personnel.
Our success is highly dependent upon the continued services of Robert
Margolis, our Chairman and Chief Executive Officer, who is the primary person
responsible for conceiving and implementing our overall business and marketing
strategy. Mr. Margolis has served as Chairman and Chief Executive Officer since
December 1994 when we emerged from bankruptcy. As of February 2, 2002, Mr.
Margolis was the beneficial owner of approximately 19% of our outstanding common
stock. We have only fourteen employees and Mr. Margolis' leadership and
experience in the apparel licensing industry is critical to the successful
implementation of our business and marketing strategy. We do not carry key
person life insurance covering Mr. Margolis. While Mr. Margolis' services are
provided pursuant to a management agreement with us, this agreement does not
ensure Mr. Margolis' continued services. The loss of the services of Mr.
Margolis could have a material adverse effect on our business, financial
condition and results of operations.
The management agreement with our Chief Executive Officer contains
provisions that provide for a substantial cash payment to our Chief
Executive Officer upon breach or termination of the management agreement by
us.
Mr. Margolis' services as Chairman and Chief Executive Officer are provided
to us pursuant to a management agreement. The current term of the management
agreement ends February 1, 2005, however, the term may be extended indefinitely
for additional one year terms so long as we meet certain pre-tax earnings
thresholds. If we terminate the management agreement without cause or Mr.
Margolis terminates the management agreement after we materially breach any of
the terms and conditions thereof or fail to perform any material obligations
thereunder, we must pay Mr. Margolis, within sixty days after the date of
termination, a lump sum in cash equal to three times the sum of the annual base
compensation under the management agreement at the rate in effect at the time of
the termination and the previous year's performance bonus under the management
agreement. Mr. Margolis' annual base compensation in Fiscal 2002 was $647,564
and his performance bonus for Fiscal 2002 was approximately $2.56 million and,
based on those amounts, the lump sum payment referenced above would exceed $9.0
million.
The occurrence of the following events, among other things, will be deemed
to be a material breach of the management agreement by us:
. Mr. Margolis and/or other directors that he and related parties have
the right to nominate to our Board of Directors, are not elected to our
Board of Directors or are not put on the slate of directors recommended
to our stockholders or Mr. Margolis or any such other director is
removed from our Board of Directors without Mr. Margolis' approval;
. the assignment to Mr. Margolis of any duties materially inconsistent
with, or the diminution of his positions, titles, offices, duties and
responsibilities with us or any removal of Mr. Margolis from, or any
failure to re-elect Mr. Margolis to, any titles, offices or positions
held by him under the management agreement, including the failure of
our Board of Directors to elect Mr. Margolis or his designee as
Chairman of the Board;
. a reduction by us in the base compensation or any other compensation
provided to Mr. Margolis in the management agreement; or
. a change or relocation of Mr. Margolis' offices that materially and
adversely affects Mr. Margolis' working environment or any other
substantial, material and adverse changes in Mr. Margolis' working
conditions imposed by us.
We do not have sufficient cash to make the lump sum payment to Mr.
Margolis, and becoming obligated to make such payment would have a material
adverse effect on our business, financial condition and results of operations.
Under certain circumstances, the obligation to make such lump sum payment to Mr.
Margolis could be triggered if a third party were to acquire us, which would
increase the acquisition costs, but would also each year thereafter reduce our
annual operating expenses due to the elimination of annual bonus payments to Mr.
Margolis pursuant to the management agreement.
9
Item 2. PROPERTIES
We lease a 14,700 square foot office facility in Van Nuys, California. On
February 20, 2001, we exercised our first option and extended the term of the
lease from August 1, 2001 through July 31, 2004. The monthly rent is $9,010. Our
Van Nuys office is well maintained, adequate and suitable for our purposes.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of business, we from time to time become involved in
legal claims and litigation. In the opinion of management, based on
consultations with legal counsel, the disposition of litigation currently
pending against us is unlikely to have, individually or in the aggregate, a
materially adverse effect on our business, financial position or results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our holders of common stock
during the final quarter of Fiscal 2002.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq National Market System under the
symbol CHKE. The table below sets forth for each of the fiscal quarters during
our last two fiscal years the range of the high and low bid quotations for our
common stock and the cash dividends paid, if any.
Dividends
High Low Paid
---- --- ----
Fiscal 2001
Quarter ended April 29, 2000................................................. 7.8125 6.25 --
Quarter ended July 29, 2000.................................................. 9.1875 6.5625 --
Quarter ended October 28, 2000............................................... 11.9375 8.375 --
Quarter ended February 3, 2001............................................... 11.375 8.375 --
Fiscal 2002
Quarter ended May 5, 2001.................................................... 9.625 8.32 --
Quarter ended August 4, 2001................................................. 9.59 7.60 --
Quarter ended November 3, 2001............................................... 9.85 8.09 --
Quarter ended February 2, 2002............................................... 14.57 8.875 --
On March 27, 2002, the latest bid price for our common stock, reported on
the Nasdaq National Market System, was $14.89 per share. As of March 27, 2002,
the number of stockholders of record of our common stock was 134. This figure
does not include beneficial holders whose shares may be held of record by
brokerage firms and clearing agencies.
On July 22, 1999, our Board of Directors authorized the repurchase of up to
one million shares or approximately 11.5% of our outstanding common stock.
Pursuant to this directive, we used cash of $607,000 to repurchase and retire
68,300 shares of our common stock in Fiscal 2002 and $2.1 million to repurchase
and retire 249,000 shares of our common stock in Fiscal 2001. Since July 22,
1999, we have used cash of $4.6 million to repurchase and retire 550,300 shares
of our common stock. We are currently authorized to repurchase up to an
aggregate of 449,700 shares of our common stock. Continued repurchases of our
stock, if any, will be made from time to time in the open market at prevailing
market prices or privately negotiated transactions.
10
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information has been taken or
derived from our audited consolidated financial statements. The information set
forth below is not necessarily indicative of our results of future operations
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes included elsewhere in this Form 10-K. See "--Item
8. Consolidated Financial Statements and Supplementary Data."
Eight
Year Year Year Year Months
Ended Ended Ended Ended Ended
February 2, February 3, January 29, January 30, January 31,
2002 2001 2000 1999 1998
----- ----- ---- ----- ----
($ In Thousands Except Per Share Data)
Statement of Operations Data:
Net Revenues ......................................... $ 30,674 $ 28,281 $ 24,714 $ 19,307 $ 8,553
Selling, general and administrative expenses ......... 8,599 7,955 7,225 6,428 4,192
Amortization of trademarks ........................... 534 396 261 200 43
Forgiveness of note receivable ....................... -- -- 1,890(1) -- --
-------- -------- -------- -------- --------
Operating income ..................................... 21,541 19,930 15,338 12,679 4,318
Other income ......................................... -- -- -- -- (422)
Interest expense ..................................... 1,754 2,367 2,817 3,247 330
Investment and interest income (292) (430) (399) (638) (525)
-------- -------- -------- -------- --------
Income before income taxes ........................... 20,079 17,993 12,920 10,070 4,935
Income tax expense (benefit) ......................... 8,020 7,227 4,859 3,982 (782)
-------- -------- -------- -------- --------
Net income ........................................... $ 12,059 $ 10,766 $ 8,061 $ 6,088 $ 5,717
======== ======== ======== ======== ========
Basic earnings per share ............................. $ 1.47 $ 1.29 $ 0.94 $ 0.70 $ 0.73
Diluted earnings per share ........................... $ 1.46 $ 1.29 $ 0.94 $ 0.70 $ 0.68
Cash distribution of capital per share ............... -- -- -- -- $ 5.50
Cash dividends per share ............................. -- -- $ 0.50 $ 1.25 $ 0.20
February 2, February 3, January 29, January 30, January 31,
2002 2001 2000 1999 1998
----- ----- ---- ----- ----
Balance Sheet Data:
Working capital (deficiency).............................. $ (287) $ (2,263) $ (2,236) $ (2,242) $ 4,445
Total assets.............................................. 24,256 19,413 17,518 19,529 24,471
Long-term debt, net of current maturities................. 11,510 20,255 28,389 35,697 41,675
Stockholders' deficit..................................... (1,760) (15,070) (24,132) (29,879) (25,646)
______________
Notes to Selected Financial Data
(1) Represents a non-cash charge of $1.89 million resulting from the partial
forgiveness and cancellation of note receivable from Mr. Margolis during
the year ended January 29, 2000.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, our quarterly reports on Form 10-Q, other
filings we may make with the Securities and Exchange Commission, as well as
press releases and other written or oral statements we may make may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. When used, the words "anticipates", "believes",
"estimates", "objectives", "goals", "aims", "hopes", "may", "likely", "should"
and similar expressions are intended to identify such forward-looking
statements. In particular, the forward-looking statements in this Form 10-K
include, among others, statements regarding our goals or expectations regarding
our future revenues and earnings, the likelihood of increased retail sales by
certain of our current and future licensees, such as Target Stores and
Carrefour, our prospects for obtaining new licensees and our prospects for
obtaining new brands to acquire or represent. Forward-looking statements involve
known and unknown risks and
11
uncertainties that may cause our actual results, performance, achievements or
share price to be materially different from any future results, performance,
achievements or share price expressed or implied by any forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
effect of national and regional economic conditions, the financial condition of
the apparel industry and the retail industry, the overall level of consumer
spending, the effect of intense competition from other apparel lines both within
and outside of Target Stores, adverse changes in licensee or consumer acceptance
of products bearing the Cherokee or Sideout brands as a result of fashion trends
or otherwise, the ability and/or commitment of our licensees to design,
manufacture and market Cherokee and Sideout branded products, our dependence on
a single licensee for most of our revenues, our dependence on our key management
personnel and the effect of a breach or termination by us of the management
agreement with our Chief Executive Officer. Several of these risks and
uncertainties are discussed in more detail under "Item 1. Business-Risk Factors"
as well as in the discussion and analysis below. You should however, understand
that it is not possible to predict or identify all risks and uncertainties and
you should not consider the risks and uncertainties identified by us to be a
complete set of all potential risks or uncertainties that could materially
effect us. You should not place undue reliance on the forward-looking statements
we make herein because some or all of them may turn out to be wrong. We
undertake no obligation to update any of the forward-looking statements
contained herein to reflect future events and developments.
Overview
The following discussion should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
Form 10-K. See "Item 8. Consolidated Financial Statements and Supplementary
Data."
Since May 1995, we have principally been in the business of marketing and
licensing the Cherokee brand and related trademarks and other brands we own or
represent. Our operating strategy emphasizes domestic and international retail
direct and wholesale licensing, whereby we grant wholesalers and retailers the
license to use our trademarks on certain categories of merchandise.
In November 1997, we reaffirmed our strategic relationship with Target
Stores, a division of Target Corp., by entering into the Amended Target
Agreement, which grants Target Stores the exclusive right in the United States
to use the Cherokee trademarks in certain categories of merchandise. See "Item
1. Business. United States Retail Direct Licensing." Under the Amended Target
Agreement, Target Stores will pay a royalty each fiscal year, up to and
including the fiscal year ending January 31, 2004, based on a percentage of
Target Stores' net sales of Cherokee branded merchandise during each fiscal
year, which percentage varies according to 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 ending January 31, 1999 and 2000
and $10.5 million for each of the four fiscal years ending January 31, 2001
through 2004. Under the Amended Target Agreement, in most cases, we or Spell C
must receive Target Stores' consent to enter into additional licensing
agreements in the United States with respect to the Cherokee brand during the
term of the agreement. Therefore, our current focus with respect to the Cherokee
brand is to continue to develop that brand in several international markets
through retail direct or wholesale licenses with manufacturers or other
companies who have market power and economies of scale in the respective
markets.
Target Stores currently has over 1,053 stores in the United States and has
publicly announced that it expects to open additional stores in the next twelve
months. We expect that these additional stores will result in an increase in the
overall sales volume of Cherokee branded products sold by Target Stores,
however, there can be no assurance that overall sales volume will increase.
Target Stores pays royalty revenues to us based on a percentage of its sales of
Cherokee branded products. The Amended Target Agreement, however, is structured
to provide royalty rate reductions for Target Stores after it has achieved
certain levels of retail sales of Cherokee branded products during each fiscal
year. In Fiscal 2002 Target Stores reached the maximum royalty rate reduction in
the third quarter. Additional stores are expected to cause Target Stores to
reach the maximum royalty rate reduction even earlier in the upcoming year. This
trend is expected to have a positive impact on our licensing revenues in our
first quarter ended May 3, 2002 as well as our licensing revenues for our entire
fiscal year ended January 31, 2003, but may have a negative impact on our
licensing revenues in our third quarter ended November 1, 2002.
As part of a recapitalization that occurred in September 1997, we sold to
Spell C, our wholly owned subsidiary, all of our rights to the Cherokee brand
and related trademarks in the United States and assigned to Spell C all of our
rights in the Amended Target Agreement in exchange for the proceeds from the
sale of the Secured Notes. See "Item 1. Business. Recapitalization; Sale of
Cherokee Trademarks to Spell C; Issuance of Secured Notes." Spell C issued for
an aggregate of $47.9 million, privately placed Zero Coupon Secured Notes,
yielding 7.0% interest per annum and maturing on February 20, 2004. The Secured
Notes amortize quarterly from May 20, 1998 through February 20, 2004, in the
amount of $9.0 million per year the first two years and $10.5 million per year
the third through sixth years. The Secured Notes are secured by the Amended
Target Agreement and the United States Cherokee brand name and trademarks. The
Secured Notes indenture provides that any royalties generated by the Amended
Target Agreement must be deposited directly into a collection account controlled
by the trustee under the indenture for distribution to holders of the Secured
Notes. Excess amounts in the collection account may be distributed to Spell C
only if the
12
excess amounts exceed the aggregate amount of principal due and payable on the
next quarterly note payment date. Such excess amounts, if any, will then be
distributed by Spell C to us. Since the aggregate payments due under the Amended
Target Agreement are $60 million and equal the aggregate minimum guaranteed
royalty payable under the Amended Target Agreement, which is also $60 million,
there is no assurance that there will be any excess amounts to be distributed.
See "Item 1. Risk Factors."
Target Stores commenced the initial sales of Cherokee branded merchandise
in July 1996. Royalty revenues from Target Stores were $6.4 million during the
eight-month fiscal period ended January 31, 1998, $14.6 million during the
fiscal year ended January 30, 1999, $16.3 million during Fiscal 2000, $19.3
million during Fiscal 2001 and $20.7 million during Fiscal 2002, which accounted
for 75%, 76%, 66%, 68% and 67%, respectively, of our consolidated revenues
during such periods. While all royalties paid under the Amended Target Agreement
appear in our consolidated financial statements, since the issuance of the
Secured Notes, most of such royalties have been, and most, if not all of such
royalties received until the maturity of the Secured Notes, will be distributed
to the holders of the Secured Notes. See "Item 1. Risk Factors." Prior to the
maturity of the Secured Notes, royalties from the Amended Target Agreement will
be offset by principal payments to the holders of the Secured Notes in the
amount of $9.0 million per year during the first two years and $10.5 million per
year during the third through sixth years of the term of the indenture. During
Fiscal 2002, of the $20.7 million in royalty revenues received from Target
Stores, $10.5 million was paid to the holders of the Secured Notes. At various
times during Fiscal 2002, Spell C distributed a total of $10.9 million to us
(which amount includes royalty revenues received from Target Stores during both
Fiscal 2001 and Fiscal 2002 and interest income earned on royalty revenues).
While we believe that royalties payable under the Amended Target Agreement may
continue to exceed the minimum guaranteed royalty payable thereunder, we cannot
predict this with any accuracy. The revenues generated from all other licensing
agreements during the eight-month fiscal period ended January 31, 1998 were $2.1
million, during the fiscal year ended January 30, 1999 were $4.7 million, during
Fiscal 2000 were $8.4 million, during Fiscal 2001 were $9.0 million and during
Fiscal 2002 were $10.0 million, which accounted for 25%, 24%, 34%, 32% and 33%,
respectively, of our revenues during such periods.
In November 1997, we purchased the Sideout brand and related trademarks
from Sideout Sport, Inc. for approximately $2.0 million and a portion of the
future royalties generated by the Sideout brand. Under the terms of the Sideout
Agreement, we agreed to pay Sideout Sport Inc., on a quarterly basis, 40% of the
first $10.0 million, 10% of the next $5.0 million and 5% of the next $20.0
million, of royalties and license fees received by us through licensing of the
Sideout trademarks. Upon the earlier of such time as we have paid Sideout total
contingent payments of $5.5 million or October 22, 2004, we will have no further
obligation to pay Sideout Sport Inc. During Fiscal 2002, we made additional
contingent payments of $1.3 million under the Sideout Agreement. Since January
1999, we have paid, in total, $3.98 million in contingent payments under the
Sideout Agreement. The Sideout brand generated licensing revenues from existing
contracts of approximately $3.3 million during Fiscal 2002, which accounted for
approximately 10.9% of our revenues during such period. See "Item 1. Business
Sideout Agreement."
As an incentive for our licensees to achieve higher retail sales of
Cherokee or Sideout branded products, many of our existing license agreements,
including the Amended Target Agreement, are structured to provide royalty rate
reductions for the licensees after they achieve certain levels of retail sales
of Cherokee or Sideout branded products during each fiscal year. As a result,
our royalty revenues as a percentage of our licensees' retail sales of branded
products are highest at the beginning of each fiscal year and decrease
throughout each fiscal year as licensees reach certain retail sales thresholds
contained in their respective license agreements. Therefore, the amount of
royalty revenue received by us in any quarter is dependent not only on retail
sales of branded products in such quarter, but also on the cumulative level of
retail sales, and the resulting attainment of royalty rate reductions in any
preceding quarters in the same fiscal year. The size of the royalty rate
reductions and the level of retail sales at which they are achieved vary in each
licensing agreement.
As of November 29, 1999, we and The Newstar Group, d/b/a The Wilstar Group
("Wilstar") entered into a Second Revised and Restated Management Agreement
which revised and restated the terms under which Wilstar agreed to continue to
provide us with the executive management services of our Chief Executive Officer
Robert Margolis. Mr. Margolis is currently the sole stockholder of Wilstar. On
January 3, 2001, Wilstar assigned the management agreement to Mr. Margolis. As
base compensation for services rendered, Mr. Margolis will be paid $647,564 per
fiscal year, subject to annual cost of living increases. Mr. Margolis is also
eligible for annual performance bonuses.
The management agreement provides that, for each fiscal year after Fiscal
2000, if our EBITDA for such fiscal year is no less than $5.0 million, then Mr.
Margolis will receive a performance bonus equal to (x) 10% of our EBITDA for
such fiscal year in excess of $2.5 million up to $10.0 million, plus (y) 15% of
our EBITDA for such fiscal year in excess of $10.0 million. As a result, for
Fiscal 2002 we accrued a bonus of $2.56 million for Mr. Margolis, and if our
EBITDA continues to increase, the bonus payable to Mr. Margolis under the
management agreement will also increase.
13
In addition to licensing our own brands, we assist other companies in
identifying licensees for their brands. During Fiscal 2001, we assisted Mossimo
Inc. in locating Target Stores as a licensee of the Mossimo brand and entered
into a finder's agreement with Mossimo, which provides that we will receive 15%
of the royalties paid to Mossimo by Target Stores. Under Mossimo's agreement
with Target Stores, Target Stores is obligated to pay Mossimo a royalty based on
a percentage of net sales of Mossimo branded products, with a minimum guaranteed
royalty, beginning in 2001, of approximately $27.8 million over the initial
three- year term of the agreement. Mossimo's agreement with Target Stores is
subject to early termination under certain circumstances. During Fiscal 2002, we
received revenues from Mossimo of $2.2 million.
Additionally, in Fiscal 2002, we entered into four other exclusive
consulting agreements, one to represent Hot Kiss in Europe, Asia and South
America, one to represent DIC Entertainment's Liberty Kid's for certain
categories in the United States, one to represent Candie's for certain
categories in Asia, and one to represent Mrs. Fields both domestically and
internationally. Other active consulting agreements include one to represent Bum
in Mainland China, Hong Kong and Macao and one to represent Rampage in the
Philippines, Mainland China, Hong Kong, Macao, Korea, Taiwan, Singapore,
Malaysia, Indonesia, Thailand, Vietnam and Cambodia. Our consulting agreements
with Maui and Sons Inc. and Pritikin expired during Fiscal 2002.
In 1997, our Board changed our fiscal year end to a 52 or 53 week fiscal
year ending on the Saturday nearest to January 31 in order to better align us
with our licensees who generally also operate and plan using such a fiscal year.
Prior to this change our fiscal year was a 52 or 53 week fiscal year ending on
the Saturday nearest May 31. As a result, the 1999 fiscal year ended on January
30, 1999 and included 52 weeks, Fiscal 2000 ended on January 29, 2000 and
included 52 weeks, Fiscal 2001 ended on February 3, 2001 and included 53 weeks
and Fiscal 2002 ended on February 2, 2002 and included 52 weeks.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, management evaluates its estimates,
including those related to revenue recognition, deferred taxes, impairment of
long-lived assets, contingencies and litigation. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
Management applies the following critical accounting policies in the
preparation of our consolidated financial statements:
. Revenue Recognition Policy. 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. Our royalty recognition policy provides for recognition
of royalties in the quarter earned, although a large portion of
such royalty payments are actually received during the month
following the end of a quarter. Revenues are not recognized unless
collectibility is reasonably assured.
. Deferred Taxes. Deferred taxes are determined based on the
differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. In assessing the need for a
valuation allowance management considers estimates of future
taxable income and ongoing prudent and feasible tax planning
strategies.
. Impairment of Long-Lived Assets. Management evaluates the
recoverability of our identifiable intangible assets and other
long-lived assets in accordance with SFAS No. 121 which generally
requires management to assess these assets for recoverability when
events or circumstances indicate a potential impairment by
estimating the undiscounted cash flows to be generated from the use
and ultimate disposition of these assets.
. Contingencies and Litigation. Management evaluates contingent
liabilities including threatened or pending litigation in
accordance with SFAS No. 5, "Accounting for Contingencies" and
records accruals when the outcome of these matters is deemed
probable and the liability is reasonably estimable. Management
makes these assessments based on the facts and circumstances and in
some instances based in part on the advice of outside legal
counsel.
14
Results of Operations
The following table sets forth for the periods indicated certain of our
consolidated financial data. In December 1997, we assigned the Amended Target
Agreement to Spell C and Spell C issued the Second notes. As a result, during
the fiscal year ended January 29, 2000, $9.0 million in royalty revenues, during
Fiscal 2001, $10.125 million in royalty revenues and during Fiscal 2002, $10.5
million in royalty revenues were distributed to the holders of the Secured
Notes.
Year Ended Year Ended Year Ended
February 2, February 3, January 29,
2002 2001 2000
---- ---- ----
Royalty revenues ....................................................... $30,674,000 $28,281,000 $24,714,000
Selling, general, administrative and amortization expenses ............. 9,133,000 8,351,000 7,486,000
Forgiveness of note receivable ......................................... -- -- 1,890,000(1)
----------- ----------- -----------
Operating income ....................................................... 21,541,000 19,930,000 15,338,000
Interest expense net of interest income ................................ 1,462,000 1,937,000 2,418,000
Income tax provision ................................................... 8,020,000 7,227,000 4,859,000
----------- ----------- -----------
Net income ........................................................ $12,059,000 $10,766,000 $ 8,061,000
=========== =========== ===========
- --------------
(1) A non-cash charge of $1.89 million resulting from the partial
forgiveness and cancellation of the note receivable from Mr. Margolis
during the year ended January 29, 2000.
Fiscal 2002 compared to Fiscal 2001
In Fiscal 2002, revenues increased 8.5% to $30.7 million from $28.3 million
for Fiscal 2001. Revenues for Fiscal 2002 and Fiscal 2001 were generated from
licensing our trademarks and finders fees for placing Mossimo with Target
Stores. Revenues from Target Stores for Fiscal 2002 and Fiscal 2001 were $20.7
million or 67% of revenues and $19.3 million or 68% of revenues, respectively.
Revenues from all other sources for Fiscal 2002 and Fiscal 2001 were $10.0
million or 33% of revenues and $9.0 million or 32% of revenues, respectively.
Zellers paid royalties of approximately $3.8 million in Fiscal 2002 compared to
$3.7 million in Fiscal 2001. In Fiscal 2002, Mervyn's continued its expansion of
the Sideout brand into other product categories and paid royalties of
approximately $2.7 million compared to $2.3 million in Fiscal 2001. Our
international licensing revenues were $4.5 million in Fiscal 2002 compared to
$4.4 million in Fiscal 2001. For Fiscal 2003, we expect the launch of Cherokee
products in Carrefour stores in spring 2002 and in Tesco stores in fall 2002 to
have a positive impact on our international licensing revenues; however, even
then there can be no guarantee that any royalties will be significant in amount.
During Fiscal 2002, royalty revenues from wholesale licensing agreements totaled
$274,000 compared to $1.2 million for Fiscal 2001. The reduction in royalty
revenues is related to the termination and/or cancellation of licensing
agreements and to the inclusion in Fiscal 2001 of a one-time $300,000 royalty
payment from a terminated licensee. In Fiscal 2002, our revenues included $2.2
million from Mossimo Inc. compared to $297,000 for Fiscal 2001.
Our royalty recognition policy provides for recognition of royalties in the
quarter earned, although a large portion of such royalty payments are actually
received during the month following the end of a quarter. Our trade receivable
balances of $6.2 million and $5.89 million for Fiscal 2002 and Fiscal 2001,
respectively, included an accrual for Target Stores, Zellers and Mervyn's
royalty revenues and Mossimo fees earned during the fourth quarters of Fiscal
2002 and Fiscal 2001 and these revenues were subsequently received in the
following quarter.
Selling, general and administrative expenses including amortization of
trademarks for Fiscal 2002 were $9.1 million or 29.7% of revenues compared to
$8.4 million or 29.5% of revenues for Fiscal 2001. Selling, general and
administrative expenses in Fiscal 2002 increased due to expenses of
approximately $222,000 in severance payments, $138,000 in amortization of our
trademarks, $68,000 in charitable contributions, $67,000 in marketing expenses
and an additional bonus expense of $689,000, offset by decreases of $175,000 for
travel and entertainment expenses. For Fiscal 2002, certain other accruals
totaling $250,000 were deemed no longer required and were reversed out.
Amortization expenses are expected to increase as Sideout contingent payments
increase and we purchase other trademarks, and management and staff bonus
expenses are expected to rise as our EBITDA rises.
Our interest expense for Fiscal 2002 was $1.8 million compared to $2.4
million for Fiscal 2001. The interest expense is attributable to the Secured
Notes. Interest expense is expected to decrease as we continue to make quarterly
payments on the Secured Notes and the outstanding principal of such notes is
reduced. Our investment and interest income for Fiscal 2002 was $292,000
compared to $430,000 for Fiscal 2001. Although we had more cash available for
investment, the decrease in investment and interest income is due mainly to
lower interest rates being offered for investments.
15
For Fiscal 2002, we booked for generally accepted accounting principles a
tax provision of $8.0 million or $0.97 per diluted share, compared to $7.2
million or $0.86 per diluted share for Fiscal 2001. Our effective tax rate was
39.9% for Fiscal 2002 and 40.1% for Fiscal 2001. Our net income for Fiscal 2002
was $12.1 million or $ 1.46 per diluted share compared to a net income of $10.8
million or $1.29 per diluted share for Fiscal 2001. A portion of this increase
in our earnings per share is attributable to our repurchase of 68,300 shares of
our common stock during Fiscal 2002.
Fiscal 2001 compared to Fiscal 2000
In Fiscal 2001, revenues increased 14.4% to $28.3 million from $24.7
million for Fiscal 2000. Revenues for Fiscal 2001 were generated from licensing
our trademarks and finders fees for placing Mossimo with Target Stores while
revenues for Fiscal 2000 were generated solely from licensing our trademarks.
Revenues from Target Stores for Fiscal 2001 and Fiscal 2000 were $19.3 million
or 68% of revenues and $16.3 million or 66% of revenues, respectively. Revenues
from all other sources for Fiscal 2001 and Fiscal 2000 were $9.0 million or 32%
of revenues and $8.4 million or 34% of revenues, respectively. Zellers paid
royalties of approximately $3.7 million in Fiscal 2001 compared to $3.6 million
in Fiscal 2000. In Fiscal 2001, Mervyn's continued its expansion of the Sideout
brand into other product categories and paid royalties of approximately $2.3
million compared to $1.7 million in Fiscal 2000.
Our royalty recognition policy provides for recognition of royalties in the
quarter earned, although a large portion of such royalty payments are actually
received during the month following the end of a quarter. Our trade receivable
balances of $5.8 million and $4.3 million for Fiscal 2001 and Fiscal 2000,
respectively, included an accrual for Target Stores, Zellers and Mervyn's
royalty revenues earned during the fourth quarters of Fiscal 2001 and Fiscal
2000 and these revenues were subsequently received in the following quarter.
Selling, general and administrative expenses including amortization of
trademarks for Fiscal 2001 were $8.4 million or 29% of revenues compared to $9.4
million or 38% of revenues for Fiscal 2000. Excluding a $1.89 million
non-recurring expense related to the forgiveness and cancellation of a note
receivable from our CEO, Mr. Margolis, selling, general and administrative
expenses for Fiscal 2000 were $7.5 million or 30% of revenues for Fiscal 2000.
After excluding such nonrecurring expense from Fiscal 2000 results, selling,
general and administrative expenses in Fiscal 2001 increased due to expenses of
approximately $341,000 in salaries for additional marketing staff to intensify
our domestic and international efforts to negotiate contracts, $135,000 in
amortization of our trademarks and an additional bonus expense of $393,000.
Our interest expense for Fiscal 2001 was $2.4 million compared to $2.8
million for Fiscal 2000. The interest expense is attributable to the Secured
Notes. Interest expense is expected to decrease as we continue to make quarterly
payments on the Secured Notes and the outstanding principal of such notes is
reduced. Our investment and interest income for Fiscal 2001 was $430,000
compared to $399,000 for Fiscal 2000. The increase in investment and interest
income is due to more cash being available for investment.
We have fully utilized the net operating losses generated subsequent to our
1994 reorganization, which were not subject to Section 382 limitations. For
Fiscal 2001, we utilized $780,450 of our limited Section 382(1)(b) net operating
losses for both federal and state. In Fiscal 2000, we utilized $5.3 million of
our federal net operating loss carryovers and $780,450 of our limited Internal
Revenue Code Section 382(1)(6) net operating loss carryovers for both federal
and state. Our effective tax rate was 40% for Fiscal 2001 and 37.6% for Fiscal
2000.
Our net income for Fiscal 2001 was $10.8 million or $1.29 per diluted share
compared to a net income of $8.1 million or $0.94 per diluted share for Fiscal
2000. A portion of this increase in earnings per share is attributable to our
repurchase of 249,000 shares of our common stock during Fiscal 2001.
Liquidity and Capital Resources
Cash Flows. On February 2, 2002 we had cash and cash equivalents of $7.0
million, which amount included restricted cash of $2.6 million held in a
collection account by the trustee under the indenture for the Secured Notes. On
February 3, 2001 we had cash and cash equivalents of $5.3 million, which amount
included restricted cash of $2.7 million. The $1.7 million increase in cash and
cash equivalents is primarily attributable to a reduction in the number of
shares of our common stock that we repurchased during Fiscal 2002.
During Fiscal 2002, cash provided by operations was $14.6 million, compared
to $14.5 million in Fiscal 2001. During Fiscal 2002, cash used in investing
activities was $1.8 million, all of which was attributable to trademark
purchases and registration fees
16
incurred in connection with continued payments under the Sideout Agreement and
registration of the Sideout trademarks. In comparison, during Fiscal 2001, cash
used in investing activities was $1.5 million, due to $1.8 million which was
attributable to trademark purchases and registration fees incurred in connection
with continued payments under the Sideout Agreement and registration of the
Sideout trademarks, partially offset by the repayment of a $373,000 note
receivable. During Fiscal 2002, cash used in financing activities was $11.0
million compared to $12.6 million in Fiscal 2001. The decrease in cash used in
financing activities was primarily attributable to a reduction in the number of
shares of our common stock that we repurchased during Fiscal 2002. During Fiscal
2002, pursuant to our Board of Directors' direction to repurchase a portion of
our common stock, we used $607,000 of cash to repurchase 68,300 shares of our
common stock, in comparison to Fiscal 2001 when we used $2.1 million of our cash
to repurchase 249,000 shares. Additionally, during Fiscal 2002 payments were
made totaling $10.5 million on the Secured Notes in comparison to $10.125
million during Fiscal 2001.
Uses of Liquidity. Our cash requirements through the end of Fiscal 2003 are
primarily to fund operations, repay the Secured Notes, repurchase shares of our
common stock and, to a lesser extent for capital expenditures. We are frequently
approached by parties seeking to sell their brands and related trademarks.
Should an established marketable brand or equity become available on favorable
terms, we would be interested in pursuing such an acquisition and may elect to
fund such acquisition, in whole or in part, using our then-available cash.
The following table provides information related to our contractual cash
obligations under various financial and commercial agreements:
=====================================================================================================================
Payments Due by Period (a)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Contractual Obligations Less than 1 year 1-3 years 4 - 5 years After 5 years Total
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Debt (b) $10,500,000 $13,125,000 -- -- $ 23,625,000
- ---------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Operating Leases (c) $ 108,000 $ 162,000 -- -- $ 270,000
- ---------------------------------------------------------------------------------------------------------------------
Unconditional Purchase Obligations -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Other Long-Term Obligations (d)(e) (d)(e) -- -- (d)(e)
- ---------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $10,608,000(f) $13,287,000 (f) -- -- $ 23,895,000(f)
- ---------------------------------------------------------------------------------------------------------------------
(a) For purposes of the above table, yearly periods were
calculated to coincide with our fiscal years, meaning, for example,
that the period covered by the column captions "Less than 1 year"
starts February 3, 2002 and ends February 1, 2003.
(b) Represents payments to the holders of the Secured Notes.
(c) Represents future minimum non-cancelable lease payments
with respect to the lease of our office facility in Van Nuys,
California. The lease currently expires on July 31, 2004; however, we
have an option to extend the term of the lease for one additional
three-year period for monthly rental payments of $9,010.
(d) Under the terms of the Sideout Agreement, we agreed to pay
Sideout Sport Inc., on a quarterly basis, 40% of the first $10.0
million, 10% of the next $5.0 million and 5% of the next $20.0 million
of royalties received by us through licensing of the Sideout
trademarks. Upon the earlier of such time as we have paid Sideout total
contingency payments of $5.5 million or October 22, 2004, we will have
no further obligations to pay Sideout Sport Inc. Since January 1999, we
have paid, in total, $3.98 million in contingent payment under the
Sideout Agreement. Because payments to Sideout Sport Inc. are based on
royalties received, we cannot predict the exact amount of payments we
will be obligated to make to Sideout Sport up to October 22, 2004.
(e) Under the terms of the management agreement with Mr.
Margolis, Mr. Margolis will be paid $647,564 per fiscal year, subject
to annual cost of living increases. The management agreement also
provides that, for each fiscal year after Fiscal 2000, if our EBITDA
for such fiscal year is no less than $5.0 million, then Mr. Margolis
will receive a performance bonus equal to (x) 10% of our EBITDA for
such fiscal year in excess of $2.5 million up to $10.0 million,
17
plus (y) 15% of our EBITDA for such fiscal year in excess of $10.0
million. As a result, for Fiscal 2002 we accrued a bonus of $2.56
million for Mr. Margolis and if our EBITDA continues to increase, the
bonus payable to Mr. Margolis under the management agreement will also
increase. Because payments to Mr. Margolis are based on a percentage of
our EBITDA, we cannot predict the exact amount of payments we will be
obligated to make to Mr. Margolis over the next five years.
Additionally, if we terminate the management agreement without cause or
Mr. Margolis terminates the management agreement after we materially
breach any of the terms and conditions thereof or fail to perform any
material obligations thereunder, we would be obligated to pay Mr.
Margolis, within sixty days after the date the termination, a lump sum
in cash in excess of $9.0 million. See "Item 1. Risk Factors."
(f) Stated amount does not include any payments pursuant to
either the Sideout Agreement or the management agreement with Mr.
Margolis.
On December 23, 1997, Spell C issued the Secured Notes which yield 7.0%
interest per annum and mature on February 20, 2004. See "Item 1.
Recapitalization; Sale of Cherokee Trademarks to Spell C; Issuance of Secured
Notes" and "Item. Risk Factors." The Secured Notes amortize quarterly from May
20, 1998 through February 20, 2004, in the amount of $9.0 million per year the
first two years and $10.5 million per year the third through sixth years. The
Secured Notes are secured by the Amended Target Agreement and the United States
Cherokee trademarks and brand names. The aggregate scheduled amortization under
the Secured Notes is $60.0 million and equals the aggregate minimum guaranteed
royalty payable under the Amended Target Agreement, which is also $60.0 million.
Spell C is dependant on revenues from the Amended Target Agreement for most, if
not all, of its revenues. Although the Amended Target Agreement provides for a
minimum annual royalty payment, if for any reason Target Stores does not pay the
minimum royalties, Spell C will be unable to meet, and will default on, its
payment obligations under the indenture for the Secured Notes. We are not
guarantors of the Secured Notes; however, the United States Cherokee trademarks
have been pledged as security for the Secured Notes and the permanent loss of
such trademarks as a result of a default would have a material adverse effect on
our business, financial condition and results of operations. The Secured Notes
indenture does not contain any financial covenants that require the maintenance
of any financial ratios, cash flows, stock price, value of any assets, credit
rating, level of earnings or earnings per share. The Secured Notes indenture
does contain covenants prohibiting Spell C from, among other things,
transferring any right, title or interest in the Amended Target Agreement or the
United States Cherokee trademarks, incurring any encumbrances on such agreement
or trademarks, or taking any action to impair the liens on such agreement or
trademarks in favor of the holders of the Secured Notes. As of February 2, 2002,
Spell C was in compliance with the covenants in the indenture for the Secured
Notes.
As of February 2, 2002 we did not have any amounts outstanding under
any credit facilities or lines of credit and we are not the guarantor of the
Senior Notes or any other material third-party obligations. As of February 2,
2002, we do not have any standby letters of credit nor any standby repurchase
obligations.
Through May 1999, we paid a quarterly dividend. However, the payment of
any future dividends will be at the discretion of our Board and will be
dependant upon our financial conditions, results of operations, capital
requirements and other factors deemed relevant by our board.
Sources of Liquidiity. Our primary source of liquidity is expected to
be cash flow generated from operations, and cash and cash equivalents currently
on hand. We believe our cash flow from operations together with our cash and
cash equivalents currently on hand will be sufficient to meet our working
capital, capital expenditure and other commitments though the end of Fiscal 2003
; provided that, if the management agreement was terminated as discussed above,
we would not have sufficient cash to make the lump sum payment to Mr. Margolis.
See "Item 1. Risk Factors" We cannot predict our revenues and cash flow
generated from operations. Some of the factors that could cause our revenues and
cash flows to be materially lower are described under the caption titled "Risk
Factors" in Item 1 of this Form 10-K and under the caption title "Cautionary
Note Regarding Forward-Looking Statements" at the beginning of this Item 7.
If our revenues and cash flows during Fiscal 2003 are only slightly
lower than Fiscal 2002, we may not have cash available to continue to repurchase
shares of our common stock or to explore or consummate the acquisition of other
brands. If our revenues and cash flows during Fiscal 2003 are materially lower
than Fiscal 2002, we may need to take steps to reduce expenditures by scaling
back operations and reducing staff related to these activities. However, any
reduction of revenues would be partially offset by reductions in the amounts we
would be required to pay under the management agreement, employee bonuses and
possibly the Sideout Agreement. Further, the aggregate scheduled amortization
under the Secured Notes does not exceed the aggregate minimum guaranteed royalty
payments under the Amended Target Agreement. Until the outstanding amount under
the Secured Notes is fully paid, our ability to obtain funds from conventional
sources of long-term external financing, such as debt, convertible debt or
equity financings is somewhat limited. We do believe that, if necessary, even
prior to the full repayment of the Secured Notes, we would have access to
short-term external financing, but we cannot provide any assurance that
financing would be available to us on acceptable terms or at all.
18
Inflation and Changing Prices
Inflation, traditionally, has not had a significant effect on our
operations. Since most of our future revenues are based upon a percentage of
sales of the licensed products by our licensees, we do not anticipate that
inflation will have a material impact on future operations.
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES OF MARKET RISK
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
Interest: From time to time we invest our excess cash in interest-bearing
temporary investments of high-quality issuers. Due to the short time the
investments are outstanding and their general liquidity, these instruments are
classified as cash equivalents in our consolidated balance sheet and do not
represent a material interest rate risk to us. Our only long-term debt
obligations are the Secured Notes, which are zero-coupon secured notes yielding
interest of 7.0% interest per annum. This long-term debt obligation does not
represent a material interest rate risk to us.
Foreign Currency: We conduct business in various parts of the world. We are
exposed to fluctuations in exchange rates to the extent that the foreign
currency exchange rate fluctuates in countries where our licensees do business.
Revenues from international licensing comprise 14.6% of our consolidated
revenues. For Fiscal 2002, a hypothetical 10% strengthening of the US dollar
relative to the foreign currencies of countries where we operate was not
material.
19
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
CHEROKEE INC.
Report of Independent Accountants...................................................................................... F-1
Consolidated Balance Sheets At February 2, 2002 and February 3, 2001................................................... F-2
Consolidated Statements of Operations For the Years Ended February 2, 2002, February 3, 2001 and
January 29, 2000.................................................................................................. F-3
Consolidated Statements of Stockholders' Deficit For the Years Ended February 2, 2002, February 3, 2001 and
January 29, 2000.................................................................................................. F-4
Consolidated Statements of Cash Flows For the Years Ended February 2, 2002, February 3, 2001 and
January 29, 2000.................................................................................................. F-5
Notes to Financial Statements.......................................................................................... F-6
SCHEDULE
II Valuations and Qualifying Accounts and Reserves..................................................................... F-14
All other schedules for which provision is made in the applicable
accounting regulation of the SEC have been omitted since the required
information is not applicable or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the Consolidated Financial Statements and related notes.
20
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Cherokee Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Cherokee Inc. and its subsidiary at February 2, 2002 and February 3,
2001, and the results of their operations and their cash flows for the three
years ended February 2, 2002, February 3, 2001 and January 29, 2000, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index, presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 21, 2002
F-1
CHEROKEE INC.
CONSOLIDATED BALANCE SHEETS
February 2, February 3,
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents.............................................................. $ 4,394,000 $ 2,598,000
Restricted cash........................................................................ 2,645,000 2,724,000
Receivables, net....................................................................... 6,232,000 5,893,000
Prepaid expenses and other current assets.............................................. 62,000 37,000
Deferred tax asset..................................................................... 886,000 713,000
------------ ------------
Total current assets.............................................................. 14,219,000 11,965,000
Securitization fees, net of accumulated amortization of $840,000 and $634,000,
respectively............................................................................. 401,000 606,000
Deferred tax asset.......................................................................... 2,100,000 493,000
Property and equipment, net of accumulated depreciation of $265,000 and
$202,000, respectively................................................................... 156,000 219,000
Trademarks, net............................................................................. 7,365,000 6,115,000
Other assets................................................................................ 15,000 15,000
------------ ------------
Total assets...................................................................... $ 24,256,000 $ 19,413,000
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable....................................................................... $ 422,000 $ 302,000
Other accrued liabilities.............................................................. 3,584,000 3,176,000
Current portion of long term notes payable............................................. 10,500,000 10,500,000
------------ ------------
Total current liabilities......................................................... 14,506,000 13,978,000
Other liabilities........................................................................... - 250,000
Notes payable less current portion.......................................................... 11,510,000 20,255,000
------------ ------------
Total liabilities................................................................. 26,016,000 34,483,000
------------ ------------
Commitments and Contingencies (Note 8)
Stockholders' Deficit
Preferred stock, $.02 par value 1,000,000 shares authorized.
None issued and outstanding............................................................ -- --
Common stock, $.02 par value, 20,000,000 shares authorized, 8,163,405 and
8,231,705 shares issued and outstanding at February 2, 2002 and February 3,
2001, respectively....................................................................... 164,000 165,000
Additional paid-in capital.................................................................. 1,252,000 --
Accumulated deficit......................................................................... (3,176,000) (15,235,000)
------------ ------------
Total stockholders' deficit......................................................... (1,760,000) (15,070,000)
------------ ------------
Total liabilities and stockholders' deficit......................................... $ 24,256,000 $ 19,413,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
------------------------
February 2, February 3, January 29,
2002 2001 2000
---- ----- ----
Net revenues.............................................................. $30,674,000 $28,281,000 $24,714,000
Selling, general and administrative expenses.............................. 8,599,000 7,955,000 9,115,000
Amortization of trademarks................................................ 534,000 396,000 261,000
----------- ----------- -----------
Operating income................................................ 21,541,000 19,930,000 15,338,000
Other income (expenses):
Interest expense..................................................... (1,754,000) (2,367,000) (2,817,000)
Investment and interest income....................................... 292,000 430,000 399,000
----------- ----------- -----------
Total other expenses, net....................................... (1,462,000) (1,937,000) (2,418,000)
----------- ------------ -----------
Income before income taxes................................................ 20,079,000 17,993,000 12,920,000
Income tax provision...................................................... 8,020,000 7,227,000 4,859,000
----------- ----------- -----------
Net income........................................................... $12,059,000 $10,766,000 $ 8,061,000
=========== =========== ===========
Basic earnings per share............................................. $ 1.47 $ 1.29 $ 0.94
=========== =========== ===========
Diluted earnings per share........................................... $ 1.46 $ 1.29 $ 0.94
=========== =========== ===========
Weighted average shares outstanding:
Basic................................................................ 8,199,284 8,334,420 8,618,053
Diluted.............................................................. 8,243,554 8,349,599 8,620,511
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Notes
Common Stock Additional Receivable
------------- Paid-in Accumulated from
Shares Par Value Capital Deficit Stockholder Total
------- ---------- -------- ------- ----------- -----
Balance at January 30, 1999............... 8,705,428 $ 174,000 $(27,919,000) $(2,134,000) $(29,879,000)
Purchase and retirement of
treasury shares........................ (233,000) (4,000) (1,903,000) (1,907,000)
Cash dividend distributions............... (2,176,000) (2,176,000)
Forgiveness of note receivable
from stockholder....................... 1,890,000 1,890,000
Interest on note receivable from
stockholder............................ (121,000) (121,000)
Net income for the year ended
January 29, 2000....................... 8,061,000 8,061,000
---------- --------- ----------- ----------- ------------
Balance at January 29, 2000............... 8,472,428 170,000 (23,937,000) (365,000) (24,132,000)
Exercise of director warrant.............. 8,277 12,000 12,000
Purchase and retirement of
treasury shares........................ (249,000) (5,000) (2,096,000) (2,101,000)
Stock option tax benefit.................. 20,000 20,000
Interest on note receivable from
stockholder............................ (8,000) (8,000)
Repayment of note receivable
from stockholder....................... 373,000 373,000
Net income for the year ended
February 3, 2001....................... 10,766,000 10,766,000
--------- ---------- ------------ ----------- ------------
Balance at February 3, 2001............... 8,231,705 165,000 (15,235,000) -- (15,070,000)
Purchase and retirement of
treasury shares........................ (68,300) (1,000) $ (606,000) (607,000)
Utilization of pre-bankruptcy NOL
carryforwards......................... 1,858,000 1,858,000
Net income for the year ended
February 2, 2002....................... 12,059,000 12,059,000
--------- ---------- ---------- ------------ ----------- ------------
Balance at February 2, 2002............... 8,163,405 $ 164,000 $1,252,000 $ (3,176,000) $ -- $ (1,760,000)
========= ========== ========== ============ =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
---------------------
February 2, February 3, January 29,
2002 2001 2000
----- ----- ----
Operating activities
Net income ............................................................. $ 12,059,000 $ 10,766,000 $ 8,061,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 63,000 46,000 61,000
Amortization of trademarks ........................................ 534,000 396,000 260,000
Amortization of securitization fees ............................... 206,000 206,000 206,000
Amortization of debt discount ..................................... 1,754,000 2,367,000 2,817,000
Interest income on note receivable from stockholder ............... -- (8,000) (121,000)
Deferred taxes .................................................... 78,000 1,170,000 2,012,000
Forgiveness of note receivable .................................... -- -- 1,890,000
Changes in current assets and liabilities:
Receivables .................................................. (339,000) (1,052,000) (1,609,000)
Prepaids and other current assets ............................ (25,000) (9,000) 1,000
Accounts payable ............................................. 120,000 (298,000) 320,000
Accrued payroll and related expenses ......................... 408,000 909,000 531,000
Other liabilities ............................................ (250,000) -- (250,000)
------------ ------------ ------------
Net cash provided by operating activities ............... 14,608,000 14,493,000 14,179,000
------------ ------------ ------------
Investing activities
Purchases of trademarks ................................................ (1,784,000) (1,845,000) (1,750,000)
Purchase of property and equipment ..................................... -- (62,000) (31,000)
Repayment on note receivable from stockholder .......................... -- 373,000 --
Change in other assets ................................................. -- -- 91,000
------------ ------------ ------------
Net cash used in investing activities ................... (1,784,000) (1,534,000) (1,690,000)
------------ ------------ ------------
Financing activities
Decrease (increase) in restricted cash ................................. 79,000 (400,000) 2,176,000
Payment of long-term debt .............................................. (10,500,000) (10,125,000) (9,000,000)
Proceeds from exercise of warrants ..................................... -- 12,000 --
Purchase of treasury shares ............................................ (607,000) (2,101,000) (1,907,000)
Cash distributions and dividends ....................................... -- -- (4,352,000)
------------ ------------ ------------
Net cash used in financing activities .................... (11,028,000) (12,614,000) (13,083,000)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents ...................... 1,796,000 345,000 (594,000)
Cash and cash equivalents at beginning of period ....................... 2,598,000 2,253,000 2,847,000
------------ ------------ ------------
Cash and cash equivalents at end of period ............................ $ 4,394,000 $ 2,598,000 $ 2,253,000
============ ============ ============
Total paid during period:
Income taxes ...................................................... $ 7,543,000 $ 5,115,000 $ 3,143,000
Interest .......................................................... $ 2,264,000 $ 1,626,000 $ 900,000
Non-cash transactions:
Utilization of pre-bankruptcy NOL carryforwards ................. $ 1,858,000 $ -- $ --
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Cherokee Inc. (which may be referred to as we, us, or our) is in the
business of marketing and licensing the Cherokee and Sideout brands and related
trademarks and other brands it owns or represents. We are one of the leading
licensors of brand names and trademarks for apparel, footwear and accessories in
the United States.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of our company
and our wholly-owned subsidiary, SPELL C. LLC, a Delaware limited liability
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Company Year End
Our fiscal year comprises of a 52 or 53 week period ending on the Saturday
nearest to January 31.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased and money market
funds with an original maturity date of three months or less to be cash
equivalents.
The Secured Notes indenture requires the trustee to retain in the
collection account certain amounts sufficient to meet the quarterly note
payments. Such amounts have been classified as restricted cash.
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.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Maintenance and repairs are expensed as incurred. The cost and
related accumulated depreciation of property and equipment sold or retired are
removed from the accounts and the resulting gains or losses are included in
current operations. Depreciation is provided on a straight line basis over the
estimated useful life of the related asset ranging from three to eight years.
Trademarks
We hold various trademarks including Cherokee(R), Sideout(R), Sideout
Sport(R), King of the Beach(R) and others, in connection with numerous
categories of apparel and other goods. These trademarks are registered with the
United States Patent and Trademark Office and in a number of other countries. We
also hold trademark applications for Cherokee, Sideout, Sideout Sport and King
of the Beach in numerous countries. We intend to renew these registrations as
appropriate prior to expiration. We monitor on an ongoing basis unauthorized
uses of our trademarks, and we rely primarily upon a combination of trademark,
copyright, know-how, trade secrets, and contractual restrictions to protect our
intellectual property rights both domestically and internationally.
F-6
Trademark registrations, renewal fees and acquired trademarks are stated at
cost and are amortized over their estimated useful life not exceeding fifteen
years.
Securitization Fees
Securitization fees are the costs associated with the leveraged
recapitalization which have been capitalized and are being amortized over the
term of the Secured Notes indenture.
Long-Lived Assets
The carrying value of long-lived assets is periodically reviewed by us and
impairment losses, if any, are recognized when the expected nondiscounted future
operating cash flows derived from such assets are less than their carrying
value. Based on current information we believe no impairment exists.
Income Taxes
Income tax expense is the tax payable for the period and the change during
the period in deferred tax assets and liabilities. Deferred income taxes are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted rates in effect during the year in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
Concentrations of Credit Risk
Financial instruments which potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and trade
receivables. We limit our credit risk with respect to cash by maintaining cash
balances with quality financial institutions. At February 2, 2002 and February
3, 2001, our cash and cash equivalents exceeded FDIC limits. Concentrations of
credit risk with respect to trade receivables are minimal due to the limited
amount of open receivables and due to the nature of our licensing royalty
revenue program. Generally, we do not require collateral or other security to
support customer receivables. One customer accounted for approximately 68% and
67%, respectively, of our trade receivables at February 2, 2002 and February 3,
2001 and approximately 67%, 68% and 66%, respectively, of our revenues during
the fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000.
Our international revenues represent approximately 15%, 16% and 18%,
respectively, of our total revenues during the fiscal years ended February 2,
2002, February 3, 2001 and January 29, 2000.
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 31, 2004, 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 and
$10.5 million for each of the four fiscal years ending January 31, 2001 through
2004. 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 agreed to renew 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
will commence on February 1, 2002 and continue 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.
In 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. During Fiscal 2002, Zellers exercised its
right to renew its licensing agreement for the Cherokee brand for an additional
term of five years on the same terms and conditions. The renewal term will
commence on February 1, 2003 and continue through January 31, 2008.
F-7
Fair Value of Financial Instruments
The amount recorded for financial instruments in our consolidated financial
statements approximates fair value as defined in SFAS No. 107 "Disclosures about
the Fair Value of Financial Instruments", except the long-term debt described in
Note 5 of which the fair value is not readily determinable.
Stock-Based Compensation
SFAS No. 123 "Accounting for the Awards of Stock-Based Compensation to
Employees" encourages, but does not require companies to record compensation
cost for stock-based compensation plans at fair value. We have adopted the
disclosure requirements of SFAS No. 123, which involves proforma disclosure of
net income under SFAS No. 123 and a detailed description of plan terms and
assumptions used in valuing stock option grants. We have chosen to continue to
account for stock-based compensation awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Advertising
Our retail direct licensees fund their own advertising programs. Our
advertising and promotional costs are immaterial and are expensed as incurred.
Earnings Per Share
Basic earnings per share is computed by dividing the net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed by
dividing the net income attributable to common shareholders by the weighted
average number of common and common equivalent shares outstanding during the
period. Common share equivalents included in the diluted computation represent
shares issuable upon assumed exercise of stock options using the treasury stock
method.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. Comprehensive income includes net
income and other comprehensive income components which under generally accepted
accounting principles ("GAAP") bypass the income statement and are reported in
the balance sheet as a separate component of equity. For the three years ended
February 2, 2002, February 3, 2001 and January 29, 2000, we had no other
comprehensive income components as defined in SFAS No. 130, and accordingly, net
income equals comprehensive income.
Segment Reporting
We determine and disclose our segments in accordance with SFAS No. 131.
"Disclosures about Segments of an Enterprise and Related Information" which uses
a "management" approach for determining segments. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of our reportable
segments. SFAS No. 131 also requires disclosures about products or services,
geographic areas and major customers. The adoption of SFAS No. 131 did not
affect the results of operations or financial position nor the disclosure of
segment information, as our reporting structure provides for only one segment--
the marketing and licensing of trademarks.
3. Receivables
Receivables consist of the following:
February 2, February 3,
2002 2001
----- ----
Trade........................................ $ 6,061,000 $ 5,784,000
Other........................................ 171,000 109,000
----------- -----------
$ 6,232,000 $ 5,893,000
=========== ===========
F-8
Our royalty recognition policy provides for recognition of royalties in the
quarter earned, although a large portion of such royalty payments are actually
received during the month following the end of a quarter. Our trade receivable
balance as of February 2, 2002 and February 3, 2001 included an accrual for
Target Stores, Zellers and Mervyn's royalty revenues and Mossimo fees earned
during the fourth quarter periods ended February 2, 2002 and February 3, 2001
and subsequently received in the following quarter.
4. Trademarks
Trademarks consist of the following:
February 2, 2002 February 3, 2001
---------------- ----------------
Trademarks....................................... $8,798,000 $ 7,014,000
Accumulated amortization......................... (1,433,000) (899,000)
---------- ------------
Total....................................... $7,365,000 $ 6,115,000
========== ===========
In November 1997, we entered into an agreement with Sideout Sport Inc. (the
"Sideout Agreement") to purchase trademarks and licenses related to Sideout(R),
Sideout Sport(R) and King of the Beach(R). Pursuant to the Sideout Agreement we
paid $1.5 million at the closing date of the acquisition and agreed to pay
$500,000 upon the release of liens, of which $495,000 was paid during the fiscal
year ended January 30, 1999. We will also pay Sideout Sport Inc., on a quarterly
basis, additional consideration contingent upon a formula of licensing revenues,
as defined in the Sideout Agreement. Such contingent consideration is limited to
a maximum of $5.5 million, or the lesser amount which may be earned through
October 22, 2004. Since January 1, 1999, we have paid in total over $3.98
million in contingent payments under the Sideout Agreement. Our Executive Vice
President is a significant stockholder in Sideout Sport, Inc.
During the fiscal year ended February 2, 2002 ( "Fiscal 2002") the Company
did not purchase trademarks, other than the contingent purchase payments to
Sideout Inc., in comparison to trademark purchases totaling $52,000 for the
fiscal year ended February 3, 2001 ("Fiscal 2001"). The purchases in 2001
related to acquisitions of foreign trademark registrations for the trade names
Cherokee and Sideout. Under the terms of the Sideout Agreement, we capitalized
$1.3 million for Fiscal 2002 in comparison to $1.2 million for Fiscal 2001.
Trademark registration and renewal fees capitalized for Fiscal 2002 totaled
$451,000 in comparison to $584,000 for Fiscal 2001.
5. Long-Term Debt
On December 23, 1997, we completed the recapitalization described below and
publicly announced that we would declare a special dividend of $5.50 per share,
which was subsequently paid on January 15, 1998. As part of the recapitalization
and in exchange for the proceeds from the Secured Notes (as defined below), we
sold to our wholly-owned subsidiary, Spell C, all our rights to the Cherokee
brand and related trademarks in the United States and assigned to Spell C all of
our rights in an amended licensing agreement (the "Amended Target Agreement")
with Target Stores, a division of Target Corporation. Spell C issued for gross
proceeds of $47.9 million, privately placed Zero Coupon Secured Notes (the
"Secured Notes"), yielding 7.0% interest per annum and maturing on February 20,
2004. The Secured Notes amortize quarterly from May 20, 1998 through February
20, 2004. The Secured Notes are collateralized by the Amended Target Agreement
and the domestic Cherokee brand name and trademarks. The Secured Notes indenture
requires that any proceeds due to Spell C under the Amended Target Agreement
must be deposited directly into a collection account controlled by the trustee
under the indenture. The trustee will distribute from the collection account the
amount of principal due and payable on the Secured Notes to the holders thereof
on quarterly note payment dates. Excess amounts on deposit in the collection
account may only be distributed to Spell C if the amount on deposit in the
collection account exceeds the aggregate amount of principal due and payable on
the next quarterly note payment date. Such excess amounts, if any, may then be
distributed by Spell C to us. The minimum guaranteed royalty under the Amended
Target Agreement is $9.0 million for each of the two fiscal years ending January
29, 1999 and 2000 and $10.5 million for each of the four fiscal years ending
January 31, 2001 through 2004. The aggregate scheduled amortization under the
Secured Notes is $60.0 million and equals the aggregate minimum guaranteed
royalty payable under the Amended Target Agreement which is also $60.0 million.
During Fiscal 2002 and Fiscal 2001, the trustee distributed from the collection
account $10.5 million and $10.125 million, respectively to the holders of the
Secured Notes.
F-9
5. Long-Term Debt continued
The maturity schedule of Secured Notes is as follows:
Face Value
----------
2003 ............................................................................................. $10,500,000
2004 ............................................................................................. 10,500,000
Thereafter ....................................................................................... 2,625,000
-----------
Total ....................................................................................... $23,625,000
Less unamortized note discount ................................................................... 1,615,000
-----------
22,010,000
Less current portion of long term debt ........................................................... 10,500,000
-----------
Long term obligation ........................................................................ $11,510,000
===========
6. Income Taxes
The income tax provision as shown in the statements of operations includes
the following:
Year Ended Year Ended Year Ended
February 2, February 3, January 29,
2002 2001 2000
---- ---- ----
Current:
Federal....................................................... $5,747,000 $4,299,000 $1,139,000
State......................................................... 1,758,000 1,317,000 1,077,000
Foreign....................................................... 437,000 447,000 427,000
---------- ---------- ----------
7,942,000 6,063,000 2,643,000
Deferred:
Federal....................................................... 68,000 888,000 2,179,000
State......................................................... 10,000 276,000 37,000
---------- ---------- ----------
78,000 1,164,000 2,216,000
---------- ---------- ----------
$8,020,000 $7,227,000 $4,859,000
========== ========== ==========
Deferred income taxes are comprised of the following:
February 2, 2002 February 3, 2001
---------------- ----------------
Current Non-Current Current Non-Current
------- ----------- ------- -----------
Deferred tax assets:
Fixed assets..................................... $ -- $ (19,000) $ -- $ (16,000)
Tax effect of NOL carryovers..................... 273,000 2,185,000 265,000 2,388,000
Other............................................ 613,000 (66,000) 448,000 (21,000)
Valuation allowance.............................. -- -- -- (1,858,000)
--------- ----------- --------- ----------
Total deferred tax assets........................ $ 886,000 $ 2,100,000 $ 713,000 $ 493,000
========= =========== ========= ==========
Our deferred tax asset is primarily related to state tax benefits and net
operating loss carryforwards. We believe that it is more likely than not that
the deferred tax assets will be realized based upon expected future income.
Accordingly, for the year ended February 2, 2002, the valuation allowance,
relating to pre-organization carryovers, has been released in its entirety
and credited to additional paid-in capital.
F-10
6. Income Taxes continued
A reconciliation of the actual income tax rates to the federal statutory
rate follows:
Year Ended Year Ended Year Ended
February 2, February 3, January 29,
2002 2001 2000
---- ---- ----
Tax expense at U.S. statutory rate ................................. 35.0% 34.0% 34.0%
State income tax benefit net of federal income tax ................. 5.8 5.8 5.7
Others ............................................................. (0.9) .3 (2.1)
-------- ------- -------
Tax provision (benefit) ............................................ 39.9% 40.1% 37.6%
======== ======= =======
In 1994, we filed a prepackaged plan of reorganization pursuant to Chapter
11 of the United States Bankruptcy Code. As a result of the plan, an ownership
change occurred and the annual limitation of pre-reorganization NOL's and
built-in losses (i.e. the tax bases of assets exceeded their fair market value
at the date of the ownership change) has been substantially limited under IRC
Section 382. The annual limitation amount, computed pursuant to IRC Section
382(1)(6), is approximately $780,000. Any unused IRC Section 382 annual loss
limitation amount may be carried forward to the following year. Those unused
limitation losses are then added to the current IRC Section 382 annual
limitation amount. As of February 2, 2002 we have $7.0 million of federal
Section 382 NOLs available that begin to expire in 2008.
7. Earnings Per Share
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for the three years
ended February 2, 2002, February 3, 2001 and January 29, 2000:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ------
For the year ended February 2, 2002:
Basic earnings per share...................................... $12,059,000 8,199,284 $ 1.47
Effect of dilutive securities--stock options and warrants..... 44,270
----------- ---------- ------
Dilutive earnings per share.............................. $12,059,000 8,243,554 $ 1.46
----------- ---------- ------
For the year ended February 3, 2001:
Basic earnings per share...................................... $10,766,000 8,334,420 $ 1.29
Effect of dilutive securities--stock options and warrants..... 15,179
----------- ---------- ------
Dilutive earnings per share.............................. $10,766,000 8,349,599 $ 1.29
----------- ---------- ------
For the year ended January 29, 2000:
Basic earnings per share...................................... $ 8,061,000 8,618,053 $ 0.94
Effect of dilutive securities--stock options and warrants..... 2,458
----------- ---------- ------
Dilutive earnings per share.............................. $ 8,061,000 8,620,511 $ 0.94
----------- ---------- ------
The computation for diluted number of shares excludes unexercised stock
options and warrants which are anti-dilutive. The number of such shares for the
three years ended February 2, 2002, February 3, 2001 and January 29, 2000 were
177,268, 291,735 and 503,702, respectively.
F-11
8. Commitments and Contingencies
Leases
We lease our current facility under an operating lease expiring on July 31,
2004. We have an option to extend the term of the lease for one additional
three-year period. The future minimum non-cancellable lease payments are as
follows:
Operating
Leases
------
2003........................................................... $ 108,000
2004........................................................... 108,000
2005........................................................... 54,000
---------
Total future minimum lease payments....................... $ 270,000
=========
Total rent expense was $105,000 for the year ended February 2, 2002, and
$102,000 for each of the years ended February 3, 2001 and January 29, 2000.
9. Related Party Transactions
In 1995, we entered into a Management Agreement (the "Agreement") with The
Newstar Group d/b/a The Wilstar Group ("Wilstar"), pursuant to which Wilstar
agreed to provide management services to us by providing the services of Mr.
Robert Margolis as Chief Executive Officer. On January 3, 2001, Wilstar assigned
the Agreement to Mr. Margolis. The Agreement, as amended, terminated on February
2, 2002 and provides for certain base compensation and bonuses, as defined,
payable to Mr. Margolis. The Agreement will automatically be extended for each
consecutive one year period in the event that pre-tax earnings, as defined,
exceed specified levels as agreed upon by our Compensation Committee. Pre-tax
earnings for Fiscal 2002, Fiscal 2001 and the year ended January 29, 2000
exceeded specified levels as agreed upon by our Compensation Committee thereby
automatically extending the Agreement to February 1, 2005. The Agreement also
provides that Mr. Margolis may elect two directors to the Board of Directors.
The Agreement may be terminated at any time without cause or in the event
of certain circumstances, as defined. For the years ended February 2, 2002,
February 3, 2001 and January 29, 2000, respectively, we paid to Mr. Margolis $
3.2 million, $2.76 million and $4.0 million of contractual base compensation and
bonuses.
On December 23, 1997 we loaned $2.0 million to Robert Margolis. The loan
yielded 6.0% interest per annum and was recorded as a reduction to stockholders'
equity. The principal amount of the note and all accrued interest thereon were
due and payable on December 23, 2002.
In connection with the amendment of the Agreement, our stockholders
approved the forgiveness and cancellation of approximately $1.9 million of the
note should we meet certain performance goals during the fourth quarter ended
January 29, 2000. Having met the performance goals during the fourth quarter
ended January 29, 2000, we recorded the partial forgiveness and cancellation of
$1.9 million of the note receivable from stockholder as a charge against income
in the year ended January 29, 2000. The remaining balance of the note receivable
and accrued interest, totaling $373,000 was paid in full in June 2000.
F-12
10. Capitalization
Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred stock. Our
board of directors can determine the rights, preferences, privileges and
restrictions on the preferred stock and the class and voting rights. As of
February 2, 2002 and February 3, 2001, no shares of preferred stock were issued.
Stock Option Plan
Our 1995 Incentive Stock Option Plan (the "Plan") was approved at the
October 30, 1995 Annual Meeting of Stockholders. The purpose of the Plan is to
further our growth and development by providing an incentive to officers and
other key employees who are in a position to contribute materially to our
prosperity. Two types of stock options (the "Options") may be granted under the
plan--Incentive and Non-Qualified stock options. The Options vest in equal
installments over a three year period starting at the grant date and have a term
of ten years. The maximum number of shares authorized for grants of options
under the 1995 Plan is 900,000. As of February 2, 2002, we have 108,797 shares
available for grants of options.
SFAS No. 123 "Accounting for the Awards of Stock-Based Compensation to
Employees" encourages, but does not require companies to record compensation
cost for stock based compensation plans at fair value. We have chosen to
continue to account for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, " Accounting
for Stock Issued to Employees," and related interpretations. Had compensation
costs for our stock option plan been determined based upon the methodology
prescribed under SFAS No. 123, our net income would approximate the pro forma
amounts below:
2002 2001 2000
---- ---- ----
Pro forma net income .................. $11,876,000 $10,381,000 $ 7,606,000
Pro forma basic earnings per share .... $ 1.45 $ 1.25 $ 0.88
Pro forma diluted earnings per share .. $ 1.44 $ 1.24 $ 0.88
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: for 2000,
risk-free interest rates ranging between 4.82% and 5.82%; dividend yields of
zero percent; volatility of 47.5%; and expected life of the option of three
years; for 2001, risk-free interest rates ranging between 6.27% and 6.70%;
dividend yields of zero percent; volatility of 48.16%; and for 2002, risk-free
interest rate of 4.50%; dividend yields of zero percent; volatility of 28.77%;
and expected life of the option of three years. Because additional stock options
are expected to be granted each year, the above pro forma disclosures are not
representative of pro forma effects on pro forma financial results for future
years.
A summary of our stock option activity, and related information for the
years ended February 2, 2002, February 3, 2001, and January 29, 2000 follows:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at beginning of year..................... 599,536 $ 8.98 587,869 $ 9.01 561,059 $ 9.06
Granted......................................... 10,000 8.90 95,000 7.85 155,000 8.33
Exercised....................................... -- -- (8,277) 1.48 -- --
Forfeited....................................... (50,000) 8.50 (75,056) 7.90 (128,190) 8.39
------- ------ ------- ------ -------- ------
Outstanding at end of year........................... 559,536 $ 9.03 599,536 $ 8.98 587,869 $ 9.01
======= ====== ======= ====== ======== ======
Exerciseable at end of year.......................... 516,203 $ 9.01 460,371 $ 9.01 320,904 $ 8.90
Weighted average grant date fair value of
options granted during the year................... $ 2.26 $ 3.13 $ 2.76
F-13
10. Capitalization continued
The following table summarizes the stock options outstanding and
exercisable as of February 2, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number of Weighted Weighted Number of average
shares average average exercise shares exercise
Range outstanding remaining life price outstanding price
----- ----------- -------------- ------ ----------- -----
$ 7.00-$ 8.00.................................. 85,834 7.68 years $ 7.63 85,834 $ 7.63
$ 8.00-$ 9.00.................................. 263,101 6.05 years $ 8.54 253,101 $ 8.53
$ 9.00-$10.00.................................. 114,467 5.93 years $ 9.71 81,134 $ 9.85
$10.00-$11.00.................................. 96,134 5.49 years $10.79 96,134 $10.79
------- -------
559,536 516,203
======= =======
11. Selected Quarterly Financial Data (Unaudited):
The following table summarizes certain financial information by quarter for
2002 and 2001:
Fiscal year ended February 2, 2002
May 5, August 4, November 3, February 2,
2001 2001 2001 2002
---- ---- ---- ----
Net Revenues................................................ $10,504,000 $8,348,000 $5,533,000 $6,289,000
Income before income taxes.................................. 7,673,000 5,419,000 3,114,000 3,873,000
Net Income.................................................. 4,598,000 3,251,000 1,866,000 2,344,000
Net income per share--basic.................................. 0.56 0.40 0.23 0.28
Net income per share--diluted................................ 0.56 0.39 0.23 0.28
Fiscal year ended February 3, 2001
April 29, July 29, October 28, February 3,
2000 2000 2000 2001
---- ---- ---- ----
Net Revenues................................................ $9,603,000 $7,686,000 $4,986,000 $6,006,000
Income before income taxes.................................. 6,929,000 4,728,000 2,907,000 3,429,000
Net Income.................................................. 4,157,000 2,837,000 1,744,000 2,028,000
Net income per share--basic.................................. 0.49 0.34 0.21 0.25
Net income per share--diluted................................ 0.49 0.34 0.21 0.25
CHEROKEE INC.
SCHEDULE II--VALUATIONS AND QUALIFYING ACCOUNTS AND RESERVES
Charged/
Balance at (Credited) to Charged Balance at
Beginning of Costs and to Other End of
Description Period Expenses Accounts Deductions Period
------------ ------ ---------- ------
Tax Valuation Allowance
Year ended Feb. 2, 2002........................ $1,858,000 $-- $ 1,858,000 $-- $--
Year ended Feb. 3, 2001........................ $1,858,000 $-- $-- $-- $1,858,000
Year ended Jan. 29, 2000....................... $1,858,000 $-- $-- $-- $1,858,000
F-14
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
compliance with Section 16(a) of the Exchange Act is incorporated herein by
reference to the information contained in the Proxy Statement relating to our
2002 Annual Meeting of Stockholders scheduled to be held on June 5, 2002, which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended February 2, 2002. The following table
sets forth information with respect to each of our current executive officers.
Name, Age and Principal Occupation for Past Five Years;
Present Position with the Company Business Experience
--------------------------------- -------------------
Robert Margolis, 54
Director, Chairman of the Board of
Directors and Chief Executive Officer............. Mr. Margolis has been our Chairman of the Board and Chief Executive
Officer since May 5, 1995 and his services are provided to us pursuant
to a management agreement. Mr. Margolis was the co-founder of our
Apparel Division in 1981. He had been our Co-Chairman of the Board of
Directors, President and Chief Executive Officer of the Company since
June 1990 and became Chairman of the Board on June 1, 1993. Mr.
Margolis resigned all of his positions with us on October 31, 1993 and
entered into a one-year consulting agreement with us.
Howard Siegel, 46
President-Operations.............................. Mr. Siegel has been employed by us since January 1996 as Vice President
of Operations and administration and became President of Operations on
June 1, 1998. Prior to January 1996, Mr. Siegel had a long tenure in
the apparel business industry working as a Senior Executive for both
Federated Department stores and Carter Hawley Hale Broadway stores.
Carol Gratzke, 53
Chief Financial Officer........................... Ms. Gratzke returned to us in November 1995 as our Chief Financial
Officer. From August 1986 to July 1994, she was the Controller and, for
a portion of such period, the Chief Financial Officer of our Apparel &
Uniform Divisions. From July 1994 to September 1995, she was Executive
Vice President of Finance for a Los Angeles based apparel
manufacturing company.
Stephen Ascher, 39
Executive Vice President, New Business............ Mr. Ascher joined us in November 1997 when the worldwide rights of the
Sideout brand were purchased in November 1997. In November 1983, Mr.
Ascher founded Sideout Sport, Inc. He was the President and CEO of
Sideout Sport through October 1997 and the former President of Sideout
Sport Inc.
21
Sandy Stuart, 50
Executive Vice President, Brand
Development....................................... Ms. Stuart joined us in June 2001 as Executive Vice President of Brand
Development. Prior to June 2001 Ms. Stuart spent 24 years at Bugle Boy
Industries, where she was Regional Sales Manager from 1977 until 1985.
She was Senior Executive, Vice President of Sales from 1985 until 2001,
where her responsibilities involved her in everything from design to
production to sales and sales management.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information contained in the Proxy Statement relating to our 2002 Annual
Meeting of Stockholders scheduled to be held on June 5, 2002, which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended February 2, 2002.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information contained in the Proxy Statement relating to our 2002 Annual
Meeting of Stockholders scheduled to be held on June 5, 2002, which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended February 2, 2002.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the information contained in the Proxy Statement relating to our 2002 Annual
Meeting of Stockholders scheduled to be held on June 5, 2002, which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended February 2, 2002.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The List of Financial Statements are filed as Item 8 of Part II of
this Form 10-K.
(2) List of Financial Statement Schedules.
II. Valuations and Qualifying Accounts and Reserves [included in the
Financial Statements filed as Item 8 of Part II of this Form 10-K].
(3) List of Exhibits.
The exhibits listed in the accompanying Index to Exhibits are filed as part
of this Form 10-K.
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Amended and Restated Certificate of Incorporation of Cherokee Inc.
(incorporated by reference from Exhibit 3.1 of Cherokee Inc.'s Form
10Q dated October 28, 2000).
3.2 Bylaws of Cherokee Inc. (incorporated by reference from Exhibit 3.2 of
Cherokee Inc.'s Form 10Q dated October 28, 2000).
4.1 Indenture, dated December 23, 1997, among SPELL C. LLC, as issuer, and
Wilmington Trust Company, as trustee, with respect to the Zero Coupon
Secured Notes (incorporated by reference from Exhibit 4.3 of Cherokee
Inc.'s Form 10-K dated January 31, 1998).
22
Exhibit
Number Description of Exhibit
------- ----------------------
4.2 Security Agreement dated December 23, 1997, between SPELL C. LLC and
Wilmington Trust Company (incorporated by reference from Exhibit 4.4
of Cherokee Inc.'s Form 10-K dated January 31, 1998).
10.1 Cherokee Inc. 1995 Incentive Stock Option Plan (incorporated by
reference from Cherokee Inc.'s Form S-8 dated June 23, 1998).
10.2 First Amendment to Cherokee Inc. 1995 Incentive Stock Option Plan
(incorporated by reference from Cherokee Inc.'s Form S-8 dated June
23, 1998).
10.3 Second Amendment to Cherokee Inc. 1995 Incentive Stock Option Plan
(incorporated by reference from Cherokee Inc.'s Form S-8 dated June
23, 1998).
10.4 Form of Director Option (incorporated by reference from Cherokee Inc.'s
Form S-8 dated October 21, 1996).
10.6 Form of Employee Option Agreement (incorporated by reference from
Exhibit 10.6 of Cherokee Inc.'s Form 10-K dated February 3, 2001).
10.7 Agreement of Purchase and Sale of Trademarks and Licenses between
Cherokee Inc. and Sideout Sport, Inc. dated November 7, 1997
(incorporated by reference from Exhibit 2.1 of Cherokee Inc.'s
Current Report on Form 8-K dated November 7, 1997).
10.8 License Agreement between Cherokee Inc. and Dayton Hudson Stores dated
November 12, 1997 (incorporated by reference from Exhibit 10.1 of
Cherokee Inc.'s Current Report on Form 8-K dated November 7, 1997).
10.9 Note Purchase Agreement dated December 23, 1997, between SPELL C. LLC
and the purchasers listed on the signature pages thereto
(incorporated by reference from Exhibit 10.16 of Cherokee Inc.'s Form
10-K dated January 31, 1998).
10.10 Trademark Purchase and License Assignment Agreement dated December 23,
1997 between SPELL C. LLC and Cherokee Inc. (incorporated by
reference from Exhibit 10.17 of Cherokee Inc.'s Form 10-K dated
January 31, 1998).
10.11 Administrative Services Agreement dated December 23, 1997, between
SPELL C. LLC and Cherokee Inc. (incorporated by reference from
Exhibit 10.18 of Cherokee Inc.'s Form 10-K dated January 31, 1998).
10.12 Limited Liability Company Agreement of SPELL C. LLC dated as of
December 23, 1997, between SPELL C. LLC and Cherokee Inc.
(incorporated by reference from Exhibit 10.19 of Cherokee Inc.'s Form
10-K dated January 31, 1998).
10.13 Second Revised and Restated Management Agreement dated as of November
29, 1999 between Cherokee Inc. and The Newstar Group d/b/a The
Wilstar Group (incorporated by reference from Exhibit 10.9 of
Cherokee Inc.'s Form 10-K dated January 29, 2000).
21.1 Subsidiaries of Cherokee Inc.
23.1 Consent of Independent Accountants.
(b) Reports on Form 8-K.
We filed no reports on Form 8-K during the three months ended February 2,
2002.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHEROKEE INC.
By /s/ Robert Margolis
-----------------------------------------
Robert Margolis
Chairman and Chief Executive Officer
Date: April 2, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert Margolis Chairman and Chief Executive April 2, 2002
- -------------------------------------- Officer and Director
Robert Margolis
/s/ Carol Gratzke Chief Financial Officer / Chief April 2, 2002
- -------------------------------------- Accounting Officer
Carol Gratzke
/s/ Timothy Ewing Director April 2, 2002
- --------------------------------------
Timothy Ewing
/s/ Keith Hull Director April 2, 2002
- --------------------------------------
Keith Hull
/s/ Dave Mullen Director April 2, 2002
- --------------------------------------
Dave Mullen
/s/ Jess Ravich Director April 2, 2002
- --------------------------------------
Jess Ravich
24