CHEROKEE INC - 10-K Annual Report

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. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES x NO ¨

As of March 26, 2004, the registrant had 8,595,916 shares of its common stock, par value $.02 per share, issued and outstanding.

As of March 26, 2004, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $192.0 million (computed on the basis of the last trade of the common stock on the Nasdaq National Market System on March 26, 2004).

Certain portions of the registrant’s proxy statement for the Annual Meeting of Stockholders to be held on June 14, 2004, are incorporated by this reference into Part III as set forth herein.

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^®, Sideout^®, Sideout Sport^®, Carole Little^®, CLII^®, Saint Tropez-West^®, Chorus Line^®, All that Jazz^®, Molly Malloy^® 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 represent a young active lifestyle and were acquired by us in November 1997. The Carole Little and Chorus Line brands and trademarks were acquired by us in December 2002. These brands are recognized women’s brands that we have begun to market in apparel, accessories, and home products. As of January 31, 2004, we had twelve continuing license agreements covering both domestic and international markets, of which two are expected to expire in 2004.

Our retail direct licensing strategy is premised on the proposition that around the world 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 globally is to capitalize on these ideas by licensing our portfolio of brands primarily to strong and growing retailers, such as Target Stores and TJX Companies in the U.S., Tesco and Carrefour in Europe, and Bolderway in China, who work in conjunction with us to develop merchandise for their stores.

Parties seeking to sell their brands and related trademarks frequently approach us. Should an established and marketable brand or equity become available on favorable terms, we would be interested in pursuing such an acquisition. For example, in December 2002, we acquired out of bankruptcy the trademarks of CL Fashion Inc., which included Carole Little, CLII, Saint Tropez-West, Chorus Line, All that Jazz, and Molly Malloy, for an aggregate purchase price of $2.7 million. Concurrently, we entered into a five-year licensing agreement with TJX Companies for the Carole Little, CLII and Saint Tropez-West brands and a five-year master licensing agreement with Gilrichco, Inc. for the remaining acquired brands. We subsequently terminated the licensing agreement with Gilrichco during fiscal 2004.

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, and other related services. In return for our services we normally charge a certain percentage of the net royalties generated by the brands we represent and manage. For example, in 2000 we introduced Mossimo to Target Stores, and in 2003 we introduced the House Beautiful brand to May Company department stores.

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. We maintain a website with the address www.thecherokeegroup.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through

our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

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. We acquired the Sideout brand and related trademarks, which represent a young active lifestyle, in November 1997. See “Sideout Agreement” below. Our primary emphasis for the past seven years has been directed toward domestic and international retail direct and wholesale licensing. As of January 31, 2004, we had twelve continuing license agreements (two of which are expected to expire in 2004), covering both domestic and international markets, five of which pertained to the Cherokee brand.

Our license agreements are with retailers, wholesalers and global trading companies on an exclusive or non-exclusive basis. Of our twelve licensing agreements, eight are with domestic or international retailers, two are with international wholesalers, and two are brand representations with contracts with domestic 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 apparel, 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 our executive employees as well as using outside consultants.

Our current business strategy is to maximize the value of our existing and future brands by marketing 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, and maintaining our trademark registrations in certain countries), no production costs, significantly reduced design, marketing, distribution and other operating expenses, and a small group of core employees.

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 primary strategy in the United States is to capitalize on these trends by licensing our portfolio of brand names directly 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.

Our most significant retail relationship in the United States is with Target Stores. The terms of our relationship with Target Stores are set forth in an amended licensing agreement (the “Amended Target Agreement”) between Cherokee and Target Stores entered into on November 12, 1997. This agreement was subsequently assigned to Spell C and pledged as collateral for the Zero Coupon Secured Notes (the “Secured Notes”) issued by Spell C in connection with a transaction that monetized future minimum payments from Target Stores under the Amended Target Agreement. See “Recapitalization; Sale of Cherokee Trademarks to Spell C; Issuance of Secured Notes” below. The Amended Target Agreement grants Target Stores the exclusive right in the United States to use the Cherokee trademarks in certain specified categories of merchandise including:

Some of the above-listed categories were subject to license agreements between us and third parties, which expired prior to or during our fiscal year ended January 31, 2004 (“fiscal 2004”). 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 cannot 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.

The initial term of the Amended Target Agreement commenced on February 1, 1998 through January 31, 2004. The Amended Target Agreement provides that if Target Stores is current in its payments of the minimum guaranteed royalty under the agreement, then the term of the agreement will automatically renew for the fiscal year ending in 2005, and will continue to automatically renew for successive fiscal year terms provided that Target Stores has paid a minimum guaranteed royalty equal to or greater than $9.0 million for the preceding fiscal year and Target Stores does not give notice of its intention to terminate the agreement. In February 2004, Target Stores elected to allow the term of the Amended Target Agreement to be renewed for one additional year. As a result, the term of the Amended Target Agreement currently continues through January 2006 and remains subject to the automatic renewal provisions described above. Target Stores may terminate the Amended Target Agreement effective February 2006 if it gives us written notice of its intent to do so by February 28, 2005, and may terminate at the end of any fiscal year thereafter, if it gives us written notice of its intent to do so during February of the calendar year prior to termination.

Under the Amended Target Agreement, Target Stores has agreed to pay royalties based on a percentage of Target Stores’ net sales of Cherokee branded merchandise during each fiscal year ended January 31^st, which percentage varies according to the volume of sales of merchandise. Target Stores has agreed to pay a minimum guaranteed royalty of $9.0 million for each of the two years ending January 31, 1999 and 2000, $10.5 million for each of the four years ending January 31, 2001 through 2004, and $9.0 million for the year ended January 31, 2005 and each fiscal year thereafter, if any, that the term of Amended Target Agreement is extended.

Royalty revenues from our Cherokee brand at 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, $20.7 million during our fiscal year ended February 2, 2002 , $21.4 million during fiscal 2003 and $20.6 million during fiscal 2004 which accounted for 75%, 76%, 66%, 68%, 67%, 65% and 57% respectively, of our consolidated revenues during such periods. Royalty revenues in fiscal 2004 from Target Stores were 196% of the guaranteed minimum royalty under the Amended Target Agreement. See “Risk Factors.”

Our retail direct licensees for the Sideout brand continued to achieve good 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 2004, royalty revenues from retail direct licensees for the Sideout brand totaled $2.9 million as compared to $3.1 million during fiscal 2003. During fiscal 2004, our non-exclusive United States retail direct licensees for the Sideout brand included Mervyn’s and Bob’s Stores. The term of our agreement with Mervyn’s continues until January 31, 2005. In fiscal 2004, Bob’s Stores was acquired by TJX Companies Inc. Our agreement with Bob’s Stores continues to January 31, 2005. We continue to actively pursue our retail direct licensing strategy to further develop the Sideout brand in the United States.

Our retail direct licensing agreement with TJX Companies for the Carole Little, CLII and Saint Tropez-West brands provides us with minimum guaranteed annual royalties during the five-year term of the agreement and provides TJX with the option at the expiration of the initial term of the agreement to either renew the agreement for an additional five years or buy the trademarks covered by the agreement from us pursuant to an agreed-upon formula. After we recover our investment of $2.7 million from the Carole Little brands (Carole Little, CLII, and Saint Tropez-West), then 45% of any additional monies received from the Carole Little brands must be paid by us to Ms. Carole Little (StudioCL Corporation), the founder of CL Fashion Inc.

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. As an incentive for our licensees to achieve higher retail sales of Cherokee or Sideout branded products, many of our existing exclusive and non-exclusive 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.

During fiscal 2004, we received $23.7 million in aggregate royalties from our United States retail direct license agreements (excluding revenues from Mossimo), which accounted for 65% of our consolidated revenues during such period.

We will continue to seek to develop in several international markets both our Cherokee and Sideout brands and other brands we own or 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 exclusive 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 was 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. Royalty revenues from Zellers totaled $3.3 million during fiscal 2004. In 2003 Zellers renewed their agreement for an additional five year period, through January 31, 2008. Under the terms of the renewal, Zellers agreed to pay us a minimum guaranteed royalty of $15.6 million over the new five-year term under the same conditions of the original agreement. Zellers has the option to renew this agreement for an additional five years beyond the most recent renewal.

In early September 2000, we entered into an exclusive international retail direct licensing agreement for the Cherokee brand with France based Carrefour, the second largest retailer in the world. The Carrefour Group was granted the exclusive right to manufacture, promote, sell and distribute a wide range of products bearing our Cherokee brand in Spain, Mexico and Brazil and subsequently Italy, France, China, Taiwan, Greece and Portugal have been added. The Carrefour Group pays us a royalty based upon a percentage of its net sales of Cherokee branded products in those countries, which includes a minimum annual guaranteed royalty. Royalty revenues from the Carrefour Group totaled $691,000 in fiscal 2004. There can be no assurances that future royalties from Carrefour Group will be significant. 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 a number of other European, South American and Asian countries not already covered by the agreement, including, among others, Poland, Argentina, Chile, Colombia and Turkey, but excluding the United Kingdom, Ireland and Germany. 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. Even if the retail sales thresholds are not met during the term of the agreement, the Carrefour Group also has the right of first refusal to add any of the European or South American countries to the territory covered by the agreement. As an incentive for Carrefour Group to expand its sales of Cherokee branded products into other countries, we agreed to waive the royalty commitment during the initial six-month start-up period for any added countries. The initial term of the agreement was to expire December 31, 2003, but was renewed in July 2003 for three more years, through December 31, 2006. If the Carrefour Group meets certain retail sales thresholds with respect to Cherokee branded products, then the Carrefour Group may extend the agreement indefinitely for successive three-year terms.

On August 1, 2001, we entered into an exclusive international retail direct licensing agreement for the Cherokee brand with Great Britain’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. Royalty revenues from Tesco totaled $5.2 million during fiscal 2004. Tesco also has a right to add a number of other countries to the territories covered by the agreement, assuming we have not already entered into exclusive licensing agreements covering such countries, and subject to the existing rights given to the Carrefour Group. In January 2004, we granted Tesco the rights to Taiwan, Korea, Malaysia, Thailand, Slovakia, and Hungary. The initial term of the agreement expires on January 31, 2005. If Tesco meets certain retail sales thresholds with respect to Cherokee branded products, then Tesco may extend the agreement

indefinitely for successive three-year terms. Based upon Tesco’s current retail sales levels, we believe that Tesco is likely to meet or surpass such retail sales thresholds and hence will extend the agreement for an additional three-year term.

Including the Carrefour Group and Tesco agreements, as of January 31, 2004, we had four international license agreements for the Cherokee brand. In January 2004, Cherokee entered into a wholesale license agreement for the Cherokee brand in Mexico with Grupo Aviara SA. The country of Mexico was previously part of our licensing agreement with Carrefour. 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 2004, with respect to the Sideout brand and related trademarks, we have three international licensing agreements with The Forzani Group, Sport Scheck and Guangdong Bolderway Trading Development Co. Ltd. Our agreements with Forzani and Sport Scheck will expire in fiscal 2005. We have not received a meaningful amount of revenues from these contracts. Our international licensing agreements for the Sideout brand are all exclusive and cover several countries that include, Canada, Germany, Switzerland, Austria and China and product categories including men’s, boy’s and women’s apparel and footwear. In December 2002, we signed a multi year international licensing agreement with Shanghai Bolderway, Fashion Inc., a division of Guangdong Bolderway Trading Development Co., Ltd., covering a wide range of categories for the Sideout brand. These products will launch in China in fiscal 2005.

During fiscal 2004, we received $9.4 million in aggregate royalties from our international license agreements, which accounted for 26% of our consolidated revenues during such period.

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. For example, in December 2002, we acquired out of bankruptcy the trademarks of CL Fashion Inc. which included Carole Little, CLII, Saint Tropez-West, Chorus Line, All that Jazz, and Molly Malloy for an aggregate purchase price of $2.7 million. Concurrently, we entered into a five-year licensing agreement with TJX Companies for the Carole Little, CLII and Saint Tropez-West brands and a five-year master licensing agreement with Gilrichco, Inc. for the remaining brands. The licensing agreement with TJX provides us with minimum guaranteed annual royalties during the term of the agreement and provides TJX with the option at the expiration of the initial term of the agreement to either renew the agreement for an additional five years or buy the trademarks covered by the agreement from us pursuant to an agreed-upon formula. After we recover our investment of $2.7 million from the Carole Little brands (Carole Little, CLII and Saint Tropez-West), then 45% of any additional monies received from the Carole Little brands must be paid by us to Ms. Carole Little (StudioCL Corporation), the founder of CL Fashion Inc. The Gilrichco agreement was terminated in October 2003 due to under-performance by our licensee, and we are currently exploring opportunities to license the Chorus Line, All that Jazz and Molly Malloy brands.

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.

For example, during fiscal 2001 we assisted Mossimo 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 all monies 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. In February 2003, the agreement between Mossimo and Target was renewed until January 31, 2006, but continues to contain early termination provisions. In fiscal 2003 we assisted House Beautiful in locating May Company Department Stores as a licensee of the House Beautiful brand. In addition, during fiscal 2003, we entered into an exclusive consulting agreement to represent the brand Latina domestically. Other active consulting agreements include Shabby Chic and HotKiss.

During fiscal 2003 and 2004, we recognized revenues from Mossimo of $2.7 million and $2.5 million, respectively, which does not include interest on such amounts owing. However, Mossimo refused to pay the $5.2 million in aggregate finder’s fees due to us from fiscal 2003 through fiscal 2004. An arbitration was held between the parties in mid-October, 2002 on this matter. An arbitration panel ruled in favor of Cherokee on November 11, 2002, issuing an interim arbitration award directing Mossimo to pay all monies owed Cherokee plus interest on any of the monies withheld, along with legal fees. The arbitrators also reaffirmed the finder’s agreement. This interim award was reaffirmed in total in a final award dated January 16, 2003 of over $2.9 million. This final arbitration award stated that Cherokee was owed $2.4 million in finder’s fees from Mossimo, plus $420,272 in legal fees plus $95,305 of interest. On June 17, 2003, the Los Angeles Superior Court confirmed the arbitration award and entered judgment in Cherokee’s favor in the total amount of nearly $3.1 million, which included the past money due to us from the final arbitration award, plus additional interest expense from January 2003 to June 17, 2003. Mossimo then appealed this judgment to the Appellate Court. In conjunction with the appeal, Mossimo posted financial security satisfactory to the court of over $4.5 million, which is equal to one and one half times the amount of the Judgment. The appeal was heard by the Appellate Court on December 12, 2003 and on January 2, 2004 the Appellate court ruled in Cherokee’s favor and upheld the lower court’s finding. On February 6, 2004 Mossimo asked the California Supreme Court to review the unanimous decision of the California Court of Appeal. This appeal was denied on March 17, 2004. Shortly thereafter, Cherokee and Mossimo began discussions about determining the total outstanding amounts owed to Cherokee in this matter (including interest at the statutory rate of 10% on all past revenues and previously awarded interest and legal fees outstanding), and in the afternoon on March 24, 2004 Mossimo presented Cherokee’s attorneys with a check for over $1.7 million along with a letter of release pertaining to the court deposit that Mossimo previously posted with the court (totaling over $4.5 million). Cherokee is in the process of obtaining a court order to receive this deposit. We have not been awarded the reimbursement of our legal fees incurred since January 17, 2003 (the date of the final arbitration award) and the amount of legal expenses and costs incurred since that date currently exceeds $410,000. We are continuing to litigate with Mossimo to receive the full reimbursement of all of our legal expenses and costs incurred in this matter, which Mossimo is currently challenging. During the Fourth Quarter and Twelve Months ended January 31, 2004, we recognized revenues from Mossimo of $308,000 and $2.5 million and an additional $128,000 and $428,000 in interest income, respectively. As of January 31, 2004 past amounts due from Mossimo totaled approximately $6.2 million, which included approximately $5.2 million in finder’s fees owed, and over $1.0 million of interest on such monies owed and reimbursement of legal fees previously awarded, but does not include our legal expenses and costs of over $410,000 incurred since January 17, 2003. We believe that based upon the rulings to date we will eventually receive reimbursement of all of our legal fees incurred in this matter from Mossimo. We have made no provision for reserves against the accounts receivable from Mossimo. Based upon the $1.7 million check received on March 24, 2004 and the release by Mossimo to us of the court deposit of over $4.5 million previously posted by Mossimo (but not yet received by us), we believe that we will receive at least $6.2 million in the resolution of this matter to fully recover the recorded amount of the receivable from Mossimo at January 31, 2004, and possibly the full reimbursement of our legal expenses not yet awarded, which is currently over $410,000. See “—Risk Factors” and “Item 3 Legal Proceedings.”

During fiscal 2004, we recognized $3.2 million in aggregate royalties from other business opportunities (which includes revenues from Mossimo), which accounted for 9% of our consolidated revenues during such period.

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 to Cherokee stockholders 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 to Cherokee stockholders described above. The Secured Notes subsequently have been paid in full out of royalties received under the Amended Target Agreement, with the final payment of principal and interest being made on February 20, 2004. During fiscal 2004, of the $20.6 million in royalty revenues from Target Stores, $10.5 million was paid to the holders of the Secured Notes, and the remainder of the royalty revenues were distributed to us. Spell C will continue to receive all royalties paid under the Amended Target Agreement but we expect all such royalties will be distributed to Cherokee.

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, a former Executive Vice President who left the Company in November of 2003, 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^® and Sideout Sport^®. 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 2004 we made payments of $315,000 under the Sideout Agreement, and since January 1999 we have paid in total over $4.6 million in contingent payments under the Sideout Agreement.

We and our wholly-owned subsidiary Spell C hold various trademarks including Cherokee^®, Sideout^®, Sideout Sport^®, Carole Little^®, CL II^®, Saint Tropez-West^®, Chorus Line^®, All that Jazz^®, Molly Malloy^® 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 and Sideout Sport, Carole Little, CLII, Saint Tropez-West, Chorus Line, All that Jazz, and Molly Malloy 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.”

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 with the address of www.thecherokeegroup.com, which utilizes a business-to-business E-commerce strategy. The information regarding our website address is provided for convenience and we are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. 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 from time to time to assist us in this effort.

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 active wear 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.”

As of January 31, 2004, we employed seventeen persons. None of our employees are represented by labor unions and we believe that our employee relations are satisfactory.

We have adopted a code of ethics that applies to all of our directors, officers and employees.

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.

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 active wear 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 prospects, financial condition, results of operations and liquidity. Other companies owning established trademarks could also enter into similar arrangements with retailers.

Our business is dependent on Target Stores, which accounted for 57% of our consolidated licensing revenues in fiscal 2004.

During fiscal 2004, 57% of our licensing revenues were generated from a single source, Target Stores, a division of Target Corp. See “Business — United States Licensing.” The term of the Amended Target Agreement currently extends until January 31, 2006 and, unless Target Stores gives us one year’s advance notice of its intention to terminate the agreement, the agreement will continue to automatically renew for successive one year terms provided that Target Stores has paid a minimum guaranteed royalty equal to or greater then $9.0 million for the preceding fiscal year. If Target Stores elects to terminate the agreement, effective after January 31, 2006 or at any other time, 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 to prevent automatic renewal, 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. Nonetheless, we could suffer substantial decreased royalty revenues under the Amended Target Agreement if Target were to reduce its sales of Cherokee branded products while continuing to pay the minimum royalties required under such agreement.

We are dependent on our intellectual property and we cannot assure you that we will be able to successfully protect our rights.

We hold various trademarks including Cherokee, Sideout 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 also hold several trademark applications for Cherokee and Sideout 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 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 prospects, financial condition, results of operations and liquidity. 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.

Target Corporation has announced that it is reviewing strategic alternatives for its Mervyn’s and Marshall Field’s divisions, which could result in the possible sale of one or both of these divisions as ongoing businesses to existing retailers or other buyers who might choose not to renew our Sideout license agreement.

During fiscal 2004, we generated $2.9 million, or approximately 8%, of our licensing revenues from our licensing agreement with Mervyn’s, a division of Target Corporation. See “—United States Licensing.” Our current licensing agreement with Mervyn’s, which is for our Sideout brand, currently extends until January 31, 2005. On March 10, 2004 Target Corporation announced that it was reviewing strategic alternatives for its Mervyn’s and Marshall Field’s divisions, and that it had engaged an investment banker to advise Target Corporation in this review. If Target Corporation elects to sell Mervyn’s to an existing retailer or other qualified buyer, or chooses to spin-off Mervyn’s or some other strategic alternative, such a transaction could adversely impact the likelihood that our existing licensing contract would be extended beyond the current term ending January 31, 2005. If this licensing contract with Mervyn’s is not extended, renewed, amended, or replaced with a new licensing contract, we would not receive licensing revenues from Mervyn’s during fiscal 2006. If this happens, we may not be able to replace the Mervyn’s royalty payments with revenues from other sources.

Mossimo Inc. has refused to make payment under the Finder’s Agreement and we have made no reserves with respect to withheld payments

nearly $3.1 million, which included the past money due to us from the final arbitration award, plus additional interest expense from January 2003 to June 17, 2003. Mossimo then appealed this judgment to the Appellate Court. In conjunction with the appeal, Mossimo posted financial security satisfactory to the court of over $4.5 million, which is equal to one and one half times the amount of the Judgment. The appeal was heard by the Appellate Court on December 12, 2003 and on January 2, 2004 the Appellate court ruled in Cherokee’s favor and upheld the lower court’s finding. On February 6, 2004 Mossimo asked the California Supreme Court to review the unanimous decision of the California Court of Appeal. This appeal was denied on March 17, 2004. Shortly thereafter, Cherokee and Mossimo began discussions about determining the total outstanding amounts owed to Cherokee in this matter (including interest at the statutory rate of 10% on all past revenues and previously awarded interest and legal fees outstanding), and in the afternoon on March 24, 2004 Mossimo presented Cherokee’s attorneys with a check for over $1.7 million along with a letter of release pertaining to the court deposit that Mossimo previously posted with the court (totaling over $4.5 million). Cherokee is in the process of obtaining a court order to receive this deposit. We have not been awarded the reimbursement of our legal fees incurred since January 17, 2003 (the date of the final arbitration award) and the amount of legal expenses and costs incurred since that date currently exceeds $410,000. We are continuing to litigate with Mossimo to receive the full reimbursement of all of our legal expenses and costs incurred in this matter, which Mossimo is currently challenging. During the Fourth Quarter and Twelve Months ended January 31, 2004, we recognized revenues from Mossimo of $308,000 and $2.5 million and an additional $128,000 and $428,000 in interest income, respectively. As of January 31, 2004 past amounts due from Mossimo totaled approximately $6.2 million, which included approximately $5.2 million in finder’s fees owed, and over $1.0 million of interest on such monies owed and reimbursement of legal fees previously awarded, but does not include our legal expenses and costs of over $410,000 incurred since January 17, 2003. We believe that based upon the rulings to date we will eventually receive reimbursement of all of our legal fees incurred in this matter from Mossimo. We have made no provision for reserves against the accounts receivable from Mossimo. Based upon the $1.7 million check received on March 24, 2004 and the release by Mossimo to us of the court deposit of over $4.5 million previously posted by Mossimo (but not yet received by us), we believe that we will receive at least $6.2 million in the resolution of this matter to fully recover the recorded amount of the receivable from Mossimo at January 31, 2004, and possibly the full reimbursement of our legal expenses not yet awarded, which is currently over $410,000. We believe that based upon the rulings to date we will eventually receive reimbursement of all of our legal fees incurred in this matter from Mossimo.

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 March 25, 2004, Mr. Margolis was the beneficial owner of approximately 16.8% of our outstanding common stock. We have only seventeen 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 prospects, financial condition, results of operations and liquidity.

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, 2006; 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 there under, we would be obligated to 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 2004 was $720,746 and his performance bonus for fiscal 2004 was approximately $3.1 million. Based on the amounts paid for fiscal 2004, the lump sum payment owed upon such a termination would be approximately $11.4 million.

The occurrence of the following events, among other things, will be deemed to be a material breach of the management agreement 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 prospects, financial condition, results of operations and liquidity. 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 such third party’s 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.

Although we have paid dividends during the fourth quarter of fiscal 2004 and during the first quarter of fiscal 2005, there can be no assurances that we will continue to generate excess cash to pay dividends, or that we will continue to pay dividends with such excess cash if other, more compelling business opportunities are available, as determined by our Board of Directors. Our ability to generate excess cash from our operations in the future is dependent upon a variety of factors, including Cherokee’s financial condition, results of operations, cash flow, capital requirements and other factors.

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. We have another option to extend the term of the lease, and plan to do so during 2004. The monthly rent is $9,010. Our Van Nuys office is well maintained, adequate and suitable for our purposes.

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.

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 all monies 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. In February 2003, the agreement between Mossimo and Target was renewed until January 31, 2006, but continues to contain early termination provisions. During fiscal 2003 and 2004, we recognized revenues from Mossimo of $2.7 million and $2.5 million, respectively, which does not include interest on such amounts owing. However, Mossimo refused to pay the $5.2 million in aggregate finder’s fees due to us from fiscal 2003 through fiscal 2004. An arbitration was held between the parties in mid-October, 2002 on this matter. An arbitration panel ruled in favor of Cherokee on November 11, 2002, issuing an interim arbitration award directing Mossimo to pay all monies owed Cherokee plus interest on any of the monies withheld, along with legal fees. The arbitrators also reaffirmed the finder’s agreement. This interim award was reaffirmed in total in a final award dated January 16, 2003 of over $2.9 million. This final arbitration award stated that Cherokee was owed $2.4 million in finder’s fees from Mossimo, plus $420,272 in legal fees plus $95,305 of interest. On June 17, 2003, the Los Angeles Superior Court confirmed the arbitration award and entered judgment in Cherokee’s favor in the total amount of nearly $3.1 million, which included the past money due to us from the final arbitration award, plus additional interest expense from January 2003 to June 17, 2003. Mossimo then appealed this judgment to the Appellate Court. In conjunction with the appeal, Mossimo posted financial security satisfactory to the court of over $4.5 million, which is equal to one and one half times the amount of the Judgment. The appeal was heard by the Appellate Court on December 12, 2003 and on January 2, 2004 the Appellate court ruled in Cherokee’s favor and upheld the lower court’s finding. On February 6, 2004 Mossimo asked the California Supreme Court to review the unanimous decision of the California Court of Appeal. This appeal was denied on March 17, 2004. Shortly thereafter, Cherokee and Mossimo began discussions about determining the total outstanding amounts owed to Cherokee in this matter (including interest at the statutory rate of 10% on all past revenues and previously awarded interest and legal fees outstanding), and in the afternoon on March 24, 2004 Mossimo presented Cherokee’s attorneys with a check for over $1.7 million along with a letter of release pertaining to the court deposit that Mossimo previously posted with the court (totaling over $4.5 million). Cherokee is in the process of obtaining a court order to receive this deposit. We have not been awarded the reimbursement of our legal fees incurred since January 17, 2003 (the date of the final arbitration award) and the amount of legal expenses and costs incurred since that date currently exceeds $410,000. We are continuing to litigate with Mossimo to receive the full reimbursement of all of our legal expenses and costs incurred in this matter, which Mossimo is currently challenging. During the Fourth Quarter and Twelve Months ended January 31, 2004, we recognized revenues from Mossimo of $308,000 and $2.5 million and an additional $128,000 and $428,000 in interest income, respectively. As of January 31, 2004 past amounts due from Mossimo totaled approximately $6.2 million, which included approximately $5.2 million in finder’s fees owed, and over $1.0 million of interest on such monies owed and reimbursement of legal fees previously awarded, but does not include our legal expenses and costs of over $410,000 incurred since January 17, 2003. We believe that based upon the rulings to date we will eventually receive reimbursement of all of our legal fees incurred in this matter from Mossimo. We have made no provision for reserves against the accounts receivable from Mossimo. Based upon the $1.7 million check received on March 24, 2004 and the release by Mossimo to us of the over $4.5 million court deposit previously posted by Mossimo (but not yet received by us), we believe that we will receive at least $6.2 million in the resolution of this matter, and possibly the full reimbursement of our legal expenses not yet awarded, which is currently over $410,000. We believe that based upon the rulings to date we will eventually receive reimbursement of all of our legal fees incurred in this matter from Mossimo.

We did not submit any matters to a vote of our holders of common stock during the final quarter of fiscal 2004.

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on The Nasdaq National Market 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 per share, if any.

On March 26, 2004, the latest bid price for our common stock, reported on the Nasdaq National Market System, was $22.10 per share. As of March 26, 2004, the number of stockholders of record of our common stock was 114. 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 $861,000 to repurchase and retire 57,500 shares of our common stock in fiscal 2003 and $607,000 to repurchase and retire 68,300 shares of our common stock in fiscal 2002. Since July 22, 1999, we have used cash of $5.5 million to repurchase and retire 607,800 shares of our common stock. We are currently authorized to repurchase up to an aggregate of 392,200 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.

On November 3, 2003, our Board of Directors declared a $0.375 per common share dividend which was paid to shareholders of record as of December 1, 2003. On February 3, 2004, our Board of Directors declared another $0.375 per common share dividend paid to shareholders of record as of March 1, 2004. In the future, from time to time, our Board of Directors may declare additional dividends depending upon Cherokee’s financial condition, results of operations, cash flow, capital requirements and other factors deemed relevant by Cherokee’s Board of Directors. Subject to general business conditions, when Cherokee finally resolves its litigation with Mossimo and collects the past amounts owed by Mossimo, it is possible that our Board of Directors will declare a special dividend to our stockholders of all or a significant portion of such amounts collected.

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.”

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONDITION AND RESULTS OF OPERATION

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 our current and future licensees, such as Target Stores and Tesco, the likelihood that our licensees will achieve royalty rate reductions, our prospects for obtaining new licensees and our prospects for obtaining new brands to acquire or represent and the outcome of our dispute with Mossimo. Forward-looking statements involve known and unknown risks and 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 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, Sideout and Carole Little branded products, our dependence on a single licensee for most of our revenues, our dependence on our key management personnel, any adverse determination of claims, liabilities or litigation, including the dispute with Mossimo, 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.

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 Licensing.” Under the Amended Target Agreement, Target Stores will pay a royalty each fiscal year during the term of the agreement 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 $10.5 million for the fiscal years ending February 1, 2003 and January 31, 2004, and $9.0 million for the year ended January 29, 2005 and each fiscal year thereafter, if any, that the term of Amended Target Agreement is extended. In February 2004, Target

Stores elected to allow the term of the Amended Target Agreement to be renewed for one additional year. As a result, the term of the Amended Target Agreement currently continues until January 31, 2006 and remains subject to the automatic renewal provisions. 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 that have market power and economies of scale in the respective markets.

Target Stores currently has approximately 1,150 stores in the United States and has publicly announced that it expects to open additional stores in the next twelve months. We hope 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. Sales of Cherokee branded product at Target Stores declined in fiscal 2004 by 5.5% to $1.9 billion, which decline we attribute to changes in the mix and placement of Cherokee branded products within Target Stores. 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 2004 Target Stores reached the maximum royalty rate reduction in the third quarter. This trend is expected to continue and have a positive impact on our licensing revenues in our first quarter ended May 1, 2004 , but may have a negative impact on our licensing revenues in our second and third quarters ended July 31, and October 29, 2004.

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.” 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 a special dividend to Cherokee stockholders. The Secured Notes subsequently have been paid in full out of royalties received under the Amended Target Agreement, with the final payment of principal and interest being made on February 20, 2004. During fiscal 2004, of the $20.6 million in royalty revenues from Target Stores, $10.5 million was paid to the holders of the Secured Notes, and the remainder of the royalty revenues were distributed to us. Spell C will continue to receive all royalties paid under the Amended Target Agreement but we expect all such royalties will be distributed to Cherokee.

Target Stores commenced the initial sales of Cherokee branded merchandise in July 1996. Royalty revenues from our Cherokee brand at 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 $20.7 million during fiscal 2002, $21.4 million during fiscal 2003, and $20.6 million during fiscal 2004 which accounted for 75%, 76%, 66%, 68%, 67%, 65% and 57 % 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 on February 20, 2004, were distributed to the holders of the Secured Notes. During fiscal 2004, of the $20.6 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 2004, Spell C distributed a total of $8.9 million to us (which amount includes royalty revenues received from Target Stores during both fiscal 2003 and fiscal 2004 and interest income earned on royalty revenues). The final payment of $2.6 million was made to the holders of the Secured Notes on February 20, 2004. The revenues generated from all other licensing agreements during the eight-month fiscal period ended January 31, 1998 were $2.1 million, during fiscal 1999 were $4.7 million, during fiscal 2000 were $8.4 million, during fiscal 2001 were $9.0 million, during fiscal 2002 were $10.0 million, during fiscal 2003 were $11.7 million and during fiscal 2004

were $15.7 million, which accounted for 25%, 24%, 34%, 32%, 33%, 35% and 43%, 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 2004, we made additional contingent payments of $0.3 million under the Sideout Agreement. Since January 1999, we have paid, in total, $4.6 million in contingent payments under the Sideout Agreement. The Sideout brand generated licensing revenues from existing contracts of approximately $3.2 million during fiscal 2004, which accounted for approximately 8.7% 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.

In December 2002, we acquired out of bankruptcy the trademarks of CL Fashion Inc. which included Carole Little, CLII, Saint Tropez-West, Chorus Line, All that Jazz, and Molly Malloy for an aggregate purchase price of $2.7 million. Concurrently, we entered into a five-year licensing agreement with TJX Companies for the Carole Little, CLII and Saint Tropez-West brands and a five-year master licensing agreement with Gilrichco, Inc. for the remaining brands. The licensing agreement with TJX provides us with minimum guaranteed annual royalties during the term of the agreement and provides TJX with the option at the expiration of the initial term of the agreement to either renew the agreement for an additional five years or buy the trademarks covered by the agreement from us pursuant to an agreed-upon formula. After we recover our investment of $2.7 million from the Carole Little brands (Carole Little, CLII and Saint Tropez-West) then 45% of any additional monies received from the Carole Little brands must be paid by us to Ms. Carole Little (StudioCL Corporation), the founder of CL Fashion Inc. The Gilrichco agreement was terminated in October 2003. The financial impact of the early termination was not material to our results of operations or cash flows.

In addition to licensing our own brands, we assist other companies in identifying licensees for their brands. For example, 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 all monies 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. In February 2003, the agreement between Mossimo and Target was renewed until January 31, 2006, but continues to contain early termination provisions. During fiscal 2003 and 2004, we recognized revenues from Mossimo of $2.7 million and $2.5 million, respectively, but Mossimo refused to pay such amounts. We instituted arbitration against Mossimo to collect the amount of finder’s fees owed to us, together with interest on such amounts, which arbitration led to a judgment in our favor for collection of all such amounts. See “Item 1. Business—Other Businesses and Brand Opportunities.” We also have provided our brand representation services for other brands, including House Beautiful.

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 $720,746 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 10% of our EBITDA for such fiscal year in excess of $2.5 million up to $10.0 million, plus 15% of our EBITDA for such fiscal year in excess of $10.0 million. As a result, for fiscal 2004 we accrued a bonus of $3.1 million for Mr. Margolis, and if our EBITDA continues to increase, the bonus payable to Mr. Margolis under the management agreement will also increase.

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, our 1999 fiscal year ended January 30, 1999 and included 52 weeks, our 2000 fiscal year (“fiscal 2000”) ended January 29, 2000 and included 52 weeks, our 2001 fiscal year (“fiscal 2001”) ended February 3, 2001 and included 53 weeks, our 2002 fiscal year (“fiscal 2002”) ended February 2, 2002 and included 52 weeks, our 2003 fiscal year (“fiscal 2003”) ended February 1, 2003 and includes 52 weeks, and fiscal 2004 ended January 31, 2004 and included 52 weeks.

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:

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 Secured Notes, which were retired on February 20, 2004.

In fiscal 2004, our revenues increased 9.6% to $36.3 million from $33.1 million for fiscal 2003. Revenues for fiscal 2004 and fiscal 2003 were generated from licensing our trademarks to retailers and wholesalers, and also from finders fees for placing Mossimo with Target Stores. Revenues from our Cherokee brand at Target Stores for fiscal 2004 and fiscal 2003 were $20.6 million or 57% of revenues and $21.4 million or 65% of revenues, respectively. Revenues from all other sources for fiscal 2004 and fiscal 2003 were $15.7 million or 43% of revenues and $11.7 million or 35% of revenues, respectively. In fiscal 2004, Mervyn’s revenues declined for the Sideout brand and Mervyn’s paid royalties of approximately $2.9 million in fiscal 2004 compared to $3.0 million in fiscal 2003. Our international licensing revenues were $9.4 million in fiscal 2004 compared to $5.8 million in fiscal 2003. Cherokee products were launched in Tesco stores in fall 2002 and Carrefour stores in spring 2002. Revenue from these licensees was $5.2 million and $691,000, respectively, in fiscal 2004. Zellers paid royalties of approximately $3.3 million in fiscal 2004 compared to $3.4 million in fiscal 2003 due to lower sales volume of Cherokee branded products. During fiscal 2004, royalty revenues from wholesale licensing

agreements totaled $87,000 compared to $98,000 for fiscal 2003. In fiscal 2004, our revenues included $2.5 million from Mossimo Inc. compared to $2.7 million for fiscal 2003. However, as described previously, Mossimo refused to pay the total $5.2 million in finder’s fees during fiscal 2004 and fiscal 2003 and we have made no provision for reserves against the accounts receivable outstanding from Mossimo. On March 24, 2004, Mossimo presented our attorneys with a check for over $1.7 million along with a letter of release pertaining to the court deposit that Mossimo previously posted with the Court (totaling over $4.5 million). See “—Overview,” “Item 1—Risk Factors” and “Item 3—Legal Proceedings.”

We believe that our future revenues from Target and Zeller’s may remain relatively flat due to changes in how Target and Zellers are placing our products in their stores and competition from other branded products. We are unsure how our future revenues from Mervyn’s will trend, as Target has announced that it is exploring strategic alternatives with Mervyn’s. If Target Stores elects to sell Mervyn’s to an existing retailer or other buyer, or chooses to spin-off Mervyn’s or some other strategic alternative, we cannot at this time determine whether such transaction would result in the extension or renewal of our existing licensing contract beyond the current term ending January 31, 2005. Based on Tesco’s sales of Cherokee branded products in the last year and Tesco’s expressed interest in continuing to promote the Cherokee brand, we believe that our future revenues from Tesco may continue to grow.

Our royalty recognition policy provides for recognition of royalties in the quarter royalties are 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 $13.0 million and $9.9 million at the end of fiscal 2004 and fiscal 2003, respectively, included an accrual for royalty revenues earned during the fourth quarters of fiscal 2004 and fiscal 2003 and these revenues were subsequently received in the following quarter. Our trade receivable balance at the end of fiscal 2004 also included over $6.2 million in outstanding accounts receivable for Mossimo. We have made no provision for reserves against the revenues and awarded interest and legal fees accrued for Mossimo in fiscal 2004 and fiscal 2003, and we recently received partial payment from Mossimo.

Selling, general and administrative expenses including amortization of trademarks for fiscal 2004 were $12.1 million or 33.3% of revenues compared to $10.0 million or 30.0% of revenues for fiscal 2003. Selling, general and administrative expenses in fiscal 2004 increased primarily due to increases in bonus expense, which increased to $3.9 million, approximately $200,000 more than the 2003 total of $3.7 million; severance expenses for the separation of a former executive of approximately $575,000 (there were no severance expenses for 2003); amortization of our trademarks for 2004, which increased to $991,000 as compared to $667,000 in 2003—primarily due to increased amortization from the Carole Little trademarks acquired near the end of fiscal 2003; and total marketing expenses, which increased by about $100,000 in fiscal 2004 as compared to fiscal 2003. In addition, we incurred total legal expenses of over $590,000, during fiscal 2004, which includes over $400,000 of legal expenses related to the Mossimo lawsuit, as compared to total legal expenses in fiscal 2003 of about $160,000. See “—Overview,” “Item 3. Legal Proceedings.” We expect to recover these legal fees from Mossimo, and, when received, they will be recorded as reimbursement of legal expenses as a reduction to legal expenses. Amortization expenses are expected to increase as a result of the acquisition of the CL Fashion trademarks, Sideout contingent payments, and the purchase of other trademarks and registrations. Management and staff bonus expenses will continue to rise if our EBITDA continues to rise.

Our interest expense for fiscal 2004 was $0.7 million compared to $1.3 million for fiscal 2003. The interest expense is attributable to the Secured Notes and amortization of securitization fees. Interest expense is expected to decrease in the future as we made our last quarterly payment on the Secured Notes on February 20, 2004 and subsequently retired the Secured Notes. However, we may incur modest amounts of future interest expense depending upon the amount of future bank debt outstanding under our new $5.0 million Bank Agreement entered into in March 2004.

Our investment and interest income for fiscal 2004 was $491,000 compared to $245,000 for fiscal 2003. The increase in investment and interest income is due to interest awarded by the Court on the amounts owed by Mossimo. See “Item 3. Legal Proceedings.”

For fiscal 2004, we booked for generally accepted accounting principles a tax provision of $9.8 million or $1.17 per diluted share, compared to $9.1 million or $1.07 per diluted share for fiscal 2003. Our effective tax rate was 41.0% for fiscal 2004 and 41.1% for fiscal 2003. Our net income for fiscal 2004 was $14.2 million or $1.68 per diluted share compared to a net income of $13.0 million or $1.54 per diluted share for fiscal 2003.

In fiscal 2003, revenues increased 8.0% to $33.1 million from $30.7 million for fiscal 2002. Revenues for fiscal 2003 and fiscal 2002 were generated from licensing our trademarks and finders fees for placing Mossimo with Target Stores. Revenues from Target Stores for fiscal 2003 and fiscal 2002 were $21.4 million or 65% of revenues and $20.7 million or 67% of revenues, respectively. Revenues from all other sources for fiscal 2003 and fiscal 2002 were $11.7 million or 35% of revenues and $10.0 million or 33% of revenues, respectively. In fiscal 2003, Mervyn’s continued its expansion of the Sideout brand into other product categories and paid royalties of approximately $3.0 million compared to $2.7 million in fiscal 2002. Our international licensing revenues were $5.8 million in fiscal 2003 compared to $4.5 million in fiscal 2002. Cherokee products were launched in Tesco stores in fall 2002 and Carrefour stores in spring 2002. Revenue from these licensees was $1.9 million and $169,000, respectively, in fiscal 2003. Zellers paid royalties of approximately $3.4 million in fiscal 2003 compared to $3.8 million in fiscal 2002 due to lower sales volume of Cherokee branded products. During fiscal 2003, royalty revenues from wholesale licensing agreements totaled $98,000 compared to $113,000 for fiscal 2002. In fiscal 2003, our revenues included $2.7 million from Mossimo compared to $2.2 million for fiscal 2002. However, as described previously, Mossimo refused to pay the $2.7 million in finder’s fees during fiscal 2003 and we have made no provision for reserves against the accounts receivable outstanding from Mossimo. See “Item 3. Legal Proceedings.”

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 $9.9 million and $6.2 million at the end of fiscal 2003 and fiscal 2002, respectively, included an accrual for royalty revenues earned during the fourth quarters of fiscal 2003 and fiscal 2002 and these revenues were subsequently received in the following quarter. Our trade receivable balance at the end of fiscal 2003 also included $3.2 million in outstanding accounts receivable for Mossimo. We have made no provision for reserves against the revenues and awarded interest and legal fees accrued for Mossimo in fiscal 2003.

Selling, general and administrative expenses including amortization of trademarks for fiscal 2003 were $10.0 million or 30.0% of revenues compared to $8.9 million or 29.1% of revenues for fiscal 2002. Selling, general and administrative expenses in fiscal 2003 increased due to increases in payroll related expenses including bonuses of $460,000, travel related expenses attributable to our increased business activities overseas of $225,000, amortization of our trademarks of $133,000, charitable contributions, and marketing expenses. In addition, for fiscal 2002, certain other accruals totaling $250,000 were deemed no longer required and were reversed. Amortization expenses are expected to increase as a result of the acquisition of the CL Fashion trademarks, Sideout contingent payments, and the purchase of other trademarks and registrations.

Our interest expense for fiscal 2003 was $1.3 million compared to $2.0 million for fiscal 2002. The interest expense is attributable to the Secured Notes and amortization of securitization fees. Interest expense decreased as we continued to make quarterly payments on the Secured Notes and the outstanding principal of the Secured Notes is reduced. The Secured Notes were paid off in February 2004.

Our investment and interest income for fiscal 2003 was $245,000 compared to $292,000 for fiscal 2002. The decrease in investment and interest income was due mainly to lower interest rates being offered for investments. Interest accrued on the monies owed to us by Mossimo was $108,000 at January 31, 2003.

For fiscal 2003, we booked a tax provision of $9.1 million or $1.07 per diluted share, compared to $8.0 million or $0.97 per diluted share for fiscal 2002. Our effective tax rate was 41.1% for fiscal 2003 and 39.9% for

fiscal 2002. Our net income for fiscal 2003 was $13.0 million or $1.54 per diluted share compared to a net income of $12.1 million or $1.46 per diluted share for fiscal 2002. A portion of this increase in our earnings per share was attributable to our repurchase of 57,500 shares of our common stock during fiscal 2003.

Cash Flows. On January 31, 2004 we had cash and cash equivalents of $8.5 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, which were subsequently retired on February 20, 2004. On February 1, 2003 we had cash and cash equivalents of $5.5 million, which amount included restricted cash of $2.6 million. The $3.0 million increase in cash and cash equivalents during fiscal 2004 is primarily attributable to the $1.1 million increase in net income over fiscal 2003, approximately $3.5 million in proceeds from the exercise of stock options (compared to $1.0 million in fiscal 2003), and a lower amount of trademark purchases in fiscal 2004 of $0.6 million compared to $3.4 million in fiscal 2003, less the payment of dividends in fiscal 2004 totaling $3.2 million.

During fiscal 2004, cash provided by operations was $13.9 million, compared to $12.2 million in fiscal 2003. During fiscal 2004, cash used in investing activities was $0.6 million and was primarily related to trademark purchases and registration fees incurred in connection with continued payments under the Sideout Agreement and registration of the Sideout trademarks and for other trademark expenditures. In comparison, during fiscal 2003, cash used in investing activities was $3.4 million, of which $2.7 million was attributable to the acquisition of the CL Fashion Trademarks, $477,000 was attributable to trademark purchases and registration fees incurred in connection with continued payments under the Sideout Agreement and registration of the Sideout trademarks, and $250,000 for other trademark expenditures. During fiscal 2004, cash used in financing activities was $10.3 million compared to $10.3 million in fiscal 2003. This included $3.5 million of cash proceeds received from the exercise of stock options, along with $10.5 million in payments on the Secured Notes. In addition, during fiscal 2004, the Board of Directors declared and paid a $0.375 per common share dividend, using $3.2 million. We did not repurchase any common stock during fiscal 2004. The cash used in financing activities for 2003 was primarily attributable to proceeds from the exercising of stock options of $1.0 million, along with the repurchase of common stock totaling $0.9 million and $10.5 million in payments on the Secured Notes. During fiscal 2003, we used $861,000 of cash to repurchase 57,500 shares of our common stock.

Uses of Liquidity. Our cash requirements through the end of fiscal 2005 are primarily to fund operations, repay the last installment of $2.6 million of our Secured Notes (which were retired in February 2004), and at our discretion repurchase shares of our common stock or pay dividends as determined by our Board of Directors, and, to a lesser extent, for capital expenditures. As discussed previously, in 2004, Mossimo refused to pay the $2.5 million in finder’s fees during fiscal 2004 and currently owes us $5.2 million in past finders fees, plus interest and legal fees. We have made no provision for reserves against the revenues and awarded interest and legal fees accrued for Mossimo in fiscal 2004. See “Item 3. Legal Proceedings.” At January 31, 2004, we had accounts receivable outstanding for Mossimo of $6.2 million, which includes $520,000 in interest and $410,000 in legal fees awarded through arbitration. On March 24, 2004, Mossimo presented our attorneys with a check for over $1.7 million along with a letter of release pertaining to the court deposit that Mossimo previously posted with the Court (totaling over $4.5 million).

In March 2004 we entered into a new $5.0 million Secured Loan Agreement (the “New Bank Facility”) with U.S. Bank National Association (“U.S. Bank), which expires on July 15, 2005. This New Bank Facility was entered into to provide us with greater working capital flexibility and liquidity for general corporate purposes, including the potential acquisition of brands or related properties which may be for sale.

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 and/or cash available for borrowing under our New Bank Facility.

The following table provides information related to our contractual cash obligations under various financial and commercial agreements:

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”. The proceeds from the sale of the Secured Notes were used to pay a special dividend to Cherokee stockholders at that time. The Secured Notes subsequently have been paid in full out of royalties received under the Amended Target Agreement, with the final payment of principal and interest being made on February 20, 2004.

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. During Fiscal 2004, we announced and paid a $0.375 per share dividend. In February 2004, we declared an additional dividend of $0.375 per share, which was paid in March 2004. In the future, from time to time, our Board of Directors may declare additional dividends depending upon Cherokee’s financial condition, results of operations, cash flow, capital requirements and other factors deemed relevant by Cherokee’s Board of Directors. Subject to general business conditions, when Cherokee finally resolves its litigation with Mossimo and collects the past amounts owed by Mossimo, it is possible that our Board of Directors will declare a special dividend to our stockholder of all or a significant portion of such amounts collected.

Sources of Liquidity. 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 2005; 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. Business—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.

As of January 31, 2004 we did not have any amounts outstanding under any credit facilities or lines of credit and we are not the guarantor of the Secured Notes or any other material third-party obligations. As of January 31, 2004, we do not have any standby letters of credit nor any standby repurchase obligations. In March 2004 we entered into a new $5.0 million Secured Loan Agreement (the “New Bank Facility”) with U.S. Bank National Association (“U.S. Bank), which expires on July 15, 2005. This New Bank Facility was entered into to provide us with greater working capital flexibility and liquidity for general corporate purposes, including the potential acquisition of brands or related properties which may be for sale.

If our revenues and cash flows during fiscal 2005 are lower than fiscal 2004, we may not have cash available to continue to pay dividends, repurchase shares of our common stock or to explore or consummate the acquisition of other brands. If Mossimo does not pay us the $5.2 million plus interest and legal fees withheld or future fees, or our revenues and cash flows during fiscal 2005 are materially lower than fiscal 2004, 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. We believe that we will have sufficient cash generated from our business activities to support our operations for the next twelve months.

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.

Refer to Note 2 of our consolidated financial statements included in “Item 8. Consolidated Financial Statements and Supplementary Data.”

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. The Secured Notes were retired on February 20, 2004.

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 26.1% of our consolidated revenues. For fiscal 2004, a hypothetical 10% strengthening of the US dollar relative to the foreign currencies of countries where we operate would not have a material effect on our results of operations or cash flow.

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.

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 January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004, 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.

The accompanying notes are an integral part of these consolidated financial statements.

Cherokee Inc. (which may be referred to as we, us, or our) is in the business of marketing and licensing the Cherokee, Sideout and Carole Little 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.

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.

Our fiscal year comprises a 52 or 53 week period ending on the Saturday nearest to January 31.

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.

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.

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 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.

We hold various trademarks including Cherokee^{^®}, Sideout^{^®}, Sideout Sport^{^®}, Carole Little^{^®}, CL II^{^®}, Saint Tropez-West^{^®}, Chorus Line, All that Jazz^{^®}, Molly Malloy^{^®} 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, Carole Little, CLII, Chorus Line, Saint Tropez-West, All that Jazz, and Molly Malloy and others 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.

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 are the costs associated with the leveraged recapitalization which have been capitalized and are being amortized over the term of the Secured Notes indenture.

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 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.

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 fiscal year end January 31, 2004 (“fiscal 2004”) and February 1, 2003 (“fiscal 2003”), 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 29% and 40%, respectively, of our trade receivables at January 31, 2004 and February 1, 2003 and approximately 57%, 65% and 67%, respectively, of our revenues during the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002. Mossimo accounted for $6.2 million or 48% of trade receivables at January 31, 2004, and $3.2 million or 32% of trade receivables at February 1, 2003. Our international revenues represent approximately 26%, 17% and 15%, respectively, of our total revenues during the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002.

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 February 2004, Target renewed their agreement with Cherokee under the same terms as of January 31, 2003. The renewal extends through January 2006. The guaranteed minimum royalty for 2006 is $9.0 million.

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 commenced on February 1, 2002 and continues through January 31, 2005. Under the Mervyn’s agreement, Mervyn’s will pay a royalty each fiscal year based on a percentage of Mervyn’s net sales of Sideout branded merchandise during each fiscal year, subject to a guaranteed minimum royalty.

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 renewed their agreement as of February 1, 2003 for an additional five year period, through January 31, 2008. Under the terms of the renewal, Zellers agreed to pay us a minimum guaranteed royalty of $15.6 million over the five-year term under the same conditions of the original agreement.

During 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 receive 15% of all monies paid to Mossimo by Target. Under the Mossimo agreement with Target Stores, Target Stores is obligated to pay Mossimo a royalty based on a percentage of net sales of Mossimo branded products, subject to a guaranteed minimum royalty.

In December, 2002, Cherokee acquired out of bankruptcy the trademarks of CL Fashion Inc. which included Carole Little, CLII, Saint Tropez-West, Chorus Line, All that Jazz, and Molly Malloy. Concurrent, and just after this acquisition, Cherokee entered into a five-year “Retail Direct” licensing agreement with TJX Companies for the Carole Little, CLII and Saint Tropez-West brands and a master licensing agreement with Gilrichco, Inc. for the remaining brands. The licensing agreement with TJX provides us with minimum guaranteed annual royalties during the five-year term of the agreement and provides TJX with the option at the expiration of the initial term of the agreement to either renew the agreement for an additional five years or buy the trademarks covered by the agreement from us pursuant to an agreed-upon formula. After we recover our investment of $2.7 million from the Carole Little brands (Carole Little, CLII, and Saint Tropez-West), then 45% of any additional monies from the Carole Little brands must be paid by us to Ms. Carole Little (StudioCL Corporation), the founder of CL Fashion Inc. The Gilrichco agreement was terminated in October 2003.

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.

At January 31, 2004, Cherokee had two stock-based employee compensation plans. Cherokee accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.

In accordance with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosures” the following table illustrates the effect on stock-based compensation, net income and earnings per share if Cherokee had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. The Company did not grant any stock options during fiscal 2004.

Our retail direct licensees fund their own advertising programs. Our advertising and promotional costs are immaterial and are expensed as incurred.

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.

SFAS 130 “Reporting Comprehensive Income” establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the three years in the period ended January 31, 2004 we had no other comprehensive income components and accordingly, net income equals comprehensive income.

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. Our reporting structure provides for only one segment—the marketing and licensing of trademarks.

Certain reclassifications have been made to the 2003 and 2002 financial statements to conform to the 2004 presentation.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that certain guarantees be recognized as liabilities at fair value at their inception date and requires certain disclosures by the guarantor in its financial statements about its obligations. The provisions of FIN 45, which were effective for qualifying guarantees entered into or modified after December 31, 2002, did not have a material impact on our financial statements. The disclosure requirements were effective for our first quarter ended May 31, 2003.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (“FIN No. 46”) as superseded in December 2003 by FASB issued Interpretation No. 46R, “Consolidation of Variable Interest Entities—an interpretation of ARB 51 (“FIN No. 46R”). FIN No. 46R requires the primary beneficiary of a variable interest entity (“VIE”) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, equity investors participate in losses or residual interests of the entity on a basis that differs from its ownership interest, or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. FIN No. 46R is applicable for the Company starting February 1, 2004. We do not expect the adoption of FIN No. 46R to have a material impact on our financial condition or results of operations.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as liabilities in balance sheets. The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. The adoption of SFAS 150 did not impact our financial position, cash flows or results of operations.

In December 2003, the SEC issued SAB 104. This staff accounting bulletin revises or rescinds certain sections of SAB 101, which gives interpretation guidance about revenue recognition. SAB 104 makes the interpretive guidance of SAB 101 consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 in the fourth quarter of fiscal 2004 did not impact our financial position, cash flows or results of operations.

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. At January 31, 2004, and February 1, 2003 we had accounts receivable outstanding from Mossimo totaling $6.2 million and $3.2 million, respectively, which includes past revenues, interest owed on such amounts past due, and certain past legal fees incurred up to January 2003. During fiscal 2003 and 2004, we recognized revenues from Mossimo of $2.7 million and $2.5 million, respectively, which does not include interest on such amounts owing. However, Mossimo refused to pay the $5.2 million in aggregate finder’s fees due to us from fiscal 2003 through fiscal 2004. An arbitration was held between the parties in mid-October, 2002 on this matter. An arbitration panel ruled in favor of Cherokee on November 11, 2002, issuing an interim arbitration award directing Mossimo to pay all monies owed Cherokee plus interest on any of the monies withheld, along with legal fees. The arbitrators also reaffirmed the finder’s agreement. This interim award was reaffirmed in total in a final award dated January 16, 2003 of over $2.9 million. This final arbitration award stated that Cherokee was owed $2.4 million in finder’s fees from Mossimo, plus $420,272 in legal fees plus $95,305 of interest. On June 17, 2003, the Los Angeles Superior Court confirmed the arbitration award and entered judgment in Cherokee’s favor in the total amount of nearly $3.1 million, which included the past money due to us from the final arbitration award, plus additional interest expense from January 2003 to June 17, 2003. Mossimo then appealed this judgment to the Appellate Court. In conjunction with the appeal, Mossimo posted financial security satisfactory to the court of over $4.5 million, which is equal to one and one half times the amount of the Judgment. The appeal was heard by the Appellate Court on December 12, 2003 and on January 2, 2004 the Appellate court ruled in Cherokee’s favor and upheld the lower court’s finding. On February 6, 2004 Mossimo asked the California Supreme Court to review the unanimous decision of the California Court of Appeal. This appeal was denied on March 17, 2004. Shortly thereafter, Cherokee and Mossimo began discussions about determining the total outstanding amounts owed to Cherokee in this matter (including interest at the statutory rate of 10% on all past revenues and previously awarded interest and legal fees outstanding), and in the afternoon on March 24, 2004 Mossimo presented Cherokee’s attorneys with a check for over $1.7 million along with a letter of release pertaining to the

court deposit that Mossimo previously posted with the court (totaling over $4.5 million). Cherokee is in the process of obtaining a court order to receive this deposit.

As of January 31, 2004 past amounts due from Mossimo totaled approximately $6.2 million, which included approximately $5.2 million in finder’s fees owed, and over $1.0 million of interest on such monies owed and reimbursement of legal fees previously awarded, but does not include our legal expenses and costs of over $410,000 incurred since January 17, 2003. We have made no provision for reserves against the accounts receivable from Mossimo. Based upon the $1.7 million check received on March 24, 2004 and the release by Mossimo to us of the over $4.5 million court deposit previously posted by Mossimo we expect to recover the full amount of the receivable recorded at January 31, 2004.

Expected amortization of trademarks for the years ending January 31, 2005, 2006, 2007, 2008, and for 2009 and thereafter is $1.0 million, $1.0 million, $1.0 million, $1.0 million, $0.9 million and $4.8 million, respectively.

In November 1997, we entered into an agreement with Sideout Sport Inc. (the “Sideout Agreement”) to purchase trademarks and licenses related to Sideout^{^®} and Sideout Sport^{^®}. 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 that may be earned through October 22, 2004. Since January 1, 1999, we have paid in total over $4.6 million in contingent payments under the Sideout Agreement. Our former Executive Vice President, Steve Ascher, who left the Company in November 2003, is a significant stockholder in Sideout Sport, Inc.

In December 2002, we acquired out of bankruptcy the trademarks of CL Fashion Inc. that included Carole Little, CLII, Saint Tropez-West, Chorus Line, All that Jazz, and Molly Malloy. Concurrently, we entered into a five-year “Retail Direct” licensing agreement with TJX Companies for the Carole Little, CLII and Saint Tropez-West brands. After we recover our investment of $2.7 million from the Carole Little brands (Carole Little, CLII, and Saint Tropez-West), then 45% of any additional monies from the Carole Little brands must be paid by us to Ms. Carole Little (StudioCL Corporation), the founder of CL Fashion Inc.

During the fiscal year ended January 31, 2004 we did not purchase any trademarks. During fiscal 2003 we purchased trademarks of CL Fashions Inc. for $2.7 million. During fiscal 2004 we capitalized registration and renewal fees of $590,000, comprised of $180,000 for Cherokee, $303,000 for Sideout, and $107,000 for the brands (Carole Little, others) purchased in fiscal 2003. In fiscal 2003, in addition to the $2.7 million acquisition costs, we capitalized registration and renewal fees totaling approximately $727,000, comprised of $360,000 for Sideout and approximately $367,000 for Cherokee and others.

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 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 that is also $60.0 million. During fiscal 2004, 2003 and 2002, the trustee distributed from the collection account $10.5 million, $10.5 million and $10.5 million, respectively to the holders of the Secured Notes. We made our last quarterly payment of $2.6 million on the Secured Notes on February 20, 2004 and subsequently retired the Secured Notes.

The income tax provision as shown in the statements of operations includes the following:

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. For the year ended February 2, 2002, the valuation allowance, relating to pre-organization carryovers, was released in its entirety and credited to additional paid-in capital.

A reconciliation of the actual income tax rates to the federal statutory rate follows:

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 January 31, 2004, we have $5.5 million of federal Section 382 NOLs available that begin to expire in 2008.

The following table provides a reconciliation of the numerators and denominators of the basic and diluted per-share computations for each of the three years in the period ended January 31, 2004:

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 January 31, 2004, February 1, 2003, and February 2, 2002 were 0, 30,464 and 177,268, respectively.

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, and expect to exercise that option during 2004. The future minimum non-cancellable lease payments are as follows:

Total rent expense was $108,000 for the year ended January 31, 2004, $108,000 for the year ended February 1, 2003 and $105,000 for the year ended February 2, 2002.

During fiscal 2004 and fiscal 2003, Mossimo refused to pay finder’s fees to us pursuant to terms of our Finder’s Agreement (see Note 3).

During its normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may be required to make future payments under specific circumstances. We have not recorded any liability for these contractual guarantees and indemnities in the accompanying consolidated financial statements. A description of significant contractual guarantees and indemnities existing as of January 31, 2004 is included below:

We indemnify certain customers against liability arising from third-party claims of intellectual property rights infringement related to the Company’s trademarks. These indemnities appear in our licensing agreements with our customers, are not limited in amount or duration and generally survive the expiration of the contracts. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, the Company is unable to determine the maximum amount of losses that it could incur related to such indemnifications.

We have entered into indemnification agreements with certain directors and executive officers which require us to indemnify such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable to determine the maximum amount of losses that it could incur relating to such indemnifications.

We have also entered into severance and change in control agreements with certain of our executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with the us.

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, provides for certain base compensation and bonuses, as defined, payable to Mr. Margolis. The initial term of the Agreement was until February 2, 2002, however, it 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 2004, fiscal 2003, and fiscal 2002 exceeded specified levels as agreed upon by our Compensation Committee thereby automatically extending the Agreement to February 1, 2006. The Agreement also provides that Mr. Margolis may nominate 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. If we terminate the agreement without cause or Mr. Margolis terminates the agreement if we materially breach the terms and conditions of the agreement or fail to perform any material obligation there under, Mr. Margolis is entitled to receive within 60 days of termination, a lump sum cash payment equal to three times the sum of his annual base compensation and the previous year’s performance bonus. For the years ended January 31, 2004, February 1, 2003 and February 2, 2002, respectively, Mr. Margolis’ base compensation and

bonuses were $3.8 million, $3.5 million and $3.2 million. As of January 31, 2004, accrued liabilities includes bonuses payable of $3.8 million, including Mr. Margolis’ bonus of $3.1 million.

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 January 31, 2004 and February 1, 2003, no shares of preferred stock were issued.

On November 3, 2003 we declared a dividend of $3,223,000 or $0.375 per share which was paid on December 19, 2003.

Our 1995 Incentive Stock Option Plan (the “1995 Plan”) was approved at the October 30, 1995 Annual Meeting of Stockholders. The purpose of the 1995 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 1995 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 January 31, 2004, we have no shares available for grants of options.

Our 2003 Incentive Award Plan (the “2003 Plan”) was approved at the June 9, 2003 Annual Meeting of Stockholders. The principal purposes of the 2003 Plan are to provide an additional incentive for directors, employees and consultants of the Company and its subsidiaries to further the growth development and financial success of the Company and to enable the Company to obtain and retain their services. The 2003 Plan provides for the grant of options and restricted stock awards (“Awards”). The Compensation Committee of the Board or another committee thereof (the “Committee”) will administer the 2003 Plan with respect to grants to employees or consultants of the Company and the full Board will administer the 2003 Plan with respect to grants to independent directors. Options and restricted stock awards under the 2003 Plan may be granted to individuals who are then officers or other employees of the Company or any of its present or future subsidiaries. Such Awards also may be granted to consultants of the Company selected by the Committee for participation in the 2003 Plan. The 2003 Plan provides that the Committee may grant or issue stock options and restricted stock awards, or any combination thereof. Two types of stock options (the “Options”) may be granted under the plan—Incentive and Non-Qualified stock options. In addition, Restricted Stock may be sold to participants at various prices (but not below par value) and made subject to such restrictions as may be determined by the Board or Committee. The maximum number of shares authorized for the grant of Awards under the 2003 Plan is 250,000. Furthermore, the maximum number of shares which may be subject to Awards granted under the 2003 Plan to any individual in any calendar year cannot exceed 100,000. The vesting period and term for Options granted under the 2003 Plan shall be set by the Committee, with the term being no greater than 10 years, and the Options generally will vest over a specific time period as designated by the Committee upon the awarding of such Options.

We account for our employee stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of

FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.

To date, we have granted options at an exercise price equal to the fair value of our common stock on the date granted. The impact on our net income and net income per share amounts, had we determined our compensation cost using a fair value methodology prescribed by SFAS No. 123, is disclosed in Note 2. 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 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; and for 2003, risk free interest rates ranging between 2.46% and 3.53%; dividend yield of zero percent; volatility of 37.6% and expected life of the option of three years. No stock options were granted in fiscal 2004. Because additional stock options are expected to be granted each year, the pro forma disclosures in Note 2 are not representative of the pro forma effects on pro forma financial results for future years.

A summary of our stock option activity, and related information for each of the three years in the period ended January 31, 2004, follows:

The following table summarizes the stock options outstanding and exercisable as of January 31, 2004

On February 3, 2004 we declared a dividend of $3.2 million, or $0.375 per share, which was paid on March 17, 2004.

On March 23, 2004 we entered into a line of credit facility agreement with a bank. Under the terms of the agreement we can borrow up to $5,000,000 at any time at an interest rate of either (i) the Prime Rate, or (ii) at the 1-month LIBOR rate plus an applicable margin. The facility is collateralized by the Minimum Guaranteed Royalty from our licensing contract with Target Corp, and expires on July 15, 2005. The facility contains certain covenants, including restrictions on the creation of liens, restrictions on any fundamental changes such as a merger or consolidation, and certain financial covenants including a Senior Debt to EBITDA Ratio, a Leverage Ratio, and a covenant requiring us to maintain at least a $15.0 million Minimum EBITDA for each fiscal year during the term of this facility.

The following table summarizes certain financial information by quarter for fiscal 2004 and fiscal 2003:

(a) Evaluation of disclosure controls and procedures. Cherokee maintains “disclosure controls and procedures”, as such term is defined under Exchange Act Rule 13a-14(c). Disclosure controls and procedures are designed to ensure that information required to be disclosed in Cherokee’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to Cherokee’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Cherokee’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and Cherokee’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Cherokee has carried out an evaluation as of the end of the period covered by this Annual Report on Form 10-K, under the supervision and with the participation of Cherokee management, including Cherokee’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Cherokee’s disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that Cherokee’s disclosure controls and procedures were effective in ensuring that material information relating to Cherokee is made known to the Chief Executive Officer and Chief Financial Officer by others within Cherokee during the period in which this report was being prepared.

(b) Changes in internal controls. There have been no significant changes in Cherokee’s internal controls or in other factors that could significantly affect these controls subsequent to the date Cherokee completed its evaluation.

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 2004 Annual Meeting of Stockholders scheduled to be held on June 14, 2004, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended January 31, 2004. The following table sets forth information with respect to each of our current executive officers.

The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to our 2004 Annual Meeting of Stockholders scheduled to be held on June 14, 2004, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended January 31, 2004.

(a)(1) The List of Financial Statements are filed as Item 8 of Part II of this Form 10-K.

II. Valuations and Qualifying Accounts and Reserves. [included in the Financial Statements filed as Item 8 of Part II of this Form 10 K]

The exhibits listed in the accompanying Index to Exhibits are filed as part of this Form 10-K.

A Current Report on Form 8-K was filed on March 1, 2004 reporting that Target Stores had extended its licensing agreement with Cherokee through January 2006.

A Current Report on Form 8-K was filed on March 31, 2004 reporting the fourth quarter and fiscal year ended January 31, 2004 financial results for Cherokee, Inc.

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 1, 2004

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.


		Page
PART I

Item 1.	Business	1

Item 2.	Properties	13

Item 3.	Legal Proceedings	13

Item 4.	Submission of Matters to a Vote of Security Holders	14

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities	15

Item 6.	Selected Financial Data	16

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	17

Item 7A.	Qualitative and Quantitative Disclosures of Market Risk	27

Item 8.	Consolidated Financial Statements and Supplementary Data	28

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29

Item 9A.	Controls and Procedures	29

PART III

Item 10.	Directors and Executive Officers of the Registrant	30

Item 11.	Executive Compensation	31

Item 12.	Security Ownership of Certain Beneficial Owners and Management	31

Item 13.	Certain Relationships and Related Transactions	31

Item 14.	Principal Accountant Fees and Services	31

PART IV

Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	32


	High		Low		Dividends Paid
Fiscal 2003
Quarter ended May 4, 2002	$	21.98	$	12.98	—
Quarter ended August 3, 2002		23.12		14.50	—
Quarter ended November 2, 2002		19.22		15.11	—
Quarter ended February 1, 2003		16.75		13.91	—

Fiscal 2004
Quarter ended May 3, 2003		16.85		14.80	—
Quarter ended August 2, 2003		20.93		15.50	—
Quarter ended November 1, 2002		21.99		18.66	—
Quarter ended January 31, 2004		23.05		20.18	0.375


	Year Ended January 31, 2004			Year Ended February 1, 2003			Year Ended February 2, 2002			Year Ended February 3, 2001			Year Ended January 29, 2000
	($ In Thousands Except Per Share Data)
Statement of Operations Data:
Net revenues	$	36,312		$	33,143		$	30,674		$	28,281		$	24,714
Selling, general and administrative expenses		11,118			9,281			8,393			7,749			7,019
Amortization of trademarks		991			667			534			396			261
Forgiveness of note receivable		—			—			—			—			1,890	(1)

Operating income		24,203			23,195			21,747			20,136			15,544
Interest expense		693			1,335			1,960			2,573			3,023
Investment and interest income		(491	)		(245	)		(292	)		(430	)		(399	)

Income before income taxes		24,001			22,105			20,079			17,993			12,920
Income tax expense		9,840			9,087			8,020			7,227			4,859

Net income	$	14,161		$	13,018		$	12,059		$	10,766		$	8,061

Basic earnings per share	$	1.70		$	1.58		$	1.47		$	1.29		$	.94
Diluted earnings per share	$	1.68		$	1.54		$	1.46		$	1.29		$	.94
Cash dividends per share	$	.38		$	—		$	—		$	—		$	.50


	January 31, 2004		February 1, 2003		February 2, 2002			February 3, 2001			January 29, 2000
Balance Sheet Data:
Working capital (deficiency)	$	15,701	$	1,619	$	(287	)	$	(2,263	)	$	(2,263	)
Total assets		34,627		29,063		24,256			19,413			17,518
Long-term debt, net of current maturities		—		2,141		11,510			20,255			28,389
Stockholders’ equity (deficit)		27,158		11,767		(1,760	)		(15,070	)		(24,132	)


	Year Ended January 31, 2004		Year Ended February 1, 2003		Year Ended February 2, 2002
Royalty revenues	$	36,312,000	$	33,143,000	$	30,674,000
Selling, general, administrative and amortization expenses		12,109,000		9,948,000		8,927,000

Operating income		24,203,000		23,195,000		21,747,000
Interest expense net of interest income		202,000		1,090,000		1,668,000
Income tax provision		9,840,000		9,087,000		8,020,000

Net income	$	14,161,000	$	13,018,000	$	12,059,000


	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)	$	2,625,000		—		—	—	$	2,625,000
Capital Lease Obligations		—		—		—	—		—
Operating Leases (c)		54,000		—		—	—		54,000
Unconditional Purchase Obligations		—		—		—	—		—
Other Long-Term Obligations		450,000	(d)(e)(f)(h)	—	(d)(e)(f)	—	—		450,000	(d)(e)(f)
Total Contractual Cash Obligations	$	3,129,000	(g)	—	(g)	—	—	$	3,129,000	(g)


		Page
CHEROKEE INC.
Report of Independent Auditors		F-1
Consolidated Balance Sheets At January 31, 2004 and February 1, 2003		F-2
Consolidated Statements of Operations For Each of the Three Years in the Period Ended January 31, 2004		F-3
Consolidated Statements of Stockholders’ Equity For Each of the Three Years in the Period Ended January 31, 2004		F-4
Consolidated Statements of Cash Flows For Each of the Three Years in the Period Ended January 31, 2004		F-5
Notes to Consolidated Financial Statements		F-6

SCHEDULE
II Valuations and Qualifying Accounts and Reserves		F-20


	January 31, 2004		February 1, 2003
Assets
Current assets:
Cash and cash equivalents	$	5,850,000	$	2,852,000
Restricted cash		2,627,000		2,637,000
Receivables, net		12,992,000		9,896,000
Prepaid expenses and other current assets		747,000		425,000
Deferred tax asset		954,000		964,000

Total current assets		23,170,000		16,774,000
Securitization fees, net of accumulated amortization of $1,241,000 and $1,046,000, respectively		—		195,000
Deferred tax asset		1,589,000		1,832,000
Property and equipment, net of accumulated depreciation of $342,000 and $311,000, respectively		108,000		120,000
Trademarks, net		9,726,000		10,127,000
Other assets		34,000		15,000

Total assets	$	34,627,000	$	29,063,000

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	529,000	$	203,000
Other accrued liabilities		4,315,000		4,452,000
Current portion of long-term notes payable		2,625,000		10,500,000

Total current liabilities		7,469,000		15,155,000
Notes payable less current portion		—		2,141,000

Total liabilities		7,469,000		17,296,000

Commitments and Contingencies (Note 8)
Stockholders’ Equity
Preferred stock, $.02 par value, 1,000,000 shares authorized, none issued and outstanding		—		—
Common stock, $.02 par value, 20,000,000 shares authorized, 8,595,916 and 8,232,264 shares issued and outstanding at January 31, 2004 and February 1, 2003, respectively		171,000		165,000
Additional paid-in capital		6,207,000		1,760,000
Retained earnings		20,780,000		9,842,000

Total stockholders’ equity		27,158,000		11,767,000

Total liabilities and stockholders’ equity	$	34,627,000	$	29,063,000


	Year Ended
	January 31, 2004			February 1, 2003			February 2, 2002
Net revenues	$	36,312,000		$	33,143,000		$	30,674,000
Selling, general and administrative expenses		11,118,000			9,281,000			8,393,000
Amortization of trademarks		991,000			667,000			534,000

Operating income		24,203,000			23,195,000			21,747,000
Other income (expense):
Interest expense		(693,000	)		(1,335,000	)		(1,960,000	)
Investment and interest income		491,000			245,000			292,000

Total other expense, net		(202,000	)		(1,090,000	)		(1,668,000	)

Income before income taxes		24,001,000			22,105,000			20,079,000
Income tax provision		9,840,000			9,087,000			8,020,000

Net income	$	14,161,000		$	13,018,000		$	12,059,000

Basic earnings per share	$	1.70		$	1.58		$	1.47

Diluted earnings per share	$	1.68		$	1.54		$	1.46

Weighted average shares outstanding:
Basic		8,337,881			8,244,675			8,199,284
Diluted		8,409,072			8,456,708			8,243,554


	Common Stock					Additional Paid-in Capital			Retained Earnings (Deficit)			Total
	Shares		Par Value			Additional Paid-in Capital			Retained Earnings (Deficit)			Total
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										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	)
Purchase and retirement of treasury stock	(57,500	)		(1,000	)		(860,000	)					(861,000	)
Stock option tax benefit							342,000						342,000
Proceeds from exercise of stock options	126,359			2,000			1,026,000						1,028,000
Net income										13,018,000			13,018,000

Balance at February 1, 2003	8,232,264			165,000			1,760,000			9,842,000			11,767,000
Stock option tax benefit							995,000						995,000
Proceeds from exercise of stock options	363,652			6,000			3,452,000						3,458,000
Dividends										(3,223,000	)		(3,223,000	)
Net income										14,161,000			14,161,000

Balance at January 31, 2004	8,595,916		$	171,000		$	6,207,000		$	20,780,000		$	27,158,000


	Years Ended
	January 31, 2004			February 1, 2003			February 2, 2002
Net income:
As reported	$	14,161,000		$	13,018,000		$	12,059,000
Stock-based compensation expense determined under the fair value method		183,000			188,000			183,000

Pro forma	$	13,978,000		$	12,830,000		$	11,876,000

Net income per share—basic:
As reported	$	1.70		$	1.58		$	1.47
Per share effect of stock-based compensation expense determined under the fair value method		(0.02	)		(0.02	)		(0.02	)

Pro forma	$	1.68		$	1.56		$	1.45

Net income per share—diluted:
As reported	$	1.68		$	1.54		$	1.46
Per share effect of stock-based compensation expense determined under the fair value method		(0.02	)		(0.02	)		(0.02	)

Pro forma	$	1.66		$	1.52		$	1.44


	January 31, 2004		February 1, 2003
Trade	$	12,988,000	$	9,825,000
Other		4,000		71,000

	$	12,992,000	$	9,896,000


	January 31, 2004			February 1, 2003
Trademarks	$	12,817,000		$	12,227,000
Accumulated amortization		(3,091,000	)		(2,100,000	)

Total	$	9,726,000		$	10,127,000


	January 31, 2004				February 1, 2003
	Current		Non-Current		Current		Non-Current
Deferred tax assets:
Fixed assets	$	—	(53,000	)	$	—	$	(20,000	)
Tax effect of NOL carryovers		273,000	1,639,000			273,000		1,912,000
State income taxes		681,000	3,000			691,000		(60,000	)

Total deferred tax assets	$	954,000	1,589,000		$	964,000	$	1,832,000


	Year Ended January 31, 2004		Year Ended February 1, 2003		Year Ended February 2, 2002
Tax expense at U.S. statutory rate	35.0	%	35.0	%	35.0	%
State income tax benefit net of federal income tax	5.8		5.9		5.8
Other	0.2		0.2		(0.9	)

Tax provision	41.0	%	41.1	%	39.9	%


	Income (Numerator)		Shares (Denominator)	Per Share Amount
For the year ended January 31, 2004:
Basic earnings per share	$	14,161,000	8,337,881	$	1.70
Effect of dilutive securities—stock options and warrants			71,191		(0.02	)

Dilutive earnings per share	$	14,161,000	8,409,072	$	1.68

For the year ended February 1, 2003:
Basic earnings per share	$	13,018,000	8,244,675	$	1.58
Effect of dilutive securities—stock options and warrants			212,033		(0.04	)

Dilutive earnings per share	$	13,018,000	8,456,708	$	1.54

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		(0.01	)

Dilutive earnings per share	$	12,059,000	8,243,554	$	1.46


	Operating Leases
2005		54,000

Total future minimum lease payments	$	54,000


	2004				2003				2002
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of year	558,641		$	10.43	559,536		$	9.03	599,536		$	8.98
Granted	—			—	125,464			14.40	10,000			8.90
Exercised	(363,652	)		9.50	(126,359	)		8.14	—			—
Forfeited	(20,311	)		18.79	—			—	(50,000	)		8.50

Outstanding at end of year	174,678		$	11.41	558,641		$	10.43	559,536		$	9.03

Exercisable at end of year	102,427		$	10.43	426,510		$	9.29	516,203		$	9.01
Weighted average grant date fair value of options granted during the year			$	—			$	4.20			$	2.26


	Options Outstanding				Options Exercisable
Range	Number of shares outstanding	Weighted average remaining life	Weighted average exercise price		Number of shares outstanding	Weighted average exercise price
$ 7.00–$ 8.00	5,000	5.50 years	$	8.00	5,000	$	8.00
$ 8.00–$ 9.00	42,886	4.27 years	$	8.72	39,552	$	8.70
$ 9.00–$ 10.00	22,967	3.30 years	$	9.86	22,967	$	9.86
$ 10.00–$ 11.00	24,754	3.52 years	$	10.78	24,754	$	10.78
$ 12.00–$ 13.00	68,917	8.00 years	$	12.99	—		—
$ 18.00–$ 19.00	10,154	8.60 years	$	18.79	10,154	$	18.79

	174,678				102,427


	Fiscal year ended January 31, 2004
	May 3, 2003		August 2, 2003		November 1, 2003		January 31, 2004
Net revenues	$	12,057,000	$	9,912,000	$	6,742,000	$	7,601,000
Income before income taxes		9,017,000		6,262,000		4,212,000		4,510,000
Net income		5,296,000		3,662,000		2,464,000		2,739,000
Net income per share—basic		0.64		0.44		0.30		0.32
Net income per share—diluted		0.63		0.43		0.29		0.32

	Fiscal year ended February 1, 2003
	May 4, 2002		August 3, 2002		November 2, 2002		February 1, 2003
Net revenues	$	11,458,000	$	8,562,000	$	6,060,000	$	7,063,000
Income before income taxes		8,553,000		5,395,000		3,478,000		4,679,000
Net income		5,113,000		3,256,000		2,087,000		2,562,000
Net income per share—basic		0.63		0.39		0.25		0.31
Net income per share—diluted		0.61		0.38		0.25		0.30


Description	Balance at Beginning of Period		Charged/ (Credited) to Costs and Expenses		Charged to Other Accounts		Deductions		Balance at End of Period
Tax Valuation Allowance:
Year ended Jan. 31, 2004	$	—	$	—		—		—		—
Year ended Feb. 1, 2003	$	—	$	—		—		—		—
Year ended Feb. 2, 2002	$	1,858,000	$	—	$	1,858,000	$	—	$	—


Name, Age and Present Position with Cherokee		Principal Occupation for Past Five Years; Business Experience
Robert Margolis, 56
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 Cherokee 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. Subsequently, Mr. Margolis rejoined us as Chairman and CEO in 1995.

Howard Siegel, 48
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, 55
Corporate Secretary and Former Chief Financial Officer		Ms. Gratzke is currently serving as our Corporate Secretary. She was our Chief Financial Officer from November 1995 until September 2002. She relinquished the CFO position to become President of the Women’s Southern California Golf Association.

Russell J. Riopelle, 40
Chief Financial Officer		Mr. Riopelle joined us in mid-February 2004. From August 2002 to mid-February 2004 Mr. Riopelle was an investment banker with RSM EquiCo, a division of H& R Block, Inc. From February 2002 to July 2002 Mr. Riopelle was Chief Financial Officer for Dorchester Capital Advisors, a hedge fund. From May 2000 to November 2001 Mr. Riopelle was a Vice President of Banc of America Securities. From August 1996 through April 2000 Mr. Riopelle was a Vice President in the investment banking division of U.S. Bancorp Libra (now known as Libra Securities, LLC).


Name, Age and Present Position with Cherokee		Principal Occupation for Past Five Years; Business Experience
Sandi Stuart, 52
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.


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).

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).


Exhibit Number		Description of Exhibit

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).

10.14		The 2003 Incentive Award Plan (incorporated by reference from Exhibit A of Cherokee Inc.’s Proxy Statement, Form DEF 14A, dated June 9, 2003).

14.1		Code of Business Conduct and Ethics adopted by Cherokee Inc. in March 2004. This Code of Business Conduct and Ethics, as applied to the Company’s principal financial officers, shall be our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.

21.1		Subsidiaries of Cherokee Inc.

23.1		Consent of Independent Accountants.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Signature	Title	Date

/s/ ROBERT MARGOLIS Robert Margolis	Chairman and Chief Executive Officer and Director	April 1, 2004

/s/ RUSSELL J. RIOPELLE Russell J. Riopelle	Chief Financial Officer	April 1, 2004

/s/ TIMOTHY EWING Timothy Ewing	Director	April 1, 2004

/s/ KEITH HULL Keith Hull	Director	April 1, 2004

/s/ DAVE MULLEN Dave Mullen	Director	April 1, 2004

/s/ JESS RAVICH Jess Ravich	Director	April 1, 2004