Basis of Presentation

9 Months Ended

Nov. 02, 2013

Basis of Presentation

Basis of Presentation

(1)   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of November 2, 2013 and for the three and nine month periods ended November 2, 2013 and October 27, 2012 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and Article 10 of Regulation S-X. These consolidated financial statements include the accounts of the Company and its subsidiaries and have not been audited by independent registered public accountants but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee Inc. (“Cherokee” or the “Company”) are necessary for a fair statement of the financial position and the results of operations for the periods presented.  All material intercompany accounts and transactions have been eliminated during the consolidation process. The accompanying consolidated balance sheet as of February 2, 2013 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.  The results of operations for the three and nine month periods ended November 2, 2013 are not necessarily indicative of the results to be expected for the fiscal year ending February 1, 2014.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended February 2, 2013.

As used herein, the term “First Quarter” refers to the three months ended May 4, 2013; the term “Second Quarter” refers to the three months ended August 3, 2013; the term “Third Quarter” refers to the three months ended November 2, 2013; the term “Nine Months” refers to the nine months ended November 2, 2013; the term “Fiscal 2015 refers to our fiscal year ending January 31, 2015; the term “Fiscal 2014” refers to our fiscal year ending February 1, 2014; the term “Fiscal 2013” refers to our most recent past fiscal year ended February 2, 2013; and the term “Fiscal 2012” refers to our fiscal year ended January 28, 2012.

Immaterial out of Period Adjustment

During the Third Quarter, the Company identified a prior period adjustment, which would have affected the previous balance sheets, income statements, statements of cash flows, statements of stockholders’ equity and certain footnote disclosures of interim periods ended May 4, 2013, and August 3, 2013 and for the annual period for Fiscal 2013. The Company previously reported the amounts relating to transaction costs and contingent consideration for the Company’s acquisition of assets related to the Liz Lange and Completely Me by Liz Lange brands in September 2012, and for the Company’s acquisition of rights to the Cherokee brand in the category of school uniforms in January 2013, based on its determination that such transactions were appropriately classified as asset acquisitions rather than business combinations.  During the Third Quarter, the Company revisited and further considered the appropriate accounting guidance with respect to this matter using the guidance applicable to business combinations, including whether the resulting adjustment causes any of the Company’s previously issued consolidated financial statements to be materially misstated. The Company has concluded that the foregoing adjustment is not material to any of its applicable prior reporting period results, and that no previously filed reports require amendment. The Third Quarter correction of this item had a net balance sheet effect of approximately $50,000 and a net income statement effect of approximately $50,000. During the Third Quarter, the Company recorded these prior period amounts to correct this adjustment.

Acquisition of Liz Lange and Completely Me by Liz Lange

On September 4, 2012, the Company entered into an asset purchase agreement with LLM Management Co., LLC, pursuant to which the Company acquired various assets related to the “Liz Lange” and “Completely Me by Liz Lange” brands. As consideration for the acquisition, Cherokee agreed to pay a cash purchase price equal to $13.1 million, with $12.6 million paid concurrently with the closing and $0.5 million of which was placed in an escrow fund that was released on March 31, 2013. In addition, Cherokee paid an earn-out payment of $0.4 million in March 2013 and agreed to pay an additional earn-out payment of $0.5 million (for a total of up to $0.9 million in contingent consideration), which additional earn-out payment is payable upon satisfaction of certain revenues attributable to the acquired assets during Fiscal 2014. In addition, as part of the acquisition, Cherokee agreed to assume the seller’s obligations under various agreements, including a consulting agreement with Ms. Lange as well as certain existing license agreements relating to the assets.

Acquisition of Cherokee School Uniforms; Amendment to Target Agreement

On January 31, 2013, the Company entered into an asset purchase agreement pursuant to which the Company acquired various rights relating to the Cherokee brand in the category of school uniforms in exchange for a cash payment of $4.25 million. Cherokee previously sold such rights to the seller in July 1995. In connection with this acquisition, the Company entered into a multi-year amendment to the license agreement with Target Inc. (“Target”) to include the category of school uniforms. Pursuant to such amendment, Target agreed to pay Cherokee an annual royalty rate for its sales of Cherokee-branded children’s school uniforms products in the United States fixed at 2% of Target’s net sales of such products and subject to a minimum annual royalty of $0.8 million.