-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EXDGkdbcwp7GCbwckEP2OQJj3/Tp2AzmG3/D0CGXdZlmbZ7Lcd7sq8/JaJUMfgpx fLS/Zdh7pWiji05n6IKosQ== 0000950148-96-001420.txt : 19960716 0000950148-96-001420.hdr.sgml : 19960716 ACCESSION NUMBER: 0000950148-96-001420 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960715 SROS: NONE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: CHEROKEE INC CENTRAL INDEX KEY: 0000844161 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 954182437 STATE OF INCORPORATION: DE FISCAL YEAR END: 0528 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-41754 FILM NUMBER: 96594827 BUSINESS ADDRESS: STREET 1: 6835 VALJEAN AVE CITY: VAN NUYS STATE: CA ZIP: 91406-4713 BUSINESS PHONE: 8189511002 MAIL ADDRESS: STREET 1: 6835 VALJEAN AVE CITY: VAN NUYS STATE: CA ZIP: 91406-4713 FORMER COMPANY: FORMER CONFORMED NAME: GREEN ACQUISITION CO DATE OF NAME CHANGE: 19900814 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: NEWSTAR GROUP INC CENTRAL INDEX KEY: 0001018378 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954465538 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 6835 VALJEAN AVE CITY: VAN NUYS STATE: CA ZIP: 91406 BUSINESS PHONE: 8189089899X300 MAIL ADDRESS: STREET 1: 6835 VALJEAN AVE CITY: VAN NUYS STATE: CA ZIP: 91406 SC 13D 1 SC 13D 1 OMB APPROVAL OMB Number: 3235-0145 Expires: October 31, 1997 Estimated average burden hours per response.......14.90 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ___)* CHEROKEE INC. (Name of Issuer) COMMON STOCK (Title of Class of Securities) 16444H102 (CUSIP Number) Barry L. Burten, Esq. c/o Jeffer, Mangels, Butler & Marmaro, 2121 Avenue of the Stars, 10th Floor, Los Angeles, California 90067 (310) 203-8080 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) March 23, 1996 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with the statement [X]. (A fee is not required only if the reporting person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of five percent or less of such class.) (See Rule 13d-7.) NOTE: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). 2 SCHEDULE 13D CUSIP NO. 164 44H-10-2 PAGE 2 OF 6 PAGES 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON The Newstar Group, Inc. dba The Wilstar Group - ------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ] (b) [ ] - ------------------------------------------------------------------------------- 3 SEC USE ONLY - ------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* WC - ------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] - ------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION United States - -------------------------------------------------------------------------------
7 SOLE VOTING POWER 2,125,186 shares of Common Stock ------------------------------------------------------ NUMBER OF 8 SHARED VOTING POWER SHARES BENEFICIALLY -0- OWNED BY ----------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING PERSON 2,125,186 shares of Common Stock WITH ----------------------------------------------------- 10 SHARED DISPOSITIVE POWER -0- -----------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 2,125,186 shares of Common Stock - ------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ] - ------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 25.59% - ------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON* CO - -------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT! 3 CUSIP No. 16444H102 Page 3 of 6 Pages The purpose of this Schedule 13D is to report the acquisition by The Newstar Group, Inc. ("Newstar"), a California corporation of shares and options to acquire shares of the Common Stock of the Issuer. Item 1. Security and Issuer. Securities: Common Stock, $.02 par value ("Common Stock") Options to acquire Common Stock ("Options") Issuer: Cherokee Inc. 6835 Valjean Avenue Van Nuys, California 91406 Item 2. Identity and Background Information as to Newstar Name: The Newstar Group, Inc. State of Incorporation: California Address: 6835 Valjean Avenue Van Nuys, California 91406 Information as to Directors, Officers and Controlling Persons of Newstar Robert Margolis Chief Executive Officer, Chairman, Member Board of Directors The Newstar Group 6835 Valjean Avenue Van Nuys, California 91406 United States citizen President Cherokee Inc. 6835 Valjean Avenue Van Nuys, California 91406 Barry I. Lublin President, Chief Financial Officer, Member Board of Directors The Newstar Group 6835 Valjean Avenue Van Nuys, California 91406 United States citizen 4 CUSIP No. 16444H102 Page 4 of 6 Pages Steve Colombo Vice President, Member Board of Directors The Newstar Group 6835 Valjean Avenue Van Nuys, California 91406 United States citizen Jay Kester Vice President, Member Board of Directors The Newstar Group 6835 Valjean Avenue Van Nuys, California 91406 United States citizen Joel Ratner Vice President The Newstar Group 6835 Valjean Avenue Van Nuys, California 91406 United States citizen Douglas Weitman President c/o Security Textile Corp. 1457 East Washington Boulevard Los Angeles, California 90021 Member Board of Directors The Newstar Group 6835 Valjean Avenue Van Nuys, California 91406 United States citizen (d) No person or entity listed above has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) No person or entity listed above has, during the last five years, been party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such judgment, decree or final order. 5 CUSIP No. 16444H102 Page 5 of 6 Pages Item 3. Source and Amount of Funds or Other Consideration. Newstar utilized working capital consisting of available funds from operations to exercise the options and to acquire the shares of Common Stock reported herein. Item 4. Purpose of Transaction. The shares of Common Stock and the Options were acquired by Newstar and reported herein result from the grant to and exercise by Newstar of an option granted pursuant to a Option Agreement with the Issuer. A copy of the Option Agreement, as amended, is attached hereto. Item 5. Interest in Securities of the Issuer (a) The number of shares of Common Stock beneficially owned by the Undersigned Reporting Person is as follows:
Percent Number of of Name of Reporting Person Shares(1) Class(1) ------------------------ --------- -------- The Newstar Group, Inc. 2,125,186 25.59%
(1) The number of shares includes 1,674,739 owned directly by Newstar and 675,670 owned by Newstar as a result of its ownership of unexercised options to acquire shares of the Issuer's common stock, of which 450,447 are exercisable within sixty (60) days hereof. Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer. Newstar is party to an Option Agreement relating to the issuance of the shares reported herein. Item 7. Material to be Filed as Exhibits. (a) The May 4, 1995 Revised Management Agreement between Newstar and the Issuer, as amended on March 23, 1996, is attached as Exhibit "99.A." (b) The May 4, 1995 Revised Option Agreement between Newstar and Issuer, as amended on March 23, 1996, is attached as Exhibit "99.B." 6 CUSIP No. 16444H102 Page 6 of 6 Pages Signatures After reasonable inquiry and to the best of the undersigned's knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. Dated: July ___, 1996 The Newstar Group, Inc. By /s/ Barry Lublin ----------------------- Barry Lublin, President EX-99.(A) 2 EXHIBIT 99.(A) 1 Exhibit 99.A EXECUTION VERSION REVISED AND RESTATED MANAGEMENT AGREEMENT This Revised and Restated Management Agreement ("Agreement") is entered into as of the 4th day of May, 1995, by and between The Newstar Group, a California corporation d/b/a The Wilstar Group ("Wilstar") and Cherokee Inc., a Delaware corporation (THE "Company"). WHEREAS, the Board of Directors of the Company believes it to be in the Company's best interest to immediately engage the management services of Wilstar, which will provide the services of Robert Margolis ("Margolis"), pursuant to the terms of this Agreement and Wilstar desires to accept such engagement; WHEREAS, on May 4, 1995, the Company and Wilstar entered into an agreement and a side letter (collectively the "Prior Agreement") regarding the subject matter hereof and now wish to replace the Prior Agreement, in its entirety, with this Agreement which shall be effective as of the date of the Prior Agreement; WHEREAS, subject to the terms and conditions set forth herein, the Company and Wilstar wish to set forth their understanding regarding the mutual rights, obligations and responsibilities of Wilstar and the Company in connection with Wilstar's management of the Company; and NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Wilstar agree as follows: Section 1. Term. 1.1 Initial Term. Except as provided in Sections 1.2 and 9 below, the term of this Agreement shall commence as of the date hereof and shall terminate on May 31, 1998. 1.2 Extended Term. In the event the Company's consolidated "pre-tax earnings" computed in accordance with generally accepted accounting principals ("GAAP")(the "Pre-Tax Earnings"), as set forth in the Company's audited financial statements for any of the Company's fiscal years during the term hereof (the "Financial Statements"), commencing with the fiscal year ended May 31, 1996, are no less than 80% of the Pre-Tax Earnings contained in the budget submitted to and approved by the Board of Directors and by Margolis for such fiscal year (the "Budgeted Earnings"); the termination date of this Agreement will automatically be extended an additional year. For the purposes hereof "Term" shall refer to the Initial Term and the Extended Term, if applicable. 2 Section 2. Management Services. 2.1 General Responsibilities. Subject to the supervision of the Board of Directors of the Company, Wilstar shall provide the services of Margolis as the Company's Chairman of the Board and Chief Executive Officer ("CEO"). Wilstar represents and warrants that it shall be able to deliver Margolis' services as contemplated hereby and that it shall be able to have Margolis agree to be bound by the terms of this Agreement. 2.2 Management Titles. As of the effective date of this Agreement, the Board of Directors of the Company shall appoint Robert Margolis, Chairman of the Board and CEO with all the powers and authorities as are customarily vested in the chairman of the board and the chief executive officer of a company. Section 3. Management Compensation, As compensation for its services rendered under this Agreement, the Company shall compensate Wilstar as follows: 3.1 Base Compensation. As its base compensation for services rendered hereunder for the term hereof, Wilstar shall receive four hundred thousand dollars ($400,000) per annum from the Company (the "Base Compensation"). Wilstar shall be paid its Base Compensation monthly, in arrears on the last business day of the month. 3.2 Performance Bonus. Wilstar shall be entitled to performance bonuses as described in this Section 3.2. If no Uniform Sale (as defined below) occurs, Wilstar shall receive a Performance Bonus equal to ten percent (10%) of the Pre-Tax Earnings in excess of a threshold amount of three million five hundred thousand dollars ($3,500,000) for the fiscal years ended May 31, 1996, 1997 and 1998. If a Uniform Sale does occur, Wilstar shall receive a Performance Bonus equal to ten percent (10%) of the Pre-Tax Earnings in excess of an adjusted threshold amount of two million five hundred thousand dollars ($2,500,000) for the fiscal years ended May 31, 1996, 1997 and 1998. If a Uniform Sale occurs during any of the above-referenced fiscal years, the bonus threshold shall be prorated between the threshold amount and the adjusted threshold amount. The Performance Bonus shall be paid in full no later than five (5) business days after the issuance of the Financial Statements for each of such fiscal years or if no audited Financial Statements are issued, no later than ninety (90) days after the end of any such fiscal year. For purposes of this Agreement, the term "Uniform Sale" shall mean the sale of all or substantially all of the assets of the Company's Uniform Division. 3.3 Wilstar Options. Wilstar shall receive on the date of this Agreement options to purchase up to seven and one-half percent (7.5%) of the Common Stock (as defined below) on a "fully diluted basis", which for the purposes hereof shall be deemed to be (i) all 3 currently issued and outstanding Common Stock; (ii) plus any shares of Common Stock issuable and minus any shares of Common Stock that are cancelled pursuant to the Prepackaged Plan (as defined below); and (iii) plus any shares of Common Stock issuable or in connection with currently outstanding agreements (collectively, the 'Diluted Common Stock") at an exercise price equal to three dollars ($3.00) per share (the 'Wilstar Options"). The Wilstar Options will have a five (5) year term from the date of grant, shall vest in one-third increments with one-third vesting upon the execution hereof and one-third vesting on each of the first two anniversaries of this Agreement. A Wilstar Option Agreement embodying the terms and conditions of the Wilstar Options set forth in this Section 3.3 and such other terms and conditions as may be mutually agreed shall be executed concurrently with this Agreement. The shares issued pursuant to the Wilstar Options shall be subject to a Registration Rights Agreement pursuant to which the Company shall agree to grant Wilstar "piggy back" registration rights to include all or such portion of the Common Stock issuable upon the exercise of the Wilstar Options in any Form S-8, S-3, S-1 or other Registration Statement filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), (i) so long as Wilstar would be deemed to be an "affiliate" as such term is defined in the Act; or (ii) Wilstar owns "restricted shares" of Common Stock as such term is defined in the Act (which restricted shares have not satisfied the holding period required for sales under Rule 144 of the Act (the "Holding Period")); or (iii) after expiration of the Holding Period, if such "restricted shares" are in an amount in excess of the volume limitations under Rule 144 of the Act (collectively, the "Restriction Period"). In addition, the Registration Rights Agreement shall provide that Wilstar shall have a one time "demand" registration right prior to the expiration of the Restriction Period. Such Registration Rights Agreement shall be executed concurrently with this Agreement. For purposes of this Agreement, the term "Prepackaged Plan" refers to that certain pre-packaged Chapter 11 plan of reorganization as confirmed by the Bankruptcy Court on December 14, 1994 and the term "Common Stock" refers to all stock issued or issuable by the Company to the Company's creditors and/or stockholders pursuant to the Prepackaged Plan. 3.4 Performance Options. Wilstar shall receive on the date of this Agreement options to purchase up to twenty-two and one-half percent (22.5%) of the Diluted Common Stock for an exercise price of two cents ($,02) per share (the "Performance Options"). The Performance Options shall have a five (5) year term commencing from the date of grant and shall vest and be exercisable as follows: (a) If a Uniform Sale does not occur: CUMULATIVE PERCENTAGE OF DILUTED COMMON STOCK EXERCISABLE EQUITY VALUE OF THE COMPANY 4 7.50% EQUAL TO OR GREATER THAN $40,000,000 7.50% EQUAL TO OR GREATER THAN $60,000,000 5.00% EQUAL TO OR GREATER THAN $80,000,000 2.50% EQUAL TO OR GREATER THAN $100,000,000 - ---- 22.50%
(b) If a Uniform Sale occurs: CUMULATIVE PERCENTAGE OF DILUTED COMMON STOCK EXERCISABLE EQUITY VALUE OF THE COMPANY
7.50% EQUAL TO OR GREATER THAN $32,500,000 7.50% EQUAL TO OR GREATER THAN $52,500,000 5.00% EQUAL TO OR GREATER THAN $72,500,000 2.50% EQUAL TO OR GREATER THAN $92,500,000 - ---- 22.50%
For the purposes of this Agreement, the "Equity Value" of the Company shall be computed as the product of the average closing trading price of the Common Stock for any ninety (90) day period during the term hereof multiplied by the weighted average number of outstanding shares of Common Stock during such period. If a Uniform Sale occurs during such ninety (90) day period, then the Equity Values at which the Performance Options shall vest and be exercisable shall be prorated between the Equity Values set forth in subsection (a) above and the Equity Values set forth in subsection (b) above. For the purposes hereof Wilstar shall be deemed to have earned and shall be fully vested in Performance Options in the percentages of the Diluted Common Stork set forth above in the event it achieves, at any time prior the termination of the Term of this Agreement, the aforementioned computation of "Equity Value". To the extent that Wilstar does not achieve one or more of the appropriate Equity Values set for the above on or prior the termination of the Term of this Agreement, the unvested Performance Options shall expire and shall no longer be exercisable. The Wilstar Option Agreement shall, in addition to the terms and conditions of the Wilstar Option contain the terms and conditions of the Performance Options set forth in this Section 3.4 and such other terms and conditions as may be mutually agreed shall be executed concurrently. The shares issued pursuant to the Performance Options shall be subject to the Registration Rights Agreement described in Section 3.3 above. Section 4. Board of Directors of the Company. 4.1 Composition of the Board. The Company agrees that it shall use its best efforts to ensure that during the term of this Agreement the Board of Directors consists of either seven or nine directors. If there are seven directors, the Company shall use its best efforts to ensure (i) that one (1) director is nominated by Wilstar (the "Wilstar Director") (the initial Wilstar Director 5 shall be Margolis); (ii) that two (2) directors (the "Investor Directors") are nominated by Douglas Weitman, Jess Ravich and the other members of the group, other than Margolis, that filed Schedule 13-Ds, dated April 24, 1995, with respect to the to the purchase of Common Stock of the Company (collectively, the "Outside Investors") (the initial Investor Directors shall be Douglas Weitman and Jess Ravich); and (iii) that four (4) directors are nominated by the non-Wilstar non-Investor Directors (the "Other Directors"). If there are nine directors, the Company shall use its best efforts to ensure that, in addition to the Wilstar Director and the Investor Directors described above, (a) one (1) director is nominated by Wilstar and the Outside Investors together (the "Wilstar/Investor Director") (the initial Wilstar/Investor Director shall be Keith Hull); and (b) five (5) directors are nominated by the Other Directors. If the Board of Directors is expanded, the Company shall use its best efforts to ensure that Wilstar is able to maintain its proportionate representation. During the term of this Agreement, the Company shall use its best efforts to ensure that the Board shall have such committees as it deems appropriate, but in any event shall have audit and compensation committees, each of which shall be comprised of three members, one of whom shall an Investor Director and two of whom shall be selected by the entire Board of Directors from all of the remaining Directors (other than the Wilstar Director). During the term hereof, if (x) the size of the Board of Directors is increased or decreased without Wilstar's maintaining (or increasing) its proportionate representation; (y) the Wilstar Director, the Investor Directors and/or the Wilstar/Investor Director is/are not elected to the Board or are not put on the slate of Directors recommended to the Company's shareholders or any such Director is removed from the Board without Wilstar's prior approval; or (z) Robert Margolis is not elected Chairman of the Board (without Wilstar's consent), then, Wilstar may elect to treat such events as a breach of this Agreement subject to the terms of Sections 9 and 10 below. 4.2 Board of Directors' Oversight. Wilstar agrees that the Board of Directors shall have approval rights of the Company's (i) budget, (ii) business plan, (iii) capital expenditures (in excess of $25,000 per quarter), (iv) purchases of any businesses or material assets (outside of the ordinary course of business), (v) sales of any of the Company's businesses, divisions or material assets (other than inventory and outside of the ordinary course of business), and (vi) hires of any employees with base salaries (including any contractually promised bonuses) in excess of $100,000 per annum. Within 90 days after the date of this Agreement, Margolis shall present to the Board of Directors a revised business plan for the Company. Thereafter, Margolis shall present further revised business plans within 15 days after any requests from the Board of Directors. Section 5. Other Activities of Wilstar, Conflict of Interest. 6 Each party hereby acknowledges and agrees that during the term of this Agreement Margolis shall devote substantially all of his business time to the Company's affairs; provided, however, that the services rendered to the Company by Wilstar and Margolis pursuant to this Agreement shall not be exclusive and that nothing contained herein shall preclude Margolis from devoting time to other business endeavors including endeavors of Wilstar and other endeavors each as described below. Each party agrees that Wilstar and/or Margolis may continue to engage in outside business activities, including the business activities set forth in Exhibit A hereto, that relate to the manufacturing, marketing, licensing, sale and distribution of casual apparel. Wilstar and Margolis shall exercise such rights to engage in outside business activities through their ownership of, or investment in, apparel related enterprises. ne aforementioned activities by Margolis shall not constitute a breach or violation of this Agreement so long as they do not unduly conflict or interfere with the satisfactory performance of Margolis' obligations to the Company pursuant to the terms of this Agreement. Section 6. Facilities and Reimbursement of Expenses. Margolis shall be provided, at no expense to Wilstar, with offices, secretarial and administrative support, telephones, etc. at the Company's principal executive offices which shall be located in the greater Los Angeles metropolitan area. In addition, Wilstar shall be reimbursed for any and all reasonable business and administrative expenses it incurs on the Company's behalf (including travel, airfare, hotel and other expenses for out-of-town travel) within 30 days after the Company's receipt of appropriate documentation detailing such expenses; provided, however, that such expenses shall be reviewed for their reasonableness and propriety (the "Expense Review") by the Company's Chief Operating Officer (or, if the Company has no Chief Operating Officer, its Chief Financial Officer) and a committee of the disinterested members of the Board of Directors, including at least one Investor Director, selected by the entire Board from the Other Directors, the Investor Directors and, if applicable, the Wilstar/Investor Director. The Expense Review shall also allocate, if necessary, the expenses between expenses attributable to Wilstar's activities on the Company's behalf (which will be reimbursed) and those expenses attributable to Wilstar's activities on behalf of any other persons or entities (which will not be reimbursed). The Expense Review shall be final and binding on Wilstar. Section 7. Insurance. The Company shall and hereby covenants to, at its own expense during the term hereof: (i) maintain directors and officers liability ("D&O') insurance policies covering Margolis, with coverage and amounts as determined by the Board of Directors of the Company; and (ii) provide or reimburse Margolis for health and disability insurance in amounts comparable to those afforded to other officers and executives of similar 7 companies or similarly situated officers of the Company, if applicable. Section 8. Indemnification. The Company shall indemnify and hold Margolis and Wilstar and its directors, officers, employees, agents, attorneys, representatives, and controlling persons, (collectively, the "Indemnified Parties") harmless from and against all claims or actions of, or demands, suits or proceedings by any third party, and damages, losses and expenses (including reasonable attorneys' fees) in connection therewith, arising out of this Agreement and the performance by Wilstar of its responsibilities hereunder; provided, however, such indemnity shall not apply to any such claim, action, demand, suit, proceeding, damage, loss or expense of any Indemnified Party to the extent it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily from the gross negligence or willful misconduct of such Indemnified Party. An Indemnified Party shall give prompt written notice if any claim, charge, action or proceeding ("Indemnity Claim") shall be asserted or commenced which, if successful, could give rise to a claim for indemnification hereunder. Upon notice of any such Indemnity Claim the Company shall, at its own expense, resist and dispose of such claim in such manner as it deems appropriate. The Company shall not, except with the prior written consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement which requires the payment of money by or imposes any obligations upon the Indemnified Party or which does not include as an unconditional term, the release of the Indemnified Party (and its officers, directors, employees and agents) by the claimant or plaintiff from any liability in respect to such claim or the defense thereof. The foregoing indemnification obligation shall be in addition to any other liability which the Company may have to the Indemnified Parties under the Certificate of Incorporation of the Company or its By-Laws. No Indemnified Party shall settle any claim, demand, action, suit or proceeding without the consent of the Company, which consent shall not be unreasonably withheld. Section 9. Events of Termination. This Agreement shall be subject to termination prior to the term set forth in Section 1 upon the occurrence of any of the following: 9.1 Minimum Pre-Tax Earnings Levels. The Board of Directors (with the Wilstar Directors abstaining) of the Company may in its sole discretion terminate this Agreement by written notice to Wilstar no later than forty-five (45) days after the release of the Financial Statements for the fiscal years ended May 31, 1996 or 1997, if the Pre-Tax Earnings set forth in such Financial Statements are less than 80% of the Bugeted Earnings for such fiscal year. 9.2 Breach of the Agreement. Wilstar may terminate this Agreement in the event the Company materially breaches any of the 8 terms and conditions hereof or fails to perform its material obligations hereunder. For the purposes hereof, notwithstanding the terms of this Agreement, unless initiated by Wilstar and/or Margolis, the occurrence, without the express written consent of Wilstar, Margolis or his designee, of any of the following shall be deemed to be a material breach of this Agreement: (a) The assignment to Margolis of any duties materially inconsistent with, or the diminution of Margolis' positions, titles, offices, duties and responsibilities with the Company, as in effect from time to time hereunder or any removal of Margolis from, or any failure to re-elect Margolis to, any titles, offices or positions held by Margolis hereunder, including the failure of the Board of Directors to elect Margolis or Wilstar's designee as Chairman of the Board during the term of this Agreement or the failure to elect, or the removal of, any Wilstar and/or Outside Investor nominee as Director from the slate of directors recommended to the Company's stockholders by the Board of Directors; (b) Except as in accordance with the terms hereof, a reduction by the Company in the Base Compensation or any other compensation provided for herein; (c) The failure by the Company to continue in effect any material benefit or compensation plan to which Wilstar is entitled, hereunder, or plans providing Wilstar with substantially similar benefits, the taking of any action by the Company which would materially and adversely affect Wilstar's participation in, or materially reduce Wilstar's benefits under, any such benefit plan or deprive Margolis any material fringe benefits enjoyed by him pursuant to the terms hereof, (d) A change or relocation of Margolis' offices at the Company that materially and adversely affects Margolis' working environment; (e) Any other substantial, material and adverse changes in Margolis's working conditions at the Company imposed by the Company; or (f) A breach by the Company of the Wilstar Option agreement or the Performance Option agreement. Upon the occurrence of any of the aforementioned items (a) through (f) above Wilstar may upon ten (10) days prior written notice, during which the Company may cure its breaches, terminate this Agreement unless it determines in good faith that such cure would be impossible in which case termination shall be effective upon such notice. 9.3 Without Cause. The Board of Directors may terminate this 9 Agreement at any time without cause; 9.4 For Cause. The Board of Directors may terminate this Agreement at any time "for cause". For the purposes hereof "for cause" shall be limited to the willful misfeasance or gross negligence on the part of Wilstar or Margolis in connection with the performance of their duties pursuant to this Agreement which willful misfeasance and/or gross negligence shall directly cause material harm to the assets, business or operations of the Company; provided, however, prior to the termination of Wilstar as a result of the willful misfeasance or gross negligence of Wilstar or Margolis, the Board of Directors shall notify Wilstar and Margolis in writing of such acts of willful misfeasance or gross negligence and allow Wilstar and/or Margolis a period of not less than twenty (20) business days to cure such acts, provided further, that if the Board of Directors determines in good faith that the Company has already suffered material and irreparable harm or will suffer such material or irreparable harm in the event Wilstar is allowed such cure period, such termination will be effective immediately upon notice. 9.5 Death or Disability. This Agreement shall terminate immediately upon Margolis' death. In addition, upon the failure of Wilstar, during the Term, to render services to the Company for a substantially continuous period of six (6) months, because of Margolis' physical or mental disability during such period, the Company, acting through its Board of Directors or a committee of its Board of Directors including at least one Investor Director to which such authority has been delegated, may terminate Wilstar's employment with the Company. If there should be any dispute between the parties as to Margolis' physical or mental disability at any time, such question shall be settled by the opinion of an impartial reputable physician agreed upon for the purpose by the parties or their representatives, or failing agreement within ten (10) days of a written request therefor by either party to the other, then one designated by the then president of the Los Angeles Medical Society. The certificate of such physician as to the matter in dispute shall be final and binding on the parties Section 10. Compensation to Wilstar in the Event of Early Termination of the Agreement. In the event the Agreement is terminated pursuant to Section 9 above, Wilstar shall be entitled to the following compensation and payments: 10.1 Minimum Payments. In all events Base Compensation pursuant to Section 3.1 through the date of termination, reimbursement for all expenses pursuant to Section 6 to the date of termination and ongoing indemnification pursuant to Section 8 above. Wilstar shall be entitled to any unpaid Performance Bonus pursuant to Section 3.2 (pro-rated for the last fiscal year if the termination occurs prior to May 31st of such fiscal year). Wilstar shall also be entitled to exercise within ninety (90) days after 10 such termination any vested Wilstar Options or Performance Options. All unvested Wilstar Options and Performance Options shall terminate on the date of termination. In addition, Margolis shall be entitled to comparable ongoing insurance coverage pursuant to Section 7 as may he available to other terminated officers, employees or directors of the Company; 10.2 Breach by the Company or at the Company's Will. In addition to the payments pursuant to Section 10. 1 above, in the event of a termination pursuant to Sections 9.2 or 9.3 above, Wilstar shall be entitled to the immediate payment of all Base Compensation for the remainder of the term of the Agreement and all Performance Bonuses for the remainder of the term of this Agreement as though such termination had not occurred, and the immediate vesting of all of the unvested Wilstar Options and Performance Options which shall remain exercisable through the balance of their five year term. Section 11. No Actions. Except as specifically contemplated hereby, during the term of this Agreement, the Company and its Board of Directors shall not enter into or authorize any contracts, or take any other actions which would be inconsistent or interfere with, modify or supersede the management responsibilities delegated to Wilstar under this Agreement or otherwise impair or interfere with Wilstar's ability to manage the operations of the Company in accordance with the terms hereof. In addition, the Company's Board of Directors shall as soon as practical advise Wilstar of those employees covered by existing employment agreements. Wilstar and Margolis agree that they shall comply with the terms of such employment agreements so long as no such employment agreement, other than that of Michael Seyhun, has a severance provision of greater than six months. Section 12. Sale of Common Stock held by Wilstar and/or Margolis. Unless and until this Agreement is terminated prior to March 1, 1996, and except in the event of a public offering of equity securities by the Company, neither Margolis nor Wilstar shall sell any Common Stock prior to March 1, 1996 without the prior written approval of the Company's Board of Directors, which approval shall not be unreasonably withheld. Thereafter, each of Wilstar and Margolis shall be free to sell Common Stock subject only to any restrictions and/or limitations imposed by applicable securities laws. Section 13. Miscellaneous Terms. 13.1 Jurisdiction. Each of the Company and Wilstar acknowledges and agrees that the sole forum for commencing or pursuing any proceeding with respect to disputes arising under or in connection with this Agreement, any provisions hereunder, or any other document or instrument entered into or given or made pursuant to this Agreement is, and each party irrevocably submits itself to 11 the personal jurisdiction of, the Superior Court for the County of Los Angeles. All parties hereto consent and agree that such courts shall have sole original jurisdiction over any matter arising under or in connection with this Agreement. This consent to jurisdiction shall be self-operative and no further instrument or action, other than service of process as provided in this Agreement and as permitted by law, shall be necessary to confer jurisdiction upon the parties hereto in such courts. 13.2 Service and Venue. Each of the Company and Wilstar expressly covenants and agrees that service of process may be made, and personal jurisdiction over said party obtained, by serving a copy of the Summons and Complaint upon said party in accordance with the applicable laws and rules of the pertinent court having jurisdiction over the case pursuant to section 13.1 above. 13.3 Notices. All notices, requests, demands and other communications called for or contemplated hereunder shall be in writing and shall be deemed duly given (i) when received; (ii) four (4) days after being sent by certified or registered United States mail, postage prepaid, with return receipt requested; or (iii) when received by wire or telecopy addressed to the parties at the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid: If to the Company: Cherokee Inc. 6835 Valjean Avenue Van Nuys, CA 91406 Attention: Chief Financial Officer Fax: (818) 908-9191 If to Wilstar: The Wilstar Group 6835 Valjean Avenue Van Nuys, CA 91406 Attention: Robert Margolis Fax: (818) 908-9191 13.4 Modification; Waiver. No modification or waiver of any provision of this Agreement or consent to departure therefrom shall be effective unless in writing and approved by the parties hereto. There shall be no waiver of any of the provisions of this Agreement unless in writing signed by the party against which the waiver is sought to be enforced. 13.5 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California applicable to agreements to be entered into and wholly performed within said state without reference to the conflicts of law provisions thereof. 13.6 Construction of Agreement. The language in all parts of this Agreement shall be in all cases construed simply according to 12 its fair meaning and not strictly for or against any of the parties hereto. Headings at the beginning of Sections, Subsections, paragraphs and subparagraphs of this Agreement are solely for convenience of reference and shalt not constitute a part of this Agreement for any other purpose. When required by the context, whenever the singular number is used in this Agreement, the same shall include the plural, and the plural shall include the singular, the masculine gender shall include the feminine and neuter genders, and vice versa. 13.7 Relationship of Parties, Other Activities. The relationship of Wilstar to the Company is one of an independent contractor and is purely contractual and no officer or employee of Wilstar shall be deemed an employee of the Company for any purpose whatsoever. 13.8 Exhibits and Schedules. All exhibits, schedules and other attachments hereto are hereby incorporated herein by this reference. 13.9 Further Assurances. After the effective date of this Agreement, each party agrees to execute any and all such further agreements, instruments or documents, and to take any and all such further action, as may be necessary or desirable to carry out the provisions hereof and to effectuate the purposes of this Agreement. 13.10 Attorneys' Fees. (a) The Company shall pay Wilstar up to an aggregate amount of one hundred and twenty thousand dollars ($120,000) for reimbursement of its actually incurred legal and accounting fees incurred through September 1, 1995 in connection with this Agreement, the Prior Agreement and its investment in the Company. (b) In the event any action in law or equity or other proceeding is brought for the enforcement of this Agreement or in connection with an interpretation of the provisions of this Agreement, the Court shall award reasonable attorneys' fees and other costs reasonably incurred in such action or proceeding to the parties based on its judgment of the relative merits of their respective claims. 13.11 Severability. Should any one or more of the provisions of this Agreement or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement, shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 13.12 Integration; Parties in Interest. This Agreement, together with the Registration Rights Agreement and the Non- 13 Qualified Stock Option Agreement both dated as of May 4, 1995, contains the entire agreement of the parties with respect to the subject matter thereof and supersedes all prior agreements between the parties, whether written or oral. No party shall be liable or bound to any other party in any manner except as specifically set forth in this Agreement. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not. No party hereto shall have the right to assign this Agreement without the prior written consent of the other party hereto; provided, however, that so long as Margolis continues to serve the Company pursuant to this Agreement, Wilstar may assign this Agreement to another entity that is a successor to, or affiliated with, Wilstar. 13.13 Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. A facsimile copy of a signed execution page shall constitute due execution of this Agreement and shall binding upon the executing party. [signature page follows] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the first date hereinabove written. CHEROKEE INC. By: Its: NEWSTAR GROUP By: Robert Margolis Its: Chief Executive Officer 14 Exhibit A [Outside Business Activities] 15 AMENDMENT NO.1 TO THE REVISED AND RESTATED MANAGEMENT AGREEMENT THIS AMENDMENT NO.1 TO THE REVISED AND RESTATED MANAGEMENT AGREEMENT (this "Amendment") is entered into by and between CHEROKEE INC., a Delaware corporation ("Cherokee"), and THE NEWSTAR GROUP, a California corporation doing business as The Wilstar Group ("Wilstar"), with reference to the following facts: A. Cherokee and Wilstar entered into a Revised and Restated Management Agreement dated May 4, 1995 (the "Agreement"). B. The parties now desire to further amend the Agreement on the terms and conditions contained herein. The parties hereto hereby agree as follows: 1. Section 1.2 shall be amended to add the following after "("GAAP")" on the third line thereof: "after backing out the effect of any charges or expenses which are incurred by the Company as a result of the "vesting" or "exercise", as the case may be, of any Performance Options pursuant to Section 3.4 hereof" 2. Section 3.4 is deleted in its entirety and replaced by the following Section 3.4: "3.4 Performance Options. Wilstar received on May 4, 1995, options to purchase up to 22.5% of Diluted Common Stock for an exercise price of $0.02 per share (the "Performance Options"). The Performance Options have a term of five years from May 4, 1995, and have certain vesting schedules. The Performance Options are hereby amended as follows: (a) They shall allow Wilstar to purchase up to a maximum of 20% of Diluted Common Stock; (b) The right to purchase all of the shares of Common Stock issuable upon the exercise of the Performance Options or an aggregate of 20% of Diluted Common Stock shall vest as follows: (i) with respect to the initial 15% of the Diluted Common Stock, on March 26, 1996; and 16 (ii) with respect to the balance of 5% of the Diluted Common Stock, on April 24, 1996. (c) Notwithstanding anything to the contrary contained herein, the parties hereto agree that in the event: (x) the Company declares any dividend of cash or property or otherwise declares any payment to the holders of its Common Stock (the "Distribution"), (y) Wilstar or its assignee has exercised the Performance Options for an amount which in the aggregate is greater than fifteen (15%) of the Diluted Common Stock (the "Additional Shares") so that the Additional Shares would be entitled to such Distribution, and (z) the declaration of such Distribution is prior to the occurrence of either of the following: (i) thirty (30) consecutive trading days during which time the closing price of the Common Stock is no less than $7.60 per share; or (ii) May 31, 1997; then and in such event Wilstar agrees that it or any subsequent holder of the Additional Shares shall not be entitled to and shall forfeit any and all rights to the Distribution solely with respect to Additional Shares (the "Forfeiture"). In connection with the Forfeiture, Wilstar further agrees as follows: (i) until the occurrence of either of the events set forth in (z) above all share certificates issued in connection with the Additional Shares shall, in addition to such other legends that may be required, contain the following legend: "PURSUANT TO AMENDMENT 1. TO THE REVISED AND RESTATED MANAGEMENT AGREEMENT BY AND BETWEEN THE COMPANY AND THE NEWSTAR GROUP D/B/A THE WILSTAR GROUP, THE HOLDER OF THE SHARES REPRESENTED BY THIS CERTIFICATE HAS IRREVOCABLY AGREED TO WAIVE AND FORFEIT ANY AND ALL RIGHTS IN AND TO ANY DIVIDEND OF CASH OR PROPERTY OR OTHER PAYMENT WITH RESPECT TO THESE SHARES WHICH IS DECLARED BY THE COMPANY PRIOR TO THE OCCURRENCE OF EITHER OF THE FOLLOWING EVENTS: (I) THIRTY (30) CONSECUTIVE TRADING DAYS DURING WHICH TIME THE CLOSING PRICE OF THE COMPANY'S COMMON STOCK IS EQUAL TO OR GREATER THAN $7.60 PER SHARE; OR (II) MAY 31, 1997." (ii) Wilstar agrees that in the event any of the Additional Shares are sold, transferred, hypothecated, pledged or assigned by it to another holder (the "Transfer") prior to the occurrence of either of the events set forth in (z) above, that, as a precondition of such Transfer that the transferee acknowledge and agree to the Forfeiture as set forth herein; and -2- 17 (iii) that Wilstar and any subsequent holder of the Additional Shares hereby agrees to indemnify and hold harmless the Company from any and all claims, damages, losses, judgments and costs (including attorneys' fees) incurred by the Company in connection with or relating to any claim arising out of or relating to the Forfeiture asserted by any subsequent holder of Additional Shares. The Wilstar Option Agreement, which has been executed, shall be amended to reflect the changes to the Performance Options contained herein. The shares issued pursuant to the Performance Options shall be subject to the Registration Rights Agreement described in Section 3.3 above." 3. Except as amended hereby, the Agreement remains unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 on the dates set forth below. CHEROKEE INC. Dated:___________________ By:___________________________ Name:______________________ Title:_____________________ THE NEWSTAR GROUP, a California corporation d/b/a The Wilstar Group Dated:___________________ By_____________________________ Name:________________________ Title:_______________________ -3- EX-99.(B) 3 EXHIBIT 99.(B) 1 Exhibit 99.B NON-QUALIFIED STOCK OPTION AGREEMENT THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this "Agreement), dated as of May 4, 1995, is made by and between Cherokee Inc., a Delaware corporation (the "Company"), and The Newstar Group, a California corporation d/b/a The Wilstar Group ("Optionee"). RECITALS A. The Company wishes to afford Optionee the opportunity to purchase shares of its $0.02 par value Common Stock. B. The Company wishes to carry out the Plan (as defined below) the terms of which are hereby incorporated by reference and made a part of this Agreement. C. The Committee (as defined below), appointed to administer the Plan, has determined that it would be to the advantage and best interest of the Company and its shareholders to grant the Options provided for herein to Optionee as an inducement to enter into or remain in the service of the Company and as an incentive for increased efforts during such service, and has advised the Company thereof and instructed the undersigned officers to issue said Options. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS 1. Definitions. Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary. The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. 1.1 Board. "Board" shall mean the Board of Directors of the Company. 1.2 Committee. "Committee" shall mean the Stock Option Committee of the Board, appointed as provided in the Plan. 1.3 Common Stock. "Common Stock" means the Company's $0.02 par value Common Stock. 2 1.4 Company. "Company" shall mean Cherokee Inc., a Delaware corporation. 1.5 Diluted Common Stock. "Diluted Common Stock" means the aggregate of (i) all currently issued and outstanding shares of Common Stock; (ii) plus any shares of Common Stock that arc issuable and minus any shares of Common Stock that are cancelled pursuant to the Prepackaged Plan; and (iii) plus all other shares of Common Stock issuable or in connection with currently outstanding agreements. 1.6 Director. "Director" shall mean a member of the Board. 1.7 Equity Value. "Equity Value" shall be the equity value of the Company and shall be computed as the product of the average closing trading price of the Common Stock for any ninety (90) day period during the term of the Management Agreement multiplied by the weighted average number of outstanding shares of Common Stock during such period. If a Uniform Sale occurs during such ninety (90) day period, then the Equity Values at which the Performance Option shall vest and be exercisable shall be prorated as set forth in Section 3.3 hereof. 1.8 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.9 Management Agreement. "Management Agreement" shall mean that certain Management Agreement, dated as of May 4, 1995, between the Company and Optionee, as it may be amended from time to time. 1.10 Margolis. "Margolis" shall mean Robert Margolis, an individual. 1.11 Officer. "Officer" shall mean an officer of the Company, as defined in Rule 16a-1(f) under the Exchange Act, as such Rule may be amended in the future. 1.12 Options. "Options" shall mean the Wilstar Option and the Performance Option together. 1.13 Prepackaged Plan. "Prepackaged Plan" means that certain prepackaged Chapter 11 plan of reorganization that relates to the Company, as confirmed by the Bankruptcy Court on December 14, 1994. 1.14 Plan. "Plan" shall mean any Stock Option Plan subsequently adopted for employees of Cherokee Inc. 1.15 Performance Option. "Performance Option" shall mean the non-qualified option to purchase Common Stock of the Company granted under this Agreement as specifically described in Sections 2.3, 2.4, 3.3 and 3.4 of this Agreement. -2- 3 1.16 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended in the future. 1.17 Secretary. "Secretary" shall mean the Secretary of the Company. 1.18 Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended. 1.19 Termination of Employment. "Termination of Employment" shall mean the time when the employee-employer relationship between Margolis and the Company is terminated for any reason, with or without cause, including, without limitation, a termination by resignation, discharge, death or retirement, but excluding any termination where there is a simultaneous reemployment by the Company, or one of its affiliates. 1.20 Uniform Sale. "Uniform Sale" shall mean the sale of all or substantially all of the assets of the Company's Uniform Division. 1.21 Wilstar Option. "Wilstar Option" shall mean the non-qualified option to purchase Common Stock of the Company granted under this Agreement as specifically described in Sections 2.1. 2.2, 3.1 and 3.2 of this Agreement. ARTICLE II GRANT OF OPTIONS 2. Grant of Options. For good and valuable consideration the receipt of which is hereby acknowledged, on the date hereof the Company irrevocably grants to Optionee, subject to the terms of this Agreement, the Wilstar Option and the Performance Option, each subject to the terms and conditions of this Agreement. 2.1 Wilstar Option. Under the Wilstar Option, Optionee shall have the option to purchase any part or all of an aggregate of up to 7 1/2% of the Diluted Common Stock upon the terms and conditions set forth in this Agreement. 2.2 Wilstar Option Purchase Price. The purchase price of the Common Stock covered by the Wilstar Option shall be $3.00 per share without commission or other charge. 2.3 Performance Option. Under the Performance Option, Optionee shall, upon the occurrence of certain conditions, have the option to purchase any part or all of an aggregate of up to 22 1/2% of the Diluted Common Stock upon the terms and conditions set forth in this Agreement. -3- 4 2.4 Performance Option Purchase Price. The purchase price of the shares Diluted Common Stock covered by the Performance Option shall be $0.02 per share without commission or other charge. 2.5 Employment Rights. Nothing in this Agreement shall confer upon Margolis any right to continue in the employ of the Company or shall interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to discharge Margolis as set forth in the Management Agreement. 2.6 Adjustments in Options. In the event that the outstanding shares of the stock subject to the Options are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split up, stock dividend or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which the Options, or portions thereof then unexercised, shall be exercisable, to the end that after such event Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in the Options shall be made without change in the total price applicable to the unexercised portion of the Options (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in the Options' price per share. ARTICLE III PERIOD OF EXERCISABILITY 3. Commencement of Exercisability. The Options shall become exercisable as set forth in this Article III. 3.1 Wilstar Option. The Wilstar Option shall become exercisable in three (3) cumulative installments as follows: (a) The first installment shall consist of 33 1/3% of the shares covered by the Wilstar Option and shall become exercisable on the date of this Agreement. (b) The second installment shall consist of 33 1/3% of the shares covered by the Wilstar Option and shall become exercisable on the first anniversary of the date of this Agreement. (c) The third installment shall consist of 33 1/3% of the shares covered by the Wilstar Option and shall become exercisable on the second anniversary of the date of this Agreement. -4- 5 Except as provided in Sections 3.6, 3.7 and 3.8 hereof, no portion of the Wilstar Option that is unexercisable at Termination of Employment shall thereafter become exercisable. 3.2 Wilstar Option Duration of Exercisability. The installments provided for in Section 3.1 are cumulative. Each such installment which becomes exercisable pursuant to Section 3.1 shall remain exercisable until it becomes unexercisable under Section 3.5. 3.3 Performance Option. The Performance Option shall vest and be exercisable as follows: (a) If a Uniform Sale does not occur:
CUMULATIVE PERCENTAGE OF DILUTED COMMON STOCK EXERCISABLE EQUITY VALUE OF THE COMPANY ------------------------ --------------------------- 7 1/2% EQUAL TO OR GREATER THAN $40,000,000 7 1/2% EQUAL TO OR GREATER THAN $60,000,000 5.00% EQUAL TO OR GREATER THAN $80,000,000 2 1/2% EQUAL TO OR GREATER THAN $100,000,000 ------ 22 1/2%
(b) If a Uniform Sale occurs:
CUMULATIVE PERCENTAGE OF DILUTED COMMON STOCK EXERCISABLE EQUITY VALUE OF THE COMPANY ------------------------ --------------------------- 7 1/2% EQUAL TO OR GREATER THAN $32,500,000 7 1/2% EQUAL TO OR GREATER THAN $52,500,000 5.00% EQUAL TO OR GREATER THAN $72,500,000 2 1/2% EQUAL TO OR GREATER THAN $92,500,000 ------ 22 1/2%
If a Uniform Sale occurs during the ninety (90) day period during which the Equity Value of the Company is determined, then the Equity Values at which the Performance Option shall vest and be exercisable shall be prorated between the Equity Values set forth in subsection (a) above and the Equity Values set forth in subsection (b) above. Except as provided in Sections 3.6, 3.7 and 3.8 hereof, no portion of the Performance Option that is unexercisable at Termination of Employment shall thereafter become exercisable. -5- 6 3.4 Performance Option Duration of Exercisability. For the purposes of this Agreement, Optionee shall be deemed to have earned and shall be fully exercisable in Performance Option in the percentages of the Diluted Common Stock set forth above in the event it achieves at any time prior to Termination of Employment the above-referenced Equity Value thresholds. To the extent that Optionee does not achieve one or more of the appropriate Equity Values set for the above on or before Termination of Employment, the unexercisable portion of the Performance Option shall expire and shall no longer be exercisable. In addition, the Performance Option shall become unexercisable as set forth in Section 3.5. 3.5 Term of Options. The Wilstar Option and the Performance Option shall have a five (5) year term from the date of this Agreement; however, neither the Wilstar Option nor the Performance Option may be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of three (3) months from the time of Margolis' Termination of Employment, if such Termination of Employment is pursuant to Section 9.1 or 9.4 of the Management Agreement. (b) The expiration of six (6) months from the date of Optionee's Termination of Employment by reason of Margolis' disability (as such term is defined in Section 9.5 of the Management Agreement) or death; or (c) The effective date of either the merger or consolidation of the Company with or into another corporation where the Company is not the surviving entity, or the acquisition by another corporation or person of all or substantially all of the Company's assets or a majority or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company ("Reorganization Transaction"), unless the Committee waives this provision in connection with Reorganization Transaction. At least thirty (30) days prior to the effective date of such Reorganization Transaction, the Committee shall give Optionee notice of such event if the Option is then outstanding. 3.6 Acceleration of Exercisability--Merger. In the event of a Reorganization Transaction, not less then thirty (30) days prior to the effective date of such event the Company shall notify Wilstar thereof and the Wilstar Option and/or the Performance Option shall be exercisable as to all the shares covered thereby, notwithstanding that such Option may not yet have become fully exercisable under Section 3.1 and/or Section 3.3; provided. however, that this acceleration of exercisability shall not take place if: (a) The Wilstar Option and/or the Performance Option becomes unexercisable under Section 3.5 prior to said effective date; or -6- 7 (b) In connection with such an event, upon the occurrence of both (i) provision is made for an assumption of the Wilstar Option and/or the Performance Option or a substitution for such options of a new option by an employer corporation or a parent or subsidiary of such corporation and (ii) in the event that the Company has not achieved at least 80% of its Budgeted Earnings (as such term is defined in the Management Agreement during the term of the Agreement up to and including the last completed quarter ending prior to the execution of the definitive agreement with respect to the Reorganization Transaction; The Committee may make such determinations and adopt such rules and conditions as it, in its reasonable discretion, deems appropriate in connection with such acceleration of exercisability, including, but not by way of limitation, provisions to ensure that any such acceleration and resulting exercise shall be conditioned upon the consummation of the contemplated corporate transaction. 3.7 Acceleration of Exercisability--Death or Disability. In the event of the death or disability of Margolis: (a) all unexercisable Wilstar Options shall immediately become exercisable; and (b) all unexercisable Performance Options shall no longer be exercisable and shall terminate. 3.8 Acceleration of Exercisability--Discharge Without Cause, Etc. In the event of the termination of the Management Agreement pursuant to Section 9.2 or 9.3 all unexercisable Wilstar Options and Performance Options shall immediately become exercisable. ARTICLE IV EXERCISE OF OPTION 4. Exercise of Options in General. The Wilstar Option and the Performance Option shall be exercisable as set forth in this Article IV. 4.1 Person Eligible to Exercise. The Options shall be exercisable only by Optionee. 4.2 Partial Exercise. Any exercisable portion of the Wilstar Option or the Performance Option may be exercised in whole or in part at any time prior to the time when the Wilstar Option or portion thereof and/or the Performance Option becomes unexercisable under Section 3.5. 4.3 Manner of Exercise. Any exercisable portion of the Wilstar Option and/or the Performance Option may be -7- 8 exercised solely by delivery to the Company at its principal office of all of the following: (a) Notice in a properly authorized writing signed by a qualified officer of Optionee that states that all or a portion of the Wilstar Option and/or the Performance Option is thereby exercised; and (b) Full payment (in cash) for the shares with respect to which such Option or portion is exercised; and (c) A bona fide written representation and agreement, in a form satisfactory to the Committee, signed by Optionee, that states that the shares of stock are being acquired for Optionee's own account, for investment and without any present intention of distributing or reselling said shares or any of them except as may be permitted under the Securities Act and then applicable rules and regulations thereunder. The Company may require an opinion of counsel acceptable to it to the effect that any subsequent transfer of shares acquired on an exercise of either or both of the Options exercise does not violate the Securities Act, and may issue stop-transfer orders covering such shares. Share certificates evidencing stock issued on exercise of the Options shall bear an appropriate legend referring to the provisions of this subsection (c) and the agreements herein. The written representation and agreement referred to in the first sentence of this subsection (c) shall, however, not be required if the shares to be issued pursuant to such exercise have been registered under the Securities Act, and such registration is then effective in respect of such shares; and (d) Full payment to the Company (or other employer corporation) of all which, under federal, state or local tax law, it is required to withhold upon exercise of the Option. 4.4 Conditions to Issuance of Stock Certificates. The shares of stock deliverable upon the exercise of the Options, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such shares shall be fully paid and non-assessable. 4.5 Rights as Shareholder. The holder of the Options shall not be, no have any of the rights or privileges of, a shareholder of the Company in respect of any shares purchasable upon the exercise of any part of the Options unless and until certificates representing such shares shalt have been issued by the Company to such holder. -8- 9 ARTICLE V OTHER PROVISIONS 5. Miscellaneous Provisions. The following provisions shall be a part of this Agreement. 5.1 Option Not Transferrable. Neither the Options nor any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of Optionee or its successors in interest or shall be subject to disposition by transfer, alienation, anticipation pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect. 5.2 Shares to be Reserved. The Company shall at all times during the term of the Options reserve and keep available such number of shares of stock as will be sufficient to satisfy the requirements of this Agreement. 5.3 Notices. All notices, requests, demands and other communication called for or contemplated hereunder shall be in writing and shall be deemed duly given (i) when received; (ii) four (4) days after being sent by certified or registered United States mail, postage prepaid, with return receipt requested; or (iii) when received by wire or telecopy addressed to the parties at the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid: If to the Company: Cherokee Inc. 6835 Valjean Avenue Van Nuys, CA 91406 Attention: Chief Financial Officer Fax: (818) 908-9191 If to Optionee: The Wilstar Group 6835 Valjean Avenue Van Nuys, CA 91406 Attention: Robert Margolis Fax: (818) 908-9191 5.4 Headings. Headings are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 5.5 Shareholder Approval. The Plan may be submitted for approval by the Company's shareholders within twelve (12) months after the date the Plan was initially adopted by the Board in such event, Wilstar may, but shall not be -9- 10 required to elect to have the Performance Option and the Wilstar Option included as part of the Plan. 5.6 Governing Law. This Agreement shall be governed by and enforced in accordance with the laws of the State of California applicable to agreements to be entered into and wholly performed within the State of California without reference to the conflicts of law provisions thereof. 5.7 Attorneys' Fees. In the event any action in law or equity or other proceeding is brought for the enforcement of this Agreement or in connection with an interpretation of the provisions of this Agreement, the Court shall award reasonable attorneys' fees and other costs reasonably incurred in such action or proceeding to the parties based on its judgment of the relative merits of their respective claims. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. CHEROKEE INC., a Delaware corporation, the "Company" By:________________________________ Name: President By:________________________________ Name: Secretary THE NEWSTAR GROUP, a California corporation d/b/a The Wilstar Group, "Optionee" By:________________________________ Name: President By:________________________________ Name: Secretary [Taxpayer Identification Number] -10- 11 AMENDMENT NO. 1 TO THE NON-QUALIFIED STOCK OPTION AGREEMENT This Amendment No. 1 dated as of the 23rd day of March, 1996, by and between The Newstar Group, a California corporation, d/b/a The Wilstar Group ("Wilstar") and Cherokee Inc., a Delaware corporation (the "Company"), to the Non-Qualified Stock Option Agreement dated as of May 4, 1995 ("Amendment No. 1"). WHEREAS, Wilstar and the Company entered into a Non- Qualified Stock Option Agreement dated as of May 4, 1995 (the "Option Agreement"); WHEREAS, Wilstar and the Company now desire to amend and modify certain terms and conditions of the Option Agreement; NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Wilstar agree as follows: 1. Section 2.3 of the Option Agreement is amended to read in its entirety as follows: 2.3 Performance Option. Under the Performance Option, Optionee shall have the option to purchase any part or all of an aggregate of up to 20% of the Diluted Common Stock upon the terms and conditions set forth in this Agreement. 2. Section 3.3 of the Option Agreement shall be amended to read in its entirety as follows: 3.3 Performance Option. The Performance shall vest and be exercisable as follows: (a) With respect to the initial 15% of the Diluted Common Stock, on March 26, 1996; and (b) With respect to the balance of 5% of the Diluted Common Stock, on April 24, 1996. 3. A new Section 4.6 is added to the Option Agreement to read in its entirety as follows: 4.6 Forfeiture of Options. 12 (a) Notwithstanding anything to the contrary contained herein, the parties hereto agree that in the event that: (x) the Company declares any dividend of cash or property or otherwise declares any payment to the holders of its Common Stock (the "Distribution"), (y) Optionee or its assignee has exercised the Performance Options for an amount which in the aggregate is greater than fifteen (15%) of the Diluted Common Stock (the "Additional Shares") so that the Additional Shares would be entitled to such Distribution, and (z) the declaration of such Distribution is prior to the occurrence of either of the following: (i) thirty (30) consecutive trading days during which time the closing price of the Common Stock is no less than $7.60 per share; or (ii) May 31, 1997; then and in such event Optionee agrees that it or any subsequent holder of the Additional Shares shall not be entitled to and shall forfeit any and all rights to the Distribution solely with respect to Additional Shares (the "Forfeiture"). (b) In connection with the Forfeiture, Optionee further agrees as follows: (i) until the occurrence of either of the events set forth in (z), above, all share certificates issued in connection with the Additional Shares shall, in addition to such other legends that may be required, contain the following legend: "PURSUANT TO AMENDMENT 1. TO THE REVISED AND RESTATED MANAGEMENT AGREEMENT BY AND BETWEEN THE COMPANY AND THE NEWSTAR GROUP D/B/A THE WILSTAR GROUP, THE HOLDER OF THE SHARES REPRESENTED BY THIS CERTIFICATE HAS IRREVOCABLY AGREED TO WAIVE AND FORFEIT ANY AND ALL RIGHTS IN AND TO ANY DIVIDEND OF CASH OR PROPERTY OR OTHER PAYMENT WITH RESPECT TO THESE SHARES WHICH IS DECLARED BY THE COMPANY PRIOR TO THE OCCURRENCE OF EITHER OF THE FOLLOWING EVENTS: (I) THIRTY (30) CONSECUTIVE TRADING DAYS DURING WHICH TIME THE CLOSING PRICE OF THE COMPANY'S COMMON STOCK IS EQUAL TO OR GREATER THAN $7.60 PER SHARE; OR (II) MAY 31, 1997." (ii) Optionee agrees that if any of the Additional Shares are sold, 13 transferred, hypothecated, pledged or assigned by it to another holder (the "Transfer") prior to the occurrence of either of the events set forth in (z) above, that, as a precondition of such Transfer that the transferee acknowledge and agree to the Forfeiture as set forth herein; and (iii) that Optionee and any subsequent holder of the Additional Shares hereby agrees to indemnify and hold harmless the Company from any and all claims, damages, losses, judgments and costs (including attorneys' fees) incurred by the Company in connection with or relating to any claim arising out of or relating to the Forfeiture asserted by any subsequent holder of Additional Shares. 4. Except as expressly modified by the terms hereof, all of the terms and conditions of the Option Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be duly executed and delivered as of the date first above written. CHEROKEE INC. ________________________ By:_____________________ Its:____________________ THE NEWSTAR GROUP ________________________ By: Robert Margolis Its: Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----