Capitalization

12 Months Ended

Jan. 28, 2012

Capitalization

Capitalization

8.     Capitalization

• Preferred Stock

        We are authorized to issue up to 1,000,000 shares of preferred stock. Our Board of Directors can determine the rights, preferences, privileges and restrictions on the preferred stock and the class and voting rights. As of January 28, 2012 and January 29, 2011, no shares of preferred stock were outstanding.

• Common Stock

        On July 22, 1999, our Board of Directors authorized the repurchase of up to one million shares of our then outstanding common stock. Pursuant to this directive, and including certain repurchases of our common stock that were effected during Fiscal 2009 and during the Second and Third Quarters as are described below, as of January 28, 2012 we have used cash of $9.4 million to repurchase and retire a total of 849,064 shares of our common stock since the stock repurchases were authorized (excluding our one-time repurchase of 400,000 shares of our common stock held by affiliates of our former Executive Chairman, discussed below). Our Board of Directors subsequently authorized and approved the extension of the expiration date of our stock repurchase program to January 31, 2012 and increased the number of remaining shares which could currently be repurchased from time to time in the open market at prevailing market prices or in privately negotiated transactions to a total of 800,000 shares of our common stock.

        During the second quarter of Fiscal 2009, we purchased and retired 10,155 shares of our common stock at an average price of $21.59. During the third quarter of Fiscal 2009, we repurchased and retired 99,561 shares of our common stock at an average price of $17.62. We did not repurchase any shares in the fourth quarter of Fiscal 2009. During Fiscal 2010 and Fiscal 2011, we did not repurchase any shares of our common stock.

        On January 28, 2011, we entered into a separation agreement with our former Executive Chairman, Robert Margolis, pursuant to which we irrevocably committed to repurchase 400,000 shares of our common stock from Mr. Margolis or his affiliates at a price of $18.15 per share, or $7.26 million in total. The repurchase was consummated on February 7, 2011. On February 17, 2011, we retired the 400,000 repurchased shares.

        During the First Quarter we did not repurchase any shares of our common stock. During the Second Quarter, we purchased and retired approximately 24,000 shares of our common stock at an average price of $16.47. During the Third Quarter, we purchased and retired approximately 108,000 shares of our common stock at an average price of $13.85. During the Fourth Quarter we did not repurchase any shares of our common stock.

• Dividends

        Cherokee has made a quarterly dividend payment to stockholders during each completed quarter of Fiscal 2012, Fiscal 2011 and Fiscal 2010. On January 28, 2012, our Board of Directors approved a dividend of $0.20 per share, or $1.7 million, which was paid on March 12, 2012. 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.

• Stock-Based Compensation

        We currently maintain two equity-based compensation plans: (i) the 2003 Incentive Award Plan as amended in 2006 with the adoption of the 2006 Incentive Award Plan (the "2003 Plan"); and (ii) the 2006 Incentive Award Plan (the "2006 Plan"). Each of these equity based compensation plans provide for the issuance of equity-based awards to officers and other employees and directors, and they have previously been approved by our stockholders. Stock options issued to employees are granted at the market price on the date of grant, generally vest over a three-year period, and generally expire seven to ten years from the date of grant. We issue new shares of common stock upon exercise of stock options.

        2003 Plan—The 2003 Plan was approved at the June 2003 Annual Meeting of Stockholders and amended in 2006 with the adoption of the 2006 Plan by the Company's Stockholders at the June 2006 Annual Meeting of Stockholders. Under the 2003 Plan, the Company is authorized to grant up to 250,000 shares of common stock in the form of incentive and nonqualified options and restricted stock awards. The maximum number of shares which may be subject to granted under the 2003 Plan to any individual in any calendar year cannot exceed 100,000. The principal purposes of the 2003 Plan is to provide additional incentive for our directors, employees and consultants to further our growth development and financial success and to enable us to obtain and retain their services. The Compensation Committee of the Board or another committee thereof (the "Committee") administers the 2003 Plan with respect to grants to our employees or consultants and the full Board of Directors administers the 2003 Plan with respect to grants to independent directors. Under the 2003 Plan, 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 vesting period and term for options granted under the 2003 Plan is set by the Committee, with the term being no greater than 10 years, and the During Fiscal 2012, Fiscal 2011 and Fiscal 2010, we granted options under the 2003 Plan to purchase 30,000, 113,666, and zero, respectively, of shares of our common stock. As of January 28, 2012, there were 71,982 shares available for option grants under the 2003 Plan as a result of various forfeitures, cancellations or expirations of previously granted stock options. In the event that any outstanding option under the 2003 Plan expires or is terminated (forfeited), the shares of common stock allocable to the unexercised portion of the option shall then become available for grant in the future until the 2003 Plan expires on April 28, 2016.

        2006 Plan—The 2006 Plan was approved at the June 2006 Annual Meeting of Stockholders and amended at the June 2010 Annual Meeting of Stockholders, under which the Company is authorized to grant up to 750,000 shares of common stock in the form of incentive and nonqualified options and restricted stock awards. The maximum number of shares that may be subject to grant under the 2006 Plan to any individual in any calendar year cannot exceed 100,000. The principal purposes of the 2006 Plan is to provide an additional incentive for our directors, employees and consultants and its subsidiaries to further our growth development and financial success and to enable us to obtain and retain their services. The Committee administers the 2006 Plan with respect to grants to our employees or consultants and the full Board administers the 2006 Plan with respect to grants to independent directors. Under the 2006 Plan, 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 vesting period and term for options granted under the 2006 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. During Fiscal 2012, Fiscal 2011 and Fiscal 2010, we granted options under the 2006 Plan to purchase 296,000, 153,334, and zero, respectively, of shares of common stock. As of January 28, 2012, there were 230,500 shares available for option grants under the 2006 Plan as a result of various forfeitures, cancellations or expirations of previously granted stock options. In the event that any outstanding option granted under the 2006 Plan expires or is terminated (forfeited), the shares of common stock allocable to the unexercised portion of the option shall then become available for grant in the future, until the 2006 Plan expires on April 28, 2016.

        Following the approval by Cherokee's stockholders, on June 4, 2010, we issued to Robert Margolis, our former Executive Chairman, a non-qualified stock option to purchase 100,000 shares of our Common Stock (the "Margolis Option") at an exercise price of $18.49, which was the closing price of our Common Stock on June 4, 2010. The Margolis Option was not issued pursuant to any of Cherokee's existing equity incentive plans. Pursuant to its original terms, the Margolis Option was to vest contingent on Mr. Margolis' continued service as a member of our Board of Directors in two equal installments of 50,000, on January 31, 2011 and January 31, 2012; however, pursuant to the Separation Agreement, the vesting applicable to the Margolis Option was accelerated in full. The Margolis Option is exercisable until June 4, 2015.

        In addition, in connection with appointment of Mr. Stupp as our Chief Executive Officer, on August 26, 2010, we granted to Mr. Stupp an option to purchase shares (the "Stupp Option") of Cherokee's common stock as an inducement grant outside of the 2006 Plan, subject to vesting requirements and other terms. The Stupp Option was originally exercisable for up to a total of 300,000 shares and the maximum number of shares for which the Stupp Option may now be exercised is 225,000 as of the date of this report (subject to applicable vesting conditions set forth in the Stupp Option). This grant of stock options was entered into as an inducement material for Mr. Stupp to enter into employment with Cherokee. While the grant of the Stupp Option was made outside of the 2006 Plan, the grant is consistent with applicable terms of the 2006 Plan. See the description of the Stupp Option in Note 7. Related Party Transactions.

        Effective January 29, 2006, we adopted ASC 718 using the modified prospective method which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statement of operations. Under the modified prospective method, we are required to recognize stock-based compensation expense for share-based payment awards granted prior to, but not yet fully vested as of January 28, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions under the original ASC 718. Stock-based compensation expense recognized under for Fiscal 2012, Fiscal 2011 and Fiscal 2010, was $0.57 million, $1.83 million, and $0.34 million, respectively.

        The estimated fair value of options granted during Fiscal 2012, Fiscal 2011 and Fiscal 2010 as of each grant date was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Fiscal 2012		Fiscal 2011		Fiscal 2010
						N/A no grants
Expected Dividend Yield		4.65 to 6.67		7.2%
Expected Volatility		49.28 to 51.95		58.8%
Risk-Free Interest Rate		0.74% to 1.1%		2.1%
Expected Life (in years)		4.5 to 5.0		4.8%
Estimated Forfeiture Rate		30%		3.2%

        The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar options, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on the historical volatility of our stock price. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant with an equivalent remaining term. Our dividend yield is based on the past dividends paid and the current dividend yield at the time of grant.

        A summary of activity for the Company's stock options as of and for Fiscal 2012, Fiscal 2011 and Fiscal 2010 is as follows:

	Shares			Weighted Average Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding, at January 31, 2009		354,723		$	31.83
Granted		—			—
Exercised		—			—
Canceled/forfeited		(192,279	)	$	37.50
Outstanding, at January 30, 2010		162,444		$	24.63
Granted		817,000		$	17.50
Exercised
Canceled/forfeited		(30,000	)	$	18.29
Outstanding, at January 29, 2011		949,444		$	18.76
Granted		326,000		$	16.57
Exercised		(10,000	)	$	16.08
Canceled/forfeited		(291,611	)	$	19.23
Outstanding, at January 28, 2012		973,833		$	17.92		4.62	$	—
Vested and Exercisable at January 28, 2012		325,994		$	19.31		3.09	$	—
Unvested and not exercisable at January 28, 2012		647,839		$	17.23		5.15	$	—

        The weighted average grant date fair value of options granted under the plans for Fiscal 2012, Fiscal 2011 and Fiscal 2010 was $6.89, $4.05, and zero, respectively. The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on January 27, 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on January 27, 2012 (the last trading day). This amount changes based on the fair market value of our common stock. The total intrinsic value of options exercised for Fiscal 2012, Fiscal 2011 and Fiscal 2010 was zero for each year.

        As of January 28, 2012, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $1,837,000, which is expected to be recognized over a weighted average period of approximately 2.98 years. The total fair value of all options which vested during Fiscal 2012, Fiscal 2011 and Fiscal 2010 was $538,000, $1,581,000, and $523,000, respectively.