8. Capitalization

Common Stock

On July 22, 1999, the Company's Board of Directors authorized the repurchase of up to one million shares of the Company's then outstanding common stock. Pursuant to this directive, and including certain repurchases of the Company's common stock that were effected during fiscal 2009 and during the second and third quarter of Fiscal 2012, as of January 28, 2012 the Company has used cash of $9.4 million to repurchase and retire a total of 849,064 shares of common stock since the stock repurchases were authorized (excluding the one-time repurchase of 400,000 shares of common stock held by affiliates of the Company's former Executive Chairman, discussed below).

The Board of Directors subsequently authorized and approved the extension of the expiration date of the 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 common stock.

During the second quarter of Fiscal 2012, the Company purchased and retired approximately 24,000 shares of common stock at an average price of $16.47. During the third quarter of Fiscal 2012, the Company purchased and retired approximately 108,000 shares of common stock at an average price of $13.85.

On January 28, 2011, Cherokee entered into a separation agreement with the former Executive Chairman, Robert Margolis, pursuant to which the Company irrevocably committed to repurchase 400,000 shares of common stock from Mr. Margolis, and his affiliates, at a price of $18.15 per share, or $7.3 million in total. The repurchase was consummated on February 7, 2011. On February 17, 2011, the Company retired the 400,000 repurchased shares.

Preferred Stock

The Company is authorized to issue up to 1,000,000 shares of preferred stock. The Board of Directors can determine the rights, preferences, privileges and restrictions on the preferred stock and the class and voting rights. As of February 2, 2013 and January 28, 2012, no shares of preferred stock were outstanding.

Dividends

Cherokee has made a quarterly dividend payment to stockholders during each completed quarter of Fiscal 2013, Fiscal 2012 and Fiscal 2011. On January 29, 2013, the Board of Directors approved a dividend of $0.10 per share, or $0.8 million, which was paid on March 15, 2013. On April 16, 2013, the Board of Directors approved a $0.10 per common share dividend, which is to be paid on June 15, 2013 to stockholders of record as of June 1, 2013. In the future, from time to time, the 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

The Company currently maintains 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 have previously been approved by the 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. The Company issues new shares of common stock upon exercise of stock options.

The Company accounts for stock options under authoritative guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors for employee stock options based on estimated fair values.

The Company estimates the fair value of stock-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 an expense over the requisite service periods in the consolidated statements of income. The compensation expense recognized for all stock-based awards is net of estimated forfeitures over the awards service period.

Stock-based compensation expense recognized in selling, general and administrative expenses for Fiscal 2013 was $1.0 million, for Fiscal 2012 was $0.6 million, and for Fiscal 2011 was $1.8 million.

2003 Plan—The 2003 Plan was approved at the June 9, 2003 Annual Meeting of Stockholders, and amended on June 13, 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 grants under the 2003 Plan to any individual in any calendar year cannot exceed 100,000. During Fiscal 2013, Fiscal 2012 and Fiscal 2011, the Company granted options under the 2003 Plan to purchase 70,000, 30,000, and 113,666, respectively, shares of common stock. During Fiscal 2013, the Company granted to certain employees stock options with a seven-year term to purchase a total of 70,000 shares of common stock pursuant to the 2003 Plan. As of February 2, 2013, there were 55,315 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. During Fiscal 2013, Fiscal 2012 and Fiscal 2011, the Company granted options under the 2006 Plan to purchase 223,000, 296,000, and 153,334, respectively, shares of common stock. During Fiscal 2013, the Company granted to certain employees stock options with a seven-year term to purchase 223,000 shares of common stock pursuant to the 2006 Plan. During the Second Quarter, the Company granted to each non-employee director restricted stock awards for 1,500 shares, or 9,000 shares in total, of common stock pursuant to the 2006 Plan. As of February 2, 2013, there were 58,500 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, the Company issued to Robert Margolis, the former Executive Chairman, a non-qualified stock option to purchase 100,000 shares of Common Stock (the "Margolis Option") at an exercise price of $18.49, which was the closing price of the Company's 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 the Board of Directors in two equal installments of 50,000, on January 31, 2011 and January 31, 2012; however, pursuant to the Company's separation with Mr. Margolis, 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 the appointment of Mr. Stupp as the Company's Chief Executive Officer, on August 26, 2010, the Company 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 be exercised is 187,500 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 a material inducement 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.

The estimated fair value of options granted during Fiscal 2013, Fiscal 2012 and Fiscal 2011 as of each grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:



Expected Dividend Yield	6.45%	4.65% to 6.67%	7.2%
Expected Volatility	51.63 to 53.33	49.28 to 51.95	58.8
Risk-Free Interest Rate	0.57% to 1.01%	0.74% to 1.1%	2.1%
Expected Life (in years)	4.0 to 4.5	4.5 to 5.0	4.8
Estimated Forfeiture Rate	10%	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 the Company's 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. The 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 2013, Fiscal 2012 and Fiscal 2011 is as follows:

			Weighted Average Price

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
Granted	293,000		$	12.50
Exercised	(5,500	)	$	13.06
Canceled/forfeited	(186,333	)	$	18.44

Outstanding, at February 2, 2013	1,075,000		$	16.37	4.49	424,830

Vested and Exercisable at February 2, 2013	539,327		$	17.55	3.61	45,711

Unvested and not exercisable at January 28, 2012	647,839		$	17.23	5.15	—

Unvested and not exercisable at February 2, 2013	535,673		$	15.18	4.49	379,119

The weighted average grant date fair value of options granted under the plans for Fiscal 2013, Fiscal 2012 and Fiscal 2011 was $3.23, $6.89, and $4.05, respectively. The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on February 2, 2013 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 February 2, 2013 (the last trading day). This amount changes based on the fair market value of the Company's common stock. The total intrinsic value of options exercised for Fiscal 2013, Fiscal 2012 and Fiscal 2011 was $7,810, $16,250 and $0, respectively.

As of February 2, 2013, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $1.7 million, which is expected to be recognized over a weighted average period of approximately 2.49 years. The total fair value of all options which vested during Fiscal 2013, Fiscal 2012 and Fiscal 2011 was $1.1 million, $0.5 million, and $1.6 million, respectively.

Restricted Stock (2006 Plan)

Compensation expense on shares of restricted stock, awards and units, was $0.01 million, $0 and $0 for Fiscal 2013, Fiscal 2012 and Fiscal 2011, respectively. The following table summarizes information about restricted stock activity during Fiscal 2013:

			Weighted Average Grant-Date Fair Value

Unvested stock at January 29, 2012	—			—
Granted	9,000		$	13.24
Vested	—			—
Forfeited	(1,500	)	$	13.06

Unvested stock at February 2, 2013	7,500		$	13.27

As of February 2, 2013, total unrecognized stock-based compensation expense related to restricted stock was approximately $0.08 million, which is expected to be recognized over a weighted average period of approximately 2.39 years.