Debt

3 Months Ended

Apr. 28, 2012

Debt

Debt

(5)   Debt

On February 16, 2011, Cherokee and U.S. Bank National Association (the “Bank”) entered into a Term Loan Agreement (the “Original Loan Agreement”). Pursuant to the Original Loan Agreement, Cherokee borrowed $10,000,000 in principal from the Bank (the “Original Loan”). Pursuant to the Original Loan Agreement, the Original Loan was to be repaid in equal monthly installments of $277,778 plus interest over three years, with the balance due at maturity, and with interest on the Original Loan calculated at a floating rate equal to either (i) the Bank’s prime rate minus 0.25% or (ii) 2.75% plus the 1, 2 or 3 month LIBOR rate, as selected by Cherokee. The Original Loan Agreement contained various affirmative and negative covenants that are customary for loan agreements and transactions of this type, including limitations on our ability to incur debt or other liabilities and limitations on our ability to consummate acquisitions in any fiscal year in excess of $5,000,000 or in excess of $10,000,000 in the aggregate while the Original Loan was outstanding. Further, as collateral for the Original Loan, the Company granted a security interest in favor of the Bank in all of Cherokee’s assets, and the Original Loan was guaranteed by Cherokee’s wholly owned subsidiary, Spell C. LLC. Proceeds from the Original Loan were primarily used to satisfy the Company’s promissory note payable to our former Chairman. On September 6, 2011, we entered into an amendment to the Original Loan Agreement (the “Amendment”) to (i) modify the covenants relating to, and related definitions of, the “fixed charge coverage ratio” and “tangible net worth” as such terms are defined in the Amendment, and (ii) modify the covenant relating to Cherokee’s ability to make certain permitted acquisitions under the Original Loan Agreement, to permit Cherokee, subject to certain conditions, to consummate acquisitions in any fiscal year in amounts below $5,000,000 or in amounts below $10,000,000 in the aggregate while the Original Loan was outstanding.

On December 7, 2011, Cherokee and the Bank entered into an amendment and restatement of the Original Loan Agreement (the “Restated Loan Agreement”). Pursuant to the Restated Loan Agreement, the Original Loan was refinanced to constitute two term loans, for an aggregate principal amount of $7,000,000 (the “New Loan”). The New Loan was prepaid in full on June 5, 2012. The New Loan consisted of (i) a term loan in the principal amount of $5,000,000, which loan was to be repaid in full on or before November 30, 2013 (the “Two Year Facility”) and (ii) a term loan in the principal amount of $2,000,000, which loan was to be repaid in full on or before November 30, 2015 (the “Four Year Facility”). The Two Year Facility did not require principal payments prior it its maturity and bore interest to be paid in monthly installments, with such interest calculated at a floating rate equal to either (i) the Bank’s prime rate minus 0.25% or (ii) 2.00% plus the 1, 2 or 3 month LIBOR rate, as selected by Cherokee. The Four Year Facility required principal to be repaid in equal monthly installments of $41,666.67, plus interest, with such interest calculated at a floating rate equal to either (i) the Bank’s prime rate minus 0.25% or (ii) 2.75% plus the 1, 2 or 3 month LIBOR rate, as selected by Cherokee. Further, pursuant to the Restated Loan Agreement, (i) we are obligated to maintain cash deposits of at least $5,000,000, (ii) the “tangible net worth” covenant contained in the Original Loan Agreement was eliminated and (iii) the components applicable to the “fixed charge coverage ratio” covenant in the Original Loan Agreement were modified and such ratio was (i) determined to be inapplicable to our third quarter for Fiscal 2012, (ii) fixed at 1.25x for our fourth quarter of Fiscal 2012 (calculated on a quarterly basis), (ii) fixed at 2.75x for the First Quarter (calculated on a quarterly basis) and (iii) fixed at 1.15x for all future quarters while any portion the New Loan is outstanding (calculated on a trailing twelve month basis). In addition, a new “quarterly profitability” covenant was added, which covenant (i) is inapplicable to our third quarter of Fiscal 2012, and (ii) requires Cherokee to achieve a minimum quarterly net profit (after tax) of $1,000,000 for our fourth quarter of Fiscal 2012 and each future fourth quarter of subsequent fiscal years, $1,700,000 for the First Quarter and each first quarter of subsequent fiscal years, $1,400,000 for each second quarter of subsequent fiscal years and $1,100,000 for each third quarter of subsequent fiscal years, in each case while any portion of the New Loan is outstanding. Also in connection with, and as a condition to, the Restated Loan Agreement, we repaid approximately $775,000 to the Bank to reduce the total amount outstanding under the Restated Loan Agreement to $7,000,000. On June 5, 2012, Cherokee prepaid all outstanding principal and interest on both the Four Year Facility and the Two Year Facility. See Note 6 below (“Subsequent Events”) for further information regarding such prepayment.

Except as described above, the terms of the Restated Loan Agreement are generally consistent with the terms of the Original Loan Agreement, and the Restated Loan Agreement contains various affirmative and negative covenants that are customary for loan agreements and transactions of this type, including limitations on our ability to incur debt or other liabilities and limitations on our ability to consummate acquisitions in any fiscal year in excess of $5,000,000 or in excess of $10,000,000 in the aggregate while the New Loan is outstanding. The New Loan was evidenced by two term notes in the principal amounts of $2,000,000 and $5,000,000, respectively (which amounts are no longer outstanding as of June 5, 2012), a restated security agreement, a restated continuing guaranty executed by Cherokee’s wholly owned subsidiary, Spell C. LLC, and a California judicial reference agreement.

On June 5, 2012, Cherokee prepaid all outstanding principal and interest on both the Four Year Facility and the Two Year Facility. See Note 6 below (“Subsequent Events”) for further information regarding such prepayment.