Subsequent Events

6 Months Ended

Jul. 28, 2012

Subsequent Events

Subsequent Events

(6) Subsequent Events

Acquisition of Assets Related to the Liz Lange and Completely Me by Liz Lange Brands

On September 4, 2012, Cherokee and LLM Management Co., LLC (the “Seller”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which Cherokee acquired various assets related to the “Liz Lange” and “Completely Me by Liz Lange” brands (the “Assets” and such transaction, the “Acquisition”). The Acquisition closed on September 4, 2012.   As consideration for the Acquisition, Cherokee agreed to pay a cash purchase price equal to $13.1 million, with $12.6 million paid by Cherokee concurrently with the closing and with $500,000 of which we agreed to place in an escrow fund that is to be released no later than March 31, 2013, subject to any funds which we recover or that are to be retained pursuant to indemnification claims.  In addition, Cherokee agreed to pay to the Seller additional earn-out payments of $400,000 and $500,000 (for a total of up to $900,000 in contingent consideration), which consideration is payable upon our achievement of specified revenue targets attributable to the Assets during the remainder of 2012 and during 2013.  In addition, as part of the Acquisition, Cherokee agreed to assume the Seller’s obligations under various agreements, which include a consulting agreement with Ms. Lange as well as certain existing license agreements relating to the Assets, including a license agreement with Target.  The Asset Purchase Agreement contains various covenants, indemnities and representations and warranties that are customary for transactions of this type.  For additional information regarding the Acquisition and the Asset Purchase Agreement, please see Cherokee’s Current Report on Form 8-K dated September 4, 2012 and filed with the Commission on September 6, 2012.

Credit Agreement with JPMorgan Chase

On September 4, 2012, and in connection with the Acquisition, Cherokee and JPMorgan Chase entered into the Credit Agreement.  Pursuant to the Credit Agreement, JPMorgan Chase agreed to lend to Cherokee up to $15 million in principal (the “Loan”).  The Loan is comprised of (i) a term loan in the principal amount of $13 million (the “Term Loan”), with interest on each advance equal to either: (i) an adjusted annual LIBOR rate reset monthly, bi-monthly or quarterly, plus of 2.75% or (ii) JPMorgan’s annual prime rate minus 0.25%, with a floor equal to the 1 month LIBOR Rate plus 2.5%, and (ii) a revolving line of credit in the principal amount of $2 million (the “Revolver”), with interest on each advance equal to either: (i) an adjusted annual LIBOR rate-reset monthly, bi-monthly or quarterly, plus 2.25% or (ii) JPMorgan’s annual prime rate minus 0.25%, with a floor equal to the 1 month LIBOR Rate plus 2.5%.  The Term Loan is subject to a five year maturity date and is to be repaid in equal quarterly payments of principal in the amount of $650,000, together with interest payments made monthly as set forth in the Term Loan.  The Revolver is subject to a three year maturity date and is to be repaid in monthly interest payments on any principal then outstanding, with the balance of any then-outstanding principal and interest to be repaid at maturity.  Cherokee paid an upfront fee equal to $65,000 in connection with the issuance of the Term Loan and is obligated to pay a monthly non-usage fee of 0.25% per annum, in arrears, computed on the average daily unused portion of the Revolver, subject to Cherokee’s right to terminate the Revolver prior to maturity.  In addition, Cherokee is obligated to pay an unspecified amount to be determined by JPMorgan Chase to compensate it for its loss in the event that Cherokee elects to repay all or a portion of the Loan prior to its maturity.  The proceeds from the Term Loan were borrowed to fund the Acquisition.

The Loan is evidenced by a term note in the principal amount of $13,000,000 and a line of credit note in the principal amount of up to $2,000,000, is secured by a continuing security agreement and a trademark security agreement executed by Cherokee and is supported by a continuing guaranty executed by Cherokee’s wholly owned subsidiary, Spell C. LLC (collectively, with the Credit Agreement, the “Loan Documents”). The Credit 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 excess of $5,000,000 in the aggregate at any time while the Loan is outstanding. In addition, the Credit Agreement prohibits us, without first obtaining JPMorgan’s consent, from (i) issuing any equity securities other than pursuant to our employee equity incentive plans and (ii) repurchasing or redeeming any outstanding shares of our common stock or paying dividends or other distributions, other than stock dividends, to our stockholders, unless such repurchases or other distributions would not cause us to be violation of the “fixed charge coverage ratio” (described below) after giving pro forma effect thereto.  The Loan Agreement also imposes the following financial covenants, as specifically defined therein, including: (i) a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 to be calculated quarterly on a trailing four quarter basis and (ii) a limitation of Cherokee’s “senior funded debt ratio” not to exceed 2.0 to 1.0, measured at any time and based on the ratio of Cherokee’s consolidated total debt to Cherokee’s EBITDA for its most recently completed four-quarter test period. Further, as collateral for the Loan, we granted a security interest in favor of the Bank in all of Cherokee’s assets (including trademarks), and the Loan is guaranteed by Cherokee’s wholly owned subsidiary, Spell C. LLC. In the event of a default under the Credit Agreement, JPMorgan Chase has the right to terminate its obligations under the Credit Agreement, accelerate the payment on any unpaid balance of the Credit Agreement and exercise its other rights under the Loan Documents, including foreclosing on our assets under the security agreement. For additional information regarding the Loan Documents, please see Cherokee’s Current Report on Form 8-K dated September 4 and filed with the Commission on September 6, 2012.