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-----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, KVtgKyio1MVY/fop9bhuBz9pu/lK8sV+ZY8HkjIAOBNWapnMhdvPcobVvY6+FlR3 /PWVdlyfYg8bgjFf/BFSfQ== 0001193125-03-008970.txt : 20030610 0001193125-03-008970.hdr.sgml : 20030610 20030609201933 ACCESSION NUMBER: 0001193125-03-008970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030503 FILED AS OF DATE: 20030610 FILER: 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: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18640 FILM NUMBER: 03738120 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 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended May 3, 2003.

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From to .

Commission file number 0-18640

CHEROKEE INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4182437
(State or other jurisdiction of Incorporation or organization)		(IRS employer identification number)

6835 Valjean Avenue, Van Nuys, CA		91406
(Address of principal executive offices)		Zip Code

Registrant’s telephone number, including area code (818) 908-9868

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at May 30, 2003
Common Stock, $.02 par value per share		8,232,264

CHEROKEE INC.

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements

Consolidated Balance Sheets May 3, 2003 and February 1, 2003		2

Consolidated Statements of Operations Three Month periods ended May 3, 2003 and May 4, 2002		3

Consolidated Statements of Cash Flows Three Month periods ended May 3, 2003 and May 4, 2002		4

Notes to Consolidated Financial Statements		5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk		18

ITEM 4. Controls and Procedures		18

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		19

ITEM 2. Changes in Securities		19

ITEM 3. Defaults Upon Senior Securities		19

ITEM 4. Submission of Matters to a Vote of Security Holders		20

ITEM 5. Other Information		20

ITEM 6. Exhibits and Reports on 8-K		20

Signatures		21

Certifications		22

Part 1. Financial Information

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CHEROKEE INC.

CONSOLIDATED BALANCE SHEETS

	May 3, 2003		February 1, 2003
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,207,000	$	2,852,000
Restricted cash		2,632,000		2,637,000
Receivables, net		15,127,000		9,896,000
Prepaid expenses and other current assets		387,000		425,000
Deferred tax asset		964,000		964,000

Total current assets		20,317,000		16,774,000

Deferred tax asset		1,832,000		1,832,000
Securitization fees, net of accumulated amortization of $1,098,000 and $1,046,000, respectively		143,000		195,000
Property and equipment, net of accumulated depreciation of $317,000 and $311,000, respectively		123,000		120,000
Trademarks, net of accumulated amortization of $2,344,000 and $2,100,000, respectively		10,071,000		10,127,000
Other assets		15,000		15,000

Total assets	$	32,501,000	$	29,063,000

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	366,000	$	203,000
Other accrued liabilities		1,480,000		4,452,000
Income taxes payable		3,387,000
Notes payable		10,205,000		10,500,000

Total current liabilities		15,438,000		15,155,000

Notes payable—long term		—		2,141,000

Total liabilities		15,438,000		17,296,000

Commitments and Contingencies (note 4)

Stockholders’ Equity:
Common stock, $.02 par value, 20,000,000 shares authorized, 8,232,264 and 8,232,264 shares issued and outstanding at May 3, 2003 and at February 1, 2003, respectively		165,000		165,000
Additional paid-in capital		1,760,000		1,760,000
Retained earnings		15,138,000		9,842,000

Stockholders’ equity		17,063,000		11,767,000

Total liabilities and stockholders’ equity	$	32,501,000	$	29,063,000

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

	Three months ended
	May 3, 2003			May 4, 2002
Royalty revenues	$	12,057,000		$	11,458,000
Selling, general and administrative expenses		2,942,000			2,588,000

Operating income		9,115,000			8,870,000

Other income (expenses):
Interest expense		(189,000	)		(348,000	)
Investment and Interest income		91,000			31,000

Total other income (expenses), net		(98,000	)		(317,000	)

Income before income taxes		9,017,000			8,553,000

Income tax provision		3,721,000			3,440,000

Net income	$	5,296,000		$	5,113,000

Basic earnings per share	$	0.64		$	0.63

Diluted earnings per share	$	0.63		$	0.61

Weighted average shares outstanding
Basic		8,232,264			8,170,561

Diluted		8,418,241			8,368,556

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Three months ended
	May 3, 2003			May 4, 2002
Operating activities
Net income	$	5,296,000		$	5,113,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,000			16,000
Amortization of trademarks		244,000			163,000
Amortization of securitization fees		52,000			51,000
Amortization of debt discount		189,000			348,000
Stock option tax benefit		—			181,000
Changes in current assets and liabilities:
Increase in accounts receivable		(5,231,000	)		(5,032,000	)
Decrease in prepaid expenses and other current assets		38,000			34,000
Increase in accounts payable, income taxes payable and accrued liabilities		578,000			546,000

Net cash provided by operating activities		1,173,000			1,420,000

Investing activities
Purchase of property and equipment		(8,000	)		—
Purchase of trademarks		(190,000	)		(274,000	)

Net cash used in investing activities		(198,000	)		(274,000	)

Financing activities
Decrease in restricted cash		5,000			15,000
Proceeds from exercise of stock options		—			770,000
Payment on notes		(2,625,000	)		(2,625,000	)

Net cash used in financing activities		(2,620,000	)		(1,840,000	)

Decrease in cash and cash equivalents		(1,645,000	)		(694,000	)
Cash and cash equivalents at beginning of period		2,852,000			4,394,000

Cash and cash equivalents at end of period	$	1,207,000		$	3,700,000

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)

Basis of Presentation

The accompanying condensed consolidated financial statements as of May 3, 2003 and for the three month periods ended May 3, 2003 and May 4, 2002 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These consolidated financial statements have not been audited by independent accountants but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee Inc. (“Cherokee” or the “Company”) are necessary for a fair statement of the financial position and the results of operations for the periods presented. Certain previously reported amounts have been reclassified to conform to current year presentation. The accompanying consolidated balance sheet as of February 1, 2003 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The results of operations for the three month period ended May 3, 2003 are not necessarily indicative of the results to be expected for the fiscal year ended January 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended February 1, 2003.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

(2)

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SPELL C. LLC, a Delaware limited liability corporation (“Spell C”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

Revenues from royalty and finders agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from our licensees. Revenues are not recognized unless collectibility is reasonably assured.

Earnings Per Share Computation

For the three month periods ended May 3, 2003 and May 4, 2002, diluted weighted average number of shares includes the dilutive effect of 185,977 and 197,995 options, respectively, computed using the treasury stock method.

The diluted weighted average number of shares excludes 30,464 and 210,601 shares of common stock issuable on the exercise of stock options for the three-month periods ended May 3, 2003 and May 4, 2002, respectively.

Significant Contracts

In 1997, we entered into an agreement with Target Stores that grants Target Stores the exclusive right in the United States to use the Cherokee trademarks in certain categories of merchandise. Under the Target Stores agreement, Target Stores will pay a royalty each fiscal year, up to and including the fiscal year ending January 30, 2005, based on percentages, specified in the agreement, of Target Stores’ net sales of Cherokee branded merchandise during each fiscal year, which percentages vary based on the volume of sales of merchandise. In any event, Target Stores has agreed to pay a minimum guaranteed royalty of $9.0 million for each of the two fiscal years ended January 31, 1999 and 2000, $10.5 million for each of the four fiscal years ending January 31, 2001 through 2004 and $9.0 million for the fiscal year ending January 31, 2005. The agreement will automatically renew for successive one-year periods, providing Target Stores is current in its minimum guaranteed payments, unless Target Stores provides one-year notice to terminate the agreement.

In 2001, Mervyn’s renewed its licensing agreement for certain merchandise categories of the Sideout brand for an additional three years on the same terms and conditions as the existing license agreement. The renewal term commenced on February 1, 2002 and continues through January 31, 2005. Under the Mervyn’s agreement, Mervyn’s will pay a royalty each fiscal year based on a percentage of Mervyn’s net sales of Sideout branded merchandise during each fiscal year, subject to a guaranteed minimum royalty. As of the First Quarter, our non-exclusive United States retail direct licensees for the Sideout brand included Mervyn’s, Bob’s Stores and Marshall Fields. The term of our agreements with Mervyn’s, Bob’s Stores and Marshall Field’s all continue until January 31, 2005.

On August 22, 1997, we entered into an international retail direct licensing agreement with Zellers Inc., a Canadian corporation, which is a division of Hudson’s Bay Company. Zellers was granted the exclusive right in Canada to use the Cherokee brand and related trademarks in certain categories of merchandise. The term of the agreement is for five years, with automatic renewal options, provided that specified minimums are met each contract year. Under the agreement, Zellers agreed to pay us a minimum guaranteed royalty of $10.0 million over the five-year initial term of the agreement. In 2002, Zellers renewed their agreement for an additional five year period, through January 31, 2008. Under the terms of the renewal, Zellers agreed to pay us a minimum guaranteed royalty of $15.6 million over the five-year term under the same conditions of the original agreement. Zellers has the option to renew this agreement for an additional five years beyond the most recent renewal.

In early September 2000, we entered into an exclusive international retail direct licensing agreement for the Cherokee brand with France based Carrefour, the second largest retailer in the world. The Carrefour Group was granted the exclusive right to manufacture, promote, sell and distribute a wide range of products bearing our Cherokee brand in Spain, Mexico and Brazil and subsequently Italy, France, China, Taiwan, Greece and Portugal have been added. The Carrefour Group pays us a royalty based upon a percentage of its net sales of Cherokee branded products in those countries, which includes a minimum annual guaranteed royalty. If the Carrefour Group exceeds certain retail sales thresholds for Cherokee branded products, then the scope of the agreement will be automatically expanded to grant the Carrefour Group the exclusive right to manufacture, promote, sell and distribute products bearing the Cherokee brand in a number of other European, South American and Asian countries not already covered by the

agreement, including, among others, Italy, Poland, Argentina, Chile, Colombia and Turkey, but excluding the United Kingdom, Ireland and Germany. Further, with respect to Japan and several other Asian countries, the Carrefour Group may elect to add any of those countries to the territory covered by the agreement, provided that at the time of such election we do not already have an existing license agreement covering the country to be added. Even if the retail sales thresholds are not met during the term of the agreement, the Carrefour Group also has the right of first refusal to add any of the European or South American countries to the territory covered by the agreement. As an incentive for Carrefour Group to expand its sales of Cherokee branded products into other countries, we agreed to waive the royalty commitment during the initial six-month start-up period for any added countries. The initial term of the agreement expires December 31, 2003. If the Carrefour Group meets certain retail sales thresholds with respect to Cherokee branded products, then the Carrefour Group may extend the agreement indefinitely for successive three-year terms.

On August 1, 2001, we entered into an exclusive international retail direct licensing agreement for the Cherokee brand with Great Britain’s Tesco Stores Limited. Tesco was granted the exclusive right to manufacture, promote, sell and distribute a wide range of products bearing our Cherokee brand in the United Kingdom and Ireland and is obligated to pay us a royalty based upon a percentage of its net sales of Cherokee branded products in those countries which includes a minimum annual guaranteed royalty. Tesco also has a right to add a number of other countries to the territories covered by the agreement, assuming we have not already entered into exclusive licensing agreements covering such countries, and subject to the existing rights given to the Carrefour Group. The initial term of the agreement expires on January 31, 2005. If Tesco meets certain retail sales thresholds with respect to Cherokee branded products, then Tesco may extend the agreement indefinitely for successive three-year terms.

In December 2002, we acquired out of bankruptcy the trademarks of CL Fashion Inc. which included Carole Little, CLII, Saint-Tropez West, Chorus Line, All that Jazz, and Molly Malloy for an aggregate purchase price of $2.7 million. Concurrently, we entered into a six-year licensing agreement with TJX Companies for the Carole Little, CLII and Saint-Tropez-West brands and a five-year master licensing agreement with Gilrichco, Inc. for the remaining brands. The licensing agreement with TJX provides us with minimum guaranteed annual royalties during the term of the agreement and provides TJX with the option at the expiration of the initial term of the agreement to either renew the agreement for an additional five years or buy the trademarks covered by the agreement from us pursuant to an agreed-upon formula. After we recover our investment of $2.7 million from the Carole Little brands (Carole Little, CLII and Saint-Tropez-West), then 45% of any additional monies received from the Carole Little brands must be paid by us to Ms. Carole Little, the founder of CL Fashion Inc. The licensing agreement with Gilrichco provides us with minimum guaranteed royalties during the initial 19 month term of the agreement, and successive one year terms, if renewed. The agreement also provides Gilrichco with the option at July 31, 2008 to buy the trademarks covered by the agreement from us for a nominal amount. The licensing agreement also provides Gilrichco with the option to terminate the agreement after the initial 19 month period provided, Gilrichco pays us the greater of the royalty revenues earned during this period or the annual minimum guaranteed royalty under the agreement.

Stock-Based Compensation

At May 3, 2003, Cherokee has one stock-based employee compensation plan. Cherokee accounts for its employee stock option plan in accordance with the provisions of Accounting Principles

Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.

In accordance with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosures” the following table illustrates the effect on stock-based compensation, net income and earnings per share if Cherokee had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

	Quarter Ended
	May 3, 2003			May 4, 2002
Net income:	$	5,296,000		$	5,113,000
As reported
Stock-based compensation expense determined under the fair value method		(46,000	)		(47,000	)

Pro forma	$	5,250,000		$	5,066,000

Net income per share—basic:
As reported	$	0.64		$	0.63
Per share effect of stock-based compensation expense determined under the fair value method		0.00			(0.01	)

Pro forma	$	0.64		$	0.62

Net income per share—diluted:
As reported	$	0.63		$	0.61
Per share effect of stock-based compensation expense determined under the fair value method		(0.01	)		0.00

Pro forma	$	0.62		$	0.61

Trademarks

During the three months ended May 3, 2003 (the “First Quarter”) and for the three months ended May 4, 2002, the Company did not purchase trademarks, other than the contingent purchase payments made to Sideout Inc., under the terms of the Sideout Agreement. We capitalized $85,000 for the First Quarter in comparison to $174,000 for the three months ended May 4, 2002. Trademark registration and renewal fees capitalized for the First Quarter totaled $105,000 in comparison to $100,000 for the three months ended May 4, 2002.

(3) Long Term Debt

Long term debt is comprised of Zero-Coupon Secured Notes (“Secured Notes”) yielding 7% interest per annum and maturing on February 20, 2004. The Secured Notes amortize quarterly from May 20, 1998 through February 20, 2004. The following table summarizes the maturity of the remaining debt:

For the year ending:	Face Value
May 4, 2004	$	10,500,000
Less unamortized note discount		295,000

	$	10,205,000

(4)

Commitments and Contingencies

Legal Proceedings

During fiscal 2001, we assisted Mossimo Inc. in locating Target Stores as a licensee of the Mossimo brand and entered into a finder’s agreement with Mossimo, which provides that we will receive 15% of all monies paid to Mossimo by Target Stores. Under Mossimo’s agreement with Target Stores, Target Stores is obligated to pay Mossimo a royalty based on a percentage of net sales of Mossimo branded products, with a minimum guaranteed royalty, beginning in 2001, of approximately $27.8 million over the initial three-year term of the agreement. Mossimo’s agreement with Target Stores is subject to early termination under certain circumstances. In February 2003, the agreement between Mossimo and Target was renewed until January 31, 2006, but continues to contain early termination provisions. During fiscal 2003, we recognized revenues from Mossimo of $2.7 million. However, Mossimo refused to pay the $2.7 million in finder’s fees during Fiscal 2003. An arbitration was heard between the parties in mid-October on this matter. An arbitration panel ruled in favor of Cherokee on November 11, 2002, issuing an interim arbitration award directing Mossimo to pay all monies owed Cherokee plus interest on any of the monies withheld, along with legal fees. As of May 3, 2003 interest and legal fees owing totaled $185,000 and $410,000, respectively. The arbitrators also reaffirmed the Finder’s Agreement. This interim award was reaffirmed in total in a final award on January 17, 2003. Cherokee is moving to confirm the final arbitration ruling in Superior Court of Los Angeles County on June 11, 2003; however, Mossimo has filed a petition to vacate the award. If the Court confirms the award, it is not clear whether Mossimo will contest this matter further. Cherokee understands that Mossimo has set aside the finder’s fees, legal fees and interest due to Cherokee in a separate cash account pending a final judgment. During the First Quarter, we recognized revenues from Mossimo of $1.0 million and an additional $77,000 in interest income.We have made no provision for reserves against the accounts receivable from Mossimo.

(5)

Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition Disclosure – an amendment of FAS 123” (SFAS No. 148). This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years ending after December 15, 2002, and disclosure requirements shall be effective for interim periods beginning after December 15, 2002. Cherokee continues to account for stock-based compensation to its employees and directors using the intrinsic value method prescribed by APB Opinion No. 25, and related interpretations. Cherokee, however, has adopted the disclosure provisions of SFAS No.148 as presented in Note 2 of the Consolidated Financial Statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Cautionary note regarding forward looking statements

This quarterly report on Form 10-Q and other filings, which we make with the Securities and Exchange Commission, as well as press releases and other written or oral statements we may make may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used, the words “anticipates”, “believes,” “estimates,” “objectives”, “goals”, “aims”, “hopes”, “may”, “likely”, “should” and similar expressions are intended to identify such forward-looking statements. In particular, the forward-looking statements in this Form 10-Q include, among others, statements regarding our goals or expectations regarding our future revenues and earnings, the likelihood of increased retail sales by certain of our current and future licensees, such as Target Stores and Carrefour, the likelihood of achieving certain royalty rate reductions, our prospects for obtaining new licensees and our prospects for obtaining new brands to acquire or represent and the outcome of our dispute with Mossimo. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, achievements or share price to be materially different from any future results, performance, achievements or share price expressed or implied by any forward-looking statements. Such risks and uncertainties, include, but are not limited to, the financial condition of the apparel industry and the retail industry, the overall level of consumer spending, the effect of intense competition in the industry in which we operate, adverse changes in licensee or consumer acceptance of products bearing the Cherokee or Sideout brands as a result of fashion trends or otherwise, the ability and/or commitment of our licensees to design, manufacture and market Cherokee, Sideout and Carole Little branded products, our dependence on a single licensee for most of our revenues, our dependence on our key management personnel, and adverse determination of claims, liabilities or litigation, including our dispute with Mossimo and the effect of a breach or termination by us of the management agreement with our Chief Executive Officer. Several of these risks and uncertainties are discussed in more detail under “Item 1. Business-Risk Factors” in our Form 10-K for the fiscal year ended February 1, 2003 or in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially effect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments.

Overview

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-Q. See “Item 1. Consolidated Financial Statements.”

Cherokee Inc. (which may be referred to as Cherokee, we, us, or our) is in the business of marketing and licensing the Cherokee and Sideout brands and related trademarks and other brands it owns or represents. We are one of the leading licensors of brand names and trademarks for apparel, footwear and accessories in the United States. We and our wholly-owned subsidiary, SPELL C. LLC (“Spell C”), hold several trademarks including Cherokee^™, Sideout^™, Sideout Sport^™, King of the Beach^™ and others. The Cherokee brand has been positioned to connote quality, comfort, fit and a “Casual American” lifestyle with traditional wholesome values. The Sideout brand and related trademarks, which represent an active lifestyle, were acquired by us in November 1997. The Carole Little and Chorus Line brands and trademarks were acquired by us

in December 2002. These brands are recognized women’s brands that we intend to market in apparel, accessories and home products.

Our operating strategy emphasizes domestic and international, retail direct and wholesale licensing whereby we grant retailers and wholesalers the license to use the trademarks held by us on certain categories of merchandise, and the licensees are responsible for designing and manufacturing the merchandise. We provide design direction and collaborate with our retailers on pre-approved packaging, graphics and quality control standards. The retailer is responsible for manufacturing the merchandise. Our retail, wholesale and international license agreements generally provide us with final approval of pre-agreed upon quality standards, packaging and marketing of licensed products and also grant us the right to conduct periodic quality control inspections to ensure that the image and quality of licensed products remain consistent. As of May 3, 2003, we had 13 continuing license agreements for our various trademarks, covering both domestic and international markets. We will continue to solicit new licensees and may, from time to time, retain the services of outside consultants to assist us in this regard.

In November 1997, we reaffirmed our relationship with Target Stores, a division of Target Corporation, by entering into an amended licensing agreement (the “Amended Target Agreement”) which grants Target Stores the exclusive right in the United States to use the Cherokee trademarks on certain specified categories of merchandise. The term of the Amended Target Agreement currently extends until January 31, 2005 and, unless Target Stores gives us one year’s advance notice of its intention to terminate the agreement, the agreement will continue to automatically renew for successive one-year terms provided that Target Stores has paid a minimum guaranteed royalty equal to or greater than $9.0 million for the preceding fiscal year. If Target Stores elects to terminate the agreement, effective January 31, 2005 or at any other time, it would have a material adverse effect on our business, financial condition, cash flow, liquidity and results of operations.

During the three months ended May 3, 2003 (“First Quarter”), sales of Cherokee branded products by Target Stores exceeded $438 million compared to $477 million for the three months ended May 4, 2002. Target Stores pays us royalties based on a percentage of Target Stores’ net sales of Cherokee branded merchandise during each fiscal year ended January 31st, which percentage varies according to the volume of sales of merchandise. Target Stores has agreed to pay a minimum guaranteed royalty of $10.5 million for the year ending January 31, 2004, and $9.0 million for the year ended January 31, 2005 and each fiscal year thereafter, if any, that the term of Amended Target Agreement is extended.

During the First Quarter, total sales of merchandise bearing the Cherokee brand continued to increase, with total retail sales approaching $514.0 million versus $503.3 million in total retail sales for the first quarter of last year. Tesco and Carrefour sales of merchandise bearing the Cherokee brand were $49.2 million and $4.5 million, respectively in the first quarter of 2004 compared with no sales in the first quarter of last year. Zellers Inc.’s sales of merchandise bearing the Cherokee brand were in excess of $22.5 million during the First Quarter compared to $25.5 million for the first quarter of last year.

During the First Quarter, sales of Mervyn’s young men’s, junior’s and children’s apparel and accessories bearing the Sideout brand were approximately $25.6 million in comparison to $25.1 million for the first quarter of last year. The increase in sales is due mainly to the expansion of product categories bearing the Sideout brand.

As an incentive for our licensees to achieve higher retail sales of Cherokee or Sideout branded products, many of our existing license agreements, including the Amended Target Agreement, are structured to provide royalty rate reductions for the licensees after they achieve certain levels of retail sales of Cherokee or Sideout branded products during each fiscal year. As a result, our royalty revenues as a percentage of certain licensees’ retail sales of branded products are highest at the beginning of each fiscal year and decrease throughout each fiscal year as licensees reach certain retail sales thresholds contained in their respective license agreements. Therefore, the amount of royalty revenue received by us in any quarter is dependent not only on retail sales of branded products in such quarter, but also on the level of retail sales, and the resulting attainment of royalty rate reductions in any preceding quarters in the same fiscal year. The size of the royalty rate reductions and the level of retail sales at which they are achieved varies in each licensing agreement.

We are frequently approached by parties, or we approach parties, seeking to sell their brands and related trademarks. Should an established and marketable brand become available on favorable terms, we would be interested in pursuing such an acquisition. In addition to acquiring and licensing our own brands, we assist other companies in identifying licensees for their brands. Generally, as an exclusive consultant, we will perform a range of services including marketing of brands, solicitation of licensees, contract negotiations and administration and maintenance of license or distribution agreements. In return for our services we will normally receive a certain percentage of net royalties generated by the brands we represent and/or manage.

During the fiscal year ended February 3, 2001, we assisted Mossimo Inc. in locating Target Stores as a licensee of the Mossimo brand and entered into a finder’s agreement with Mossimo, which provides that we will receive 15% of the royalties paid to Mossimo by Target Stores. Under Mossimo’s agreement with Target Stores, Target Stores is obligated to pay Mossimo a royalty based on a percentage of net sales of Mossimo branded products, with a minimum guaranteed royalty, beginning in 2001, of approximately $27.8 million over the initial three year term of the agreement. Mossimo’s agreement with Target Stores is subject to early termination under certain circumstances. In February 2003, the agreement between Mossimo and Target was renewed until January 31, 2006, but continues to contain early termination provisions. Products bearing the Mossimo brand began selling at Target Stores in late December 2000. During fiscal 2003, we recognized revenues from Mossimo of $2.7 million. During the First Quarter, we recognized revenues from Mossimo of approximately $1.0 million compared to $990,000 for the comparable period last year. Certain amounts of the Mossimo finder’s fees are currently being disputed by Mossimo and they have refused to pay either the $2.7 million of finder’s fees during fiscal 2003 or the $1.0 million in finder’s fees during the First Quarter. See Part II – Item 1. “Legal Proceedings.” We have made no provision for reserves against the revenues accrued for Mossimo during fiscal 2003 or the First Quarter, and if we ultimately do not receive payments from Mossimo we would be required to write off these accounts receivable.

Additionally, last year, we entered into an exclusive consulting agreement with Hearst Publications to represent their House Beautiful brand domestically and internationally. Other active consulting agreements include Mrs. Fields and HotKiss.

Our Board of Directors has authorized and approved the extension of the expiration date of our stock repurchase program to July 31, 2004. During the First Quarter, we did not repurchase any shares of our common stock. From July 1999 through the First Quarter, we have repurchased and retired 607,800 shares of our common stock. We are currently authorized to repurchase up to an aggregate of 392,200 shares of our common stock. Continued repurchases of

our stock, if any, will be made from time to time in the open market at prevailing market prices or in privately negotiated transactions.

In December 1997, we completed a series of transactions whereby we sold our rights to the Cherokee brand and related trademarks in the United States to Spell C, our wholly-owned subsidiary, and also assigned to Spell C our rights in the Amended Target Agreement. In return we received the gross proceeds resulting from the sale by Spell C, for an aggregate of $47.9 million, of privately placed Zero Coupon Secured Notes (the “Secured Notes”), which yield 7.0% interest per annum, amortize quarterly from May 20, 1998 through February 20, 2004 and are secured by the Amended Target Agreement and by the United States Cherokee trademarks. The aggregate scheduled amortization under the Secured Notes is $60.0 million, which equals the aggregate minimum guaranteed royalty payable under the Amended Target Agreement, of $60.0 million. As of the end of the First Quarter, approximately $10.2 million remains outstanding under the Secured Notes.

Results of Operations

Revenues were $12.1 million during the First Quarter compared to $11.5 million during the three month period ended May 4, 2002, an increase of 5.2%. Revenues from the Cherokee brand were $9.9 million during the First Quarter compared to $9.6 million for the comparable period last year. During the First Quarter and the comparable period last year, revenues of $8.1 million and $8.8 million were recognized from Target Stores, which accounted for 67% and 77% of total revenues, respectively. The reduction in revenues from Target stores was attributable to lower sales of Cherokee branded product principally in the women’s and men’s apparel categories. Revenues from Zellers were $676,000 during the First Quarter compared to $762,000 for the comparable period last year due primarily to lower sales of Cherokee branded product by Zellers in the children apparel and shoe categories. Cherokee branded products were recently launched in both Tesco and Carrefour and revenues from those licensees during the First Quarter were $985,000 and $50,000, respectively.

Revenues from the Sideout brand were $930,000 during the First Quarter compared to $843,000 for the comparable period. Revenues from Mervyn’s, which is a Sideout brand licensee, during the First Quarter were $800,000 compared to $742,000 for the comparable period last year. First Quarter revenues also included $186,000 from the recently acquired Carole Little and Chorus Line brands.

Revenues from international licensees of both Cherokee and Sideout brands, such as Zellers, Tesco and Carrefour, were collectively $1.9 million during the First Quarter compared to $852,000 for the comparable period last year. This increase is due to revenues from Tesco and Carrefour which only recently began selling Cherokee branded products.

First Quarter revenues include $1.0 million attributable to Mossimo Inc. compared to $990,000 for the comparable period last year. However, as described previously, Mossimo has refused to pay the $1.0 million in finder’s fees and we have made no provision for reserves against the accounts receivable outstanding from Mossimo. See “Part II. Item I—Legal Proceedings.”

Our royalty revenue recognition policy provides for recognition of royalties in the quarter earned, although a large portion of such royalty payments are actually received during the month following the end of a quarter. Our trade receivables balance of $15.1 million as of the end of the First Quarter included accrual for revenues earned from Target Stores, Zellers, Mervyn’s, Tesco, Carrefour and other licensees that were subsequently received in the month following the end of

the First Quarter. However, such trade receivables balance also included $4.4 million in outstanding accounts receivable from Mossimo, which Mossimo is refusing to pay. We have made no provisions for reserves against the revenues, awarded interest and legal fees accrued for Mossimo, and if we ultimately do not receive payment from Mossimo we would be required to write off these accounts receivable.

Selling, general and administrative expenses for the First Quarter were $2.9 million or 24% of revenues in comparison to selling, general and administrative expenses of $2.6 million or 23% of revenues during the comparable period last year. The increase in our selling, general and administrative expenses during the First Quarter was attributable to increases in accrued management bonuses and other payroll related expenses of $109,000, increases in our travel related expenses due to our business activities overseas of $32,000, increases in our legal fees of $58,000, increases in amortization of our trademarks of $81,000, and increases in Investor related and board fees including directors’ fees, and director’s and officer’s insurance of $87,000.

During the First Quarter our interest expense was $189,000 compared to $348,000 for the comparable period last year. The interest expense is attributable to the Secured Notes. The decrease in interest expense is due to the reduction in the outstanding principal amount of the Secured Notes. During the First Quarter our investment and interest income was $91,000 compared to $31,000 for the comparable period last year. The increase in interest income is due to the recognition of $77,000 in interest income on the monies owed to us by Mossimo, which interest has not been paid.

During the First Quarter we booked for generally accepted accounting principles a tax provision of $3.7 million which equates to an effective tax rate of 41.3% compared to $3.4 million and an effective tax rate of 40.2% booked for the same period last year. We are making quarterly estimated tax payments for our federal and state income tax liabilities. During the First Quarter our net income was $5.3 million or $0.63 per diluted share, compared to $5.1 million or $0.61 per diluted share for the comparable period last year.

Liquidity and Capital Resources

Cash Flows. On May 3, 2003 we had cash and cash equivalents of $3.8 million, which amount included restricted cash of $2.6 million held in a collection account by the trustee under the indenture for the Secured Notes. On February 1, 2003 we had cash and cash equivalents of $5.5 million, which amount included restricted cash of $2.6 million. The $1.7 million decrease in cash and cash equivalents is primarily attributable to the payment of accrued management bonuses during the First Quarter.

During the First Quarter, cash provided by operations was $1.2 million, compared to $1.4 million for the three months ended May 4, 2002. Higher net income, depreciation and amortization and increased accruals were offset by higher accounts receivable and lower amortized debt discount. Cash used in investing activities during the First Quarter was $198,000 comprised of $85,000 in contingent payments made to Sideout Sport, Inc. and the remainder in trademark registration fees for the Cherokee, Sideout and Carole Little brands. In comparison, during the three months ended May 4, 2002, cash used in investing activities was $274,000 comprised of $174,000 in contingent payments to Sideout Sport, Inc. with the remainder in trademark registration fees. Cash used in financing activities was $2.6 million during the First Quarter, compared to $1.8 million for the comparable period last year. Cash used in financing activities principally pertains to the quarterly payment on the Secured Notes. The increase in

cash used in financing activities during the First Quarter was primarily attributable to a reduction in proceeds received from stock option exercises as compared to the three months ended May 4, 2002.

Uses of Liquidity. Our cash requirements through the end of fiscal 2004 are primarily to fund operations, repay the Secured Notes, trademarks, capital expenditures, selectively expand our brand portfolio and, if adequate, to potentially repurchase shares of our common stock and /or pay dividends. The declaration and payment of any dividends will be at the discretion of our board and will be dependent upon our financial condition, results of operations, cash flow, capital expenditures and other factors deemed relevant by our board. As discussed previously, Mossimo has refused to pay us finder’s fees. At May 3, 2003, we had $4.4 million in outstanding accounts receivable from Mossimo which includes $185,000 in interest and $410,000 in legal fees awarded through arbitration. Continued delay in the payment by Mossimo of the past due fees that have been withheld, or of future fees, could have a material adverse effect or our liquidity, cash flows, business, prospects, financial condition and results of operation. See “Part II. Item I—Legal Proceedings”.

We are frequently approached by parties seeking to sell their brands and related trademarks. Should an established marketable brand or equity become available on favorable terms, we would be interested in pursuing such an acquisition and may elect to fund such acquisition, in whole or in part, using our then-available cash.

The following table provides information related to our contractual cash obligations under various financial and commercial agreements:

	Payments Due by Period (a)
	(in thousands)
Contractual Obligations	Less than 1 year			1- 3 years			4- 5 years	After 5 years	Total
Short Term Debt(b)	$	10,500							$	10,500
Capital Lease Obligations		—			—		—	—		—
Operating Leases(c)	$	108		$	27		—	—	$	135
Unconditional Purchase Obligations		—	(d)(e)(f)		—	(d)(e)(f)	—	—		—	(d)(e)(f)
Other Long-Term Obligations							—	—
Total Contractual Cash Obligations	$	10,608	(g)	$	27	(g)	—	—	$	10,635	(g)

(a)

For purposes of the above table, yearly periods were calculated to coincide with our fiscal quarters, meaning, for example, that the period covered by the column captions “Less than 1 year” starts May 4, 2003 and ends May 1, 2005.

(b)

Represents payments to the holders of the secured notes.

(c)

Represents future minimum non-cancelable lease payments with respect to the lease of our office facility in Van Nuys, California. The lease currently expires on July 31, 2004; however, we have an option to extend the term of the lease for one additional three-year period for monthly rental payments of $9,010.

(d)

Under the terms of the Sideout Agreement, we agreed to pay Sideout Sport Inc., on a quarterly basis, 40% of the first $10.0 million, 10% of the next $5.0 million and 5% of the next $20.0 million of royalties received by us through licensing of the Sideout trademarks. Upon the earlier of such time as we have paid Sideout total contingent payments of $5.5 million or October 22, 2004, we will have no further obligations to pay Sideout Sport Inc. Since January 1999, we have paid, in total, $4.4 million in contingent payments under the Sideout Agreement. Because payments to Sideout Sport Inc. are based on royalties received, we cannot predict the exact amount of payments we will be obligated to make to Sideout Sport up to October 22, 2004. Steven Ascher, Executive Vice President of Cherokee,

beneficially owns 37.2% of Sideout Sport Inc. and Mr. Ascher’s father and father-in-law beneficially own 8.9% and 5.0%, respectively, of Sideout Sport Inc.

(e)

Under the terms of the management agreement with Mr. Margolis, Mr. Margolis will be paid $647,564 per fiscal year, subject to annual cost of living increases. The management agreement also provides that, for each fiscal year after fiscal 2000, if our EBITDA for such fiscal year is no less than $5.0 million, then Mr. Margolis will receive a performance bonus equal to (x) 10% of our EBITDA for such fiscal year in excess of $2.5 million up to $10.0 million, plus (y) 15% of our EBITDA for such fiscal year in excess of $10.0 million. As a result, during the First Quarter we accrued a bonus of $672,000 for Mr. Margolis and if our EBITDA continues to increase, the bonus payable to Mr. Margolis under the management agreement will also increase. Because payments to Mr. Margolis are based on a percentage of our EBITDA, we cannot predict the exact amount of payments we will be obligated to make to Mr. Margolis over the next five years. Additionally, if we terminate the management agreement without cause or Mr. Margolis terminates the management agreement after we materially breach any of the terms and conditions thereof or fail to perform any material obligations thereunder, we would be obligated to pay Mr. Margolis, within sixty days after the date of the termination, a lump sum in cash in excess of $10.5 million. See “Item 1. Risk Factors” in our Form 10-K for February 1, 2003.

(f)

After we recover our investment of $2.7 million from the Carole Little brands (Carole Little, CLII and Saint Tropez-West), then 45% of any additional monies received from the Carole Little brands must be paid by us to Ms. Carole Little (StudioCL Corporation), the founder of CL Fashion Inc. We cannot predict the exact amount of payments we will be obligated to make to Ms. Little or when such payments may be due.

(g)

Stated amount does not include any payments pursuant to either the Sideout Agreement, the management agreement with Mr. Margolis or our agreement with Ms. Little.

On December 23, 1997, Spell C issued the Secured Notes, which yield 7.0% interest per annum and mature on February 20, 2004. See “Item 1. Recapitalization; Sale of Cherokee Trademarks to Spell C; Issuance of Secured Notes” and “Item 1. Risk Factors” in our Form 10-K for February 1, 2003. The Secured Notes amortize quarterly from May 20, 1998 through February 20, 2004, in the amount of $9.0 million per year the first two years and $10.5 million per year the third through sixth years. The Secured Notes are secured by the Amended Target Agreement and the United States Cherokee trademarks and brand names. The aggregate scheduled amortization under the Secured Notes is $60.0 million and equals the aggregate minimum guaranteed royalty payable under the Amended Target Agreement, which is also $60.0 million. Spell C is dependant on revenues from the Amended Target Agreement for most, if not all, of its revenues. Although the Amended Target Agreement provides for a minimum annual royalty payment, if for any reason Target Stores does not pay the minimum royalties, Spell C will be unable to meet, and will default on, its payment obligations under the indenture for the Secured Notes. We are not guarantors of the Secured Notes; however, the United States Cherokee trademarks have been pledged as security for the Secured Notes and the permanent loss of such trademarks as a result of a default would have a material adverse effect on our business, financial condition and results of operations. The Secured Notes indenture does not contain any financial covenants that require the maintenance of any financial ratios, cash flows, stock price, value of any assets, credit rating, level of earnings or earnings per share. The Secured Notes indenture does contain covenants prohibiting Spell C from, among other things, transferring any right, title or interest in the Amended Target Agreement or the United States Cherokee trademarks, incurring any encumbrances on such agreement or trademarks, or taking any action

to impair the liens on such agreement or trademarks in favor of the holders of the Secured Notes. As of May 3, 2003, Spell C was in compliance with the covenants in the indenture for the Secured Notes.

As of May 3, 2003, we did not have any amounts outstanding under any credit facilities or lines of credit and we are not the guarantor of the Senior Notes or any other material third-party obligations. As of May 3, 2003, we do not have any standby letters of credit nor any standby repurchase obligations.

Sources of Liquidity. Our primary source of liquidity is expected to be cash flow generated from operations, and cash and cash equivalents currently on hand. We believe our cash flow from operations together with our cash and cash equivalents currently on hand will be sufficient to meet our working capital, capital expenditure and other commitments for the next twelve months; provided that, if the management agreement was terminated as discussed above, we would not have sufficient cash to make the lump sum payment to Mr. Margolis. See “Item 1. Risk Factors” in our Form 10-K for February 1, 2003. We cannot predict our revenues and cash flow generated from operations. Some of the factors that could cause our revenues and cash flows to be materially lower are described under the caption titled “Risk Factors” in Item 1 of our Form 10-K for February 1, 2003 and under the caption titled “Special Note Regarding Forward-Looking Statements” below.

If our revenues and cash flows during fiscal 2004 are only slightly lower than fiscal 2003, we may not have cash available to continue to repurchase shares of our common stock or to explore or consummate the acquisition of other brands. If Mossimo does not pay us the $3.8 million it is currently withholding, plus interest and legal fees, or refuses to pay any future fees, or if our revenues and cash flows during fiscal 2004 are materially lower than fiscal 2003, we may need to take steps to reduce expenditures by scaling back operations and reducing staff related to these activities. However, any reduction of revenues would be partially offset by reductions in the amounts we would be required to pay under the management agreement, employee bonuses and possibly the Sideout Agreement. Further, the aggregate scheduled amortization under the Secured Notes does not exceed the aggregate minimum guaranteed royalty payments under the Amended Target Agreement. Until the outstanding amount under the Secured Notes is fully paid, our ability to obtain funds from conventional sources of long-term external financing, such as debt, convertible debt or equity financings is somewhat limited. We do believe that, if necessary, even prior to the full repayment of the Secured Notes, we would have access to short-term external financing, but we cannot provide any assurance that financing would be available to us on acceptable terms or at all.

Inflation and Changing Prices

Inflation did not have a significant effect on our operations during the First Quarter or the prior year period.

Recent Accounting Pronouncements

interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years ending after December 15, 2002, and disclosure requirements shall be effective for interim periods beginning after December 15, 2002. Cherokee continues to account for stock-based compensation to its employees and directors using the intrinsic value method prescribed by APB Opinion No. 25, and related interpretations. Cherokee, however, has adopted the disclosure provisions of SFAS No.148 as presented in Note 2 of the Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest

From time to time we invest our excess cash in interest-bearing temporary investments of high-quality issuers. Due to the short time the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in our consolidated balance sheet and do not represent a material interest rate risk to us. Our only long-term debt obligations are the Secured Notes, which are zero-coupon secured notes yielding interest of 7.0% per annum. This long-term debt obligation does not represent a material interest rate risk to us.

Foreign Currency

We conduct business in various parts of the world. We are exposed to fluctuations in exchange rates to the extent that the foreign currency exchange rate fluctuates in countries where the Company’s licensees do business. For the First Quarter, a hypothetical 10% strengthening of the US dollar relative to the foreign currencies of countries where we operate was not material.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Cherokee maintains “disclosure controls and procedures”, as such term is defined under Exchange Act Rule 13a-14 (c). Disclosure controls and procedures are designed to ensure that information required to be disclosed in Cherokee’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to Cherokee’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Cherokee’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and Cherokee’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Cherokee has carried out an evaluation, within the 90 days prior to the date of filing of this report, under the supervision and with the participation of Cherokee management, including Cherokee’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Cherokee’s disclosure

controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that Cherokee’s disclosure controls and procedures were effective in ensuring that material information relating to Cherokee is made known to the Chief Executive Officer and Chief Financial Officer by others within Cherokee during the period in which this report was being prepared.

(b) Changes in internal controls. There have been no significant changes in Cherokee’s internal controls or in other factors that could significantly affect these controls subsequent to the date Cherokee completed its evaluation.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During fiscal 2001, we assisted Mossimo Inc. in locating Target Stores as a licensee of the Mossimo brand and entered into a finder’s agreement with Mossimo, which provides that we will receive 15% of all monies paid to Mossimo by Target Stores. Under Mossimo’s agreement with Target Stores, Target Stores is obligated to pay Mossimo a royalty based on a percentage of net sales of Mossimo branded products, with a minimum guaranteed royalty, beginning in 2001, of approximately $27.8 million over the initial three-year term of the agreement. Mossimo’s agreement with Target Stores is subject to early termination under certain circumstances. In February 2003, the agreement between Mossimo and Target was renewed until January 31, 2006, but continues to contain early termination provisions. During fiscal 2003, we recognized revenues from Mossimo of $2.7 million. However, Mossimo refused to pay the $2.7 million in finder’s fees during fiscal 2003. An arbitration was heard between the parties in mid-October on this matter. An arbitration panel ruled in favor of Cherokee on November 11, 2002, issuing an interim arbitration award directing Mossimo to pay all monies owed Cherokee plus interest on any of the monies withheld, along with legal fees. As of May 3, 2003 interest and legal fees owing totaled $185,000 and $410,000, respectively. The arbitrators also reaffirmed the Finder’s Agreement. This interim award was reaffirmed in total in a final award on January 17, 2003. Cherokee is moving to confirm the final arbitration ruling in Superior Court of Los Angeles County on June 11, 2003; however, Mossimo has filed a petition to vacate the award. If the Court confirms the award, it is not clear whether Mossimo will contest this matter further. Cherokee understands that Mossimo has set aside the finder’s fees, legal fees and interest due to Cherokee in a separate cash account pending a final judgment. During the First Quarter, we recognized revenue from Mossimo of $1.0 million and an additional $77,000 in interest income. We have made no provision for reserves against the accounts receivable from Mossimo.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON 8-K

(a)

Exhibits

Exhibit Number		Description of Exhibit

10.1		The 2003 Incentive Award Plan of Cherokee Inc. (incorporated by reference from Annex A of Cherokee’s Definitive Proxy Statement dated April 25, 2003)

10.2		Form of Incentive Stock Option Agreement (for use with The 2003 Incentive Award Plan)

10.3		Form of Non-Qualified Stock Option Agreement (for use with The 2003 Incentive Award Plan)

10.4		Form of Restricted Stock Agreement (for use with The 2003 Incentive Award Plan)

99.1		Certification by the Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2		Certification by the Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)

Reports on Form 8-K

Cherokee Inc. filed the following Current Reports on Form 8-K during the quarterly period ended May 3, 2003.

Date of Report	Item Reported	Financial Statement Filed
February 4, 2003	9	None
February 7, 2003	9	None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: June 9, 2003

CHEROKEE INC.

By:		/s/ Robert Margolis
		Robert Margolis Chief Executive Officer

By:		/s/ Kyle Wescoat
		Kyle Wescoat Chief Financial Officer

Certification Of Principal Executive Officer

Pursuant To Section 302 Of The Sarbanes–Oxley Act Of 2002

I, Robert Margolis, certify that:

I have reviewed this quarterly report on Form 10-Q of Cherokee Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Cherokee Inc. and we have:

designed such disclosure controls and procedures to ensure that material information relating to Cherokee Inc. including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

evaluated the effectiveness of the Cherokee Inc.’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

Cherokee Inc.’s other certifying officers and I have disclosed, based on our most recent evaluation, to Cherokee Inc.’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

all significant deficiencies in the design or operation of internal controls which could adversely affect Cherokee Inc.’s ability to record, process, summarize and report financial data and have identified for Cherokee Inc.’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in Cherokee Inc.’s internal controls; and

Cherokee Inc.’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Certification Of Principal Executive Officer

Pursuant To Section 302 Of The Sarbanes–Oxley Act Of 2002

I, Kyle B. Wescoat, certify that:

I have reviewed this quarterly report on Form 10-Q of Cherokee Inc.;

evaluated the effectiveness of the Cherokee Inc.’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in Cherokee Inc.’s internal controls; and

EX-10.2 3 dex102.htm FORM OF INCENTIVE STOCK OPTION AGREEMENT Form of Incentive Stock Option Agreement

Exhibit 10.2

INCENTIVE STOCK OPTION AGREEMENT

THIS AGREEMENT, dated , is made by and between Cherokee Inc., a Delaware corporation, hereinafter referred to as the “Company,” and , an Employee of the Company or a Subsidiary of the Company, hereinafter referred to as “Optionee.”

WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase shares of its Common Stock, par value $0.02 per share; and

WHEREAS, the Company wishes to carry out The 2003 Incentive Award Plan of Cherokee Inc. (the “Plan”) (the terms of which are hereby incorporated by reference and made a part of this Agreement);

WHEREAS, the Committee, appointed to administer the Plan, has determined that it would be to the advantage and best interest of the Company and its stockholders to grant the Incentive Stock Option (the “Option”) provided for herein to the Optionee as an inducement to enter into or remain in the service of the Company or its Subsidiaries and as an incentive for increased efforts during such service, and has advised the Company thereof and instructed the undersigned officer to issue said Option; and

WHEREAS, all capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Plan.

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows:

ARTICLE I

GRANT OF OPTION

1.1 Grant of Option. In consideration of the Optionee’s agreement to remain in the employ of the Company or its Subsidiaries and for other good and valuable consideration, effective as of (the “Date of Grant”), the Company irrevocably grants to the Optionee the option to purchase any part or all of an aggregate of shares of Common Stock, upon the terms and conditions set forth in this Agreement. The Option shall be an Incentive Stock Option.

1.2 Purchase Price. The purchase price of the shares of Common Stock covered by the Option shall be per share without commission or other charge; provided, however, that the price per share of the shares subject to the Option shall not be less than the greater of (i) 100% of the Fair Market Value of a share of Common Stock on the Date of Grant, or (ii) 110% of the Fair Market Value of a share of Common Stock on the Date of Grant in the case of an Optionee then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code).

1.3 Consideration to the Company. In consideration of the granting of the Option by the Company, the Optionee agrees to render faithful and efficient services to the Company or any Subsidiary, with such duties and responsibilities as the Company shall from time to time prescribe, for a period of at least one (1) year from the Date of Grant. Nothing in the Plan or this Agreement shall confer upon the Optionee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause.

1.4 Adjustments in Option. The Committee may make adjustments with respect to the Option in accordance with the provisions of Section 9.3 of the Plan.

ARTICLE II

PERIOD OF EXERCISABILITY

2.1 Commencement of Exercisability.

(a) Subject to Sections 2.3 and 4.9, the Option shall vest and become exercisable as follows: [Insert vesting schedule].

(b) No portion of the Option which has not become exercisable at Termination of Employment shall thereafter become exercisable, except as may be otherwise provided by the Committee.

2.2 Duration of Exercisability. The installments provided for in Section 2.1(a) are cumulative. Each such installment which becomes exercisable pursuant to Section 2.1 shall remain exercisable until it becomes unexercisable under Section 2.3.

2.3 Expiration of Option. The Option may not be exercised to any extent by anyone after the first to occur of the following events:

(a) The expiration of ten (10) years from the Date of Grant; or

(b) If the Optionee owned (within the meaning of Section 424(d) of the Code), at the time the Option was granted, more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code), the expiration of five (5) years from the date the Option was granted; or

(c) The expiration of twelve (12) months following the date of the Optionee’s Termination of Employment by reason of the Optionee’s death or permanent and total disability; or

(d) The expiration of three (3) months following the date of the Optionee’s Termination of Employment for any reason other than such Optionee’s death or permanent and total disability, unless such Optionee dies within said three-month period.

2.4 Special Tax Consequences. The Optionee acknowledges that, to the extent that the aggregate Fair Market Value of stock with respect to which “incentive stock options” (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code), including the Option, are exercisable for the first time by the Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company, any Subsidiary and any parent corporation thereof (within the meaning of Section 422 of the Code)) exceeds $100,000, the Option and such other options shall be treated as not qualifying under Section 422 of the Code but rather shall be taxed as non-qualified stock options. The Optionee further acknowledges that the rule set forth in the preceding sentence shall be applied by taking options into account in the order in which they were granted. For purposes of these rules, the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted.

ARTICLE III

EXERCISE OF OPTION

3.1 Person Eligible to Exercise. During the lifetime of the Optionee, only the Optionee may exercise the Option or any portion thereof. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 2.3, be exercised by the Optionee’s personal representative or by any person empowered to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.

3.2 Partial Exercise. Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 2.3; provided, however, that each partial exercise shall be for whole shares only.

3.3 Manner of Exercise. The Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or the Secretary’s office of all of the following prior to the time when the Option or such portion thereof becomes unexercisable under Section 2.3:

(a) A written notice complying with the applicable rules established by the Committee stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion of the Option;

(b) Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Committee may in its sole and absolute discretion (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of Common Stock which have been owned by the Optionee for at least six months, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of shares of Common Stock then

issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of a notice that the Optionee has placed a market sell order with a broker with respect to shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided that payment of such proceeds is then made to the Company upon settlement of such sale; or (v) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii) and (iv);

(c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; and

(d) In the event the Option or portion thereof shall be exercised pursuant to Section 3.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option.

3.4 Conditions to Issuance of Stock Certificates. The shares of Common Stock deliverable upon the exercise of the Option, 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 nonassessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of Common Stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions:

(a) The admission of such shares to listing on all stock exchanges on which such Common Stock is then listed; and

(b) The completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and

(c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and

(d) The receipt by the Company of full payment for such shares, including payment of all amounts which, under federal, state or local tax law, the Company (or other employer corporation) is required to withhold upon exercise of the Option; and

(e) The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience.

3.5 Rights as Stockholder. The holder of the Option shall not be, nor have any of the rights or privileges of, a stockholder of the Company in respect of any shares purchasable upon the exercise of any part of the Option unless and until certificates representing such shares shall have been issued by the Company to such holder.

ARTICLE IV

OTHER PROVISIONS

4.1 Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, this Agreement or the Option. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement, except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee.

4.2 Option Not Transferable.

(a) Neither the Option nor any interest or right therein or part thereof shall be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution, unless and until the Option has been exercised, or the shares underlying such Option have been issued, and all restrictions applicable to such shares have lapsed. Neither the Option nor any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or his or her 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, except to the extent that such disposition is permitted by the preceding sentence.

(b) During the lifetime of the Optionee, only the Optionee may exercise the Option (or any portion thereof). After the death of the Optionee, any exercisable portion of an Option may, prior to the time when such portion becomes unexercisable under the Plan or the Option Agreement, be exercised by the Optionee’s personal representative or by any person empowered to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.

4.3 Shares to Be Reserved. The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement.

4.4 Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary, and any notice to be given to the Optionee shall be addressed to the Optionee at the address given beneath the Optionee’s signature hereto. By a notice given pursuant to this Section 4.4, either party may hereafter designate a different address for notices to be given to that party. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased, be given to the Optionee’s personal representative if such representative has previously informed the Company of such representative’s status and address by written notice under this Section 4.4. Any notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

4.5 Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

4.6 Stockholder Approval. The Plan will be submitted for approval by the Company’s stockholders within twelve (12) months after the date the Plan was initially adopted by the Board. The Option may not be exercised to any extent by anyone prior to the time when the Plan is approved by the stockholders, and if such approval has not been obtained by the end of said twelve-month period, the Option shall thereupon be canceled and become null and void.

4.7 Notification of Disposition. The Optionee shall give prompt notice to the Company of any disposition or other transfer of any shares of stock acquired under this Agreement if such disposition or transfer is made (a) within two (2) years from the Date of Grant with respect to such shares or (b) within one (1) year after the transfer of such shares to him. Such notice shall specify the date of such disposition or other transfer and the amount realized, in cash, other property, assumption of indebtedness or other consideration, by the Optionee in such disposition or other transfer.

4.8 Construction. This Agreement shall be administered, interpreted and enforced under the laws of the State of California without regard to conflicts of laws thereof.

4.9 Conformity to Securities Laws. The Optionee acknowledges that the Plan is intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Option is granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.

CHEROKEE INC.

By
		[Name] President and Chief Executive Officer

Optionee

Address

Optionee’s Social Security Number:

EX-10.3 4 dex103.htm FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT Form of Non-Qualified Stock Option Agreement

Exhibit 10.3

NON-QUALIFIED STOCK OPTION AGREEMENT

THIS AGREEMENT, dated , is made by and between Cherokee Inc., a Delaware corporation, hereinafter referred to as the “Company,” and , an Employee, Consultant or Independent Director of the Company, or a Subsidiary of the Company, hereinafter referred to as “Optionee.”

WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase shares of its Common Stock, par value $0.02 per share; and

WHEREAS, the Company wishes to carry out The 2003 Incentive Award Plan of Cherokee Inc. (the “Plan”) (the terms of which are hereby incorporated by reference and made a part of this Agreement);

WHEREAS, the Committee appointed to administer the Plan has determined that it would be to the advantage and best interest of the Company and its stockholders to grant the Non-Qualified Stock Option (the “Option”) provided for herein to the Optionee as an inducement to enter into or remain in the service of the Company or its Subsidiaries and as an incentive for increased efforts during such service, and has advised the Company thereof and instructed the undersigned officer to issue said Option; and

WHEREAS, all capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Plan.

ARTICLE I.

GRANT OF OPTION

1.1 Grant of Option. For good and valuable consideration, effective as of (the “Date of Grant”), the Company irrevocably grants to the Optionee the option to purchase any part or all of an aggregate of shares of Common Stock, upon the terms and conditions set forth in this Agreement.

the Company or any Subsidiary, or as a Director of the Company, or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause.

1.4 Adjustments in Option. The Committee (or the Board, in the case of Options granted to an Independent Director) may make adjustments with respect to the Option in accordance with the provisions of Section 9.3 of the Plan.

ARTICLE II.

PERIOD OF EXERCISABILITY

2.1 Commencement of Exercisability.

(a) Subject to Sections 2.3 and 4.8, the Option shall vest and become exercisable as follows: [Insert vesting schedule].

(b) No portion of the Option which has not become vested and exercisable at Termination of Employment, Termination of Consultancy or Termination of Directorship, as applicable, shall thereafter become vested and exercisable, except as may be otherwise provided by the Committee.

2.2 Duration of Exercisability. The installments provided for in Section 2.1(a) are cumulative. Each such installment which vests and becomes exercisable pursuant to Section 2.1 shall remain vested and exercisable until it becomes unexercisable under Section 2.3.

2.3 Expiration of Option. The Option may not be exercised to any extent by anyone after the first to occur of the following events:

(a) The expiration of ten (10) years from the Date of Grant; or

(b) The expiration of twelve (12) months following the date of the Optionee’s Termination of Employment, Termination of Consultancy or Termination of Directorship, as applicable, by reason of the Optionee’s death or permanent and total disability; or

(c) The expiration of three (3) months following the date of the Optionee’s Termination of Employment, Termination of Consultancy or Termination of Directorship, as applicable, for any reason other than such Optionee’s death or permanent and total disability, unless such Optionee dies within said three-month period.

ARTICLE III.

EXERCISE OF OPTION

empowered to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.

(a) A written notice complying with the applicable rules established by the Committee (or the Board, in the case of Options granted to an Independent Director) stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion of the Option;

(b) Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Committee (or the Board, in the case of Options granted to an Independent Director), may in its sole and absolute discretion (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of Common Stock which have been owned by the Optionee for at least six months, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of a notice that the Optionee has placed a market sell order with a broker with respect to shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided that payment of such proceeds is then made to the Company upon settlement of such sale; or (v) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii) and (iv);

(c) Such representations and documents as the Committee (or the Board, in the case of Options granted to an Independent Director), in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee (or the Board, in the case of Options granted to an Independent Director) may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; and

(a) The admission of such shares to listing on all stock exchanges on which such Common Stock is then listed; and

(b) The completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee (or the Board, in the case of Options granted to an Independent Director) shall, in its absolute discretion, deem necessary or advisable; and

(c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee (or the Board, in the case of Options granted to an Independent Director) shall, in its absolute discretion, determine to be necessary or advisable; and

(e) The lapse of such reasonable period of time following the exercise of the Option as the Committee (or the Board, in the case of Options granted to an Independent Director) may from time to time establish for reasons of administrative convenience.

ARTICLE IV.

OTHER PROVISIONS

Notwithstanding the foregoing, the full Board acting by a majority of its members in office, shall conduct the general administration of the Plan and this Agreement with respect to Options granted to Independent Directors. No member of the Committee or the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, this Agreement or the Option. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement, except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee.

4.2 Option Not Transferable.

(c) Notwithstanding the foregoing provisions of this Section 4.2, the Option may be transferred by the Optionee, in writing and with prior written notice to the Committee, to any one or more Permitted Transferees (as defined below), subject to the following terms and conditions: (i) the Option, as transferred to a Permitted Transferee, shall not be assignable or transferable by the Permitted Transferee other than by will or the laws of descent and distribution; (ii) the Option, as transferred to a Permitted Transferee, shall continue to be subject to all the terms and conditions of the Option as applicable to the Optionee (other than the ability to further transfer the Option); and (iii) the Optionee and the Permitted Transferee shall execute any and all documents requested by the Committee, including, without limitation documents to (A) confirm the status of the transferee as a Permitted Transferee, (B) satisfy any requirements for an exemption for the transfer under applicable federal and state securities laws and (C) evidence the transfer. For purposes of this subsection (c), “Permitted Transferee” shall mean, with respect to the Optionee, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Optionee’s household (other than a tenant or employee), a trust in which these

persons (or the Optionee) control the management of assets, and any other entity in which these persons (or the Optionee) own more than fifty percent (50%) of the voting interests, or any other transferee specifically approved by the Committee (or the Board, in the case of Options granted to an Independent Director) after taking into account any state or federal tax or securities laws applicable to transferable Non-Qualified Stock Options.

4.5 Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

4.7 Construction. This Agreement shall be administered, interpreted and enforced under the laws of the State of California without regard to conflicts of laws thereof.

4.8 Conformity to Securities Laws. The Optionee acknowledges that the Plan is intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Option is granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.

CHEROKEE INC.

By:
		[Name] President and Chief Executive Officer

Optionee

Address

Optionee’s Social Security Number:

EX-10.4 5 dex104.htm FORM OF RESTRICTED STOCK AGREEMENT Form of Restricted Stock Agreement

Exhibit 10.4

RESTRICTED STOCK AGREEMENT

WHEREAS, the Company has established The 2003 Incentive Award Plan of Cherokee Inc. (the “Plan”) (the terms of which are hereby incorporated by reference and made a part of this Agreement);

WHEREAS, the Plan provides for the issuance of shares of the Company’s Common Stock, par value $0.02 per share;

WHEREAS, the Committee, appointed to administer the Plan, has determined that it would be to the advantage and best interest of the Company and its stockholders to issue the Restricted Stock provided for herein to the Restricted Stockholder as an inducement to enter into or remain in the service of the Company or its Subsidiary, and as an incentive for increased efforts during such service, and has advised the Company thereof and instructed the undersigned officer to issue said Restricted Stock; and

WHEREAS, all capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Plan.

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.

AWARD OF RESTRICTED STOCK

1.1 Award of Restricted Stock. For good and valuable consideration, on the date hereof the Company hereby issues to the Restricted Stockholder shares of Common Stock upon the terms and conditions set forth in this Agreement (the “Restricted Stock”). The purchase price of the shares of Common Stock to be purchased by the Restricted Stockholder pursuant to this Agreement shall be $ per share without commission or other charge.

1.2 Consideration to Company. In consideration for the issuance of Restricted Stock by the Company, the Restricted Stockholder agrees to render faithful and efficient services to the Company or any Subsidiary, with such duties and responsibilities as the Company or any Subsidiary shall from time to time prescribe, for a period of at least one year from the date the Restricted Stock is issued. Nothing in this Agreement or in the Plan shall confer upon the Restricted Stockholder any right to continue in the service of the Company or any Subsidiary, or as a Director of the Company, or shall interfere with or restrict in any way the rights of the Company or any Subsidiary, which are hereby expressly reserved, to discharge the Restricted Stockholder at any time for any reason whatsoever, with or without cause.

1.3 Adjustments in Award. The Committee (or the Board, in the case of Restricted Stock granted to an Independent Director) may make adjustments with respect to the Restricted Stock in accordance with the provisions of Section 9.3 of the Plan.

ARTICLE II.

RESTRICTIONS

2.1 Repurchase of Restricted Stock. Immediately upon a Termination of Employment, Termination of Directorship or Termination of Consultancy (as applicable) for any reason, the Company shall have the right to repurchase from the Restricted Stockholder all shares of Restricted Stock then subject to Restrictions at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock; provided, however, that provision may be made by the Committee (or the Board, in the case of Restricted Stock granted to Independent Directors) in its sole and absolute discretion that no such right of repurchase shall exist in the event of a Termination of Employment, Termination of Directorship or Termination of Consultancy without cause or because of the Restricted Stockholder’s death, disability or retirement.

2.2 Forfeiture of Restricted Stock. If no consideration was paid by the Restricted Stockholder upon issuance of the Restricted Stock, immediately upon a Termination of Employment, Termination of Directorship or Termination of Consultancy, the Restricted Stockholder shall forfeit any and all shares of Restricted Stock then subject to Restrictions and the Restricted Stockholder’s rights in any Restricted Stock then subject to Restrictions shall lapse; provided, however, that provision may be made by the Committee in its sole and absolute discretion that no such forfeiture shall exist in the event of a Termination of Employment, Termination of Directorship or Termination of Consultancy without cause or because of the Restricted Stockholder’s death, disability or retirement.

For purposes of this Agreement, the term “Restrictions” shall mean the exposure to repurchase set forth in Section 2.1 hereof and to forfeiture set forth in this Section 2.2 and the restrictions on sale or other transfer set forth in Sections 2.5 and 2.6.

2.3 Legend. Certificates representing shares of Restricted Stock issued pursuant to this Agreement shall, until all Restrictions lapse and new certificates are issued pursuant to Section 2.4(b) hereof, bear the following legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE, REACQUISITION AND CERTAIN RESTRICTIONS ON TRANSFERABILITY UNDER THE TERMS OF THAT CERTAIN RESTRICTED STOCK AGREEMENT BY AND BETWEEN CHEROKEE INC. AND THE REGISTERED OWNER OF SUCH SECURITIES, AND SUCH SECURITIES MAY NOT BE, DIRECTLY OR INDIRECTLY, OFFERED, TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNDER ANY CIRCUMSTANCES, EXCEPT PURSUANT TO THE PROVISIONS OF SUCH AGREEMENT.”

2.4 Lapse of Restrictions.

(a) Subject to Sections 2.1 and 2.2 hereof, the Restrictions shall lapse as follows: [Insert vesting schedule].

(b) Upon the lapse of the Restrictions, the Company shall cause new certificates to be issued with respect to such shares and delivered to the Restricted Stockholder or his or her legal representative, free from the legend provided for in Section 2.3 hereof and any of the other Restrictions. Notwithstanding the foregoing, no such new certificate shall be delivered to the Restricted Stockholder or his or her legal representative unless and until the Restricted Stockholder or his or her legal representative shall have paid to the Company in cash the full amount of all federal and state withholding or other employment taxes applicable to the taxable income of the Restricted Stockholder resulting from the grant of Restricted Stock or the lapse of the Restrictions.

2.5 Restricted Stock Not Transferable. Until the Restrictions hereunder lapse or expire pursuant to this Agreement, neither the Restricted Stock (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) nor any interest or right therein or part thereof shall be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution. Neither the Restricted Stock nor any interest or right therein or part thereof shall be liable for the debts, contracts, or engagements of the Restricted Stockholder or his or her 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; except to the extent that such disposition is permitted by the preceding sentence.

2.6 Restrictions on New Shares. In the event that the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of capital stock or other securities of the Company or of another corporation by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares, such new or additional or different shares or securities which are issued upon conversion of or in exchange or substitution for shares of Restricted Stock which are then subject to Restrictions shall be considered to be Restricted Stock and shall be subject to all of the Restrictions, unless the Committee provides for the expiration of the Restrictions on the shares of Restricted Stock underlying the distribution of the new or additional or different shares or securities.

ARTICLE III.

MISCELLANEOUS

3.1 Holding Period. Notwithstanding any provision of this Agreement to the contrary, if the Restricted Stockholder is subject to Section 16 of the Exchange Act on the date on which the Restricted Stock is granted, the Restricted Stock may not be sold, assigned or otherwise transferred or exchanged until at least six months and one day have elapsed from the date on which the Restricted Stock was granted.

3.2 Conditions to Issuance of Stock Certificates. Shares of Restricted Stock 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 nonassessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock pursuant to this Agreement prior to fulfillment of all of the following conditions:

(a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed;

(c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable;

(d) The lapse of such reasonable period of time as the Committee may from time to time establish for reasons of administrative convenience; and

(e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax.

3.3 Escrow.

(a) The Restricted Stockholder hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the shares of Restricted Stock which are subject to the Restrictions from the Restricted Stockholder to the Company in the event of repurchase of such shares by the Company pursuant to Section 2.1 or forfeiture of such shares pursuant to Section 2.2.

(b) To insure the availability for delivery of the Restricted Stock upon repurchase pursuant to Section 2.1 or forfeiture pursuant to Section 2.2, the Restricted Stockholder hereby appoints the Secretary, or any other person designated by the Company as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such shares, if any, repurchased or forfeited pursuant to this Agreement and shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company, or such other person designated by the Company, the share certificates representing the Restricted Stock, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A. The Restricted Stock and stock assignment shall be held by the Secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and the Restricted Stockholder attached hereto as Exhibit B, until all of the Restrictions expire or shall have been removed. As a further condition to the Company’s obligations under this Agreement, the spouse of the Restricted Stockholder, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit C. Upon the lapse of the Restrictions on the Restricted Stock, the escrow agent shall promptly deliver to the Restricted Stockholder the certificate or certificates representing such shares in the escrow agent’s possession belonging to the Restricted Stockholder, and the escrow agent shall be discharged of all further obligations hereunder; provided, however,

that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement.

(c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Restricted Stock in escrow and while acting in good faith and in the exercise of its judgment.

3.4 Notices. Any notice to be given by the Restricted Stockholder under the terms of this Agreement shall be addressed to the Secretary of the Company. Any notice to be given to the Restricted Stockholder shall be addressed to him or her at the address given beneath his or her signature hereto. By a notice given pursuant to this Section 3.4, either party may hereafter designate a different address for notices to be given to him. Any notice which is required to be given to the Restricted Stockholder shall, if Restricted Stockholder is then deceased, be given to the Restricted Stockholder’s personal representative if such representative has previously informed the Company of his or her status and address by written notice under this Section 3.4. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed as set forth above.

3.5 Rights as Stockholder. Except as otherwise provided herein, upon the delivery of Restricted Stock to the escrow holder pursuant to Section 3.3 hereof, the holder of the Restricted Stock shall have all the rights of a stockholder with respect to the Restricted Stock, including the right to vote the Restricted Stock and the right to receive all dividends or other distributions paid or made with respect to the Restricted Stock; provided, however, that in the discretion of the Committee, any extraordinary distributions with respect to the Restricted Stock that is subject to the Restrictions shall also be subject to the Restrictions.

3.6 Conformity to Securities Laws. The Restricted Stockholder acknowledges that the Plan is intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Restricted Stock is granted, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

3.7 Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to the Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting, exercise or payment of the Restricted Stock. The Committee may, in its discretion and in satisfaction of the foregoing requirement, allow such Restricted Stockholder to elect to have the Company withhold shares of Common Stock otherwise issuable under such Restricted Stock (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision of the Plan or this Agreement, the number of shares of Common Stock which may be withheld with respect to the issuance, vesting or payment of the Restricted Stock (or which may be repurchased from the Restricted Stockholder within six months

after such shares of Common Stock were acquired by the Restricted Stockholder from the Company) in order to satisfy the Restricted Stockholder’s federal and state income and payroll tax liabilities with respect to the issuance, vesting or payment of the Restricted Stock shall be limited to the number of shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal and state tax income and payroll tax purposes that are applicable to such supplemental taxable income.

3.8 Governing Law. This Agreement shall be administered, interpreted and enforced under the internal laws of the State of California without regard to conflicts of laws thereof.

3.9 Stop Transfer Instructions. To ensure compliance with the Restrictions, the Company may issue appropriate “stop transfer” instructions to its transfer agent with respect to the Restricted Stock.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.

CHEROKEE INC.,

By:
		[Name]
		President and Chief Executive Officer

RESTRICTED STOCKHOLDER

Restricted Stockholder

Address

Restricted Stockholder’s Social Security Number:

EX-99.1 6 dex991.htm CERTIFICATION BY THE CEO Certification by the CEO

Exhibit 99.1

Certification of Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Cherokee Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended May 3, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: June 9, 2003

/s/ Robert Margolis

Robert Margolis

Chief Executive Officer

Pursuant to Securities and Exchange Commission Release 34-47551, dated March 21, 2003, this certification is being furnished and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or incorporated by reference in any registration statement of the Company filed under the Securities Act of 1993, as amended.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.2 7 dex992.htm CERTIFICATION BY THE CFO Certification by the CFO

Exhibit 99.2

Certification of Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: June 9, 2003

/s/ Kyle Wescoat

Kyle Wescoat

Chief Financial Officer

-----END PRIVACY-ENHANCED MESSAGE-----

Dated: June 9, 2003

/s/ Robert Margolis

Robert Margolis

Chief Executive Officer

(Principal Executive Officer)