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 October 31, 2015.
☐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) |
|
|
|
5990 Sepulveda Boulevard, Sherman Oaks, CA |
|
91411 |
(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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
|
Accelerated filer ☒ |
|
|
|
Non-accelerated filer ☐ |
|
Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ 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 December 4, 2015 |
Common Stock, $.02 par value per share |
|
8,720,012 |
CHEROKEE INC.
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CHEROKEE INC.
Unaudited
(amounts in thousands, except share and per share amounts)
|
|
October 31, |
|
January 31 |
|
||
|
|
2015 |
|
2015 |
|
||
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,709 |
|
$ |
7,581 |
|
Receivables |
|
|
8,040 |
|
|
7,425 |
|
Income taxes receivable |
|
|
741 |
|
|
919 |
|
Prepaid expenses and other current assets |
|
|
477 |
|
|
431 |
|
Deferred tax asset |
|
|
455 |
|
|
412 |
|
Total current assets |
|
|
15,422 |
|
|
16,768 |
|
Intangible Assets, net |
|
|
47,515 |
|
|
39,821 |
|
Goodwill |
|
|
5,979 |
|
|
— |
|
Deferred tax asset |
|
|
928 |
|
|
858 |
|
Property and equipment, net |
|
|
1,177 |
|
|
1,165 |
|
Other assets |
|
|
39 |
|
|
48 |
|
Total assets |
|
$ |
71,060 |
|
$ |
58,660 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable and other accrued payables |
|
$ |
2,127 |
|
$ |
1,720 |
|
Current portion of long term debt |
|
|
8,456 |
|
|
7,308 |
|
Deferred revenue—current |
|
|
227 |
|
|
17 |
|
Accrued compensation payable |
|
|
725 |
|
|
1,430 |
|
Total current liabilities |
|
|
11,535 |
|
|
10,475 |
|
Long term liabilities: |
|
|
|
|
|
|
|
Long term debt |
|
|
17,182 |
|
|
17,836 |
|
Income taxes payable |
|
|
208 |
|
|
391 |
|
Other non-current |
|
|
1,824 |
|
|
121 |
|
Total liabilities |
|
|
30,749 |
|
|
28,823 |
|
Commitments and Contingencies (Note 7) |
|
|
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
|
|
Preferred stock, $.02 par value, 1,000,000 shares authorized, none issued and outstanding |
|
|
— |
|
|
— |
|
Common stock, $.02 par value, 20,000,000 shares authorized, 8,713,366 shares issued and outstanding at October 31, 2015 and 8,403,500 issued and outstanding at January 31, 2015 |
|
|
174 |
|
|
171 |
|
Additional paid-in capital |
|
|
27,447 |
|
|
24,024 |
|
Retained earnings |
|
|
12,690 |
|
|
5,642 |
|
Total stockholders’ equity |
|
|
40,311 |
|
|
29,837 |
|
Total liabilities and stockholders’ equity |
|
$ |
71,060 |
|
$ |
58,660 |
|
See the accompanying notes which are an integral part of these consolidated financial statements.
3
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(amounts in thousands, except per share amounts)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
October 31, |
|
November 1, |
|
October 31, |
|
November 1, |
|
||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Royalty revenues |
|
$ |
8,098 |
|
$ |
8,706 |
|
$ |
26,810 |
|
$ |
27,431 |
|
Selling, general and administrative expenses |
|
|
5,415 |
|
|
4,663 |
|
|
14,776 |
|
|
14,042 |
|
Amortization of trademarks |
|
|
212 |
|
|
233 |
|
|
633 |
|
|
699 |
|
Operating income |
|
|
2,471 |
|
|
3,810 |
|
|
11,401 |
|
|
12,690 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(169) |
|
|
(201) |
|
|
(509) |
|
|
(653) |
|
Interest income and other income (expense), net |
|
|
46 |
|
|
(2) |
|
|
45 |
|
|
(3) |
|
Total other income (expense), net |
|
|
(123) |
|
|
(203) |
|
|
(464) |
|
|
(656) |
|
Income before income taxes |
|
|
2,348 |
|
|
3,607 |
|
|
10,937 |
|
|
12,034 |
|
Income tax provision |
|
|
802 |
|
|
1,291 |
|
|
3,889 |
|
|
3,874 |
|
Net income |
|
$ |
1,546 |
|
$ |
2,316 |
|
$ |
7,048 |
|
$ |
8,160 |
|
Net income per common share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.18 |
|
$ |
0.27 |
|
$ |
0.81 |
|
$ |
0.97 |
|
Diluted earnings per share |
|
$ |
0.17 |
|
$ |
0.27 |
|
$ |
0.79 |
|
$ |
0.96 |
|
Weighted average common shares outstanding attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
8,713 |
|
|
8,424 |
|
|
8,659 |
|
|
8,411 |
|
Diluted |
|
|
8,891 |
|
|
8,566 |
|
|
8,876 |
|
|
8,490 |
|
Dividends declared per common share |
|
$ |
0.00 |
|
$ |
0.00 |
|
$ |
0.00 |
|
$ |
0.10 |
|
See the accompanying notes which are an integral part of these consolidated financial statements.
4
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(amounts in thousands)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
October 31, |
|
November 1, |
|
October 31, |
|
November 1, |
|
||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Net income |
|
$ |
1,546 |
|
$ |
2,316 |
|
$ |
7,048 |
|
$ |
8,160 |
|
Other comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Comprehensive income |
|
$ |
1,546 |
|
$ |
2,316 |
|
$ |
7,048 |
|
$ |
8,160 |
|
See the accompanying notes which are an integral part of these consolidated financial statements.
5
CHEROKEE INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Unaudited
(amounts in thousands)
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
||
|
|
Common Stock |
|
Paid-in |
|
Retained |
|
|
|
|
|||||
|
|
Shares |
|
Par Value |
|
Capital |
|
Earnings |
|
Total |
|
||||
Balance at January 31, 2015 |
|
8,558 |
|
$ |
171 |
|
$ |
24,024 |
|
$ |
5,642 |
|
$ |
29,837 |
|
Stock-based compensation |
|
— |
|
|
— |
|
|
1,607 |
|
|
— |
|
|
1,607 |
|
Tax effect from stock option exercises |
|
— |
|
|
— |
|
|
165 |
|
|
— |
|
|
165 |
|
Stock option exercises and equity issuances, net of tax |
|
155 |
|
|
3 |
|
|
1,651 |
|
|
— |
|
|
1,654 |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
7,048 |
|
|
7,048 |
|
Balance at October 31, 2015 |
|
8,713 |
|
$ |
174 |
|
$ |
27,447 |
|
$ |
12,690 |
|
$ |
40,311 |
|
See the accompanying notes which are an integral part of these consolidated financial statements.
6
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(amounts in thousands)
|
|
Nine Months Ended |
|
||||
|
|
October 31, 2015 |
|
November 1, 2014 |
|
||
Operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
7,048 |
|
$ |
8,160 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
322 |
|
|
361 |
|
Amortization of trademarks |
|
|
633 |
|
|
699 |
|
Deferred income taxes |
|
|
(229) |
|
|
38 |
|
Reversal of uncertain tax liabilities |
|
|
— |
|
|
(736) |
|
Stock-based compensation |
|
|
1,607 |
|
|
780 |
|
Tax effect from stock option exercises |
|
|
— |
|
|
— |
|
Excess tax benefit from share-based payment arrangements |
|
|
(267) |
|
|
(22) |
|
Other, net |
|
|
264 |
|
|
57 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Receivables |
|
|
(591) |
|
|
(2,319) |
|
Prepaids and other current assets |
|
|
(45) |
|
|
(104) |
|
Income taxes receivable and payable, net |
|
|
853 |
|
|
647 |
|
Accounts payable and other accrued payables |
|
|
45 |
|
|
(505) |
|
Deferred revenue |
|
|
90 |
|
|
(74) |
|
Accrued compensation |
|
|
(908) |
|
|
645 |
|
Net cash provided by operating activities |
|
|
8,822 |
|
|
7,627 |
|
Investing activities: |
|
|
|
|
|
|
|
Purchases of trademarks, including registration and renewal cost |
|
|
(67) |
|
|
(59) |
|
Cash paid for business acquisitions, net of cash acquired |
|
|
(12,881) |
|
|
— |
|
Purchase of property and equipment |
|
|
(334) |
|
|
(519) |
|
Net cash used in investing activities |
|
|
(13,282) |
|
|
(578) |
|
Financing activities: |
|
|
|
|
|
|
|
Proceeds from JPMorgan Term Loan |
|
|
6,000 |
|
|
— |
|
Payments of JPMorgan Term Loan |
|
|
(5,508) |
|
|
(5,191) |
|
Debt discount and deferred financing costs |
|
|
(30) |
|
|
— |
|
Proceeds from exercise of stock options |
|
|
1,859 |
|
|
354 |
|
Excess tax benefit from share-based payment arrangements |
|
|
267 |
|
|
22 |
|
Dividends |
|
|
— |
|
|
(842) |
|
Net cash provided by (used in) financing activities |
|
|
2,588 |
|
|
(5,657) |
|
Increase (decrease) in cash and cash equivalents |
|
|
(1,872) |
|
|
1,392 |
|
Cash and cash equivalents at beginning of period |
|
|
7,581 |
|
|
3,634 |
|
Cash and cash equivalents at end of period |
|
$ |
5,709 |
|
$ |
5,026 |
|
Cash paid during period for: |
|
|
|
|
|
|
|
Income taxes |
|
$ |
3,394 |
|
$ |
4,093 |
|
Interest |
|
$ |
467 |
|
$ |
627 |
|
See the accompanying notes which are an integral part of these consolidated financial statements.
7
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except percentages, share and per share amounts)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of October 31, 2015 and for the three and nine month periods ended October 31, 2015 and November 1, 2014 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and Article 10 of Regulation S-X. These consolidated financial statements include the accounts of Cherokee Inc. (“Cherokee” or the “Company”) and its consolidated subsidiaries and have not been audited by independent registered public accountants, but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee are necessary for a fair statement of the Company’s financial position and the results of operations for the periods presented. All material intercompany accounts and transactions have been eliminated during the consolidation process. The accompanying consolidated balance sheet as of January 31, 2015 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP for an audited balance sheet. The results of operations for the three and nine month periods ended October 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2016 or for any other period. 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 January 31, 2015.
As used herein, the term “Third Quarter” refers to the three months ended October 31, 2015; the term “Nine Months” refers to the nine months ended October 31, 2015; the term “Fiscal 2017” refers to the fiscal year ending January 28, 2017; the term “Fiscal 2016” refers to the fiscal year ending January 30, 2016; the term “Fiscal 2015” refers to the most recent past fiscal year ended January 31, 2015; and the term “Fiscal 2014” refers to the fiscal year ended February 1, 2014.
(2) Summary of Significant Accounting Policies
Receivables
Receivables are reported at amounts the Company expects to be collected, net of allowance for doubtful accounts.
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors, such as: historical experience, age of accounts receivable balances, credit quality of the Company’s licensees, current economic conditions, bankruptcy, and other factors that may affect the Company’s licensees’ ability to pay. There was no allowance for doubtful accounts as of October 31, 2015 or January 31, 2015.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued new guidance relating to revenue from contracts with customers that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the Financial Accounting Standards Board deferred the effective date of this guidance for all entities by one year. As a result, this guidance is effective for fiscal periods beginning after December 15, 2017. The anticipated impact of the adoption of this guidance on the Company is still being evaluated.
In August 2014, the Financial Accounting Standards Board issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain
8
criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016. The adoption of this guidance will not impact the Company’s consolidated financial statements or related disclosures.
In February 2015, the Financial Accounting Standards Board issued authoritative guidance which modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This guidance is effective for fiscal periods beginning after December 15, 2015, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.
Use of Estimates
On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition and deferred revenue, allowance for doubtful accounts, valuation of long-lived assets, stock based compensation and income taxes. The Company bases its estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased and money market funds purchased with an original maturity date of three months or less to be cash equivalents. At October 31, 2015 and January 31, 2015, the Company’s cash and cash equivalents exceeded Federal Deposit Insurance Corporation (“FDIC”) limits.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collection is reasonably assured. Revenues from royalty and brand representation agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from the Company’s licensees. The Company’s royalty revenue recognition policy provides for recognition of royalties in the quarter earned.
The Company’s agreement with Target Corporation (“Target”) for the Cherokee brand in the U.S. accounts for the majority of the Company’s historical revenues and is structured to provide royalty rate reductions once certain cumulative levels of retail sales are achieved by Target. With respect to Target’s sales in the U.S. of Cherokee branded products other than in the school uniforms category and adult products sold on Target’s website, revenue is recognized by applying the reduced contractual royalty rates prospectively to point of sale data after defined sales thresholds are exceeded. The royalty rate reductions do not apply retroactively to sales since the beginning of the fiscal year. As a result, the Company’s royalty revenues as a percentage of Target’s retail sales in the U.S. are highest at the beginning of each fiscal year and decrease during the fiscal year as Target exceeds sales thresholds as set forth in the Company’s agreement with Target. The amount of Cherokee brand royalty revenue earned by the Company from Target in any quarter is dependent not only on Target’s retail sales of Cherokee branded products in the U.S. in each quarter, but also on the royalty rate then in effect after considering Target’s cumulative level of retail sales for Cherokee branded products in the U.S. for the fiscal year. Historically, with Target, this has caused the Company’s first quarter to be the Company’s highest revenue and most profitable quarter and the Company’s fourth quarter to be the Company’s lowest revenue and least profitable quarter. However, such historical patterns may vary in the future depending upon the terms of any new license agreements, retail sales volumes achieved in each quarter from Target and revenues the Company receives from Target or other licensees that may or may not be subject to reduced royalty rates based upon cumulative sales, including with respect to the Company’s Liz Lange and Completely Me by Liz Lange brands, Cherokee brand in the school uniforms category, Cherokee adult products sold on Target’s website, and the Hawk and Tony Hawk brands.
In order to ensure that Cherokee’s licensees are appropriately reporting and calculating royalties owed to Cherokee, all of Cherokee’s license agreements include audit rights to allow Cherokee to validate the amount of the
9
royalties paid. Any revenue resulting from these audits, or other audits, is recognized in the financial statements of the current reporting period.
Franchise revenues includes royalties and franchise fees. Royalties from franchisees are based on a percentage of net sales of the franchisee and are recognized as earned. Initial franchise fees are recorded as deferred revenue when received and are recognized as revenue when a franchised location is opened as all material services and conditions related to the franchise fee have been substantially performed upon the opening. Renewal franchise fees are recognized as revenue when the franchise agreements are signed and the fee is paid since there are no material services and conditions related to the franchise fees.
Deferred Financing Costs and Debt Discount
Deferred financing costs and debt discounts are capitalized and amortized into interest expense over the life of the debt.
Foreign Withholding Taxes
Licensing revenue is recognized gross of withholding taxes that are remitted by the Company’s licensees directly to their local tax authorities.
Property and Equipment
Property and equipment consist of the following:
(amounts in thousands) |
|
October 31, 2015 |
|
January 31, 2015 |
|
||
Computer Equipment |
|
$ |
553 |
|
$ |
426 |
|
Software |
|
|
79 |
|
|
62 |
|
Furniture and Fixtures |
|
|
1,644 |
|
|
1,457 |
|
Leasehold Improvements |
|
|
416 |
|
|
413 |
|
Less: Accumulated depreciation |
|
|
(1,515) |
|
|
(1,193) |
|
Property and Equipment, net |
|
$ |
1,177 |
|
$ |
1,165 |
|
Property and equipment are stated at cost, less accumulated depreciation. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are written off, and the resulting gains or losses are included in current operations. Depreciation is provided on a straight line basis over the estimated useful life of the related asset.
Computers and related equipment and software are depreciated over three years. Furniture and store fixtures are depreciated over the shorter of seven years, or the remaining term of the licensee agreement. Leasehold improvements are depreciated over the shorter of five years, or the remaining life of the lease term. Depreciation expense was $115 and $322 for the three and nine month periods ended October 31, 2015 and $152 and $361 for the three and nine month periods ended November 1, 2014, respectively.
10
Earnings Per Share Computation (amounts in thousands, including share amounts)
The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three and nine month periods ended October 31, 2015 and November 1, 2014:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
October 31, 2015 |
|
November 1, 2014 |
|
October 31, 2015 |
|
November 1, 2014 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income-numerator for net income per common share and net income per common share assuming dilution |
|
$ |
1,546 |
|
$ |
2,316 |
|
$ |
7,048 |
|
$ |
8,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per common share — weighted average shares |
|
|
8,713 |
|
|
8,424 |
|
|
8,659 |
|
|
8,411 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
178 |
|
|
142 |
|
|
217 |
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per common share, assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and assumed exercises |
|
|
8,891 |
|
|
8,566 |
|
|
8,876 |
|
|
8,490 |
|
The computation for the diluted number of shares excludes unexercised stock options that are anti-dilutive. There were 335 and 198 shares underlying anti-dilutive stock options for the three and nine month periods ended October 31, 2015, respectively, and 502 and 917 shares underlying anti-dilutive stock options for each of the three and nine months periods ended November 1, 2014.
Basic earnings per share (“EPS”) is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to the computation for basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.
Significant Contracts
The terms of the Company’s relationship with Target are set forth in a restated license agreement with Target, which was entered into effective as of February 1, 2008 and amended (i) on January 31, 2013 to add the category of school uniforms, (ii) on April 3, 2013 to provide for a fixed royalty rate of 2% for sales of Cherokee branded products in the category of adult merchandise sold on Target’s website (target.com) in Fiscal 2015 and in future periods and (iii) on January 6, 2014 to reflect Target’s election to renew the agreement through January 31, 2017 and to provide that Target can renew the agreement for successive two (2) year periods, provided that it satisfies the minimum guaranteed royalty payment of $10,500 for the preceding fiscal year (the “Restated Target Agreement”). The Restated Target Agreement grants Target the exclusive right in the United States to use the Cherokee trademarks in various specified categories of merchandise. On September 3, 2015, Target orally informed the Company that the Restated Target Agreement would not be renewed and will terminate at the end of its current term, which expires January 31, 2017. The non-renewal was confirmed in writing on September 4, 2015. The Restated Target Agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and Fiscal 2017 through its expiration. The Cherokee branded products in the school uniforms category will expire at the end of its current term on January 31, 2018, and Target will continue to pay the minimum guarantee through that period.
Under the current terms of the Restated Target Agreement, the minimum annual guaranteed royalty for Target is $10,500 and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum guaranteed royalty of $800).Under the Restated Target Agreement, Target has agreed to pay royalties based on a percentage of Target’s net sales of Cherokee
11
branded merchandise during each fiscal year, which percentage varies according to the volume of sales of merchandise other than sales of Cherokee branded products in the school uniforms category and, beginning in Fiscal 2015, other than sales of Cherokee branded products in the adult merchandise category that are made on Target’s website. The Company assumed a separate license agreement with Target for the Liz Lange brand in connection with the Company’s acquisition of the applicable assets in September 2012.
In connection with the acquisition of the “Hawk” and “Tony Hawk” signature apparel brands and related trademarks in January 2014, , Cherokee and Kohl’s entered into an amended license agreement. Pursuant to the license agreement, Kohl’s is granted the exclusive right to sell Tony Hawk and Hawk branded apparel and related products in the United States for a four-year term and has agreed to pay Cherokee an annual royalty rate for its sales of Hawk branded signature apparel and related products in the United States, subject to a minimum annual guaranteed royalty of $4,800.
Stock-Based Compensation
Effective July 16, 2013, the Company’s stockholders approved the 2013 Stock Incentive Award Plan (the “2013 Plan”). The 2013 Plan serves as the successor to the 2006 Incentive Award Plan (which includes the 2003 Incentive Award Plan as amended by the adoption of the 2006 Incentive Award Plan) (the “2006 Plan”). The 2013 Plan authorized to be issued (i) 700,000 additional shares of common stock, and (ii) 102,483 shares of common stock previously reserved but unissued under the 2006 Plan. No future grants will be awarded under the 2006 Plan, but outstanding awards previously granted under the 2006 Plan continue to be governed by its terms. Any shares of common stock that are subject to outstanding awards under the 2006 Plan which are forfeited, terminate or expire unexercised and would otherwise have been returned to the share reserve under the 2006 Plan will be available for issuance as common stock under the 2013 Plan. The 2013 Plan provides for the issuance of equity-based awards to officers, other employees, and directors.
Stock Options
Stock options issued to employees are granted at the market price on the date of grant, generally vest over a three-year period, and generally expire seven to ten years from the date of grant. The Company issues new shares of common stock upon exercise of stock options. The Company has also granted non-plan stock options to certain executives as a material inducement for employment. The Company accounts for stock options under authoritative guidance, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values.
The Company estimates the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the consolidated statements of income. The compensation expense recognized for all stock-based awards is net of estimated forfeitures over the award’s service period.
Stock-based compensation expense recognized in selling, general and administrative expenses for stock options for the nine months was $1,607, as compared to $780 for the comparable period in the prior year.
12
A summary of all activity for the Company’s stock options for the Nine Months is as follows:
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Weighted |
|
Contractual |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Term |
|
Intrinsic |
|
|
|
|
Shares |
|
Price |
|
(in years) |
|
Value |
|
|
Outstanding, at January 31, 2015 |
|
1,185,767 |
|
$ |
15.89 |
|
3.49 |
|
2,910 |
|
Granted |
|
335,000 |
|
$ |
22.79 |
|
|
|
|
|
Exercised |
|
(261,097) |
|
$ |
17.06 |
|
|
|
|
|
Canceled/forfeited |
|
(146,667) |
|
$ |
17.33 |
|
|
|
|
|
Outstanding, at October 31, 2015 |
|
1,113,003 |
|
$ |
17.50 |
|
4.31 |
|
2,075 |
|
Vested and Exercisable at October 31, 2015 |
|
570,828 |
|
$ |
15.38 |
|
3.00 |
|
1,443 |
|
As of October 31, 2015, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $2,346, which is expected to be recognized over a weighted average period of approximately 2.29 years. The total fair value of all options which vested during the Nine Months was $677.
Performance Stock Units and Restricted Stock Units
In 2013, the Compensation Committee of the Company’s board of directors (the “Board of Directors”) granted certain performance-based equity awards to executives under the 2006 Plan.
The performance metric applicable to such awards is compound stock price growth, using the closing price of the Company’s common stock on February 1, 2013, or $13.95, as the benchmark. The target growth rate is 10% annually, which results in an average share price target of (i) $15.35 for Fiscal 2014, (ii) $16.88 for Fiscal 2015 and (iii) $18.57 for Fiscal 2016. The average share price will be calculated as the average of all market closing prices during the January preceding the applicable fiscal year end. If a target is met at the end of a fiscal year, one third of the shares subject to the award will vest. If the stock price target is not met, the relevant portion of the shares subject to the award will not vest but will roll over to the following fiscal year. The executive must continue to be employed by the Company through the relevant vesting dates to be eligible for vesting. The target average share price was met for Fiscal 2015, which resulted in the vesting of two thirds of the shares subject to each award.
Since the vesting of these performance-based equity awards is subject to market based performance conditions, the fair value of these awards was measured on the date of grant using the Monte Carlo simulation model for each vesting tranche. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award grant and calculates the fair market value for the performance units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions and the resulting fair value of the award.
In June 2015, the Compensation Committee of the Company’s Board of Directors granted RSUs and stock options to each member of the Board of Directors and to each of the Company’s executive officers under the 2013 Plan. All of the equity awards approved at that meeting vest in equal annual installments over three years, such that the full grants shall be vested on the third anniversary of the grant date. The fair value of the RSU awards was measured on the effective date of grant using the price of the Company’s common stock.
In August 2014, the Compensation Committee of the Company’s Board of Directors granted a sales-based performance-based equity award to an employee under the 2013 Plan, which vests in five increments dependent upon achievement of certain annual sales targets. The fair value of this award was measured on the effective date of grant using the price of the Company’s common stock.
Stock-based compensation expense for restricted stock and performance stock units for the Nine Months was $833 compared to $244 for the comparable period in the prior year.
13
A summary of all activity for the Company’s restricted stock and performance stock units for the Nine Months is as follows:
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
Number of |
|
Grant-Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Unvested stock at January 31, 2015 |
|
76,936 |
|
$ |
13.02 |
|
Granted |
|
166,000 |
|
$ |
22.71 |
|
Vested |
|
(27,435) |
|
|
15.74 |
|
Forfeited |
|
— |
|
|
— |
|
Unvested stock at October 31, 2015 |
|
215,501 |
|
$ |
20.14 |
|
As of October 31, 2015, total unrecognized stock-based compensation expense related to restricted stock and performance stock units was approximately $3,516, which is expected to be recognized over a weighted average period of approximately 2.58 years.
Intangible Assets
The Company holds various trademarks including Cherokee®, Liz Lange®, Completely Me by Liz Lange®, Hawk®, Tony Hawk®, Everyday California®, Flip Flop Shops®, Sideout®, Sideout Sport®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, and others, in connection with numerous categories of apparel and other goods. These trademarks are registered with the United States Patent and Trademark Office and corresponding government agencies in a number of other countries. The Company also holds trademark applications for Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Flip Flop Shops, Sideout, Sideout Sport, Carole Little, Chorus Line, Saint Tropez-West, All That Jazz, and others in numerous countries. The Company intends to renew these registrations, as appropriate, prior to expiration. The Company monitors on an ongoing basis unauthorized uses of the Company’s trademarks, and relies primarily upon a combination of trademark, copyright, know-how, trade secrets, and contractual restrictions to protect the Company’s intellectual property rights both domestically and internationally.
Trademark registration and renewal fees are capitalized and are amortized on a straight-line basis over the estimated useful lives of the assets. Trademark acquisitions are capitalized and are either amortized on a straight-line basis over the estimated useful lives of the assets, or are capitalized as indefinite-lived assets, if no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life to Cherokee. Trademarks are evaluated for the possibility of impairment at least annually.
During the Nine Months, the Company has acquired various intangible assets related to the Everyday California lifestyle brand and related trademarks and the Flip Flop Shops brand and related trademarks. The consideration for the Everyday Lifestyle brand and assets consisted of an initial cash payment and contingent cash payments dependent upon performance of the assets during Fiscal 2017 and the fiscal year ending January 27, 2018. The consideration for the Flip Flop Shops brand and assets consisted of a cash payment of $12,000. See Note 3 of these consolidated financial statements for further information about the acquisition of the Flip Flop Shops brand and related assets.
Intangible assets consist of the following:
(amounts in thousands) |
|
October 31, 2015 |
|
January 31, 2015 |
|
||
Acquired Trademarks |
|
$ |
54,955 |
|
$ |
47,994 |
|
Other Trademarks |
|
|
8,687 |
|
|
8,621 |
|
Franchise Agreements |
|
|
1,300 |
|
|
— |
|
Accumulated amortization |
|
|
(17,427) |
|
|
(16,794) |
|
Total |
|
$ |
47,515 |
|
$ |
39,821 |
|
Amortization expense of intangible assets was $633 and $699 for the nine month periods ended October 31, 2015 and November 1, 2014, respectively. Expected amortization of intangible assets for fiscal years 2017, 2018, 2019, 2020, and 2021 is approximately $900, $600, $300, $300 and $200, respectively. Certain acquired trademarks are
14
indefinite lived and not amortized. The weighted average amortization period for other trademarks and franchise agreements was 9.4 and 11 years and 9.4 years as of October 31, 2015 and 9.4 years for trademarks as of January 31, 2015.
Trademark registration and renewal fees capitalized during the Nine Months totaled approximately $67. Trademark acquisition, registration, and renewal fees capitalized during the nine month periods ended November 1, 2014 totaled $59.
Fair Value of Financial Instruments
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1: Observable inputs, such as quoted prices for identical assets or liabilities in active markets
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
Level 3: Unobservable inputs for which there is little or no market data, which require the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities
The carrying amount of receivables, accounts payable and accrued liabilities approximates fair value due to the short-term nature of these instruments. Long-term debt approximates fair value due to the variable rate nature of the debt.
The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in business are written off in the period identified since they will no longer generate any positive cash flows for the Company. Periodically, long-lived assets that will continue to be used by the Company need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses involve management judgment. In the event the projected undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written down to their estimated fair value, in accordance with authoritative guidance. The estimated undiscounted cash flows used for this nonrecurring fair value measurement are considered a Level 3 input, which consist of unobservable inputs that reflect assumptions about how market participants would price the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
Income Taxes
Income tax expense of $802 was recognized for the Third Quarter, resulting in an effective tax rate of 34.2% in the Third Quarter, as compared to 35.8% in the third quarter of last year and compared to 32.4% for the full year of Fiscal 2015. The effective tax rate for the Third Quarter differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the benefit of certain tax credits.
The amount of unrecognized tax benefits was approximately $230 and $449, respectively, at October 31, 2015 and January 31, 2015. At October 31, 2015, approximately $152 of unrecognized tax benefits would, if recognized, affect the effective tax rate.
In accordance with authoritative guidance, interest and penalties related to unrecognized tax benefits are included within the provision for taxes in the consolidated statements of income. The total amount of interest and penalties recognized in the consolidated statements of income for the Third Quarter was $(36) as compared with $4 in
15
the third quarter of last year. As of October 31, 2015 and January 31, 2015, respectively, the total amount of accrued interest and penalties included in the liability for unrecognized tax benefits was $51 and $84.
The Company has unrecognized tax benefits pertaining to the issue of its taxability in various state tax jurisdictions. It is reasonably possible that the amount of unrecognized tax benefits may decrease within the next 12 months as a result of the Company’s interaction with these various state tax jurisdictions. The Company anticipates that the total amount of unrecognized tax benefits may decrease in the next 12 months by approximately $230.
The Company files income tax returns in the U.S. federal and California and certain other state jurisdictions. For federal income tax purposes, the year ended February 2, 2013 and later tax years remain open for examination by the tax authorities under the normal three year statute of limitations. For state tax purposes, the year ended January 28, 2012 and later tax years remain open for examination by the tax authorities under a four year statute of limitations.
Marketing and Advertising
Generally, the Company’s “Direct to Retail” licensees fund their own advertising programs. Cherokee’s marketing, advertising and promotional costs totaled $858 and $876 for the nine month periods ended October 31, 2015 and November 1, 2014, respectively. These costs are expensed as incurred and were accounted for as selling, general and administrative expenses.
The Company provides marketing expense money to certain large licensees based upon sales criteria to help them build the Company’s licensed brands in their respective territories, thus providing an identifiable benefit to Cherokee. The amounts paid for such marketing expenses during the nine month periods ended October 31, 2015 and November 1, 2014 were $396 and $168, respectively, and are included in the total marketing, advertising and promotional costs, based upon authoritative guidance.
Deferred Rent and Lease Incentives
When a lease includes lease incentives (such as a rent abatement) or requires fixed escalations of the minimum lease payments, rental expense is recognized on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and amounts payable under the lease is included in deferred rent and lease incentives in the accompanying consolidated balance sheets. For leasehold allowances, the Company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the consolidated statements of income over the term of the lease.
Comprehensive Income
Authoritative guidance establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the three months ended October 31, 2015 and November 1, 2014, the Company has no comprehensive income components and accordingly, net income equals comprehensive income.
Treasury Stock
Repurchased shares of the Company’s common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, and the proceeds from the sale exceed the average price that was paid by the Company to acquire the shares, the Company records such excess as an increase in additional paid-in capital.
Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company records such difference as a decrease in additional paid-in capital to the extent of increases previously recorded, with the balance recorded as a decrease in retained earnings.
16
(3) Business Combinations
FFS Merger
On October 13, 2015, Cherokee entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FFS Holdings, LLC, a Delaware limited liability company (“FFS”), FFS Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of Cherokee (“Merger Sub”), and Darin Kraetsch, solely in his capacity as the representative of the FFS equityholders. Flip Flop Shops is a franchise retail chain dedicated to offering the hottest brands and latest styles of flip flops, casual footwear and accessories.
Pursuant to the Merger Agreement, Merger Sub merged with and into FFS, with FFS continuing as the surviving corporation and a wholly owned subsidiary of Cherokee (the “Merger”).
Cherokee acquired FFS for the base purchase price of $12,000, consisting of $6,000 in cash and the remaining $6,000 in debt, which is subject to certain adjustments and escrow arrangements. The Merger was treated as a business combination accounted for using the acquisition method of accounting. The Company has incurred legal, accounting, banking and other professional costs relating to the Merger in the amount of approximately $500 and has included these costs in selling, general and administrative expenses in the Third Quarter. Trademarks have been treated as indefinite‑lived and no amortization has been recorded. Trademarks are evaluated for the possibility of impairment at least annually. Franchise agreements have been treated as finite-lived with corresponding amortization expense. Goodwill primarily relates to the excess cash flows to be generated as the Flip Flop Shops franchise grows through the opening of new stores and the generation of new franchisees. The total amount of goodwill that is expected to be deductible for tax purposes is $5,979. The amounts of revenue and earnings of FFS since the completion of the Merger are included in the consolidated statements of income included herein and totaled approximately $80 and ($37) for the 18 day reporting period.
The initial accounting for the Merger is preliminary, as the Company consummated the acquisition on October 13, 2015. This is based upon an initial draft of the purchase price allocation provided to us by a professional services firm. We expect to receive the finalized report in early Calendar 2016. As a result, the purchase price allocation may be adjusted in the future to reflect updated information.
Preliminary Purchase Price Allocation
Cash paid to seller by Cherokee |
$ |
12,000 |
|
Allocation of purchase price to trademarks |
|
5,700 |
|
Allocation of purchase price to goodwill |
|
5,979 |
|
Allocation of purchase price to franchise agreements |
|
1,300 |
|
Allocation of purchase price to deferred revenue |
|
(1,600) |
|
Allocation of purchase price to deferred tax asset |
|
579 |
|
Allocation of purchase price to working capital |
|
42 |
|
Supplemental information on an unaudited pro forma basis, as if the acquisition had been completed as of February 2, 2014, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
Nine Months Ended |
|
Nine Months Ended |
||||
(amounts in thousands) |
|
October 31, 2015 |
|
November 1, 2014 |
|
October 31, 2015 |
|
November 1, 2014 |
||||
Revenues |
|
|
8,465 |
|
|
9,115 |
|
|
28,069 |
|
|
28,936 |
Net Income/Loss |
|
|
1,454 |
|
|
2,204 |
|
|
6,724 |
|
|
7,738 |
Basic EPS |
|
$ |
0.17 |
|
$ |
0.26 |
|
$ |
0.78 |
|
$ |
0.92 |
Diluted EPS |
|
$ |
0.16 |
|
$ |
0.26 |
|
$ |
0.76 |
|
$ |
0.91 |
17
(4) Debt
Credit Agreement with JPMorgan Chase
On September 4, 2012, Cherokee and JPMorgan Chase Bank, N.A. (“JPMorgan”) entered into a credit agreement (as amended, the “Credit Agreement”), which was amended on January 31, 2013 in connection with the Company’s acquisition of rights related to the Cherokee brand in the school uniforms category, was further amended on January 10, 2014 in connection with the Company’s acquisition of the Hawk and Tony Hawk brands, and was further amended on October 13, 2015 in connection with the Merger with FFS. Effective October 13, 2015, Cherokee and JPMorgan entered into amendments to each of (i), the “Credit Agreement, (ii) the term note that was originally issued by Cherokee in favor of JPMorgan as of September 4, 2012 and previously amended by the parties effective January 31, 2013 and January 10, 2014 (as amended, the “2013 Term Note”), (ii) the term note that was originally issued by Cherokee in favor of JPMorgan as of January 10, 2014 (as amended, the “2014 Term Note”) and (iii) the line of credit note, which was issued by Cherokee in favor of JPMorgan as of September 4, 2012 and previously amended by the parties effective January 10, 2014 (as amended, the “Revolver”). In addition, pursuant to the Credit Agreement, Cherokee issued to JPMorgan a new term note (the “2015 Term Note” and, together with the foregoing amendments, the “Credit Agreement Amendments”) in exchange for its principal amount of $6,000. Pursuant to the Credit Agreement Amendments, the maturity dates of each of the 2013 Term Note, the 2014 Term Note and the Revolver were amended to be March 1, 2017. The principal outstanding under the 2015 Term Note is to be repaid on a quarterly basis, commencing on November 30, 2015 and continuing thereafter through February 28, 2017 in equal principal installments of $300, with any remaining principal balance due on March 1, 2017. The 2015 Term Note bears interest equal to either: (i) an adjusted annual LIBOR rate reset monthly, bi-monthly or quarterly, plus 2.75% or 3.00% depending on the applicable senior funded debt ratio or (ii) the Bank’s annual prime rate or such annual prime rate plus 0.25% depending on the applicable senior funded debt ratio, with a floor equal to the 1 month LIBOR rate plus 2.5%. Pursuant to the Credit Agreement, the definition of “senior funded debt ratio” requires that Cherokee not exceed a ratio equal to (i) 2.25 to 1.00 until the fiscal quarter ending January 31, 2016, and (ii) 2.00 to 1.00 thereafter. As of October 31, 2015, borrowings under the credit agreement totaled approximately $26,000 in principal amount under three term notes. The company also has a revolving line of credit in principal amount of $2,000 available for future borrowings.
The Credit Agreement Amendments also waive the event of default under the Credit Agreement that resulted from the election by Target in September 2015 to not renew the Restated Target Agreement when the current term expires on January 31, 2017. Prior to JPMorgan’s waiver of this event of default in the Credit Agreement Amendments, the Company and JPMorgan had entered into a forbearance agreement, pursuant to which JPMorgan had agreed that it would not exercise any of its rights or remedies under the Credit Agreement solely with respect to this event of default through October 12, 2015, the day immediately preceding the waiver granted in the Credit Agreement Amendments.
Following the issuance of the 2015 Term Note, Cherokee’s total borrowings under the Credit Agreement (collectively, the “Loan”) are evidenced by (i) the 2013 Term Note, which was issued in the principal amount of $16,600, of which approximately $7,000 was outstanding as of October 31, 2015, (ii) the Revolver, which provides Cherokee with a revolving line of credit in the principal amount of $2,000, none of which was outstanding as of October 31, 2015, (iii) the 2014 Term Note, which was issued in the principal amount of $19,000 , of which approximately $13,000 was outstanding as of October 31, 2015 and (iv) the 2015 Term Note in the principal amount of $6,000, all of which was outstanding as of October 31, 2015. Cherokee paid an upfront fee equal to $30 in connection with the issuance of the 2015 Term Note. The upfront fee is recognized as a debt discount.
Consistent with the existing terms of the Credit Agreement, the Loan is secured by continuing security agreements, trademark security agreements and continuing guarantees executed by Cherokee and its subsidiaries, as applicable. In addition, the Credit Agreement includes various restrictions and covenants regarding the operation of Cherokee’s business, including covenants that require Cherokee to obtain JPMorgan’s consent in certain circumstances before Cherokee can: (i) incur additional indebtedness, (ii) make acquisitions, mergers or consolidations in excess of $5,000 on an aggregate basis, (iii) issue any equity securities other than pursuant to Cherokee’s employee equity incentive plans or programs or (iv) repurchase or redeem any outstanding shares of common stock or pay dividends or other distributions, other than stock dividends, to Cherokee’s stockholders. The Credit Agreement also imposes financial covenants, including: (i) a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 and (ii) a limitation of
18
Cherokee’s “senior funded debt ratio” as described above. Further, Cherokee has granted a security interest in favor of JPMorgan in all of Cherokee’s assets (including trademarks) as collateral for the Loan. As of October 31, 2015, the Company was in compliance with its financial and other covenants under the Credit Agreement. JPMorgan has the right to terminate its obligations under the Credit Agreement, accelerate the payment on any unpaid balance of the Credit Agreement and exercise its other rights, including foreclosing on Cherokee’s assets under the security agreements.
(5) Commitments and Contingencies
Trademark Indemnities
Cherokee indemnifies certain customers against liability arising from third- party claims of intellectual property rights infringement related to the Company’s trademarks. These indemnities appear in the licensing agreements with the Company’s customers, are not limited in amount or duration and generally survive the expiration of the contracts. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, the Company is unable to determine the range of estimated losses that it could incur related to such indemnifications.
Litigation
Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the expected probable favorable or unfavorable outcome of each claim. As additional information becomes available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or existing claims evolve, such revisions in estimates of the potential liability could materially impact the results of operations and financial position. The Company may also be involved in various other claims and other matters incidental to the Company’s business, the resolution of which is not expected to have a material adverse effect on the Company’s financial position or results of operations. No material amounts were accrued as of October 31, 2015 or January 31, 2015 related to any of the Company’s legal proceedings.
(6) Segment Reporting
Authoritative guidance requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies reportable segments based on how management internally evaluates separate financial information, business activities and management responsibility.
The Company operates in a single business segment, the marketing and licensing of brand names and trademarks for apparel, footwear and accessories. Cherokee’s marketing and licensing activities extend to brands that the Company owns and to brands owned by others. Cherokee’s operating activities relating to owned and represented brands are identical and are performed by a single group of marketing professionals. While Cherokee’s principal operations are in the United States, the Company also derives royalty revenues from the Company’s international licensees. Revenues by geographic area based upon the licensees’ country of domicile consisted of the following:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
(amounts in thousands) |
|
October 31, 2015 |
|
November 1, 2014 |
|
October 31, 2015 |
|
November 1, 2014 |
|
||||
U.S. and Canada |
|
$ |
5,725 |
|
$ |
6,064 |
|
$ |
19,534 |
|
$ |
19,724 |
|
Asia |
|
|
996 |
|
|
887 |
|
|
2,801 |
|
|
2,692 |
|
Latin America |
|
|
557 |
|
|
700 |
|
|
1,710 |
|
|
2,143 |
|
United Kingdom and Europe |
|
|
170 |
|
|
523 |
|
|
681 |
|
|
1,714 |
|
All Others |
|
|
650 |
|
|
532 |
|
|
2,084 |
|
|
1,158 |
|
Total |
|
$ |
8,098 |
|
$ |
8,706 |
|
$ |
26,810 |
|
$ |
27,431 |
|
Long-lived tangible assets have been located in the U.S., Mexico and Asia with net values of approximately $876, $250 and $51 as of October 31, 2015 and net values of approximately $794, $299 and $72 as of January 31, 2015.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) should be read together with the unaudited condensed consolidated financial statements and the related notes included in this report. For additional context with which to understand our financial condition and results of operations, refer to the MD&A for the fiscal year ended January 31, 2015 contained in our 2015 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on April 16, 2015, as well as the consolidated financial statements and notes contained therein (collectively, our “Annual Report”). In addition to historical information, this MD&A contains forward-looking statements based upon our current views, expectations and assumptions that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking statements due to a number of factors, including, among others, the risks described in Part II, Item 1A, “Risk Factors” and elsewhere in this report In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date we file this report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.
As used in this MD&A and elsewhere in this report, “Cherokee”, the “Company”, “we”, “us” and “our” refer to Cherokee Inc. and its consolidated subsidiaries, unless the context indicates or requires otherwise. Additionally, as used herein, the term “Third Quarter” refers to the three months ended October 31, 2015; the term “Nine Months” refers to the nine months ended October 31, 2015; the term “Fiscal 2017” refers to the fiscal year ending January 28, 2017; the term “Fiscal 2016” refers to the fiscal year ending January 30, 2016; the term “Fiscal 2015” refers to the most recent past fiscal year ended January 31, 2015; the term “Fiscal 2014” refers to the fiscal year ended February 1, 2014 ; and the term “Fiscal 2013” refers to the fiscal year ended February 2, 2013.
We have a 52- or 53-week fiscal year ending on the Saturday nearest to January 31, which aligns us with our retail licensees who generally also operate and plan using such a fiscal year. This results in a 53-week fiscal year approximately every four or five years. Each of Fiscal 2015, Fiscal 2014 and Fiscal 2013 was a 52-week, 52-week and 53-week fiscal year, respectively. Certain of our international licensees report royalties to us for quarterly and annual periods that may differ from ours. We do not believe that the varying quarterly or annual period ending dates from our international licensees have a material impact upon our reported financial results, as these international licensees maintain comparable annual periods in which they report retail sales and royalties to us on a year-to-year basis.
We own the registered trademarks or trademark applications for Cherokee®, Liz Lange®, Completely Me by Liz Lange®, Hawk®, Tony Hawk®, Everyday California®, Flip Flop Shops®, Sideout®, Sideout Sport®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, and others. All other trademarks, trade names and service marks included or incorporated by reference into this report, the accompanying base prospectus and any applicable free writing prospectus are the property of their respective owners.
Overview
Cherokee is a global marketer and manager of a portfolio of fashion and lifestyle brands it owns or represents, licensing the Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Sideout, Carole Little, Everyday California , Flip Flop Shops and àle by alessandra brands and related trademarks and other brands in multiple consumer product categories and sectors. We are one of the leading global licensors of style focused lifestyle brands for apparel, footwear, home and accessories. As part of our business strategy, we frequently evaluate other brands and trademarks for acquisition into our portfolio. We enter into license agreements with recognizable retail partners in their respective global locations to provide them the rights to design, manufacture and sell products bearing our brands and to provide them our proprietary 360-degree platform. We believe our retail responsiveness process and 360-degree unique value proposition have allowed Cherokee to address the growing power of the consumer and the present and future needs of the retailers that are selling our portfolio of lifestyle brands. Based on consumer research, retail insights and brand insights that we continually measure, evaluate and incorporate into our 360-degree platform, we believe Cherokee has
20
become a key strategic partner to our licensees. We refer to this strategy as our “Direct to Retail” or “DTR” licensing model. As of October 31, 2015, we had thirty-three continuing license agreements covering both domestic and international markets, thirteen of which pertained to the Cherokee brand. In connection with our acquisition of the Flip Flop Shops trademark and related assets, we acquired, and became the franchisor under, franchise agreements with franchisees that have Flip Flop Shops retail stores located worldwide.
We derive revenues primarily from licensing our trademarks to retailers all over the world. Our current retail licensee relationships cover over fifty countries and over 9,000 retail stores and online businesses and include relationships with Target Corporation (“Target”), Kohl’s Illinois, Inc. (“Kohl’s”), RT Mart, Comercial Mexicana, TJ Maxx, Nishimatsuya, Sears Canada and Argos. Our two most significant licensees are Target and Kohl’s.
Recent Developments
Acquisition of Everyday California® Lifestyle Brand
On May 14, 2015, Cherokee consummated an asset purchase agreement with Everyday California Holdings, LLC, under which it acquired various assets related to the Everyday California® Lifestyle Brand and related trademarks. The consideration for the assets consisted of an initial cash payment and contingent cash payments dependent upon performance of the assets during Fiscal years 2017 and 2018.
Non-Renewal of Restated License Agreement with Target
On September 3, 2015, Target orally informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S which expires at the end of its current term on January 31, 2017. Target confirmed the non-renewal in writing on September 4, 2015. The restated license agreement with Target, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and Fiscal 2017 through its expiration. The Cherokee branded products in the school uniforms category will expire at the end of its current term on January 31, 2018, and Target will continue to pay the minimum guarantee through that period.
Target’s election to not renew the restated license agreement for the Cherokee brand in the U.S. triggered an event of default under our credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”). However, we and JPMorgan immediately entered into a forbearance agreement pursuant to which JPMorgan agreed that it would not exercise its rights or remedies under the credit agreement solely with respect to this event of default through October 12, 2015, and on October 13, 2015, JPMorgan waived this event of default in certain amendments to the credit agreement that were made in connection with our acquisition of the Flip Flop Shops brand, discussed below.
Acquisition of Flip Flop Shops
On October 13, 2015, we entered into a merger agreement (“Merger”) with Flip Flop Shops (“FFS”). Upon completion of the Merger, we, through our subsidiaries, own all rights to the Flip Flop Shops trademark and brand name, which is a franchise retail chain dedicated to offering the hottest brands and latest styles of flip flops, casual footwear and accessories, and we are the franchisor for approximately 90 existing Flip Flop Shops franchise shops located in the U.S. Canada, the Caribbean, the Middle East and South Africa and approximately 100 additional retail shops in development worldwide. Flip Flop Shops retail stores carry definitive assortments of recognized brands including OluKai, SANUK, Cobian, Havaianas, Quiksilver, ROXY, Reef, and many more.
In connection with the Merger with FFS, on October 13, 2015, we amended our credit agreement with JPMorgan to, among other things, (i) extend the maturity date of existing term notes and a line of credit note issued under the credit agreement to March 1, 2017 and (ii) issue a new term note to JPMorgan in exchange for the principal amount of the note of $6 million. As of October 31, 2015, our borrowings under the credit agreement totaled approximately $26 million in principal amount under three term notes, and we also have a revolving line of credit in
21
principal amount of $2 million available for future borrowings. See Note 4 to our consolidated financial statements included in this report for further information about our credit agreement with JPMorgan.
Expansion of Licensing Portfolio
In addition to our acquisition of the Flip Flop Shops brand name and related franchise relationships as described above, we have also acquired a number of new licensees for our brands in a variety of territories in our efforts to expand our licensing portfolio in existing and new markets. Below is a discussion of representative license agreements that we have entered into during Fiscal 2016 to date:
Cherokee
Walmart Canada
In September 2015, we entered into a license agreement with Walmart Canada. The agreement covers a broad assortment of Tony Hawk signature apparel, accessory and footwear categories for young men’s and boy’s sizes 4-20, which is expected to launch in the fall of 2016.
Sears Canada
In April 2015, we entered into a license agreement with Sears Canada Inc. The agreement covers a wide range of Cherokee products in the family lifestyle categories, including men’s, women’s and children’s clothing, footwear and accessories, and is planned to launch in the spring of 2016. Additionally, in May 2015, we entered into a new license agreement with Sears Canada covering Liz Lange maternity and sportswear, including expanded size ranges, to be sold in Sears Canada stores and online at www.sears.ca beginning in the spring of 2016.
Argos
In January 2015, we entered into a license agreement with Argos, a subsidiary of Home Retail Group plc, covering a broad assortment of Cherokee lifestyle products online, in catalogs and in more than 750 Argos stores across the United Kingdom and Ireland, which launched in late July 2015.
Hawk
Sports Direct
In March 2015, we entered into a license agreement with Sports Direct International plc to launch a broad assortment of Tony Hawk signature clothing and accessories online and in Sports Direct stores throughout Europe in the winter of 2015-2016.
Liz Lange
Sears Canada
In April 2015, we entered into a new license agreement with Sears Canada covering Liz Lange maternity and sportswear, including expanded size ranges, to be sold in Sears Canada stores and online at www.sears.ca beginning in the spring of 2016.
Everyday California
5 Horizons
In August 2015, we entered into a license agreement with 5 Horizons Group for our Everyday California brand. The agreement provides 5 Horizons the rights to manufacture and sell a wide assortment of branded Everyday California
22
products, including backpacks, bags, luggage, cold and warm weather accessories and select apparel products for adults and kids. Distribution will include specialty and department store retailers as well as resorts in the U.S., Canada and Mexico and select countries in South and Central America, Europe, the Middle East and Africa. Product is expected to launch in the spring of 2016.
NTD Apparel
In May 2015, we entered into a license agreement with NTD Apparel Inc. for our Everyday California brand. The agreement provides NTD Apparel the rights to manufacture and sell Everyday California branded products in certain apparel and accessory categories for adults and kids. The distribution will include specialty and department store retailers, as well as resorts throughout the U.S. and Canada. Product is expected to launch in the spring of 2016.
Critical Accounting Policies and Estimates
There has been no material change to our critical accounting policies and estimates from the information provided in our Annual Report.
This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition and deferred revenue, deferred taxes, valuation and impairment of long-lived assets, contingencies and litigation and stock-based compensation. Management bases its estimates on historical experience, anticipated results and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates.
We consider accounting policies relating to the following areas to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:
· |
Revenue recognition and deferred revenue; |
· |
Provision for income taxes and deferred taxes; |
· |
Valuation and impairment of long-lived assets; |
· |
Contingencies and litigation; and |
· |
Accounting for stock-based compensation. |
You should refer to our Annual Report for a discussion of our policies on revenue recognition, deferred taxes, impairment of long-lived assets, contingencies and litigation and accounting for stock-based compensation.
See Note 2 to our consolidated financial statements included in this report for a description of recent accounting pronouncements.
23
Results of Operations
The following table sets forth for the periods indicated certain of our consolidated financial data.
|
|
Three Months |
|
Three Months |
|
Nine Months |
|
Nine Months |
|
||||
|
|
ended October 31, |
|
ended November 1, |
|
ended October 31, |
|
ended November 1, |
|
||||
(amounts in thousands) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Royalty revenues |
|
$ |
8,098 |
|
$ |
8,706 |
|
$ |
26,810 |
|
$ |
27,431 |
|
Selling, general and, administrative expenses |
|
|
5,627 |
|
|
4,896 |
|
|
15,409 |
|
|
14,741 |
|
Operating income |
|
|
2,471 |
|
|
3,810 |
|
|
11,401 |
|
|
12,690 |
|
Interest income (expense) and other income (expense), net |
|
|
(123) |
|
|
(203) |
|
|
(464) |
|
|
(656) |
|
Income tax provision |
|
|
802 |
|
|
1,291 |
|
|
3,889 |
|
|
3,874 |
|
Net income |
|
$ |
1,546 |
|
$ |
2,316 |
|
$ |
7,048 |
|
$ |
8,160 |
|
Revenues
In the three and nine month periods ended October 31, 2015, our revenues totaled $8.1 million and $26.8 million, respectively, as compared to $8.7 million and $27.4 million in the three and nine month periods ended November 1, 2014. Revenues for the third quarter and nine month periods ended October 31, 2015 and November 1, 2014 were primarily generated from licensing our trademarks to retailers and, to a lesser extent, wholesalers and our share of licensing revenues from brand representation licensing agreements with other brand owners. The decrease in revenues between periods was principally due to the timing of transitions in the United Kingdom from Tesco to Argos for our Cherokee brand and in Canada from Target Canada to Sears Canada for our Cherokee and Liz Lange brands. Revenues from Argos began in the third quarter of Fiscal 2016 and we expect revenues from Sears Canada to begin during the first quarter of Fiscal 2017. Additionally, the decrease is due to the strengthening of the U.S. dollar, which we estimate to be approximately $0.2 million during the Third Quarter and $0.6 million during the Nine Months.
Total worldwide retail sales of merchandise bearing the Cherokee brand totaled $332 million and $964 million and approximately $345 million and $1,008 million in the third quarter and nine month periods ended October 31, 2015 and November 1, 2014, respectively.
Because we do not have direct oversight over our licensees, we may not have all the information necessary to determine or predict the specific reasons why revenue may increase or decrease in any given period. Given our contractual royalty rate reductions as certain sales volume thresholds are achieved for Cherokee branded products and Hawk and Tony Hawk branded products in various product categories in the U.S., we expect that we will continue to record our highest revenues and profits in our first quarter and our lowest revenues and profits in our fourth quarter.
Revenues By Brand
The following table sets forth our revenues by brand for the three and nine months ended October 31, 2015 and November 1, 2014.
|
|
Three Months Ended |
|
Three Months Ended |
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
||||||||||||
|
|
October 31, 2015 |
|
November 1, 2014 |
|
|
October 31, 2015 |
|
November 1, 2014 |
|
|
||||||||||||
(dollar amounts in thousands) |
|
Royalty |
|
% of Total |
|
Royalty |
|
% of Total |
|
|
Royalty |
|
% of Total |
|
Royalty |
|
% of Total |
|
|
||||
Royalty Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
|
||||
Cherokee Brand Royalty Revenues |
|
$ |
6,134 |
|
76 |
% |
$ |
6,606 |
|
76 |
% |
|
$ |
20,226 |
|
76 |
% |
$ |
21,072 |
|
77 |
% |
|
Hawk Brand Royalty Revenues |
|
|
1,200 |
|
15 |
% |
|
1,316 |
|
15 |
% |
|
|
3,750 |
|
14 |
% |
|
3,765 |
|
14 |
% |
|
Liz Lange Brand Royalty Revenues |
|
|
565 |
|
7 |
% |
|
586 |
|
7 |
% |
|
|
1,965 |
|
7 |
% |
|
2,049 |
|
7 |
% |
|
All Other Brand Revenues |
|
|
199 |
|
2 |
% |
|
198 |
|
2 |
% |
|
|
869 |
|
3 |
% |
|
545 |
|
2 |
% |
|
Total Royalty Revenue |
|
$ |
8,098 |
|
100 |
% |
$ |
8,706 |
|
100 |
% |
|
$ |
26,810 |
|
100 |
% |
$ |
27,431 |
|
100 |
% |
|
24
Geographic Revenues
The following table sets forth our geographic licensing revenues for the three and nine months ended October 31, 2015 and November 1, 2014.
|
|
Three Months Ended |
|
Three Months Ended |
|
Nine Months Ended |
|
Nine Months Ended |
|
|
||||||||||||
|
|
October 31, 2015 |
|
November 1, 2014 |
|
October 31, 2015 |
|
November 1, 2014 |
|
|
||||||||||||
(amounts in thousands, except percentages) |
|
Royalty |
|
% of Total |
|
Royalty |
|
% of Total |
|
Royalty |
|
% of Total |
|
Royalty |
|
% of Total |
|
|
||||
Geographic Royalty Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
|
|
||||
U.S. and Canada |
|
$ |
5,725 |
|
71 |
% |
$ |
6,064 |
|
70 |
% |
$ |
19,534 |
|
73 |
% |
$ |
19,724 |
|
72 |
% |
|
Asia |
|
|
996 |
|
12 |
% |
|
887 |
|
10 |
% |
|
2,801 |
|
10 |
% |
|
2,692 |
|
10 |
% |
|
Latin America |
|
|
557 |
|
7 |
% |
|
700 |
|
8 |
% |
|
1,710 |
|
6 |
% |
|
2,143 |
|
8 |
% |
|
United Kingdom and Europe |
|
|
170 |
|
2 |
% |
|
532 |
|
6 |
% |
|
681 |
|
3 |
% |
|
1,158 |
|
4 |
% |
|
All others |
|
|
650 |
|
8 |
% |
|
523 |
|
6 |
% |
|
2,084 |
|
8 |
% |
|
1,714 |
|
6 |
% |
|
Total Royalty Revenues |
|
$ |
8,098 |
|
100 |
% |
$ |
8,706 |
|
100 |
% |
$ |
26,810 |
|
100 |
% |
$ |
27,431 |
|
100 |
% |
|
U.S. and Canada
Our largest licensees in the U.S. generally are Target and Kohl’s, which together contributed 55% and 60% of our consolidated revenues for the Third Quarter and the Nine Months, respectively. In Canada, we are transitioning from Target Canada to Sears Canada for our Cherokee and Liz Lange brands.
Target currently has approximately 1,800 stores in the United States. Retail sales of Cherokee branded products at Target in the U.S. were slightly higher in the Third Quarter at approximately $259 million, up from $257 million in the third quarter of last year. Target pays royalty revenues to us based on a percentage of its sales of Cherokee branded products pursuant to our restated license agreement with Target. The restated license agreement is structured to provide royalty rate reductions for Target after it has achieved certain levels of retail sales of Cherokee branded products in certain product categories in the U.S. during each fiscal year. Target also pays fixed royalty rates for Target’s sales of Cherokee branded products in the adult merchandise category that are made by Target through its website (target.com) and sales of Cherokee branded products in the category of school uniforms. In addition, Target pays a fixed percentage of net sales of its products bearing the Liz Lange brand in the U.S.
Under the current terms of the restated license agreement with Target, the minimum annual guaranteed royalty for Target is $10.5 million and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum annual guaranteed royalty of $0.8 million).
Royalty revenues from our Cherokee brand at Target, excluding sales of Cherokee branded products in Canada and Cherokee branded products sold in the school uniforms category, were $3.5 million and $12.5 million in the Third Quarter and Nine Months, respectively, which accounted for 41%, and 47%, respectively, of our consolidated revenues for such periods. Royalty revenues from our Cherokee brand at Target, excluding sales of Cherokee branded products in Canada and Cherokee branded products sold in the school uniforms category, were $3.5 million and $12.5 million for the third quarter and nine months of last year, respectively, which accounted for 40%, and 46%, respectively, of our consolidated revenues for such periods.
In September 2015, Target informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S., which expires at the end of its current term on January 31, 2017. The restated license agreement with Target, including the existing royalty obligations, will remain in effect and continue to generate revenues to us in Fiscal 2016 and Fiscal 2017 through its expiration. If Target were to reduce its sales of Cherokee branded products prior to expiration of its license, even if Target continues to pay the minimum annual royalty of $10.5 million required under the restated license agreement with Target, any increased revenues we may receive from other licensees may not be sufficient to offset such a reduction in royalty revenues from Target.
25
Kohl’s. Kohl’s currently has approximately 1,200 stores in the United States. Retail sales of Hawk or Tony Hawk branded products at Kohl’s totaled $26.5 million and $67.7 million in the Third Quarter and Nine Months, respectively, compared to $33.9 million and $87.7 million in the third quarter and first nine months of last year, respectively.
Because retail sales did not exceed the contractual minimum guarantees, royalty revenues from our Hawk brand at Kohl’s remained flat between periods at $1.2 million and $3.6 million in the Third Quarter and Nine Months respectively, which accounted for 14% and 13% of our consolidated revenues for such periods, respectively.
United Kingdom and Europe
We have a number of licensees with rights to our brands in various European countries. One of our more significant European licensees is Argos, a subsidiary of Home Retail Group plc, which launched a broad assortment of Cherokee lifestyle products online, in catalogs and in more than 750 Argos stores across the United Kingdom and Ireland in late July 2015. Revenues from Argos licensees began during the third quarter of Fiscal 2016.
Latin America, Asia and Others
Other international royalty revenues in the Third Quarter decreased to $2.4 million from $2.6 million in the third quarter of Fiscal 2015, representing a 10.2% decrease. Other international royalty revenues in the Nine Months decreased to $7.3 million from $7.7 million in the first nine months of Fiscal 2015, representing a 5.6% decrease. The decreases were principally due to the strengthening of the U.S. dollar. This total includes licensees for Japan, China, Mexico, South Africa, Peru, Israel, Chile, India, and other territories. In local currencies, the majority of our international licensees had growth in retail sales for the Nine Months.
The majority of our international licensees are required to pay the royalty revenues owed to us in U.S. dollars. As a consequence, any weakening of the U.S. dollar benefits us in that the total royalty revenues reported from our international licensees increases when the dollar weakens against such foreign currencies. Conversely, any strengthening of the U.S. dollar against an international licensee’s foreign currency results in lower royalty revenues from such licensee. As the U.S. dollar strengthened between periods, the estimated cumulative effect on our revenues of changes to applicable foreign currency exchange rates during the Third Quarter and Nine Months in comparison to the third quarter and first nine months of Fiscal 2015 was estimated at an approximate $0.2 million decrease and an approximate $0.6 million decrease, respectively.
Selling, General and Administrative Expenses
The following table sets forth detailed information regarding the components for selling, general and administrative expenses for the three and nine months ended October 31, 2015 and November 1, 2014.
|
|
Three Months |
|
Three Months |
|
Nine Months |
|
Nine Months |
|
||||
|
|
ended October 31, |
|
ended November 1, |
|
ended October 31, |
|
ended November 1, |
|
||||
(amounts in thousands) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Personnel expenses (including salaries, taxes, benefits, consultants and bonus) |
|
$ |
2,332 |
|
$ |
2,530 |
|
$ |
6,796 |
|
$ |
7,757 |
|
Corporate expenses |
|
|
1,271 |
|
|
1,037 |
|
|
3,505 |
|
|
3,077 |
|
M&A expenses/ IP protection |
|
|
557 |
|
|
— |
|
|
691 |
|
|
— |
|
Marketing expenses |
|
|
264 |
|
|
385 |
|
|
1,282 |
|
|
1,376 |
|
Product development expenses |
|
|
212 |
|
|
203 |
|
|
573 |
|
|
691 |
|
Non cash stock compensation |
|
|
664 |
|
|
356 |
|
|
1,607 |
|
|
780 |
|
Depreciation and amortization |
|
|
327 |
|
|
385 |
|
|
955 |
|
|
1,060 |
|
Total selling, general, administrative and amortization expenses |
|
$ |
5,627 |
|
$ |
4,896 |
|
$ |
15,409 |
|
$ |
14,741 |
|
Selling, general and administrative expenses, including amortization of trademarks, were $5.6 million and $15.4 million for the Third Quarter and Nine Month period of Fiscal 2016, respectively, compared to $4.9 million and
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$14.7 million for the third quarter and first nine months of Fiscal 2015, respectively, representing an increase of $0.7 million between periods. The increase in selling, general, and administrative expenses for the quarter and for the nine month period ended October 31, 2015 was due primarily to an increase in professional fees related to the protection of intellectual property, legal and due diligence costs related to the Everyday California and Flip Flop Shop acquisitions and other potential acquisitions, and an increase in stock based compensation.
Interest and Other Income or Expense
Our interest expense for the Third Quarter and Nine Months was $0.2 million and $0.5 million, respectively, compared to $0.2 million and $0.7 million for the third quarter and first nine months of Fiscal 2015, respectively.
Tax Provision
During the Third Quarter and Nine Months, we recorded a tax provision of $0.8 million and $3.9 million, respectively, which equates to an effective tax rate of 34.2% and 35.6%, respectively, compared to a tax provision of $1.3 million and $3.9 million respectively, and an effective tax rate of 35.8% and 32.2%, respectively, recorded for the third quarter and first nine months of last year. The effective tax rate for the Third Quarter differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the benefit of certain tax credits. The effective tax rate for the Nine Months differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the recognition of previously unrecognized tax benefits upon the conclusion of income tax examinations.
Net Income
During the Third Quarter and Nine Months, our net income was $1.5 million and $7.0 million, or $0.17 and $0.79 per diluted share, respectively, compared to $2.3 million and $8.2 million, or $0.27 and $0.96 per diluted share, respectively, for the third quarter and first nine months of last year.
Liquidity and Capital Resources
Cash Flows
On October 31, 2015, we had cash and cash equivalents of $5.7 million, which represented a decrease of $1.9 million from January 31, 2015.
During the Nine Months, cash provided by our operations was $8.8 million, compared to $7.6 million for the first nine months of Fiscal 2015. The increase of $1.2 million during the Nine Months was primarily due to the changes in: (i) reversal of uncertain tax liabilities, of which there were none in the Nine Months, as compared to an increase of $0.7 million in the first nine months of Fiscal 2015 (ii) accounts receivable, which increased by $0.6 million in the Nine Months, as compared to an increase of $2.3 million in the same period in the prior year, which was primarily due to an increase in royalty revenues from the Hawk and Tony Hawk brands in Fiscal 2015; and (iii) accrued compensation, which decreased by $0.9 million in the Nine Months as compared to an increase of $0.6 million in the first nine months of last year, which was primarily attributable to accruals for vesting of stock awards in the prior year as well as variances in bonus accruals.
Cash used by investing activities during the Nine Months was $13.3 million, which consisted of capital expenditures of property and equipment and trademark registration and renewal costs, as well as acquisitions of intangible assets relating to Everyday California and Flip Flop Shops. In comparison, during the first nine months of Fiscal 2015, cash used by investing activities was $0.6 million, which consisted of capital expenditures of property and equipment and trademark registration and renewal costs.
Cash provided by financing activities was $2.6 million during the Nine Months, which consisted of proceeds of $6 million, from a new term loan under our amended JP Morgan credit agreement for the Flip Flop Shops acquisition, exercise of stock options of $1.9 million and excess tax benefit from share-based payment arrangements of $0.3 million,
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partially offset by principal payments of $5.5 million on our outstanding term loans under our credit agreement with JP Morgan. In comparison, during the first nine months of Fiscal 2015, cash used in financing activities was $5.7 million, which consisted of principal payments of $5.2 million for the term loan with JP Morgan and dividend payments of $0.8 million, partially offset by proceeds from exercise of stock options of $0.3 million.
Uses of Liquidity
Our cash requirements over the next twelve months are primarily to fund our operations and working capital, to make payments of principal and interest under our credit facility with JPMorgan, at our discretion and subject to the terms of the credit facility, to repurchase shares of our common stock or pay dividends as determined by our board of directors (the “Board of Directors”), and, to a lesser extent, to fund capital expenditures. As of October 31, 2015, we had approximately $26 million in principal amount of outstanding indebtedness owed under our credit facility with JPMorgan, all of which is due in March 2017. We may seek to refinance all or a portion of this indebtedness before its maturity date. Any such refinancing would depend on the capital markets and our financial condition at the time, which could affect our ability to obtain attractive refinance terms when desired, or at all. The declaration and payment of any future dividends or repurchases of our common stock are subject to negative covenants contained in our credit facility and, assuming the satisfaction or waiver by JPMorgan of such covenants, would be made solely at the discretion of our Board of Directors and would be dependent upon our financial condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant by our Board of Directors. Additionally, should an established and marketable brand or similar equity property become available on favorable terms, we would consider using our liquidity to fund such an acquisition opportunity, subject to obtaining any consent required under our JPMorgan credit agreement.
Sources of Liquidity
We expect our primary sources of liquidity to be cash flow generated from operations, cash and cash equivalents currently on hand, and up to $2 million of funds made available to us pursuant to the revolving line of credit issued by JPMorgan under our credit agreement. We believe our cash flow from operations, together with our cash and cash equivalents currently on hand and access to funds pursuant to the revolving line of credit, will be sufficient to meet our working capital, capital expenditure and other commitments and otherwise support our operations for the next twelve months.
In September 2015, Target informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S., which expires at the end of its current term on January 31, 2017. The restated license agreement with Target, including the existing royalty obligations, will remain in effect and continue to generate revenues to us in Fiscal 2016 and Fiscal 2017 through its expiration. If Target reduces its sales of Cherokee branded products prior to the expiration of the restated license agreement, even if Target continues to pay the minimum annual royalty of $10.5 million required under the restated license agreement, any increased revenues we may receive from other licensees may not be sufficient to offset such a reduction in royalty revenues from Target. Further, replacing the royalty payments received from Target under the restated license agreement will be a significant challenge, and we might not be successful in doing so. If we are not successful in replacing the Target royalty payments with equal or greater payments from other licensees, the termination of this license agreement on January 31, 2017 could have an adverse effect upon our liquidity in the long term.
We cannot predict our revenues and cash flow that will be generated from operations in future periods, and our revenues and cash flows could be materially lower than we expect. If our revenues and cash flows are lower than we anticipate, or if our expenses are higher than we anticipate, then we may not have sufficient cash available to fund our planned operations and we could fall out of compliance with the terms of our credit agreement with JPMorgan or our other contractual commitments. In that case, we may need to take steps to reduce expenditures by scaling back operations and reducing staff related to these activities or seek funds from other sources, which may not be available when needed, on acceptable or at all. See “Risk Factors” in Item 1A of Part II of this report.
As of October 31, 2015, we were not the guarantor of any other material third-party obligations and did not have any irrevocable repurchase obligations.
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Seasonality
We have agreed to certain contractual royalty rate reductions with our two most significant licensees, Target and Kohl’s, for sales of certain Cherokee branded products and Hawk and Tony Hawk branded products in various product categories in the U.S. in each fiscal year, which apply for future sales during the applicable fiscal year as certain sales volume thresholds are achieved. Historically, this has caused us to record our highest revenues and profits in our first quarter and our lowest revenues and profits in our fourth quarter. However, such historical patterns and seasonal trends may vary significantly in future periods, depending upon retail sales volumes achieved in each quarter by Target and Kohl’s, the revenues we receive from Target, Kohl’s and our other licensees that may or may not be subject to reduced royalty rates based upon cumulative sales, and the terms of any new license agreements.
Inflation and Changing Prices
The rate of inflation over the past several years has not had a material effect on our revenues and profits. Since most of our future revenues will be based upon a percentage of sales by our licensees of products bearing our owned or represented trademarks, we do not anticipate that short term future inflation will have a material impact, positive or negative, on future financial results.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates and foreign currency exchange rates. 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 sheets and do not represent a material interest rate risk to us. In relation to our credit facility with JPMorgan, a 100 basis point increase in the interest rate would have had an immaterial impact on interest expense for the quarter and nine months ended October 31, 2015.
Foreign Currency
We conduct business in various parts of the world. As most of our international licensees are required to pay the royalty revenues owed to us in U.S. dollars, we are exposed to fluctuations in the exchange rates of the foreign currencies in countries in which our licensees do business when they are converted to the U.S. dollar, and significant fluctuations in exchange rates could materially impact our results of operations and cash flow. For the Nine Months, revenues from international licensing activities comprised 28% of our total consolidated revenues. A hypothetical 10% strengthening of the U.S. dollar relative to the foreign currencies of countries where our licensees operate would have negatively affected our revenues by approximately $0.8 million for the Nine Months, which represents 3% of our total consolidated revenues reported for the period. Such change is not considered to represent a material effect on our results of operations or cash flow. This compares to a projected negative effect on our revenues of approximately $1.1 million for Fiscal 2015, also representing 3% of our total consolidated revenues for the period, assuming the same hypothetical 10% strengthening of the U.S. dollar relative to the foreign currencies of countries where our licensees operate. Also, as the U.S. dollar strengthened between periods, the estimated cumulative effect on our total consolidated revenues of
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changes to applicable foreign currency exchange rates during the Third Quarter in comparison to the third quarter of Fiscal 2015 was an approximate $0.2 million decrease.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of October 31, 2015.
Changes in Internal Control over Financial Reporting.
During our most recent fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that could harm our business. We are not currently aware of any such legal proceedings or claims to which we or our wholly owned subsidiaries are a party that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
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The occurrence of any of the risks and uncertainties and other factors described below and elsewhere in this report, our annual report on Form 10-K for our most recently completed fiscal year and the other documents we file with the SEC could have a material adverse effect on our business, financial condition, results of operations and share price and could also cause our future business, financial condition and results of operations to differ materially from our historical results and the results contemplated by any forward-looking statements we may make herein, in any other document we file with the SEC, or in any press release or other written or oral statement we may make. You should carefully consider all of these risks and the other information in this report and the other documents we filed with the SEC before making any investment decision with respect to our common stock. The risks described below and elsewhere in this report are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our financial condition and business operations.
Our business is subject to intense competition.
Royalties paid to us under our licensing agreements are generally based on a percentage of our licensees’ net sales of licensed products. Additionally, franchisees of our Flip Flop Shops brand pay us a percentage of their net sales. Merchandise bearing our Cherokee, Carole Little, Sideout, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk and Everyday California brands, all of which are manufactured and sold by both domestic and international wholesalers and retail licensees, as well as merchandise sold by Flip Flop Shops retail shops, are subject to extensive competition by numerous domestic and foreign companies. Such competitors with respect to the Cherokee brand include Polo Ralph Lauren, Tommy Hilfiger, Liz Claiborne, and private label brands (developed by retailers) such as Faded Glory, Arizona, Merona, and Route 66. Factors that shape the competitive environment include quality of garment construction and design, brand name, style and color selection, price, fashion and other trends, avenue of purchase (including in stores and online), and the manufacturer’s ability to respond quickly to the retailer on a national basis. In recognition of what we believe is an increasing trend towards consolidation of retailers and what appears to be a de-emphasis by retailers on the manufacture of private label merchandise, our business plan in the United States focuses on creating strategic alliances with major retailers for their sale of products bearing our brands through the licensing of our trademarks directly to retailers and, to a lesser extent and with respect to Flip Flop Shops, entering into franchise relationships with Flip Flop Shops retail store owners. Therefore, our degree of success is dependent on the strength of our brands, consumer acceptance of and desire for our brands, and our licensees’ ability to design, manufacture and sell products bearing our brands and to respond to ever-changing consumer demands. Failures with respect to any of these factors could have a material adverse effect on our business prospects, financial condition, results of operations and liquidity. We cannot control the level of consumer acceptance of our brands and changing preferences and trends may lead customers to purchase other products. Further, we cannot control the level of resources that our licensees or franchisees commit to supporting our brands, and our licensees may choose to support other brands to the detriment of our brands because our license agreements generally do not prevent our licensees from licensing from our competitors. In addition, we compete with other companies owning established trademarks, which have entered into, and could continue to enter into, similar arrangements with retailers in the U.S. and internationally, including with our existing retail partners, thereby competing with us for consumer attention and limited floor and rack space in the same stores in which our branded products are sold.
We are subject to risks related to the retail business that are applicable to our licensees and franchisees.
There are numerous risks and other factors applicable to the businesses of retailers (including our licensees and franchisees) that can impact the sale of products that bear our brands. Any decline in sales by one or more of our licensees or franchisees could adversely affect our revenues.
Factors that may adversely affect our licensees and franchisees and their sales of products bearing our brands include the following, among others: (i) weather, environmental or other conditions that may impact consumer shopping activity in retail stores; (ii) consumer preferences regarding fashion trends and styles, which can be region-dependent and subject to rapid and significant fluctuations; (iii) consumer preferences regarding where to shop; (iv) the growth of online shopping and the ability of our licensees and franchisees to market and sell our branded products through these avenues; (v) changes in the availability or cost of capital in light of the financial condition and capital requirements of
32
our licensees and franchisees; (vi) shifts in the seasonality of shopping patterns; (vii) declining retail prices; (viii) labor strikes or other interruptions that impact supply chains and transport vendors, such as the labor strikes impacting ports in California and the Pacific Northwest and products that move through these channels; (ix) the impact of excess retail capacity; (x) changes in the cost of accepting various payment methods and changes in the rate of utilization of these payment methods; (xi) material acquisitions or dispositions; (xii) investments in new business strategies; (xiii) the success or failure of significant new business ventures or technologies; (xiv) actions taken or omitted to be taken by legislative, regulatory, judicial and other governmental authorities and officials; (xv) security breaches; (xvi) natural disasters, the outbreak of war, acts of terrorism or other significant national or international events; and (xvii) the other risks discussed in this Item 1A.
We rely on the accuracy of our licensees’ and franchisees’ retail sales reports for reporting and collecting our revenues, and if these reports are untimely or incorrect, our revenues could be delayed or inaccurately reported.
Most of our revenues are generated from retailers who license our brands for manufacture and sale of products bearing our brands in their stores and on their websites. In addition, we have a number of franchise agreements with franchisees of the Flip Flop Shops brand. Under our existing agreements, these licensees and franchisees pay us fees based in part on the retail value of products sold. We rely on our licensees and franchisees to accurately report the retail sales in collecting our license and franchise fees, preparing our financial reports, projections and budgets, and directing our sales and marketing efforts. All of our license and franchise agreements permit us to audit our licensees and franchisees. If any of our licensee or franchisee reports understate the retail sales of products they sell, we may not collect and recognize revenues to which we are entitled, or may endure significant expense to obtain compliance.
Our business is dependent on the success of our Direct to Retail licensing model.
In Direct to Retail licensing, we grant retailers a license to use our trademarks on certain categories of merchandise. In many cases, the licensee is responsible for designing and manufacturing the merchandise, although we typically collaborate with our licensees’ product development staff and merchandisers on design direction, packaging, marketing, and other aspects pertaining to products bearing our trademarks. Over the past two decades, the Direct to Retail licensing model has become more widely accepted by many retailers worldwide, and our business plan is largely based on the continued success of this model with our current licensees and with new retailers we may solicit to license our brands in new territories and additional product categories as we seek to expand our business. Although we believe there are increasing trends towards consolidation of retailers and de-emphasis on the manufacture of private label merchandise, which would support the growth of our Direct to Retail licensing model, this belief may turn out to be wrong. If our current or potential future retail licensees do not perceive our Direct to Retail licensing model to be advantageous to them, then they may move away from this model and instead embrace alternatives, such as purchasing from wholesalers or manufacturing private label products. Such a change in perception could occur for a variety of reasons, including reasons based on retailers’ beliefs or expectations that do not turn out to be accurate.
Our business is largely dependent on royalties from Target, which has notified us that it will not renew its current relationship with us.
Royalty revenues from our Cherokee brand at Target Corporation (“Target”) accounted for greater than 40% of our consolidated revenues during the first nine months of Fiscal 2016 and each of Fiscal 2015, Fiscal 2014, and Fiscal 2013. On September 3, 2015, Target orally informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S., which expires at the end of its current term on January 31, 2017. Target confirmed the non-renewal in writing on September 4, 2015. The restated license agreement with Target, including the existing royalty obligations, will remain in effect and continue to generate revenues to us in Fiscal 2016 and Fiscal 2017 through its expiration. The Cherokee branded products in the school uniforms category will expire at the end of its current term on January 31, 2018, and Target will continue to pay the minimum guarantee through that period. If Target were to reduce its sales of Cherokee branded products prior to expiration of its license, even if Target continues to pay the minimum annual royalty of $10.5 million required under the restated license agreement with Target, any increased revenues we may receive from other licensees or franchisees may not be sufficient to offset such a reduction in royalty revenues from Target. Replacing the royalty payments received from Target will be a significant challenge, and we might not be successful in doing so. If we are not successful in replacing the Target royalty payments with equal or greater payments
33
from other partners, the termination of this license agreement, which currently extends through January 31, 2017 could have an adverse effect upon our revenues and cash flow.
In addition, in September 2012 we expanded our relationship with Target as a result of our assumption of an additional license agreement with Target for the Liz Lange brand, which we assumed in connection with our acquisition of assets related to this brand. We acquired the Liz Lange brand in part based upon our expectation that revenues from Target for this brand would grow in future periods, although such revenue growth may never occur.
As a result of our reliance on Target at least through Fiscal 2017, our continued success is dependent on various factors affecting Target’s business, including, for example, perceptions of Target by consumers in the United States. For example, we believe that sales of Cherokee branded products at Target in the United States after the fourth quarter of Fiscal 2014 were adversely impacted following Target’s announcement of unauthorized access to payment card data in U.S. stores.
Revenues from our Hawk and Tony Hawk brands depend on Kohl’s.
In January 2014, we acquired the Hawk and Tony Hawk brands. Concurrently with this acquisition, we entered into a retail license agreement with Kohl’s Illinois, Inc. (“Kohl’s”), pursuant to which Kohl’s is granted the exclusive right to sell Tony Hawk and Hawk-branded apparel and related products in the United States. We agreed to this exclusive license in part based upon our expectation that revenues from Kohl’s for such brands will grow in future periods, although this expectation may turn out to be wrong and such revenue growth may never occur beyond the $4.8 million minimum annual royalty guaranteed under the license agreement. In April 2015, we entered into an agreement to license the Hawk and Tony Hawk brands with Sports Direct in the United Kingdom, but we do not expect to generate any material revenue from this license in Fiscal 2016.
The failure of our licensees or franchisees to sell products bearing our brands, to pay us royalties for such products or to renew their license or franchise agreements with us could result in a decline in our results of operations.
Our revenues are dependent on royalty payments made to us under our license and franchise agreements. Although the license agreements for our brands in many cases provide for guaranteed minimum royalty payments to us, the failure of our licensees or franchisees to satisfy their obligations under their agreements with us, their decision to not renew their agreements with us or their inability to grow or maintain their businesses could cause our revenues to suffer. Further, while we are substantially dependent on our relationships with Target and Kohl’s and expect to continue to be at least through Fiscal 2017 when our agreement with Target for the Cherokee brand will expire, the concurrent failure by several of our other material licensees or franchisees to meet their financial obligations to us or to renew their respective license or franchise agreements could materially and adversely impact our results of operation and our financial condition.
Our franchise business exposes us to numerous risks.
In connection with our acquisition of the Flip Flop Shops brand in October 2015, we acquired, and became the franchisor under, a number of franchise agreements with franchisees of this brand. Many of these franchisees maintain one or more Flip Flop Shops retail stores located across the globe, including in the U.S., Canada, the Caribbean, the Middle East and South Africa. This new Flip Flop Shops franchise business exposes us to a variety of risks, including, among others, that: (i) we may not be able to find capable and experienced franchisees who can implement the Flip Flop Shops brand concept and strategies we believe are necessary for the future growth of this brand or produce merchandise and operate stores in a manner consistent with our standards and requirements, which could limit our revenues from this brand and diminish the image and reputation of this brand and our other brands; (ii) even if we are able to attract capable franchise owners, these franchisees may not be able to open new Flip Flop Shops retail stores in a timely manner, or manage and maintain them once opened, if they cannot secure desirable site locations, obtain adequate financing, construct and develop new store locations without delays and attract qualified operating personnel, which could slow the growth of this brand and reduce our franchise revenues; (iii) the third party brands that are sold at Flip Flop Shops stores could decline in popularity or decide to stop selling their merchandise at some or all of the Flip Flop Shops store locations, which could cause sales at these stores to decline; (iv) neighborhood or economic conditions or other
34
demographic patterns where existing or new Flip Flop Shops stores are located could decline or otherwise change in a negative way, which could result in reduced sales by these store locations; and (v) our franchise business is subject to complex and varying franchise laws and regulations imposed by the U.S. federal, state and foreign jurisdictions in which we operate, and we may need to devote significant costs and resources in order to learn and comply with these laws and regulations.
Our business may be negatively impacted by general economic conditions.
Our performance is subject to worldwide economic conditions and the corresponding impact on levels of consumer spending, which may affect our licensees’ and franchisees’ retail sales. It is difficult to predict future levels of consumer spending and any such predictions are inherently uncertain. Many factors affect the level of consumer spending in the apparel industries, including, among others, prevailing economic conditions, levels of employment, salaries and wage rates, energy costs, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. Further, the worldwide apparel industry is heavily influenced by general economic cycles. Purchases of apparel, footwear and accessories tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income typically declines. As a result, during periods of economic uncertainty, slowdown or recession, the risks associated with our business are generally more acute and we may not be able to maintain or increase our revenue. In addition to decreased consumer spending generally, these periods may be accompanied by decreased demand for, or additional downward pricing pressure on, the products carrying our brands. Accordingly, any prolonged economic slowdown, a lengthy or severe recession or any other negative trend in either the U.S. or the global economy is likely to have a material adverse effect on our results of operations, financial condition and business prospects.
We are subject to additional risks associated with our international licensees and franchisees.
We franchise our Flip Flop Shops brand and market and license our other brands outside the United States. Many of our licensees and franchisees are located outside the United States. As a key component of our business strategy, we intend to expand our international sales as well as the support we provide our international licensees and franchisees. During the first nine months of Fiscal 2016, greater than 25% of our revenues were derived from our international licensees. We face numerous risks in doing business outside the United States, including: (i) unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements; (ii) tariffs, trade protection measures, import or export licensing requirements, trade embargos, and other trade barriers; (iii) difficulties in attracting and retaining qualified personnel to manage foreign licensees and franchisees; (iv) competition from foreign companies; (v) longer accounts receivable collection cycles and difficulties in collecting accounts receivable; (vi) less effective and less predictable protection and enforcement of our intellectual property; (vii) changes in the political or economic condition of a specific country or region, particularly in emerging markets; (viii) potentially adverse tax consequences; and (ix) cultural differences in the conduct of business. Any one or more of such factors could cause our future international sales to decline or could cause us to fail to execute on our business strategy involving international expansion. In addition, our business practices in international markets are subject to the requirements of the Foreign Corrupt Practices Act, any violation of which could subject us to significant fines, criminal sanctions and other penalties.
Additionally, and because the majority of our international revenue is denominated in U.S. dollars, fluctuations in the value of the U.S. dollar relative to the foreign currencies of our international licensees’ or franchisees’ operations may negatively impact our royalty revenues. The main foreign currencies we encounter in our operations are the Mexican Peso, the EURO, the Great British Pound, the South African Rand, the Japanese Yen, the Chinese Yuan, and the Canadian Dollar. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.
Our business and the success of our products could be harmed if we are unable to maintain the strength of our brands.
Our success to date has been due in large part to the strength of our brands. If we are unable to timely and appropriately respond to changing consumer demand, the strength of our brands may be impaired. Even if we react
35
appropriately to changes in consumer preferences, consumers may consider one or more of our brands to be outdated or associate one or more of our brands with styles that are no longer popular. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales and losses. Our business may be similarly affected in the future.
We are dependent on our intellectual property, and we may not be able to successfully protect our rights or that we may become involved in costly legal proceedings regarding our intellectual property.
We hold various trademarks for our brands, including Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Everyday California, Flip Flop Shops, Sideout and Carole Little and others in connection with apparel, footwear, home and accessories. These trademarks are vital to the success and future growth of our business. These trademarks are registered with the United States Patent and Trademark Office and corresponding government agencies in numerous other countries and we also hold trademark applications for these brands in a number of other countries, although the laws of many countries may not protect our intellectual property rights to the same extent as the laws of the United States. These actions taken by us to establish and protect our trademarks and other proprietary rights might not prevent imitation of our products, infringement of our intellectual property rights by unauthorized parties or other challenges to our intellectual property ownership, or prevent the loss of licensing or franchise revenue or other damages caused thereby. If any of these events occurs, our business prospects, financial condition, results of operations and liquidity could be materially harmed.
In the future, we may be required to assert infringement claims against third parties, and one or more parties may assert infringement claims against us. Any resulting litigation could result in significant expense and divert the efforts of our management personnel whether or not such litigation is determined in our favor. Further, if any adverse ruling in any such matter occurs, any resulting limitations in our ability to market or license our brands could have a material adverse effect on our business, financial condition and results of operations.
We may become involved in other litigation and administrative proceedings that may materially affect us.
From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including commercial, employment, class action, whistleblower and other litigation and claims, as well as governmental and other regulatory investigations, audits and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, the results of any of these actions or legal costs associated with these actions could have a material adverse effect on our business, results of operations or financial condition.
We are dependent on our key management personnel.
Our success is highly dependent upon the continued services of our key executives and employees, including, Henry Stupp, our Chief Executive Officer and a member of our Board or Directors, Howard Siegel, our President and Chief Operating Officer, Jason Boling, our Chief Financial Officer, and Brian Curin, the President of our subsidiary FFS Holdings, LLC. We have a limited number of employees and Mr. Stupp’s and our other executives’ leadership and experience in the apparel licensing industry and Mr. Curin’s expertise in the franchising industry is important to the successful implementation of our business and marketing strategy. We do not carry key person life insurance covering any of our executives or other employees. The loss of the services of Mr. Stupp or our other key executives or employees could have a material adverse effect on our business prospects, financial condition, results of operations and liquidity.
We may encounter difficulties in connection with acquisitions or other strategic transactions and we may not realize the expected benefits from these transactions.
We regularly evaluate opportunities to acquire or represent new brands. During the past three years, we have consummated five acquisitions: our acquisition of the Liz Lange brands in September 2012; our acquisition of various rights to the Cherokee brand in the category of school uniforms in January 2013; our acquisition of the Hawk and Tony Hawk signature apparel brands in January 2014; our acquisition of the Everyday California Lifestyle brand in May 2015; and our acquisition of the Flip Flop Shops brand in October 2015. In addition, in February 2013, we commenced a
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relationship with Alessandra Ambrosio to market and represent her brand àle by alessandra. We expect to continue to consider opportunities to acquire or make investments in other brands or to engage in other strategic transactions that could enhance our portfolio of products and services or expand the breadth of our markets. Our history of acquiring and integrating acquisitions is limited, and we may not be successful in realizing the expected benefits from an acquisition. Future success depends, in part, upon our ability to manage an expanded portfolio of brands, which could pose substantial challenges for management. Acquisitions and other strategic transactions can involve numerous risks and potential difficulties, including, among others: (i) problems assimilating the brands; (ii) significant future charges relating the amortization of intangible assets; (iii) problems maintaining and enforcing standards, procedures, controls, policies and information systems; (iv) difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel, and inability to retain key employees of any acquired businesses; (v) unanticipated costs associated with an acquisition, including accounting and legal charges, capital expenditures, and transaction expenses; (vi) diversion of management’s attention from our core business or our existing brand portfolio; (vii) adverse effects on existing business relationships with our partners; and (viii) risks associated with entering markets or new types of business arrangements in which we have no or limited prior experience, such as, for instance, our acquisition of franchise agreements and entry into the franchising business upon our acquisition of the Flip Flop Shops brand in October 2015. Accordingly, our recent acquisitions as well as any future transactions that we pursue could have a material adverse effect on our business, results of operations, financial condition and prospects.
In addition, future acquisitions may also require us to obtain additional equity or debt financing, which may not be available when needed, on favorable terms or at all. If we finance future acquisitions or other strategic transactions by issuing equity or convertible debt securities, our existing stockholders would be diluted. If we finance future acquisitions or other strategic transactions by issuing debt, we may become over-leveraged and our ability to operate our business may be restricted by the agreements governing the debt. In addition, we may experience or incur contingent liabilities, amortization expenses or write-offs of goodwill or trademarks in connection with such transactions. Any of these effects could harm our operating results or financial condition.
We have incurred a significant amount of indebtedness to pay the cash consideration for our recent acquisitions. Our level of indebtedness, and restrictions under such indebtedness, could adversely affect our operations and liquidity.
In order to fund our acquisition of the Liz Lange brands, we entered into a credit facility with JPMorgan on September 4, 2012. We have increased the size of our credit facility on January 31, 2013 in connection with our acquisition of rights related to the Cherokee brand in the school uniforms category, on January 10, 2014 in connection with our acquisition of various assets related to the Hawk and Tony Hawk signature apparel brands, and on October 13, 2015 in connection with our acquisition of the Flip Flop Shops brand and associated assets.
Approximately $26 million in principal amount was outstanding under our credit facility as of October 31, 2015, and is evidenced by (i) three term notes, which were issued on January 31, 2013, January 10, 2014 and October 13, 2015 in the principal amounts of $16.6 million, $19 million and $6 million, respectively, and (ii) a revolving line of credit, pursuant to which we may borrow up to $2 million in principal.
Our indebtedness under the credit facility could adversely affect our operations and liquidity, by, among other things: making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because we may not have sufficient cash flows to make our scheduled debt payments; causing us to use a larger portion of our cash flow to fund interest and principal payments, thereby reducing the availability of cash to fund working capital, product development and capital expenditures and other business activities; making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities or other strategic transactions, and to react to changes in market or industry conditions; and limiting our ability to borrow additional monies in the future to fund working capital, product development, capital expenditures, brand acquisitions and other general corporate purposes. All of our outstanding indebtedness owed under the credit facility is due in March 2017. We may seek to refinance all or a portion of this indebtedness before its maturity date. Any such refinancing would depend on the capital markets and our financial condition at the time, which could affect our ability to obtain attractive refinance terms when desired, or at all.
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In addition, the terms of our indebtedness contain various restrictions and covenants regarding the operation of our business, including covenants that require us to obtain JPMorgan’s consent before we can: (i) incur additional indebtedness, (ii) consummate acquisitions, mergers or consolidations, (iii) issue any equity securities other than pursuant to our employee equity incentive plans or programs, or (iv) repurchase or redeem any outstanding shares of common stock or pay dividends or other distributions, other than stock dividends, to our stockholders. The credit facility also imposes financial covenants, including a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 and a limitation of our “senior funded debt ratio” to not exceed a ratio equal to (i) 2.25 to 1.00 through our fiscal quarter ending January 31, 2016, and (ii) 2.00 to 1.00 thereafter. Further, as collateral for the credit facility, we granted a security interest in favor of JPMorgan in all of our assets (including trademarks), and our indebtedness is guaranteed by Cherokee’s wholly owned subsidiaries.
Target’s election in September 2015 to not renew the restated license agreement for the Cherokee brand in the U.S. triggered an event of default under the credit facility. However, we and JPMorgan immediately entered into a forbearance agreement pursuant to which JPMorgan agreed that it would not exercise any of its rights or remedies under the credit facility solely with respect to this event of default through October 12, 2015, and on October 13, 2015, JPMorgan waived this event of default in connection with certain amendments to the credit facility. In the event of a default under the credit facility that is not forborne, cured or waived in accordance with the terms of the credit facility, JPMorgan has the right to terminate its obligations under the credit facility, accelerate the payment on any unpaid balance of the credit facility and exercise its other rights including foreclosing on our assets under the related security agreements. Our failure to comply with the terms of our indebtedness could result in a material adverse effect to our business, including our financial condition and our liquidity.
Our future capital needs may be uncertain and we may need to raise additional funds in the future, and such funds may not be available when needed, on acceptable terms or at all.
Our capital requirements in future periods may be uncertain and could depend upon many factors, including: acceptance of, and demand for, our brands; the costs of developing new brands; the extent to which we invest in new brands; the number and timing of our acquisitions and other strategic transactions; the costs associated with our expansion, if any; and the costs of litigation and enforcement activities to defend our trademarks. In the future, we may need to raise additional funds, and such funds may not be available when needed, on favorable terms, or at all. Furthermore, if we issue equity or convertible debt securities to raise additional funds, our existing stockholders would experience dilution and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders, and if we incur additional debt to raise funds, we may become over-leveraged and our ability to operate our business may be restricted by the agreements governing the debt. Moreover, we may incur substantial costs in pursuing future capital transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. If we cannot raise funds when needed and on acceptable terms, or at all, we may not be able to develop or enhance our products and services, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations, and financial condition.
Our strategic and marketing initiatives may not be successful.
In recent periods, we have invested significant funds and management time in furtherance of our global strategic and marketing initiatives, which are designed to strengthen our brands, assist our licensees in generating increased sales of products bearing our brands and build value for our stockholders over the long term. We expect to continue and, in some cases, expand such initiatives in future periods. While we are hopeful that our efforts in executing on these initiatives will expand our business and build stockholder value over the long term, we may not be successful in doing so and such initiatives may not result in the intended benefits. Any failure by us to execute on our strategic initiatives, or the failure of such initiatives to cause our revenues to grow, could have a materially adverse impact on our operating results and financial performance.
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We may not pay dividends regularly or at all in the future.
The determination regarding the payment of dividends is subject to the discretion of our board of directors (“Board of Directors”), and therefore we may not pay any dividends in future periods, whether or not we generate sufficient cash to do so. In addition, pursuant to our credit facility with JPMorgan, we are prohibited from paying dividends without JPMorgan’s consent and in the event that we would be in violation of our covenant regarding our “fixed charge coverage ratio” after giving effect to any proposed dividend or are otherwise then in default of such agreement.
We must successfully maintain and/or upgrade our information technology systems.
We rely on various information technology systems, including our Enterprise Resource Planning system, to manage our operations, which subjects us to inherent costs and risks associated with maintaining, upgrading, replacing and changing these systems, including impairment of our information technology, potential disruption of our internal control systems, substantial capital expenditures, demands on management time and other risks of delays or difficulties in upgrading existing systems, transitioning to new systems or integrating new systems into our current systems.
Our business and operations would suffer in the event of cybersecurity and other system failures.
Despite the implementation of security measures, our internal computer systems and those of our licensees and franchisees are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Although we have not experienced any such cybersecurity or system failure, accident or breach to date, some of our licensees, including Target, have experienced such events. If such an event were to occur to our internal systems, it could result in a material disruption of our operations, substantial costs to rectify or correct the failure, if possible, loss of or damage to our data or applications, inappropriate disclosure of confidential or proprietary information, or the incurrence of other material liabilities. If additional such events were to occur to our licensees’ or franchisees’ systems, our royalty revenues could be reduced or disrupted due to decreased sales of our branded products as a result of reputational damage or diversion of costs and other resources from selling products bearing our brands. Any of these events could severely harm our business, results of operations and prospects.
The trading price of our stock may be volatile and shares of our common stock are relatively illiquid.
The trading price of our common stock is likely to be subject to fluctuations as a result of various factors impacting our business, including (i) our financial results, (ii) announcements by us, our retail partners or our competitors, as applicable, regarding or affecting the retail environment either domestically or internationally, the reputation of our brands, our existing or new license agreements and brand representations or acquisitions, strategic alliances or other transactions, (iii) recruitment or departure of key personnel, (iv) changes in the estimates of our financial results or changes in the recommendations of any securities analysts that elect to follow our common stock, and (v) market conditions in the retail industry and the economy as a whole.
Further, as a result of our relatively small public float, our common stock may be less liquid than the common stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common shares may have a greater impact on the trading price for our common stock than would be the case if our public float was larger.
Our Certificate of Incorporation allows our Board of Directors to issue up to 1,000,000 shares of “blank check” preferred stock.
Our Certificate of Incorporation allows our Board of Directors to issue up to 1,000,000 shares of “blank check” preferred stock, without action by our stockholders. Subject to the approval of JPMorgan pursuant to our credit facility, such shares of preferred stock may be issued on terms determined by our Board of Directors in its discretion, and may have rights, privileges and preferences superior to those of our common stock. For instance, such shares of preferred stock could have liquidation rights that are senior to the liquidation preference applicable to our common stock, could have superior voting or conversion rights, which could adversely affect the voting power of the holders of our common
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stock, or could have other terms that negatively impact the voting control or other rights of our common stockholders. Additionally, the ownership interest of holders of our common stock would be diluted following the issuance of any shares of our preferred stock. Further, the preferred stock could be utilized, under certain circumstances, as a method for discouraging, delaying or preventing a change in control of our Company.
Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.
We are subject to income taxes in the United States, California and certain other state jurisdictions. Our effective income tax rates could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, or by changes in the valuation of our deferred tax assets and liabilities. Significant judgment is required in determining our provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We may come under audit by tax authorities, where these authorities may evaluate and disagree with our judgments regarding our tax provisions. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could materially affect our income tax provision, net income or cash flows in the period or periods for which that determination is made. In addition, changes in tax rules may adversely affect our future reported financial results or the way we conduct our business.
We previously identified material weaknesses in our internal control over financial reporting which could, if repeated, result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management has previously identified material weaknesses in our internal control over financial reporting as of the end of Fiscal 2013 and during the first three quarters of Fiscal 2014. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. During Fiscal 2014, we developed and implemented a remediation plan that was designed to address these material weaknesses. While we believe our remedial measures have sufficiently addressed our previously identified material weaknesses, it is possible that additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future. In this case, our consolidated financial statements may be more likely to contain material misstatements, in which case we could be required to restate our financial results. Any such restatement of our financial results could lead to substantial additional costs for accounting and legal fees and litigation and could cause our stock price to decline.
In addition, while we believe we have strengthened our controls and procedures, our current controls and procedures may not be adequate in future periods to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements. If we fail to maintain the adequacy of our internal controls in accordance with applicable standards, we may be unable to conclude in future periods that our internal control over financial reporting is effective in ensuring the reliability of our financial reports. If we cannot produce reliable financial reports, our business and financial condition could be harmed, investors could lose confidence in our reported financial information and the market price of our common stock could decline significantly. Moreover, our reputation with lenders, retailers, investors, securities analysts and others may be adversely affected.
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Compliance with changing securities laws, regulations and financial reporting standards will increase our costs and pose challenges for our management team.
Existing, changing and new laws, regulations, listing requirements and other standards relating to corporate governance and public disclosure create uncertainty for public companies and significantly increase the costs and risks associated with operating as a publicly traded company in the United States. Our management team devotes significant time and financial resources to comply with existing and evolving standards for public companies. Further, the SEC has passed, promulgated and proposed new rules on a variety of subjects including, for example, with respect to the preparation and filing of financial statements. The existence of new and proposed laws and regulations relating to our financial reporting or that impose additional or more stringent compliance requirements on us could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and qualified executive officers. In addition, in order to comply with existing and any new or additional requirements, we may need to add additional accounting staff, engage consultants or change our internal practices, standards and policies, which could significantly increase our costs and divert the time and attention of our management team away from revenue generating activities. Notwithstanding our efforts, it is possible in future periods that our financial and other public reporting may not be considered timely, accurate or complete. If reporting delays or errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC, which could adversely affect our financial results or result in a loss of investor confidence in the reliability of our financial information and other public disclosures, and could materially and adversely affect the market price of our common stock.
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(a) |
Exhibits |
Exhibit |
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Description of Exhibit |
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2.1(1)* |
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Agreement and Plan of Merger, dated October 13, 2015, by and among Cherokee Inc., FFS Merger Sub LLC, FFS Holdings, LLC and Darin Kraetsch, solely in his capacity as the representative of the FFS Holdings, LLC equityholders. |
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10.1* |
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Third Amendment to Credit Agreement and Waiver, dated as of October 13, 2015, by and between Cherokee Inc. and JPMorgan Chase Bank, N.A. |
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10.2* |
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Third Amendment to Term Note, dated as of October 13, 2015, by and between Cherokee Inc. and JPMorgan Chase Bank, N.A. |
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10.3* |
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Second Amendment to Line of Credit Note, dated as of September 4, 2015, by and between Cherokee Inc. and JPMorgan Chase Bank, N.A. |
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10.4* |
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First Amendment to Term Note B-1, dated as of October 13, 2015, by and between Cherokee Inc. and JPMorgan Chase Bank, N.A. |
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10.5* |
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Term Note B-2, dated as of October 13, 2015, executed by Cherokee Inc. in favor of JPMorgan Chase Bank, N.A. |
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31.1* |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1** |
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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. |
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32.2** |
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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. |
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101* |
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The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at October 31, 2015 and January 31, 2015; (ii) Consolidated Statement of Operations for the three and nine months ended October 31, 2015 and November 1, 2014; (iii) Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended October 31, 2015; (iv) Consolidated Statements of Cash Flows for the nine months ended October 31, 2015 and November 1, 2014; and (v) Notes to Condensed Consolidated Financial Statements, tagged as block of text. |
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Filed herewith. |
**Furnished herewith.
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(1)Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedules or exhibits to the Securities and Exchange Commission upon request.
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: December 10, 2015
CHEROKEE INC. |
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By: |
/s/ Henry Stupp |
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Henry Stupp |
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Chief Executive Officer |
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(Principal Executive Officer) |
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By: |
/s/ Jason Boling |
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Jason Boling |
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Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
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EXHIBIT 2.1
among:
CHEROKEE INC.,
FFS MERGER SUB LLC,
FFS HOLDINGS, LLC, and
THE SELLERS’ REPRESENTATIVE
Dated as of October 13, 2015
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this “Agreement”), effective October 13, 2015 (the “Effective Date”), is made by and among FFS Holdings, LLC, a Delaware limited liability company (the “Company”), Darin Kraetsch, solely in his capacity as the Sellers’ Representative (“Sellers’ Representative”), Cherokee Inc., a Delaware corporation, or its designee (“Buyer”), and FFS Merger Sub LLC, a Delaware limited liability company and wholly owned subsidiary of Buyer (“Merger Sub”). Except as otherwise indicated, capitalized terms have the meanings set forth in ARTICLE VII.
BACKGROUND
A.Buyer, Merger Sub and the Company desire to enter into a transaction by which Buyer will acquire all of the issued and outstanding equity interests of the Company by means of a merger (the “Merger”) of Merger Sub with and into the Company in accordance with this Agreement and the Delaware Limited Liability Company Act (the “DE LLC Act”). Upon consummation of the Merger, Merger Sub will cease to exist and the Company will become the surviving entity and a wholly owned subsidiary of Buyer.
B.This Agreement has been approved by the board of directors of Buyer and the respective managers of Merger Sub and the Company.
C.This Agreement has been approved by the requisite vote of the members of Merger Sub and the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
(a)Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, Merger Sub will be merged with and into the Company. Following the Effective Time, the separate corporate existence of Merger Sub will cease, and the Company will continue as the surviving limited liability company in the Merger (sometimes referred to as the “Surviving Company”), will be wholly owned by Buyer and will succeed to and assume all of the rights and obligations of Merger Sub and the Company in accordance with the DE LLC Act. The Merger and the other transactions contemplated by this Agreement and the other agreements referred to in this Agreement are collectively referred to as the “Acquisition”.
(b)Concurrently with the execution of this Agreement or as soon as practicable following thereof, the Company will cause a certificate of merger in substantially the form attached hereto as Exhibit A (the “Certificate of Merger”) to be executed and filed with the Secretary of State
of the State of Delaware as provided in the DE LLC Act. The Merger will become effective at the time when the Certificate of Merger has been so filed or at any later time agreed to in writing by the Company and Buyer and specified in the Certificate of Merger (the “Effective Time”).
(c)At the Effective Time, (i) the Certificate of Formation of the Surviving Company will be the Certificate of Formation of the Surviving Company until changed or amended as provided in such document or by any applicable Legal Requirement, and (ii) the limited liability company agreement of the Surviving Company will be amended and restated as attached hereto as Exhibit B (the “A&R Operating Agreement”).
(d)The managers of the Surviving Company immediately after the Effective Time will be as set forth in the A&R Operating Agreement, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be, in accordance with any applicable Legal Requirement, and the Certificate of Formation of the Surviving Company and the A&R Operating Agreement.
(e)The officers of the Surviving Company immediately after the Effective Time will be the individuals set forth on Schedule 1.1(e), until the earlier of their resignation or removal or until their respective successors are duly elected or appointed and qualified, as the case may be, in accordance with any applicable Legal Requirements, and the Certificate of Formation of the Surviving Company and the A&R Operating Agreement.
(f)At the Effective Time, each Member will have the right to receive an amount in cash equal to the amount of capital contribution of such Member (the “Capital Contribution Amount”) in accordance with the schedule of consideration attached hereto as Schedule 1.2(b).
(g)At the Effective Time, each unit of Interest of the Company outstanding immediately prior to the Effective Time will no longer be outstanding and will automatically be cancelled and extinguished and will be converted into the right to receive an amount in cash equal to the quotient obtained by dividing (x) the Adjusted Closing Payment Amount by (y) the total number of units of Interest outstanding as of the Effective Time (the “Per Unit Participation Amount”), without interest, and each Member will cease to have any rights with respect thereto, except the right to receive its allocable portion of the Purchase Price in accordance with Section 1.2.
(h)At the Effective Time, each issued and outstanding unit of membership interest of Merger Sub will be converted into and become one fully paid and non-assessable unit of membership interest of the Surviving Company and such membership interest will be held by Buyer.
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(a) Purchase Price. Subject to any post-Closing adjustments made pursuant to Section 1.3 (d) below, the total consideration for the Acquisition (the “Purchase Price”) will be TWELVE MILLION DOLLARS AND 00/100 ($12,000,000.00) payable as follows:
(i)ELEVEN MILLION FOUR HUNDRED THOUSAND DOLLARS AND 00/100 ($11,400,000.00), minus the transaction expenses set forth on Schedule 1.2(a) (the “Transaction Expenses”) and plus or minus any adjustments made pursuant to Section 1.3(c) below (the “Closing Payment”) shall be paid to the Sellers’ Representative, as representative of the Members, in cash at Closing, it being understood that the Closing Payment shall be allocated and paid to the Members, subject to Section 1.2(c) below, in accordance with the schedule of consideration attached hereto as Schedule 1.2(b);
(ii)SIX HUNDRED THOUSAND DOLLARS AND 00/100 ($600,000.00) (the “Escrowed Funds”) shall be deposited by Merger Sub with the Escrow Agent and administrated in accordance with the provisions of the Escrow Agreement. The parties agree that the Escrowed Funds (less any prior disbursements made pursuant to this Agreement and the Escrow Agreement and excluding any amounts that are subject to a Claim made pursuant to this Agreement) shall be held by the Escrow Agent until the third business day following the one (1) year anniversary of the Effective Date. The Parties agree that, to the extent not paid directly by the Members, the Required Financials Expense shall be paid out of the Escrowed Funds as contemplated by Section 4.7 hereof.
(b) Schedule of Consideration. Schedule 1.2(b) sets forth the following information: (i) the name and address of each Member; (ii) the number and class of units of Interest held by each Member; (iii) the total number of units of Interest outstanding as of the Effective Time (the “Outstanding Units”) and the Per Unit Participation Amount; (iv) the Capital Contribution Amount with respect to each Member; and (v) the dollar amount and percentage of the Closing Payment payable to each Member.
(c)Payment of Consideration. Prior to the Effective Date, Sellers’ Representative will have delivered to Members holding in the aggregate 100% of the Interests, at such Member’s respective addresses set forth on Schedule 1.2(b), a Letter of Transmittal. Upon surrender of any certificate or instrument which immediately prior to the Effective Time represented Outstanding Units together with a duly executed Letter of Transmittal to Buyer and Sellers’ Representative, the Member will be entitled to receive in exchange therefor that portion of the Closing Payment that such Member has the right to receive pursuant to the provisions of this Section 1.2.
1.3Purchase Price Adjustments.
(a) Closing Statement. As soon as practical prior to the Closing, the Company shall have prepared in good faith and delivered to Buyer an estimated balance sheet (including supporting schedules with respect thereto) and a calculation of the Company’s estimated Working Capital as of the Effective Date (the “Estimated Closing Working Capital” and together with the estimated balance
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sheet, the “Preliminary Closing Statement”) which, subject to the adjustments described in Schedule 1.3(a), shall have been determined in accordance with the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Interim Financials and the example statement of the Estimated Closing Working Capital attached as Exhibit C hereto. Promptly following the Effective Date, but in no event later than sixty (60) days following the Effective Date, Buyer (with the assistance and cooperation of Sellers’ Representative) shall prepare and deliver a balance sheet and calculation of the Company’s Working Capital as of the Effective Date (the “Closing Statement”). If Buyer shall fail to prepare and deliver the Closing Statement within such sixty (60) day period, the Preliminary Closing Statement shall be deemed the Closing Statement. The Closing Statement shall be prepared in a manner consistent with the preparation of the Preliminary Closing Statement.
(b)Disagreements as to Closing Statement. The value and amounts reflected on the Closing Statement shall be binding upon Buyer and the Members unless the Sellers’ Representative gives written notice of disagreement with any of said values or amounts within thirty (30) days after receipt by Sellers’ Representative of the Closing Statement specifying in reasonable detail, insofar as possible, the nature and extent of such disagreement. If Buyer and Sellers’ Representative are unable to resolve any such disagreement within thirty (30) days after Buyer gives notice thereof, the disagreement shall be referred for final determination to a recognized national or regional accounting firm selected by Buyers and reasonably acceptable to Sellers’ Representative or, in the absence of agreement, by a recognized national or regional accounting firm agreed to by the accounting firm designated by Sellers’ Representative’s and Buyer’s primary accountants. Buyer and Sellers’ Representative may submit to such accounting firm any facts which they deem relevant to the determination, and the determination of such accounting firm shall be conclusive, non-appealable and binding upon Buyer and Members for all purposes. Buyer and Sellers’ Representative agree that judgment may be entered upon the determination of such accounting firm in any court having jurisdiction over the party against which such determination is to be enforced. Buyer and Sellers’ Representative agree that the procedures established by this Section 1.3(b) shall constitute the exclusive procedures for resolving disagreements as to the values reflected on the Closing Statement.
(c)Adjustments to Purchase Price. If (i) the Estimated Closing Working Capital is greater than $50,000.00 (the “Target Working Capital Amount”), then the difference shall be considered an increase to the Purchase Price and shall be paid to the Members at Closing. If the Estimated Closing Working Capital is less than the Target Working Capital Amount, then the difference shall be considered a decrease to the Purchase Price and shall be deducted from the payments made by Buyer to the Members at Closing.
(d)Post-Closing Adjustments. In the event the final Closing Statement accepted or deemed accepted by Sellers’ Representative pursuant to Section 1.3(b) above reflects Working Capital as of the Effective Date (the “Final Closing Working Capital”) that is less than the Target Working Capital Amount, then the entire difference shall be deemed a post-Closing decrease to the Purchase Price (reflecting any adjustment pursuant to Section 1.3(c)) that shall be paid by Sellers’ Representative and Buyer promptly instructing the Escrow Agent to distribute to the Buyer, pursuant to the Escrow Agreement, the amount of such difference. In the event the Final Closing Working
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Capital is greater than the Target Working Capital Amount, then the entire difference shall be deemed a post-Closing increase to the Purchase Price (reflecting any adjustment pursuant to Section 1.3(c)) that shall be paid by Buyer to Sellers’ Representative. Any payments made pursuant to this Section 1.3(d) shall be made within five (5) business days following the date on which the Closing Statement is accepted by or becomes binding upon Sellers and Buyer in accordance with Section 1.3(b) above.
(e) Payment of Certain Expenses. The Sellers’ Representative and Buyer shall each pay the fees and disbursements of their respective internal and independent accountants and other personnel incurred in the initial preparation, review and final determination of the Closing Statement. The fees and disbursements of the accounting firm to which any disagreement is referred pursuant to Section 1.3(b) hereof shall be paid by Sellers’ Representative, on the one hand, and by Buyer, on the other hand, based upon the percentage that the amount actually contested but not awarded to Sellers’ Representative or Buyer, respectively, bears to the aggregate amount actually contested by Sellers’ Representative and Buyer.
1.4Closing. The consummation of the Acquisition, including the payment of the Purchase Price as set forth in Section 1.2 (the “Closing”), will take place at the offices of counsel to Buyer at 1900 Avenue of the Stars, 7th Floor, Los Angeles, California 90067 on the Effective Date.
(a)Company and Sellers’ Representative Closing Deliveries. At the Closing, Sellers’ Representative and the Company will deliver to Buyer:
(i)(1) copies of the Certificate of Formation and Operating Agreement (or corresponding organizational documents) of the Company and each of its Subsidiaries as then in effect, (2) copies of any resolutions adopted by the managers of the Company and the Members authorizing the transactions contemplated by this Agreement, and (3) a certificate of good standing of the Company issued by the Secretary of State of Delaware and each state listed on Schedule 2.1, dated within five (5) days of the Effective Date, certified in each case as of the Effective Date by the President and Chief Executive Officer of the Company as being correct and complete;
(ii)any Required Consents;
(iii)written resignations effective as of the Effective Date of the managers and officers of the Company;
(iv)the Escrow Agreement, duly executed by Sellers’ Representative;
(v)an executed estoppel certificate in favor of Buyer duly executed by each of the master franchisees of the Company;
(vi)an employment agreement (the “Employment Agreement”), duly executed by Brian Curin, in form and substance acceptable to Buyer;
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(viii)a letter of transmittal (each, a “Letter of Transmittal”) in the form attached hereto as Exhibit D duly executed by Members holding in the aggregate 100% of the Interests, which such Letter of Transmittal confirms the appointment of the Sellers’ Representative and the indemnification obligations of such Member under the Agreement and effects the surrender of such Member’s right, title and interest in such Member’s Interests in exchange for the applicable portion of the Purchase Price pursuant to Schedule 1.2(b);
(ix)a side letter duly executed by Flip Flop Shops, Inc. (“FFS Member”) in form and substance acceptable to Buyer whereby, among other things, FFS Member agrees to change its corporate name so that it does not contain the words “Flip Flop,” “FFS”, or any trademark of the Company;
(x)a termination and release agreement in the form attached hereto as Exhibit E duly executed by each party set forth on Schedule 1.5(a)(xi) whereby, among other things, such party terminates the Related Party Contract such party is party to and releases all claims such party has against the Company and Buyer arising from such Related Party Contract; and
(xi)disks containing a copy of the entirety of the Data Rooms (the “Data Room Disks”).
(b)Buyer Closing Deliveries. At the Closing, Buyer will make the following deliveries:
(i)Buyer will deliver to Sellers’ Representative, by wire transfer of immediately available federal funds to an account designated by Sellers’ Representative, the Closing Payment for distribution to the Members as set forth in Schedule 1.2(b);
(ii)Buyer will deliver the Escrow Agreement, duly executed by Buyer; and
(iii)Buyer will deliver the Transaction Expenses as set forth in Schedule 1.2(a); provided, however, for the avoidance of doubt, the Transaction Expenses are being paid by Buyer at the direction and for the convenience of the Company, the Members and the Sellers’ Representative and all such Transaction Expenses shall remain the responsibility of the Members and the Sellers’ Representative.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth in the disclosure schedule delivered by the Company to Buyer on the date of this Agreement (the “Disclosure Schedule”), the Company represents and warrants to Buyer and Merger Sub that the statements contained in this ARTICLE II are true, correct and complete as of the date of this Agreement (or, if made as of a specified date, as of such date). Unless the context clearly
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indicates otherwise, all references to the Company contained in ARTICLE II or III of this Agreement will be read to include the Company together with each of its Subsidiaries.
2.1Organization. The Company is limited liability company duly organized, validly existing and in good standing under the laws of Delaware. The Company has the necessary limited liability company power and authority to conduct its business in the manner in which its business is currently being conducted. The Company is qualified to do business in each jurisdiction listed on Schedule 2.1, and the Company is qualified and in good standing under the laws of each state of the United States and each foreign jurisdiction where the nature of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect on the Company. There is no pending or threatened proceeding for the dissolution or liquidation of the Company.
2.2Organizational Documents. The Company has delivered to Buyer or its counsel complete and accurate copies of the following: (a) the Certificate of Formation and Operating Agreement of the Company, as currently in effect, and attached hereto as Schedule 2.2--1, and (b) minutes and other records of the meetings and other proceedings of the managers and members of the Company. The Company is not in violation of any provisions of its Certificate of Formation or Operating Agreement. Except as set forth on Schedule 2.2--2, the minute books of the Company, all of which have been made available to Buyer, are complete and correct in all material respects and have been maintained in accordance with sound business practices. The minute books of the Company contain accurate and complete records of all meetings, and actions taken by written consent of, the members, the managers and any committees of the managers of the Company, and no meeting, or action taken by written consent, of any such members, managers or committees have been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of those books and records will be in the possession of the Company.
(a)Schedule 2.3(a) sets forth the name of each subsidiary of the Company (each a “Subsidiary” and collectively, the “Subsidiaries”), and the jurisdiction of its incorporation or organization. Except for the Subsidiaries, the Company does not own, directly or indirectly, any outstanding voting securities of or other ownership interests in any other Person. Except for the Company’s ownership interests in the Subsidiaries and the Company Intellectual Property, the Company does not own any other assets or have any Liabilities.
(b)Each Subsidiary is duly organized, validly existing and in good standing under the laws of the state or jurisdiction of its organization. Each Subsidiary has the necessary corporate power and authority to conduct its business in the manner in which its business is currently being conducted.
(c)Except as set forth in Schedule 2.3(c), (i) neither the Company nor any Subsidiary, is a general or limited partner of any general partnership, limited partnership or other entity, and (ii) the Company is the owner of all of the outstanding capital stock of each Subsidiary, and (iii) there are no options, warrants, convertible securities, subscription rights, conversion rights,
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exchange rights or other Contracts to which the Company or any Subsidiary is a party relating to the issuance or sale of any securities or other interests in any Subsidiary and no other Person has the right to acquire any equity interest in any Subsidiary.
2.4Authority. The Company has the limited liability company power and authority to enter into and to perform its obligations under this Agreement and each of the agreements, certificates and documents required to be delivered by the Company pursuant to the terms of this Agreement (the “Company Ancillary Agreements”). The execution, delivery and performance of the Agreement and the Company Ancillary Agreements, and the consummation of the transactions contemplated by the Agreement and the Company Ancillary Agreements, have been duly authorized and approved by all necessary limited liability company action on the part of the Company and the Members. The Agreement and each of the Company Ancillary Agreements constitute the legal, valid and binding obligation of the Company, enforceable against the Company accordance with their terms, subject to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies. The indemnification obligations of the Members in Article V of this Agreement constitute the legal, valid and binding obligation of the Members, enforceable against the Members accordance with their terms, subject to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies.
2.5Non-Contravention; Required Consents. The execution and delivery of the Agreement and the Company Ancillary Agreements by the Company and the consummation of the transactions contemplated by the Agreement and the Company Ancillary Agreements by the Company will not (a) conflict with or violate any provisions of the Certificate of Formation or Operating Agreement of the Company; (b) violate any Legal Requirement applicable to the Company; or (c) result in a breach, cause a default under, or give rise to a right of payment under or the right to terminate, amend, modify, abandon or accelerate obligations under, any Contract listed on Schedule 2.5(a). Except as set forth on Schedule 2.5 (the “Required Consents”), the Company is not required to make any filing with or give any notice to, or to obtain any consent from, any Person in connection with the execution and delivery of this Agreement or the Company Ancillary Agreements by the Company or the Company’s consummation of the transactions contemplated by this Agreement or the Company Ancillary Agreements.
(a)Schedule 2.6(a) sets forth a complete and correct list of (i) the Interests and the record owners thereof, which membership interests represent all of the authorized, issued and outstanding membership interests of the Company. There are no outstanding Options. All of the issued and outstanding membership interests of the Company are duly authorized, validly issued, fully paid and nonassessable.
(b)No Interests were issued in violation of any preemptive rights. No preemptive rights, rights of first refusal or similar rights exist with respect to the Interests, and no such rights arise
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or become exercisable by virtue of or in connection with the transactions contemplated by this Agreement. There are no outstanding appreciation rights, profit participation or other similar rights with respect to securities of the Company. There are no voting agreements or voting trusts with respect to any of the Interests.
(c) There are no obligations, contingent or otherwise, of the Company to repurchase, redeem or otherwise acquire any outstanding membership interests of the Company or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. There are no accrued and unpaid dividends with respect to any outstanding membership interests of the Company.
(a)The Company has delivered to Buyer complete copies of (i) audited consolidated balance sheets of the Company as of December 31, 2012, 2013 and 2014, and the related statements of income and cash flows for the years then ended (the audited consolidated balance sheet of the Company as of December 31, 2014 and the related statements of income and cash flows for the year then ended are collectively, the “Audited Financials”), and (ii) an unaudited consolidated balance sheet of the Company as of June 30, 2015, and the related unaudited statements of income and cash flows for the period then ended (the “Interim Financials” and, collectively with the Audited Financials, the “Financial Statements”). The Financial Statements (i) were prepared from the books and records of the Company in accordance with GAAP consistently applied in all material respects (except for the lack of notes with respect to the Interim Financials which notes, if included, would not disclose material liabilities or obligations of the Company which are not either reflected in such financial statements, elsewhere in this Agreement or in the Disclosure Schedules), and (ii) present fairly the financial position of the Company as of the date thereof and the results of its operations for the periods then ended (with respect to the unaudited interim statements, subject to normal year-end adjustments and any other adjustments expressly described therein or in the Disclosure Schedules) in all material respects.
(b)The Company has maintained, and the Company maintains, internal accounting controls which provide assurance that (i) transactions are executed with management’s authorization; (ii) transactions are recorded as necessary to prepare the financial statements of the Company and to maintain accountability for the Company’s assets; (iii) prevent or timely detect unauthorized acquisition, use or disposition of the assets of the Company, (iv) reports of the Company assets are compared with existing assets at regular intervals; and (v) accounts, notes and other receivables and inventory are recorded, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis.
(c)The Company has no debts, liabilities, commitments and obligations of any kind, whether fixed, contingent or absolute, matured or unmatured, liquidated or unliquidated, accrued or not accrued, asserted or not asserted, known or unknown, determined, determinable or otherwise, whenever or however arising (including, whether arising out of any contract or tort based on negligence or strict liability) and whether or not the same would be required by GAAP to be reflected
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in financial statements or disclosed in the notes thereto (“Liabilities”), except (a) those which are adequately reflected or reserved against in the Financial Statements, and (b) those which have been incurred in the ordinary course of business consistent with past practice since June 30, 2015 and which are not, individually or in the aggregate, material in amount.
2.8Absence of Changes. Except as contemplated by this Agreement or as disclosed in the Interim Financials, since December 31, 2014, the Company has operated only in the ordinary and normal course, consistent with past practice, and since December 31, 2014, the Company has not:
(a)suffered any Material Adverse Change;
(b)experienced any loss, theft, damage or destruction to any of the Company’s assets having an aggregate value in excess of $20,000;
(c)incurred any Liabilities other than in the ordinary course consistent with past practices;
(d)other than in the ordinary course consistent with past practices, permitted or allowed any of its properties or assets to be mortgaged, pledged or subject to any Encumbrance, except liens for current taxes not yet due;
(e)entered into any Contract that would constitute a Material Contract;
(f)caused or experienced the acceleration, termination, modification, or cancellation of any Contract providing for payments by or to the Company in the aggregate of $20,000, or received notice that any other Person intends to accelerate, terminate, modify or cancel any Material Contract;
(g)made or committed to any capital expenditure (or series of related capital expenditures) for additions to property, plant or equipment except for expenditures made in the ordinary course of business consistent with past practices and involving no more than $20,000 individually or $100,000 in the aggregate;
(h)other than in the ordinary course of business consistent with past practices, made any capital investment in, loan to or acquisition of the securities, equity interests or assets of, any other Person other than the Company Subsidiaries;
(i)other than in the ordinary course of business consistent with past practices, incurred any indebtedness for borrowed money in excess of $20,000 individually or $100,000 in the aggregate, or assumed or guaranteed any indebtedness or other obligation of any third party;
(j)delayed or postponed the payment of accounts payable or other Liabilities outside the ordinary course of business consistent with past practices;
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(k)released, compromised or cancelled any debts owed to it or claims against others exceeding $20,000 in the aggregate;
(l)granted any increase in compensation of employees (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, retirement or other plan or commitment), or any increase in any such compensation payable or to become payable to any officer or employee except in the ordinary course of business consistent with past practice;
(m)instituted any employee welfare, equity compensation plan, profit-sharing, retirement or similar plan or arrangement with, any of the officers, directors or employees of the Company;
(n)changed its accounting methods, principles or practices;
(o)merged with or into, consolidated with, or sold a substantial part of its assets to, any other Person;
(p)disposed of or permitted to lapse any patent, trademark or copyright right or any patent, trademark, or copyright registration or application or license; or
(q)entered into any Contract to take any of the actions referred to in clauses (c) through (p).
2.9Material Vendors. Schedule 2.9 sets forth a list of all suppliers and vendors of the Company to whom the Company made payments aggregating $200,000 or more for the fiscal year ended December 31, 2014. Schedule 2.9 shows, with respect to each, the name and dollar volume involved. No such supplier or vendor has terminated or adversely modified its business relationships with the Company, or given notice to the Company of (i) the termination or substantial reduction of such vendor’s business relationship with the Company, or (ii) such vendor’s intention to terminate or substantially reduce the extent of such vendor’s business relationship with the Company. The Company does not purchase products or merchandise for resale purposes and all products or merchandise sold by a franchisee of the Company are purchased by such franchisee from the supplier or vendor of such products or merchandise. The Company has no obligation or Liability (in the form of a guaranty or otherwise) with respect to the purchase of products or merchandise by any franchisee (including any sub-franchisee thereof) of the Company.
2.10Accounts Receivable and Inventory. All accounts receivable of the Company (i) represent sales actually made in the ordinary course of business consistent with past practice, (ii) are not subject to any valid set-off or counterclaim other than for return policies to which the Company is subject in the ordinary course of business consistent with past practice, (iii) do not represent obligations for goods sold on consignment, and (iv) are not the subject of any actions or proceedings brought by or on behalf of the Company. All accounts receivable of the Company reflected on the Financial Statements are fully collectible in the ordinary course of business, after deducting the allowance for doubtful accounts as reflected in the Financial Statements. The reserve for bad debts
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shown on the Interim Balance Sheet or, with respect to accounts receivable arising after the Interim Balance Sheet Date, on the accounting records of the Company have been determined in accordance with GAAP, consistently applied, subject to normal year-end adjustments and the absence of disclosures normally made in footnotes. The Company does not own any inventory in the conduct of its business.
(a)Schedule 2.11(a) contains an accurate and complete list of all of the Company Intellectual Property comprising each name used by the Company in its business, all United States and foreign patents, patent applications, registered trademarks, trademark applications, unregistered trademarks, service marks, trade names, copyrights and copyright applications registered in the name of, or pending on behalf of, the Company, and all written licenses and other rights granted by any third party to the Company with respect to the any of the foregoing. The list included in Schedule 2.11(a), as to each item, shall also include the registration or application number, if appropriate, the goods with which each mark on the list is used, the country or countries in which each patent or mark is registered, applied for or used, and the application date, registration date and renewal date for each such patent or mark, as applicable. The Company Intellectual Property constitutes all of the Intellectual Property Rights necessary for the operation of the business of the Company as presently conducted.
(b)Except as set forth on Schedule 2.11(b), (i) the Company owns and possesses all right, title and interest in and to, or has a valid license to, all of the Company Intellectual Property Rights, the Company Intellectual Property, to the extent owned by the Company, is owned by the Company free and clear of all joint ownership, assignments, licenses, sublicenses, restrictions, liens, security interest and Encumbrances, and none of the Company Intellectual Property Rights have been abandoned; (ii) no claims by any third party contesting the validity, enforceability, use or ownership of any Company Intellectual Property Rights has been made against and notified to the Company, is currently pending or, to the Knowledge of the Company, is threatened, and to the Knowledge of the Company, there is no reasonable basis for any such claim; (iii) neither the Company nor any registered agent thereof has received any written notices of an allegation of any infringement or misappropriation by, or other conflict with, any third party with respect to any Company Intellectual Property Rights, nor has any such Person received any written claims of infringement or misappropriation of or other conflict with any Intellectual Property Rights of any third party; (iv) to the Knowledge of the Company, the Company has not infringed, misappropriated or otherwise violated in any material respect any Intellectual Property Rights of any third party, nor will any infringement, misappropriation or other conflict with respect to the Intellectual Property Rights of such third party occur as a result of the transactions contemplated hereby, or the continued operation of the business of the Company; and (v) to the Knowledge of the Company, no other Person is infringing, misappropriating or otherwise violating, or has infringed, misappropriated or otherwise violated, any of the Company Intellectual Property.
(c)Each registered Company Intellectual Property owned by the Company is and has been in compliance with all material legal requirements, and all filings, payments, and other actions required to be made or taken to maintain such item of registered Company Intellectual Property
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in full force and effect have been made by the applicable deadline. No application for a patent or for a copyright, or trademark registration or any other type of registered Company Intellectual Property filed by or on behalf of the Company and included in the Purchased Assets has been abandoned, allowed to lapse, or rejected. Schedule 2.11(c) accurately identifies and describes each filing, payment, and action that must be made or taken on or before the date that is ninety (90) days after the Effective Date in order to maintain each such item of such registered Company Intellectual Property in full force and effect.
(d)Each Person who is or was an employee or contractor of the Company and who is or was involved in the creation or development of any Company Intellectual Property for the Company either (i) has signed a valid, enforceable agreement containing an assignment of their Intellectual Property Rights to the Company and confidentiality provisions protecting the Company Intellectual Property, or (ii) if no such agreement exists, was an employee of the Company whose work and any resulting Intellectual Property Rights therein constituted work made for hire under the United States Copyright Act of 1976, as amended. No current or former member, manager, officer, director, or employee of the Company has any claim, right (whether or not currently exercisable), or interest to or in any of the Company Intellectual Property.
2.12Title to Assets; Equipment; Real Property.
(a)The Company owns and has good and valid title to, or leases and has a valid leasehold interest in, all tangible assets reflected as being owned by or leased to it in the Financial Statements (except for inventory sold in the ordinary course of business consistent with past practices), free and clear of any Encumbrance (except Permitted Encumbrances). The assets currently owned by and leased to the Company constitute all of the assets and properties used to conduct the Company’s business in the manner in which and to the extent to which such business was conducted during periods reflected in the Financial Statements and is currently being conducted.
(b)The items of equipment and other tangible assets owned by or leased to the Company are adequate for their current uses and are in good condition and repair (ordinary wear and tear excepted). All leases in effect as of the date of this Agreement under which the Company, as lessee, leases items of equipment or other items of personal property are valid, subsisting and in full force and effect, and the Company is not, and, to the Knowledge of the Company, no other party thereto is, in default of any of its obligations under any of such leases.
(c)Schedule 2.12(c) sets forth a list of all real property leases under which the Company is a lessee, sublessee, landlord or sublandlord, or otherwise has an interest under a Contract (the “Leases”). The Company is in compliance with the terms of all Leases, and all such Leases are valid and subsisting and in full force and effect. The Company enjoys peaceful and undisturbed possession under all such Leases. The Company has not agreed to purchase, sell, lease, assign, license or grant to any other Person any right in any real property, except as otherwise contemplated by this Agreement. The Company is not, and, to the Knowledge of the Company, no other party thereto is, in default of any of its obligations under any Lease.
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(d)The Company has never owned and does not currently own any real property.
2.13Related Party Transactions. Except as set forth on Schedule 2.13, no Person who is a manager, member, or officer in the Company, or a member of any such manager’s, member’s or officer’s immediate family: (a) has a direct or indirect financial interest in any contract, agreement, arrangement, commitment or undertaking with the Company, except as an owner of the Company; (b) has any interest in any property, real or personal, tangible or intangible (including any Company Intellectual Property Rights), used in the Company’s business, except for the normal rights of a member; or (c) has a material interest in (i) any Person which purchases from or sells, licenses or furnishes to either of the Company any goods, property, technology or intellectual or other property rights or services or (ii) any Contract to which the Company is a party or by which the Company may be bound (each, a “Related Party Contract”).
(a)Except as set forth in Schedule 2.14(a), neither the Company nor any of its assets are party to or bound by any of the following Contracts (the “Material Contracts”):
(i)any licensing agreement or arrangement, either as licensee or licensor, with respect to any Company Intellectual Property Rights, or any other Contract by which the Company is or will be obligated to pay royalties to others with respect to any Intellectual Property Right;
(ii)any guaranty or suretyship, indemnification or contribution agreement or letter of credit, pledge, bond or similar arrangement given by or running to the account of the Company;
(iii)any Contract relating to the purchase, maintenance or acquisition, or sale or furnishing of goods, products, materials, supplies, merchandise, machinery, equipment, parts or any other property or services, excluding, however, (i) any purchase orders or other customer contracts entered into in the ordinary course of the Company’s business, (ii) supplier or vendor contracts entered into in the ordinary course of business, and (iii) any other Contract made in the ordinary course of business that involves revenues or expenditures equal to or less than $100,000 in the aggregate;
(iv)any Contract obligating the Company (1) to refrain from competing with any business, (2) to refrain from conducting business in any particular jurisdiction, (3) to refrain from conducting any business with certain parties, or (4) that otherwise restrains or prevents the Company from carrying on any lawful business;
(v)any employment or consulting Contract other (i) than “at will” employment Contracts and (ii) Contracts that can be terminated without penalty, liability or premium upon prior notice of ninety (90) days or less;
(vi)any Contract relating to indebtedness for borrowed money;
(vii)any Contract to purchase or sell real property;
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(viii)any Contract relating to the lease of real or personal property;
(ix)any powers of attorney;
(x)any Contract that contains any severance or termination pay Liabilities or obligations
(xi)any Contract granting exclusive rights or licenses;
(xii)any master franchise agreement;
(xiii)any sub-franchise agreement with a franchisee under a master franchise agreement where such franchisee is permitted by the terms of the master franchise agreement to sub-franchise the right to open stores to sub-franchisees;
(xiv)any other Contract that involves either an unperformed commitment in excess of $100,000 but excluding any such Contracts that can be terminated upon prior notice of ninety (90) days’ or less without liability, penalty or premium; or
(xv)any other Contract that is material to the Company and not previously disclosed pursuant to this Section 2.14.
(b)The Company has delivered to Buyer true, correct and complete copies of all written Material Contracts, and brief written descriptions of all oral Material Contracts that are true, correct and complete in all material respects. There are no existing defaults, events of default or, to the Knowledge of the Company, events, occurrences or acts that, with the giving of notice or lapse of time or both, would constitute defaults, and no penalties have been incurred nor are amendments pending, with respect to the Material Contracts.
(c)The Company has not received notice of any plan or intention of any other party to any Material Contract to exercise any right to cancel or terminate any Material Contract. Other than such amendments or changes as may be implemented in the ordinary course of the Company’s business, the Company does not contemplate and the Company has no Knowledge that any other Person currently contemplates, any material amendment or change to any Material Contract.
2.15Legal Proceedings. There are no Legal Proceedings pending, or to the Knowledge of the Company, threatened by or against the Company other than collection actions in the ordinary course of the Company’s business where the amount in controversy does not individually exceed $20,000. The Company is not subject to any judgment, decree, injunction or order of any Governmental Entity. No action or proceeding has been instituted against either the Company or any Member before any Governmental Entity by any Person seeking to restrain or prohibit the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. There is no event or condition of any kind or character pertaining to the business or assets of the Company that is reasonably likely to result in a Legal Proceeding against the Company. To the Knowledge of
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the Company, no investigation or review by any Governmental Entity with respect to the Company is pending or threatened.
2.16Governmental Authorizations; Legal Compliance.
(a)The Company holds the Governmental Authorizations necessary to enable it to conduct its business in the manner in which such business is currently being conducted and to perform all of its obligations under the Contracts to which it is a party. The Company is in compliance with the terms and requirements of such Governmental Authorizations except where any noncompliance would not have a Material Adverse Effect. The Company has not received any written notice or other written communication from any Governmental Entity (a) asserting any violation of or failure to comply with any Legal Requirement of any Governmental Authorization or (b) notifying the Company of the revocation or withdrawal of any Governmental Authorization.
(b)The Company is in compliance in all material respects with all applicable Legal Requirements. The Company has not been cited, fined or otherwise notified of any failure to comply with any applicable Legal Requirement and no Legal Proceeding with respect to any such violation is pending or, to the Actual Knowledge of the Company, threatened. To the Knowledge of the Company, the Company is and has been in compliance with all applicable Franchise Laws in all material respects, including by (i) filing notices and other documents (including FDDs, where applicable) and complying with conditions for exemptions from registration or other filing requirements, prior to the offer or sale of a franchise, (ii) filing on a timely basis all required amendments and renewals of the registrations and exemptions under the Franchise Laws, and (iii) complying with all applicable franchise advertising filing requirements under applicable Franchise Laws and have not offered or sold any franchise in violation of any Franchise Law.
(c)Since its inception, neither the Company nor any of its Affiliates has given or offered to give anything of value to any governmental official, political party or candidate for government office that was illegal to give or offer to give nor has it otherwise taken any action which would constitute a violation of the Foreign Corrupt Practices Act of 1977, as amended, or any similar law.
(a)All Tax Returns required to be filed with any Governmental Entity by the Company have been, or will be, properly and timely filed when due under all applicable laws. The Company has not requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed. All Tax Returns filed by or on behalf of the Company accurately and fairly reflect the Taxes of the Company for the periods covered thereby. The Company has timely paid, withheld or established adequate reserves for all Taxes (whether or not shown on any Tax Return) due or to be due with respect to periods ending on or prior to the Effective Date.
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(b)All foreign, state and local jurisdictions where the Company has filed Tax Returns are set forth on Schedule 2.17(b). The Company is not subject to Tax by, or required to file Tax Returns in, any jurisdiction other than those set forth on Schedule 2.17(b).
(c)There is no Tax deficiency or delinquency asserted or, to the Knowledge of the Company, threatened against the Company and no audit, action or similar Legal Proceeding is pending or, to the Knowledge of the Company, threatened by any Governmental Entity against the Company. No adjustment relating to any Tax Return of the Company has been proposed by any Governmental Entity. The Company has not granted any extension to any Governmental Entity of the limitations period during which any Tax liability may be assessed or collected.
(d)There are no Encumbrances for Taxes upon the assets of the Company, except Encumbrances for current Taxes not yet due and payable.
(a)Set forth in Schedule 2.18(a) is a true, complete and correct list of each “employee benefit plan” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and each other employee profit-sharing, incentive, deferred compensation, welfare, pension, retirement, severance, group insurance, stock option, bonus and other employee benefit plan, arrangement, agreement and practice which relates to employee benefits, whether or not subject to ERISA, sponsored, maintained or contributed to by the Company, or any other corporation or trade or business under common Control with the Company or treated as a single employer with the Company as determined under Sections 414(b), (c), (m) or (o) of the Code (an “ERISA Affiliate”), or under which the Company or any ERISA Affiliate has any current or future obligation or Liability with respect to a present or former officer, employee, agent or consultant of either of the Company or under which any present or former officer, employee, agent or consultant of the Company, or such present or former officer’s, employee’s, agent’s or consultant’s dependents or beneficiaries, have any current or future right to benefits (collectively, the “Employee Plans”).
(b)The Company has delivered or made available to Buyer true, complete and correct copies of (i) each Employee Plan (or, in the case of each unwritten Employee Plan, a description thereof), (ii) all annual reports on Form 5500 filed with the Internal Revenue Service with respect to each Employee Plan (if any such report was required by applicable law), (iii) the most recent summary plan description for each Employee Plan for which such a summary plan description is required by applicable law, and (iv) each trust agreement and insurance contract relating to any Employee Plan, to the extent applicable.
(c)Each Employee Plan has been maintained, operated and administered under its respective terms and in compliance with all Legal Requirements. All reports, notices and other documents required to be filed, or furnished under the Code, ERISA or the terms of the Employee Plans with respect to each Employee Plan have been duly and timely filed or furnished.
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(d)Since their inception, neither the Company nor an ERISA Affiliate has had an obligation to contribute to a “defined benefit plan,” as defined in Section 3(35) of ERISA, a pension plan subject to the minimum funding standards of Section 302 of ERISA or Section 412 of the Code, or a “multiemployer plan,” as defined in Section 3(37) of ERISA (collectively, “Pension Plans”). No other trade or business is, or has been treated, together with the Company or an ERISA Affiliate, as a single employer under Section 414 of the Code or Section 4001 of ERISA and neither the Company nor any ERISA Affiliate has incurred any Liability to or with respect to an Employee Plan (other than with respect to contributions not yet due) or to the Pension Benefit Guaranty Corporation (other than for the payment of premiums not yet due). Neither the Company nor any ERISA Affiliate has incurred or is contingently liable for any withdrawal Liability to any “multiemployer plan” under Section 4021 of ERISA. No Employee Plan has incurred any “accumulated funding deficiency” as defined in Section 412 of the Code and Section 302(a)(2) of ERISA (whether or not waived).
(e)Each Employee Plan intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified, or if not so qualified each such plan may still be amended within the remedial amendment period applicable to such plan to cure any qualification defect to the extent permitted by Legal Requirements, and each trust created thereunder which is intended to be exempt from federal income tax under the provisions of Section 501(a) of the Code has been determined by the Internal Revenue Service to be so exempt and no event has occurred or condition exists that could adversely affect the qualified status of any Employee Plan or the exempt status of any such trust.
(f)There are no actions or claims pending or, to the Knowledge of the Company, threatened, with respect to any Employee Plan (other than routine claims for benefits), and there are no investigations or audits of any Employee Plan by any Governmental Entity currently pending, or to the Knowledge of the Company, threatened and there have been no such investigations or audits that have been concluded that resulted in any liability of the Company or an ERISA Affiliate that has not been fully discharged.
(g)No lien has been filed by any person or entity and no lien exists by operation of law or otherwise on the assets of the Company relating to, or as a result of, the operation or maintenance of any Employee Plan, any Pension Plan or any other similar plan maintained, or contributed to, by the Company or any ERISA Affiliate, and the Company has no Knowledge of the existence of facts or circumstances that would reasonably be expected to result in the imposition of such lien.
(h)No termination, retention, severance or similar benefit will become payable, and no employee of the Company will be entitled to any additional benefits or any acceleration of the time of payment or vesting of any benefits under any Employee Plan or other Contract, as a result of the transactions contemplated by this Agreement.
(i)All employees of the Company may be terminated at will, without notice and without incurring any severance or other Liability to the employee in connection with the termination.
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(j)Except as disclosed in Schedule 2.18(j), all contributions to, and any payments from, the Employee Plans that may have been required to be made under the terms of such plans have been made timely. All contributions to, and payments from, the Employee Plans, except those payments to be made from a trust qualified under Section 401(a) of the Code, for any period ending on the Effective Date that are not yet payable, but will be required to be made, will be properly accrued and reflected in the Closing Balance Sheet.
(k)The group health plans (as defined in Section 4980B(g) of the Code) that benefit employees are in compliance with the continuation coverage requirements of Section 4980B of the Code as such requirements affect the employees of the Company. There are no outstanding, uncorrected violations under COBRA, with respect to any of the Employee Plans, covered employees, or qualified beneficiaries.
2.19Environmental Matters. The Company is in compliance with all applicable Environmental Laws in all material respects. The Company has not received any notice or other communication from a Governmental Entity or any other Person that alleges that the Company is not in compliance with any Environmental Law. To the Actual Knowledge of the Company, the Leases and the existing and prior uses and activities thereon, including the use, maintenance and operation of the Company’s business (and activities related thereto), comply and have complied with all Environmental Laws.
2.20Insurance. Schedule 2.20 sets forth a true, complete and correct summary of all policies of insurance for the Company. All such policies are in full force and effect, and the Company has not received any written notice or other written communication regarding any actual or possible (a) cancellation or invalidation of any insurance policy, (b) refusal of any coverage or rejection of any claim under any insurance policy, or (c) material adjustment in the amount of the premiums payable with respect to any insurance policy. All premiums payable with respect to such policies that are due and payable have been paid and the Company is otherwise in compliance with all conditions and requirements applicable to such policies and coverage thereunder. There is no pending claim (including any workers’ compensation claim) under any insurance policy of the Company.
2.21Labor Relations. (a) There are no labor strikes, disputes, slowdowns, stoppages or lockouts actually pending, or, to the Knowledge of the Company, threatened against or affecting Company, and since the inception of the Company there have been no such actions; (b) the Company is not a party to or bound by any collective bargaining or similar agreement with any labor, organization or work rules or practices agreed to with any labor organization or employee association applicable to employees of the Company; (c) to the Knowledge of the Company, there are no current union organizing activities among the employees of Company; (d) true, correct and complete copies of all written personnel policies, rules or procedures applicable to employees of Company have been delivered to Buyer; (e) the Company is, and has at all times been, in compliance with all applicable Legal Requirements respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health, except where a failure to so comply would not result in a Material Adverse Effect; and (f) excluding any obligations that might arise from the consummation of the transactions contemplated by this Agreement, the Company is in
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compliance with and has no existing liability under the Worker Adjustment and Retraining Notification Act of 1988 (the “WARN Act”) and any similar state or local Legal Requirements.
2.22Franchisee and Related Operations.
(a)Schedule 2.22(a)--1 lists all stores that are branded as “Flip Flop Shops” or are developed or operated pursuant to a franchise agreement, sub-franchise agreement, store development agreement, or any other similar Contract (together, the “Franchise Agreements”) entered into between a franchisee and the Company and for each store, identifies (i) the address of the store, (ii) the name of the franchisee or master franchisee, as applicable, (iii) the term of the Franchise Agreement and any options for extensions of term thereunder, (iv) the ongoing monthly fees payable to Company by franchisee or master franchisee, as applicable, (v) the amount of any initial franchise or master franchise fees or deposits paid or payable by the applicable franchisee or master franchisee, (vi) description of the protected territory (if any) for the franchisee or master franchisee, as applicable, and (vii) any minimum advertising or marketing obligations of the Company. Schedule 2.22(a)--2 lists all stores that are branded as “Flip Flop Shops” and are owned or operated by the Company. The Company does not own or operate, nor has the Company granted a franchise or other right or license to any Person to own or operate, any store that is not branded “Flip Flop Shops”. To the Knowledge of the Company, there are no stores utilizing the “Flip Flop Shops” name or related Intellectual Property Rights that are not subject to a Franchise Agreement.
(b)The Company has made available accurate and complete copies of all of the Leases by the Company as lessor, sublessor or guarantor to a franchisee as lessee or sublessee (the “Franchisee Leases”) and each such Franchisee Lease delivered represents the entire agreement by and between the landlord, the franchisee and the Companies relating to the leasing of the subject location. Schedule 2.22(b) sets forth, with respect to each Franchisee Lease, a complete and accurate summary of the material terms thereof, including without limitation, the address of the franchise, the names of the franchisee, landlord, lessor, lessee, sublessor and sublessee (each as applicable), any guarantor under the Franchisee Lease, the term, base rent, any additional minimum rent or percentage rent, pass-throughs, material use restrictions, and any renewal rights.
(c)Except as set forth on Schedule 2.22(c), there have been no fees received by the Company pursuant to a Franchise Agreement which are currently or which, with the execution of this Agreement, the consummation of the transactions contemplated hereby, the passage of time, or the giving of notice would be subject to a claim of refund by any franchisee.
(d)Each standard form of Franchise Agreement utilized by the Company (the “Standard Form”) in a particular year was attached to the FDD of the Company of such respective year and a copy of each FDD of the Company has been made available to Buyer in the Data Rooms and is included on the Data Room Disks. Attached to Schedule 2.22(d) is the current Standard Form. Other than as set forth on Schedule 2.22(d), (i) the Company has not entered into any Franchise Agreement with any franchisee that is not in the Standard Form as in effect at the time, and (ii) neither any Member nor the Company has made to any franchisee, to any employee or agent of any such franchisee, or to any other Person, any commitment to provide any discounted royalties currently in
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effect. Other than Contracts provided to Buyer on the Data Room Disks, there are no other Contracts with any franchisee.
(e)Set forth on Schedule 2.22(e) is a list of potential franchisees which the Company is currently in negotiations with or the Company reasonably foresees may enter into a Franchise Agreement with the Company in the next twelve (12) months. For the avoidance of doubt, the parties agree and acknowledge that Schedule 2.22(e) is a good faith forecast and not a guarantee of performance or results of the Company.
(f)The Company has not entered into any guaranty or suretyship, indemnification or contribution agreement or letter of credit, pledge, bond or similar arrangement or co-signed any Contract that would obligate the Company for any Liability of any franchisee of the Company. The Company does not have any product warranty obligation or any other actual or potential Liability with respect to any of the products sold by any franchisee. The Company does not directly or indirectly sell any products to consumers, distributors or franchisees.
(g)Set forth on Schedule 2.22(g) is a list of any and all franchisees of the Company whose franchise relationship with the Company has expired or terminated in the three (3) years preceding the Effective Date (each, a “Terminated Franchisee”). There are no Legal Proceedings pending, or to the Knowledge of the Company, threatened by or against the Company with respect to any Terminated Franchisee or any other franchisee of the Company.
(h)Since December 31, 2014, no franchisee of the Company has adversely modified its business relationships with the Company, or given notice to the Company of (i) the termination or substantial decrease of such franchisee’s business relationship with the Company, or (ii) such franchisee’s intention to terminate or substantially decrease the extent of such franchisee’s business relationship with the Company. The Company does not have any intention of terminating or substantially decreasing the Company’s relationship with any franchisee.
(i)Since January 1, 2010, the Company has prepared and maintained FDDs in compliance with applicable Franchise Laws. All FDDs that were used to offer or sell franchises for any franchises that are in effect as of the Effective Date: (i) have contained all information required by the FTC Rule and other Franchise Laws; (ii) have otherwise been prepared and delivered to prospective Franchisees in compliance with the Franchise Laws; (iii) do not contain any statement which is false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein not false or misleading in light of the circumstances under which they are made. Company has retained properly-signed FDD receipts evidencing compliance with the applicable Franchise Laws with respect to all franchises granted since January 1, 2010.
2.23Brokers. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company.
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2.24ACA Compliance. The Company has fewer than fifty (50) ACA Employees and is not (and has not been) required to provide coverage under the Patient Protection and Affordable Care Act. The Company has not incurred liability for any assessable payments with respect to the Employer Shared Responsibility Requirements.
2.25Disclaimer of Other Representations and Warranties. The representations and warranties set forth in this Article II are the only representations and warranties made by the Company with respect to the Company or any other matter relating to the transactions contemplated by this Agreement. Except as specifically set forth in this Agreement, the Company makes no other warranty, express or implied, as to any matter whatsoever relating to the Company or any other matter relating to the transactions contemplated by this Agreement including as to (i) the operation of the business of the Company after the Closing in any manner (ii) the probable success or profitability of the business of the Company after the Closing, or (iii) any information contained in any descriptive memoranda, summary business descriptions or any information, documents or material made available to the Buyer or its Affiliates or representatives, whether orally or in writing, in certain “data rooms,” management presentations, functional “break-out” discussions, responses to questions submitted on behalf of the Buyer or in any other form in expectation of the transactions contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUB
Buyer and Merger Sub represent and warrant to the Company that the statements contained in this ARTICLE III are true, correct and complete as of the Effective Date.
3.1Due Organization. Buyer is a Delaware corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with all requisite corporate power and authority to own its properties and conduct its business as currently conducted. Merger Sub is a Delaware limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with all requisite limited liability company power and authority to own its properties and conduct its business as currently conducted.
3.2Authority; Binding Nature. Buyer and Merger Sub each have the corporate or limited liability company power, respectively, and authority to execute, deliver and perform its obligations under this Agreement and each of the Company Ancillary Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Company Ancillary Agreements to which Buyer or Merger Sub is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of Buyer or Merger Sub, respectively. This Agreement and the Company Ancillary Agreements to which Buyer or Merger Sub is a party have been duly and validly executed by Buyer or Merger Sub and constitute the legal, valid and binding obligations of Buyer or Merger Sub, enforceable against it under its terms, subject to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies.
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3.3Non‑Contravention; Consents.
(a)The execution and delivery of this Agreement and the Company Ancillary Agreements by Buyer and the consummation of the transactions contemplated by this Agreement will not (a) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws (or similar governing documents) of Buyer, (b) violate or cause a violation by Buyer of any Legal Requirement applicable to Buyer; (c) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity; or (d) require any consent, waiver or approval or result in a default (or give rise to any right of termination, cancellation, modification or acceleration) under any of the terms, conditions or provisions of any Contract to which Buyer is a party or by which Buyer or any of its subsidiaries or their respective assets may be bound.
(b)The execution and delivery of this Agreement and the Company Ancillary Agreements by Merger Sub and the consummation of the transactions contemplated by this Agreement will not (a) conflict with or result in any breach of any provision of the Certificate of Formation or Operating Agreement (or similar governing documents) of Merger Sub, (b) violate or cause a violation by Merger Sub of any Legal Requirement applicable to Merger Sub; (c) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity; or (d) require any consent, waiver or approval or result in a default (or give rise to any right of termination, cancellation, modification or acceleration) under any of the terms, conditions or provisions of any Contract to which Merger Sub is a party or by which Merger Sub or any of its subsidiaries or their respective assets may be bound.
3.4Brokers. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer or Merger Sub.
3.5Independent Investigation. The Buyer has conducted its own independent investigation, review and analysis of the business, operations, assets, liabilities, results of operations, financial condition and prospects of the business of the Company as it has deemed appropriate, which investigation, review and analysis was done by the Buyer and its Representatives. The Buyer acknowledges that it and its Representatives have been provided adequate access to the personnel, properties, premises and records of the Company for such purpose. In entering into this Agreement, the Buyer acknowledges that it has relied solely upon the aforementioned investigation, review and analysis and the representations and warranties set forth in this Agreement (and in any Company Ancillary Agreement). The Buyer hereby acknowledges and agrees that other than the representations and warranties set forth in this Agreement (and in any Company Ancillary Agreement), none of the Members, the Sellers’ Representative, the Company, any of their Affiliates, or any of their respective employees, agents or Representatives make or have made any representation or warranty, express or implied, at law or in equity, as to any matter whatsoever relating to the Company or any other matter relating to the transactions contemplated by this Agreement including as to (i) the operation of the business of the Company after the Closing in any manner, (ii) the probable success or profitability of the business of the Company after the Closing, or (iii) any information contained in any descriptive memoranda, summary business descriptions or any information, documents or material made available
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to the Buyer or its Affiliates or representatives, whether orally or in writing, in certain “data rooms,” management presentations, functional “break-out” discussions, responses to questions submitted on behalf of the Buyer or in any other form in expectation of the transactions contemplated by this Agreement.
CERTAIN COVENANTS OF THE PARTIES
4.1Confidentiality. Subject to any obligation to comply with (a) any Legal Requirement, (b) any rule or regulation of any Governmental Entity, (c) obligations under any listing agreement with or rules of any security exchange applicable to Buyer, or (d) any subpoena or other legal process to make information available to the Persons entitled thereto, whether or not the transactions contemplated hereby are consummated, all information obtained by any party about any other party, and all of the terms and conditions of this Agreement, shall be kept in confidence by each party, and each party shall cause its Representatives to hold such information confidential. Each party shall maintain such confidentiality to the same degree as it maintains its own confidential information until such time, if any, as any such data or information either is, or becomes, published or a matter of public knowledge; provided, however, that the foregoing will not apply to any information received by a party from a third party not under any obligation to keep such information confidential, nor to any information obtained by a party that is generally known to the public.
(a)Buyer and the Sellers’ Representative will: (i) promptly make and effect all registrations, filings and submissions required to be made or effected by them under any applicable Legal Requirements with respect to this Agreement and the transactions contemplated under this Agreement; and (ii) use commercially reasonable efforts to cause to be taken on a timely basis, all other actions necessary or appropriate for the purpose of consummating and effectuating the transactions contemplated by this Agreement, including the obtaining of all necessary consents, approvals or waivers from third parties.
(b)The Buyer and the Sellers’ Representative shall promptly provide all information requested by any Governmental Entity in connection with this Agreement or any of the other transactions contemplated by this Agreement.
(c)The Buyer and the Sellers’ Representative shall: (i) give the other party prompt notice of the commencement of any investigation, action or Legal Proceeding by or before any Governmental Entity with respect to this Agreement or any of the other transactions contemplated by this Agreement, and (ii) keep the other party informed as to the status of any such investigation, action or Legal Proceeding.
4.3Further Assurances. Subject to the terms and conditions of this Agreement, each of the parties agrees to use commercially reasonable efforts to take, or cause to be taken, all actions and to
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do, or cause to be done, all things necessary, proper or advisable under applicable Legal Requirements to consummate and make effective the transactions contemplated by this Agreement. The Members shall from time to time after the Closing, at the request of Buyer and without further consideration, execute and deliver further instruments of transfer and assignment and take such other action as Buyer may reasonably require.
4.4Public Disclosure. Subsequent to the Closing, except as may be required by applicable Legal Requirements or by obligations pursuant to any listing agreement with any securities exchange or any stock exchange regulations, no party to this Agreement shall issue any press release or make any other public statement, in each case relating to, connected with or arising out of the consummation of the transactions contemplated by this Agreement or the terms of such transactions without obtaining the prior written approval of the other parties (which consent shall not unreasonably be withheld or delayed), and the parties shall cooperate as to the timing and contents of any such release or statement. Notwithstanding the foregoing, the Company and the Sellers’ Representative acknowledge that after the Closing, nothing contained herein shall restrict Buyer or its Affiliates from providing investors, analysts and/or other interested parties with such information as the Buyer shall deem reasonably necessary or appropriate, including but not limited to copies of this Agreement.
4.5Tax Returns. The Company, the Sellers’ Representative and Buyer will cooperate with each other in connection with the preparation and filing of all federal, state, local and foreign Tax filings required to be filed by the Company with respect to taxable periods beginning on or before the Effective Date, so that such returns are consistent with the provisions of this Agreement. Any Tax audits of the Company for periods up to and including the Effective Date will be controlled by Sellers’ Representative, except to the extent that any adjustments pursuant to any such Tax audits made by any Tax authorities which may affect the Tax position of Buyer for any period are subject to the approval of Buyer which will not be unreasonably withheld.
4.6Expenses. Except as otherwise expressly provided herein, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred.
4.7Required Financials. The Company, the Members and the Sellers’ Representative have been informed that Buyer expects to satisfy its obligation to file audited financial statements related to the Acquisition by filing financial statements consisting of (i) audited statements of income and members capital for the year ended December 31, 2014, (ii) audited balance sheet as of December 31, 2014, (iii) audited statement of cash flows for the year ended December 31, 2014, and (iv) unaudited financial statements for interim periods, each to the extent required under applicable rules of the SEC (collectively, the “Required Financials”). Following the Closing, the Members and the Sellers’ Representative agree that they, at their own cost and expense, shall (and shall cause any Affiliates to) (i) provide complete and timely access to the books, records and personnel of the Members and the working papers, schedules and other information reasonably necessary to the preparation and filing of the Required Financials, to the extent reasonably requested by the Buyer, (ii) to the extent reasonably requested by the Buyer assist the Buyer, assist the Buyer and the Company to prepare and file the
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Required Financials within the time period required by the rules of the SEC, which for avoidance of doubt is no more than seventy-five (75) days following the Closing, and (iii) engage the Company’s existing accountant (Robin Brown CPA) to perform the restatement of the Company’s financial statements as of and for the period ended December 31, 2014. Upon request by Buyer, the Members shall promptly reimburse the Buyer or the Company, as applicable, for any out-of-pocket expenses reasonably incurred by the Buyer or the Company in connection with the preparation of the Required Financials (the “Required Financials Expense”). The Members and the Sellers’ Representative agree that (i) such reimbursement may, in Buyer’s sole discretion, be made in the form of payment out of the Escrow Account and (ii) they will cooperate and execute an instruction letter or such other documentation as may be reasonably required by the Escrow Agent to effect such reimbursement.
5.1Survival of Representations and Warranties.
(a)Representations and Warranties of the Company. The representations and warranties of the Company in this Agreement will survive the Closing and will terminate as follows:
(i)the representations and warranties in Sections 2.1 (Organization), 2.4 (Authority), 2.6 (Capitalization), 2.16 (Governmental Authorizations; Legal Compliance), 2.17 (Tax Matters), 2.19 (Environmental Matters), 2.22 (Franchise Related Operations), 2.23 (Broker) shall survive until sixty (60) days following the expiration of the applicable statute of limitations (collectively, the “Fundamental Representations”); provided, however, that the representations and warranties in Sections 2.4 (Authority) and 2.6 (Capitalization) shall survive for the maximum period permitted by applicable law; and
(ii) all other representations and warranties will terminate upon the one (1) year anniversary of the Effective Date (the “Release Date”).
(b)Buyer’s Representations and Warranties. The representations and warranties of Buyer and Merger Sub in this Agreement will survive the Closing and will terminate on the Release Date.
(c)Covenants. All covenants of the parties will survive according to their respective terms.
(d)Certain Definitions. The term “Damages” means any and all Liabilities, losses, claims, expenses, costs, fines, fees, penalties, settlement payments, obligations or injuries, including those resulting from claims, actions, suits, demands, assessments, investigations, judgments, penalties, fines, awards, arbitrations or other proceedings, together with reasonable costs and expenses, including the reasonable attorneys’ fees, interest and other reasonable costs and expenses relating thereto, such as court costs or expert witnesses fees. The term “Buyer Indemnitees” means Buyer and any present
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or future officer, director, employee, Affiliate (including, post-Closing, the Company), subsidiary, or shareholder of Buyer. The term “Member Indemnitees” means the Members and, to the extent applicable, any present or future officer, director, employee, Affiliate, subsidiary, or shareholder of the Members.
5.2Indemnification by Members.
(a)The Members will, severally (but not jointly and severally) pro rata based upon each Member’s portion of the total Purchase Price, indemnify and hold harmless the Buyer Indemnitees from and against any and all Damages directly or indirectly incurred, paid or accrued in connection with or resulting from or and arising out of:
(i)the breach or inaccuracy of any representation or warranty of the Company contained in ARTICLE II of this Agreement or in any certificate or instrument delivered by or on behalf of the Company or the Members pursuant to this Agreement;
(ii)the breach, non-fulfillment or violation of any covenant or other obligation of the Company or any Member under this Agreement;
(iii)the failure of any Member to execute and deliver a Letter of Transmittal at the Closing, including, without limitation, any claims by any Member against any Buyer Indemnitee in connection with or resulting from or and arising out of the transactions contemplated herein; and
(iv)any claims by any party against any Buyer Indemnitee in connection with or resulting from or and arising out of any Related Party Contract, including any Related Party Contract set forth on Schedule 2.13.
5.3Limitations on Members’ Indemnification Liability.
(a)Threshold for Bringing Claims against the Members. If Buyer or a Buyer Indemnitee seeks indemnification for matters identified in Section 5.2(a)(i), the indemnification by the Members will not apply unless and until the aggregate Damages for the current and all prior Claims exceeds $100,000.00 (the “Indemnification Threshold”). Once the Indemnification Threshold has been reached, the Members must indemnify Buyer and the Buyer Indemnitees for the full amount all Damages for past, present and any future Claims to the extent that the aggregate total of all such Damages exceeds such Indemnification Threshold.
(b)Limitation of Amount of the Members’ Liability. Except as otherwise provided herein, the total cumulative amount of Damages for which the Members may be liable to Buyer or the Buyer Indemnitees under this ARTICLE V shall not exceed $600,000.00.
(c)Exceptions to Limitations. Notwithstanding anything contained herein to the contrary, the limitations set forth in Sections 5.3(a) and 5.3(b) shall not apply to Damages based on or arising from or relating to (i) a breach or inaccuracy of any Fundamental Representation, (ii) the fraud
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or intentional misrepresentation of the Company or any Member, or (iii) as described in Sections 5.2(a)(iii) or 5.2(a)(iv) above.
(d)Escrowed Funds. With respect to any amounts payable for Damages by the Members to Buyer or the Buyer Indemnitees under this ARTICLE V, the Buyer Indemnitee shall first make claims against the Escrowed Funds and, to the extent that such Escrowed Funds are not sufficient to pay such Damages, against the Members.
(a)Notice Requirement. The term “Claim” means a claim for indemnification for Damages under ARTICLE V. Buyer may give notice of a Claim for Damages incurred by it or another Buyer Indemnitee. Promptly after becoming aware of the existence of a potential Claim, Buyer will give to the Sellers’ Representative a written notice of the Claim executed by Buyer (a “Notice of Claim”). No delay on the part of Buyer in giving the Sellers’ Representative a Notice of Claim will relieve the Members from any of their obligations unless and only to the extent that the Members are materially prejudiced by the delay. The written assertion of a claim, demand, suit, action, arbitration, investigation, inquiry or proceeding brought by a third party against Buyer or a Buyer Indemnitee that is based upon, or includes assertions relating to any item listed in Section 5.2 is referred to in this Agreement as a “Third-Party Claim.”
(b)Contents of Notice of Claim. Each Notice of Claim will contain (i) the good faith estimate of Buyer of the reasonably foreseeable maximum amount of the alleged Damages arising from the Claim and (ii) a brief description of the material facts, circumstances or events giving rise to the alleged Damages based on information reasonably available to Buyer, and copies of any formal demand or complaint.
5.5Defense of Third-Party Claims.
(a)Buyer will defend any Third-Party Claim, and the costs and expenses incurred by Buyer in connection with such defense, including reasonable attorneys’ fees, other professionals’ and experts’ fees and court or arbitration costs will be included in the Damages for which Buyer may seek indemnification under this Agreement, whether or not the Third-Party Claim is successful.
(b)The Sellers’ Representative will have the right to receive copies of all pleadings, notices and communications with respect to the Third-Party Claim and shall have the right to participate in settlement negotiations with respect to the Third-Party Claim. The Members will bear their own costs in participating in settlement negotiations. Buyer may not settle any Third-Party Claim without the consent of the Sellers’ Representative which shall not be unreasonably withheld.
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5.6Resolution of Claims. Any Notice of Claim received by the Sellers’ Representative under Section 5.4 will be resolved as follows:
(a)Uncontested Claims. If within sixty (60) days after receipt of the Notice of Claim by the Sellers’ Representative, the Sellers’ Representative has not provided Buyer with a written notice contesting all or a portion of a Notice of Claim, the Claim will be deemed an “Uncontested Claim.” The Sellers’ Representative will be conclusively deemed to have consented to the recovery by the Buyer Indemnitee of the full amount of Damages specified in the Notice of Claim for an Uncontested Claim. In addition, the Sellers’ Representative will also be deemed to have stipulated to the entry of a final judgment for damages against the Members for such amount in the Superior Court for the County of Los Angeles, the United States District Court for the Central District of California or any other court having jurisdiction over the matter where venue is proper.
(b)Contested Claims. If within sixty (60) days after receipt of the Notice of Claim by the Sellers’ Representative, the Sellers’ Representative gives Buyer written notice contesting all or any portion of a Notice of Claim, the Claim will be deemed a “Contested Claim.” Contested Claims will be resolved by either (i) a written settlement agreement executed by Buyer and the Sellers’ Representative or (ii) in the absence of such a written settlement agreement, by a final, non-appealable judgment by a federal or state court located in the County of Los Angeles, State of California.
(c) Settled Claims. The terms of the written settlement agreement executed by the Sellers’ Representative and Buyer will govern the resolution of Contested Claim settled under the agreement (a “Settled Claim”).
(d) Exclusive Remedy. Except for the right to specific performance pursuant to Section 6.12 and actions raising from the fraud or misrepresentation of the Company or any Member, this ARTICLE V shall be the sole and exclusive remedy for any claim or controversy arising out of or relating to (i) any breach or inaccuracy of any representation or warranty made by the Company in connection with the transactions contemplated by this Agreement, or (ii) any breach or violation of any covenant or other obligation of the Company or any Member arising under this Agreement or the transactions contemplated by this Agreement.
5.7Purchase Price Adjustment. Any payment made by the Members under ARTICLE V will be paid to Buyer and treated by the parties as a reduction of the Purchase Price.
(a)Appointment and Powers. By approving this Agreement and the transactions contemplated hereby or by executing and delivering a Letter of Transmittal, each Member shall have irrevocably approved the designation of Darin Kraetsch as the representative of such Member and as the joint attorneys-in-fact and agents for and on behalf of such Member (together, the “Sellers’ Representative”) with respect to Claims under this ARTICLE V or Disputes (as defined in Section 6.4(a)), and the taking by the Sellers’ Representative of any and all actions and the making of any decisions required or permitted to be taken by the Sellers’ Representative under this Agreement,
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including the exercise of the power to: (a) authorize, agree to, or initiate any proceeding challenging any proposed Closing Statement or the amount of any adjustments to the Purchase Price pursuant to Section 1.3, (b) agree to, negotiate, enter into settlements and compromises of, initiate legal proceedings with respect to and comply with orders of courts and awards of arbitrators with respect to, any Claims or Disputes arising under this ARTICLE V; (c) arbitrate, resolve, settle or compromise any Claim made under this ARTICLE V or Dispute; (d) executed and deliver any Company Ancillary Documents on behalf of the Company or any Member; (e) receive notice or communications on behalf of any Member; (f) take delivery of the Purchase Price and distribute pursuant to Schedule 1.2(b); (g) engage, employ or appoint any agents or representatives (including attorneys, accountants and consultants) to assist Sellers’ Representative in complying with its duties and obligations; and (h) take all other actions necessary in the judgment of the Sellers’ Representative for the accomplishment of the foregoing. The Sellers’ Representative will have authority and power to act on behalf of such Member with respect to the disposition, settlement or other handling of (i) all Claims under this ARTICLE V, (ii) all rights or obligations arising under this ARTICLE V, (iii) all Disputes, (iv) any disputes, claims or other proceedings relating to the adjustments described in Section 1.3 of this Agreement, and (iv) the execution and delivery of any certificates, certifications, representation letters, or other documents required to be delivered by Members at the Closing. Each Members will be bound by all actions taken and documents executed by the Sellers’ Representative in connection with Sections 1.3, and this ARTICLE V. Buyer shall be entitled to deal exclusively with Sellers’ Representative on all matters relating to this Agreement and will be entitled to rely on any action or decision of the Sellers’ Representative on any document executed or purported to be executed on behalf of any Member by Sellers’ Representative, and on any other action taken or purported to be taken on behalf of any Member by Sellers’ Representative, as being fully binding upon such Person. Notices or communications to or from Sellers’ Representative shall constitute notice to or from each of the Members. Any decision or action by Sellers’ Representative hereunder, including any agreement between Sellers’ Representative and Buyer relating to the defense, payment or settlement of any claims for indemnification hereunder, shall constitute a decision or action of all Members and shall be final, binding and conclusive upon each such Person. No Member shall have the right to object to, dissent from, protest or otherwise contest the same.
(b)Limitation of Liability and Indemnification. In performing the functions specified in this Agreement, the Sellers’ Representative will not be liable to any Member, Buyer or any Buyer Indemnitee in the absence of fraud or willful misconduct on the part of the Sellers’ Representative. The Members will severally indemnify the Sellers’ Representative and hold him harmless against any loss, claim or liability (including defense costs) incurred without willful misconduct on the part of the Sellers’ Representative and arising out of or in connection with the acceptance or administration of his duties hereunder.
(c)Compensation and Reimbursement. The Sellers’ Representative will not be entitled to receive any compensation from Buyer, the Company or the Members in connection with this Agreement. Any out-of-pocket costs and expenses reasonably incurred by the Sellers’ Representative in connection with actions taken by the Sellers’ Representative under the terms of this Agreement (including the hiring of legal counsel and the incurring of legal fees and costs) will be paid
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by the Members (pro rata based upon each Member’s portion of the total Purchase Price) to the Sellers’ Representative.
(d)Replacement. If the Sellers’ Representative dies, becomes unable to perform the responsibilities hereunder or resigns, a substitute representative will be appointed by the Members representing a majority of the consideration to be received by the Members as set forth on Schedule 1.2(b). The Sellers’ Representative may resign as the Sellers’ Representative hereunder, effective upon a new representative being appointed in writing. The new Sellers’ Representative will provide written notice to Buyer of the occurrence of such event.
(e)Binding Nature of Election. The provisions of this Section 5.8 are independent and severable, will constitute an irrevocable power of attorney, coupled with an interest and surviving death, granted by each Member to the Sellers’ Representative and will be binding upon the executors, heirs, legal representatives and successors of each Member and any references in this Agreement to a Member will include the successor to Member’s rights hereunder, whether under testamentary disposition, the laws of descent or otherwise.
5.9Indemnification by Buyer.
(a)Buyer will indemnify and hold harmless the Member Indemnitees from and against any and all Damages directly or indirectly incurred, paid or accrued in connection with or resulting from or and arising out of:
(i)the breach or inaccuracy of any representation or warranty of Buyer contained in ARTICLE IV of this Agreement or in any certificate or instrument delivered by or on behalf of Buyer pursuant to this Agreement; and
(ii)the breach, non-fulfillment or violation of any covenant or other obligation of Buyer under this Agreement.
(b)Notice Requirement. The Sellers’ Representative may give notice of a Claim for Damages incurred by a Member or any Member Indemnitee. Promptly after becoming aware of the existence of a potential Claim, the Sellers’ Representative will give to Buyer a written notice of the Claim executed by the Sellers’ Representative (the “Seller Notice of Claim”). No delay on the part of Sellers’ Representative in giving Buyer such Seller Notice of Claim will relieve Buyer from any of its obligations unless and only to the extent that Buyer is materially prejudiced by the delay. The written assertion of a claim, demand, suit, action, arbitration, investigation, inquiry or proceeding brought by a third party against a Member or a Member Indemnitee that is based upon, or includes assertions relating to any item listed in Section 5.9(a) is referred to in this Agreement as a “Seller Third-Party Claim.”
(c)Contents of Seller Notice of Claim. Each Seller Notice of Claim will contain (i) the good faith estimate of the Sellers’ Representative of the reasonably foreseeable maximum amount of the alleged Damages arising from the Claim and (ii) a brief description of the material facts,
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circumstances or events giving rise to the alleged Damages based on information reasonably available to the Sellers’ Representative, and copies of any formal demand or complaint.
(d)Defense of Seller Third-Party Claims. The Member Indemnitee will defend such Member’s Seller Third-Party Claim, and the costs and expenses incurred by such Member Indemnitee in connection with such defense, including reasonable attorneys’ fees, other professionals’ and experts’ fees and court or arbitration costs will be included in the Damages for which such Member Indemnitee may seek indemnification under this Agreement, whether or not the Seller Third-Party Claim is successful. Buyer will have the right to receive copies of all pleadings, notices and communications with respect to the Seller Third-Party Claim and shall have the right to participate in settlement negotiations with respect to the Seller Third-Party Claim. Buyer will bear its own costs in participating in settlement negotiations.
(e)Resolution of Claims. Any Seller Notice of Claim received by Buyer under Section 5.9 will be resolved as follows:
(i)Uncontested Claims. If within sixty (60) days after receipt of the Seller Notice of Claim by Buyer, Buyer has not provided the Sellers’ Representative with a written notice contesting all or a portion of the Seller Notice of Claim, Buyer will be conclusively deemed to have consented to the recovery by the Member Indemnitees of the full amount of Damages specified in the Notice of Claim for such Claim. In addition, Buyer will also be deemed to have stipulated to the entry of a final judgment for damages against Buyer for such amount in the Superior Court for the County of Los Angeles, the United States District Court for the Central District of California or any other court having jurisdiction over the matter where venue is proper.
(ii)Contested Claims. If within sixty (60) days after receipt of the Seller Notice of Claim by Buyer, Buyer gives the Sellers’ Representative written notice contesting all or any portion of a Seller Notice of Claim, the Claim will be resolved by either (i) a written settlement agreement executed by Buyer and the Sellers’ Representative or (ii) in the absence of such a written settlement agreement, by a final, non-appealable judgment by a federal or state court located in the County of Los Angeles, State of California.
(iii)Exclusive Remedy. Except for the right to specific performance pursuant to Section 6.12 and actions raising from the fraud or misrepresentation of Buyer, this ARTICLE V shall be the sole and exclusive remedy for any claim or controversy arising out of or relating to (i) any breach or inaccuracy of any representation or warranty made by Buyer in connection with the transactions contemplated by this Agreement, or (ii) any breach or violation of any covenant or other obligation of Buyer arising under this Agreement or the transactions contemplated by this Agreement.
(f)Limitation of Amount of Buyer’ Liability. The total cumulative amount of Damages for which Buyer may be liable to the Member Indemnitees under this ARTICLE V shall not exceed the Purchase Price.
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ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1Amendment; Waiver. This Agreement may not be amended except by an instrument in writing signed by the Company, Buyer, and Sellers’ Representative. At any time prior to the Closing, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (c) waive compliance with any of the agreements or conditions contained in this Agreement. Waiver of any term or condition of this Agreement will only be effective if and to the extent documented in a writing signed by the party making or granting such waiver and will not be construed as a waiver of any subsequent breach or waiver of the same term or condition, or a waiver of any other term or condition of this Agreement. Upon the request of Buyer, the parties agree to amend this Agreement to substitute in place of Buyer any other wholly-owned direct or indirect subsidiary of Buyer.
6.2Applicable Law; Severability. This Agreement shall be governed by and construed under the laws of the State of California, exclusive of the body of law known as conflicts of law. Should a court or other body of competent jurisdiction determine that any term or provision of this Agreement is excessive in scope or duration or is illegal, invalid or unenforceable, then the parties agree that such term or provision shall not be voided or made unenforceable, but rather shall be modified so as to be valid, legal and enforceable to the maximum extent possible, under the purposes stated in the preceding sentence and with applicable Legal Requirements, and all other terms and provisions of this Agreement shall remain valid and fully enforceable.
6.3Attorneys’ Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, including any proceeding under Section 6.4, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.
6.4Venue for Dispute Resolution.
(a)Except as set forth in Section 1.3 of this Agreement, any claim arising from or relating to the Contested Claim or other controversy, claim or dispute, whether based on contract, tort, statute or any other legal or equitable theory, arising out of or relating to this Agreement or the transactions contemplated hereby (“Dispute”) shall be brought in the federal or state courts located in the County of Los Angeles, State of California. Each of the parties hereto expressly submits to the exclusive jurisdiction of such courts and waives any claim of improper jurisdiction or lack of venue in connection with any claim or controversy that may be brought in connection with this Agreement. Each party hereby agrees that such courts, as applicable, shall have in personam jurisdiction with respect to such party, and such party hereby submits to the personal jurisdiction of such courts. THE COMPANY, BUYER AND SELLERS EACH HEREBY AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND, to the extent permitted by applicable law, WAIVE ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT
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THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS AGREEMENT OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY THE COMPANY, BUYER AND SELLERS, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. THE COMPANY, SELLERS OR BUYER, AS APPLICABLE, ARE HEREBY AUTHORIZED TO FILE A COPY OF THIS SECTION IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY THE COMPANY, BUYER OR SELLERS, AS APPLICABLE. THE PROVISIONS OF THIS SECTION SHALL SURVIVE THE CLOSING OR EARLIER TERMINATION OF THIS AGREEMENT.
6.5Assignability; Third Party Beneficiary. This Agreement will be binding upon, enforceable by and inure solely to the benefit of, the parties and their respective permitted successors and assigns. This Agreement shall not be assigned by any party hereto without the prior written consent of the non-assigning party. Notwithstanding the foregoing, (i) Buyer may without the other parties’ prior written consent at any time on or after the Effective Date assign this Agreement and any of Buyer's rights hereunder, or delegate any of Buyer's obligations hereunder in connection with (x) any merger, consolidation or recapitalization of Buyer or (y) any sale of a substantial portion of the assets of Buyer or a significant business or division of Buyer, and (ii) the rights of Buyer under this Agreement may be collaterally assigned to Buyer’s lender(s) as collateral security for repayment of debts and performance of obligations owed by Buyer to such lenders. Except as otherwise expressly provided in this Agreement, nothing in this Agreement is intended to or will confer upon any Person, other than the parties to the Agreement, any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
6.6Notices. All notices and other communications under this Agreement must be in writing and will be deemed given if delivered personally, faxed, sent by nationally recognized overnight courier, or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as such party specifies by like notice):
To Buyer or to the Company:
Cherokee Inc.
5990 Sepulveda Blvd # 600,
Van Nuys, CA 91411
Attention: Howard Siegel
Telephone: (818) 908-9868
Email: howards@cherokeeglobalbrands.com
With a copy to:
Jeffer Mangels Butler & Mitchell LLP
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1900 Avenue of the Stars
Los Angeles, CA 90067
Phone: 310-201-3517
Fax: 310-712-8517
Attn: Rod S. Berman, Esq.
Robert M. Steinberg, Esq.
To Sellers’ Representative:
Darin Kraetsch
2885 Hilton Circle
Kennesaw, GA 30152
Telephone: 770-575-3232
Email: darin@flipflopshops.com
with a copy to:
Baker & McKenzie LLP
2300 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: Ted Schweinfurth
Email: ted.schweinfurth@bakermckenzie.com
All such notices and other communications will be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of a facsimile, when the party receiving such facsimile has confirmed receipt of the communication, (c) in the case of delivery by nationally recognized overnight courier, on the business day following dispatch, and (d) in the case of mailing, on the fifth business day following such mailing.
(a)For purposes of this Agreement, whenever the context requires: the singular number includes the plural, and vice versa; the masculine gender includes the feminine and neuter genders; the feminine gender includes the masculine and neuter genders; and the neuter gender includes the masculine and feminine genders.
(b)The parties agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party will not be applied in the construction or interpretation of this Agreement.
(c)As used in this Agreement, the words “include” and “including,” and variations thereof, will not be deemed to be terms of limitation, but rather will be deemed to be followed by the words “without limitation.”
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(d)The titles and captions of the Sections of this Agreement are included for convenience of reference only and will have no effect on the construction or meaning of this Agreement.
(e)Except as otherwise indicated, all references in this Agreement to “Sections” and “Exhibits” are intended to refer to Sections of this Agreement and Exhibits to this Agreement.
6.8Interpretation. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise.
6.9Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
6.10Telecopy Execution and Delivery. The parties may execute and deliver this Agreement by facsimile or similar electronic transmission device under which the signature of or on behalf of such party can be seen, and such execution and delivery will be considered valid, binding and effective for all purposes.
6.11Entire Agreement. This Agreement and the other agreements referred to in this Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof and thereof. Although Buyer has been provided access to, reviewed and/or received copies of documentation and business records of the Company and has had an opportunity to ask and has received answers to questions posed to the Company’s management team, the Company shall not be deemed to have made any representation or warranty with respect to the Company or any other matter unless expressly set forth in this Agreement.
6.12Specific Performance. Each party agrees that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by them in accordance with the terms hereof, and that each party shall be entitled to seek injunctive relief or specific performance of the terms hereof, without posting any bond or other security being required and without the necessity of proving the inadequacy of money damages as a remedy, in addition to any other remedy available at law or in equity.
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As used in this Agreement, the following terms have the following meanings:
“ACA Employee” means any individual who is or was a common law employee of the Company for at least one day on or between January 1st of the current calendar year and the Effective Date.
“Actual Knowledge,” means the actual knowledge of Brian Curin, Darin Kraetsch, Todd Giatrelis, Sarah Towne or Alan Wood.
“Acquisition” is defined in the recitals.
“Affiliate” means a Person who, with respect to another Person, Controls, is Controlled by or is under common Control with such other Person.
“Adjusted Closing Payment Amount” means the difference obtained by subtracting the Aggregate Capital Contribution Amount from the Closing Payment.
“Aggregate Capital Contribution Amount” means ONE MILLION FOUR HUNDRED THOUSAND DOLLARS and 00/100 ($1,400,000.00).
“Agreement” is defined in the preamble.
“A&R Operating Agreement” is defined in Section 1.1(c).
“Audited Financials” is defined in Section 2.7.
“Business Records” means all correspondence, marketing and sales information, pricing, marketing plans, business plans, financial statements, financial and business projections, customer lists and other files and records of the Company, but excluding (i) any personnel files of any former employee of the Company, and (ii) any personnel files of any employee who does not consent to the disclosure of his or her personnel file to Buyer under the terms of the employment offer made under this Agreement.
“Buyer” is defined in the preamble.
“Buyer Indemnitees” is defined in Section 5.1(d).
“Certificate of Merger” is defined in Section 1.1(b).
“Claim” is defined in Section 5.4(a).
“Closing” is defined in Section 1.4.
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“Closing Statement” is defined in Section 1.3(a).
“Closing Payment” is defined in Section 1.2.
“Code” means the Internal Revenue Code of 1986, as amended, and the rulings and regulations promulgated thereunder.
“Company” is defined in the preamble.
“Company Ancillary Agreements” is defined in Section 2.4.
“Company Intellectual Property” means all of the Company’s worldwide right, title and interest in and to any Intellectual Property Rights owned by or licensed to the Company.
“Contested Claim” is defined in Section 5.6(b).
“Contract” means any written or oral agreement, contract, subcontract, lease, instrument, note, option, purchase order, license, sublicense, insurance policy, benefit plan or legally binding commitment or undertaking of any nature.
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a Person, whether through the ownership of stock or other equity interests, as an officer, director, trustee or executor, by contract or otherwise.
“Current Assets” means cash and cash equivalents, accounts receivable, inventory and prepaid expenses, but excluding (a) the portion of any prepaid expense of which Buyer will not receive the benefit following the Closing, (b) deferred Tax assets and (c) receivables from any of the Company’s Affiliates, directors, employees, officers or stockholders and any of their respective Affiliates, determined in accordance with the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Interim Financials.
“Current Liabilities” means accounts payable, accrued Taxes and accrued expenses, but excluding payables to any of the Company’s Affiliates, directors, employees, officers or stockholders and any of their respective Affiliates, deferred Tax liabilities and the current portion of long term debt, determined in accordance with the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Interim Financials.
“Damages” is defined in Section 5.1(d).
“Data Rooms” means that certain virtual data room maintained by SecuriSync in connection with the transactions contemplated hereby and that certain extranet website maintained by Baker & McKenzie Global Services, LLC containing information and documents related to the Company, made available to Buyer as of the Effective Date.
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“Data Room Disks” is defined in Section 1.5(x).
“DE LLC Act” is defined in the Recitals.
“Disclosure Schedule” is defined in the preamble to ARTICLE II.
“Dispute” is defined in Section 6.4(a).
“Effective Date” is defined in the preamble.
“Effective Time” is defined in Section 1.1(b).
“Employee Plans” is defined in Section 2.18(a).
“Employer Shared Responsibility Requirements” means Section 4980H of the Code and any regulations thereunder, as applicable.
“Employment Agreement” is defined in Section 1.5(a)(v).
“Encumbrance” means any lien, pledge, collateral assignment, hypothecation, charge, mortgage, security interest, title retention, conditional sale or other security arrangement, or any charge, adverse claim of title, ownership or right to use, or any other encumbrance of any kind whatsoever.
“Environmental Law” means any Legal Requirement relating to pollution or protection of the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including any law or regulation relating to emissions, discharges or releases of chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products.
“ERISA” is defined in Section 2.18(a).
“ERISA Affiliate” is defined in Section 2.18(a).
“Escrow Agent” means the escrow agent part to the Escrow Agreement.
“Escrow Agreement” means that certain Escrow Agreement by and among the Escrow Agent, Buyer and Sellers’ Representative in form and substantive reasonably satisfactory to Buyer and Sellers’ Representative.
“Escrowed Funds” is defined in Section 1.2(a)(ii).
“Estimated Closing Working Capital” is defined in Section 1.3(a).
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“FDD” means the franchise disclosure document prepared in accordance with the FTC Rule or any applicable Franchise Law.
“FFS Member” is defined in Section 1.5(ix).
“Final Closing Working Capital” is defined in Section 1.3(d).
“Financial Statements” is defined in Section 2.7.
“Franchise Agreements” is defined in Section 2.22(a).
“Franchise Laws” means the FTC Rule and any other Legal Requirements regulating the offer and/or sale of franchises.
“FTC Rule” means the Federal Trade Commission trade regulation rules entitled “Disclosure Requirements and Prohibitions Concerning Franchising,” 16 C.F.R. Section 436.1 et seq.
“Franchise Lease” is defined in Section 2.22(b).
“Fundamental Representation” is defined in Section 5.1(a)(i).
“GAAP” means generally accepted accounting principles in the United States applied on a consistent basis.
“Governmental Authorization” means any permit, registration, qualification or authorization granted or issued by a Governmental Entity.
“Governmental Entity” or “Governmental Authority” means any federal, state, local or foreign governmental authority.
“Indemnification Threshold” is defined in Section 5.3(a).
“Intellectual Property Right(s)” means any and all rights (throughout the universe, in all media, now existing or created in the future, and for the entire duration of such rights) arising under statutory or common law, contract, or otherwise, and whether or not perfected, including without limitation, all (a) rights in and to Marks; (b) rights associated with works of authorship including, but not limited to, copyrights, moral rights, industrial design rights, patterns, copyright applications, copyright registrations, and rights to prepare derivative works; (c) rights related to websites including the content contained therein; (d) rights relating to the protection of trade secrets and confidential information including, without limitation, know-how and show-how; (e) product rights including, without limitation, mold rights; (f) rights analogous to those set forth in this definition; (g) rights associated with patent applications including divisionals, continuations, continuations-in-part, substitutes, renewals, reissues and extensions of the foregoing, and all patents, reissues and reexamined patents resulting there from, now existing, hereafter filed, issued, or acquired; and (h) the
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right to sue for past, present or future infringement of any Intellectual Property Right(s), and any and all goodwill related to the foregoing.
“Interests” means the issued and outstanding membership interest of the Company.
“Interim Financials” is defined in Section 2.7.
“Knowledge,” means the actual knowledge of Brian Curin, Darin Kraetsch, Todd Giatrelis, Sarah Towne or Alan Wood or constructive knowledge such Person would reasonably be expected to have after due inquiry of other Persons who have primary responsibility for the relevant matter.
“Leases” is defined in Section 2.12(c).
“Legal Proceeding” means any action, suit, litigation, arbitration, proceeding or hearing conducted or heard by or before, or otherwise involving, any court or other Governmental Entity or any arbitrator or arbitration panel.
“Legal Requirement” means laws, statutes, ordinances, rules, regulations, decrees, writs, injunctions, judgments, rulings and or orders adopted or promulgated by any Governmental Entity, including, without limitation, any applicable disclosure requirements under applicable state and federal securities laws as well as, with respect to Buyer, under any applicable listing requirements of any trading market or exchange on which the Buyer’s securities are traded.
“Letter of Transmittal” is defined in Section 1.2(c).
“Liabilities” is defined in Section 2.7(c).
“Material Adverse Change” or “Material Adverse Effect,” when used with reference to any entity means any fact, event, change, violation, inaccuracy, circumstance or effect that is or is reasonably likely to be, individually or in the aggregate, materially adverse to the business, financial condition, properties, assets, results of operations, or prospects of such entity and its subsidiaries, taken as a whole. Notwithstanding anything to the contrary contained in this paragraph, none of the following shall be deemed, singly or in the aggregate, to constitute a Material Adverse Effect or Material Adverse Change: (a) any failure by the Company to meet projections or forecasts for any period ending on or after the date of this Agreement; or (b) any adverse change, effect, event, violation, inaccuracy, circumstance, state of facts or development resulting from or relating to (directly or indirectly) any of the following: (i) the announcement or pendency of the transactions contemplated by this Agreement (including any cancellations of or delays in orders, any reduction in sales, any disruption in supplier, distributor, partner or similar relationships or any loss of employees); (ii) conditions affecting the industries in which the Company participate, the U.S. economy as a whole or foreign economies in any locations where the Company have material operations or sales, including, without limitation, war or acts of terrorism; (iii) out-of-pocket fees and expenses (including legal, accounting, investment banking and other fees and expenses) incurred in connection with the transactions contemplated by this Agreement; (iv) compliance by Company with the terms of, or the
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taking of any action required or contemplated by, this Agreement; (v) any change in accounting requirements or principles or any change in applicable Legal Requirements, rules or regulations or the interpretation thereof; (vi) actions required or requested to be taken under applicable Legal Requirements, rules, regulations, contracts or agreements; or (vii) any failure or alleged failure of the Company to achieve or execute successfully any aspect of its business plan or other strategic development plans.
“Material Contracts” is defined in Section 2.14(a).
“Member” means each holder of Interests.
“Member Indemnitees” is defined in Section 5.1(d).
“Merger” is defined in the Recitals.
“Merger Sub” is defined in the Preamble.
“Notice of Claim” is defined in Section 5.4(a).
“Options” means any outstanding option, warrant, convertible security, subscription right, conversion right, exchange right or other Contract to which the Company or any Subsidiary is a party relating to the issuance or sale of any securities or other interests in the Company or any of its Subsidiaries.
“Pension Plans” is defined in Section 2.18(d).
“Permitted Encumbrances” means (i) Encumbrances for Taxes not yet due and payable, and (ii) Encumbrances disclosed in the Financial Statements or Disclosure Schedule.
“Person” means any individual, or any U.S. or non-U.S. corporation, partnership, joint venture, estate, trust, company (including limited liability company and joint stock company), association, organization, firm, enterprise or other entity or any Governmental Entity.
“Preliminary Closing Statement” is defined in Section 1.3(a).
“Purchase Price” is defined in Section 1.2.
“Release Date” is defined in Section 5.1(a).
“Related Party Contract” is defined in Section 2.13.
“Representatives” of a Person means the managers, officers, directors, employees, agents, attorneys, accountants, investment bankers, advisors and other representatives of that Person. With respect to the Company, “Representatives” include franchisees of the Company.
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“Required Consents” is defined in Section 2.5.
“Required Financials” is defined in Section 4.7.
“Required Financials Expense” is defined in Section 4.7.
“Seller Notice of Claim” is defined in Section 5.9(b).
“Sellers’ Representative” is defined in Section 5.8.
“Seller Third Party Claim” is defined in Section 5.9(b).
“Settled Claims” is defined in Section 5.6(d).
“Standard Form” is defined in Section 2.22(d).
“Subsidiary” and “Subsidiaries” are defined in Section 2.3(a).
“Surviving Company” is defined in Section 1.1(a).
“Target Working Capital Amount” is defined in Section 1.3(c).
“Tax” means (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, estimated, sales, use, ad valorem, personal property, franchise, profits, license, withholding on amounts paid to or by the Company, payroll, employment, social security, unemployment, disability, excise, severance, stamp, occupation, capital stock, transfer, registration, value added, premium, property, environmental or windfall profit tax, custom, import, license, duty or other tax, governmental fee or other like assessment, unclaimed property and escheat obligations, or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Entity responsible for the imposition of any such tax (federal, state and local, foreign or domestic), and (ii) liability of the Company for the payment of any amounts of the type described in clause (i) as a result of any express or implied obligation to indemnify any other Person.
“Tax Return” means any return (including any information return) filed with or submitted to, or required to be filed with or submitted to, any Governmental Entity in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax.
“Terminated Franchisee” is defined in Section 2.2(g).
“Third-Party Claim” is defined in Section 5.4(a).
“Transaction Expenses” is defined in Section 1.2(a).
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“Uncontested Claim” is defined in Section 5.6(a).
“WARN Act” id defined in Section 2.21.
“Working Capital” means the Current Assets of the Company as of a particular date less the Current Liabilities of the Company of such date.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written.
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CHEROKEE INC. |
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FFS Holdings, LLC |
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/s/ Henry Stupp |
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/s/ Darin Kraetsch |
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Darin Kraetsch |
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MERGER SUB: |
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FFS MERGER SUB LLC |
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/s/ Henry Stupp |
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/s/ Darin Kraetsch |
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Henry Stupp |
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Darin Kraetsch |
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CEO |
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THIRD AMENDMENT TO CREDIT AGREEMENT AND WAIVER
THIS THIRD AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this “Amendment”) dated as of October 13, 2015 is by and between Cherokee Inc., a Delaware corporation (the “Borrower”), and JPMorgan Chase Bank, N.A. (the “Bank”).
In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
W I T N E S S E T H:
WHEREAS, the Borrower and the Bank are parties to that certain Credit Agreement dated as of September 4, 2012, as amended on January 31, 2013 and on January 10, 2014 (as the same may be further amended, modified or restated from time to time, the “Credit Agreement”), which provides for a line of credit in the form of “Facility A” and term loans in the form of “Facility B” and “Facility B-1”;
WHEREAS, the Borrower has heretofore issued in favor of Bank that certain Line of Credit Note dated as of September 4, 2012, as amended on January 10, 2014, in connection with Facility A under the Credit Agreement (the “Line of Credit Note”);
WHEREAS, the Borrower has heretofore issued in favor of Bank that certain Term Note dated as of September 4, 2012, as amended on January 31, 2013 and on January 10, 2014, in connection with Facility B under the Credit Agreement (the “Term Note B”);
WHEREAS, the Borrower has heretofore issued in favor of Bank that certain Term Note dated as of January 10, 2014 in connection with Facility B-1 under the Credit Agreement (the “Term Note B-1” and together with the Line of Credit Note and Term Note B, the “Existing Notes”);
WHEREAS, the Borrower has requested, and the Bank has agreed to provide a new term loan in the amount of $6,000,000 in the form of “Facility B-2” in connection with a proposed acquisition of additional assets by the Borrower; and
WHEREAS, the parties hereto desire to amend the Credit Agreement to provide the new term loan through Facility B-2 and cause other amendments as set forth herein, and to concurrently herewith enter into a new Term Note in connection with Facility B-2 (the “Term Note B-2”).
NOW, THEREFORE, in consideration of the agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Defined Terms. Capitalized terms used, but not defined herein shall have the meanings assigned to them in the Credit Agreement, as amended by this Amendment.
ARTICLE II
AMENDMENTS AND CONDITIONS
SECTION 2.1 Amendments.
(a)Section 1.1 of the Credit Agreement is hereby amended by replacing the phrase “Facility A, Facility B and Facility B-1” in the first sentence therein with the phrase “Facility A, Facility B, Facility B-1 and Facility B-2”.
(b)Section 1 of the Credit Agreement is hereby amended by inserting a new Section 1.5 as follows:
“1.5Facility B-2 (Term Loan). The Bank agrees to extend credit to the Borrower in the form of a term loan in the principal sum of $6,000,000 (“Facility B-2”), bearing interest and payable as set forth in the promissory note executed on or about October 13, 2015, and with any and all renewals, modifications, extensions, rearrangements, restatements thereof and replacements or substitutions therefor.”
(c)Section 2.1 of the Credit is hereby amended by inserting the following new definition in the appropriate alphabetical order:
““Flip Flop Acquisition Agreement” means the Agreement and Plan of Merger dated on or about October 13, 2015 by and among the Borrower, FFS Merger Sub, LLC, a Delaware limited liability company and subsidiary of Borrower, FFS Holdings, LLC, a Delaware limited liability company, and Darin Kraetsch, solely in his capacity as the Sellers’ Representative, providing for the merger of FFS Merger Sub, LLC with and into FFS Holdings, LLC and for the acquisition of certain assets described therein.”
(d)Section 2.1 of the Credit Agreement is hereby amended by amending the definition of “Permitted Acquisitions” in its entirety as follows:
““Permitted Acquisitions” means the purchase or acquisition (whether in one or a series of related transactions) by the Borrower of (a) more than 50% of the Equity Interests with ordinary voting power of another Person or (b) all or substantially all of the Property (other than Equity Interests) of another Person or division or line of business or business unit of another Person, whether or not involving a merger or consolidation with such Person; provided that (i) at the time thereof and after giving effect thereto, no default or event of default under Section 7 shall have occurred and be continuing or would result from such acquisition or purchase, (ii) the aggregate amount of the consideration (or, in the
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case of consideration consisting of assets, the fair market value of the assets) paid by the Borrower and its Subsidiaries shall not exceed (a) $5,000,000 plus (b) the amount paid by the Borrower in connection with the transactions contemplated by the Hawk Acquisition Agreement plus (c) the amount paid by the Borrower in connection with the transactions contemplated by the Flip Flop Acquisition Agreement, such limit to apply on a cumulative basis for all such acquisitions or purchases subsequent to the date hereof, (iii) the Borrower would be in compliance with the financial covenants set forth in Section 5 for the most recent calculation period and as of the last day thereof, if such acquisition or purchase had been completed on the first day of such calculation period, (iv) not less than five Business Days prior to the consummation of such proposed acquisition, the Borrower shall deliver to the Bank, a certificate of the chief financial officer of the Borrower setting forth in reasonable detail calculations demonstrating compliance with the conditions set forth in clauses (ii) and (iii) above, (v) such acquisition or purchase is consummated on a non-hostile basis and (vi) the Bank shall have given its prior written consent to such purchase or acquisition.”
(e)Paragraph (A) of Section 3.2 of the Credit Agreement is hereby amended by replacing the phrase “Acquisition Agreement and the Hawk Acquisition Agreement” with the phrase “Acquisition Agreement, the Hawk Acquisition Agreement and the Flip Flop Acquisition Agreement.”
(f)Paragraph (B) of Section 3.2 of the Credit Agreement is hereby amended by replacing the phrase” Acquisition Agreement and the Hawk Acquisition Agreement” with the phrase “Acquisition Agreement, the Hawk Acquisition Agreement and the Flip Flop Acquisition Agreement.”
(g)Paragraph (E) of Section 3.2 of the Credit Agreement is hereby amended in its entirety as follows:
“E.Acquisition. In the case of Facility B, the transactions contemplated by each of (1) the Acquisition Agreement and (2) the Asset Purchase Agreement entered into in January, 2013 between the Borrower and Strategic Partners, Inc., a California corporation, shall have been consummated without any amendment, modification or waiver of any of the provisions of the same (other than those necessary and made to ensure compliance with the Related Documents). In the case of Facility B-1, the transactions contemplated by the Hawk Acquisition Agreement shall have been consummated without any amendment, modification or waiver of any of the provisions of the same (other than those necessary and made to ensure compliance with the Related Documents). In the case of Facility B-2, the transactions contemplated by the Flip Flop Acquisition Agreement shall have been consummated without any amendment, modification or waiver of any of the provisions of the same (other than those necessary and made to ensure compliance with the Related Documents).”
(h)Paragraph (A) of Section 4.5 of the Credit Agreement is amended by deleting the phrase “and reviewed by an independent certified public accountant of recognized standing satisfactory to the Bank”.
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(i)Paragraph (C) of Section 4.5 of the Credit Agreement is hereby deleted.
(j)Paragraph (A) of Section 5.2 of the Credit Agreement is hereby amended in its entirety to read as follows:
“(A)Distributions. Redeem, retire, purchase or otherwise acquire, directly or indirectly, any of its Equity Interests, return any contribution to an Equity Owner or, other than stock dividends and dividends paid to the Borrower, declare or pay any Distributions unless (i) the Bank has consented thereto and (2) after giving pro forma effect thereto, the Borrower shall be in compliance with the Fixed Change Coverage Ratio and the Senior Funded Debt Ratio.”
(k)Paragraphs (O)(i) and (ii) of Section 5.2 of the Credit Agreement are hereby amended in their entirety as follows:
“(i)Fixed Charge Coverage Ratio. Permit the Borrower’s Fixed Charge Coverage Ratio for any Test Period to be less than 1.20 to 1.00. “Fixed Charge Coverage Ratio” means, for any Test Period, with respect to the Borrower and its Subsidiaries on a consolidated basis, the ratio of (a) (i) EBITDA for such period plus (ii) GAAP rental expense for such period minus (iii) capital expenditures for such period minus (iv) tax expenses paid in cash for such period minus (v) Distributions paid in cash during such period plus (vi) non-cash stock compensation (without duplication), to (b) the sum of (i) cash rentals payable under leases of real and personal property for such period (without duplication of items included in consolidated interest expense), plus (ii) scheduled current maturities of long term debt, plus (iii) consolidated interest expense during such period.
(ii)Senior Funded Debt Ratio. Permit the Borrower’s Senior Funded Debt Ratio to be greater than (i) 2.50 to 1.00 from the date hereof until the fiscal quarter ending October 31, 2014, (ii) 2.25 to 1.00 from the fiscal quarter ending January 31, 2015 until the fiscal quarter ending January 31, 2016, and (iii) 2.00 to 1.00 thereafter. “Senior Funded Debt Ratio” means, at any date of determination, with respect to the Borrower and its Subsidiaries on a consolidated basis, the ratio of (a) indebtedness for (i) borrowed money plus (ii) the deferred purchase price of property not purchased on ordinary trade terms plus (iii) capitalized leases and for other liabilities evidenced by promissory notes or other instruments, but not including any indebtedness that has been subordinated to the indebtedness evidenced by Notes pursuant to a writing that has been accepted by the Bank to (b) the sum on such date of (i) EBITDA for the most recently completed Test Period prior to such date plus (ii) non-cash stock compensation (without duplication) plus (iii) deemed EBITDA of Flip Flop Shops Franchise Company, LLC of $1,000,000 for the test period ending October 31, 2015, $750,000 for the test period ending January 31, 2016, $500,000 for the test period ending April 30, 2016, and $250,000 for the test period ending July 31, 2016.”
(l)Section 6.1 of the Credit Agreement is hereby amended by replacing the phrase “the Acquisition Agreement and the Hawk Acquisition Agreement” with the phrase “the Acquisition Agreement, the Hawk Acquisition Agreement and the Flip Flop Acquisition Agreement” in clause (m) therein.
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SECTION 2.2 Upfront Fee. The Borrower agrees to pay to the Bank an upfront fee equal to 0.50% of the total amount advanced under Facility B-2, which shall be payable upon execution and delivery of this Amendment.
SECTION 2.3 Conditions. This Amendment shall become effective upon the first date on which each of the following conditions has been satisfied:
(a)The Bank shall have received this Amendment, the new Term Note B-2, the Second Amendment to the Line of Credit Note, the Third Amendment to the Term Note B, and the First Amendment to the Term Note B-1, each executed and delivered by the authorized officers of the Borrower.
(b)The Bank shall have received a certificate dated as of the date of this Amendment from an authorized officer of the Borrower in form and substance satisfactory to the Bank certifying as to the matters set forth in paragraphs (A) and (B) of Section 3.2 of the Credit Agreement.
(c)The Bank shall have received (i) a certified copy of the Flip Flop Acquisition Agreement and (ii) a quality of earnings report with respect to Flip Flop Shops Franchise Company, LLC, in each case, in form and substance satisfactory to the Bank.
SECTION 2.4 Post-Closing Covenant. Within 90 days after the date of this Amendment, the Borrower shall have caused (i) all security interest filings with respect to trademarks, patents or copyrights of the Borrower or any other Obligor that are filed with the United States Patent and Trademark Office or the United States Copyright Office, other than security interest filings in favor of the Bank, to have been terminated and all filings with respect to such terminations shall have been filed with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, and (ii) security interest filings in favor of the Bank with respect to all trademarks, copyrights and patents of the Borrower or any other Obligor to have been filed in the United States Patent and Trademark Office or the United States Copyright Office, as applicable . Failure to comply with this covenant shall constitute an event of default under Section 7.1 of the Credit Agreement.
ARTICLE III
WAIVER
Upon satisfaction of the conditions set forth in Section 2.3, the Bank waives the event of default that has occurred and is continuing under Section 7.1(N) of the Credit Agreement as a result of the receipt of that certain letter dated September 4, 2015 from Target to the Borrower.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION 4.1 Amended Credit Agreement. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, shall continue in full force and effect. All references to the Credit Agreement in any other document,
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instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended hereby. This Amendment shall constitute a “Related Document” for all purposes under the Credit Agreement.
SECTION 4.2 Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 4.3 Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof.
SECTION 4.4 Execution in Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be an original and all of which shall constitute together but one and the same agreement.
SECTION 4.5 Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
SECTION 4.6 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns.
SECTION 4.7 Each guarantor acknowledging this Amendment below hereby consents to the modifications to the Credit Agreement contemplated by this Amendment and agrees that its continuing guaranty in favor of the Bank provided in connection with the Credit Agreement is, and shall remain, in full force and effect after giving effect to this Amendment.
SECTION 4.8 Nothing contained in this Amendment shall be construed or interpreted or is intended as a waiver of or limitation on any rights, powers, privileges or remedies that the Bank has or may have under the Credit Agreement or any other Related Document on account of any default or event of default other than as set forth in Section 3 above.
SECTION 4.9 Cancellation of Consent. The consent to the Share Buy Back, as defined in and consented to in the Consent dated as of September 23, 2015 between the Bank, the Borrower and the Guarantors, is hereby cancelled and of no force and effect.
[Signature page follows]
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IN WITNESS WHEREOF, the Borrower and the Bank have executed this Amendment on the date first above written.
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Cherokee Inc. |
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/s/ Howard Siegel |
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Name: Howard Siegel |
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Title: COO |
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/s/ Jason Boling |
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Name: Jason Boling |
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Title: CFO |
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BANK |
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JPMorgan Chase Bank, N.A. |
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/s/ Manju Manwani |
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Name: Manju Manwani |
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Title: Officer |
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ACKNOWLEDGED BY THE GUARANTORS
SPELL C. LLC |
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CHEROKEE BRANDS LLC |
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Cherokee Inc., its sole member |
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By: |
Cherokee Inc., its sole member |
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By: |
/s/ Howard Siegel |
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By: |
/s/ Howard Siegel |
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Name: Howard Siegel |
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Name: Howard Siegel |
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Title: COO |
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Title: COO |
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By: |
/s/ Jason Boling |
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By: |
/s/ Jason Boling |
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Name: Jason Boling |
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Name: Jason Boling |
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Title: CFO |
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Title: CFO |
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HAWK 900 BRANDS LLC |
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THREE-SIXTY VISION LLC |
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Cherokee Inc., its sole member |
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By: |
Cherokee Inc., its sole member |
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By: |
/s/ Howard Siegel |
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By: |
/s/ Howard Siegel |
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Name: Howard Siegel |
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Name: Howard Siegel |
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Title: COO |
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Title: COO |
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By: |
/s/ Jason Boling |
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By: |
/s/ Jason Boling |
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Name: Jason Boling |
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Name: Jason Boling |
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Title: CFO |
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Title: CFO |
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With respect to the following Guarantors, such acknowledgement is effective immediately upon consummation of the transactions contemplated by the Flip Flop Acquisition Agreement: |
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FFS HOLDINGS, LLC |
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FLIP FLOP SHOPS FRANCHISE COMPANY, LLC |
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Cherokee Inc., its sole member |
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By: |
Cherokee Inc., its sole member |
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By: |
/s/ Howard Siegel |
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By: |
/s/ Howard Siegel |
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Name: Howard Siegel |
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Name: Howard Siegel |
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Title: COO |
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Title: COO |
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By: |
/s/ Jason Boling |
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/s/ Jason Boling |
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Name: Jason Boling |
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Name: Jason Boling |
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Title: CFO |
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Title: CFO |
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THIRD AMENDMENT TO TERM NOTE
THIS THIRD AMENDMENT TO TERM NOTE (this “Amendment”) dated as of October 13, 2015, is by and between Cherokee Inc., a Delaware corporation (the “Borrower”), and JPMorgan Chase Bank, N.A. (the “Bank”).
In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
W I T N E S S E T H:
WHEREAS, the Borrower has heretofore issued in favor of Bank that certain Term Note dated as of September 4, 2012, as amended on January 31, 2013 and January 10, 2014 (the “Term Note”) in connection with “Facility B” under the Credit Agreement entered into between the Borrower and the Bank as of September 4, 2012 and as further amended as of January 31, 2013, January 10, 2014 and concurrently herewith;
WHEREAS, the Borrower and the Bank have agreed to amend the maturity date of Facility B; and
WHEREAS, the parties desire to amend the Term Note to put such change into effect.
NOW, THEREFORE, in consideration of the agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Defined Terms. Capitalized terms used, but not defined herein shall have the meanings assigned to them in the Term Note, as amended by this Amendment.
ARTICLE II
AMENDMENTS
SECTION 2.1. The Term Note is hereby amended by replacing the date “August 31, 2017” with “March 1, 2017” in each of the Section titled “Promise to Pay” and in the heading of the Term Note.
SECTION 2.2 The Term Note is hereby amended by amending in its entirety the Section titled “Principal Payments” to read as follows:
The Borrower shall repay the principal amounts of this Note on a quarterly basis, commencing on November 30, 2012 and continuing on the last day of each February, May, August and November thereafter through February 28, 2017, in equal principal installments of (A) $650,000 for the payment dates up to and including February 28, 2013 and (B) $886,111.10 thereafter, and the remaining outstanding principal amount shall be repaid on March 1, 2017.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION 3.1 Ratification of and References to the Promissory Note. This Amendment shall be deemed to be an amendment to the Term Note, and the Term Note, as amended hereby, shall continue in full force and effect and is hereby ratified, reaffirmed, approved and confirmed in each and every respect. All references to the Term Note in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Term Note as amended hereby.
SECTION 3.2 Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 3.3 Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof.
SECTION 3.4 Execution in Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be an original and all of which shall constitute together but one and the same agreement.
SECTION 3.5 Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
SECTION 3.6 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns.
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date first above written.
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Name: Howard Siegel |
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Title: COO |
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Name: Jason Boling |
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Title: CFO |
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JPMorgan Chase Bank, N.A. |
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By: |
/s/ Manju Manwani |
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Name: Manju Manwani |
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Title: Officer |
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Signature page to Third |
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Amendment to Term Note |
SECOND AMENDMENT TO LINE OF CREDIT NOTE
THIS SECOND AMENDMENT TO LINE OF CREDIT NOTE (this “Amendment”) dated as of September 4, 2015, is by and between Cherokee Inc., a Delaware corporation (the “Borrower”), and JPMorgan Chase Bank, N.A. (the “Bank”).
In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
W I T N E S S E T H:
WHEREAS, the Borrower has heretofore issued in favor of Bank that certain Line of Credit Note dated as of September 4, 2012 (as previously amended or otherwise modified, the “Line of Credit Note”) in connection with “Facility A” under the Credit Agreement entered into between the Borrower and the Bank as of September 4, 2012 and as further amended as of January 31, 2013, as of January 10, 2014 and concurrently herewith;
WHEREAS, the Borrower and the Bank have agreed to extend the maturity date of Facility A; and
WHEREAS, the parties desire to amend the Line of Credit Note to put such change into effect.
NOW, THEREFORE, in consideration of the agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1Defined Terms. Capitalized terms used, but not defined herein shall have the meanings assigned to them in the Line of Credit Note, as amended by this Amendment.
ARTICLE II
AMENDMENTS
SECTION 2.1. The Line of Credit Note is hereby amended by replacing the date “September 4, 2015” in the sections titled “Principal payments” and “Promise to Pay” with the date “March 1, 2017”.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION 3.1Ratification of and References to the Promissory Note. This Amendment shall be deemed to be an amendment to the Line of Credit Note, and the Line of Credit Note, as amended hereby, shall continue in full force and effect and is hereby ratified, reaffirmed, approved and confirmed in each and every respect. All references to the Line of Credit Note in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Line of Credit Note as amended hereby.
SECTION 3.2Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 3.3Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof.
SECTION 3.4Execution in Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be an original and all of which shall constitute together but one and the same agreement.
SECTION 3.5Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
SECTION 3.6Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns.
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date first above written.
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Title: COO |
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/s/ Jason Boling |
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Name: Jason Boling |
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Title: CFO |
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BANK |
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JPMorgan Chase Bank, N.A. |
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/s/ Manju Manwani |
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Name: Manju Manwani |
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Title: Officer |
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S-1
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Signature page to Second Amendment to |
FIRST AMENDMENT TO TERM NOTE B-1
THIS FIRST AMENDMENT TO TERM NOTE B-1 (this “Amendment”) dated as of October 13, 2015, is by and between Cherokee Inc., a Delaware corporation (the “Borrower”), and JPMorgan Chase Bank, N.A. (the “Bank”).
In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
W I T N E S S E T H:
WHEREAS, the Borrower has heretofore issued in favor of Bank that certain Term Note B-1 dated as of January 10, 2014 (as previously amended or otherwise modified, the “Term Note B-1”) in connection with “Facility B-1” under the Credit Agreement entered into between the Borrower and the Bank as of September 4, 2012 and as further amended as of January 31, 2013, as of January 10, 2014 and concurrently herewith;
WHEREAS, the Borrower and the Bank have agreed to amend the maturity date of Facility B-1; and
WHEREAS, the parties desire to amend the Term Note B-1 to put such change into effect.
NOW, THEREFORE, in consideration of the agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1Defined Terms. Capitalized terms used, but not defined herein shall have the meanings assigned to them in the Term Note B-1, as amended by this Amendment.
ARTICLE II
AMENDMENTS
SECTION 2.1. The Term Note B-1 is hereby amended by replacing the date “December 31, 2018” with “March 1, 2017” in each of the Section titled “Promise to Pay” and in the heading of the Term Note B-1.
SECTION 2.2 The Term Note B-1 is hereby amended by amending in its entirety the Section titled “Principal Payments” to read as follows:
Principal payments. The Borrower shall repay the principal amounts of this Note on a quarterly basis, commencing on February 28, 2014 and continuing on
the last day of each February, May, August and November thereafter through February 28, 2017 in equal principal installments of $950,000, and the remaining outstanding principal amount shall be repaid on March 1, 2017.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION 3.1Ratification of and References to the Promissory Note. This Amendment shall be deemed to be an amendment to the Term Note B-1, and the Term Note B-1, as amended hereby, shall continue in full force and effect and is hereby ratified, reaffirmed, approved and confirmed in each and every respect. All references to the Term Note B-1 in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Term Note B-1 as amended hereby.
SECTION 3.2Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 3.3Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof.
SECTION 3.4Execution in Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be an original and all of which shall constitute together but one and the same agreement.
SECTION 3.5Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
SECTION 3.6Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns.
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date first above written.
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Cherokee Inc. |
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/s/ Howard Siegel |
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Name: Howard Siegel |
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Title: COO |
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/s/ Jason Boling |
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Name: Jason Boling |
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Title: CFO |
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BANK |
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JPMorgan Chase Bank, N.A. |
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By: |
/s/ Manju Manwani |
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Name: Manju Manwani |
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Title: Officer |
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S-1
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Signature page to First |
Term Note B-2 |
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$ 6,000,000.00 |
Due: March 1, 2017 |
Date: October 13, 2015 |
Promise to Pay. On or before March 1, 2017, for value received, CHEROKEE INC. (the "Borrower") promises to pay to JPMorgan Chase Bank, N.A., whose address is 300 S. Grand Ave., Los Angeles, CA 90071-3109 (the "Bank") or order, in lawful money of the United States of America, the sum of SIX MILLION AND 00/100 Dollars ($6,000,000.00) or so much thereof as may be advanced and outstanding, plus interest on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days at the rate(s) provided for below and at the rate of 3.00% per annum above such rate(s), at the Bank's option, upon the occurrence of any default under this Note and continuation thereof beyond any applicable cure period as provided herein or in the Credit Agreement (as hereinafter defined), whether or not the Bank elects to accelerate the maturity of this Note, from the date such increased rate is imposed by the Bank.
Definitions. As used in this Note, the following terms have the following respective meanings:
"Adjusted LIBOR Rate" means, with respect to the relevant Interest Period, the sum of (i) the Applicable Margin plus (ii) the quotient of (a) the LIBOR Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period.
"Adjusted One Month LIBOR Rate" means, with respect to a CB Floating Rate Advance for any day, the sum of (i) 2.50% per annum plus (ii) the quotient of (a) the interest rate determined by the Bank by reference to the Screen to be the rate at approximately 11:00 a.m. London time, on such date or, if such date is not a Business Day, on the immediately preceding Business Day for dollar deposits with a maturity equal to one (1) month, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to dollar deposits in the London interbank market with a maturity equal to one (1) month.
"Advance" means a LIBOR Rate Advance or a CB Floating Rate Advance and "Advances" means all LIBOR Rate Advances and all CB Floating Rate Advances under this Note.
"Applicable Margin" means, on any day, (i) with respect to any CB Floating Rate Advance, (a) 0.00% per annum if the Senior Funded Debt Ratio is less than or equal to 2.00 to 1.00 or (b) 0.25% per annum if the Senior Funded Debt Ratio is 2.01 to 1.00 or greater; and (ii) with respect to any LIBOR Rate Advance, (a) 2.75% per annum if the Senior Funded Debt Ratio is less than or equal to 2.00 to 1.00 or (b) 3.00% per annum if the Senior Funded Debt Ratio is 2.01 to 1.00 or greater.
"Business Day" means a day (other than a Saturday or Sunday) on which banks generally are open in California and/or New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market.
"CB Floating Rate" means the Prime Rate; provided that the CB Floating Rate shall, on any day, not be less than the Adjusted One Month LIBOR Rate. The CB Floating Rate is a variable rate and any change in the CB Floating Rate due to any change in the Prime Rate or the Adjusted One Month LIBOR Rate is effective from and including the effective date of such change in the Prime Rate or the Adjusted One Month LIBOR Rate, respectively.
"CB Floating Rate Advance" means any borrowing under this Note when and to the extent that its interest rate is determined by reference to the CB Floating Rate.
"Interest Period" means, with respect to a LIBOR Rate Advance, a period of one (1), two (2) or three (3) month(s) commencing on a Business Day selected by the Borrower pursuant to this Note. Such Interest Period shall end on the day which corresponds numerically to such date one (1), two (2) or three (3) month(s) thereafter, as applicable, provided, however, that if there is no such numerically corresponding day in such first, second or third succeeding month(s), as applicable, such Interest Period shall end on the last Business Day of such first, second or third succeeding month(s), as applicable. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day.
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"LIBOR Rate" means with respect to any LIBOR advance for any Interest Period, the interest rate determined by the Bank by reference to Reuters Screen LIBOR01, formerly known as Page 3750 of the Moneyline Telerate Service (together with any successor or substitute, the "Service") or any successor or substitute page of the Service providing rate quotations comparable to those currently provided on such page of the Service, as determined by the Bank from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market, to be the rate at approximately 11:00 a.m. London time, two Business Days prior to the commencement of the Interest Period for dollar deposits with a maturity equal to such Interest Period. If no LIBOR Rate is available to the Bank, the applicable LIBOR Rate for the relevant Interest Period shall instead be the rate determined by the Bank to be the rate at which the Bank offers to place U.S. dollar deposits having a maturity equal to such Interest Period with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period.
"LIBOR Rate Advance" means any borrowing under this Note when and to the extent that its interest rate is determined by reference to the Adjusted LIBOR Rate.
"Prime Rate" means the rate of interest per annum announced from time to time by the Bank as its prime rate. The Prime Rate is a variable rate and each change in the Prime Rate is effective from and including the date the change is announced as being effective. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE THE BANK'S LOWEST RATE.
"Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D.
"Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.
"Senior Funded Debt Ratio" has the meaning provided in the Credit Agreement.
Illegality. If any applicable domestic or foreign law, treaty, rule or regulation now or later in effect (whether or not it now applies to the Bank) or the interpretation or administration thereof by a governmental authority charged with such interpretation or administration, or compliance by the Bank with any guideline, request or directive of such an authority (whether or not having the force of law), shall make it unlawful or impossible for the Bank to maintain or fund the advances evidenced by this Note, then, upon notice to the Borrower by the Bank, the outstanding principal amount, together with accrued interest and any other amounts payable to the Bank under this Note or the Related Documents shall be repaid (a) immediately upon the Bank's demand if such change or compliance with such requests, in the Bank's judgment, requires immediate repayment, or (b) at the expiration of the last Interest Period to expire before the effective date of any such change or request.
Inability to Determine Interest Rates. If the Bank determines that quotations of interest rates for the relevant deposits for purposes of the definition of Adjusted LIBOR Rate are not being provided for purposes of determining the interest rate as provided in this Note, then the Bank shall, at the Bank's option, give notice of such circumstances to the Borrower, whereupon (i) the obligation of the Bank to make advances evidenced by this Note shall be suspended until the Bank notifies the Borrower that the circumstances giving rise to the suspension no longer exists, and (ii) the Borrower shall repay in full the then outstanding principal amount of each advance evidenced by this Note, together with accrued interest, on the last day of the then current Interest Period.
Interest Rates. The Advance(s) evidenced by this Note may be drawn down and remain outstanding as up to three (3) LIBOR Rate Advances and/or a CB Floating Rate Advance. The Borrower shall pay interest to the Bank on the outstanding and unpaid principal amount of each CB Floating Rate Advance at the CB Floating Rate plus the Applicable Margin and each LIBOR Rate Advance at the Adjusted LIBOR Rate. In no event shall the interest rate exceed the maximum rate allowed by law. Any interest payment that would for any reason be unlawful under applicable law shall be applied to principal.
Interest Payments. Interest on the Advances shall be paid as follows:
A. For each CB Floating Rate Advance, on the last day of each month beginning with the first month following disbursement of the Advance; and
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B. For each LIBOR Rate Advance, on the last day of the Interest Period for the Advance and, if the Interest Period is longer than three months, at three-month intervals beginning with the day three months from the date the Advance is disbursed.
Principal payments. The Borrower shall repay the principal amounts of this Note on a quarterly basis, commencing on November 30, 2015 and continuing on the last day of each February, May, August and November, thereafter through February 28, 2017, in equal principal installments of $300,000.00, and the remaining outstanding principal amount shall be repaid on March 1, 2017.
The Borrower shall pay the Bank amounts sufficient (in the Bank's reasonable opinion) to compensate the Bank for any loss, cost, or expense incurred as a result of any payment of a LIBOR Rate Advance on a date other than the last day of the Interest Period for the Advance, including, without limitation, acceleration of the Advances by the Bank pursuant to this Note or the other Related Documents; or
The Borrower shall make all payments on this Note and the other Related Documents, without setoff, deduction, or counterclaim, to the Bank at the Bank's address above or at such other place as the Bank may designate in writing. If any payment of principal or interest on this Note shall become due on a day that is not a Business Day, the payment will be made on the next succeeding Business Day. In addition, the Borrower will make those additional payments required by the Credit Agreement. Payments shall be allocated among principal, interest and fees at the discretion of the Bank unless otherwise agreed or required by applicable law. Acceptance by the Bank of any payment that is less than the payment due at that time shall not constitute a waiver of the Bank's right to receive payment in full at that time or any other time.
Notice and Manner of Electing Interest Rates on Advances. The Borrower shall give the Bank written notice (effective upon receipt) of the Borrower's intent to draw down an Advance under this Note no later than 2:00 p.m. Pacific time, on the date of disbursement, if the full amount of the drawn Advance is to be disbursed as a CB Floating Rate Advance and no later than 11:00 a.m. Pacific time three (3) Business Days before disbursement, if any part of such Advance is to be disbursed as a LIBOR Rate Advance. The Borrower's notice must specify: (a) the disbursement date, (b) the amount of each Advance, (c) the type of each Advance (CB Floating Rate Advance or LIBOR Rate Advance), and (d) for each LIBOR Rate Advance, the duration of the applicable Interest Period; provided, however, that the Borrower may not elect an Interest Period ending after the maturity date of this Note. Each LIBOR Rate Advance shall be in a minimum amount of Five Hundred Thousand US Dollars ($500,000). All notices under this paragraph are irrevocable. By the Bank's close of business on the disbursement date and upon fulfillment of the conditions set forth herein and in any other of the Related Documents, the Bank shall disburse the requested Advances in immediately available funds by crediting the amount of such Advances to the Borrower's account with the Bank.
Authorization for Direct Payments (ACH Debits). To effectuate any payment due under this Note or under any other Related Documents, the Borrower hereby authorizes the Bank to initiate debit entries to Account Number 475392689 at the Bank and to debit the same to such account. This authorization to initiate debit entries shall remain in full force and effect until the Bank has received written notification of its termination in such time and in such manner as to afford the Bank a reasonable opportunity to act on it. The Borrower represents that the Borrower is and will be the owner of all funds in such account. The Borrower acknowledges: (1) that such debit entries may cause an overdraft of such account which may result in the Bank's refusal to honor items drawn on such account until adequate deposits are made to such account; (2) that the Bank is under no duty or obligation to initiate any debit entry for any purpose; and (3) that if a debit is not made because the above-referenced account does not have a sufficient available balance, or otherwise, the payment may be late or past due.
Late Fee. Any principal or interest which is not paid within 10 days after its due date (whether as stated, by acceleration or otherwise) shall be subject to a late payment charge of five percent (5.00%) of the total payment due, in addition to the payment of interest, up to the maximum amount of One Thousand Five Hundred and 00/100 Dollars ($1,500.00) per late charge. The Borrower agrees to pay and stipulates that five percent (5.00%) of the total payment due is a reasonable amount for a late payment charge. The Borrower shall pay the late payment charge upon demand by the Bank or, if billed, within the time specified.
Purpose of Loan. The Borrower acknowledges and agrees that this Note evidences a loan for a business, commercial, agricultural or similar commercial enterprise purpose, and that no advance shall be used for any personal, family or household purpose. The proceeds of the loan shall be used only to finance the acquisition by merger of FFS Merger Sub LLC, a Delaware limited liability company and wholly owned subsidiary of Borrower with and into FFS Holdings, LLC, a Delaware limited liability company ("FFS Holdings") and sole member of Flip Flop Shops Franchise Company, LLC, and the acquisition by Borrower of the equity interests of FFS Holdings.
Miscellaneous. This Note binds the Borrower and its successors, and benefits the Bank, its successors and assigns. Any reference to the Bank includes any holder of this Note. This Note is subject to that certain Credit Agreement by and between the Borrower and the
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Bank, dated as of September 4, 2012, and all amendments, restatements and replacements thereof (the "Credit Agreement") to which reference is hereby made for a more complete statement of the terms and conditions under which the loan evidenced hereby is made and is to be repaid. The terms and provisions of the Credit Agreement are hereby incorporated and made a part hereof by this reference thereto with the same force and effect as if set forth at length herein. No reference to the Credit Agreement and no provisions of this Note or the Credit Agreement shall alter or impair the absolute and unconditional obligation of the Borrower to pay the principal and interest on this Note as herein prescribed. Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. Time is of the essence under this Note and in the performance of every term, covenant and obligation contained herein.
Funding Loss Indemnification. If the Borrower pays all or any portion of the principal balance of this Note on a date other than the last day of the Interest Period or the maturity date of this Note (whether by acceleration, prepayment or otherwise) the Borrower shall pay the Bank amounts sufficient (in the Bank's reasonable opinion) to compensate the Bank for any loss, cost, or expense incurred as a result thereof.
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Address: |
5990 Sepulveda Blvd. |
CHEROKEE INC. |
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Suite 600 |
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Sherman Oaks, CA 91411 |
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/s/ Howard Siegel |
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Howard Siegel |
COO |
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Date Signed: |
October 13, 2015 |
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/s/ Jason Boling |
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Jason Boling |
CFO |
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October 13, 2015 |
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Signature page to Term Note B-2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Henry Stupp, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Cherokee Inc.;
2.Based on my knowledge, this 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 report;
3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: December 10, 2015 |
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By: |
/s/ Henry Stupp |
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Henry Stupp |
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Chief Executive Officer |
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(Principal Executive Officer) |
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jason Boling, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Cherokee Inc.;
2.Based on my knowledge, this 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 report;
3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: December 10, 2015 |
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By: |
/s/ Jason Boling |
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Jason Boling |
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Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
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 adopted 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 October 31, 2015 (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: December 10, 2015 |
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By: |
/s/ Henry Stupp |
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Henry Stupp |
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Chief Executive Officer |
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(Principal Executive Officer) |
This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
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
Pursuant to 18 U.S.C. § 1350, as adopted 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 October 31, 2015 (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: December 10, 2015 |
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By: |
/s/ Jason Boling |
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Jason Boling |
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Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
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