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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JUNE 1, 1997 TO
JANUARY 31, 1998
COMMISSION FILE NO. 0-18640
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CHEROKEE INC.
(Exact name of registrant as specified in charter)
DELAWARE 95-4182437
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6835 VALJEAN AVENUE
VAN NUYS, CA 91406
(Address of principal executive (Zip Code)
office)
(818) 908-9868
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.02 per share
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.
(1) Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
- --
As of April 15, 1998, the registrant had 8,612,657 shares of its Common
Stock, par value $.02 per share, issued and outstanding.
As of April 15, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $66,724,000 (computed on
the basis of the last trade of the Common Stock on the NASDAQ Small Cap Issue
Market on April 15, 1998).
Certain portions of the registrant's proxy statement for the Annual Meeting
of Stockholders to be held on June 8, 1998 are incorporated by this reference
into Part III as set forth herein.
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CHEROKEE INC.
INDEX
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PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 15
Item 6. Selected Financial Data....................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation...................................... 17
Item 7A. Qualitative and Quantitative Risk............................. 23
Item 8. Consolidated Financial Statements and Supplementary Data...... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 25
PART III
Item 10. Executive Officers of the Registrant.......................... 25
Item 11. Executive Compensation........................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 26
Item 13. Certain Relationships and Related Transactions................ 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................... 26
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Cherokee Inc. (the "Company") is in the business of marketing and licensing
the Cherokee and Sideout brands and related trademarks and other brands it
owns. The Company is one of the leading licensors of brand names and
trademarks for apparel, footwear and accessories in the United States. The
Company's operating strategy emphasizes retail direct, wholesale and
international licensing whereby the Company grants retailers and wholesalers
the license to use the trademarks held by the Company on certain categories of
merchandise, and the licensees are responsible for designing and manufacturing
the merchandise. The Company and its wholly-owned subsidiary, SPELL C. LLC
("Spell C"), hold several trademarks including Cherokee(TM), Sideout(TM),
Sideout Sport(TM), King of the Beach(TM) and others. The Cherokee brand, which
began as a footwear brand in 1973, has been positioned to connote quality,
comfort, fit, and a "Casual American" lifestyle with traditional wholesome
values. The Sideout brand and related trademarks, which represent a beach-
oriented, active, "California" lifestyle, were acquired by the Company in
November 1997. As of January 31, 1998, the Company had twenty-five continuing
license agreements, covering both domestic and international markets.
In November 1997 the Company reaffirmed its relationship with Target Stores,
a division of Dayton Hudson Corporation ("Target"), by entering into an
amended licensing agreement (the "Amended Target Agreement") which grants
Target the exclusive right in the United States to use the Cherokee trademarks
on certain specified categories of merchandise. Under the Amended Target
Agreement, Target is obligated to pay a royalty based upon a percentage of its
net sales of Cherokee brand products, with a minimum guaranteed royalty of
$60.0 million over the six-year initial term of the agreement.
In December 1997 the Company completed a series of transactions whereby it
sold its rights to the Cherokee brand and related trademarks in the United
States to Spell C, its wholly-owned subsidiary, and also assigned to Spell C
its rights in the Amended Target Agreement. In return the Company received the
gross proceeds resulting from the sale by Spell C, for an aggregate of $47.9
million, of privately placed Zero Coupon Secured Notes (the "Secured Notes"),
which yield 7.0% interest per annum, mature February 20, 2004 and are secured
by the Amended Target Agreement and by the United States Cherokee trademarks.
The aggregate scheduled amortization under the Secured Notes ($60.0 million)
equals the aggregate minimum guaranteed royalty payable under the Amended
Target Agreement ($60.0 million). Therefore, unless royalties under the
Amended Target Agreement exceed the minimum guaranteed royalty, no revenues
derived from the Amended Target Agreement can be distributed to the Company by
Spell C. Using the proceeds from the sale of the Secured Notes, the Company's
Board declared a special dividend of $5.50 per share which was paid on January
15, 1997.
At a meeting held December 19, 1997, the Board of Directors of the Company
(the "Board") changed the fiscal year end of the Company to a 52 or 53 week
fiscal year ending on the Saturday nearest to January 31 in order to better
align the Company with its licensees who also generally operate and plan using
such a fiscal year. Prior to this change, the Company's fiscal year was a 52
or 53 week fiscal year ending on the Saturday nearest to May 31. This
Transition Report on Form 10-K is made with respect to the eight (8) month
fiscal period beginning June 1, 1997 and ending January 31, 1998, (referred to
herein as the "Eight Month Fiscal Period") resulting from such change.
HISTORY AND RESTRUCTURINGS
On April 24, 1995, a group including Robert Margolis, who founded the
Company's Apparel Division in 1981, and who had been the Company's Chairman
and Chief Executive Officer from May 1989 to October 1993, purchased 1,358,000
shares, or approximately 22.3% of the Company's then outstanding Common Stock
("Common Stock"). On May 5, 1995, Mr. Margolis was appointed Chairman and
Chief Executive Officer of the Company. After a period of assessment, Mr.
Margolis set in motion a strategy which resulted in the
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Company's principal business being a marketer and licensor of the Cherokee
brand and other brands it owns or may acquire in the future. The Company
stopped manufacturing and importing apparel and footwear, sold its inventories
of apparel and footwear, and on July 28, 1995 sold the assets of its Uniform
Division. The proceeds from these sales were used to pay off all of the
Company's indebtedness. As a result of discontinuing the apparel and footwear
business and selling the Uniform Division, the number of employees was reduced
from approximately 345 on May 28, 1994 to 15 by November 1, 1995.
Prior to this major strategic change, the Company was a designer,
manufacturer, and marketer of casual apparel and footwear primarily under the
Cherokee name. The Company operated four divisions during the fiscal year
ended June 3, 1995 ("Fiscal 1995"): the Apparel Division, the Footwear
Division, the Uniform Division, and the Licensing Division. The Apparel
Division designed, manufactured, imported and marketed moderately priced,
natural fiber women's and young girls' clothing. The Footwear Division
designed, arranged for the manufacture, imported and marketed Cherokee brand
and a broad line of private label footwear for women, men and children. The
Uniform Division designed, manufactured and marketed Cherokee brand uniforms
primarily for the medical industry. The Licensing Division continues to
license the use of the Company's proprietary brand names to domestic and
international licensees for a variety of apparel, footwear, accessories, home
products and other lifestyle related products.
The 1993 Plan
The Company, which was founded in 1973 and whose shares first became
publicly traded in 1983, was acquired in a leveraged buy-out in 1989. In
connection with the acquisition, the Company incurred substantial debt. As a
result of a significant decrease in its earnings, the Company was unable to
service its debt. On April 23, 1993, the Company and its then wholly-owned
operating subsidiary, The Cherokee Group ("Group"), filed a petition with the
United States Bankruptcy Court in the District of Delaware (the "Bankruptcy
Court") for relief under Chapter 11 of the United States Bankruptcy Code
("Chapter 11"). Concurrent with such filing, the Company and Group filed a
joint "prepackaged" Plan of Reorganization (the "1993 Plan") which was the
result of negotiations among the Company and unofficial representatives of its
subordinated debt-holders and stockholders. On May 28, 1993, the Bankruptcy
Court confirmed the 1993 Plan, and on June 1, 1993, the 1993 Plan became
effective. As a result of the 1993 Plan, Group was merged into the Company.
Furthermore, subsequent to the effective date of the 1993 Plan, the Apparel
Division (including the Uniform Division), the Footwear Division, the
Licensing Division, and prior to its sale in May 1994, the Priority Finishing
Division, were operated by the Company.
The 1994 Plan
It became apparent by October 1994 that the Company's business was not
generating sufficient cash flow to service its existing debt. On November 7,
1994, the Company filed a petition with the Bankruptcy Court for relief under
Chapter 11. Concurrent with such filing, the Company filed a "prepackaged"
Plan of Reorganization (the "1994 Plan") which was the result of negotiations
among the Company and unofficial representatives of its debt-holders and
stockholders. On December 14, 1994, the Bankruptcy Court confirmed the 1994
Plan, and on December 23, 1994, the 1994 Plan became effective (the "Effective
Date"). For financial statement purposes the effective date of the 1994 Plan
was assumed to be February 25, 1995.
The consummation of the 1994 Plan resulted in the following: (1) a new
credit agreement with the Company's sole secured creditor, the CIT
Group/Business Credit, Inc. ("CIT"), the proceeds of which were used to
satisfy the claims of the secured creditor under the prior credit facility;
(2) the cancellation of all outstanding shares of the Company's common stock,
par value $.01 (the "Old Common Stock") and the Series A, B, and C warrants to
purchase Old Common Stock; (3) the issuance of 4,900,000 shares of Common
Stock to the holders of 11% Senior Subordinated Notes due 2004 (the "Old
Notes") in exchange for the principal amount of $76,565,000 (with accrued and
unpaid interest of approximately $4,211,000 as of November 1, 1994) of Old
Notes; (4) the issuance of 100,000 shares of Common Stock to the holders of
Old Common Stock; and (5) the
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agreement to issue to the Company's general unsecured creditors 60.5504 shares
of Common Stock for each $1,000 of such creditors' claims which were allowed
by the Bankruptcy Court.
RECENT DEVELOPMENTS
Recapitalization; Sale of Cherokee Trademarks to Spell C; Issuance of Secured
Notes
In September 1997, the Company's Board authorized Libra Investments, Inc.
("Libra"), to explore ways to maximize shareholder value, including a
recapitalization and sale of the Company. On December 23, 1997, the Company
completed the recapitalization described below and publicly announced that it
would declare a special dividend of $5.50 per share, which was subsequently
paid on January 15, 1998.
To facilitate the recapitalization, the Company formed Spell C. LLC, a
special purpose, bankruptcy remote, single member Delaware limited liability
company, wholly owned by the Company. Pursuant to a Trademark Purchase and
License Assignment Agreement, dated December 23, 1997, between the Company and
Spell C (the "Assignment Agreement") the Company assigned to Spell C all of
its right, title and interest in the Amended Target Agreement and sold to
Spell C all if its right, title and interest in the Cherokee brand name and
related trademarks in the United States. The sale of the rights to the
Cherokee trademarks in the United States was subject to certain exceptions
which (i) allow the Company to continue to use the trademarks in the United
States in conjunction with the Company's then-existing license agreements, and
(ii) allow the Company to use the trademarks in the United States in
conjunction with retail license agreements in the category of cosmetics, bath
and body products. The Company may extend existing Cherokee brand license
agreements only if the Company assigns 50% of the royalties payable during the
extended term to Spell C. Pursuant to the Assignment Agreement, except for
these exceptions, the Company no longer has the right to license the Cherokee
brand and related trademarks in the United States, but retains all rights to
do so outside of the United States. Concurrently with the Assignment
Agreement, the Company and Spell C entered into an administrative services
agreement under which the Company will perform certain administrative duties
on behalf of Spell C in connection with, among other things, the Cherokee
trademarks and the Assignment Agreement for a nominal administrative fee.
On December 23, 1997 Spell C also issued for gross proceeds of $47.9
million, privately placed Zero Coupon Secured Notes, yielding 7.0% interest
per annum and maturing on February 20, 2004. The Secured Notes amortize
quarterly from May 20, 1998 through February 20, 2004, in the amount of $9.0
million per year the first two years and $10.5 million per year the third
through sixth years. The Secured Notes are secured by the Amended Target
Agreement and the United States Cherokee trademarks and brand names. The
Secured Notes indenture (the "Indenture") requires that any proceeds due to
Spell C under the Amended Target Agreement and certain other license
agreements must be deposited directly into a collection account controlled by
the trustee under the Indenture. The trustee will distribute from the
collection account the amount of principal due and payable on the Secured
Notes to the holders thereof on quarterly note payment dates. Excess amounts
on deposit in the collection account may only be distributed to Spell C if the
amount on deposit in the collection account exceeds the amount of principal
due and payable on the next quarterly note payment date. Such excess amounts,
if any, may then be distributed by Spell C to the Company. The minimum
guaranteed royalty under the Amended Target Agreement is $9.0 million for each
of the two fiscal years ending January 31, 1999 and 2000 and $10.5 million for
each of the four fiscal years ending January 31, 2001 through 2004. The
aggregate scheduled amortization under the Secured Notes ($60.0 million)
equals the aggregate minimum guaranteed royalty payable under the Amended
Target Agreement ($60.0 million). While the Company believes that royalties
payable under the Amended Target Agreement may exceed the Minimum Guaranteed
Royalty, the Company cannot predict with accuracy whether such royalties will
exceed the Minimum Guaranteed Royalty, and if they do not, the Company will
not receive distributions from Spell C during the term of the Amended Target
Agreement. See "--Certain Business Considerations and Risk Factors--
Restrictions on Distributions by Spell C."
Pursuant to the Assignment Agreement, the gross proceeds of the Secured
Notes, which totaled approximately $47.9 million were paid to the Company. On
December 23, 1997 the Company's Board declared
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a special dividend of $5.50 per share which was paid on January 15, 1997. The
aggregate amount of the dividend paid was approximately $47.4 million.
Sideout Agreement
On November 7, 1997, the Company entered into an Agreement of Purchase and
Sale of Trademarks and Licenses (the "Sideout Agreement") with Sideout Sport
Inc., pursuant to which the Company agreed to purchase all of Sideout Sport
Inc.'s trademarks, copyrights, trade secrets and license agreements with
respect thereto (the "Assets"). The trademarks acquired from Sideout Sport
Inc. include, among others, Sideout, Sideout Sport and King of the Beach.
Pursuant to the Sideout Agreement, Cherokee paid $1.5 million at the closing
of the acquisition and agreed to pay an additional $500,000 upon release of
certain liens on the Assets. Most of the liens have since been released and
$450,000 of the $500,000 holdback has been paid. Under the terms of the
Sideout Agreement, the Company will also pay Sideout Sport Inc., on a
quarterly basis, 40% of the first $10.0 million, 10% of the next $5.0 million
and 5% of the next $20.0 million, of royalties and license fees received by
the Company through licensing of the Sideout trademarks. Upon the earlier of
such time as Cherokee has paid Sideout a total of $7.5 million or October 22,
2004, Cherokee will have no further obligation to pay royalties to Sideout.
The Sideout brand currently generates licensing revenues from existing
contracts of approximately $500,000 per year. The Company intends to further
develop the Sideout brand through retail direct, wholesale and international
licensing; however, there can be no assurance that the Company's efforts will
result in significant increases in royalty payments. See "--Certain Business
Considerations and Risk Factors--Uncertainty Regarding Development of Sideout
Brand." The Company is currently in discussions with prospective licensees
concerning significant new licensing agreements for the Sideout brand. There
can be no assurance, however, that these discussions will result in definitive
agreements.
LICENSING BUSINESS
The Company is one of the leading licensors of brand names and trademarks
for apparel, footwear and accessories in the United States. The Cherokee name,
which began as a footwear brand in 1973, has been positioned to connote
quality, comfort, fit, and a "Casual American" lifestyle with traditional,
wholesome values. The Company's primary emphasis for the past three years has
been directed toward retail direct, wholesale and international licensing. As
of January 31, 1998, the Company had twenty-five continuing license
agreements, including both domestic and international markets, seventeen of
which pertained to the Cherokee name. The Sideout brand and related
trademarks, which represent a beach-oriented, active, "California" lifestyle,
were acquired by the Company in November 1997.
The Company's license agreements are with wholesalers and retailers and are
either international masters or category-specific exclusives or non-
exclusives. Of the twenty-five licensing agreements, five are with retailers,
seven are with domestic wholesale licensees and thirteen are with
international wholesale and/or retail licensees. Wholesale licensees
manufacture and import various categories of apparel, footwear and accessories
under the Company's trademarks which include Cherokee, Sideout, Sideout Sport,
King of the Beach and others, and sell the licensed products to retailers. In
retail direct licensing, the Company grants retailers the license to use the
trademarks on certain categories of merchandise, including those products that
the Company previously manufactured, generally on a non-exclusive basis, and
the retailer is responsible for designing and manufacturing the merchandise
(the "Retail Direct" licensing strategy). The Company's license agreements,
wholesale, retail and international, provide the Company with final approval
of pre-agreed upon quality standards, packaging and marketing of licensed
products. The Company has the right to conduct periodic quality control
inspections to ensure that the image and quality of licensed products remain
consistent. The Company will continue to solicit new licensees through a small
number of executive employees and may retain the services of outside
consultants to assist the Company in this regard.
The Company's current business strategy is to maximize the value of its
existing and future brands by exploiting them in a manner that recognizes the
relative market power, in different areas of the world, of the various
participants--manufacturer, wholesaler and retailer--in the chain of supply to
the ultimate consumer. In
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the United States and Canada, that market power, and accompanying economies of
scale, is generally and increasingly held by a few dominant retailers of
moderately priced merchandise, and, accordingly, in North America the Company
has pursued its Retail Direct licensing strategy. In contrast to the retailing
market in North America, in certain international markets the Company has
sought to develop its brands through wholesale licenses with manufacturers or
other companies who have market power and economies of scale in their
respective markets. Finally, in certain countries, the Company believes that
an owner or licensee of one or more well-known U.S. brands has the opportunity
to become a dominant, vertically integrated manufacturer and/or retailer of
branded apparel, footwear and accessories. Accordingly, in those areas the
Company has begun to pursue licensing or strategic alignments whereby its
brands can become the basis for such a vertically integrated
manufacturer/retailer. This strategy permits the Company to operate with
minimal working capital, virtually no capital expenditures (other than those
associated with acquiring new brands and related trademarks), no production
costs, significantly reduced design, marketing, distribution and other
operating expenses, and a small group of core employees.
NORTH AMERICAN RETAIL DIRECT LICENSING
The Company's Retail Direct licensing strategy is premised on the
proposition that in the United States and Canada nearly all aspects of the
moderately priced apparel, footwear and accessories business, from product
development and design, to merchandising, to sourcing and distribution, can be
executed most effectively by large retailers, who not only command significant
economies of scale, but also interact daily with the end consumer. In
addition, the Company believes that these retailers in general may be able to
obtain higher gross margins on sales through stocking and selling "quasi-
private label" licensed products bearing widely recognized brand names (such
as the Company's brands) than through carrying strictly private label goods on
the one hand or branded product from third-party vendors on the other. The
Company also expects that the enhanced profitability to retailers of private
label products and in-store brands, coupled with the substantial and
increasing marketing costs to establish and maintain a widely recognized
apparel brand, will result in further erosion of revenues and profitability
for mid-sized and small apparel manufacturers and corresponding increased
desirability to retailers of well-established brands with broad appeal. The
Company's strategy in the United States and Canada is to capitalize on these
trends by licensing its portfolio of brand names primarily directly to strong
and growing retailers for their in-store branded merchandise, and to augment
that portfolio by acquiring additional brands which have high consumer
awareness, broad appeal and applicability to a range of merchandise
categories.
On August 15, 1995, the Company entered into a major strategic alliance with
Target Stores, a division of Dayton Hudson Corporation. Target was granted the
exclusive right in the United States to use the Cherokee trademarks in
connection with the sale of the following female products in Target Stores: 5-
pocket denim jeans and shorts, all female footwear, all 0-14 girlswear, and
all women's and girls fashion accessories. On November 1, 1995, the Company
entered into a second agreement with Target, whereby Target was granted a non-
exclusive right to use the Cherokee trademarks in connection with the sale of
merchandise in the following categories in Target Stores: women's casual denim
& sportswear, activewear, golfwear, tenniswear, bodywear, careerwear, daywear,
sleepwear, robes, loungewear, boys' activewear sizes 0-7, junior casual &
denim sportswear, activewear, swimwear, dresses, and home textiles. The August
15, 1995 and November 1, 1995 agreements with Target expired as of February 1,
1998.
On November 12, 1997, the Company entered into the Amended Target Agreement
with Target. This agreement was subsequently assigned to Spell C and pledged
as collateral for the Secured Notes. The Amended Target Agreement grants
Target the exclusive right in the United States to use the Cherokee trademarks
in certain specified categories of merchandise, including (i) men's, women's
and children's apparel, including intimate apparel, foundations and sleepwear,
(ii) men's, women's and children's fashion accessories, (iii) bed and bath
products and accessories, (iv) luggage, sports bags and backpacks, (v) home
textiles, (vi) domestics and home decor, (vii) home furnishings, (viii)
sporting goods, and (ix) cosmetics, bath and body products (collectively, the
"Merchandise"). Certain of the above-listed categories are subject to
unexpired license agreements
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between the Company and third parties. The Amended Target Agreement provides
that upon the expiration or termination of such agreements, the categories of
Merchandise subject to such agreements will become exclusive to Target in the
United States. Also, the Company and Spell C cannot license the Cherokee
trademark, and/or renew or otherwise extend existing license agreements
relating to the Cherokee trademark with third parties, in the United States,
in any merchandise category whatsoever except for certain limited exceptions
covering (a) existing license agreements with Brylane L.P. ("Brylane"), The
Caldor Corporation ("Caldor") or Pamida, Inc. ("Pamida"), (b) retail license
agreements with certain drug store chains and (c) certain then-existing
wholesale license agreements. Due to the broad nature of the rights granted to
Target in the United States, and the restrictions contained in the Amended
Target Agreement, neither the Company nor Spell C anticipate entering into
additional licensing agreements in the United States with respect to the
Cherokee brand during the term of the Amended Target Agreement (except for
those specifically allowed above) and are in fact prohibited from doing so in
most instances.
Under the terms of the Amended Target Agreement, Target will pay a royalty
each fiscal year for the fiscal years ending January 31, 1999 through 2004
equal to the greater of (i) the Minimum Guaranteed Royalty (as defined below)
for such year or (ii) a percentage of Target's net sales of Merchandise during
such fiscal year which percentage varies according to the volume of sales of
Merchandise during such fiscal year. The "Minimum Guaranteed Royalty" is $9.0
million for each of the two fiscal years ending January 31, 1999 and 2000 and
$10.5 million for each of the four fiscal years ending January 31, 2001
through 2004. The initial term of the Amended Target Agreement commenced on
February 1, 1998 and ends January 31, 2004. If Target is current in its
payments of the Minimum Guaranteed Royalty, the Amended Target Agreement will
automatically renew for the fiscal year ending in 2005, and will continue to
automatically renew for successive fiscal year terms provided that Target has
paid a Minimum Guaranteed Royalty equal to or greater than $9.0 million for
the preceding fiscal year. Target commenced the initial sales of Cherokee
brand merchandise in July 1996 and paid the Company $5,935,000 during the
fiscal year ended May 31, 1997, and $6,428,000 during the Eight Month Fiscal
Period, which accounted for 68% and 75%, respectively, of the Company's
revenues during such periods. See "--Certain Business Considerations and Risk
Factors--Dependence on a Single Licensee."
On August 22, 1997, the Company entered into an international retail direct
licensing agreement (the "Hudson's Bay Agreement") with Hudson's Bay Company
and Zellers Inc., a Canadian corporation ("Hudson's Bay"). Hudson's Bay was
granted the exclusive right in Canada to use the Cherokee brand and related
trademarks in connection with a broad range of categories of merchandise,
including women's, men's and children's apparel and footwear, women's intimate
apparel, fashion accessories, home textiles, cosmetics and recreational
products. The term of the contract is for five years, with automatic renewal
options, provided that certain minimums are met each contract year. Under the
Hudson Agreement, Hudson's Bay will pay the Company a minimum guaranteed
royalty of $10.0 million over the five-year initial term of the agreement.
Other than the Amended Target Agreement, the Company currently has five
retail direct non-exclusive Cherokee brand licensing agreements covering the
United States and Canada ("North America"). North American retail licensees
include, among others, Caldor, Brylane, Pamida and Hudson's Bay. Generally,
royalties on non-exclusive domestic retail licenses begin at 3% of the
retailer's net sales of licensed product and may decrease depending on the
retailer's annual sales of licensed products and/or the retailer's guaranteed
annual sales of licensed product. All of the current United States Cherokee
brand retail license agreements will expire during the term of the Amended
Target Agreement and due to the exclusivity provisions contained in the
Amended Target Agreement, there is no assurance the Company will renew or
extend such Agreements after 2002 and in many circumstances will not be
permitted to do so under terms of the Amended Target Agreement. Further, under
the Assignment Agreement, if the Company extends any existing United States
license agreement after January 31, 2002, the Company must assign 50% of the
royalties payable during the extended term to Spell C. The above restrictions
under the Amended Target Agreement and Assignment Agreement do no apply to
Canada; however, under the Hudson's Bay Agreement, Hudson's Bay has the
exclusive right to use the Cherokee brand on a broad range of products in
Canada.
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The Company currently has no retail direct non-exclusive Sideout brand
licensing agreements covering the United States. All categories of merchandise
are still available for domestic non-exclusive retail license agreements and
the Company intends to actively pursue its Retail Direct licensing strategy to
further develop the Sideout brand in the United States.
During the Eight Month Fiscal Period, the Company received $7,492,000 in
aggregate royalties from its United States retail license agreements, which
accounted for 87.6% of the Company's revenues during such periods.
NORTH AMERICAN WHOLESALE LICENSING
The Company currently has four Cherokee brand wholesale license agreements
that grant unaffiliated manufacturers the license to manufacture and market
women's intimate apparel, socks, sunglasses, watches, and men's activewear
under the Cherokee trademarks in the United States. The Company's wholesale
license agreements typically require the wholesale licensee to pay royalties
on revenues against a guaranteed minimum royalty that generally increases over
the term of the agreement. All of the current United States wholesale license
agreements will expire during the term of the Amended Target Agreement, and
due to the exclusivity provisions contained in the Amended Target Agreement,
there is no assurance the Company will renew or extend such agreements and in
many circumstances will not be permitted to do so under terms of the Amended
Target Agreement
Pursuant to the Sideout Agreement, the Company acquired several existing
wholesale licensing contracts. The Company terminated or amended certain of
these agreements and, as a result, the net number of wholesale licensing
agreements acquired by the Company was three.
The Company's wholesale license agreements for the Sideout brand are for
product categories including menswear, childrens wear, toddlers and boys 4-7,
footwear, volleyballs, bags and accessories. The agreements have various
expiration dates and contain three to five-year renewal options. One of the
wholesale licensees is currently manufacturing Sideout brand men's and boys
activewear and sportswear for several department stores. The footwear licensee
sells men's, women's and children's footwear to many of the better department
and specialty stores, including Nordstrom, Sportmart, Champs, Lady Footlocker,
Bob's Stores and Miller's Outpost. The footwear license has experienced
substantial growth during the last two years. Minimum royalty guarantees total
$877,500 for the remaining term of these agreements. Renewal options held both
by the licensee and the Company provide for minimum guaranteed royalties of
$3,126,000 to the Company if such contracts are renewed.
During the Eight Month Fiscal Period, the Company received $513,000 in
aggregate royalties from its wholesale licensing agreements, which accounted
for 6% of the Company's revenues during such period.
INTERNATIONAL LICENSING
The Amended Target Agreement only grants Target exclusive rights to the
Cherokee trademarks in the United States with respect to certain product
categories. Additionally, the Company sold Spell C the United States but not
the international rights to the Cherokee trademarks. Therefore, the Company
will continue to seek to develop in certain international markets both its
Cherokee and Sideout brands through wholesale licenses with manufacturers or
other companies who have market power and economies of scale in their
respective markets. In certain countries, the Company believes that an owner
or licensee of one or more well-known United States brands has the opportunity
to become a dominant, vertically integrated manufacturer and/or retailer of
branded apparel, footwear and accessories. Accordingly, in those areas the
Company has begun to pursue licensing or strategic alignments whereby its
brands can become the basis for such a vertically integrated
manufacturer/retailer.
9
<PAGE>
Suzuya Co. Ltd. ("Suzuya"), the Company's Far East licensee for the past ten
years, operated twenty-one Cherokee retail stores in Japan, and had eight sub-
licensees that manufactured and sold Cherokee brand apparel and accessories to
the Cherokee stores and to other unaffiliated retailers. In April 1997, the
Suzuya licensing agreement was terminated and a new master licensing agreement
was signed with Vantex, Inc ("Vantex"). Under the new agreement Vantex will
pay the Company a minimum guaranteed royalty of $5.0 million over the five-
year term of the agreement. During the Eight Month Fiscal Period, Vantex
entered into three sub-licensing agreements for the further development of the
Cherokee brand in Japan. The Company currently has thirteen international
wholesale and/or retail license agreements, which include a master licensing
agreement for South Korea with Kum Kyung Co., Ltd., a South Korean based
company, a wholesale licensing agreement with Joosung Enterprises Co., Ltd., a
South Korean based company which manufactures handbags and handbag related
items, and a master license agreement with Mondragon, a Philippines based
company. Due to the poor economy in Korea, the Company expects to terminate
the licensing agreements with Kum Kyung Co. Ltd. and Joosung Enterprises Co.,
Ltd.
Pursuant to the Sideout Agreement, the Company acquired five international
licensing agreements with respect to the Sideout brand and related trademarks.
The Company's international licensing agreements for the Sideout brand are all
exclusive and cover countries including Argentina, Uruguay, Japan, Italy,
Mexico, Australia and New Zealand for product categories for the Sideout and
King of the Beach brands for volleyballs, men's, boy's and women's apparel and
footwear. Sideout Mexico, the Company's Mexican licensee, currently
distributes to department and specialty stores and has six Sideout flagship
stores throughout Mexico. Minimum guaranteed royalties for the remaining
initial term of the current licensing agreements total $1,974,000.
During the Eight Month Fiscal Period, the Company received $548,000 in
aggregate royalties from the Sideout international license agreements, which
accounted for 6.4% of the Company's revenues during such period.
TRADEMARKS
The Company holds various trademarks including Cherokee, Sideout, Sideout
Sport, King of the Beach and others, in connection with certain apparel and
other goods. These trademarks are registered with the United States Patent and
Trademark Office and in certain other countries. The Company also holds
trademark applications for Cherokee, Sideout, Sideout Sport and King of the
Beach 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 its trademarks and the Company relies primarily upon a
combination of trademark, copyright, know-how, trade secrets, and contractual
restrictions to protect its intellectual property rights both domestically and
internationally. See "--Certain Business Considerations and Risk Factors--
Dependence on and Protection of Intellectual Property Rights."
MARKETING
The Cherokee name has been positioned by the Company to connote quality,
comfort, fit and a "Casual American" lifestyle with traditional, wholesome
values. The Sideout brand and related trademarks represent a beach-oriented,
active, "California" lifestyle. Advertising, product, labeling and
presentation are integrated to reinforce these brand images. The Company
intends to continue to promote a positive image in marketing the Cherokee and
Sideout brands through licensee sponsored advertising. The Company's
wholesale, retail and international license agreements provide the Company
with final approval of pre-agreed upon quality standards, packaging and
marketing of licensed product. The Company has the right to conduct periodic
quality control inspections to ensure that the image and quality of licensed
products remain consistent. Historically, the Company spent between 3% and 4%
of its revenues on advertising. Since the time the Company switched its
principal business to that of a marketer and licensor of its brands, it has
principally relied on its licensees to advertise the Cherokee brand, and as a
result the Company's advertising costs have been minimal.
10
<PAGE>
The Company intends to attempt to implement its Retail Direct licensing
strategy in the United States with respect to the Sideout brand; however,
there can be no assurance that the Company's efforts will result in
significant increases in royalty payments. Internationally, the Company
intends to continue to seek to develop both of its brands through license
agreements and strategic alliances with manufacturers or other companies who
have market power and economies of scale in their respective markets. The
Company will continue to market its brands and solicit new licensees through a
small number of executive employees and may retain the services of outside
consultants to assist the Company in this regard. The Company recently hired
additional marketing staff to intensify the Company's international efforts to
negotiate new license agreements and provide support and advice regarding
advertising and merchandising concepts to existing licensees.
COMPETITION
Although the Company no longer manufactures or sells products, royalties
paid to the Company under its licensing agreements are generally based on a
percentage of the licensee's net sales of licensed products. Cherokee and
Sideout brand footwear, apparel, and accessories, which are manufactured and
sold by both domestic and international wholesalers and retail licensees, are
subject to extensive competition by numerous domestic and foreign companies.
Such competitors with respect to the Cherokee brand include Levi Strauss &
Co., Liz Claiborne and VF Corp. and private labels developed for retailers and
competitors with respect to the Sideout brand include Quicksilver, Mossimo,
Nike and other activewear companies. Factors which shape the competitive
environment include quality of garment construction and design, brand name,
style and color selection, price and the manufacturer's ability to respond
quickly to the retailer on a national basis. In recognition of the increasing
trend towards consolidation of retailers and greater emphasis by retailers on
the manufacture of private label merchandise, in the United States the
Company's business plan focuses on creating strategic alliances with major
retailers for their sale of products bearing the Company's brands through the
licensing of the Company's trademarks directly to retailers. Therefore, the
success of the Company is dependent on its licensees' ability to design,
manufacture and sell products bearing the Company's brands and to respond to
ever changing consumer demands. Other companies owning established trademarks
could also enter into similar arrangements with retailers. See "--Certain
Business Considerations and Risk Factors--Competition."
EMPLOYEES
As of January 31, 1998, the Company employed 12 persons all of whom are
involved in the Company's licensing business. None of the Company's employees
are represented by labor unions and the Company believes that its employee
relations are satisfactory.
CERTAIN BUSINESS CONSIDERATIONS AND RISK FACTORS
Restrictions on Distributions by Spell C: There is no assurance that Spell C
will distribute any significant amount of cash or property to the Company
until after the maturity of the Secured Notes, if then. The Secured Notes
Indenture provides that any royalties payable under the Amended Target
Agreement will be deposited directly into a collection account controlled by
the trustee under the Indenture. The trustee will distribute from the
collection account the amount of principal due and payable on the Secured
Notes to the holders thereof on quarterly note payment dates. Excess amounts
in the collection account may only be distributed to Spell C if the amount in
the collection account exceeds the aggregate amount of principal due and
payable on the next quarterly note payment date. Such excess amounts, if any,
may then be distributed by Spell C to the Company. The aggregate scheduled
amortization under the Secured Notes ($60.0 million) equals the aggregate
minimum guaranteed royalty payable under the Amended Target Agreement ($60.0
million). See "--Recent Developments" and "--North American Retail Direct
Licensing." There is no assurance, therefore, that there will be any excess
amounts to be distributed to the Company. The Company does not expect revenues
deposited in the collateral account from sources other than the Amended Target
Agreement to be significant during Fiscal year 1999. The Company cannot
predict with accuracy whether payments under the Amended Target Agreement will
exceed the minimum guaranteed royalty, and if they do not, no distribution
will be made
11
<PAGE>
to Spell C from the collateral account, and in turn, Spell C will have no
funds available to distribute to the Company. Further, the initial term of the
Amended Target Agreement expires concurrently with the maturity of the Secured
Notes. Therefore, even after the maturity of the Secured Notes, the likelihood
of significant distributions from Spell C to the Company is contingent upon
the extension of the Amended Target Agreement. See "--North American Retail
Direct Licensing."
Uncertainty Regarding Development of Sideout Brand: The Sideout brand and
related trademarks were acquired by the Company in November 1997. See "--
Recent Developments--Sideout Agreement." The Company intends to develop the
Sideout brand through both domestic and international retail direct and
wholesale licensing. Although the Sideout brand is a well recognized,
authentic beach volleyball brand, there can be no assurance that the Company's
efforts to develop and market the Sideout brand will result in significant
increases in royalty payments.
Competition: Although the Company no longer manufactures or sells products,
royalties paid to the Company under its licensing agreements are generally
based on a percentage of the licensee's net sales of licensed products.
Cherokee and Sideout brand footwear, apparel, and accessories, which are
manufactured and sold by both domestic and international wholesalers and
retail licensees, are subject to extensive competition by numerous domestic
and foreign companies. Such competitors with respect to the Cherokee brand
include Levi Strauss & Co., Liz Claiborne and VF Corp. and private labels
developed for retailers and competitors with respect to the Sideout brand
include Quicksilver, Mossimo, Nike and other activewear companies. Factors
which shape the competitive environment include quality of garment
construction and design, brand name, style and color selection, price and the
manufacturer's ability to respond quickly to the retailer on a national basis.
In recognition of the increasing trend towards consolidation of retailers and
greater emphasis by retailers on the manufacture of private label merchandise,
in the United States the Company's business plan focuses on creating strategic
alliances with major retailers for their sale of products bearing the
Company's brands through the licensing of the Company's trademarks directly to
retailers. Therefore, the success of the Company is dependent on its
licensees' ability to design, manufacture and sell products bearing the
Company's brands and to respond to ever changing consumer demands; failure by
the Company's licensees to do so could have a material adverse effect on the
Company's business or financial condition. Other companies owning established
trademarks could also enter into similar arrangements with retailers. See "--
Competition."
Dependence on Single Licensee: During the Eight Month Fiscal Period 75% of
the Company's and Spell C's consolidated licensing revenues were generated
from a single source, Target Stores, a division of Dayton Hudson Corporation.
See "--North American Retail Direct Licensing." Under the Assignment Agreement
the Company assigned all its rights in the Amended Target Agreement to Spell
C, which in turn pledged the Amended Target Agreement as collateral for the
Secured Notes. Spell C will be dependent on revenues from the Amended Target
Agreement for most, if not all, of its revenues. Although the Amended Target
Agreement provides for minimum annual royalty payments, if for any reason,
Target does not pay the minimum royalties, Spell C will likely be unable to
meet, and will default on, its payment obligations under the Indenture for the
Secured Notes. The Company currently has no reason to anticipate or expect a
default by Target as it has timely paid all of the royalty commitments due
under the prior Target Agreements. The Cherokee marks are diversified over a
broad range of categories of merchandise presently manufactured and marketed
by Target. Therefore, while it is possible that Target could altogether cease
manufacturing and marketing Cherokee brand products, the Company believes that
is unlikely to happen. The Company is not a guarantor of the Secured Notes;
however, the United States Cherokee trademarks have been pledged as security
for the Secured Notes and the permanent loss of such trademarks as a result of
a default would have a material adverse effect on the Company's business or
financial condition. The Secured Notes mature and the initial term of the
Amended Target Agreement expires at approximately the same time. At such time
payments from the Amended Target Agreement, if extended or renewed, may be
distributed by Spell C to the Company. If Target elects not to extend or renew
the Amended Target License Agreement upon the expiration of its initial term,
the Company's business and operations could be adversely affected. There can
be no guarantee that the Company could be able to replace the Target royalty
payments from other sources.
12
<PAGE>
Dependence on and Protection of Intellectual Property Rights: The Company
and Spell C hold various trademarks including Cherokee, Sideout, Sideout
Sport, King of the Beach and others in connection with apparel, footwear and
accessories. These trademarks are vital to the success and future growth of
the Company's business. These trademarks are registered with the United States
Patent and Trademark Office and in certain other countries. The Company and
Spell C also hold several trademark applications for Cherokee, Sideout,
Sideout Sport and King of the Beach in numerous countries. The Company
monitors on an ongoing basis unauthorized uses of its trademarks, and the
Company relies primarily upon a combination of trademark, copyright, know-how,
trade secrets, and contractual restrictions to protect its intellectual
property rights. The Company believes that such measures afford only limited
protection and, accordingly, there can be no assurance that the actions taken
by the Company to establish and protect its trademarks and other proprietary
rights will prevent imitation of its products or infringement of its
intellectual property rights by others, or prevent the loss of licensing
revenue or other damages caused thereby. In addition, the laws of certain
countries in which the Company has licensed its intellectual property may not
protect the Company's intellectual property rights to the same extent as the
laws of the United States. Despite the Company's efforts to protect its
intellectual property rights, unauthorized parties may attempt to copy aspects
of the Company's intellectual property which could have a material adverse
effect on the Company's business or financial condition. The Company is
currently involved in one infringement action with respect to the use by a
third party of the name Cherokee on two-way radios, which it believes will not
have a material adverse effect on the Company's business or financial
condition. However, in the future the Company may be required to assert
infringement claims against third parties, and there can be no assurance that
one or more parties will not assert infringement claims against the Company.
While the Company currently has the resources to pursue or defend most
infringement claims, any resulting litigation could result in significant
expense to the Company and divert the efforts of the Company's management
personnel whether or not such litigation is determined in favor of the
Company.
Dependence on Key Management: The overall business and marketing strategy
and current direction of the Company was principally conceived and implemented
by Robert Margolis, its current Chairman and Chief Executive Officer, Patricia
Warren, its former President and Carol Gratzke, its current Chief Financial
Officer. On March 3, 1998, the Company announced the resignation of Patricia
Warren as President of the Company. Ms. Warren will continue to work with the
Company through 1998 in selected special projects. Mr. Margolis will assume
Ms. Warren's responsibilities until a new president is appointed. Because Ms.
Warren will still be available through 1998 for selected special projects and
because the Company believes that it has sufficiently implemented the business
plan set in motion by its management team over the last three years, the
Company believes that it can successfully continue to implement its business
plans notwithstanding the departure of Ms. Warren. Prior to the hiring and
training of a new president, the loss of the services of either Robert
Margolis or Carol Gratzke could have a material adverse effect upon the
Company's business or financial condition.
ITEM 2. PROPERTIES
The Company owned a building of approximately 100,000 square feet on ten
acres of land in Sunland, California, which housed its principal offices and
fabric cutting facility. The property was sold for $3,900,000 in April 1997.
By October 15, 1995, the Company moved all its employees out of this facility
and into a 3,000 square foot office facility in Van Nuys, California. This
facility is leased by The Wilstar Group ("Wilstar"), a business name used by
The Newstar Group, to which Mr. Margolis serves as Chief Executive Officer.
The Company uses approximately one-half of such space and pays Wilstar for
such usage at the rate of $.75 per square foot or $1,125 per month. In
addition, the Company reimbursed Wilstar for one-half of certain costs
relating to this office space. Beginning November 1, 1997, the Company
increased its rental space to 3,685 square feet and currently pays Wilstar
$2,762 in rent per month (which includes costs relating to the office space).
The Company believes that its rental of such space from Wilstar is on terms of
no less favorable than could be obtained from an unaffiliated third party. The
Company believes this facility is currently adequate for its expected
requirements for the next few years and when the lease held by Wilstar has
expired, the Company currently anticipates negotiating a new lease with the
facility's owner. The Company leases a 1,158 square foot showroom facility in
Dallas, Texas, which it no longer occupies. The Company has subleased this
facility. The lease expired
13
<PAGE>
on February 28, 1998. The Company also rents 4,000 square feet of Wilstar's
warehouse as a storage facility and pays rent at a rate of $.50 per square
foot.
ITEM 3. LEGAL PROCEEDINGS
In connection with the 1994 Plan, the Company has settled all claims
submitted by trade creditors and other claimants. A Final Decree was entered
by the Company and approved by the Bankruptcy Judge on August 15, 1996.
In the ordinary course of business, the Company becomes involved in certain
legal claims and litigation. In the opinion of Management, based upon
consultations with legal counsel, the disposition of litigation currently
pending against the Company will not have, individually or in the aggregate, a
materially adverse effect on its consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of holders of Common Stock
during the final quarter of the Eight Month Fiscal Period.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock trades on the NASDAQ Small Cap Issues Market under the
symbol CHKE. The table below sets forth for each of the fiscal quarters during
the Company's last two fiscal years the range of the high and low bid
information for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1997
Quarter ended August 31, 1996.............................. 6 1/2 4 1/2
Quarter ended November 30, 1996............................ 6 7/8 5 1/4
Quarter ended March 1, 1997................................ 7 3/4 5 1/4
Quarter ended May 31, 1997................................. 7 1/8 5 3/4
FISCAL 1998
Quarter ended August 30, 1997.............................. 12 6 3/4
Quarter ended November 29, 1997............................ 15 1/8 10 3/4
Two months ended January 31, 1998.......................... 17 1/4 7 1/4*
</TABLE>
On April 15, 1998, the latest bid price for the Common Stock reported on the
NASDAQ Small Cap Issues Market was $9.50 per share.
As of April 15, 1998, the number of stockholders of record of the Common
Stock was 151. This figure does not include beneficial holders whose shares
may be held of record by brokerage firms and clearing agencies.
On January 28, 1997, the Company's Board established a quarterly dividend
policy of $0.15 per share. The first dividend payment was made on March 17,
1997 to all shareholders of record as of February 25, 1997. Subsequent
dividend payments of $0.20 per share were made on May 30, 1997 and August 29,
1997 to shareholders of record as of May 14, 1997 and August 15, 1997,
respectively. On December 23, 1997, the Company's Board declared a special
dividend of $5.50 per share, which was paid on January 15, 1998 to all
shareholders of record as of January 2, 1998. On April 6, 1998, the Company's
Board declared a cash dividend of $0.50 per share payable on May 1, 1998 to
shareholders of record as of April 17, 1998. On April 6, 1998 the Company's
Board established a quarterly dividend policy of $0.25 per share through its
fiscal year ended January 30, 1999; however, the payment of such dividends
will be at the discretion of the Company's Board and will be dependent upon
the Company's financial condition, results of operations, capital requirements
and other factors deemed relevant by the Company's Board.
On May 30, 1996, the Company made a distribution of capital to all
shareholders of record as of May 15, 1996. The distribution was $0.60 per
share on Common Stock and was made in accordance with Section 316 of the
Internal Revenue Code of 1986.
- --------
*The current stock price reflects a $5.50 price adjustment due to the payment
of the $5.50 special dividend on January 15, 1998.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information, except as noted
herein, has been taken or derived from the audited consolidated financial
statements of the Company and its predecessor and should be read in
conjunction with the consolidated financial statements included elsewhere
herein. See "--Item 8. Consolidated Financial Statements and Supplementary
Data."
Given the recent developments involving the Company, such as the assignment
of the Amended Target Agreement to Spell C, the sale of the rights to the
Cherokee trademarks in the United States to Spell C and the issuance of the
Secured Notes, the future results of the Company are expected to differ
significantly from the Company's historical results, and therefore undue
reliance should not be placed on the following selected consolidated financial
information as indicative of such future results.
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
----------------------------------------- ---------------------
EIGHT MONTHS YEAR YEAR 3 MONTHS 9 MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 31, MAY 31, JUNE 1, JUNE 3, FEB. 25, MAY 28,
1998 1997 1996 1995 1995 1994
------------ ------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
($ IN THOUSANDS EXCEPT PER SHARE
DATA)
Royalty revenues/Net
sales.................. $ 8,553 $ 8,718 $13,899 $20,264 $65,623 $114,087
Cost of goods sold...... -- 184 10,445 16,310 54,994 83,225
-------- ------- ------- ------- ------- --------
Gross profit............ 8,553 8,534 3,454 3,954 10,629 30,862
Selling, general and
administrative
expenses............... 4,192 3,406 4,460 5,153 19,097 30,974
Performance option
expense................ -- -- 4,567(4) -- -- --
Amortization of
trademarks and
goodwill............... 43 -- -- -- 819 1,691
Operational
restructuring.......... -- -- -- 3,165 -- 6,052
Write-off of
reorganization value in
excess of amounts
allocable to
identifiable assets.... -- -- -- -- -- 9,281
-------- ------- ------- ------- ------- --------
Operating income (loss). 4,318 5,128 (5,573) (4,364) (9,287) (17,136)
Other (income) expense.. (422) (75) (96) (116) (167) 141
Interest expense........ 330 3 355 587 5,467 11,914(1)
Investment and interest
income................. (525) (460) (543) (24) (107) (55)
Gain on sale of Uniform
Div. and other assets . -- (220) (3,840) -- -- --
Reorganization items.... -- -- -- -- 54,093(2) --
-------- ------- ------- ------- ------- --------
Income (loss) before
income taxes........... 4,935 5,880 (1,449) (4,811) (68,573) (29,136)
Income tax benefit...... (782) (771) -- (400) (5,230) (4,306)
-------- ------- ------- ------- ------- --------
Income (loss) before
extraordinary item..... 5,717 6,651 (1,449) (4,411) (63,343) (24,830)
Extraordinary item (net
of income taxes)....... -- -- -- -- 88,291(2) --
-------- ------- ------- ------- ------- --------
Net income (loss)....... 5,717 6,651 (1,449) (4,411) 24,948 (24,830)
Preferred dividend
requirement............ -- -- -- -- -- --
Net income (loss)
applicable to common
stock.................. $ 5,717 $ 6,651 $(1,449) $(4,411) $24,948 $ 24,830)
Basic earnings (loss)
per share (3).......... $ 0.73 $ 0.87 $ (0.22) $ (0.72) -- (3) -- (3)
Diluted earnings (loss)
per share.............. $ 0.68 $ 0.82 $ (0.21) $ (0.72) -- --
Cash distribution of
capital per share...... $ 5.50 -- $ 0.60 -- -- --
Cash dividends per
share.................. $ 0.20 $ 0.35 -- -- -- --
<CAPTION>
JANUARY 31, MAY 31, JUNE 1, JUNE 3, FEB. 25,(2) MAY 28,
1998 1997 1996 1995 1995 1994
------------ ------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 4,445 $ 9,148 $ 227 $ 2,836 $27,321 $ 26,517
Total assets............ 24,471 13,601 8,320 28,260 41,527 93,700
Long-term debt, net of
current maturities..... 41,675 -- -- -- 18,995 83,204
Stockholders' equity
(deficit).............. (25,646) 12,224 6,070 7,222 11,825 (11,630)
</TABLE>
16
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(1) Interest expense includes non-cash charges of $9,420 for the year ended
May 28, 1994 and $4,361 for the nine months ended February 25, 1995.
(2) On December 14, 1994, the 1994 Plan was confirmed by the Bankruptcy Court
and became effective on December 24, 1994. For financial statement
purposes the effective date of the 1994 Plan was assumed to be February
25, 1995, the last day of the third quarter of the Company's fiscal 1994
year. The Company has implemented "fresh start" reporting; therefore all
assets and liabilities have been restated to reflect the reorganization
value of the Company and as such the June 3, 1995 balance sheet is that of
a successor company. See Notes 1 and 2 to the accompanying Financial
Statements.
(3) Earnings per share for periods subsequent to the adoption of fresh-start
reporting as of February 25, 1995 is based on the weighted average number
of common shares, including those yet to be distributed by the Disbursing
Agent during the relevant periods. (See Note 1 to the Financial
Statements). Per share data is not presented for periods ending prior to
June 3, 1995, due to the general lack of comparability as a result of the
revised capital structure of the Company under the 1994 Plan.
(4) Represents a non-cash charge of $4,567,000 resulting from the exercise of
Wilstar performance options. Wilstar is a related party, and Robert
Margolis is the majority shareholder and Chief Executive Officer of
Wilstar.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Since May 1995, the Company has principally been in the business of
marketing and licensing the Cherokee brand and related trademarks and other
brands it owns. Prior to May 1995, the Company's principal business was
manufacturing, importing and wholesaling casual apparel and footwear primarily
under the Cherokee brand, and licensing the Cherokee trademark to unaffiliated
manufacturers for the production and marketing of apparel, footwear, and
accessories that the Company did not manufacture, import or market. In
previous years, the Company's licensing division operated primarily a
wholesale licensing program; it licensed the Cherokee trademarks to
unaffiliated manufacturers for the production and marketing of apparel,
footwear, and accessories that the Company did not manufacture, import or
market. In May 1995, the Company stopped manufacturing and importing apparel
and footwear, sold most of its inventories, and on July 28, 1995, sold the
assets of its uniform division.
The Company's current operating strategy emphasizes domestic and
international wholesale and retail direct licensing, whereby the Company
grants wholesalers and retailers the license to use its trademark on certain
categories of merchandise. The Company's current licensing agreements are
either non-exclusive, category-specific exclusive or international masters,
and all provide the Company with final approval of pre-agreed upon quality
standards, packaging, and marketing of licensed products. The Company has the
right to conduct periodic quality control inspections to ensure that the image
and quality of licensed products remain consistent. Under this operating
strategy, the Company has been able to significantly reduce its overhead and
ongoing operating costs as compared to before May 1995.
In November 1997, the Company reaffirmed its strategic relationship with
Target Stores, a division of Dayton Hudson Corporation, by entering into the
Amended Target Agreement, which grants Target the exclusive right in the
United States to use the Cherokee trademarks in certain categories of
merchandise. See "--Item 1. Business. North American Retail Direct Licensing."
Target will pay a royalty each fiscal year for the fiscal years ending January
31, 1999 through 2004, equal to the greater of (i) the Minimum Guaranteed
Royalty for such year, or (ii) a percentage of Target's net sales of
Merchandise during such fiscal year which percentage varies according to the
volume of sales of Merchandise during such fiscal year. The Minimum Guaranteed
Royalty is
17
<PAGE>
$9.0 million for each of the two fiscal years ending January 31, 1999 and
2000, and $10.5 million for each of the four fiscal years ending January 31,
2001 through 2004.
In September 1997, the Company's Board authorized Libra Investment, Inc. to
explore ways to maximize shareholder value, including a recapitalization and
sale of the Company. On December 23, 1997, the Company completed the
recapitalization described below and publicly announced that it would declare
a special dividend of $5.50 per share, which was subsequently paid on January
15, 1998. See "--Item 1. Business. Recent Developments."
As part of the recapitalization, the Company sold to Spell C, its wholly-
owned subsidiary, all of its rights to the Cherokee brand and related
trademarks in the United States and assigned to Spell C all of its rights in
the Amended Target Agreement in exchange for the proceeds from the sale of the
Secured Notes. See "Item 1. Business. Recent Developments." Spell C issued for
an aggregate of $47.9 million, privately placed Zero Coupon Secured Notes,
yielding 7.0% interest per annum and maturing on February 20, 2004. The
Secured Notes amortize quarterly from May 20, 1998 through February 20, 2004,
in the amount of $9.0 million per year the first two years and $10.5 million
per year the third through sixth years. The Secured Notes are secured by the
Amended Target Agreement and the United States Cherokee brand name and
trademarks. The Secured Notes Indenture provides that any royalties generated
by the Amended Target Agreement must be deposited directly into a collection
account controlled by the trustee under the Indenture for distribution to
holders of the Secured Notes. Excess amounts in the collection account may be
distributed to Spell C only if the excess amounts exceed the aggregate amount
of principal due and payable on the next quarterly note payment date. Such
excess amounts, if any, will then be distributed by Spell C to the Company.
Since the aggregate payments due under the Amended Target Agreement ($60.0
million) match the aggregate Minimum Guaranteed Royalty under the Amended
Target Agreement ($60.0 million), there is no assurance that there will be any
excess amounts to be distributed. While the Company believes that royalties
payable under the Amended Target Agreement may exceed the Minimum Guaranteed
Royalty, the Company cannot predict with accuracy whether royalties will
exceed the Minimum Guaranteed Royalty.
Target commenced the initial sales of Cherokee brand merchandise in July
1996, and paid the Company $5,935,000 million during the fiscal year ended May
31, 1997, and $6,428,000 million during the Eight Month Fiscal Period, which
accounted for 68% and 75%, respectively, of the Company's revenues during such
periods. Royalties payable under the Amended Target Agreement appear in the
Company's consolidated financial statements for the Eight Month Fiscal Period.
However, on a going-forward basis, most, if not all of such royalties will be
distributed to the holders of the Secured Notes. See "Item 1. Business.
Certain Business Considerations and Risk Factors Restrictions on Distributions
by Spell C." Prior to the maturity of the Secured Notes, royalties from the
Amended Target Agreement will be offset by principal payments to the holders
of the Secured Notes in the amount of $9.0 million per year during the first
two years and $10.5 million per year during the third through sixth years of
Spell C's obligations under the Indenture. The revenues generated from all
other licensing agreements during the fiscal year ended May 31, 1997 were
$2,783,000 and during the Eight Month Fiscal Period were $2,125,000, which
accounted for 32% and 25% respectively, of the Company's revenues during such
periods.
In November 1997, the Company purchased the Sideout brand and related
trademarks from Sideout Sport, Inc. for approximately $2.0 million and a
portion of the future royalties generated by the Sideout brand. The Sideout
brand represents a beach-oriented active, "California" lifestyle. As part of
the purchase, the Company acquired several existing domestic and international
retail and wholesale license agreements. The Sideout brand currently generates
licensing revenues from existing contracts of approximately $500,000 per year.
See "--Item 1. Business. Recent Developments."
The Company intends to further develop the Sideout brand both in the United
States and internationally through retail direct and wholesale licensing. Due
to the restrictions in the Amended Target Agreement, neither the Company nor
Spell C anticipate entering into additional licensing agreements in the United
States with respect to the Cherokee brands during the term of the agreement.
The Company's current focus with respect to the Cherokee brand is to continue
to develop that brand in certain international markets through retail direct
or
18
<PAGE>
wholesale licenses with manufacturers or other companies who have market power
and economies of scale in the respective markets. In April 1997, the Company
entered into a new master licensing agreement for Japan with Vantex under
which the Company is to receive a minimum guaranteed royalty of $5.0 million
over the five year term of the agreement. In August 1997, the Company also
entered into an international retail direct licensing agreement granting
Hudson's Bay the exclusive right in Canada to use the Cherokee brand in
connection with a broad range of categories of merchandise. Hudson's Bay will
pay the Company a minimum guaranteed royalty of $10.0 million over the five
year initial term of the agreement.
Currently, the Company is not actively seeking to acquire other brands,
however, the Company is frequently approached by parties seeking to sell
brands and related trademarks. Should an established and marketable brand
become available on favorable terms, the Company currently has significant
assets with which to pursue such an acquisition.
At a meeting held December 19, 1997, the Company's Board changed the fiscal
year end of the Company to a 52 or 53 week fiscal year ending on the Saturday
nearest to January 31 in order to better align the Company with its licensees
who generally also operate and plan using such a fiscal year. Prior to this
change the Company's fiscal year was a 52 or 53 week fiscal year ending on the
Saturday nearest May 31.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
consolidated financial data of the Company. In December 1997, the Company
entered into the Assignment Agreement and Spell C entered into the Indenture.
In addition, the Company's historical financial statements (presented below)
relating to the Year Ended May 31, 1997 and the Year Ended June 1, 1996,
include operating results relating to the Apparel Division, Footwear Division
and Uniform Division, all of which have been terminated or sold. Therefore,
the historical financial statements are not indicative of the results of
operations attributable to the ongoing Licensing Division or after giving
effect to the Assignment Agreement or the Indenture. Further, during the
fiscal year ended January 31, 1999, $9.0 million in royalty revenues from the
Licensing Division are expected to be distributed to the holders of the
Secured Notes.
<TABLE>
<CAPTION>
EIGHT MONTHS
EIGHT MONTHS ENDED
ENDED FEBRUARY 1, YEAR ENDED YEAR ENDED
JANUARY 31, 1997 MAY 31, JUNE 1,
1998 (UNAUDITED) 1997 1996
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
ROYALTY REVENUES/NET SALES
Apparel Division......... $ -- $ -- $ -- $ 7,846,000
Footwear Division........ -- -- -- 2,331,000
Licensing Division....... 8,553,000 4,723,000 8,333,000 1,421,000
Other(2)/Uniforms........ -- 366,000 385,000 2,301,000
---------- ---------- ---------- -----------
Total Company.......... $8,553,000 $5,089,000 $8,718,000 $13,899,000
========== ========== ========== ===========
GROSS PROFIT
Apparel Division......... $ -- $ -- $ -- $ 1,217,000
Footwear Division........ -- -- -- 56,000
Licensing Division....... 8,553,000 4,723,000 8,333,000 1,421,000
Other(2)/Uniforms........ -- 183,000 201,000 760,000
---------- ---------- ---------- -----------
Total Company.......... $8,553,000 $4,906,000 $8,534,000 $ 3,454,000
========== ========== ========== ===========
SELLING, GENERAL ,
ADMINISTRATIVE AND
AMORTIZATION EXPENSES..... $4,235,000 $1,778,000 $3,406,000 $ 4,460,000
PERFORMANCE OPTION EXPENSE. -- -- -- $ 4,567,000(1)
OPERATING INCOME (LOSS).... $4,318,000 $3,128,000 $5,128,000 $(5,573,000)
</TABLE>
19
<PAGE>
- --------
(1) A non-cash charge of $4,567,000 resulting from the exercise of performance
options for the year ended June 1, 1996.
(2) Other sales include the liquidation of the remaining sweatshirt inventory
during fiscal year ended May 31, 1997.
EIGHT MONTHS ENDED JANUARY 31, 1998 COMPARED TO EIGHT MONTHS ENDING FEBRUARY
1, 1997
Net revenues for the Eight Month Fiscal Period ended January 31, 1998 were
$8,553,000, 100% of which represented licensing revenues. In comparison, net
sales for the eight months ended February 1, 1997 (the "1997 Eight Months")
were $5,089,000, which included $4,723,000 in licensing revenues with the
remaining sales from the liquidations of apparel and footwear inventories. As
a percentage of total revenues for the 1997 Eight Months, licensing revenues
represented 93%. Revenues from Target for the Eight Month Fiscal Period were
$6,428,000, which represented 75% of net revenues. Revenues from all other
sources for the Eight Month Fiscal Period were $2,125,000, which represented
25% of net revenues.
The Company's gross profit margin for the Eight Month Fiscal Period was
$8,553,000 or 100% of net revenues compared to $4,906,000 or 96% of net sales
for the 1997 Eight Months. The gross profit percentage is not comparable to
historical levels as a result of the Company ceasing to manufacture and import
apparel and footwear and selling its inventories.
Selling, general and administrative expenses (excluding amortization expense
of $43,000) for the Eight Month Fiscal Period were $4,192,000 or 49% of net
revenues compared to $1,778,000 (net of certain other liabilities totaling
$700,000 which were deemed no longer necessary), or 35% of net sales for the
1997 Eight Months. During the Eight Month Fiscal Period, selling, general and
administrative expenses increased due to the payment of $474,000 in financial
advisory services, $240,000 in staff bonuses, the addition of marketing staff
to intensify the Company's international efforts to negotiate contracts, and
the development of advertising materials to expand the Company's global
marketing and to maintain the synergy of the Cherokee brand image on a
worldwide basis. The Company anticipates that selling, general and
administrative expenses for fiscal year ("Fiscal") 1999 will account for a
lower percentage of net revenues than in the Eight Month Fiscal Period due to
the absence of certain extraordinary expenses totaling $474,000 incurred in
the Eight Month Fiscal Period.
Based on the Company's anticipated results for Fiscal 1999, management
believes that the Company's tax liabilities will be immaterial in Fiscal 1999
because its federal and California tax net operating loss carryovers of
approximately $14,900,000 and $5,300,000, respectively, are expected to offset
taxable income.
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues for Fiscal 1997 were $8,718,000, of which $8,333,000
represented licensing revenues in comparison to net sales of $13,899,000 for
Fiscal 1996, which included $1,421,000 in licensing revenues with the
remaining sales from the liquidations of apparel and footwear inventories. As
a percentage of total revenues for Fiscal 1997 and Fiscal 1996, licensing
revenues represented 95.6% and 10.2%, respectively, and the terminated
businesses represented 4.4% and 89.8%, respectively.
The Company's gross profit margin for Fiscal 1997 was $8,534,000 or 98% of
net revenues compared to $3,454,000 or 25% of net sales for Fiscal 1996. The
gross profit percentage is not comparable to historical levels as a result of
the Company ceasing to manufacture and import apparel and footwear and selling
its inventories.
Selling, general and administrative expenses for Fiscal 1997 were $3,406,000
or 39% of net revenues compared to $4,460,000 or 32% of net sales for Fiscal
1996. During Fiscal 1997, certain other accruals totaling $750,000 were deemed
no longer required and were reversed. In Fiscal 1996, the Company recorded a
non-cash charge to expense of $4,567,000 for Wilstar performance options,
which was the difference between the market price of the Common Stock at
exercise date and exercise price of the options. (See Notes to the Financial
Statements Note 11: Employment and Management Agreements). During Fiscal 1997,
selling, general and administrative expenses declined from historical levels
primarily as a result of the termination of the manufacturing and importing of
apparel and footwear and the sale of its Uniform Division. These actions
enabled the Company to significantly reduce its work force, space requirements
and other operating expenses.
20
<PAGE>
For Fiscal 1997, the Company gains on sale of assets was attributable to the
sale of a trademark asset and the Company's Wentworth Street facility, its
former headquarters from August 1988 to October 1995. For Fiscal 1996, the
Company's gain on sale of assets was attributable to the sale of the Uniform
Division and the "Rockers" trademark. On July 28, 1995, the Company sold the
assets of the Uniform Division to Strategic Partners. The assets sold included
accounts receivable, inventory, furniture and fixtures, equipment and the
exclusive right to use the Cherokee trademark with respect to the manufacture
and sale of uniforms. The sales price was $11,700,000, which was $4,000,000
greater than the book value of the assets that were sold. Of the purchase
price, $9,575,000 was paid in cash and $2,125,000 was paid by a 10%
subordinated promissory note (the "Note"). The Note required quarterly
payments of interest and annual principal payments of $300,000 on July 27,
1997, 1998, 1999 and 2000 with the remaining principal amount due on July 27,
2001. The Company recorded the note at its estimated fair value of $1,588,000,
which represented a discount of $537,000. In addition, Strategic Partners
agreed to pay the Company royalties with respect to its sales of Cherokee
brand uniform footwear, and beginning in June 2001, agreed to pay Cherokee,
subject to certain conditions, a royalty equal to 2% of annual sales of
Cherokee brand uniform in excess of $30,000,000. On December 1, 1995, the
Company sold its patents and trademarks related to the "Rockers" brand
footwear to Strategic Partners for $250,000. Strategic Partners also agreed to
pay the Company a royalty if the "Rockers" trademark was used in connection
with the sale of Cherokee footwear to the uniform trade.
On April 3, 1997, Strategic Partners and the Company negotiated a 10%
discount to pay off the $2,125,000 Note due 2001 and in addition, Strategic
Partners agreed to pay $100,000 in royalty income to buy back all future
royalty obligations for the Cherokee branded uniform apparel and uniform
shoes. Strategic Partners delivered a payment of $1,912,500 and $100,000 on
May 14, 1997 in full satisfaction of the Note and royalty income buy back.
The Company's interest expense for the Eight Month Fiscal Period ended
January 31, 1998, Fiscal 1997 and Fiscal 1996 was $330,000, $3,000 and
$355,000, respectively. The Company's investment and interest income for the
Eight Month Fiscal Period ended January 31, 1998, Fiscal 1997 and Fiscal 1996
was $525,000, $460,000 and $543,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On January 31, 1998, the Company had $10,275,000 in cash and cash
equivalents. Cash flow needs over the next twelve months are expected to be
met through the operating cash flows generated from licensing revenues and the
Company's cash and cash equivalents.
During the Eight Month Fiscal Period, cash provided by operations was
$4,488,000. During the Eight Month Fiscal Period, cash used in investing
activities was $3,423,000 due to the initial payment made in the Sideout
Agreement and the costs associated with the leveraged recapitalization. During
the Eight Month Fiscal Period, cash used in financing activities was $181,000
which represented the net from the proceeds received from the exercise of
warrants and stock options, the net proceeds from the issuance of long-term
debt and the cash dividend distributions made during the Eight Month Fiscal
Period.
INFLATION AND CHANGING PRICES
Inflation, traditionally, has not had a significant effect on the Company's
operations. Since most of the Company's future revenues are based upon a
percentage of sales of the licensed products by the Company's licensees, the
Company does not anticipate that inflation will have a material impact on
future operations.
YEAR 2000 COMPLIANCE
The Year 2000 issue is a result of computer programs being written using two
digits, e.g. "98", to define a year. Date-sensitive software may recognize the
year "00" as the year 1900 rather than the year 2000. This would result in
errors and miscalculations or even system failure causing disruptions in
everyday business activities and transactions. Software is termed "Year 2000
compliant" when it is capable of performing transactions correctly in the year
2000.
21
<PAGE>
Based on a recent assessment of the Company's computer systems software, it
has been determined that more than 95% of the Company's hardware and software
systems are either currently Year 2000 compliant or have an existing upgrade
available from the software vendor that is Year 2000 compliant. All systems
that are not currently Year 2000 compliant will either be upgraded to be Year
2000 compliant or replaced with alternative systems that are Year 2000
compliant over the next eighteen months.
The Company does not expect the achieving of Year 2000 compliance to have a
material impact on its financial condition or results of operations.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting standards ("SFAS") No. 130 "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of generalpurpose financial statements.
Comprehensive income includes net income and other comprehensive income
components which under generally accepted accounting principles ("GAAP")
bypass the income statement and are reported in the balance sheet as a
separate component of equity. For the eight months ended January 31, 1998 and
the three years ended May 31, 1997, June 1, 1996 and June 3, 1995, the Company
had no other comprehensive income components as defined in SFAS No. 130. SFAS
No. 130 does not apply to an enterprise that has no items of other
comprehensive income in any of the periods presented.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," which changes current practice and
established a new framework, referred to as the "management" approach, on
which to base segment reporting. The management approach requires that
management identify the "operating segments" based on the way that management
disaggregates the entity for internal operating decisions. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 and is not
required for interim statements in the first year of adoption. Management
believes that the adoption of this new standard will not have any material
impact on the Company's financial position or results of operations.
In February 1998, The FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Post-retirement Benefits" which revises employers'
disclosures about pension and post-retirement benefit plans. This statement is
effective for fiscal years beginning after December 15, 1997. This statement
is not anticipated to have any effect on the Company.
SUBSEQUENT EVENTS
On March 3, 1998, the Company announced the resignation of Patricia Warren
as President of the Company. She will continue to work with the Company
through 1998 in selected special projects. Mr. Margolis will assume Ms.
Warren's responsibilities until a new president is appointed.
On April 6, 1998, the Company announced that its Board of Directors had
declared a cash dividend of $0.50 per share to be distributed on May 1, 1998
to the Company's shareholders of record on the close of business on April 17,
1998. Assuming the Company's cash position continues to be favorable, the
Company intends to maintain a quarterly cash dividend of $0.25 per share for
the balance of the fiscal year ending January 30, 1999; however, the
declaration of such dividends remains subject to the discretion of the
Company's Board.
ITEM 7A. QUALITATIVE AND QUANTITATIVE RISK
Not applicable
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Transition Report on Form 10-K contains certain forward-looking
statements, including without limitation, statements containing the words,
"believes," "anticipates," "estimates," "expects," and words of similar
import. Such forward-looking statements involve known and unknown risks,
uncertainties and other
22
<PAGE>
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company is subject to certain risk factors, which include, but are not limited
to, restrictions on distributions by Spell C, uncertainty regarding the
Sideout brand, competition, dependence on a single licensee, dependence on
intellectual property rights, and dependence on key management and other
factors referenced in this Form 10-K. Certain of these factors are discussed
in more detail elsewhere in this Form 10-K, including without limitation under
the captions, "Certain Business Considerations and Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," and "Business." The forward-looking information provided by the
Company pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 should be evaluated in conjunction with the risk
factors listed under "Certain Business Considerations and Risk Factors." Given
the known and unknown risks and uncertainties, undue reliance should not be
placed on the forward-looking statements contained herein. In addition, the
Company disclaims any intent or obligation to update any of the forward-
looking statements contained herein to reflect future events and developments.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHEROKEE INC.
Report of Independent Accountants......................................... F-1
Consolidated Balance Sheets
At January 31, 1998, May 31, 1997 and June 1,1996........................ F-2
Consolidated Statements of Operations
For the Eight Months Ended January 31, 1998 and February 1, 1997
(unaudited) (Successor Company), and for the Years Ended May 31, 1997 and
June 1, 1996 (Successor Company), and for the Three Months Ended June 3,
1995 (Successor Company), and for the Nine Months Ended February 25, 1995
(Predecessor Company).................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the Eight Months Ended January 31, 1998 and February 1, 1997
(unaudited) (Successor Company), and for the Years Ended May 31, 1997 and
June 1, 1996 (Successor Company), and for the Three Months Ended June 3,
1995 (Successor Company), and for the Nine Months Ended February 25, 1995
(Predecessor Company).................................................... F-4
Consolidated Statements of Cash Flows
For the Eight Months Ended January 31, 1998 and February 1, 1997
(unaudited) (Successor Company), and for the Years Ended May 31, 1997 and
June 1, 1996 (Successor Company), and for the Three Months Ended June 3,
1995 (Successor Company), and for the Nine Months Ended February 25, 1995
(Predecessor Company).................................................... F-5
Notes to Financial Statements............................................. F-7
SCHEDULES
II Valuations and Qualifying Accounts and Reserves....................... F-27
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the SEC have been omitted since the required information is not
applicable or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
Consolidated Financial Statements and related notes.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Cherokee Inc.
We have audited the accompanying consolidated balance sheets of Cherokee
Inc. (the "Company") as of January 31, 1998, May 31, 1997 and June 1, 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the eight months ended January 31, 1998, the
years ended May 31, 1997 and June 1, 1996, the three months ended June 3, 1995
and the nine months ended February 25, 1995. Our audits also included the
financial statement schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1 to the financial statements, the Company's
reorganization plan became effective on February 25, 1995 for financial
reporting purposes. In accordance with the American Institute of Certified
Public Accountants Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," the Company was
required to account for the reorganization using "Fresh-Start Reporting."
Accordingly, all financial statements prior to February 25, 1995, are not
comparable to the financial statements for periods after the implementation of
fresh-start reporting.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cherokee
Inc. at January 31, 1998, May 31, 1997 and June 1, 1996, and the results of
its operations and its cash flows for the eight months ended January 31, 1998,
for the years ended May 31, 1997 and June 1, 1996, the three months ended June
3, 1995 and the nine months ended February 25, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Coopers & Lybrand L.L.P.
Los Angeles, California
April 6, 1998
F-1
<PAGE>
CHEROKEE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, MAY 31, JUNE 1,
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 10,275,000 $ 9,391,000 $ 1,207,000
Restricted cash....................... -- -- 310,000
Receivables, net...................... 2,347,000 1,024,000 694,000
Inventories........................... 45,000 80,000 256,000
Other current assets.................. 220,000 30,000 10,000
------------ ----------- -----------
Total current assets................ 12,887,000 10,525,000 2,477,000
Assets held for sale.................... -- -- 3,576,000
Notes receivable........................ -- -- 1,961,000
Securitization fees..................... 1,218,000 -- --
Deferred tax asset...................... 7,576,000 2,408,000 --
Other assets............................ 2,790,000 668,000 306,000
------------ ----------- -----------
Total assets........................ $ 24,471,000 $13,601,000 $ 8,320,000
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 645,000 $ 210,000 $ 112,000
Other accrued liabilities............. 522,000 417,000 638,000
Current portion of long term Notes
payable.............................. 6,525,000 -- --
------------ ----------- -----------
Total current liabilities........... 7,692,000 627,000 750,000
Other liabilities....................... 750,000 750,000 1,500,000
Notes payable less current portion...... 41,675,000 -- --
------------ ----------- -----------
Total liabilities................... 50,117,000 1,377,000 2,250,000
------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, $.02 par value, 20,000,000
shares authorized, 8,612,657, 7,726,986
and 7,650,813 shares issued and
outstanding at January 31, 1998, May
31, 1997 and June 1, 1996,
respectively........................... 173,000 155,000 153,000
Additional paid-in capital.............. (23,806,000) 11,334,000 11,977,000
Retained earnings....................... -- 735,000 (5,916,000)
Note receivable from stockholder........ (2,013,000) -- (144,000)
------------ ----------- -----------
Total stockholders' (deficit)
equity............................. (25,646,000) 12,224,000 6,070,000
------------ ----------- -----------
Total liabilities and stockholders'
equity............................. $ 24,471,000 $13,601,000 $ 8,320,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
--------------------------------------------------------------- ------------
EIGHT MONTHS EIGHT MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED
JANUARY 31, FEBRUARY 1, MAY 31, JUNE 1, ENDED FEBRUARY 25,
1988 1997 1997 1996 JUNE 3, 1995 1995
------------ ------------ ---------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Product sales, net...... $ -- $ 366,000 $ 385,000 $12,478,000 $19,939,000 $ 64,138,000
Licensing revenues...... 8,553,000 4,723,000 8,333,000 1,421,000 325,000 1,485,000
---------- ---------- ---------- ----------- ----------- ------------
Total net sales....... 8,553,000 5,089,000 8,718,000 13,899,000 20,264,000 65,623,000
Cost of goods sold...... -- 183,000 184,000 10,445,000 16,310,000 54,994,000
---------- ---------- ---------- ----------- ----------- ------------
Gross profit............ 8,553,000 4,906,000 8,534,000 3,454,000 3,954,000 10,629,000
Selling, general and
administrative
expenses............... 4,192,000 1,778,000 3,406,000 4,460,000 5,153,000 19,097,000
Performance option
expense................ -- -- -- 4,567,000 -- --
Amortization of
trademarks and
goodwill............... 43,000 -- -- -- -- 819,000
Operational
restructuring charge... -- -- -- -- 3,165,000 --
---------- ---------- ---------- ----------- ----------- ------------
Operating income (loss). 4,318,000 3,128,000 5,128,000 (5,573,000) (4,364,000) (9,287,000)
OTHER INCOME (EXPENSES):
Interest expense........ (330,000) (2,000) (3,000) (355,000) (587,000) (5,467,000)
Investment and interest
income................. 525,000 293,000 460,000 543,000 24,000 107,000
Gain on sale of Uniform
Division and other
assets................. -- -- 220,000 3,840,000 -- --
Other income............ 422,000 -- 75,000 96,000 116,000 167,000
---------- ---------- ---------- ----------- ----------- ------------
Total other income
(expenses), net...... 617,000 291,000 752,000 4,124,000 (447,000) (5,193,000)
REORGANIZATION ITEMS:
Professional fees and
expenses............... -- -- -- -- -- (3,429,000)
Fresh start adjustments. -- -- -- -- -- (50,664,000)
---------- ---------- ---------- ----------- ----------- ------------
Total reorganization
items................ -- -- -- -- -- (54,093,000)
Income (loss) before
income taxes and
extraordinary item..... 4,935,000 3,419,000 5,880,000 (1,449,000) (4,811,000) (68,573,000)
Income tax benefit...... (782,000) -- (771,000) -- (400,000) (5,230,000)
---------- ---------- ---------- ----------- ----------- ------------
Income (loss) before
extraordinary item..... 5,717,000 3,419,000 6,651,000 (1,449,000) (4,411,000) (63,343,000)
EXTRAORDINARY ITEM:
Gain on extinguishment
of debt................ -- -- -- -- -- 88,291,000
---------- ---------- ---------- ----------- ----------- ------------
Net income (loss)....... $5,717,000 $3,419,000 $6,651,000 $(1,449,000) $(4,411,000) $ 24,948,000
========== ========== ========== =========== =========== ============
Basic earnings (loss)
per share.............. $ 0.73 $ 0.45 $ 0.87 $ (0.22) $ (0.72) *
========== ========== ========== =========== ===========
Diluted earnings (loss)
per share.............. $ 0.68 $ 0.42 $ 0.82 $ (0.21) $ (0.72)
========== ========== ========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic................. 7,866,862 7,660,813 7,688,521 6,480,443 6,096,000
Diluted............... 8,412,768 8,080,100 8,154,311 6,945,360 6,131,590
</TABLE>
- --------
* Per share results are not presented for periods prior to June 3, 1995, due
to the general lack of comparability as a result of the revised capital
structure of the Company.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED NOTES
-------------------- ADDITIONAL (DEFICIT)/ RECEIVABLE
PAR PAID-IN RETAINED FROM
SHARES VALUE CAPITAL EARNINGS STOCKHOLDERS TOTAL
---------- -------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Predecessor Company
balance at May 28,
1994................... 5,016,298 50,000 13,150,000 (24,830,000) -- (11,630,000)
========== ======== =========== =========== ========== ===========
Net loss for the nine
months ended prior to
fresh start
adjustments............ -- -- -- (12,679,000) -- (12,679,000)
Recapitalization and
fresh start adjustments
(Notes 1 and 2)
Cancellation of old
common stock.......... (5,016,298) (50,000) (13,150,000) -- -- (13,200,000)
Issuance of new common
stock................. 6,096,000 122,000 11,703,000 -- -- 11,825,000
Issuance of note
receivable to
stockholder........... -- -- -- -- (192,000) (192,000)
Fresh start
adjustments........... -- -- -- 37,509,000 -- 37,509,000
---------- -------- ----------- ----------- ---------- -----------
Successor Company
balance at
February 25, 1995...... 6,096,000 122,000 11,703,000 -- (192,000) 11,633,000
Net loss for three
months ended June 3,
1995................... -- -- -- (4,411,000) -- (4,411,000)
---------- -------- ----------- ----------- ---------- -----------
BALANCE AT JUNE 3, 1995. 6,096,000 122,000 11,703,000 (4,411,000) (192,000) 7,222,000
========== ======== =========== =========== ========== ===========
Issuance of new common
stock.................. 366,667 7,000 (7,000) -- -- --
Exercise of director
warrants, employee
stock options and
performance options.... 1,694,739 35,000 4,620,000 -- -- 4,655,000
Purchase and retirement
of treasury shares..... (31,593) (1,000) (60,000) (56,000) -- (117,000)
Cancellation of shares
held and returned by
disbursing agent....... (475,000) (10,000) 10,000 -- -- --
Distribution of capital. -- -- (4,289,000) -- -- (4,289,000)
Repayment on note
receivable............. -- -- -- -- 48,000 48,000
Net loss for the year
ended June 1, 1996..... -- -- -- (1,449,000) -- (1,449,000)
---------- -------- ----------- ----------- ---------- -----------
BALANCE AT JUNE 1, 1996. 7,650,813 153,000 11,977,000 (5,916,000) (144,000) 6,070,000
========== ======== =========== =========== ========== ===========
Exercise of director
warrants, employee
stock options and...... 95,000 2,000 404,000 -- -- 406,000
Cancellation of shares
held and returned by
disbursing agent....... (18,827) -- -- -- -- --
Cash dividend
distributions.......... -- -- (2,529,000) -- -- (2,529,000)
Utilization of pre-
bankruptcy NOL
carryforwards.......... -- -- 1,482,000 -- -- 1,482,000
Repayment on note
receivable............. -- -- -- -- 144,000 144,000
Net income for the year
ended May 31, 1997..... -- -- -- 6,651,000 -- 6,651,000
---------- -------- ----------- ----------- ---------- -----------
BALANCE AT MAY 31, 1997. 7,726,986 155,000 11,334,000 735,000 -- 12,224,000
========== ======== =========== =========== ========== ===========
Exercise of director
warrants and employee
stock options.......... 885,671 18,000 2,850,000 -- -- 2,868,000
Cash dividend
distributions.......... -- -- (42,467,000) (6,452,000) -- (48,919,000)
Utilization of pre-
bankruptcy NOL
carryforwards.......... -- -- 1,727,000 -- -- 1,727,000
Stock option tax
benefit................ -- -- 2,750,000 -- -- 2,750,000
Note receivable from
stockholder............ -- -- -- -- (2,013,000) (2,013,000)
Net income for the eight
months ended
January 31, 1998....... -- -- -- 5,717,000 -- 5,717,000
---------- -------- ----------- ----------- ---------- -----------
BALANCE AT JANUARY 31,
1998................... 8,612,657 173,000 (23,806,000) -- (2,013,000) (25,646,000)
========== ======== =========== =========== ========== ===========
COMPARATIVE TRANSITION PERIOD
(UNAUDITED)
BALANCE AT JUNE 1, 1996. 7,650,813 153,000 11,977,000 (5,916,000) (144,000) 6,070,000
========== ======== =========== =========== ========== ===========
Exercise of director
warrants, employee
stock options and...... 80,000 2,000 336,000 -- -- 338,000
Cancellation of shares
held and returned by
disbursing agent....... (18,827) -- -- -- -- --
Interest on note
receivable from
stockholder............ -- -- -- -- (6,000) (6,000)
Dividend distribution
adjustment............. -- -- (7,000) -- -- (7,000)
Cash dividend
distributions.......... -- -- -- -- -- --
Net income for the eight
months ended
February 1, 1997....... -- -- -- 3,419,000 -- 3,419,000
---------- -------- ----------- ----------- ---------- -----------
BALANCE AT FEBRUARY 1,
1997................... 7,711,986 155,000 12,306,000 (2,497,000) (150,000) 9,814,000
========== ======== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CHEROKEE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
-------------------------------------------------------------- ------------
EIGHT EIGHT THREE NINE
MONTHS MONTHS YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, MAY 31, JUNE 1, JUNE 3, FEBRUARY 25,
1988 1997 1997 1996 1995 1995
----------- ----------- ---------- ----------- ----------- ------------
UNAUDITED
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income....... $ 5,717,000 $3,419,000 $6,651,000 $(1,449,000) $(4,411,000) $24,948,000
Adjustments to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 23,000 6,000 19,000 18,000 26,000 690,000
Amortization of
goodwill and
trademarks............ 43,000 -- -- -- -- 819,000
Provision for bad
debts................. -- -- (112,000) 112,000 72,000 696,000
Operational
restructuring charge.. -- -- -- -- 2,551,000 --
Gain on Sale of Uniform
Division.............. -- -- -- (1,588,000) -- --
Change in other
liabilities........... -- (750,000) (750,000) -- -- --
Interest income on note
receivable from
stockholder........... (13,000) (6,000) -- -- -- --
Deferred taxes......... (3,058,000) -- (926,000) -- (500,000) (5,230,000)
Stock option tax
benefit............... 2,367,000 -- -- -- -- --
Amortization of
deferred financing
costs
and debt discount..... 347,000 -- -- -- -- 85,000
Gain on extinguishment
of debt............... -- -- -- -- -- (88,291,000)
Fresh start
adjustments........... -- -- -- -- -- 50,664,000
Amortization of
discount on note
receivable............ -- (83,000) -- 108,000 -- --
Performance option
exercise expense...... -- -- -- 4,567,000 -- --
Changes in current
assets and
liabilities:
Receivables........... (1,323,000) (1,014,000) (218,000) 10,747,000 5,010,000 (2,441,000)
Inventories........... 35,000 179,000 176,000 11,274,000 5,724,000 (1,880,000)
Other current assets.. (190,000) (89,000) (20,000) 496,000 (141,000) (88,000)
Accounts payable...... 540,000 (181,000) (122,000) (1,348,000) (1,794,000) 7,787,000
Accrued payroll and
related expenses..... -- -- -- (1,559,000) 1,152,000 (227,000)
Other liabilities..... -- -- -- (1,668,000) (521,000) 364,000
----------- ---------- ---------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 4,488,000 1,481,000 4,698,000 19,710,000 7,168,000 (12,104,000)
INVESTING ACTIVITIES
Purchases of trademark.. $(2,000,000) $ -- $ -- $ -- $ -- $ --
Proceeds from sales of
assets held for sale... -- -- 3,576,000 89,000 -- 435,000
Purchase of treasury
shares................. -- -- -- (117,000) -- --
Restricted cash......... -- 310,000 310,000 (310,000) -- --
Repayment on note
receivable from
stockholder............ -- -- 144,000 48,000 -- --
Change in other assets.. (1,673,000) (197,000) (382,000) (84,000) 95,000 87,000
Collection of notes
receivable............. 250,000 -- 1,961,000 -- -- --
----------- ---------- ---------- ----------- ----------- -----------
Net cash (used in)
provided by investing
activities............. (3,423,000) 113,000 5,609,000 (374,000) 95,000 522,000
FINANCING ACTIVITIES
Payment of long-term
debt, including
revolving credit which
was classified as
current at June 3,
1995................... -- -- -- -- (7,065,000) (2,383,000)
Net proceeds from the
issuance of long-term
debt................... 47,870,000 -- -- -- -- 14,719,000
Net (payments on)
proceeds from revolving
credit and other....... -- -- -- (14,213,000) 64,000 (1,232,000)
Note receivable from
stockholder............ (2,000,000) -- -- -- -- --
Proceeds from exercise
of stock options....... 2,786,000 281,000 336,000 64,000 -- --
Proceeds from exercise
of warrants............ 82,000 57,000 70,000 24,000 -- --
Cash Distributions...... (48,919,000) -- (2,529,000) (4,289,000) -- --
----------- ---------- ---------- ----------- ----------- -----------
Net cash (used in)
provided by financing
activities............. (181,000) 338,000 (2,123,000) (18,414,000) (7,001,000) 11,104,000
----------- ---------- ---------- ----------- ----------- -----------
Increase (decrease) in
cash and cash
equivalents............ 884,000 1,932,000 8,184,000 922,000 262,000 (478,000)
Cash and cash
equivalents at
beginning of period.... 9,391,000 1,207,000 1,207,000 285,000 23,000 501,000
----------- ---------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $10,275,000 $3,139,000 $9,391,000 $1,207,000 $285,000 $23,000
=========== ========== ========== =========== =========== ===========
TOTAL PAID DURING
PERIOD:
Income taxes........... $ 64,000 $ 4,600 $ 4,600 $ -- $ 92,000 $ 17,000
Interest............... $ -- $ 2,000 $ 3,000 $ 355,000 $ 587,000 $ 1,644,000
NON-CASH TRANSACTIONS:
Declaration of cash
dividend.............. $ -- $1,159,000 $ -- $ -- $ -- $ --
Utilization of pre-
bankruptcy NOL
carryforwards......... $ 1,727,000 $ -- $1,482,000 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REORGANIZATION
Cherokee Inc. (the "Company") is in the business of marketing and licensing
the Cherokee and Sideout brands and related trademarks and other brands it
owns. The Company is one of the leading licensors of brand names and
trademarks for apparel, footwear and accessories in the United States. The
Company's operating strategy emphasizes retail direct, wholesale and
international licensing whereby the Company grants retailers and wholesalers
the license to use the trademarks held by the Company on certain categories of
merchandise and the licensees are responsible for designing and manufacturing
the merchandise. The Company and its wholly-owned subsidiary, Spell C. LLC
("Spell C"), hold several trademarks including Cherokee(TM), Sideout(TM),
Sideout Sport(TM), King of the Beach(TM), and others. The Cherokee brand,
which began as a footwear brand in 1973, has been positioned to connote
quality, comfort, fit, and a "Casual American lifestyle with traditional
wholesome values. The Sideout brand and related trademarks, which represent a
beach-oriented active, "California" lifestyle, were acquired by the Company in
November 1997. As of January 31, 1998 the Company had twenty-five continuing
license agreements, covering both domestic and international markets.
On April 24, 1995, a group including Robert Margolis, who founded the
Company's Apparel Division in 1981, and who had been the Company's Chairman
and Chief Executive Officer from May 1989 to October 1993, purchased 1,358,000
shares, or approximately 22.3% of the Company's then outstanding Common Stock
("Common Stock"). On May 5, 1995, Mr. Margolis was appointed Chairman and
Chief Executive Officer of the Company. After a period of assessment, Mr.
Margolis set in motion a strategy which resulted in the Company's principal
business being a marketer and licensor of the Cherokee brand and other brands
it owns or may acquire in the future. The Company stopped manufacturing and
importing apparel and footwear, sold its inventories of apparel and footwear
and on July 28, 1995 sold the assets of its Uniform Division. The proceeds
from these sales were used to pay off all of the Company's indebtedness. As a
result of discontinuing the apparel and footwear business and selling the
Uniform Division, the number of employees was reduced from approximately 345
on May 28, 1994 to 15 by November 1, 1995.
The Company filed a prepackaged plan of reorganization (the "1994 Plan")
pursuant to Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") on November 7, 1994. An order confirming the 1994 Plan was
entered by the Court on December 14, 1994 and the Plan became effective on
December 23, 1994 (the "Effective Date"). The confirmed 1994 Plan provided for
the following:
Common Stock: On the Effective Date Cherokee issued 5,000,000 shares of
Common Stock, par value of $.02 per share, ("Common Stock") to holders of 11%
Senior Subordinated Notes due 1999 ("Old Notes") and common stock par value
$.01 per share ("Old Common Stock"). The Company also issued 1,000,000 shares
of Common Stock to a disbursing agent, which shares were to be issued to
Holders of Allowed General Unsecured Claims following allowance and settlement
of such Claims. To implement distribution of Common Stock to general unsecured
creditors, 1,000,000 shares of Common Stock were issued to Cherokee's
disbursing agent (the "Disbursing Agent"). The Disbursing Agent distributed
517,795 shares of Common Stock to general unsecured creditors and returned
482,205 shares to the Company since they were determined not to be
distributable to creditors, and subsequently, were canceled at the Company's
request. Having settled all claims, the Company sent in a Final Decree to the
Bankruptcy Court, which was signed and approved by the Bankruptcy Judge on
August 15, 1996.
In accordance with the 1994 Plan, the Company's Certificate of Incorporation
was amended to authorize 20,000,000 shares of Common Stock par value $.02 per
share, and 1,000,000 shares of Preferred Stock par value $.02 per share. The
terms and conditions of the Preferred Stock shall be determined from time to
time by the Company's Board of Directors.
F-6
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Old Notes: For each $1,000 principal amount of Old Notes (an aggregate of
$76,565,000), Holders received 63.9978 shares of Common Stock (or an aggregate
of 4,900,000 shares of Common Stock). Accrued and unpaid interest through the
petition date was taken into account in determining the exchange ratio. Having
settled all claims, the remaining 10,954 shares were returned and canceled by
the Disbursing Agent on February 24, 1997.
Allowed General Unsecured Claims: Holders of Allowed General Unsecured
Claims have received 60.5504 shares of Common Stock for each $1,000 amount of
Allowed General Unsecured Claims.
Allowed General Unsecured Claims of Less than $1,000: Holders of Allowed
General Unsecured Claims of Less than $1,000 received full payment in cash.
Old Common Stock: Holders of Old Common Stock received.019935 shares of
Common Stock for each share of Old Common Stock (or an aggregate of 100,000
shares of Common Stock). Having settled all claims, the remaining 668 shares
were returned and canceled by the Disbursing Agent on February 24, 1997.
Old Warrants: Series A, Series B and Series C Warrants were cancelled and
holders received no consideration under the Plan.
2. BASIS OF PRESENTATION
Bankruptcy Reorganization
For financial reporting purposes, the effective date of the 1994
reorganization was assumed to be February 25, 1995, the last day of the third
quarter of the Company's fiscal year.
The Company has implemented the recommended accounting principles for
entities emerging from Chapter 11 set forth in the American Institute of
Certified Public Accountants Statement of Position 90-7 on Financial Reporting
by Entities in Reorganization under the Bankruptcy Code ("SOP 90-7"). This
results in the use of "fresh start" reporting, since the reorganization value,
as defined, was less than the total of all post-petition liabilities and pre-
petition claims, and holders of voting shares immediately before confirmation
of the 1994 Plan received less than fifty percent of the voting shares of the
emerging entity. Under this concept, all assets and liabilities are restated
to reflect the reorganization value of the reorganized entity, which
approximates its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure
was recast in conformity with the 1994 Plan.
F-7
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BALANCE SHEETS
FEBRUARY 25, 1998
($000 OMITTED)
<TABLE>
<CAPTION>
PRE-FRESH START FRESH START FRESH START
BALANCE SHEET CANCELLATION DEBT FAIR VALUE BALANCE SHEET
FEB. 25, 1995 OF STOCK DISCHARGE ADJUSTMENT FEB. 25, 1995
--------------- ------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............ $ 23 $-- $ -- $ -- $ 23
Receivables, net........ 16,857 -- -- (622)(3) 16,235
INVENTORIES:
Raw materials........... 5,643 -- -- (1,831)(3) 3,812
Work in process......... 1,802 -- -- (41)(3) 1,761
Finished goods.......... 16,616 -- -- (2,833)(3) 13,783
------- ---- ------- -------- -------
24,061 -- -- (4,705)(3) 19,356
Deferred income taxes... 2,511 -- -- (2,511)(4) --
Other current assets.... 415 -- -- (1)(3) 414
Total current assets.. 43,867 -- -- (7,839) 36,028
Property & Equipment.... 12,578 -- -- (8,863)(1) 3,715
Less accumulated
depreciation and
amortization........... (1,455) -- -- 1,455(3) --
------- ---- ------- -------- -------
11,123 -- -- (7,408)(3) 3,715
------- ---- ------- -------- -------
Trademarks, net of
amortization........... 36,290 -- -- (36,290)(5) --
Other assets............ 3,156 192(2) -- (1,564)(3) 1,784
------- ---- ------- -------- -------
Total assets.......... $94,436 $192(2) $ -- $(53,101) $41,527
======= ==== ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term revolving
credit and other....... $ 439 $-- $ -- $ -- $ 439
Current maturities of
long-term debt......... 1,780 -- -- -- 1,780
Accounts payable and
accrued expenses....... 13,754 -- (7,365)(2) 29(3) 6,418
Accrued interest
payable................ 4,361 -- (4,361)(2) -- --
Income tax payable...... 70 -- -- -- 70
Senior subordinated
notes due 1999......... 76,565 -- (76,565)(2) -- --
------- ---- ------- -------- -------
Total current
liabilities.......... 96,969 -- (88,291) 29 8,707
Long-term debt, net of
current maturities..... 18,995 -- -- -- 18,995
Deferred incomes taxes.. 2,781 -- -- (781)(4) 2,000
------- ---- ------- -------- -------
Total liabilities..... 118,745 -- (88,291) (752) 29,702
STOCKHOLDERS' EQUITY
(DEFICIT):
Common stock, $.01 par
value, 20,000,000
authorized, 5,016,298
shares issued and
outstanding............ 50 (50)(1) -- -- --
Common stock, $.02 par
value, 20,000,000
authorized, 6,096,000
shares issued and
outstanding............ -- 4(1) 118(2) -- 122
Additional paid-in
capital................ 13,150 238(1) (1,685)(2) 11,703
Deficit................. (37,509) -- 88,173(2) (50,664)(3) --
------- ---- ------- -------- -------
Stockholders' Equity
(Deficit)............ (24,309) 192 88,291 (52,349) 11,825
------- ---- ------- -------- -------
Total liabilities and
Stockholders' Equity
(Deficit)............ $94,436 $192 $ -- $(53,101) $41,527
======= ==== ======= ======== =======
</TABLE>
F-8
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(1) Exchange Common Stock for Old Common Stock.
(2) Exchange of Old Notes and accounts payable for Common Stock and related
gain on debt extinguishment.
(3) Record assets and liabilities at their fair value pursuant to the
reorganization value of the Company and eliminate any retained earnings or
deficit.
(4) Record income tax effect of fresh start adjustments.
(5) Based on the Company's continued poor operating performance and its second
bankruptcy reorganization since fiscal year 1993, no value was attributed
to trademarks in connection with the fresh start accounting for the 1994
Plan.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, SPELL C. LLC, a Delaware limited liability
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
COMPANY YEAR END
On December 19, 1997, the Company determined to change its fiscal year to a
52 or 53 week fiscal year ending on the Saturday nearest to January 31 in
order to better align the Company with its licensees who also generally
operate and plan using a fiscal year ending nearest to January 31. Prior to
this change, the Company's fiscal year was a 52 or 53 week fiscal year ending
on the Saturday nearest to May 31.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased and money
market funds with an original maturity date of three months or less to be cash
equivalents.
The Company had restricted cash of $310,000 at June 1, 1996, held as
collateral for a stand by letter of credit ("LC"). The LC secured a custom's
bond in the Company's name. The LC was returned and the cash was released to
the Company on August 23, 1996.
INVENTORIES
Inventories are valued at the lower of cost or market, determined by the use
of the first-in, first-out method.
REVENUE RECOGNITION
Product sales are recognized on the date of shipment. Royalty revenues are
recognized when earned based upon contractual agreement.
F-9
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEPRECIATION AND AMORTIZATION
In accordance with fresh start reporting related to the 1994 Plan, the pre-
effective date accumulated depreciation and amortization of $1,455,000 at
February 25, 1995 was eliminated and a new depreciation and amortization base
was established equal to the estimated fair market value of the existing fixed
assets at that date.
Depreciation of furniture and fixtures, stated at cost, is provided on a
straight-line method over the estimated useful lives of the assets ranging
from three to eight years.
OTHER ASSETS AND ASSETS HELD FOR SALE
Other assets is comprised of property, plant and equipment and intangible
assets. Property and equipment are stated at cost, less accumulated
depreciation and amortization. Other assets includes the Sideout trademarks
acquired on November 7, 1997 for $2,000,000.
Based on the Company's continued poor operating performance and its second
bankruptcy reorganization since fiscal year 1993, no value was attributed to
trademarks in connection with the fresh start accounting for the 1994 Plan.
Subsequent to 1994, the Company capitalizes all fees incurred in filing
trademark registrations and renewals. Trademark registrations, renewal fees
and acquired trademarks are amortized over the life of the registrations
ranging from five to ten years.
Assets held for sale at June 1, 1996 included the Company facility in
Sunland, California, which was sold on April 22, 1997.
Securitization fees are the costs associated with the leveraged
recapitalization which have been capitalized and are being amortized over the
term of the Note Agreement.
LONG-TERM ASSETS
The carrying value of long-term assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less
than their carrying value. Based on current information management believes no
impairment exists.
INCOME TAXES
Income tax expense is the tax payable for the period and the change during
the period in deferred tax assets and liabilities. Deferred income taxes are
determined based on the difference between the financial reporting and tax
bases of assets and liabilities using enacted rates in effect during the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Under fresh-start reporting and SFAS No. 109, the tax benefits realized from
net operating loss carryforwards that survive the reorganization will be a
direct credit to additional paid-in-capital.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. The Company limits its credit risk with respect to
F-10
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
cash by maintaining cash balances with quality financial institutions. At
January 31, 1998, May 31, 1997 and June 1, 1996, the Company's cash and cash
equivalents exceeded FDIC limits. Concentrations of credit risk with respect
to trade receivables are minimal due to the limited amount of open receivables
and due to the nature of the Company's licensing royalty revenue program.
Generally, the Company does not require collateral or other security to
support customer receivables. As of January 31, 1998, the Company had twenty-
five continuing license agreements; five of which were with retailers, seven
of which were with domestic licensees and thirteen of which were with
international licensees.
One customer accounted for approximately 96% and 83%, respectively, of the
Company's trade receivables at January 31, 1998 and May 31, 1997 and
approximately 75% and 68%, respectively, of the Company's revenues during the
fiscal year ended January 31, 1998 and May 31, 1997. No customer accounted for
more than 10% of trade receivables at June 1, 1996 or of sales during the
period ended June 1, 1996.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made.
The Company has elected to account for its stock compensation arrangements
under the provisions of APB 25, "Accounting for Stock Issued to Employees."
The Company adopted the provisions for pro forma disclosure requirements of
SFAS 123 in Fiscal 1997. (See Note 13.)
ADVERTISEMENT
The Company's retail direct licensees fund their own advertisement programs.
The Company's advertising and promotional costs are immaterial and are
expensed as incurred.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 supersedes and simplifies the previous computational guidelines under
Accounting Principles Board Opinion No. 15, "Earnings Per Share". Among other
changes, SFAS 128 eliminates the presentation of primary EPS and replaces it
with basic EPS for which common stock equivalents are not considered in the
computation. It also revises the computation of diluted EPS.
Basic earnings per share is computed by dividing the net income attributable
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is computed
by dividing the net income attributable to common shareholders by the weighted
average number of common and common equivalent shares outstanding during the
period. Common share equivalents included in the diluted computation represent
shares issuable upon assumed exercise of stock options using the treasury
stock method. Earnings per share and weighted average shares outstanding for
all prior periods have been restated in accordance with SFAS 128.
For the eight months ended January 31, 1998, the Company, in consolidation,
recorded as a charge against income, $474,000 in financial advisory services,
resulting in a reduction in basic and diluted earnings per share of $0.06 and
$0.05, respectively. For the year ended June 1, 1996, the Company recorded a
non-cash charge to
F-11
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
recognize performance option expense of $4,567,000, resulting in a reduction
in basic and diluted earnings per share of $0.70 and $0.66, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassed to conform with current
period presentation.
4. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, MAY 31, JUNE 1,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Trade........................................ $2,289,000 $ 657,000 $ 621,000
Due from Factor.............................. -- -- 43,000
Note Receivable, Current..................... -- 250,000 --
Other........................................ 58,000 117,000 621,000
---------- ---------- ----------
2,347,000 1,024,000 1,285,000
Less allowance for doubtful accounts......... -- -- (591,000)
---------- ---------- ----------
$2,347,000 $1,024,000 $ 694,000
========== ========== ==========
</TABLE>
5. LONG-TERM DEBT
In September 1997, the Company's Board authorized Libra Investments, Inc.
("Libra") to explore ways to maximize shareholder value, including a
recapitalization or sale of the Company. On December 23, 1997, the Company
completed the recapitalization described below and publicly announced that it
would declare a special dividend of $5.50 per share, which was subsequently
paid on January 15, 1998.
As part of the recapitalization, the Company, in exchange for the proceeds
from the Secured Notes (as defined below), sold to its wholly-owned
subsidiary, Spell C, all its rights to the Cherokee brand and related
trademarks in the United States and assigned to Spell C all of its rights in
an amended licensing agreement (the "Amended Target Agreement") with Target
Stores, a division of Dayton Hudson Corporation ("Target"). Spell C issued for
gross proceeds of $47.9 million, privately placed Zero Coupon Secured Notes
(the "Secured Notes"), yielding 7.0% interest per annum and maturing on
February 20, 2004. The Secured Notes amortize quarterly from May 20, 1998
through February 20, 2004. The Secured Notes are secured by the Amended Target
Agreement and the domestic Cherokee brand name and trademarks. The Secured
Notes indenture (the "Indenture") requires that any proceeds due to Spell C
under the Amended Target Agreement must be deposited directly into a
collection account controlled by the trustee under the Indenture. The trustee
will distribute from the collection account the amount of principal due and
payable on the Secured Notes to the holders thereof on quarterly note payment
dates. Excess amounts on deposit in the collection account may only be
distributed to Spell C if the amount on deposit in the collection account
exceeds the aggregate amount of principal due and payable on the next
quarterly note payment date. Such excess amounts, if any, may then be
distributed by Spell C to the Company. The minimum guaranteed royalty under
the Amended Target Agreement is $9.0 million per year for each of the two
fiscal years ending January 29, 1999 and 2000 and $10.5 million per year for
each of the four fiscal years ending January 31, 2001 through 2004, therefore,
the aggregate scheduled amortization under the Secured Notes ($60.0 million)
equals the aggregate minimum guaranteed royalty payable under the Amended
Target Agreement ($60.0 million).
F-12
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MATURITY SCHEDULE OF SECURED NOTES
<TABLE>
<CAPTION>
FACE VALUE
-----------
<S> <C>
1999......................................................... $ 6,750,000
2000......................................................... 9,000,000
2001......................................................... 10,125,000
2002......................................................... 10,500,000
2003......................................................... 10,500,000
Thereafter................................................... 13,125,000
-----------
Total.................................................... $60,000,000
Less unamortized Note Discount............................... 11,800,000
-----------
42,800,000
Less current portion of long term debt....................... 6,525,000
-----------
Long term obligation......................................... $41,625,000
</TABLE>
6. INCOME TAXES
The income tax benefit as shown in the statements of operations includes the
following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
SUCCESSOR COMPANY COMPANY COMPANY
------------------------------------ ------------ ------------
EIGHT MONTHS NINE MONTHS
ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED
JANUARY 31, MAY 31, JUNE 1, ENDED FEBRUARY 25,
1998 1997 1996 JUNE 3, 1995 1995
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current:
Federal............... $ 1,892,000 $ 96,000 $-- $ -- $ --
State................. 353,000 32,000 -- 100,000 --
Foreign............... 31,000 27,000 -- -- --
----------- --------- ---- --------- -----------
2,276,000 155,000 -- 100,000 --
Deferred:
Federal............... (3,058,000) (785,000) -- (250,000) (3,355,000)
State................. -- (141,000) -- (250,000) (1,875,000)
Foreign............... -- -- -- -- --
----------- --------- ---- --------- -----------
(3,058,000) (926,000) -- (500,000) (5,230,000)
----------- --------- ---- --------- -----------
$ (782,000) $(771,000) $-- $(400,000) $(5,230,000)
</TABLE>
F-13
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31, 1998 MAY 31, 1997
------------------- -------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Fixed assets.......................... -- -- -- --
Inventory reserve..................... -- -- -- --
Uniform capitalization................ -- -- -- --
Bad debt reserve...................... -- -- -- --
Accrued liabilities................... -- -- -- --
Tax effect of NOL carryovers.......... -- 9,110,000 -- 8,648,000
Other................................. -- 324,000 -- 218,000
Valuation allowance................... -- (1,858,000) -- (6,458,000)
---- ----------- ---- -----------
Total deferred tax assets......... $-- $ 7,576,000 $-- $ 2,408,000
==== =========== ==== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 1, 1996 JUNE 3, 1995
-------------------- -------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Fixed assets................ -- -- -- 442,000
Inventory reserve........... -- -- 2,583,000 --
Uniform capitalization...... -- -- 418,000 --
Bad debt reserve............ -- -- 436,000 --
Accrued liabilities......... -- -- 967,000 --
Tax effect of NOL
carryovers................. -- 10,624,000 -- 14,823,000
Other....................... -- 90,000 -- 232,000
Valuation allowance......... -- (10,714,000) (4,404,000) (15,497,000)
---- ------------ ----------- ------------
Total deferred tax
assets................. $-- $ -- $ -- $ --
==== ============ =========== ============
</TABLE>
The Company's deferred tax asset is primarily related to net operating loss
carryforwards. The Company believes that it is more likely than not that the
majority of the deferred tax asset will be realized based upon the expected
future income from the Amended Target Agreement. Accordingly, with the
exception of the amount attributable to IRC Section 382 net operating losses
(as described below) which cannot be utilized until after the Target Agreement
expires, the valuation allowance has been reduced during the short period
ended January 31, 1998. The reduction in the valuation allowance relating to
pre-reorganization carryovers has been credited to additional paid-in-capital.
F-14
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the actual income tax rates to the federal statutory
rate follows:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------------------------- ------------
EIGHT MONTHS NINE MONTHS
ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED
JANUARY 31, MAY 31, JUNE 1, ENDED FEBRUARY 25,
1998 1997 1996 JUNE 3, 1995 1995
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Tax (benefit) expense at
U.S. statutory rate.... 34.0% 34.0% (34.0)% (34.0)% 34.0%
Additional paid-in-
capital................ 35.2 25.2 -- -- --
Net gain from
extraordinary gain from
extinguishment of debt
not taxable............ -- -- -- -- (51.2)
Net operating loss for
which no tax benefit
was recognized......... -- -- 34.0 33.9 12.5
Writedown of net
deferred taxes......... -- -- -- (5.2) (21.0)
Utilization of net
operating loss
carryforward........... -- (33.6) -- -- --
Valuation Allowance..... (93.8) (41.0) -- -- --
Foreign taxes........... .6 .5 -- -- --
Nondeductible
reorganization costs... -- -- -- -- 4.7
State income tax benefit
net of federal income
tax.................... 4.8 .4 -- (3.1) --
Minority interest and
others................. 3.2 1.4 -- .4 --
----- ----- ----- ----- -----
Tax benefit............. (16.0)% (13.1)% -- (8.0)% (21.0)%
===== ===== ===== ===== =====
</TABLE>
At January 31, 1998 the Company has federal and California tax net operating
loss carryovers ("NOL's"), generated subsequent to the Company's 1994
reorganization, of approximately $14,900,000 and $5,300,000, respectively,
which will begin to expire in 2010 and 2000, respectively. The Company
believes utilization of these losses is not subject to Internal Revenue Code
("IRC") Section 382 limitations.
As a result of the 1994 Plan discussed in Note 1, an ownership change
occurred and the annual utilization of pre-reorganization NOL's and built-in
losses (i.e. the tax bases of assets exceeded their fair market value at the
date of the ownership change) has been substantially limited under IRC Section
382. The annual limitation amount, computed pursuant to IRC Section 382(1)(6),
is approximately $780,000. Any unused IRC Section 382 annual loss limitation
amount may be carried forward to the following year. Those unused limitation
losses are then added to the current IRC Section 382 annual limitation amount.
Given the IRC Section 382 limitations, a substantial portion of the pre
reorganization losses will expire unused. Such deferred tax assets have been
written off against the valuation allowance.
7. OPERATIONAL RESTRUCTURING CHARGE
The operational restructuring charge of $3,165,000 which was taken in the
three months ended June 3, 1995, covers the costs and charges of exiting from
apparel and footwear manufacturing, importing and wholesaling businesses in
order to implement the Company's new licensing strategy. Historically, the
Company operated a wholesale licensing program; it licensed the Cherokee
trademark to unaffiliated manufacturers for the production and marketing of
apparel, footwear and accessories that the Company did not manufacture, import
or market. The Company's current operating strategy includes retail direct
licensing whereby the Company grants retailers the license to use the Cherokee
trademark on certain categories of merchandise, including those products that
the Company previously manufactured. Under its licensing operating strategy,
the Company was transformed into a significantly smaller, more focused
organization.
F-15
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company completed the transition out of the apparel and footwear
manufacturing and importing businesses in November 1995. The $3,165,000
restructuring charge includes $614,000 in severance payments, $2,027,000 in
writedowns of inventory to estimated realizable values, and $524,000 for
cancellation of inventory orders, prepaid expenses, deposits and others. The
Company's work force was reduced from approximately 165 on June 3, 1995 to
approximately 15 by November 1, 1995. As of June 3, 1995, approximately
$1,504,000 of the $3,165,000 was included in liability accounts and has since
been paid.
Revenues and gross profit for the Company's terminated businesses were
$84,077,000 and $12,772,000 in Fiscal 1995.
8. COMMITMENT AND CONTINGENCIES
LEASES
The Company leases real property in Dallas Texas under a lease agreement
expiring on February 28, 1998. The Company has no plans to renew the lease for
these premises. Monthly rent is $1,496 plus operating expenses. The Company
entered into a sublease agreement on August 30, 1995 with an unaffiliated
third party. The term of this sublease is from September 1, 1995 to February
28, 1998. Sublessee is to pay rent of $1,280 per month for the property.
From May 26, 1995 to October 31, 1997, the Company has rented approximately
1,500 square feet of office space from The Newstar Group d/b/a The Wilstar
Group ("Wilstar") and paid Wilstar $.75 per square foot or $1,125 per month.
In addition, the Company reimbursed Wilstar for one-half of certain costs
relating to this office space. Beginning November 1, 1997, the Company
increased its rental space to 3,685 square feet and currently pays Wilstar
$2,762 in rent per month. The Company believes that its rental of such space
from Wilstar is on terms no less favorable than could be obtained from an
unaffiliated third party. The rent and costs are prorated based upon square
footage used by Cherokee and Wilstar does not profit from this reimbursement.
Since May 4, 1996, the Company has rented 4,000 feet of Wilstar's warehouse
space at $.50 per square foot as storage space for its financial records. Both
rental agreements are on a month to month basis.
Total rent expense was $48,000, $60,000 and $198,000 for the eight months
ended January 31, 1998 and the years ended May 31, 1997 and June 1, 1996,
respectively.
9. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting standards ("SFAS") No. 130 "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
Comprehensive income includes net income and other comprehensive income
components which under generally accepted accounting principles ("GAAP")
bypass the income statement and are reported in the balance sheet as a
separate component of equity. For the eight months ended January 31, 1998 and
the three years ended May 31, 1997, June 1, 1996 and June 3, 1995, the Company
had no other comprehensive income components as defined in SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," which changes current practice and
established a new framework, referred to as the "management" approach, on
which to base segment reporting. The management approach requires that
management identify the "operating segments" based on the way that management
disaggregates the entity for internal operating decisions. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 and
F-16
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is not required for interim statements in the first year of adoption.
Management believes that the adoption of this new standard will not have any
material impact on the Company's financial position or results of operations.
Prior to implementing its strategy to change its business to that of a
licensor, the Company was primarily engaged in the manufacturing, importing
and the distribution of apparel and shoes; therefore, its business is within
one industry segment.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Post-retirement Benefits" which revises employers'
disclosures about pension and post-retirement benefit plans. This statement is
effective for fiscal years beginning after December 15, 1997. This statement
is not anticipated to have any effect on the Company.
10. EMPLOYMENT AND MANAGEMENT AGREEMENTS
On April 24, 1995, a group which included Mr. Margolis (a former Chairman
and Chief Executive Officer of the Company) acquired approximately 22.3% of
the Company's then outstanding Common Stock (the "Group"). The Group sought to
have Mr. Margolis installed as Chief Executive Officer of the Company and to
have Mr. Margolis appointed a director of the Company. On May 4, 1995, the
Company and Wilstar entered into a Management Agreement (the "Agreement")
pursuant to which Wilstar agreed to provide executive management services to
the Company by providing the services of Robert Margolis as Chief Executive
Officer. The Agreement originally provided it would terminate on May 31, 1998;
however, the Agreement provided an automatic extension for additional one-year
terms as long as the Company's pre-tax earnings are equal to at least 80% of
the pre-tax earnings contained in the budget submitted to and approved by the
Board of Directors for such fiscal year. During Fiscal 1996, Wilstar met the
80% pre-tax earning requirement; hence, the contract was extended for an
additional one year term. In addition, Wilstar received an option to purchase
7 1/2% of the Common Stock on a fully diluted basis (675,700 shares) at a
purchase price of $3.00 per share (the "Wilstar Options"). The Wilstar options
were exercised on December 29, 1997. Subsequent to the exercise date and
pursuant to a redemption agreement entered into by all its principals, Wilstar
transferred to each principal individually his pro-rata share of the Common
Stock as consideration for redeeming his Wilstar shares.
On April 24, 1996, the Board of Directors revised the Agreement to
accelerate the vesting of Wilstar's performance options so that Wilstar was
immediately vested in its right to purchase up to 20% of the Company's fully
diluted Common Stock. Wilstar agreed to relinquish its rights to purchase up
to an additional 2.5% of the Company's fully diluted stock pursuant to the
performance options. Wilstar exercised the performance options in full on
April 25, 1996 and purchased 1,674,739 shares. The Company accounted for this
transaction as a non cash charge to earnings of $4,567,000. During Fiscal
1997, Wilstar transferred to its principals an aggregate of 874,739 shares of
the Common Stock in satisfaction of principal and interest due on
indebtedness, bonuses and Subchapter S distributions owed to its principals
and shareholders. During Fiscal 1998, Wilstar transferred 17,500 shares of the
Common Stock to certain employees and 384,386 shares of the Common Stock to
its principals, whereby, pursuant to a redemption agreement, each principal
received his pro-rata share individually as consideration for redeeming his
Wilstar shares.
The Agreement further provides that Wilstar and the Group each have the
right to elect two members of the Company's Board of Directors.
Effective for services rendered on or after June 1, 1997, the Compensation
Committee and the Board of Directors amended the Agreement by the adoption of
two amendments, designated, respectively, the Second Amendment and the Third
Amendment. The changes to the Agreement made by the Second Amendment include
(i) extension of the specified term of the Agreement to May 31, 2000; (ii)
modification of the existing provision of the Agreement for automatic
extension of its term for an additional year for each year after fiscal year
1997 in
F-17
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which the Company achieves specified levels of pre-tax earnings; (iii)
increase in the annual base compensation of Wilstar from $400,000 to $550,000;
(iv) provision for an annual cost-of-living increase in base compensation
after fiscal year 1998; and (v) increase in the annual performance bonus
percentage payable to Wilstar based on the Company's earnings before interest,
taxes, depreciation and amortization above specified levels from 10% to 15% of
such earnings in excess of $10,000,000. At January 31, 1998 and May 31, 1997,
the Company had accrued the bonus payable under Other Accrued Liabilities.
The Third Amendment, approved by a majority of shareholders on September 15,
1997 at the 1997 Annual Meeting, further provided changes to the Agreement
including, (i) provision for payment of an "acquisition bonus" to Wilstar in
the event of an acquisition of the Company for a price per share of not less
than $12 pursuant to an acquisition agreement entered into by the end of
fiscal year 2000 (the amount of such acquisition bonus ranges from $1,000,000
to $2,500,000 in the event of an acquisition of the Company for a price per
share ranging from $12 to $15 or more and automatically decreases by one-third
per year if the acquisition agreement is not entered into by the end of May
31, 1998, 1999, or 2000); and (ii) provision for payment of $3,000,000 to
Wilstar in consideration for an agreement not to compete with the Company for
a specified period of time by Wilstar and Mr. Margolis in the event of an
acquisition of the Company pursuant to an acquisition agreement entered into
by the end of May 31, 2000 (the amount of such payment automatically decreases
by one-third per year if the acquisition agreement is not entered into by the
end of May 31, 1998, 1999, or 2000); and (iii) provision for reduction of
payments under the Agreement that are contingent on a change in control if it
is determined that such payments would result in the nondeductibility of some
or all of such payments under the provisions of Section 280G of the Internal
Revenue Code.
During the eight months ended January 31, 1998 and the year ended May
31,1997, the Company made compensation payments in lieu of cash dividends to
Wilstar totalling $135,134 and $375,100, respectively.
Mr. Margolis was employed pursuant to an employment agreement which would
have expired on May 31, 1994. Under such agreement, Mr. Margolis would have
received an annual salary of $780,550 during Fiscal 1994; Mr. Margolis was
actually paid $345,140 in salary prior to his resignation. Mr. Margolis
resigned all of his positions with the Company on October 31, 1993 and entered
into a consulting agreement with the Company pursuant to which he agreed to
make himself available as a consultant to the Company for a period of one year
for a fee of $1,130,000 of which $880,000 was paid during Fiscal 1994.
The $250,000 which was owed to Mr. Margolis became an unsecured creditor's
claim in the Company's 1994 Plan; Mr. Margolis received the same treatment as
all other unsecured creditors and received 15,259 shares of the Company's
Common Stock in full satisfaction of such claim.
Mr. Seyhun, the former Chief Operating Officer and the former Chief
Financial Officer of the Company, was employed pursuant to a 28 month
agreement expiring May 31, 1997. In connection with the agreement on February
1, 1995, Mr. Seyhun purchased 96,000 shares of Common Stock from the Company
at a price of $2.00 per share. Mr. Seyhun paid for these shares with a
$192,000, 7% Promissory Note for which $48,000 was paid in May 1996. Proceeds
from the sale of such stock must be applied first to accrued and unpaid
interest and then to unpaid principal. The note was recorded as a reduction to
stockholders equity. Mr. Seyhun repaid the note in full on February 19, 1997.
Mr. Seyhun also received an option to purchase 96,000 shares for a price of
$2.00 per share which was cancelled upon termination of his employment
agreement. Mr. Seyhun terminated his employment on January 5, 1996. Mr. Seyhun
paid the remaining principal and interest on the Promissory Note on February
19, 1997.
Ms. Warren, the former President of the Company, who resigned March 3, 1998,
was employed pursuant to a three-year agreement expiring on May 30, 1998 which
provided for a salary at an annual rate of $100,000 from June 21, 1995 to May
31, 1996 and $325,000 from June 1, 1996 to May 31, 1998. Ms. Warren will
continue
F-18
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to work with the Company on selected special projects through November 1998
and will be paid through December 4, 1998. Ms. Warren could earn bonuses
ranging from 10% of her salary up to $175,000 based upon the Company's
earnings before interest and taxes.
11. RELATED PARTY TRANSACTIONS
On December 23, 1997 the Company loaned $2.0 million to Robert Margolis, who
is a Director, the Chairman of the Board of Directors and the Chief Executive
Officer of the Company. The loan was approved by a majority of the
disinterested members of the Company's Board of Directors on December 19,
1997. Mr. Margolis executed a note, dated December 23, 1997, in favor of the
Company for $2.0 million which yields 6.0% interest per annum, which has been
recorded as a reduction to stockholders' equity on the January 31, 1998
Balance Sheet. The principal amount of the note and all accrued interest
thereon is due and payable on December 23, 2002. The note may be repaid in
whole or in part at any time without penalty.
In connection with the Securitization and issuance of the Secured Notes, the
Company paid to Libra Investments, Inc. ("Libra") fees totaling $1,432,000.
Mr. Jess Ravich, the Chairman of Libra, is a member of the Board of Directors
of the Company.
In fiscal years ended May 31, 1997 and June 1, 1996, Wilstar purchased
apparel and trim from the Company totalling $87,000 and $154,000,
respectively.
12. WARRANTS AND OPTIONS
On February 1, 1995, the Company granted warrants to purchase 5,000 shares
of Common Stock at an exercise price of $2.43 to each of the Company's five
outside directors of the Board. On July 25, 1995, the Company granted warrants
to purchase 5,000 shares of Common Stock at an exercise price of $3.00 to any
new outside directors of the Board. The warrants expire on January 31, 2000
and June 30, 2000, respectively. On April 25, 1996 two Board members exercised
their warrants in full and each purchased 5,000 shares. On various dates
during Fiscal 1997, five Board members exercised their warrants in full and
each purchased 5,000 shares. During Fiscal 1998, two Board members exercised
their warrants in full and each purchased 5,000 shares.
On October 14, 1996, the Company granted options to purchase 10,000 shares
of Common Stock at an exercise price of $5.50 to each of the Company's seven
directors of the Board.
On various dates during Fiscal 1997, five Board members exercised their
options in full and each purchased 10,000 shares. During Fiscal 1998, two
Board members exercised their options in full and each purchased 10,000
shares.
On September 15, 1997, the Company granted options to purchase 5,000 shares
of Common stock at an exercise price of $11.25 to each of the Company's six
directors of the Board. The Company granted options to purchase 20,000 shares
of Common Stock at an exercise price of $11.25 to one retiring director. The
option plan provided an adjustment to the exercise price, in the event the
Company distributed to all shareholders an extraordinary dividend. The option
grants were adjusted from 5,000 and 20,000 shares to 8,277 and 33,109 shares,
respectively, and the exercise price was adjusted from $11.25 to $6.80 per
share in accordance with Internal Revenue Code Section 425. The adjustment did
not result in a compensation charge to earnings. None of the directors
exercised any of these options during Fiscal 1998.
F-19
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. STOCK OPTION PLAN
The Company's 1995 Incentive Stock Option Plan (the "Plan") was approved at
the October 30, 1995 Annual Meeting of Stockholders. The purpose of the Plan
is to further the growth and development of the Company by providing an
incentive to officers and other key employees who are in a position to
contribute materially to the prosperity of the Company. Two types of stock
options (the "Option") may be granted under the plan--Incentive and Non-
Qualified stock options.
Any employee is eligible to receive an Option under the Plan; provided,
however that no person who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company shall be eligible
to receive an Incentive Stock Option unless at the time such Option is granted
the Option price is at least 110% of the fair market value of the shares
subject to the Option.
The aggregate number of shares which may be issued upon the exercise of
Options granted under the Plan shall not exceed 600,000 shares of Common
Stock. The Options are vested in equal installments over a three year period,
starting from the date of grant and have a term of ten years.
On November 10, 1997, the Compensation Committee determined to grant Options
to certain of its employees pursuant to the Company's Plan. The Board of
Directors adopted an amendment to the Plan, pursuant to which any Option
granted shall provide that upon the Company's payment of an extraordinary cash
dividend to the Company's shareholders, the exercise price of each of the
Options shall be adjusted in accordance with Section 7.13 of the Plan.
Pursuant to the Company's declaration of the $5.50 dividend, on December 29,
1997 and January 2, 1998, certain directors, officers, employees and related
parties exercised options and purchased 819,004 shares of Cherokee common
stock.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
During the fiscal year ended May 31, 1997, the Board of Directors adopted a
plan for compensation of officers of the Company, employees of the Company,
and Wilstar in lieu of cash dividends. If and when cash dividends are paid on
outstanding shares of common stock of the Company, compensation will be paid
to each plan participant in an amount equal to the cash dividends which would
have been paid on the vested option shares covered by stock options of the
Company held by such participant as if such shares had been purchased by such
participant prior to, and were outstanding and owned by such participant on,
the record date and the payment date for such cash dividend. The plan began on
January 15, 1997 and will terminate on December 31, 1998 or such earlier or
later date as may be determined by the Board of Directors. During the eight
months ended January 31, 1998 and the year ended May 31, 1997, an aggregate of
$150,801 and $391,850, respectively, was paid to participants in the plan.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1996 and 1997: weighted-average risk-free interest
F-20
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rate range between 5.27% and 6.57%; dividend yields of 12.80%; weighted-
average volatility factors of the expected market price of the Company's
common stock of 99.24%; and a weighted average expected life of the option of
three years. For 1998, the weighted average assumptions were as follows:
weighted-average risk-free interest rate range between 5.80% and 6.35%;
dividend yields of 7.50%; weighted-average volatility factors of the expected
market price of the Company's common stock of 68.97%; and a weighted-average
expected life of the option of three years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in the
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Pro Forma net income (loss)................. $5,179,000 $6,546,000 $(1,502,000)
Pro Forma basic earnings (loss) per share... $ 0.66 $ 0.85 $ (0.23)
Pro Forma diluted earnings (loss) per share. $ 0.62 $ 0.80 $ (0.22)
</TABLE>
A summary of the Company's stock option activity, and related information
for the eight months ended January 31, 1998 and the years ended May 31, 1997
and June 1, 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 180,000 $3.91 180,000 $3.29 -- $.00
Granted............... 480,083(1) 9.46(1)(2) 35,000 6.25(1) 210,000 3.27(1)
Exercised............. 180,000 3.91 (20,000) 3.03 (10,000) 3.00
Forfeited............. -- -- (15,000) 3.13 (20,000) 3.00
------- ----- ------- ----- ------- ----
Outstanding at end of
year................... 480,083 9.46 180,000 3.91 180,000 3.29
======= ===== ======= ===== ======= ====
Exerciseable at end of
year................... 78,635 9.46 45,003 3.35 -- --
</TABLE>
- --------
(1) Weighted average grant date fair value of options granted during the year
(2) The Options have exercise prices and become exercisable in four
installments upon the following dates, subject to the optionee's continued
employment by the Company on each vesting date installments: (i) 25% of
the number of shares vest immediately with an adjusted exercise price of
$8.15, (ii) 25% of the number of shares vest November 10, 1998 with an
adjusted exercise price of $8.97, (iii) 25% of the number of shares vest
November 10, 1999 with an adjusted exercise price of $9.86 and (iv) 25% of
the number of shares vest November 10, 2000 with an adjusted exercise
price of $10.85. As a result of the Company's payment of an extraordinary
cash dividend to the Company's shareholders, the exercise price of each of
the Options has been adjusted in accordance with Section 7.13 of the Plan.
F-21
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SALE OF UNIFORM DIVISION
On July 28, 1995, the Company sold the Uniform Division to Strategic
Partners, Inc. ("Strategic Partners"), a corporation which was formed by
Michael Singer and investors unaffiliated with Cherokee. Mr. Singer was the
President of Cherokee's Uniform Division until the sale of the Uniform
Division and is the President and Chief Executive Officer of Strategic
Partners. The assets sold included accounts receivable, inventory, furniture
and fixtures, equipment, and the exclusive right to use the Cherokee trademark
with respect to the manufacture and sale of uniforms. The sales price was
approximately $11,700,000, which was $4,000,000 greater than the book value of
the assets that were sold. Of the purchase price, approximately $9,575,000 was
paid in cash and $2,125,000 was paid by a 10% subordinated promissory note
("Note").
The Company has recorded the Note at its estimated fair value of $1,588,000,
which represents a discount of $537,000, resulting in an effective interest
rate of 16%. The Note requires quarterly payments of interest and principal
payments of $300,000 on July 27, 1997, 1998, 1999 and 2000 with the remaining
principal amount due on July 27, 2001. On April 3, 1997, Strategic Partners
and the Company negotiated a 10% discount to pay off the $2,125,000 note due
2001. Strategic Partners delivered a payment of $1,912,500 on May 14, 1997 in
full satisfaction of the note.
15. SUBSEQUENT EVENT
On March 3, 1998, the Company announced the resignation of Patricia Warren
as President of the Company. She will continue to work with the Company
through 1998 in selected special projects. Mr. Margolis will assume Ms.
Warren's responsibilities until a new president is chosen.
On April 6, 1998, the Company announced that its Board of Directors had
declared a cash dividend of $0.50 per share to be distributed on May 1, 1998
to the Company's shareholders of record on the close of business on April 17,
1998. Assuming the Company's cash position continues to be favorable, the
Company intends to maintain a quarterly cash dividend of $0.25 per share for
the balance of the fiscal year ending January 30, 1999; however, the
declaration of such dividends remains subject to the discretion of the
Company's Board.
F-22
<PAGE>
CHEROKEE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CHEROKEE INC.
SCHEDULE II VALUATIONS AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
CHARGED/
BALANCE AT (CREDITED) TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ----------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
DEDUCTED FROM ASSETS TO
WHICH THEY APPLY:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year ended Jan 31,
1998................. $ -- $ -- $ -- $ -- $ --
Year ended May 31,
1997................. $ 591,000 $ (112,000) $ -- $ 479,000(1) $ --
Year ended June 1,
1996................. $ 1,006,000 $ 112,000 $ -- $ 527,000(1) $ 591,000
Year ended June 3,
1995................. $ 2,885,000 $1,602,000 $ -- $3,481,000(1) $ 1,006,000
INVENTORY RESERVE
Year ended Jan 31,
1998................. $ -- $ -- $ -- $ -- $ --
Year ended May 31,
1997................. $ -- $ -- $ -- $ -- $ --
Year ended June 1,
1996................. $ 6,011,000 $ -- $ -- $6,011,000 $ --
Year ended June 3,
1995................. $ 2,146,000 $3,865,000 $ -- $ -- $ 6,011,000
TAX VALUATION ALLOWANCE
Year ended Jan 31,
1998................. $ 6,458,000 $2,559,000 $ 2,041,000 $ -- $ 1,858,000
Year ended May 31,
1997................. $10,714,000 $2,408,000 $ 1,848,000 $ -- $ 6,458,000
Year ended June 1,
1996................. $19,901,000 $ -- $ 5,702,000 $3,485,000 $10,714,000
Year ended June 3,
1995................. $ -- $ -- $19,901,000 $ -- $19,901,000
</TABLE>
- --------
(1) Uncollectible accounts receivable written off against the allowance.
F-23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
compliance with Section 16(a) of the Exchange Act is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Company's Annual Meeting of Stockholders scheduled to be held on June 8, 1998,
which will be filed with the SEC no later than 120 days after the close of the
Eight Months Fiscal Period ended January 31, 1998. The following table sets
forth information with respect to each of the Company's executive officers.
<TABLE>
<CAPTION>
NAME, AGE AND PRINCIPAL OCCUPATION FOR PAST FIVE YEARS;
PRESENT POSITION WITH THE COMPANY BUSINESS EXPERIENCE
--------------------------------- -----------------------------------------
<S> <C>
Robert Margolis, 50 Mr. Margolis was appointed Chairman of the Board
Director, Chairman of the Board of and Chief Executive Officer of the Company on
Directors and Chief Executive Officer May 5, 1995. Mr. Margolis was the co-founder of
the Company's Apparel Division in 1981. He had
been the Co-Chairman of the Board of Directors,
President and Chief Executive Officer of the
Company since June 1990 and became Chairman of
the Board on June 1, 1993. Mr. Margolis resigned
all of his positions with the Company on October
31, 1993 and entered into a one-year consulting
agreement with the Company. Since 1994 Mr.
Margolis has been Chief Executive Officer and a
Director of a privately owned company operates
various textiles and apparel related
enterprises, including a private label
manufacturing operation. Wilstar's private label
manufacturing operations were sold to an
unrelated party in April 1997. Wilstar provides
Mr. Margolis' services as Chief Executive
Officer of the Company pursuant to the terms of
a management agreement between the Company and
Wilstar (the "Wilstar Management Agreement").
Patricia Warren, 51 Ms. Warren has been employed by Cherokee since
President May 1995 and became its President on June 21,
1995. Ms. Warren resigned as President on March
3, 1998, but will continue to work with the
Company on selected projects through the end of
1998. From October 1989 to May 1993 she was
Senior Vice President and General Merchandise
Manager of The Bon Marche, a division of
Federated Department Stores. From May 1993 to
May 1994, she was Executive Vice President,
Merchandising for The Broadway Department
Stores. From September 1994 until May 1995, she
was an independent consultant to wholesalers and
retailers.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRINCIPAL OCCUPATION FOR PAST FIVE YEARS;
PRESENT POSITION WITH THE COMPANY BUSINESS EXPERIENCE
--------------------------------- -----------------------------------------
<S> <C>
Carol Gratzke, 49 Ms. Gratzke returned to Cherokee in November
Chief Financial Officer 1995 as its Chief Financial Officer. From August
1986 to July 1994, she was the Controller and,
for a portion of such period, the Chief
Financial Officer of the Apparel & Uniform
Divisions. From July 1994 to September 1995, she
was Executive Vice President of Finance for a
Los Angeles based apparel manufacturing company.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the information contained in the Proxy Statement relating to the Company's
Annual Meeting of Stockholders scheduled to be held on June 8, 1998, which
will be filed with the SEC no later than 120 days after the close of the Eight
Month Fiscal Period ended January 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the information contained in the Proxy Statement relating to the Company's
Annual Meeting of Stockholders scheduled to be held on June 8, 1998, which
will be filed with the SEC no later than 120 days after the close of the Eight
Month Fiscal Period ended January 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the information contained in the Proxy Statement relating to the Company's
Annual Meeting of Stockholders scheduled to be held on June 8, 1998, which
will be filed with the SEC no later than 120 days after the close of the Eight
Month Fiscal Period ended January 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The List of Financial Statements are filed as Item 8 of Part II of this
Form 10-K.
(2) List of Financial Statement Schedules.
II. Valuations and Qualifying Accounts and Reserves [included in the
Financial Statements filed as Item 8 of Part II of this Form 10-K].
(3) List of Exhibits.
The exhibits listed in the accompanying Index to Exhibits are filed as
part of this Form 10-K.
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Plan of Reorganization of Cherokee Inc. as confirmed on December 14,
1994 (incorporated by reference from Exhibit 2.1 to Cherokee Inc.'s
Current Report on Form 8-K dated January 5, 1995).
3.1 Amended and Restated Certificate of Incorporation of Cherokee Inc.
(incorporated by reference from Exhibit 3.1 of Cherokee Inc.'s Form 10
dated April 24, 1995).
3.2 Bylaws of Cherokee Inc. (incorporated by reference from Exhibit 3.2 of
Cherokee Inc.'s Form 10 dated April 24, 1995).
4.1 Financing Agreement dated as of December 23, 1994, between Cherokee
Inc. and The CIT Group/Business Credit, Inc. (incorporated by
reference from Exhibit 4.1 of Cherokee Inc.'s Form 10 dated April 24,
1995).
4.2 Amendment to Financing Agreement dated June 2, 1995 between Cherokee
Inc. and The CIT Group/Business Credit Inc. (incorporated by reference
from Exhibit 4.1 of Cherokee Inc.'s Form 10 dated April 24, 1995).
4.3 Indenture, dated December 23, 1997, among SPELL C. LLC, as issuer, and
Wilmington Trust Company, as trustee, with respect to the Zero Coupon
Secured Notes.
4.4 Security Agreement dated December 23, 1997, between SPELL C. LLC and
Wilmington Trust Company.
10.1 Form of Director Warrant (incorporated by reference from Exhibit 10.3
of Cherokee Inc.'s Form 10 dated April 24, 1995).
10.2 Management Agreement dated as of May 4, 1995 between Cherokee Inc. and
The Newstar Group Inc., d/b/a The Wilstar Group ("Wilstar")
(incorporated by reference from Exhibit 10.5 of Cherokee Inc.'s Form
10-K dated June 3, 1995).
10.3 Option Agreement dated as of May 4, 1995 between Cherokee Inc. and
Wilstar (incorporated by reference from Exhibit 10.5 of Cherokee
Inc.'s Form 10-K dated June 3, 1995).
10.4 Registration Rights Agreement dated as of May 4, 1995 between Cherokee
Inc. and Wilstar (incorporated by reference from Exhibit 10.6 of
Cherokee Inc.'s Form 10-K dated June 3, 1995).
10.5 Amendment No. 1 to the Non-Qualified Stock Option Agreement dated
October 30, 1995. (incorporated herein by reference from Exhibit 10.7
of Cherokee Inc.'s Form 10-K dated June 1, 1996).
10.6 Amendment No. 2 to the Non-Qualified Stock Option Agreement dated
March 23, 1996. (incorporated herein by reference from Exhibit 10.7 of
Cherokee Inc.'s Form 10-K dated June 1, 1996).
10.7 Amendment No. 1 to the Revised and Restated Wilstar Management
Agreement dated April 26, 1996. (incorporated herein by reference from
Exhibit 10.7 of Cherokee Inc.'s Form 10-K dated June 1, 1996).
10.8 Asset Purchase Agreement dated July 17, 1995 between Cherokee Inc. and
Strategic Partners, Inc. (incorporated herein by reference from
Exhibit 2.1 to Cherokee Inc.'s Current Report on Form 8-K dated August
10, 1995).
10.9 Stock Purchase Agreement dated July 28, 1995 between Cherokee Inc. and
Axicom Capital Group (incorporated by reference from Exhibit 10.8 of
Cherokee Inc.'s Form 10-K dated June 3, 1995).
10.10 License Agreement between Cherokee Inc. and Target Stores, a division
of Dayton-Hudson Corporation, dated August 15, 1995 (incorporated by
reference from Exhibit 10.9 of Cherokee Inc.'s Form 10-K dated June 3,
1995).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.11 Amendment No. 2 to the Revised and Restated Wilstar Management
Agreement dated July 21, 1997 (incorporated by reference from Exhibit
10.11 of Cherokee Inc.'s Form 10-K dated May 31, 1997).
10.12 Amendment No. 3 to the Revised and Restated Wilstar Management
Agreement dated July 21, 1997 (incorporated by reference from Exhibit
10.12 of Cherokee Inc.'s Form 10-K dated May 31, 1997).
10.13 Plan for Compensation in Lieu of Cash Dividends, dated January 15,
1997 (incorporated by reference from Exhibit 10.13 of Cherokee Inc.'s
Form 10-K dated May 31, 1997).
10.14 Agreement of Purchase and Sale of Trademarks and Licenses between
Cherokee Inc. and Sideout Sport, Inc. dated November 7, 1997
(incorporated by reference from Exhibit 2.1 of Cherokee Inc.'s Current
Report on Form 8-K dated November 7, 1997).
10.15 License Agreement between Cherokee Inc. and Dayton Hudson Stores dated
November 12, 1997 (incorporated by reference from Exhibit 10.1 of
Cherokee Inc.'s Current Report on Form 8-K dated November 7, 1997).
10.16 Note Purchase Agreement dated December 23, 1997, between SPELL C. LLC
and the purchasers listed on the signature pages thereto.
10.17 Trademark Purchase and License Assignment Agreement dated December 23,
1997 between SPELL C. LLC and Cherokee Inc.
10.18 Administrative Services Agreement dated December 23, 1997, between
SPELL C. LLC and Cherokee Inc.
10.19 Limited Liability Company Agreement of SPELL C. LLC dated as of
December 23, 1997, between SPELL C. LLC and Cherokee Inc.
16.1 Letter of Ernst & Young L.L.P. regarding change in accountants
(incorporated herein by reference from Exhibit 16.1 to Cherokee Inc.'s
Current Report on Form 8-K dated June 5, 1995).
21.1 Subsidiaries of Cherokee Inc.
23.1 Consent of Independent Auditors dated April 20, 1998.
27.1 Article 5 of Regulation S-X--Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
On December 23, 1997, the Company filed a report on Form 8-K regarding (1)
the Board of Director's declaration of the January 15, 1998 cash dividend
of $5.50, (2) the completion of a leveraged recapitalization and (3) the
change in the Company's fiscal year end.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CHEROKEE INC.
/s/ Robert Margolis
By-----------------------------------
Robert Margolis
Chairman and Chief Executive
Officer
Date: April 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Robert Margolis Chairman and Chief Executive April 20, 1998
- ----------------------------- Officer and Director
Robert Margolis
/s/ Carol Gratzke Chief Financial Officer/Chief April 20, 1998
- ----------------------------- Accounting Officer
Carol Gratzke
/s/ Timothy Ewing Director April 20, 1998
- -----------------------------
Timothy Ewing
/s/ Keith Hull Director April 20, 1998
- -----------------------------
Keith Hull
/s/ Douglas Weitman Director April 20, 1998
- -----------------------------
Douglas Weitman
/s/ Jess Ravich Director April 20, 1998
- -----------------------------
Jess Ravich
/s/ Avi Dan Director April 20, 1998
- -----------------------------
Avi Dan
</TABLE>
28
<PAGE>
CONFORMED COPY
INDENTURE
dated as of December 23, 1997
between
SPELL C. LLC,
Issuer
and
WILMINGTON TRUST COMPANY,
Trustee
__________________________________
Zero Coupon Secured Notes
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE 1
Definitions
<S> <C>
Section 1.01. Definitions 3
Section 1.02. Rules of Construction 13
Section 1.03. Legal Holidays 13
ARTICLE 2
Issue, Execution, Form and Registration of Notes
Section 2.01. Authentication and Delivery of Notes 13
Section 2.02. Execution of Notes 14
Section 2.03. Certificate of Authentication 14
Section 2.04. Form, Denomination and Date of the Notes 14
Section 2.05. Payment of Notes 15
Section 2.06. Registration, Transfer or Exchange of Notes 16
Section 2.07. Replacement of Lost, Mutilated or Stolen Notes 19
Section 2.08. Tax Purposes 19
Section 2.09. Cancellation 19
Section 2.10. Quarterly Report 19
ARTICLE 3
The Collection Account
Section 3.01. Collection Account 20
Section 3.02. Distribution of Amounts on Deposit in the Collection
Account on the Closing Date 20
Section 3.03. Distribution of Amounts on Deposit in the Collection
Account on Note Payment Dates 20
Section 3.04. Distribution of Excess Amounts on Deposit in the
Collection Account 21
Section 3.05. Other Existing Licenses 21
Section 3.06. Investments in the Collection Account 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE 4
Reserve Account
<S> <C>
Section 4.01. Reserve Account 22
Section 4.02. Withdrawals from the Reserve Account 23
Section 4.03. Investments in the Reserve Account 23
ARTICLE 5
Information
ARTICLE 6
Inspection of Books and Records
ARTICLE 7
Covenants of the Issuer
Section 7.01. Payment of Principal and Make-Whole Amount 26
Section 7.02. Legal Existence; Payment of Taxes; Compliance with Laws 26
Section 7.03. Consolidation or Merger 27
Section 7.04. Protection of Trust Estate 27
Section 7.05. Performance under the Basic Documents 28
Section 7.06. Negative Covenants 28
ARTICLE 8
Events of Default
Section 8.01. Events of Default 29
Section 8.02. Application of Proceeds 32
Section 8.03. Waiver of Past Specified Events 33
Section 8.04. Provisions Relating to the Trust Estate 33
ARTICLE 9
Satisfaction and Discharge of Indenture; Unclaimed Moneys
Section 9.01. Satisfaction and Discharge of Indenture 37
Section 9.02. Application by Trustee of Funds Deposited for Payment of
Notes 37
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 9.03. Repayment of Moneys and Transfer of Eligible Investments
Held by Trustee 38
Section 9.04. Return of Moneys Held by Trustee 38
ARTICLE 10
Concerning the Trustee
Section 10.01. Duties of the Trustee; Certain Rights of the Trustee 38
Section 10.02. Trustee Not Liable for Trademark Licenses; Performance
of Trustee's Duties 40
Section 10.03. Resignation and Removal; Appointment of Successor
Trustee 41
Section 10.04. Acceptance of Appointment by Successor Trustee 42
Section 10.05. Merger or Consolidation of Trustee 42
Section 10.06. Certain Procedural Matters 42
Section 10.07. Trustee Fees and Indemnification 43
Section 10.08. Information 43
ARTICLE 11
Supplemental Indenture
Section 11.01. Supplemental Indenture Without Consent of Noteholders 44
Section 11.02. Supplemental Indenture with Consent of Noteholders 44
Section 11.03. Effect of Supplemental Indenture 45
Section 11.04. Documents to Be Given to Trustee 45
Section 11.05. Notation on Notes in Respect of Supplemental Indenture 45
ARTICLE 12
Concerning the Holders
Section 12.01. Control by Majority Holders 46
Section 12.02. Evidence of Action Taken by Holders 46
Section 12.03. Proof of Execution of Instruments 46
Section 12.04. Notes Owned by the Issuer 47
Section 12.05. Right of Revocation of Action Taken 47
Section 12.06. Right to Vote Notes in Part 47
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE 13
Redemption of Notes
<S> <C>
Section 13.01. Optional Redemptions 47
Section 13.02. Notice of Redemption; Make-Whole Computations 47
Section 13.03. Surrender of Notes; Notation Thereon 48
Section 13.04. Purchase of Notes 48
ARTICLE 14
Miscellaneous
Section 14.01. Binding Upon Assigns 48
Section 14.02. Notices 48
Section 14.03. Effect of Headings 50
Section 14.04. Severability 50
Section 14.05. Counterparts 50
Section 14.06. Further Assurance 50
Section 14.07. Governing Law 50
Section 14.08. Limitation on Recourse 50
Section 14.09. Jurisdiction and Process 50
Schedule I - Note Payment Dates
Exhibit A - Form of Note
Exhibit B - Form of Transferee Certificate
Exhibit C - Form of Transferor Certificate
</TABLE>
iv
<PAGE>
INDENTURE, dated as of December 23, 1997 (this "INDENTURE"), between
SPELL C. LLC, a Delaware limited liability company (together with its
successors, the "ISSUER"), and Wilmington Trust Company, a Delaware banking
corporation, in its capacity as indenture trustee (the "TRUSTEE"), providing
among other things for the issuance by the Issuer of $60,000,000 aggregate
principal amount of its Zero Coupon Secured Notes (the "NOTES").
W I T N E S S E T H:
WHEREAS, Cherokee, Inc., a Delaware corporation ("CHEROKEE"), and Dayton
Hudson Corporation, a Delaware corporation ("LICENSEE"), entered into a License
Agreement dated as of November 12, 1997 (the "LICENSE AGREEMENT"), whereby
Cherokee granted Licensee certain rights to use the Trademark, as such term is
defined below;
WHEREAS, the Issuer is a bankruptcy-remote limited purpose entity whose
sole member is Cherokee;
WHEREAS, the Issuer and Cherokee have entered into a Trademark Purchase and
License Assignment Agreement dated as of the date hereof (together with the
license from SPV to Cherokee entered into pursuant to Section 4.01 thereof, the
"TRADEMARK PURCHASE AND LICENSE ASSIGNMENT AGREEMENT"), whereby Issuer will
purchase on the Closing Date with the proceeds of the Notes the Assigned Rights
(as defined therein) from Cherokee and Cherokee will sell and assign the
Assigned Rights to Issuer;
WHEREAS, the Issuer has authorized an issue of Zero Coupon Secured Notes in
an aggregate principal amount of $60,000,000, the proceeds of which will be used
to finance the purchase of the Assigned Rights from Cherokee;
WHEREAS, the Notes will be secured by all of the Issuer's right, title and
interest in the Assigned Rights and other collateral pledged by the Issuer,
pursuant to this Indenture and the Security Agreement between the Issuer and the
Trustee dated as of the date hereof;
WHEREAS, the execution and delivery of this Indenture have been duly
authorized by the Issuer;
WHEREAS, the Trustee hereunder has accepted the trusts created by this
Indenture and in evidence thereof has joined in the execution hereof; and
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WHEREAS, all things necessary to make the Notes when issued by the Issuer
and authenticated by the Trustee hereunder as in this Indenture provided the
legal, valid and binding obligations of the Issuer and to provide a security
interest in the Trust Estate (as hereinafter defined) have been done and
performed.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that in consideration of the
premises, of the acceptance by the Trustee of the trusts hereby created, and of
the purchase and acceptance of the Notes by the owners thereof, the receipt and
sufficiency of which is hereby acknowledged, and for the purpose of fixing and
declaring the terms and conditions upon which the Notes are to be issued,
authenticated, delivered, secured and accepted by all Persons who shall from
time to time be or become owners thereof, and in order to secure the payment of
principal of all the Notes at any time issued and outstanding and interest, if
any, and Make-Whole Amount, if any, thereon according to their tenor, purpose
and effect, and in order to secure the performance and observance of all the
covenants, agreements and conditions contained therein, herein and in the other
Basic Documents and all Secured Obligations, the Issuer has executed and
delivered this Indenture and has Granted and does hereby Grant, pledge, assign,
transfer and convey to the Trustee hereunder on and subject to the terms set
forth in this Indenture:
GRANTING CLAUSES:
A security interest by way of a lien over, a pledge of and a lien on all
right, title and interest of the Issuer, whether now owned or hereafter
acquired, in, to and under (a) all moneys and securities including, without
limitation, all Eligible Investments (as hereinafter defined) from time to time
held by, or on behalf of, the Trustee under the terms of this Indenture,
including amounts set apart and transferred to any of the Trust Accounts (as
hereinafter defined) and all investment earnings of any of the foregoing,
subject to and until disbursements from the Trust Accounts in accordance with
the provisions of this Indenture; (b) the Assigned Rights; (c) all other
Trademark Collateral (as defined in the Security Agreement); (d) the Trademark
Purchase and License Assignment Agreement and the Administrative Services
Agreement (including the right (but not the obligation) to make requests, give
consents and take other actions on behalf of the Issuer, all as permitted or
required thereunder); (e) any and all other property of every kind and nature
from time to time which was heretofore or hereafter is by delivery or by writing
of any kind conveyed, mortgaged, pledged, assigned or transferred, as and for
additional security hereunder, by the Issuer or by any other Person, with or
without the consent of the Issuer, to the Trustee, which is hereby authorized to
receive any and all such property at any time and at all times to hold and apply
the same subject to the terms hereof, subject to and until disbursed from the
Trust Accounts in accordance with the provisions of this
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Indenture; and (f) all proceeds of any of the foregoing, subject to and until
disbursed from the Trust Accounts in accordance with the provisions of this
Indenture. Except as contemplated by the definition of Trademark License, the
Trust Estate does not include any interest in the Cherokee Licenses.
TO HAVE AND TO HOLD all the same absolutely with all privileges and
appurtenances hereby conveyed, transferred and assigned, or agreed or intended
so to be (collectively, the "TRUST ESTATE"), to the Trustee hereunder and its
successors as trustee and to them and their assigns for the benefit of the
Noteholders until such time as the Notes and all Secured Obligations payable
with respect thereto are paid in full in accordance with Article 9 hereof;
IN TRUST NEVERTHELESS, upon the terms and trusts herein set forth for the
equal and proportionate benefit, security and protection of all Holders of the
Notes issued under and secured by this Indenture without privilege, priority or
distinction as to lien or otherwise of any of the Notes over any of the other
Notes, except as otherwise expressly provided in this Indenture, and for the
benefit, security and protection of the Noteholders, and the Trustee, with
respect to the payment of all amounts payable to the Noteholders or the Trustee
out of the Trust Accounts to the extent provided in this Indenture; provided,
however, that if the Issuer, its successors or assigns, shall pay, or cause to
be paid, the applicable principal of, default interest, if any, on, and Make-
Whole Amount, if any, in respect of the Notes and all other Secured Obligations
at the times and in the manner provided in the Notes and in the other Basic
Documents according to the true intent and meaning thereof and there shall be
made all the payments into the Trust Accounts as required under this Indenture,
and shall pay to the Trustee all sums of money due or to become due to it in
accordance with the terms and provisions hereof, and if all amounts payable to
the Noteholders and the Trustee, to the extent provided in this Indenture shall
have been paid in full, then upon such final payments this Indenture and the
rights hereby granted shall cease, determine and be void; otherwise, this
Indenture shall be and remain in full force and effect.
ARTICLE 1
Definitions
Section 1.01. Definitions. The following terms, as used herein, have the
following meanings:
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"ADMINISTRATIVE SERVICES AGREEMENT" means the Administrative Services
Agreement dated as of the date hereof between the Issuer and Cherokee.
"AFFILIATE" means with respect to any Person, any Person that directly or
indirectly through one or more intermediaries, controls such Person, is
controlled by such Person or is under direct or indirect common control with
such Person. As used herein, the term "CONTROL" means possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"ASSIGNED RIGHTS" has the meaning assigned to that term in the Trademark
Purchase and License Assignment Agreement.
"AUTHORIZED OFFICER" means (i) in the case of the Issuer, the Persons
specified by the Issuer as such in an Officers' Certificate signed by a Senior
Officer or, for purposes of Section 2.02, a certificate of the Secretary or
Assistant Secretary of the Issuer delivered from time to time to the Trustee and
(ii) in the case of the Trustee, a Responsible Officer or such other Persons as
may from time to time be designated as such by the Trustee in writing to the
Issuer.
"BASIC DOCUMENTS" means this Indenture, the Note Purchase Agreement, the
Security Agreement, the Notes, the Trademark Purchase and License Assignment
Agreement and the Administrative Services Agreement.
"BUSINESS DAY" means any day other than Saturday or Sunday and any day on
which commercial banking institutions in New York, New York or Wilmington,
Delaware are authorized or obligated by law or executive order to close.
"CHEROKEE" has the meaning assigned to that term in the first recital
hereof.
"CHEROKEE LICENSES" has the meaning assigned to that term in the Trademark
Purchase and License Assignment Agreement.
"CLOSING DATE" means the closing date for the issuance of the Notes pursuant
to the Note Purchase Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLECTION ACCOUNT" has the meaning assigned to that term in Section 3.01.
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"CURRENT VALUE" means, with respect to any Note at any date (the "DATE OF
DETERMINATION"), the sum of (i) for each unpaid installment of principal of such
Note due on a Note Payment Date on or prior to the date of determination, the
principal amount of such installment together with, if such unpaid installment
is past due, interest thereon at the Default Rate from and including the Note
Payment Date on which such principal amount was due to but not including the
date of determination and (ii) for each unpaid installment of principal of such
Note due on a Note Payment Date subsequent to the date of determination, the sum
of the Original Value of such installment plus earned Original Issue Discount
with respect thereto as of the date of determination. Calculations of amounts
due hereunder which are stated to include default interest shall not duplicate
amounts, if any, of default interest included in Current Value.
"DEFAULT" means any event or occurrence which with the giving of notice or
lapse of time or both would become an Event of Default.
"DEFAULT RATE" means the higher of (i) 9.00% per annum, and (ii) the rate
announced by the bank acting as the Trustee as of any date of determination as
its "prime rate" plus 2% per annum, in each case compounded semi-annually.
"DOLLARS" and the sign "$" mean lawful currency of the United States of
America.
"ELIGIBLE INVESTMENT" means any investment in (i) direct obligations of the
United States or any agency thereof, or obligations fully guaranteed by the
United States or any agency thereof, (ii) commercial paper rated at least A-1 by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") and P-1 by Moody's Investors Service, Inc. ("MOODY'S") which is
payable in full within 183 days from the date of original issue thereof (without
regard to the period held by the Trustee), (iii) time deposits with, including
certificates of deposit issued by, any office located in the United States of
any bank or trust company (including Wilmington Trust Company) which is
organized under the laws of the United States or any state thereof and has total
shareholder equity aggregating at least $500,000,000 and the long term unsecured
senior debt of which (or of the holding company thereof) is rated at least AA-
by S&P and at least Aa3 by Moody's and (iv) money market mutual funds rated AAAm
by S&P (or an equivalent rating by Moody's), provided that:
(a) each Eligible Investment shall be evidenced by negotiable
certificates or instruments, or if non-negotiable or in book entry form,
then issued or registered in the name of the Trustee, or its nominee, as
secured party;
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(b) each Eligible Investment (together with any appropriate
instruments of transfer) shall be delivered to, and held by, the Trustee or
an agent thereof (which shall not be the Issuer or any of its Affiliates)
(other than any Eligible Investment in book entry form);
(c) each Eligible Investment shall mature not later than the next
succeeding Note Payment Date; provided that Eligible Investments in an
amount not less than the amounts required to be withdrawn by the Trustee
pursuant to Section 3.03 shall mature not later than one Business Day prior
to the next succeeding Note Payment Date.
"EMPLOYEE BENEFIT PLAN" means any "EMPLOYEE BENEFIT PLAN" as defined in
(S)3(3) of ERISA, or any "PLAN" as defined in Section 4975(e)(1) of the Code.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EVENT OF DEFAULT" has the meaning assigned to that term in Section 8.01.
"GAAP" means generally accepted accounting principles as in effect from time
to time in the United States of America.
"GOVERNMENTAL APPROVAL" means any authorization, consent, approval, license,
lease, ruling, permit, certification, exemption, filing for, or registration by
or with any Governmental Body in connection with (a) the execution, delivery and
performance of the Basic Documents by the Issuer, (b) the validity or
enforceability of the Basic Documents or (c) the grant by the Issuer of any Lien
granted hereunder or under the Security Agreement and the validity, perfection
and priority of such Lien.
"GOVERNMENTAL BODY" means any Federal, state, municipal or other
governmental department, commission, board, bureau, agency, ministry, authority
or other instrumentality of any jurisdiction, domestic or foreign, including but
not limited to the United States of America; and the term "ORDER" includes any
order, writ, injunction, decree, judgment, award, determination, direction or
demand.
"GRANT" means to grant, bargain, sell, warrant, alienate, remise, demise,
release, convey, assign, transfer, mortgage, pledge, create and grant a security
interest in and right of set-off against, deposit, set over and confirm. A
Grant of the Trust Estate or of any other instruments shall include all rights,
powers and options (but none of the obligations) of the granting party
thereunder, including the immediate continuing right to claim for, collect,
receive and receipt for principal and interest payments in respect to the Trust
Estate and all other monies
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payable thereunder, to give and receive notices and other communications, to
make waivers or other agreements, to exercise all rights and options, to bring
proceedings in the name of the granting party or otherwise and generally to do
and receive anything that the granting party is or may be entitled to do or
receive thereunder or with respect thereto.
"GUARANTEE" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part), provided that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business. The term "GUARANTEE"
used as a verb has a meaning correlative to the foregoing.
"HOLDERS" and "NOTEHOLDERS" and "HOLDERS" mean the registered holders from
time to time of any of the Notes.
"INDEBTEDNESS" of any Person means, without duplication, (A) all obligations
for borrowed money of such Person, (B) all obligations for the deferred purchase
price of property acquired by such Person (excluding accounts payable arising in
the ordinary course of business but including all obligations of such Person
created or arising under any conditional sale or other title retention agreement
with respect to any property acquired by such Person), (C) all obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) property which are required to be classified and
accounted for as a capital lease or financial lease on a balance sheet of such
Person in accordance with GAAP, (D) all obligations for borrowed money secured
by any Lien upon or in any property owned by such Person whether or not such
Person has assumed or become liable for the payment of such obligations for
borrowed money and (E) all obligations of the type described in any of clauses
(A) through (D) above which are Guaranteed, directly or indirectly, or endorsed
(otherwise than for collection or deposit in the ordinary course of business) or
discounted with recourse by such Person.
"INDENTURE" has the meaning assigned to that term in the first paragraph
hereof.
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"INDEPENDENT COUNSEL" means Davis Polk & Wardwell, or any other law firm
reasonably acceptable to the Majority Holders which is recognized nationally as
specializing in the substantive area of law to be opined to in the opinion in
question.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended.
"ISSUER" has the meaning assigned to that term in the first paragraph
hereof.
"LICENSE AGREEMENT" has the meaning assigned to that term in the recitals
hereof.
"LICENSEE" has the meaning assigned to that term in the recitals hereof.
"LIEN" means, as applied to property or assets, real or personal, tangible
or intangible, any pledge, mortgage, lien, charge, security interest or
encumbrance of any kind thereon (including, without limitation, any agreement to
give any of the foregoing, any conditional sale or other title retention
agreement or the interest of the lessor under any capitalized lease and the
filing of or agreement to give any financing statement or similar document to
perfect any security interest under the Uniform Commercial Code of any
jurisdiction or any other similar filing to perfect any security interest).
"LLC AGREEMENT" means the Limited Liability Company Agreement of the Issuer
dated as of the date hereof.
"MAJORITY HOLDERS" or "MAJORITY NOTEHOLDERS" means at any time Noteholders
holding collectively Outstanding Notes evidencing at least 66 2/3% of the
aggregate unpaid principal amount of the Outstanding Notes.
"MAKE-WHOLE AMOUNT" means, at any time, in connection with any redemption of
a Note pursuant to Section 13.01 or any acceleration of a Note pursuant to
Section 8.01, the amount (but not less than zero) equal to:
(A) the sum of the Present Values (as hereinafter defined) of the
amounts which would have been payable in respect of such Note on each subsequent
Note Payment Date, MINUS
(B) the amount calculated pursuant to clause (ii) of the definition of
Current Value with respect to such Note at such time.
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For purposes of this definition, "PRESENT VALUE" shall be determined in
accordance with generally accepted financial practice in the United States of
America on a semi-annual basis at a discount rate equal to the sum of the
applicable Treasury Yield PLUS .40%; and the "TREASURY YIELD" for such purpose
shall be determined by reference to the yield for U.S. Treasury securities as
indicated by Telerate Access Service (page 500 or the relevant page at the date
of determination indicating such yields) (or, if such data ceases to be
available, any publicly available source of similar market data) at
approximately 11:00 A.M., New York City time, 3 Business Days prior to the date
of such redemption or acceleration of such Note, and shall be the yield on
actively traded U.S. Treasury securities having a constant maturity equal to the
then-remaining weighted average life to maturity (determined in accordance with
generally accepted financial practice in the United States of America) of such
Note; provided that if such then-remaining weighted average life to maturity is
not equal to the maturity of an actively traded U.S. Treasury security, such
yield shall be obtained by linear interpolation (calculated to the nearest one-
twelfth of a year) from the yields of actively traded U.S. Treasury securities
having a constant maturity closest to such then-remaining weighted average life
to maturity.
"MATERIAL ADVERSE EFFECT" means (A) a material adverse effect on the
validity, enforceability or value of the Assigned Rights, (B) a material adverse
effect on the ability of the Issuer to perform its obligations under any Basic
Document or (C) any adverse effect which a Noteholder could reasonably deem to
be material on the legality, validity or enforceability of any Basic Document,
the validity, perfection or priority of the Liens securing the Notes or the
rights and remedies of the Trustee or the Noteholders thereunder.
"MINIMUM GUARANTEED ROYALTY" has the meaning assigned to that term in the
License Agreement.
"NOTE PAYMENT DATE" means each date set forth in Schedule I.
"NOTE PURCHASE AGREEMENT" means the Note Purchase Agreement dated as of the
date hereof between the Issuer and the parties listed on the signature page
thereto.
"NOTE REGISTER" has the meaning assigned to that term in Section 2.06.
"NOTES" has the meaning assigned to that term in the first paragraph hereof.
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"OFFICERS' CERTIFICATE" means a certificate signed by an Authorized Officer
or a Senior Officer, as applicable, and a Secretary or Assistant Secretary of
the Issuer and delivered to the Trustee.
"OPINION OF COUNSEL" means an opinion in writing signed by legal counsel and
delivered to the Trustee, which counsel may be an employee of the Issuer or
other counsel satisfactory to the Trustee.
"ORIGINAL ISSUE DISCOUNT" means, as to any installment of principal of any
Note due on any Note Payment Date, the difference between the Original Value of
such installment and the principal amount of such installment. Determinations of
earned Original Issue Discount shall be made in accordance with generally
accepted financial practice on the constant interest method at an annual rate of
7.00% from the Closing Date to the date as of which earned Original Issue
Discount is to be determined.
"ORIGINAL VALUE" means, with respect to any installment of principal of any
Note due on any Note Payment Date, the amount of such installment discounted to
present value at the Closing Date at the rate of 7.00% per annum, compounded
semi-annually. The aggregate Original Values for the aggregate principal amount
of the Notes due on each Note Payment Date are set forth in Schedule I hereto.
"OTHER EXISTING LICENSES" has the meaning assigned to that term in the
Trademark Purchase and License Assignment Agreement.
"OTHER PERMITTED LICENSES" has the meaning assigned to that term in the
Trademark Purchase and License Assignment Agreement.
"OUTSTANDING", used with reference to the Notes, means at any time, subject
to the provisions of Section 12.04, all Notes authenticated and delivered by the
Trustee under the Indenture, except
(A) Notes theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(B) Notes, or portions thereof, for the payment of which moneys in the
necessary amount shall have been deposited in trust with the Trustee; provided
that if such Notes are to be redeemed prior to the maturity thereof, notice of
such redemption shall have been given as herein provided, or provision
satisfactory to the Trustee shall have been made for the giving of such notice;
and
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(C) Notes in substitution or exchange for which other Notes shall
have been authenticated and delivered.
"PERMITTED LIEN" means a Lien on all or a portion of the Trust Estate
permitted by Section 7.06(a)(ii) hereof.
"PERSON" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"RECORD DATE" means the first day of the month in which any Note Payment
Date occurs.
"REGISTRAR" shall mean the entity appointed by the Issuer to act as
registrar for any Notes, which shall initially be the Trustee.
"RESERVE ACCOUNT" has the meaning assigned to such term in Section 4.01.
"RESPONSIBLE OFFICER" means, with respect to the Trustee, any Vice President
or Assistant Vice President, Assistant Secretary, Assistant Treasurer, and, with
respect to a particular corporate trust matter, any other officer to whom such
matter is referred because of his knowledge of and familiarity with the
particular subject.
"RULE 144A INFORMATION" has the meaning assigned to that term in Section
2.06(j).
"SECURED OBLIGATIONS" has the meaning assigned to that term in Section 1 of
the Security Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENT" means the Security Agreement dated as of the date
hereof, between the Issuer and the Trustee.
"SENIOR OFFICER" means any of the following officers of the Issuer:
President and Treasurer.
"SUBSIDIARY" means with respect to any Person any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other individuals
performing similar functions, are at the time directly or indirectly owned by
such Person.
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"TAX" means any tax (whether income, documentary, sales, stamp,
registration, issue, capital, property, excise or otherwise), duty, levy,
impost, fee, charge or withholding, directly or indirectly, imposed, assessed,
levied or collected by or for the account of any Governmental Body, excluding
net income and franchise taxes imposed on the Holder by the jurisdiction under
the laws of which such Holder is organized or any political subdivision thereof
or by any jurisdiction in which the office at which the Holder has acquired or
booked the Notes is located or any political subdivision thereof.
"TRADEMARK" has the meaning assigned to that term in the Trademark Purchase
and License Assignment Agreement.
"TRADEMARK LICENSE" means (i) the License Agreement and (ii) to the extent
the same shall have been assigned to the Issuer as contemplated by Section 4.02
of the Trademark Purchase and License Assignment Agreement, any of the Other
Existing Licenses with Brylane, Caldor and/or Pamida.
"TRADEMARK PURCHASE AND LICENSE ASSIGNMENT AGREEMENT" has the meaning
assigned to that term in the third recital hereof.
"TRANSFEREE CERTIFICATE" has the meaning assigned to that term in Section
2.06(f).
"TRANSFEROR CERTIFICATE" has the meaning assigned to that term in Section
2.06(f).
"TRUST ACCOUNTS" means the Collection Account and the Reserve Account.
"TRUST ESTATE" has the meaning assigned to that term in the Granting
Clauses.
"TRUST OFFICE" means the principal office in Wilmington, Delaware, at which
at any particular time the corporate trust business of the Trustee shall be
administered, which office is located at the time of the execution of this
Indenture at Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890 or such other office as the Trustee or any successor Trustee may from time
to time designate in writing to the Issuer and the Noteholders.
"TRUSTEE" means Wilmington Trust Company in its capacity as Trustee under
this Indenture, and its successors in such capacity.
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"UNITED STATES" means the States, District of Columbia, territories,
possessions and territorial waters of the United States of America.
Section 1.02. Rules of Construction. Words of the masculine gender shall
be deemed and construed to include correlative words of the feminine and neuter
genders. Unless the context shall otherwise indicate, the words "Note",
"owner", "Holder", "holder", "Noteholders" and "Person" shall include the plural
as well as the singular number.
References herein to specific Persons include their legal successors (or
their successors fulfilling the function specified herein) and permitted
assigns, and references herein to specific agreements and contracts include
references to such agreements and contracts as amended or supplemented from time
to time, to the extent herein and therein permitted.
Except as otherwise expressly provided herein, all accounting terms used
herein shall be interpreted, and all financial statements and certificates and
reports as to financial matters required to be delivered to the Trustee
hereunder shall be prepared, in accordance with GAAP. All calculations made for
the purposes of determining compliance with this Indenture shall (except as
otherwise expressly provided herein) be made by application of GAAP.
Section 1.03. Legal Holidays. In any case where any Note Payment Date or
any date for the making of a deposit or distribution hereunder shall fall on a
day which is not a Business Day, such payment, deposit or distribution need not
be made on such date, but may be made on the next succeeding day that is a
Business Day with the same force and effect as if made on such Note Payment Date
or other date for a deposit or distribution.
ARTICLE 2
Issue, Execution, Form and Registration of Notes
Section 2.01. Authentication and Delivery of Notes. Upon the execution
and delivery of this Indenture, Notes in an aggregate principal amount not in
excess of U.S.$60,000,000, at any one time Outstanding will be issued and
executed by the Issuer in the manner prescribed in Section 2.02 and delivered by
the Issuer to the Trustee for authentication, accompanied by a certificate of an
Authorized Officer of the Issuer directing such authentication and the Trustee
shall thereupon authenticate and deliver, or cause the authentication and
delivery of, such Notes to the respective Holders thereof upon the written order
of the
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Issuer signed by an Authorized Officer of the Issuer, without any further
action by the Issuer.
Section 2.02. Execution of Notes. The Notes shall be executed on behalf
of the Issuer by an Authorized Officer of the Issuer. Such signature may be the
manual or facsimile signature of any present or any future such Authorized
Officer. With the delivery of this Indenture, the Issuer is furnishing to the
Trustee a certificate of a Secretary or Assistant Secretary of the Issuer, and
from time to time thereafter may furnish to the Trustee, an Officers'
Certificate, in each case identifying and certifying the incumbency and specimen
signature(s) of the Authorized Officers. Until the Trustee receives a subsequent
Officers' Certificate, the Trustee shall be entitled to rely on the last such
Officers' Certificate delivered to it for purposes of determining the Authorized
Officers.
In case any Authorized Officer who shall have signed any of the Notes shall
cease to be such Authorized Officer before the Note so signed shall be
authenticated and delivered by the Trustee or disposed of by or on behalf of the
Issuer, such Note nevertheless may be authenticated and delivered or disposed of
as though the Person who signed such Note had not ceased to be such Authorized
Officer; and any Note may be signed on behalf of the Issuer by such Persons as,
at the actual date of the execution of such Note, shall be an Authorized
Officer, and such Note shall be a valid and binding obligation of the Issuer
notwithstanding that at the date of the execution and delivery of this Indenture
any such Person was not an Authorized Officer.
Section 2.03. Certificate of Authentication. Only such Notes as shall
bear thereon a certification of authentication substantially as set forth in the
form of the Note annexed as Exhibit A hereto, such certification to be executed
by the Trustee by manual signature of one of its Authorized Officers, shall be
entitled to the benefits of this Indenture or be valid or obligatory for any
purpose. Such certification by the Trustee upon any Note executed by or on
behalf of the Issuer shall be conclusive evidence that the Note so authenticated
has been duly authenticated and delivered hereunder and that the Holder is
entitled to the benefits of this Indenture.
Section 2.04. Form, Denomination and Date of the Notes. (a) The Notes
will be issued in fully registered form substantially in the form of Exhibit A
hereto. The Notes shall be numbered, lettered, or otherwise distinguished in
such manner as the Authorized Officer of the Issuer executing the same may
determine with the approval of the Trustee prior to the issuance of the Notes.
Any of the Notes may be issued with appropriate insertions, omissions,
substitutions and variations, and may have imprinted or otherwise reproduced
thereon such legend or legends, not inconsistent with the provisions of this
Indenture, as may be
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required to comply with any law or with any rules or regulations pursuant
thereto, or to conform to general usage.
(b) The final maturity of the Notes shall be February 20, 2004. Prior to
such final maturity, installments of principal on the Notes shall be due on each
Note Payment Date in the aggregate amount specified in Schedule I. The Notes
shall bear interest, to the extent enforceable under applicable law, on any
overdue principal and Make-Whole Amount, if any, at the Default Rate.
(c) Except as provided in the last sentence of subsection (b) above, the
Notes shall not bear interest. Instead, Original Issue Discount shall accrete
thereon from the Closing Date to the respective Note Payment Dates. The amount
payable by the Issuer in respect of principal of any Note (exclusive of any
Make-Whole Amount) at any date shall not exceed the Current Value of such Note
at such date.
(d) Each Note shall be dated the date of its authentication and shall take
effect therefrom.
(e) The Notes shall be issuable in registered form without coupons in
minimum denominations of $500,000.
Section 2.05. Payment of Notes. (a) Payments at Trust Office. The
principal of and Make-Whole Amount, if any, on the Notes shall be payable to the
Holder of record as of the Record Date at the Trust Office in lawful money of
the United States of America, in funds immediately available at such office
against surrender of such Notes in the case of payment in full, except as
provided in Section 2.05(b).
(b) Home Office Payment. Notwithstanding any provision of this Indenture
or the Notes to the contrary, payments of all amounts which become due and
payable in respect of any Note shall be made by the Trustee, by wire transfer of
immediately available funds for receipt not later than 2:00 p.m. New York time
on the date any such payment is due, directly to the Holder of such Note,
without surrender or presentation thereof to the Trustee (except that upon
written request of the Trustee or the Issuer made concurrently with or
reasonably promptly after payment or prepayment in full of any Note, each Holder
shall surrender its Note for cancellation to the Trustee at its Trust Office or
at such other location as is specified by the Trustee and the Issuer), if there
shall be filed with the Trustee a copy of an agreement between the Issuer and
such Noteholder (or the person for whom such Noteholder is a nominee) providing
that such payments will be so made and such Noteholder agrees not to sell,
transfer or otherwise dispose of such Note unless the amount of all prepayments
of principal
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previously made thereon shall be noted thereon. The Trustee shall have no
responsibility regarding notations of payment by any Noteholder who has entered
into such an agreement and the Trustee shall be responsible only for maintaining
its records in accordance with this Indenture and absent manifest error the
records of the Trustee shall be controlling as to payments and prepayments in
respect of the Notes.
Section 2.06. Registration, Transfer or Exchange of Notes. (a) The
Issuer shall keep or cause to be kept at the Trust Office one or more books
(herein called the "NOTE REGISTER") for the registration and registration of
transfer or exchange of any of the Notes. The Issuer hereby appoints the Trustee
its registrar to keep the Note Register and the Trustee hereby accepts such
appointment.
The Note Register shall contain the following information regarding all
Noteholders:
(i) the names and addresses of such Holders;
(ii) the percentage of the aggregate principal amount of the Notes
held by each Holder;
(iii) the date on which the name of each Person was entered on such
register as a Holder; and
(iv) the date on which any Person ceased to be a Holder;
provided that registration as provided under this Section shall be made within
30 days of the date of issuance of each Note as provided under this Indenture.
Any Note may be surrendered for transfer or exchange at the Trust Office,
accompanied in the case of a transfer by a Transferor Certificate and Transferee
Certificate in form reasonably acceptable to the Trustee, duly executed by the
Holder of such Note, and thereupon the Issuer shall execute, in the case of a
transfer in the name of the transferee or transferees, and the Trustee shall
authenticate and deliver, a new Note or Notes for the same aggregate unpaid
principal amount as the Note so surrendered.
(b) The ownership of any Note shall be proved by the Note Register. The
Trustee may deem and treat the registered Holder of any Note as the absolute
owner of such Note for all purposes and, prior to due presentment for
registration of transfer, shall not be affected by any notice to the contrary.
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(c) No fee shall be charged to any Holder for any registration of transfer
or exchange, but the Trustee or the Issuer may require payment by the Holder
requesting such registration of a sum sufficient to reimburse it for any
governmental, regulatory, or other similar charge or other expense to which the
Trustee or the Issuer is subject in connection therewith.
(d) All Notes authenticated and delivered by the Trustee upon any transfer
or exchange pursuant to this Indenture shall be entitled to the same benefits
under this Indenture as the Note or Notes surrendered upon such transfer or
exchange.
(e) The Trustee shall permit each Holder of a Note to inspect and copy the
Note Register and the other books and records of the Trustee relating to the
Notes upon written request during regular business hours of the Trustee.
(f) No Note may be sold or transferred (including, without limitation, by
pledge or hypothecation) unless such sale or transfer is exempt from the
registration requirements of the Securities Act and is exempt under applicable
state securities laws. The Trustee shall require, prior to any sale or other
transfer of a Note, that the Noteholder's prospective transferee deliver to the
Trustee and the Issuer a certificate relating to such transfer substantially in
the form of Exhibit B annexed hereto (the "TRANSFEREE CERTIFICATE"). In
addition, the Trustee shall require, prior to any sale or other transfer of a
Note, that the Noteholder deliver to the Trustee and the Issuer a certificate
relating to such transfer substantially in the form of Exhibit C (the
"TRANSFEROR CERTIFICATE"). The Transferee Certificates and the Transferor
Certificates furnished pursuant to this Section 2.06(f) hereof may be relied on
conclusively by the Trustee in determining whether the provisions of this
Section 2.06(f) hereof have been complied with. None of the Issuer, the Trustee
or any other person shall be required or obligated to register the Notes under
the Securities Act or any state securities laws.
(g) Subject to its prior receipt of a Transferee Certificate from a
transferee, the Issuer shall be deemed to have made the representations set
forth in the second paragraph of Section 2.10 of the Note Purchase Agreement to
such transferee as of the date such transferee acquired a Note that is the
subject of such Transferee Certificate; provided, however, that the Issuer shall
have five (5) business days to review such Transferee Certificate and to notify
the Trustee that due to either (x) a change in an applicable provision of ERISA
or the Code or (y) the disclosure made to the Issuer pursuant to Item (e)(iv) of
the Transferee Certificate, the Issuer is unable to make the representations set
forth in such second paragraph.
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(h) No Note may be sold or transferred in denominations of less than U.S.
$500,000, provided that if necessary to enable the registration of transfer by a
holder of its entire holding of Notes, one Note may be in a denomination of less
than U.S. $500,000.
(i) No Note may be sold or transferred (including, without limitation, by
pledge or hypothecation) unless the prospective transferee represents in the
Transferee Certificate that the purchaser is a "qualified purchaser" for
purposes of Section 3(c)(7) of the Investment Company Act. Notwithstanding
anything to the contrary in this Indenture, no transfer of a Note may be made if
such transfer would require registration of the Issuer under the Investment
Company Act.
(j) At any time when the Issuer is not subject to Section 13 or 15(d) of
the United States Securities Exchange Act of 1934, as amended, upon the request
of any Noteholder, the Issuer shall promptly furnish to such Noteholder or to a
prospective purchaser of any Note designated by such Noteholder, as the case may
be, the information which the Issuer determines to be required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act ("RULE 144A INFORMATION")
in order to permit compliance by such Noteholder with Rule 144A in connection
with the resale of such Note by such Noteholder. Upon request by the Issuer,
the Trustee shall reasonably cooperate with the Issuer in mailing or otherwise
distributing (at the Issuer's expense) to such Noteholders or prospective
purchasers, at and pursuant to the Issuer's written direction, the foregoing
materials prepared and provided by the Issuer; provided, however, that the
Trustee shall be entitled to affix thereto or enclose therewith such disclaimers
as the Trustee reasonably shall deem appropriate, at its discretion (such as,
for example, a disclaimer that such Rule 144A Information was assembled by the
Issuer and not by the Trustee, that the Trustee has not reviewed or verified the
accuracy thereof, and that it makes no representation as to the sufficiency of
such information under Rule 144A or for any other purpose).
(k) Notwithstanding any terms herein to the contrary, the Trustee shall
not be responsible for ascertaining whether any transfer complies with, or
otherwise to monitor or determine compliance with, the requirements or terms of
the Securities Act, applicable state securities laws, ERISA, the Code or the
Investment Company Act; except that if a certificate is specifically required by
the terms of this Section 2.06 to be provided to the Trustee, the Trustee shall
be under a duty to receive and examine the same to determine whether it
substantially conforms on its face to the applicable requirements of this
Section.
(l) No Noteholder may sell or transfer a Note to a Person that such
Noteholder reasonably should know is a competitor of the Issuer, Cherokee or the
Licensee; provided that such Noteholder may rely conclusively on the transferee
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certification in subsection (m) of the relevant Transferee Certificate. For
purposes of this subsection (l), "competitor" shall mean any manufacturer,
distributor or retailer of goods of the type covered by the Trademark or the
License Agreement or the owner or licensor of a trademark for goods of such
type.
Section 2.07. Replacement of Lost, Mutilated or Stolen Notes. In case any
Note shall become mutilated or defaced or be lost, destroyed or stolen, then on
the terms herein set forth, and not otherwise, the Issuer shall execute and the
Trustee shall authenticate and deliver to the Holder a new Note of like tenor
and date, and bearing such identifying number or designation as the Trustee may
determine, in exchange and substitution for, and upon cancellation of, the
mutilated or defaced Note, or in lieu of and in substitution for the same if
lost, destroyed or stolen. The applicant for a new Note pursuant to this
Section 2.07 shall, in the case of any mutilated or defaced Note, surrender such
Note to the Trustee and furnish to the Trustee, in the case of any lost,
destroyed or stolen Note, evidence reasonably satisfactory to the Trustee of
such loss, destruction or theft and, in each case, evidence satisfactory to the
Trustee of the ownership and authenticity of such Note and furnish such security
or indemnity as may be reasonably required by the Trustee and the Issuer to
indemnify and defend and save them harmless (provided that if such Noteholder is
an original Holder of any Note, or a nominee or affiliate thereof, or any other
institutional Holder of a Note, such Holder's own unsecured agreement of
indemnity shall be deemed satisfactory to the Issuer). Any defaced or mutilated
Note shall be destroyed by the Trustee, or retained in accordance with its
standard retention policy, upon delivery by it of a new Note to the Holder.
Section 2.08. Tax Purposes. Each Holder by acceptance of its Note agrees
to treat its Note as debt for United States federal income tax purposes.
Section 2.09. Cancellation. All Notes surrendered for payment,
registration of transfer, exchange or redemption, or deemed lost or stolen,
shall, if surrendered to any Person other than the Trustee, be delivered to the
Trustee and shall be promptly cancelled by it. All canceled Notes held by the
Trustee shall be destroyed or held by the Trustee in accordance with its
standard retention policy.
Section 2.10. Quarterly Report. The Trustee shall deliver to each Holder
of a Note and the Issuer a quarterly report immediately following each Note
Payment Date detailing the Outstanding principal amount of the Notes and the
status of each of the Trust Accounts including receipts and disbursements
therefrom since the preceding Note Payment Date and the amount of the funds and
the types of Eligible Investments then held by the Trustee under this Indenture.
Each Holder of a Note and the Issuer may, from time to time, on a
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reasonable basis, request any additional reports and information regarding
activity in the Trust Accounts regularly prepared or maintained by the Trustee.
ARTICLE 3
The Collection Account
Section 3.01. Collection Account. The Trustee will establish a special
purpose trust account (Account No. 43558-1) designated as Wilmington Trust
Company, as Trustee--account u/i/d December 23, 1997 made by SPELL C. LLC--
Collection Account (the "COLLECTION ACCOUNT") over which the Trustee shall have
sole and exclusive control and sole and exclusive right of withdrawal and into
which payments due to the Issuer under any Trademark License, including all cash
proceeds thereof, shall be made directly. In addition, the Trustee shall
deposit into the Collection Account (i) the proceeds of the issuance of the
Notes, which shall be distributed pursuant to Section 3.02 hereof and (ii) any
principal, interest or other payment or distribution received by the Trustee
from time to time in respect of Eligible Investments made with amounts on
deposit in the Reserve Account. All right, title and interest in and to the
cash amounts on deposit from time to time in the Collection Account shall
constitute part of the Trust Estate and shall be held for the benefit of the
Noteholders, the Trustee, and the Issuer as their interests shall appear
hereunder and shall not constitute payment of the Secured Obligations (or any
other obligations to which such funds are provided hereunder to be applied)
until applied thereto as hereinafter provided.
Section 3.02. Distribution of Amounts on Deposit in the Collection Account
on the Closing Date. On the Closing Date, the Trustee shall make the following
transfers from the Collection Account:
(i) to the account specified pursuant to Section 3.03 of the
Trademark Purchase and License Assignment Agreement, $47,845,558.83;
(ii) to the Reserve Account in escrow to fund the Trustee's fees,
indemnities and expenses as provided in Section 10.07, $24,000; and
(iii) the balance to or as directed by the Issuer.
Section 3.03. Distribution of Amounts on Deposit in the Collection Account
on Note Payment Dates. Amounts deposited into the Collection Account on any
date shall be held therein and applied or transferred by the
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Trustee on the immediately succeeding Note Payment Date in the following order
of priorities:
(i) to the payment of any overdue principal owing on the Notes, for
receipt not later than 2:00 p.m., New York time;
(ii) to the ratable payment of the aggregate amount of principal
due and payable on the Notes on such Note Payment Date, for receipt not
later than 2:00 p.m., New York time;
(iii) to the ratable payment of the Make-Whole Amount, if any,
payable on the Notes on such Note Payment Date, for receipt not later than
2:00 p.m., New York time;
(iv) to the ratable payment of any other amounts, if any, payable
on the Notes pursuant to the terms of this Indenture or any other Basic
Document, for receipt not later than 2:00 p.m., New York time;
(v) (A) if a Default or Event of Default shall have occurred and be
continuing, to retain the balance in the Collection Account until such
Default or Event of Default shall have been cured or waived or such balance
shall have been otherwise applied in accordance with this Indenture or (B)
otherwise, to the Issuer or to such other Person as the Issuer shall direct
in writing to the Trustee.
Section 3.04. Distribution of Excess Amounts on Deposit in the Collection
Account. If on any date other than a Note Payment Date (a) the amount on
deposit in the Collection Account exceeds the aggregate amount of principal of
the Notes due and payable on the next succeeding Note Payment Date, and (b) no
Default or Event of Default has occurred and is then continuing, such excess
amount shall be distributed to the Issuer or to such other Person as the Issuer
shall direct in writing to the Trustee.
Section 3.05. Other Existing Licenses. Notwithstanding anything to the
contrary in this Article 3, if at any time any Other Existing Licenses become
Trademark Licenses, then all payments received by the Trustee for the account of
the Issuer in accordance with Section 4.02 of the Trademark Purchase and License
Assignment Agreement shall be transferred to the Reserve Account promptly after
the receipt of such funds, and shall not be available for distribution pursuant
to Sections 3.03 and 3.04 hereof.
Section 3.06. Investments in the Collection Account. (a) Any income
received by, or on behalf of, the Trustee with respect to the balance from time
to
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time on deposit in the Collection Account, including any interest or capital
gains on Eligible Investments made with amounts on deposit therein, shall
remain, or be deposited, in such Trust Account until transferred or paid in
accordance with this Indenture. All rights, title and interest in and to the
cash amounts on deposit from time to time in the Collection Account, together
with any Eligible Investments from time to time made pursuant to this Section
shall constitute part of the Trust Estate and shall be held for the benefit of
the Noteholders, the Trustee, and the Issuer as their interests shall appear
hereunder and shall not constitute payment of the Secured Obligations (or any
other obligations to which such funds are provided hereunder to be applied)
until applied thereto as hereinafter provided.
(b) If immediately available cash on deposit in the Collection Account is
not sufficient to make any distribution or application referred to in Section
3.03, the Trustee shall liquidate as promptly as practicable Eligible
Investments made with amounts on deposit in the Collection Account as required
to obtain cash to make such distribution or application. Upon the occurrence
and continuation of an Event of Default, the Trustee shall, if so instructed in
writing by the Majority Holders, apply or cause to be applied (subject to
collection) any or all of the balance from time to time on deposit in the
Collection Account in the manner specified in Section 8.02.
(c) Amounts on deposit in the Collection Account shall be invested and re-
invested from time to time in such Eligible Investments as the Issuer shall
timely direct the Trustee in writing, which Eligible Investments shall be held
in the name and be under the control of the Trustee.
(d) All amounts on deposit in the Collection Account shall be paid to the
Issuer upon payment of all amounts due under the Notes in accordance with the
terms hereof and thereof and all other Secured Obligations.
ARTICLE 4
Reserve Account
Section 4.01. Reserve Account. The Trustee will establish a special
purpose trust account (Account No. 43558-2) designated as "Wilmington Trust
Company, as Trustee--account--u/i/d December 23, 1997 made by SPELL C. LLC --
Reserve Account" (the "RESERVE ACCOUNT") over which the Trustee shall have sole
and exclusive control and sole and exclusive right of withdrawal. The Trustee
shall deposit into the Reserve Account amounts transferred from the Collection
Account pursuant to Sections 3.02(ii) and 3.05.
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Section 4.02. Withdrawals from the Reserve Account. Except as elsewhere
provided in this Indenture, all amounts in the Reserve Account shall be applied
by the Trustee upon the instruction of the Issuer (i) in the case of amounts
transferred to the Reserve Account pursuant to Section 3.05, to make payments to
Licensee as required pursuant to Section 7(b)(v)(a) of the License Agreement,
and (ii) in the case of amounts transferred to the Reserve Account pursuant to
Section 3.02(ii), to make payments of the expenses in respect of which such
reserve was established.
Section 4.03. Investments in the Reserve Account. (a) Any income received
by, or on behalf of, the Trustee with respect to the balance from time to time
on deposit in the Reserve Account, including any interest or capital gains on
Eligible Investments made with amounts on deposit therein, shall remain, or be
deposited, in such Trust Account until transferred or paid in accordance with
this Indenture. All right, title and interest in and to the cash amounts on
deposit from time to time in the Reserve Account, together with any Eligible
Investments from time to time made pursuant to this Section shall constitute
part of the Trust Estate and shall be held for the benefit of the Noteholders,
the Trustee, and the Issuer as their interests shall appear hereunder and shall
not constitute payment of the Secured Obligations (or any other obligations to
which such funds are provided hereunder to be applied) until applied thereto as
hereinafter provided.
(b) If immediately available cash on deposit in the Reserve Account is not
sufficient to make any distribution or application referred to in Section 8.02,
the Trustee shall liquidate as promptly as practicable Eligible Investments made
with amounts on deposit in the Reserve Account as required to obtain cash to
make such distribution or application. Upon the occurrence and continuation of
an Event of Default, the Trustee shall, if so instructed in writing by the
Majority Holders, apply or cause to be applied (subject to collection) any or
all of the balance from time to time on deposit in the Reserve Account in the
manner specified in Section 8.02.
(c) Amounts on deposit in the Reserve Account shall be invested and re-
invested from time to time in such Eligible Investments as the Issuer shall
timely direct the Trustee in writing, which Eligible Investments shall be held
in the name and be under the control of the Trustee.
(d) All amounts on deposit in the Reserve Account shall be paid to the
Issuer upon payment of all amounts due under the Notes in accordance with the
terms hereof and thereof and all other Secured Obligations.
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ARTICLE 5
Information
The Issuer will furnish to the Trustee sufficient copies and the Trustee
will furnish to each Noteholder:
(a) promptly, but in any event within five Business Days after an officer
of the Issuer becomes aware thereof, notice of (i) the occurrence of any Default
or Event of Default, (ii) any litigation or governmental proceeding pending or
threatened against the Issuer which could reasonably be expected to have a
Material Adverse Effect, (iii) any action by any Governmental Body to condemn,
seize or appropriate all or any part of the assets of the Issuer if such action
could reasonably be expected to have a Material Adverse Effect and (iv) any
other event, act or condition (excluding general economic conditions) which
could reasonably be expected to have Material Adverse Effect;
(b) promptly after delivery or receipt thereof, a copy of all notices or
documents given or received by the Issuer pursuant to any of the Trademark
Licenses concerning (i) any default or alleged default under, breach or alleged
breach of, or other noncompliance with, any Trademark License in any material
respect, (ii) any prospective inability to perform under any Trademark License
in any material respect, (iii) any termination or attempted termination of any
Trademark License, (iv) any amendment, supplement or other modification of any
Trademark License which the parties propose or (v) any claim against the Issuer
arising under any Trademark License;
(c) promptly upon receipt thereof, copies of all materials delivered to
the Issuer pursuant to Section 3(h) of the Administrative Services Agreement or
Section 5(e) of the License Agreement and copies of all notices given to the
Issuer pursuant to Section 3(b) or 3(c) of the Administrative Services
Agreement; and
(d) promptly, such other information, including financial statements and
computations, relating to the performance of the provisions of this Indenture
and the other Basic Documents and the affairs of the Issuer as the Trustee at
the request of any such Holder may from time to time reasonably request.
If at any time Licensee ceases to be a company required to provide public
financial information pursuant to the reporting requirements of the Securities
and Exchange Commission, the Issuer shall timely request interim and audited
financial statements from the Licensee pursuant to Section 5(e) of the License
Agreement.
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Notwithstanding anything to the contrary in this Article 5, the Issuer
shall not be required to provide any information to the Trustee or the
Noteholders that the Issuer reasonably determines would cause it to violate the
License Agreement, it being understood that provision of the materials specified
in subsections (b) and (c) above would not cause such a violation.
ARTICLE 6
Inspection of Books and Records
Prior to the occurrence of a Default or an Event of Default, the Trustee
and each Holder of a Note shall have the right to discuss the affairs, finances
and accounts of the Issuer with, and to be advised as to the same by, the
Issuer's officers and employees upon reasonable notice, at such reasonable times
during regular business hours and intervals and to such reasonable extent as the
Trustee or such Holder may desire. Following the occurrence and during the
continuance of a Default or an Event of Default, the Trustee and each Holder of
a Note shall have the right to visit and inspect any of the offices of the
Issuer, to examine the books of account and records of the Issuer, to make or be
provided with copies and extracts therefrom and, to discuss the affairs,
finances and accounts of the Issuer with, and to be advised as to the same by,
its officers and employees all at such reasonable times during regular business
hours and intervals and to such reasonable extent as the Trustee or such Holder
may desire.
The Trustee agrees and each Holder of a Note shall be deemed to have agreed
by acceptance of such Note, that all information (other than publicly available
information) received pursuant to this Indenture or otherwise in connection
herewith or with any Basic Document, will be held by the Trustee and such Holder
as confidential in accordance with its customary procedures for handling
confidential information, but such Holder may make disclosure to the extent
necessary to any bona fide prospective institutional investor transferee in
connection with the contemplated transfer of Notes (provided that (i) prior to
disclosure by such Holder after the date hereof to any prospective transferee of
a Note of any information covered by this paragraph, such Holder will obtain
from such prospective transferee in favor of the Issuer its agreement to be
bound by the provisions of this paragraph provided that such Holder shall not in
any event be liable to any Person because of the failure of such prospective
transferee to comply with such provisions and (ii) at such time as any
disclosure is made to a transferee, such Holder will notify the Issuer in
writing of the information released and the identity of the recipient of such
information) or as required by, in appropriate response to a request by, or as
otherwise customarily disclosed to, any
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Governmental Body (including without limitation the National Association of
Insurance Commissioners or any successor thereto) or representative thereof, or
pursuant to legal process or pursuant to any litigation that any Holder is
involved in, or to the accountants, counsel or other professional advisers of
such Holder in the course of their respective duties (provided that such Holder
requests any such adviser to whom it discloses such information to treat all
such information as non-public data).
ARTICLE 7
Covenants of the Issuer
The Issuer agrees that so long as any amount payable hereunder or under any
Note remains unpaid:
Section 7.01. Payment of Principal and Make-Whole Amount. The Issuer
shall duly and punctually pay the principal of and Make-Whole Amount, if any, on
the Notes in accordance with the terms of, and to the extent provided under, the
Notes and this Indenture. The Issuer's obligations to make such payments on any
date shall be satisfied if on such date immediately available funds in an amount
sufficient to make all payments then due are on deposit in the Collection
Account and available for such purpose and not subject to any legal restraint on
payment by the Trustee from the Collection Account to the Holders. All payments
of amounts due and payable with respect to any Notes that are to be made from
amounts withdrawn from the Collection Account shall be made on behalf of the
Issuer by the Trustee.
Section 7.02. Legal Existence; Payment of Taxes; Compliance with Laws.
The Issuer shall:
(a) do or cause to be done all things necessary to preserve and keep in
full force and effect its legal existence, rights (charter and statutory),
franchises, permits and licenses and all necessary Governmental Approvals;
provided, however, that the Issuer shall not be required to preserve any right,
franchise, permit or license of the Issuer if the board of directors of the
Issuer shall determine that the preservation thereof is no longer desirable in
the conduct of the business of the Issuer and that the loss thereof could not,
individually or in the aggregate, have a Material Adverse Effect;
(b) pay and discharge or cause to be paid and discharged all taxes,
assessments and governmental charges or levies imposed upon it or upon its
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income or profits or upon any of its property, or upon any part thereof, when
due, as well as all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon its property; provided, however, that
the Issuer shall not be required to pay any such tax, assessment, charge, levy
or claim if (i) the amount, applicability or validity thereof shall currently be
contested in good faith by appropriate proceedings, and if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
therefor or (ii) such nonpayment could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect;
(c) comply in all material respects with all applicable statutes,
regulations and Orders of, and all applicable restrictions imposed by, any
Governmental Body, necessary to the conduct of its business and the ownership of
its properties, except such as are being contested in good faith by appropriate
proceedings; and
(d) not alter the provisions of the LLC Agreement.
Section 7.03. Consolidation or Merger. The Issuer shall not, directly or
indirectly, consolidate with or merge with or into, or sell, lease or otherwise
dispose of its assets as an entirety or substantially as an entirety to, any
Person.
Section 7.04. Protection of Trust Estate. (a) The Issuer shall from time
to time at the reasonable request of the Trustee upon the instruction of the
Majority Holders execute and deliver all such instruments of further assurance
and other instruments and take such other action as may be necessary or
advisable to:
(i) Grant more effectively all or any portion of the Trust Estate;
(ii) maintain or preserve the Lien (and the priority thereof) of
this Indenture or to carry out more effectively the purposes hereof;
(iii) perfect, publish notice of, or protect the validity of any
Grant made or to be made by this Indenture;
(iv) enforce the Trademark Licenses in accordance with their terms;
(v) preserve and defend title to the Trust Estate and the rights
therein of the Trustee and the Noteholders against the claims of all
persons and parties; and
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(vi) promptly upon request, provide to the Trustee all information
and evidence it may reasonably request concerning the Trust Estate to
enable the Trustee to enforce the provisions of this Indenture and the
Security Agreement.
(b) Promptly upon receipt thereof, the Issuer shall furnish to the Trustee
a copy of any notice of default given pursuant to Section 8 of the License
Agreement.
Section 7.05. Performance under the Basic Documents. The Issuer shall
perform all of its obligations under, and observe all of the limitations imposed
on it by, each Basic Document, the License Agreement and the LLC Agreement.
Section 7.06. Negative Covenants. (a) The Issuer shall not, without the
prior written consent of the Majority Noteholders, (i) sell, lease, license,
exchange, assign or otherwise dispose of, or grant any option with respect to,
any of the Assigned Rights, except pursuant to or as expressly permitted by the
Basic Documents (including, without limitation, the Other Permitted Licenses),
(ii) create, assume, incur or suffer to exist any Lien upon or with respect to
the Trust Estate, except for the Liens created pursuant to the Basic Documents
(including, without limitation, the Other Permitted Licenses), (iii) agree or
consent to any amendment, modification or termination of or material forbearance
or written waiver with respect to any provision of any Basic Document, Trademark
License or (to the extent the Issuer's consent thereto is required under the
Trademark Purchase and License Assignment Agreement) Other Permitted License or
(iv) take any action that would cause the Lien in favor of the Trustee on behalf
of the Noteholders contemplated by this Indenture and the Security Agreement not
to constitute a valid first priority perfected security interest in the Trust
Estate.
(b) The Issuer shall not acquire directly or indirectly (by purchase,
participation, prepayment or otherwise) any of the Outstanding Notes except by
way of payment or prepayment in accordance with the provisions of the Notes and
of this Indenture.
(c) The Issuer shall not incur or have outstanding, assume, or Guarantee
any Indebtedness, or assume or Guarantee any Indebtedness of any Person other
than the Notes, or issue any membership or other equity interest to any Person
other than Cherokee, or any successor thereof by merger, consolidation or sale
of substantially all assets.
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(d) The Issuer shall not engage in any business or activity other than
(i) the issuance, selling and redemption of the Notes and the performance of its
obligations under this Indenture and the Notes and any other instrument or
property included in the Trust Estate in connection therewith, (ii) activity
necessary to consummate the transactions contemplated by the Basic Documents and
to perform its obligations and preserve and enforce its rights thereunder and
(iii) other activities that are reasonably necessary to accomplish the foregoing
or are incidental thereto.
(e) The Issuer shall not create any Subsidiaries.
(f) The Issuer shall not voluntarily appoint or cause to be appointed or
commence any proceeding to appoint any receiver or liquidator over all or any of
its property.
ARTICLE 8
Events of Default
Section 8.01. Events of Default. If one or more of the following events
(herein referred to as "EVENTS OF DEFAULT") (whatever the reason for such Events
of Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body) shall
have occurred and be continuing:
(a) default shall be made in the due and punctual payment of all
or any part of the principal of, or Make-Whole Amount (if any) on, any
Note, when and as the same shall became due and payable, whether at stated
maturity, by acceleration, by prepayment or otherwise;
(b) default shall be made by the Issuer in the observance of any
of its obligations or undertakings contained in any of Article 5(a)(i) or
Sections 7.03, 7.04(b) and 7.06;
(c) default shall be made by the Issuer in the observance of any
of its other obligations or undertakings under this Indenture or any other
Basic Document and such default shall have continued for a period of at
least 30 days after the Trustee, acting upon the instruction of the
Majority Holders, shall have notified the Issuer thereof; provided that
unless such default could reasonably be expected to have a Material Adverse
Effect,
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no Event of Default shall arise under this subsection (c) with respect
thereto for so long as the Issuer shall be diligently attempting to cure
such default;
(d) any representation or warranty made by the Issuer in this
Indenture or in any other Basic Document or in any certificate or other
instrument delivered hereunder or thereunder or pursuant hereto or thereto
or in connection with any provision hereof shall prove to be false,
incorrect or breached on the date as of which made in any respect material
to the transactions contemplated hereby;
(e) the License Agreement shall have been terminated or any party
shall be in default thereunder in a manner that could reasonably be
expected to have a Material Adverse Effect;
(f) the Issuer or the Licensee shall (1) apply for or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee, liquidator or administrator of itself or of all or a substantial
part of its property, (2) be generally unable to pay its debts as such
debts become due, (3) make a general assignment for the benefit of its
creditors, (4) commence a voluntary case under the United States Bankruptcy
Code (as now or hereafter in effect), (5) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (6) fail to
controvert in a timely or appropriate manner, or acquiesce in writing to,
any petition filed against it in an involuntary case under the United
States Bankruptcy Code, (7) take any action under the laws of its
jurisdiction of organization (or any other jurisdiction) analogous to any
of the foregoing, or (8) take any corporate or entity action for the
purpose of effecting any of the foregoing;
(g) a proceeding or case in respect of the Issuer or the Licensee
shall be commenced, without the application or consent of the Issuer or the
Licensee in any court of competent jurisdiction, seeking (1) liquidation,
reorganization, dissolution, winding up, or composition or readjustment of
its debts, (2) the appointment of a trustee, receiver, custodian,
liquidator, administrator or the like of it or of all or any substantial
part of its properties, or (3) similar relief in respect of it, under any
law providing for the relief of debtors and such proceeding or case shall
continue undismissed, or unstayed and in effect, for a period of 60 days;
or an order for relief shall be entered in an involuntary case under the
United States Bankruptcy Code against the Issuer or the Licensee; or action
under the laws of the jurisdiction of incorporation of the Issuer or the
Licensee (or any other jurisdiction) analogous to any of the foregoing
shall be taken
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with respect to the Issuer or the Licensee and shall continue unstayed and
in effect for any period of 60 consecutive days;
(h) any judgment or judgments of a court or courts of competent
jurisdiction shall be rendered against the Issuer for the payment of money
in excess of U.S.$100,000 in the aggregate and any one or more of such
judgments exceeding such amount in the aggregate shall not be discharged or
execution thereof stayed pending appeal, within 30 days after entry
thereof, or, in the event of such a stay, such judgment or judgments shall
not be discharged within 30 days after such stay expires;
(i) the Liens created by this Indenture and the Security Agreement
shall at any time not constitute valid and perfected Liens on the Trust
Estate intended to be covered thereby in favor of the Trustee (except by
reason of the failure of the Trustee to retain possession of property
required to be retained by it hereunder), free and clear of any other
Liens, or, except for expiration in accordance with its terms, the Security
Agreement shall for whatever reason be terminated or cease to be in full
force and effect, or the enforceability thereof shall be contested by the
Issuer; or
(j) there shall be a vacancy in the position of Independent
Director (as defined in the LLC Agreement), and such vacancy shall not be
filled with an individual meeting the criteria specified in the LLC
Agreement within 60 days;
then (1) upon the occurrence of any Event of Default described in Subsection (f)
or (g) above the Current Value of each Note, and, to the extent permitted by
law, the Make-Whole Amount in respect of such Note and all other amounts payable
by the Issuer hereunder in respect of each such Note, shall automatically become
immediately due and payable, (2) upon the occurrence of any Event of Default
described in Subsection (a) above with respect to any Note, the Holder of such
Note may, by written notice to the Issuer (with a copy to the Trustee), declare
the Current Value of such Note to be, and the same shall forthwith become, due
and payable and, to the extent permitted by law, the Make-Whole Amount in
respect of such Note and all other amounts payable by the Issuer hereunder in
respect of each such Note or (3) upon the occurrence of any Event of Default
(other than as described in Subsection (f) or (g) above), the Majority Holders
may, and the Trustee shall, upon the direction of such Holders, in each case by
written notice to the Issuer, declare the aggregate Current Values of all Notes
to be, and the same shall forthwith become, due and payable and, to the extent
permitted by law, the Make-Whole Amount in respect of each such Note and all
other amounts payable by the Issuer hereunder in respect of each such Note, in
each case under the
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foregoing clauses (1), (2) and (3) without presentment, demand, protest or other
requirements of any kind, all of which are hereby expressly waived by the
Issuer. If any Holder of any Note shall exercise the option specified in clause
(2) above, the Issuer will forthwith give written notice thereof to the Holders
of all other outstanding Notes and each such Holder (including such original
Holder) may (whether or not such notice is given or received), by written notice
to the Issuer (with a copy to the Trustee) declare the aggregate Current Values
of all Notes held by it (but not a portion thereof) to be, and the same shall
forthwith become, due and payable, and, to the extent permitted by law, the
Make-Whole Amount in respect of each such Note, and all other amounts payable by
the Issuer hereunder in respect of each such Note, all without presentment,
demand, protest or other requirements of any kind, all of which are hereby
expressly waived by the Issuer.
The provisions of this Section are subject, however, to the condition that
if, within 30 days after any Note shall have become due and payable, the Issuer
shall pay all principal of and Make-Whole Amount (if any) on the Notes which
shall have become due otherwise than by acceleration (with interest on such
principal and Make-Whole Amount (if any) at the Default Rate) and all Events of
Default (other than nonpayment of principal and Make-Whole Amount (if any) due
and payable solely by virtue of acceleration) shall be remedied or waived, then,
and in every such case, the Holders of 66 2/3% of the aggregate unpaid principal
amount of the Outstanding Notes, by written notice to the Issuer (with a copy to
the Trustee) given within 90 days after such amounts shall have become due and
payable, may rescind and annul any such acceleration and its consequences; but
no such action shall affect any subsequent Default or Event of Default or impair
any right consequent thereon.
Section 8.02. Application of Proceeds. Any moneys collected by the
Trustee pursuant to this Article, any moneys held by the Trustee pursuant to the
terms of the Indenture or the Security Agreement and all moneys at the time on
deposit in the Collection Account and the Reserve Account shall at the direction
of the Majority Holders, upon the occurrence and during the continuance of an
Event of Default, be applied in the following order at the date or dates fixed
by the Trustee:
(i) to the payment of all amounts due to the Trustee under
Section 10.07;
(ii) to the payment of the whole amount then due and unpaid upon
all the Notes for principal or Make-Whole Amount, if any, as the case may
be, with interest upon any such overdue amounts at the Default Rate; and in
case such moneys shall be insufficient to pay in full the whole amount so
due and unpaid upon the Notes, then to the payment of such
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interest, principal and Make-Whole Amount, if any, and, without preference
or priority of any Note over any other Note, ratably to the aggregate of
such unpaid interest, principal and Make-Whole Amount, if any; and
(iii) to the payment of the remainder, if any, to the Issuer or any
other Person lawfully entitled thereto.
Section 8.03. Waiver of Past Specified Events. Prior to the declaration
of the acceleration of the Notes as provided in Section 8.01, the Majority
Holders may on behalf of the Holders of all the Notes waive any past Event of
Default hereunder and its consequences, except a default (a) in the payment of
principal of or Make-Whole Amount, if any, on any of the Notes or (b) in respect
of a covenant or provision hereof which cannot be modified or amended without
the consent of the Holder of each Note affected. In the case of any such waiver,
the Issuer, the Trustee and the Noteholders shall be restored to their former
positions and rights hereunder, respectively, and the relevant Event of Default
shall cease to exist and be deemed to have been cured and not to have occurred
for every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Event of Default or impair any right consequent thereon.
Section 8.04. Provisions Relating to the Trust Estate.
(a) Proceedings in Event of Default. In addition to the actions provided
in Section 8.01 and under the Security Agreement, upon the occurrence of any
Event of Default the Trustee may, at the direction of the Majority Holders,
institute proceedings to seek or enforce any remedy to protect and enforce any
of its rights or powers with respect to the Trust Estate, including to foreclose
upon the Trust Estate under a decree of a court or courts of competent
jurisdiction, and may, at the direction of the Majority Holders, to the extent
permitted by applicable law take any other action of a secured party under such
law. The Trustee shall not be bound to institute any such proceedings or take
any other action, unless (i) it shall have been so directed in writing by the
Majority Holders and (ii) it shall have been furnished, by the Noteholders or
otherwise, indemnity to its reasonable satisfaction.
(b) Trustee's Actions in Event of Default Proceedings. At any time after
the occurrence and during the continuance of an Event of Default the following,
in each case subject to Section 14.08, shall be applicable:
(i) the Trustee in its own name, and as trustee of an express
trust, shall be entitled and empowered to institute any suits, actions or
proceedings at law, in equity or otherwise, to recover judgment against the
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Issuer on this Indenture or the Notes or against any other party to a
Trademark License, for the whole amount due and unpaid from the Issuer or
any other party to such Trademark License under the applicable agreement,
and may prosecute any such claims or proceedings to judgment or final
decree against the Issuer or any other party to such Trademark License, and
collect the moneys adjudged or decreed to be payable in any manner provided
by law, whether before or after or during the pendency of any proceedings
for the enforcement of the Lien of this Indenture or under the Security
Agreement, or of any of the Trustee's rights or the rights of the Holders
under this Indenture or under the Security Agreement, and such power of the
Trustee shall not be affected by the exercise of any other right, power or
remedy for the enforcement of the provisions of this Indenture or the
Security Agreement or for the foreclosure of the Lien hereof;
(ii) the Trustee in its own name, or as trustee of an express
trust, as the case may be, or in any one or more of such capacities shall
be entitled and empowered to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of
the Trustee and of the Holders (whether such claims be based upon the
provisions of such Notes or of this Indenture or the Security Agreement)
allowed in any receivership, insolvency, bankruptcy, moratorium,
liquidation, readjustment, reorganization or any other judicial or other
proceedings relative to the Issuer, the creditors of the Issuer or any
other party to a Trademark License and any receiver, assignee, trustee,
liquidator, sequestrator (or other similar official) in any such judicial
or other proceeding is hereby authorized to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due
to it for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel;
(iii) all rights of action and of asserting claims under this
Indenture, the Security Agreement or any Trademark License or under any of
the Notes enforceable by the Trustee may be enforced by the Trustee to the
extent permitted by law without possession of any of such Notes or the
production thereof at the trial or other proceedings relative thereto;
(iv) in the case the Trustee shall have proceeded to enforce any
right under this Indenture or any Trademark License by suit, foreclosure or
otherwise and such proceedings shall have been discontinued or abandoned
for any reason, or shall have been determined adversely to the Trustee,
then in every such case the Issuer and the Trustee shall, to the
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extent permitted by law, be restored without further act to their
respective former positions and rights under this Indenture, and all
rights, remedies and powers of the Trustee shall continue as though no such
proceedings had been taken, except to the extent determined in litigation
adversely to the Trustee; and
(v) the Trustee shall incur no liability as a result of the sale
of the Trust Estate, or any part thereof, at any private sale conducted in
a commercially reasonable manner. The Issuer hereby waives any claims
against the Trustee arising by reason of the fact that the price at which
the Trust Estate may have been sold at such a private sale was less than
the price that might have been obtained at a public sale or was less than
the aggregate amount of the Notes, even if the Trustee accepts the first
offer received and does not offer the Trust Estate to more than one
offeree; provided such sale was conducted in a commercially reasonable
manner.
(c) Waiver of Appraisement, Valuation and Right to Marshalling. To the
extent it may lawfully do so, the Issuer for itself and for any Person who may
claim through or under it hereby:
(i) agrees that neither it nor any such Person will plead, claim
or in any manner whatsoever take advantage of, any appraisement, valuation
or redemption laws, now or hereafter in force in any jurisdiction, which
may delay, prevent or otherwise hinder (A) the performance, enforcement or
foreclosure of this Indenture or of the Security Agreement, or (B) the sale
or other enforcement of the Trust Estate as provided herein and therein;
(ii) waives all benefit or advantage of any such laws;
(iii) waives and releases all rights to have the Trust Estate
marshalled upon any foreclosure, sale or other enforcement of this
Indenture or of the Security Agreement; and
(iv) consents and agrees that, subject to the terms of this
Indenture and the Security Agreement, the instruments constituting the
Trust Estate and regulations applicable thereto, all the Trust Estate may
upon any such sale be sold by the Trustee as an entirety.
(d) Bankruptcy. In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other similar judicial proceeding relative to the Issuer or the property of the
Issuer or its creditors, the Trustee (irrespective of whether the principal of
the Notes
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shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made demand on the
Issuer for the payment of overdue principal or Make-Whole Amount, if any, or
default interest, if any) shall be entitled and empowered, by intervention in
such proceeding or otherwise:
(i) to file and prove a claim for the whole amount of principal,
Make-Whole Amount, if any, and default interest, if any, owing and unpaid
in respect of the Notes and to file such other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee
(including any claims for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and of
the Holders allowed in such judicial proceeding; and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or similar
official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event the Trustee
shall consent to the making of such payments directly to the Holders, to
pay the Trustee any amount due it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and
counsel, and any other amounts due the Trustee.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any proposal,
plan of reorganization, arrangement, adjustment or composition or other similar
arrangement affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holders in any such
proceeding.
(e) Remedies Cumulative; Delay or Omission Not a Waiver. To the extent
permitted by law, every remedy given hereunder or under the Security Agreement
to the Trustee or to any of the Holders shall not be exclusive of any other
remedy or remedies, and every such remedy shall be cumulative and in addition to
every other remedy given hereunder or now or hereafter given by statute, law,
equity or otherwise. The Trustee may exercise all or any of the powers, rights
or remedies given to it hereunder or which may be now or hereafter given by
statute, law, equity or otherwise, in its absolute discretion. No course of
dealing between the Issuer and the Trustee or the Holders or any delay or
omission of the Trustee or of the Holders to exercise any right, remedy or power
accruing upon any Event of Default shall impair any right, remedy or power or
shall be construed to be a waiver of any such Event of Default or of any right
of
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the Trustee or of any Holder or acquiescence therein, and every right, remedy
and power given by this Article 8 to the Trustee or to the Holders may, to the
extent permitted by law, be exercised from time to time and as often as may be
deemed expedient by the Trustee or by the Holders.
(f) Control by the Holders. The Majority Holders shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee; provided that: (i) such direction shall not be in conflict with any
rule of law or with this Indenture or expose the Trustee to personal expense or
liability; and (ii the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
ARTICLE 9
Satisfaction and Discharge of Indenture; Unclaimed Moneys
Section 9.01. Satisfaction and Discharge of Indenture. If at any time (a)
the Issuer shall have paid the principal of and Make-Whole Amount, if any, on
all the Notes Outstanding hereunder and other amounts, if any, due hereunder or
under any of the other Basic Documents as and when the same shall have become
due and payable, by prepayment or otherwise or (b) the Issuer shall have
delivered to the Trustee for cancellation all Notes theretofore authenticated
(other than any Notes which shall have been destroyed, lost or stolen and which
shall have been replaced or paid as provided in Section 2.07), the Trustee, at
the cost and expense of the Issuer, shall execute instruments prepared by the
Issuer acknowledging such satisfaction of and discharging this Indenture and
releasing the assignments made pursuant to this Indenture and the Security
Agreement. The Issuer agrees to reimburse or cause the reimbursement of the
Trustee hereunder for any documented costs or expenses thereafter reasonably and
properly incurred and to compensate the Trustee hereunder for any services
thereafter reasonably and properly rendered by the Trustee in connection with
this Indenture or the Notes.
Section 9.02. Application by Trustee of Funds Deposited for Payment of
Notes. Subject to Section 9.04, all moneys deposited with the Trustee to
accomplish the purposes of Section 9.01 shall be held in trust by the Trustee
and applied by it first to the payment of all sums payable hereunder by the
Issuer (other than the amounts referred to in clause second) and second to the
Holders of the particular Notes for the payment of which such moneys have been
deposited with the Trustee, of all sums due and to become due thereon as
principal or Make-
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Whole Amount, if any, but such money need not be segregated from other funds
except to the extent required by law.
Section 9.03. Repayment of Moneys and Transfer of Eligible Investments
Held by Trustee. Following the satisfaction and discharge of this Indenture,
all moneys and Eligible Investments then held by the Trustee under the
provisions of this Indenture shall, upon written demand of the Issuer, be repaid
or, as the case may be, assigned or transferred to the Issuer and upon receipt
thereof by the Issuer, the Trustee shall be released from all further liability
with respect to such moneys and such Eligible Investments.
Section 9.04. Return of Moneys Held by Trustee. Any moneys deposited with
or paid to the Trustee for the payment of the principal of or Make-Whole Amount,
if any, on any Note and not applied but remaining unclaimed for three years
after the date upon which such principal or Make-Whole Amount, if any, shall
have become due and payable shall be repaid to or for the account of the Issuer
by the Trustee (upon receipt of a written request from the Issuer), the receipt
of such repayment to be confirmed promptly in writing by or on behalf of the
Issuer, and, to the extent permitted by law, the Holder of such Note shall
thereafter look only to the Issuer for any payment which such Holder may be
entitled to collect, and all liability of the Trustee with respect to such
moneys shall upon receipt thereof by the Issuer cease.
ARTICLE 10
Concerning the Trustee
Section 10.01. Duties of the Trustee; Certain Rights of the Trustee. (a)
The Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture. Neither the Trustee, its agents nor
Affiliates shall be liable for any act or omission made in connection with this
Indenture or the other Basic Documents or any Trademark License except in the
case of its gross negligence or willful misconduct. In furtherance, and not in
limitation, of the Trustee's rights, duties and protections hereunder, and
unless otherwise specifically provided in this Indenture, the Trustee shall
(subject to the terms hereof) grant such consents, make such requests and
determinations and take or refrain from taking such actions (including, without
limitation, actions with respect to an Event of Default, of which the Trustee
has notice) as are permitted (but not expressly required) to be granted, made or
taken by the Trustee under this Indenture, as the Majority Holders shall direct
in writing. No provision
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of this Indenture shall be construed to relieve the Trustee from liability for
its own gross negligence or willful misconduct; provided, however, that:
(i) the duties and obligations of the Trustee shall be determined
solely by the express provisions of this Indenture to which the Trustee is
a party and the Trustee shall not be liable except for the performance of
such duties and obligations as are specifically set forth herein, and no
implied covenants or obligations shall be read into this Indenture against
the Trustee;
(ii) in the absence of gross negligence or bad faith on the part of
the Trustee, the Trustee may conclusively rely as to the truth of the
statements and the correctness of the opinions expressed therein, upon any
statements, certificates or opinions furnished to the Trustee pursuant to
this Indenture and conforming to the requirements of this Indenture;
(iii) the Trustee shall not be liable with respect to any action
taken, suffered or omitted to be taken by it in good faith in accordance
with the written direction of the Majority Holders under, or reasonably
believed by it to be authorized or permitted by, this Indenture, and shall
not be liable for accepting, or acting on, any decision made by the Holders
in accordance with the provisions hereof; and
(iv) the Trustee shall be under no duty to verify, recompute or
recalculate information supplied to it by any Person; provided that, in
accordance with Section 10.08, the Trustee shall forward to Noteholders any
calculations received from the Issuer pursuant to the terms of this
Indenture; and provided further that the Trustee shall verify amounts in
the Trust Accounts in accordance with its customary business practice and
as required by the terms hereof.
(b) Certain Rights of Trustee. (i) The Trustee may request and rely upon,
and shall be protected in acting or refraining from acting upon, and shall not
be bound to make any investigation into the facts or matters stated in, any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, note, guaranty or other paper or document believed by
it to be genuine and to have been signed or presented by the proper party or
parties, but the Trustee in its sole discretion may make such further inquiry or
investigation into such facts or matters as it may see fit;
(ii) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request, order
or direction of any of the Holders, including the Majority Holders,
pursuant
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to the provisions of this Indenture or any of the other Basic Documents,
unless such Holders shall have furnished to the Trustee reasonable security
or indemnity (including reasonable advances) against the costs, expenses
and liabilities (including, without limitation, attorneys' fees and
expenses) which might be incurred therein or thereby;
(iii) none of the provisions contained in this Indenture shall
require the Trustee to expend or risk its own funds or otherwise incur
personal financial liability in the performance of any of its duties or in
the exercise of any of its rights or powers;
(iv) as a condition to the taking or omitting of any action by it
hereunder for the benefit of the Holders, the Trustee may consult with
counsel or other professionals and the advice of such counsel or other
professionals or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken or omitted by
it hereunder in good faith and in reliance thereon; and
(v) for all purposes under this Indenture, the Trustee shall not
be deemed to have notice or knowledge of any Default or Event of Default
(other than the Event of Default specified in Section 8.01(a)) unless a
Responsible Officer assigned to and working in the Trust Office has
received written notice of such a Default or Event of Default and such
notice references the Notes generally, the Issuer, the Trust Estate or this
Indenture.
Section 10.02. Trustee Not Liable for Trademark Licenses; Performance of
Trustee's Duties. (a) Neither the Trustee nor its agents shall be liable to any
Person for any delay in or failure of the payment under any Trademark License or
for any nonperformance or default on the part of any party (other than the
Trustee) under the Basic Documents. THE TRUSTEE MAKES NO REPRESENTATION OR
WARRANTY EXPRESS OR IMPLIED AS TO THE EXISTENCE, TITLE, VALUE, CONDITION, OR
COLLECTABILITY OF ANY TRADEMARK LICENSE OR THE VALIDITY, PERFECTION, PRIORITY OR
ENFORCEABILITY OF ANY INTERESTS THEREIN OR IN RESPECT OF ANY OF THE BASIC
DOCUMENTS, WHETHER BY OPERATION OF LAW OR BY REASON OF ANY ACTION OR OMISSION TO
ACT ON ITS PART HEREUNDER OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, WITH RESPECT TO ANY TRADEMARK LICENSE WHATSOEVER.
(b) The Trustee may, in the execution and exercise of all or any of the
trusts, powers, authorities and discretions vested in it by this Indenture, act
by
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Responsible Officers or a Responsible Officer of the Trustee or its Affiliates,
and the Trustee may also whenever it deems it expedient in the interests of the
Noteholders, whether by power of attorney or otherwise, delegate to any Person
or fluctuating body of Persons all or any of the trusts, powers, authorities and
discretions vested in it by the Basic Documents and any such delegation may be
made upon such terms and conditions and subject to such regulations (including
power to subdelegate) as the Trustee may deem fit and it shall not be bound to
supervise the proceedings and shall not in any way or to any extent be
responsible for any loss incurred by any misconduct or default on the part of
such delegate or subdelegate; provided that the Trustee shall have exercised
reasonable care in the selection of such delegate and provided further that the
Trustee shall not delegate its disbursement obligations or its obligations to
hold the Trust Accounts contained in Articles 3 and 4 hereunder. The Trustee
shall give prompt notice to the Issuer of the appointment (and termination
thereof) of any delegate as aforesaid and shall procure that any delegate shall
also give prompt notice to the Issuer of any subdelegate.
(c) Neither the Trustee nor any director or officer of the Trustee shall be
precluded from underwriting, guaranteeing the subscription of or subscribing for
some or all of the Notes with or without a commission or other remuneration or
from purchasing or otherwise acquiring, holding, dealing in or disposing of the
Notes or any of them or any notes, bonds, debentures, debenture stock, shares or
securities whatsoever of, or from acting as banker (including, without
limitation, engaging in normal banking, trust and investment banking business),
paying agent or process agent for or with, the Issuer and any Affiliate thereof
or from otherwise at any time contracting or entering into any financial or
other transactions with the Issuer or any Affiliate thereof.
Section 10.03. Resignation and Removal; Appointment of Successor Trustee.
(a) The Trustee may resign and be discharged of the trusts created by this
Indenture by giving 30 days' written notice to the Issuer and the Holders, and
such resignation shall take effect upon receipt by the Trustee of an instrument
of acceptance of appointment executed by a successor trustee as herein provided
in Sections 10.04 and 10.05.
(b) The Trustee may be removed from its duties under the Indenture upon
written notice by the Majority Holders delivered to the Trustee and to the
Issuer.
(c) If at any time the Trustee shall resign or be removed or otherwise
become incapable of acting, or if at any time a vacancy shall occur in the
office of the Trustee for any other cause, the Issuer shall use its best efforts
to locate and recommend a qualified successor trustee to act under this
Indenture and a
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<PAGE>
successor trustee may be appointed by the Majority Holders to act under this
Indenture (whether or not such successor shall have been located or recommended
by the Issuer) upon written notice to the Issuer and the Trustee. If the
successor trustee is to be appointed by the Majority Holders as provided in the
preceding sentence, such appointment shall be subject to the receipt of the
consent of the Issuer, such consent not to be unreasonably withheld. In the
event that no such successor trustee is appointed by the Majority Holders to act
under this Indenture, the Trustee may request a court to make such appointment.
Any successor trustee appointed pursuant to this Section 10.03 shall be a
licensed bank or trust company organized under the law of the United States or
any State thereof having a corporate trust department and a total shareholder
equity aggregating at least $500,000,000 if there be such an institution willing
and able to accept the trust upon reasonable or customary terms.
Section 10.04. Acceptance of Appointment by Successor Trustee. Any
successor trustee appointed as provided in Section 10.03 shall execute,
acknowledge and deliver to the Issuer and to its predecessor trustee an
instrument accepting such appointment hereunder, and, subject to the provisions
of Section 10.03, thereupon the resignation or removal of the predecessor
Trustee shall become effective and such successor trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, duties
and obligations of its predecessor hereunder, with like effect as if originally
named as Trustee herein; but, nevertheless, at the written direction of the
Majority Holders or written request of the successor trustee, the Trustee
ceasing to act shall execute and deliver an instrument transferring to such
successor Trustee all the rights and powers of the Trustee so ceasing to act.
Upon written request of any such successor Trustee, the Holders shall execute
any and all instruments in writing for more fully and certainly vesting in and
confirming to such successor Trustee all such rights and powers. Any
predecessor Trustee shall nevertheless retain a Lien upon all property or funds
held or collected by such Trustee to secure any amounts then due it pursuant to
the provisions of the Indenture and shall remain liable for any willful
misconduct or gross negligence on its part while acting as Trustee.
Section 10.05. Merger or Consolidation of Trustee. Any corporation into
which the Trustee may be merged or converted or with which it may be
consolidated or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party shall be the successor of
the Trustee hereunder, provided that such corporation shall be qualified under
the provisions of Section 10.03(c), without the execution or filing of any paper
or any further act on the part of any of the parties hereto or the Holders,
notwithstanding anything contained herein to the contrary.
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Section 10.06. Certain Procedural Matters. The Trustee, in its own name
and as trustee of an express trust, at the written direction of the Majority
Holders, shall be entitled and empowered to institute any action or proceeding
at law or in equity for the collection of any amounts due and unpaid or the
enforcement of any other rights of the Holders, prosecute any such action or
proceeding to judgment or final decree, and shall at the written direction of
the Majority Holders enforce any such judgment or final decree and collect in
the manner provided by law the moneys adjudged or decreed to be payable.
Section 10.07. Trustee Fees and Indemnification. (a) The Issuer covenants
and agrees to pay to the Trustee from time to time, and the Trustee shall be
entitled to, compensation as agreed between the Issuer and the Trustee in
writing (which shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust). Such compensation and the
reasonable fees and expenses of Richards Layton & Finger, P.A., counsel to the
Trustee, shall be payable for the first time upon the Closing Date.
(b) The Issuer covenants and agrees to pay or reimburse the Trustee, and
each successor Trustee, upon its request for all documented expenses,
disbursements and advances reasonably incurred or made by or on behalf of it in
accordance with any of the provisions of this Indenture or the other Basic
Documents (including, without limitation, the compensation, documented expenses
and disbursements reasonably incurred of its counsel and of all agents except
any such expense, disbursement or advance as may arise from its gross negligence
or willful misconduct).
(c) The Issuer covenants and agrees to indemnify, or cause to be
indemnified, the Trustee and each of its officers, directors, agents and
employees for, and to hold it, and its officers, directors, agents and employees
harmless against, any loss, liability or reasonable expense incurred without
gross negligence, wilful misconduct or bad faith, on its part, arising out of or
in connection with the execution, delivery, performance or enforcement of this
Indenture. The Trustee shall notify the Issuer promptly of any claim for which
it may seek indemnity. The Issuer shall defend the claim and the Trustee shall
cooperate in the defense. The Trustee may have separate counsel and the Issuer
will pay the reasonable fees and expenses of such counsel. The Issuer need not
pay for any settlement made without its consent. This indemnity shall survive
the resignation or removal of the Trustee and termination of this Indenture.
Section 10.08. Information. The Trustee will promptly forward to the
Noteholders any Issuer notices, financial statements, Officers' Certificates or
other forms of written communication that it receives pursuant to the terms of
this Indenture.
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ARTICLE 11
Supplemental Indenture
Section 11.01. Supplemental Indenture Without Consent of Noteholders. The
Issuer and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto for one or more of the following
purposes:
(a) to convey, transfer, assign, mortgage or pledge to the Trustee as
security for the Notes any property or assets; and
(b) to cure any ambiguity or to correct or supplement any provision
contained herein, in the Notes, in any Trademark License or other Basic Document
or in any supplemental indenture which may be defective or inconsistent with any
other provision contained herein or in the Notes or in any supplemental
indenture; or to make such other provisions in regard to matters or questions
arising under this Indenture, the Notes or under any supplemental indenture as
the Issuer and the Trustee may deem necessary or desirable and which shall not
adversely affect the interests of the Noteholders; provided, however, that an
opinion of Independent Counsel shall be addressed and delivered to the Trustee
and the Noteholders opining that such supplemental indenture does not adversely
affect the rights of the Noteholders under this Indenture.
The Trustee is hereby authorized to join in the execution of any such
supplemental indenture, to make any further appropriate agreements and
stipulations which may be therein contained and to accept the conveyance,
transfer, assignment, mortgage or pledge of any property thereunder, but the
Trustee shall not be obligated to enter into any such supplemental indenture
which affects the Trustee's own rights, duties or immunities under this
Indenture or under the other Basic Documents or otherwise.
Any supplemental indenture authorized by the provisions of this Section may
be executed without the consent of the Holders of any of the Notes at the time
Outstanding, notwithstanding any of the provisions of Section 11.02.
Section 11.02. Supplemental Indenture with Consent of Noteholders. With
the consent (evidenced as provided in Article 12) of the Majority Holders, the
Issuer and the Trustee may, from time to time and at any time, enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture, the Notes or of any supplemental indenture or of modifying in
any manner the rights of the Noteholders, provided, that no such supplemental
44
<PAGE>
indenture shall (a) change the final maturity of any Note or the time of payment
of any principal thereof, or reduce the principal amount thereof, or any Make-
Whole Amount thereon or reduce any amount payable on redemption thereof or
reduce the amount of principal or Make-Whole Amount that would be due and
payable upon the occurrence of an Event of Default, or impair or affect the
rights of any Noteholder to institute suit for the payment thereof without the
consent of each Noteholder so affected, (b) reduce any amount required to be
collected or retained in any Trust Account, (c) except as provided in Articles 3
and 4, release any part of the Trust Estate or (d) reduce the aforesaid
percentage of Notes the consent of the Holders of which is required for any
supplemental indenture, acceleration or rescission without the consent of the
Holders of each Note so affected.
Upon the request of the Issuer, accompanied by a copy of the supplemental
indenture and upon the filing with the Trustee of evidence of the consent of the
Majority Holders or any greater percentage of Holders as required by this
Section 11.02 and other documents, if any, required by Section 12.02, the
Trustee shall join with the Issuer in the execution of such supplemental
indenture unless such supplemental indenture affects the Trustee's own rights,
duties or immunities under the Indenture or otherwise, in which case the Trustee
may in its discretion, but shall not be obligated to, enter into such
supplemental indenture.
Section 11.03. Effect of Supplemental Indenture. Upon the execution of
any supplemental indenture pursuant to the provisions hereof, this Indenture and
the Notes shall be and be deemed to be modified and amended in accordance
therewith and the respective rights, limitations of rights, obligations, duties
and immunities under this Indenture of the Trustee, the Issuer and the
Noteholders shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments, and all the terms
and conditions of any such supplemental indenture shall be and be deemed to be
part of the terms and conditions of this Indenture for any and all purposes.
Section 11.04. Documents to Be Given to Trustee. The Trustee, subject to
the provisions of Sections 11.01 and 11.02, shall be entitled to receive one or
more certificate or certificates of an Authorized Officer and Opinion or
Opinions of Counsel as evidence that any such supplemental indenture complies
with the applicable provisions of this Indenture.
Section 11.05. Notation on Notes in Respect of Supplemental Indenture.
Notes authenticated and delivered after the execution of any supplemental
indenture pursuant to the provisions of this Article may bear a notation in form
and manner approved by the Trustee as to any matter provided for by such
supplemental indenture. If the Issuer or the Trustee shall so determine, new
Notes so modified as to conform to any modification of this Indenture contained
in any
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<PAGE>
such supplemental indenture may be prepared by the Issuer at its expense,
authenticated by the Trustee and delivered in exchange for the Notes then
Outstanding.
ARTICLE 12
Concerning the Holders
Section 12.01. Control by Majority Holders. Except as provided below, the
Majority Holders, by a written direction to the Trustee, shall have the right to
direct the time, method, and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee; provided, however, that the Trustee shall have the right to decline to
follow any such direction (i) if the Trustee shall be advised by counsel that
the action so directed may not lawfully be taken or (ii) if the Trustee shall be
advised by counsel that the action so directed may involve it in personal
liability unless it shall have been furnished a reasonably satisfactory
indemnity or security therefor.
Section 12.02. Evidence of Action Taken by Holders. Whenever in this
Indenture or in any other Basic Document it is provided that the Majority
Holders may take any action (including the making of any demand or request, the
giving of any notice, direction, instruction, consent or waiver or the taking of
any other action), the fact that at the time of taking any such action the
Majority Holders have joined therein shall be evidenced in writing by one or
more instruments of similar tenor executed by such Holders in person or by agent
or proxy appointed in writing. Such action by the Majority Holders shall become
effective when such instrument or instruments are delivered to and received by
the Trustee. The Trustee shall thereafter notify the Issuer of the
effectiveness of such action.
Section 12.03. Proof of Execution of Instruments. The fact and date of
the execution of any instrument by a Holder or his agent or proxy may be proved
by the certificate of any notary public or other officer of any jurisdiction
within or without the United States authorized to take acknowledgments of deeds
to be recorded in such jurisdiction that the person executing such instrument
acknowledged to him the execution thereof, or by an affidavit of a witness to
such execution sworn to before any such notary or other such officer. Where such
execution is by or on behalf of any legal entity other than an individual, such
certificate or affidavit shall also constitute proof of the authority of the
individual executing the same.
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<PAGE>
Section 12.04. Notes Owned by the Issuer. In determining whether the
Holders have concurred in any direction, request, consent or waiver under the
Indenture, Notes which are owned by the Issuer or any of its Affiliates shall be
disregarded in both the numerator and denominator of the fraction used to
determine the requisite percentage.
Section 12.05. Right of Revocation of Action Taken. At any time prior to
(but not later than) the evidencing to the Trustee, as provided in Section
12.02, of the taking of any action by the Holders, any Holder of a Note the
serial number of which is shown by the evidence to be included in those Notes
the Holders of which have consented to such action may, by filing written notice
with the Trustee at the Trust Office and upon proof of holding as provided in
Section 2.06, revoke such action insofar as it concerns such Note. Unless
revoked pursuant to the foregoing provisions, any such action taken by a Holder
shall be conclusive and binding upon such Holder and upon all future Holders and
owners of such Note and of any Note issued in exchange or substitution therefor,
irrespective of whether or not any notation in regard thereto is made upon such
Note. Except as otherwise provided herein, any action taken by the Majority
Holders shall be conclusive and binding upon the Issuer, the Trustee and the
Holders of all Notes.
Section 12.06. Right to Vote Notes in Part. Notwithstanding anything in
this Indenture to the contrary, each Holder may deliver directions to the
Trustee with respect to a portion of the principal amount of the Note or Notes
held by such Holder.
ARTICLE 13
Redemption of Notes
Section 13.01. Optional Redemptions. Upon notice given as provided in
Section 13.02 of this Indenture, the Issuer, at its option, may redeem the Notes
at any time as a whole (but not in part) at an optional redemption price equal
to the aggregate Current Values of the Notes at the date of redemption, together
with a premium equal to the Make-Whole Amount.
Section 13.02. Notice of Redemption; Make-Whole Computations. The Issuer
shall call Notes for redemption under Section 13.01 by giving written notice
thereof to each Holder (with a copy of such notice to the Trustee), which notice
shall be given not less than 30 nor more than 60 days prior to the date fixed
for such redemption and shall specify the date fixed for such redemption. Upon
the giving of such notice of redemption, the aggregate Current Values of the
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<PAGE>
Notes plus the Make-Whole Amount shall become due and payable on the specified
redemption date.
Any notice of redemption pursuant to this Section 13.02 shall include
computations in reasonable detail showing the manner of calculation of what the
applicable Make-Whole Amount would have been if the Notes had been redeemed on
the date of such notice. The Issuer shall determine the Make-Whole Amount on
the third Business Day prior to the date fixed for any redemption under Section
13.02. Two Business Days prior to such redemption date, the Issuer will furnish
to the Holders and the Trustee a certificate signed by an Authorized Officer of
the Issuer setting forth computations in reasonable detail showing the manner of
calculation of such Make-Whole Amount and attaching a copy of the source of the
market data by reference to which the Treasury Yield was determined in
connection with such computations. In the event of any disagreement between the
Holders and the Issuer as to the calculation of any Make-Whole Amount, the
calculation thereof by the Required Holders shall, absent manifest error, be
conclusive.
Section 13.03. Surrender of Notes; Notation Thereon. Subject to the
provisions of Section 2.05(b), the Issuer may, as a condition of payment on
account of any Note, require the Holder to present the Note for notation of such
payment and, if such Note be paid in full, require the surrender thereof.
Section 13.04. Purchase of Notes. The Issuer will not acquire directly or
indirectly by purchase or redemption or otherwise any of the Outstanding Notes
except by way of payment or redemption in accordance with the provisions of the
Notes and of the Indenture.
ARTICLE 14
Miscellaneous
Section 14.01. Binding Upon Assigns. Except as otherwise provided herein,
the provisions of this Indenture (including any amendments, modifications and
waivers hereof properly adopted) shall be binding upon and shall inure to the
benefit of the parties hereto, the holders and their respective successors and
assigns.
Section 14.02. Notices. (a) Except as otherwise expressly provided
herein, all notices, request, demands, directions or other communications to or
upon the respective parties hereto, and the Holders shall be in writing, with a
copy
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sent by facsimile on the date the notice is sent in each case, and shall become
effective when received. Any written notice shall either be (i) mailed (by
certified or registered mail, return receipt requested with proper postage for
airmail prepaid), (ii sent in the form of a telex (with answerback received) or
facsimile (with confirmation that the appropriate number of pages has been
received by the addressee, and promptly followed by hard copy mailed as provided
in clause (iii)), (iii) delivered by overnight delivery service (providing for
delivery receipts) or (iv) delivered by hand.
(b) All notices, requests, demands, directions or other communications
under this Indenture shall be addressed as follows (or to such other address as
a party hereto may hereafter specify for such purpose by notice to the other
parties hereto):
To the Trustee:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Attention: Corporate Trust Administration
Telephone: 302-651-1000
Facsimile: 302-429-4749
If to the Issuer:
SPELL C. LLC
625 Landor Lane
Pasadena, CA 91106
Attention: Carol Gratzke
With a copy to:
Cherokee, Inc.,
Administrator
6835 Valjean Avenue
Van Nuys, CA 91406
Telephone: 818-908-9868
Facsimile: 818-908-9191
(c) The Trustee shall not be liable for any error or failure in the
sending, dispatching or transmission of any notice, request, demand, direction
or other communication under this Indenture.
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Section 14.03. Effect of Headings. The Table of Contents hereto and the
Article and Section headings herein are for convenience only and shall not
affect the construction hereof.
Section 14.04. Severability. Any provision of this Indenture which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 14.05. Counterparts. This Indenture may be executed in any number
of counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
Section 14.06. Further Assurance. The Issuer shall, from time to time on
being required to do so by the Trustee, now or at any time in the future, do or
procure the doing of all such acts and/or execute all such documents in a form
reasonably satisfactory to the Trustee as the Trustee may reasonably consider
necessary for giving full effect to this Indenture and securing to the Trustee
the full benefit of the rights, powers and remedies conferred upon the Trustee
in this Indenture.
Section 14.07. Governing Law. THIS INDENTURE AND THE NOTES SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH LAW OF THE STATE OF NEW YORK.
Section 14.08. Limitation on Recourse. No recourse under or upon any
obligation, covenant or agreement contained in this Indenture, or in any Note,
or because of any indebtedness evidenced thereby shall be had against any
incorporator or any past or present or future stockholder, officer or director,
as such, of the Issuer or of any successor entity, either directly or through
the Issuer or any successor entity, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any legal
or equitable proceeding or otherwise, all such liability being expressly waived
and released by the acceptance of the Notes by the Holders and as part of the
consideration for the issue of the Notes.
Section 14.09. Jurisdiction and Process. THE ISSUER AGREES THAT ANY LEGAL
ACTION OR PROCEEDING ARISING OUT OF THIS INDENTURE OR ANY DOCUMENT EXECUTED IN
CONNECTION HEREWITH, OR ANY LEGAL ACTION OR PROCEEDING TO EXECUTE
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<PAGE>
OR OTHERWISE ENFORCE ANY JUDGMENT OBTAINED AGAINST THE ISSUER, FOR BREACH HEREOF
OR THEREOF, OR AGAINST ANY OF ITS PROPERTIES, MAY BE BROUGHT IN THE COURTS OF
THE STATE OF NEW YORK OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK BY OR ON BEHALF OF THE TRUSTEE OR BY OR ON BEHALF OF ANY
HOLDER OF A NOTE, AS SUCH HOLDER MAY ELECT, AND THE ISSUER HEREBY IRREVOCABLY
AND UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS
(WITHOUT LIMITING THE JURISDICTION OF OTHER COURTS) FOR PURPOSES OF ANY SUCH
LEGAL ACTION OR PROCEEDING. THE ISSUER HEREBY IRREVOCABLY AND UNCONDITIONALLY
AGREES THAT SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THE
BASIC DOCUMENTS MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO
THE ISSUER AT ITS ADDRESS SET FORTH IN SECTION 14.02 OR AT SUCH OTHER ADDRESS OF
WHICH THE TRUSTEE SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. IN ADDITION, THE
ISSUER (A) HEREBY IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT,
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE OR ANY OTHER
DOCUMENT EXECUTED IN CONNECTION HEREWITH OR THEREWITH BROUGHT IN THE COURTS OF
THE STATE OF NEW YORK OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM; AND (B)
HEREBY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING
OUT OF OR RELATING TO THIS INDENTURE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Indenture to be duly
executed as a deed as of the date hereof by their respective officers hereunto
duly authorized.
SPELL C. LLC
as Issuer
By: /s/ Carol Gratzke
--------------------------------
Name: Carol Gratzke
Title: Secretary and Treasurer
WILMINGTON TRUST COMPANY
as Trustee
By: /s/ Donald G. MacKelcan
--------------------------
Name: Donald G. MacKelcan
Title: Assistant Vice President
52
<PAGE>
Schedule I
----------
Note Payment Dates
<TABLE>
<CAPTION>
Date Principal Amount Due Original Value
- ---- -------------------- --------------
<S> <C> <C>
May 20, 1998 $ 2,250,000 $ 2,187,667.08
August 20, 1998 $ 2,250,000 $ 2,150,359.43
November 20, 1998 $ 2,250,000 $ 2,113,688.00
February 20, 1999 $ 2,250,000 $ 2,077,641.96
May 20, 1999 $ 2,250,000 $ 2,042,210.63
August 20, 1999 $ 2,250,000 $ 2,007,383.54
November 20, 1999 $ 2,250,000 $ 1,973,150.37
February 20, 2000 $ 2,250,000 $ 1,939,501.00
May 20, 2000 $ 2,625,000 $ 2,224,163.06
August 20, 2000 $ 2,625,000 $ 2,186,233.01
November 20, 2000 $ 2,625,000 $ 2,148,949.81
February 20, 2001 $ 2,625,000 $ 2,112,302.43
May 20, 2001 $ 2,625,000 $ 2,076,280.01
August 20, 2001 $ 2,625,000 $ 2,040,871.91
November 20, 2001 $ 2,625,000 $ 2,006,067.65
February 20, 2002 $ 2,625,000 $ 1,971,856.92
May 20, 2002 $ 2,625,000 $ 1,938,229.61
August 20, 2002 $ 2,625,000 $ 1,905,175.77
November 20, 2002 $ 2,625,000 $ 1,872,685.61
February 20, 2003 $ 2,625,000 $ 1,840,749.53
May 20, 2003 $ 2,625,000 $ 1,809,358.08
August 20, 2003 $ 2,625,000 $ 1,778,501.96
November 20, 2003 $ 2,625,000 $ 1,748,172.06
February 20, 2004 $ 2,625,000 $ 1,718,359.39
--------------
$60,000,000 $47,869,558.83
</TABLE>
53
<PAGE>
CUSIP No. 84780P AA 2 EXHIBIT A
THE ISSUER OF THE SECURITIES EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT COMPANY
ACT"), AND SUCH SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT BY THE HOLDER HEREOF IN
ACCORDANCE WITH THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAW OF ANY
STATE OF THE UNITED STATES, AND PRIOR TO THE EXPIRATION OF THE HOLDING
PERIOD APPLICABLE TO SALES OF SUCH SECURITIES UNDER RULE 144(k) UNDER THE
SECURITIES ACT (OR ANY SUCCESSOR PROVISION), ONLY TO A PERSON (i)(A) WHOM
SUCH HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A UNDER THE SECURITIES ACT OR (B) WHO IS AN
INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT AND (ii) WHO IS PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A PERSON THAT IS EITHER (A) A QUALIFIED
INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A
OR (B) AN INSTITUTIONAL ACCREDITED INVESTOR. IN ADDITION, SUCH SECURITIES
MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED TO A PERSON WHO (i) IS A
QUALIFIED PURCHASER AS SUCH TERM IS DEFINED IN THE INVESTMENT COMPANY ACT
AND (ii) IS PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A PERSON
THAT IS A QUALIFIED PURCHASER, AND WHO DELIVERS A DULY EXECUTED TRANSFEREE
CERTIFICATE AND SUCH INFORMATION AS SET FORTH THEREIN TO THE TRUSTEE AND
THE ISSUER, IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES
OF THE UNITED STATES AND OTHER JURISDICTIONS. IN CONNECTION WITH ANY
TRANSFER OF THIS NOTE, THE HOLDER HEREOF AGREES TO DELIVER A DULY EXECUTED
TRANSFEROR CERTIFICATE AND SUCH INFORMATION SET FORTH THEREIN TO THE
TRUSTEE AND THE ISSUER.
A-1
<PAGE>
THE FOLLOWING INFORMATION IS PROVIDED PURSUANT TO UNITED STATES TREASURY
REGULATION SECTION 1.1275-3(b): THIS NOTE HAS BEEN ISSUED WITH ORIGINAL
ISSUE DISCOUNT FOR UNITED STATES FEDERAL INCOME TAX PURPOSES. THE HOLDER
OF THIS NOTE MAY OBTAIN THE INFORMATION DESCRIBED IN UNITED STATES TREASURY
REGULATION SECTION 1.1275-3(b)(1)(i) FROM THE TREASURER OF THE ISSUER, AT
THE FOLLOWING ADDRESS: 625 LANDOR LANE, PASADENA, CALIFORNIA 91106.
No. ____________________ U.S. $________________
SPELL C. LLC
------------
Zero Coupon Secured Note
SPELL C. LLC, a Delaware limited liability company (the "Issuer"), for
value received, hereby promises to pay to [_______________] or registered
assigns, at the Trust Office of the Trustee, _________% of each of the
respective principal amounts indicated on Schedule I hereto at the applicable
times indicated on Schedule I hereto and to pay on demand interest at a rate per
annum equal to the Default Rate on any overdue principal and Make-Whole Amount,
if any, all in the manner provided in and subject to the terms of the Indenture
(the "Indenture") dated as of December 23, 1997 among the Issuer and Wilmington
Trust Company, as Trustee (the "Trustee"), in such coin or currency of the
United States of America as at the time of payment shall be legal tender for the
payment of public and private debts. This Note is one of the Notes referred to
in the Indenture.
Reference is made to the further provisions of this Note set forth on the
following pages. Such further provisions shall for all purposes have the same
effect as though fully set forth at this place.
This Note shall not be valid or become obligatory for any purpose until the
certificate of authentication hereon shall have been signed by the Trustee.
A-2
<PAGE>
IN WITNESS WHEREOF, SPELL C. LLC has caused this instrument to be duly
executed.
Dated: SPELL C. LLC
By: _____________________________________
Name: ____________________________________
Title:____________________________________
A-3
<PAGE>
THIS is one of the Notes referred to in the within-mentioned Indenture.
Authenticated without recourse,
warranty or liability
WILMINGTON TRUST COMPANY
as Trustee
By __________________________________________________
Name: ____________________________________________
Title: ___________________________________________
Date of Authentication:
_______________________
A-4
<PAGE>
SPELL C. LLC
Zero Coupon Secured Note
This Note is one of a duly authorized issue of secured notes (herein called
the "Notes") issued in one series by SPELL C. LLC (herein called the "Issuer"),
with such series being issued under and pursuant to the Indenture dated as of
December 23, 1997 (herein called the "Indenture"; terms defined in the Indenture
being used herein as therein defined), duly executed and delivered by the Issuer
and Wilmington Trust Company, as Trustee.
Reference is hereby made to the Indenture and all indentures supplemental
thereto for a description of the rights, limitations of rights, obligations,
recourse, duties and immunities thereunder of the Trustee thereunder, the Issuer
and the Noteholders.
In case an Event of Default shall have occurred and be continuing, the
Current Value hereof may be declared, or otherwise become, due and payable, in
the manner, with the effect and subject to the conditions provided in the
Indenture.
The Notes shall bear interest, to the extent enforceable under applicable
law, on any overdue principal and Make-Whole Amount, if any, at the Default
Rate.
The amount payable by the Issuer in respect of principal of this Note
(exclusive of any Make-Whole Amount) at any date shall not exceed the Current
Value of this Note at such date.
The Indenture contains provisions permitting the Issuer and the Trustee to
enter into supplemental indentures for one or more of the following purposes:
(a) to convey, transfer, assign, mortgage or pledge to the Trustee as security
for the Notes any property or assets; and (b) to cure any ambiguity or to
correct or supplement any provision contained in the Indenture, in the Notes or
in any Trademark License or other Basic Document or in any supplemental
indenture which may be defective or inconsistent with any other provision
contained in the Indenture or in the Notes or in any supplemental indenture; or
to make such other provisions in regard to matters or questions arising under
the Indenture, the Notes or under any supplemental indenture as the Issuer and
the Trustee may deem necessary or desirable and which shall not adversely affect
the interests of the Noteholders.
A-5
<PAGE>
The Indenture contains provisions permitting the Issuer and the Trustee,
with the consent of the Majority Holders evidenced as in the Indenture provided,
to execute supplemental indentures adding any provisions to or changing in any
manner or eliminating any of the provisions of the Indenture, the Notes or of
any supplemental indenture or modifying in any manner the rights of the
Noteholders; provided, however, that no such supplemental indenture shall (i)
change the final maturity of any Note or the time of payment of any principal
thereof, or reduce the principal amount thereof, or any Make-Whole Amount
thereon or reduce any amount payable on redemption thereof or reduce the amount
of principal that would be due and payable upon the occurrence of an Event of
Default, or impair or affect the rights of any Noteholder to institute suit for
the payment thereof without the consent of each Noteholder so affected, (ii)
reduce any amount required to be collected or retained in any Trust Account,
(iii) release any part of the Trust Estate or (iv) reduce the aforesaid
percentage of Notes the consent of the Holders of which is required for any
supplemental indenture, acceleration or rescission without the consent of the
Holders of each Note so affected. It is also provided in the Indenture that,
prior to the declaration of the acceleration of the Notes as provided in Section
8.01 of the Indenture, the Majority Holders may on behalf of the Holders of all
the Notes waive any past Event of Default under the Indenture and its
consequences, except a default (i) in the payment of principal of or Make-Whole
Amount, if any, on any of the Notes or (ii) in respect of a covenant or
provision of the Indenture which cannot be modified or amended without the
consent of the Holder of each Note affected. In the case of any such waiver,
the Issuer, the Trustee and the Noteholders shall be restored to their former
positions and rights under the Indenture, respectively, and the relevant Event
of Default shall cease to exist and be deemed to have been cured and not to have
occurred for every purpose under the Indenture; but no such waiver shall extend
to any subsequent or other Event of Default or impair any right consequent
thereon.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional, to pay the principal of this Note in the manner, at
the respective times and in the coin or currency herein prescribed.
The Notes are issuable in registered form without coupons in minimum
denominations of $500,000 and in the manner and subject to the limitations
provided in the Indenture.
The Notes may be redeemed at the option of the Issuer at any time as a
whole (but not in part) at a redemption price equal to the Current Value thereof
plus the Make-Whole Amount. The Trustee may rely upon the Note Register as
conclusive evidence of the aggregate Outstanding principal amount of the Notes.
A-6
<PAGE>
Upon due presentment for registration of transfer of this Note at the Trust
Office a new Note or Notes of authorized denominations for an equal unpaid
principal amount will be issued to the transferee in exchange therefor, subject
to the limitations provided in the Indenture, without charge except for any tax
or other governmental charge imposed in connection therewith; provided, that
such transferor shall deliver a Transferor Certificate and transferee shall
deliver a Transferee Certificate.
The Issuer, the Trustee and any authorized agent of the Issuer or the
Trustee may deem and treat the registered Holder hereof as the absolute owner of
this Note for all purposes and, prior to due presentment for registration of
transfer, shall not be affected by any notice to the contrary.
This Note shall not be entitled to any benefit under the Indenture or be
valid or become obligatory for any purpose until this Note shall be
authenticated by the execution by the manual signature of a duly Authorized
Officer of the Trustee of the Trustee's certificate of authentication hereon.
It is hereby certified and recited that all conditions, acts and things
required by law and the Indenture to exist, to have happened and to have been
performed precedent to and in the issuance of this Note exist, have happened and
have been performed in due time, form and manner as required by law and the
Indenture, and that the issuance of this Note and the issue of which it forms a
part are within every debt and other limit prescribed by the laws of the State
of New York.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH NEW YORK
LAW.
A-7
<PAGE>
EXHIBIT B
FORM OF TRANSFEREE CERTIFICATE
[Trustee's Address]
[Issuer's Address]
Attention: ____________
Re: Zero Coupon Secured Notes
of SPELL C. LLC
-------------------------
Ladies and Gentlemen:
Reference is hereby made to Section 2.06(f) of the Indenture, dated as of
December 23, 1997 (the "Indenture"), between SPELL C. LLC (the "Issuer") and
Wilmington Trust Company, as trustee (the "Trustee"). Capitalized terms used
but not defined herein shall have the meanings assigned to them in the
Indenture.
In connection with our proposed purchase of U.S. $_____________ aggregate
principal amount of Zero Coupon Secured Notes of the Issuer, pursuant to Section
2.06(f) of the Indenture, we (the "Transferee") acknowledge, represent, agree
and confirm, as of the date hereof, for your benefit and the benefit of the
Issuer and the Transferee's transferor, that:
(a) The Transferee is a "qualified purchaser" (as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act") and related rules
and is aware that the Issuer will not be registered as an investment company
under the Investment Company Act and is acquiring the Notes for its own or one
or more accounts, each of which is a qualified purchaser, and as to each of
which the Transferee exercises sole investment discretion, and in a principal
amount of not less than U.S. $500,000 for the Transferee and for each such
account, in each case solely for investment and not with a view to resale or
distribution thereof in violation of the Securities Act.
(b) The Transferee is either (check one or more items in (i), (ii) or (iii)
below as appropriate):
(i) ___ acquiring the Notes from a transferor that qualifies under
paragraph (a) of the Transferor Letter
B-1
<PAGE>
(ii) ___ a "qualified institutional buyer" (as defined in Rule 144A under
the Securities Act) and is aware that the sale of the Notes to
it is being made in reliance on the exemption from registration
provided by Rule 144A under the Securities Act and is acquiring
the Notes for its own account or for one or more accounts, each
of which is a qualified institutional buyer that is aware that
the sale of the Notes to it is being made in reliance on the
exemption from registration provided by Rule 144A under the
Securities Act.
(iii) ___ a sophisticated investor who is an institutional "accredited
investor," as defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act, that is acquiring the Notes for its own
account (or for the account of another as specified in writing
to the Trustee and the Issuer). If such Transferee is acquiring
the Notes for the account of another, it confirms that such
other investor is (x) a sophisticated institutional "accredited
investor," as so defined, or (y) a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act), and
is aware of the restrictions on transfer of the Notes, and as to
each such account the Transferee exercises sole investment
discretion, and is acquiring Notes in a principal amount of not
less than U.S. $500,000 for the Transferee and for each such
account, in each case solely for investment and not with a view
to resale or distribution thereof in violation of the Securities
Act.
(c) The Transferee has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of its
investment in the Notes, and the Transferee and any accounts for which it is
acting are each able to bear the economic risk of investing in the Notes.
(d) The Transferee is not a defined contribution plan (such as a 401(k)
plan), or a partnership or other investment vehicle (i) in which its partners or
participants have or will have any discretion to determine whether or how much
of the Transferee's assets are invested in any investment made or to be made by
the Transferee (including the Transferee's investment in the Notes) or (ii) that
is otherwise an entity managed to facilitate the individual decisions of its
beneficial owners to invest in the Notes.
(e) The Transferee hereby represents that at least one of the following
statements is an accurate representation as to each source of funds (a "Source")
to
B-2
<PAGE>
be used by the Transferee to pay the purchase price of the Notes to be purchased
by the Transferee hereunder:
(i) if the Transferee is an "insurance company" as defined in Section V(d)
of Prohibited Transaction Exemption ("PTE") 95-60 (as issued by the
United States Department of Labor) and the Source is an "insurance
company general account" as defined in Section V(e) of PTE 95-60 then,
in accordance with Section I(a) of PTE 95-60, there is no Employee
Benefit Plan, treating as a single Employee Benefit Plan all plans
maintained by the same employer or employee organization, with respect
to which the amount of the reserves and liabilities for all general
account contracts held by or on behalf of such Plan exceed ten percent
(10%) of the total reserves and liabilities of such general account
(exclusive of separate account liabilities) plus surplus;
(ii) the Source is either an insurance company pooled separate account,
within the meaning of PTE 90-1 (issued January 29, 1990) or a bank
collective investment fund, within the meaning of the PTE 91-38
(issued July 12, 1991) and, except as the Transferee has disclosed to
the Issuer in writing pursuant to this paragraph (ii), no Employee
Benefit Plan or group of Employee Benefit Plans maintained by the same
employer or employee organization beneficially owns more than 10% of
all assets allocated to such pooled separate account or collective
investment fund; or
(iii) the Source constitutes assets of an "investment fund" (within the
meaning of Part V of the QPAM Exemption) managed by a "qualified
professional asset manager" or "QPAM" (within the meaning of Part V of
the QPAM Exemption), no Employee Benefit Plan's assets that are
included in such investment fund, when combined with the assets of all
other employee benefit plans established or maintained by the same
employer or by an affiliate (within the meaning of Section V(c)(1) of
the QPAM Exemption) of such employer or by the same employee
organization and managed by such QPAM, exceed 20% of the total client
assets managed by such QPAM, the conditions of Part I(c) and (g) of
the QPAM Exemption are satisfied, neither the QPAM nor a person
controlling or controlled by the QPAM (applying the definition of
"control" in Section V(e) of the QPAM Exemption) owns a 5% or more
interest in the Issuer and the identity of such QPAM and the names of
all Employee Benefit Plans whose assets are included in
B-3
<PAGE>
such investment fund have been disclosed to the Issuer in writing
pursuant to this paragraph (iii);
(iv) the Source is one or more Employee Benefit Plans, or a separate
account or trust fund comprised of one or more Employee Benefit Plans,
each of which has been identified expressly as such to the Issuer in
writing pursuant to this paragraph (iv);
(v) the Source constitutes assets of a Employee Benefit Plan managed by an
"in-house asset manager" (within the meaning of Part IV(a) of PTE 96-
23) which has made or properly authorized the decision for such Plan
to purchase the Notes under the circumstances described in PTE 96-23;
or
(vi) the Source does not include assets of any Employee Benefit Plan.
As used in this Section (e), the term "separate account" shall have
the meaning assigned to such term in Section 3 of ERISA.
(f) The Transferee understands that the Notes were originally issued in a
transaction not involving any public offering in the United States within the
meaning of the Securities Act, the Notes have not been and will not be
registered under the Securities Act and if in the future the Transferee decides
to offer, resell, pledge or otherwise transfer the Notes, such Notes may be
offered, resold, pledged or otherwise transferred only in accordance with the
terms of the Indenture, the Note Purchase Agreement and the legend on such
Notes. The Transferee acknowledges that no representation is made by the Issuer
or its transferor as to the availability of any exemption under the Securities
Act or any State securities laws for resale of the Notes.
(g) In connection with the purchase of Notes by the Transferee and this
Transferee Certificate and any other documentation relating to this Transferee
Certificate to which the Transferee is a party or that the Transferee is
required by this Transferee Certificate to deliver: (i) neither the Issuer nor
its transferor is acting as a fiduciary or financial or investment adviser for
the Transferee; (ii) the Transferee is not relying (for purposes of making any
investment decision or otherwise) upon any advice, counsel or representations
(whether written or oral) of the Issuer or its transferor (except as may be set
forth in any agreement between the Transferee and its transferor); (iii) neither
the Issuer nor its transferor has given to the Transferee (directly or
indirectly through any other person) any assurance, guarantee, or representation
whatsoever as to the expected or projected success, profitability, return,
performance, result, effect, consequence, or benefit (including legal,
regulatory, tax, financial, accounting, or otherwise) of this
B-4
<PAGE>
Transferee Certificate, the Basic Documents or other documentation (except as
may be set forth in any agreement between the Transferee and its transferor);
(iv) the Transferee has consulted with its own legal, regulatory, tax, business,
investment, financial, and accounting advisers to the extent it has deemed
necessary, and it has made its own investment decisions (including decisions
regarding the suitability of any transaction pursuant to the Indenture) based
upon its own judgment and upon any advice from such advisers as it has deemed
necessary and not upon any view expressed by the Issuer or its transferor; (v)
the Transferee is not relying on its transferor with respect to the
appropriateness or fairness of the prices of the Notes (except as may be set
forth in any agreement between the Transferee and its transferor), and all
trading decisions have been the result of arms' length negotiations between the
Transferee and its transferor; (vi) the Transferee is purchasing the Notes with
a full understanding of all of the risks thereof (economic and otherwise), and
it is capable of assuming and willing to assume (financially and otherwise)
those risks; and (vii) the Transferee is a sophisticated investor.
(h) (i) The Transferee understands that the Notes will bear a legend to the
following effect:
"THE ISSUER OF THE SECURITIES EVIDENCED HEREBY HAS NOT BEEN REGISTERED
UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT
COMPANY ACT"), AND SUCH SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT BY THE HOLDER HEREOF
IN ACCORDANCE WITH THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAW OF
ANY STATE OF THE UNITED STATES, AND PRIOR TO THE EXPIRATION OF THE HOLDING
PERIOD APPLICABLE TO SALES OF SUCH SECURITIES UNDER RULE 144(k) UNDER THE
SECURITIES ACT (OR ANY SUCCESSOR PROVISION), ONLY TO A PERSON (i)(A) WHOM
SUCH HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A UNDER THE SECURITIES ACT OR (B) WHO IS AN
INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT AND (ii) WHO IS PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A PERSON THAT IS EITHER (A) A QUALIFIED
INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A
OR (B) AN INSTITUTIONAL ACCREDITED INVESTOR. IN
B-5
<PAGE>
ADDITION, SUCH SECURITIES MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED TO A
PERSON WHO (i) IS A QUALIFIED PURCHASER AS SUCH TERM IS DEFINED IN THE
INVESTMENT COMPANY ACT AND (ii) IS PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A PERSON THAT IS A QUALIFIED PURCHASER, AND WHO DELIVERS A
DULY EXECUTED TRANSFEREE CERTIFICATE AND SUCH INFORMATION AS SET FORTH
THEREIN TO THE TRUSTEE AND THE ISSUER, IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS.
IN CONNECTION WITH ANY TRANSFER OF THIS NOTE, THE HOLDER HEREOF AGREES TO
DELIVER A DULY EXECUTED TRANSFEROR CERTIFICATE AND SUCH INFORMATION SET
FORTH THEREIN TO THE TRUSTEE AND THE ISSUER.
"THE FOLLOWING INFORMATION IS PROVIDED PURSUANT TO UNITED STATES TREASURY
REGULATION SECTION 1.1275-3(b): THIS NOTE HAS BEEN ISSUED WITH ORIGINAL
ISSUE DISCOUNT FOR UNITED STATES FEDERAL INCOME TAX PURPOSES. THE HOLDER
OF THIS NOTE MAY OBTAIN THE INFORMATION DESCRIBED IN UNITED STATES TREASURY
REGULATION SECTION 1.1275-3(b)(1)(i) FROM THE TREASURER OF THE ISSUER, AT
THE FOLLOWING ADDRESS: 625 LANDOR LANE, PASADENA, CALIFORNIA 91106."
(ii) The Transferee understands that the Notes will be represented by one
or more fully registered Notes. Before any interest in any Note may be
offered, resold, pledged or otherwise transferred to any person, both
the transferor and the transferee will be required to provide the
Trustee with a written certification (in the form provided in this
Transferee Certificate, in the case of the Transferee) as to
compliance with the transfer restrictions referred to in the legend
set forth on the Notes.
(i) The Transferee will not, at any time, offer to buy or offer to sell
the Notes by any form of general solicitation or advertising, including, but nor
limited to, any advertisement, article, notice or other communication published
in any newspaper, magazine or similar medium or broadcast over television or
radio or seminar or meeting whose attendees have been invited by general
solicitations or advertising.
B-6
<PAGE>
(j) The Transferee understands that prior to any proposed transfer of
Notes, the Transferee may be required to furnish to the Issuer such
certifications, legal opinions or other information as the Issuer may reasonably
require to confirm that the proposed transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. Any
such legal opinion may be from the Transferee's internal counsel or, at the
Issuer's expense, from such other counsel as the Issuer may select.
(k) The Transferee's Taxpayer Identification Number is __________________.
(l) The Transferee shall preserve copies of this letter and all related
letters, certificates, legal opinions, notices and other documents, and upon
request shall furnish you with copies thereof. You are entitled to rely on such
documents, and the Transferee irrevocably authorizes you to produce such
documents in connection with any administrative or legal proceeding or official
inquiry with respect to the matters covered hereby.
(m) The Transferee is not, to the best of its knowledge, a competitor of
the Issuer, Cherokee or the Licensee. For purposes of this subsection (m),
"competitor" shall mean any manufacturer, distributor or retailer of goods of
the type covered by the Trademark or the License Agreement or the owner or
licensor of a trademark for goods of such type.
The undersigned represents and warrants that, as of the date hereof, the
foregoing information is complete and accurate.
[TRANSFEREE]
By:___________________________
Name:
Title:
Dated: __________________
B-7
<PAGE>
EXHIBIT C
FORM OF TRANSFEROR CERTIFICATE
[Trustee's Address]
[Issuer's Address]
Attention: ____________
Re: Zero Coupon Secured Notes
of SPELL C. LLC
-------------------
Ladies and Gentlemen:
Reference is hereby made to Section 2.06(f) of the Indenture, dated as of
December 23, 1997 (the "Indenture"), between SPELL C. LLC (the "Issuer") and
Wilmington Trust Company (the "Trustee"). Capitalized terms used but not defined
herein shall have the meanings assigned to them in the Indenture.
This letter relates to U.S. $_________ aggregate principal amount of Zero
Coupon Secured Notes (the "Notes") of the Issuer which are registered in the
name of [insert name of transferor] (the "Transferor"). The Transferor has
requested a transfer of such Notes for Notes registered in the name of [insert
name of transferee] (the "Purchaser").
In connection with such request, and in respect of such Notes, the
Transferor does hereby certify that such Notes are being transferred (x) to a
Person that the Transferor reasonably believes is a "qualified purchaser" within
the meaning of the Investment Company Act and that is purchasing such Notes for
its own account or for the account of a Person that is a qualified purchaser,
(y) in accordance with (i) the transfer restrictions set forth in Section 2.06
of the Indenture and the Notes and (ii) any applicable securities laws of any
state of the United States or any other jurisdiction and (z) to a Person that
either (check one or more items as appropriate):
(a) ___ is eligible to purchase such Notes from the Transferor pursuant
to Rule 144(k) under the Securities Act (or any successor
provision);
(b) ___ the Transferor reasonably believes that the Purchaser is a
"qualified institutional buyer" within the meaning of Rule
C-1
<PAGE>
144A and that is aware that the sale to it is being made in
reliance upon Rule 144A and is purchasing such Notes for its own
account or for the account of a Person that is a qualified
institutional buyer and that is aware that the sale to it is
being made in reliance upon Rule 144A, in a transaction meeting
the requirements of Rule 144A; or
(c) ___ the Transferor reasonably believes that the Purchaser is an
institutional "accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) of the Securities Act that is
purchasing such Notes for its own account or for the account of a
Person that is (x) an institutional accredited investor or (y) a
"qualified institutional buyer" within the meaning of Rule 144A.
This letter and the statements contained herein are made for your benefit.
[Insert Name of Transferor]
By______________________________________
Name:
Title:
Dated: ____________________
C-2
<PAGE>
CONFORMED COPY
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of December 23, 1997 between SPELL C. LLC, a
Delaware limited liability company (with its successors, "SPV"), and Wilmington
Trust Company, a Delaware banking corporation, not in its individual capacity,
but solely as Trustee (the "TRUSTEE").
W I T N E S S E T H :
WHEREAS, SPV and Trustee are parties to an Indenture dated as of the date
hereof (as the same may be amended from time to time, the "INDENTURE"); and
WHEREAS, SPV has agreed to grant a continuing security interest in and to
its Collateral (as hereafter defined) to secure its obligations under the
Indenture and the Notes issued pursuant thereto;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Definitions. Terms defined in the Indenture and not otherwise
defined herein have, as used herein, the respective meanings provided for
therein. The following additional terms, as used herein, have the following
respective meanings:
"COLLATERAL" means the Trust Estate.
"PROCEEDS" means all proceeds of, and all other profits, rentals or
receipts, in whatever form, arising from the collection, sale, lease, exchange,
assignment, licensing or other disposition of, or realization upon, collateral,
including without limitation all claims against third parties for loss of or
damage to any collateral, and any condemnation or requisition payments with
respect to any collateral, in each case whether now existing or hereafter
arising.
"SECURED OBLIGATIONS" means the obligations of SPV secured under this
Agreement consisting of (i) all amounts payable with respect to any Note issued
pursuant to the Indenture, whether characterized as Original Value, Current
Value, principal, Make-Whole Amount (if any), Original Issue Discount or default
<PAGE>
interest (if any) (including, without limitation, any Original Issue Discount or
default interest which accrues after the commencement of any case, proceeding or
other action relating to the bankruptcy, insolvency or reorganization of SPV) or
otherwise, the amount thereof at any point in time as determined in accordance
with the Indenture, (ii) all other amounts payable by SPV hereunder or under the
Indenture, the Note Purchase Agreement or any Note and (iii) any renewals or
extensions of any of the foregoing.
"SECURITY INTERESTS" means the security interests in the Collateral granted
hereunder and under the Indenture securing the Secured Obligations.
"TRADEMARK COLLATERAL" means the collateral in which a security interest is
granted by SPV pursuant to Section 3 hereof.
"TRADEMARK RIGHTS" has the meaning assigned to that term in the Trademark
Purchase and License Assignment Agreement.
"TRADEMARK SECURITY AGREEMENT" means the Trademark Security Agreement
executed and delivered by SPV in favor of Trustee, for the ratable benefit of
the Noteholders, substantially in the form of Annex A hereto, as amended from
time to time.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of New York; provided that if by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of the
Security Interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than New York, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or non-
perfection.
Section 2. Representations and Warranties. SPV represents and warrants as
of the date hereof as follows:
(i) SPV is the sole owner of each item of its Collateral in which
it purports to grant a security interest hereunder and has good and
marketable title to all of such Collateral, free and clear of any Liens
other than the Security Interests and the Other Permitted Licenses.
(ii) Other than financing statements or other similar or equivalent
documents or instruments with respect to the Security Interests, no
financing statement, mortgage, security agreement or similar or equivalent
document or instrument covering all or any part of the Collateral is on
file
2
<PAGE>
or of record in any jurisdiction in which such filing or recording would
be effective to perfect a Lien on such Collateral.
(iii) Not later than 30 days following the date hereof, SPV shall
furnish to Trustee file search reports from the UCC filing offices of the
Secretaries of State of California and Delaware confirming the filings
contemplated by Section 4.08 of the Note Purchase Agreement.
(iv) The Security Interests granted hereunder constitute valid
security interests under the UCC securing the Secured Obligations. When UCC
financing statements shall have been filed in the offices specified in
clause (iii) above, the Security Interests shall constitute perfected
security interests in the Collateral to the extent that a security interest
therein may be perfected by filing pursuant to the UCC, prior to all other
Liens and rights of others therein. When the Trademark Security Agreement
shall have been recorded with the United States Patent and Trademark
Office, the Security Interests granted hereunder shall constitute valid and
perfected security interests in all right, title and interest of SPV in the
Trademark to the extent that such security interests may be perfected under
the United States Trademark Act, U.S. Code, Title 15, prior to all other
Liens and rights of others therein.
Section 3. The Security Interests. In order to secure the full and
punctual payment of the Secured Obligations in accordance with the terms
thereof, and to secure the performance of all of the obligations of SPV
hereunder:
(a) SPV hereby assigns and grants to Trustee, for its benefit and for the
ratable benefit of the Noteholders, a continuing security interest in and to all
of the following property of SPV, whether now owned or existing or hereafter
acquired or arising:
(i) all right, title and interest in the Trademark and the Trademark
Rights, together with any extensions or renewals thereof, and all existing
and future applications therefor and registrations thereof, together with
the goodwill of the business connected with the use of or symbolized by the
Trademark and the Trademark Rights and all applications therefor and
registrations thereof, including without limitation any and all claims and
causes of action which may arise by reason of unfair competition therewith,
infringement, violation or dilution thereof or injury to the Trademark or
any of the Trademark Rights or any registration thereof or application
therefor or the goodwill associated with any of the foregoing;
3
<PAGE>
(ii) all right, title and interest in and to each Trademark License,
including, without limitation, all obligations and indebtedness owing to
SPV under such Trademark Licenses (including, without limitation, any such
obligation which might be characterized as an account, contract right or
general intangible under the Uniform Commercial Code in effect in any
jurisdiction), all monies, fees, income, royalties, revenues, rents or
profits due or to become due to SPV under such Trademark Licenses (whether
or not yet earned by performance by SPV), all claims of SPV arising under
or pursuant to or in connection with such Trademark Licenses (whether for
damages, indemnity, payments for past, present or future infringements
thereof, unfair competition with or injury to the Trademark or any of the
Trademark Rights or the goodwill associated therewith, or otherwise), all
of SPV's right to perform thereunder or to compel performance or otherwise
exercise remedies thereunder and all collateral security or guarantees of
any kind given by any Person with respect to any of the foregoing;
(iii) all of SPV's right, title and interest in and to any other
intellectual property, goodwill, trade secrets, permits and licenses
associated with the Trademark or any Trademark License;
(iv) all of SPV's right, title and interest in and to the
Administrative Services Agreement and the Trademark Purchase and License
Assignment Agreement;
(v) all books and records of SPV (including, without limitation,
customer lists, marketing information, credit files, price lists, operating
records, accounting records, sales or promotional literature, computer
programs, printouts and other computer materials and records) pertaining to
any of the foregoing; and
(vi) all Proceeds of any of the foregoing;
provided that except as contemplated by the definition of Trademark
License, the Trademark Collateral does not include any interest in the Cherokee
Licenses.
(b) The Security Interests are granted as security only and shall not
subject Trustee or any Noteholder to, or transfer or in any way affect or
modify, any obligation or liability of SPV with respect to any of the Collateral
or any transaction in connection therewith.
4
<PAGE>
Section 4. Further Assurances; Covenants. (a) SPV will not change its
name, identity or limited liability company structure in any manner unless it
shall have given Trustee at least 30 days' prior notice thereof. SPV will not
change the location of its chief executive office or chief place of business
unless it shall have given Trustee at least 30 days' prior notice thereof.
(b) SPV will, from time to time, at its expense, execute, deliver, file
and record any statement, assignment, instrument, document, agreement or other
paper and take any other action (including, without limitation, any filings with
the United States Patent and Trademark Office and any filings of financing or
continuation statements under the UCC), that from time to time may be necessary,
or that Trustee may reasonably request, in order to create, preserve, perfect,
confirm or validate the Security Interests or to enable Trustee and the
Noteholders to obtain the full benefits of this Agreement, or to enable Trustee
to exercise and enforce any of its rights, powers and remedies hereunder with
respect to any of the Collateral. To the extent permitted by applicable law,
SPV hereby authorizes Trustee to execute and file financing statements or
continuation statements without SPV's signature appearing thereon. SPV agrees
that a carbon, photographic, photostatic or other reproduction of this Agreement
or of a financing statement is sufficient as a financing statement. SPV shall
pay the costs of, or incidental to, any recording or filing of any financing or
continuation statements concerning the Collateral.
(c) SPV shall notify Trustee promptly if it knows, or has reason to know,
that any registration relating to the Trademark Rights may become abandoned, or
of any materially adverse determination or development (including, without
limitation, the institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office or any court)
regarding SPV's ownership of the Trademark, its right to register the same, or
to keep and maintain the same. In the event that the Trademark Rights or any
Trademark License is materially breached, infringed, misappropriated or diluted
by a third party, SPV shall notify Trustee promptly after it learns thereof and
shall, unless SPV shall reasonably determine that any such action would be of
negligible economic value, promptly take such action as SPV reasonably believes
appropriate, including to sue for breach, infringement, misappropriation or
dilution and to recover any and all damages for such breach, infringement,
misappropriation or dilution, and take such other actions as SPV shall
reasonably deem appropriate under the circumstances to protect the Trademark
Rights or such Trademark License. In the event SPV shall, either itself or
through any agent, employee or licensee, after the date hereof file a new
application for the registration of the Trademark Rights purported to be or to
become subject to the Lien hereof with the United States Patent and Trademark
Office, it shall promptly thereafter notify the Trustee thereof and execute,
deliver and file or record any and
5
<PAGE>
all agreements, instruments, documents and papers as may be necessary or as
Trustee may reasonably request to evidence the Security Interests in the
Trademark Rights and the goodwill and general intangibles of SPV relating
thereto or represented thereby.
Section 5. Payments, Etc. in Respect of Collateral. SPV shall have the
right to receive payments, income, royalties, profits, rents, proceeds or other
distributions due or to become due, and all instruments and other property
received, receivable or otherwise distributed in respect of, or in exchange for,
any of its Collateral only in accordance with Articles 3 and 4 of the Indenture.
Section 6. General Authority. SPV hereby irrevocably appoints Trustee its
true and lawful attorney, with full power of substitution, in the name of SPV,
to the extent permitted by law, to exercise, at any time and from time to time
during the continuance of an Event of Default, all or any of the following
powers with respect to all or any of the Collateral:
(i) to demand, sue for, collect, receive and give acquittance for
any and all monies due or to become due thereon or by virtue thereof,
(ii) to file any claims or take any action or institute any
proceeding to enforce the rights of Trustee with respect to any of such
Collateral or to enforce compliance with the terms of the Trademark
Licenses included in the Collateral;
(iii) to settle, compromise, compound, prosecute or defend any
action or proceeding with respect thereto,
(iv) subject to the limitation as to commercial reasonableness
specified in Section 8.04(b)(v) of the Indenture, to sell, license,
transfer, assign or otherwise deal in or with the same or the proceeds or
avails thereof, in whole or in part, as fully and effectually as if Trustee
were the absolute owner thereof, and
(v) to extend the time of payment of any or all thereof and to
make any allowance and other adjustments with reference thereto;
provided that Trustee shall give SPV not less than ten days' prior written
notice of the time and place of any sale or other intended disposition of any of
the Collateral, except any such Collateral which threatens to decline speedily
in value or is of a type customarily sold on a recognized market. SPV agrees
that such notice constitutes "reasonable notification" within the meaning of
Section 9-504(3) of the UCC.
6
<PAGE>
Section 7. Remedies upon Event of Default. (a) If any Event of Default
has occurred and is continuing, Trustee may exercise on behalf of the
Noteholders all rights of a secured party under the UCC (whether or not in
effect in the jurisdiction where such rights are exercised) and, in addition,
Trustee may, without being required to give any notice, except as herein
provided or as may be required by mandatory provisions of law, (i) exercise any
and all rights and remedies of SPV under or in connection with the Trademark
Licenses or otherwise in respect of Collateral, including, without limitation,
any and all rights of SPV to demand or otherwise require payment of any amount
under or performance of any provision of any contract, license or agreement
included in the Collateral, (ii) apply cash, if any, then held by it as
Collateral as specified in Section 9 and (iii) if there shall be no such cash or
if such cash shall be insufficient to pay all the Secured Obligations in full,
sell such Collateral or any part thereof at public or private sale, for cash,
upon credit or for future delivery, and at such price or prices and on such
terms as Trustee may deem satisfactory; provided that Trustee shall not
terminate Cherokee's service as Administrator under the Administrative Services
Agreement unless it shall have retained a reasonably qualified successor
Administrator thereunder.
(b) Without limiting the generality of the foregoing, if any Event of
Default has occurred and is continuing,
(i) So long as doing so would not violate the terms of the License
Agreement, Trustee may (subject to the rights of the licensees under the
Cherokee Licenses) license, or sublicense, whether general, special or
otherwise, and whether on an exclusive or non-exclusive basis, the
Trademark anywhere in the United States of America for such term or terms,
on such conditions and in such manner as Trustee shall in its sole
discretion determine;
(ii) Trustee may (without assuming any obligations or liability
thereunder), at any time and from time to time, enforce (and shall have the
exclusive right to enforce) against any licensor, franchisee, licensee or
sublicensee all rights and remedies of SPV in, to and under the Trademark
Licenses and take or refrain from taking any action under any thereof, and
SPV hereby releases Trustee and each of the Noteholders from, and agrees to
hold Trustee and each of the Noteholders free and harmless from and against
any claims arising out of, any lawful action hereby permitted to be so
taken or omitted to be taken with respect thereto; and
(iii) In the event of any such disposition pursuant to this Section,
SPV shall supply to Trustee SPV's records relating to the Trademark Rights
(subject to the limitation specified in Article 5 of the Indenture).
7
<PAGE>
Section 8. Limitation on Duty of Agent in Respect of Collateral. The
powers conferred on Trustee hereunder are solely to protect its interest in the
Collateral and shall not impose any duty upon it to exercise any such powers.
Beyond the exercise of reasonable care of Collateral in its custody and the
accounting for any monies actually received by it hereunder and under the
Indenture, Trustee shall have no duty as to any Collateral in its possession or
control or in the possession or control of any agent or any income thereon or as
to the preservation of rights against prior parties or any other rights
pertaining thereto, except as otherwise specified in the Indenture. Trustee
shall be deemed to have exercised reasonable care in the custody of the
Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which it accords its own property.
Section 9. Application of Proceeds. Upon the occurrence and during the
continuance of an Event of Default, the proceeds of any sale of, or other
realization upon, all or any part of the Collateral and any cash held in respect
thereof shall be applied by Trustee as specified in Section 8.02 of the
Indenture.
Section 10. Appointment of Co-Agents. At any time or times, in order to
comply with any legal requirement in any jurisdiction, Trustee may appoint
another bank or trust company or one or more other persons, either to act as co-
agent or co-agents, jointly with Trustee, or to act as separate agent or agents
on behalf of the Noteholders with such power and authority as may be necessary
for the effectual operation of the provisions hereof and may be specified in the
instrument of appointment (which may, in the discretion of Trustee, include
provisions for the protection of such co-agent or separate agent similar to the
provisions of Sections 8 and 11).
Section 11. Expenses. In the event that SPV fails to comply with the
provisions of the Indenture, such that the value of any of the Collateral or the
validity, perfection, rank or value of any Security Interest therein is thereby
diminished or potentially diminished or put at risk, Trustee if requested by the
Majority Noteholders may, but shall not be required to, effect such compliance
on behalf of SPV and SPV shall reimburse Trustee for the reasonable costs
thereof on demand. All expenses of protecting, appraising, insuring and
maintaining any Collateral, any and all excise, property, sales, and use taxes
or other similar taxes imposed by any state, federal, or local authority on any
of such Collateral, or in respect of the sale or other disposition thereof shall
be borne and paid by SPV; and if SPV fails to promptly pay any portion thereof
when due, Trustee or any Noteholder may, at its option, but shall not be
required to, pay the same and charge SPV's account therefor, and SPV agrees to
reimburse Trustee or such Noteholder therefor on demand. All sums so paid or
incurred by Trustee or any
8
<PAGE>
Noteholder for any of the foregoing and any and all other sums for which SPV may
become liable hereunder and all costs and expenses (including attorneys' fees,
legal expenses and court costs) reasonably incurred by Trustee or any Noteholder
(i) in enforcing or protecting the Security Interests in the Collateral or any
of their rights or remedies under this Agreement, (ii) in the exercise or
enforcement of any of the rights of Trustee or the Noteholders hereunder and the
exercise and enforcement by Trustee of any of the rights of SPV under the
Trademark Licenses or any other Collateral or (iii) arising out of the failure
by SPV to perform or observe its obligations hereunder, shall, together with
interest thereon for each day until paid at a rate per annum equal to the
Default Rate, be additional Secured Obligations of SPV hereunder.
Section 12. Termination of Security Interests; Release of Collateral. Upon
the repayment in full of all Secured Obligations in accordance with the terms
thereof, of the Indenture and of the Note Purchase Agreement, the Security
Interests shall terminate and all rights to the Collateral shall revert to SPV.
At any time and from time to time prior to such termination of the Security
Interests, Trustee may release any of the Collateral with the prior written
consent of all Noteholders. Upon any such termination of the Security Interests
or release of Collateral, Trustee will, at the expense of SPV, execute and
deliver to SPV such documents as SPV shall reasonably request to evidence the
termination of the Security Interests or the release of its Collateral, as the
case may be.
Section 13. Notices. All notices or other communications hereunder shall
be in writing (including telecopy or similar writing) and shall be given to such
party (x) in the case of Trustee, at its address or telecopy number specified in
Section 14.02 of the Indenture or (y) in the case of SPV at the address or
telecopy number of SPV specified in Section 14.02 of the Indenture (with copies
in each case to the Administrator under the Administrative Services Agreement,
at its address specified in Section 9 of the Administrative Services Agreement)
or such other address or telecopy number as such party may hereafter specify for
such purpose by notice to the other party. Each such notice, request or other
communication shall become effective when received.
Section 14. Waivers, Non-Exclusive Remedies. No failure on the part of
Trustee to exercise, and no delay in exercising and no course of dealing with
respect to, any right under this Agreement shall operate as a waiver thereof;
nor shall any single or partial exercise by Trustee of any right under this
Agreement or the Indenture preclude any other or further exercise thereof or the
exercise of any other right. The rights in this Agreement and the Indenture are
cumulative and are not exclusive of any other remedies provided by law.
9
<PAGE>
Section 15. Successors and Assigns. This Agreement is for the benefit of
Trustee and the Noteholders and their successors and assigns, and in the event
of an assignment of all or any of the Secured Obligations, the rights hereunder,
to the extent applicable to the indebtedness so assigned, shall be transferred
with such indebtedness. This Agreement shall be binding on SPV and its
respective successors and permitted assigns.
Section 16. Changes in Writing. This Agreement and any provision hereof
may be changed, waived, discharged or terminated only subject to the Indenture
and as agreed in writing between the parties hereto.
Section 17. New York Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York, except as otherwise
required by mandatory provisions of law and except to the extent that remedies
provided by the laws of any jurisdiction other than New York are governed by the
laws of such jurisdiction.
Section 18. Severability. If any provision hereof is invalid or
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of Trustee and the
Noteholders in order to carry out the intentions of the parties hereto as nearly
as may be possible; and (ii) the invalidity or unenforceability of any provision
hereof in any jurisdiction shall not affect the validity or enforceability of
such provision in any other jurisdiction.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
SPELL C. LLC
By: /s/ Carol Gratzke
----------------------------
Name: Carol Gratzke
Title: Secretary and Treasurer
WILMINGTON TRUST COMPANY
By: /s/ Donald G. MacKelcan
---------------------------------
Name: Donald G. MacKelcan
Title: Assistant Vice President
11
<PAGE>
CONFORMED COPY
SPELL C. LLC
NOTE PURCHASE AGREEMENT
Dated as of December 23, 1997
Zero Coupon Secured Notes
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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ARTICLE 1
INTRODUCTORY MATTERS; ISSUANCE OF NOTES
---------------------------------------
<S> <C>
Section 1.01. Purchase and Sale of the Notes; the Closing.................. 1
-
Section 1.02. Waiver of Closing Conditions................................. 1
-
ARTICLE 2
REPRESENTATIONS OF THE ISSUER
-----------------------------
Section 2.01. Organization; Power and Authority............................ 2
-
Section 2.02. Authorization, Etc........................................... 2
-
Section 2.03. Material Adverse Change...................................... 2
-
Section 2.04. Capitalization; Subsidiaries................................. 2
-
Section 2.05. Liabilities.................................................. 3
-
Section 2.06. Compliance with Laws, Other Instruments of the
Issuer, Etc.................................................. 3
-
Section 2.07. Governmental Approvals....................................... 3
-
Section 2.08. Litigation................................................... 3
-
Section 2.09. Taxes........................................................ 4
-
Section 2.10. Compliance with ERISA........................................ 4
-
Section 2.11. Offering of Notes............................................ 4
-
Section 2.12. Solvency..................................................... 5
-
Section 2.13. Use of Proceeds; Margin Regulations.......................... 5
-
Section 2.14. Foreign Assets Control Regulations, Inc...................... 5
-
Section 2.15. Status Under Certain Statutes................................ 5
-
Section 2.16. Ranking...................................................... 6
-
Section 2.17. Existing Indebtedness........................................ 6
-
Section 2.18. Trust Estate................................................. 6
-
Section 2.19. Place of Business............................................ 6
-
Section 2.20. Broker's Fees................................................ 6
-
ARTICLE 3
REPRESENTATIONS OF THE PURCHASERS
---------------------------------
Section 3.01. Purchase of the Notes........................................ 7
-
Section 3.02. Source of Funds.............................................. 9
-
Section 3.03. Sale of Notes................................................ 10
--
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
ARTICLE 4 ----
CONDITIONS OF CLOSING
---------------------
<S> <C> <C>
Section 4.01. Proceedings Satisfactory..................................... 11
--
Section 4.02. Opinions of Special Counsel for the Purchasers............... 11
--
Section 4.03. Opinions of Counsel for the Issuer and Cherokee.............. 11
--
Section 4.04. Opinion of Counsel for the Trustee........................... 12
--
Section 4.05. License Agreement............................................ 12
--
Section 4.06. Dayton Hudson Documents...................................... 12
--
Section 4.07. Trademark Filing............................................. 12
--
Section 4.08. Collateral................................................... 12
--
Section 4.09. Basic Documents.............................................. 13
--
Section 4.10. Representations True, Etc.................................... 13
--
Section 4.11. Legality..................................................... 13
--
Section 4.12. Private Placement Number..................................... 13
--
Section 4.13. Other Purchasers............................................. 14
--
Section 4.14. Payment...................................................... 14
--
Section 4.15. Purchaser's Representations.................................. 14
--
Section 4.16. Opinion of Counsel for the Trustee........................... 14
--
Section 4.17. Legality..................................................... 14
--
ARTICLE 5
DEFINITIONS
-----------
Section 5.01. Certain Definitions.......................................... 14
--
Section 5.02. Accounting Terms, Etc........................................ 16
--
ARTICLE 6
HOME OFFICE PAYMENT
-------------------
ARTICLE 7
Liabilities of the Purchasers
ARTICLE 8
Miscellaneous
Section 8.01. Expenses..................................................... 17
--
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 8.02. Reliance on and Survival of Representations;
Covenants.................................................... 18
--
Section 8.03. Successors and Assigns....................................... 18
--
Section 8.04. Communications............................................... 18
--
Section 8.05. Indemnification.............................................. 19
--
Section 8.06. JURISDICTION AND PROCESS..................................... 20
--
Section 8.07. Governing Law................................................ 21
--
Section 8.08. Headings..................................................... 21
--
Section 8.09. Counterparts................................................. 21
--
Section 8.10. Severability................................................. 21
--
Section 8.11. Confidentiality.............................................. 21
--
</TABLE>
EXHIBIT A-1 - Opinion of Davis Polk & Wardwell
EXHIBIT A-2 - Opinion of Latham & Watkins with respect to corporate matters
EXHIBIT A-3 - Opinion of Latham & Watkins with respect to bankruptcy law
EXHIBIT A-4 - Opinion of Jeffer, Mangels, Butler & Marmaro LLP
EXHIBIT A-5 - Opinion of Richards, Layton & Finger, P.A., special counsel to
Trustee
EXHIBIT A-6 - Opinion of counsel to Dayton Hudson
EXHIBIT A-7 - Opinion of Richards, Layton & Finger, P.A., special counsel to
Issuer
EXHIBIT B - Letter Agreement Dayton Hudson
iii
<PAGE>
ARTICLE 1
Introductory Matters; Issuance of Notes
Section 1.01. Purchase and Sale of the Notes; the Closing. Subject to the
terms and conditions hereof and of the Indenture and in reliance upon
representations and warranties of the Purchasers contained herein or made
pursuant hereto, the Issuer agrees to issue and sell to each Purchaser and,
subject to the terms and conditions hereof and of the Indenture and in reliance
on the representations and warranties of the Issuer contained herein and therein
or made pursuant hereto or thereto, each Purchaser severally agrees to purchase
from the Issuer, Notes in a principal amount equal to the respective percentage
(such Purchaser's "PURCHASE PERCENTAGE") of aggregate principal amount of the
Notes set forth opposite such Purchaser's name in Schedule I, at a purchase
price equal to such Purchaser's Purchase Percentage of $47,869,558.83. The
proceeds of the sale of the Notes will be used to pay Cherokee for the Assigned
Rights and for any other lawful purposes. The closing of the purchase of the
Notes hereunder shall take place at the office of Davis Polk & Wardwell at 11:00
A.M., New York City time, on the Closing Date. On the Closing Date, the Issuer
will cause the Trustee to deliver to each Purchaser one or more Notes registered
in such Purchaser's name or in the name of such Purchaser's nominee, in such
denominations (minimum of U.S. $500,000), and in the aggregate principal amount
to be purchased by such Purchaser, all as specified in Schedule I or as such
Purchaser may otherwise specify by timely notice to the Issuer (or, in the
absence of such notice and if not so specified in Schedule I, one Note
registered in such Purchaser's name), duly executed and dated the Closing Date,
against payment of such purchase price by wire transfer of immediately available
funds to Wilmington Trust Company, Wilmington, Delaware, ABA No. 0311100092, for
credit to the account of Cherokee, Account No. 43558-1, Attn: Ann Roberts,
Corporate Trust Administration, (302) 651-8681, Reference: Cherokee Collection
Account (and the Issuer agrees that, except to return funds to the Purchasers if
the purchase of the Notes shall not occur on the Closing Date, none of the
proceeds from the sale of the Notes shall be withdrawn from such account until
all of the conditions precedent set forth in Article 4 shall have been satisfied
or waived pursuant to Section 1.02).
Section 1.02. Waiver of Closing Conditions. If on the Closing Date any of
the conditions specified in Article 4 to the obligations hereunder of the
Purchasers, on the one hand, or the Issuer, on the other hand, have not been
fulfilled, the Purchasers or the Issuer, as the case may be, may waive
compliance with any such condition to such extent as the Purchasers or the
Issuer, as the case,
<PAGE>
may in their sole discretion determine but the Purchasers or the Issuer, as the
case may be, shall have no obligation to do so. Nothing in this Section 1.02
shall operate to relieve any party of any of its obligations hereunder or to
waive may be any of the rights of any party hereunder.
ARTICLE 2
Representations of the Issuer
The Issuer represents and warrants, as of the date hereof, as follows:
Section 2.01. Organization; Power and Authority. The Issuer is a limited
liability company duly organized and in good standing under the laws of
Delaware. The Issuer has all requisite legal power and authority to own the
properties it purports so to own or hold, to transact its business as proposed
to be transacted, to execute and deliver each Basic Document to which it is a
party and has all requisite legal power and authority to perform the provisions
hereof and thereof. The Issuer is duly qualified or has been duly licensed as a
foreign limited liability company and is (if applicable) in good standing and is
authorized to do business in each jurisdiction in which the character of the
properties owned by it or the nature of the business transacted by it requires
such qualification.
Section 2.02. Authorization, Etc.. Each Basic Document has been duly
authorized by all necessary legal action on the part of the Issuer, and
constitutes a legal, valid and binding obligation of the Issuer enforceable
against the Issuer in accordance with its terms, except as the enforceability
thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights generally
and (ii general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
Section 2.03. Material Adverse Change. The Issuer does not know of any
fact (other than matters of a general economic or political nature) which, so
far as the Issuer can reasonably foresee, the Issuer expects will have a
Material Adverse Effect.
Section 2.04. Capitalization; Subsidiaries. (a) The capital and reserves
of the Issuer as of the date hereof are equal to $100,000. The sole member of
---------
the Issuer is Cherokee, Inc., which is a Delaware corporation.
(b) The Issuer has no Subsidiaries.
2
<PAGE>
Section 2.05. Liabilities. There are no liabilities, contingent or
otherwise, of the Issuer except (i) its obligations under the Basic Documents
and the License Agreement and (ii) other liabilities which could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
Section 2.06. Compliance with Laws, Other Instruments of the Issuer, Etc..
The execution and delivery by the Issuer of each Basic Document do not, and the
performance by the Issuer of each Basic Document and the transactions
contemplated hereby and thereby will not, (i) contravene, result in any breach
of, or constitute a default under, or result in the creation of any Lien in
respect of any property of the Issuer under, any existing organizational or
other governing document, or any other existing agreement or instrument to which
the Issuer is bound or by which the Issuer or any of its properties may be bound
or affected (other than any Lien created pursuant to the Indenture and the
Security Agreement), (ii) conflict with or result in a breach of any of the
terms, conditions or provisions of any existing Order of any court, arbitrator
or Governmental Body applicable to the Issuer or (iii) violate any provision of
any existing statute or other existing rule or regulation of any Governmental
Body applicable to the Issuer.
The Issuer is not in violation of any existing statute or other rule or
regulation of any Governmental Body, or any Order of any court, arbitrator or
Governmental Body.
As used in this Agreement, the term "GOVERNMENTAL BODY" includes any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality of any jurisdiction, domestic or foreign,
including but not limited to the United States of America; and the term "ORDER"
includes any order, writ, injunction, decree, judgment, award, determination,
direction or demand.
Section 2.07. Governmental Approvals. Except as contemplated by Section
2.18(b) and (c), no authorization, consent or approval of, and no filing or
registration with, any Governmental Body is required in connection with the
execution, delivery and performance of the Basic Documents or necessary for the
validity or enforceability thereof or for the creation and perfection of the
Liens intended to be created under the Indenture and the Security Agreement.
Section 2.08. Litigation. There are no Proceedings pending or, to the
knowledge of the Issuer, threatened against or affecting the Issuer or any
property of the Issuer.
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Section 2.09. Taxes. The Issuer is not separately subject to tax apart
from Cherokee upon its income under the Code or under applicable Delaware law.
Section 2.10. Compliance with ERISA. Neither the Issuer nor any ERISA
Affiliate has (A) incurred any "ACCUMULATED FUNDING DEFICIENCY" with respect to
any Employee Benefit Plan within the meaning of Section 412 of the Code and
Section 302 of ERISA, whether or not waived, (B) incurred any material liability
to the Pension Benefit Guaranty Corporation established under ERISA (other than
for Pension Benefit Guaranty Corporation insurance premiums payable in the
ordinary course) in connection with any Employee Benefit Plan established or
maintained by it and no contribution which in the aggregate exceeds $1,000,000
to any such Plan subject to the funding requirements of Section 412 of the Code
is due and payable by the Issuer or any ERISA Affiliate, (C) incurred any
material withdrawal liability in connection with a complete or partial
withdrawal from a Multiemployer Plan or (D) had any tax or penalty assessed
against it by the United States Internal Revenue Service or United States
Department of Labor for any alleged violation under Section 4975 of the Code or
Section 406 of ERISA.
The Issuer is not a "PARTY IN INTEREST" or a "DISQUALIFIED PERSON" (as
defined in Section 3(14) of ERISA and Section 4975(e)(2) of the Code,
respectively) with respect to any Employee Benefit Plan disclosed pursuant to
Section 3.02. Assuming the accuracy of the representations and warranties of
the Purchasers set forth in this Agreement, the transactions contemplated by
this Agreement and the other Basic Documents will not constitute a nonexempt
prohibited transaction (as such term is defined in Section 4975 of the Code or
Section 406 of ERISA) and will not subject the Issuer or any holder of a Note to
any tax or penalty on prohibited transactions imposed under said Section 4975 of
the Code or by Section 502(i) of ERISA. The representations by the Issuer in
the preceding sentence are made in reliance upon the representations by the
Purchasers in Section 3.02.
Section 2.11. Offering of Notes. Neither the Issuer nor any other Person
appointed to act on behalf of the Issuer by the Issuer or Cherokee has offered
the Notes or any similar securities for sale to, or solicited any offer to buy
any of the same from any Person other than the Purchasers and not more than 20
other institutional investors. Neither the Issuer nor any such appointee has
taken, or will take, any action which would subject the issuance or sale of the
Notes to Section 5 of the United States Securities Act of 1933, as amended, or
otherwise require the registration, filing or qualification of the Notes under
any applicable laws of the United States of America.
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Section 2.12. Solvency. The Issuer is, and upon giving effect to the
issuance of the Notes and the transactions contemplated by this Agreement will
be, a "solvent institution", as said term is used in Section 1405(c) of the New
York Insurance Law, whose "obligations . . . are not in default as to principal
or interest", as said terms are used in said Section 1405(c). The Issuer is not
entering into the transactions contemplated by this Agreement and the other
Basic Documents with an intent to hinder, delay, or defraud any present or
future holder of any Indebtedness of the Issuer, and after giving effect to the
consummation of such transactions, the fair value of the respective assets of
the Issuer will not be less than its debts, the Issuer will be able to pay its
debts as they mature and the Issuer will not have unreasonably small capital
with which to conduct its business.
Section 2.13. Use of Proceeds; Margin Regulations. The Issuer will use the
proceeds of the sale of the Notes to purchase the Assigned Rights pursuant to
the Trademark Purchase and License Assignment Agreement, to pay any other
amounts due hereunder or under the other Basic Documents and, to the extent not
required for such purposes, for any other lawful purpose. No part of the
proceeds from the sale of the Notes hereunder will be used, directly or
indirectly, by the Issuer for the purpose of buying or carrying any margin stock
within the meaning of Regulation G of the Board of Governors of the United
States Federal Reserve System (12 CFR 207), or for the purpose of purchasing or
carrying or trading in any securities under such circumstances as to involve the
Issuer in a violation of Regulation X of said Board (12 CFR 224) or to involve
any broker or dealer in a violation of Regulation T of said Board (12 CFR 220).
Margin stock does not constitute more than 25% of the assets of the Issuer and
the Issuer has no present intention that margin stock will constitute more than
25% of the assets of the Issuer. As used in this Section, the terms "MARGIN
STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to
them in said Regulation G.
Section 2.14. Foreign Assets Control Regulations, Inc. Neither the sale of
the Notes by the Issuer hereunder nor its use of the proceeds thereof will
violate the Trading with the Enemy Act, as amended, or any of the foreign assets
control regulations of the United States Treasury Department (31 CFR, Subtitle
B, Chapter V, as amended) or any enabling legislation or executive order
relating thereto.
Section 2.15. Status Under Certain Statutes. The Issuer is not subject to
regulation under the Public Utility Holding Company Act of 1935, as amended, the
Transportation Acts, as amended, or the Federal Power Act, as amended, and the
Issuer is not an investment company required to register under the Investment
Company Act.
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Section 2.16. Ranking. All obligations and liabilities of the Issuer under
this Agreement and the Notes constitute and will constitute the direct and
unconditional obligations of the Issuer.
Section 2.17. Existing Indebtedness. The Issuer has no Indebtedness except
pursuant to the Indenture. The assets of the Issuer are free and clear of all
Liens except for Permitted Liens.
Section 2.18. Trust Estate. The Issuer owns and has or will own and will
have on the Closing Date and at the time of payment by the Purchasers of the
purchase price for the Notes good, legal and valid title to the Trust Estate
free and clear of all Liens, except Permitted Liens. Assuming performance by
the Trustee of its duties under the Indenture in accordance with the terms
thereof, the provisions of the Indenture, the Security Agreement and the
Trademark Security Agreement are effective to create, in favor of the Trustee
for the benefit of the holders of the Notes, a legal, valid and enforceable Lien
on and security interest in all of the Trust Estate, and upon completion of the
filings and recordations specified in subclauses (i) and (iii) of Section 4.08,
all necessary and appropriate recordings and filings will have been made (and
all related fees have been paid or will have been paid by the time such
recordings and filings have been made) in all necessary and appropriate public
offices in all appropriate jurisdictions, and all other necessary and
appropriate action has been taken, so that the Indenture creates a perfected
Lien on and security interest in all right, title, estate and interest of the
Issuer in the Trust Estate named therein and all necessary and appropriate
consents to the creation, perfection and enforcement of such Lien have been or,
as of the Closing Date will have been, obtained.
Section 2.19. Place of Business. The Issuer's sole place of business will
as of the Closing Date be located at 625 Landor Lane, Pasadena, California
91106.
Section 2.20. Broker's Fees. No broker's, finder's or similar fee in
connection with the transactions contemplated hereby is payable except for a
placement fee payable to Libra Investments, Inc., which will be paid by the
Issuer.
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ARTICLE 3
Representations of the Purchasers
Each Purchaser severally represents (as to itself and no other Purchaser)
to the Issuer that:
Section 3.01. Purchase of the Notes. (a) Such Purchaser (i) is both a
Qualified Purchaser and (x) a Qualified Institutional Buyer that is aware that
the sale of the Notes to it is being made in reliance on Rule 144A or (y) an
Accredited Investor and (ii) is acquiring such Notes for its own account or for
the account of (x) a Qualified Institutional Buyer that is aware that the sale
of such Notes is being made in reliance on Rule 144A and that is also a
Qualified Purchaser in a transaction meeting the requirements of Rule 144A or
(y) an Accredited Investor that is also a Qualified Purchaser.
(b) Such Purchaser understands that the Notes will bear a legend to the
following effect:
"THE ISSUER OF THE SECURITIES EVIDENCED HEREBY HAS NOT BEEN REGISTERED
UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT
COMPANY ACT"), AND SUCH SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT BY THE HOLDER HEREOF
IN ACCORDANCE WITH THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAW OF
ANY STATE OF THE UNITED STATES, AND PRIOR TO THE EXPIRATION OF THE HOLDING
PERIOD APPLICABLE TO SALES OF SUCH SECURITIES UNDER RULE 144(k) UNDER THE
SECURITIES ACT (OR ANY SUCCESSOR PROVISION), ONLY TO A PERSON (i)(A) WHOM
SUCH HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A UNDER THE SECURITIES ACT OR (B) WHO IS AN
INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT AND (ii) WHO IS PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A PERSON THAT IS EITHER (A) A QUALIFIED
INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE
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REQUIREMENTS OF RULE 144A OR (B) AN INSTITUTIONAL ACCREDITED INVESTOR. IN
ADDITION, SUCH SECURITIES MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED TO A
PERSON WHO (i) IS A QUALIFIED PURCHASER AS SUCH TERM IS DEFINED IN THE
INVESTMENT COMPANY ACT AND (ii) IS PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A PERSON THAT IS A QUALIFIED PURCHASER, AND WHO DELIVERS A
DULY EXECUTED TRANSFEREE CERTIFICATE AND SUCH INFORMATION AS SET FORTH
THEREIN TO THE TRUSTEE AND THE ISSUER, IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS.
IN CONNECTION WITH ANY TRANSFER OF THIS NOTE, THE HOLDER HEREOF AGREES TO
DELIVER A DULY EXECUTED TRANSFEROR CERTIFICATE AND SUCH INFORMATION SET
FORTH THEREIN TO THE TRUSTEE AND THE ISSUER.
"THE FOLLOWING INFORMATION IS PROVIDED PURSUANT TO UNITED STATES TREASURY
REGULATION SECTION 1.1275-3(b): THIS NOTE HAS BEEN ISSUED WITH ORIGINAL
ISSUE DISCOUNT FOR UNITED STATES FEDERAL INCOME TAX PURPOSES. THE HOLDER
OF THIS NOTE MAY OBTAIN THE INFORMATION DESCRIBED IN UNITED STATES TREASURY
REGULATION SECTION 1.1275-3(b)(1)(i) FROM THE TREASURER OF THE ISSUER, AT
THE FOLLOWING ADDRESS: 625 LANDOR LANE, PASADENA, CALIFORNIA 91106."
(c) Such Purchaser acknowledges that it shall have no rights to require
the registration of the Notes under the Securities Act.
(d) Such Purchaser has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of
purchasing the Notes; it has previously invested in securities similar to the
Notes and fully understands the limitations on transfer described herein; it is
able to bear the economic risk of loss of its investment in the Notes; and it is
presently able to afford the complete loss of such investment.
(e) Such Purchaser is not acquiring the Notes with a view to or for sale
in connection with any distribution thereof or with any present intention of
offering or selling any of the Notes in a transaction that would violate the
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Securities Act or the securities laws of any State of the United States or any
other applicable jurisdiction; provided that the disposition of its property and
the property of any accounts for which it is acting as fiduciary shall remain at
all times within its control.
(f) Such Purchaser acknowledges that it has access to such financial and
other information, and has been afforded the opportunity to ask such questions
of representatives of the Issuer and receive answers it deems necessary in
connection with its decision to purchase the Notes; it has relied exclusively on
its own investigation of the Issuer's and Cherokee's representations set forth
in the Basic Documents and in the License Agreement and has not relied on any
other representation of the Issuer or Cherokee, whether written or oral.
Section 3.02. Source of Funds. Such Purchaser represents that at least one
of the following statements is an accurate representation as to each source of
funds (a "SOURCE") to be used by such Purchaser to pay the purchase price of the
Notes to be purchased by such Purchaser hereunder:
(a) if such Purchaser is an "INSURANCE COMPANY" as defined in Section V(d)
of Prohibited Transaction Exemption ("PTE") 95-60 (as issued by the United
States Department of Labor) and the Source is an "INSURANCE COMPANY GENERAL
ACCOUNT" as defined in Section V(e) of PTE 95-60 then, in accordance with
Section I(a) of PTE 95-60, there is no Employee Benefit Plan, treating as a
single Employee Benefit Plan all plans maintained by the same employer or
employee organization, with respect to which the amount of the reserves and
liabilities for all general account contracts held by or on behalf of such Plan
exceed ten (10%) percent of the total reserves and liabilities of such general
account (exclusive of separate account liabilities) plus surplus;
(b) the Source is either (i) an insurance company pooled separate account,
within the meaning of PTE 90-1 (issued January 29, 1990) or (ii) a bank
collective investment fund, within the meaning of the PTE 91-38 (issued July 12,
1991) and, except as such Purchaser has disclosed to the Issuer in writing
pursuant to this paragraph (b), no Employee Benefit Plan or group of Employee
Benefit Plans maintained by the same employer or employee organization
beneficially owns more than 10% of all assets allocated to such pooled separate
account or collective investment fund; or
(c) the Source constitutes assets of an "INVESTMENT FUND" (within the
meaning of Part V of the QPAM Exemption) managed by a "QUALIFIED PROFESSIONAL
ASSET MANAGER" or "QPAM" (within the meaning of Part V of the QPAM Exemption),
no Employee Benefit Plan's assets that are included in such investment fund,
when combined with the assets of all other employee benefit
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plans established or maintained by the same employer or by an affiliate (within
the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the
same employee organization and managed by such QPAM, exceed 20% of the total
client assets managed by such QPAM, the conditions of Part I(c) and (g) of the
QPAM Exemption are satisfied, neither the QPAM nor a person controlling or
controlled by the QPAM (applying the definition of "control" in Section V(e) of
the QPAM Exemption) owns a 5% or more interest in the Issuer and (i) the
identity of such QPAM and (ii) the names of all Employee Benefit Plans whose
assets are included in such investment fund have been disclosed to the Issuer in
writing pursuant to this paragraph (c);
(d) the Source is one or more Employee Benefit Plans, or a separate
account or trust fund comprised of one or more Employee Benefit Plans, each of
which has been identified expressly as such to the Issuer in writing pursuant to
this paragraph (d);
(e) the Source constitutes assets of a Employee Benefit Plan managed by an
"IN-HOUSE ASSET MANAGER" (within the meaning of Part IV(a) of the PTE 96-23)
which has made or properly authorized the decision for such Plan to purchase the
Notes under the circumstances described in PTE 96-23; or
(f) the Source does not include assets of any Employee Benefit Plan.
As used in this Section 3.02, the term "SEPARATE ACCOUNT" shall have the
meaning assigned to such term in Section 3 of ERISA.
Section 3.03. Sale of Notes. Such Purchaser understands that the Issuer
has not been registered under the Investment Company Act and that the Notes have
not been registered under the Securities Act. Such Purchaser understands and
acknowledges that the Notes may not be reoffered, resold, pledged or otherwise
transferred by such Purchaser except (a) to a Person that is a Qualified
Purchaser acquiring for its own account or for the account of a person that is a
Qualified Purchaser, (b) prior to the expiration of the holding period
applicable to sales of such Notes under Rule 144(k) under the Securities Act, to
either (i) a Qualified Institutional Buyer in a transaction meeting the
requirements of Rule 144A acquiring for its own account or for the account of a
person that is a Qualified Institutional Buyer in a transaction meeting the
requirements of Rule 144A or (ii) an Accredited Investor acquiring for its own
account or for the account of a person that is either (x) an Accredited Investor
or (y) a Qualified Institutional Buyer and (c) if the transferor delivers to the
Trustee a duly executed Transferor Certificate in the form of Exhibit C to the
Indenture and the proposed transferee of such Notes delivers to the Trustee a
duly executed Transferee
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Certificate in the form of Exhibit B to the Indenture and such additional
information as set forth therein.
ARTICLE 4
Conditions of Closing
Each Purchaser's obligation to purchase and pay for the Notes to be
purchased by such Purchaser hereunder shall be subject to the conditions
hereinafter set forth:
Section 4.01. Proceedings Satisfactory. All proceedings taken in
connection with the issuance of the Notes and the consummation of the
transactions contemplated hereby, and all documents and papers relating thereto,
shall be reasonably satisfactory to such Purchaser and the Purchasers' special
counsel, and such Purchaser and the Purchasers' special counsel shall have
received copies of such documents and papers, all in form and substance
reasonably satisfactory to such Purchaser and the Purchasers' special counsel,
as such Purchaser or they may reasonably request in connection therewith.
Section 4.02. Opinions of Special Counsel for the Purchasers. Such
Purchaser shall have received an opinion dated the Closing Date and addressed to
such Purchaser and the Trustee from Davis Polk & Wardwell, the Purchasers'
special counsel in substantially the form of Exhibit A-1 hereto and covering
such other matters incident to the transactions contemplated hereby as such
Purchaser may reasonably request.
Section 4.03. Opinions of Counsel for the Issuer and Cherokee. Such
Purchaser shall have received opinions dated the Closing Date and addressed to
such Purchaser and the Trustee (a) from Latham & Watkins, special counsel to the
Issuer and Cherokee, substantially in the form of Exhibit A-2 hereto with
respect to corporate matters, (b) from Latham & Watkins, special counsel to the
Issuer and Cherokee, substantially in the form of Exhibit A-3 hereto with
respect to bankruptcy law matters, (c) from Jeffer, Mangels, Butler & Marmaro
LLP, special counsel to the Issuer and Cherokee, substantially in the form of
Exhibit A-4 hereto with respect to trademark matters and (d) from Richards,
Layton & Finger, P.A., special counsel to the Issuer, substantially in the form
of Exhibit A-7 hereto, and in the case of each such opinion covering such other
matters incident to the transactions contemplated hereby as such Purchaser may
reasonably request.
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Section 4.04. Opinion of Counsel for the Trustee. Such Purchaser shall have
received an opinion dated the Closing Date and addressed to such Purchaser from
Richards, Layton & Finger, P.A., special counsel to the Trustee, substantially
in the form of Exhibit A-5 hereto and covering such other matters incident to
the transactions contemplated hereby as such Purchaser may reasonably request.
Section 4.05. License Agreement. Such Purchaser shall have received a
certificate of an officer of the Issuer certifying that the License Agreement is
in full force and effect, in accordance with its terms, and attaching a copy of
the License Agreement as duly executed and delivered by each of the parties
thereto and certified as a true, correct and complete copy by such officer.
Section 4.06. Dayton Hudson Documents. Such Purchaser shall have received a
copy of (i) a letter duly executed and delivered by the Licensee in the form of
Exhibit B hereto acknowledging the assignment of the License Agreement to the
Issuer, agreeing to make payments thereunder directly to the Collection Account,
stating that to the best knowledge of the Licensee, no defense to the
obligations of the Licensee under the License Agreement and no claim of the
Licensee against Cherokee which might be asserted as a potential offset thereto
exists on the Closing Date and containing certain other agreements of the
Licensee and (ii) an opinion of counsel for the Licensee, who may be an employee
of the Licensee, substantially in the form of Exhibit A-6 hereto, to the effect
that the License Agreement has been duly authorized, executed and delivered and
constitutes a legal, valid and binding obligation of the Licensee enforceable in
accordance with its terms (subject to customary exceptions).
Section 4.07. Trademark Filing. Such Purchaser shall have received
evidence satisfactory to such Purchaser that the Memorandum of Assignment
contemplated by Section 5.03 of the Trademark Purchase and License Assignment
Agreement shall have been tendered to the United States Patent and Trademark
Office for recordation, and any required recording fee in connection therewith
shall have been paid.
Section 4.08. Collateral. The Security Agreement and the Trademark
Security Agreement shall have been duly executed and delivered by the Issuer and
the Trustee and shall be in full force and effect. In addition, such Purchaser
shall have received evidence satisfactory to such Purchaser that the Issuer
shall have taken all actions (including, without limitation, (i) delivery to
special counsel for the Purchasers of the Trademark Security Agreement for
recordation with the United States Patent and Trademark Office, together with
payment of any required recording fees, (ii) the obtaining of a UCC file search
report in the names of each of the Issuer and Cherokee from the Secretary of
State of the State of
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California and (ii delivery to special counsel for the Purchasers of UCC-1
financing statements in the name of the Issuer for filing with the Secretaries
of State of California and Delaware) as may be necessary or as such Purchaser
may reasonably request in order to create and perfect the security interests
created pursuant to the Indenture, the Security Agreement and the Trademark
Security Agreement.
Section 4.09. Basic Documents. Each Basic Document shall have been duly
executed and delivered by the parties thereto and shall be in full force and
effect.
Section 4.10. Representations True, Etc. All representations and
warranties of the Issuer contained in Article 2 and of the Issuer or Cherokee
contained in any other Basic Document or Trademark License shall be true on and
as of the Closing Date; the Issuer shall have performed all agreements on its
part required to be performed under this Agreement and in any other Basic
Document on or prior to the Closing Date; no Default or Event of Default shall
have occurred and be continuing; and such Purchaser shall have received a
certificate from an officer of the Issuer and a certificate from an officer of
Cherokee, each dated the Closing Date, certifying to the effect specified in
this Section 4.10.
Section 4.11. Legality. On the Closing Date the purchasing of the Notes to
be purchased by such Purchaser shall (i) be permitted by the laws and
regulations of each jurisdiction to which such Purchaser is subject, without
recourse to provisions (such as Section 1405(a)(8) of the New York Insurance
Law) permitting limited investments by insurance companies without restriction
as to the character of the particular investment, (ii) not violate any
applicable law or regulation (including, without limitation, Regulation G, T or
X of the Board of Governors of the Federal Reserve System) and (iii) not subject
such Purchaser to any tax, penalty or liability under or pursuant to any
applicable law or regulation, which law or regulation was not in effect on the
date hereof. If requested by such Purchaser, such Purchaser shall have received
an Officer's Certificate from the Issuer certifying as to such matters of fact
as such Purchaser may reasonably specify to enable such Purchaser to determine
whether such purchase is permitted as contemplated in this Section 4.11.
Section 4.12. Private Placement Number. Such Purchaser shall have received
evidence satisfactory to such Purchaser that a private placement number with
respect to the Notes shall have been obtained from Standard & Poor's CUSIP
Service Bureau (in cooperation with the Securities Valuation Office of the
National Association of Insurance Commissioners).
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Section 4.13. Other Purchasers. All other Purchasers shall have purchased
and made payment for the respective aggregate principal amounts of the Notes to
be purchased by them hereunder.
The obligations of the Issuer to issue and sell the Notes pursuant to this
Agreement are subject to the satisfaction at the Closing Date of the following
conditions:
Section 4.14. Payment. Each Purchaser shall have paid the purchase price
of the Notes to be purchased by it hereunder in accordance with Section 1.01.
Section 4.15. Purchaser's Representations. The representations and
warranties of each Purchaser contained herein shall be true on and as of the
Closing Date as if made on and as of such time and each Purchaser shall have
performed and complied in all material respects with all agreements required by
this Agreement to be performed or complied with by such Purchaser at or prior to
the Closing Date.
Section 4.16. Opinion of Counsel for the Trustee. The Issuer shall have
received an opinion dated the Closing Date and addressed to the Issuer from
Richards, Layton & Finger, P.A., special counsel to the Trustee, substantially
in the form of Exhibit A-5 hereto and covering such other matters incident to
the transactions contemplated hereby as the Issuer may reasonably request.
Section 4.17. Legality. The issue and sale of the Notes by the Issuer
shall not be prohibited by any applicable law, court order or governmental
regulation.
ARTICLE 5
Definitions
Section 5.01. Certain Definitions. Unless the context otherwise requires,
any reference in this Agreement to any agreement, contract or document shall
mean such agreement, contract or document and all schedules, exhibits and
attachments thereto as amended, supplemented or modified and in effect from time
to time, as permitted hereby. Unless otherwise stated, any reference in this
Agreement to any Person shall include its permitted successors and assigns and,
in the case of any Governmental Body, any Person succeeding to its functions and
capacities. Defined terms in this Agreement shall include in the singular
number
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the plural and in the plural number the singular. The words "hereof", "herein"
and "hereunder" and words of similar import when used in this Agreement shall,
unless otherwise expressly specified, refer to this Agreement as a whole and not
to any particular provisions of this Agreement and all references to sections
shall be references to sections of this Agreement unless otherwise expressly
specified. Terms defined in the Indenture are used herein as so defined except
as otherwise defined herein. In addition, as used herein the following terms
shall have the following respective meanings (all terms defined in this Section
5.01 and in the other provisions of this Agreement in the singular to have the
same meanings when used in the plural and vice versa):
"ACCREDITED INVESTOR" has the meaning specified in the introduction hereto.
"AGREEMENT" means this Note Purchase Agreement.
"CLOSING DATE" has the meaning specified in the introduction hereto.
"EMPLOYEE BENEFIT PLAN" means any "EMPLOYEE BENEFIT PLAN" as defined in
(S)3(3) of ERISA, or any "PLAN" as defined in Section 4975(e)(1) of the
Code.
"ERISA AFFILIATE" means any trade or business (whether or not incorporated)
that is treated as a single employer together with the Issuer under section
414 of the Code.
"GOVERNMENTAL BODY" has the meaning stated in Section 2.06.
"INDENTURE" has the meaning specified in the introduction hereto.
"INVESTMENT COMPANY ACT" has the meaning specified in the introduction
hereto.
"ISSUER" has the meaning specified in the introduction hereto.
"MULTIEMPLOYER PLAN" means any Employee Benefit Plan that is a
"MULTIEMPLOYER PLAN" (as such term is defined in section 4001(a)(3) of
ERISA).
"NOTES" has the meaning specified in the introduction hereto.
"ORDER" has the meaning specified in Section 2.06.
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"PROCEEDINGS" means all actions, suits, injunctions, writs, restraining
orders, or other proceedings (including counterclaims) in any court or
before any arbitrator of any kind or before or by any Governmental Body.
"PURCHASER" has the meaning specified in the introduction hereto.
"QUALIFIED INSTITUTIONAL BUYERS" has the meaning specified in the
introduction hereto.
"QUALIFIED PURCHASER" has the meaning specified in the introduction hereto.
"RULE 144A" has the meaning specified in the introduction hereto.
"SECURITIES ACT" has the meaning specified in the introduction hereto.
"TRADEMARK SECURITY AGREEMENT" has the meaning assigned to that term in the
Security Agreement.
"TRUSTEE" has the meaning specified in the introduction hereto.
"UNIFORM COMMERCIAL CODE" means the Uniform Commercial Code as from time to
time in effect in the State of New York.
Section 5.02. Accounting Terms, Etc.. All accounting terms used herein
which are not expressly defined in this Agreement have the meanings respectively
given to them in accordance with GAAP. Except as otherwise specifically
provided herein, all computations made pursuant to this Agreement shall be made
in accordance with GAAP, and all balance sheets and other financial statements
shall be prepared in accordance with GAAP.
ARTICLE 6
Home Office Payment
In the case of any Note owned by a Holder who is either (i) a Purchaser or
(ii) a subsequent Holder who has given written notice to the Issuer and the
Trustee requesting that the provisions of this Section shall apply, the Issuer
will, or will cause the Trustee to, make all payments in respect of the Notes of
such Holder, without any presentment thereof, directly to such Holder at the
address of such Holder set forth in Schedule I or at such other address as such
Holder from time to
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time designates in writing to the Issuer and the Trustee five or more Business
Days prior to the date of payment or, if a bank account is designated for such
Holder on Schedule I hereto or in any written notice to the Issuer and the
Trustee from such Holder, the Issuer will, or will cause the Trustee to, make
such payments in dollars in immediately available funds to such bank account,
marked for attention as indicated, or by such other method of payment or to such
other account of such Holder in any bank in the United States as such Holder may
from time to time direct in writing to the Issuer and the Trustee five or more
Business Days prior to the date of payment. The Holder of any Notes to which
this Section applies agrees that in the event it shall sell or transfer any such
Notes it will, prior to the delivery of such Notes (unless it has already done
so), make a notation thereon of all principal paid on such Notes. With respect
to Notes to which this Section applies, the Issuer and the Trustee shall be
entitled to presume conclusively that such Purchaser or such subsequent Holder
as shall have requested the provisions hereof to apply to its Notes remains the
Holder of such Notes until such Notes shall have been presented to the Trustee
for transfer. Each Holder of any Note that is paid in full shall deliver or
cause to be delivered such Note to the Trustee or the Issuer promptly upon
written request therefor.
ARTICLE 7
Liabilities of the Purchasers
Neither this Agreement nor any disposition of any of the Notes shall be
deemed to create any liability or obligation of any Purchaser or any other
holder of any Note to enforce any provision hereof or of any of the Notes for
the benefit or on behalf of any other Person who may be the holder of any Note.
ARTICLE 8
Miscellaneous
Section 8.01. Expenses. The Issuer agrees, whether or not the transactions
hereby contemplated shall be consummated, to pay all reasonable fees and
disbursements of Davis Polk & Wardwell in connection with the preparation,
negotiation and execution of the Basic Documents and the Trademark Licenses and
the creation and perfection of the Liens on the Trust Estate contemplated by the
Security Agreement. The Issuer also agrees to pay (i) all reasonable expenses
incurred by each Holder (including reasonable counsel fees) in connection with
any amendment or requested amendment (if requested by the
17
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Issuer or the Trustee) of, or waiver or consent (if requested by the Issuer or
the Trustee) or requested waiver or consent (if requested by the Issuer or the
Trustee) under or with respect to, this Agreement or any other Basic Document,
whether or not the same shall become effective and (ii) all reasonable expenses
incurred by each Holder (including reasonable counsel fees) incurred in
connection with the preservation of any Lien or realization on or pursuit of
remedies with respect to any of the Trust Estate, in each case covered by this
clause (ii) following the occurrence and during the continuance of any Default
or Event of Default or any workout, restructuring or similar negotiations
relating to the Notes; provided that this sentence shall not require the Issuer
to pay counsel fees for more than one firm of counsel (together with any local
counsel) representing all Holders. The obligations of the Issuer under this
Section 8.01 shall survive the payment or prepayment of the Notes.
In furtherance of the foregoing, on the Closing Date, the Issuer will pay
or cause to be paid the reasonable fees and disbursements of the Purchasers'
special counsel, which are reflected in the statement of such counsel submitted
to the Issuer prior to the Closing Date. The Issuer will also pay or cause to
be paid, promptly upon receipt of supplemental statements therefor, additional
reasonable fees, if any, and disbursements of such special counsel in connection
with the transactions hereby contemplated (including disbursements unposted as
of the Closing Date).
Section 8.02. Reliance on and Survival of Representations; Covenants. All
representations and warranties of the Issuer herein and in any certificates or
other instruments delivered pursuant to this Agreement are made as of the date
hereof in the case of this Agreement or as of the date of any such certificate
or instrument and shall (i) be deemed to be material and to have been relied
upon by each Purchaser, notwithstanding any investigation heretofore or
hereafter made by such Purchaser or on behalf of such Purchaser and (ii) survive
the execution and delivery of this Agreement and the delivery of the Notes to
each Purchaser. All covenants and agreements contained herein shall continue in
effect so long as any Note is outstanding and thereafter as provided in Sections
8.01 and 8.05.
Section 8.03. Successors and Assigns. This Agreement shall bind and inure
to the benefit of and be enforceable by the Issuer and its permitted successors
and assigns hereunder and each Purchaser and its successors and assigns, and, in
addition, shall in every respect inure to the benefit of and be enforceable by
all holders from time to time of the Notes.
Section 8.04. Communications. All notices and other communications
provided for in this Agreement shall be in writing and shall be sent, if
practicable, by confirmed telecopy (with hard copy sent on the same day by
overnight courier)
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and, otherwise, by overnight courier service prepaid to a Person at its address
specified below. A communication shall be addressed, until such time as a Person
shall have notified the other parties and holders of Notes of a change of
address
(A) if to the Issuer, to:
625 Landon Lane
Pasadena, California 91106
Attention: Carol Gratzke
With a copy to:
Cherokee, Inc., Administrator
6835 Valjean Avenue
Van Nuys, California 91406
Telephone: 818-908-9868
Telecopy: 818-908-9191
(B) if to a Purchaser, at the address for such Purchaser set
forth in Schedule I,
(C) if to any other holder of a Note, at the address of such
holder as it appears on the Note Register maintained pursuant to
the Indenture, or
(D) if to the Trustee, at the address specified therefor in
the Indenture.
Section 8.05. Indemnification. The Issuer agrees to indemnify, exonerate
and hold each Purchaser and each other holder of a Note and each of their
respective trustees, officers, directors, employees and agents (collectively
herein called the "INDEMNITEES" and individually called an "INDEMNITEE") free
and harmless from and against any and all actions, causes of action, suits,
losses, liabilities and damages, and reasonable expenses in connection
therewith, including without limitation reasonable counsel fees and
disbursements (collectively herein called the "INDEMNIFIED LIABILITIES")
incurred by the Indemnitees or any of them as a result of, or arising out of, or
relating to any transaction financed or to be financed in whole or in part
directly or indirectly with the proceeds from the sale of any of the Notes, or
the execution, delivery, performance or enforcement of this Agreement or any
other Basic Document or any instrument contemplated hereby or thereby by any of
the Indemnitees, except for any such Indemnified Liabilities arising on account
of such Indemnitee's gross
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negligence or willful misconduct, and if and to the extent the foregoing
undertaking may be unenforceable for any reason, the Issuer agrees to make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The obligations of the
Issuer under this Section 8.05 shall survive the payment or prepayment of the
Notes.
Section 8.06. JURISDICTION AND PROCESS. THE ISSUER AGREES THAT ANY LEGAL
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER
BASIC DOCUMENT OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH OR
THEREWITH, OR ANY LEGAL ACTION OR PROCEEDING TO EXECUTE OR OTHERWISE ENFORCE ANY
JUDGMENT OBTAINED AGAINST THE ISSUER FOR BREACH HEREOF OR THEREOF, OR AGAINST
ANY OF ITS PROPERTIES, MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR
THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK BY ANY
PURCHASER OR ON BEHALF OF SUCH PURCHASER OR BY OR ON BEHALF OF ANY HOLDER OF A
NOTE, AS SUCH PURCHASER OR HOLDER MAY ELECT, AND THE ISSUER HEREBY IRREVOCABLY
AND UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS
(WITHOUT LIMITING THE JURISDICTION OF OTHER COURTS) FOR PURPOSES OF ANY SUCH
LEGAL ACTION OR PROCEEDING. THE ISSUER HEREBY IRREVOCABLY AND UNCONDITIONALLY
AGREES THAT SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THE
BASIC DOCUMENTS OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION THEREWITH MAY BE
EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO THE ISSUER AT ITS
ADDRESS SET FORTH IN SECTION 8.04 OR AT SUCH OTHER ADDRESS OF WHICH THE TRUSTEE
SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. IN ADDITION, THE ISSUER (A) HEREBY
IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER BASIC
DOCUMENT OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH OR THEREWITH
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY CLAIM THAT ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
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IN AN INCONVENIENT FORUM AND (B) HEREBY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
Section 8.07. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Section 8.08. Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect any of the terms
hereof.
Section 8.09. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
Section 8.10. Severability. In case any one or more of the provisions
contained in this Agreement or in any instrument contemplated hereby, or any
application thereof, shall be invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein and therein, and any other application thereof, shall not in any way be
affected or impaired thereby.
Section 8.11. Confidentiality. Each Purchaser shall be deemed to have
agreed by acceptance of the Notes, that all information (other than publicly
available information) received pursuant to such Purchaser's status as a holder
of Notes and identified to such Purchaser in writing by the Issuer as being
confidential, will be held by the Purchaser in accordance with its customary
procedures for handling confidential information, but such Purchaser may make
disclosure to the extent necessary to any bona fide prospective institutional
investor transferee in connection with the contemplated transfer of Notes
(provided that (i) prior to disclosure by such Purchaser after the date hereof
to any prospective institutional investor transferee of a Note of any
information covered by this paragraph, such Purchaser will obtain from such
prospective transferee in favor of the Issuer its written agreement to be bound
by the provisions of this paragraph provided that such Purchaser shall not in
any event be liable to any Person because of the failure of such prospective
transferee to comply with such provisions and (ii) at such time as any
disclosure is made to a transferee, such Purchaser will notify the Issuer in
writing of the information released and the identity of the recipient of such
information) or as required by, in appropriate response to a request by, or as
otherwise customarily disclosed to, any Governmental Body (including without
limitation the National Association of Insurance Commissioners or any successor
thereto) or representative thereof or
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pursuant to legal process or pursuant to any litigation that such Purchaser may
be involved in, or to the accountants, counsel or other professional advisers of
such Purchaser in the course of their respective duties (provided that such
Purchaser requests any such adviser to whom it discloses such information to
treat all such information as non-public data).
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If you are in agreement with the foregoing, please sign the form of acceptance
in the space provided below whereupon this Agreement shall become a binding
agreement between you and the Issuer.
Very truly yours,
SPELL C. LLC
By: /s/ Carol Gratzke
Name: Carol Gratzke
Title: Secretary and Treasurer
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<PAGE>
The foregoing Agreement is hereby accepted and agreed as of the date first above
written :
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK AS TRUSTEE OF A COMMINGLED
PENSION TRUST FUND
By: /s/ E. Clifford Cole
--------------------------
Name: E. Clifford Cole
Title: Vice President
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By: /s/ Julie Bock
--------------------------
Name: Julie Bock
Title: Assistant Vice President
By: /s/ Wayne Hoffmann
--------------------------
Name: Wayne Hoffmann
Title: Vice President
METROPOLITAN LIFE INSURANCE COMPANY
By: /s/ James A. Wiriott
--------------------------
Name: James A. Wiriott
Title: Director
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<PAGE>
CANADA LIFE ASSURANCE COMPANY
By: /s/ George Isaac
--------------------------
Name: George Isaac
Title: Associate Treasurer
CANADA LIFE INSURANCE COMPANY OF AMERICA
By: /s/ George Isaac
--------------------------
Name: George Isaac
Title: Associate Treasurer
CANADA LIFE INSURANCE COMPANY OF NEW YORK
By: /s/ George Isaac
--------------------------
Name: George Isaac
Title: Associate Treasurer
25
<PAGE>
CONFORMED COPY
TRADEMARK PURCHASE
AND LICENSE ASSIGNMENT AGREEMENT
TRADEMARK PURCHASE AND LICENSE ASSIGNMENT AGREEMENT (this "AGREEMENT")
dated as of December 23, 1997, between Cherokee, Inc., a Delaware corporation
("CHEROKEE") and SPELL C. LLC, a Delaware limited liability company ("SPV").
W I T N E S S E T H:
WHEREAS, Cherokee owns the Trademark (as defined below);
WHEREAS, Cherokee and Licensee (as defined below) have entered into a
License Agreement (as defined below), whereby Cherokee granted Licensee certain
rights to use the Trademark pursuant to the License Agreement;
WHEREAS, SPV is a direct, wholly-owned, bankruptcy-remote limited purpose
subsidiary of Cherokee; and
WHEREAS, Cherokee desires to sell, and SPV desires to purchase, the
Trademark Rights (as defined below), and Cherokee desires to assign, and SPV
desires to assume, the License Rights, in each case upon the terms and subject
to the conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.0. Definitions. Capitalized terms used but not defined herein
shall have the respective meanings given to such terms in the Indenture dated
December 23, 1997 between SPV and Wilmington Trust Company, as Trustee (the
"INDENTURE"). The following additional terms, as used herein, have the
following respective meanings:
<PAGE>
"AGREEMENT" has the meaning assigned to that term in the first paragraph
hereof.
"ASSIGNED RIGHTS" has the meaning assigned to that term in Section 2.01.
"ASSIGNMENT" has the meaning assigned to that term in Section 2.01.
"CHEROKEE" has the meaning assigned to that term in the first paragraph
hereof.
"CHEROKEE LICENSES" has the meaning assigned to that term in Section 2.01.
"INDIAN HEAD DESIGN" means the design included in Exhibit A.
"INDENTURE" has the meaning assigned to that term in the introductory
sentence to this Section 1.01.
"LICENSE AGREEMENT" has the meaning assigned to that term in Section 2.01.
"LICENSEE" has the meaning assigned to that term in Section 2.01.
"LICENSE RIGHTS" has the meaning assigned to that term in Section 2.01.
"OTHER EXISTING LICENSES" has the meaning assigned to that term in Section
2.01.
"OTHER PERMITTED LICENSES" means the Cherokee Licenses and the license
granted by SPV to Cherokee pursuant to Section 4.01 hereof.
"SPV" has the meaning assigned to that term in the first paragraph hereof.
"SPV INDEMNIFIED PARTIES" has the meaning assigned to that term in Section
8.11.
"TRADEMARK" means all United States right, title and interest of Cherokee
in and to the "Cherokee" trademark and other marks incorporating the name
Cherokee, with various stylized designs, including the "Indian Head Design," as
used and registered in the United States Patent and Trademark Office, copies of
which registrations are attached as Exhibit A hereto.
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<PAGE>
"TRADEMARK RIGHTS" has the meaning assigned to that term in Section 2.01.
ARTICLE 2
Sale, Assignment and Transfer
Section 2.01. Transfer to SPV. On the terms set forth herein and subject
to (i) the due execution and delivery of this Agreement by each of the parties
hereto and (ii the receipt by Cherokee of the payment required to be made under
Section 3.01 hereof, as of the date hereof Cherokee hereby:
(a) assigns all of its rights and obligations as licensor under the
License Agreement (the "LICENSE AGREEMENT") dated as of November 12, 1997
between Cherokee and Dayton Hudson Corporation (the "LICENSEE") together with
all rights and privileges granted, secured and provided thereby (the "LICENSE
RIGHTS"), such rights to be held and enjoyed by SPV from and after the date
hereof, for its own use and benefit and for the use and benefit of its
successors, assigns or other legal representatives, as fully and entirely as the
same would have been held and enjoyed by Cherokee if this assignment and
assumption had not been made; and
(b) sells, assigns and transfers to SPV all of its right, title and
interest in, to and under the Trademark, together with any United States
extensions or renewals thereof, United States trademark registrations and
trademark applications for the Cherokee trademark, any other mark incorporating
the Cherokee name or the Indian Head Design, and United States common law rights
to the Cherokee trademark, other marks incorporating the name Cherokee and the
Indian Head Design, whether presently existing or hereafter arising or acquired,
together with the good will of the business connected with the use of or
symbolized by the foregoing, together with all rights and privileges granted and
secured thereby, including without limitation any and all claims and causes of
action which may hereafter arise by reason of unfair competition therewith,
infringement, violation or dilution thereof or injury to the associated goodwill
or otherwise, such rights to be held and enjoyed by SPV, for its own use and
benefit and for the use and benefit of its successors, assigns or other legal
representatives as fully and entirely as the same would have been held and
enjoyed by Cherokee if this assignment had not been made (the "TRADEMARK RIGHTS"
and, together with the License Rights, the "ASSIGNED RIGHTS"); provided, that
the sale, assignment and transfer contemplated in this clause (b) is subject to
(x) the License Agreement, (y) the other existing licenses of the Trademark set
forth in
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<PAGE>
Schedule 2.01 (the "OTHER EXISTING LICENSES") and (z) retail license
agreements (in the category of cosmetics, bath and body products only) hereafter
granted by Cherokee as permitted by Section 7(b)(v)(b) of the License Agreement
and Section 4.01 hereof (such other retail license agreements referred to in
(z), together with the Other Existing Licenses, the "CHEROKEE LICENSES"), and
conveys no interest in the Cherokee Licenses.
The sale, assignment and transfer contemplated in this Section 2.01 shall
together be referred to herein as the "ASSIGNMENT."
Section 2.02. Acceptance and Assumption. SPV hereby acknowledges its
acceptance and assumption of all right, title and interest in and to the
Trademark and the License Agreement. SPV hereby expressly assumes all of
Cherokee's liabilities and obligations under the License Agreement.
Section 2.03. Absolute Transfer. Cherokee and SPV hereby agree and
acknowledge that the Assignment is an absolute and irrevocable transfer of the
Trademark and the License Agreement, and is not intended to be a transfer for
purposes of security.
Section 2.04. No Recourse. The Assignment shall be without recourse,
representation or warranty except as expressly provided herein. Without
limiting the generality of the foregoing, Cherokee shall have no responsibility
for performance by the Licensee of its obligations under the License Agreement.
ARTICLE 3
Payment of Purchase Price
Section 3.01. Purchase Price. As consideration for the Assignment, SPV
shall, by not later than 1:00 p.m. New York time on the date hereof, pay or
cause to be paid to Cherokee an amount equal to $47,845,558.83.
Section 3.02. Allocation. Cherokee and SPV agree that any payments due
pursuant to the License Agreement after the date hereof shall be payable to, and
for the account of, SPV, regardless of whether some portion thereof may have
accrued prior to the date hereof.
Section 3.03. Account Information. The payment hereunder to Cherokee shall
be made in immediately available funds, without setoff, deduction or
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<PAGE>
counterclaim by payment to such bank account as Cherokee may specify for this
purpose.
ARTICLE 4
Other Permitted Licenses
Section 4.01. License to Cherokee. SPV hereby grants to Cherokee, and
Cherokee hereby accepts, the right and license to use the Trademark to the
extent necessary or appropriate to enable Cherokee to grant and maintain the
Cherokee Licenses and perform its obligations thereunder and receive the rights
and benefits thereof, in each case subject to Section 4.02. Except as
contemplated by Section 4.02, no royalty shall be payable by Cherokee for any
license granted pursuant to this Section 4.01. The license granted pursuant to
this Section 4.01 shall be memorialized in a license agreement in the form of
Exhibit D.
Section 4.02. Extension of Other Permitted Licenses. Cherokee will not
grant, extend or amend any of the Cherokee Licenses in contravention of Section
7(b)(v) of the License Agreement. In addition, Cherokee will not, without the
prior written consent of SPV, extend the term of the Other Existing Licenses
with Brylane, Calder and/or Pamida or with Dayton Hudson Corporation; provided
that notwithstanding the foregoing Cherokee may agree to extend the term of any
of such Other Existing Licenses (other than the Other Existing License with
Dayton Hudson Corporation) so long as, prior thereto, Cherokee shall have
assigned to SPV, absolutely, the right to receive 50% of all royalties payable
under such Other Existing License during its extended term, and made
arrangements for the payment of such portion of the royalty directly to the
Trustee for the account of SPV, all pursuant to documents reasonably
satisfactory in form and substance to SPV and the Trustee. Upon and subject to
such arrangements having been made, the license granted pursuant to Section 4.01
shall apply to the extended term of such Other Existing License.
ARTICLE 5
Representations and Warranties of Cherokee
Cherokee represents and warrants to SPV as of the date hereof that:
Section 5.01. Trademark. (a) The Trademark is validly registered under
the Lanham Act as set forth in Exhibit A. Except as set forth in Schedule 5.01,
no
5
<PAGE>
other registration or filing with any governmental authority is necessary or
appropriate to maintain and protect the Trademark for the uses contemplated by
the License Agreement.
(b) Prior to the transfer and assignment contemplated in Section 2.01
hereof, Cherokee owns and possesses all right, title and interest in and to the
Trademark, and, except for the License Agreement, the Other Permitted Licenses
and the Strategic Partners Agreement dated July 17, 1995, between Cherokee and
Strategic Partners, Inc., the Trademark Rights are not subject to any judgment,
injunction, order, decree, pledge, encumbrance or agreement restricting the use
thereof or restricting the licensing thereof to any Person.
(c) To Cherokee's knowledge, there are no existing or threatened claims or
proceedings alleging that use of the Trademark Rights by Cherokee or any of its
licensees in the United States infringes any third party's rights or challenging
the ownership of any registration of the Trademark in any jurisdiction in the
United States and Cherokee is not aware of any grounds for any such claims or
proceedings, except as set forth in Schedule 5.01.
(d) The Trademark Rights include all trademarks or service marks owned and
used by Cherokee in connection with the transactions described in the License
Agreement, except as set forth in Schedule 5.01.
(e) The use of the Trademark Rights permitted by the License Agreement
does not infringe any rights owned or possessed by any third party.
(f) To Cherokee's knowledge, no Person is infringing or misappropriating
any of the Trademark Rights, except as set forth in Schedule 5.01.
Section 5.02. License Agreement. The License Agreement is a valid and
binding agreement of each of Cherokee and the Licensee and is in full force and
effect, and neither Cherokee nor Licensee is in default or breach in any
material respect under the terms of the License Agreement. A true and correct
copy of the License Agreement as in effect on the date hereof is set forth in
Exhibit B hereto.
Section 5.03. Transfer Effective. This Agreement is effective in
accordance with its terms to transfer the Assigned Rights to SPV, and upon
satisfaction of the conditions specified in clauses (i) and (ii) of Section
2.01, SPV will be the owner of the Assigned Rights free and clear of any claim,
judgment, injunction, order, decree, pledge, encumbrance or agreement
restricting the use thereof or restricting licensing thereof to any Person,
except as set forth in Section 5.01(b). Except for the recordation of a
Memorandum of Assignment in
6
<PAGE>
substantially the form of Exhibit C hereto with the United States Patent and
Trademark Office, no registration or filing with any governmental authority is
necessary or appropriate in connection with the transfer of the Assigned Rights
by Cherokee to SPV pursuant to this Agreement.
Section 5.04. Corporate Existence and Power. Cherokee is a corporation
duly incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all corporate powers and all governmental
licenses, authorizations, permits, consents and approvals required to carry on
its business as now conducted.
Section 5.05. Corporate Authorization. The execution, delivery and
performance by Cherokee of this Agreement and the Administrative Services
Agreement and the consummation of the transactions contemplated hereby and
thereby are within Cherokee's corporate powers and have been duly authorized by
all necessary corporate action on the part of Cherokee. This Agreement and the
Administrative Services Agreement each constitutes a valid and binding agreement
of Cherokee enforceable against Cherokee in accordance with its terms, except as
the enforceability thereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Section 5.06. Governmental Authorization. The execution, delivery and
performance by Cherokee of this Agreement and the Administrative Services
Agreement and the consummation of the transactions contemplated hereby and
thereby require no action by or in respect of, or filing with, any governmental
body, agency or official, except, with respect to this Agreement, for the filing
of an instrument of transfer in the form of Exhibit C with the United States
Patent and Trademark Office.
Section 5.07. Noncontravention. The execution, delivery and performance by
Cherokee of this Agreement and the Administrative Services Agreement and the
consummation of the transactions contemplated hereby and thereby do not and will
not (i) violate the certificate of incorporation or bylaws of Cherokee, (ii)
violate any applicable law, rule, regulation, judgment, injunction, order or
decree or (iii) constitute a default under, require any consent under, or give
rise to any right of termination, cancellation or acceleration of any right or
obligation of Cherokee or to a loss of any benefit relating to the Trademark or
the License Agreement to which Cherokee is entitled under, any provision of any
agreement or other instrument binding upon Cherokee.
7
<PAGE>
ARTICLE 6
Representations and Warranties of SPV
SPV represents and warrants to Cherokee as of the date hereof that:
Section 6.01. Limited Liability Company Existence and Power. SPV is a
limited liability company duly formed, validly existing and in good standing
under the laws of the State of Delaware and has all legal powers and all
material governmental licenses, authorizations, permits, consents and approvals
required to carry on its business as now conducted.
Section 6.02. Limited Liability Company Authorization. The execution,
delivery and performance by SPV of this Agreement and the Administrative
Services Agreement and the consummation of the transactions contemplated hereby
and thereby are within the legal powers of SPV and have been duly authorized by
all necessary legal action on the part of SPV. This Agreement and the
Administrative Services Agreement each constitutes a valid and binding agreement
of SPV enforceable against SPV in accordance with its terms, except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Section 6.03. Governmental Authorization. The execution, delivery and
performance by SPV of this Agreement and the Administrative Services Agreement
and the consummation of the transactions contemplated hereby and thereby require
no action by or in respect of, or filing with, any governmental body, agency or
official.
Section 6.04. Non-Contravention. The execution, delivery and performance
by SPV of this Agreement and the Administrative Services Agreement and the
consummation of the transactions contemplated hereby and thereby do not and will
not (i) violate the certificate of formation or limited liability company
agreement of SPV, (ii) violate any applicable law, rule, regulation, judgment,
injunction, order or decree or (iii) constitute a default under, require any
consent under, or give rise to any right of termination, cancellation or
acceleration of any right or obligation of SPV or to a loss of any benefit
relating to the Trademark or the License Agreement to which SPV is entitled
under, any provision of any agreement or other instrument binding upon SPV.
8
<PAGE>
ARTICLE 7
Confidentiality
Section 7.01. Confidentiality. (a) The parties hereby agree that the
disclosure of the arrangements and understandings contemplated hereby shall only
be made at such time and in such manner as the parties shall specifically agree.
(b) Notwithstanding clause (a) of this Section 7.01, disclosures of such
arrangements and understandings may be made to the Noteholders and the Trustee
to the extent necessary to allow the performance of the Basic Documents by the
parties thereto, to the Licensee to the extent necessary to allow the
performance of the License Agreement by the parties thereto and may be made to
other third parties (i) if such arrangements and understandings are in the
public domain and have entered the public domain through no fault of the party
seeking to make such disclosure or its affiliates or representatives, or (ii) to
the extent disclosure is compelled by law or court order.
ARTICLE 8
Miscellaneous
Section 8.01. Further Assurances. Cherokee will, from time to time, at its
expense, execute, deliver, file and record any statement, assignment,
instrument, document, agreement or other paper and take any other action
(including, without limitation, any filings with the United States Patent and
Trademark Office) that from time to time may be necessary, or that SPV may
reasonably request, in furtherance of the purposes of this Agreement.
Section 8.02. Notices. All notices and other communications hereunder
shall be in writing (including telecopy or similar writing) and shall be given
to such party (x) in the case of Cherokee, at 6835 Valjean Avenue, Van Nuys, CA
91406 or (y) in the case of SPV at 625 Landor Lane, Pasadena, CA 91106 (with
copies in each case to Wilmington Trust Company, at its address set forth in the
Indenture) or such other address or telecopy number as such party may hereafter
specify for such purpose by notice given hereunder. Each such notice, request
or other communication shall be effective when received.
Section 8.03. Severability. Should any provision of this Agreement for any
reason be declared invalid or unenforceable, such declaration shall not affect
the validity or enforceability of any of the other provisions of this Agreement,
which other provisions shall remain in full force and effect and the application
of
9
<PAGE>
such invalid or unenforceable provision to persons or circumstances other than
those as to which it has been held invalid or unenforceable shall be valid and
enforced to the fullest extent permitted by law.
Section 8.04. Binding Effect; Assignment. This Agreement and all of the
provisions hereof shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Neither
this Agreement nor any of the rights, interests or obligations hereunder shall
be assigned, directly or indirectly, including without limitation, by operation
of law, by any party hereto without the prior written consent of the other party
hereto; provided, that SPV may assign such rights, interests and obligations in
accordance with the Security Agreement.
Section 8.05. Dispute Resolution. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
may be brought only in the courts of the State of New York and of the United
States of America, in each case located in the County of New York, and each of
the parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) and waives any objection to venue laid therein. Each of the
parties agrees that service of process in any such action or proceeding may be
effected by mailing a copy thereof by registered or certified mail (or any
substantially similar form of mail), postage prepaid, to such party at its
address for notices under Section 8.02.
Section 8.06. Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof, and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
Section 8.07. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
Section 8.08. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 8.09. Waiver. Any failure by any party to comply with any
obligation, covenant or agreement herein or to fulfill any condition herein may
be waived only by a written notice from the party entitled to the benefits
thereof. No failure by either party hereto to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise
10
<PAGE>
of any right hereunder preclude any other or future exercise of that right or
any other right hereunder by that party.
Section 8.10. Expenses. Except as otherwise specifically provided in this
Agreement, each of SPV and Cherokee will bear the cost of its own performance
under this Agreement.
Section 8.11. Indemnity. Cherokee shall indemnify and hold harmless SPV
and its officers, directors, employees, agents and representatives
(collectively, the "SPV INDEMNIFIED PARTIES") from and against any and all
liabilities, losses, claims, suits, damages, reasonable costs and expense
(including, without limitation, reasonable fees and disbursement of legal
counsel, accountants and other experts) incurred by the SPV Indemnified Parties
arising out of or in connection with (i) any breach by Cherokee of any of its
representations and warranties or covenants under this Agreement or (ii) to the
extent arising from transactions occurring or circumstances existing at or prior
to the date of this Agreement any actual or alleged trademark infringement,
unfair competition or infringement of similar proprietary rights, arising solely
out of the use by SPV and/or the Licensee of the Trademark as authorized
pursuant to the License Agreement.
Section 8.12. No Petition. Cherokee hereby agrees that it shall not
acquiesce in, petition or otherwise invoke or cause SPV to invoke the process of
any court or governmental authority for the purpose of commencing or sustaining
a case against SPV under any federal or state bankruptcy, insolvency or similar
law or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of SPV or any substantial part of the
property of SPV, or ordering the winding up or liquidation of the affairs of
SPV.
11
<PAGE>
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
executed by its duly authorized representative as of the day and year first
above written.
CHEROKEE, INC.
By: /s/ Robert Margolis
--------------------------
Name: Robert Margolis
Title: Chairman of the Board
of Directors and Chief
Executive Officer
SPELL C. LLC
By: /s/ Carol Gratzke
--------------------------
Name: Carol Gratzke
Title: Secretary and Treasurer
12
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement") is entered
into as of December 23, 1997, by and between SPELL C. LLC, a Delaware limited
liability company (the "Company"), and Cherokee Inc., a Delaware corporation, as
administrator hereunder (in such capacity, the "Administrator").
RECITALS
WHEREAS, Cherokee Inc., a Delaware corporation ("Cherokee"), has
transferred and assigned to the Company certain trademarks and rights under the
License Agreement (as defined below) pursuant to that certain Trademark Purchase
and License Assignment Agreement dated as of December 23, 1997 (as amended,
restated, supplemented or otherwise modified from time to time, the "Trademark
Agreement"), including all rights and obligations of Cherokee as licensor under
that certain License Agreement dated as of November 12, 1997 (as amended,
restated, supplemented or otherwise modified from time to time, the "License
Agreement"), by and between Cherokee and Dayton Hudson Corporation (the
"Licensee"); and
WHEREAS, the Company has entered into that certain Indenture dated as
of December 23, 1997 (as amended, restated, supplemented or otherwise modified
from time to time, the "Indenture"), by and between the Company and the trustee
named therein (in such capacity, the "Trustee"), pursuant to which the Company
has issued certain Notes which are secured by a security interest in the
Company's rights in the Trademark and the License Agreement; and
WHEREAS, the Administrator has developed certain familiarity with and
expertise in connection with establishing, maintaining and protecting the
Trademark and the rights under the License Agreement, as well as the
administration of the License Agreement; and
WHEREAS, the Company has requested that the Administrator perform
certain administrative duties on behalf of the Company in connection with, among
other things, the Trademark and the License Agreement, and the Administrator is
willing to so perform such duties, all on the terms set forth herein.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
AGREEMENT
1. Definitions. Capitalized terms used and not otherwise defined
-----------
herein shall have the meanings given in the Indenture.
2. Appointment of Administrator. Until such time as the Company
----------------------------
designates a new Administrator, Cherokee is hereby designated as, and hereby
agrees
<PAGE>
to perform the duties and obligations of, the Administrator pursuant hereto. The
Administrator shall perform its obligations pursuant hereto not as an agent of
the Company but as an independent contractor and shall clearly identify to all
third parties that it is acting in its capacity as the Administrator pursuant to
this Agreement, and is not itself the owner of the Trademark or the License
Agreement. The Administrator may, with the prior written consent of the Company
(which consent shall not be unreasonably withheld or delayed), sub-contract
certain of its administrative activities hereunder, provided that the
Administrator shall not be relieved of its obligations and duties hereunder and
shall remain fully liable therefor and for any action or inaction of any such
subcontractor.
3. Administrator Duties. The Administrator shall perform the
--------------------
following duties for the benefit of the Company, subject to the further
direction of the Company:
a. Quality Control. The Company shall consult with the
---------------
Administrator and shall establish standards of quality for goods and services
with which the Trademark is to be used by the Licensee. The Administrator shall
monitor the quality of all goods and services in connection with which the
Licensee (and any other licensee of the Trademark) uses the Trademark. From time
to time, upon request of the Administrator, the Company shall direct the
Licensee to submit to the Administrator, or to otherwise make available for
inspection by the Administrator, specimens of goods and other materials on or in
connection with which the Trademark is used. The Administrator shall report to
the Company in the event the Administrator discovers that any goods or services
in connection with which the Trademark is used fail to satisfy the Company's
quality standards. The Administrator shall take such action as may be necessary
or as the Company shall reasonably direct to cause Licensee to restore the
quality of goods and/or services offered by the Licensee in connection with the
Trademark to the Company's standards. Such action may include, without
limitation, notifying the Licensee of its breach of covenant to maintain product
quality, overseeing Licensee's efforts to restore product quality, and (only if
the Company expressly so directs) taking action to terminate the license granted
to the Licensee under License Agreement if Licensee's failure to satisfy the
Company's quality standards continues.
b. Applications and Registrations. The Administrator shall file
------------------------------
in the name of the Company and thereafter diligently prosecute such applications
to register the Trademark in the United States in connection with such goods
and/or services as may be required under the License Agreement or as the
Company, after consulting with the Administrator, shall reasonably direct. The
Administrator shall take such actions as it determines appropriate to maintain
registrations for the Trademark in the United States. The Company shall
cooperate with the Administrator as shall be reasonably necessary or as the
Administrator may reasonably request to file, prosecute and maintain such
applications and registrations for the Trademark. The fees and costs for filing,
prosecuting and maintaining applications and registrations for the Trademark
shall be borne in accordance with Section 6 of this Agreement.
2
<PAGE>
Notwithstanding the foregoing, the Administrator shall not be obligated to file
or prosecute any application if (i) the Administrator has a reasonable belief
that it is unlikely that such application would proceed to registration and (ii)
it promptly notifies the Company in writing to such effect.
c. Trademark Protection. The Company agrees to notify the
--------------------
Administrator promptly in writing in the event it becomes aware that (i) any
legal action is threatened or instituted against the Company or the Licensee
relating to the use of the Trademark by the Company or the Licensee, or (ii) the
Company or the Licensee become aware of any infringement or illegal use by any
third party of the Trademark. The Administrator shall take such action
(including without limitation engaging counsel, and filing lawsuits,
cancellation petitions and notices of opposition) as may be necessary or as the
Company may reasonably direct to protect the Trademark and the rights of the
Company and the Licensee to use the Trademark. The Company shall cooperate with
the Administrator as shall be reasonably required in stopping any infringement
of the Trademark or defending or instituting action to protect the Trademark.
The Company shall serve as a named party in any suit, action or proceeding
brought by the Administrator to protect the Trademark. The cost and expense of
any such suit, action or proceeding and otherwise relating to trademark quality
and control, applications and registrations, and protection shall be borne in
accordance with Section 6 below. Notwithstanding the foregoing, the
Administrator shall not be required to institute legal action if (i) in the
reasonable opinion of the Administrator and its counsel, the probability of
success of such legal action does not justify the time and expense which would
be incurred in instituting such legal action and (ii) it promptly notifies the
Company in writing to such effect.
d. Use of Trademark. The Administrator shall cooperate with the
----------------
Licensee as shall be reasonably necessary to enable the Licensee to establish
use of the Trademark in connection with goods and services and as may be
required under the License Agreement or as the Company shall from time to time
reasonably direct.
e. Licensor Duties. The Administrator shall generally review
---------------
such reports and other communications from the Licensee it receives relating to
the License Agreement, the Trademark, or the Licensee's performance or
obligations under the License Agreement. The Administrator shall provide
periodic reports to the Company, on its view of the status of the Licensee's
performance under the License Agreement. At the Company's reasonable direction,
the Administrator shall engage personnel to inspect the Licensee's books or
records, and shall take other action on behalf of the Company as Administrator
determines appropriate for it to take and which is authorized to be taken under
the License Agreement. The Administrator shall otherwise generally assist the
Company in performing the Company's obligations under the License Agreement, and
in overseeing the Licensee's performance of its obligations under the License
Agreement, as the Company shall reasonably direct.
3
<PAGE>
f. Information. The Administrator shall keep the Company
-----------
apprised of, and shall promptly notify the Company of, all matters that the
Administrator is aware of that may have a material adverse effect on the
validity or value of the Trademark or the License Agreement.
g. Services. Unless the Company notifies the Administrator to
--------
the contrary, the Administrator shall furnish or cause to be furnished to, the
Company the administrative, monitoring and ministerial services specified in
this Section 3(g);
(i) accounting and financial management services, including
advice in all required areas of accounting, internal and public financial
statements and any required federal, state or local governmental reports;
(ii) tax services, including regular and periodic advice and
consultation with respect to tax matters related to the Company, and the
preparation and filing of, and assistance with respect to, any required tax
returns;
(iii) insurance services, including the inclusion to the extent
agreed upon by the Company, of the Company under the insurance policies of the
Administrator including those relating to public liability, property damage,
workers compensation and other matters and processing and administration of
insurance claims;
(iv) management information and other system services,
including computer operations, data input systems and programming and technical
support;
(v) administration of legal formalities, including the
matters specified in the LLC Agreement;
(vi) other actions of the Company that are required or deemed
necessary or appropriate under the Basic Documents, to the extent that the
authority to perform such actions is not withheld pursuant to Section 4 hereof;
and
(vii) such other services as the Company and the Administrator
may hereafter agree.
h. Reports. Cherokee agrees to deliver promptly to the Company
-------
copies of all reports which Cherokee files with the Securities and Exchange
Commission pursuant to Sections 12 and 13 of the Securities Exchange Act of
1934, as amended. If Cherokee ceases to be a reporting company under such Act,
it shall deliver to the Company, not less frequently than quarterly, reports and
interim financial statements in scope reasonably satisfactory to the Company.
4. Authorities Withheld. The Company specifically withholds from the
--------------------
Administrator the following specific authorities, unless superseded by written
permission from the Company:
4
<PAGE>
a. Execution of documents on behalf of the Company granting or
perfecting any rights in the Trademark or the License Agreement;
b. Any use of the Company's name by the Administrator or any
representation by the Administrator that the Administrator is the Company or
holds any ownership interest in (other than as licensee of the Company with
respect to Cherokee Licenses) or with respect to the Trademark or the License
Agreement;
c. Other authorities or rights not expressly granted to the
Administrator hereunder; and
d. Other authorities or rights that expressly require the
Company's approval hereunder.
5. Standard of Care. In performing its duties pursuant hereto, the
----------------
Administrator shall exercise that degree of skill and care consistent with the
degree of skill and care that the Administrator exercises with respect to
trademarks, trademark licenses and related rights held by the Administrator.
6. Expenses; Compensation. The Administrator shall be responsible
----------------------
to pay all expenses incurred by it in connection with the performance of the
services provided by it hereunder. As compensation for the services provided by
the Administrator hereunder, the Company shall pay the Administrator an
Administration Fee, which is to be separately determined between the parties.
Notwithstanding the foregoing, the Administration Fee shall accrue but not be
payable (i) to the extent there are insufficient funds available to the Company
pursuant to Section 3.03(v) or 3.04 of the Indenture, or (ii) during an Event of
Default.
7. Indemnification by the Administrator.
------------------------------------
a. Indemnification. The Administrator agrees to indemnify and
---------------
save the Company harmless from and against all loss, cost, liability and
reasonable expense that arises from: (i) acts constituting theft, fraud, willful
misconduct or gross negligence on the part of the Administrator or (ii) the
Administrator's material breach of its obligations under this Agreement. Except
for any of the aforementioned acts or failures to act by the Administrator or
the Administrator's employees, agents and/or representatives, the Company shall
indemnify, defend and hold harmless the Administrator from any loss, cost,
liability and reasonable expense, relating to the Trademark or the License
Agreement that arises from the Administrator's performance of the
Administrator's obligations hereunder in accordance with the terms hereof,
provided:
(i) the Administrator notifies the Company and any insurance
carrier (as required) promptly after the Administrator receives notice of any
such loss, damage or injury;
5
<PAGE>
(ii) the Administrator takes no action (such as admission of
liability) that bars the Company from obtaining any protection afforded by any
insurance policy the Company may hold or that might prejudice the Company in its
defense to a claim based on such loss, damage or injury; and
(iii) any indemnification of the Administrator by the Company
hereunder shall be payable only from amounts available to the Company pursuant
to Section 3.03(v) or 3.04 of the Indenture.
The Administrator hereby agrees that it shall not acquiesce to, petition or
otherwise invoke or cause the Company to invoke the process of any court or
governmental authority for the purpose of commencing or sustaining a case
against the Company under any federal or state bankruptcy, insolvency or similar
law or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Company or any substantial part of
the property of the Company, or ordering the winding up or liquidation of the
affairs of the Company.
b. Survival of Indemnification. The indemnifications set forth
---------------------------
in this Section 7 shall survive the expiration or earlier termination of this
Agreement with respect to acts, facts, circumstances or occurrences which exist
or occur prior to such termination.
8. Term. This Agreement shall become effective as of the date
----
hereof, and shall continue in full force and effect until the earlier of (a)
payment in full of the Notes and (b) the Company's termination of this Agreement
and the appointment of Cherokee as Administrator hereunder for cause. For
purposes of this Section 8, "cause" shall mean the occurrence of a material
breach hereunder by the Administrator which is not cured within thirty (30) days
of receipt by the Administrator of written notice of such breach from the
Company, it being understood that a failure to perform the obligations set forth
in Section 3 hereof shall constitute a material breach for purposes of this
Section entitling the Company, in addition to its remedies under this Section,
to recovery of expenses incurred in performing such obligations, to the extent
that the Company has made a good faith determination that the incurrence of such
expenses is necessary or appropriate. If so terminated, the Administrator shall
be obligated to pay to the Company the amount, if any, by which the compensation
to be paid to engage a reasonably qualified successor firm to provide the
services hereunder for the remainder of the term of this Agreement exceeds the
amount set forth in Section 6 hereof.
Upon termination pursuant to this Section 8, the Administrator shall
deliver to the successor firm books and records of the Company theretofore
maintained by the Administrator, on behalf of the Company.
9. Notices. Any notice required under this Agreement shall be
-------
written and shall be deemed to be delivered when deposited in the United States
mail, postage prepaid, registered or certified mail, return receipt requested
or, if delivered by hand,
6
<PAGE>
when received by an officer or principal of the party receiving the same or, if
transmitted by telecopy, when transmitted and receipt has been confirmed, in
each case, addressed to the parties at the following addresses:
If to the Company: SPELL C. LLC
625 Landor Lane
Pasadena, California 91106
Attention: Carol Gratzke
Telephone: 818-792-4880
If to the Administrator: Cherokee Inc.
6835 Valjean Avenue
Van Nuys, California 91406
Fax: 818-908-9191
Attention: Robert Margolis
Either party may change its address by giving notice to the other party of such
change in writing in accordance herewith.
10. Entire Agreement. This Agreement represents the entire
----------------
agreement between the parties with respect to the subject matter hereof, and no
alteration, modification or interpretation hereof shall be binding unless in
writing and signed by both parties.
11. Interpretation. All headings are inserted in this Agreement
--------------
only for convenience and ease of reference and are not to be considered in the
construction or interpretation of this Agreement. Unless the context clearly
requires otherwise: (a) words such as "include," "including," or "such as" shall
be interpreted as if followed by the words "without limitation"; and (b) any
reference to an Article, Section, or other subdivision, or Exhibit or Schedule,
is intended to refer to an Article, Section, or other subdivision, or Exhibit or
Schedule, of this Agreement. In the event of any inconsistency between the text
of this Agreement and any Exhibit or Schedule attached hereto, the text shall
govern. This Agreement shall be so construed that whenever applicable the use
of the singular number shall include the plural number, and the use of the
plural number shall include the singular number, and the use of the feminine,
masculine, or neuter gender shall include the other genders.
12. Further Assurances. The Company and the Administrator agree to
------------------
execute such other documents and perform such other acts as may be necessary or
desirable to carry out the purposes of this Agreement.
7
<PAGE>
13. Third Parties. Neither this Agreement nor any provision hereof
-------------
nor any service, relationship or other matter referred to herein shall inure
to the benefit of any third party, to any trustee in bankruptcy, to any assignee
for the benefit of creditors, to any receiver by reason of insolvency, to any
another fiduciary or officer representing a bankrupt or insolvent estate of
either party, or to the creditors or claimants of such an estate, except that
the benefits of this Agreement may be assigned as collateral to the Trustee
under the Indenture as security for the payment of the Notes.
14. No Interest or Lien. This Agreement does not constitute an
-------------------
interest in or lien upon property of the Company. It shall not be recorded in
the public records where any property of the Company is located and shall not
constitute or establish any basis for claim, for filing of a lis pendens or
notice of pendency or claim of lien.
15. Confidentiality. The Administrator shall not make any public
---------------
announcement concerning the negotiation or consummation of this Agreement, or
of any of the terms of this Agreement, without the Company's prior consent,
which consent may be granted or denied in the Company's sole discretion. The
Administrator shall keep confidential all information pertaining to the
administration of the Trademark, the License Agreement and the Indenture and all
financial information pertaining thereto and to the Company and the members of
the and their affiliates. Except as (a) may be required by law or (b) may have
been made publicly available by parties other than the Administrator or (c) may
be required to perform its duties and services hereunder, the Administrator
shall not disclose any such information which is designated by the Company as
being confidential without the Company's prior consent, which consent may be
granted or denied in the Company's sole discretion.
16. No Waiver. No consent or waiver, express or implied, by either
---------
party to any breach or default by the other party in the performance of any of
its obligations under this Agreement shall be deemed or construed to be a
consent or waiver to or of any other breach or default in performance by such
other party of such obligation or of any party of such obligation or of any
other obligation under this Agreement. To be effective, any waiver must be in
writing and be signed by the party intended to be bound thereby.
17. Exculpation. No member, officer or manager of the Company
-----------
(direct or indirect) shall be personally liable for the performance of such
party's obligations under this Agreement, it being understood that the liability
of the Company for the Company's obligations under this Agreement shall be
limited to its interest in the Trademark and the License Agreement and the
proceeds thereof and the Administrator shall not look to any of the other assets
of the Company or any assets of any of the aforesaid parties in seeking either
to enforce the Company's obligations under this Agreement or to satisfy a
judgment for the Company's failure to perform such No shareholder, officer or
director of the Administrator (direct or indirect) shall be personally liable
for the performance of such party's obligations under this Agreement, provided,
however, nothing contained herein shall be deemed to exculpate the aforesaid
parties
8
<PAGE>
from liability arising out of theft, gross negligence or fraud on the part of
the Administrator.
18. Additional Remedies. The rights and remedies of the parties
-------------------
under this Agreement shall not be mutually exclusive. The exercise of one or
more of the remedial provisions of this Agreement shall not preclude the
exercise of any other remedial provisions hereof.
19. Company's Approval, Consent, Direction or Authorization. Any
-------------------------------------------------------
reference to the Company's approval, consent, direction or authorization in
this Agreement shall mean the written approval, consent, direction or
authorization of the Company, which may (unless expressly provided otherwise
herein) be granted or withheld in the Company's sole discretion.
20. Partial Invalidity. If any term, covenant, condition or
------------------
provision of this Agreement or the application thereof to any person or
circumstance shall, to any extent be invalid, unenforceable or violate a
party's legal rights, then such term, covenant, condition or provision shall be
deemed to be null and void and unenforceable; however, all other provisions of
this Agreement, or the application of such term or provision to persons or
circumstances other than those to which are held invalid, unenforceable or
violative of legal rights, shall not be affected thereby, and each and every
other term, condition, covenant and provision of this Agreement shall be valid
and be enforced to the fullest extent permitted by law.
21. Governing Law. This Agreement shall be governed by the internal
-------------
laws of the State of California, without regard to conflicts of law principles.
9
<PAGE>
IN WITNESS WHEREOF, the Company and the Administrator have executed
this Administrative Services Agreement as of the date first set forth above.
"Administrator"
CHEROKEE INC.*
By: /s/ Patricia Warren
--------------------
Name: Patricia Warren
Title: President
"Company"
SPELL C. LLC
By: /S/ Robert Margolis
--------------------
Name: Robert Margolis
Title: President
* Also known as Delaware Cherokee Inc.
10
<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
SPELL C. LLC
This Limited Liability Company Agreement (together with the schedules
attached hereto, this "Agreement") of SPELL C. LLC (the "Company"), is entered
into by Cherokee Inc., a Delaware corporation, as the sole member (the
"Member"). Capitalized terms used and not otherwise defined herein have the
meanings set forth on Schedule A hereto.
----------
The Member, by execution of this Agreement, (i) hereby forms the
Company as a limited liability company pursuant to and in accordance with the
Delaware Limited Liability Company Act (6 Del.C. (S)18-101, et seq.), as amended
------ -- ---
from time to time (the "Act"), and this Agreement and (ii) hereby agrees as
follows:
1. Name.
----
The name of the limited liability company formed hereby is SPELL C.
LLC.
2. Principal Business Office.
-------------------------
The principal business office of the Company shall be located at 625
Landor Lane, Pasadena, California 91106, or such other location as may hereafter
be determined by the Member.
3. Registered Office.
-----------------
The address of the registered office of the Company in the State of
Delaware is c/o RL&F Service Corp., One Rodney Square, 10th Floor, Tenth and
King Streets, Wilmington, New Castle County, Delaware 19801.
4. Registered Agent.
----------------
The name and address of the registered agent of the Company for
service of process on the Company in the State of Delaware is RL&F Service
Corp., One Rodney Square, 10th Floor, Tenth and King Streets, Wilmington, New
Castle County, Delaware 19801.
5. Member.
------
a. The mailing address of the Member is set forth on Schedule B
----------
attached hereto.
<PAGE>
b. Subject to Section 9j, the Member may act by written consent.
6. Certificates.
------------
James G. Leyden, Jr., is hereby designated as an "authorized person"
within the meaning of the Act, and has executed, delivered and filed the
Certificate of Formation of the Company with the Secretary of State of the State
of Delaware. Upon the filing of the Certificate of Formation with the Secretary
of State of the State of Delaware, his powers as an "authorized person" ceased,
and the Member thereupon became the designated "authorized person" and shall
continue as the designated "authorized person" within the meaning of the Act.
The Member or an Officer shall execute, deliver and file any other certificates
(and any amendments and/or restatements thereof) necessary for the Company to
qualify to do business in California and in any other jurisdiction in which the
Company may wish to conduct business.
7. Purposes.
--------
Subject to Section 9j, the purposes of the Company are to engage in
the following activities:
a. (i) to acquire, own, hold, administer, service, grant or enter
into agreements for the servicing of, finance, manage, sell, assign, pledge,
collect amounts due on and otherwise deal with the Trademark, the Trademark
License and other assets to be acquired pursuant to the Basic Documents and any
proceeds or rights associated therewith and other licenses relating thereto and
agreements pertaining thereto;
(ii) to issue, sell, authorize and deliver the Notes and other
evidences of the Indebtedness and to enter into any agreement or document
providing for the authorization, issuance, sale and delivery of the Notes;
(iii) to sell, exchange, pledge, encumber or otherwise dispose
of all or any part of the Trademark, the Trademark License and the Company's
other assets and property and, in connection therewith, to accept, collect,
hold, sell, exchange or otherwise dispose of evidences of indebtedness or other
property received pursuant thereto, including without limitation the granting of
security interests to secure the Indebtedness;
(iv) to execute, deliver and perform the Basic Documents;
(v) to invest proceeds from the Trademark, the Trademark
License and the Company's other assets and any capital and income of the Company
in accordance with the Basic Documents or as otherwise determined by the Board
and not inconsistent with this Section 7 or the Basic Documents; and
2
<PAGE>
(vi) to do such other things and carry on any other activities
which the Board determines to be necessary, convenient or incidental to any of
the foregoing purposes, and have and exercise all of the power and rights
conferred upon limited liability companies formed pursuant to the Act.
b. The Company, by or through any Officer on behalf of the Company,
may enter into and perform the Basic Documents, including without limitation the
Note Issuance Documents (including without limitation the issuance of the Notes
pursuant thereto) and the Administrative Services Agreement, and all documents,
agreements, certificates, or financing statements contemplated thereby or
related thereto, all without any further act, vote or approval of the Member or
any Director or Officer notwithstanding any other provision of this Agreement,
the Act or applicable law, rule or regulation. The foregoing authorization
shall not be deemed a restriction on the powers of any Officer to enter into
other agreements on behalf of the Company.
8. Powers.
------
Subject to Section 9j, the Company, and the Board of Directors and the
proper Officers of the Company on behalf of the Company, (i) shall have and
exercise all powers necessary, convenient or incidental to accomplish its
purposes as set forth in Section 7 and (ii) shall have and exercise all of the
powers and rights conferred upon limited liability companies formed pursuant to
the Act.
9. Management.
----------
a. Board of Directors. Subject to Section 9j, the business and
------------------
affairs of the Company shall be managed by or under the direction of a Board of
one or more Directors. Subject to Section 10, the Member may determine at any
time in its sole and absolute discretion the number of Directors to constitute
the Board. The authorized number of Directors may be increased or decreased by
the Member at any time in its sole and absolute discretion, upon notice to all
Directors, and subject in all cases to Section 10. The initial number of
Directors shall be three, one of which shall be an Independent Director pursuant
to Section 10. Each Director elected, designated or appointed shall hold office
until a successor is elected and qualified or until such Director's earlier
death, resignation or removal. Each Director shall execute and deliver the
Management Agreement. Directors need not be a Member.
b. Powers. Subject to Section 9j, the Board of Directors shall have
------
the power to do any and all acts necessary, convenient or incidental to or for
the furtherance of the purposes described herein, including all powers,
statutory or otherwise. Subject to Section 7, the Board of Directors has the
authority to bind the Company.
3
<PAGE>
c. Meeting of the Board of Directors. The Board of Directors of the
---------------------------------
Company may hold meetings, both regular and special, within or outside the State
of Delaware. Regular meetings of the Board may be held without notice at such
time and at such place as shall from time to time be determined by the Board.
Special meetings of the Board may be called by the President on not less than
one day's notice to each Director by telephone, facsimile, mail, telegram or any
other means of communication, and special meetings shall be called by the
President or Secretary in like manner and with like notice upon the written
request of any one or more of the Directors.
d. Quorum; Acts of the Board. At all meetings of the Board, a
-------------------------
majority of the Directors shall constitute a quorum for the transaction of
business and, except as otherwise provided in any other provision of this
Agreement, the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board. If a quorum shall not be
present at any meeting of the Board, the Directors present at such meeting may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present. Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee, as the case may be.
e. Electronic Communications. Members of the Board, or any
-------------------------
committee designated by the Board, may participate in meetings of the Board, or
any committee, by means of telephone conference or similar communications
equipment that allows all persons participating in the meeting to hear each
other, and such participation in a meeting shall constitute presence in person
at the meeting. If all the participants are participating by telephone
conference or similar communications equipment, the meeting shall be deemed to
be held at the principal place of business of the Company.
f. Committees of Directors.
-----------------------
(i) The Board may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the Directors of the Company. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
(ii) In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such members constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
4
<PAGE>
(iii) Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Company. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board. Each committee
shall keep regular minutes of its meetings and report the same to the Board when
required.
g. Compensation of Directors; Expenses. The Board shall have the
-----------------------------------
authority to fix the compensation of Directors. The Directors may be paid their
expenses, if any, of attendance at meetings of the Board, which may be a fixed
sum for attendance at each meeting of the Board or a stated salary as Director.
No such payment shall preclude any Director from serving the Company in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
h. Removal of Directors. Unless otherwise restricted by law, any
--------------------
Director or the entire Board of Directors may be removed, with or without cause,
at any time by the Member, and, subject to Section 10, any vacancy caused by any
such removal may be filled by action of the Member.
i. Directors as Agents. To the extent of their powers set forth in
-------------------
this Agreement and subject to Section 9j, the Directors are agents of the
Company for the purpose of the Company's business, and the actions of the
Directors taken in accordance with such powers set forth in this Agreement shall
bind the Company.
j. Limitations on the Company's Activities.
---------------------------------------
(i) This Section 9j is being adopted in order to comply with
certain provisions required in order to qualify the Company as a "special
purpose entity" for the purpose of the Indebtedness.
(ii) The Member shall not, so long as any Indebtedness is
outstanding, amend, alter, change or repeal the definition of "Independent
Director" or Sections 7, 8, 9, 10, 20, 21, 22, 23, 24, 26 or 31 or Schedule A of
----------
this Agreement without the unanimous written consent of the Board (including the
Independent Director). Subject to this Section 9j, the Member reserves the right
to amend, alter, change or repeal any provisions contained in this Agreement in
accordance with Section 31.
(iii) Notwithstanding any other provision of this Agreement and
any provision of law that otherwise so empowers the Company, the Member or the
Board, neither the Member nor the Board shall be authorized or empowered, nor
shall they permit the Company, without the prior unanimous written consent of
the Member and the Board (including the Independent Director), to take any
Material Action.
5
<PAGE>
(iv) The Board and the Member shall cause the Company to do or
cause to be done all things necessary to preserve and keep in full force and
effect its existence, rights (charter and statutory) and franchises; provided,
--------
however, that the Company shall not be required to preserve any such right or
- -------
franchise if the Board shall determine that the preservation thereof is no
longer desirable for the conduct of its business and that the loss thereof is
not disadvantageous in any material respect to the holders of the Indebtedness
and the Company shall deliver to the Note Trustee an Officer's Certificate to
that effect. The Board also shall cause the Company to:
(1) maintain its own separate books and records and bank
accounts;
(2) at all times hold itself out to the public as a legal
entity separate from the Member and any other Person;
(3) have a Board composed differently from that of the
Member and any other Person;
(4) file its own tax returns, if any, as may be required
under applicable law, to the extent (a) not part of a
consolidated group filing a consolidated return or
returns or (b) not treated as a division for tax
purposes of another taxpayer, and pay any taxes so
required to be paid under applicable law;
(5) not commingle its assets with assets of any other
Person;
(6) conduct its business in its own name;
(7) maintain separate financial statements;
(8) pay its own liabilities only out of its own funds;
(9) maintain an arm's length relationship with its
Affiliates and the Member;
(10) pay the salaries of its own employees, if any;
(11) not hold out its credit as being available to satisfy
the obligations of others;
6
<PAGE>
(12) allocate fairly and reasonably any overhead for
shared office space;
(13) use separate stationery, invoices and checks;
(14) not pledge its assets for the benefit of any other
Person other than pursuant to the Note Issuance
Documents;
(15) correct any known misunderstanding regarding its
separate identity;
(16) maintain adequate capital in light of its
contemplated business purposes;
(17) cause its Board of Directors to meet at least
annually or act pursuant to written consent and keep
minutes of such meetings and actions and observe all
other Delaware limited liability company formalities;
and
(18) not acquire any obligations or securities of the
Member.
(v) So long as any Indebtedness is outstanding, the Board
shall not cause or permit the Company to:
(1) guarantee any obligation of any Person, including any
Affiliate;
(2) engage, directly or indirectly, in any business other
than that arising out of the issuance of the
Indebtedness or the actions required or permitted to
be performed under Section 7, the Note Issuance
Documents or this Section 9j;
(3) incur, create or assume any indebtedness other than
the Indebtedness or as otherwise expressly permitted
under the Note Issuance Documents;
(4) make or permit to remain outstanding any loan or
advance to, or own or acquire any stock or securities
of, any Person, except that the Company may invest in
those investments
7
<PAGE>
permitted under the Note Issuance Documents and may
make any advance required or expressly permitted to
be made pursuant to any provisions of the Note
Issuance Documents and permit the same to remain
outstanding in accordance with such provisions;
(5) to the fullest extent permitted by law, engage in any
dissolution, liquidation, consolidation, merger,
asset sale or transfer of ownership interests other
than such activities as are expressly permitted
pursuant to any provision of the Note Issuance
Documents; or
(6) form, acquire or hold any subsidiary (whether
corporate, partnership, limited liability company or
other).
10. Independent Director.
--------------------
As long as any Indebtedness is outstanding, the Member shall cause the
Company at all times to have at least one Independent Director who will be
appointed by the Member. To the fullest extent permitted by Section 18-1101(c)
of the Act, the Independent Director shall consider only the interests of the
Company, including its respective creditors, in acting or otherwise voting on
the matters referred to in Section 9j(iii). No resignation or removal of an
Independent Director, and no appointment of a successor Independent Director,
shall be effective until the successor Independent Director shall have accepted
his or her appointment by a written instrument, which may be a counterpart
signature page to the Management Agreement. All right, power and authority of
the Independent Directors shall be limited to the extent necessary to exercise
those rights and perform those duties specifically set forth in this Agreement.
Except as provided in the second sentence of this Section 10, in exercising
their rights and performing their duties under this Agreement, any Independent
Director shall have a fiduciary duty of loyalty and care similar to that of a
director of a business corporation organized under the General Corporation Law
of the State of Delaware.
11. Officers.
--------
a. Officers. The Officers of the Company shall be chosen by the
--------
Board and shall consist of at least a President, a Secretary and a Treasurer.
The Board of Directors may also choose one or more Vice Presidents, Assistant
Secretaries and Assistant Treasurers. Any number of offices may be held by the
same person. The Board shall choose a President, a Secretary and a Treasurer.
The Board may appoint such other Officers and agents as it shall deem necessary
or advisable who shall hold their offices for such terms and shall exercise such
powers
8
<PAGE>
and perform such duties as shall be determined from time to time by the Board.
The salaries of all Officers and agents of the Company shall be fixed by or in
the manner prescribed by the Board. The Officers of the Company shall hold
office until their successors are chosen and qualified. Any Officer elected or
appointed by the Board may be removed at any time, with or without cause, by the
affirmative vote of a majority of the Board. Any vacancy occurring in any office
of the Company shall be filled by the Board.
b. President. The President shall be the chief executive officer of
---------
the Company, shall preside at all meetings of the Member, if any, and the Board,
shall be responsible for the general and active management of the business of
the Company and shall see that all orders and resolutions of the Board are
carried into effect. The President shall execute all bonds, mortgages and other
contracts, except: (i) where required or permitted by law or this Agreement to
be otherwise signed and executed, including Section 7b; (ii) where signing and
execution thereof shall be expressly delegated by the Board to some other
Officer or agent of the Company; and (iii) as otherwise permitted in Section
11c.
c. Vice President. In the absence of the President or in the event
--------------
of the President's inability to act, the Vice President, if any (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated by the Directors, or in the absence of any designation, then in the
order of their election), shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. The Vice Presidents, if any, shall perform such other duties and
have such other powers as the Board may from time to time prescribe.
d. Secretary and Assistant Secretary. The Secretary shall be
---------------------------------
responsible for filing legal documents and maintaining records for the Company.
The Secretary shall attend all meetings of the Board and all meetings of the
Member, if any, and record all the proceedings of the meetings of the Company
and of the Board in a book to be kept for that purpose and shall perform like
duties for the standing committees when required. The Secretary shall give, or
shall cause to be given, notice of all meetings of the Member, if any, and
special meetings of the Board, and shall perform such other duties as may be
prescribed by the Board or the President, under whose supervision the Secretary
shall serve. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board (or if there be no
such determination, then in order of their election), shall, in the absence of
the Secretary or in the event of the Secretary's inability to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
e. Treasurer and Assistant Treasurer. The Treasurer shall have the
---------------------------------
custody of the Company funds and securities and shall keep full and accurate
9
<PAGE>
accounts of receipts and disbursements in books belonging to the Company and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Company in such depositories as may be designated by the Board.
The Treasurer shall disburse the funds of the Company as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
President and to the Board, at its regular meetings or when the Board so
requires, an account of all of the Treasurer's transactions and of the financial
condition of the Company. The Assistant Treasurer, or if there shall be more
than one, the Assistant Treasurers in the order determined by the Board (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Treasurer or in the event of the Treasurer's inability to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board may from time
to time prescribe.
f. Officers as Agents. The Officers, to the extent of their powers
------------------
set forth in this Agreement or otherwise vested in them by action of the Board
not inconsistent with this Agreement, are agents of the Company for the purpose
of the Company's business and, subject to Section 9j, the actions of the
Officers taken in accordance with such powers shall bind the Company.
g. Duties of Board and Officers. Except to the extent otherwise
----------------------------
provided herein, each Director and Officer shall have a fiduciary duty of
loyalty and care similar to that of directors and officers of business
corporations organized under the General Corporation Law of the State of
Delaware.
12. Limited Liability.
-----------------
Except as otherwise expressly provided by the Act, the debts,
obligations and liabilities of the Company, whether arising in contract, tort or
otherwise, shall be the debts, obligations and liabilities solely of the
Company, and neither the Member nor any Director shall be obligated personally
for any such debt, obligation or liability of the Company solely by reason of
being a Member or Director of the Company.
13. Capital Contributions.
---------------------
The Member has contributed to the Company property of an agreed value
as listed on Schedule B attached hereto.
----------
14. Additional Contributions.
------------------------
The Member is not required to make any additional capital contribution
to the Company. However, the Member may make additional capital contributions
to the Company at any time upon the written consent of such Member. To the
extent that the Member makes an additional capital contribution to the Company,
the Member shall revise Schedule B of this Agreement. The provisions of this
----------
Agreement, including this Section 14, are intended solely to benefit the Member
and, to the fullest extent permitted by law,
10
<PAGE>
shall not be construed as conferring any benefit upon any creditor of the
Company (and no such creditor of the Company shall be a third-party beneficiary
of this Agreement) and the Member shall not have any duty or obligation to any
creditor of the Company to make any contribution to the Company or to issue any
call for capital pursuant to this Agreement.
15. Allocation of Profits and Losses.
--------------------------------
The Company's profits and losses shall be allocated to the Member.
16. Distributions.
-------------
Distributions shall be made to the Member at the times and in the
aggregate amounts determined by the Board. Notwithstanding any provision to the
contrary contained in this Agreement, the Company shall not be required to make
a distribution to the Member on account of its interest in the Company if such
distribution would violate Section 18-607 of the Act or any other applicable law
or the Basic Documents.
17. Books and Records.
-----------------
The Board shall keep or cause to be kept complete and accurate books
of account and records with respect to the Company's business. The books of the
Company shall at all times be maintained by the Board. The Member and its duly
authorized representatives shall have the right to examine the Company books,
records and documents during normal business hours. The Company, and the Board
on behalf of the Company, shall not have the right to keep confidential from the
Member any information that the Board would otherwise be permitted to keep
confidential from the Member pursuant to Section 18-305(c) of the Act. The
Company's books of account shall be kept using the method of accounting
determined by the Member. The Company's independent auditor shall be an
independent public accounting firm selected by the Member.
18. Reports.
-------
a. Within 60 days after the end of each fiscal quarter, the Board
shall cause to be prepared an unaudited report setting forth as of the end of
such fiscal quarter:
(i) unless such quarter is the last fiscal quarter, a balance
sheet of the Company; and
(ii) unless such quarter is the last fiscal quarter, an income
statement of the Company for such fiscal quarter.
b. The Board shall use diligent efforts to cause to be prepared and
mailed to the Member, within 120 days after the end of each fiscal year, an
audited or unaudited report setting forth as of the end of such fiscal year:
(i) a balance sheet of the Company;
11
<PAGE>
(ii) an income statement of the Company for such fiscal year;
and
(iii) a statement of the Member's capital account.
c. The Board shall, after the end of each fiscal year, use
reasonable efforts to cause the Company's independent accountants to prepare and
transmit to the Member as promptly as such tax information as may be reasonably
necessary to enable the Member to prepare its federal, state and local income
tax returns relating to such fiscal year.
19. Other Business.
--------------
The Member and any Affiliate of the Member may engage in or possess an
interest in other business ventures (unconnected with the Company) of every kind
and description, independently or with others. The Company shall not have any
rights in or to such independent ventures or the income or profits therefrom by
virtue of this Agreement.
20. Exculpation and Indemnification.
-------------------------------
a. Neither the Member nor any Officer, Director, employee or agent
of the Company and no employee, representative, agent or Affiliate of the Member
(collectively, the "Covered Persons") shall be liable to the Company or any
other Person who has an interest in or claim against the Company for any loss,
damage or claim incurred by reason of any act or omission performed or omitted
by such Covered Person in good faith on behalf of the Company and in a manner
reasonably believed to be within the scope of the authority conferred on such
Covered Person by this Agreement, except that a Covered Person shall be liable
for any such loss, damage or claim incurred by reason of such Covered Person's
gross negligence or willful misconduct.
b. To the fullest extent permitted by applicable law, a Covered
Person shall be entitled to indemnification from the Company for any loss,
damage or claim incurred by such Covered Person by reason of any act or omission
performed or omitted by such Covered Person in good faith on behalf of the
Company and in a manner reasonably believed to be within the scope of the
authority conferred on such Covered Person by this Agreement, except that no
Covered Person shall be entitled to be indemnified in respect of any loss,
damage or claim incurred by such Covered Person by reason of such Covered
Person's gross negligence or willful misconduct with respect to such acts or
omissions; provided, however, that any indemnity under this Section 20 shall be
-------- -------
provided out of and to the extent of Company assets only, and the Member shall
not have personal liability on account thereof; and provided further, that so
-------- -------
long as any Indebtedness is outstanding, no indemnity payment from funds of the
Company (as distinct from funds from other sources, such as insurance) of any
indemnity under this Section 20
12
<PAGE>
shall be payable except out of funds available for payment of Company expenses
as provided in the Indenture.
c. To the fullest extent permitted by applicable law, expenses
(including legal fees) incurred by a Covered Person defending any claim, demand,
action, suit or proceeding shall, from time to time, be advanced by the Company
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Company of an undertaking by or on behalf of the Covered
Person to repay such amount if it shall be determined that the Covered Person is
not entitled to be indemnified as authorized in this Section 20.
d. A Covered Person shall be fully protected in relying in good
faith upon the records of the Company and upon such information, opinions,
reports or statements presented to the Company by any Person as to matters the
Covered Person reasonably believes are within such other Person's professional
or expert competence and who has been selected with reasonable care by or on
behalf of the Company, including information, opinions, reports or statements as
to the value and amount of the assets, liabilities, or any other facts pertinent
to the existence and amount of assets from which distributions to the Member
might properly be paid.
e. To the extent that, at law or in equity, a Covered Person has
duties (including fiduciary duties) and liabilities relating thereto to the
Company or to any other Covered Person, a Covered Person acting under this
Agreement shall not be liable to the Company or to any other Covered Person for
its good faith reliance on the provisions of this Agreement or any approval or
authorization granted by the Company or any other Covered Person. The
provisions of this Agreement, to the extent that they restrict the duties and
liabilities of a Covered Person otherwise existing at law or in equity, are
agreed by the Member to replace such other duties and liabilities of such
Covered Person.
f. The foregoing provisions of this Section 20 shall survive any
termination of this Agreement.
21. Assignments.
-----------
Subject to Section 23, the Member may assign in whole or in part its
limited liability company interest in the Company. If the Member transfers all
of its limited liability company interest in the Company pursuant to this
Section 21, the transferee shall be admitted to the Company as a member of the
Company upon its execution of an instrument signifying its agreement to be bound
by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the transfer and, immediately following such
admission, the transferor Member shall cease to be a member of the Company.
Notwithstanding anything in this Agreement to the contrary, any successor to the
Member by merger or consolidation in compliance with the Basic
13
<PAGE>
Documents shall, without further act, be the Member hereunder, and such merger
or consolidation shall not constitute an assignment for purposes of this
Agreement.
22. Resignation.
-----------
So long as any Indebtedness is outstanding, the Member may not resign
without the prior written consent of the Majority Holders (as defined in the
Indenture). If the Member is permitted to resign pursuant to this Section 22,
an additional member of the Company shall be admitted to the Company, subject to
Section 23, upon its execution of an instrument signifying its agreement to be
bound by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the resignation and, immediately following such
admission, the resigning Member shall cease to be a member of the Company.
23. Admission of Additional Members.
-------------------------------
One or more additional members of the Company may be admitted to the
Company with the written consent of the Member; provided that, notwithstanding
--------
the foregoing, so long as any Indebtedness remains outstanding, no additional
Member may be admitted to the Company unless the Member retains a majority
interest in the Company.
24. Dissolution.
-----------
a. Subject to Section 9j, the Company shall be dissolved, and its
affairs shall be wound up upon the first to occur of the following: (i) the
retirement, resignation or dissolution of the Member or the occurrence of any
other event which terminates the continued membership of the Member in the
Company unless the business of the Company is continued in a manner permitted by
the Act or (ii) the entry of a decree of judicial dissolution under Section 18-
802 of the Act.
b. The bankruptcy (as defined in Sections 18-101(1) and 18-304 of
the Act) of the Member shall not cause the Member to cease to be a member of the
Company and upon the occurrence of such an event, the business of the Company
shall continue without dissolution.
c. In the event of dissolution, the Company shall conduct only such
activities as are necessary to wind up its affairs (including the sale of the
assets of the Company in an orderly manner), and the assets of the Company shall
be applied in the manner, and in the order of priority, set forth in Section 18-
804 of the Act.
d. The Company shall terminate when (i) all of the assets of the
Company, after payment of or due provision for all debts, liabilities and
obligations of the Company shall have been distributed to the Member in the
manner provided for in this
14
<PAGE>
Agreement and (ii) the Certificate of Formation shall have been canceled in the
manner required by the Act.
25. Waiver of Partition; Nature of Interest.
---------------------------------------
Except as otherwise expressly provided in this Agreement, to the
fullest extent permitted by law, the Member hereby irrevocably waives any right
or power that the Member might have to cause the Company or any of its assets to
be partitioned, to cause the appointment of a receiver for all or any portion of
the assets of the Company, to compel any sale of all or any portion of the
assets of the Company pursuant to any applicable law or to file a complaint or
to institute any proceeding at law or in equity to cause the dissolution,
liquidation, winding up or termination of the Company. The Member shall not
have any interest in any specific assets of the Company, and the Member shall
not have the status of a creditor with respect to any distribution pursuant to
Section 16 hereof. The interest of the Member in the Company is personal
property.
26. Benefits of Agreement; No Third-Party Rights.
--------------------------------------------
None of the provisions of this Agreement shall be for the benefit of
or enforceable by any creditor of the Company or by any creditor of the Member.
Nothing in this Agreement shall be deemed to create any right in any Person
(other than Covered Persons) not a party hereto, and this Agreement shall not be
construed in any respect to be a contract in whole or in part for the benefit of
any third Person.
27. Severability of Provisions.
--------------------------
Each provision of this Agreement shall be considered severable and if
for any reason any provision or provisions herein are determined to be invalid,
unenforceable or illegal under any existing or future law, such invalidity,
unenforceability or illegality shall not impair the operation of or affect those
portions of this Agreement which are valid, enforceable and legal.
28. Entire Agreement.
----------------
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof.
29. Binding Agreement.
-----------------
Notwithstanding any other provision of this Agreement, the Member
agrees that this Agreement, including, without limitation, Sections 7, 8, 9, 10,
20, 21, 22, 23, 24, 26 and 31, constitutes a legal, valid and binding agreement
of the Member, and is enforceable against the Member by the Independent
Director, in accordance with its terms.
30. Governing Law.
-------------
15
<PAGE>
This Agreement shall be governed by and construed under the laws of
the State of Delaware (without regard to conflict of laws principles), all
rights and remedies being governed by said laws.
31. Amendments.
----------
Subject to Section 9j, this Agreement may not be modified, altered,
supplemented or amended except pursuant to a written agreement executed and
delivered by the Member
32. Counterparts.
------------
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original of this Agreement and all of which together
shall constitute one and the same instrument.
33. Notices.
-------
Any notices required to be delivered hereunder shall be in writing and
personally delivered, mailed or sent by telecopy or other similar form of rapid
transmission, and shall be deemed to have been duly given upon receipt (a) in
the case of the Company, to the Company at its address in Section 2, (b) in the
case of the Member, to the Member at its address as listed on Schedule B
----------
attached hereto and (c) in the case of either of the foregoing, at such other
address as may be designated by written notice to the other party.
34. Effectiveness.
-------------
Pursuant to Section 18-201(d) of the Act, this Agreement shall be
effective as of the time of the filing of the Certificate of Formation with the
Office of the Delaware Secretary of State on December 3, 1997.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, has duly executed this Limited Liability Company Agreement as of the 3rd
day of December, 1997.
MEMBER:
CHEROKEE INC.*
By: /s/ Robert Margolis
-------------------
Name: Robert Margolis
Title: President
*Also known as Delaware Cherokee Inc.
1
<PAGE>
SCHEDULE A
Definitions
-----------
A. Definitions
-----------
When used in this Agreement, the following terms not otherwise defined
herein have the following meanings:
"Act" has the meaning set forth in the preamble to this Agreement.
---
"Administrative Services Agreement" means the Administrative Services
---------------------------------
Agreement to be entered into between the Company and the Member, as
administrator, as the same may be amended, restated, supplemented or otherwise
modified from time to time.
"Affiliate" means, with respect to any Person, any other Person
---------
directly or indirectly Controlling or Controlled by or under direct or indirect
common Control with such Person.
"Agreement" means this Limited Liability Company Agreement, together
---------
with the schedules attached hereto, as amended, restated or supplemented or
otherwise modified from time to time.
"Basic Documents" means the Indenture, the Trademark Agreement, the
---------------
Administrative Services Agreement, the Note Purchase Agreement, the Security
Agreement and all other documents and certificates delivered in connection
therewith.
"Board" or "Board of Directors" means the Board of Directors of the
----- ------------------
Company.
"Certificate of Formation" means the Certificate of Formation of the
------------------------
Company filed with the Secretary of State of the State of Delaware on December
3, 1997, as amended or amended and restated from time to time.
"Collection Account" means the special purpose trust account to be
------------------
established in the name of the Note Trustee pursuant to the Indenture and into
which will be deposited the payments due to the Company under any Trademark
License.
"Company" means SPELL C. LLC, a Delaware limited liability company.
-------
"Control" means the possession, directly or indirectly, or the power
-------
to direct or cause the direction of the management or policies of a Person,
whether through the ownership of voting securities or general partnership or
managing member interests, by contract or otherwise. "Controlling" and
"Controlled" shall have correlative meanings. Without limiting the generality
of the foregoing, a Person shall be deemed to Control any other Person in which
it owns, directly or indirectly, a majority of the ownership interests.
A-1
<PAGE>
"Covered Persons" has the meaning set forth in Section 20a.
---------------
"Directors" means the directors elected to the Board of Directors from
---------
time to time by the Member, including the Independent Director. A Director is
hereby designated as a "manager" of the Company within the meaning of Section
18-101(10) of the Act.
"Indebtedness" means the obligations of the Company arising under the
------------
Notes.
"Indenture" means the Indenture to be entered into between the
---------
Company, as issuer, and the Note Trustee, as trustee, restated, as the same may
be amended, supplemented or otherwise modified from time to time.
"Independent Director" means a natural person who, for the five-year
--------------------
period prior to his or her appointment as Independent Director has not been, and
during the continuation of his or her service as Independent Director is not:
(i) an employee, director, stockholder, partner or officer of the Company or any
of its Affiliates (other than his or her service as an Independent Director of
the Company); (ii) a customer or supplier that derives more than ten percent of
its revenues from the Company or any of its Affiliates; or (iii) any member of
the immediate family of a person described in (i) or (ii).
"Member" means Cherokee Inc., a Delaware corporation, as the sole
------
member of the Company.
"Management Agreement" means the agreement of the Directors in the
--------------------
form attached hereto as Schedule C.
----------
"Material Action" means to consolidate or merge the Company with or
---------------
into any Person, or sell all or substantially all of the assets of the Company,
or to institute proceedings to have the Company be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against the Company or file a petition seeking, or consent to, reorganization or
relief with respect to the Company under any applicable federal or state law
relating to bankruptcy, or consent to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Company or a
substantial part of its property, or make any assignment for the benefit of
creditors of the Company, or admit in writing the Company's inability to pay its
debts generally as they become due, or, to the fullest extent permitted by law,
take action in furtherance of any such action, or dissolve or liquidate the
Company.
"Member" means the Member and includes any Person admitted as an
------
additional member of the Company or a substitute member of the Company pursuant
to the provisions of this Agreement.
"Note Issuance Documents" means the collective reference to the
-----------------------
Indenture, the Security Agreement and the other governing documents relating to
the Indebtedness, as
A-2
<PAGE>
the same may be amended, restated, supplemented or otherwise modified from time
to time.
"Note Purchase Agreement" means the Note Purchase Agreement to be
-----------------------
entered into between the Company and the parties listed on the signature pages
thereto, as the same may be amended, restated, supplemented or otherwise
modified from time to time.
"Notes" means the notes at any time issued pursuant to the Indenture
-----
or any indenture supplemental thereto.
"Note Trustee" means the institution serving as trustee under the
------------
Indenture.
"Officer" means an officer of the Company described in Section 11.
-------
"Officer's Certificate" means a certificate signed by any Officer of
---------------------
the Company who is authorized to act for the Company in matters relating to the
Company.
"Person" means any individual, corporation, partnership, joint
------
venture, limited liability company, limited liability partnership, association,
joint-stock company, trust, unincorporated organization, or other organization,
whether or not a legal entity, and any governmental authority.
"Security Agreement" means the Security Agreement to be entered into
------------------
by the Company and the Note Trustee, as the same may be amended, restated,
supplemented or otherwise modified from time to time.
"Trademark" means all United States right, title and interest of
---------
Cherokee in and to the "Cherokee" trademark and other marks incorporating the
name Cherokee, with various stylized designs, including the "Indian Head
Design," as used and registered in the United States Patent and Trademark
Office.
"Trademark Agreement" means the Trademark Purchase and License
-------------------
Assignment Agreement to be entered into between the Company and the Member.
"Trademark Documents" means the collective reference to the Trademark
-------------------
Agreement and the agreements, instruments and documents contemplated thereby, as
the same may be amended, restated, supplemented or otherwise modified from time
to time.
"Trademark License" means all rights and obligations of Cherokee as
-----------------
licensor under that certain License Agreement dated as of November 12, 1997, by
and between Cherokee and Dayton Hudson Corporation, together with all rights and
privileges granted, secured and provided thereby.
B. Rules of Construction
---------------------
Definitions in this Agreement apply equally to both the singular and
plural forms of the defined terms. The words "include" and "including" shall be
deemed to be
A-3
<PAGE>
followed by the phrase "without limitation." The terms "herein," "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular Section, paragraph or subdivision. The Section titles
appear as a matter of convenience only and shall not affect the interpretation
of this Agreement. All Section, paragraph, clause, Exhibit or Schedule
references not attributed to a particular document shall be references to such
parts of this Agreement.
A-4
<PAGE>
SCHEDULE B
Member
------
<TABLE>
<CAPTION>
Agreed Value of Membership
Name Mailing Address Capital Contribution Interest
- ---- --------------- -------------------- --------
<S> <C> <C> <C>
Cherokee Inc. 6835 Valjean Avenue $100,000 100%
Van Nuys, CA 91406
</TABLE>
B-1
<PAGE>
SCHEDULE C
Management Agreement
--------------------
December 18, 1997
SPELL C. LLC
625 Landor Lane
Pasadena, California 91106
Re: Management Agreement -- SPELL C. LLC
------------------------------------
Ladies and Gentlemen:
For good and valuable consideration, each of the undersigned persons,
who have been designated as managers of SPELL C. LLC, a Delaware limited
liability company (the "Company"), in accordance with the Limited Liability
Company Agreement of the Company, dated as of December 3, 1997, as it may be
amended or restated from time to time (the "LLC Agreement"), hereby agree as
follows:
1. Each of the undersigned accepts such person's rights and authority
as a Director (as defined in the LLC Agreement) under the LLC Agreement and
agrees to perform and discharge such person's duties and obligations as a
Director under the LLC Agreement, and further agrees that such rights,
authorities, duties and obligations under the LLC Agreement shall continue until
such person's successor as a Director is designated or until such person's
resignation or removal as a Director in accordance with the LLC Agreement. Each
of the undersigned agrees and acknowledges that it has been designated as a
"manager" of the Company within the meaning of the Delaware Limited Liability
Company Act.
2. So long as any Indebtedness (as defined in the LLC Agreement) is
outstanding, each of the undersigned agrees, solely in its capacity as a
creditor of the Company on account of any indemnification or other payment owing
to the undersigned by the Company, not to acquiesce, petition or otherwise
invoke or cause the Company to invoke the process of any court or governmental
authority for the purpose of commencing or sustaining a case against the Company
under any federal or state bankruptcy, insolvency or similar law or appointing a
receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Company or any substantial part of the property of the
Company, or ordering the winding up or liquidation of the affairs of the
Company.
C-1
<PAGE>
3. THIS MANAGEMENT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AND ALL RIGHTS AND REMEDIES
SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.
This Management Agreement may be executed in any number of
counterparts, each of which shall be deemed an original of this Management
Agreement and all of which together shall constitute one and the same
instrument.
C-2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Management
Agreement as of the day and year first above written.
/s/ Robert Margolis
-------------------
Robert Margolis
/s/ Jess Ravich
---------------
Jess Ravich
/s/ Richard Nevins
------------------
Richard Nevins
C-3
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF CHEROKEE INC.
<TABLE>
<CAPTION>
NAME JURISDICTION OF ORGANIZATION
---- ----------------------------
<S> <C>
1. SPELL C. LLC., a Delaware limited liability
company.......................................... Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Cherokee Inc. on Form S-3 (File No. 333-15545), on Form S-8 (File No. 333-
14533) and on Form S-8 (File No. 333-49865) on our report dated April 6, 1998,
on our audits of the consolidated financial statements and the financial
statement schedules of Cherokee Inc. as of January 31, 1998, May 31, 1997 and
June 1, 1996, and for the eight months ended January 31, 1998 and the years
ended May 31, 1997, June 1, 1996, the three months ended June 3, 1995 and the
nine months ended February 25, 1997, which reports are included (or
incorporated by reference) in this Transition Report on Form 10-K.
Los Angeles, CA Coopers & Lybrand L.L.P.
April 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-01-1996
<PERIOD-START> JUN-04-1995
<PERIOD-END> JUN-01-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.21)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 8-MOS YEAR
<FISCAL-YEAR-END> JAN-31-1998 MAY-31-1997
<PERIOD-START> JUN-01-1997 JUN-02-1996
<PERIOD-END> JAN-31-1998 MAY-31-1997
<CASH> 10,275 0
<SECURITIES> 0 0
<RECEIVABLES> 2,347 0
<ALLOWANCES> 0 0
<INVENTORY> 45 0
<CURRENT-ASSETS> 12,887 0
<PP&E> 112 0
<DEPRECIATION> 63 0
<TOTAL-ASSETS> 24,471 0
<CURRENT-LIABILITIES> 7,692 0
<BONDS> 0 0
0 0
0 0
<COMMON> 173 0
<OTHER-SE> (25,819) 0
<TOTAL-LIABILITY-AND-EQUITY> 24,471 0
<SALES> 8,553 0
<TOTAL-REVENUES> 8,553 0
<CGS> 0 0
<TOTAL-COSTS> 4,235 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 330 0
<INCOME-PRETAX> 4,935 0
<INCOME-TAX> (782) 0
<INCOME-CONTINUING> 5,717 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,717 0
<EPS-PRIMARY> 0.73 0.87
<EPS-DILUTED> 0.68 0.82
</TABLE>
