<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
CHECK THE APPROPRIATE BOX:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
CHEROKEE INC.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(Name of Registrant as Specified in Its Charter)
CHEROKEE INC.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
........................................................................
(2) Aggregate number of securities to which transaction applies:
........................................................................
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
........................................................................
(4) Proposed maximum aggregate value of transaction:
........................................................................
(5) Total fee paid:
........................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------
(2) Form Schedule or Registration Statement No.:
-----------------------
(3) Filing Party:
------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------
<PAGE>
CHEROKEE INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
On June 8, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of
Cherokee Inc. (the "Company") will be held at the Palisades Salon in the Loews
Santa Monica Beach Hotel, 1700 Ocean Avenue, Santa Monica, California, on June
8, 1998, at 10:00 A.M. (Pacific Time) for the following purposes:
1. To elect five directors to the Board of Directors of the Company who
will serve until the Company's 1999 Annual Meeting of Stockholders and
until their successors have been duly elected and qualified;
2. To consider and vote upon an amendment to expand the class of persons
eligible to receive stock options under the Company's 1995 Incentive
Stock Option Plan and to increase from 600,000 to 900,000 the number of
shares authorized for issuance under the Company's 1995 Incentive Stock
Option Plan; and
3. To transact such other business as may be properly brought before the
meeting or any adjournment thereof.
Stockholders of record at the close of business on April 24, 1998 will be
entitled to notice of and to vote at said meeting or any adjournments thereof.
A list of such stockholders shall be open to the examination of any stockholder
at the meeting and for a period of ten days prior to the date of the meeting at
the office of Cherokee Inc., 6835 Valjean Avenue, Van Nuys, California 91406.
The enclosed proxy is solicited by the Board of Directors of the Company,
which recommends that stockholders vote FOR the election of the nominees named
therein and vote FOR approval of the amendment to the 1995 Incentive Stock
Option Plan. The Board of Directors urges each stockholder to read carefully
the enclosed proxy statement which is incorporated herein by reference.
By Order of the Board of Directors,
/s/ Carol A. Gratzke
Carol A. Gratzke
Secretary
6835 Valjean Avenue
Van Nuys, CA 91406
Dated: May 8, 1998
IMPORTANT
WHETHER OR NOT YOU EXPECT TO ATTEND THE 1998 ANNUAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOUR PROXY WILL BE
REVOCABLE ANY TIME PRIOR TO ITS EXERCISE EITHER IN WRITING OR BY VOTING YOUR
SHARES PERSONALLY AT THE 1998 ANNUAL MEETING.
<PAGE>
CHEROKEE INC.
6835 VALJEAN AVENUE
VAN NUYS, CA 91406
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
JUNE 8, 1998
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors (the "Board") and management of Cherokee Inc., a Delaware
corporation ("Cherokee" or "Company"), of proxies to be used at the Annual
Meeting of Stockholders to be held at the Palisades Salon in the Loews Santa
Monica Beach Hotel, 1700 Ocean Avenue, Santa Monica, California, on June 8,
1998, at 10:00 A.M. (Pacific Time) (the "Annual Meeting") and at any
adjournments thereof. A form of the proxy is enclosed for use at the meeting.
Stockholders are being asked to vote upon the election of five directors to the
Board, to vote upon approval of an amendment to the 1995 Incentive Stock Option
Plan of the Company and to transact such other business as may properly come
before the meeting.
If no instructions are given on the proxy, all shares represented by valid
proxies received pursuant to this solicitation (and not revoked before they are
voted) will be voted FOR the directors nominated by the Board, FOR approval of
the amendment to the 1995 Incentive Stock Option Plan and as recommended by the
Board with regard to all other matters or if no such recommendation is given, in
the discretion of the proxy holder. Proxies marked "withhold" and/or "abstain"
will be counted towards the quorum requirement but will not be voted for the
election of the Board's director nominees or the amendment to the 1995 Incentive
Stock Option Plan.
A proxy may be revoked at any time before it is exercised by giving written
notice of revocation to the Secretary of the Company, by submitting, prior to
the time of the meeting, a properly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. Stockholders having executed
and returned a proxy, who attend the meeting and desire to vote in person, are
requested to so notify the Secretary of the Company prior to the time of the
meeting.
The mailing address of the Company is 6835 Valjean Avenue, Van Nuys,
California 91406. The approximate date on which this Proxy Statement and form
of proxy are being mailed to the stockholders is May 8, 1998.
GENERAL INFORMATION
OUTSTANDING SHARES AND VOTING RIGHTS
There were 8,695,428 shares of common stock of the Company ("Common Stock")
outstanding as of April 24, 1998, the Record Date for the stockholders entitled
to vote at the Annual Meeting. Each stockholder of record at the close of
business on April 24, 1998 is entitled to one vote for each share of Common
Stock then held on each matter to come before the meeting, or any adjournments
thereof.
A majority of the votes eligible to be cast at the Annual Meeting by
holders of Common Stock, or 4,347,715 votes, represented in person or by proxy
at the Annual Meeting is required for a quorum. Under Delaware law, shares
represented by proxies that reflect abstentions or "broker non-votes" (i.e.,
shares held by a broker or nominee which are represented at the meeting but with
respect to which such broker or nominee is not empowered to vote on a particular
proposal) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum. Directors will be elected by
a favorable vote of a plurality of the shares of voting stock present and
entitled to vote, in person or by proxy, at the Annual Meeting. Accordingly,
abstentions or broker non-votes as to the election of directors will not affect
the election of the candidates receiving
<PAGE>
the plurality of votes. The nominees receiving the five highest number of votes
will become directors. Votes that are withheld from any nominee will be excluded
from the vote and will have no effect. The proposal to amend the 1995 Incentive
Stock Option Plan must receive the favorable vote of a majority of the shares of
Common Stock represented and entitled to vote, in person or by proxy, at the
Annual Meeting. Abstentions as to such proposal will have the same effect as
votes against the proposal. Broker non-votes, however, will be treated as
unvoted for purposes of determining approval of such proposal and will not be
counted as votes for or against such proposal. Brokers who hold shares in street
name have the authority to vote on certain "routine" matters when they have not
received instructions from beneficial owners. Brokers that do not receive
instructions are entitled to vote on the election of directors. The Company's
Certificate of Incorporation does not provide for cumulative voting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 24, 1998 by each person
believed by the Company to own beneficially more than 5% of the outstanding
shares of any class of the Company's voting securities. Unless noted otherwise,
the holders listed below have sole voting power and dispositive power over the
shares beneficially held by them. Pursuant to the rules of the Securities
Exchange Commission ("SEC"), in calculating percentage ownership, each holder is
deemed to beneficially own his own shares subject to options exercisable within
sixty days, but options owned by others (even if exercisable within sixty days)
are deemed not to be outstanding shares. Percentage ownership is based on
8,695,428 shares of Common Stock outstanding on April 24, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------- -------------------- ----------
<S> <C> <C>
Timothy Ewing
2200 Ross Avenue
Suite 4660 West
Dallas, TX 75201................ 2,123,096 /(A)/ 24.4% /(A)/
Value Partners, Ltd.
C/O Ewing & Partners
2200 Ross Avenue
Suite 4660 West
Dallas, TX 75201................ 2,104,069 24.2%
Robert Margolis
6835 Valjean Avenue
Van Nuys, CA 91406.............. 1,592,394 /(B)/ 18.3% /(B)/
The Newstar Group, Inc.
dba The Wilstar Group
6835 Valjean Avenue
Van Nuys, CA 91406.............. 718,541 /(C)/ 8.3% /(C)/
</TABLE>
/(A)/ Includes 2,104,069 shares held directly by Value Partners, Ltd. Mr. Ewing
is managing partner of Ewing & Partners, which is the general partner of
Value Partners, Ltd.
/(B)/ Includes 718,541 shares owned by The Newstar Group, Inc. d/b/a The
Wilstar Group ("Wilstar"). Mr. Margolis is sole shareholder of Wilstar.
/(C)/ Does not include 873,850 shares individually held by Mr. Margolis.
2
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of April 24, 1998, owned by all
directors, each of the executive officers named in the Executive Summary
Compensation Table and all directors and executive officers as a group. Unless
noted otherwise, the holders listed below have sole voting and dispositive power
over the shares beneficially held by them. Pursuant to the rules of the SEC, in
calculating percentage ownership, each holder is deemed to beneficially own his
own shares subject to options exercisable within sixty days, but options owned
by others (even if exercisable within sixty days) are deemed not to be
outstanding shares. Percentage ownership is based on 8,695,428 shares of Common
Stock outstanding on April 24, 1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------ --------------------- --------
<S> <C> <C>
Robert Margolis /(A)/........................................... 1,592,394 18.3%
Douglas Weitman................................................. 351,397 4.0%
Jess Ravich /(B)/............................................... 188,349 2.2%
Keith Hull /(C)/................................................ 23,277 *
Avi Dan /(D)/................................................... 401,544 4.6%
Timothy Ewing /(E)/............................................. 2,123,096 24.4%
Carol Gratzke /(F)/............................................. 79,748 *
Patricia Warren /(G)/........................................... 163,134 1.9%
All Executive Officers and directors as a group /(H)/........... 4,922,939 56.0%
</TABLE>
* = Less than 1%
/(A)/ Includes 873,853 shares held individually by Mr. Margolis and 718,541
owned by Wilstar. Mr. Margolis is the sole shareholder of Wilstar.
/(B)/ Includes 165,033 shares owned by Libra Investments, Inc. ("Libra"). Mr.
Ravich is the Chairman and Chief Executive Officer of Libra and,
therefore, may be deemed to be the beneficial owner of such shares.
/(C)/ Excludes 77,386 shares owned by Avondale Mills, Inc. Mr. Hull is a Vice
President of Avondale Mills, Inc., however, he disclaims beneficial
ownership of such shares.
/(D)/ Includes 378,267 shares owned by Axicom Capital Group. Mr. Dan is the
President of Axicom Capital Group and, therefore, may be deemed to be the
beneficial owner of such shares.
/(E)/ Includes 2,104,069 shares held directly by Value Partners, Ltd. Mr. Ewing
is managing partner of Ewing & Partners, which is the general partner of
Value Partner's Ltd. and, therefore, Mr. Ewing may be deemed to be the
beneficial owner of such shares.
/(F)/ Includes 39,748 shares, which may be purchased pursuant to options that
are or will be exercisable within sixty days of April 24, 1998. The
number of shares issuable and the option exercise price are subject to
adjustment in the event of a stock split or dividend, extraordinary
dividend payment, recapitalization or certain other events.
/(G)/ Includes 60,137 shares, which shares may be purchased pursuant to options
that are or will be exercisable within sixty days of April 24, 1998. The
number of shares issuable and the option exercise price are subject to
adjustment in the event of a stock split or dividend, extraordinary
dividend payment, recapitalization or certain other events.
/(H)/ Includes 99,885 shares, which may be acquired pursuant to options that
are or will be exercisable within sixty days of April 24, 1998.
3
<PAGE>
ITEM 1.
ELECTION OF DIRECTORS
At the Annual Meeting, stockholders will be asked to elect five directors
to serve until the next annual meeting of stockholders and until their
respective successors shall be elected and shall qualify. All five current
directors have been nominated for reelection at the Annual Meeting for one-year
terms. Directors will be elected by a favorable vote of a plurality of the
shares of voting stock present and entitled to vote, in person or by proxy, at
the Annual Meeting.
In the event that any nominee for director should become unavailable, it is
intended that votes will be cast, pursuant to the enclosed proxy, for such
substitute nominee as may be nominated by the Board. The Board has no present
knowledge that any of the persons named will be unavailable to serve.
INFORMATION CONCERNING DIRECTORS AND NOMINEES FOR BOARD OF DIRECTORS
The following table sets forth the principal occupation or employment and
principal business of the employer, if any, of each director and nominee for
director of the Company, as well as his age, business experience, other
directorships held by him and the period during which he has previously served
as director of the Company.
<TABLE>
<CAPTION>
NAME, AGE PRINCIPAL OCCUPATION FOR PAST FIVE YEARS;
AND OTHER DIRECTORSHIPS;
PRESENT POSITION WITH THE COMPANY BUSINESS EXPERIENCE
- ------------------------------------------------ ---------------------------------------------------------
<S> <C>
Robert Margolis, 50 Mr. Margolis has been a director of the Company since May
Director, Chairman of the Board of Directors and 1995. Mr. Margolis was appointed Chairman of the Board and
Chief Executive Officer Chief Executive Officer of the Company on 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 which operates various textile 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").
Timothy Ewing, 38 Mr. Ewing has been a director of the Company since September
Director 1997. Mr. Ewing, a Chartered Financial Analyst, is
managing partner of Ewing & Partners and manager of Value
Partners, Ltd., a Texas-based private investment partnership
formed in 1989. Mr. Ewing currently serves on the board of
directors of The Baylor Healthcare System Foundation, the
governing board of a Hospital System based in Dallas, Texas,
and is vice president of the board of directors of First
Fidelity Bancorp, Inc., a bank holding company in Irvine,
California.
Douglas Weitman, 54 Mr. Weitman has been a director of the Company since May 1995.
Director For more than six years, Mr. Weitman has been the Chief
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
Executive Officer of Security Textile Corp., a privately owned
manufacturer of apparel and textile related products. When
Mr. Weitman first joined the Board in 1995, he was nominated
pursuant to the terms of the Wilstar Management Agreement
which provides Wilstar may nominate two members of the Board.
Jess Ravich, 40 Mr. Ravich has been a director of the Company since May 1995.
Director Mr. Ravich has been the Chief Executive Officer and the
majority shareholder of Libra Investments, Inc. ("Libra") a
registered broker dealer since it was founded in June 1991.
From March 1990 to March 1991, he was Executive Vice President
and director of High Yield Trading with Jeffries & Co. a
registered broker dealer.
Keith Hull, 45 Mr. Hull has been a director since June 1995. For more than
Director six years, Mr. Hull has been President of Avondale Fabrics and
Vice President of its parent, Avondale Mills, Inc. Avondale
Mills is a diversified manufacturer of textiles. When Mr.
Hull first joined the Board in 1995, he was nominated pursuant
to the terms of the Wilstar Management Agreement which
provides Wilstar may nominate two members of the Board.
</TABLE>
THE BOARD RECOMMENDS VOTES FOR THE ELECTION OF ALL FIVE NOMINEES FOR DIRECTORS.
ALL THE NOMINEES CURRENTLY SERVE AS DIRECTORS OF THE COMPANY. PROXIES GIVEN
WITHOUT INSTRUCTIONS WILL BE VOTED FOR ALL FIVE NOMINEES.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business affairs of the Company are managed under the direction of the
Board of Directors, although the Board is not involved in day-to-day operations.
During the eight months ended January 31, 1998 (the "Eight Month Fiscal Period")
the Board met six times. Each director attended at least 75% of all Board and
applicable committee meetings during the Eight Month Fiscal Period.
AUDIT COMMITTEE
The Audit Committee recommends to the Board of Directors a firm of
independent certified public accountants to conduct the annual audit of the
Company's books and records; reviews with such accounting firm the scope and
results of the annual audit; consults with the independent accountants with
regard to the adequacy of the Company's system of internal accounting controls;
and reviews fees charged by the independent accountants for professional
services.
The Company's independent public accountants are invited to attend meetings
of the Audit Committee and certain members of management may also be invited to
attend. The Audit Committee consists of two non-employee directors, Mr. Hull and
Mr. Dan. The Audit Committee met once during the Eight Month Fiscal Period.
COMPENSATION COMMITTEE
The Company's compensation program for executives is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
consists of Mr. Ravich, Mr. Ewing, and Mr. Weitman, all of whom are non-employee
directors and outside directors within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended, and Section 162(m) of the Internal
Revenue Code, respectively. The committee is responsible for setting and
administering executive officer salaries and the annual bonus and long-term
incentive plans that govern the compensation paid to the Company's executives.
The Compensation Committee met three times during the Eight Month Fiscal Period.
5
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for Mr. Margolis, who is the Chief Executive Officer, a director
and, as of June 23, 1997, the sole shareholder of Wilstar, and Mr. Weitman, who,
until June 23, 1997, was a director and shareholder of Wilstar, none of the
executive officers of the Company has served on the Board of Directors or on the
Compensation Committee of any other entity, any of whose officers served either
on the Board of Directors or on the Compensation Committee of the Company. On
May 4, 1995, the Company and Wilstar entered into the Wilstar Management
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 Wilstar Management Agreement was amended for services
rendered on or after June 1, 1997 (see "Employment Contracts and Management
Agreements" below for a further description of the Wilstar Agreement as
amended).
Since May 26, 1995, the Company has shared office space with Wilstar at an
office facility in Van Nuys, California which Wilstar leases from an
unaffiliated third party. Mr. Margolis serves as chief executive officer of
Wilstar. Prior to November 1, 1997 the Company used approximately one-half of
such space and paid Wilstar for such usage at the rate of $.75 per square foot
or $1,125 per month plus one-half of certain costs relating to the office space.
The rent and costs were prorated based upon square footage used by the Company
and Wilstar did not profit therefrom. 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 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 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.
The Company believes that its rental of such office and warehouse space from
Wilstar is on terms no less favorable than could be obtained from an
unaffiliated third party.
For more information with respect to certain transactions and relationships
between the Company and certain executive officers, directors and related
parties, see "Certain Relationships and Related Transactions" below.
DIRECTORS' REMUNERATION AND STOCK OPTIONS
For their services on the Board during the Eight Month Fiscal Period, non-
officer or non-employee directors were paid a retainer fee of $15,000 per annum
and any director serving on more than one committee received an additional
$7,500 per annum. The director fees are paid on a quarterly basis. Shown below
is information concerning the amount or retainer or committee fee paid to each
non-officer or non-employee director during the Eight Month Fiscal Period.
<TABLE>
<CAPTION>
FEES PAID IN THE EIGHT MONTH
------------------------------
DIRECTOR FISCAL PERIOD
- -------- -------------
<S> <C>
Timothy Ewing..................... $ 7,500
Jeffrey Schultz................... 9,225
Douglas Weitman................... 12,750
Jess Ravich....................... 12,750
Keith Hull........................ 16,500
Avi Dan........................... 12,750
Herschel Elias.................... 5,250
</TABLE>
On September 15, 1997, Timothy Ewing, Douglas Weitman, Jess Ravich, Keith
Hull, Avi Dan and Robert Margolis were granted five year options to purchase
5,000 shares each at an exercise price of $11.25, and Jeffrey Schultz was
granted an option to purchase 20,000 shares. Due to the issuance by the Company
of an extraordinary dividend, the exercise price of the options was adjusted to
$6.80 and the number of shares issuable was adjusted to 8,277 and 33,109,
respectively. All the directors exercised all of the above options on April 13,
1998.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR EACH OF THE DIRECTORS NOMINATED IN ITEM 1
6
<PAGE>
ITEM 2.
AMENDMENT TO THE 1995 INCENTIVE STOCK OPTION PLAN
GENERAL
The Company established the Cherokee Inc. 1995 Incentive Stock Option Plan
to enable executive officers, other key employees, and directors of the Company
to participate in the ownership of the Company. The 1995 Incentive Stock Option
Plan is designed to attract and retain executive officers, other key employees,
and directors of the Company and to provide incentives to such persons to
maximize the Company's performance. The 1995 Incentive Stock Option Plan
provides for the award to executive officers, other key employees, and directors
of the Company of nonqualified stock options and incentive stock options.
Options granted under the 1995 Incentive Stock Option Plan provide participants
with rights to acquire shares of Common Stock.
Under the 1995 Incentive Stock Option Plan, not more than 600,000 shares of
Common Stock and, subject to stockholder approval of this Item 2, not more than
900,000 shares of Common Stock, are authorized for issuance upon exercise of
nonqualified stock options and incentive stock options. Furthermore, the
maximum number of shares which may be subject to options granted under the 1995
Incentive Stock Option Plan to any individual in any calendar year cannot exceed
100,000 (subject to certain adjustments).
The Compensation Committee of the Company's Board of Directors serves as
the Stock Option Committee under the 1995 Incentive Stock Option Plan. As such,
the Compensation Committee, which consists entirely of outside directors,
administers the 1995 Incentive Stock Option Plan. Under the 1995 Incentive
Stock Option Plan, the Stock Option Committee is authorized to select from among
the eligible participants those individuals to whom options are to be granted,
to determine the number of shares to be subject thereto, to determine the
exercise price and other terms and conditions thereof, and to make all other
determinations and take all other actions necessary or advisable for the
administration of the 1995 Incentive Stock Option Plan. The Stock Option
Committee is also authorized to construe and interpret the 1995 Incentive Stock
Option Plan and to promulgate, amend and rescind rules and regulations relating
to its administration. Subject to stockholder approval of this Item 2, the
Board of Directors will administer the 1995 Incentive Stock Option Plan with
respect to options granted to members of the Stock Option Committee.
Options under the 1995 Incentive Stock Option Plan may be granted to
officers, employees or directors (other than members of the Stock Option
Committee while serving on the Stock Option Committee) of the Company or its
subsidiaries, and, subject to stockholder approval of this Item 2, options under
the 1995 Incentive Stock Option Plan may be granted to officers, employees or
directors (regardless of whether they are serving as members of the Stock Option
Committee) of the Company or its subsidiaries.
Nonqualified stock options provide for the right to purchase Common Stock
at a specified price which may be less than fair market value on the date of
grant (but not less than par value), and usually will become exercisable in
installments after the grant date.
Incentive stock options are designed to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") and will be subject to
restrictions contained in the Code, including the requirement that the exercise
price of such options be equal to at least 100% of fair market value of Common
Stock on the grant date and a ten year restriction on the term of such options,
but may be subsequently modified to disqualify them from treatment as an
incentive stock option.
SECURITIES LAWS AND FEDERAL INCOME TAXES
Securities Laws. The 1995 Incentive Stock Option Plan is intended to
conform to the extent necessary with all provisions of the Securities Act of
1933 and the Securities and Exchange Act of 1934 and any and all regulations and
rules promulgated by the Securities and Exchange Commission thereunder,
including without limitation Rule 16b-3. The 1995 Incentive Stock Option Plan
will be administered, and options will be granted and may be exercised, only in
such a manner as to conform to such laws, rules and regulations.
7
<PAGE>
General Federal Tax Consequences. Under current federal laws, in general,
recipients of nonqualified stock options under the 1995 Incentive Stock Option
Plan are taxable under Section 83 of the Code upon their receipt of Common Stock
with respect to such options and, subject to Section 162(m) of the Code, the
Company will be entitled to an income tax deduction with respect to the amounts
taxable to such recipients. Under Sections 421 and 422 of the Code, recipients
of incentive stock options are generally not taxable on their receipt of Common
Stock upon the exercise of incentive stock options if the incentive stock
options and option stock are held for certain minimum holding periods and, in
such event, the Company is not entitled to income tax deductions with respect to
such exercises.
Section 162(m) Limitation. In general, under Section 162(m) of the Code,
income tax deductions of publicly-held corporations may be limited to the extent
total compensation (including base salary, annual bonus, stock option exercises
and nonqualified benefits paid) for certain executive officers exceeds
$1,000,000 (less the amount of any "excess parachute payments" as defined in
Section 280G of the Code) in any one year. However, under Section 162(m), the
deduction limit does not apply to certain "performance-based compensation"
established by an independent compensation committee which is adequately
disclosed to, and approved by, stockholders. In particular, stock options will
satisfy the "performance-based compensation" exception if the grants are made by
a qualifying compensation committee, the plan sets the maximum number of shares
that can be granted to any person within a specified period and the compensation
is based solely on an increase in the stock price after the grant date (i.e.,
the option exercise price is equal to or greater than the fair market value of
the stock subject to the award on the grant date).
The Company has attempted to structure the 1995 Incentive Stock Option Plan
in such a manner that the remuneration attributable to stock options which meet
the other requirements of Section 162(m) will not be subject to the $1,000,000
limitation.
AMENDMENT TO THE 1995 INCENTIVE STOCK OPTION PLAN
As of May 1, 1998, the Board of Directors adopted and approved, subject to
stockholder approval, the amendment to the Company's 1995 Incentive Stock Option
Plan to expand the class of persons eligible to receive stock options thereunder
and to increase the number of shares of Common Stock reserved for issuance
thereunder from 600,000 shares to 900,000 shares. A copy of the amendment to
the 1995 Incentive Stock Option Plan (titled "Second Amendment to Cherokee Inc.
Incentive Stock Option Plan") is set forth as Exhibit A to this Proxy Statement.
The Company's stockholders are asked to approve the adoption of this amendment
to the 1995 Incentive Stock Option Plan at the 1998 Annual Meeting.
Under the Company's 1995 Incentive Stock Option Plan as in effect prior to
adoption of the amendment, any officer or other employee of the Company (or its
subsidiaries), or any director of the Company (or its subsidiaries) other than a
member of the Stock Option Committee while serving on the Stock Option Committee
is eligible to receive options. The Company's Board of Directors believes that,
in order to continue to retain, motivate, and attract directors essential to the
continued success of the Company, it is necessary to make all of its directors
eligible to receive options under the 1995 Incentive Stock Option Plan,
irrespective of whether they are serving on the Stock Option Committee. The
Board of Directors believes that expanding such eligibility to all directors
will eliminate any disincentive to serving on the Stock Option Committee, a
committee which performs the important function of administering the Company's
1995 Incentive Stock Option Plan. With respect to options granted to members of
the Stock Option Committee, the Board of Directors, rather than the Stock Option
Committee, will administer the 1995 Incentive Stock Option Plan.
Under the Company's 1995 Incentive Stock Option Plan as in effect prior to
adoption of the amendment, the aggregate number of shares of Common Stock that
may be issued upon the exercise of options granted thereunder cannot exceed
600,000 shares of Common Stock. Due to the Company's need to attract, retain and
reward its key employees and directors, the number of shares issuable pursuant
to options granted under the 1995 Incentive Stock Option Plan is approaching the
600,000 share limit. The Company's Board of Directors believes that, in order to
continue to retain, motivate, and attract key personnel essential to the
continued success of the Company, it is necessary to maintain its current
practice of providing meaningful incentive awards such as stock options. The
Board of Directors believes that stock options have played a critical role in
enabling the Company to
8
<PAGE>
create a motivated management team and to build a growing, highly competitive
business. The Board of Directors also believes that the Company's 1995 Incentive
Stock Option Plan has helped to stimulate a deeper commitment to the Company,
minimize management turnover and reward continuous improvement in financial
performance.
The Board of Directors believes that this amendment to the Company's 1995
Incentive Stock Option Plan will promote the interests of the Company and its
stockholders by strengthening the Company's ability to attract, motivate and
retain employees and directors and by providing a means to encourage stock
ownership and proprietary interest in the Company to valued employees and
directors upon whose judgment, initiative, and efforts the continued financial
success and growth of the business of the Company largely depend.
VOTE REQUIRED
The affirmative vote of a majority of shares of Common Stock represented
and entitled to vote in person or by proxy at the Annual Meeting is required for
approval of the amendment to the Company's 1995 Incentive Stock Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE AMENDMENT TO THE 1995 INCENTIVE STOCK OPTION PLAN
9
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY EXECUTIVE COMPENSATION TABLE
The Summary Executive Compensation Table below sets forth the annual and
long-term compensation for services in all capacities for the Eight Month Fiscal
Period, the fiscal years ended May 31, 1997 ("Fiscal 1997"), and June 1, 1996
("Fiscal 1996") for the Company's Chief Executive Officer and the two additional
most highly compensated executive officers (the "Named Executive Officers").
Three Named Executive Officers are listed because the Company only has a total
of twelve employees, the Company is no longer segregated into divisions and only
the three Named Executive Officers serve in a policy making capacity.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION/(A)/ COMPENSATION/(C)/
----------------------------------------- -------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND FISCAL SALARY /(B)/ BONUS /(B)/ OPTIONS COMPENSATION /(D)/
PRINCIPAL POSITION YEAR $ $ # $
- ----------------------- --------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Robert Margolis 1998 - /(E)/ - 8,277 2,000
Chairman and 1997 - /(E)/ - 10,000 3,500
Chief Executive Officer 1996 - /(E)/ - - /(F)/ -
Patricia Warren /(G)/ 1998 216,667 /(H)/ 100,000 165,548 9,000
President 1997 325,000 - 8,750
1996 125,000 - 75,000 -
Carol Gratzke 1998 100,000 /(H)/ 50,000 148,992 2,000
Chief Financial Officer 1997 125,000 - 10,000 3,500
1996 68,269 - 30,000 -
</TABLE>
/(A)/ None of the Named Executive Officers earned Other Annual Compensation
except for perquisites which in no case exceeded the lesser of $50,000 or
10% of total annual salary and bonus for the Eight Month Fiscal Period,
Fiscal 1997 and Fiscal 1996, and as a result, the corresponding column
was omitted.
/(B)/ Amounts shown include cash and non-cash compensation earned by Named
Executive Officers; no amounts earned were deferred at the election of
those officers.
/(C)/ None of the Named Executive Officers received reserved stock awards or
long-term incentive plan payouts during the time covered by the Summary
Executive Compensation Table and, as a result, the corresponding columns
were omitted.
/(D)/ Represents payments made in accordance with the Company's compensation in
lieu of dividend plan whereby each plan participant is paid 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 owned by such participant on, the record date and payment
date for such cash dividend. (See "Compensation in Lieu of Dividends
Plan" below.)
/(E)/ Mr. Margolis was appointed Chairman and Chief Executive Officer on May 4,
1995. Mr. Margolis provides his services to the Company pursuant to the
terms of the Wilstar Management Agreement. For the Eight Month Fiscal
Period, Fiscal 1997 and Fiscal 1996, Wilstar received $366,667, $400,000
and $400,000, respectively, in annual compensation for providing such
services and has received and subsequently exercised certain options to
purchase the Company Common Stock pursuant to the Wilstar Management
Agreement. For the Eight Month Period, Fiscal 1997 and Fiscal 1996,
Wilstar also received a bonus of $320,605, $375,000 and zero,
respectively. The terms of the Wilstar Management Agreement have been
amended for services rendered on or after June 1, 1997 (See "Employment
Contracts and Management Agreements" below for a further description of
the Wilstar Management Agreement, as amended). Prior to May 31, 1997, Mr.
Margolis owned 50.1% of the stock of Wilstar. Mr. Margolis
10
<PAGE>
became the sole stockholder of Wilstar through a series of redemptions
occurring on May 31, 1997 and June 23, 1997.
/(F)/ Pursuant to the Wilstar Management Agreement, Wilstar received and
subsequently exercised 675,670 options to purchase shares of Common
Stock. (See "Employment Contracts and Management Agreements" below for a
further description of the Wilstar Management Agreement).
/(G)/ Mrs. Warren resigned as President on March 3, 1998, but will continue to
work with the Company on related projects through the end of 1998.
/(H)/ Adjusted to reflect salary for the Eight Month Fiscal Period.
OPTION GRANTS IN LAST FISCAL YEAR
Set forth below is further information on grants of stock options during
the Eight Month Fiscal Period to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES EXERCISE OR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION OF UNEXERCISED
NAME GRANTED(#) YEAR /(1)/ ($/SHARE) DATE OPTIONS /(2)/
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
------ ------
Robert Margolis 8,277 /(3)/ 1.7% $ 6.80 /(3)/ Sept. 14, 2002 $ 15,550 $ 34,362
- ------------------------------------------------------------------------------------------------------------------------
Patricia Warren 41,387 /(3)//(4)/ 8.5% $ 8.15 /(3)//(4)/ Nov. 9, 2007 $212,129 $537,576
41,387 /(3)//(4)/ 8.5% $ 8.97 /(3)//(4)/ Nov. 9, 2007 $233,472 $591,662
- ------------------------------------------------------------------------------------------------------------------------
Carol Gratzke 37,248 /(3)//(4)/ 7.6% $ 8.15 /(3)//(4)/ Nov. 9, 2007 $190,913 $483,814
37,248 /(3)//(4)/ 7.6% $ 8.97 /(3)//(4)/ Nov. 9, 2007 $210,121 $532,493
37,248 /(3)//(4)/ 7.6% $ 9.86 /(3)//(4)/ Nov. 9, 2007 $230,971 $585,326
37,248 /(3)//(4)/ 7.6% $10.85 /(3)//(4)/ Nov. 9, 2007 $254,162 $644,096
</TABLE>
/(1)/ Ms. Warren was granted 165,548 options during the Eight Month Fiscal
Period exercisable in four installments as described in Footnote 3 below.
Due to Ms. Warren's resignation, she has or will vest in 82,774 of the
165,548 options granted. All 165,548 options granted to Ms. Warren were
included in the calculation of the "Percentage of Total Options Granted
to Employees in Fiscal Year."
/(2)/ The actual value, if any, the Named Executive Officer may realize will
depend on the excess of the stock price over the exercise price on the
date the option is exercised, so there is no assurance the value realized
by the Named Executive Officer will be at or near the value shown.
/(3)/ The number of securities underlying the options and the option exercise
price are subject to adjustment in the event of a stock split or
dividend, payment of an extraordinary dividend, recapitalization or
certain other events. As a result of the Company's payment of a $5.50
cash dividend to the Company's shareholders, the number of securities
underlying the options and the exercise price of the options were
adjusted in accordance with Section 424(h) of the Code.
/(4)/ 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 installment: (i)
25% of the options vest immediately with an exercise price of $8.15, (ii)
25% of the options vest November 10, 1998 with an exercise price of
$8.97, (iii) 25% of the options vest November 10, 1999 with an exercise
price of $9.86 and (iv) 25% of the options vest November 10, 2000 with an
exercise price of $10.85. If the grantee's employment is terminated under
certain circumstances or there is a restructuring of the Company these
options would become immediately exercisable. Ms. Warren resigned on
March 3, 1998 and through her employment contract she will be paid
through December 4, 1998, and therefore will receive the 41,387 options
which will vest on November 10, 1998.
11
<PAGE>
OPTION EXERCISES AND FISCAL YEAR END VALUES
Set forth below is certain information concerning exercised and unexercised
options to purchase Common Stock granted both in the Eight Month Fiscal Period
and prior years under employment agreements to the Named Executive Officers, and
held by them at January 31, 1998. During the Eight Month Fiscal Period, the
Named Executive Officers exercised options and purchased 125,000 shares of
stock.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED $ VALUE OF
OPTIONS AT IN-THE-MONEY OPTIONS AT
JANUARY 31, 1998 JANUARY 31, 1998 /(2)/
---------------------------- -----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Margolis /(1)/ 10,000 $ 85,000 8,277 -- $7,863 $ --
Patricia Warren 75,000 $746,250 41,387 124,161 $ -- $ --
Carol Gratzke 40,000 $433,750 37,248 111,744 $ -- $ --
</TABLE>
/(1)/ Does not include stock options granted to Wilstar pursuant to the Wilstar
Agreement in connection with the Company's engagement of Robert Margolis
as Chairman and Chief Executive Officer. Wilstar exercised 675,670
options during the Eight Month Fiscal Period and the value realized
totaled $2,824,158. (See Employment Contracts and Management Agreements
below for a further description of the Wilstar Management Agreement.).
/(2)/ Based on the closing price of the NASDAQ Small Cap Issue Market on
January 30, 1998 ($7.75), net of the "adjusted" option exercise price.
EMPLOYMENT CONTRACTS AND MANAGEMENT AGREEMENTS
On April 24, 1995, a group which included Mr. Margolis (the "Group")
acquired approximately 22.3% of the Company's then outstanding Common Stock.
The Group sought to have Mr. Margolis installed as Chief Executive Officer and
appointed a director of the Company. On May 4, 1995, the Company and Wilstar
entered into the Wilstar Management 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 Wilstar Management
Agreement originally provided it would terminate on May 31, 1998; however, the
Wilstar Management 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 earnings rule; hence, the contract was extended for an additional
one year term. In addition, Wilstar received an option to purchase 7.5% of the
Company's Common Stock on a fully diluted basis (675,670 shares) at a purchase
price of $3.00 per share (the "Wilstar Options"). All of these Wilstar options
were exercised on December 29, 1997 and the shares issued were subsequently
transferred pursuant to the terms of the Wilstar redemption agreement.
On April 24, 1996, the Board of Directors revised the Wilstar Management
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 Wilstar Performance Options. Wilstar exercised the Wilstar
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. On two separate occasions, Wilstar transferred these shares of
stock to its principals in satisfaction of certain loans, bonuses, etc. and in
accordance with the terms of Wilstar's redemption agreement.
The Wilstar Management Agreement further provides that Wilstar and the
Group together 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 Wilstar Management Agreement by
the adoption of two amendments, designated,
12
<PAGE>
respectively, the Second Amendment and the Third Amendment. The changes to the
Wilstar Management Agreement made by the Second amendment include (i) extension
of the specified term of the Wilstar Management Agreement to May 31, 2000; (ii)
modification of the existing provision of the Wilstar Management Agreement for
automatic extension of its term for an additional year for each year after
Fiscal 1997 in 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 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.
The Third Amendment, approved by a majority of shareholders on September
15, 1997 at the 1997 Annual Meeting, further provided changes to the Wilstar
Management 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 (after giving effect to the extraordinary dividend
paid by the Company on January 15, 1998) 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 (after giving effect to
the extraordinary dividend paid by the Company on January 15, 1998) 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).
Ms. Warren, the former President of the Company who resigned March 3, 1998,
was employed pursuant to a three-year agreement expiring May 30, 1998 which
provides 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. Mrs. Warren will
continue to work with the Company on selected special projects through November
1998 and will continue to be paid her salary through December 4, 1998.
COMPENSATION IN LIEU OF DIVIDENDS PLAN
During the Eight Month Fiscal Period, 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 options 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
Month Fiscal Period, an aggregate of $150,801 was paid to participants in the
plan.
CERTAIN RELATIONSHIPS AND RELATED 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 Company's 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 recapitalization of the Company which resulted in a
$5.50 per share dividend to shareholders, the Company paid Libra Investments,
Inc. fees totaling $1,432,000. Mr. Jess Ravich, the Chairman of Libra
Investments, Inc., is a member of the Board of Directors of the Company.
13
<PAGE>
For more information with respect to certain transactions and relationships
between the Company and certain executive officers, directors and related
parties, see "Compensation Committee Interlocks and Insider Participation"
above.
REPORT OF EXECUTIVE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors makes this report on
executive compensation pursuant to Item 402 of Regulation S-K. Notwithstanding
anything to the contrary set forth in any of the Company's previous filings
under the Securities Act of 1933, as amended (the "Securities Act"), or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
information contained in this report shall not be deemed "soliciting material"
or to be "filed" with the SEC, nor shall such information be incorporated by
reference, in whole or in part, into any future filing under the Securities Act
or Exchange Act, and such information shall be entitled to the benefits provided
in Item 402(a)(9) of Regulation S-K.
The Compensation Committee reviews the performance of the Chief Executive
Officer of the Company, makes recommendations to the Board of Directors as to
the compensation of the Chief Executive Officer and the other executive officers
of the Company and reviews compensation programs for any other key employee,
including salary and cash bonus levels and the stock option grants under the
1995 Incentive Stock Option Plan.
Compensation Policies and Philosophy. The Company's executive compensation
policies are designed to attract, retain and reward executive officers who
contribute to the Company's success, to provide economic incentives for
executive officers to achieve the Company's business objectives by linking the
executive officers' compensation to the performance of the Company, to
strengthen the relationship between executive pay and stockholder value and to
reward individual performance. The Company uses a combination of base salary,
cash bonuses and stock options to achieve these objectives.
In carrying out these objectives, the Compensation Committee considers a
number of factors which include the types of compensation paid to executive
officers in similar positions by comparable companies in the same industry. In
addition, the Compensation Committee evaluates corporate performance by looking
at factors such as performance relative to the business environment, and the
success of the Company in meeting its financial objectives. The Compensation
Committee also reviews the individual performance of the Chief Executive Officer
and, as appropriate, approves the recommendations of the Chief Executive Officer
relating to the performance of the other executive officers and their ability to
perform their given tasks, knowledge of their jobs, and their ability to work
with others toward the achievement of the Company's goals.
The Compensation Committee has reviewed the impact of Section 162(m) of the
Internal Revenue Code which, beginning in 1994, limits the deductibility of
certain otherwise deductible compensation in excess of $1 million paid to the
Chief Executive Officer and the next four most highly compensated executive
officers. It is the policy of the Compensation Committee to attempt to have all
compensation treated as tax-deductible compensation wherever, in the judgment of
the Compensation Committee, to do so would be consistent with the objectives of
the compensation plan under which the compensation is paid. However, this
policy does not rule out the ability to make awards or to approve compensation
that may not qualify for the compensation deduction, if there exists sound
corporate reasons for so doing.
Components of Compensation. Executive officer salaries are established in
relation to a range of salaries for comparable positions among companies of
comparable size and complexity with the exception of the Chief Executive Officer
salary which is based upon a three year contract with The Newstar Group d/b/a
The Wilstar Group. The Company seeks to pay its executive officers salaries
that are commensurate with the qualifications, duties and responsibilities that
are competitive in the marketplace. In making its annual salary recommendation,
the Compensation Committee looks at the Company's financial position and
performance and the overall contribution of the executive officers as a group
during the prior fiscal year in helping to meet the Company's financial and
business objectives. The Compensation Committee recommends and approves any
changes to the original and amended Wilstar Management Agreement. The
Compensation Committee also makes recommendations on a range of salary changes
for the other executive officers as well.
14
<PAGE>
Stock options grants and annual cash bonuses to executive officers are used
to provide executive officers with financial incentives to meet annual
performance targets of the Company. Since stock options have value only if the
price of the Company's Common Stock increases over the exercise/grant price, the
Compensation Committee believes that stock option grants to executive officers
provide incentives for executive officers to build shareholder value and thereby
align the interests of the executive officers with the shareholders. The
Compensation Committee believes that these grants which may vest over a period
of two or more years also provide incentives for executive officers to stay with
the Company. The size of the option grants is usually based upon factors such
as comparable equity compensation offered by other companies, the seniority of
the executive officer and the contribution that the executive officer is
expected to make to the Company. In determining the size of the periodic
grants, the Compensation Committee also considers prior grants to the executive
officer and his or her expected contributions during the succeeding fiscal year.
Compensation of the Chief Executive Officer. The Compensation Committee
reviews the performance of the Chief Executive Officer of the Company, as well
as other executives of the Company, annually. On May 4, 1995, the Company and
Wilstar entered into the Wilstar Management 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. On July 11, 1997, the
Wilstar Management Agreement was amended to provide for (i) management fees of
$550,000 per year, and (ii) an annual performance bonus of 15% of the Company's
earnings before interest, taxes, depreciation and amortization, in excess of
$10,000,000, which amendment was determined based on a consideration of the
various factors discussed above, including the performance of the Company, the
individual performance of Mr. Margolis and Mr. Margolis' performance compared to
various objective and subjective goals established by the Board of Directors.
Respectfully submitted,
Compensation Committee
Mr. Timothy Ewing
Mr. Jess Ravich
Mr. Douglas Weitman
COMMON STOCK PERFORMANCE
The Company has reorganized under Chapter 11 of the Bankruptcy Code twice
since June of 1993. As a result of the 1993 and 1994 Chapter 11 reorganizations,
holders of the Company's then outstanding common stock received approximately 8%
and 1.6% of the reorganized Company's common stock, respectively. Accordingly,
the holder of 1000 shares of the Company's then outstanding common stock during
the quarter ended May 29, 1993 which shares traded as high as $.875 per share
during such period would now have the right to less than one share of Common
Stock of the Company. The Company's Chapter 11 reorganizations in 1993 and 1994
essentially diluted the Company's then outstanding common stock to a fraction of
its value prior to such reorganizations thereby making stock performance
comparisons with the trading price of the then outstanding common stock of the
Company or other comparable companies during such periods meaningless.
Due to the nature of the Company's business being that of a licensor of its
Cherokee and Sideout brands to wholesalers and retailers, which put those
brand(s) on various product categories including but not limited to footwear,
apparel, accessories, watches, eyewear, home textile products and sporting
goods, the Company does not believe that a comparable peer group of publicly
traded licensing companies exists; hence, the Company's return on investment was
compared to the NASDAQ INDEX COMPOSITE and S&P 100-LTD.
The graph below compares the cumulative total shareholder return on the
Company's Common Stock with the cumulative total return on the NASDAQ INDEX
COMPOSITE and the S&P 100-LTD for the period commencing June 27, 1995 (the date
the Registration Statement on Form 10 of the Company registering the new Common
Stock became effective) and ending on January 30, 1998. The data set forth
below assumes the value of an investment in the Company's Common Stock and each
Index was $100 on June 27, 1995. Notwithstanding anything to the contrary set
forth in any of the Company's previous filings under the Securities Act or the
Exchange Act, the information contained in the graph shall not be deemed
"soliciting material" or to be "filed" with the SEC,
15
<PAGE>
nor shall such information be incorporated by reference, in whole or in part,
into any future filing under the Securities Act or Exchange Act, and such
information shall be entitled to the benefits provided in Item 402(a)(9) of
Regulation S-K. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
COMPARISON OF TOTAL RETURN AMONG
CHEROKEE INC., THE NASDAQ INDEX COMPOSITE AND THE S&P 100-LTD
<TABLE>
<CAPTION>
Measurement Period CHEROKEE* NASDAQ INDEX
(Fiscal Year Covered) INC. COMPOSITE S&P 100-LTD
- ------------------- ---------- ------------ -----------
<S> <C> <C> <C>
Measurement Pt-
06/27/95 $100.00 $100.00 $100.00
01/1996 $127.07 $113.97 $119.38
01/1997 $263.97 $149.41 $154.25
01/1998 $516.43 $176.72 $190.46
</TABLE>
* Please note that the Total Shareholder Return set forth in the graph assumes
the following dividends paid by the Company were reinvested monthly:
the $0.60 per share dividend which was paid on May 30, 1996,
the $0.15 per share dividend which was paid on March 17, 1997,
the $0.20 per share dividend which was paid on May 30, 1997 and August
29, 1997 and
the $5.50 per share dividend which was paid on January 15, 1998.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16 of the Exchange Act requires the Company's directors and
executive officers and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities to file various reports with
the SEC and the National Association of Securities Dealers concerning their
holdings of, and transactions in, securities of the Company. The SEC rules also
require that copies of these filings be furnished to the Company.
To the Company's knowledge, based solely on its review of copies of such
reports received or written representations from certain reporting persons that
no other reports were required during the Eight Month Fiscal Period, all Section
16(a) filing requirements applicable to its officers, directors and ten percent
(10%) stockholders were met during the Eight Month Fiscal Period.
16
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
On May 30, 1995 the Company engaged Coopers & Lybrand L.L.P. ("Coopers") to
serve as its principal independent accountant to audit its financial statements
commencing for the year ended June 3, 1995. A representative of Coopers is
expected to attend the Annual Meeting, such representative will have an
opportunity to make a statement if he or she desires to do so, and such
representative will be available to answer questions, if any, from stockholders.
OTHER MATTERS
ADDITIONAL INFORMATION
Copies of the Company's Annual Report on Form 10-K for the eight months
ended January 31, 1998, (including financial statements and financial statement
schedules) as filed with the Securities and Exchange Commission are available
upon written request from the office of Investor Relations, Cherokee Inc., 6835
Valjean Avenue, Van Nuys, CA 91406.
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
Any proposal relating to a proper subject which a stockholder may intend to
be presented for action at the next Annual Meeting of Stockholders must be
received by the Company no later than January 8, 1999, to be considered for
inclusion in the proxy material to be disseminated by the Board in accordance
with the provisions of Rule 14a(8)(3)(i) promulgated under the Exchange Act.
Copies of such proposals should be sent to the Corporate Secretary at the
Company's principal executive offices. To be eligible for inclusion in such
proxy materials, such proposals must conform to the requirements set forth in
Regulation 14A under the Exchange Act.
OTHER BUSINESS OF THE MEETING
The Board is not aware of any matter to be presented at the Annual Meeting
or any postponement or adjournment thereof which is not listed on the Notice of
Annual Meeting and discussed above. If other matters should properly come before
the meeting, however, the persons named in the accompanying proxy will vote all
proxies in accordance with the recommendation of the Board, or if no such
recommendation is given, in their own discretion.
COST OF SOLICITING PROXIES
The expense of soliciting proxies and the cost of preparing, assembling and
mailing material in connection with the solicitation of proxies will be paid by
the Company. In addition to the use of the mail, proxies may be solicited by
personal interview, telephone or telegraph, by officers, directors and other
employees of the Company, who will not receive any additional compensation for
such services. The Company has retained U.S. Stock Transfer Corporation to
assist in soliciting proxies with respect to shares of Common Stock held of
record by brokers, nominees and institutions. The Company does not anticipate
that the costs of such proxy solicitation firm will exceed $10,000, plus its out
of pocket fees and expenses. The Company will also request persons, firms and
corporations holding shares in their names, or in the names of their nominees,
which are beneficially owned by others, to send or cause to be sent proxy
materials to, and obtain proxies from, such beneficial owners and will reimburse
such holders for their reasonable expenses in so doing.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Carol A. Gratzke
CAROL A. GRATZKE
SECRETARY
LOS ANGELES, CALIFORNIA
DATED: MAY 8, 1998
17
<PAGE>
EXHIBIT A
SECOND AMENDMENT TO
CHEROKEE INC. 1995 INCENTIVE STOCK OPTION PLAN
THIS SECOND AMENDMENT TO CHEROKEE INC. 1995 INCENTIVE STOCK OPTION
PLAN, dated as of June 8, 1998, is made and adopted by CHEROKEE INC., a Delaware
corporation (the "Company"). Capitalized terms used but not otherwise defined
herein shall have the respective meanings ascribed to such terms in the Plan (as
defined below).
WHEREAS, effective July 25, 1995, the Company adopted the Cherokee
Inc. 1995 Incentive Stock Option Plan (the "Plan") for the benefit of its
officers and other key employees;
WHEREAS, effective as of October 9, 1996, the Company amended and
restated the Plan, and effective as of November 27, 1997, the Company further
amended the Plan;
WHEREAS, the Company desires to amend the Plan so as to expand the
class of persons eligible to receive Options thereunder and to increase the
number of shares reserved for issuance thereunder; and
WHEREAS, this Second Amendment was duly adopted by a resolution of the
Board of Directors of the Company dated as of May 1, 1998, subject to approval
thereof by the Company's shareholders.
NOW THEREFORE, in consideration of the foregoing, the Company hereby
amends the Plan as follows:
1. Section 4.2 of the Plan is hereby amended by adding the following
sentence after the first sentence of such Section:
"Notwithstanding the foregoing, with respect to Options granted
to members of the Stock Option Committee, the Plan Administrator
shall be the Board."
2. Section 5 of the Plan is hereby amended by deleting the
parenthetical phrase "(other than members of the Stock Option Committee while
serving on the Stock Option Committee)" from the first sentence of such Section.
3. Section 6 of the Plan is hereby amended by deleting the second
sentence of such Section in its entirety and replacing it with the following
sentence:
"The aggregate number of shares which may be issued pursuant to
exercise of Options granted under the Plan, as amended, shall not
exceed 900,000 shares of Common Stock (subject to adjustment as
provided in Section 7.13 hereof), including shares previously
issued under the Plan."
4. This Second Amendment shall be and is hereby incorporated in and
forms a part of the Plan.
5. This Second Amendment shall be effective as of June 8, 1998,
subject to approval thereof by the Company's shareholders.
6. Except as set forth herein, the Plan shall remain in full force
and effect.
18
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CHEROKEE INC.
1998 ANNUAL MEETING OF STOCKHOLDERS, JUNE 8, 1998
The undersigned hereby appoints Robert Margolis and Keith Hull, and each of
them, proxies for the undersigned with full power of substitution, to vote all
of the shares which the undersigned is entitled to vote, with all powers the
undersigned would possess if personally present at the 1998 Annual Meeting of
Stockholders of Cherokee Inc. (including all adjournments thereof) to be held
at the Loews Santa Monica Beach Hotel, 1700 Ocean Avenue, Santa Monica,
California, on June 8, 1998 at 10:00 A.M. Pacific Time, on all matters that may
come before the Annual Meeting.
The undersigned hereby instructs said proxies or their substitutes:
<TABLE>
<S> <C> <C>
1. ELECTION OF DIRECTORS: [_] To VOTE FOR all nominees [_] To WITHHOLD AUTHORITY to
listed below. vote for all nominees
listed below.
</TABLE>
Robert Margolis, Timothy Ewing, Douglas Weitman, Jess Ravich, Keith Hull
INSTRUCTIONS: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below.
-----------------------------------------------------------------------------
2. AMENDMENT TO CHEROKEE INC. 1995 INCENTIVE STOCK OPTION PLAN: Approval of
the amendment to the Cherokee Inc. 1995 Incentive Stock Option Plan (the
"Amendment").
<TABLE>
<S> <C> <C>
[_] To VOTE FOR approval of [_] To VOTE AGAINST [_] To ABSTAIN with regard
the Amendment approval of the Amendment to approval of the Amendment
</TABLE>
3. DISCRETIONARY AUTHORITY: In their discretion, the proxies are
authorized to vote with respect to all other matters which may properly
come before the Annual Meeting.
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE
ELECTION OF DIRECTORS AND FOR THE APPROVAL OF THE AMENDMENT TO THE CHEROKEE
INC. 1995 INCENTIVE STOCK OPTION PLAN.
The undersigned hereby revokes any proxies heretofore given by the
undersigned to vote at the Annual Meeting of Stockholders or any adjournment
thereof. The undersigned hereby acknowledges receipt of a copy of the Notice of
Annual Meeting of Stockholders and Proxy Statement, both dated May 8, 1998, and
a copy of the Company's Annual Report on Form 10-K for the eight month period
ended January 31, 1998.
Dated: ______________ , 1998 _____________________________
_____________________________
Signature(s)
Note: Your signature should
appear the same as your name
appears hereon. In signing
as attorney, executor,
administrator, trustee or
guardian, please indicate
the capacity in which
signing, when signing as
joint tenants, all parties
in the joint tenancy must
sign. When a proxy is given
by a corporation, it should
be signed by an authorized
officer and the corporate
seal affixed. No additional
postage is required if
mailed within the United
States.
