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 [_]
[_] Confidential, for Use of the
Commission Only (as
permitted by Rule
14a-6(e)(2))
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Definitive Proxy Statement
[X] 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)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] 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 previously
was paid. 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:___________________________________________________________
Notes:
CHEROKEE INC.
6835 Valjean Avenue
Van Nuys, California 91416
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 31, 2001
NOTICE IS HEREBY GIVEN that the 2001 Annual Meeting of the Stockholders of
Cherokee Inc. will be held at the Palisades Salon in the Loews Santa Monica
Beach Hotel, 1700 Ocean Avenue, Santa Monica, California, on May 31, 2001 at
10:00 A.M. (Pacific Time) for the following purposes:
1. To elect five directors to the Board of Directors who will serve until the
2002 Annual Meeting of Stockholders of Cherokee Inc. and until their
successors have been duly elected and qualified; and
2. To transact such other business as may be properly brought before the
meeting or any postponement or adjournment thereof.
Stockholders of record at the close of business on April 16, 2001 will be
entitled to notice of and to vote at the annual meeting or any adjournments
thereof. A list of stockholders entitled to vote at the annual meeting will be
available for examination by any stockholder for any purpose germane to the
annual meeting during normal business hours for ten days prior to the annual
meeting at the Loews Santa Monica Beach Hotel.
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
Van Nuys, California
April 27, 2001
IMPORTANT
Whether or not you expect to attend the annual meeting in person, please
complete, date, sign and return the enclosed proxy card 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 annual meeting.
CHEROKEE INC.
6835 Valjean Avenue
Van Nuys, California 91406
----------------
PROXY STATEMENT
2001 ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 31, 2001
----------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Cherokee Inc., a Delaware corporation, ("Cherokee" or the
"Company") of proxies to be used at the 2001 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 May 31, 2001, at 10:00 A.M. (Pacific
Time) and at any adjournments or postponements thereof. A form of the proxy is
enclosed for use at the annual meeting. Stockholders are being asked to vote
upon the election of five directors to the Board of Directors and to transact
such other business as may properly come before the annual meeting. The
approximate date on which this Proxy Statement and form of proxy are being
mailed to the stockholders is May 1, 2001.
Record Date, Outstanding Shares and Voting
The Company's Board of Directors has fixed April 16, 2001, as the record date
to determine stockholders entitled to notice of and to vote at the annual
meeting. As of the record date, there were 8,231,705 shares of common stock
outstanding. Each stockholder of record at the close of business on April 16,
2001 is entitled to one vote for each share of common stock then held on each
matter to come before the annual meeting, or any adjournments or postponements
thereof.
Quorum and Voting Requirements
A majority of the votes eligible to be cast at the annual meeting by holders
of common stock, or 4,115,854 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" will be counted as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. Broker non-votes are 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. Under the rules that
govern brokers, brokers who have record ownership of shares have the authority
to vote on certain "routine" matters even when they have not received
instructions from the beneficial owners of such shares. Brokers that do not
receive instructions are entitled to vote on the election of directors.
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. The nominees receiving the five highest number of votes will become
directors. No other proposals are expected to be presented at the annual
meeting. However, most other proposals, such as a proposal to postpone or
adjourn the annual meeting, 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 other proposals will have
the same effect as votes against the proposals. Broker non-votes, however, will
be treated as unvoted for purposes of determining approval of such proposals
and will not be counted as votes for or against such other proposals. The
Company's Certificate of Incorporation does not provide for cumulative voting.
1
Voting and Revocation of Proxies
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 of Directors, and
as recommended by the Board of Directors 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 of Directors'
director nominees.
A proxy may be revoked at any time before it is exercised by giving written
notice of revocation to the Secretary of the Company or by submitting, prior to
the time of the meeting, a properly executed proxy bearing a later date.
Stockholders having executed and returned a proxy, who attend the meeting and
desire to vote in person, are required to so notify the Secretary of the
Company prior to the beginning of the annual meeting.
Security Ownership of Principal Stockholders
The following table sets forth information regarding the beneficial ownership
of common stock as of April 16, 2001 by each person believed to own
beneficially five percent or more of the Company's common stock. Unless noted
otherwise, the holders listed below have sole voting power and dispositive
power over the shares beneficially held by them. Under the rules of the
Securities and Exchange Commission, in calculating percentage ownership, each
holder is deemed to beneficially own any shares subject to options exercisable
by the holder within sixty days of April 16, 2001, but options owned by others
are deemed not to be outstanding shares even if the options are exercisable
within sixty days. Percentage ownership is based on 8,231,705 shares of common
stock outstanding on April 16, 2001.
Name and Address Amount and Nature of Percentage
of Beneficial Owner Beneficial Ownership of Class
------------------- -------------------- ----------
Timothy Ewing........................... 1,905,246(1) 23.1%(1)
4514 Cole Avenue, Suite 808
Dallas, TX 75205
Value Partners, Ltd. ................... 1,864,169 22.6%
C/O Ewing & Partners
4515 Cole Avenue, Suite 808
Dallas, TX 75205
Robert Margolis......................... 1,707,394(2) 20.7%(2)
6835 Valjean Avenue
Van Nuys, CA 91406
The Newstar Group, Inc. ................ 718,541(3) 8.7%(3)
dba The Wilstar Group
6835 Valjean Avenue
Van Nuys, CA 91406
Stadium Capital Management, LLC......... 1,053,680 12.8%
430 Cowper St., Suite 200
Palo Alto, CA 94301
- --------
(1) Includes 1,864,169 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. Mr. Ewing expressly disclaims beneficial ownership of
such shares.
(2) Includes 718,541 shares owned by The Newstar Group, Inc. d/b/a The Wilstar
Group ("Wilstar") and 136,442 shares contributed to The Robert Margolis
Foundation, Inc. ("Foundation"). Mr. Margolis expressly disclaims
beneficial ownership of such shares in the Foundation. Mr. Margolis is the
sole shareholder of Wilstar.
(3) Does not include 852,411 shares individually held by Mr. Margolis.
2
Security Ownership of Management
The following table sets forth information regarding the beneficial ownership
of common stock as of April 16, 2001, by each director and nominee for
director, the Chief Executive Officer and each of the four other most highly
compensated executive officers as of February 3, 2001, 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. Under the rules of the Securities and Exchange Commission, in calculating
percentage ownership, each holder is deemed to beneficially own any shares
subject to options exercisable by the holder within sixty days of April 16,
2001, but options owned by others are deemed not to be outstanding shares even
if the options are exercisable within sixty days. Percentage ownership is based
on 8,231,705 shares of common stock outstanding on April 16, 2001.
Amount and
Nature of
Beneficial Percentage
Name of Beneficial Owner Ownership of Class
------------------------ ---------- ----------
Robert Margolis(1) ................................... 1,707,394 20.7%
Jess Ravich(2) ....................................... 38,316 *
Keith Hull(2) ........................................ 38,277 *
Timothy Ewing(3)...................................... 1,905,246 23.1%
Dave Mullen(4)........................................ 5,000 *
Carol Gratzke(5) ..................................... 198,992 2.4%
Howard Siegel(6)...................................... 170,150 2.0%
Steven Ascher(7)...................................... 46,668 *
Nina Leong(8)......................................... * *
All Executive Officers and directors as a group(9).... 3,973,601 46.1%
- --------
*= less than 1%
(1) Includes 842,411 shares held individually by Mr. Margolis, 10,000 shares
which may be acquired pursuant to options that are currently exercisable,
718,541 shares owned by Wilstar and 136,442 shares held by the Foundation.
Mr. Margolis is the sole shareholder of Wilstar.
(2) Includes 15,000 shares which may be acquired pursuant to options that are
currently exercisable.
(3) Includes 10,000 shares which may be acquired pursuant to options that are
currently exercisable and 1,864,169 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.
(4) Includes 5,000 shares which may be acquired pursuant to options that are
currently exercisable.
(5) Includes 158,992 shares which may be acquired pursuant to options that are
or will be exercisable within sixty days of April 16, 2001.
(6) Includes 135,884 shares which shares may be acquired pursuant to options
that are or will be exercisable within sixty days of April 16, 2001.
(7) Includes 46,668 shares which may be acquired pursuant to options that are
or will be exercisable within sixty days of April 16, 2001.
(8) Ms. Leong's employment with the Company ended March 16, 2001.
(9) Includes 396,544 shares which may be acquired pursuant to options that are
or will be exercisable within sixty days of April 16, 2001.
3
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 are elected and qualified. All five incumbent directors have been
nominated for re-election for one-year terms. Both Mr. Margolis and Mr. Hull
have been nominated pursuant to the terms of a management agreement between Mr.
Margolis and the Company. None of the nominees has any family relationship to
any other nominee or to any executive officer of the Company. Directors will be
elected by a favorable vote of a plurality of the shares of common 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 of Directors. The Board of
Directors 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, 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. Each nominee has consented to being named in this Proxy Statement as a
nominee for election as director and has agreed to serve as a director if
elected.
Name, Age and Principal Occupation for Past Five Years;
Present Position with the Company Other Directorships; Business Experience
--------------------------------- -----------------------------------------
Robert Margolis, 53................. Mr. Margolis has been a director since
Director, Chairman of the Board of May 1995. Mr. Margolis was appointed
Directors and Chief Executive Chairman of the Board of Directors and
Officer Chief Executive Officer 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 since June 1990 and became
Chairman of the Board of Directors 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. Mr. Margolis' services as Chief
Executive Officer are provided pursuant
to the terms of a management agreement
between Mr. Margolis and the Company. See
"Employment and Management Agreements."
Timothy Ewing, 40................... Mr. Ewing has been a director since
Director September 1997. Mr. Ewing, a Chartered
Financial Analyst, is the managing
partner of Ewing & Partners and manager
of Value Partners, Ltd., a private
investment partnership formed in 1989.
Mr. Ewing is vice-chairman of the board
of directors of First Fidelity Bancorp,
Inc. in Irvine, California, he sits on
the board of directors of Harbourton
Financial Corporation in McLean, Virginia
and is on the board of trustees of the
Carolco Pictures Liquidating Trust. In
addition, he is on the board of directors
of the Baylor Health Care System
Foundation and The Dallas Opera, and the
governing board of the Dallas Museum of
Natural History.
4
Name, Age and Principal Occupation for Past Five Years;
Present Position with the Company Other Directorships; Business Experience
--------------------------------- -----------------------------------------
Dave Mullen, 66..................... Mr. Mullen has been a Director since May
Director 2000. For more than five years, he was
the President and CEO of Robinsons-May in
North Hollywood, California and retired
from The May Department Stores in July
1999. He joined The May Department Stores
in March 1988 and from March 1988 to June
1988 was the President and CEO of
Goldwater's in Phoenix, Arizona. From
June 1988 to January 1991 he was
President and CEO of Filene's in Boston,
Massachusetts and in January 1991 became
the President and CEO of Robinsons-May in
North Hollywood.
Jess Ravich, 43..................... Mr. Ravich has been a Director since May
Director 1995. Mr. Ravich has been the Chairman
and Chief Executive Officer of the U.S.
Bancorp Libra, a division of U.S. Bancorp
Investments, Inc., a registered broker-
dealer since January 1999. From June 1991
to January 1999, he was the Chairman and
Chief Executive Officer and the majority
shareholder of Libra Investments, Inc., a
registered broker dealer he founded which
merged with US Bancorp Investments, Inc.
in January 1999. Mr. Ravich is on the
board of directors of Communication
Intelligence Corporation.
Keith Hull, 48...................... Mr. Hull has been a director since June
Director 1995. For more than five years, Mr. Hull
has been President of Avondale Fabrics
and Corporate Vice President of its
parent, Avondale Mills Inc. Avondale
Mills is a diversified manufacturer of
textiles.
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 of Directors is not involved in day-to-
day operations. During the fiscal year ended February 3, 2001 ("Fiscal 2001")
the Board of Directors met three times. Each director attended at least 75% of
all Board of Directors and applicable committee meetings during Fiscal 2001.
Audit Committee
The Audit Committee recommends to the Board of Directors a firm of
independent certified public accountants to conduct, among other things, the
annual audit of the Company's books and records; reviews with the independent
accountants the scope and results of the annual audit and quarterly reviews
prior to the filing of a report on Form 10-K or 10-Q with the SEC; reviews and
discusses the audited financial statements with the Company's management;
consults with the independent accountants and management with regard to the
adequacy of the Company's system of internal accounting controls; receives from
the independent auditors the report required by Independence Standards Board
Standard No. 1 as in effect at that time and discusses it with the independent
auditors; reviews and reassesses annually the adequacy of its charter; prepares
a report each year for inclusion in the Company's annual Proxy Statement; and
reviews fees charged by the independent accountants for professional services.
The Cherokee Board of Directors has adopted a written charter for the Audit
Committee. A copy of the Audit Committee Charter is attached as Appendix A to
this Proxy Statement. In addition, the Board of Directors has determined that
all of the members of the Audit Committee are "independent", as defined by the
rules of The Nasdaq Stock Market, Inc.
Representatives of 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. In Fiscal 2001, the Audit Committee consisted of
three non-employee directors, Mr. Hull, Mr. Mullen and Mr. Ravich. The Audit
Committee met four times during this period.
5
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. Hull, 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 Compensation 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 five times during Fiscal 2001.
Compensation Committee Interlocks and Insider Participation
Except for Mr. Margolis, who is a director and Chief Executive Officer of the
Company, as well as the sole 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. The
executive management services of Mr. Margolis as the Company's Chairman of the
Board and Chief Executive Officer are provided pursuant to a management
agreement between Mr. Margolis and the Company. See "Employment and Management
Agreements."
Directors' Remuneration and Stock Options
For their services on the Board of Directors during Fiscal 2001, each non-
employee director was paid a retainer fee of $15,000 per annum. The fees are
paid on a quarterly basis. On May 31, 2000, each director was granted options
to purchase 5,000 shares of common stock with an exercise price equal to the
fair market value of such stock on the date of grant. The option grants were
made pursuant to the Company's 1995 Incentive Stock Option plan, as amended.
The options are immediately exercisable, expire ten years from the date of
grant and contain cashless exercise and antidilution provisions. The options
generally terminate three months after a director ceases to serve on the Board
of Directors unless such director ceases to serve as a result of death or
disability in which case the options terminate one year after the director
ceases to serve on the Board of Directors. None of the current directors
exercised options during Fiscal 2001.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR EACH OF THE DIRECTORS NOMINATED IN ITEM 1
6
EXECUTIVE COMPENSATION
Summary Compensation Table(1)
The following table includes information concerning annual and long-term
compensation earned by the Chief Executive Officer and the other four most
highly compensated executive officers as of February 3, 2001 (collectively, the
"Named Executive Officers"), for services rendered during each of the Company's
last three fiscal years.
Annual Compensation Long Term Compensation
--------------------------- --------------------------
Securities
Underlying All Other
Name and Principal Fiscal Salary Option Awards Compensation
Position Year $ Bonus $ # $
- ------------------ ------ ------- --------- ------------- ------------
Robert Margolis......... 2001 589,333(2) 2,175,760(2) 5,000 --
Chairman and Chief 2000 590,367(2) 1,776,084(2) 5,000 1,890,624
Executive Officer 1999 550,000(2) 1,459,842(2) 5,000 --
Carol Gratzke........... 2001 155,769(3) 205,738 -- --
Chief Financial Officer 2000 150,000 169,089 -- --
1999 150,000 122,323 10,000 39,748
Howard Siegel........... 2001 155,769(3) 205,738 -- --
President-Operations 2000 150,000 169,089 -- --
1999 150,000 122,323 30,000 28,971
Steven Ascher........... 2001 320,213(3) 108,240 -- --
Executive Vice 2000 250,000 100,000 100,000 --
President 1999 250,000 25,000 20,000 --
Nina Leong.............. 2001 141,538(4) 50,000 50,000 --
Executive Vice
President
- --------
(1) None of the Named Executive Officers received any compensation reportable
as Other Annual Compensation during the period covered by the Summary
Compensation Table, except for perquisites, which did not exceed the lesser
of $50,000 or 10% of total annual salary and bonus of such Named Executive
Officer, and as a result, the corresponding column was omitted.
Additionally, none of the Named Executive Officers received restricted
stock awards or long-term incentive plan payouts during the period covered
by the Summary Compensation Table and, as a result, the corresponding
columns were omitted.
(2) The executive management services of Mr. Margolis as the Company's Chairman
of the Board and Chief Executive Officer are provided pursuant to a
management agreement originally between Wilstar and the Company. Mr.
Margolis is the sole stockholder of Wilstar. On January 3, 2001, Wilstar
assigned the management agreement to Mr. Margolis. Under the management
agreement, Mr. Margolis is eligible to receive both base compensation and
annual cash bonuses for providing management services. In Fiscal 2001,
$589,333 in annual base compensation was paid pursuant to the management
agreement. In Fiscal 2001, a bonus of $2,175,760 was accrued pursuant to
the management agreement. See "Employment and Management Agreements" below
for a further description of the management agreement.
(3) The Fiscal 2001 salary amount represents a 53-week year.
(4) Nina Leong joined the Company as Executive Vice President on June 15, 2000,
and her Fiscal 2001 salary amount represents a partial year. Ms. Leong's
employment with the Company ended March 16, 2001.
7
Option Grants in Last Fiscal Year
Set forth below is further information on grants of stock options during
Fiscal 2001 to the Named Executive Officers.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Number of Percentage of Price Appreciation
Securities Total Options Exercise for Option Term
Underlying Granted to or Base ($)(2)
Options Employees in Price Expiration ----------------------
Name Granted(1)# Fiscal 2001 ($/Share) Date 5% 10%
- ---- ----------- ------------- --------- ---------- ---------- -----------
Robert Margolis......... 5,000(3) 10.0% 7.0625 5-3-10 22,208 56,279
Nina Leong.............. 50,000(4) 90.0% 8.50 6-19-10 267,278 677,340
- --------
(1) All option grants were made pursuant to the Company's 1995 Incentive Stock
Option Plan, as amended. Under the plan, in the event of a liquidation,
merger, reorganization, or consolidation of the Company with any other
corporation in which the Company is not the surviving corporation or the
Company becomes a wholly-owned subsidiary of another corporation, each
option granted under the plan, to the extent not fully exercised, will be
cancelled unless the surviving corporation in any such merger,
reorganization or consolidation elects to assume the options or to grant
substitute options in place thereof. Notwithstanding the foregoing, vested
options will remain exercisable until the date of any such liquidation,
merger, reorganization, or consolidation and any unvested options will
become exercisable for a ten-day period ending on the fifth day immediately
preceding any such liquidation, merger, reorganization or consolidation.
(2) The dollar gains under these columns result from calculations assuming 5%
and 10% growth rates as set by the Securities and Exchange Commission and
are not intended to forecast future price appreciations of the Company's
common stock. 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 that there is no assurance
the value realized by the Named Executive Officer will be at or near the
value shown.
(3) On May 31, 2000, each director, including Mr. Margolis, received an award
of 5,000 options to purchase common stock. The exercise price of each
option is $7.0625, which equals the fair market value of common stock on
the date of grant. The options are immediately exercisable, expire ten
years from the date of grant and contain cashless exercise and antidilution
provisions. The options will generally terminate three months after Mr.
Margolis ceases to serve on the Board of Directors unless he ceases to
serve as a result of death or disability in which case the options
terminate one year after he ceases to serve on the Board of Directors.
(4) On June 19, 2000, Ms. Leong received an award of 50,000 options to purchase
common stock. Such options become exercisable in three installments of
16,666, 16,667 and 16,667, on the first, second and third anniversaries of
the date of the grant, respectively. The exercise price of each option is
$8.50, which equals the fair market value of our common stock on the date
of grant. The options are exercisable ten years from the date of grant and
contain cashless exercise and antidilution provisions. The options
generally terminate three months after Ms. Leong's employment with the
Company is terminated, unless her employment is terminated as a result of
her death or disability in which case the options terminate one year after
her employment is terminated. Since Ms. Leong's employment with the Company
ended on March 16, 2001, which was prior to the first anniversary of her
employment with the Company, none of the options granted to Ms. Leong were
vested and all 50,000 options were therefore cancelled.
8
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 Fiscal 2001 and prior years to
the Named Executive Officers, and held by them at February 3, 2001. During
Fiscal 2001, none of the Named Executive Officers exercised options to purchase
stock.
Number of Unexercised Value of
Options at In-the-Money Options at
February 3, 2001 February 3, 2001 $(1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
Robert Margolis......... -- -- 10,000 -- 17,812 --
Carol Gratzke........... -- -- 158,992 -- 61,283 --
Howard Siegel........... -- -- 135,884 10,000 61,101 8,750
Steven Ascher........... -- -- 46,668 73,332 63,752 32,249
Nina Leong.............. -- -- -- 50,000(2) -- 40,625
- --------
(1) The value of unexercised in-the-money options at FY-end was calculated
based on the market value of the underlying securities, minus the exercise
price, and assumes the sale of the underlying securities on February 2,
2001, the last trading day in Fiscal 2001, at a price of $9.3125 per share,
which was the closing price of the Company's common stock on the NASDAQ
National Market System on that date.
(2) The options granted to Ms. Leong were unvested at the time of termination
and have been cancelled.
Employment and Management Agreements
Management Agreement
The Newstar Group, Inc. d/b/a The Wilstar Group ("Wilstar") previously
provided the executive management services of Mr. Margolis as the Company's
Chairman of the Board and Chief Executive Officer pursuant to a management
agreement between Wilstar and the Company. The parties originally entered into
a management agreement on May 4, 1995, which was subsequently amended several
times. As of November 29, 1999, Wilstar and the Company entered into a revised
management agreement, which substantially revised and restated in one document
the terms under which Wilstar agreed to continue to provide executive
management services to the Company. Robert Margolis is currently the sole
stockholder of Wilstar. On January 3, 2001, in accordance with the terms of the
management agreement, Wilstar assigned the management agreement to
Mr. Margolis.
Base Compensation and Performance Bonuses. As base compensation for services
rendered under the management agreement, Mr. Margolis is currently paid
$587,450 per fiscal year. Mr. Margolis' base compensation is subject to an
annual cost of living increase.
Mr. Margolis is also eligible for annual performance bonuses. Section 3.3 of
the management agreement provides, that, for each fiscal year after the
Company's fiscal year ended January 29, 2000 ("Fiscal 2000"), if the Company's
EBITDA for such fiscal year is no less than $5.0 million, then Mr. Margolis
will receive a performance bonus equal to (x) 10% of the Company's EBITDA for
such fiscal year in excess of $2.5 million up to $10.0 million, plus (y) 15% of
the Company's EBITDA for such fiscal year in excess of $10.0 million.
In all cases, EBITDA will be determined in accordance with U.S. generally
accepted accounting principles and will be reduced by all accrued compensation
expenses attributable to any compensation paid or payable to Mr. Margolis under
the management agreement, including but not limited to the performance bonuses
provided for under Section 3.3 and base compensation payable to Mr. Margolis.
Initial Term and Extensions. The initial term of the management agreement
terminates on February 2, 2002. If the Company's consolidated pre-tax earnings,
as set forth in its audited financial statements for any of its fiscal years
during the term of the management agreement, commencing with Fiscal 2000: (a)
are no less than 80% of the consolidated pre-tax earnings contained in the
budget submitted to and approved by the
9
Compensation Committee for such fiscal year, and (b) are also no less than the
consolidated pre-tax earnings for the immediately preceding fiscal year, then
the termination date of the management agreement will automatically be
extended an additional year. There may be any number of such extensions if the
foregoing tests are met on multiple occasions. During Fiscal 2000 and Fiscal
2001, the foregoing tests were met and therefore the term of the management
agreement has been extended to February 1, 2004.
Composition of the Board of Directors. The management agreement provides
that if the Company's board is comprised of five directors, the Company will
use its commercially reasonable best efforts to ensure (a) that one director
is nominated by Mr. Margolis (the "Wilstar Director"); (b) that one director
(the "Investor Director") is nominated by the members of the group, other than
Mr. Margolis, that filed a Schedule 13-D, dated April 24, 1995, with respect
to the purchase of the Company's common stock (collectively, the "Outside
Investors"); and (c) that three directors are nominated by the non-Wilstar
non-Investor Directors (the "Other Directors"). If there are seven directors,
the Company will use its commercially reasonable best efforts to ensure that a
second Investor Director is nominated by Outside Investors and four directors
are nominated by the Other Directors. If there are nine directors, the Company
will use its commercially reasonable best efforts to ensure that, in addition
to the Wilstar Director and the Investor Directors described above, one
director is nominated by Mr. Margolis and the Outside Investors together (the
"Wilstar/Investor Director") and five directors are nominated by the Other
Directors. If the Board of Directors is expanded, the Company will use its
commercially reasonable best efforts to ensure that Mr. Margolis is able to
maintain his proportionate representation. The Company will use its
commercially reasonable best efforts to ensure that the Board of Directors
will have an audit and a compensation committee, each of which will be
comprised of three members, one of whom shall be an Investor Director and two
of whom shall be selected by the entire Board of Directors from all of the
remaining directors, other than the Wilstar Director.
In addition to the events of termination described below under the title
"Events of Termination," Mr. Margolis may elect to treat the following events
relating to the composition of the Board of Directors as a breach of the
management agreement by the Company:
. the size of the Board of Directors is increased or decreased without Mr.
Margolis' maintaining or increasing his proportionate representation;
. the Wilstar Director, the Investor Directors or the Wilstar/Investor
Director, as applicable, are not elected to the Board of Directors or
are not put on the slate of directors recommended to the Company's
stockholders or any such director is removed from the Board of Directors
without Mr. Margolis' prior approval; or
. without Mr. Margolis' consent, he is not elected Chairman of the Board.
Events of Termination. Mr. Margolis may terminate the management agreement
if the Company materially breaches any of the terms and conditions of the
management agreement or fails to perform its material obligations thereunder.
Unless initiated or consented to by Mr. Margolis, the occurrence of any of the
following will be deemed to be a material breach of the management agreement:
. the assignment to Mr. Margolis of any duties materially inconsistent
with, or the diminution of Mr. Margolis' positions, titles, offices,
duties and responsibilities with the Company or any removal of Mr.
Margolis from, or any failure to re-elect Mr. Margolis to, any titles,
offices or positions held by Mr. Margolis under the Revised Management
Agreement, including the failure of the Board of Directors to elect Mr.
Margolis or his designee as Chairman of the Board or the failure to
elect, or the removal of, any Wilstar or Outside Investor nominee as
director from the slate of directors recommended to the Company's
stockholders by the Board of Directors;
. except as in accordance with the management agreement, a reduction by
the Company in the base compensation or any other compensation provided
for in the management agreement;
10
. a change or relocation of Mr. Margolis' offices at the Company that
materially and adversely affects Mr. Margolis' working environment; or
. any other substantial, material and adverse changes in Mr. Margolis'
working conditions imposed by the Company.
The Board of Directors may terminate the management agreement at any time
without cause. If appropriate, the Board of Directors may also terminate the
management agreement "for cause." "For cause" is limited to the willful
misfeasance or gross negligence on the part of Mr. Margolis in connection with
the performance of his duties pursuant to the management agreement, which
willful misfeasance or gross negligence directly causes material harm to the
assets, business or operations of the Company. The management agreement will
terminate immediately upon Mr. Margolis' death and may be terminated by the
Board of Directors if Mr. Margolis fails to render services to the Company for
a substantially continuous period of six months because of Mr. Margolis'
physical or mental disability during such period.
Payments to Mr. Margolis if the Management Agreement is Terminated. If the
management agreement is terminated for any reason by either the Company or Mr.
Margolis, the Company will:
. pay Mr. Margolis' base compensation through the date of termination;
. reimburse Mr. Margolis for all expenses incurred through the date of
termination;
. provide ongoing indemnification for Mr. Margolis and ongoing insurance
coverage comparable to the insurance offered to other terminated
directors, officers or employees of the Company; and
. pay Mr. Margolis any unpaid performance bonuses earned pursuant to
Section 3.3 during the fiscal year in which the management agreement is
terminated; unpaid performance bonuses will be calculated using the
results of the whole fiscal year during which the management agreement
is terminated, but will be pro rated for the number of full months
occurring in such fiscal year prior to the date of termination.
In addition to the payments and other compensation described above, if the
Company terminates the management agreement without cause or Mr. Margolis
terminates the management agreement after the Company materially breaches any
of the terms and conditions thereof or fails to perform its material
obligations thereunder, the Company will pay Mr. Margolis, within 60 calendar
days after the date of termination, a lump sum in cash equal to three times
the sum of (a) Mr. Margolis' base compensation at the rate in effect at the
date of the termination and (b) the "Previous Performance Bonus." The
"Previous Performance Bonus" means an amount equal to the performance bonus
received by Mr. Margolis under Section 3.3 of the management agreement in the
Company's last full fiscal year ending prior to the date of termination.
Cap on Payments Contingent on a Change in Control. If the Company's
accountants determine that any payments to Mr. Margolis under the management
agreement would result in the non-deductibility of some or all of such
payments under Section 280G of the Code, the payments to Mr. Margolis will be
reduced to the maximum amount that is payable without causing such payments to
be nondeductible by the Company.
Other Compensation Arrangements
Pursuant to a compensation arrangement with Steven Ascher, the Executive
Vice President of New Business, Mr. Ascher will receive an annual base salary
of $350,000. Effective for Fiscal 2001 and each fiscal year thereafter, as
long as he is employed by the Company, Mr. Ascher will receive bonuses equal
to two and one-half percent of the Company's EBIT growth year to year. EBIT is
defined at earnings before interest and taxes and will not include net
revenues received from Carrefour, which is one of the Company's international
licensees for the Cherokee brand. For Fiscal 2001, the Company accrued a bonus
of $108,240 for Mr. Ascher. Bonus payments resulting from EBIT growth, if any,
will be paid in equal quarterly installments during the year following the
fiscal year in which the bonus is earned. Mr. Ascher will also receive five
percent of the net royalty revenues received by the Company from Carrefour. If
the Company terminates Mr. Ascher's
11
employment without cause, it must pay Mr. Ascher $175,000, any unpaid bonus
amounts related to the prior year's EBIT growth and five percent of the net
royalty revenues received by the Company from Carrefour for a period of three
years from the date of termination.
Pursuant to a compensation arrangement with Ms. Nina Leong, the former
Executive Vice President of Business Development, Ms. Leong was to receive an
annual base salary of $230,000. Ms. Leong was guaranteed a minimum bonus of
$50,000 for Fiscal 2001 and a grant of 50,000 stock options, which were to vest
in equal installments on the first, second and third anniversaries of her date
of hire and which had an exercise price of $8.50 per share. The compensation
arrangement also provided that if, Ms. Leong's employment was terminated
without cause, the Company would be obligated to pay Ms. Leong $115,000 in
severance. The Company terminated Ms. Leong's employment on March 16, 2001 and
will pay Ms. Leong $115,000 in installment payments over a six month period
commencing on March 30, 2001. Also, the 50,000 stock options were unvested at
the time of termination and were cancelled.
Certain Relationships and Related Transactions
On December 23, 1997, the Company loaned $2.0 million to Mr. 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 Promissory Note, dated December 23, 1997, in favor of
the Company for $2.0 million which yields 6.0% interest per annum, and which
has been recorded as a reduction to stockholders' equity on the Company's
balance sheet. Under the terms of the management agreement, $1.89 million of
the principal amount of the Promissory Note was forgiven as of January 29,
2000. The remaining principal amount of the Promissory Note and accrued
interest, totaling $373,000 was repaid on June 6, 2000.
On November 7, 1997, the Company entered into an Agreement of Purchase and
Sale of Trademarks and Licenses with Sideout Sport Inc., pursuant to which the
Company agreed to purchase all of Sideout Sport Inc.'s trademarks, copyrights,
trade secrets and associated license agreements. Steven Ascher, an Executive
Vice President of the Company beneficially owns 37.2% of Sideout Sport Inc. Mr.
Ascher's father and father-in-law beneficially own 8.9 % and 5.0%,
respectively, of Sideout Sport Inc. Pursuant to the agreement with Sideout, the
Company paid $1.5 million at the closing of the acquisition and agreed to pay
an additional $500,000 upon release of liens on the assets that were purchased.
Most of the liens have since been released and $495,000 of the $500,000
holdback has been paid. Under the terms of the agreement with Sideout, the
Company also agreed to pay Sideout Sport Inc., on a quarterly basis, contingent
payments of 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 the Company has paid Sideout Sport Inc a total of $7.5 million or
October 22, 2004, the Company will have no further obligation to pay Sideout
Sport Inc. During Fiscal 2001, the Company made payments exceeding $1.2 million
to Sideout Sport Inc. and since January 1999, the Company has paid in total
over $2.6 million in contingent payments to Sideout Sport Inc.
On May 11, 1999, the Company loaned $100,000 to Mr. Ascher. Mr. Ascher
executed a note, dated May 11, 1999, in favor of the Company for $100,000,
which yields 6.0% interest per annum. The principal amount of the note and all
accrued interest thereon is due and payable on May 11, 2001. The note may be
repaid in whole or in part at any time without penalty. Upon the termination of
Mr. Ascher's employment for any reason, the entire principal amount of the note
and all accrued interest thereon will become due and payable. As of April 29,
2001, approximately $81,312 in principal and interest remained outstanding
under the note from Mr. Ascher.
For information with respect to other transactions and relationships between
the Company and certain executive officers, directors and related parties, see
"Compensation Committee Interlocks and Insider Participation" above and
"Employment and Management Agreements" above.
12
Compensation Committee Report
The following Report of the Compensation Committee of the Board of Directors
covering Fiscal 2001 and the performance graph that follows are included herein
pursuant to Item 402 of Regulations 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 and the performance graph that follows shall not be
deemed "soliciting material" or to be "filed" with the Securities and Exchange
Commission, 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.
General. The Compensation Committee of the Board of Directors is currently
composed of three non-employee directors of the board, Mr. Ewing, Mr. Ravich
and Mr. Hull. The Compensation Committee reviews the performance of the Chief
Executive Officer whose services are provided pursuant to the management
agreement with Mr. Margolis, and when appropriate makes recommendations to the
Board of Directors as to the terms of the management agreement. As appropriate,
the Compensation Committee reviews and approves the recommendations of the
Chief Executive Officer regarding compensation for other executive officers,
including salary and cash bonus levels and the stock option grants under the
Company's 1995 Incentive Stock Option Plan, as amended. During Fiscal 2001, the
Company had five executive officers and fourteen total employees.
Compensation Policies. The Company's executive compensation policies are
designed to attract, reward and retain executive officers who contribute to the
Company's success, to provide economic incentives for executive officers to
achieve the Company's business and financial 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 above listed objectives, the Compensation Committee
considers, among others, the following factors concerning the individual
performance of executive officers: (1) their ability to perform their given
tasks; (2) knowledge of their jobs; and (3) their ability to work with others
toward the achievement of the Company's goals. The Compensation Committee also
evaluates corporate performance by looking at factors such as the Company's
performance relative to the business environment and the success of the Company
in meeting its business and financial objectives. In reviewing the above listed
factors regarding both individual and corporate performance, the Compensation
Committee relies on its subjective evaluations of such factors.
Section 162(m) of the Internal Revenue Code 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
executive 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. The
Compensation Committee may elect to approve awards or grant compensation to
executive officers which is not deductible by the Company under Section 162(m)
of the Internal Revenue Code.
Components of Compensation. The annual base compensation and performance
bonuses payable to Mr. Margolis for providing his executive management services
as the Company's Chairman of the Board and Chief Executive Officer are governed
by the management agreement. See "Employment and Management Agreements" above.
The Company seeks to pay its other executive officers salaries that are
commensurate with their qualifications, duties and responsibilities. In
reviewing and approving the Chief Executive Officer's recommendations regarding
the annual salaries of the other executive officers, the Compensation Committee
considers the individual and corporate performance factors outlined above, and
puts particular emphasis on the
13
success of the Company in meeting its business and financial objectives and the
overall contribution of each executive officer in helping to meet those
objectives.
For Fiscal 2001, a bonus pool equal to approximately 4% of the Company's
EBITDA in excess of $2.5 million was established and eleven of the Company's
fourteen employees participated in the bonus pool. Ms. Gratzke and Mr. Siegel
were each entitled to 25% of the bonus pool, and the Chief Executive Officer
allocated the remainder of the bonus pool among the other nine employees based
upon their individual performance during Fiscal 2001. This approach is designed
to motivate the Company's employees to meet the business and financial
objectives of the Company because the bonuses are tied to the profitability of
the Company. Mr. Ascher, the Executive Vice President of New Business, was
placed on a different bonus plan designed to reward him when he generates new
licensees for the Company. Mr. Ascher will receive bonuses equal to two and
one-half percent of EBIT growth year to year. Mr. Ascher will also receive five
percent of the royalties from the Company's new licensee Carrefour. This bonus
arrangement was approved prior to obtaining the license agreement with
Carrefour and was designed as an incentive for Mr. Ascher to obtain a license
agreement with Carrefour, which is one of the world's largest retailers. See
"Employment and Management Agreements."
The Company's 1995 Incentive Stock Option Plan authorizes the Compensation
Committee to grant employees stock options. Stock options are granted under the
plan with exercise prices equal to or above the market price of the Company's
common stock on the date of grant and generally vest in annual installments
over two or three years. 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 stockholder value and
thereby align the interests of the executive officers with the stockholders.
The Compensation Committee also believes that these grants, which may vest over
a period of two or more years, provide incentives for executive officers to
remain with the Company. In determining the numbers of options granted in any
fiscal year, the Compensation Committee considers such factors as the seniority
of the executive officer, the contribution that the executive officer is
expected to make to the Company and the size of prior grants to the executive
officer.
Compensation of the Chief Executive Officer. Until November 1999,
compensation in return for the services of Mr. Margolis as Chief Executive
Officer of the Company was governed by an amended management agreement between
Wilstar and the Company that was originally entered into on May 4, 1995.
Wilstar is wholly owned by Mr. Margolis.
On November 29, 1999, Wilstar and the Company entered into a revised
management agreement (replacing the prior management agreement), which was
approved by both the Compensation Committee and the disinterested members of
the Board of Directors. The material terms of such management agreement are
summarized above under the section "Employment and Management Agreements." The
terms of the management agreement resulted from several months of negotiations
between Wilstar and the Company. The primary basis for the Compensation
Committee's determination to approve the terms of the management agreement was
to retain the services of Mr. Margolis as Chairman of the Board and Chief
Executive Officer of the Company and to provide a strong incentive for him to
continue to increase the long-term value of the Company for its stockholders.
Under Mr. Margolis' leadership, the Company's revenues have grown from
approximately $8.7 million in the fiscal year ended May 31, 1997 to
approximately $28.3 million in Fiscal 2001, an increase of over 225% during
that time period. Mr. Margolis' performance is further highlighted by the
performance graph on the next page, which covers Mr. Margolis' tenure as Chief
Executive Officer since the first full fiscal year after the Company emerged
from bankruptcy and compares the Company's stock performance with the stock
performance of other companies, as measured by broad market indices.
14
Under the management agreement Mr. Margolis' base compensation was adjusted
to account for cost of living increases but otherwise remained unchanged, as
compared to the prior management agreement. The method of calculating annual
cash performance bonuses also remained substantially the same as compared to
the prior management agreement. However, the receipt of such bonuses was made
subject to the attainment of certain performance goals designed to generally
qualify such bonuses as "qualified performance-based compensation" under
Section 162(m) of the Revenue Code of 1986. The provisions of the management
agreement regarding the annual cash performance bonus and the performance goals
related thereto, were submitted to and approved by the stockholders of the
Company in January 2000. The performance goals were achieved in Fiscal 2001
and, as a result, Mr. Margolis earned a cash bonus from the Company of $2.2
million for Fiscal 2001.
Respectfully submitted,
Compensation Committee
Mr. Jess Ravich, Chairman
Mr. Timothy Ewing
Mr. Keith Hull
15
Common Stock Performance
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 in turn put
those brands on various products 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 S&P 100-LTD and NASDAQ INDEX COMPOSITE.
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 January 27, 1996 and
ending on February 3, 2001. The data set forth below assumes the value of an
investment in the Company's common stock and each Index was $100 on January
27, 1996. The data set forth below also assumes the reinvestment of all
dividends, including, but not limited to the $5.50 per share dividend which
was paid on January 15, 1998.
Comparison of Total Return
Since January 27, 1996
AMONG CHEROKEE INC., THE NASDAQ COMPOSITE AND THE S&P 100-LTD
[CHEROKEE GRAPH CHART]
Jan. 1996 Jan. 1997 Jan. 1998 Jan. 1999 Jan. 2000 Jan. 2001
--------- --------- --------- --------- --------- ---------
Cherokee Inc. .......... 100 239.07 436.18 492.05 482.34 619.56
S&P 100-Ltd............. 100 129.28 159.62 221.20 263.49 254.75
NASDAQ Index Composite.. 100 130.52 153.84 238.97 376.86 258.59
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities to file various reports with the
Securities and Exchange Commission and the National Association of Securities
Dealers concerning their holdings of, and transactions in, securities of the
Company. The Securities and Exchange Commission 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 Fiscal 2001, all Section 16(a)
filing requirements applicable to its officers, directors and ten percent
stockholders were met during Fiscal 2001.
16
AUDIT COMMITTEE REPORT
The following Report of the Audit Committee of the Company's Board of
Directors is included herein pursuant to Item 306 of Regulations S-K.
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 this report shall not be deemed "soliciting material" or to be
"filed" with the Securities and exchange Commission, 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 306(c) of Regulation S-K.
The Audit Committee of the Company's Board of Directors is comprised of
independent directors as required by the listing standards of The Nasdaq Stock
Market, Inc. The Audit Committee operates pursuant to a written charter adopted
by the Board of Directors, a copy of which is attached to this Proxy Statement
as Appendix A.
The role of the Audit Committee is to oversee the Company's financial
reporting process on behalf of the Board of Directors. Management of the
Company has the primary responsibility for the Company's financial statements
as well as the Company's financial reporting process, accounting principles and
internal controls. The Company's independent public accountants are responsible
for performing an audit of the Company's financial statements and expressing an
opinion as to the conformity of such financial statements with generally
accepted accounting principles.
In this context, the Audit Committee has reviewed and discussed the audited
financial statements of the Company as of and for the year ended February 3,
2001 with management and the Company's independent public accountants. The
Audit Committee has discussed with the Company's independent public accountants
the matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees), as currently in effect. In addition, the
Audit Committee has received the written disclosures and the letter from the
Company's independent public accountants required by Independence Standards
Board Standard No. 1 (Independence Discussions with Audit Committees), as
currently in effect, and it has discussed with the Company's independent public
accountants their independence from the Company. The Audit Committee has
considered whether the independent accountants' provision of non-audit services
to the Company is compatible with maintaining the independent public
accountants' independence.
The members of the Audit Committee are not engaged in the accounting or
auditing profession and, consequently, none are experts in matters involving
auditing or accounting. In the performance of their oversight function, the
members of the Audit Committee necessarily relied upon the information,
opinions, reports and statements presented to them by management of the Company
and by the Company's independent public accountants. As a result, the Audit
Committee's oversight and the review and discussions referred to above do not
assure that management has maintained adequate financial reporting processes,
principles and internal controls, that the Company's financial statements are
accurate, that the audit of such financial statements has been conducted in
accordance with generally accepted auditing standards or that the Company's
independent public accountants meet the applicable standards for independent
public accountants independence.
Based on the reports and discussions described above, the Audit Committee
recommended to the Board that the audited financial statements be included in
the Company's Annual Report on Form 10-K for the fiscal year ended February 3,
2001, for filing with the Securities and Exchange Commission.
Respectfully submitted,
Audit Committee
Mr. Jess Ravich, Chairman
Mr. David Mullen
Mr. Keith Hull
17
INDEPENDENT PUBLIC ACCOUNTANTS
Since May 30, 1995, the Company has engaged PricewaterhouseCoopers LLP,
formerly Coopers & Lybrand L.L.P., to serve as its principal independent
accountant to audit its financial statements. A representative of
PricewaterhouseCoopers LLP is expected to be present at the annual meeting. The
representative will have an opportunity to make a statement during the annual
meeting if the representative desires to do so and the representative is
expected to be available to respond to appropriate questions.
Fees Paid to Independent Public Accountants
The fees paid by the Company to PricewaterhouseCoopers LLP, the Company's
independent public accountants, during Fiscal 2001 are as follows:
Fees Paid
---------
Audit Fees(1) ................................................. $54,235
Financial Information Systems Design and Implementation
Fees(2)....................................................... $ --
All Other Fees(3) ............................................. $44,092
- --------
(1) Includes the aggregate fees billed for professional services rendered by
PricewaterhouseCoopers for the audit of the Company's annual financial
statements for the fiscal year ended February 3, 2001 and the reviews of
the financial statements included in the Company's Quarterly Reports on
Form 10-Q during such fiscal year.
(2) No fees were billed to the Company by PricewaterhouseCoopers LLP during the
fiscal year ended February 3, 2001 for the provision of information
technology services of the type described in Rule 2-01(c)(4)(ii) of
Regulation S-X.
(3) Includes the aggregate fees billed for all services rendered by
PricewaterhouseCoopers during Fiscal 2001, other than fees for services
that must be reported under "Audit Fees" and "Financial Information Systems
Design and Implementation Fees." Such services included income tax
research, quarterly estimated taxes calculations and the preparation of the
Company's annual federal and state tax returns.
OTHER MATTERS
Additional Information
A copy of the Company's Annual Report on Form 10-K for Fiscal 2001, including
financial statements, is being mailed with this proxy statement to each
stockholder of record on the record date for the annual meeting. Additionally,
copies of the Company's Annual Report on Form 10-K for Fiscal 2001, including
financial statements and financial statement schedules, as filed with the
Securities and Exchange Commission, are available free of charge upon written
request to the office of Investor Relations, Cherokee Inc., 6835 Valjean
Avenue, Van Nuys, CA 91406.
Date for Submission of Stockholder Proposals for the 2002 Annual Meeting
Any proposal relating to a proper subject which a stockholder may intend to
be presented for action at the 2002 Annual Meeting of Stockholders must be
received by the Company no later than January 1, 2002, to be considered for
inclusion in the proxy material to be disseminated by the Board of Directors in
accordance with the provisions of Rule 14a(8)(e)(1) 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.
In addition, if the Company has not received notice on or before March 17,
2002 of any matter a stockholder intends to propose for a vote at the 2002
Annual Meeting, then a proxy solicited by the Board of Directors may be voted
on such matter in the discretion of the proxy holder, without a discussion of
the matter
18
in the proxy statement soliciting such proxy and without such matter appearing
as a separate matter on the proxy card.
Other Business of the Annual Meeting
The Board of Directors 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 of Directors, 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
Van Nuys, California
April 27, 2001
19
Appendix A
CHEROKEE INC.
AMENDED AND RESTATED AUDIT COMMITTEE CHARTER
Purpose
The purpose of the Audit Committee (the "Committee") is to provide assistance
to the Board of Directors (the "Board") of Cherokee Inc. (the "Company") in
fulfilling the Board's oversight responsibilities regarding the Company's
accounting and system of internal controls, the quality and integrity of the
Company's financial reports and the independence and performance of the
Company's outside auditor. In so doing, the Committee should endeavor to
maintain free and open means of communication between the members of the
Committee, other members of the Committee, other members of the Board, the
outside auditor and the financial management of the Company.
The Committee's responsibility is oversight. Management of the Company has
the responsibility for the Company's financial statements as well as the
Company's financial reporting process, principles and internal controls. The
outside auditor is responsible for performing an audit of the Company's annual
financial statements, expressing an opinion as to the conformity of such annual
financial statements with generally accepted accounting principles, reviewing
the Company's quarterly financial statements and other procedures. It is
recognized that the members of the Committee are not engaged in the accounting
or auditing profession and, consequently, are not experts in matters involving
auditing or accounting including in respect of auditor independence. As such,
it is not the duty of the Committee to plan or conduct audits or to determine
that the Company's financial statements fairly present the Company's financial
position and results of operation and are in accordance with generally accepted
accounting principles and applicable laws and regulations. Each member of the
Committee shall be entitled to rely on (i) the integrity of those persons
within the Company and of the professionals and experts (such as the outside
auditor) from which it receives information, (ii) the accuracy of the financial
and other information provided to the Committee by such persons, professionals
or experts absent actual knowledge to the contrary and (iii) representations
made by management or the outside auditor as to any information technology
services of the type described in Rule 2-01(c)(4)(ii) of Regulation S-X and
other non-audit services provided by the outside auditor to the Company.
Membership
The Committee shall consist of three members of the Board. The members shall
be appointed by action of the Board and shall serve at the discretion of the
Board. No later than June 14, 2001, each Committee member shall satisfy the
"independence" requirements of The Nasdaq Stock Market. Each Committee member
must be able to read and understand fundamental financial statements, including
a company's balance sheet, income statement, and cash flow statement or must be
able to do so within a reasonable period of time after his or her appointment
to the Committee. At least one Committee member must have past employment
experience in finance or accounting, requisite professional certification in
accounting, or any other comparable experience or background (including a
current or past position as a chief executive or financial officer or other
senior officer with financial oversight responsibilities) which results in the
Committee member's financial sophistication.
Committee Organization and Procedures
1. The members of the Committee shall appoint a Chair of the Committee by
majority vote. The Chair (or in his or her absence, a member designated by the
Chair) shall preside at all meetings of the Committee.
2. The Committee shall have the authority to establish its own rules and
procedures consistent with the bylaws of the Company for notice and conduct of
its meetings, should the Committee, in its discretion, deem it desirable to do
so.
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3. The Committee shall meet, in person or by conference telephone call, at
least four times in each fiscal year, and more frequently as the Committee in
its discretion deems desirable.
4. The Committee may, in its discretion, include in its meetings members of
the Company's financial management, representatives of the outside auditor, the
senior internal audit manager and other financial personnel employed or
retained by the Company. The Committee may meet with the outside auditor or the
senior internal audit manager in separate executive sessions to discuss any
matters that the Committee believes should be addressed privately, without
management's presence. The Committee may likewise meet privately with
management, as it deems appropriate.
5. The Committee may, in its discretion, utilize the services of the
Company's regular corporate legal counsel with respect to legal matters or, at
its discretion, retain other legal counsel if it determines that such counsel
is necessary or appropriate under the circumstances.
Responsibilities
Outside Auditor
6. The outside auditor of the Company shall be ultimately accountable to the
Board and the Committee in connection with the audit of the Company's annual
financial statements and related services. The Board, with the assistance of
the Committee, has the ultimate authority and responsibility to select,
evaluate and, where appropriate, replace the outside auditor.
7. The Committee shall approve the fees to be paid to the outside auditor and
any other terms of the engagement of the outside auditor.
8. The Committee shall ensure that the outside auditor, prepare and deliver,
at least annually, a written statement delineating all relationships between
the outside auditor and the Company, consistent with Independence Standards
Board Standard No. 1. The Committee shall actively engage in a dialogue with
the outside auditor with respect to any disclosed relationships or services
that, in the view of the Committee, may impact the objectivity and independence
of the outside auditor. If the Committee determines that further inquiry is
advisable, the Committee shall recommend that the Board take any appropriate
action in response to the outside auditor's report to satisfy itself of the
auditor's independence.
9. If applicable, the Committee shall consider whether the outside auditor's
provision of (i) information technology services of the type described in Rule
2-01(c)(4)(ii) of Regulation S-X and (ii) other non-audit services to the
Company is compatible with maintaining the independence of the outside auditor.
Annual Audit
10. The Committee shall meet with the outside auditor and management of the
Company in connection with each annual audit to discuss the scope of the audit
and the procedures to be followed.
11. The Committee shall meet with the outside auditor and management prior to
the public release of the financial results of operations for the year under
audit and discuss with the outside auditor any matters within the scope of the
pending audit that have not yet been completed.
12. The Committee shall review and discuss the audited financial statements
with the management of the Company.
13. The Committee shall discuss with the outside auditor the matters required
to be discussed by Statement on Auditing Standards No. 61 as then in effect
including, among others, (i) the methods used to account for any significant
unusual transactions reflected in the audited financial statements; (ii) the
effect of significant accounting policies in any controversial or emerging
areas for which there is a lack of authoritative
A-2
guidance or a consensus to be followed by the outside auditor; (iii) the
process used by management in formulating particularly sensitive accounting
estimates and the basis for the auditor's conclusions regarding the
reasonableness of those estimates; and (iv) any disagreements with management
over the application of accounting principles, the basis for management's
accounting estimates or the disclosures in the financial statements.
14. The Committee shall, based on the review and discussions in paragraphs 12
and 13 above, and based on the disclosures received from the outside auditor
regarding its independence and discussions with the auditor regarding such
independence in paragraph 8 above, recommend to the Board whether the audited
financial statements should be included in the Company's Annual Report on Form
10-K for the fiscal year subject to the audit.
Quarterly Review
15. The outside auditor is required to review the interim financial
statements to be included in any Form 10-Q of the Company using professional
standards and procedures for conducting such reviews, as established by
generally accepted auditing standards as modified or supplemented by the
Securities and Exchange Commission, prior to the filing of the Form 10-Q. The
Committee shall discuss with management and the outside auditor in person, at a
meeting, or by conference telephone call, the results of the quarterly review
including such matters as significant adjustments, management judgments,
accounting estimates, significant new accounting policies and disagreements
with management. The Chair may represent the entire Committee for purposes of
this discussion.
Internal Controls
16. The Committee shall discuss with the outside auditor and the chief
financial officer, at least annually, the adequacy and effectiveness of the
accounting and financial controls of the Company, and consider any
recommendations for improvement of such internal control procedures.
17. The Committee shall discuss with the outside auditor and with management
any management letter provided by the outside auditor and any other significant
matters brought to the attention of the Committee by the outside auditor as a
result of its annual audit. The Committee should allow management adequate time
to consider any such matters raised by the outside auditor.
Other Responsibilities
18. The Committee shall review and reassess the Committee's charter at least
annually and submit any recommended changes to the Board for its consideration.
19. The Committee shall provide the report for inclusion in the Company's
Annual Proxy Statement required by Item 306 of Regulation S-K of the Securities
and Exchange Commission.
20. The Committee, through its Chair, shall report periodically, as deemed
necessary or desirable by the Committee, but at least annually, to the full
Board regarding the Committee's actions and recommendations.
A-3
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CHEROKEE INC.
2001 Annual Meeting of Stockholders, May 31, 2001
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 2001 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 May 31, 2001 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:
1. ELECTION OF DIRECTORS: [_] To VOTE FOR all nominees [_] To WITHHOLD AUTHORITY to
listed below. vote for all nominees
listed below.
Robert Margolis, Timothy Ewing, David Mullen, Jess Ravich, Keith Hull
Instructions: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below.
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2. 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.
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 April 27, 2001,
and a copy of the Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 2001.
Dated: ______________ , 2001 -----------------------------
_____________________________
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.