Exhibit 10.3


 


CHEROKEE
INC.


 


STOCK
OPTION AGREEMENT


 


THIS AGREEMENT, dated June 4, 2010, is made by
and between Cherokee Inc., a Delaware corporation, hereinafter referred to as
the “Company,” and Robert Margolis, a member of the Company’s Board of Directors
(the “Board”) and an executive officer of the Company, hereinafter referred to
as “Optionee.”


 


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


 


WHEREAS, following the approval of that certain
Second Amendment to the Second Revised and Restated Management Agreement, dated
as of April 23, 2010, between the Company and The Newstar Group d/b/a The
Wilstar Group dated as of November 29, 1999 and amended as of August 28,
2007 (the “Management Agreement Amendment”) by each of the Company’s
Compensation Committee (the “Committee”) and the Company’s Stockholders at the
Company’s Annual Meeting of Stockholders held on the Date of Grant (as defined
below), the independent members of the Board have determined that it would be
to the advantage and best interest of the Company and its stockholders to grant
the non-qualified stock option (the “Option”) provided for herein to the
Optionee as an inducement to enter into or remain in the service of the Company
as a member of the Board and as an incentive for increased efforts during such
service, and has advised the Company thereof and instructed the undersigned
officer to issue said Option; and


 


WHEREAS, this Agreement is entered into in full
satisfaction of the Company’s obligation to issue stock options to the Optionee
pursuant to Section 3.7 of that certain Second Revised and Restated
Management Agreement dated as of November 29, 1999 between
Cherokee Inc. and The Newstar Group d/b/a The Wilstar Group as amended by
that certain First Amendment to the Second Revised and Restated Management
Agreement between the Company and The Newstar Group d/b/a The Wilstar Group
dated as of November 29, 1999, and as further amended by the Management
Agreement Amendment (collectively, the “Management Agreement”); and


 


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


 


ARTICLE
I


 


GRANT
OF OPTION


 


1.1           Grant of Option.  Pursuant to Section 3.7 of the
Management Agreement, and in consideration of the Optionee’s agreement to
remain in the service of the Company as a member of the Board and for other
good and valuable consideration, effective as of June 4, 2010 (the “Date
of Grant”), the Company irrevocably grants to the Optionee the option to
purchase any part or all of an aggregate of 100,000 shares of Common Stock,
upon the terms and conditions set forth in this Agreement.  The Option is comprised of 100,000 Non-Qualified
Stock Options, with the vesting schedule shown on page two, Section 2.1(a).  “Non-Qualified Stock Option” shall mean an
option not intended to qualify as an incentive stock option within the


 

















 


meaning of Section 422
of the Internal Revenue Code, as amended (the “Code”) and the regulations
promulgated thereunder.


 


1.2           Purchase Price.  The purchase price of the shares of Common
Stock covered by the Option shall be $18.49 per share without commission or
other charge (which was the closing sale price on the Date of Grant).


 


1.3           Consideration to the Company.  The Option is issued in full satisfaction of
the Company’s obligation to issue stock options to the Optionee pursuant to Section 3.7
of the Management Agreement or otherwise. 
In the event of any conflict between the terms of this Agreement and the
Management Agreement, this Agreement shall control.


 


ARTICLE II


 


PERIOD OF EXERCISABILITY


 


2.1           Commencement of Exercisability.


 


(a)           Subject to Sections 2.3 and
4.7, the Option shall vest and become exercisable as follows:


 


	
  Vesting Dates

  	
   

  	
  Number of

  Shares

  Subject to

  Option

  	
   

  	
  Total Stock Options that Become

  Exercisable Upon Stated Vesting

  Date

  	
   

  	
  Option

  Exercise

  Price

  	
   

  	
  Option

  Expiration

  Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  January 31, 2011

  	
   

  	
  100,000

  	
   

  	
  50,000

  	
   

  	
  $

  	
  18.49

  	
   

  	
  6/4/2015

  	
   

  
	
  January 31, 2012

  	
   

  	
  100,000

  	
   

  	
  50,000

  	
   

  	
  $

  	
  18.49

  	
   

  	
  6/4/2015

  	
   

  
	
  Total

  	
   

  	
  —

  	
   

  	
  100,000

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


(b)           No portion of the Option which has not become vested
at such time that the Optionee no longer serves as a member of the Company’s
Board of Directors (the “Board Service Termination Date”) shall thereafter
become exercisable.


 


(c)           Notwithstanding the foregoing, the Option shall
become fully exercisable in the event that Company undergoes a 280G Change in
Control prior to the Board Service Termination Date.  “280G Change in Control” shall mean a change
in the ownership of the Company, a change in the effective control of the
Company or a change in the ownership of a substantial portion of the Company’s
assets, within the meaning of such terms under Section 280G of the Code
and the proposed, or if adopted, final, regulations thereunder.


 


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


 


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2.3           Expiration of Option.  The Option may not be exercised to any extent
by anyone after the expiration of five (5) years from the Date of Grant.


 


ARTICLE
III


 


EXERCISE
OF OPTION


 


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


 


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


 


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


 


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


 


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


 


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(c)           Such representations and documents as the Committee,
in its absolute discretion, deems necessary or advisable to effect compliance
with all applicable provisions of the Securities Act of 1933, as amended (the “Securities
Act”) and any other federal or state securities laws or regulations.  The Committee may, in its absolute
discretion, also take whatever additional actions it deems appropriate to
effect such compliance including, without limitation, placing legends on share
certificates and issuing stop-transfer notices to agents and registrars; and


 


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


 


(e)              “Fair Market Value” shall
mean, as of any date, the value of the Common Stock determined as follows:


 


(i)       
If the Common Stock is listed on any established stock exchange or traded on
the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value
of a share of Common Stock shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange or
market (or the exchange or market with the greatest volume of trading in the
Common Stock) on the last market trading day prior to the day of determination;
or


 


(ii)       
In the absence of such markets for the Common Stock, the Fair Market Value
shall be determined in good faith by the Board.


 


3.4           Conditions to Issuance of Stock Certificates.  The shares of Common Stock deliverable upon
the exercise of the Option, or any portion thereof, may be either previously
authorized but unissued shares or issued shares which have then been reacquired
by the Company.  Such shares shall be
fully paid and nonassessable.  The
Company shall not be required to issue or deliver any certificate or
certificates for shares of Common Stock purchased upon the exercise of the
Option or portion thereof prior to fulfillment of all of the following
conditions:


 


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


 


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


 


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


 


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


 


4

















 


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


 


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


 


ARTICLE
IV


 


OTHER
PROVISIONS


 


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


 


4.2           Option Not Transferable.


 


(a)           Neither the Option nor any interest or right therein
or part thereof shall be sold, pledged, assigned or transferred in any manner
other than by will or the laws of descent and distribution, unless and until
the Option has been exercised, or the shares underlying such Option have been
issued, and all restrictions applicable to such shares have lapsed.  Neither the Option nor any interest or right
therein or part thereof shall be liable for the debts, contracts or engagements
of the Optionee or his or her successors in interest or shall be subject to disposition
by transfer, alienation, anticipation, pledge, encumbrance, assignment or any
other means whether such disposition be voluntary or involuntary or by
operation of law by judgment, levy, attachment, garnishment or any other legal
or equitable proceedings (including bankruptcy), and any attempted disposition
thereof shall be null and void and of no effect, except to the extent that such
disposition is permitted by the preceding sentence.


 


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


 


5

















 


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


 


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


 


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


 


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


 


4.7           Conformity to Securities Laws.  The Optionee acknowledges that the Option is
intended to conform to the extent necessary with all provisions of the
Securities Act and the Securities Exchange Act of 1934, as amended and any and
all regulations and rules promulgated by the Securities and Exchange
Commission thereunder, and state securities laws and regulations.  Notwithstanding anything herein to the
contrary,  the Option is granted and may
be exercised, only in such a manner as to conform to such laws, rules and
regulations.  To the extent permitted by
applicable law, this Agreement shall be deemed amended to the extent necessary
to conform to such laws, rules and regulations.


 


4.8           Amendment.  Except as otherwise set forth herein
regarding the Committee’s authority regarding the terms of the Option, this
Agreement may only be amended by a written agreement executed by the Optionee
and the Company and subject to the prior approval of any such amendment by the
Committee.


 


4.9           Taxes.  The Optionee may incur tax liability as a
result of the Optionee’s exercise of, or subsequently disposition of the Common
Stock underlying, the Option. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THE OPTION OR DISPOSING OF THE COMON STOCK UNDERLYING THE OPTION.


 


4.10         Adjustments
Upon Changes in Capitalization. 
Subject to any required action by the stockholders of the Company, the
number of shares of Common Stock covered by the Option, the exercise price of
the Option, as well as any other terms that the Committee determines require
adjustment shall be proportionately adjusted for (i) any increase or
decrease in the number of issued Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, or similar transaction affecting the Common Stock, (ii) any
other increase or decrease in the number of issued Common Stock


6

















 


effected without receipt of consideration by the Company, or (iii) 
any other transaction with respect to Common Stock including a corporate
merger, consolidation, acquisition of property or stock, separation (including
a spin-off or other distribution of stock or property), reorganization,
liquidation (whether partial or complete) or any similar transaction; provided,
however that conversion of any convertible securities of the Company shall not
be deemed to have been “effected without receipt of consideration.”  In
the event of any distribution of cash or other assets to stockholders other
than a normal cash dividend, the Committee shall also make such adjustments as
provided in this Section 4.10 or substitute, exchange or grant an award to
effect such adjustments (collectively “Adjustments”).  Any such Adjustments to the Option will be
effected in a manner that precludes the enlargement of rights and benefits
under the Option.  In connection
with the foregoing adjustments, the Committee may, in its discretion, prohibit
the exercise of the Option or other issuance of Common Stock, cash or other
consideration pursuant to the Option during certain periods of time. Except as
the Committee determines, no issuance by the Company of shares of any class, or
securities convertible into shares of any class, shall affect, and no
adjustment by reason hereof shall be made with respect to, the number or price
of shares of Common Stock subject to the Option.


 


4.11         Limitations Applicable to
Section 16 Persons.   Notwithstanding any other
provision of this Agreement, the Option shall be subject to any additional
limitations set forth in any applicable exemptive rule under Section 16
of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange
Act) that are requirements for the application of such exemptive rule. To the
extent permitted by applicable law, this Agreement shall be deemed amended to
the extent necessary to conform to such applicable exemptive rule.


 


4.12         Section 409A.   This Agreement and the Option
shall be interpreted in accordance with Section 409A of the Code and
Department of Treasury regulations and other interpretive guidance issued
thereunder, including without limitation any such regulations or other guidance
that may be issued or amended after the Date of Grant. Notwithstanding any
provision of this Agreement to the contrary, in the event that following the Date
of Grant the Committee determines that the Option may be subject to Section 409A
of the Code and related Department of Treasury guidance (including such
Department of Treasury guidance as may be issued after the Date of Grant), the
Committee may adopt such amendments to this Agreement or adopt other policies
and procedures (including amendments, policies and procedures with retroactive
effect), or take any other actions, that the Committee determines are necessary
or appropriate to (1) exempt the Option from Section 409A of the Code
and/or preserve the intended tax treatment of the benefits provided with
respect to the Option, or (2) comply with the requirements of Section 409A
of the Code and related Department of Treasury guidance.


 


4.13         Further Assurances.  The Optionee shall from time to time and at
all times hereafter make, do, execute, or cause or procure to be made, done and
executed such further acts, deeds, conveyances, consents and assurances without
further consideration, which may reasonably be requested by the Committee in
its discretion to effect the intent of this Agreement.


 


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


 


	
   

  	
  CHEROKEE
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By
  

  	
  /s/ Russell J. Riopelle

  
	
   

  	
   

  	
  Russell
  J. Riopelle

  
	
   

  	
   

  	
  Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ Robert Margolis

  	
   

  
	
  Robert
  Margolis

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Address

  	
   

  
	
   

  	
   

  
	
  Optionee’s Social Security
  Number:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  



 

















 


EXHIBIT A


 


FORM OF EXERCISE NOTICE


 


Cherokee
Inc.


6835
Valjean Avenue


Van
Nuys, California 91406


 


Attention:  Corporate Secretary


 


Re:          Exercise
of Stock Option


 


Ladies
and Gentlemen:


 


1.             Exercise of Option.  The undersigned Optionee,                                               ,
was granted an option (the “Option”) to purchase shares of the Common Stock,
par value $0.02 per share (“Common Stock”), of Cherokee Inc., a Delaware
corporation (the “Company”), effective as of                               ,
pursuant to the Stock Option Agreement, dated June 4, 2010 (the “Option
Agreement”).  The undersigned hereby
elects to exercise the Option as follows:


 


The
undersigned hereby elects to exercise the Option as to                       
shares of the Common Stock, in accordance with Section 2.1 of the Option
Agreement (the “Shares”).


 


2.             Payment.  The undersigned has enclosed herewith                     
(representing full payment for such Shares in accordance with Section 3.3
of the Option Agreement).  The
undersigned authorizes payroll withholding and otherwise will make adequate
provision for the tax withholding obligations of the Company, if any, with respect
to such exercise.


 


3.             Binding Effect.  The undersigned agrees that the Shares are
being acquired in accordance with and subject to the terms, provisions and
conditions of the Option Agreement set forth therein, to all of which the
undersigned hereby expressly assents. 
This Agreement shall inure to the benefit of and be binding upon the
heirs, executors, administrators, successors and assigns of the undersigned.


 

















 


The undersigned understands
that he is purchasing the Shares pursuant to the terms of the Option Agreement,
a copy of which the undersigned has received and carefully read and
understands.


 


 


	
   

  	
   

  



 


 


Receipt
of the above is hereby acknowledged


 


CHEROKEE
INC.,


a Delaware
corporation


 


	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  
	
  Title: