Document:

EXHIBIT 10.1

 

EMPLOYMENT AGREEMENT BETWEEN

CHEROKEE INC. AND HENRY STUPP

 

This
Employment Agreement (“Agreement”) is entered into as of the 26th day of August, 2010, by and between Henry
Stupp (“Stupp”) and Cherokee Inc., a Delaware corporation (the “Company”).

 

WHEREAS,
the Board of Directors of the Company believes it to be in the Company’s best
interest to employ Henry Stupp, pursuant to the terms of this Agreement, and
Stupp desires to accept such employment;

 

WHEREAS,
subject to the terms and conditions set forth herein, the Company and Stupp
wish to set forth their understanding regarding the mutual rights, obligations
and responsibilities of Stupp and the Company in connection with Stupp’s senior
executive position with the Company; and

 

NOW,
THEREFORE, in consideration of the foregoing premises, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Stupp agree as follows:

 

1.             Term.  Except as provided in Section 9 below,
the term of this Agreement shall commence as of the date hereof and shall
terminate on the earlier of (i) termination of Stupp’s employment in
accordance with Section 9 and (ii) January 31, 2014 (the “Term”),
which may be extended by mutual agreement and as determined by the Company’s
Board of Directors.

 

2.             Services.

 

2.1           General Responsibilities.  Subject to the supervision of the Board of
Directors of the Company, Stupp shall serve as the Company’s Chief Executive
Officer (“CEO”) during the Term.

 

2.2           Management Titles.  During the Term, the Board of Directors of
the Company shall appoint Stupp as CEO with all the powers and authorities as
are customarily vested in the chief executive officer of a publicly-traded
company such as the Company.  Such duties
shall include, but not be limited to, the development and submission to the
Board for approval of an annual fiscal year operating budget, which shall be
submitted to the Board no later than November 30th of the prior fiscal
year, and considered for approval by the Board no later than January 15th
of the prior fiscal year.

 

3.             Compensation.  As compensation for his services rendered
under this Agreement, the Company shall compensate Stupp as follows:

 

3.1           Base Compensation.  As his base compensation for services rendered
hereunder, Stupp shall receive a base salary of $350,000 per annum.  Stupp shall be paid the base salary
consistent with normal payroll procedures, as other senior officers are paid.

 

3.2           Annual Performance Bonus.  Beginning for the Company’s fiscal year ended
January 31, 2012 (“Fiscal 2012”), and for each fiscal year during the
Term, Stupp shall be entitled to receive a performance bonus (the “Performance
Bonus”) equal to five percent (5%) of the Pre-Tax Income during such fiscal
year in excess of a threshold amount of twenty million dollars ($20,000,000),
subject to a maximum of $650,000 per fiscal year.  Pre-Tax Income shall be determined from the
audited financial statements of the Company for each such subject fiscal year.

 

3.3           Payment of Performance
Bonuses.

 

(a)           All performance bonuses
payable to Stupp pursuant to Section 3.2 of this Agreement (collectively, “Performance
Bonuses”) shall be paid in full in accordance with the Company’s normal payroll
bonus procedures, and shall be paid within 2 1⁄2 months following the subject
fiscal year end, pursuant to IRS guidelines regulating the deductibility of
such payments. Anything set forth herein to the contrary notwithstanding, no
Performance Bonuses will be paid to Stupp hereunder unless and until the Compensation
Committee of the Board of Directors of Company has certified in writing that
the terms of this Agreement have been satisfied and such Performance Bonuses
and other compensation have been earned and are payable in accordance with this
Agreement.  The Compensation Committee
shall act on such certification within 2 1⁄2 months following the subject fiscal
year end.

 

1

 

(b)           For purposes of this
Agreement, Pre-Tax Income shall be determined in accordance with U.S. generally
accepted accounting principles and shall be reduced by all accrued compensation
expenses attributable to any compensation paid or payable to Stupp hereunder,
including but not limited to the Performance Bonuses and Base Compensation.

 

3.4           Stupp Equity Investment in
the Company, and Concurrent Inducement Grant of Stock Options.

 

(a)           Sale and Issuance of Common
Stock.

 

(i)            Subject to the terms and
conditions of this Agreement, Stupp agrees to purchase on the date of this
Agreement, and the Company agrees to sell and issue to Stupp, a total of 81,967
shares of the Company’s Common Stock (the “Initial Shares”) at a purchase price
of $18.30 per share, for a total purchase price of $1,500,000 (the “Initial
Purchase Price”), payable by cash, check or wire transfer.  The per share price is equal to the closing
sales price of the Company’s Common Stock as reported on the Nasdaq Global
Market on the date of this Agreement. 
Promptly after receipt of such payment, the Company shall deliver to
Stupp a stock certificate representing the Initial Shares.

 

(ii)           Subject to the terms and
conditions of this Agreement, Stupp agrees to purchase on or before January 31,
2011, and the Company agrees to sell and issue to Stupp, that number of shares
of the Company’s Common Stock (the “Subsequent Shares”, and, together with the
Initial Shares, the “Shares”) equal to $1,000,000 (the “Subsequent Purchase
Price”) divided by the closing sales price of the Company’s Common Stock as
reported on the Nasdaq Global Market on the date of such purchase and sale (the
“Subsequent Purchase Date”). The Subsequent Purchase Price is payable by cash,
check or wire transfer on the Subsequent Purchase Date.  The per share price of the Subsequent Shares
equal to the closing sales price of the Company’s Common Stock as reported on
the Nasdaq Global Market on the Subsequent Purchase Date.  Promptly after receipt of the Subsequent
Payment, the Company shall deliver to Stupp a stock certificate representing
the Subsequent Shares.

 

(iii)          Stupp hereby acknowledges
that the Shares are being offered and sold without registration under the
Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the
exemption provided in Regulation D promulgated under the Securities Act and
that the availability of such exemption is based in material respects upon the
truth of the following representations. 
With the foregoing in mind and to induce the Company to accept this
subscription, Stupp hereby represents and warrants to the Company as follows:

 

(1)           Stupp has received and
reviewed all information that he considers necessary or appropriate for
deciding whether to purchase the Shares; Stupp (and/or his professional
advisor, if any) has had an opportunity 
to ask questions and receive answers from the Company regarding the
terms and conditions of the sale of the Shares hereunder and regarding the
business, financial condition, properties, operations, prospects and other
aspects of the Company and all such questions have been answered to Stupp’s
full satisfaction; and Stupp has further had the opportunity to obtain all
information (to the extent that the Company possesses or can acquire such
information without unreasonable effort or expense) which Stupp deems necessary
to evaluate the investment and to verify the accuracy of information otherwise
provided to Stupp; Stupp has not relied on any information or representations
with respect to the Company or the offering of the Shares, other than as
expressly set forth herein.  Stupp
understands that no person has been authorized to give any information or to
make any representations other than those expressly contained herein; Stupp is
an “accredited investor” within the meaning of Rule 501 of Regulation D
under the Securities Act; Stupp represents that he has consulted with his own
tax, investment and legal advisors with respect to the federal, state, local
and foreign tax consequences arising from his purchase of the Shares to the
extent Stupp has determined it necessary to protect his own interest in connection
with a purchase of the Shares in view of Stupp’s prior financial experience and
present financial condition, and has relied on his own analysis and
investigation and that of Stupp’s advisors in determining whether to invest in
the Shares; Stupp recognizes that an investment in the Shares involves a high
degree of risk, (ii) no assurance or guarantee has or can be given that an
investor in the Company will receive a return of his capital or realize a
profit on his investment; Stupp has determined that he can afford to bear the
risk of the investment in the Shares, including loss of the entire investment
in the Company and he will not experience personal hardship if such a loss
occurs; Stupp is purchasing the Shares solely for his own account for investment
(not for the account of any other person), and not with a view to, or for, any
resale, distribution, fractionalization, or other transfer thereof, and Stupp
has no present plans to enter into any contract, undertaking, agreement, or
arrangement for any such resale, distribution, fractionalization, or transfer;
Stupp acknowledges that neither the Company nor any other person offered to
sell the Shares to it by means of any form of general advertising, such as
media advertising or seminars; and Stupp understands that the Shares have not
been registered or qualified under the Securities Act, and Stupp understands
and agrees that all Shares are subject to restrictions on transfer as contained
in this Agreement.  Further, certificates
representing the Shares shall bear a legend substantially as follows:

 

2

 

“The
shares represented by this certificate have not been registered under the
United States Securities Act of 1933, as amended (the ‘Act’), and may not be offered,
sold or otherwise transferred, pledged or hypothecated unless and until such
shares are (a) registered under the Act or (b) are sold pursuant to a
valid exemption from the Act and an opinion of counsel reasonably satisfactory
to the Company is obtained to the effect that such registration is not
required.  These shares also are subject
to transfer restrictions as set forth in an Agreement, dated August 26,
2010.”

 

(b)           Registration Rights.  Within three (3) months following the
later of February 1, 2011 or the Subsequent Purchase Date, the Company
shall file with the Securities and Exchange Commission a registration
statement, or registration statements if necessary, on an appropriate form(s) to
effect the registration for resale of both the Shares and the shares of Common
Stock that may be acquired upon exercise of the Option (as defined below).  The Company shall use its commercially
reasonable efforts to cause such registration statement(s) to become
effective and to keep any such registration statement(s) continuously
effective under the Securities Act of 1933, as amended (the “Act”), until the
earlier of (i) the date when all of the Shares have been sold or (ii) the
date when all of the Shares may be sold immediately without registration
pursuant to Rule 144 promulgated under the Act.

 

(c)           Lock-Up Agreement.  Stupp hereby agrees that, without the prior
written consent of the Company’s Board of Directors, he will not, during the
period commencing on the date hereof and ending on January 31, 2014, subject
to the terms in this Section 3.4 (c) below, sell or otherwise
transfer or dispose of, directly or indirectly, any of the Shares (the “Lock-Up”);
provided, however, that from and after January 31, 2012, 33.3% of the
Shares shall be released from the Lock-up, and 66.6% of the Shares (inclusive
of the 33.3% released on January 31, 2012) shall be released from the
Lock-up on January 31, 2013; provided, further, that all of the Shares
shall be released from the Lock-Up as follows: 
(i) immediately following termination without Cause by the Company
if such termination occurs during the first twelve (12) months of the Term; or (ii) three
(3) months following Stupp’s voluntary resignation (at any time during the
Term); or (iii) three (3) months following termination without Cause
by the Company which occurs following the first twelve (12) months of the Term;
or (iv) six (6) months following any termination for Cause by the
Company.

 

(d)           Equity Compensation.  Also concurrent with the execution of this
Agreement, the Compensation Committee of the Board shall approve and document
the grant to Stupp of a non-qualified, non-plan option to purchase 300,000
shares of the Company’s common stock (the “Option”) on the date that this
Agreement is entered into (the “Date of Grant”).  The documentation shall be consistent with
the Company’s standard form of option agreement under its 2006 Equity Incentive
Plan except as specifically provided in this Agreement.  The Company and Stupp agree and acknowledge
that this option grant is intended to be a material inducement to Stupp to
accept employment with the Company, consistent with Nasdaq Rule 5635(c)(4),
and the Company and Stupp confirm that Stupp has not previously been an
employee, officer or director of the Company which would disqualify the Company
from relying on the exception to the stockholder approval requirements
contained in such Rule 5635(c)(4). 
The exercise price per share will be equal to the closing sale price of
one share of common stock on the Date of Grant. 
The option shall vest contingent on Stupp’s continued service as an
employee, director or consultant of the Company, as documented below.

 

	
  Vesting
  schedule:

  	
   

  	
  60,000
  vest on 1/31/2012

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  60,000
  vest on 1/31/2013

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  60,000
  vest on 1/31/2014

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  60,000
  vest on 1/31/2015

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  60,000
  vest on 1/31/2016

  

 

3

 

In
the event of a Change of Control, in addition to any shares which may already
have vested, 60,000 shares shall vest immediately prior to the closing of the
Change of Control.

 

In
the event that Stupp does not comply with his obligations under Section 3.4(a)(ii) above
and complete the acquisition of the Subsequent Shares on or before January 31,
2011, then 150,000 of the shares subject to the Option shall be forfeited on February 1,
and the vesting schedule above shall be deemed amended to replace 60,000 with
30,000.  The forfeited shares shall not
be exercisable by Stupp.

 

The
Option shall expire on the 6th anniversary of the Date of Grant (estimated to
be 8/30/2016).

 

For
purposes of this Agreement, “Change of Control” shall mean a change in
ownership or control of the Company effected through a merger, consolidation or
acquisition by any person or related group of persons (other than an
acquisition by the Company or by a person or persons that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934) of securities possessing more than fifty
percent of the total combined voting power of the outstanding securities of the
Company.

 

4.             Board Seat and
Oversight of the Board of Directors of the Company.

 

4.1           Seat on Cherokee’s Board of
Directors.  Stupp shall
be appointed to serve as a member of the Company’s Board of Directors and join
the Board of Directors effective upon the execution of this Agreement.  Each year during the Term, the Board shall
nominate Stupp for election to the Board at the Company’s annual meeting of stockholders.

 

4.2           Board of Director’s
Oversight.  Stupp
agrees that the Board of Directors shall have approval rights of the Company’s (i) annual
operating budget, (ii) business plan, (iii) capital expenditures (in
excess of twenty-five thousand dollars ($25,000) per quarter), (iv) purchases
of any businesses or material assets (outside of the ordinary course of
business), (v) sales of any of the Company’s businesses, division or
material assets (other than inventory and outside of the ordinary course of business),
and (vi) hires of any employees with base salaries (including any
contractually promised bonuses) in excess of one hundred thousand dollars
($100,000) per annum. Stupp shall present to the Board of Directors revised
business plans within fifteen (15) calendar days after any requests from the
Board of Directors.

 

5.             Other
Activities of Stupp; Conflict of Interest.  During the Term of this Agreement, Stupp
agrees to devote substantially all of his business time to the business and
affairs of the Company and to use his best efforts to perform faithfully and
efficiently the responsibilities assigned to him hereunder to the extent
necessary to discharge such responsibilities, except for (i) services on
corporate, civic or charitable boards or committees not significantly
interfering with the performance of such responsibilities; and (ii) periods
of vacation and sick leave to which he is entitled.

 

During
the Term of this Agreement (i) Stupp will not accept any other employment,
and (ii) Stupp or any entity controlled by Stupp (each a “Controlled
Entity”) will not own (directly, indirectly, of record, beneficially or
otherwise) or control the voting power of, greater than 5% of the capital stock
or other securities of any corporation or any other business entity that is in
a Competitive Business (as defined below) with the Company or its subsidiaries
(each of (i) and (ii), a “Prohibited Activity”), unless all material facts
regarding such Prohibited Activity have been presented to the Board of
Directors and the disinterested members of the Board of Directors, by duly
adopted written resolution, authorize Stupp or the Controlled Entity to engage
in such Prohibited Activity.  For
purposes of this Agreement, a Competitive Business is one that engages in the
marketing, licensing of brands and/or the manufacturing of branded
merchandise.  During the Term, neither
Stupp nor any Controlled Entity shall engage or in any manner participate in
any Competitive Business.

 

Notwithstanding
the foregoing, Cherokee and the Board of Directors agree and acknowledge (a) that
Stupp may fulfill his obligations pursuant to his existing agreement between
Strong Harrison, LLC (which is an entity controlled by Stupp) and NTD Apparel
Inc., and (b) that Company waives any conflict attached thereto and any
entitlement to any proceeds otherwise due to Strong Harrison or Stupp pursuant
to such agreement; provided, however, that Stupp shall spend not more than ten
percent (10%) of his time on matters related to NTD Apparel and any, and all Cherokee
matters and business shall take priority and come first before any matters or
business related to NTD Apparel. 
Furthermore, Stupp shall indemnify and hold Company and its affiliates,
directors, officers, employees and agents harmless from and against any and all
liabilities, losses, claims, suits, damages, costs and expenses (including,
without limitation, reasonable attorneys’ fees and expenses) arising out of or
otherwise relating to any claims by NTD Apparel.

 

4

 

6.             Reimbursement
of Expenses.  Stupp shall
be reimbursed for any and all reasonable business and administrative expenses
incurred on the Company’s behalf (including travel, airfare, hotel and other
expenses for out-of-town travel), consistent with the Company’s existing
business expense reimbursement policy as currently applied to senior
executives.  Such reimbursement shall
generally occur within thirty (30) calendar days after the Company’s receipt of
appropriate documentation detailing such expenses and in accordance with Treas.
Regs. Section 1.409A-3(i)(1)(iv); provided, however, that such expenses
may be reviewed for their reasonableness and propriety (the “Expense Review”)
by the Company’s Chief Operating Officer (or, if the Company has no Chief
Operating Officer, its Chief Financial Officer) and/or by the disinterested
members of the Board of Directors. The results of any Expense Review shall be
final and binding on Stupp.

 

7.             Insurance.  The Company shall and hereby covenants to, at
its own expense during the term hereof: (i) maintain directors and
officers liability insurance policies covering Stupp, with coverage and amounts
as determined by the Board of Directors of the Company; and (ii) provide
or reimburse Stupp (but not his dependents) for health and disability insurance
in amounts comparable to those afforded to other officers of the Company, if
applicable.

 

8.             Indemnification.  To the maximum extent permitted by governing
law, the Company shall indemnify and hold Stupp harmless from and against all
claims or actions of, or demands, suits or proceedings by any third party, and
damages, losses and expenses (including reasonable attorneys’ fees) in
connection therewith, arising out of this Agreement and the performance by
Stupp of his responsibilities hereunder; provided, however, such indemnity
shall not apply to any such claim, action, demand, suit, proceeding, damage,
loss or expense of Stupp to the extent he is found in a final judgment by a
court of competent jurisdiction (not subject to further appeal) to have
resulted primarily from his gross negligence or willful misconduct. Stupp shall
give prompt written notice if any claim, charge, action or proceeding (“Indemnity
Claim”) shall be asserted or commenced which, if successful, could give rise to
a claim for indemnification hereunder.

 

Upon
notice of any such Indemnity Claim the Company shall, at its own expense,
resist and dispose of such claim in such manner as it deems appropriate. The
Company shall not, except with Stupp’s prior written consent, consent to entry
of any judgment or enter into any settlement which requires the payment of
money by or imposes any obligations upon Stupp or which does not include as an
unconditional term, the release of Stupp by the claimant or plaintiff from any
liability in respect to such claim or the defense thereof. The foregoing
indemnification obligation shall be in addition to any other liability which
the Company may have to Stupp under the Certificate of Incorporation of the
Company or its By-Laws. Stupp shall not settle any claim, demand, action, suite
or proceeding without the consent of the Company, which consent shall not be
unreasonably withheld.

 

9.             Events of
Termination.  Stupp’s
employment with the Company shall be “at will” at all times.  The Company may terminate Stupp’s employment
with the Company at any time, without any advance notice, for any reason or no
reason at all, notwithstanding anything to the contrary contained in or arising
from any statements, policies or practices of the Company relating to the
employment, discipline or termination of its employees.  Similarly, Stupp may terminate his employment
with the Company at any time for any reason or no reason at all.  Upon and after such termination, all
obligations of the Company under this Agreement shall cease, except as
otherwise provided herein. Stupp shall not be entitled to any payments under
this Section 9 if Stupp’s employment is terminated for Cause, by Death or
by Disability or if Stupp’s employment is terminated by Stupp.  Stupp’s eligibility to receive the payments
and benefits provided for in this Section 9 is conditioned on Stupp having
first signed a release agreement in the form and substance reasonably
satisfactory to the Company within thirty (30) days following his termination
of employment. Payments under this Section 9 shall commence on the
fortieth (40th) day following
this termination of employment, conditioned upon the execution of the release
as provided in the preceding sentence and the expiration of any revocation
periods provided under the terms of the release or law.  Any amounts to which Stupp is entitled that
were otherwise payable during such forty (40) day period following his
termination shall be paid on the first business day following the expiration of
such forty (40) day period.  For purposes
of determining Stupp’s entitlement under this Agreement to any payments as a
result of his “termination”, such term shall mean a “separation from service”
as that term is defined in Code Section 409A(a)(2)(A)(i) and Treas.
Regs. Section 1.409A-1(h), and as amplified by any other official
guidance.  Upon termination of Stupp’s
employment, Stupp shall be deemed to have resigned from all offices and
directorships then held with the Company. 
Following any termination of employment, Stupp shall cooperate with the
Company in the winding up of pending work on behalf of the Company and the
orderly transfer of work to other employees. 
Stupp shall also cooperate with the Company in the defense of any action
brought by any third party against the Company that relates to Stupp’s
employment by the Company.

 

5

 

9.1           Termination Following a
Change in Control.  In the
event that the Company terminates Stupp’s employment without Cause within 3
months prior to or 12 months following a Change in Control which occurs within
12 months from the date of this Agreement, Stupp will be eligible to receive an
amount equal to $300,000, payable in the form of salary continuation over 12 months.  Stupp shall also be entitled to the
accelerated vesting of stock options as provided in Section 3.4(b) above
upon a Change in Control.

 

9.2           Termination during the first
12 months.  Except as
otherwise provided in Section 9.1, if Stupp’s employment is terminated for
any reason during the first 12 months of the Term by either the Company or
Stupp then all stock options granted hereunder will be cancelled and shall not
be exercisable.  In the event that Stupp’s
employment is terminated by the Company without Cause during the first 12
months of the Term, Stupp will be eligible to receive an amount equal to
$175,000, payable in the form of salary continuation over 6 months.

 

9.3           Termination after the first
12 months by the Company, without Cause.  Except as otherwise provided in Section 9.1,
if Stupp’s employment is terminated by the Company without Cause at any time
after the first 12 months of the Term, then he shall be paid an amount equal to
twelve (12) months of his then-current base salary, payable in the form of
salary continuation over 12 months.

 

9.4           Termination by the Company,
for Cause.  The Board
of Directors may terminate this Agreement at any time for “Cause.” For purposes
of this Agreement, “Cause” shall mean: (i) any act knowingly undertaken by
Stupp with the intent of causing damage to the Company, its properties, assets
or business or its stockholders, officers, directors or employees; (ii) any
fraud, misappropriation or embezzlement by Stupp resulting in more than a de
minimis personal profit to Stupp, in any case, involving properties, assets or
funds of the Company or any of its subsidiaries; (iii) Stupp’s consistent
failure to materially perform his normal duties other than any such failure
resulting from Stupp’s permanent disability; (iv) conviction of, or
pleading nolo contendere to, (A) any crime or offense involving monies or
other property of the Company; or (B) any felony offense involving a crime
of moral turpitude; or (v) Stupp’s chronic or habitual use or consumption
of drugs or alcoholic beverages, in either case, that causes material damage to
the Company, its properties, assets or business, provided, that to the extent
any circumstances that would otherwise constitute Cause shall be capable of
cure, including without limitation subsections (iii) and (v) of this
paragraph, Stupp shall be given no less than thirty days written notice by the
Company to cure such circumstances prior to any termination of his employment
for Cause.

 

9.5           Death or Disability.  This Agreement shall terminate immediately
upon Stupp’s death. In addition, upon the failure of Stupp, during the Term, to
render services to the Company for a substantially continuous period of six (6) months,
because of Stupp’s physical or mental disability during such period, the
Company, acting through its Board of Directors or a committee of its Board of
Directors to which such authority has been delegated, may terminate Stupp’s
employment with the Company. If there should be any dispute between the parties
as to Stupp’s physical or mental disability at any time, such question shall be
settled by the opinion of an impartial reputable physician agreed upon for the
purpose by the parties or their representatives, or failing agreement within
ten (10) business days of a written request therefor by either party to
the other, then one designated by the then president of the Los Angeles Medical
Society. The certificate of such physician as to the matter in dispute shall be
final and binding on the parties.

 

10.           Compensation to Stupp in the Event of Early
Termination of the Agreement.  In the event of a termination pursuant to Section 9,
in addition to amounts set out therein, if any, the Company shall (i) pay
Stupp (or his estate) Base Compensation pursuant to Section 3.1 through
the date of termination, (ii) reimburse Stupp (or his estate) for all
expenses pursuant to Section 6 to the date of termination and (iii) provide
ongoing indemnification for Stupp (or his estate) pursuant to Section 8.  Stupp (or his estate) shall be entitled to any
unpaid Performance Bonuses earned pursuant to Sections 3.2 or 3.3 during the
fiscal year which this Agreement is terminated. 
Such unpaid Performance Bonuses will be paid pursuant to (and at the
time specified in) Section 3.4 and calculated pursuant to Section 3
using the results of the whole fiscal year during which the 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. Stupp shall also be entitled
to comparable ongoing insurance coverage pursuant to Section 7 as may be
available to other terminated officers, employees or directors of the Company.

 

6

 

11.           No Actions.  Except as specifically contemplated hereby,
during the term of this Agreement, the Company and its Board of Directors shall
not enter into or authorize any contracts, or take any other actions which
would be inconsistent or interfere with, modify or supersede the management
responsibilities delegated to Stupp under this Agreement or otherwise impair or
interfere with Stupp’s ability to manage the operations of the Company in
accordance with the terms hereof.

 

12.           Miscellaneous Terms.

 

12.1         Jurisdiction.  Each of the Company and Stupp acknowledges
and agrees that the sole forum for commencing or pursuing any proceeding with
respect to disputes arising under or in connection with this Agreement, any
provisions hereunder, or any other document or instrument entered into or given
or made pursuant to this Agreement is, and each party irrevocably submits
itself to the personal jurisdiction of, the Superior Court for the County of
Los Angeles. Each party hereto consents and agrees that such courts shall have
sole original jurisdiction over any matter arising under or in connection with
this Agreement.  This consent to
jurisdiction shall be self-operative and no further instrument or action, other
than service of process as provided in this Agreement and as permitted by law,
shall be necessary to confer jurisdiction upon the parties hereto in such
courts.

 

12.2         Service and Venue.  Each of the Company and Stupp expressly
covenants and agrees that service of process may be made, and personal
jurisdiction over said party obtained, by serving a copy of the Summons and
Complaint upon said party in accordance with the applicable laws and rules of
the pertinent court having jurisdiction over the case pursuant to Section 12.1.

 

12.3         Notices.  All notices, requests, demands and other
communications called for or contemplated hereunder shall be in writing and
shall be deemed duly given (i) on the date of delivery if delivered
personally, (ii) on the first business day following the date of dispatch
if delivered by a nationally recognized next-day courier service, (iii) on
the seventh business day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid or (iv) if
sent by facsimile transmission, with a copy mailed on the same day in the
manner provided in (ii) or (iii) above, when transmitted and receipt
is confirmed by telephone. All notices, requests, demands and other
communications shall be addressed to the parties at the following addresses, or
at such other addresses as the parties may designate by written notice in the
manner aforesaid:

 

	
  If
  to the Company:

  	
  Cherokee
  Inc.

  
	
   

  	
  6835
  Valjean Avenue

  
	
   

  	
  Van
  Nuys, CA 91406

  
	
   

  	
  Attention:
  Chief Financial Officer

  
	
   

  	
  Fax:
  (818) 908-9191

  
	
   

  	
   

  
	
  If
  to Stupp:

  	
  Mr. Henry
  Stupp

  
	
   

  	
  17400
  Oak Creek Court

  
	
   

  	
  Encino,
  CA 91316

  
	
   

  	
  Fax:
  818-475-1356

  

 

12.4         Modification; Waiver.  No modification or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and approved by the parties hereto. There shall be no waiver of any of
the provisions of this Agreement unless in writing signed by the party against
which the waiver is sought to be enforced.

 

12.4A.     Delay of Benefits Required
by 409A.  Payments under this Agreement
to Stupp shall be delayed to the extent necessary to comply with Section 409A(a)(2)(B)(i) of
the Internal Revenue Code of 1986 (the “Code) (relating to payments made to
certain “specified employees” of certain publicly-traded companies) and in such
event, any such amount to which Stupp would otherwise be entitled during the
six (6) month period immediately following his or her separation from
service will be paid on the first business day following the expiration of such
six (6) month period.

 

7

 

12.4B  Compliance with Code Section 409A.  This Agreement  is intended to comply with the provisions of
Code Section 409A, and the Company reserves the right to amend this
Agreement in its discretion in order to make this Agreement comply with Code Section 409A;  provided, however, that the Company makes no
representation that the amounts payable to Stupp under this Agreement will
comply with Code Section 409A and makes no undertaking to prevent Code Section 409A
from applying to the amounts payable under this Agreement or to mitigate its
effects on any amounts payable under this Agreement.

 

12.5         Employee Representations.  Stupp hereby represents and warrants to
Cherokee that as of the date hereof (a)  there is no current pending,
threatened or actual litigation with respect to Stupp or any of his Controlled
Entities, and (b) Stupp has never been charged with or convicted of a
crime (other than traffic violations).

 

12.6         Governing Law.  This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California
applicable to agreements to be entered into and wholly performed within said
state without reference to the conflicts of law provisions thereof.

 

12.7         Construction of Agreement.  The language in all parts of this Agreement
shall be in all cases construed simply according to its fair meaning and not
strictly for or against any of the parties hereto. Headings at the beginning of
Sections, Subsections, paragraphs and subparagraphs of this Agreement are
solely for convenience of reference and shall not constitute a part of this
Agreement for any other purpose. When required by the context, whenever the
singular number is used in this Agreement, the same shall include the plural,
and the plural shall include the singular, the masculine gender shall include
the feminine and neuter genders, and vice versa.

 

12.8         Further Assurances.  After the effective date of this Agreement,
each party agrees to execute any and all such further agreements, instruments
or documents, and to take any and all such further action as may be necessary
or desirable to carry out the provisions hereof and to effectuate the purposes
of this Agreement.

 

12.9         Attorneys’ Fees.  In the event any action in law or equity or
other proceeding is brought for the enforcement of this Agreement or in connection
with an interpretation of the provisions of this Agreement, the Court shall
award reasonable attorneys’ fees and other costs reasonably incurred in such
action or proceeding to the parties based on its judgment of the relative
merits of their respective claims.

 

12.10       Severability.  Should any one or more of the provisions of
this Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this Agreement,
shall be given effect separately from the provision or provisions determined to
be illegal or unenforceable and shall not be affected thereby.

 

12.11       Integration: Parties in
Interest.  This
Agreement contains the entire agreement of the parties with respect to the
subject matter thereof and supersedes all prior agreements between the parties,
whether written or oral. No party shall be liable or bound to any other party
in any manner except as specifically set forth in this Agreement. All the terms
and provisions of this Agreement shall be binding upon and inure to the benefit
of and be enforceable by the respective successors and assigns of the parties
hereto, whether so expressed or not. No party hereto shall have the right to
assign this Agreement without the prior written consent of the other party
hereto.

 

12.12       Counterparts.  This Agreement may be executed in any number
of counterparts with the same effect as if all parties had signed the same
document. All such counterparts shall be deemed an original, shall be construed
together and shall constitute one and the same instrument. A facsimile copy of
a signed execution page shall constitute due execution of this Agreement
and shall binding upon the executing party.

 

8

 

IN
WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and
delivered as of the first date hereinabove written.

 

 

	
  HENRY STUPP

  	
   

  	
  CHEROKEE INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Henry Stupp

  	
   

  	
  By:

  	
  /s/
  Robert Margolis

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Henry
  Stupp

  	
   

  	
  Name:

  	
  Robert
  Margolis

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Chairman of the Board

  

 

9EXHIBIT 10.2

 

CHEROKEE INC.

 

STOCK OPTION AGREEMENT

 

THIS
AGREEMENT, dated August 26, 2010, is made by and between Cherokee Inc., a
Delaware corporation, hereinafter referred to as the “Company,” and Henry
Stupp, 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 Employment Agreement between the Company
and the Optionee, dated as of August 26, 2010, (the “Employment Agreement”)
by each of the Company’s Compensation Committee (the “Committee”) and the
Board, the Committee has 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 an executive officer and
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 Option constitutes a material inducement to the Optionee to accept
employment with the Company, consistent with Nasdaq Rule 5635(c)(4); 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 3.4(d) of the
Employment Agreement, and in consideration of the Optionee’s agreement to
remain in the service of the Company as an executive officer and member of the
Board and for other good and valuable consideration, effective as of August 26,
2010 (the “Date of Grant”), the Company irrevocably grants to the Optionee the
option to purchase any part or all of an aggregate of 300,000 shares of Common
Stock, upon the terms and conditions set forth in this Agreement.  The Option is comprised of 300,000
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 $18.30 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 3.4(d) of
the Employment Agreement or otherwise. 
In the event of any conflict between the terms of this Agreement and the
Employment Agreement, this Agreement shall control.

 

1

 

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, 2012

  	
   

  	
  60,000

  	
   

  	
  60,000

  	
   

  	
  $

  	
  18.30

  	
   

  	
  8/26/2016

  	
   

  
	
  January 31, 2013

  	
   

  	
  60,000

  	
   

  	
  120,000

  	
   

  	
  $

  	
  18.30

  	
   

  	
  8/26/2016

  	
   

  
	
  January 31, 2014

  	
   

  	
  60,000

  	
   

  	
  180,000

  	
   

  	
  $

  	
  18.30

  	
   

  	
  8/26/2016

  	
   

  
	
  January 31, 2015

  	
   

  	
  60,000

  	
   

  	
  240,000

  	
   

  	
  $

  	
  18.30

  	
   

  	
  8/26/2016

  	
   

  
	
  January 31, 2016

  	
   

  	
  60,000

  	
   

  	
  300,000

  	
   

  	
  $

  	
  18.30

  	
   

  	
  8/26/2016

  	
   

  
	
  Total

  	
   

  	
  300,000

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

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

 

(c)           Notwithstanding the
foregoing, an additional twenty percent (20%) of the Option shall become fully
exercisable in the event that Company undergoes a Change in Control prior to
the Service Termination Date.  “Change in
Control” shall mean a change in ownership or control of the Company effected
through a merger, consolidation or acquisition by any person or related group
of persons (other than an acquisition by the Company or by a person or persons
that directly or indirectly controls, is controlled by, or is under common
control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) of securities possessing
more than fifty percent of the total combined voting power of the outstanding
securities of the Company.

 

(d)           Notwithstanding the
foregoing, in the event that the Optionee does not comply with his obligations
under Section 3.4(a)(ii) in the Employment Agreement and complete the
acquisition of the Subsequent Shares (as defined in the Employment Agreement)
on or before January 31, 2011, then 150,000 of the total 300,000 shares
subject to this Agreement shall be forfeited on February 1, 2011, and the
vesting schedule shall change such that the new total 150,000 shares shall vest
in five (5) equal annual installments of 30,000 each beginning on January 31,
2012.  The forfeited shares shall not be
exercisable by the Optionee.

 

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.

 

2.3          Expiration of Option.  The Option may not be exercised to any extent
by anyone after the expiration of six (6) 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.

 

2

 

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);

 

(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 Global Select Market, Nasdaq Global Market or the Nasdaq Capital 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

 

3

 

(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

 

(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 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.

 

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

 

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 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.

 

5

 

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.

 

6

 

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

 

 

	
   

  	
   

  	
  CHEROKEE INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/
  Russell J. Riopelle

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Russell
  J. Riopelle

  
	
   

  	
   

  	
  Title:

  	
  Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  HENRY STUPP

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Henry Stupp

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Henry Stupp

  	
   

  	
   

  

 

 

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
                            
(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 assent.  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:

  	
   

  	
   

  

 

1

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