CHEROKEE INC.
5990 Sepulveda Boulevard, Suite 600
Sherman Oaks, California 91411
PROXY STATEMENT
2017 ANNUAL MEETING OF STOCKHOLDERS
To Be Held On June 22, 2017
GENERAL INFORMATION
This proxy statement (the “Proxy Statement”) and all related proxy materials are being furnished in connection with the solicitation by the Board of Directors (the “Board” or the “Board of Directors”) of Cherokee Inc., a Delaware corporation (“Cherokee”, the “Company”, “we”, “us” or “our”), of proxies to be used at the 2017 annual meeting of stockholders to be held at our corporate headquarters, located at 5990 Sepulveda Boulevard, Suite 600, Sherman Oaks, California 91411, on Thursday, June 22, 2017, at 10:00 a.m. (Pacific Time) and any adjournment or postponement thereof (the “Annual Meeting”). Stockholders are being asked to vote at the Annual Meeting on the following proposals: (1) the election of seven directors to the Board of Directors, (2) the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending February 3, 2018 (“Fiscal 2018”), (3) the approval, on a non‑binding, advisory basis, of our executive compensation, (4) the approval, on a non‑binding, advisory basis, of the frequency
of holding an advisory vote on our executive compensation (once every one, two or three years)
, and (5) such other business as may properly come before the Annual Meeting. This Proxy Statement summarizes the information you need to know in order to vote on these proposals in an informed manner.
Delivery of Proxy Materials
In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), we have elected to deliver our proxy materials for the Annual Meeting, including this Proxy Statement, our Annual Report on Form 10‑K (the “Annual Report”) for our fiscal year ended January 28, 2017 (“Fiscal 2017”), and a proxy card for the Annual Meeting, to our stockholders by mail or, if a stockholder has previously agreed, by e-mail. Accordingly, we expect to mail or, to stockholders who have agreed, e-mail this Proxy Statement and our other proxy materials to our stockholders on or about May 26, 2017. If you would like to receive our proxy materials for future annual meetings of our stockholders by e-mail rather than by mail, you may submit such consent to electronic delivery by writing to the attention of our Corporate Secretary at the address of our principal executive offices.
In addition, we are also making all of our proxy materials for the Annual Meeting available on the Internet. Applicable SEC rules require us to notify our stockholders of the availability of prior proxy materials on the Internet with the following notice:
Important Notice Regarding the Availability of Proxy Materials
For the Stockholders Meeting to be held on Thursday, June 22, 2017
This Proxy Statement and the Annual Report are available at
www.proxyvote.com
Record Date, Outstanding Shares
Our Board of Directors has fixed April 24, 2017 as the record date to determine the stockholders entitled to notice of and to vote at the Annual Meeting. As of the record date, there were 12,951,284 shares of common stock outstanding.
Voting Matters
Voting Rights
Each of our stockholders is entitled to one vote for each share of common stock held as of the record date for the Annual Meeting on each matter to come before the Annual Meeting.
Quorum Requirement
We will have the required quorum to conduct the business of the Annual Meeting if holders of a majority of the outstanding shares of our common stock as of the record date are present in person or represented by proxy at the Annual Meeting. Pursuant to our amended and restated bylaws (“Bylaws”) and applicable Delaware law, shares represented by proxies that reflect abstentions or “broker non‑votes,” discussed below, will be counted as shares that are present for purposes of determining the presence of a quorum.
Effect of Not Providing Voting Instructions; Broker Non-Votes
If you are a stockholder of record and you submit a valid proxy that is not revoked before your shares are voted at the Annual Meeting and that does not provide voting instructions with respect to your shares, all shares represented by your proxy will be voted in accordance with the recommendation of the Board of Directors on each proposal to be presented at the Annual Meeting, as described in this Proxy Statement.
If you hold your shares in “street name” (that is, your shares are held by a broker or other nominee on your behalf as the beneficial owner, but are not held in your name), it is critical that you provide voting instructions to your broker or other nominee if you want your vote to count in the election of directors (Proposal 1), the advisory vote on our executive compensation (Proposal 3) and the advisory vote on the frequency of
holding an advisory vote on our executive compensation (once every one, two or three years) (Proposal 4)
. These proposals constitute “non‑routine” matters on which a broker or other nominee is not entitled to vote shares held for a beneficial owner without receiving specific voting instructions from the beneficial owner. As a result, if you hold your shares in street name and you do not instruct your broker on how to vote on Proposals 1, 3 and 4, no vote will be cast on these proposals on your behalf and a “broker non-vote” will occur. Your broker or other nominee will, however, have discretion to vote uninstructed shares on the ratification of the appointment of our independent registered public accounting firm (Proposal 2), because this proposal constitutes a “routine” matter on which a broker or other nominee is entitled to vote shares held for a beneficial owner even without receiving voting instructions from the beneficial owner.
Voting Requirements
The election of directors (Proposal 1) will be determined by a plurality of the votes cast on the proposal by shares present in person or represented by proxy at the Annual Meeting, meaning that the nominees receiving the highest number of votes up to the number of directors to be elected at the Annual Meeting (seven) will be duly elected as directors. Additionally, the advisory vote on the frequency of
holding an advisory vote on our executive compensation (once every one, two or three years) (Proposal 4)
will be determined by a plurality of the votes cast on the proposal by
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Written Notice.
You may also revoke a previously submitted proxy by delivering written notice of revocation to our Corporate Secretary at the address of our principal executive offices.
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Any new proxy card or written notice of revocation that is mailed to us must include the stockholder’s name and must be received prior to the Annual Meeting to be effective, and any later‑dated vote submitted by telephone or on the Internet must be received by 11:59 p.m. Eastern Time on June 21, 2017 to be effective. Only your latest-dated vote that is received by the deadline applicable to each voting method will be counted.
Beneficial Owners
You are a beneficial owner of shares held in street name if, at the close of business on the record date for the Annual Meeting, your shares were held by a broker, or other nominee and not in your name. As the beneficial owner, you have the right to direct your broker or nominee how to vote your shares by following the voting instructions your broker or other nominee provides. If you are a beneficial owner of your shares, you should receive voting instructions from the broker or other nominee that holds your shares, and you should follow those instructions in order to direct your broker or other nominee on how to vote your shares. The availability of telephone and Internet voting will depend on the voting processes of your broker or other nominee. If you are a beneficial owner of shares held in street name, you may vote your shares in person at the Annual Meeting only if you obtain a legal proxy from the broker or other nominee holding your shares giving you the right to vote the shares.
If your shares are held in street name, you should follow the instructions provided by your broker or other nominee regarding how to revoke a previously submitted proxy.
Attending the Annual Meeting
All stockholders that owned our common stock at the close of business on the record date for the Annual Meeting, or their duly appointed proxies, may attend the Annual Meeting.
Even if you plan to attend the Annual Meeting in person, we recommend that you also submit your proxy card or vote by telephone or on the Internet by the applicable deadline, to ensure that your vote will be counted. Please see “How to Vote” above for voting instructions.
If you attend the Annual Meeting in person, you may be asked to present valid picture identification, such as a driver’s license or passport. Additionally, if you are a beneficial owner of shares held in street name, you must bring to the Annual Meeting a copy of a brokerage statement reflecting your ownership of our common stock as of the record date, so that we may identify you as a stockholder of our Company.
Submitting your vote prior to the Annual Meeting will not affect your right to vote at the Annual Meeting should you decide to attend; however, your attendance at the Annual Meeting after having submitted a valid proxy will not in and of itself constitute a revocation of your proxy. In order to do so, you will be required to give oral notice of your intention to vote in person to the inspector of elections of the Annual Meeting and submit a completed ballot at the Annual Meeting reflecting your new vote.
Adjournments and Postponements
Although it is not expected, the Annual Meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment or postponement may be made without notice by an announcement at the Annual Meeting. All signed proxy cards and proxies submitted on the Internet or by telephone that are received by us by the deadline applicable to each voting method, as described under “How to Vote” above, will be voted in favor of an adjournment or postponement in these circumstances. Any adjournment or postponement of the Annual Meeting for the purpose of soliciting additional proxies will allow our stockholders who have already provided their proxies to revoke them at any time prior to their use.
PROPOSAL 4
NON-BINDING, AD
VISORY VOTE To Approve THE FREQUENCY OF
AN ADVISORY VOTE ON EXECUTIVE
COMPENSATION
In addition to the advisory vote on our executive compensation (see Proposal 3 of this Proxy Statement), Section 14A of the Exchange Act, as added by the Dodd-Frank Act, also requires that we provide our stockholders with the opportunity to indicate, on a non-binding, advisory basis, the frequency with which we should seek an advisory vote on our executive compensation. This proposal, commonly known as a “say-on-frequency” proposal, is required at least once every six years beginning with our annual meeting of stockholders held in June 2011, and as such, is again required at the Annual Meeting.
After careful consideration, the Board has determined that an advisory vote on our executive compensation that occurs every one year is the most appropriate frequency for the Company, and therefore the Board recommends that you vote for a one-year interval for advisory votes on our executive compensation. In formulating its recommendation, the Board noted the Company’s current practice of holding an annual advisory vote on our executive compensation, which is consistent with the Board’s recommendation and the say-on-frequency vote of our stockholders at our 2011 annual meeting, and considered, among other factors, that an annual advisory vote on our executive compensation provides a clear, simple means for us to obtain information on investor sentiment about our executive compensation programs on at least an annual basis and supports stockholder communication by providing our stockholders with a means to provide direct input regarding our compensation philosophy, policies and practices as disclosed in our proxy statements.
In this say-on-frequency proposal, we are asking our stockholders to indicate whether they would prefer that we hold an advisory vote on our executive compensation once every one, two or three years. The vote on this say-on-frequency proposal is advisory and therefore not binding on Cherokee, the Compensation Committee or our Board of Directors in any way. We recognize that our stockholders may have differing views on the appropriate frequency for holding an advisory vote on our executive compensation, and a
lthough the Board may decide that it is in the best interests of the Company and our stockholders to hold such an advisory vote more or less frequently than the option approved by our stockholders, the Board and the Compensation Committee value the opinions of our stockholders and will consider the results of this proposal in making its decision.
Accordingly, our Board of Directors asks that our stockholders cast a non-binding, advisory vote for once every “ONE YEAR” in response to the following resolution at the Annual Meeting:
“RESOLVED, that the stockholders determine, on an advisory, non-binding basis, whether the preferred frequency of an advisory, non-binding vote on the executive compensation of the Company's named executive officers, as disclosed in in the Company's proxy statement pursuant to the compensation disclosure rules of the Securities and Exchange Commission, is once every one year, two years or three years.”
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EVERY “ONE YEAR”
AS THE PREFERRED FREQUENCY FOR HOLDING AN ADVISORY VOTE
ON EXECUTIVE COMPENSATION.
CORPORATE GOVERNANCE
Director Independence
Our Board of Directors has unanimously determined that each of Ms. Baiocchi, Ms. Engel, Mr. Galvin, Mr. Hull, Mr. Ravich and Mr. Tworecke, constituting six of the seven directors standing for re‑election at the Annual Meeting, is an independent director within the meaning of Marketplace Rule 5605(a)(2) of The NASDAQ Stock Market LLC (“NASDAQ”). In addition, the Board has determined that, based upon such independence standards, Mr. Ewing, our former director until his resignation in February 2017, was an independent director during all periods in Fiscal 2017 when he served, and Mr. Stupp is not an independent director because he is currently an executive officer of Cherokee.
Board Meetings
The business affairs of Cherokee are managed under the direction of the Board of Directors, although the Board of Directors is not involved in Cherokee’s day‑to‑day operations. In Fiscal 2017, the Board of Directors met 11 times. Each director attended 100% of all meetings of the Board and all meetings of the Board committees on which he served that were held during Fiscal 2017. Cherokee encourages all of its directors to attend our annual meetings of stockholders. All of our directors attended, in person or by telephone, our 2016 annual meeting of stockholders.
Board Committees
The Board of Directors has established the following three standing committees: an Audit Committee, a Compensation Committee, and a Nominating & Governance Committee. The Board of Directors has adopted a written charter for each of these committees, current copies of which are available on Cherokee’s website at
www.cherokeeglobalbrands.com
. To access these charters from Cherokee’s homepage, click on “Investor Relations,” then click on “Committee Composition” under “Financial Information.” In addition, the Board of Directors may create additional committees from time to time, including committees relating to pending litigation proceedings or other significant corporate matters or committees to approve financing or other strategic transactions.
The following table sets forth the membership of each of Cherokee’s three standing committees from January 31, 2016, the beginning of Fiscal 2017, through April 24, 2017:
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Nominating &
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Audit
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Compensation
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Governance
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Director
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Committee
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Committee
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Committee
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Carol Baiocchi (1)
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—
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Member
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—
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Susan E. Engel (1)
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Member
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—
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—
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Timothy Ewing (1)
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Member
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Chair
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—
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Robert Galvin
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Chair
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—
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Member
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Keith Hull
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Member
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—
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Chair
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Jess Ravich
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—
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Member
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—
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Frank Tworecke(2)
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—
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Member/Chair
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Member
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(1)
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On February 21, 2017, Mr. Ewing resigned as a director of Cherokee and as a member of all Board committees on which he served, and substantially concurrently with such resignation, each of Ms. Baiocchi and Ms. Engel was appointed as a director of Cherokee and a member of certain Board committees. As a result, the presentation of Board committee membership in this table reflects, for Mr. Ewing, membership during all of Fiscal 2017 and thereafter until his resignation and, for each of Ms. Baiocchi and Ms. Engel, membership since their appointment.
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(2)
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Upon the resignation of Mr. Ewing on February 21, 2017, Mr. Tworecke transitioned from his former role as a member of the Compensation Committee to his current role as the Chair of the Compensation Committee.
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Audit Committee
The primary functions of Cherokee’s Audit Committee are, among other things, to:
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be directly responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm;
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review and discuss with management and our independent registered public accounting firm the Company’s financial statements prior to filing with the SEC any report containing such financial statements;
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oversee audits of the Company’s financial statements and meet with independent registered public accounting firm in connection with each annual audit to review the planning and staffing of the audit;
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oversee the Company’s accounting and financial reporting processes, including reviewing management’s evaluation of the adequacy and effectiveness of internal controls;
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review and discuss with management and our independent registered public accounting firm Cherokee’s policies with respect to risk assessment and risk management;
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receive and review the formal written statement and letter from our independent registered public accounting firm required by the Public Company Accounting Oversight Board’s Ethics and Independence Rule 3526;
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prepare and approve a report each year for inclusion in Cherokee’s annual proxy statement; and
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pre‑approve all auditing services and permitted non‑audit services to be performed for Cherokee by its independent registered public accounting firm, subject to exceptions for
de minimis
amounts under certain circumstances as permitted by applicable law.
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At the discretion of the Audit Committee, representatives of Cherokee’s independent registered public accounting firm certain members of management may be invited to attend Audit Committee meetings. The Audit Committee met five times in Fiscal 2017.
The Board of Directors has determined that all directors serving currently or at any time in Fiscal 2017 as members of the Audit Committee are independent under applicable NASDAQ Marketplace Rules and Rule 10A‑3 under the Exchange Act and meet all other applicable requirements of NASDAQ Marketplace Rules and rules of the SEC. The Board has also determined that Mr. Galvin is an “audit committee financial expert,” as that term is defined by applicable SEC rules.
Compensation Committee
The primary functions of Cherokee’s Compensation Committee are, among other things, to:
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review and approve the Company’s compensation philosophy;
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review management’s risk assessment regarding the Company’s compensation policies and practices;
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annually review and approve the compensation, including bonus and incentive compensation, for our executive officers;
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review and advise the Board regarding the performance of our executive officers;
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administer and interpret the Company’s incentive compensation plans and stock‑related plans;
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review and approve the compensation of our non‑employee directors; and
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oversee and approve all public disclosures with respect to compensation of the Company’s directors and executive officers.
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The Compensation Committee may form and delegate any of its responsibilities to subcommittees consisting solely of Compensation Committee members, with Board approval. In addition, Cherokee’s Amended and Restated 2013 Stock Incentive Plan (the “2013 Plan”) permits the Board to delegate to management the authority to grant awards under such plan, subject to limitations as may be determined by the Board from time to time. The agenda for meetings of the Compensation Committee is determined by its chair, with, at the discretion of the committee chair, assistance from our Chief Executive Officer and our Chief Financial Officer. The committee chair then reports the Compensation Committee’s recommendations or approvals to the full Board. The Compensation Committee has the sole authority to retain compensation consultants as it deems appropriate to assist in establishing compensation packages for our executive officers and directors and to approve any such consultant’s fees and other retention terms. Pursuant to the terms of its charter, the Compensation Committee reviews the independence of any compensation consultant it may retain, including any conflicts of interest exist, in accordance with applicable NASDAQ Marketplace Rules and rules of the SEC. For more information about the role of our Chief Executive Officer and our other executive officers and any compensation consultants in the determination of executive officer compensation, see the discussion under “Compensation Discussion and Analysis” below. The Compensation Committee met four times in Fiscal 2017.
The Board of Directors has determined that all directors serving currently or at any time in Fiscal 2017 as members of the Compensation Committee are independent under applicable NASDAQ Marketplace Rules and taking into account the factors set forth in Rule 10C‑1 under the Exchange Act, are non‑employee directors within the meaning of Rule 16b‑3 under the Exchange Act, and are outside directors under Section 162(m) (“Section 162(m)”) of the Internal Revenue Code of 1986, as amended (the “Code”).
Nominating & Governance Committee
The primary functions of the Nominating & Governance Committee are, among other things, to
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identify qualified candidates to become Board members;
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select candidates to recommend to the Board as nominees for election as directors at the next annual meeting of stockholders (or special meeting of stockholders at which directors are to be elected);
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select candidates to fill any vacancies on the Board;
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to recommend to the Board the directors to serve as members and chairs of all Board committees and as the Chairman of the Board;
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oversee the evaluation of the Board; and
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develop, recommend to the Board and monitor a policy regarding the consideration of director candidates recommended by stockholders.
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The Board of Directors has determined that all directors serving currently or at any time in Fiscal 2017 as members of the Nominating & Governance Committee are independent under applicable NASDAQ Marketplace Rules. The Nominating & Governance Committee met three times in Fiscal 2017.
Board Leadership Structure
The Board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board, as the Board believes it is in the best interests of Cherokee to make this determination based on the position and direction of Cherokee and the membership of the Board, in each case as it may evolve and change over time. In Fiscal 2017, Mr. Ravich served as the non‑executive Chairman of the Board. The Board believes that, at this time, separating the roles of Chief Executive Officer and Chairman of the Board and appointing Mr. Ravich as Chairman of the Board is in the best interest of our stockholders, as it permits our Chief Executive Officer to focus on our day‑ to‑day business activities while our Chairman of the Board can focus on leading the Board in its fundamental role of providing advice to and independent oversight (including risk oversight) of management.
Board Role in Risk Oversight
Risk is inherent in every business. We face a number of risks, including business, operational, strategic, reputational, competitive, financial, legal and regulatory risks. In general, our management is responsible for the day-to-day management of the risks we face, while our Board is responsible for the oversight of risk management. The Board performs its risk oversight function as a whole and through its committee structure, as follows:
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the full Board is responsible for generally overseeing the management of areas of material risk to us;
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the Audit Committee oversees management of financial risks and risks relating to any related party or conflict of interest transactions, as well as our policies with respect to risk assessment and risk management generally;
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the Compensation Committee is responsible for overseeing the management of risks relating to our executive compensation programs and arrangements; and
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the Nominating & Governance Committee oversees management of risks relating to the composition of the Board, including the independence of our directors.
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Members of Cherokee’s senior management team provide regular reports to the full Board or an appropriate Board committee regarding our material risks. The directors then use this information to understand, identify, manage and attempt to mitigate risk. If such a management report is provided to a Board committee, the committee discusses the report and the chair of the committee then reports on the discussion to the full Board at the next Board meeting. This structure enables the Board and its committees to coordinate with respect to the oversight of our material risks.
Identifying and Evaluating Director Nominees
Our Nominating & Governance Committee is responsible for identifying individuals qualified to become members of the Board and recommending these candidates to our Board for nomination or appointment.
Board Membership Criteria
In identifying and recommending qualified director candidates, the Nominating & Governance Committee considers the business and non‑business backgrounds of prospective candidates and the evolving needs of the Board. Under the Nominating & Governance Committee charter, the following criteria, among others, are considered when recommending director candidates:
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personal and professional integrity, ethics and values;
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experience in corporate management, such as serving as an officer of a publicly held company;
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experience in Cherokee’s industry and with relevant social policy concerns;
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experience as a board member of another publicly held company;
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academic expertise in an area of Cherokee’s operations; and
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practical and mature business judgment.
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In considering candidates for the Board, the Nominating & Governance Committee considers the entirety of each candidate’s credentials, both as a whole and in the context of these membership criteria. With respect to the nomination of continuing directors for re‑election, an individual’s past contributions to the Board are also considered. Although we do not have a formal policy with respect to Board diversity, we believe a diverse Board encourages new ideas, expands the knowledge base available to management and fosters a boardroom culture that promotes innovation and constructive deliberation. As a result, the Nominating & Governance Committee and the Board strive to assemble a Board of Directors that brings to Cherokee a variety of perspectives, skills, expertise and business understanding and judgment, derived from a broad range of business, professional, governmental, community involvement and industry experience. All of the nominees for director being voted on at the Annual Meeting are directors standing for re‑election, and have been recommended as director nominees by Cherokee’s Nominating & Governance Committee.
Other than the foregoing, there are no stated minimum criteria for director nominees, and the Nominating & Governance Committee may consider these factors and any such other factors as it deems appropriate and in the best interests of Cherokee and our stockholders. The Nominating & Governance Committee does, however, recognize that under applicable regulatory requirements at least one member of our Board of Directors should meet the criteria for an “audit committee financial expert” as defined by SEC rules, at least a majority of the members of our Board of Directors must be independent directors under NASDAQ Marketplace Rules or the standards of any other applicable self‑regulatory organization, and the members of certain of our Board committees must satisfy enhanced independence criteria under applicable NASDAQ Marketplace and SEC rules. The Nominating & Governance Committee also obtains a completed questionnaire from any prospective director candidate and may, at its discretion, conduct interviews and background and reference checks, to review the activities and associations of each prospective director candidate and ensure there is no legal impediment, conflict of interest or other consideration that might hinder or prevent service on the Board.
Process for Identifying Director Nominees
The Nominating & Governance Committee begins its process for identifying appropriate director candidates at an appropriate time before each meeting of stockholders at which directors are to be elected. The Nominating & Governance Committee typically starts the process by evaluating the current members of our Board willing to continue to serve. Current members of our Board with skills and experience that are relevant and valuable to our business and who have demonstrated past contributions to the Board and are willing to continue in service are considered for re‑nomination, balancing the value of continuity of service by existing Board members with the value of obtaining new perspectives. If any member of our Board does not wish to be considered for re‑election at an upcoming annual meeting of stockholders, the Nominating & Governance Committee would seek to identify a new nominee in light of the criteria and other factors described above. In such cases, all of the members of our Board are polled for suggestions as to potential new directors, and other research may also be performed to identify qualified candidates. If the Nominating & Governance Committee believes that additional candidates for nomination are needed, then it may explore alternative sources for identifying additional candidates, which could include engaging, as appropriate, a third‑party search firm to assist in identifying qualified candidates.
Stockholder Recommendations of Director Candidates
In accordance with its charter, our Nominating & Governance Committee is responsible for developing and monitoring a policy regarding the consideration of director candidates recommended by stockholders. As a result, it is the policy of the Nominating & Governance Committee to consider and evaluate director candidates that are properly submitted by our stockholders in the same manner as other prospective director candidates. Any such submission should be made in writing to our Corporate Secretary at the address of our principal executive offices and should include the name, address and a current resume of the proposed director candidate, a statement describing the candidate’s
qualifications and consent to serve on our Board if selected as a director nominee, and contact information for personal and professional references. The submission should also include the name and address of the stockholder who is submitting the proposed director candidate, the number of shares of our common stock that are owned of record or beneficially by the submitting stockholder and a description of all arrangements or understandings between the submitting stockholder and the candidate. Any stockholder-proposed candidate that is selected by our Nominating &Governance Committee would be recommended by this committee as a director nominee to the Board, which would then consider and evaluate the candidate and, if approved, appoint the individual as a director to a vacant seat on the Board or include the individual in the Board’s slate of recommended director nominees for election at our next annual meeting of stockholders.
Stockholder Nominations of Directors
Our Bylaws provide that any stockholder who is entitled to vote at an annual meeting of our stockholders and who complies with the notice requirements set forth in our Bylaws may nominate persons for election to our Board of Directors at the annual meeting. These notice requirements provide that a stockholder desiring to nominate a director to our Board of Directors must do so by written notice delivered to or mailed and received by our Corporate Secretary at the address of our principal executive offices within a specified time period before the annual meeting of stockholders at which the proposed director candidate is to be up for election. See “Stockholder Nominations and Other Proposals for Our 2018 Annual Meeting of Stockholders” below for information about these time periods in connection with our 2018 annual meeting of stockholders. The stockholder’s written notice must include, among other things as specified in our Bylaws, certain personal identification information about the stockholder and its recommended director nominee(s); the principal occupation or employment of the recommended director nominee(s); the class and number of shares of the Company that are beneficially owned by the stockholder and its recommended director nominee(s); and any other information relating to the recommended director nominee(s) that is required to be disclosed in solicitations for proxies for the election of directors pursuant to Regulation 14A under the Exchange Act. A stockholder who complies in full with all of the notice provisions set forth in our Bylaws will be permitted to present the director nominee at the applicable annual meeting of our stockholders, but will not be entitled to have the nominee included in our proxy statement for the annual meeting unless an applicable SEC rule requires that we include the director nominee in our proxy statement. Stockholders may obtain additional information about these advance notice requirements by referencing a copy of our Bylaws contained in the filings we make with the SEC, which are available through our website at
www.cherokeeglobalbrands.com
or through the SEC’s website at
www.sec.gov
.
Stockholder Communications with the Board
The Board of Directors has not adopted a formal process for stockholders to send communications directly to the Board of Directors or to any specific director. However, stockholders may send such communications to our Corporate Secretary at the address of our principal executive offices, who will forward all such communications to the Board or any identified individual director(s), unless any such communication is deemed to be, in the Corporate Secretary’s discretion, unrelated to the duties and responsibilities of the Board or unduly hostile, threatening, illegal or similarly unsuitable for Board consideration. Additionally, any stockholder or employee may submit to the Audit Committee at any time a complaint or concern regarding any questionable accounting, internal accounting controls or auditing matters concerning Cherokee by writing to our Audit Committee Chair at the address of our principal executive officers or by submitting a notice via our online whistleblower system at
https://cherokee.alertline.com/gcs/welcome
.
Code of Business Conduct and Ethics
Cherokee has adopted a Code of Business Conduct and Ethics that applies to Cherokee’s directors, officers (including the Chief Executive Officer, Chief Financial Officer, Controller and persons performing similar functions) and all other employees. This code satisfies the requirements of a “code of conduct” under NASDAQ Marketplace Rule 5610 and a “code of ethics” within the meaning of Section 406 of the Sarbanes‑Oxley Act of 2002 and applicable SEC rules. A copy of the code is contained in the filings we make with the SEC, which are available through our website at
www.cherokeeglobalbrands.com
or through the SEC’s website at
www.sec.gov
. We intend to post on our website at
www.cherokeeglobalbrands.com
any amendments to or waivers from the code, to the extent required by applicable law.
Compensation Committee Interlocks and Insider Participation
Messrs. Ewing, Ravich and Tworecke served as a member of the Compensation Committee in Fiscal 2017. Subsequent to the end of Fiscal 2017, Ms. Baiocchi was appointed as a member of the Compensation Committee upon the resignation of Mr. Ewing. No such person is or has in the past been an officer or employee of Cherokee or had any relationship requiring disclosure under Item 404 of Regulation S‑K promulgated by the SEC, except as follows:
On December 7, 2016, in connection with our acquisition of the Hi-Tec and Magnum footwear brands, we obtained an unsecured receivables funding loan for $5.0 million in principal amount from Mr. Ravich, the Chairman of the Board (such loan, the “Ravich Loan”). As of April 24, 2017, $3.5 million owed under the Ravich Loan had been repaid and there were outstanding borrowings of $1.5 million under such loan. The Ravich Loan bears interest at a rate of 9.5% per annum, resulting in our payment of an aggregate of $67,556 in interest under such loan during Fiscal 2017. In addition, the Ravich Loan was subject to a fee equal to 2.5% of the principal amount of the loan, or $125,000, which we paid upon the funding of the Ravich Loan. We used the proceeds of the Ravich Loan to fund a portion of the purchase price for the Hi-Tec and Magnum footwear brands.
None of the executive officers of Cherokee currently serves, nor has any of them served at any time in Fiscal 2017, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Board of Directors or Compensation Committee of Cherokee.
Compensation Discussion and Analysis
This compensation discussion and analysis explains Cherokee’s policies and philosophies regarding executive compensation and the material elements of the compensation awarded to, earned by, or paid to each of Cherokee’s Named Executive Officers in Fiscal 2017.
Compensation Policies and Philosophy
The Compensation Committee established and oversees the design and administration of our executive compensation programs. The primary objectives of our executive compensation programs are to:
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encourage high performance;
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attract and retain highly qualified and motivated executive officers;
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align the interests of our executive officers with the interest of Cherokee’s stockholders; and
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promote accountability.
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To achieve these objectives, the Compensation Committee endeavors to implement and maintain compensation packages that are performance‑oriented and designed to link Cherokee’s strategic business objectives, specific financial performance objectives and the enhancement of stockholder returns with the compensation of Cherokee’s executives, including the Named Executive Officers, while also providing competitive guaranteed compensation and opportunities for rewards that attract and retain top‑quality and experienced executives. Our compensation programs seek to accomplish these goals by using a combination of base salary, performance‑based and discretionary cash bonuses, equity compensation, change in control and post‑termination severance benefits and other benefits generally available to all of Cherokee’s employees. The appropriate mix and levels of these compensation components are determined by our Compensation Committee based on the performance of each executive and our Company, within the context of our compensation philosophy and objectives. The Compensation Committee evaluates and determines the performance of each of our Named Executive Officers considering the following factors, among others as it deems appropriate in its discretion: the executive’s ability to perform assigned tasks; the executive’s knowledge of his or her job; the executive’s ability to work with others toward the achievement of Cherokee’s goals; and internal pay equity among our Named Executive Officers. The Compensation Committee also evaluates corporate performance by considering factors such as Cherokee’s performance relative to the business environment and our competitors and Cherokee’s success in meeting its business and financial objectives. In reviewing these factors for both individual and corporate performance, the Compensation Committee relies on its subjective evaluations of these factors, based on its business judgment and experience.
Process for Establishing Executive Compensation
The Compensation Committee determines Named Executive Officer compensation by drawing on its experience and judgment in establishing compensation programs and pay levels that it believes are appropriately rewarding to our Named Executive Officers and are responsible for a company in our stage of growth, and that otherwise satisfy the principle objectives of our compensation policies and philosophy. The Compensation Committee’s practice is to establish the annual compensation packages for each of our Named Executive Officers in the beginning of each fiscal year, typically in our first fiscal quarter in connection with annual performance reviews. Performing this process after the end of the prior fiscal year allows the Compensation Committee to incorporate data on Cherokee’s performance during the prior year into its analysis and to conduct an assessment of the executives’ contributions to Cherokee’s overall performance. The Compensation Committee then compiles this information to establish annual base compensation and performance‑related incentives and make adjustments to long‑range compensation incentives as it deems appropriate.
Compensation Peer Group
In determining executive compensation packages for Fiscal 2017, the Compensation Committee desired to maintain compensation levels and structure that were substantially consistent with those of Fiscal 2015 and Fiscal 2016. As a result, it did not rely on peer groups, benchmarking, industry surveys or similar tools.
In the third quarter of Fiscal 2017, the Compensation Committee engaged Radford Consulting (“Radford”) to review and assess the Company's executive and director compensation programs within the context of the competitive market, including assisting in establishing an appropriate group of selected peer companies and comparing Cherokee’s executive and director compensation programs with these peer companies. Selecting a group of our peer companies can be challenging for many reasons, including our relatively small market cap, our relatively low revenues, the limited number of employees we employ and our strategic plan to grow our business. In selecting our peer companies for compensation purposes, the Compensation Committee generally sought to identify companies that are similar to us across one or more key metrics and that, in the Compensation Committee’s view, compete with us for talent. As a result, with the assistance of Radford and with input from management, the Compensation Committee developed a group of peer companies consisting of U.S.-based, stand-alone, publicly traded companies that operate in our industry or with a similar business model and are comparable to us with respect to one or more identified factors, including market capitalization, annual revenues, net income and number of employees, among others. Based on this assessment, the Compensation Committee selected the following companies as our peer companies for compensation purposes, which we refer to collectively as the “Compensation Peer Group”:
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Differential Brands Group
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Perry Ellis International
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Vera Bradley
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Iconix Brand Group
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Sequential Brands Group
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Vince Holding Corp.
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Lakeland Industries
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Tilly’s
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Xcel Brands
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Oxford Industries
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Tumi Holdings
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Zumiez
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Although the Compensation Peer Group was not referenced to establish base compensation packages for our Named Executive Officers for Fiscal 2017 due the timing of Radford’s engagement, the Compensation Committee used information about the executive compensation practices of the Compensation Peer Group to inform compensation decisions about bonus levels and special awards to our Named Executive Officers for Fiscal 2017 and in setting base compensation packages for our Named Executive Officers for Fiscal 2018. The Compensation Committee used data about the Compensation Peer Group to serve as market reference points for a variety of compensation features, including the level of overall compensation and each compensation component, optimum pay mix and the relative competitive landscape of our executive compensation program. In using this data, the Compensation Committee did not strive to benchmark any individual compensation component or total compensation levels to be at any specific percentile relative to the market, as the Compensation Committee believes that benchmarking may not always be the most appropriate tool for setting compensation due to the aspects of our business and objectives that may be unique to us. Rather, the Compensation Committee used the information about the Compensation Peer Group for general compensation comparison purposes, with the goal of setting compensation levels that it believes are commensurate with Cherokee’s scope and performance and the individual performance of each of our Named Executive Officers.
Role of our Chief Executive Officer and Other Executive Officers in Compensation Decisions
For compensation paid to each Named Executive Officer other than the Chief Executive Officer, our Chief Executive Officer reviews, on an annual basis, the performance of each executive officer, as well as the compensation paid to each executive officer for the prior fiscal year. Following this review, our Chief Executive Officer submits to the Compensation Committee his recommendations regarding the compensation to be paid to each Named Executive Officer for the next fiscal year, including recommended salary levels, bonuses and equity awards, as applicable. Following a review of such recommendations, the Compensation Committee takes such action regarding such compensation as it deems appropriate, including approving compensation in an amount it determines is reasonable. The Chief Executive Officer is not involved in discussions about or the determination of any aspect of his own compensation. Ultimately, the Compensation Committee determines and approves the mix and level of compensation for all executives based on its own assessment of factors it deems relevant, including each executive’s and Cherokee’s performance.
Our Chief Executive Officer participates in meetings of the Compensation Committee at the Compensation Committee’s request, other than during executive session or when our Chief Executive Officer’s own compensation is under discussion, to provide:
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background information regarding our strategic objectives;
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his evaluation of the performance of executive officers (other than himself); and
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compensation recommendations as to executive officers (other than himself).
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In addition, our Chief Financial Officer often prepares information for the meetings of the Compensation Committee, including information about our financial performance, and our President and Chief Operating Officer and our Chief Financial Officer participate in Compensation Committee meetings at the Compensation Committee’s request, other than during executive session or when the compensation of such executive officers is under discussion.
Our Chief Executive Officer and our other executive officers also play a significant role in the compensation‑setting process for our non-executive employees by:
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evaluating employee performance;
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recommending business performance targets and establishing objectives; and
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recommending salary levels, bonuses and equity awards.
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Role of Compensation Consultant
In the third quarter of 2016, the Compensation Committee engaged Radford to conduct a full review and assessment of the Company's executive and director compensation programs within the context of the competitive market. Radford was engaged by and reports solely to the Compensation Committee, and the Compensation Committee has the sole authority to approve the terms of the engagement. Radford did not provide any services to the Company in Fiscal 2017 other than executive compensation consulting services provided to the Compensation Committee. Before engaging Radford, the Compensation Committee determined that Radford is independent, after taking into account the factors set forth in Rule 10C-1 of the Exchange Act and NASDAQ Marketplace Rule 5605(d)(3).
Review of Stockholder Advisory Votes on Our Executive Compensation
Consistent with the preference of our stockholders, which was expressed at Cherokee’s annual meeting of stockholders held in June 2011, our stockholders currently have the opportunity to cast an advisory vote on our executive compensation annually. At our 2016 annual meeting of stockholders, our executive compensation received a favorable advisory vote from 98% of the votes cast on the proposal at the meeting (which excludes abstentions and broker non-votes). The Compensation Committee believes this approval affirmed stockholders’ support of Cherokee’s approach to executive compensation, and therefore the Compensation Committee did not significantly change our compensation policies, philosophy, structure or levels in Fiscal 2017. The Compensation Committee will continue to consider the outcome of stockholder advisory votes on our executive compensation when making compensation decisions for our Named Executive Officers and in respect of our compensation programs generally.
Components of Compensation
The compensation of our Named Executive Officers consists of four principal components, including base salary, performance‑based and discretionary cash bonuses, equity compensation and change in control and post‑termination severance benefits, and also includes certain other benefits that are generally available to all of Cherokee’s employees. The Compensation Committee views each Named Executive Officer’s compensation holistically as a package, such that a decision to deliver a higher discretionary cash bonus could result in a consequent decision to grant the Named Executive Officer fewer equity awards. The Compensation Committee sets the mix and levels of these compensation components with the goal of providing appropriate short‑term and long‑term cash and non‑cash compensation to be competitive with companies with which Cherokee competes for talent, attract and retain talented and hard‑working individuals and align their incentives with the interests of our stockholders.
Base Salary
We provide base salaries to recognize the experience, skills, knowledge and responsibilities of our Named Executive Officers, reward individual performance, reward an executive’s contribution to our overall business performance and success in meeting our business and financial objectives, and provide an appropriate retention incentive. The Compensation Committee conducts an annual review of the base salary for each Named Executive Officer, which includes a review of the recommendations of our Chief Executive Officer regarding salary levels for executives other than himself. In considering the base salary of each Named Executive Officer, the Compensation Committee considers the individual and corporate performance factors described above, in addition to other qualitative and quantitative factors it may deem relevant, including the base salary levels for similar executives of the Compensation Peer Group and other information provided by Radford. Typically, a Named Executive Officer’s base salary is increased with additional job responsibility or in light of other factors, but is not intended to be the primary compensation method to reward past performance or incentivize future performance.
The base salaries for our Named Executive Officers for Fiscal 2016, Fiscal 2017 and Fiscal 2018 are as follows:
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Name and Title
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Fiscal 2016
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Fiscal 2017
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Fiscal 2018
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Henry Stupp,
Chief Executive Officer
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$
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750,000
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$
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750,000
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$
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750,000
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Howard Siegel,
President and Chief Operating Officer
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$
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425,000
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$
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425,000
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$
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425,000
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Jason Boling,
Chief Financial Officer
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$
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300,000
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$
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300,000
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$
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300,000
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Cash Bonuses
We periodically pay cash bonuses to Named Executive Officers at the discretion of the Compensation Committee based on the Compensation Committee’s evaluation of performance against various corporate and individual goals and objectives and pursuant to a performance‑based cash bonus plan. In each case, this element of compensation is designed to motivate the Named Executive Officers to meet the business and financial objectives of Cherokee.
Fiscal 2017 Performance Bonus
Pursuant to the terms of Messrs. Stupp’s and Siegel’s employment agreements with us, which are described under “Employment Agreements” below, and pursuant to the Compensation Committee’s determination in May 2014 to also apply the applicable terms to Mr. Boling, each of Messrs. Stupp, Siegel and Boling is eligible to receive a cash performance‑based bonus (the “Performance Bonus”) based on the level of achievement of Cherokee’s EBITDA (defined as net income before interest expense, tax provision, depreciation, and amortization are subtracted, and inclusive of any amounts payable as Performance Bonus) for each fiscal year relative to the EBITDA target included in the budget approved by the Board for such fiscal year (and taking into account any Board approved adjustments to the budgeted EBITDA resulting from any business acquisitions or dispositions consummated during the relevant fiscal year or any other specified unusual or non-recurring transactions or events). The amount of the Performance Bonus is as follows: (i) for Mr. Stupp, $200,000 at 100% achievement, with a minimum bonus of $50,000 at 80% achievement and a maximum bonus of $350,000 at 120% achievement (with linear interpolation between 80% and 120% achievement) and (ii) for each of Messrs. Siegel and Boling, 30% of his then‑current base salary at 100% achievement, with a minimum bonus of 20% of his then‑current base salary at 80% achievement and a maximum bonus of 40% of his then‑current base salary at 120% achievement (with linear interpolation between 80% and 120% achievement). If Cherokee’s EBITDA for a fiscal year is less than 80% of the EBITDA target included in the budget approved by the Board for such fiscal year (and taking into account any Board approved adjustments to the budgeted EBITDA), then none of Messrs. Stupp, Siegel and Boling are entitled to any Performance Bonus for that fiscal year.
The Compensation Committee determined to base the achievement of the Performance Bonus on Cherokee’s EBITDA because this metric provides a basis for measuring Cherokee’s operating performance and profitability based upon its business and assets, without regard to the impact of variations attributable to certain accounting or tax‑related matters.
For Fiscal 2017, Cherokee’s EBITDA was approximately $(1.9) million, which was less than 80% of the EBITDA target that the Compensation Committee had established for this period. As a result, none of Messrs. Stupp, Siegel and Boling was awarded a Performance Bonus for Fiscal 2017.
Fiscal 2017 Discretionary Cash Bonus
The decisions as to whether or not discretionary cash bonuses will be paid and the amounts and timing of such bonuses are tied to the profitability and performance of Cherokee and other factors the Compensation Committee may deem relevant with respect to each Named Executive Officer. For Fiscal 2017, the Compensation Committee did not pre‑establish or communicate to executives any performance targets for discretionary cash bonuses. In determining cash bonus levels, the Compensation Committee reviews our corporate performance and the performance of each Named Executive Officer, which includes a review of the recommendations of our Chief Executive Officer regarding cash bonus levels for executives other than himself. The Compensation Committee also considers internal pay equity factors together with each Named Executive Officer’s qualifications, duties and responsibilities and, with respect to our Chief Executive Officer, his eligibility to receive discretionary cash bonuses as set forth in his employment agreement with us, which is described under “Employment Agreements” below.
For Fiscal 2017, the Compensation Committee determined not to pay any of our Named Executive Officers a discretionary cash bonus for overall performance during the year. However, in December 2016, the Compensation Committee approved special cash bonuses to each Named Executive Officer in recognition of significant efforts in Cherokee’s successful completion of its acquisition of the Hi-Tec and Magnum brands. These special cash bonuses consisted of cash payments of $160,000, $80,000 and $80,000 to Messrs. Stupp, Siegel and Boling, respectively.
Equity Compensation
One of the goals of our executive compensation programs is to motivate long-term performance by aligning the interests of our executives with those of our stockholders. The Compensation Committee believes the use of equity awards offers the best approach for achieving this goal, and has established our equity compensation plans in order to provide certain employees, including our Named Executive Officers, an opportunity to participate in the ownership of our Company. In general, the Compensation Committee develops its equity award determinations based on its judgments as to whether the equity awards provided to our Named Executive Officers appropriately align the interests of our Named Executive Officers with those of our stockholders and are sufficient to retain, motivate and adequately reward our executives on a long-term basis.
Cherokee currently maintains one equity compensation plan, the 2013 Plan, which initially became effective following its approval by our stockholders on July 16, 2013 and which was amended and restated upon approval by our stockholders on June 6, 2016. The 2013 Plan serves as the successor to the 2006 Incentive Award Plan (the “Predecessor Plan”), which terminated concurrently with the approval by our stockholders of the 2013 Plan (except with respect to awards previously granted under the Predecessor Plan that remain outstanding). For more information about the 2013 Plan and the Predecessor Plan, please see “Executive Compensation—Equity Compensation Plans” below.
Types of Awards
We have historically granted our Named Executive Officers the following three types of equity awards under our equity compensation plans, all pursuant to award agreements under the applicable plan:
Stock Options.
Stock option awards afford the recipient the option to purchase shares of our common stock at a stated price per share. Stock option awards granted to our Named Executive Officers are granted under Cherokee’s equity compensation plans with exercise prices equal to or above the market price of Cherokee’s common stock on the date of grant and generally vest in equal annual installments over two, three or five years beginning on the one-year anniversary of the date of grant, subject to continued service through each vesting date and, to the extent specified in the applicable award agreement, accelerated vesting under certain circumstances. Since stock option awards have value only if the price of Cherokee’s common stock increases over the exercise price, the Compensation Committee believes that stock option awards provide incentives to build stockholder value and thereby align the interests of our Named
Executive Officers with those of our stockholders. The Compensation Committee also believes that these awards, which may vest over a period of two or more years, have important retention value.
RSUs.
RSUs are full-value awards that represent the contingent right to receive shares of our common stock upon achievement of stated time‑based vesting criteria. RSUs granted to our Named Executive Officers are granted under Cherokee’s equity compensation plans and generally vest in equal annual installments over three years beginning on the one-year anniversary of the date of grant, subject to continued service through each vesting date and, to the extent specified in the applicable award agreement, accelerated vesting under certain circumstances. As RSUs generally do not require the payment of an exercise price or the satisfaction of other performance criteria in order to vest, the Compensation Committee believes that these awards provide greater certainty of delivering value to our Named Executive Officers, which may be desired in order to reward our Named Executive Officers for achievement of individual or corporate strategic objectives or otherwise strong performance or in light of other factors deemed relevant, such as the terms of other outstanding equity awards, while still incentivizing long‑term performance and providing long‑term retention benefits by delivering value aligned with our stock performance over a three‑year vesting period.
Performance Stock Units.
Performance stock units are a type of RSU that vest in up to three annual installments based on the achievement of a stock price target each year. Each stock price target is calculated using the closing price of the Company’s common stock on the last day of the fiscal year preceding the grant date of the award and adding 10% growth per year, and is measured at the end of each fiscal year in which the award is outstanding. In order to achieve the applicable stock price target, the average of all closing prices during the January preceding the applicable fiscal year‑end must meet or exceed the stock price target. If a stock price target is met, one‑third of the shares subject to the award vest, and if a stock price target for either of the first two years in which an award is outstanding is not met, the portion of the award that would have vested would “roll over” and vest if the stock price target for the following fiscal year(s) in which the award remains outstanding are met, subject in all cases to continued service through each vesting date and, to the extent specified in the applicable award agreement, accelerated vesting under certain circumstances. The Compensation Committee believes this type of award design has several benefits, including, among others, that the awards have a strong performance orientation in that they generally do not vest unless one or more stock price targets are achieved; the awards align the Named Executive Officers’ interests with those of our stockholders, since the awards only vest if stockholders experience an increase in the value of their shares relative to the trading price of the shares on the grant date of the award; the stock price targets are objective, measureable, straightforward, and difficult to manipulate; the awards are only earned following a sustained stock price increase, minimizing the possibility of vesting upon a short‑term stock price spike; and there is no exercise price associated with the awards, so they could have more value delivery potential with less associated dilution than some other types of equity awards.
Award Timing, Mix and Levels
In determining the number and type of equity awards to grant in any fiscal year, the Compensation Committee considers a variety of factors, including the responsibilities and seniority of the Named Executive Officer, the contribution that the Named Executive Officer is expected to make to Cherokee in the coming years and has made to Cherokee in the past, and the size and terms of prior equity awards granted to the Named Executive Officer. The Compensation Committee generally grants equity awards for Named Executive Officers and other employees other than the Chief Executive Officer based on recommendations from the Chief Executive Officer made in connection with annual performance reviews. Decisions regarding these equity awards are typically made at the Compensation Committee’s first fiscal quarter meeting at which executive compensation for the coming year is determined. However, the Compensation Committee may also grant equity awards from time to time based on individual and corporate achievements and other factors it deems relevant, such as for retention purposes or to reflect changes in responsibilities or similar events or circumstances.
Fiscal 2017 Equity Awards
In Fiscal 2017, the Compensation Committee granted each Named Executive Officer performance stock units and special transaction awards, as described below.
Performance Stock Units.
On April 5, 2016, the Compensation Committee approved the grant of performance stock unit awards to Messrs. Stupp, Siegel and Boling pursuant to the 2013 Plan, entitling them to receive up to 10,000, 6,000 and 3,500 shares of Cherokee’s common stock, respectively, in each case over the three years beginning on the last day of Fiscal 2017 and subject to the performance criteria set forth in the applicable award agreements and as described above. Since the price target for Fiscal 2017 was not met, the first one‑third of the shares subject to each award failed to vest on the last day of Fiscal 2017. The Compensation Committee granted these awards to our Named Executive Officers to provide a long-term performance-based incentive following the expiration of performance stock units that were granted in Fiscal 2014 and expired at the end of Fiscal 2016.
Special Transaction Awards.
Along with the special cash bonuses awarded in December 2016, as described under “Cash Bonuses—Discretionary Cash Bonuses” above, the Compensation Committee also approved in December 2016 special transaction equity awards to each Named Executive Officer in recognition of significant efforts in Cherokee’s successful completion of its acquisition of the Hi-Tec and Magnum brands. These special transaction equity awards consisted of stock options to purchase up to 50,000, 30,000 and 20,000 shares of our common stock granted to Messrs. Stupp, Siegel and Boling, respectively. Each stock option award has an exercise price of $11.20 per share, has a contractual term of 3.5 years, and vests in equal annual installments over three years beginning on the one-year anniversary of the date of grant, subject to continued service through each vesting date and accelerated vesting under certain circumstances.
Change in Control and Post‑Termination Severance Benefits
The employment agreements for each of our Named Executive Officers provide them certain benefits if their employment is terminated under specified conditions, including a termination in connection with a change in control of Cherokee. The Compensation Committee believes these benefits are important elements of each Named Executive Officer’s comprehensive compensation package, primarily for their retention value and their alignment of the interests of our Named Executive Officers with those of our stockholders. The details and amounts of these benefits are described under “Executive Compensation—Potential Payments Upon Termination or Change in Control” below.
Other Benefits
Cherokee provides broad‑based benefits that are generally available to all of its employees, including health and dental insurance, life and disability insurance and a savings plan that qualifies as a defined contribution plan under Section 401(k) of the Code. Participants in this 401(k) plan are permitted to contribute to the plan through payroll deductions within statutory and plan limits and may select from a variety of investment options, which do not include Cherokee’s common stock. Under this 401(k) plan, Cherokee provides a matching contribution of up to 4% of each participant’s salary per year. In addition, Cherokee annually reviews the perquisites that senior executives receive, and the Named Executive Officers are generally entitled to the same perquisites that are available to all of Cherokee’s employees.
Deductibility of Executive Compensation
It is our policy generally to seek to qualify compensation paid to Named Executive Officers for deductibility under Section 162(m). Section 162(m) generally prohibits us from taking a tax deduction in any tax year for compensation paid to certain executive officers that exceeds $1,000,000, unless the compensation is payable only upon the achievement of pre-established, objective performance goals under a plan approved by our stockholders. We believe the stock option, RSU and performance stock unit awards we have granted to our Named Executive Officers under the 2013 Plan, the Predecessor Plan and our other historical equity compensation plans qualify as performance‑based compensation under Section 162(m), but there is no guarantee that such equity awards, or any other performance‑based compensation paid to our Named Executive Officers, qualify as such. We reserve the discretion to pay compensation to our executives that may not be deductible if we determine that paying such compensation is in the best interests of Cherokee and our stockholders.
Employment Agreements
We have entered into an employment agreement or offer letter with each of our Named Executive Officers that sets forth the terms of his compensation arrangements as described above and certain other terms of his employment
with us. The Compensation Committee determined to enter into employment agreements with each of our Named Executive Officers in light of various factors, including their respective levels of responsibility, the retention value of the agreements, particularly the change in control and post‑termination severance benefits provided in the agreements, and internal pay equity factors.
During Fiscal 2017, the Compensation Committee approved and amended and restated employment agreement with Mr. Stupp, which supersedes and replaces his prior employment agreement with us. The terms of Mr. Stupp’s new employment agreement are substantially similar to those of his prior employment agreement with us, except that (i) the contractual term of the new employment agreement extends until January 31, 2020 (whereas the prior employment agreement’s contractual term expired January 31, 2017), and (ii) the determination of the amount of Mr. Stupp’s Performance Bonus for each fiscal year is based on the level of achievement of the Company’s budgeted EBITDA for the applicable fiscal year after taking into account all adjustments to the budgeted EBITDA that are approved by the Board of Directors, as described under “Cash Bonuses—Fiscal 2017 Performance Bonus” above (whereas the prior employment agreement only took into account adjustments to the budgeted EBITDA resulting from any business acquisitions or dispositions consummated during the applicable fiscal year). Each of Messrs. Stupp’s, Siegel’s and Boling’s employment agreement or offer letter with us is described under “Executive Compensation—Employment Agreements” below.
Summary of Fiscal 2017 Executive Compensation
The following table summarizes the compensation of our Named Executive Officers for Fiscal 2017:
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Performance
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Stock Option
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Stock Unit
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Base
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Cash
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Share
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Share
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Name and Title
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Salary ($)(1)
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Bonuses ($)(2)
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Amount (#)(3)
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Amount (#)(4)
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Henry Stupp, Chief Executive Officer
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750,000
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160,000
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50,000
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10,000
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Howard Siegel, President and Chief Operating Officer
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425,000
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80,000
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30,000
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6,000
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Jason Boling, Chief Financial Officer
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300,000
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80,000
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20,000
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3,500
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(1)
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Represents each Named Executive Officer’s base salary for Fiscal 2017.
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(2)
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Represents all cash bonuses for Fiscal 2017, consisting of the special transaction cash bonuses described under “Cash Bonuses—Fiscal 2017 Discretionary Cash Bonus” above.
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(3)
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Represents the special transaction equity awards granted in Fiscal 2017, described under “Equity Compensation—Fiscal 2017 Awards—Special Transaction Awards” above.
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(4)
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Represents the performance stock units granted in Fiscal 2017, described under “Equity Compensation— Fiscal 2017 Awards—Performance Stock Units” above.
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Compensation Committee Report
We, the Compensation Committee, have reviewed and discussed with Cherokee’s management the disclosure under “Compensation Discussion and Analysis” above. Based on this review and discussion, we recommended to the Board of Directors that such Compensation Discussion and Analysis be included in this Proxy Statement.
COMPENSATION COMMITTEE:
Frank Tworecke,
Chair
Carol Baiocchi
Jess Ravich
This compensation committee report shall not be deemed to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act other than as provided by applicable SEC rules, or to the liabilities of Section 18 of the Exchange Act except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation awarded to, earned by or paid to our Named Executive Officers for Fiscal 2017, Fiscal 2016 and Fiscal 2015:
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|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
Total
|
|
|
|
|
Fiscal
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)(1)
|
|
($)(2)
|
|
($)(2)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
|
Henry Stupp
|
|
2017
|
|
750,000
|
|
160,000
|
|
103,065
|
|
184,600
|
|
—
|
|
54,250
|
|
1,251,915
|
|
|
Chief Executive
|
|
2016
|
|
750,000
|
|
—
|
|
1,147,000
|
|
383,288
|
|
155,250
|
|
59,036
|
|
2,494,574
|
|
|
Officer
|
|
2015
|
|
750,000
|
|
14,000
|
|
—
|
|
255,592
|
|
186,000
|
|
64,647
|
|
1,270,239
|
|
|
Howard Siegel
|
|
2017
|
|
425,000
|
|
80,000
|
|
61,840
|
|
110,760
|
|
—
|
|
47,324
|
|
724,924
|
|
|
President, Chief
|
|
2016
|
|
425,000
|
|
—
|
|
458,800
|
|
351,347
|
|
99,000
|
|
44,631
|
|
1,378,778
|
|
|
Operating Officer & Secretary
|
|
2015
|
|
425,000
|
|
128,000
|
|
—
|
|
102,237
|
|
—
|
|
53,485
|
|
708,722
|
|
|
Jason Boling
|
|
2017
|
|
300,000
|
|
80,000
|
|
36,072
|
|
73,840
|
|
—
|
|
32,611
|
|
522,523
|
|
|
Chief Financial
|
|
2016
|
|
300,000
|
|
—
|
|
458,800
|
|
351,347
|
|
69,900
|
|
30,647
|
|
1,210,694
|
|
|
Officer
|
|
2015
|
|
288,000
|
|
6,000
|
|
—
|
|
102,237
|
|
84,000
|
|
28,567
|
|
508,804
|
|
|
|
(1)
|
|
Represents discretionary cash bonuses earned for performance during each of the periods presented, including, for Fiscal 2017, the special transaction cash bonuses awarded in connection with the completion of our acquisition of the Hi-Tec and Magnum brands.
|
|
|
(2)
|
|
Represents the grant date fair value of awards granted during each of the periods computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. For more information, see Note 9 to the consolidated financial statements contained in the Annual Report filed with the SEC on May 18, 2017.
|
|
|
(3)
|
|
Represents the amount of the Performance Bonus earned by the applicable Named Executive Officer for his performance during each of the periods presented.
|
|
|
(4)
|
|
Amounts include employer‑paid health insurance premiums and vacation payouts and the employer contributions to the Company’s 401(k) retirement savings plan paid on behalf of each Named Executive Officer.
|
Grants of Plan‑Based Awards
The following table provides information about each grant of a plan‑based award to a Named Executive Officer in Fiscal 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards:
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
Estimated Future Payouts Under
|
|
Number of
|
|
Exercise or
|
|
Fair Value of
|
|
|
|
|
|
|
Non‑Equity Incentive Plan
|
|
Equity Incentive Plan
|
|
Securities
|
|
Base Price
|
|
Stock and
|
|
|
|
|
|
|
Awards(1)
|
|
Awards(2)
|
|
Underlying
|
|
of Option
|
|
Option
|
|
|
|
|
Grant
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Options
|
|
Awards
|
|
Awards(4)
|
|
|
Name
|
|
Date
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
(#)(3)
|
|
($/Sh)
|
|
($)
|
|
|
Henry Stupp
|
|
4/5/2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
10,000
|
|
—
|
|
—
|
|
|
—
|
|
103,065
|
|
|
|
|
12/14/2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
50,000
|
|
$
|
11.20
|
|
184,600
|
|
|
|
|
—
|
|
50,000
|
|
200,000
|
|
350,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Howard Siegel
|
|
4/5/2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6,000
|
|
—
|
|
—
|
|
|
|
|
61,840
|
|
|
|
|
12/14/2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
30,000
|
|
$
|
11.20
|
|
110,760
|
|
|
|
|
—
|
|
85,000
|
|
127,500
|
|
170,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Jason Boling
|
|
4/5/2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,500
|
|
—
|
|
—
|
|
|
—
|
|
36,072
|
|
|
|
|
12/14/2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
20,000
|
|
$
|
11.20
|
|
73,840
|
|
|
|
|
—
|
|
60,000
|
|
90,000
|
|
120,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
(1)
|
|
Represents potential amounts payable under the Performance Bonus. No amounts were actually paid under the Performance Bonus to any Named Executive Officer for his performance in Fiscal 2017.
|
|
|
(2)
|
|
Represents the total number of shares that could be earned under performance stock units granted in Fiscal 2017. The shares subject to the performance stock units vest in up to three installments if the average closing price of Cherokee's common stock during the month preceding the end of Cherokee's fiscal year is at least (i) $18.58 for Fiscal 2017, (ii) $20.44 for Fiscal 2018, and (iii) $22.48 for the Company's fiscal year ending February 2, 2019 ("Fiscal 2019"). Since the price target for Fiscal 2017 was not met, the first one‑third of the shares subject to each award failed to vest on the last day of Fiscal 2017, subject to certain “roll over” provisions described under “Compensation Discussion and Analysis—Equity Compensation—Types of Awards” above.
|
|
|
(3)
|
|
All stock option awards vest in equal annual installments over three years beginning on the one-year anniversary of the date of grant, subject to continued service through each vesting date and accelerated vesting under certain circumstances.
|
|
|
(4)
|
|
Represents the grant date fair value of the awards computed in accordance with FASB ASC Topic 718. For more information, see Note 9 to the consolidated financial statements contained in the Annual Report filed with the SEC on May 18, 2017.
|
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes outstanding equity awards held by our Named Executive Officers as of January 28, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Payout Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market Value of
|
|
Unearned
|
|
of Unearned
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Shares or
|
|
Shares or
|
|
Shares, Units
|
|
Shares, Units
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Units of
|
|
Units of
|
|
or Other
|
|
or Other
|
|
|
|
|
Underlying
|
|
Underlying
|
|
Option
|
|
|
|
Stock That
|
|
Stock That
|
|
Rights That
|
|
Rights That
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Exercise
|
|
Option
|
|
Have Not
|
|
Have Not
|
|
Have Not
|
|
Have Not
|
|
|
|
|
Options (#)
|
|
Options (#)
|
|
Price
|
|
Expiration
|
|
Vested
|
|
Vested
|
|
Vested
|
|
Vested
|
|
|
Name
|
|
Exercisable(1)
|
|
Unexercisable(1)
|
|
($)
|
|
Date
|
|
(#)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)(2)
|
|
|
Henry Stupp
|
|
30,001
|
|
—
|
|
13.06
|
|
6/18/2019
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
50,000
|
|
25,000
|
|
13.54
|
|
5/9/2021
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
20,000
|
|
40,000
|
|
22.94
|
|
6/8/2022
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
—
|
|
50,000
|
|
11.20
|
|
6/14/2020
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
33,334
|
|
313,340
|
|
—
|
|
—
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
10,000
|
|
94,000
|
|
|
Howard Siegel
|
|
50,000
|
|
—
|
|
18.30
|
|
8/26/2017
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
100,000
|
(4)
|
—
|
|
17.21
|
|
3/23/2018
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
60,000
|
|
—
|
|
13.06
|
|
6/18/2019
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
20,000
|
|
10,000
|
|
13.54
|
|
5/9/2021
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
18,333
|
|
36,667
|
|
22.94
|
|
6/8/2022
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
30,000
|
|
11.20
|
|
6/14/2020
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,334
|
|
125,340
|
|
—
|
|
—
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6,000
|
|
56,400
|
|
|
Jason Boling
|
|
30,000
|
|
—
|
|
14.03
|
|
3/25/2020
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
20,000
|
|
—
|
|
12.02
|
|
8/19/2020
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
20,000
|
|
10,000
|
|
13.54
|
|
5/9/2021
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
18,333
|
|
36,667
|
|
22.94
|
|
6/8/2022
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
—
|
|
20,000
|
|
11.20
|
|
6/14/2020
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,334
|
|
125,340
|
|
—
|
|
—
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,500
|
|
32,900
|
|
|
|
(1)
|
|
Other than as described below, all stock option and RSU awards vest in equal annual installments over three years beginning on the first anniversary of the date of grant, subject to continued service through each vesting date and accelerated vesting under certain circumstances.
|
|
|
(2)
|
|
Determined by multiplying the unvested portion of the stock awards by $9.40, the closing price of our common stock on January 27, 2017.
|
|
|
(3)
|
|
Represents the total number of shares that could be earned under performance stock units granted in Fiscal 2017. The shares subject to the performance stock units vest in up to three installments if the average closing price of Cherokee's common stock during the month preceding the end of Cherokee's fiscal year is at least (i) $18.58 for Fiscal 2017, (ii) $20.44 for Fiscal 2018, and (iii) $22.48 for Fiscal 2019. Since the price target for Fiscal 2017 was not met, the first one‑third of the shares subject to each award failed to vest on the last day of Fiscal 2017, subject to certain “roll over” provisions described under “Compensation Discussion and Analysis—Equity Compensation—Types of Awards” above.
|
|
|
(4)
|
|
The option award vests in equal annual installments over five years beginning on the first anniversary of the date of grant, subject to continued service through each vesting date and accelerated vesting under certain circumstances.
|
Restricted Stock Awards Vested
The following table summarizes the Named Executive Officers’ restricted stock awrads vested during Fiscal 2017:
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
Value
|
|
|
|
|
Acquired on
|
|
Realized on
|
|
|
Name
|
|
Vesting (#)
|
|
Vesting ($)(1)
|
|
|
Henry Stupp
|
|
16,666
|
|
$
|
236,157
|
|
|
Howard Siegel
|
|
6,666
|
|
$
|
94,457
|
|
|
Jason Boling
|
|
6,666
|
|
$
|
94,457
|
|
|
|
(1)
|
|
Determined
by multiplying the number of shares vested by $14.17, the closing price of our common stock on June 8, 2016, the vesting date of such shares. As of April 24, 2017, none of our Named Executive Officers had sold any of the shares delivered upon vesting of the stock awards.
|
Employment Agreements
Restated Employment Agreement with Mr. Stupp
On July 11, 2016, we entered into an Amended and Restated Executive Employment Agreement (the “Restated Employment Agreement”) with Henry Stupp, our Chief Executive Officer, which was approved by the Compensation Committee. The Restated Employment Agreement amends, restates and supersedes in its entirety the employment agreement dated July 16, 2013 between Cherokee and Mr. Stupp. The Restated Employment Agreement has an initial term that expires January 31, 2020, and it will automatically renew for three‑year terms thereafter, unless either party provides written notice of non‑renewal at least 90 days prior to the end of the then‑current term.
Pursuant to the terms of the Restated Employment Agreement, Mr. Stupp is to receive a base salary equal to $750,000 per year, which was his base salary for Fiscal 2017. The Compensation Committee may increase Mr. Stupp’s base salary in its discretion. In addition, Mr. Stupp is eligible to receive the Performance Bonus and an additional discretionary cash bonus of up to $300,000 as determined in the discretion of the Compensation Committee. See the description of the Performance Bonus under “Compensation Discussion and Analysis—Components of Compensation—Cash Bonuses” above. For Fiscal 2017, base salary and non‑incentive plan cash bonuses constituted approximately 73% of Mr. Stupp’s total compensation.
In addition, the Restated Employment Agreement provides that Mr. Stupp will receive equity awards on or about each anniversary of the date of the Restated Employment Agreement in amounts and on terms to be determined by the Compensation Committee in its discretion. Further, the Restated Employment Agreement provides for certain payments upon a termination of Mr. Stupp’s employment with Cherokee, as described under “Potential Payments Upon Termination or Change in Control” below.
Employment Agreement with Mr. Siegel
On July 23, 2015, we entered into an employment agreement (the “Employment Agreement”) with Mr. Siegel, our President and Chief Operating Officer, which was approved by our Compensation Committee. Pursuant to the terms of the Employment Agreement, Mr. Siegel is to receive a base salary equal to $425,000 per year, which was his base salary for Fiscal 2017. Also pursuant to the terms of the Employment Agreement, Mr. Siegel is eligible to receive the Performance Bonus, as described under “Compensation Discussion and Analysis—Components of Compensation—Cash Bonuses” above. For Fiscal 2017, base salary and non‑incentive plan cash bonuses constituted approximately 70% of Mr. Siegel’s total compensation. Mr. Siegel is also eligible to receive equity awards at the times and in the amounts determined by the Compensation Committee in its discretion. In addition, the Employment Agreement provides for certain payments upon a termination of Mr. Siegel’s employment with Cherokee, as described under “Potential Payments Upon Termination or Change in Control” below.
Offer Letter with Mr. Boling
On February 22, 2013, we entered into an offer letter (the “Offer Letter”) with Mr. Boling, our Chief Financial Officer, which was approved by our Compensation Committee and became effective on March 25, 2013. Pursuant to the terms of the Offer Letter, Mr. Boling’s annual base salary was initially $250,000, which amount was increased to $300,000 in May 2014. Also pursuant to the terms of the Offer Letter, Mr. Boling was initially eligible to receive an annual discretionary bonus of up to 40% of his base compensation as determined in the sole discretion of the Compensation Committee, which amount was reduced to 30% of his annual base salary and was tied to the Company’s achievement of certain EBITDA targets pursuant to the terms of the Performance Bonus in May 2014. See the description of the Performance Bonus under “Compensation Discussion and Analysis—Components of Compensation—Cash Bonuses” above. For Fiscal 2017, base salary and non‑incentive plan cash bonuses constituted approximately 73% of Mr. Boling’s total compensation. Mr. Boling is also eligible to receive equity awards at the times and in the amounts determined by the Compensation Committee in its discretion. In addition, the Offer Letter provides for certain payments upon a termination of Mr. Boling’s employment with Cherokee, as described under “Potential Payments Upon Termination or Change in Control” below.
Pension Benefits, Non‑Qualified Defined Contribution and Other Deferred Compensation Plans
We do not have any plans that provide for pension payments or other benefits to our Named Executive Officers at, following or in connection with their retirement. We also do not have any non‑qualified defined contribution plans or other deferred compensation plans that provide for the deferral of compensation on a basis that is not tax‑qualified.
Potential Payments Upon Termination or Change in Control
The descriptions below provide information about the payments and other benefits to which each of our Named Executive Officers would be entitled upon a termination of such Named Executive Officer or a change in control of Cherokee. The tables below show, for each Named Executive Officer, our estimates of Cherokee’s potential cash payments and other benefits that would have been paid to the Named Executive Officer assuming that such a termination or change in control was effected as of January 28, 2017. The tables below also assume that all salary and bonus amounts earned by each Named Executive Officer through the date of such a termination or change in control had already been paid. As a result, all amounts in these tables are only estimates, and the actual amounts that would be paid can only be determined at the time of the event triggering the payments.
Chief Executive Officer—Mr. Stupp
Pursuant to the Restated Employment Agreement, if Cherokee terminates Mr. Stupp’s employment at any time other than for cause or if Mr. Stupp terminates his employment at any time for good reason, then Mr. Stupp would be entitled to receive:
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·
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an amount equal to 12 months of his then‑current base salary, payable in the form of salary continuation;
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·
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a pro‑rated Performance Bonus for the fiscal year in which such termination occurs (based on the actual achievement for the full fiscal year and then pro‑rated to reflect the number of days of employment during such fiscal year), payable at the same time as performance bonuses are payable to Cherokee’s other senior executives;
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·
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an amount equal to one times the average Performance Bonuses paid to Mr. Stupp for the prior two completed fiscal years, payable in a lump sum within 60 days following the termination of Mr. Stupp’s employment;
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·
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continuation of Mr. Stupp’s medical and dental benefits for 12 months or reimbursement for payments by Mr. Stupp to maintain such benefits; and
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·
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accelerated vesting of the equity awards held by Mr. Stupp.
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Mr. Stupp will only be entitled to receive the foregoing benefits if, among other things, he executes and delivers a general release of claims in favor of Cherokee. Mr. Stupp is not entitled to any severance if his employment is terminated by death or by disability, if his employment is terminated by him for any reason other than good reason or if his employment is terminated by Cherokee for cause, except that if Mr. Stupp’s employment is terminated as a result of his death or disability, then he or his estate would receive a pro‑rated Performance Bonus based upon the methodology described above and the vesting of Mr. Stupp’s equity awards would accelerate. Also pursuant to the Restated Employment Agreement, the performance stock units issued to Mr. Stupp would immediately vest in full if Cherokee’s common stock ceases to be publicly traded as a result of a “going private transaction” having the effects described in Rule 13e‑3(a)(3)(ii) of the Exchange Act.
For purposes of the Restated Employment Agreement:
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·
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“cause” means Mr. Stupp: (i) is indicted or charged with a felony or crime involving dishonesty, breach of trust, or physical harm to any person; (ii) willfully engages in conduct that is in bad faith and materially injurious to Cherokee; (iii) commits a material breach of the Restated Employment Agreement, which breach is not cured within twenty days after written notice; (iv) willfully refuses to implement or follow a lawful policy of Cherokee, which breach is not cured within twenty days after written notice; or (v) engages in misfeasance or malfeasance demonstrated by a pattern of failure to perform job duties diligently and professionally; and
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·
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“good reason” means (i) the assignment to Mr. Stupp of any duties inconsistent with his position, duties, responsibilities or status with Cherokee or a reduction of his duties or responsibilities; (ii) Mr. Stupp no longer reports directly to the Board; (iii) a reduction in Mr. Stupp’s base salary or bonus opportunities; (iv) the requirement that Mr. Stupp be based at any office or location more than 50 miles from Cherokee’s corporate headquarters, except for travel reasonably required in the performance of Mr. Stupp’s responsibilities; or (v) material breach by Cherokee of its material obligations under the Restated Employment Agreement or any other agreement with Mr. Stupp, which breach is not cured within twenty days after written notice.
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The following table shows the potential payments to our Chief Executive Officer, Henry Stupp, if a termination or going private transaction had occurred as of January 28, 2017:
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Involuntary Not
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Termination
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Termination by
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Going
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For Cause
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Due to Death
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Executive For
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Private
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Benefits and Payments Upon Termination
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Termination
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or Disability
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Good Reason
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Transaction
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Cash severance payment(1)
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$
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750,000
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|
—
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$
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750,000
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—
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Continuation of medical and dental benefits(2)
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$
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13,865
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—
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$
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13,865
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—
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Payout of Performance Bonus(3)
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$
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173,000
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$
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173,000
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173,000
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—
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Acceleration of stock options(4)
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—
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—
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—
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—
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Acceleration of RSUs(5)
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$
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313,340
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$
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313,340
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$
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313,340
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—
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Acceleration of performance stock units(6)
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$
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94,000
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$
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94,000
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$
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94,000
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$
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94,000
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Total:
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$
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1,344,205
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$
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580,340
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$
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1,344,205
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$
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94,000
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(1)
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Represents 12 months of Mr. Stupp’s base salary as of
January 28, 2017
.
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(2)
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Represents the approximate value of the continuation of Mr. Stupp’s medical and dental benefits for 12 months.
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(3)
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Represents a payment equal to the sum of (i) one times the average Performance Bonuses paid to Mr. Stupp for the prior two completed fiscal years ($173,000, as Mr. Stupp earned a Performance Bonus of $160,000 and $186,000 for Fiscal 2016 and Fiscal 2015, respectively), plus (ii) a pro‑rated Performance Bonus for the fiscal year in which the termination occurs, based on the actual achievement for the full fiscal year and then pro‑rated to reflect the number of days of employment during such fiscal year ($0, as Mr. Stupp did not earn a Performance Bonus for
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Fiscal 2017), except that the payment upon a termination due to death or disability is equal to the amount described in clause (ii) only.
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(4)
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All amounts are $0 because there were no unvested shares subject to stock options that are exercisable for less than $9.40 per share, the closing price of our common stock on January 27, 2017.
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(5)
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Determined by multiplying the unvested portion of outstanding RSU awards (totaling 33,334 shares) by $9.40 per share, the closing price of our common stock on January 27, 2017.
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(6)
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Determined by multiplying the unvested portion of outstanding performance stock unit awards (totaling 10,000 shares) by $9.40 per share, the closing price of our common stock on January 27, 2017.
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President and Chief Operating Officer—Mr. Siegel
Pursuant to the Employment Agreement, if Cherokee terminates Mr. Siegel’s employment at any time other than for cause, by death or by disability, then Mr. Siegel would be entitled to receive an amount equal to 12 months of his then‑current base salary, payable in the form of salary continuation.
The Employment Agreement also provides that Mr. Siegel would be entitled to receive certain payments if Cherokee undergoes a change of control event or if Cherokee terminates Mr. Siegel’s employment or eliminates Mr. Siegel’s position in connection with a change of control event, as follows:
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·
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if Cherokee terminates Mr. Siegel’s employment without cause or eliminates Mr. Siegel’s position within three months prior to or 12 months following a change of control event, then Mr. Siegel would be entitled to receive: (i) an amount equal to 12 months of his then‑current base salary, payable in the form of salary continuation, (ii) any earned but unpaid bonus amount, payable as a lump sum, and (iii) continuation of Mr. Siegel’s medical and dental benefits under COBRA for 12 months; and
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·
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if Cherokee undergoes a change of control event or Cherokee terminates Mr. Siegel’s employment without cause or eliminates Mr. Siegel’s position within three months prior to a change of control event, then Mr. Siegel would also be entitled to acceleration of vesting of all equity awards held by Mr. Siegel as of the time of the change of control event.
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Mr. Siegel will only be entitled to receive the foregoing benefits if, among other things, he executes and delivers a general release of claims in favor of Cherokee. Mr. Siegel would not be entitled to any severance if his employment is terminated by death or by disability or if his employment is terminated by him for any reason other than as described above.
For purposes of the Employment Agreement:
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·
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“cause” means Mr. Siegel: (i) is convicted of or pleads guilty to a felony or crime involving moral turpitude; (ii) is personally dishonest in a manner that directly affects the Company; (iii) engages in willful misconduct or gross negligence; (iv) breaches a fiduciary duty to the Company; (v) commits an act of fraud, embezzlement or misappropriation against the Company; or (vi) fails to substantially perform his duties as the President and Chief Operating Officer of the Company; and
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·
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a “change of control event” means the sale, transfer, merger or disposition of all or substantially all of the assets or stock of the Company, by way of contribution, reorganization, share exchange, stock purchase or sale, asset purchase or sale, or other form of corporate transaction.
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The following table shows the potential payments to our President and Chief Financial Officer, Jason Boling, if a termination and/or change in control had occurred as of January 28, 2017:
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Termination
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Termination
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Involuntary Not
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Within 3 Months
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Within 12 Months
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Change
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For Cause
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Before Change
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After Change
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of
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Benefits and Payments Upon Termination
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Termination
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of Control
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of Control
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Control
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Cash severance payment(1)
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$
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425,000
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$
|
425,000
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$
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425,000
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—
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Continuation of medical and dental benefits(2)
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$
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—
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$
|
19,863
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$
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19,863
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|
—
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|
Acceleration of stock options(3)
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—
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—
|
|
|
—
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—
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Acceleration of RSUs(4)
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—
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$
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125,340
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—
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$
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125,340
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Acceleration of performance stock units(5)
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—
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$
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56,400
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—
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$
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56,400
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Total:
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$
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425,000
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$
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626,603
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$
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444,863
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$
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181,740
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(1)
Represents 12 months of Mr. Siegel’s base salary as of January 28, 2017, as applicable.
(2)
Represents the approximate value of the continuation of Mr. Siegel’s medical benefits for 12 months.
(3)
All amounts are $0 because there were no unvested shares subject to stock options that are exercisable for less than $9.40 per share, the closing price of our common stock on January 27, 2017.
(4)
Determined by multiplying the unvested portion of outstanding RSU awards (totaling 13,334 shares) by $9.40 per share, the closing price of our common stock on January 27, 2017.
(5)
Determined by multiplying the unvested portion of outstanding performance stock unit awards (totaling 6,000 shares) by $9.40 per share, the closing price of our common stock on January 27, 2017.
Chief Financial Officer—Mr. Boling
Pursuant to the Offer Letter, if Cherokee terminates Mr. Boling’s employment other than for cause, then Mr. Boling would be entitled to receive:
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·
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if such termination occurs at any time before March 25, 2016, (i) an amount equal to six months of his then‑current base salary, payable in the form of salary continuation, and (ii) continuation of his medical and dental benefits for six months; and
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·
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if such termination occurs at any time after March 25, 2016, (i) an amount equal to 12 months of his then‑current base salary, payable in the form of salary continuation, and (ii) continuation of his medical and dental benefits for 12 months.
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The Offer Letter also provides that Mr. Boling would be entitled to receive certain payments if Cherokee undergoes a change of control and, within 12 months following such change of control, any of the following occurs: (i) Mr. Boling’s position is eliminated; (ii) Mr. Boling is terminated for any reason other than for cause; or (iii) Mr. Boling terminates his employment following a material reduction in his duties or responsibilities or an office move that would extend his commute by greater than 30 miles. Under such circumstances, Mr. Boling would be entitled to receive:
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·
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|
an amount equal to 12 months of his then‑current base salary;
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|
·
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|
any earned but unpaid bonus amount;
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|
·
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|
continuation of Mr. Boling’s medical and dental benefits under COBRA for 12 months; and
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·
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acceleration of vesting of all equity awards held by Mr. Boling as of the time of the change of control.
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Mr. Boling will only be entitled to receive the foregoing benefits if, among other things, he executes and delivers a general release of claims in favor of Cherokee. Mr. Boling would not be entitled to any severance if his employment is terminated by death or by disability or if his employment is terminated by him for any reason other than as described above following a change of control of Cherokee.
For purposes of the Offer Letter:
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·
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“cause” means Mr. Boling: (i) is convicted of or pleads guilty to a felony or crime involving moral turpitude; (ii) is personally dishonest in a manner that directly affects the Company; (iii) engages in willful misconduct or gross negligence; (iv) breaches a fiduciary duty to the Company; (v) commits an act of fraud, embezzlement or misappropriation against the Company; or (vi) fails to substantially perform his duties as Chief Financial Officer of the Company; and
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·
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a “change of control” means the sale, transfer, merger or disposition of all or substantially all of the assets or stock of the Company, by way of contribution, reorganization, share exchange, stock purchase or sale, asset purchase or sale, or other form of corporate transaction.
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The following table shows the potential payments to our President and Chief Operating Officer, Howard Siegel, if a termination had occurred as of January 28, 2017:
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|
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|
|
|
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|
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Termination
|
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Involuntary Not
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Following Change of
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For Cause
|
|
Control Under
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Benefits and Payments Upon Termination
|
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Termination
|
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Specified Conditions
|
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Cash severance payment(1)
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$
|
300,000
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|
$
|
300,000
|
|
Continuation of medical and dental benefits(2)
|
|
$
|
10,457
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|
$
|
10,457
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|
Acceleration of stock options(3)
|
|
|
—
|
|
|
—
|
|
Acceleration of RSUs(4)
|
|
|
—
|
|
$
|
125,340
|
|
Acceleration of performance stock units(5)
|
|
|
—
|
|
$
|
32,900
|
|
Total:
|
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$
|
310,457
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|
$
|
468,697
|
(1)
Represents 12 months of Mr. Boling’s base salary as of January 28, 2017.
(2)
Represents the approximate value of the continuation of Mr. Boling’s medical benefits for 12 months.
(3)
All amounts are $0 because there were no unvested shares subject to stock options that are exercisable for less than $9.40 per share, the closing price of our common stock on January 27, 2017.
(4)
Determined by multiplying the unvested portion of outstanding RSU awards (totaling 13,334 shares) by $9.40 per share, the closing price of our common stock on January 27, 2017.
(5)
Determined by multiplying the unvested portion of outstanding performance stock unit awards (totaling 3,500 shares) by $9.40 per share, the closing price of our common stock on January 27, 2017.
Risks Related to Compensation Policies and Practices
The Compensation Committee has considered and regularly monitors whether our overall compensation program for employees in Fiscal 2017 creates incentives for employees to take excessive or unreasonable risks that could materially harm Cherokee. Although risk-taking is a necessary part of building any business, the Compensation Committee focuses on aligning the Company’s compensation policies with the long-term interests of the Company and its stockholders and avoiding short-term rewards for management or other employee decisions that could pose long-term risks to the Company. We believe that several features of our compensation policies for management‑level employees appropriately mitigate these risks, including a mix of long‑ and short‑term compensation incentives that we believe is properly weighted for a company of our size, in our industry and with our stage of growth, and the uniformity of compensation policies and objectives across Cherokee’s employees. We also believe our internal legal and financial controls appropriately mitigate the probability and potential impact of an individual employee committing us to a harmful long‑term business transaction in exchange for short‑term compensation benefits.
Equity Compensation Plans
Cherokee currently maintains one equity compensation plans, the 2013 Plan. The 2013 Plan serves as the successor to the Predecessor Plan, which terminated concurrently with the approval by our stockholders of the 2013 Plan, except that the terms of the Predecessor Plan remain applicable to awards previously granted under the Predecessor Plan that remain outstanding. The terms of the 2013 Plan and the Predecessor Plan are summarized below.
2013 Plan
The 2013 Plan became effective upon its approval by our stockholders on July 16, 2013, and was amended and restated upon the approval of our stockholders on June 6, 2016.
Share Reserve, Share Counting and Other Share Limits
The share reserve under the 2013 Plan consists of (i) 1,200,000 shares, plus (ii) 121,484 shares previously reserved but unissued under the Predecessor Plan, plus (iii) shares subject to outstanding awards granted under the Predecessor Plan (369,001 as of April 24, 2017), which will be available for issuance under the 2013 Plan if they would have returned to the Predecessor Plan as a result of the forfeiture, termination, repurchase, expiration of such awards. The number of shares that actually are added to the 2013 Plan on account of such forfeitures, terminations, repurchases or expirations likely will be substantially fewer than the total number of shares underlying the outstanding Predecessor Plan awards, as it is unlikely that all of the outstanding Predecessor Plan awards will expire or terminate without being exercised or settled. As of April 24, 2017, there were 1,218,747 total shares reserved for issuance under the 2013 Plan, including 845,003 shares subject to outstanding equity awards granted under this plan.
Any shares covered by an award which is forfeited, canceled or expires will be deemed not to have been issued for purposes of determining the maximum number of shares which may be issued under the 2013 Plan. Shares that have been issued under the 2013 Plan pursuant to an award will not be returned to the 2013 Plan and will not become available for future grant under the 2013 Plan, except where unvested shares are forfeited or repurchased by the Company at the lower of their original purchase price or their fair market value. Shares tendered or withheld in payment of an award exercise or purchase price, shares withheld by the Company to pay any tax withholding obligation, and shares purchased in the open market with proceeds of a stock option exercise will not be returned to the 2013 Plan and will not become available for future issuance under the 2013 Plan. In addition, all shares covered by the portion of a stock appreciation right that is exercised will be considered issued pursuant to the 2013 Plan.
With respect to stock options, stock appreciation rights, restricted stock and RSUs that are intended to be performance-based compensation under Section 162(m), the maximum number of shares subject to such awards that may be granted to a participant during a fiscal year of the Company is 100,000 shares, subject to adjustment in the event of a change in our shares or our capital structure.
Administration
The 2013 Plan is administered by the administrator of the plan, which is defined as the Board or one or more committees designated by the Board. The Compensation Committee currently acts as the administrator of the 2013 Plan. With respect to awards granted to officers and directors, the Compensation Committee will be constituted in such a manner as to satisfy applicable laws, including Rule 16b-3 under the Exchange Act and Section 162(m).
Eligibility
Persons eligible to receive awards under the 2013 Plan include directors, officers and other employees, consultants, and advisors of Cherokee or any of its subsidiaries. As of April 24, 2017, there were approximately 83 officers (including the three Named Executive Officers) and other employees of the Company and its subsidiaries and seven non-employee directors, all of whom are eligible to receive awards under the 2013 Plan.
Types and Terms of Awards
The 2013 Plan authorizes the grant of a variety of types of awards, including non-qualified stock options, incentive stock options, restricted stock, RSUs, dividend equivalent rights, stock appreciation rights and cash-based awards. All awards under the 2013 Plan may be granted with such vesting schedules and other terms as the administrator of the 2013 Plan may determine in its discretion, subject to the provisions and limitations of the plan. Although the 2013 Plan provides the administrator with such discretion, stock option and RSU awards granted to employees under the 2013 Plan typically vest in equal annual installments over two, three or five years beginning on the one-year anniversary of the date of grant, subject to continued service through each vesting date and, to the extent specified in an award agreement, accelerated vesting under certain circumstances, awards granted under the 2013 Plan that are intended to qualify as performance-based compensation typically vest upon the satisfaction of one or more performance goals established by the plan administrator at or around the time the award is granted.
Treatment of Awards upon Corporate Transaction
The 2013 Plan provides that, in the event of a “corporate transaction,” as defined in the 2013 Plan, all outstanding awards under the 2013 Plan will terminate unless the awards are assumed in connection with the corporate transaction. Except as provided in an individual award agreement, for the portion of each award that is neither assumed nor replaced, such portion of the award will automatically become fully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at fair market value) for all of the shares (or other consideration) at the time represented by such portion of the award, immediately prior to the specified effective date of such corporate transaction, provided that the grantee’s continuous service has not terminated prior to such date.
Under the 2013 Plan, a corporate transaction includes, in general, (i) a person’s or group’s acquisition of more than 50% of the total combined voting power of our outstanding securities, (ii) certain changes to the composition of our Board of Directors, (iii) the consummation by the Company of certain mergers, consolidations, reorganizations, business combinations, asset sales or acquisitions, and (iv) a stockholder-approved liquidation or dissolutions of the Company.
Amendment, Suspension and Termination
The 2013 Plan will terminate on April 7, 2026, unless earlier terminated by the Board. The Board may at any time amend, suspend or terminate the 2013 Plan, subject to obtaining stockholder approval for any amendment to the extent necessary to comply with applicable laws and rules.
Predecessor Plan
Share Reserve and Share Limits
The share reserve under the Predecessor Plan consisted of (i) 750,000 shares of our common stock (or the equivalent in other equity securities), plus (ii) any shares of our common stock that could again be optioned, granted or awarded under the terms of our prior equity compensation plan as in effect immediately prior to the adoption of the Predecessor Plan. The maximum number of shares which may be subject to awards granted under the Predecessor Plan to any one individual in any calendar year could not exceed 100,000, and the maximum amount of cash compensation payable pursuant to one or more awards granted under the Predecessor Plan to any one individual in any fiscal year of the Company could not exceed $500,000.
In general, to the extent that an award granted under the Predecessor Plan expires or lapses for any reason, or is settled in cash, any shares subject to the award could again be available for new grants under such plan. The Predecessor Plan prohibited shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any award from being available for subsequent grant under such Plan.
Administration
The Predecessor Plan is administered by the administrator of the plan, which is defined as the Compensation Committee or another Board committee with respect to awards granted to officers, employees and consultants, and the full Board with respect to awards granted to directors. With respect to awards granted to officers and directors, the
Compensation Committee or other Board committee serving as the administrator of the plan will be constituted in such a manner as to satisfy applicable laws, including Rule 16b-3 under the Exchange Act and Section 162(m).
Eligibility
Persons eligible to receive awards under the Predecessor Plan included independent directors, officers and other employees, consultants, and of Cherokee or any of its subsidiaries.
Types and Terms of Awards
The Predecessor Plan authorized the grant of a variety of types of awards, including non-qualified stock options, incentive stock options, restricted stock, stock appreciation rights, other stock-based awards, including performance shares and stock units, and performance-based cash bonuses. All awards under the Predecessor Plan were granted with such vesting schedules and other terms as the administrator of the Predecessor Plan determined in its discretion, subject to the provisions and limitations of the plan. Although the Predecessor Plan provided the administrator with such discretion, stock option and RSU awards granted to employees under the 2006 Plan typically vest in equal annual installments over two, three or five years beginning on the one-year anniversary of the date of grant, subject to continued service through each vesting date and, to the extent specified in an award agreement, accelerated vesting under certain circumstances, and awards granted under the Predecessor Plan that are intended to qualify as performance-based compensation typically vest upon the satisfaction of one or more performance goals established by the plan administrator at or around the time the award is granted.
Treatment of Awards upon Change in Control
The Predecessor Plan provides that, in the event of a “change in control,” as defined in the Predecessor Plan, the plan administrator may cause all outstanding awards under the Predecessor Plan to terminate at a specified time, including the date of the change in control. Except as provided in an individual award agreement, awards that re not converted, assumed or replaced by a successor entity will become fully exercisable and all forfeiture restrictions on such awards will lapse as of immediately prior to the change in control.
Under the Predecessor Plan, a change in control includes, in general, (i) a person’s or group’s acquisition of more than 50% of the total combined voting power of our outstanding securities, (ii) certain changes to the composition of our Board of Directors, (iii) the consummation by the Company of certain mergers, consolidations, reorganizations, business combinations, asset sales or acquisitions, and (iv) a stockholder-approved liquidation or dissolutions of the Company.
Term
The Predecessor Plan became effective on June 13, 2006 and was terminated on the effective date of the 2013 Plan. No awards may be made under the Predecessor Plan after its termination date, but awards granted prior to such date that extend beyond such date will continue to be subject to the terms of the Predecessor Plan.
U.S. Federal Income Tax Consequences Relating to the 2013 Plan and the Predecessor Plan
The following summary of the federal income tax consequences of the awards granted under the 2013 Plan and the Predecessor Plan does not purport to be complete, and does not discuss non-U.S., state or local tax consequences or additional guidance that is expected to be issued by the Treasury Department under Section 409A of the Code.
The grant of a non-qualified stock option under the 2013 Plan or the Predecessor Plan will not result in any federal income tax consequences to the option holder or to the Company. Upon exercise of a non-qualified stock option, the option holder is subject to income taxes at the rate applicable to ordinary compensation income on the difference between the option exercise price and the fair market value of the shares at the time of exercise. This income is subject to withholding for federal income and employment tax purposes. The Company is entitled to an income tax deduction in the amount of the income recognized by the option holder, subject to possible limitations imposed by Section 162(m) and so long as the Company withholds the appropriate taxes with respect to such income (if required) and the option holder’s total compensation is deemed reasonable in amount. Any gain or loss on the option holder’s subsequent
disposition of the shares will receive long or short-term capital gain or loss treatment, depending on whether the shares are held for more than one year following exercise. The Company does not receive a tax deduction for any such gain.
The grant of an incentive stock option under the 2013 Plan or the Predecessor Plan will not result in any federal income tax consequences to the option holder or to the Company. An option holder recognizes no federal taxable income upon exercising an incentive stock option (subject to certain alternative minimum tax rules), and the Company receives no deduction at the time of exercise. In the event of a disposition of shares acquired upon exercise of an incentive stock option, the tax consequences depend upon how long the option holder has held the shares. If the option holder does not dispose of the shares within two years after the incentive stock option was granted, nor within one year after the incentive stock option was exercised, the option holder will recognize a long-term capital gain (or loss) equal to the difference between the sale price of the shares and the exercise price. The Company is not entitled to any deduction under these circumstances. If the option holder fails to satisfy either of the foregoing holding periods (referred to as a “disqualifying disposition”), he or she must recognize ordinary income in the year of the disposition. The amount of such ordinary income generally is the lesser of (i) the difference between the amount realized on the disposition and the exercise price or (ii) the difference between the fair market value of the shares at the time of exercise and the exercise price. Any gain in excess of the amount taxed as ordinary income will be treated as a long- or short-term capital gain, depending on whether the shares were held for more than one year. The Company, in the year of the disqualifying disposition, is entitled to a deduction equal to the amount of ordinary income recognized by the option holder, subject to possible limitations imposed by Section 162(m) and so long as the option holder’s total compensation is deemed reasonable in amount.
Federal income tax consequences of other awards that may be granted under the 2013 Plan or the Predecessor Plan are generally as follows: nontransferable restricted stock subject to a substantial risk of forfeiture within the meaning of Section 83 of the Code results in the recognition of ordinary income equal to the excess of the fair market value over the price paid (if any) only at the time the restrictions lapse (unless the participant is retirement eligible or elects to accelerate recognition as of the date of grant); stock appreciation rights, cash and stock-based performance awards, dividend equivalent rights, RSUs, and other types of awards are generally subject to tax at the time of payment; and compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, the Company is generally entitled to a corresponding deduction at the time the participant recognizes income, subject to possible limitations imposed by Section 162(m) and so long as the Company withholds the appropriate taxes with respect to such income (if required) and the participant’s total compensation is deemed reasonable in amount.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of January 28, 2017 about compensation plans under which our equity securities are authorized for issuance:
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Equity Compensation Plan Information
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Number of
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Number of
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securities to be
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securities
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issued upon
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Weighted average
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remaining
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exercise of
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exercise price of
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available for
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outstanding
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outstanding
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future issuance
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options,
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options,
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under equity
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Plan category
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warrants and rights
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warrants and rights
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compensation plans
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Equity compensation plans approved by security holders(1)
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1,062,502
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$
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16.66
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(2)
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373,077
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Equity compensation plans not approved by security holders(3)
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30,000
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$
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14.03
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—
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Total
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1,092,502
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$
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16.59
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373,077
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(1)
Represents shares reserved under the 2013 Plan as of January 28, 2017.
(2)
Excludes restricted stock awards and performance stock unit awards, which have no associated exercise price.
(3)
Represents outstanding awards granted outside of the Predecessor Plan or the 2013 Plan, consisting of a stock option award to purchase up to 30,000 shares of our common stock granted to Mr. Boling in connection with his hire and appointment as our Chief Financial Officer in March 2013, which has an exercise price of $14.03 per share and a contractual term of seven years and vests in equal annual installments over three years beginning on the first anniversary of the date of grant, subject to continued service through each vesting date and accelerated vesting under certain circumstances.