Former Loan Agreement with U.S. Bank
On February 16, 2011, Cherokee and U.S. Bank National Association (“U.S. Bank”) entered into a Term Loan Agreement which was restated on December 7, 2011. The restated loan agreement consisted of (i) a term loan in the principal amount of $5,000,000 and a two year maturity date and (ii) a term loan in the principal amount of $2,000,000 and a four year maturity. On June 5, 2012, Cherokee prepaid all outstanding principal and interest on the restated loan agreement. As a result, Cherokee currently has no outstanding borrowings under the Term Loan Agreement with U.S. Bank.
Credit Agreement with JPMorgan Chase
On September 4, 2012, and in connection with the Acquisition, Cherokee and JPMorgan Chase entered into the Credit Agreement. Pursuant to the Credit Agreement, JPMorgan Chase agreed to lend to Cherokee up to $15 million in principal (the “Loan”). The Loan is comprised of (i) a term loan in the principal amount of $13 million (the “Term Loan”), with interest on each advance equal to either: (i) an adjusted annual LIBOR rate reset monthly, bi-monthly or quarterly, plus 2.75% or (ii) JPMorgan’s annual prime rate minus 0.25%, with a floor equal to the 1 month LIBOR Rate plus 2.5%, and (ii) a revolving line of credit in the principal amount of $2 million (the “Revolver”), with interest on each advance equal to either: (i) an adjusted annual LIBOR rate
reset monthly, bi-monthly or quarterly, plus 2.25% or (ii) JPMorgan’s annual prime rate minus 0.5%, with a floor equal to the 1 month LIBOR Rate plus 2.5%. The Term Loan is subject to a five year maturity date and is to be repaid in equal quarterly payments of principal in the amount of $650,000, together with interest payments made monthly as set forth in the Term Loan. The Revolver is subject to a three year maturity date and is to be repaid in monthly interest payments on any principal then outstanding, with the balance of any then-outstanding principal and interest to be repaid at maturity. Cherokee paid an upfront fee equal to $65,000 in connection with the issuance of the Term Loan and is obligated to pay a monthly non-usage fee of 0.25% per annum, in arrears, computed on the average daily unused portion of the Revolver, subject to Cherokee’s right to terminate the Revolver prior to maturity. In addition, Cherokee is obligated to pay an unspecified amount to be determined by JPMorgan Chase to compensate it for its loss in the event that Cherokee elects to repay all or a portion of the Loan prior to its maturity. The proceeds from the Term Loan were borrowed to fund the Acquisition.
The Loan is evidenced by a term note in the principal amount of $13,000,000 and a line of credit note in the principal amount of up to $2,000,000, is secured by continuing security agreements and trademark security agreements executed by Cherokee and Cherokee Brands, LLC and is supported by continuing guaranties executed by Cherokee’s wholly owned subsidiaries, Spell C. LLC and Cherokee Brands, LLC (collectively, with the Credit Agreement, the “Loan Documents”). The Credit Agreement contains various affirmative and negative covenants that are customary for loan agreements and transactions of this type, including limitations on our ability to incur debt or other liabilities and limitations on our ability to consummate acquisitions in excess of $5,000,000 in the aggregate at any time while the Loan is outstanding. In addition, the Credit Agreement prohibits us, without first obtaining JPMorgan’s consent, from (i) issuing any equity securities other than pursuant to our employee equity incentive plans and (ii) repurchasing or redeeming any outstanding shares of our common stock or paying dividends or other distributions, other than stock dividends, to our stockholders, unless such repurchases or other distributions would not cause us to be in violation of the “fixed charge coverage ratio” (described below) after giving pro forma effect thereto. The Loan Agreement also imposes the following financial covenants, as specifically defined therein, including: (i) a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 to be calculated quarterly on a trailing four quarter basis and (ii) a limitation of Cherokee’s “senior funded debt ratio” not to exceed 2.0 to 1.0, measured at any time and based on the ratio of Cherokee’s consolidated total debt to Cherokee’s EBITDA for its most recently completed four-quarter test period. Further, as collateral for the Loan, we granted a security interest in favor of the Bank in all of Cherokee’s assets (including trademarks), and the Loan is guaranteed by Cherokee’s wholly owned subsidiaries, Spell C. LLC and Cherokee Brands, LLC. In the event of a default under the Credit Agreement, JPMorgan Chase has the right to terminate its obligations under the Credit Agreement, accelerate the payment on any unpaid balance of the Credit Agreement and exercise its other rights under the Loan Documents, including foreclosing on our assets under the security agreements. For additional information regarding the Loan Documents, please see Cherokee’s Current Report on Form 8-K dated September 4 and filed with the Commission on September 6, 2012.