Cherokee maps plan with its creditors for bankruptcy petition.

Sunland-based Cherokee Inc. is expected to file a prepackaged plan for Chapter 11 bankruptcy protection and emerge by June with a lighter debt load, after creditors last week indicated support for a complex debt for equity swap plan.

By the April 21 voting deadline, most Cherokee creditors had approved the proposed debt for equity restructuring. The apparel company needed approval from 98 percent of the bondholders in order to avoid a Chapter 11 filing, and by press time that seemed unlikely.

However, approval of the proposed prepackaged bankruptcy plan will allow officials to gain Chapter 11 bankruptcy protection and restructure $100 million in debt -- mostly junk bonds incurred in a 1989 leveraged buyout financed by the now defunct Drexel Burnham Lambert Inc.

Interestingly, under the proposed reorganization, two former Drexel employees -- who now manage the assets of a major Cherokee creditor -- would become company directors.

However, whether the company's fiscal overhaul will translate into a profitable Cherokee, an apparel and shoe manufacturer which targets women consumers, with healthy sales remains to be seen, an analyst said.

Earlier this year, Cherokee announced it had posted a $5.1 million loss for its fiscal second quarter compared with a loss of $1.43 million for the same quarter the previous year. The company's sales for the quarter, which ended Nov. 28, also nose-dived 26 percent to $32.2 million from $43.5 million the previous year.

The restructuring is designed to drop the company's debt and preferred stock obligations from approximately $190 million to $90 million and slash annual interest and dividend payments from $27 million per year to $11 million.

To keep Cherokee from filing a prepackaged Chapter 11 bankruptcy plan, the company would have needed 98 percent of debt holders to approve the reorganization plan -- an unlikely event, said Cary Cooper, chief financial officer for Cherokee Inc.

As a result, Cooper said the fiscally troubled company, which is not yet in Chapter 11, is expected to restructure through a prepackaged Chapter 11 bankruptcy filing, which officials said speeds up the bankruptcy process.

"We are confident we will get sufficient votes which will enable us to file the prepackaged Chapter 11 for both Inc. and Group," said Cooper, who is CFO for Cherokee Inc., last week. The parent company was created in the LBO and its subsidiary is Cherokee Group, which was organized in 1973.

As a result, the restructured company could emerge by the first week of June, Cooper said.

"I haven't heard of any major problems that would keep this thing from flying," said Paul Aronzon, an attorney with the Los Angeles office of Milbank, Tweed, Hadley & McCloy, who represents Cherokee. "The plan is put together and it's solid. You're going to see a deleveraged company with a strong product."

The company went public in 1991 at $6.50 per share and now trades at about 63 cents per share. Cherokee currently employs 636 people and markets clothes and shoes, mostly targeted to women, through nearly 8,000 retail stores.

Under the reorganization plan, some creditors would swap debt for new debt, but the majority of creditors would swap their debt for 77 percent of the company's common stock. The remaining 23 percent of company stock would be divided up among existing equity holders and current company management.

Joseph Radecki, director of financial restructuring for L.A.-based brokerage Jefferies & Co., Cherokee's financial adviser, said 15 percent of that 23 percent would go to company employees and Robert Margolis, who will serve as the new chairman after the restructuring.

The remaining 8 percent will be owned by current common stock shareholders, including public shareholders and a group led by Jeffrey S. Deutschman, a director of the company and managing director of Aurora Capital Partners, a merchant banking firm in Santa Monica.

Deutschman, 36, who would not comment for this story, led the $174 million LBO of Cherokee in 1989. Drexel financed the deal and afterward its partnerships took a 70 percent equity stake in the company.

Former Drexel employees are now playing a major role in the company's restructuring.

Radecki said Leon Black, a former merger and acquisition specialist at Drexel, who now runs Apollo Advisers, is a company creditor and controls a portion -- he would not say how much -- of the 77 percent of stock owned by creditors.

However, Steve Mayer, an investment banker with Lion Advisors in Century City, said Apollo and Lion, which are affiliated, will jointly manage a fund which will own 15 percent of the 77 percent of creditors' stock. He declined to say who owned the fund.

However, a major bondholder of Cherokee was Executive Life Insurance Co., part of the Los Angeles-based First Executive Corp. Executive Life's assets were acquired last year by the French company Altus Finance, and Apollo advises Altus on its Executive Life assets.

One source, who did not wish to be named, indicated the 15 percent stake would be controlled by Altus.

Another indicator of Drexel's lingering specter at the company: After the restructuring, two new company directors would be John Kissick and Antony Ressler. Kissick, 51, a former Drexel executive, is now with Lion Advisors L.P. in Century City. Ressler, 33, a former Drexel executive, is now with Apollo.

Other directors under the reorganized Cherokee: 45-year-old Margolis would become chairman; James P. Argyropoulos, 49, who founded the company in 1972 in West L.A., would become a director, and Deutschman would remain a director.

"You won't be seeing a brand new Cherokee, the company remains the same" after the restructuring, said Radecki with Jefferies. "But Cherokee will be a much more stable company with a stronger capital base."

However, even the reorganization of the company's burdensome junk bond debt may not be enough to increase company vitality and boost sales.

Paul Davner, a senior analyst with BDS Securities Corp. in New York, called the restructuring a "positive" for the company but added that "for things to work going forward, the company needs to attain a strong level of growth, sales and profitability."

He said predictions about Cherokee's future were "a tough call."