Cherokee Files Under Chapter 11 : Apparel: The Sunland-based clothier seeks bankruptcy protection as it presses its debt-reorganization plan.

Cherokee Inc., an apparel maker squeezed by junk bond-laden debt and the recession, said Friday it has filed for Chapter 11 protection under federal bankruptcy laws.

The action was a so-called “prepackaged” filing largely aimed at finalizing a previously announced plan for paring the Sunland-based company’s $190-million debt and preferred-stock obligations to about $90 million.

The action, in U.S. Bankruptcy Court in Delaware, where Cherokee is incorporated, was not unexpected. Cherokee said last month that it might enter bankruptcy court to enact the plan, which calls for creditors to swap a big portion of their claims for a controlling interest in Cherokee’s common stock.

Cherokee said its Chapter 11 stint should be brief, with the company emerging before its fiscal year ends May 31. In the meantime, the company said its operations will continue normally.

Cherokee’s casual, affordably priced jeans, other clothing and shoes are well known to young shoppers across much of the nation, sold mainly through department stores such as Mervyn’s and Sears, Roebuck & Co. But the company became a victim of the leveraged-buyout craze of the 1980s, in which many companies were bought with mostly borrowed cash.

Cherokee was purchased in 1989 for $174 million by a group led by Santa Monica investor Jeffrey Deutschman and apparel veteran Robert Margolis, who are Cherokee’s co-chairmen. The company’s debt includes junk bonds that cost a lofty 15.5% in annual interest.

For three years, Cherokee’s operations threw off enough cash to meet the interest payments, but by fiscal 1992, Cherokee’s operating performance was sagging from the recession and it became increasingly hard to support the debt.

Competition also hurt. The popularity of Levi Strauss & Co.’s Dockers line of casual clothing prompted mass merchants such as Mervyn’s--Cherokee’s largest retail customer--to give more space to the Levi’s line and less to Cherokee’s.

The result: Cherokee lost $8.9 million in fiscal 1992 on sales of $195 million, and in the first half of its current fiscal year, the company lost an additional $9.33 million as six-month sales skidded 25% from a year earlier, to $73.1 million.

After the proposed restructuring is completed, however, Cherokee is confident it can survive. “The business is performing well enough to cover the new debt load,” said Cary Cooper, chief financial officer.

One of Cherokee’s big creditors also voiced optimism. “We expect the company to perform under a de-leveraged capital structure quite successfully,” said Tony Ressler, a partner of Lion Advisors, a Los Angeles money manager for Altus Finance, a French investment firm that is a major holder of Cherokee’s junk bonds. (Altus got the bonds last year, when it led a French investment group that bought failed Executive Life Insurance Co.)

Cherokee said most of the creditors--including mutual-fund companies Franklin, Keystone and American Express Co.’s IDS Financial Services--have approved the reorganization plan, but that it needs the bankruptcy court to finalize the proposal for all of the creditors.

Under the plan, holders of Cherokee’s debt and preferred stock in effect would exchange much of their claims for 87% of the company’s common stock. Management would retain 5% and Cherokee’s public stockholders would keep 8% of the common shares.

(Cherokee had sold a minority equity stake back to the public in June, 1991, for $6.50 a share. The stock now trades for less than $1 on the NASDAQ market.)

At the same time, Cherokee’s overall total of debt and preferred-stock obligations would be halved, to about $90 million, and annual interest and dividend payments on those securities would be cut to $11 million from $27 million.

Cherokee also said its banks have agreed to extend for one year the deadline for repayment of its bank debt, which totals about $43 million, to May, 1995.