UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number: 0-26430
TARRANT APPAREL GROUP
(Exact name of registrant as specified in its charter)
California 95-4181026
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3151 East Washington Boulevard
Los Angeles, California 90023
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (323) 780-8250
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [_] No [X]
As of June 28, 2002, the aggregate market value of the Common Stock
held by non-affiliates of the Registrant was approximately $38,126,931 based
upon the closing price of the Common Stock on that date.
Number of shares of Common Stock of the Registrant outstanding as of
March 15, 2003: 15,846,315.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the 2003 Annual Meeting are incorporated by reference into Part
III of this Report. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than April 30, 2003.
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This 2002 Annual Report on Form 10-K contains statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements include statements regarding our
intent, belief or current expectations. Prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, our ability to profitably manage a
vertically integrated sourcing and distribution business, the financial strength
of our major customers, the continued acceptance of our existing and new
products by our existing and new customers, dependence on key customers, the
risks of foreign manufacturing, competitive and economic factors in the textile
and apparel markets, the availability of raw materials, the ability to manage
growth, weather-related delays, dependence on key personnel, general economic
conditions, China's entry into WTO, global manufacturing costs and restrictions,
and other risks and uncertainties that may be detailed herein. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results."
ITEM 1. BUSINESS
GENERAL
Tarrant Apparel Group is a leading provider of private label casual
apparel, serving specialty retail, mass merchandise and department store chains
and major international brands located primarily in the United States by
designing, merchandising, contracting for the manufacture of, manufacturing
directly and selling casual, moderately- priced apparel for women, men and
children. Since 1988, when we began designing and supplying private label denim
jeans to a single specialty retail store chain, we have successfully expanded
our product lines and customer base to service over 25 customers during 2002.
Since 1999, we have transformed Tarrant from sourcing apparel solely from
contract manufacturers in the Far East to also being a vertically integrated
manufacturer in Mexico, where we operate cutting, sewing, washing and finishing
facilities. Our current products are manufactured in a variety of woven and knit
fabrications and include jeans wear, casual pants, t-shirts, shorts, blouses,
shirts and other tops, dresses and jackets. See " --Products and --Customers."
We achieved a compound annual growth rate in net sales of approximately
19% from $205 million in 1995 to $395 million in 1999. In 2000, our net sales
remained flat. In 2001, our net sales decreased by 16.4% to $330 million. In
2002, our net sales increased by 5.2% to $347 million as compared with 2001, but
this growth included $77 million in net sales of United Apparel Ventures, LLC,
an entity in which we have a 50.1% ownership interest and consolidate 100% of
its revenues. See "--Acquisitions-General." In 2001 and 2002, we experienced a
net loss of $2.9 million and $1.2 million, respectively, before cumulative
effect of accounting change, and $2.9 million and $6.1 million, respectively,
after cumulative effect of accounting change. See "Item 7. Management's
Discussion and Analysis of Financial Condition of Results of Operations."
At inception, we relied primarily on independent contract manufacturers
located primarily in the Far East. Commencing in the third quarter of 1997, and
taking advantage of the North American Free Trade Agreement, or NAFTA, we
substantially expanded our use of independent cutting, sewing and finishing
contractors in Mexico, primarily for basic garments. Commencing in 1999, and
concluding in December 2002 with the purchase of a denim and twill manufacturing
plant in Tlaxacala, Mexico,
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we engaged in an ambitious program to develop a vertically integrated
manufacturing operation in Mexico while maintaining our sourcing operation in
the Far East. We believe that the dual strategy of maintaining independent
contract manufacturers in the Far East and operating manufacturing facilities in
Mexico can best serve the different needs of our customers and enable us to
capitalize on advantages offered by both markets. We believe this diversified
approach also helps to mitigate the risks of doing business abroad, such as
transportation delays, economic and political instability, currency
fluctuations, restrictions on the transfer of funds and the imposition of
tariffs, export duties, quota, and other trade restrictions.
Major apparel retailers are increasingly outsourcing apparel
merchandise management programs to minimize inventory risks, increase
profitability and return on investment, and enable them to replenish inventory
rapidly. Many retailers are also consolidating the number of their suppliers to
ensure the best service and the volume required for lower cost products. We
believe that both our sourcing operation in the Far East and our Mexican
manufacturing operations are well positioned to capitalize on these trends.
The continuing predominance of casual wear in the workplace and the
emphasis on a casual, active lifestyle has increased the demand for casual,
moderately priced, private label products. We believe our flexibility to produce
both denim and twill products in Mexico, and our sourcing ability in the Far
East, can satisfy the different requirements of our various customers. See
"--Products."
We have entered into a program of sharing Mexican production facilities
with Azteca Production International Inc. ("Azteca"), a company owned by the
brothers of Gerard Guez, the Chairman of the Company, which we believe will
improve utilization of our facilities, lower unit costs, and favorably impact
margins for apparel products sourced from Mexico. In order to manage the shared
utilization, new procedures have been adopted, which we believe will maintain
control and appropriately allocate costs.
China's entry into the World Trade Organization ("WTO") may pose
serious challenges to Mexican products due to the elimination of U.S. quotas on
Chinese apparel products in 2005. Because we still maintain a strong sourcing
operation in the Far East, we believe we will be able to take advantage of
improved pricing from China. Our Mexican operation will continue to maintain its
competitiveness due to the tariff advantages afforded by NAFTA. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BUSINESS STRATEGY
We believe that the following trends are currently affecting apparel
retailing and manufacturing:
o The continued predominance of casual apparel in the workplace
and the emphasis on a casual, active lifestyle, have increased
the demand for casual, moderately priced private label
products.
o Consolidation among apparel retailers has increased their
ability to demand value-added services from apparel
manufacturers, including fashion expertise, rapid response,
just-in-time delivery, Electronic Data Interchange and
favorable pricing.
o Increased competition among retailers due to consolidation has
resulted in an increased demand for private label apparel,
which generally offers retailers higher margins and permits
them to differentiate their products.
o The current fashion cycle requires more design and product
development, in addition to quickly responding to emerging
trends. Apparel manufacturers that offer these capabilities
are in demand.
3
o From the end of 2000 through 2002, the U.S. economy
experienced an economic downturn, which was exacerbated by the
events of September 11, the potential threat of a war in the
Middle East and the threat of terrorism.
We believe that we have the capabilities to take advantage of these
trends and to become a principal value-added supplier of casual, moderately
priced, private label apparel due to the following:
DESIGN EXPERTISE. As one of the very few sourcing companies with our
own design team, we believe that we have established a reputation with our
customers as a fashion resource and manufacturer that is capable of providing
design assistance to customers in the face of rapidly changing fashion trends.
RESEARCH AND DEVELOPMENT CAPABILITIES. We believe our design team and
our two sample rooms in Mexico and China have made significant contributions to
customers in developing new fabrics, washes and finishes.
SAMPLE-MAKING AND MARKET-TESTING CAPABILITIES. We seek to support
customers with our design expertise, sample-making capability and ability to
rapidly produce small test orders of products.
ON-TIME DELIVERY. We have developed a diversified network of
international contract manufacturers and fabric suppliers which, together with
our vertically integrated Mexican manufacturing operations, enable us to accept
orders of varying sizes and delivery schedules and to produce a broad range of
garments at varying prices depending upon lead time and other requirements of
the customer. We believe our Mexican operation has the added geographical
advantage of being capable of delivering large quantities of garments to
retailers in the United States with much shorter lead-times than would be
available if sourced outside of North America.
QUALITY AND COMPETITIVELY PRICED PRODUCTS. While we continue to
maintain a quality sourcing operation in the Far East, we have also developed a
vertically integrated manufacturing operation in Mexico. We believe that this
strategy has increased our sales capacity, increased our control over the
production process, improved quality control and shortened lead times.
PRODUCT DIVERSIFICATION. Our modern spinning and weaving equipment in
Mexico has the flexibility to produce both denim and twill garments. See
"--Products".
REDUCED PRODUCTION COSTS. We believe we have put strategies in place to
maintain a low cost structure in this period of uncertainty. We have continued
to take steps to lower production costs in Mexico. To maximize utilization, we
have agreed to share appropriate production capacity with Azteca Production
International Inc., to eliminate duplicate overhead.
ACQUISITIONS --GENERAL
UNITED APPAREL VENTURES
On July 1, 2001, we formed an entity to jointly market, share certain
risks and achieve economies of scale with Azteca Production International, Inc.,
called United Apparel Ventures, LLC. This entity was created to coordinate the
production of apparel for a single customer of our branded business. UAV is
owned 50.1% by Tag Mex, Inc., our wholly owned subsidiary, and 49.9% by Azteca.
The results of UAV have been consolidated into our results commencing July 2001
with the minority partner's share of earnings (losses) provided for in our
financial statements. Since October, 2002, both parties contributed the Express
relationship and future orders into this entity.
4
ACQUISITIONS--VERTICAL INTEGRATION
In December 2002, we acquired, through our subsidiaries, a denim and
twill manufacturing plant in Tlaxacala, Mexico, including all machinery and
equipment used in the plant, the buildings, and the real estate on which the
plant is located. We made the acquisition pursuant to an Agreement for the
Purchase of Assets and Stock, dated as of December 31, 2002, by and among us and
certain of our subsidiaries, Trans Textil International, S.A. de C.V.,
Inmobiliaria Cuadros, S.A. de C.V., Rosa Lisette Nacif Benavides, Gazi Nacif
Borge, Jorge Miguel Echevarria Vazquez, and Kamel Nacif Borge. Pursuant to the
purchase agreement, we acquired from Trans Textil all of the machinery and
equipment used in and located at the plant, and acquired from Jorge Miguel
Echevarria Vazquez and Rosa Lisette Nacif Benavides, all the issued and
outstanding capital stock of Inmobiliaria, which owns the buildings and real
estate. The purchase price for the machinery and equipment was paid by
cancellation of $42 million in indebtedness owed by Trans Textil to us. The
purchase price for the Inmobiliaria shares consisted of a nominal cash payment
to the Inmobiliaria shareholders of $500, and the subsequent repayment by us and
our affiliates of approximately $34.7 million in indebtedness of Inmobiliaria to
Kamel Nacif Borge, his daughter Rosa Lisette Nacif Benavides, and certain of
their affiliates. The repayment of this indebtedness was made by: (a) delivery
to Rosa Lisette Nacif Benavides of one hundred thousand shares of a newly
created, non-voting Series A Preferred Stock of Tarrant, which will become
convertible into three million shares of common stock if our common shareholders
approve the conversion at our 2003 annual shareholders meeting; (b) delivery to
Rosa Lisette Nacif Benavides of an ownership interest representing twenty- five
percent of the voting power of and profit participation in our subsidiary,
Tarrant Mexico, S. de. R.L. de C.V.; and (c) cancellation of approximately $14.9
million of indebtedness of Mr. Nacif and his affiliates.
With the acquisition of the plant in Tlaxacala, we completed our
four-year plan to vertically integrate our business in Mexico. Key elements of
this strategy included (i) establishing cutting, sewing, washing, finishing,
packing, shipping and distribution activities in company-owned facilities and
through the acquisition of established contractors, and (ii) establishing a
fabric production capability through the acquisition of established textile
mills and the construction of new mills. Our vertical integration efforts
included the following:
o In March 2001, we acquired a sewing facility located in
Ajalpan, Mexico for $11 million. The facility contains 98,702
square feet and eight sewing lines containing up to 840 sewing
machines, which can generate a maximum capacity of six million
units per year. The assets acquired included land, buildings
and all equipment, in addition to a trained labor force in
place of approximately 2,000 employees.
o On June 2000, we signed an exclusive production agreement with
Manufactures Cheja through February 2002. We have agreed on a
new contract to extend the agreement for an additional
quantity of 6.4 million units beginning April 1, 2002, which
was amended on November 8, 2002, for the manufacturing of 5.7
million units through September 30, 2004. We have unrecouped
advances to Cheja of approximately $2.9 million related to the
production agreement to be recouped out of future production.
o In August 1999, we acquired Industrial Exportadora Famian,
S.A. de C.V. and Coordinados Elite, S.A. de C.V., both Mexican
corporations, which operated seven apparel production
facilities in and near Tehuacan, Mexico. The purchase price
consisted of (i) $1,000,000 cash, (ii) a $3,000,000
non-interest bearing promissory note, and (iii) $8,000,000
payable in installments through September 30, 2002. During
2000, we invested approximately $6 million to increase
capacity at Grupo Famian by expanding six sewing facilities
consisting of approximately 46,000 square feet and 6 sewing
lines. As a result, total sewing capacity has been increased
to 220,000 units per week, and laundry and finishing capacity
has been increased to 200,000 units per week.
5
o In April 1999, we acquired a denim mill located in Puebla,
Mexico. The purchase price consisted of $22.0 million in cash
and 1,724,000 shares of our common stock, which was valued at
$45.3 million.
We believe that our production capabilities in Mexico will reduce
product costs, allow us to better control production variances, and make us more
competitive in today's apparel industry. These operations, however, are subject
to the customary risks associated with owning a manufacturing business,
including the maintenance and management of manufacturing facilities, equipment,
employees and inventories. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors That May Affect Future
Results."
PRODUCTS
Women's jeans historically have been, and continue to be, our principal
product. In recent years, we have expanded our sales of moderately priced
women's apparel to include casual, denim and non-denim, including twill, woven
tops and bottoms, and in 1998, we commenced the sale of men's and children's
apparel. Our women's apparel products currently include jeans wear, casual
pants, t-shirts, shorts, blouses, shirts and other tops, dresses and jackets.
These products are manufactured in petite, standard and large sizes and are sold
at a variety of wholesale prices generally ranging from less than $4.00 to over
$20.00 per garment.
Over the past three years, approximately 68% of net sales were derived
from the sale of pants and jeans, approximately 10% from the sale of shorts and
approximately 5% from the sale of shirts. The balance of net sales consisted of
sales of skirts, dresses, jackets and other products.
While denim continues to be in strong demand, our modern spinning and
weaving equipment in Mexico has the flexibility to produce both denim and twill.
In the ordinary course of our business, we regularly evaluate new
markets and potential acquisitions. Presently, we believe that numerous
opportunities exist to move into new markets and make acquisitions due, in part,
to the adverse effect on the earnings of many apparel companies resulting from
the recent decline in retail sales, and due to consolidation among retailers.
CUSTOMERS
We generally market our products to high-volume retailers that we
believe can grow into major accounts. By limiting our customer base to a select
group of larger accounts, we seek to build stronger long-term relationships and
leverage our operating costs against large bulk orders. Although we continue to
diversify our customer base, the majority of any growth in sales is expected to
come from existing customers.
6
The following table shows the percentage of our net sales in fiscal
years 2000, 2001 and 2002 attributable to each customer that accounted for more
than 5% of net sales.
PERCENTAGE OF NET SALES
------------------------------
CUSTOMER 2000 2001 2002
- --------------------- ------- ------- --------
The Limited (1).......................... 44.2 22.8 22.6
Lane Bryant (2).......................... -- 20.5 17.6
Tommy Hilfiger........................... -- 7.8 17.4
Walmart.................................. 9.1 12.2 9.7
Mervyn's................................. -- 7.9 7.3
- ----------
(1) Includes Express, Lerner New York and Limited stores, and includes Lane
Bryant in 2000.
(2) Owned by The Limited in 2000, and by Charming Shoppes in 2001 and 2002.
In the same periods, virtually all of our sales were of private label
apparel and several major international brands. We currently serve over 25
customers, which, in addition to those identified above, include K-Mart,
Kohl's', Sears, Abercrombie & Fitch, Northern Reflection, and J.C. Penney.
Additionally, we manufacture branded merchandise for several major designers.
We do not have long-term contracts with any of our customers and,
therefore, there can be no assurance that any customer will continue to place
orders with us of the same magnitude as it has in the past, or at all. In
addition, the apparel industry historically has been subject to substantial
cyclical variation, with consumer spending for purchases of apparel and related
goods tending to decline during recessionary periods. To the extent that these
financial difficulties occur, there can be no assurance that our financial
condition and results of operations would not be adversely affected. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results."
DESIGN, MERCHANDISING AND SALES
While many private label producers only arrange for the bulk production
of styles specified by their customers, we not only design garments, but also
assist some of our customers in market testing new designs. We believe that our
design, sample-production and test-run capabilities give us a competitive
advantage in obtaining bulk orders from our customers. We also often receive
bulk orders for garments we have not designed because many of our customers
allocate bulk orders among more than one producer.
We have developed integrated teams of design, merchandising and support
personnel, some of whom serve on more than one team, that focus on designing and
producing merchandise that reflects the style and image of their customers.
Teams generally are divided between import and domestic sourcing operations.
Each team is responsible for all aspects of its customer's needs,
including designing products, developing product samples and test items,
obtaining orders, coordinating fabric choices and procurement, monitoring
production and delivering finished products. The team seeks to identify
prevailing fashion trends that meet its customer's retail strategies and design
garments incorporating those trends. The team also works with the buyers of its
customer to revise designs as necessary to better reflect the style and image
that the customer desires to project to consumers. During the production
process, the team is responsible for informing the customer about the progress
of the order, including any difficulties that might affect the timetable for
delivery. In this way, our customer and we can make appropriate arrangements
regarding any delay or other change in the order. We believe that this team
7
approach enables our employees to develop an understanding of the customer's
distinctive styles and production requirements in order to respond effectively
to the customer's needs. During 2000, we opened an office in Bentonville,
Arkansas to support this approach and better service the needs of Wal-Mart. We
also operate a similar office in Columbus, Ohio for The Limited, which opened in
1999.
As part of our merchandising strategy, we produce, at our own expense,
four collections a year from Hong Kong and Mexico embodying new designs and
fabrics. We produce samples at our facilities in Guangdong Province, China, Hong
Kong and Mexico. The facilities in China and Mexico currently furnish the
majority of our sample requirements.
From time to time and at scheduled seasonal meetings, we present these
samples to the customer's buyers who determine which, if any, of the samples
will be produced on a test run or a bulk scale. Samples are often presented in
coordinated groupings or as part of a product line. Some customers, particularly
specialty retail stores such as divisions of The Limited, may require that a
product be tested before placing a bulk order. Testing involves the production
of as few as several hundred copies of a given sample in different size, fabric
and color combinations. The customer pays for these test items, which are placed
in selected stores to gauge consumer response. The production of test items
enables our customers to identify garments that may appeal to consumers and also
provides us with important information regarding the cost and feasibility of the
bulk production of the tested garment. If the test is determined to be
successful, we generally receive a significant percentage of the customer's
total bulk order of the tested item. In addition, as is typical in the private
label business, we receive bulk production orders to produce merchandise
designed by our competitors or other designers, since most customers allocate
bulk orders among a number of suppliers.
SOURCING
GENERAL
When bidding for or filling an order, our international sourcing
network enables us to choose from among a number of suppliers and manufacturers
based on the customer's price requirements, product specifications and delivery
schedules. Historically, we manufactured our products through independent
cutting, sewing and finishing contractors located primarily in Hong Kong and
China, and have purchased our fabric from independent fabric manufacturers with
weaving mills located primarily in Hong Kong and China. In recent years, we have
expanded our network to include suppliers and manufacturers located in a number
of additional countries, including Thailand, Egypt and Mexico. Most recently,
Mexico, through our vertical integration strategy, has become the source for
more than 50% of our merchandise. Key elements of our sourcing strategy include
(i) continuing to maintain our strong sourcing ability in the Far East, and (ii)
continuing to expand our production of basic denim and twill products in Mexico.
The following table sets forth the percentage of our merchandise, on the basis
of the free on board cost at the supplier's plant, or FOB Basis, by country for
the periods indicated:
2000 2001 2002
------- ------- -------
INTERNATIONAL SOURCING:
Hong Kong and China ...... 30.1 % 29.3 % 25.3 %
Other (1) ................ 11.7 % 9.5 % 13.3 %
DOMESTIC SOURCING:
United States ............ 7.5 % 9.3 % 6.1 %
Mexico and Central America 50.7 % 51.9 % 55.3 %
----------
(1) In 2002, such countries consisted of Thailand, Egypt,
Bangladesh, Macau, Mongolia and Nepal.
8
DEPENDENCE ON CONTRACT MANUFACTURERS
The use of contract manufacturers and the resulting lack of direct
control over the production of our products could result in our failure to
receive timely delivery of products of acceptable quality. Although we believe
that alternative sources of cutting, sewing and finishing services are readily
available, the loss of one or more contract manufacturers could have a
materially adverse effect on our results of operations until an alternative
source can be located and commence producing our products. Therefore, we have
reduced our reliance on outside third party contractors through our Mexico
vertical integration strategy. Our principal fabric supply is through facilities
in Puebla and Tlaxcala, Mexico, both of which we own. Garment production is
predominantly done in Grupo Famian and Ajalpan, both owned by us, supplemented
by Manufactures Cheja and Azteca's cutting, washing, and finishing facilities
through our United Apparel Ventures joint venture. All international sourcing is
still manufactured by independent cutting, sewing and finishing contractors. See
"-- Acquisitions - Vertical Integration."
Although we monitor the compliance of our independent contractors with
applicable labor laws, we do not control our contractors or their labor
practices. The violation of federal, state or foreign labor laws by one of our
contractors can result in us being subject to fines and our goods, which are
manufactured in violation of such laws, being seized or their sale in interstate
commerce being prohibited. From time to time, we have been notified by federal,
state or foreign authorities that certain of our contractors are the subject of
investigations or have been found to have violated applicable labor laws. To
date, we have not been subject to any sanctions that, individually or in the
aggregate, have had or could have a material adverse effect upon us, and we are
not aware of any facts on which any such sanctions could be based. There can be
no assurance, however, that in the future we will not be subject to sanctions as
a result of violations of applicable labor laws by our contractors, or that such
sanctions will not have a material adverse effect on us. In addition, our
customers require strict compliance by their apparel manufacturers, including
us, with applicable labor laws. To that end, we are regularly inspected by some
of our major customers. There can be no assurance that the violation of
applicable labor laws by one of our contractors will not have a material adverse
effect on our relationship with our customers.
Except for our production management agreement for operating the twill
mill near Puebla, Mexico, we do not have any long-term contracts with
independent fabric suppliers. The loss of any of our major fabric suppliers
could have a material adverse effect on our financial condition and results of
operations until alternative arrangements are secured. The impact of such a loss
may be offset in part by the acquisition or development of fabric mills and
production facilities in Mexico. See " --Acquisitions--Vertical Integration."
DIVERSIFIED PRODUCTION NETWORK
We believe that we have the ability, through our production network, to
operate on production schedules with lead times as short as 45 days. Typically,
our specialty retail customers attempt to respond quickly to changing fashion
trends and are increasingly less willing to assume the risk that goods ordered
on long lead times will be out of fashion when delivered. These retailers,
including divisions of The Limited, frequently require production schedules with
lead times ranging from 30 to 120 days. Although mass merchandisers, such as
Wal-Mart, are beginning to operate on shorter lead times, they are occasionally
able to estimate their needs as much as six months to nine months in advance for
"program" business--basic products that do not change in style significantly
from season to season. Our ability to operate on production schedules with a
wide range of lead times helps us to meet our customers' varying needs.
By allocating an order among different manufacturers, we seek to fill
the high-volume orders of our customers, while meeting their delivery
requirements. Upon receiving an order, we determine which
9
of our suppliers and manufacturers (both owned and third party contractors) can
best fill the order and meet the customer's price, quality and delivery
requirements. We consider, among other things, the price charged by each
manufacturer and the manufacturer's available production capacity to complete
the order, as well as the availability of quota for the product from various
countries and the manufacturer's ability to produce goods on a timely basis
subject to the customer's quality specifications. Our personnel also consider
the transportation lead times required to deliver an order from a given
manufacturer to the customer. In addition, some customers prefer not to carry
excess inventory and therefore require that we stagger the delivery of products
over several weeks.
INTERNATIONAL SOURCING
We conduct and monitor our international sourcing operations from our
international offices. At December 31, 2002, we had offices in Hong Kong,
Thailand and Mexico. The staffs at these locations have extensive knowledge
about, and experience with, sourcing and production in their respective regions,
including purchasing, manufacturing and quality control. Several times each
year, members of our senior management, including local staff, visit and inspect
the facilities and operations of our international suppliers and manufacturers.
Foreign manufacturing is subject to a number of risk factors,
including, among other things, transportation delays and interruptions,
political instability, expropriation, currency fluctuations and the imposition
of tariffs, import and export controls, other non-tariff barriers (including
changes in the allocation of quotas), natural disasters and cultural issues. In
addition to these risk factors, we face additional risks arising from the
uncertainty regarding the future status of Hong Kong since resumption of Chinese
sovereignty on July 1, 1997, the continuation of favorable trade relations
between the U.S. and China (in particular the continuation of China's Normal
Trade Relations ("NTR") status for tariff purposes), and the continuation of
economic reform programs in China which encourage private economic activity.
Each of these factors could have a material adverse effect on us.
While we are in the process of establishing business relationships with
manufacturers and suppliers located in countries other than Hong Kong or China,
we still primarily contract with manufacturers and suppliers located primarily
in Hong Kong and China for our international sourcing needs (not including
Mexico), and currently expect that we will continue to do so for the foreseeable
future. Any significant disruption in our operations or our relationships with
our manufacturers and suppliers located in Hong Kong or China could have a
material adverse effect on us.
We commenced manufacturing basic denim and twill products through
independent contractors in Mexico in the second quarter of 1997, and are
continuing to expand our use of manufacturing facilities in this region. From
1999 through 2002, we expanded our Mexico production capabilities, and acquired
several Mexico manufacturing operations. We believe that after absorbing the
high startup costs, risks and overhead associated with the process, the further
diversification of our international sourcing network by increasing the use of
manufacturing facilities in Mexico along with our vertical integration strategy
has (i) reduced our cost of goods, (ii) enhanced the proximity of our sourcing
operations to our customers and our executive offices, thereby improving
delivery times and increasing management's control, and (iii) lessened certain
risks of doing business in the Far East. See "--Acquisitions--Vertical
Integration."
THE IMPORT SOURCING PROCESS
As is customary in the apparel industry, we do not have any long-term
contracts with our manufacturers. During the manufacturing process, our quality
control personnel visit each factory to inspect garments when the fabric is cut,
as it is being sewn and as the garment is being finished. Daily information on
the status of each order is transmitted from the various manufacturing
facilities
10
to our offices in Hong Kong, Mexico and Los Angeles. We, in turn, keep our
customers apprised, often through daily telephone calls and frequent written
reports. These calls and reports include candid assessments of the progress of a
customer's order, including a discussion of the difficulties, if any, that have
been encountered and our plans to rectify them.
We often arrange, on behalf of manufacturers, for the purchase of
fabric from a single supplier. We have the fabric shipped directly to the
cutting factory and invoice the factory for the fabric. Generally, the factories
pay us for the fabric with offsets against the price of the finished goods. For
our longstanding program business, we may purchase or produce fabric in advance
of receiving the order, but in accordance with the customer's specifications. By
procuring fabric for an entire order from one source, we believe that production
costs per garment are reduced and customer specifications as to fabric quality
and color can be better controlled.
The anti-terrorist measures adopted by the U.S. government and in
particular, by the U.S. Customs, have meant more stringent inspection processes
before imported goods are cleared. In some instances, these have caused delays
in the pre-planned delivery of products to customers.
THE MANUFACTURING PROCESS
Through our Mexican subsidiaries, we have become a vertically
integrated apparel manufacturer. Our vertical integration will reduce product
costs, allowing us to better control production variances and making us more
competitive in today's business environment. In Mexico, we own two mills along
with cutting, sewing, washing, finishing and warehousing facilities and
equipment.
As in the case of products sourced from independent contractors, the
manufacturing process begins with the merchandising department in the U.S.
working closely with the customers and developing the product. Once the customer
places an order for product, the manufacturing process begins. The Mexico and
U.S. operations share the same computer system and communications. When an order
is entered into the computer system, either electronically or manually, the
appropriate plans for production are made in the Mexican facilities. Based on
the production schedule, fabric is acquired from our denim plant, our twill
plant or an outside third party. The fabric is then cut using computerized as
well as manual methods. The cutwork is then transferred to the sewing facility
where it is sewn into garments. Once sewn, we apply the appropriate fashion
washes and finishes as required by our customers. The finishing facility applies
trims, packs, and ships the finished garments to the customers by truck.
DISTRIBUTION
Based on our world wide sourcing capability and in order to properly
fulfill orders, we have tailored our distribution system to meet the needs of
the customer. Some customers, like Wal-Mart and Kohl's, use Electronic Data
Interchange, or EDI, to send orders and receive merchandise and invoices. The
EDI distribution function has been centralized in our Los Angeles corporate
headquarters in order to expedite and control the flow of merchandise and
electronic information, and to insure that the special requirements of our EDI
customers are met.
For orders sourced outside the United States and Mexico, the
merchandise is shipped from the production facility by truck to a port where it
is consolidated and loaded on containerized vessels for ocean transport to the
United States. For customers with West Coast and Mid West distribution centers,
the merchandise is brought into the port of Los Angeles. After Customs
clearance, the merchandise is shipped by truck to either our Los Angeles
warehouse facility or an independent bonded warehouse in Ohio. Proximity to the
customer's distribution center is important for to customer support. For
merchandise produced in the Middle East and destined for an East Coast customer
distribution center, the
11
port of entry is New York. After Customs clearance, the merchandise is trucked
to an independent public warehouse in New Jersey. The independent warehouses are
instructed in writing by the Los Angeles office when to ship the merchandise to
the customer.
BACKLOG
At February 26, 2003, we had unfilled customer orders of approximately
$135 million as compared to approximately $160 million at February 26, 2002. We
believe that all of our backlog of orders as of February 26, 2003 will be filled
within the second quarter of fiscal 2003. Backlog is based on our estimates
derived from internal management reports. The amount of unfilled orders at a
particular time is affected by a number of factors, including the scheduling of
manufacturing and shipping of the product, which in some instances, depends on
the customer's requirements. Accordingly, a comparison of unfilled orders from
period to period is not necessarily meaningful and may not be indicative of
eventual annual bookings or actual shipments. Our experience has been that the
cancellations, rejections or returns of orders have not materially reduced the
amount of sales realized from our backlog.
SEGMENT INFORMATION
We operate primarily in one industry segment, the design, manufacturing
and importation of private label, moderately priced, casual apparel. For
information regarding the revenues and assets associated with our geographic
segments, see Note 14 of the "Notes to our Consolidated Financial Statements"
included elsewhere in this filing.
IMPORT RESTRICTIONS
QUOTAS
We imported approximately 94% of our products (on an FOB Basis) in
2002, including approximately 61% imported from Mexico. In the case of Mexico,
imports are subject to special rules under NAFTA. While certain apparel imports
may enter free of duty and of quota restrictions, other apparel from Mexico
remains subject to import duties and quantitative restrictions, but not to the
same extent that imports are restricted from countries subject to bilateral
textile agreements. Most of the remaining products imported by us were
manufactured in foreign jurisdictions (e.g., Hong Kong and China) with which the
U.S. has entered into bilateral textile agreements that, among other
restrictions, impose specific quantitative restraints, or quotas, on the amounts
of various categories of textiles and apparel that can be imported into the U.S.
from that foreign jurisdiction during a particular quota year. These bilateral
textile agreements also include provisions that allow the U.S. to impose quotas
on categories of textiles and apparel not previously under quota or to charge
(i.e., impose deductions upon) the quotas for origin-related violations.
Accordingly, our operations are subject to the restrictions imposed by these
bilateral agreements.
Through the early 1990s, the Arrangement Regarding International Trade
in Textiles, known as the Multifiber Arrangement, or MFA, provided the
international framework for the global regulation of the textile and apparel
trade. Pursuant to the MFA, the U.S. entered into these bilateral textile
agreements for the purpose of imposing quota on the imports of textiles and
apparel. However, under The Final Act Embodying the Results of the Uruguay Round
of Multilateral Trade Negotiations (the Uruguay Round Agreement) which was
agreed to on a preliminary basis in December 1993 by 117 member nations of the
General Agreement on Tariffs and Trade, or GATT, and enacted into U.S. domestic
law in December 1994 under the Uruguay Round Agreements Act, the MFA has been
replaced by the World Trade Organization Agreement on Textiles and Clothing, or
ATC. Under the ATC, quota implemented under the MFA on the importation of
textiles and apparel from countries that are members of the World Trade
12
Organization (the WTO, which is the successor organization to GATT under the
Uruguay Round Agreement) will be phased out over a ten-year period that
commenced on January 1, 1995 (with the U.S. phasing out quota on most of the
sensitive categories at the end of this period). However, a member country may,
under the Uruguay Round Agreement on Safeguards, re-impose quotas on textiles
and apparel under certain specified conditions.
China is a signatory to the MFA, but was not a member of GATT and,
therefore, was not a party to the Uruguay Round Agreement. China acceded to the
WTO on December 11, 2001 and as of 2005, quota on Chinese origin apparel will be
phased out, along with quota on apparel from other WTO countries. Because China
is now a member of the WTO, its exports of textiles and apparel to the U.S. will
be covered by the ATC. See "Item 7. Management's Discussion and Analysis of
Financial Condition of Results of Operations."
In 2002, products imported using Hong Kong quota accounted for
approximately 24% of our net sales (on an FOB Basis). Under the U.S. and Hong
Kong rules of origin currently in effect, we conduct certain non-origin
conferring manufacturing operations in China for a significant portion of the
products we import using Hong Kong quota.
DUTIES AND TARIFFS
Merchandise we import into the U.S. is subject to rates of duty
established by U.S. statute. In general, these rates vary, depending on the type
of product, from 2.95% to 47.18% of the appraised value of the product. In
addition to duties, in the ordinary course of our business, we, from time to
time, may become subject to claims by the U.S. Customs Service for penalties,
liquidated damages claims and other charges relating to import activities.
Similarly, from time to time, we may be entitled to refunds from the U.S.
Customs Service due to the overpayment of duties.
Products imported from China into the U.S. receive the same
preferential tariff treatment accorded goods from countries granted NTR status.
With China becoming a member of the WTO in December 2001, this status is now
permanent.
Our continued ability to source products from foreign jurisdictions may
be adversely affected by additional bilateral and multilateral agreements,
unilateral trade restrictions, changes in trade policy, significant decreases in
import quotas, embargoes, the disruption of trade from exporting countries as a
result of political instability or the imposition of additional duties, taxes
and other charges or restrictions on imports.
COMPETITION
There is intense competition in the sectors of the apparel industry in
which we participate. We compete with many other manufacturers, many of which
are larger and have greater resources than us. We also face competitions from
our own customers and potential customers, many of which have established, or
may establish, their own internal product development and sourcing capabilities.
For example, The Limited's wholly owned subsidiary, Mast Industries, Inc.,
competes with us and other private label apparel suppliers for orders from
divisions of The Limited. We believe that we compete favorably on the basis of
design and sample capabilities, the quality and value of our products, price,
production flexibility that we enjoy as a result of our sourcing network and
vertical integration initiatives and the long-term customer relationships we
have developed.
13
EMPLOYEES
At December 31, 2002, we had approximately 150 full-time employees in
the United States, 6,600 in Mexico (which includes all manufacturing labor to
produce fabric, cut, sew, trim, wash and pack finished garments), 120 in Hong
Kong, 110 in China and 10 in Thailand. We consider our relations with our
employees to be good.
ITEM 2. PROPERTIES
We currently conduct our operations from 22 facilities, 17 of which are
leased. Our executive offices are located at 3151 East Washington Boulevard, Los
Angeles, California 90023. We lease this facility for an annual rent of
approximately $650,000 from a California corporation, which is owned by Mr. Guez
and Mr. Kay. The base rent is subject to increase on January 1, 2003 based on
the Consumer Price Index. The lease for this facility, under which we are
responsible for the payment of taxes, utilities and insurance, terminates in
December 2003 subject to a renewal option for five additional years. We also
sublease an office at the penthouse at 9000 Sunset Boulevard, Los Angeles at a
base rent of $359,640 per year. Furthermore, we also lease 146,000 square feet
of warehouse space in South Gate, California for an annual rent of $399,630 from
an unrelated third party. In Bentonville, Arkansas, we opened an administrative
office during 2000 to handle business related to Wal-Mart. This facility is
leased until 2004 for approximately 2,000 square feet at an annual rent of
approximately $32,000. In Columbus, Ohio we opened an administrative office
during 1999 to handle business related to The Limited. This facility is leased
until 2004, for approximately 6,000 square feet at an annual rental of
approximately $75,000. We lease approximately 36,000 square feet of warehouse
and office space in Hong Kong for an annual rent of $674,000 from a Hong Kong
corporation that is owned by Mr. Guez and Mr. Kay. The base rent is subject to
increase every two years in accordance with market rates. The lease for this
facility, under which we are responsible for the payment of taxes, utilities and
insurance, expires in June 2004. We lease approximately 50,000 square feet,
which we use to operate our sample-making facility in Guangdong Province, China.
The lease for this facility terminates in 2004 and the annual rent is $60,000.
We also lease office space in Bangkok, Thailand to house the small staff we
maintain there. We also own two facilities in Ruleville, Mississippi with an
aggregate of 70,000 square feet. We also lease one location in New York City for
showroom and sales operations. The square footage of this location is
approximately 9,000 with an annual base rent of approximately $350,000. This
lease expires in 2010. Through our subsidiary, Grupo Famian, we lease seven
sewing and washing plants in and around Tehuacan, Mexico from the former owners
of Grupo Famian. These facilities are leased until 2010 and have a combined
annual rent of approximately $850,000. See "Commitments and Contingencies" and
"related-party transactions" in the section of "Notes to Consolidated Financial
Statements" for additional information with respect to these facilities.
On April 18, 1999, we acquired a 250,000 square foot denim mill in
Puebla, Mexico with an annual capacity of approximately 18 million meters of
denim. On March 29, 2001, we completed the acquisition of a sewing facility in
Ajalpan, Mexico. This facility contains 98,702 square feet. On December 31,
2002, we completed the acquisition of a twill mill facility, which has 1,700,000
square feet, and a capacity of 18 million meters of denim or twill. See "--
Acquisitions--Vertical Integration."
We believe that all of our existing facilities are well maintained, in
good operating condition and adequate to meet our current and foreseeable needs.
14
ITEM 3. LEGAL PROCEEDINGS
PATRICK BENSIMON
Patrick Bensimon caused his company, Needletex, Inc., to transfer its
assets to a newly formed limited liability company now known as Jane Doe
International, LLC pursuant to the terms of an Asset Purchase Agreement dated
April 12, 2000. The new company is beneficially owned 51% by us and 49% by
Bensimon. At the same time, Bensimon entered into an employment agreement with
the new company, which provided for the payment of a salary to Bensimon and a
bonus tied to the new company's sales performance. The existing lenders to
Needletex, Inc. agreed to the asset transfer in return for, among other things,
the confirmation of Bensimon's continuing guaranty of the loan obligations, the
assumption of the loan obligations by the new company and a guaranty of those
obligations by us. We received an express indemnity by Needletex, Inc. and
Bensimon to reimburse us for all amounts we paid to those lenders for the
account of Needletex and Bensimon.
Thereafter a dispute arose as to whether Bensimon had performed in
accordance with his terms of employment set forth in the Employment Agreement.
When an amicable resolution of this dispute could not be achieved, Bensimon
commenced an arbitration proceeding against his employer (Jane Doe
International, LLC), Fashion Resource (TCL), Inc., the managing member of Jane
Doe International, and us. We and other respondents contested and vigorously
opposed the matter.
On January 21, 2003, after hearing, the arbitration panel issued an
interim award in favor of Bensimon awarding him $1,425,655 for salary and bonus
plus interest accrued thereon and legal fees and costs to be determined. All
other claims asserted by Bensimon were denied. The counterclaims asserted by the
respondents also were denied. The panel has yet to make its final award
including costs and attorneys fees. These latter items could total in excess of
$100,000. On March 10, 2003, we commenced an action against Bensimon in the Los
Angeles County Superior Court seeking damages arising out of the express
indemnity in the amount of $2,159,387 plus interest and attorney's fees and
costs. The amount of the damages sought from Bensimon for express indemnity
arises out of payments made by us for the account of Bensimon, as indicated
above. In accordance with the terms of the Asset Purchase Agreement, our claim
will be referred to a retired judge appointed by the Los Angeles Superior Court
to hear and decide the case. Under the terms of this Agreement, the matter must
be heard by the retired judge within six months of its having been referred by
the Court.
We also intend to seek court intervention either to vacate the
arbitration award made to Bensimon or to stay its enforcement pending resolution
of the litigation we commenced against Bensimon.
We believe that we have a meritorious case against Bensimon on our
claim of express indemnity, which we intend to pursue vigorously. As a
consequence, we believe we should be able to offset these claims against the
arbitration award received by Bensimon.
We tendered the claim by Bensimon to our insurance carrier, which
accepted the tender with a reservation of rights as to whether coverage existed
for the claim. After the interim award was made, the insurance carrier denied
coverage. During 2002, we recorded a charge of $1.3 million to increase our
litigation reserve for this matter.
We believe that we have reasonable grounds to assert that the insurance
carrier has liability for all or some of the damages assessed against it by the
arbitration panel and for the legal fees and costs we incurred in opposing the
claim in arbitration. Accordingly, we intend to vigorously press a claim against
the carrier arising out of its decision to deny us any coverage under the
insurance policy we maintain.
15
OTHER MATTERS
From time to time, we are involved in various routine legal proceedings
incidental to the conduct of our business. Our management does not believe that
any of these legal proceedings will have a material adverse impact on our
business, financial condition or results of operations, either due to the nature
of the claims, or because our management believes that such claims should not
exceed the limits of the our insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NASDAQ NATIONAL MARKET
Our Common Stock began trading on The Nasdaq Stock Market's National
Market under the symbol "TAGS" on July 24, 1995.
The following table sets forth, for the periods indicated, the range of
high and low sale prices for our Common Stock as reported by Nasdaq.
Low High
--------- ---------
2001
First Quarter .......................... 3.06 6.00
Second Quarter ......................... 4.50 7.12
Third Quarter .......................... 3.25 6.62
Fourth Quarter ......................... 2.76 5.48
2002
First Quarter .......................... 4.65 5.49
Second Quarter ......................... 4.95 6.49
Third Quarter .......................... 4.79 6.45
Fourth Quarter ......................... 3.99 5.00
On March 25, 2003, the last reported sale price of our Common Stock as
reported by Nasdaq was $3.68. As of March 25, 2003, we had 18 shareholders of
record.
DIVIDEND POLICY
We have not declared dividends on our common stock during either of the
last two fiscal years. We intend to retain any future earnings for use in our
business and, therefore, do not anticipate declaring or paying any cash
dividends in the foreseeable future. The declaration and payment of any cash
dividends in the future will depend upon our earnings, financial condition,
capital needs and other factors deemed relevant by the Board of Directors. In
addition, our credit agreement prohibits the payment of dividends during the
term of the agreement. See Note 7 to "Notes to Consolidated Financial
Statements."
17
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2002.
NUMBER OF SECURITIES WEIGHTED-AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE OR
EXERCISE OF OUTSTANDING FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, OPTIONS, WARRANTS EQUITY COMPENSATION
WARRANTS AND RIGHTS AND RIGHTS PLANS
-------------------- ----------------- ----------------------
Equity compensation
plans approved by 6,376,487 $8.89 1,723,513
security holders
Equity compensation
plans not approved by -- -- --
security holders
--------- ----- ---------
Total 6,376,487 $8.89 1,723,513
========= ===== =========
RECENT SALE OF UNREGISTERED SECURITIES
On December 31, 2002, we issued 100,000 shares of Series A Preferred
Stock (the "Series A Shares") to Rosa Lissette Nacif Benevides. The Series A
Shares were issued in connection with the acquisition by our wholly-owned
subsidiaries, Tarrant Mexico, S. de R.L. de C.V. and Machrima Luxembourg
International, Sarl, of a denim and twill manufacturing plant in Tlaxcala,
Mexico, including all machinery and equipment used in the plant, the buildings,
and the real estate on which the plant is located (the "Acquisition"). The
Acquisition was made pursuant to an Agreement for the Purchase of Assets and
Stock, dated as of December 31, 2002, by and among us, Trans Textil
International, S.A. de C.V., Inmobiliaria Cuadros, S.A. de C.V., Rosa Lisette
Nacif Benavides, Gazi Nacif Borge, Jorge Miguel Echevarria Vazquez, and Kamel
Nacif Borge. Pursuant to the purchase agreement, Tarrant Mexico purchased from
Trans Textil all of the machinery and equipment used in and located at the
plant, and the Purchasers acquired from Jorge Miguel Echevarria Vazquez and Rosa
Lisette Nacif Benavides all the issued and outstanding capital stock of
Inmobiliaria, which owns the buildings and real estate. A portion of the
purchase price for the Inmobiliaria shares consisted of the issuance to Rosa
Lisette Nacif Benavides of the Series A Shares, which will become convertible,
at the option of the holder, into 3,000,000 shares of common stock upon the
approval by our shareholders at the 2003 annual meeting. Pursuant to the
Purchase Agreement, we issued the Series A Shares to a subsidiary of ours, and
subsequently caused the transfer of the Series A Shares to Rosa Lisette Nacif
Benavides as partial repayment of indebtedness owed by Inmobiliaria to Ms.
Benavides. Ms. Benevides represented to us that she was an "accredited investor"
within the meaning of Rule 501 of Regulation D under the Securities Act of 1933,
and that she was purchasing the securities for investment and not in connection
with a distribution thereof. The issuance and sale of these securities was
exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by,
and should be read in conjunction with, the other information and financial
statements, including the notes thereto, appearing elsewhere herein.
Year Ended December 31,
-----------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(In thousands, except per share data)
Income Statement Data:
Net sales................... $378,155 $395,341 $395,169 $330,253 $347,391
Cost of sales............... 307,077 329,131 332,333 277,525 302,082
-------- -------- -------- -------- --------
Gross profit.............. 71,078 66,210 62,836 52,728 45,309
Selling and distribution
expenses................... 11,274 13,692 17,580 14,345 10,757
General and administrative
expenses................... 19,896 25,259 40,327 33,136 30,082
Amortization of
intangibles(1)(3).......... 1,337 2,312 2,840 3,317 --
-------- -------- -------- -------- --------
Income from operations.... 38,571 24,947 2,089 1,930 4,470
Interest expense............ (2,423) (5,771) (9,850) (7,808) (5,444)
Interest income............. 360 396 1,295 3,256 4,748
Minority interest........... -- -- 1,313 (412) (4,581)
Other income(2).. .......... 590 920 1,350 1,853 2,648
Other expense(2)............ (22) (172) (193) (856) (2,004)
-------- -------- -------- -------- --------
Income before provision for
income taxes and cumulative
effect of accounting change. 37,076 20,320 (3,996) (2,037) (163)
Provision for income taxes.. (12,410) (7,439) 1,478 852 1,051
-------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
accounting change.. ....... $ 24,666 $ 12,881 $ (2,518) $ (2,889) $ (1,214)
Cumulative effect of
accounting change(3)....... -- -- -- -- (4,871)
-------- -------- -------- -------- --------
Net income (loss)........... $ 24,666 $ 12,881 $ (2,518) $ (2,889) $ (6,085)
======== ======== ======== ======== ========
Net income (loss) per share - Basic:
Before cumulative effect of
Accounting change.......... $ 1.82 $ 0.85 $ (0.16) $ (0.18) $ (0.08)
Cumulative effect of
Accounting change.......... -- -- -- -- (0.30)
After cumulative effect of
Accounting change.......... $ 1.82 $ 0.85 $ (0.16) $ (0.18) $ (0.38)
Net income (loss) per share - Diluted:
Before cumulative effect of
Accounting change.......... $ 1.71 $ 0.79 $ (0.16) $ (0.18) $ (0.08)
Cumulative effect of
Accounting change.......... -- -- -- -- (0.30)
After cumulative effect of
Accounting change.......... $ 1.71 $ 0.79 $ (0.16) $ (0.18) $ (0.38)
Weighted average shares
Outstanding (000)
Basic..................... 13,520 15,200 15,815 15,825 15,834
Diluted................... 14,417 16,314 15,815 15,825 15,834
19
As of December 31,
--------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Working capital................$ 57,082 $ 25,196 $ 27,957 $ 25,109 $ 11,731
Total assets................... 153,891 295,042 308,092 288,467 318,202
Bank borrowings and long-term
obligations................... 36,694 99,072 114,439 111,336 106,937
Shareholders' equity.......... 79,210 139,403 130,489 125,164 121,161
- ----------
(1) See "Item 1. Business--Acquisitions."
(2) Major components of Other income (expense) (as presented above) include
fees paid by affiliate entities for management and administrative services
provided by us, royalty income, and foreign currency gains or losses. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(3) Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." According to
this statement, goodwill and other intangible assets with indefinite lives
are no longer subject to amortization, but rather an annual assessment of
impairment applied on a fair-value-based test. We adopted SFAS No. 142 in
fiscal 2002 and performed our first annual assessment of impairment, which
resulted in an impairment loss of $4.9 million.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We are a leading provider of private label casual apparel, serving
specialty retail, mass merchandise and department store chains and major
international brands located primarily in the United States by designing,
merchandising, contracting for the manufacture of, manufacturing directly and
selling casual, moderately-priced apparel for women, men and children. Our major
customers include specialty retailers, such as Lerner New York, Limited Stores
and Express, all of which are divisions of The Limited, as well as Lane Bryant,
Abercrombie & Fitch, J.C. Penney, K-Mart, Kohl's, Mervyns, Sears and Wal-Mart.
Our products are manufactured in a variety of woven and knit fabrications and
include jeans wear, casual pants, t-shirts, shorts, blouses, shirts and other
tops, dresses and jackets.
In 2000, our net sales remained flat, however, in 2001, our net sales
decreased by 16.4% to $330 million. In 2002, our net sales increased by 5.2% to
$347 million. In 2001 and 2002, we experienced a net loss of $2.9 million and
$1.2 million, respectively, before cumulative effect of accounting change due to
our adoption of SFAS No. 142, and $2.9 million and $6.1 million, respectively,
after the cumulative effect of accounting change.
From inception, we relied primarily on independent contract
manufacturers located primarily in the Far East. Commencing in the third quarter
of 1997, and taking advantage of the North American Free Trade Agreement, or
NAFTA, we substantially expanded our use of independent cutting, sewing and
finishing contractors in Mexico, primarily for basic garments. Commencing in
1999, and concluding in December 2002 with the purchase of a denim and twill
manufacturing plant in Tlaxacala, Mexico, we engaged in an ambitious program to
develop a vertically integrated manufacturing operation in Mexico while
maintaining our sourcing operation in the Far East. We believe that the dual
strategy of maintaining independent contract manufacturers in the Far East and
operating manufacturing facilities in Mexico controlled can best serve the
different needs of our customers and enable us to capitalize on advantages
offered by both markets. We believe this diversified approach also helps to
mitigate the risks of doing business abroad, such as transportation delays,
economic and political instability, currency fluctuations, restrictions on the
transfer of funds and the imposition of tariffs, export duties, quota, and other
trade restrictions.
On June 28, 2000, we signed a production agreement with Manufactures
Cheja, the original term of which extended through February 2002. We extended
the contract for an additional quantity of 6.4 million units commencing on April
1, 2002, which was amended on November 8, 2002, for the manufacture of 5.7
million units through September 30, 2004.
On April 12, 2000, we formed a new company, Jane Doe International,
LLC, or JDI. This company was formed for the purpose of purchasing the assets of
Needletex, Inc., owner of the Jane Doe brand. JDI is owned 51% by Fashion
Resource (TCL), Inc., a subsidiary of ours, and 49% by Needletex, Inc. In March
2001, we converted JDI from an operating company to a licensing company, and
entered into two licenses with regards to the use of the Jane Doe trademark.
Pending the outcome of the litigation with Patrick Bensimon, owner of Needletex
Inc., this licensing company has been largely dormant in its activities in 2002.
For a description of the terms of this acquisition and details of the
litigation, see "Item 3. Legal Proceedings."
On December 2, 1998, we contracted to acquire a fully operational
facility being constructed near Puebla, Mexico by an affiliate of Kamel Nacif,
our principal shareholder. On October 16, 2000, we extended our option to
purchase the facility until September 30, 2002. In September, 2002, we exercised
21
the option to purchase the facility and completed the transaction at the end of
December, 2002. See "-- Acquisitions - Vertical Integration."
We believe there is a major competitive advantage in being a fully
integrated supplier with the capability of controlling and managing the process
of manufacturing from raw materials to finished garments. In order to execute
the garment production operations, facilities have been acquired and developed
to support anticipated capacity requirements. Computer systems have been
developed and installed, which allow us to better track our production and
inventory. New operational policies have been implemented to insure operations
function efficiently and effectively.
We have entered into a program of sharing Mexico production facilities
with Azteca, and we believe improved utilization of our production facilities
should lower unit costs and favorably impact margins. In order to manage the
shared utilization, new procedures have been adopted, which we believe will
maintain control and appropriately allocate costs between Azteca and us.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis, we evaluate
estimates, including those related to returns, discounts, bad debts,
inventories, intangible assets, income taxes, and contingencies and litigation.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a further discussion on the application of these and
other accounting policies, see Note 1 to our audited consolidated financial
statements included elsewhere in this report.
ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS
We evaluate the collectibility of accounts receivable and chargebacks
(disputes from the customer) based upon a combination of factors. In
circumstances where we are aware of a specific customer's inability to meet its
financial obligations (such as in the case of bankruptcy filings or substantial
downgrading of credit sources), a specific reserve for bad debts is taken
against amounts due to reduce the net recognized receivable to the amount
reasonably expected to be collected. For all other customers, we recognize
reserves for bad debts and chargebacks based on our historical collection
experience. If collection experience deteriorates (for example, due to an
unexpected material adverse change in a major customer's ability to meet its
financial obligations to us), the estimates of the recoverability of amounts due
us could be reduced by a material amount.
As of December 31, 2002, the balance in the allowance for returns,
discounts and bad debts reserves was $4.3 million, compared to $6.2 million at
December 31, 2001. This reduction can be explained by an additional reserve for
bad debt related to a particular customer in 2001.
22
INVENTORY
Our inventories are valued at the lower of cost or market. Under
certain market conditions, estimates and judgments regarding the valuation of
inventory are employed by us to properly value inventory.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL
We assess the impairment of identifiable intangibles, long-lived assets
and goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important that could
trigger an impairment review include, but are not limited to, the following:
o a significant underperformance relative to expected historical
or projected future operating results;
o a significant change in the manner of the use of the acquired
asset or the strategy for the overall business; or
o a significant negative industry or economic trend.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." According to this
statement, goodwill and other intangible assets with indefinite lives are no
longer subject to amortization, but rather an annual assessment of impairment
applied on a fair-value-based test. We adopted SFAS No. 142 in fiscal 2002 and
performed our first annual assessment of impairment, which resulted in an
impairment loss of $4.9 million.
INCOME TAXES
As part of the process of preparing our consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for book and tax purposes. These timing differences
result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. Management records a valuation allowance to reduce
its deferred tax assets to the amount that is more likely than not to be
realized. Management has considered future taxable income and ongoing tax
planning strategies in assessing the need for the valuation allowance. Increases
in the valuation allowance result in additional expense to be reflected within
the tax provision in the consolidated statement of operations. Accruals are also
estimated for ongoing audits regarding Federal tax issues that are currently
unresolved. We routinely monitor the potential impact of these situations and
believe that amounts are properly accrued for.
DEBT COVENANTS
Our debt agreements require the maintenance of certain financial ratios and
a minimum level of net worth as discussed in Note 7 to our consolidated
financial statements. If our results of operations erode and we are not able to
obtain waivers from the lenders, the debt would be in default and callable by
our lenders. In addition, due to cross-default provisions in a majority of the
debt agreements, approximately 87% of our long-term debt would become due in
full if any of the debt is in default. In anticipation of us not being able to
meet the required covenants due to various reasons, we either negotiate for
changes in the relative covenants or an advance waiver or reclassify the
relevant debt as current. We believe that results of operations will improve for
the year ending December 31, 2003 and thereafter and the likelihood of our
defaulting on debt covenants is decreasing absent any material negative event
affecting the U.S. economy as a whole. We also believe that our lenders would
provide waivers if necessary. However, our expectations of future operating
results and continued compliance
23
with other debt covenants cannot be assured and our lenders' actions are not
controllable by us. If projections of future operating results are not achieved
and the debt is placed in default, we would be required to reduce our expenses,
including by curtailing operations, and to raise capital through the sale of
assets, issuance of equity or otherwise, any of which could have a material
adverse effect on our financial condition and results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in our consolidated statements of income as a percentage of net sales:
Year Ended
December 31,
-------------------
2000 2001 2002
----- ----- -----
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 84.1 84.0 87.0
----- ----- -----
Gross profit........................................ 15.9 16.0 13.0
Selling and distribution expenses................... 4.5 4.4 3.1
General and administration expenses................. 10.2 10.0 8.6
Amortization expense(1)(2).......................... 0.7 1.0 0.0
----- ----- -----
Income from operations.............................. 0.5 0.6 1.3
Interest expense.................................... (2.5) (2.4) (1.6)
Interest income..................................... 0.3 1.0 1.4
Minority interest................................... 0.3 (0.1) (1.3)
Other income........................................ 0.4 0.6 0.8
Other expense....................................... (0.0) (0.3) (0.6)
----- ----- -----
Loss before provision for income taxes
and cumulative effect of accounting change........ (1.0) (0.6) 0.0
Income taxes........................................ 0.4 (0.3) (0.3)
----- ----- -----
Loss before cumulative effect of accounting
change............................................ (0.6) (0.9) (0.3)
Cumulative effect of accounting change(2)........... -- -- (1.4)
-------------------
Net loss............................................ (0.6)% (0.9)% (1.7)%
===== ===== =====
- ----------
(1) Reflects amortization of the excess of cost over fair value of assets.
(2) Reflects the adoption of SFAS No. 142
COMPARISON OF 2002 TO 2001
Net sales increased by $17.1 million, or 5.2%, from $330.3 million in
2001 to $347.4 million in 2002, primarily due to the success of United Apparel
Venture, LLC. The increase in net sales was attributed to $34.6 million increase
in sales to Tommy Hilfiger, one of the two customers of UAV, and $12 million to
Kohl's. The increase in sales to these two customers was offset by decreases of
$6.4 million in sales to Charming group, $2.9 million to mass merchandisers, and
$6.5 million to outlets, and the rest among other less significant accounts.
24
Gross profit (which consists of net sales less product costs, direct
labor, manufacturing overhead, duty, quota, freight in, brokerage, and
warehousing) for 2002 was $45.3 million, or 13% of net sales, compared to $52.7
million, or 16.0 % of net sales, for 2001, representing a decrease of 14.1%. The
decrease of $7.4 million in gross profit occurred primarily because of the
increase in quota prices from Hong Kong imports and insufficient capacity
utilization in Mexico in the first and fourth quarters.
Selling and distribution expenses decreased from $14.3 million in 2001
to $10.8 million in 2002 due to better control of overhead and reduction in
distribution costs. As a percentage of sales, these variable expenses decreased
from 4.4% in 2001 to 3.1% in 2002. General and administrative expenses decreased
from $33.1 million in 2001 to $30.1 million in 2002. As a percentage of net
sales these expenses decreased from 10.0% in 2001 to 8.6% in 2002. Included in
these expenses for 2002 was a charge of $1.3 million for a litigation reserve.
See "Item 3. Legal Proceeding." The charge for the change in the allowances for
returns and discounts for 2002 was $867,000, or 0.2% of sales, compared to such
charge of $2.7 million, or 0.8% of sales, during 2001. The higher allowance
expenses in 2001 were caused by a special reserve of $2.4 million for bad debt
related to a particular customer. After adjusting for the reduction in the
allowance expense for discounts and returns and the reserve for the litigation,
general and administrative expenses decreased by $2.6 million in 2002 as
compared to 2001. This decrease was due to our continuing cost cutting efforts.
Income from operations was $4.5 million in 2002, or 1.3% of net sales,
compared to $1.9 million in 2001, or 0.6% of net sales, due to the factors
described above.
Interest expense decreased from $7.8 million in 2001 to $5.4 million in
2002. This decrease in interest expense was as a result of reduced borrowings
due to the pay down of certain debt facilities during 2002 and interest rate
reductions positively impacting the variable rate debt. Interest income was $4.7
million in 2002 compared to $3.3 million in 2001. Included in interest income
were approximately $4.5 million for 2002 and $3.2 million for 2001 from the
related party note receivable related to the sale of certain equipment
pertaining to the twill mill, which we re-acquired in December 2002. This
interest income was recorded on a cash collected basis. Other income increased
from $1.9 million in 2001 to $2.6 million in 2002 while other expenses increased
from $856,000 to $2.0 million in 2002.
Minority interest expense was $(4.6) million in 2002 as compared to
($412,000) in 2001. The minority interest in 2001 and 2002 represented the
minority holder's share of the UAV subsidiary's income.
Loss before taxes and cumulative effect of accounting change was $2.0
million in 2001 and $163,000 in 2002, representing 0.6% and 0.0% of net sales,
respectively. The decrease in loss before taxes as a percentage of net sales was
due to the factors discussed above.
Provision for income taxes was $852,000 in 2001 versus $1.1 million in
2002.
Loss after taxes and cumulative effect of accounting change was $2.9
million in 2001 and $6.1 million in 2002, representing 0.9% and 1.7% of net
sales, respectively.
COMPARISON OF 2001 TO 2000
Net sales decreased by $64.9 million, or 16.4%, from $395.2 million in
2000 to $330.3 million in 2001. The decrease in net sales included a decrease in
sales of $14.3 million to mass merchandisers, a decrease of $32.4 million to
divisions of The Limited (excluding Lane Bryant which was sold to Charming
Shoppes in 2001) and a decrease of $6.4 million as a result of converting Jane
Doe from a sales company to a licensing company. The decrease in net sales was
primarily attributable to the overall economic conditions, which are affecting
the retail industry. The weakening economy and announced
25
layoffs have affected consumer spending habits thus hurting retail sales and
causing retailers to reduce their orders from suppliers, including us. During
2001, sales to divisions of The Limited accounted for 22.8% of total sales as
compared to 27.3% in 2000. These results do not include sales to Lane Bryant,
which was sold by The Limited in August 2001.
Gross profit (which consists of net sales less product costs, duties
and direct costs attributable to production) for 2001 was $52.7 million, or
16.0% of net sales, compared to $62.8 million, or 15.9 % of net sales, for 2000,
a decrease of 16.1%. The decrease of $10.1 million in gross profit occurred
primarily because of the decline in sales during 2001 as compared to 2000. The
gross profit percent was consistent in both years although lower than
anticipated due to excess manufacturing capacity during the year and lower sales
levels.
Selling and distribution expenses decreased from $17.6 million in 2000
to $14.3 million in 2001. As a percentage of sales these expenses decreased from
4.5% in 2000 to 4.4% in 2001. General and administrative expenses decreased from
$40.3 million in 2000 to $33.1 million in 2001. As a percentage of sales these
expenses decreased from 10.2% in 2000 to 10.0% in 2001. The charge for the
change in the allowance for returns and discounts for 2000 was $1.3 million, or
0.3% of sales, compared to such charge of $2.7 million, or 0.8% of sales, during
2001. After adjusting for the net increase in the allowance for discounts,
general and administrative expenses decreased by $8.6 million in 2001 as
compared to 2000. This decrease was due to our continuing cost cutting efforts
focused on eliminating redundant costs and inefficiencies. During 2001, we
transitioned some of our operations to Mexico thereby reducing overall overhead.
Income from operations was $2.1 million in 2000, or 0.5% of net sales,
compared to $1.9 million in 2001, or 0.6% of net sales, due to the factors
described above.
Interest expense decreased from $9.8 million in 2000 to $7.8 million in
2001. This decrease in interest expense was as a result of reduced borrowings
due the pay down of certain debt facilities during 2001 and interest rate
reductions positively impacting the variable rate debt. Interest income was $3.3
million in 2001 compared to $1.3 million in 2000. Included in interest income
were approximately $3.2 million during 2001 and $1.0 million in 2000 from the
note receivable related to the sale of certain equipment pertaining to the twill
mill. The note receivable was outstanding for all of fiscal 2001 and only from
October through December 2000. Other income increased from $1.4 million in 2000
to $1.9 million in 2001 while other expenses increased from $193,000 in 2000 to
$856,000 in 2001.
Minority interest was ($412,000) in 2001 as compared to of $1.3 million
in 2000. In 2000, the minority interest amount represents the minority partner's
share of losses for JDI, in which we acquired a 51% interest on April 12, 2000.
Such loss was recorded up to the original investment amount of the minority
partner. The minority interest in 2001 represents the minority share of the UAV
joint venture income.
Loss before taxes was $4.0 million in 2000 and $2.0 million in 2001,
representing (1.0)% and (0.6)% of net sales, respectively. The increase in loss
before taxes as a percentage of net sales was due to the decrease in net sales,
selling and distribution expenses and general and administrative expense and
interest expense and an increase in interest income.
Provision (credit) for income taxes was a credit of $1.5 million in
2000 versus an expense of $0.9 million in 2001. The difference is due to the
ability to carry larger amounts of net operating carry backs to prior periods in
2000 combined with greater foreign income and related tax expense in 2001.
26
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in our consolidated statements of income in millions of dollars and as a
percentage of net sales:
Quarter Ended
-----------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001 2002 2002 2002 2002
-------- -------- -------- -------- -------- -------- -------- --------
(In millions)
Net sales....... $84.3 $96.1 $78.2 $71.6 $65.2 $95.3 $94.3 $92.6
Gross profit.... 14.4 15.8 10.1 12.4 8.4 14.5 14.2 8.2
Operating income
(loss)......... 0.9 3.3 (3.3) 1.1 (0.8) 4.8 3.6 (3.1)
Net income
(loss)......... 0.4 1.7 (4.2) (0.8) (6.6) 1.3 1.1 (1.9)
Quarter Ended
-----------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001 2002 2002 2002 2002
-------- -------- -------- -------- -------- -------- -------- --------
Net sales....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.... 17.1 16.5 12.9 17.3 12.9 15.1 15.1 8.9
Operating income
(loss)......... 1.1 3.4 (4.3) 1.5 (1.3) 5.0 3.8 (3.4)
Net income
(loss)......... 0.5 1.8 (5.4) (1.1) (10.1) 1.4 1.2 (2.1)
As is typical for us, quarterly net sales fluctuated significantly
because our customers typically place bulk orders with us, and a change in the
number of orders shipped in any one period may have a material effect on the net
sales for that period.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise from the funding of our working
capital needs, principally inventory, finished goods shipments-in-transit,
work-in-process and accounts receivable, including receivables from our contract
manufacturers that relate primarily to fabric we purchase for use by those
manufacturers. Our primary sources for working capital and capital expenditures
are cash flow from operations, borrowings under our bank and other credit
facilities, borrowings from principal shareholders, issuance of long-term debt,
borrowing from affiliates and the proceeds from the exercise of stock options.
Our liquidity is dependent, in part, on customers paying on time. Any
abnormal chargebacks or returns may affect our source of short-term funding. We
are also subject to market price changes. Any changes in credit terms given to
major customers may have an impact on our cash flow. Suppliers' credit is
another major source of short-term financing and any adverse changes in their
terms will have negative impact on our cash flow.
27
Following is a summary of our contractual obligations and commercial
commitments available to us as of December 31, 2002 (in millions):
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- -------------------------- ------------------------------------------------
Less Between Between After
than 1 2-3 4-5 5
Total year years years years
------- ------- ------ ------ ------
Long-term debt ........... $ 77.6 $ 21.7 $ 55.9 $ 0 $ 0
Operating leases ......... $ 12.8 $ 3.1 $ 3.2 $ 2.6 $ 3.9
Total Contractual
Cash Obligations ...... $ 90.4 $ 24.8 $ 59.1 $ 2.6 $ 3.9
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL AMOUNTS ------------------------------------------
OTHER COMMERCIAL COMMITTED Less than Between Between After
COMMITMENTS AVAILABLE TO US TO US 1 year 2-3 years 4-5 years 5 years
- --------------------------- ------------- ------------------------------------------
Lines of Credit .......... $129.5 $69.5 $60.0 -- --
Letters of Credit (within
lines of credit) ...... $ 25.0 $25.0 -- -- --
Total Commercial
Commitments ........... $129.5 $69.5 $60.0 -- --
Net cash provided by operating activities was $15.5 million in 2002, as
compared to net cash provided by operations in 2001 of $30.1 million and $14.9
million in 2000. Net cash provided by operations in 2002 resulted primarily from
a net loss of $6.1 million adjusted for depreciation and amortization of $10.1
million. In addition to these items, the components of working capital impacting
cash from operations included an increase of $7.1 million in accounts
receivable, a decrease of $5.8 million in inventory, an increase of $5.5 million
in tax payable, an increase of $2.7 million in accrued liabilities offset by an
increase of $10.7 million in due from affiliates. Changes from prior years were
a result of net income provided and changes in working capital.
During 2002, cash flow used in investing activities was $4.8 million,
as compared to $9.2 million in 2001 and $28.2 million in 2000. Cash used in
investing activities in 2002 included approximately $3.0 million for purchase of
fixed assets and equipment primarily in Mexico for production purposes.
During 2002, cash used in financing activities was $9.3 million as
compared to cash of $22.1 million used in financing activities in 2001 and an
inflow of $14.5 million in 2000. Cash used in financing activities in 2002
included $3.2 million net repayment to shareholders and officers, and $6.1
million net repayment to the borrowing facilities.
On June 13, 2002, we entered into a letter of credit facility of $25
million with UPS Capital Global Trade Finance Corporation, or UPS, to replace
the credit facility of The Hong Kong and Shanghai Banking Corporation Limited in
Hong Kong. Under this facility, we may arrange for the issuance of letters of
credit and acceptances. The facility is a one-year facility subject to renewal
on its anniversary and is collateralized by the shares and debentures of all our
subsidiaries in Hong Kong, as well as our permanent quota holdings in Hong Kong.
In addition to the guarantees provided by Tarrant Apparel Group and Fashion
Resource (TCL), Inc. and Machrima Luxembourg SARL, a new holding company we
formed during 2002, Mr. Gerard Guez, our chairman, also signed a guarantee of $5
million in favor of UPS to secure this facility. This facility is also subject
to certain restrictive covenants, including no two consecutive quarterly losses,
aggregate net worth of $105 million and $109 million at the end of 2002 and
2003, respectively, interest coverage of 1.5 times, fixed charge ratio of 1.25
to 1 and leverage ratio of 2.1 to 1 in 2002 and 1.6 to 1 in 2003. As of December
31, 2002, $24.2 million, of which $12.9 million was for letters of credits, was
outstanding under this facility. We were in violation of our fixed charge ratio
covenant at December 31, 2002 for which a waiver was obtained for a fee of
$5,000.
28
On January 21, 2000, we entered into a new revolving credit, factoring
and security agreement (the "Debt Facility") with a syndicate of lending
institutions. The Debt Facility initially provided a revolving facility of
$105.0 million, including a letter of credit facility not to exceed $20.0
million, and matures on January 31, 2005. The Debt Facility provides for
interest at LIBOR plus the LIBOR rate margin determined by the Total Leverage
Ratio (as defined). The Debt Facility is collateralized by our receivables,
intangibles, inventory and various other specified non-equipment assets. In
addition, the facility is subject to various financial covenants with quarterly
targets, including provisions for tangible net worth of not less than $98.5
million subject to adjustment for the fluctuating of the exchange rate of
Mexican peso of December 31 2000 or that of the preceding year-end, fixed charge
ratio of 1.1 to 1, and interest coverage ratios of 3.2 to 1, leverage ratio of
not more than 1.6 to 1 at year-end and prohibits the payment of dividends. On
March 2, 2001, we entered into an amendment of our Debt Facility with GMAC
Commercial Finance, LLC (GMAC), who solely assumed the facility in 2000. This
amendment reduced the $105.0 million facility to $90.0 million. Our over-advance
line of $25 million converted to a term facility to be repaid by monthly
installments of $500,000 before August 2001 and $687,500 thereafter. A total of
$58 million was outstanding under the Debt Facility at December 31, 2002.
As of December 31, 2002, we were in violation of covenants on interest
coverage, total leverage ratio, and fixed charges under the Debt Facility. We
received a waiver from GMAC with respect to our violation of these covenants,
and we received a waiver from GMAC with respect to our compliance at March 31,
2003 with all financing covenants under the Debt Facility. We paid GMAC $45,000
for this waiver. We have agreed with GMAC to set new financial convenants for
fiscal 2003 based on our projections before May 1, 2003.
The Debt Facility includes a factoring arrangement whereby we factor
with GMAC accounts receivables from customers with debt ratings below BBB. We
did not receive advances against these receivables, and were paid only upon
collection of proceeds. For this credit insurance arrangement, we pay the factor
a commission of 60 basis points.
As of December 31, 2002, Grupo Famian had a short-term advance from
Banco Bilbao Vizcaya amounting to $298,000. This subsidiary also had a credit
facility with Banco Nacional de Comercio Exterior SNC, which we guaranteed. This
facility provided for a $10 million credit line based on purchase orders and is
restricted by certain covenants. As of December 31, 2002, the outstanding amount
was $4.7 million. After the merger of Grupo Famian into Tarrant Mexico, the bank
agreed that Tarrant Mexico was to repay the outstanding amount of $4.7 million
in monthly installments of $523,000 each commencing March 26, 2003.
We have two equipment loans with initial borrowings of $16.25 million
and $5.2 million from GE Capital Leasing ("GE Capital") and Bank of America
Leasing ("BOA"), respectively. The leases are secured by equipment located in
Puebla and Tlaxcala, Mexico. The amounts outstanding as of December 31, 2002
were $7.1 million due to GE Capital and $2.4 million due to BOA. Interest
accrues at a rate of 2 1/2% over LIBOR. The loan from GE Capital will mature in
the year 2005 and the loan from BOA in the year 2004. The GE Capital facilities
are subject to covenants on Tangible Net Worth ($30 million), leverage ratio of
not more than two times and no losses for two consecutive quarters. We were in
29
violation of the covenant on consecutive quarterly losses and obtained a waiver
from the bank on March 28, 2002 for a fee of $10,000 and acceleration by $25,000
of monthly repayment of principal. We have classified the GE Capital obligation
as a current liability because of the potential that we may be in violation of
one or more of the covenants under the GE Capital facilities for the first
quarter of 2003. The BOA facility is subject to a financial benchmark on
interest coverage (3 to 1) and a leverage ratio of not more than 2 times.
The Debt Facility with GMAC and the credit facilities with UPS, GE
Capital and BOA all carry cross-default clauses. A breach of a financial
covenant set by GMAC, UPS or GE Capital constitutes an event of default,
entitling these banks to demand payment in full of all outstanding amounts under
their respective debt and credit facilities. Similarly, if we breach a financial
benchmark set by BOA, the bank can accelerate repayment of all outstanding
principal amount to become six equal monthly installments.
During 2000, we financed equipment purchases for the new manufacturing
facility with certain vendors of the related equipment. A total of $16.9 million
was financed with five-year promissory notes, which bear interest ranging from
7.0% to 7.5%, and are payable in semiannual payments commencing in February
2000. Of this amount, $7.3 million was outstanding as of December 31, 2002. Of
the $7.3 million, $4.6 million is denominated in the Euro. The remainder is
payable in U.S. dollars.
From time to time, we open letters of credit under an uncommitted line
of credit from Aurora Capital Associates who issues these letters of credits out
of Israeli Discount Bank. As of December 31, 2001, $2.3 million in letters of
credit were open under this arrangement.
An unrealized gain of $104,000 and an unrealized loss of $1 million
were recorded at December 31, 2001 and 2002, respectively, related to foreign
currency fluctuations and is recorded in other income (expense) in the
accompanying statement of operations. In addition, during the year ended
December 31, 2000, we entered into hedge contracts for Euros related to this
debt and for our peso exposure.
The weighted average interest rates on short-term bank borrowing as of
December 31, 2002 and 2001 were 4.1% and 6.7%, respectively.
We have financed our operations from our cash flow from operations,
borrowings under our bank and other credit facilities, issuance of long-term
debt (including debt to or arranged by vendors of equipment purchased for the
Mexican twill and production facility), the proceeds from the exercise of stock
options and from time to time shareholder advances. Our short-term funding
relies very heavily on our major customers, bankers, suppliers and major
shareholders. From time to time, we have temporary over-advances from our
bankers and short-term funding from our major shareholders. Any withdrawal of
support from these parties will have serious consequences on our liquidity.
We may seek to finance future capital investment programs through
various methods, including, but not limited to, borrowings under our bank credit
facilities, issuance of long- term debt, leases and long-term financing provided
by the sellers of facilities or the suppliers of certain equipment used in such
facilities. To date, there is no plan for any major capital expenditure. See-
"Item 1. Acquisitions - Vertical Integration."
We do not believe that the moderate levels of inflation in the United
States in the last three years have had a significant effect on net sales or
profitability.
30
RELATED PARTY TRANSACTIONS
We lease our principal offices and warehouse located in Los Angeles,
California and office space in Hong Kong from corporations owned by Messrs. Guez
and Kay. We believe, at the time the leases were entered into, the rents on
these properties were comparable to then prevailing market rents. We paid
$1,330,000 in 2002 for rent for office and warehouse facilities.
From time to time, we have borrowed funds from, and advanced funds to,
certain officers and principal shareholders, including Messrs. Guez, Kay and
Nacif. The maximum amount of such borrowings from Mr. Kay in 2002 was
$2,317,000. The maximum amount of such advances to Messrs. Guez and Nacif during
2002 was approximately $4,923,000 and $8,896,000, respectively. As of December
31, 2002, we were indebted to Mr. Kay in the amount of $487,000. Messrs. Guez
and Nacif had an outstanding advance from us in the amount of $4,879,000 and
$723,000, respectively, as of December 31, 2002. All advances to, and borrowings
from, Messrs. Guez and Kay in 2002 bore interest at the rate of 7.75%.
Subsequent to the enactment of the Sarbanes-Oxley Act of 2002, no further
personal loans (or amendments to existing loans) have been or will be made to
officers or directors of Tarrant.
On December 31, 2002, our wholly owned subsidiaries, Tarrant Mexico and
Machrima Luxembourg, acquired a denim and twill manufacturing plant in Tlaxcala,
Mexico, including all machinery and equipment used in the plant, the buildings,
and the real estate on which the plant is located. Pursuant to an Agreement for
the Purchase of Assets and Stock, dated as of December 31, 2002, Tarrant Mexico
purchased from Trans Textil all of the machinery and equipment used in and
located at the plant, and the Purchasers acquired from Jorge Miguel Echevarria
Vazquez and Rosa Lisette Nacif Benavides (the "Inmobiliaria Shareholders") all
the issued and outstanding capital stock of Inmobiliaria, which owns the
buildings and real estate. The purchase price for the machinery and equipment
was paid by cancellation of $42 million in indebtedness owed by Trans Textil to
Tarrant Mexico. The purchase price for the Inmobiliaria shares consisted of a
nominal cash payment to the Inmobiliaria Shareholders of $500, and subsequent
repayment by us and our affiliates of approximately $34.7 million in
indebtedness of Inmobiliaria to Kamel Nacif Borge, his daughter Rosa Lisette
Nacif Benavides, and certain of their affiliates, which payment was made by: (i)
delivery to Rosa Lisette Nacif Benavides of one hundred thousand shares of our
newly created, non-voting Series A Preferred Stock, which shares will become
convertible into three million shares of common stock if our common stockholders
approve the conversion at the Annual Meeting; (ii) delivery to Rosa Lisette
Nacif Benavides of an ownership interest representing twenty-five percent of the
voting power of and profit participation in Tarrant Mexico; and (iii)
cancellation of approximately $14.9 million of indebtedness of Mr. Nacif and his
affiliates.
Kamel Nacif Borge is an employee of Tarrant Mexico and the beneficial
owner of more than 5% of our outstanding common stock. Jamil Textil, S.A. de
C.V., an entity we believe is controlled by Mr. Nacif, owns 1,720,000 shares of
our common stock, representing approximately 10.9% of our outstanding common
stock as of December 31, 2002. Trans Textil, an entity controlled by Mr. Nacif
and his family members, was initially commissioned by us to construct and
develop the plant in December 1998. Subsequent to completion, Trans Textil
purchased and/or leased the plant's manufacturing equipment from us and entered
into a production agreement that gave us the first right to all production
capacity of the plant. This production agreement included the option for us to
purchase the facility and discontinue the production agreement with Trans Textil
through September 30, 2002. We exercised the option and acquired the plant as
described above.
From time to time, we have advanced funds to Mr. Nacif and his
affiliates, and Mr. Nacif and such affiliates have advanced funds to us.
Immediately prior to the mill acquisition, Mr. Nacif and his affiliates owed us
approximately $7.5 million, which indebtedness was cancelled as part of the
repayment by Inmobiliaria of indebtedness due Mr. Nacif and his affiliates.
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On July 1, 2001, we formed an entity to jointly market, share certain
risks and achieve economies of scale with Azteca Production International, Inc.,
called United Apparel Ventures, LLC. This entity was created to coordinate the
production of apparel for a single customer of our branded business. UAV is
owned 50.1% by Tag Mex, Inc., a wholly owned subsidiary of ours, and 49.9% by
Azteca. Results of the operation of UAV have been consolidated into our results
since July 2001 with the minority partner's share of all gains and loses
eliminated through the minority interest line in our financial statements. Since
October 2002, both parties have contributed the Express business into UAV and
the results are consolidated in the company's financials. UAV makes purchases
from two related parties in Mexico, Azteca and Tag-it Pacific, Inc.
In 1998, a California limited liability company owned by Messrs. Guez
and Kay purchased 2,390,000 shares of the Common Stock of Tag-It Pacific, Inc.
(or approximately 37% of such Common Stock then outstanding). Tag-It is a
provider of brand identity programs to manufacturers and retailers of apparel
and accessories. Tag-It assumed the responsibility for managing and sourcing all
trim and packaging used in connection with products manufactured by or on our
behalf in Mexico. This arrangement is terminable by either Tag-It or us at any
time. We believe that the terms of this arrangement, which is subject to the
acceptance of our customers, are no less favorable to us than could be obtained
from unaffiliated third parties. We purchased $23.9 million of trim inventory
from Tag-It during the year ended December 31, 2002. From time to time we have
guaranteed the indebtedness of Tag-It for the purchase of trim on our behalf.
We have adopted a policy that any transactions between us and any of
our affiliates or related parties, including our executive officers, directors,
the family members of those individuals and any of their affiliates, must (i) be
approved by a majority of the members of the Board of Directors and by a
majority of the disinterested members of the Board of Directors and (ii) be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements,
which are subject to a variety of risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below.
RISKS RELATED TO OUR BUSINESS
WE DEPEND ON A GROUP OF KEY CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR SALES. A
SIGNIFICANT ADVERSE CHANGE IN A CUSTOMER RELATIONSHIP OR IN A CUSTOMER'S
FINANCIAL POSITION COULD HARM OUR BUSINESS AND FINANCIAL CONDITION.
Affiliated stores owned by The Limited (including Lerner New York,
Limited Stores and Express) accounted for approximately 22.6% and 22.8% of our
net sales in fiscal years 2002 and 2001, respectively. Lane Bryant, owned by
Charming Shoppes, accounted for 17.6% and 20.5% of our net sales in fiscal years
2002 and 2001, respectively. Moreover, we believe that consolidation in the
retail industry has centralized purchasing decisions and given customers greater
leverage over suppliers like us, and we expect this trend to continue. If this
consolidation continues, our net sales and results of operations may be
increasingly sensitive to a deterioration in the financial condition of, or
other adverse developments with, one or more of our customers.
While we have long-standing customer relationships, we do not have
long-term contracts with any of them, including The Limited. As a result,
purchases generally occur on an order-by-order basis, and the relationship, as
well as particular orders, can generally be terminated by either party at any
time.
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A decision by a major customer, whether motivated by competitive considerations,
financial difficulties, economic conditions or otherwise, to decrease its
purchases from us or to change its manner of doing business with us, could
adversely affect our business and financial condition. In addition, during
recent years, various retailers, including some of our customers, have
experienced significant changes and difficulties, including consolidation of
ownership, increased centralization of purchasing decisions, restructurings,
bankruptcies and liquidations.
These and other financial problems of some of our retailers, as well as
general weakness in the retail environment, increase the risk of extending
credit to these retailers. A significant adverse change in a customer
relationship or in a customer's financial position could cause us to limit or
discontinue business with that customer, require us to assume more credit risk
relating to that customer's receivables, limit our ability to collect amounts
related to previous purchases by that customer, or result in required prepayment
of our receivables securitization arrangements, all of which could harm our
business and financial condition.
WE HAVE ONLY LIMITED EXPERIENCE OPERATING A VERTICALLY INTEGRATED BUSINESS.
During 2002, we completed the vertical integration of our business,
which included: (1) establishing cutting, sewing, washing, finishing, packing,
shipping and distribution activities in company-owned facilities or through the
acquisition of established contractors and (2) establishing fabric production
capability through the acquisition of established textile mills or the
construction of new mills. Prior to 1999, we had no previous history of
operating textile mills or cutting, sewing, washing, finishing, packing or
shipping operations upon which an evaluation of the prospects of our vertical
integration strategy can be based. Since the beginning of our vertical
integration strategy, we have experienced increased complexities. In addition,
the implementation of the integration strategy could place significant strain on
our administrative, operational and financial resources and increased demands on
our financial systems and controls. Our ability to manage our vertical
integration successfully will require us to continue to improve and expand these
resources, systems and controls. If our management is unable to manage our
vertical integration effectively, our operating results could be adversely
affected.
FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.
Since our inception, we have experienced periods of rapid growth. No
assurance can be given that we will be successful in maintaining or increasing
our sales in the future. Any future growth in sales will require additional
working capital and may place a significant strain on our management, management
information systems, inventory management, production capability, distribution
facilities and receivables management. Any disruption in our order processing,
sourcing or distribution systems could cause orders to be shipped late, and
under industry practices, retailers generally can cancel orders or refuse to
accept goods due to late shipment. Such cancellations and returns would result
in a reduction in revenue, increased administrative and shipping costs and a
further burden on our distribution facilities.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We have experienced, and expect to continue to experience, substantial
variations in our net sales and operating results from quarter to quarter. We
believe that the factors which influence this variability of quarterly results
include the timing of our introduction of new product lines, the level of
consumer acceptance of each new product line, general economic and industry
conditions that affect consumer spending and retailer purchasing, the
availability of manufacturing capacity, the seasonality of the markets in which
we participate, the timing of trade shows, the product mix of customer orders,
the timing of the placement or cancellation of customer orders, the weather,
transportation delays, quotas, the occurrence of chargebacks in excess of
reserves and the timing of expenditures in anticipation of
33
increased sales and actions of competitors. Due to fluctuations in our revenue
and operating expenses, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It is
possible that in some future quarter or quarters, our operating results will be
below the expectations of securities analysts or investors. In that case, our
stock price could fluctuate significantly or decline.
INCREASES IN THE PRICE OF RAW MATERIALS OR THEIR REDUCED AVAILABILITY COULD
INCREASE OUR COST OF SALES AND DECREASE OUR PROFITABILITY.
The principal raw material used our apparel is cotton. The price and
availability of cotton may fluctuate significantly, depending on a variety of
factors, including crop yields, weather, supply conditions, government
regulation, economic climate and other unpredictable factors. Any raw material
price increases could increase our cost of sales and decrease our profitability
unless we are able to pass higher prices on to our customers. Moreover, any
decrease in the availability of cotton could impair our ability to meet our
production requirements in a timely manner.
THE SUCCESS OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO OFFER INNOVATIVE AND
UPGRADED PRODUCTS.
The apparel industry is characterized by constant product innovation
due to changing consumer preferences and by the rapid replication of new
products by competitors. As a result, our success depends in large part on our
ability to continuously develop, market and deliver innovative products at a
pace and intensity competitive with other manufacturers in our segments. In
addition, we must create products that appeal to multiple consumer segments at a
range of price points. Any failure on our part to regularly develop innovative
products and update core products could:
o limit our ability to differentiate, segment and price our
products;
o adversely affect retail and consumer acceptance of our
products; and
o limit sales growth.
The increasing importance of product innovation in apparel requires us
to strengthen our internal research and commercialization capabilities, to rely
on successful commercial relationships with third parties such as fiber, fabric
and finishing providers and to compete and negotiate effectively for new
technologies and product components.
THE FINANCIAL CONDITION OF OUR CUSTOMERS COULD AFFECT OUR RESULTS OF OPERATIONS.
Certain retailers, including some of our customers, have experienced in
the past, and may experience in the future, financial difficulties, which
increase the risk of extending credit to such retailers and the risk that
financial failure will eliminate a customer entirely. These retailers have
attempted to improve their own operating efficiencies by concentrating their
purchasing power among a narrowing group of vendors. There can be no assurance
that we will remain a preferred vendor for our existing customers. A decrease in
business from or loss of a major customer could have a material adverse effect
on our results of operations. There can be no assurance that our factor will
approve the extension of credit to certain retail customers in the future. If a
customer's credit is not approved by the factor, we could assume the collection
risk on sales to the customer itself, require that the customer provide a letter
of credit, or choose not to make sales to the customer.
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THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN
QUALIFIED EMPLOYEES.
We need talented and experienced personnel in a number of areas
including our core business activities. Our success is dependent upon
strengthening our management depth across our business at a rapid pace. An
inability to retain and attract qualified personnel or the loss of any of our
current key executives could harm our business. Our ability to attract and
retain qualified employees is adversely affected by the Los Angeles location of
our corporate headquarters due to the high cost of living in the Los Angeles
area.
WE DEPEND ON OUR COMPUTER AND COMMUNICATIONS SYSTEMS.
As a multi-national corporation, we rely on our computer and
communication network to operate efficiently. Any interruption of this service
from power loss, telecommunications failure, weather, natural disasters or any
similar event could have a material adverse affect on our business and
operations. Recently, hackers and computer viruses have disrupted the operations
of several major companies. We may be vulnerable to similar acts of sabotage,
which could have a material adverse effect on our business and operations.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.
We may not be able to fund our future growth or react to competitive
pressures if we lack sufficient funds. Currently, we believe we have sufficient
cash available through our bank credit facilities, issuance of long-term debt,
proceeds from loans from affiliates, and proceeds from the exercise of stock
options to fund existing operations for the foreseeable future. However, in the
future we may need to raise additional funds through equity or debt financings
or collaborative relationships. This additional funding may not be available or,
if available, it may not be available on economically reasonable terms. In
addition, any additional funding may result in significant dilution to existing
stockholders. If adequate funds are not available, we may be required to curtail
our operations or obtain funds through collaborative partners that may require
us to release material rights to our products.
OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.
We import raw materials and finished garments. Substantially all of our
import operations are subject to tariffs imposed on imported products and quotas
imposed by trade agreements. In addition, the countries in which our products
are manufactured or imported may from time to time impose additional new quotas,
duties, tariffs or other restrictions on our imports or adversely modify
existing restrictions. Adverse changes in these import costs and restrictions,
or our suppliers' failure to comply with customs or similar laws, could harm our
business. We cannot assure that future trade agreements will not provide our
competitors with an advantage over us, or increase our costs, either of which
could have an adverse effect on our business and financial condition.
Our operations are also subject to the effects of international trade
agreements and regulations such as the North American Free Trade Agreement, and
the activities and regulations of the World Trade Organization. Generally, these
trade agreements benefit our business by reducing or eliminating the duties
and/or quotas assessed on products manufactured in a particular country.
However, trade agreements can also impose requirements that adversely affect our
business, such as limiting the countries from which we can purchase raw
materials and setting quotas on products that may be imported into the United
States from a particular country. In addition, the World Trade Organization may
commence a new round of trade negotiations that liberalize textile trade by
further eliminating quotas or reducing tariffs. The elimination of quotas on
World Trade Organization member countries by 2005 and other effects of these
trade agreements could result in increased competition from developing
countries, which historically have
35
lower labor costs, including China and Taiwan, both of which recently became
members of the World Trade Organization. Due to our vertical integration in
Mexico, this increased competition could have an adverse effect on our business
and financial condition.
Our ability to import products in a timely and cost-effective manner
may also be affected by problems at ports or issues that otherwise affect
transportation and warehousing providers, such as labor disputes. These problems
could require us to locate alternative ports or warehousing providers to avoid
disruption to our customers. These alternatives may not be available on short
notice or could result in higher transit costs, which could have an adverse
impact on our business and financial condition.
OUR PARTIAL DEPENDENCE ON INDEPENDENT MANUFACTURERS REDUCES OUR ABILITY TO
CONTROL THE MANUFACTURING PROCESS, WHICH COULD HARM OUR SALES, REPUTATION AND
OVERALL PROFITABILITY.
Although we have reduced our reliance on outside third party
contractors through our vertical integration in Mexico, a substantial portion of
our sourcing are manufactured by independent cutting, sewing and finishing
contractors. As a result, we depend on independent contract manufacturers to
secure a sufficient supply of raw materials and maintain sufficient
manufacturing and shipping capacity in an environment characterized by declining
prices, continuing cost pressure and increased demands for product innovation
and speed-to-market. This dependence could subject us to difficulty in obtaining
timely delivery of products of acceptable quality. In addition, a contractor's
failure to ship products to us in a timely manner or to meet the required
quality standards could cause us to miss the delivery date requirements of our
customers. The failure to make timely deliveries may cause our customers to
cancel orders, refuse to accept deliveries, impose non-compliance charges
through invoice deductions or other charge-backs, demand reduced prices or
reduce future orders, any of which could harm our sales, reputation and overall
profitability. We do not have material long-term contracts with any of our
independent contractors and any of these contractors may unilaterally terminate
their relationship with us at any time. To the extent we are not able to secure
or maintain relationships with independent contractors that are able to fulfill
our requirements, our business would be harmed.
Although we monitor the compliance of our independent contractors with
applicable labor laws, we do not control our contractors or their labor
practices. The violation of federal, state or foreign labor laws by one of the
our contractors could result in our being subject to fines and our goods that
are manufactured in violation of such laws being seized or their sale in
interstate commerce being prohibited. From time to time, we have been notified
by federal, state or foreign authorities that certain of our contractors are the
subject of investigations or have been found to have violated applicable labor
laws. To date, we have not been subject to any sanctions that, individually or
in the aggregate, have had a material adverse effect on our business, and we are
not aware of any facts on which any such sanctions could be based. There can be
no assurance, however, that in the future we will not be subject to sanctions as
a result of violations of applicable labor laws by our contractors, or that such
sanctions will not have a material adverse effect on our business and results of
operations. In addition, certain of our customers, including The Limited,
require strict compliance by their apparel manufacturers, including us, with
applicable labor laws and visit our facilities often. There can be no assurance
that the violation of applicable labor laws by one of our contractors will not
have a material adverse effect on our relationship with our customers.
OUR BUSINESS IS SUBJECT TO RISKS OF OPERATING IN A FOREIGN COUNTRY AND TRADE
RESTRICTIONS.
Approximately 94% of our products were imported from outside the U.S.
in fiscal 2002, and most of our fixed assets are located in Mexico. The Company
is subject to the risks associated with doing business and owning fixed assets
in foreign countries, including, but not limited to, transportation delays and
interruptions, political instability, expropriation, currency fluctuations and
the imposition of tariffs, import and export controls, other non-tariff barriers
(including changes in the allocation of quotas) and
36
cultural issues. Any changes in those countries' labor laws and government
regulations may have a negative effect on our profitability.
OUR OPERATIONS IN MEXICO ARE SUBJECT TO RISKS ASSOCIATED WITH MANUFACTURING
FACILITIES. INCREASED COMPETITION FROM OTHER FOREIGN COUNTRIES COULD ADVERSELY
AFFECT THE RESULTS OF OUR OPERATIONS.
As a manufacturer in Mexico, we are subject to the risks associated
with owning a manufacturing business, including but not limited to, the
maintenance and management of manufacturing facilities, equipment, employees,
trade unions and inventories. The risk of being a fully integrated manufacturer
is increased in an industrial wide slowdown because of the fixed costs
associated with manufacturing facilities.
As of 2005, quota on Chinese origin apparel will be phased out. This
may pose serious challenges to Mexican apparel products sold to the United
States market. Products from China now receive the same preferential tariff
treatment accorded goods from countries granted NTR status. With China becoming
a member of the WTO, this status is now permanent. Our products manufactured in
Mexico may be adversely affected by the increased competition from Chinese
products.
OUR COST REDUCTION MEASURES MAY ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS.
Since the beginning of 2000, we have been making efforts to reduce
overhead costs by the elimination of functions duplicated in Los Angeles, New
York and Mexico. In addition, in 2002 we continued reducing headcount by 50% in
the U.S. and approximately 20% in both Mexico and Hong Kong due to decreased
sales. As a result, some personnel may be required to perform additional
functions or responsibilities, which may have an adverse effect on our business
and results of operations.
WE CANNOT GUARANTEE THAT OUR FUTURE ACQUISITIONS WILL BE SUCCESSFUL.
In the future, we may seek to continue our growth through acquisition.
We compete for acquisition and expansion opportunities with companies which have
significantly greater financial and management resources than us. There can be
no assurance that suitable acquisition or investment opportunities will be
identified, that any of these transactions can be consummated, or that, if
acquired, these new businesses can be integrated successfully and profitably
into our operations. These acquisitions and investments may also require a
significant allocation of resources, which will reduce our ability to focus on
the other portions of our business, including many of the factors listed in the
prior risk factor.
RISK ASSOCIATED WITH OUR INDUSTRY
OUR SALES ARE HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.
Apparel is a cyclical industry that is heavily dependent upon the
overall level of consumer spending. Purchases of apparel and related goods tend
to be highly correlated with cycles in the disposable income of our consumers.
Our customers anticipate and respond to adverse changes in economic conditions
and uncertainty by reducing inventories and canceling orders. As a result, any
substantial deterioration in general economic conditions, increases in interest
rates, acts of war, terrorist or political events that diminish consumer
spending and confidence in any of the regions in which we compete, could reduce
our sales and adversely affect our business and financial condition. This has
been underscored by the events of September 11, 2001 and the war in the Middle
East.
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OUR BUSINESS IS HIGHLY COMPETITIVE AND DEPENDS ON CONSUMER SPENDING PATTERNS.
The apparel industry is highly competitive. We face a variety of
competitive challenges including:
o anticipating and quickly responding to changing consumer
demands;
o developing innovative, high-quality products in sizes, colors
and styles that appeal to consumers of varying age groups and
tastes;
o competitively pricing our products and achieving customer
perception of value; and
o providing strong and effective marketing support.
WE MUST SUCCESSFULLY GAUGE FASHION TRENDS AND CHANGING CONSUMER PREFERENCES TO
SUCCEED.
Our success is largely dependent upon our ability to gauge the fashion
tastes of our customers and to provide merchandise that satisfies retail and
customer demand in a timely manner. The apparel business fluctuates according to
changes in consumer preferences dictated in part by fashion and season. To the
extent we misjudge the market for our merchandise, our sales may be adversely
affected. Our ability to anticipate and effectively respond to changing fashion
trends depends in part on our ability to attract and retain key personnel in our
design, merchandising and marketing staff. Competition for these personnel is
intense, and we cannot be sure that we will be able to attract and retain a
sufficient number of qualified personnel in future periods.
OUR BUSINESS IS SUBJECT TO SEASONAL TRENDS.
Historically, our operating results have been subject to seasonal
trends when measured on a quarterly basis. This trend is dependent on numerous
factors, including the markets in which we operate, holiday seasons, consumer
demand, climate, economic conditions and numerous other factors beyond our
control. There can be no assurance that our historic operating patterns will
continue in future periods as we cannot influence or forecast many of these
factors.
RISKS RELATED TO OUR COMMON STOCK.
OUR MANAGEMENT OWNS A SIGNIFICANT PERCENTAGE OF OUR COMMON STOCK AND WILL BE
ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS.
Our executive officers and directors will continue to beneficially own
56.9% of our outstanding common stock, based upon the beneficial ownership of
our common stock as of March 15, 2003. Accordingly, these stockholders
effectively have the ability to control the outcome on all matters requiring
stockholder approval, including the election and removal of directors and any
change in control. This concentration of ownership of our common stock could
have the effect of delaying or preventing a change of control of us or otherwise
discouraging or preventing a potential acquirer from attempting to obtain
control of us. This, in turn, could have a negative effect on the market price
of our common stock. It could also prevent our stockholders from realizing a
premium over the market prices for their shares of common stock.
OUR STOCK PRICE HAS BEEN VOLATILE.
Our common stock is quoted on the Nasdaq National Market System, and
there can be substantial volatility in the market price of our common stock. The
market price of our common stock has been, and is likely to continue to be,
subject to significant fluctuations due to a variety of factors, including
38
quarterly variations in operating results, operating results which vary from the
expectations of securities analysts and investors, changes in financial
estimates, changes in market valuations of competitors, announcements by us or
our competitors of a material nature, loss of one or more customers, additions
or departures of key personnel, future sales of common stock and stock market
price and volume fluctuations. In addition, general political and economic
conditions such as a recession, or interest rate or currency rate fluctuations
may adversely affect the market price of our common stock.
In addition, the stock market in general has experienced extreme price
and volume fluctuations that have affected the market price of our common stock.
Often, price fluctuations are unrelated to operating performance of the specific
companies whose stock is affected. In the past, following periods of volatility
in the market price of a company's stock, securities class action litigation has
occurred against the issuing company. If we were subject to this type of
litigation in the future, we could incur substantial costs and a diversion of
our management's attention and resources, each of which could have a material
adverse effect on our revenue and earnings. Any adverse determination in this
type of litigation could also subject us to significant liabilities.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU.
Some investors favor companies that pay dividends, particularly in
general downturns in the stock market. We have not declared or paid any cash
dividends on our common stock. We currently intend to retain any future earnings
for funding growth, and we do not currently anticipate paying cash dividends on
our common stock in the foreseeable future. Because we may not pay dividends,
your return on this investment likely depends on your selling our stock at a
profit.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK. Our earnings are affected by fluctuations in the
value of the U.S. dollar as compared to foreign currencies as a result of doing
business in Mexico as well as certain debt denominated in the Euro. As a result,
we bear the risk of exchange rate gains and losses that may result in the future
as a result of this financing. At times we use forward exchange contracts to
reduce the effect of fluctuations of foreign currencies on purchases and
commitments. These short-term assets and commitments are principally related to
trade payables positions and fixed asset purchase obligations. We do not utilize
derivative financial instruments for trading or other speculative purposes. We
actively evaluate the creditworthiness of the financial institutions that are
counter parties to derivative financial instruments, and we do not expect any
counter parties to fail to meet their obligations.
INTEREST RATE RISK. Because our obligations under our various credit
agreements bear interest at floating rates (primarily LIBOR rates), we are
sensitive to changes in prevailing interest rates. Any major increase or
decrease in market interest rates that affect our financial instruments would
have a material impact on earning or cash flows during the next fiscal year.
Our interest expense is sensitive to changes in the general level of
U.S. interest rates. In this regard, changes in U.S. interest rates affect
interest paid on our debt. A majority of our credit facilities are at variable
rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8K" for our financial statements, and the notes thereto, and the financial
statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning our directors and executive officers is
incorporated herein by reference from in our definitive Proxy Statement to be
filed pursuant to Regulation 14A within 120 days after the end of our last
fiscal year (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is incorporated
herein by reference from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is incorporated herein by reference from the Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, our Chief
Executive Officer and our Chief Financial Officer, with the participation of our
management, carried out an evaluation of the effectiveness of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer believe
that, as of the date of the evaluation, our disclosure controls and procedures
are effective in making known to them material information relating to us
(including our consolidated subsidiaries) required to be included in this
report.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls, known to the Chief
Executive Officer or the Chief Financial Officer, subsequent to the date of the
evaluation.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedule. Reference is made to the
Index to Financial Statements and Schedule on page F-1 for a list of financial
statements and the financial statement schedule filed as part of this report.
All other schedules are omitted because they are not applicable or the required
information is shown in the Company's financial statements or the related notes
thereto.
(b) Reports on Form 8-K filed: None.
(c) Exhibits. The following exhibits are filed as part of this
report.
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation of the Company(/1/)
3.1.1 Certificate of Amendment of Restated Articles of Incorporation. (/26/)
3.1.2 Certificate of Amendment of Restated Articles of Incorporation. (/26/)
3.1.3 Certificate of Determination of Preferences, Rights and Limitations of
Series A Preferred Stock of Tarrant Apparel Group. (/27/)
3.2 Restated Bylaws of the Company(/1/)
4.1 Specimen of Common Stock Certificate(/2/)
10.1 Note in the principal amount of $2,600,000 dated March 15, 1995 in
favor of Imperial Bank(/1/)
10.2 General Security Agreement dated March 15, 1995 by and between the
Company and Imperial Bank(/1/)
10.3 Factoring Agreement effective as of September 28, 1993, as amended, by
and between the Company and NationsBanc Commercial Corporation(/1/)
10.4 1995 Stock Option Plan dated as of May 1, 1995(/1/)
10.5 Letter Agreement dated February 17, 1995 between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/1/)
10.6 Letter dated April 18, 1995 from The Hongkong and Shanghai Banking
Corporation Limited to Tarrant Company Limited regarding the release
of certain security interest(/1/)
10.7 Commercial Lease dated January 1, 1994 and GET and the Company(/1/)
10.8 Tenancy Agreement dated July 15, 1994 between Lynx International
Limited and Tarrant Company Limited as amended by that certain
Supplementary Tenancy Agreement dated December 30, 1994 and that
certain Second Supplementary Tenancy Agreement dated December 31,
1994(/1/)
42
Exhibit
Number Description
- ------- -----------
10.9 Lease Agreement dated June 10, 1994, between Yip Sik Kin and Tarrant
Company Limited (translated from Chinese)(/1/)
10.10 Tenancy Contract effective as of December 24, 1994, between Khalifa
Muhairi and Tarrant Trading Co. Ltd.(/1/)
10.11 Agreement dated as of June 1, 1995, by and among Pret-A-Porter, the
Company, French Designers, Inc., Bernard Aidan, Gerard Guez and Todd
Kay(/5/)
10.12 Services Agreement dated as of April 1, 1995, by and between F.I.S.,
Inc. and the Company(/2/)
10.13 Services Agreement dated as of October 1, 1994, by and between the
Company and GET(/1/)
10.14 Services Agreement dated as of October 1, 1994, by and between the
Company and Lynx International Limited(/1/)
10.15 Indemnification Agreement dated as of March 14, 1995, by and among the
Company, Gerard Guez and Todd Kay(/2/)
10.16 Promissory Note in the initial principal amount of $2 million dated
February 8, 1996, by Gerard Guez in favor of the Company(/2/)
10.17 Promissory Note in the initial principal amount of $1 million dated
February 8, 1995, by Todd Kay in favor of the Company(/2/)
10.18 Promissory Note in the principal amount of $1,334,566.71 dated
December 31, 1994, by P.I.S., Inc. in favor of the Company(/2/)
10.19 Release dated as of June 1, 1995, by and between the Company and
certain other parties signatory thereto(/2/)
10.20 Option Agreement dated as of July 28, 1995, by and among Limited
Direct Associates, L.P., Gerard Guez, Todd Kay and the Company(/5/)
10.21 Registration Rights Agreement dated as of July 28, 1995, by and among
the Company and Limited Direct Associates, L.P.(/5/)
10.22 Reorganization and Tax Indemnification Agreement dated as of June 13,
1995, by and among the Company and its shareholders(/5/)
10.23 Employment Agreement January 1, 1995, by and between the Company and
Gerard Guez(/2/)
10.23.1 Employment Agreement effective January 1, 1998, by and between the
Company and Gerard Guez(/13/)
43
Exhibit
Number Description
- ------- -----------
10.23.2 First amendment to Employment Agreement dated as of January 10, 2000 by
and between Gerard Guez and the Company ( /21/ )
10.24 Agreement dated as of January 1, 1995, by and between the Company and
Todd Kay(/1/)
10.24.1 Employment Agreement effective January 1, 1998, by and between the
Company and Todd Kay(/13/)
10.24.2 First Amendment to Employment Agreement dated as of January 10, 2000
by and between Todd Kay and the Company
10.25 Employment Agreement dated as of January 1, 1994, by and between the
Company and Jimmy Esebag, as amended, by that certain Amendment No. 1
dated as of June 1, 1995(/2/)
10.26 Employment Agreement dated as of November 18, 1994, by and between the
Company and Mark B. Kristof(/1/)
10.27 Employment Agreement dated as July 5, 1994, by and between the Company
and Bradley R. Kenson(/1/)
10.28 License Agreement dated January 1, 1994, by and between the Company
and GET(/1/)
10.29 Assignment dates as of June 1, 1995 with respect to the GET!
trademark, executed by GET in favor of the Company(/2/)
10.30 Amendment No. 1 to Commercial Lease dated as of April 1, 1995 by and
between GET and the Company(/2/)
10.31 Lease and Services Agreement dated as of June 1, 1995, by and between
Tarrant Company Limited and French Designers, Inc.(/2/)
10.32 Note in the principal amount of $2,600,000 dated May 15, 1995, by the
Company in favor of Imperial Bank(/2/)
10.33 Letter Agreement dated May 17, 1995, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/2/)
10.34 Buying Agency Agreement executed as of December 19, 1992, between
P.I.S., Inc. and Tarrant Company Ltd.(/2/)
10.35 Buying Agency Agreement executed as of April 4, 1995, by Azteca
Production International, Inc. and Tarrant Company Ltd., with the
Company acknowledging as to certain matters(/2/)
10.36 Tripartite Agreement Assignment of Factoring Proceeds (Advances)
executed and delivered June 6, 1995, by the Company, and accepted and
agreed to by The Hongkong and Shanghai Banking Corporation Limited and
NationsBanc Commercial Corporation(/2/)
10.36.1 Amendment to Three Party Special Deposit Account Agreement(/8/)
44
Exhibit
Number Description
- ------- -----------
10.37 Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) entered into as
of June 6, 1995, by and between the Hongkong and Shanghai Banking
Corporation Limited and the Company(/2/)
10.38 Security Agreement (Tarrant Co. Ltd. Draft Acceptance) entered into as
of June 6, 1995, by and between The Hongkong and Shanghai Banking
Corporation Limited and the Company(/2/)
10.39 Agreement dated March 14, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/3/)
10.40 Agreement dated March 17, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/3/)
10.41 Underwriting Agreement dated as of July 24, 1995, by and among the
Company, Gerard Guez, Todd Kay and Prudential Securities
Incorporated(/5/)
10.42 Letter agreement dated August 10, 1995, by and among the Company and
NationsBanc Commercial Corporation(/4/)
10.42.1 Amendment dated June 9, 1997 to Factoring Agreement effective as of
September 28, 1993, as amended, by and between the Company and
NationsBanc Commercial Corporation(/8/)
10.43 Letter agreement dated January 30, 1996, by and between Tarrant
Company Limited and The Hongkong Shanghai Banking Corporation
Limited(/5/)
10.43.1 Letter agreement dated May 28, 1996, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/8/)
10.43.2 Letter agreement dated April 16, 1998, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/11/)
10.44 Promissory Note in the principal amount of $3 million dated March 25,
1996, by GET in favor of the Company(/6/)
10.45 Deed of Trust dated March 25, 1996 by and Between GET and the
Company(/6/)
10.46 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Gerard Guez and the Company(/6/)
10.47 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Todd Kay and the Company(/6/)
10.48 Letter agreement dated February 22, 1996, by and between Tarrant
Company Limited and Standard Chartered Bank(/7/)
45
Exhibit
Number Description
- ------- -----------
10.49 Letter agreement dated March 8, 1996, by and between Tarrant Company
Limited and Standard Chartered Bank(/7/)
10.50 Guarantee Agreement entered into as of August 30, 1996, by and between
Standard Chartered Bank and the Company(/7/)
10.51 Letter of Undertaking entered into as of August 30, 1996, by and between
Standard Chartered Bank and the Company(/7/)
10.52 Intercreditor Agreement entered into as of November 1, 1996, between
The Hongkong and Shanghai Banking Corporation Limited, Standard
Chartered Bank and Tarrant Company Limited(/7/)
10.53 Security Agreement entered into as of November 1, 1996, by and between
Standard Chartered Bank and the Company(/7/)
10.53.1 Termination Agreement dated as of March 29, 2002, by and between
Standard Chartered Bank and Tarrant Apparel Group.(/25/)
10.54 Amendment to Security Agreement (Guaranty of Tarrant Co. Ltd. Debt)
entered into as of November 1, 1996, between The Hongkong and
Shanghai Banking Corporation Limited and the Company(/7/)
10.55 Agreement dated January 29, 1997 by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/7/)
10.56 Form of Indemnification Agreement with directors and certain executive
officers(/8/)
10.57 Special Deposit Account Agreement(8)
10.58 Accounts Receivable Financing Agreement dated June 13, 1997, by between
the Company and The CIT GroupCommercial Services, Inc.(8)
10.58.1 Letter Agreement dated October 1, 1997 regarding Accounts Receivable
Financing Agreement, by and between the Company and The CIT
GroupCommercial Service., Inc.(13)
10.59* Asset Purchase Agreement dated February 18, 1998, by and between Marble
Limited and MGI International Limited(10)
10.60* Asset Purchase Agreement dated February 18, 1998, by and between the
Company and Marshall Gobuty International U.S.A., Inc.(10)
10.61 Employment Agreement dated February 23, 1998, by and between the Company
and Marshall Gobuty(10)
10.62 Noncompetition Agreement dated February 23, 1998, by and between
Marshall Gobuty International U.S.A., Inc. and Marshall Gobuty, on the
one hand, and the Company, on the other hand(10)
10.63 Noncompetition Agreement dated February 23, 1998, by and between MGI
International Limited and Marshall Gobuty, on the one hand, and the
Company, on the other hand(10)
10.64 Loan Agreement dated as of July 1, 1998, between the Company and
Standard Chartered Bank(12)
46
Exhibit
Number Description
- ------- -----------
10.65 Partnership Interest Purchase Agreement dated as of July 2, 1998, among
Rocky Acquisition, LLC, the Company, Limited Direct Associates, L.P.,
Rocky Apparel, Inc., and Gabriel Manufacturing Company(13)
10.66 Escrow Agreement made as of July 2, 1998, by and among the Company,
Gabriel Manufacturing Company and Rocky Apparel, Inc.(13)
10.67 Facility Development Agreement dated as of December 2, 1998, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V.(13)
10.67.1 Letter of Intent to Purchase Twill mill dated August 30, 2002. (/27/)
10.68+ Agreement for Purchase of Assets dated as of February 22, 1999, by and
among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de C.V.,
Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma Benavides
Montes De Oca(13)
10.68.1 Final Agreement for Purchase of Assets dated as of April 18, 1999, by
and among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de
C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
Benavides Montes De Oca (15)
10.69 Agreement for Purchase of Assets effective as of the twenty-third day of
March, 1999, by and among CMG, Inc., Charles Ghailian, CHAZZZ
Acquisition, L.L.C. and the Company(14)
10.70 Employment Agreement effective as of the twenty-third day of March,
1999, by and between Charles Ghailian and the Company to pay CMG Inc.
(14)
10.71 Non-Negotiable Promissory Note dated March 23, 1999 to pay CMG
Inc.(/14/)
10.71.1 Non-Negotiable Promissory Note dated February 14, 2000 to pay CMG Inc.
(20)
10.72 Escrow Agreement, by and among the Company, Tarrant Mexico, S. de R.L.
de C.V. and Jamil Textil, S.A. de C.V. dated as of April 1,
1999(/14/)
10.72.1 Final Escrow Agreement dated as of May 24, 1999, by and among Tarrant
Apparel Group, Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A.
de C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
Benavides Montes De Oca(/15/)
10.73 Employment Agreement dated as of April 1, 1999 by and between Kamel
Nacif and Tarrant Mexico, S. de R.L. de C.V.(/14/)
10.73.1 Amendment to Employment Agreement entered into August 7, 2000 by and
between Tarrant Mexico, S. de R.L. de C.V. and Kamel Nacif (20)
47
Exhibit
Number Description
- ------- -----------
10.74 Agreement for Purchase of Stock dated as of August 1, 1999, by and
among Tag Mex, Inc., NO! Jeans, Inc., Antonio Haddad Haddad, Tarrant
Apparel Group and the shareholders of Industrial Exportadora Famian,
S.A. de C.V. and Coordinados Elite, S.A, de C.V.*(/15/)
10.75 Noncompetition Agreement dated as of August 1, 1999, by and among Tag
Mex, Inc., NO! Jeans, Inc., Antonio Haddad, Tarrant Apparel
Group and the shareholders of Industrial Exportadora Famian, S.A. de
C.V. and Coordinados Elite, S.A, de C.V.(/16/)
10.77 Loan Agreement dated September 1, 1999 by and between General Electric
Capital Corporation and Tarrant Apparel Group(/16/)
10.77.1 Amendment No. 1 to Loan Agreement dated September 12, 1999 by and
between General Electric Capital Corporation and Tarrant Apparel
Group(/16/)
10.77.2 Modification Agreement entered into as of June 7, 2002, by and between
General Electric Capital Corporation and Tarrant Apparel Group. (/26/)
10.78 Promissory Note dated September 1, 1999 to pay to the order of General
Electric Capital Corporation the loan amount referred to in Exhibit
10.77(/16/)
10.79 Corporate Guaranty dated September 1, 1999 by Tarrant Mexico, S. de
R.L. de C.V. in connection with loan agreement referred to in Exhibit
10.77(/16/)
10.79.1 Amendment No. 1 to Corporate Guaranty dated September 12, 1999 by
Tarrant Mexico, S. de R.L. de C.V. in connection with loan agreement
referred to in Exhibit 10.77(/16/)
10.80 Master Security Agreement made as of September 1, 1999 by and between
General Electric Capital Corporation and Tarrant Mexico, S. de R.L.
de C.V. in connection with loan agreement referred to in Exhibit
10.77(/16/)
10.80.1 Amendment No. 1 to Master Security Agreement made as of September 12,
1999 by and between General Electric Capital Corporation and Tarrant
Mexico, S. de R.L. de C.V. in connection with loan agreement referred
to in Exhibit 10.77(/16/)
10.81 Loan Agreement dated December 30, 1999 by and between Standard
Chartered Bank and Tarrant Apparel Group(/17/)
10.82 Factoring Agreement dated November 24, 1999 by and between MTB Bank
and Rocky Apparel, LLC.(/17/)
10.83 Machinery and Equipment Agreement dated November 17, 1999 by and
between Tarrant Mexico, S. de R.L. de C.V and Banc of America Leasing
& Capital, L.L.C.(/17/)
48
Exhibit
Number Description
- ------- -----------
10.84 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Antonio Haddad
Haddad(/17/)
10.85 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Mario Alberto Haddad
Yunes(/17/)
10.86 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Marco Antonio Haddad
Yunes(/17/)
10.87 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Miguel Angel Haddad
Yunes(/17/)
10.88 Non-Negotiable Promissory Note dated August 1, 1999 to pay to the order
of Antonio Haddad Haddad(/17/)
10.89 Stock Pledge Agreement dated August 1, 1999 by and between TAG MEX,
INC. and those individuals whose names appear on the signature
page(/17/)
10.90 Revolving Credit, Factoring and Security Agreement dated January 21,
2000 by and between Tarrant Apparel Group, Tag Mex, Inc., and GMAC
Commercial Credit LLC(/17/)
10.90.1 First Amendment to Revolving Credit, factoring and security agreement
dated January 21, 2000 by and between Tarrant Apparel Group, Tag Mex,
Inc. and GMAC Commercial Credit LLC (20)
10.90.2 Second Amendment to Revolving Credit, factoring and security agreement
dated January 21, 2000 by and between Tarrant Apparel Group, Tag Mex,
Inc. and GMAC Commercial Credit LLC (20)
10.90.3 Third Amendment to Revolving Credit, factoring and security agreement
dated January 21, 2000 by and between Tarrant Apparel Group, Tag Mex,
Inc. and GMA Commercial Credit LLC (20)
10.90.4 Letter agreement dated June 29,2001 by and between the Company and GMAC
Commercial Credit (/22/)
10.90.5 Waiver agreement dated November 2001 by and between Tarrant Apparel
Group And GMAC Commercial Credit (/24/)
10.90.6 Letter Amendment dated March 2002 by and between Tarrant Apparel
Group, Tag Mex, Inc., Fashion Resource (TCL), Inc., United Apparel
Ventures, LLC and GMAC Commercial Credit, LLC. Reference is made to
Revolving Credit, Factoring and Security Agreement dated January
21, 2000. (/25)
10.90.7 Letter Amendment dated January 24, 2003 between Tarrant Apparel
Group, Tag Mex, Inc., Fashion Resource (TCL), Inc., United Apparel
Ventures, LLC and GMAC Commercial Credit, LLC. Reference is made to
Revolving Credit, Factoring and Security Agreement dated January
21, 2000.
49
Exhibit
Number Description
- ------- -----------
10.90.8 Waiver dated November 13, 2002 between Tarrant Apparel Group, Tag
Mex, Inc., Fashion Resource (TCL), Inc., United Apparel Ventures,
LLC and GMAC Commercial Credit, LLC. Reference is made to Revolving
Credit, Factoring and Security Agreement dated January 21, 2000.
10.91 Agreement for Purchase of Assets dated April 12, 2000, by and among
Harvest Wear, Inc., a California corporation (HW), Mapa Trading, LTD,
a Hong Kong corporation (Mapa), Needletex, Inc., a California
corporation (Needletex), Patrick Bensimon (the Shareholder), Jane Doe
International LLC, (formally Needletex, LLC) a Delaware limited
liability company (the Purchaser)(/19/)
10.92 Amendment No. 1 to Facility Development Agreement dated as of March
30, 2000, by and between Tarrant Mexico, S. de R.L. de C.V. and Tex
Transas, S.A. de C.V.(/18/)
10.93 Equipment Purchase Agreement dated as of October 16, 2000, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V.(/18/)
10.94 Secured Promissory Note dated October 5, 2000 in the principal amount of
U.S. $47,702,128 of Tex Transas, S.A. de C.V.(/18/)
10.94.1 Amended Secured Promissory Note dated October 5, 2000 in the principal
amount of U.S. $47,702,128 of Tex Transas, S.A. de C.V (Amended and
Restated as of December 18, 2001).
10.94.2 Amendment No. 2 to Secured Promissory Note dated January 2, 2002 between
Trans Textil International, S.A. de. C.V. and Tarrant Company Limited
and Trade Link Holdings Company.
10.95 Equipment Lease dated as of October 16, 2000, by and between Tarrant
Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de C.V.(/18/)
10.96 Production Agreement dated as of October 16, 2000, by and between Tag
Mex, Inc. and Tex Transas, S.A. de C.V.(/18/)
10.97 Pledge Security Agreement dated as of October 16, 2000, by and between
Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de C.V.(/18/)
10.98 Promissory note dated February 28, 2001 in the amount of US
$4,119,545.06 to pay to the order of Standard Chartered Bank (20)
10.99 Stock repurchase agreement entered into July 10, 2000 by and among
Tarrant Apparel Group and Gabriel Manufacturing Company (20)
10.99.1 Consulting Agreement effective as of October 9, 2001 by and between
Gabriel Zeitounti and the Company (23)
10.100 Agreement for Purchase of Assets dated August 1, 2000 by and among
Tarrant Mexico, S. de R.L. de C.V., Confecciones Jamil, S.A.de R.L.
de C. and Inmobiliaria Cuadros, S.A. de C.V.(/21/)
50
Exhibit
Number Description
- ------- -----------
10.101 Limited Liability Company Operating Agreement of United Apparel
Ventures, LLC effective as of July 1,2001 (/23/)
10.101.1 Amendment to Operating Agreement dated as of October 23, 2001 by and
among Azteca Production International, Inc. ("Azteca") and "TAG MEX".
(/25/)
10.101.2 Second amendment to Operating Agreement dated as of January 2, 2002 by
and among Azteca Production International, Inc. ("Azteca") and "TAG
MEX". (/25/)
10.101.3 Third Amendment to Operating Agreement dated as of July 5, 2002, by and
between Azteca Production International, Inc, and TAG Mex, Inc. (/26/)
10.102 Employment Agreement effective January 1, 2002 by and between Eddie
Yuen and the Company (/24/)
10.103 Employment Agreement effective January 7, 2002 by and between Patrick
Chow and the Company (/24/)
10.103.1 First Amendment to Employment Agreement dated January 2, 2003, between
Patrick Chow and the Company.
10.104 Security Agreement entered in to as of April 9, 2001, by and between
Banco Nacional De Comercio Exterior, Industrial Exportadora Famian
S.A. and Tarrant Apparel Group (/24/)
10.105 Guaranty Agreement dated as of May 30, 2002 by and between UPS Capital
Global Trade Finance Corporation and Tarrant Apparel Group and Fashion
Resource (TCL), Inc. (/26/)
10.105.1 Conditional Consent Agreement dated December 31, 2002, between UPS
Capital Global Trade Finance Corporation and Fashion Resource
(TCL), Inc.
10.106 Guaranty Agreement dated as of May 30, 2002 by and between UPS Capital
Global Trade Finance Corporation and Gerard Guez. (/26/)
10.107 Syndicated Letter of Credit Facility dated June 13, 2002 by and
between Tarrant Company Limited, Marble Limited and Trade Link
Holdings Limited as Borrowers and UPS Capital Global Trade Finance
Corporation as Agent and Issuer and Certain Banks and Financial
Institutions as Banks. (/26/)
10.107.1 Charge Over Shares dated June 13, 2002 by Fashion Resource (TCL), Inc.
in favor of UPS Capital Global Trade Finance Corporation. (/26/)
10.107.2 Syndicated Composite Guarantee and Debenture dated June 13, 2002
between Tarrant Company Limited, Marble Limited and Trade link
Holdings Limited and UPS Capital Global Trade Finance Corporation.
(/26/)
10.108 Assignment of Promissory Note by Tarrant Apparel Group to Tarrant
Company Limited and to Trade Link Holdings Company dated December 26,
2001. (/26/)
51
Exhibit
Number Description
- ------- -----------
10.110 Assignment of Promissory Note for full settlement of indebtedness
issued by Tex Transas, S.A. de C.V. due to Tarrant Company Limited,
Trade Link Holdings Limited dated December 26, 2001. (/26/)
10.111 Promissory Note dated July 1, 2002 by Tarrant Apparel Group in favor of
Todd Kay. (/26/)
10.111.1 Amendment to Promissory Note dated January 2, 2003, between Todd Kay
and the Company.
10.112 Agreement for Purchase of Assets and Stock dated December 31, 2002, by
and among the Registrant, Tarrant Mexico, S. de R.L. de C.V.,
Machrima Luxembourg International, Sarl, Trans Textil International,
S.A. de C.V., Inmobiliaria Cuadros, S.A. de C.V., Rosa Lisette Nacif
Benavides, Gazi Nacif Borge, Jorge Miguel Echevarria Vazquez, and
Kamel Nacif Borge.+ (/27/)
23.1 Consent of Ernst & Young LLP.
24 Power of Attorney (included on signature page).
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- ----------
* Confidential treatment has been requested for portions of this document.
+ All schedules and or exhibits have been omitted. Any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange
Commission upon request.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on May 4, 1995 (File No.
33-91874).
(2) Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 15, 1995.
(3) Filed as an exhibit to Amendment No. 2 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 11, 1995.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 30, 1995.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(10) Filed as exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
52
(11) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(12) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(15) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
(16) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
(17) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
(18) Filed as an exhibit on Form 8K 10/21/2000.
(19) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(20) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2000.
(21) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2001.
(22) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2001.
(23) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending September 30, 2001.
(24) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2001.
(25) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2002.
(26) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2002.
(26) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending September 30, 2002.
(27) Filed as an exhibit to the Company's Current Report on Form 8K dated
December 31, 2002 and filed on January 15, 2003.
53
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Financial Statements
Report of Independent Auditors..........................................F-2
Consolidated Balance Sheets--December 31, 2001 and 2002.................F-3
Consolidated Statements of Operations--Three year period
ended December 31, 2002.............................................F-4
Consolidated Statements of Shareholders' Equity--Three
year period ended December 31, 2002...............................F-5
Consolidated Statements of Cash Flows--Three year period
ended December 31, 2002.............................................F-6
Notes to Consolidated Financial Statements..............................F-7
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts.........................F-29
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Tarrant Apparel Group
We have audited the accompanying consolidated balance sheets of Tarrant Apparel
Group and subsidiaries as of December 31, 2001 and 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tarrant Apparel
Group and subsidiaries at December 31, 2001 and 2002 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule when considered in relation to the basic financial
statements, taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 6 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142.
/S/ ERNST & YOUNG LLP
---------------------
Los Angeles, California
March 14, 2003
F-2
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
2001 2002
ASSETS
------
Current assets:
Cash and cash equivalents......................... $ 1,524,447 $ 1,388,482
Accounts receivable, net ......................... 58,576,654 65,287,902
Due from affiliates .............................. 2,064,923 10,269,251
Due from officers ................................ 87,456 456,500
Inventory ........................................ 50,600,584 44,782,154
Temporary quota................................... 369,849 --
Current portion of note receivable--related party. 3,468,490 --
Prepaid expenses and other receivables............ 6,274,330 5,135,672
Income taxes receivable........................... 692,868 280,200
------------ ------------
Total current assets............................ 123,659,601 127,600,161
Property and equipment, net ...................... 90,173,451 159,998,629
Permanent quota, net.............................. 73,978 --
Note receivable--related party, less current
portion.......................................... 41,430,564 --
Other assets...................................... 3,932,146 2,539,040
Excess of cost over fair value of net assets
acquired, net.................................... 29,196,886 28,064,019
------------ ------------
Total assets.................................... $288,466,626 $318,201,849
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term bank borrowings ....................... $ 22,085,349 $ 29,326,924
Accounts payable.................................. 31,560,131 39,142,350
Accrued expenses.................................. 9,648,389 12,566,475
Income taxes...................................... 7,177,324 12,640,388
Deferred tax liabilities.......................... 514,913 --
Due to shareholders............................... 2,307,687 486,875
Current portion of long-term obligations.......... 25,256,628 21,706,502
------------ ------------
Total current liabilities....................... 98,550,421 115,869,514
Long-term obligations............................... 63,993,808 55,903,976
Deferred tax liabilities ........................... -- 407,751
Minority interest in UAV............................ 757,927 3,205,167
Minority interest in Tarrant Mexico................. -- 21,654,538
Commitments and contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none
(2001) and 100,000 shares (2002) issued and
outstanding........................................ -- 8,820,573
Common stock, no par value, 20,000,000 shares
authorized; 15,840,815 shares (2001) and
15,846,315 (2002) issued and outstanding......... 69,341,090 69,368,239
Contributed capital................................. 1,434,259 1,434,259
Retained earnings................................... 62,958,375 56,873,094
Notes receivable from shareholders.................. (12,118,773) (5,601,804)
Accumulated other comprehensive income (loss)....... 3,549,519 (9,733,458)
------------ ------------
Total shareholders' equity...................... 125,164,470 121,160,903
------------ ------------
Total liabilities and shareholders' equity...... $288,466,626 $318,201,849
============ ============
See accompanying notes.
F-3
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------
2000 2001 2002
------------ ------------ -----------
Net sales........................... $395,169,020 $330,253,548 $347,390,930
Cost of sales....................... 332,333,227 277,525,010 302,082,144
------------ ------------ ------------
Gross profit........................ 62,835,793 52,728,538 45,308,786
Selling and distribution expenses... 17,580,135 14,345,356 10,757,029
General and administrative
expenses........................... 40,326,636 33,136,008 30,082,061
Amortization of excess of cost over
fair value of net assets acquired.. 2,840,505 3,317,428 --
------------ ------------ ------------
Income from operations.............. 2,088,517 1,929,746 4,469,696
Interest expense.................... (9,849,502) (7,807,918) (5,443,995)
Interest income..................... 1,294,909 3,255,843 4,748,144
Minority interest................... 1,312,651 (412,022) (4,580,766)
Other income........................ 1,350,367 1,853,066 2,647,975
Other expense ...................... (193,359) (855,994) (2,004,073)
------------ ------------ ------------
Loss before provision for income
taxes and cumulative effect of
accounting change.................. (3,996,417) (2,037,279) (163,019)
Provision (credit) for income taxes (1,478,675) 851,977 1,051,018
------------ ------------ ------------
Loss before cumulative effect of
accounting change.................. $(2,517,742) $(2,889,256) $(1,214,037)
Cumulative effect of accounting
change............................. -- -- (4,871,244)
------------ ------------ ------------
Net loss ........................... $(2,517,742) $(2,889,256) $(6,085,281)
============ ============ ============
Net loss per share - Basic and Diluted:
Before cumulative effect of
Accounting change................. $ (0.16) $ (0.18) $ (0.08)
Cumulative effect of accounting
change............................ -- -- (0.30)
After cumulative effect of
accounting change................. $ (0.16) $ (0.18) $ (0.38)
Weighted average shares outstanding:
Basic and Diluted................... 15,814,693 15,824,750 15,834,122
See accompanying notes.
F-4
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other Notes Total
Preferred Common Contributed Retained Comprehensive from Shareholders'
Stock Stock Capital Earnings Income (Loss) Shareholders Equity
---------- ----------- ----------- -------------- ------------- ------------ ------------
Balance at December 31,
1999................... $ -- $69,595,141 $1,434,259 $68,365,373 $ 8,698 $ -- $139,403,471
Net loss.............. -- -- -- (2,517,742) -- -- (2,517,742)
Currency translation.. -- -- -- -- (727,702) -- (727,702)
------------
Comprehensive loss.... -- -- -- -- -- -- (3,245,444)
Exercise of stock
options.............. -- 198,000 -- -- -- -- 198,000
Repurchase of shares.. -- (518,525) -- -- -- -- (518,525)
Income tax benefit
from exercise of
stock options........ -- 28,067 -- -- -- -- 28,067
Advances to shareholders,
net................... -- -- -- -- -- (5,376,486) (5,376,486)
---------- ----------- ----------- ------------ ----------- ----------- ------------
Balance at December 31,
2000................... -- 69,302,683 1,434,259 65,847,631 (719,004) (5,376,486) 130,489,083
Net loss.............. -- -- -- (2,889,256) -- -- (2,889,256)
Currency translation.. -- -- -- -- 4,268,523 -- 4,268,523
-----------
Comprehensive income.. -- -- -- -- -- -- 1,379,267
Exercise of stock
options.............. -- 33,750 -- -- -- -- 33,750
Income tax benefit
from exercise of
stock options........ -- 4,657 -- -- -- -- 4,657
Advances to shareholders,
net.................. -- -- -- -- -- (6,742,287) (6,742,287)
---------- ---------- ----------- ----------- ----------- ----------- ------------
Balance at December 31,
2001................... -- 69,341,090 1,434,259 62,958,375 3,549,519 (12,118,773) 125,164,470
Net loss.............. -- -- -- (6,085,281) -- -- (6,085,281)
Currency translation.. -- -- -- -- (13,282,977) -- (13,282,977)
------------
Comprehensive loss.... -- -- -- -- -- -- (19,368,258)
Exercise of stock
options.............. -- 24,135 -- -- -- -- 24,135
Income tax benefit
from exercise of
stock options........ -- 3,014 -- -- -- -- 3,014
Issuance of preferred
stock............... 8,820,573 -- -- -- -- -- 8,820,573
Repayment from share-
holders, net......... -- -- -- -- -- 6,516,969 6,516,969
---------- ----------- ---------- ----------- ------------ ----------- ------------
Balance at December 31,
2002................... $8,820,573 $69,368,239 $1,434,259 $56,873,094 $(9,733,458) $(5,601,804) $121,160,903
========== =========== ========== =========== =========== =========== ============
See accompanying notes
F-5
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
2000 2001 2002
------------ ------------ ------------
Operating activities:
Net loss..................................... $ (2,517,742) $ (2,889,256) $ (6,085,281)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Deferred taxes............................. (553,087) 1,273,305 (107,162)
Depreciation and amortization.............. 12,580,992 14,564,623 10,130,132
Accrued interest on note receivable........ -- -- (4,452,490)
Cumulative effect of accounting change..... -- -- 4,871,244
(Gain) loss on sale of fixed assets........ (10,202) 26,861 5,291
Unrealized (gain) loss on foreign currency. (411,811) (103,705) 1,014,696
Minority interest.......................... (1,312,650) 757,927 4,426,080
Gain on legal settlement................... -- -- (473,041)
Provision for returns and discounts........ 1,127,089 1,830,841 453,167
Changes in operating assets and
liabilities:
Accounts receivable...................... 3,485,045 5,902,995 (7,141,536)
Due from affiliates...................... (6,533,328) (2,102,811) (10,746,255)
Inventory................................ 445,238 10,474,030 5,818,431
Temporary quota.......................... 4,293,572 (142,221) 369,849
Prepaid expenses and other receivables... (4,837,206) 1,385,875 1,551,324
Accounts payable......................... 1,301,541 2,343,419 7,646,926
Accrued expenses and income tax payable.. 7,806,018 (3,270,616) 8,211,770
------------ ------------ ------------
Net cash provided by
operating activities.................. 14,863,469 30,051,267 15,493,145
Investing activities:
Purchase of fixed assets..................... (18,883,236) (3,918,602) (2,984,547)
Acquisitions, net of cash.................... (2,734,828) (6,750,391) (2,355,954)
Purchase of permanent quota.................. (221,934) -- --
Collection on note receivable................ 766,150 2,036,924 --
(Increase) decrease in other assets.......... (7,173,379) (594,660) 509,524
------------ ------------ ------------
Net cash used in investing activities..... (28,247,227) (9,226,729) (4,830,977)
Financing activities:
Short-term bank borrowings, net.............. (11,359,688) (16,927,528) 7,241,576
Proceeds from long-term obligations.......... 36,746,378 52,894,023 198,551,201
Payment of long-term obligations and bank
borrowings.................................. (9,608,034) (40,376,783) (211,894,730)
Advances/repayments to
shareholders/officers....................... (40,453,524) (20,505,451) (3,988,538)
Borrowings from shareholders/officers........ 39,442,067 2,743,353 790,091
Repurchase of shares......................... (518,525) -- --
Exercise of stock options including related
tax benefit................................. 226,067 38,407 27,149
------------ ------------ ------------
Net cash provided by (used in)
financing activities.................. 14,474,741 (22,133,979) (9,273,251)
Effect of changes in foreign currency........ (681,197) 184,591 (1,524,882)
------------ ------------ ------------
Increase(decrease)in cash and cash equivalents. 409,786 (1,124,850) (135,965)
Cash and cash equivalents at beginning of year 2,239,511 2,649,297 1,524,447
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,649,297 $ 1,524,447 $ 1,388,482
============ ============ ============
See accompanying notes
F-6
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF CONSOLIDATION
The accompanying financial statements consist of the consolidation of Tarrant
Apparel Group, a California corporation (formerly "Fashion Resource, Inc.") (the
"Parent Company" or the "Company"), and its wholly owned Subsidiaries located
primarily in the U.S., Mexico, and Asia. The Company owns 51% of Jane Doe
International, LLC ("JDI"), and 50.1% of United Apparel Ventures ("UAV"). The
Company consolidates both of these entities and reflects the minority interests
in earnings (losses) of the ventures in the accompanying financial statements.
All inter-company amounts are eliminated in consolidation.
The Company serves both specialty retail and mass merchandise store chains by
designing, merchandising and contracting for the manufacture, manufacturing
directly and selling of casual, moderately priced apparel, for women, men and
children under private label. The Company also sources apparel and operates its
own vertically integrated manufacturing facilities.
REVENUE RECOGNITION
Revenue is recognized at the point of shipment for all merchandise sold based on
FOB shipping point. For merchandise shipped on landed duty paid (LDP) terms,
revenue is recognized at the point of either leaving Customs for direct
shipments or at the point of leaving our warehouse where title is transferred.
SHIPPING AND HANDLING COSTS
Freight charges are included in selling and distribution expenses in the
statement of operations and amounted to $3,022,000, $2,509,000 and $2,136,000
for the years ended December 31, 2000, 2001 and 2002, respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.
ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS
The Company evaluates the collectibility of accounts receivable and chargebacks
(disputes from the customer) based upon a combination of factors. In
circumstances where the Company is aware of a specific customer's inability to
meet its financial obligations (such as in the case of bankruptcy filings or
substantial downgrading of credit sources), a specific reserve for bad debts is
taken against amounts due to reduce the net recognized receivable to the amount
reasonably expected to be collected. For all other customers, the Company
recognizes reserves for bad debts and chargebacks based on its historical
collection experience. If collection experience deteriorates (for example, due
to an unexpected material adverse change in a major customer's ability to meet
its financial obligations to us), the estimates of the recoverability of amounts
due the Company could be reduced by a material amount.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
COST OF SALES
Cost of sales includes costs related to product costs, direct labor,
manufacturing overhead, duty, quota, freight in, brokerage and warehousing.
F-7
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SELLING AND DISTRIBUTION EXPENSES
Selling and distribution expenses include expenses related to samples, travel
and entertainment, salaries, rent and other office expenses, professional fees,
freight out and selling commissions incurred in the sales process.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include expenses related to research and
product development, travel and entertainment, salaries, rent and other office
expenses, depreciation, professional fees and bank charges.
PRODUCT DESIGN, ADVERTISING AND SALES PROMOTION COSTS
Product design, advertising and sales promotion costs are expensed as incurred.
Product design, advertising and sales promotion costs included in operating
expenses in the accompanying statements of operations (excluding the costs of
manufacturing samples) amounted to approximately $1,931,000, $1,621,000 and
$1,340,000 in 2000, 2001 and 2002, respectively.
QUOTA
The Company purchases quota rights to be used in the importation of its products
from certain foreign countries. The effect of quota transactions is accounted
for as a product cost.
Permanent quota entitlements were principally obtained through free allocations
by the Hong Kong Government pursuant to an import restraint between Hong Kong
and the United States and are renewable on an annual basis, based upon the prior
year utilization. Permanent quota entitlements acquired from outside parties are
amortized over three years on a straight-line basis, and amounted to $418,000,
net of amortization of $1.8 million at December 31, 2000, $74,000, net of
amortization of $2.1 million at December 31, 2001 and $0, net of amortization of
$2.2 million at December 31, 2002.
Temporary quota represents quota rights acquired from other permanent quota
entitlement holders on a temporary basis. Temporary quota has a maximum life of
twelve months. The cost of temporary quota purchased for use in the current year
has been assigned to inventory purchases while the cost of temporary quota
acquired for usage in the year following the balance sheet date is recorded as a
current asset.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Additions and betterments are
capitalized while repair and maintenance costs are charged to operations as
incurred. Depreciation of property and equipment is provided for by the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized using the straight-line method over the lesser of their estimated
useful lives or the term of the lease. Upon retirement or disposal of property
and equipment, the cost and related accumulated depreciation are eliminated from
the accounts and any gain or loss is reflected in the statements of operations.
Repair and maintenance costs are charged to expense as incurred. The estimated
useful lives of the assets are as follows:
Buildings .................................... 35 to 40 years
Equipment .................................... 7 to 15 years
Furniture and Fixtures ....................... 5 to 7 years
Vehicles ..................................... 5 years
Leasehold Improvements ....................... Term of lease
INTANGIBLES
The excess of cost over fair value of net assets acquired was amortized over
five to thirty years through December 31, 2001. Effective January 1, 2002, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." According
to
F-8
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
this statement, goodwill and other intangible assets with indefinite lives are
no longer subject to amortization, but rather an annual assessment of impairment
applied on a fair-value-based test. The Company adopted SFAS No. 142 in fiscal
2002 and performed its first annual assessment of impairment, which resulted in
an impairment loss of $4.9 million.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of long-lived asserts are reviewed when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment loss has occurred based on
the lowest level of identifiable expected future cash flow, then a loss is
recognized in the statement of operations using a fair value based model.
DEFERRED FINANCING COST
Included in the other assets are deferred financing costs of $949,000 and
$638,000 at December 31, 2001 and 2002, respectively. These costs of obtaining
financing are being amortized as interest expense over the term of the related
debt.
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes", which
prescribes the use of the liability method to compute the differences between
the tax basis of assets and liabilities and the related financial reporting
amounts using currently enacted tax laws and rates.
The Company's Hong Kong corporate affiliates are taxed at an effective Hong Kong
rate of 16%. No domestic tax provision has been provided for $48.7 million of
un-remitted retained earnings of these Hong Kong corporations, as the Company
intends to maintain these amounts in Hong Kong on a permanent basis in support
of its working capital requirements.
NET LOSS PER SHARE
Net loss per share has been computed in accordance with SFAS No. 128, "Earnings
Per Share". All options have been excluded from the computation in 2000, 2001
and 2002 as the impact would be anti-dilutive.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Mexico and Hong Kong subsidiaries are translated
at the rate of exchange in effect on the balance sheet date; income and expenses
are translated at the average rates of exchange prevailing during the year. The
functional currencies in which the Company transacts business are the Hong Kong
dollar and the peso in Mexico.
Foreign currency gains and losses resulting from translation of assets and
liabilities are included in other comprehensive income (loss). Transaction gains
or losses, other than inter-company debt deemed to be of a long-term nature, are
included in net income (loss) in the period in which they occur. At December 31,
2002, the Hong Kong subsidiaries have retained earnings of $67.2 million and an
inter-company receivable due from Tarrant Apparel Group of $19.8 million.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Considerable judgment
is required in estimating fair values. Accordingly, the estimates may not be
indicative of the amounts that the Company could realize in a current market
exchange. The carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair values. The carrying amounts of the Company's
variable rate borrowings under the various short-term borrowings and long-term
debt arrangements approximate fair value.
F-9
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentration of
credit risk consist primarily of cash equivalents, trade accounts receivable and
amounts due from factor.
The Company's products are primarily sold to mass merchandisers and specialty
retail stores. These customers can be significantly affected by changes in
economic, competitive or other factors. The Company makes substantial sales to a
relatively few, large customers. In order to minimize the risk of loss, the
Company assigns certain of its domestic accounts receivable to a factor without
recourse or requires letters of credit from its customers prior to the shipment
of goods. For non-factored receivables, account-monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required. The
following table presents the percentage of net sales concentrated with certain
customers. Customer A represents a group of customers under common ownership.
2000 2001 2002
---- ---- ----
Customer A................................................. 44.2% 22.8% 22.6%
Customer B (formerly part of A in 2000).................... -- 20.5% 17.6%
Customer C................................................. 9.1 12.2% 9.7%
Customer D................................................. -- 7.8% 17.4%
The Company maintains demand deposits with several major banks. At times, cash
balances may be in excess of Federal Deposit Insurance Corporation or equivalent
foreign insurance limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EMPLOYEE STOCK OPTIONS
The Company accounts for employee stock options using the intrinsic value method
rather than the alternative fair-value accounting method. Under the
intrinsic-value method, if the exercise price of the employee's stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 148, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
weighted-average risk-free interest rate of 6% for 2000 and 2001 and 4% for
2002; dividend yields of 0% for 2000, 2001 and 2002; weighted-average volatility
factors of the expected market price of the Company's Common Stock of 1.28 for
2000, 1.22 for 2001, and 0.65 for 2002; and a weighted-average expected life of
the option of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in the
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
F-10
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2000 2001 2002
----------- ---------- -----------
Pro forma net loss.................. $(7,445,975) $(7,035,501) $(9,519,060)
Net loss as reported................ $(2,517,742) $(2,889,256) $(6,085,281)
Pro forma loss per share
Basic............................. $ (0.47) $ (0.44) $ (0.60)
Diluted........................... $ (0.47) $ (0.44) $ (0.60)
Net loss per share
Basic............................. $ (0.16) $ (0.18) $ (0.38)
Diluted........................... $ (0.16) $ (0.18) $ (0.38)
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets". This statement addresses the financial
accounting and reporting for the impairment and disposal of long-lived assets.
It supercedes and addresses significant issues relating to the implementation of
SFAS No. 121, "Accounting for the Impairment of Disposal of Long-Lived Assets
and For Long-Lived Assets to Be Disposed Of". SFAS No. 144 retains many of the
fundamental provisions of SFAS No. 121 and establishes a single accounting
model, based on the framework established in SFAS No. 121, for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired.
The Company adopted this standard as of the beginning of fiscal 2002. The
application of SFAS No. 144 did not have a material impact on the Company's
results of operations or financial position.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The provisions of
this statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The impact on future
financial statements will depend on future exit or disposal activities.
In the current year, the Company adopted the provisions of SFAS No. 148
"Accounting for Stock-Based Compensation--Transition and Disclosure", which
amends SFAS No. 123, "Accounting for Stock-Based Compensation" and Accounting
Principles Board Opinion 28, "Interim Financial Reporting," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock based compensation and the effect of the method used on
reported results. The Company has adopted the disclosure provisions of SFAS No.
148, which require expanded disclosure regarding stock-based compensation in the
accounting policies footnote to the consolidated financial statements. The
expanded disclosure will be required in our quarterly financial reports
beginning in the first quarter of 2003.
CURRENCY RATE HEDGING
The Company manufactures in a number of countries throughout the world,
including Hong Kong and Mexico, and, as a result, is exposed to movements in
foreign currency exchange rates. Periodically the Company will enter into
various currency rate hedges. The primary purpose of the Company's foreign
currency hedging activities is to manage the volatility associated with foreign
currency purchases of materials and equipment in the normal course of business.
The Company utilizes forward exchange contracts with maturities of one to three
months. The Company enters into certain foreign currency derivative instruments
that do not meet hedge accounting criteria. These primarily are intended to
protect against exposure related to financing transactions (equipment) and
income from international operations. The net impact of the related gains and
losses was not material.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-11
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
December 31,
------------------------
2001 2002
----------- -----------
U.S. trade accounts receivable..................... $41,266,134 $42,979,762
Foreign trade accounts receivable.................. 17,846,606 16,445,868
Due from factor.................................... 1,507,089 4,176,598
Other receivables.................................. 4,123,073 6,002,295
Allowance for returns, discounts and bad debts..... (6,166,248) (4,316,621)
----------- -----------
$58,576,654 $65,287,902
=========== ===========
The Debt Facility includes a factoring arrangement whereby the Company factors
with GMAC accounts receivables from customers with debt ratings below BBB. The
Company does not receive advances against these receivables, and is paid only
upon collection of proceeds. For this credit insurance arrangement, the Company
pays the factor a commission of 60 basis points.
3. INVENTORY
Inventory consists of the following:
December 31,
-----------------------
2001 2002
----------- -----------
Raw materials, fabric and trim accessories.......... $16,708,651 $12,451,447
Raw cotton.......................................... 2,096,792 1,017,963
Work-in-process..................................... 7,735,827 9,948,700
Finished goods shipments-in-transit................. 3,706,735 4,877,002
Finished goods...................................... 20,352,579 16,487,042
----------- -----------
$50,600,584 $44,782,154
=========== ===========
F-12
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
--------------------------
2001 2002
------------ ------------
Land.......................... $ 1,443,744 $ 1,285,267
Buildings..................... 14,798,596 61,697,034
Equipment..................... 89,427,176 120,270,968
Furniture and fixtures........ 2,442,717 2,428,858
Leasehold improvements........ 11,719,752 10,657,364
Vehicles...................... 1,246,800 1,099,538
------------ ------------
121,078,785 $197,439,029
Less accumulated depreciation
and amortization............. (30,905,334) (37,440,400)
------------ ------------
$ 90,173,451 $159,998,629
============ ============
Depreciation expense, including amortization of assets recorded under capital
leases, totaled $9,352,087, $10,903,237 and $10,056,154 for the years ended
December 31, 2000, 2001 and 2002, respectively.
5. ACQUISITIONS
TWILL MILL
On December 2, 1998, the Company contracted to acquire a fully operational
facility being constructed in Puebla, Mexico by Tex Transas, S.A. de C.V. ("Tex
Transas"). Construction of this facility commenced in the third quarter of 1998,
and it was anticipated that the Company would take possession of this facility
in fiscal 2000. On October 16, 2000, the Company revised its agreement regarding
the fully operational facility to extend its option to purchase the facility.
On December 31, 2002, the Company acquired certain assets of this twill mill
located in Puebla, Mexico from Tex Transas and Inmobiliaria Cuadros, S.A. de
C.V. ("Cuadros"), both of which are affiliated with Kamel Nacif. The price paid
for the asset acquisition consisted of 100,000 shares (the Shares) of Series A
Preferred Stock of the Company valued at $8.8 million, a 25% equity stake in
Tarrant's wholly-owned subsidiary, Tarrant Mexico S. de R.L. de C.V., the
cancellation of approximately $56.9 million of certain notes and accounts
receivables due from the sellers and their affiliates and a cash payment of
$500. The acquisition of the twill mill has been accounted for as the
acquisition of a discrete operating asset. Therefore no amounts were recorded as
goodwill, but were allocated to either the assets acquired or the consideration
paid based on independent valuations received by the Company.
On December 31, 2002, the Company recorded $4.5 million of interest income,
which represented accrued interest on one of the canceled notes receivable. The
interest was recorded as the cash was collected. Pursuant to the terms of the
purchase agreement, interest was accrued through December 31, 2002 as part of
the purchase price.
UNITED APPAREL VENTURES
On July 1, 2001, the Company formed an entity to jointly market, share certain
risks and achieve economics of scale with Azteca Production International, Inc.
("Azteca"), a corporation owned by the brother of Gerard Guez, the Chairman of
the Company, called United Apparel Ventures, LLC ("UAV"). This entity was
created to coordinate the production of apparel for a single customer of the
Company's branded business. UAV is owned 50.1% by Tag Mex, Inc., a wholly owned
F-13
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
subsidiary of the Company, and 49.9% by Azteca. The results of UAV have been
consolidated into the Company's results commencing in July 2001 with the
minority partner's share of earnings (losses) provided for in the Company's
financial statements. Since October 2002, both parties have contributed the
Express relationship and future orders into the entity.
AJALPAN
On March 29, 2001, the Company completed the acquisition of a sewing facility
located in Ajalpan Mexico from Confecciones Jamil, S.A. de C.V, which is
majority owned by Kamel Nacif, a principal shareholder of the Company. This
facility, which was newly constructed during 1999 and commenced operations in
2000, was used by the Company for production during 2000 and 2001. The results
of Ajalpan have been consolidated into the Company's results commencing on March
29, 2001.
The Company paid $11 million for this operating facility. This entire amount had
been paid in cash and the transfer of certain receivables of the Company to the
seller. The assets acquired include land, buildings and all equipment. This
transfer has been accounted for as a purchase and the purchase price has been
allocated based on the fair market value of assets acquired and liabilities
assumed. The excess of cost over fair value of net assets acquired was $4.7
million. Included in the SFAS No. 142 charge was a $1.7 million impairment loss
related to Ajalpan.
EXCLUSIVE PRODUCTION AGREEMENT
On June 28, 2000, the Company signed an exclusive production agreement with
Manufactures Cheja ("Cheja") through February 2002. The Company has agreed on a
new contract to extend the agreement for an additional quantity of 6.4 million
units beginning April 1, 2002, which was amended on November 8, 2002, for the
manufacturing of 5.7 million units through September 30, 2004. The Company has
unrecouped advances to Cheja of approximately $2.9 million related to the
production agreement to be recouped out of future production.
JANE DOE
On April 12, 2000, the Company formed a new company, Jane Doe International, LLC
("JDI"). This company was formed for the purpose of purchasing the assets of
Needletex, Inc., owner of the Jane Doe brand. JDI is owned 51% by Fashion
Resource (TCL), Inc., a subsidiary of the Company, and 49% by Needletex, Inc. In
March 2001, the Company converted JDI from an operating company to a licensing
company and entered into two licenses in regard to the use of the Jane Doe
trademark. The licensing activities on this trademark have been largely dormant
in 2002 pending the outcome of the litigation with Patrick Bensimon. See Note 9
for the discussion of this litigation. Included in the SFAS No. 142 charge was a
$3.2 million impairment loss related to JDI.
6. GOODWILL - ADOPTION OF STATEMENT NO. 142
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142 "Goodwill and Other Intangible Assets," which establishes financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. The Company adopted SFAS No.
142 beginning with the first quarter of 2002. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized but, instead, tested at least annually for impairment while intangible
assets that have finite useful lives continue to be amortized over their
respective useful lives. Accordingly, the Company ceased amortization of all
goodwill.
SFAS No. 142 requires that goodwill and other intangibles be tested for
impairment using a two-step process. The first step is to determine the fair
value of the reporting unit, which may be calculated using a discounted cash
flow methodology, and compare this value to its carrying value. If the fair
value exceeds the carrying value, no further work is required and no impairment
loss would be recognized. The second step is an allocation of the fair value of
the reporting unit to all of the reporting unit's assets and liabilities under a
hypothetical purchase price allocation. Based on the evaluation performed to
adopt SFAS No. 142 along with continuing difficulties being experienced in the
industry, the Company recorded a non-cash charge of $4.9 million to reduce the
carrying value of goodwill to the estimated fair value. This charge is
non-operational in nature and is reported as a cumulative effect of an
accounting change in the accompanying consolidated statement of
F-14
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
operations. The Company utilized the discounted cash flow methodology to
estimate fair value. The following table presents the results of the Company on
a comparable basis:
YEAR ENDED DECEMBER 31,
2000 2001 2002
------------- ------------- -------------
Reported net loss ........... $ (2,517,742) $ (2,889,256) $ (1,214,037)
Goodwill amortization,
net of tax ............... 1,789,518 2,089,980 --
------------- ------------- -------------
Adjusted net loss before
cumulative effect of
accounting change ........ (728,224) (799,276) (1,214,037)
Cumulative effect of
accounting change ........ -- -- (4,871,244)
------------- ------------- -------------
Adjusted net loss ........... $ (728,224) $ (799,276) $ (6,085,281)
------------- ------------- -------------
Basic and diluted earnings
per common share:
Reported loss before
cumulative effect of
accounting change ........ $ (0.16) $ (0.18)$ (0.08)
Goodwill amortization, net
of taxes ................. 0.11 0.13 --
------------- ------------- -------------
Adjusted loss before
cumulative effect of
accounting change ........ (0.05) (0.05) (0.08)
Cumulative effect of
accounting change ........ -- -- (0.30)
------------- ------------- -------------
Adjusted net loss ........... $ (0.05) $ (0.05) $ (0.38)
------------- ------------- -------------
The following table displays the change in the gross carrying amount of goodwill
by business units at the end of December 31, 2002:
TOTAL JANE DOE TARRANT TARRANT TAG MEX INC. TAG MEX INC.
MEXICO - MEXICO - - ROCKY - CHAZZZ &
AJALPAN FAMIAN DIVISION MGI DIVISION
-------------- --------------- -------------- --------------- -------------- ---------------
Balance as of
December 31, 2002 $29,196,886 $1,904,529 $4,427,843 $7,260,134 $7,521,536 $8,082,844
Additional purchase price 3,050,000 -- -- 2,550,000 -- 500,000
Additional liabilities
assumed 1,428,588 1,428,588 -- -- -- --
Impairment losses (4,871,244) (3,182,779) (1,688,465) -- -- --
Foreign currency translation (740,211) -- -- (740,211) -- --
-------------- --------------- -------------- --------------- -------------- ---------------
Balance as of
December 31, 2002 $28,064,019 $ 150,338 $2,739,378 $9,069,923 $7,521,536 $8,582,844
-------------- --------------- -------------- --------------- -------------- ---------------
F-15
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT
Debt consists of the following:
2001 2002
------------ ------------
Short term bank borrowings:
Import trade bills payable ............... $ 4,521,675 $ 5,686,327
Bank direct acceptances .................. 13,838,270 11,272,375
Other Hong Kong credit facilities ........ 361,108 6,206,103
Other Mexican credit facilities .......... 1,282,593 4,968,309
Uncleared checks ......................... 2,081,703 1,193,810
------------ ------------
$ 22,085,349 $ 29,326,924
============ ============
Long term debt:
Vendor financing ......................... $ 11,043,449 $ 7,257,683
Equipment financing ...................... 13,931,997 9,682,290
Debt facility ............................ 62,863,990 58,193,505
Other debt (including capital leases) .... 1,411,000 2,477,000
------------ ------------
89,250,436 77,610,478
Less current portion ..................... (25,256,628) (21,706,502)
------------ ------------
$ 63,993,808 $ 55,903,976
============ ============
Import Trade Bills Payable
On June 13, 2002, the Company entered into a letter of credit facility of $25
million with UPS Capital Global Trade Finance Corporation ("UPS") to replace the
credit facility of The Hong Kong and Shanghai Banking Corporation Limited in
Hong Kong. Under this facility, the Company may arrange for the issuance of
letters of credit and acceptances. The facility is a one-year facility subject
to renewal on its anniversary and is collateralized by the shares and debentures
of all of the Company's subsidiaries in Hong Kong, as well as the Company's
permanent quota holdings in Hong Kong. In addition to the guarantees provided by
Tarrant Apparel Group and Fashion Resource (TCL) Inc and Machrima Luxembourg
SARL, a new holding company the Company set up during 2002. Mr. Gerard Guez, our
chairman, also signed a guarantee of $5 million in favor of UPS to secure this
facility. This facility is also subject to certain restrictive covenants,
including no two consecutive quarterly losses, aggregate net worth of $105
million and $109 million at the end of 2002 and 2003, respectively; interest
cover of 1.5 times, fixed charge ratio of 1.25 to 1 and leverage ratio of 2.1
to1 in 2002 and 1.6 to 1 in 2003. As of December 31, 2002, $24.2 million, of
which $12.9 million were letters of credits, was outstanding under this
facility. The Company was in violation of the fixed charge ratio covenant and a
waiver has been obtained at a fee of $5,000.
OTHER MEXICAN CREDIT FACILITIES
As of December 31, 2002, Grupo Famian had a short-term advance from Banco Bilbao
Vizcaya amounting to $298,000. This subsidiary also had a credit facility with
Banco Nacional de Comercio Exterior SNC the Company guaranteed. This facility
provided for a $10 million credit line based on purchase orders and is
restricted by certain covenants. As of December 31, 2002, the outstanding amount
was $4.7 million. After the merger of Grupo Famian into Tarrant Mexico, the bank
has agreed that Tarrant Mexico was to repay the outstanding amount of $4.7
million by $523,000 per month starting March 26, 2003.
F-16
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
VENDOR FINANCING
During 2000, the Company financed equipment purchases for the new manufacturing
facility with certain vendors of the related equipment. A total of $16.9 million
was financed with five-year promissory notes, which bear interest ranging from
7.0% to 7.5%, and are payable in semiannual payments commencing in February
2000. Of this amount, $7.3 million was outstanding as of December 31, 2002. Of
the $7.3 million, $4.6 million is denominated in the Euro. The remainder is
payable in U.S. dollars. The Company has covered its exchange risks by forward
exchange contracts.
From time to time, the Company opens letters of credit under an uncommitted
credit arrangement with Aurora Capital Associates who issues these credits
through Israeli Discount Bank. As of December 31, 2002, $2.3 million are open in
letters of credit under this arrangement.
An unrealized gain of $412,000 and $104,000 and an unrealized loss of $1.0
million was recorded at December 31, 2000, 2001 and 2002, respectively, related
to this fluctuation and is recorded in other income in the accompanying
financial statements. In addition, during the year ended December 31, 2000, the
Company entered into a hedge contract for Euros related to this debt.
Annual maturities for the long term debt and capital lease obligations are
$21,706,502 (2003), $10,834,036 (2004), $45,025,284 (2005), $12,854 (2006),
$13,647 (2007) and $18,155 (thereafter). The weighted average interest rate on
short-term bank borrowing as of December 31, 2002 and 2001 were 4.1% and 6.7%,
respectively.
EQUIPMENT FINANCING
The Company has two equipment loans with the initial borrowings of $16.25
million and $5.2 million from GE Capital Leasing ("GE Capital") and Bank of
America Leasing ("BOA"), respectively. The leases are secured by equipment
located in Puebla and Tlaxcala, Mexico. The amounts outstanding as of December
31, 2002 were $7.1 million due to GE Capital and $2.4 million due to BOA.
Interest accrues at a rate of 2 1/2% over LIBOR. The loan from GE Capital will
mature in the year 2005 and the loan from BOA in the year 2004. The GE Capital
facilities are subject to covenants on Tangible Net Worth ($30 million),
leverage ratio of not more than two times and no losses for two consecutive
quarters. The Company was in violation of the covenant on consecutive quarterly
losses and obtained a waiver from the bank on March 28, 2002 for a fee of
$10,000 and acceleration by $25,000 of monthly repayment of principal. The
Company has reclassified the GE Capital obligation as a current liability
because of the potential that it may violate one of the covenants in the first
quarter of 2003. The BOA facility is subject to a financial benchmark on
interest coverage (3 to 1) and a leverage ratio of not more than 2 times.
The Debt Facility with GMAC and the credit facilities with GE Capital, UPS and
BOA all carry cross-default clauses. A breach of a financial covenant set by
GMAC, UPS or GE Capital constitutes an event of default, entitling these banks
to demand payment in full of all outstanding amounts under their respective debt
and credit facilities. Similarly, if the Company breaches a financial benchmark
set by BOA, the bank can accelerate repayment of all outstanding principal
amount to become six equal monthly installments.
DEBT FACILITY
On January 21, 2000, the Company entered into a new revolving credit, factoring
and security agreement (the "Debt Facility") with a syndicate of lending
institutions. The Debt Facility initially provided a revolving facility of
$105.0 million, including a letter of credit facility not to exceed $20.0
million, and matures on January 31, 2005. The Debt Facility provides for
interest at LIBOR plus the LIBOR rate margin determined by the Total Leverage
Ratio (as defined). The Debt Facility is collateralized by receivables,
intangibles, inventory and various other specified non-equipment assets of the
Company. In addition, the facility is subject to various financial covenants
with quarterly targets, including provisions for tangible net worth of not less
than $98.5 million subject to adjustment for the fluctuating of the exchange
rate of Mexican peso of December 31, 2000 or that of the preceding year-end
fixed charge ratio of 1.1 to 1, and interest coverage ratios of 3.2 to 1,
leverage ratio of not more than 1.6 to 1 at year-end
F-17
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and prohibits the payment of dividends. On March 2, 2001, the Company entered
into an amendment of our Debt Facility with GMAC, who solely assumed the
facility in 2000. This amendment reduced the $105.0 million facility to $90.0
million. The over-advance line of $25 million was converted to a term facility
to be repaid by monthly installments of $500,000 before August 2001 and $687,500
thereafter. A total of $58 million was outstanding under the Debt Facility at
December 31, 2002.
As of December 31, 2002, the Company was in violation of covenants on interest
coverage, total leverage ratio and fixed charge under the Debt Facility. The
Company received a waiver from GMAC with respect to its violation of these
covenants, and also received a waiver from GMAC with respect to compliance at
March 31, 2003 with all financial covenants under the Debt Facility. The Company
paid GMAC $45,000 for this waiver. The Company and GMAC have agreed to set new
financial covenants for the remainder of fiscal 2003 based on the company's
projections before May 1, 2003.
Within the Debt Facility, the credit agreement with GMAC provides for a
factoring arrangement whereby the Company factor with GMAC accounts receivables
from customers with debt ratings below BBB. The Company did not receive advances
against these receivables, and was paid only upon collection of proceeds. For
this credit insurance arrangement, the Company pays the factor a commission of
60 basis points.
8. INCOME TAXES
The provision (credit) for domestic and foreign income taxes is as follows:
Year Ended December 31,
------------------------------------
2000 2001 2002
----------- ---------- -----------
Current:
Federal..............................$(4,661,591) $(1,272,918) $ (307,684)
State................................ 6,503 1,079 293,055
Foreign.............................. 3,729,499 850,511 1,162,798
----------- ---------- -----------
(925,589) (421,328) 1,148,169
Deferred:
Federal.............................. (346,982) 999,201 --
State................................ (197,513) 232,821 --
Foreign.............................. (8,591) 41,283 (97,151)
----------- ---------- -----------
(553,086) 1,273,305 (97,151)
----------- ---------- -----------
Total..............................$(1,478,675) $ 851,977 $1,051,018
=========== ========== ===========
F-18
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The source of income (loss) before the provision for taxes and cumulative effect
of accounting change is as follows:
Year Ended December 31,
---------------------------------------
2000 2001 2002
------------ ----------- ------------
Federal................................$(18,125,699) $(8,582,448) $(11,061,937)
Foreign................................ 14,129,282 6,545,169 10,898,918
------------ ----------- ------------
Total..............................$ (3,996,417) $(2,037,279) $ (163,019)
============ =========== ============
Foreign deferred income taxes result primarily from temporary differences in the
recognition of bad debt and depreciation expenses for tax and financial
reporting purposes. The resulting foreign deferred income tax liability amounted
to approximately $48,000, $89,000 and $0 at December 31, 2000, 2001 and 2002
respectively.
A reconciliation of the statutory federal income tax provision (benefit) to the
reported tax provision (benefit) on income is as follows:
Year Ended December 31,
-------------------------------------
2000 2001 2002
----------- ----------- -----------
Income tax (benefit) based on
federal statutory rate............ $(1,358,782) $ (713,048) $(1,761,992)
State income taxes, net of federal
benefit........................... (122,246) 152,035 190,486
Effect of foreign income taxes..... (324,219) 1,494,708 1,162,798
Increase in valuation allowance and
other............................. 326,572 (81,718) 1,459,726
----------- ----------- -----------
$(1,478,675) $ 851,977 $ 1,051,018
=========== =========== ===========
F-19
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
deferred tax assets (liabilities) are as follows:
December 31,
------------------------
2001 2002
----------- -----------
Deferred tax assets:
Provision for doubtful accounts and unissued
credits....................................... $ 1,238,401 $ 835,980
Provision for other reserves................... 976,597 2,608,101
Net operating loss carry forward............... -- 850,326
Deferred compensation and benefits............. 231,245 238,232
State taxes.................................... 1,960 --
----------- -----------
Total deferred tax assets.................... 2,448,203 4,532,639
Deferred tax liabilities:
Unrealized gain................................ (583,100) (80,858)
----------- -----------
(583,100) (80,858)
Valuation allowance for deferred tax assets...... (2,380,016) (4,859,532)
----------- -----------
Net deferred tax liabilities..................... $ (514,913) $ (407,751)
=========== ===========
The Company has ongoing tax audits related to Federal tax returns. Management
believes adequate reserves have been provided for potential claims.
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into various non-cancelable operating lease agreements,
principally for executive office, warehousing facilities and production
facilities with unexpired terms in excess of one year. Certain of these leases
provided for scheduled rent increases. The Company records rent expense on a
straight-line basis over the term of the lease. The future minimum lease
payments under these non-cancelable operating leases are as follows:
Related
Party Other
---------- ----------
2003.................................................. $2,180,217 $ 950,949
2004.................................................. 1,208,974 601,801
2005.................................................. 898,366 428,691
2006.................................................. 925,317 356,840
2007.................................................. 953,076 356,840
Thereafter............................................ 2,938,808 952,573
---------- ----------
Total future minimum lease payments................. $9,104,758 $3,647,694
========== ==========
Several of the operating leases contain provisions for additional rent based
upon increases in the operating costs, as defined, per the agreement. Total rent
expense under the operating leases amounted to approximately $2,548,000,
$2,968,000 and $3,166,000 for 2000, 2001 and 2002, respectively.
F-20
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company had open letters of credit of $17,778,561 and $15,458,189 as of
December 31, 2001 and 2002, respectively.
The Company has two employment contracts dated January 1, 1998 with two
executives providing for base compensation and other incentives. Commitments
under these agreements for base compensation amount to $1,000,000 for each of
the two executives annually through December 31, 2003. Each contract also
provides for annual bonuses of up to $2,000,000 for each executive and vesting
of stock options based on attaining specified performance criteria. Effective
January 10, 2000, these contracts were amended reducing the base salary to
$500,000 for each of the two executives and extending the term of the agreements
to March 31, 2003.
On April 1, 1999, the Company entered into a three-year employment agreement
with Mr. Nacif, pursuant to which Mr. Nacif initially was entitled to receive
(i) an annual base salary of $1 million, (ii) reimbursement of all reasonable
and documented business expenses, (iii) participation in all plans sponsored by
the Company for employees in general and (iv) the right (the "Option") for ten
years to purchase up to 500,000 shares of the Company's Common Stock at an
exercise price of $25 per share. The Option vested in three equal installments
on April 1, 2000, 2001 and 2002. In the event the Company terminates Mr. Nacif's
employment without cause (as defined), the Company shall remain obligated to pay
Mr. Nacif an amount equal to his base salary for the remainder of the stated
term. In the event Mr. Nacif's employment is terminated for any other reason
(including death, disability, resignation or termination with cause), neither
party shall have any further obligation to the other, except that the Company
shall pay to Mr. Nacif, or his estate, all reimbursable expenses and such
compensation as is due prorated through the date of termination. As of January
1, 2000, the Company and Mr. Nacif amended Mr. Nacif's employment Agreement to
reduce his annual salary from $1 million to $250,000 starting in 2000.
The Company entered into a consulting agreement with Gabe Zeitouni, the former
President of the Company's Rocky division, through December 31, 2002. Under the
terms of this agreement, Mr. Zeitouni was paid $140,000 through December 2002.
In conjunction with this consulting agreement, Mr. Zeitouni's Put Option
Agreement of July 10, 2000 was amended. As of December 31, 2002, the Company
advanced approximately $1.1 million to Mr. Zeitouni. The Company has also
changed the time frame of Mr. Zeitouni's right to require the Company to
purchase 80,890 of shares at $18.54 to be the three-month period commencing on
January 1, 2003 and ending on March 31, 2003. Mr. Zeitouni exercised his right
in February 2003. The cost of the Put Option (excess of $18.54 over the current
market value of the Company's stock) is being amortized over the consulting
period.
In connection with the establishment of JDI (see Note 5), JDI entered into an
employment agreement with Bensimon, which provided for the payment of a salary
to Bensimon and a bonus tied to the new company's sales performance. The
existing lenders to Needletex, Inc. agreed to the asset transfer in return for,
among other things, the confirmation of Bensimon's continuing guaranty of the
loan obligations, the assumption of the loan obligations by JDI and a guaranty
of those obligations by the Company. The Company received an express indemnity
by Needletex, Inc. and Bensimon to reimburse us for all amounts we paid to those
lenders for the account of Needletex and Bensimon. Thereafter a dispute arose as
to whether Bensimon had performed in accordance with his terms of employment set
forth in the Employment Agreement. When an amicable resolution of this dispute
could not be achieved, Bensimon commenced an arbitration preceding against his
employer (JDI), Fashion Resource (TCL), Inc., the managing member of Jane Doe
International and the Company. The Company and other respondents contested and
vigorously opposed the matter.
On January 21, 2003, after hearing, the arbitration panel issued an interim
award in favor of Bensimon awarding him $1,425,655 for salary and bonus plus
interest accrued thereon and legal fees and costs to be determined. The Company
has accrued an additional $1.3 million reserve for litigation in 2002 in
addition to the previously recorded accrual of $315,000 included in accrued
liabilities.
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of the Company's management, resolution of such
matters will not have a material effect on its financial position or results of
operations.
F-21
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. EQUITY
The Company has elected to follow Accounting Principles Board Opinion No. 25,"
Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company's Employee Incentive Plan, formerly the 1995 Stock Option Plan, as
amended and restated in May 1999 (the Plan) and amended in 2002, has authorized
the grant of both incentive and non-qualified stock options to officers,
employees, directors and consultants of the Company for up to 5,100,000 shares
(as adjusted for a stock split effective May 1998) of the Company's Common
Stock. The exercise price of incentive options must be equal to 100% of fair
market value of common stock on the date of grant and the exercise price of
non-qualified options must not be less than the par value of a share of Common
Stock on the date of grant. The Plan was also amended to expand the types of
awards, which may be granted pursuant thereto to include stock appreciation
rights, restricted stock and other performance-based benefits.
In October 1998, the Company granted 1,000,000 non-qualified stock options not
under the Plan. The options were granted to the Chairman and President of the
Company at $13.50 per share, the closing sales price of the Common Stock on the
day of the grant. The options expire in 2008 and vest over four years, subject
to certain performance criteria. In May 2002, the Company granted 3,000,000
non-qualified stock options not under the Plan. The options were granted to the
Chairman, President of the Company and Mr. Kamel Nacif at $5.50 per share, the
closing sales price of the Common Stock on the day of the grant. The options
expire in 2012 and vest over three years, subject to certain performance
criteria.
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
2000 2001 2002
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning
of year................ 2,876,737 $14.43 2,697,487 $14.29 3,520,737 $11.90
Granted............... 95,750 9.61 955,000 5.18 3,004,000 5.50
Exercised............. (20,000) 4.28 (8,500) 3.97 (5,500) 4.39
Forfeited............. (255,000) 13.99 (123,250) 12.65 (142,750) 12.14
--------- ------ --------- ------ --------- ------
Outstanding at end of
year................... 2,697,487 $14.29 3,520,737 $11.90 6,376,487 $ 8.89
========= ====== ========= ====== ========= ======
Exercisable at end of
year................... 1,631,220 2,173,587 3,535,487
Weighted average per
option fair value
of options granted
during the year........ $ 7.88 $ 3.89 $ 2.89
F-22
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ------------------------------------------------------ ---------------------
$3.00 - 5.09 968,112 7.4 $ 4.89 576,362 $ 4.82
5.50 3,004,000 9.4 5.50 750,000 5.50
5.55 - 9.97 718,000 5.4 7.17 602,000 7.39
13.50 - 15.50 1,026,000 5.7 13.51 1,022,250 13.51
18.44 - 18.54 116,875 5.5 18.53 41,875 18.49
25.00 500,000 6.3 25.00 500,000 25.00
33.13 - 39.97 41,500 6.2 39.31 41,500 39.31
45.50 2,000 6.3 45.50 1,500 45.50
- ------------------------------------------------------ ---------------------
$3.00 - 45.50 6,376,487 7.7 $ 8.89 3,535,487 $11.35
====================================================== =====================
11. PREFERRED STOCK
In connection with the twill mill acquisition, the Company issued 100,000 Series
A Preferred Shares ("Preferred Shares"). The Preferred Shares accrue dividends
at an annual rate of 7% of the initial stated value of $88.20 per share and have
no voting rights. The Shares issued will become convertible into three million
shares of common stock if the Company's common shareholders approve the
conversion at the 2003 annual meeting. If the Company's shareholders do not
approve the issuance of the conversion shares at the next shareholder meeting,
the Company will then have the right to redeem any or all of the Preferred
Shares for a price equal to the stated value plus all accrued and unpaid
dividends.
The Company granted the holder of the shares of common stock issuable upon
conversion of the Preferred Shares "piggyback" registration rights, which
provide such holder the right, under certain circumstances, to have such shares
registered for resale under the Securities Act of 1933. In the event of a
liquidation, dissolution or winding-up of the Company, the Preferred Shares will
be entitled to receive, prior to any distribution on the common stock, a
distribution equal to the initial stated value of the Preferred Shares plus all
accrued and unpaid dividends.
12. SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
2000 2001 2002
---------- ---------- ----------
Cash paid for interest..................... $8,685,000 $4,473,000 $2,361,000
========== ========== ==========
Cash paid (refunded) for income taxes...... $3,861,000$(2,554,000)$(5,086,000)
========== ========== ==========
F-23
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During 2000, in a non-cash transaction, the Company sold certain equipment and
other assets to a related party at net book value. The purchase price of such
assets, together with $12.5 million previously advanced is represented by a
$48.0 million note receivable. In addition, during 2001 the Company transferred
$5.5 million in receivables to the seller in connection with the purchase of
Ajalpan. In 2002, the Company acquired certain assets of a twill mill located in
Puebla, Mexico. Included in the consideration paid were 100,000 shares of Series
A Preferred Stock valued at $8.8 million, a 25% equity stake in Tarrant's
wholly-owned subsidiary, Tarrant Mexico and the cancellation of approximately
$56.9 million of certain notes and accounts receivables due from the sellers and
their affiliates. These non-cash transactions have been excluded from the
respective statements of cash flows.
13. RELATED-PARTY TRANSACTIONS
Related-party transactions, consisting primarily of purchases and sales of
finished goods and raw materials, are as follows:
2000 2001 2002
-------- ----------- -----------
Sales to related parties................ $ 4,069,000 $ 8,340,000 $ 4,864,000
Purchases from related parties......... $20,972,000 $32,095,000 $76,231,000
As of December 31, 2001 and 2002, related party affiliates were indebted to the
Company in the amounts of $14.2 million and $15.9 million, respectively. These
include amounts due from principal shareholders of the Company of $12.1 million
and $5.6 million at December 31, 2001 and 2002, respectively, which have been
shown as reductions to shareholders' equity in the accompanying financial
statements. Total interest paid by related party affiliates and the Chairman and
President were $70,000 and $368,000 for the years ended December 31, 2001 and
2002, respectively. During 2001, Kamel Nacif advanced the Company a total of
$18.1 million for working capital purposes. Such advances were short-term and
paid back by the Company within 30 days of the advance. No amounts were due to
Mr. Nacif at December 31, 2002.
From time to time, the Company has borrowed funds from, and advanced funds to,
certain officers and principal shareholders, including Messrs. Guez and Kay. The
maximum amount of such borrowings from Mr. Kay during 2002 was $2,317,000. The
maximum amount of such advances to Mr. Guez during 2002 was approximately
$4,923,000. As of December 31, 2002, the Company was indebted to Mr. Kay in the
amount of $487,000. Mr. Guez had an outstanding advance from the Company of
$4,879,000 as of December 31, 2002. As of December 31, 2001, the Company was
indebted to Mr. Kay in the amount of $2,308,000. Mr. Guez had an outstanding
advance from the Company of $4,116,000 as of December 31, 2001. As of December
31, 2001 and 2002, Mr. Kamel Nacif was indebted to the Company for $8.0 million
and $723,000, respectively. All advances to, and borrowings from, Mr. Guez and
Mr. Kay in 2002 bore interest at the rate of 7.75%. All existing loans to
officers and directors before July 30, 2002 are grandfathered under the
Sarbanes-Oxley Act of 2002. No further personal loans will be made to officers
and directors in compliance with the Sarbanes-Oxley Act.
Under lease agreements entered into between the Company and two entities owned
by the Chairman and President, the Company paid $1,299,000 in 2000, $1,299,000
in 2001 and $1,330,000 in 2002 for rent for office and warehouse facilities. In
addition during 2000 and 2001, the Company leased an airplane from 477 Aviation
LLC for the purpose of transporting employees of the Company. 477 Aviation LLC
is wholly owned by the Company's principal shareholder. Lease payments amounted
to $705,000 for the year ended December 31, 2000. The Company did not lease the
plane in 2001 and 2002. The Company reimbursed the principal shareholder fuel
and related expenses whenever the Company's executives used the aircraft for
business purposes.
Under lease agreements entered into between the Company and the former owners of
Grupo Famian, the Company paid $136 ,000 in 2000, $832,000 in 2001 and $843,000
in 2002 for rent for sewing and washing facilities in Tehuacan, Mexico.
In 1998, a California limited liability company owned by the Chairman and
President of the Company purchased 2,300,000 shares of the Common Stock of Tag-
It Pacific, Inc. ("Tag-It") (or approximately 37% of such Common Stock then
outstanding). Tag-It is a provider of brand identity programs to manufacturers
and retailers of apparel and accessories. Tag-It assumed the responsibility for
managing and sourcing all trim and packaging used in connection with products
manufactured by or on behalf of the Company in Mexico. This arrangement is
terminable by either the Company or Tag-It at any time. The Company believes
that the terms of this arrangement, which is subject to the acceptance of the
Company's
F-24
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
customers, are no less favorable to the Company than could be obtained from
unaffiliated third parties. The Company purchased $20.9 million, $17.9 million
and $23.9 million of trim inventory from Tag-it for the years ended December 31,
2000, 2001 and 2002, respectively. As of December 31, 2001 and 2002, there were
$556,000 million and $4.4 million outstanding invoices in Accounts Payable,
respectively.
The Company purchased $5.8 million and $37.0 million of finished goods from
Azteca for the years ended December 31, 2001 and 2002, respectively. Total sales
of fabric from the Company to Azteca in 2002 were $2.9 million. Two and one half
percent of gross sales as management fees were paid in 2002 to each of the
members of UAV, per the operating agreement.
The Company purchased $8.5 million and $12.3 million of fabric from Trans Textil
in 2001 and 2002.
As of December 31, 2001 and 2002, there was $2.5 million and $7.0 million
outstanding invoices in Accounts Payable, respectively.
As of December 31, 2000, Aris Industries, Inc. ("Aris") owed the Company
approximately $5.8 million for goods manufactured and shipped by the Company. On
February 12, 2001, Aris and the Company entered into an agreement under which
Aris issued to the Company 1.5 million shares of its common stock and undertook
to repay either $2.5 million in cash or its equivalent in common stock to the
Company on December 31, 2001 in full satisfaction of the debt. As of February
20, 2002, Aris had issued the Company an aggregate of 8,117,647 shares of its
common stock including the 1.5 million shares previously issued in full
satisfaction of this debt. On March 27, 2002, the Company sold this stock to an
unrelated third party for an aggregate of $1,785,882. As of December 31, 2002,
Messrs. Guez and Kay jointly owned approximately 7% of the outstanding shares of
Aris.
F-25
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATIONS BY GEOGRAPHIC AREAS
The Company operates primarily in one industry segment, the design,
manufacturing and importation of private label, moderately priced, casual
apparel. Information about the Company's operations in the United States and
Asia is presented below. Inter-company revenues and assets have been eliminated
to arrive at the consolidated amounts.
Adjustments
United and
States Asia Mexico Eliminations Total
------------ ------------ ------------ ------------- ------------
2000
Sales................... $368,308,000 $ 16,874,000 $ 9,987,000 $ -- $395,169,000
Inter-company sales..... 47,632,000 107,860,000 84,664,000 (240,156,000) --
------------ ------------ ------------ ------------- ------------
Total revenue........... $415,940,000 $124,734,000 $ 94,651,000 $(240,156,000) $395,169,000
============ ============ ============ ============= ============
Income (loss) from
operations............. $ (8,131,000) $ 8,217,000 $ 2,003,000 $ -- $ 2,089,000
============ ============ ============ ============= ============
Total assets............ $245,165,000 $ 97,246,000 $159,971,000 $(194,290,000) $308,092,000
============ ============ ============ ============= ============
2001
Sales................... $312,587,000 $ 5,952,000 $ 11,714,000 $ -- $330,253,000
Inter-company sales..... 12,341,000 86,291,000 77,062,000 (175,694,000) --
------------ ------------ ------------ ------------- ------------
Total revenue........... $324,928,000 $ 92,243,000 $ 88,776,000 $(175,694,000) $330,253,000
============ ============ ============ ============= ============
Income (loss) from
operations............. $ 5,364,000 $ 5,369,000 $ (8,803,000)$ -- $ 1,930,000
============ ============ ============ ============= ============
Total assets............ $176,178,000 $ 97,175,000 $121,188,000 $(106,074,000) $288,467,000
============ ============ ============ ============= ============
2002
Sales................... $332,877,000 $ 3,943,000 $ 10,571,000 $ -- $347,391,000
Inter-company sales..... 14,474,000 90,830,000 82,531,000 (187,835,000) --
------------ ------------ ------------ ------------- ------------
Total revenue........... $347,351,000 $ 94,773,000 $ 93,102,000 $(187,835,000) $347,391,000
============ ============ ============ ============= ============
Income (loss) from
operations............. $ 6,916,000 $ 4,950,000 $ (7,396,000)$ -- $ 4,470,000
============ ============ ============ ============= ============
Total assets............ $185,086,000 $107,266,000 $202,741,000 $(176,891,000) $318,202,000
============ ============ ============ ============= ============
15. EMPLOYEE BENEFIT PLANS
On August 1, 1992, Tarrant HK established a defined contribution retirement plan
covering all of its Hong Kong employees whose period of service exceeds 12
months. Plan assets are monitored by a third-party investment manager and are
segregated from those of Tarrant HK. Participants may contribute up to 5% of
their salary to the plan. The Company makes annual matching contributions. Costs
of the plan charged to operations for 2000, 2001 and 2002 amounted to
approximately $119,000, $155,000 and $149,000 respectively.
On July 1, 1994, the Company established a defined contribution retirement plan
covering all of its U.S. employees whose period of service exceeds 12 months.
Plan assets are monitored by a third-party investment manager and are segregated
F-26
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
from those of the Company. Participants may contribute from 1% to 15% of their
pre-tax compensation up to effective limitations specified by the Internal
Revenue Service. The Company's contributions to the plan are based on a 50%
(100% effective July 1, 1995) matching of participants' contributions, not to
exceed 6% (5% effective July 1, 1995) of the participants' annual compensation.
In addition, the Company may also make a discretionary annual contribution to
the plan. Costs of the plan charged to operations for 2000, 2001 and 2002
amounted to approximately $257,000, $289,000 and $249,000 respectively.
On December 27, 1995, the Company established a deferred compensation plan for
executive officers. Participants may contribute a specific portion of their
salary to such plan. The Company does not contribute to the Plan.
On December 20, 1996, the Compensation Committee of the Company's Board of
Directors established the Incentive Compensation Plan, which provides for both
discretionary bonuses and bonus amounts upon achieving certain earnings
thresholds for certain members of management. The adoption of this plan received
shareholder approval at the 1997 annual meeting.
16. OTHER INCOME AND EXPENSE
Other income and expense consists of the following:
2000 2001 2002
---------- ---------- ----------
Rental income ........................... $ 71,576 $ 586,305 $ 495,754
Unrealized gain on foreign currency ..... 441,811 103,705 --
Realized gain on foreign currency ....... -- -- 1,123,076
Royalty income .......................... -- 180,833 62,166
Sales of damaged goods and samples ...... -- 192,680 --
Gain on legal settlement ................ -- -- 473,041
Other items ............................. 836,980 789,543 493,938
---------- ---------- ----------
Total other income ...................... $1,350,367 $1,853,066 $2,647,975
========== ========== ==========
Royalty expense ......................... $ -- $ 500,000 $ 655,691
Unrealized loss on foreign currency ..... -- -- 1,014,696
Other items ............................. 193,359 355,994 333,686
---------- ---------- ----------
Total other expense ..................... $ 193,359 $ 855,994 $2,004,073
========== ========== ==========
F-27
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2002:
Quarter Ended Year
----------------------------------------------- Ended
Mar. 31(2) Jun. 30 Sep.30 Dec. 31(1) Dec. 31
--------- --------- --------- --------- ---------
(In thousands, except per share data)
2001
Net sales ............. $ 84,330 $ 96,126 $ 78,175 $ 71,622 $ 330,253
Gross profit .......... 14,419 15,814 10,071 12,424 52,728
Operating income
(loss) ............... 891 3,300 (3,349) 1,088 1,930
Net income (loss) ..... $ 446 $ 1,706 $ (4,229) $ (812) $ (2,889)
Net income (loss) per
common share:
Basic ............... $ .03 $ .11 $ (.27) $ (0.05) $ (0.18)
Diluted ............. $ .03 $ .11 $ (.27) $ (0.05) $ (0.18)
Weighted average shares
outstanding:
Basic ............... 15,822 15,832 15,824 15,831 15,825
Diluted ............. 15,825 15,905 15,824 15,831 15,825
2002
Net sales ............. $ 65,164 $ 95,307 $ 94,328 $ 92,592 $ 347,391
Gross profit .......... 8,419 14,424 14,230 8,236 45,309
Operating income
(loss) ............... (831) 4,780 3,626 (3,105) 4,470
Income (loss) before
cumulative effect of
accounting change .... $ (1,726) $ 1,302 $ 1,127 $ (1,917) $ (1,214)
Net income (loss) ..... $ (6,597) $ 1,302 $ 1,127 $ (1,917) $ (6,085)
Income (loss) per share
before cumulative
effect
of accounting change:
Basic ............... $ (.11) $ .08 $ .07 $ (0.12) $ (0.08)
Diluted ............. $ (.11) $ .08 $ .07 $ (0.12) $ (0.08)
Net income (loss) per
common share:
Basic ............... $ (.41) $ .08 $ .07 $ (0.12) $ (0.38)
Diluted ............. $ (.41) $ .08 $ .07 $ (0.12) $ (0.38)
Weighted average shares
outstanding:
Basic ............... 15,832 15,832 15,836 15,836 15,834
Diluted ............. 15,832 16,099 15,931 15,836 15,834
- ----------
(1) In the fourth quarter of 2000, the Company recorded a book to physical
adjustment of $3.2 million, a $965,000 loss on a foreign currency hedge
and the write-off of certain assets of $350,000 related to abandonment of
leasehold improvements in Mississippi and Mexico.
(2) Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." According to this statement, goodwill and other
intangible assets with indefinite lives are no longer subject to
amortization, but rather an annual assessment of impairment applied on a
fair-value-based test. The Company adopted SFAS No. 142 in fiscal 2002 and
performed its first annual assessment of impairment, which resulted in an
impairment loss of $4.9 million recorded in the first quarter of 2002.
F-28
SCHEDULE II
TARRANT APPAREL GROUP
VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
of Year Expenses Accounts Deductions of Year
---------- ---------- --------- ---------- ----------
For the year ended
December 31, 2000
Allowance for returns
and discounts......... $2,868,658 $1,024,082 $ -- $ -- $3,892,740
Allowance for bad debt. $ 339,660 $ 103,007 $ -- $ -- $ 442,667
========== ========== ========= =========== ==========
For the year ended
December 31, 2001
Allowance for returns
and discounts......... $3,892,740 $ -- $(758,754) $ (452,385) $2,681,601
Allowance for bad debt. $ 442,667 $2,283,226 $ 758,754 $ -- $3,484,647
========== ========== ========= =========== ==========
For the year ended
December 31, 2002
Allowance for returns
and discounts......... $2,681,601 $ 453,167 $ -- $ -- $3,134,768
Allowance for bad debt. $3,484,647 $ -- $ -- $(2,302,794) $1,181,853
========== ========== ========= =========== ==========
F-29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TARRANT APPAREL GROUP
By: /S/ GERARD GUEZ
---------------------------------------
Gerard Guez
Chairman of the Board
POWER OF ATTORNEY
The undersigned directors and officers of Tarrant Apparel Group do
hereby constitute and appoint Patrick Chow and Gerard Guez with full power of
substitution and resubstitution, as their true and lawful attorneys and agents,
to do any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney and agent, may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, as amended and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto, and we do hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ GERARD GUEZ Chief Executive Officer and March 31, 2003
- ----------------------- Chairman of the Board of Directors
Gerard Guez
/S/ TODD KAY President and Vice Chairman of the March 31, 2003
- ----------------------- Board of Directors
Todd Kay
/S/ PATRICK CHOW Chief Financial Officer, Treasurer March 31, 2003
- ----------------------- and Director (Principal Financial
Patrick Chow and Accounting Officer)
/S/ EDDY YUEN Director March 31, 2003
- -----------------------
Eddy Yuen
/S/ KAREN WASSERMAN Executive Vice President, March 31, 2003
- ----------------------- General Merchandising Manager,
Karen Wasserman and Director
/S/ MITCHELL SIMBAL Director March 31, 2003
- -----------------------
Mitchell Simbal
/S/ BARRY AVED Director March 31, 2003
- -----------------------
Barry Aved
/S/ JOSEPH MIZRACHI Director March 31, 2003
- -----------------------
Joseph Mizrachi
/S/ MILTON KOFFMAN Director March 31, 2003
- -----------------------
Milton Koffman
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Gerard Guez, certify that:
1. I have reviewed this annual report on Form 10-K of Tarrant Apparel
Group;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/S/ GERARD GUEZ
-----------------------
Gerard Guez
Chief Executive Officer
Certification of CFO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Patrick Chow, certify that:
1. I have reviewed this annual report on Form 10-K of Tarrant Apparel
Group;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/S/ PATRICK CHOW
-----------------------
Patrick Chow
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation of the Company(/1/)
3.1.1 Certificate of Amendment of Restated Articles of Incorporation. (/26/)
3.1.2 Certificate of Amendment of Restated Articles of Incorporation. (/26/)
3.1.3 Certificate of Determination of Preferences, Rights and Limitations of
Series A Preferred Stock of Tarrant Apparel Group. (/27/)
3.2 Restated Bylaws of the Company(/1/)
4.1 Specimen of Common Stock Certificate(/2/)
10.1 Note in the principal amount of $2,600,000 dated March 15, 1995 in
favor of Imperial Bank(/1/)
10.2 General Security Agreement dated March 15, 1995 by and between the
Company and Imperial Bank(/1/)
10.3 Factoring Agreement effective as of September 28, 1993, as amended, by
and between the Company and NationsBanc Commercial Corporation(/1/)
10.4 1995 Stock Option Plan dated as of May 1, 1995(/1/)
10.5 Letter Agreement dated February 17, 1995 between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/1/)
10.6 Letter dated April 18, 1995 from The Hongkong and Shanghai Banking
Corporation Limited to Tarrant Company Limited regarding the release
of certain security interest(/1/)
10.7 Commercial Lease dated January 1, 1994 and GET and the Company(/1/)
10.8 Tenancy Agreement dated July 15, 1994 between Lynx International
Limited and Tarrant Company Limited as amended by that certain
Supplementary Tenancy Agreement dated December 30, 1994 and that
certain Second Supplementary Tenancy Agreement dated December 31,
1994(/1/)
10.9 Lease Agreement dated June 10, 1994, between Yip Sik Kin and Tarrant
Company Limited (translated from Chinese)(/1/)
10.10 Tenancy Contract effective as of December 24, 1994, between Khalifa
Muhairi and Tarrant Trading Co. Ltd.(/1/)
10.11 Agreement dated as of June 1, 1995, by and among Pret-A-Porter, the
Company, French Designers, Inc., Bernard Aidan, Gerard Guez and Todd
Kay(/5/)
Exhibit
Number Description
- ------- -----------
10.12 Services Agreement dated as of April 1, 1995, by and between F.I.S.,
Inc. and the Company(/2/)
10.13 Services Agreement dated as of October 1, 1994, by and between the
Company and GET(/1/)
10.14 Services Agreement dated as of October 1, 1994, by and between the
Company and Lynx International Limited(/1/)
10.15 Indemnification Agreement dated as of March 14, 1995, by and among the
Company, Gerard Guez and Todd Kay(/2/)
10.16 Promissory Note in the initial principal amount of $2 million dated
February 8, 1996, by Gerard Guez in favor of the Company(/2/)
10.17 Promissory Note in the initial principal amount of $1 million dated
February 8, 1995, by Todd Kay in favor of the Company(/2/)
10.18 Promissory Note in the principal amount of $1,334,566.71 dated
December 31, 1994, by P.I.S., Inc. in favor of the Company(/2/)
10.19 Release dated as of June 1, 1995, by and between the Company and
certain other parties signatory thereto(/2/)
10.20 Option Agreement dated as of July 28, 1995, by and among Limited
Direct Associates, L.P., Gerard Guez, Todd Kay and the Company(/5/)
10.21 Registration Rights Agreement dated as of July 28, 1995, by and among
the Company and Limited Direct Associates, L.P.(/5/)
10.22 Reorganization and Tax Indemnification Agreement dated as of June 13,
1995, by and among the Company and its shareholders(/5/)
10.23 Employment Agreement January 1, 1995, by and between the Company and
Gerard Guez(/2/)
10.23.1 Employment Agreement effective January 1, 1998, by and between the
Company and Gerard Guez(/13/)
10.23.2 First amendment to Employment Agreement dated as of January 10, 2000 by
and between Gerard Guez and the Company ( /21/ )
10.24 Agreement dated as of January 1, 1995, by and between the Company and
Todd Kay(/1/)
10.24.1 Employment Agreement effective January 1, 1998, by and between the
Company and Todd Kay(/13/)
10.24.2 First Amendment to Employment Agreement dated as of January 10, 2000
by and between Todd Kay and the Company
10.25 Employment Agreement dated as of January 1, 1994, by and between the
Company and Jimmy Esebag, as amended, by that certain Amendment No. 1
dated as of June 1, 1995(/2/)
Exhibit
Number Description
- ------- -----------
10.26 Employment Agreement dated as of November 18, 1994, by and between the
Company and Mark B. Kristof(/1/)
10.27 Employment Agreement dated as July 5, 1994, by and between the Company
and Bradley R. Kenson(/1/)
10.28 License Agreement dated January 1, 1994, by and between the Company
and GET(/1/)
10.29 Assignment dates as of June 1, 1995 with respect to the GET!
trademark, executed by GET in favor of the Company(/2/)
10.30 Amendment No. 1 to Commercial Lease dated as of April 1, 1995 by and
between GET and the Company(/2/)
10.31 Lease and Services Agreement dated as of June 1, 1995, by and between
Tarrant Company Limited and French Designers, Inc.(/2/)
10.32 Note in the principal amount of $2,600,000 dated May 15, 1995, by the
Company in favor of Imperial Bank(/2/)
10.33 Letter Agreement dated May 17, 1995, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/2/)
10.34 Buying Agency Agreement executed as of December 19, 1992, between
P.I.S., Inc. and Tarrant Company Ltd.(/2/)
10.35 Buying Agency Agreement executed as of April 4, 1995, by Azteca
Production International, Inc. and Tarrant Company Ltd., with the
Company acknowledging as to certain matters(/2/)
10.36 Tripartite Agreement Assignment of Factoring Proceeds (Advances)
executed and delivered June 6, 1995, by the Company, and accepted and
agreed to by The Hongkong and Shanghai Banking Corporation Limited and
NationsBanc Commercial Corporation(/2/)
10.36.1 Amendment to Three Party Special Deposit Account Agreement(/8/)
10.37 Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) entered into as
of June 6, 1995, by and between the Hongkong and Shanghai Banking
Corporation Limited and the Company(/2/)
10.38 Security Agreement (Tarrant Co. Ltd. Draft Acceptance) entered into as
of June 6, 1995, by and between The Hongkong and Shanghai Banking
Corporation Limited and the Company(/2/)
10.39 Agreement dated March 14, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/3/)
10.40 Agreement dated March 17, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/3/)
Exhibit
Number Description
- ------- -----------
10.41 Underwriting Agreement dated as of July 24, 1995, by and among the
Company, Gerard Guez, Todd Kay and Prudential Securities
Incorporated(/5/)
10.42 Letter agreement dated August 10, 1995, by and among the Company and
NationsBanc Commercial Corporation(/4/)
10.42.1 Amendment dated June 9, 1997 to Factoring Agreement effective as of
September 28, 1993, as amended, by and between the Company and
NationsBanc Commercial Corporation(/8/)
10.43 Letter agreement dated January 30, 1996, by and between Tarrant
Company Limited and The Hongkong Shanghai Banking Corporation
Limited(/5/)
10.43.1 Letter agreement dated May 28, 1996, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/8/)
10.43.2 Letter agreement dated April 16, 1998, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/11/)
10.44 Promissory Note in the principal amount of $3 million dated March 25,
1996, by GET in favor of the Company(/6/)
10.45 Deed of Trust dated March 25, 1996 by and Between GET and the
Company(/6/)
10.46 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Gerard Guez and the Company(/6/)
10.47 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Todd Kay and the Company(/6/)
10.48 Letter agreement dated February 22, 1996, by and between Tarrant
Company Limited and Standard Chartered Bank(/7/)
10.49 Letter agreement dated March 8, 1996, by and between Tarrant Company
Limited and Standard Chartered Bank(/7/)
10.50 Guarantee Agreement entered into as of August 30, 1996, by and between
Standard Chartered Bank and the Company(/7/)
10.51 Letter of Undertaking entered into as of August 30, 1996, by and between
Standard Chartered Bank and the Company(/7/)
10.52 Intercreditor Agreement entered into as of November 1, 1996, between
The Hongkong and Shanghai Banking Corporation Limited, Standard
Chartered Bank and Tarrant Company Limited(/7/)
10.53 Security Agreement entered into as of November 1, 1996, by and between
Standard Chartered Bank and the Company(/7/)
Exhibit
Number Description
- ------- -----------
10.53.1 Termination Agreement dated as of March 29, 2002, by and between
Standard Chartered Bank and Tarrant Apparel Group.(/25/)
10.54 Amendment to Security Agreement (Guaranty of Tarrant Co. Ltd. Debt)
entered into as of November 1, 1996, between The Hongkong and
Shanghai Banking Corporation Limited and the Company(/7/)
10.55 Agreement dated January 29, 1997 by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/7/)
10.56 Form of Indemnification Agreement with directors and certain executive
officers(/8/)
10.57 Special Deposit Account Agreement(8)
10.58 Accounts Receivable Financing Agreement dated June 13, 1997, by between
the Company and The CIT GroupCommercial Services, Inc.(8)
10.58.1 Letter Agreement dated October 1, 1997 regarding Accounts Receivable
Financing Agreement, by and between the Company and The CIT
GroupCommercial Service., Inc.(13)
10.59* Asset Purchase Agreement dated February 18, 1998, by and between Marble
Limited and MGI International Limited(10)
10.60* Asset Purchase Agreement dated February 18, 1998, by and between the
Company and Marshall Gobuty International U.S.A., Inc.(10)
10.61 Employment Agreement dated February 23, 1998, by and between the Company
and Marshall Gobuty(10)
10.62 Noncompetition Agreement dated February 23, 1998, by and between
Marshall Gobuty International U.S.A., Inc. and Marshall Gobuty, on the
one hand, and the Company, on the other hand(10)
10.63 Noncompetition Agreement dated February 23, 1998, by and between MGI
International Limited and Marshall Gobuty, on the one hand, and the
Company, on the other hand(10)
10.64 Loan Agreement dated as of July 1, 1998, between the Company and
Standard Chartered Bank(12)
10.65 Partnership Interest Purchase Agreement dated as of July 2, 1998, among
Rocky Acquisition, LLC, the Company, Limited Direct Associates, L.P.,
Rocky Apparel, Inc., and Gabriel Manufacturing Company(13)
10.66 Escrow Agreement made as of July 2, 1998, by and among the Company,
Gabriel Manufacturing Company and Rocky Apparel, Inc.(13)
10.67 Facility Development Agreement dated as of December 2, 1998, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V.(13)
10.67.1 Letter of Intent to Purchase Twill mill dated August 30, 2002. (/27/)
Exhibit
Number Description
- ------- -----------
10.68+ Agreement for Purchase of Assets dated as of February 22, 1999, by and
among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de C.V.,
Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma Benavides
Montes De Oca(13)
10.68.1 Final Agreement for Purchase of Assets dated as of April 18, 1999, by
and among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de
C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
Benavides Montes De Oca (15)
10.69 Agreement for Purchase of Assets effective as of the twenty-third day of
March, 1999, by and among CMG, Inc., Charles Ghailian, CHAZZZ
Acquisition, L.L.C. and the Company(14)
10.70 Employment Agreement effective as of the twenty-third day of March,
1999, by and between Charles Ghailian and the Company to pay CMG Inc.
(14)
10.71 Non-Negotiable Promissory Note dated March 23, 1999 to pay CMG
Inc.(/14/)
10.71.1 Non-Negotiable Promissory Note dated February 14, 2000 to pay CMG Inc.
(20)
10.72 Escrow Agreement, by and among the Company, Tarrant Mexico, S. de R.L.
de C.V. and Jamil Textil, S.A. de C.V. dated as of April 1,
1999(/14/)
10.72.1 Final Escrow Agreement dated as of May 24, 1999, by and among Tarrant
Apparel Group, Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A.
de C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
Benavides Montes De Oca(/15/)
10.73 Employment Agreement dated as of April 1, 1999 by and between Kamel
Nacif and Tarrant Mexico, S. de R.L. de C.V.(/14/)
10.73.1 Amendment to Employment Agreement entered into August 7, 2000 by and
between Tarrant Mexico, S. de R.L. de C.V. and Kamel Nacif (20)
10.74 Agreement for Purchase of Stock dated as of August 1, 1999, by and
among Tag Mex, Inc., NO! Jeans, Inc., Antonio Haddad Haddad, Tarrant
Apparel Group and the shareholders of Industrial Exportadora Famian,
S.A. de C.V. and Coordinados Elite, S.A, de C.V.*(/15/)
10.75 Noncompetition Agreement dated as of August 1, 1999, by and among Tag
Mex, Inc., NO! Jeans, Inc., Antonio Haddad, Tarrant Apparel
Group and the shareholders of Industrial Exportadora Famian, S.A. de
C.V. and Coordinados Elite, S.A, de C.V.(/16/)
10.77 Loan Agreement dated September 1, 1999 by and between General Electric
Capital Corporation and Tarrant Apparel Group(/16/)
10.77.1 Amendment No. 1 to Loan Agreement dated September 12, 1999 by and
between General Electric Capital Corporation and Tarrant Apparel
Group(/16/)
Exhibit
Number Description
- ------- -----------
10.77.2 Modification Agreement entered into as of June 7, 2002, by and between
General Electric Capital Corporation and Tarrant Apparel Group. (/26/)
10.78 Promissory Note dated September 1, 1999 to pay to the order of General
Electric Capital Corporation the loan amount referred to in Exhibit
10.77(/16/)
10.79 Corporate Guaranty dated September 1, 1999 by Tarrant Mexico, S. de
R.L. de C.V. in connection with loan agreement referred to in Exhibit
10.77(/16/)
10.79.1 Amendment No. 1 to Corporate Guaranty dated September 12, 1999 by
Tarrant Mexico, S. de R.L. de C.V. in connection with loan agreement
referred to in Exhibit 10.77(/16/)
10.80 Master Security Agreement made as of September 1, 1999 by and between
General Electric Capital Corporation and Tarrant Mexico, S. de R.L.
de C.V. in connection with loan agreement referred to in Exhibit
10.77(/16/)
10.80.1 Amendment No. 1 to Master Security Agreement made as of September 12,
1999 by and between General Electric Capital Corporation and Tarrant
Mexico, S. de R.L. de C.V. in connection with loan agreement referred
to in Exhibit 10.77(/16/)
10.81 Loan Agreement dated December 30, 1999 by and between Standard
Chartered Bank and Tarrant Apparel Group(/17/)
10.82 Factoring Agreement dated November 24, 1999 by and between MTB Bank
and Rocky Apparel, LLC.(/17/)
10.83 Machinery and Equipment Agreement dated November 17, 1999 by and
between Tarrant Mexico, S. de R.L. de C.V and Banc of America Leasing
& Capital, L.L.C.(/17/)
10.84 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Antonio Haddad
Haddad(/17/)
10.85 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Mario Alberto Haddad
Yunes(/17/)
10.86 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Marco Antonio Haddad
Yunes(/17/)
10.87 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Miguel Angel Haddad
Yunes(/17/)
Exhibit
Number Description
- ------- -----------
10.88 Non-Negotiable Promissory Note dated August 1, 1999 to pay to the order
of Antonio Haddad Haddad(/17/)
10.89 Stock Pledge Agreement dated August 1, 1999 by and between TAG MEX,
INC. and those individuals whose names appear on the signature
page(/17/)
10.90 Revolving Credit, Factoring and Security Agreement dated January 21,
2000 by and between Tarrant Apparel Group, Tag Mex, Inc., and GMAC
Commercial Credit LLC(/17/)
10.90.1 First Amendment to Revolving Credit, factoring and security agreement
dated January 21, 2000 by and between Tarrant Apparel Group, Tag Mex,
Inc. and GMAC Commercial Credit LLC (20)
10.90.2 Second Amendment to Revolving Credit, factoring and security agreement
dated January 21, 2000 by and between Tarrant Apparel Group, Tag Mex,
Inc. and GMAC Commercial Credit LLC (20)
10.90.3 Third Amendment to Revolving Credit, factoring and security agreement
dated January 21, 2000 by and between Tarrant Apparel Group, Tag Mex,
Inc. and GMA Commercial Credit LLC (20)
10.90.4 Letter agreement dated June 29,2001 by and between the Company and GMAC
Commercial Credit (/22/)
10.90.5 Waiver agreement dated November 2001 by and between Tarrant Apparel
Group And GMAC Commercial Credit (/24/)
10.90.6 Letter Amendment dated March 2002 by and between Tarrant Apparel
Group, Tag Mex, Inc., Fashion Resource (TCL), Inc., United Apparel
Ventures, LLC and GMAC Commercial Credit, LLC. Reference is made to
Revolving Credit, Factoring and Security Agreement dated January
21, 2000. (/25)
10.90.7 Letter Amendment dated January 24, 2003 between Tarrant Apparel
Group, Tag Mex, Inc., Fashion Resource (TCL), Inc., United Apparel
Ventures, LLC and GMAC Commercial Credit, LLC. Reference is made to
Revolving Credit, Factoring and Security Agreement dated January
21, 2000.
10.90.8 Waiver dated November 13, 2002 between Tarrant Apparel Group, Tag
Mex, Inc., Fashion Resource (TCL), Inc., United Apparel Ventures,
LLC and GMAC Commercial Credit, LLC. Reference is made to Revolving
Credit, Factoring and Security Agreement dated January 21, 2000.
10.91 Agreement for Purchase of Assets dated April 12, 2000, by and among
Harvest Wear, Inc., a California corporation (HW), Mapa Trading, LTD,
a Hong Kong corporation (Mapa), Needletex, Inc., a California
corporation (Needletex), Patrick Bensimon (the Shareholder), Jane Doe
International LLC, (formally Needletex, LLC) a Delaware limited
liability company (the Purchaser)(/19/)
Exhibit
Number Description
- ------- -----------
10.92 Amendment No. 1 to Facility Development Agreement dated as of March
30, 2000, by and between Tarrant Mexico, S. de R.L. de C.V. and Tex
Transas, S.A. de C.V.(/18/)
10.93 Equipment Purchase Agreement dated as of October 16, 2000, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V.(/18/)
10.94 Secured Promissory Note dated October 5, 2000 in the principal amount of
U.S. $47,702,128 of Tex Transas, S.A. de C.V.(/18/)
10.94.1 Amended Secured Promissory Note dated October 5, 2000 in the principal
amount of U.S. $47,702,128 of Tex Transas, S.A. de C.V (Amended and
Restated as of December 18, 2001).
10.94.2 Amendment No. 2 to Secured Promissory Note dated January 2, 2002 between
Trans Textil International, S.A. de. C.V. and Tarrant Company Limited
and Trade Link Holdings Company.
10.95 Equipment Lease dated as of October 16, 2000, by and between Tarrant
Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de C.V.(/18/)
10.96 Production Agreement dated as of October 16, 2000, by and between Tag
Mex, Inc. and Tex Transas, S.A. de C.V.(/18/)
10.97 Pledge Security Agreement dated as of October 16, 2000, by and between
Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de C.V.(/18/)
10.98 Promissory note dated February 28, 2001 in the amount of US
$4,119,545.06 to pay to the order of Standard Chartered Bank (20)
10.99 Stock repurchase agreement entered into July 10, 2000 by and among
Tarrant Apparel Group and Gabriel Manufacturing Company (20)
10.99.1 Consulting Agreement effective as of October 9, 2001 by and between
Gabriel Zeitounti and the Company (23)
10.100 Agreement for Purchase of Assets dated August 1, 2000 by and among
Tarrant Mexico, S. de R.L. de C.V., Confecciones Jamil, S.A.de R.L.
de C. and Inmobiliaria Cuadros, S.A. de C.V.(/21/)
10.101 Limited Liability Company Operating Agreement of United Apparel
Ventures, LLC effective as of July 1,2001 (/23/)
10.101.1 Amendment to Operating Agreement dated as of October 23, 2001 by and
among Azteca Production International, Inc. ("Azteca") and "TAG MEX".
(/25/)
10.101.2 Second amendment to Operating Agreement dated as of January 2, 2002 by
and among Azteca Production International, Inc. ("Azteca") and "TAG
MEX". (/25/)
Exhibit
Number Description
- ------- -----------
10.101.3 Third Amendment to Operating Agreement dated as of July 5, 2002, by and
between Azteca Production International, Inc, and TAG Mex, Inc. (/26/)
10.102 Employment Agreement effective January 1, 2002 by and between Eddie
Yuen and the Company (/24/)
10.103 Employment Agreement effective January 7, 2002 by and between Patrick
Chow and the Company (/24/)
10.103.1 First Amendment to Employment Agreement dated January 2, 2003, between
Patrick Chow and the Company.
10.104 Security Agreement entered in to as of April 9, 2001, by and between
Banco Nacional De Comercio Exterior, Industrial Exportadora Famian
S.A. and Tarrant Apparel Group (/24/)
10.105 Guaranty Agreement dated as of May 30, 2002 by and between UPS Capital
Global Trade Finance Corporation and Tarrant Apparel Group and Fashion
Resource (TCL), Inc. (/26/)
10.105.1 Conditional Consent Agreement dated December 31, 2002, between UPS
Capital Global Trade Finance Corporation and Fashion Resource
(TCL), Inc.
10.106 Guaranty Agreement dated as of May 30, 2002 by and between UPS Capital
Global Trade Finance Corporation and Gerard Guez. (/26/)
10.107 Syndicated Letter of Credit Facility dated June 13, 2002 by and
between Tarrant Company Limited, Marble Limited and Trade Link
Holdings Limited as Borrowers and UPS Capital Global Trade Finance
Corporation as Agent and Issuer and Certain Banks and Financial
Institutions as Banks. (/26/)
10.107.1 Charge Over Shares dated June 13, 2002 by Fashion Resource (TCL), Inc.
in favor of UPS Capital Global Trade Finance Corporation. (/26/)
10.107.2 Syndicated Composite Guarantee and Debenture dated June 13, 2002
between Tarrant Company Limited, Marble Limited and Trade link
Holdings Limited and UPS Capital Global Trade Finance Corporation.
(/26/)
10.108 Assignment of Promissory Note by Tarrant Apparel Group to Tarrant
Company Limited and to Trade Link Holdings Company dated December 26,
2001. (/26/)
10.110 Assignment of Promissory Note for full settlement of indebtedness
issued by Tex Transas, S.A. de C.V. due to Tarrant Company Limited,
Trade Link Holdings Limited dated December 26, 2001. (/26/)
10.111 Promissory Note dated July 1, 2002 by Tarrant Apparel Group in favor of
Todd Kay. (/26/)
10.111.1 Amendment to Promissory Note dated January 2, 2003, between Todd Kay
and the Company.
Exhibit
Number Description
- ------- -----------
10.112 Agreement for Purchase of Assets and Stock dated December 31, 2002, by
and among the Registrant, Tarrant Mexico, S. de R.L. de C.V.,
Machrima Luxembourg International, Sarl, Trans Textil International,
S.A. de C.V., Inmobiliaria Cuadros, S.A. de C.V., Rosa Lisette Nacif
Benavides, Gazi Nacif Borge, Jorge Miguel Echevarria Vazquez, and
Kamel Nacif Borge.+ (/27/)
23.1 Consent of Ernst & Young LLP.
24 Power of Attorney (included on signature page).
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- ----------
* Confidential treatment has been requested for portions of this document.
+ All schedules and or exhibits have been omitted. Any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange
Commission upon request.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on May 4, 1995 (File No.
33-91874).
(2) Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 15, 1995.
(3) Filed as an exhibit to Amendment No. 2 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 11, 1995.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 30, 1995.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(10) Filed as exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
(11) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(12) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(15) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
(16) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
(17) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
(18) Filed as an exhibit on Form 8K 10/21/2000.
(19) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(20) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2000.
(21) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2001.
(22) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2001.
(23) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending September 30, 2001.
(24) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2001.
(25) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2002.
(26) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2002.
(26) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending September 30, 2002.
(27) Filed as an exhibit to the Company's Current Report on Form 8K dated
December 31, 2002 and filed on January 15, 2003.