UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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 30, 2003, the aggregate market value of the Common Stock
held by non-affiliates of the Registrant was approximately $16,804,979 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 26, 2004: 28,814,763.
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 2004 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This 2003 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 and Section 21E of the Securities Exchange Act of 1934,
both 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 face stiff
competition, profitably manage a 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 World Trade Organization, or
"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
OVERVIEW
Tarrant Apparel Group is a leading provider of casual apparel, serving
mass merchandisers, department stores, branded wholesalers and specialty chains
located primarily in the United States by designing, merchandising, contracting
for the manufacture of, manufacturing directly and selling casual apparel for
women, men and children. Our major customers include specialty retailers, such
as Express, a division of The Limited, as well as Lane Bryant, Lerner New York,
J.C. Penney, K-Mart, Kohl's, Mervyn's 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 2001, our net sales decreased by 16.4% to $330 million. In 2002, our
net sales increased by 5.2% to $347 million. In 2003, our net sales decreased by
7.8% to $320 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. In 2003, we
experienced a net loss of $35.9 million. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations."
During 2003, we launched our private brands initiative, where we
acquire ownership of or exclusively license rights to a brand name and sell
apparel products under this brand to a single retail company within a geographic
region. In the second quarter of 2003, we acquired an equity interest in the
owner of the trademark "American Rag CIE," and the operator of American Rag
retail stores, and our subsidiary, Private Brands, Inc., acquired a license to
certain exclusive rights to this trademark. Private Brands then entered into a
multi-year exclusive distribution agreement with Federated Merchandising Group
("FMG"), the sourcing arm of Federated Department Stores, to supply FMG with
American Rag CIE, a new casual sportswear collection for juniors and young men.
Private Brands designs and manufactures a full collection of American Rag
apparel exclusively for sale in Federated stores across the country. Beginning
in August 2003, the American Rag collection is available in approximately 100
select Macy's, the Bon Marche, Burdines, Goldsmith's, Lazarus and
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Rich's-Macy's locations. During 2003, we also began selling products under our
own brand "No Jeans" exclusively to Wet Seal.
Commencing September 1, 2003, we ceased directly operating nearly all
of our equipment and fixed assets in Mexico by leasing and outsourcing the
management of a substantial majority of our Mexican operations to affiliates of
Mr. Kamel Nacif, one of our shareholders. See "-- 2003 Restructuring."
In October 2003, we sold an aggregate of 881,732 shares of the Series A
Preferred Stock, at $38 per share, to a group of institutional investors and
high net worth individuals and raised an aggregate of approximately $31 million,
after payment of commissions and expenses. We used the proceeds of this offering
to accounts payable and reduce debts. The preferred stock was converted into an
aggregate of 8,817,320 shares of common stock following a special meeting of
shareholders held on December 4, 2003.
2003 RESTRUCTURING
At inception, we relied on independent contract manufacturers located
primarily in the Far East to produce the merchandise we sold to our customers.
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
believed that the dual strategy of maintaining independent contract
manufacturers in the Far East and operating manufacturing facilities in Mexico
controlled by us could best serve the different needs of our customers and
enable us to capitalize on advantages offered by both markets. We believed this
diversified approach would help to mitigate the risks of doing business outside
of North America, 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.
In August 2003, we determined to abandon our strategy of being both a
trading and vertically integrated manufacturing company, and commencing
September 1, 2003, we ceased directly operating nearly all of our equipment and
fixed assets in Mexico by leasing and outsourcing the management of a
substantial majority of our Mexican operations to affiliates of Mr. Kamel Nacif,
one of our shareholders. We made our determination based on many factors,
including the following:
o Our vertical integration strategy in Mexico required
significant working capital, which required us to
significantly increase debt to finance our Mexico operations.
Such financing was not available to us on commercially
reasonable terms.
o We faced the challenges of rising overhead costs and the need
to take low and sometimes negative margin orders in slow
seasons to fill capacity at our facilities, which reduced our
overall average gross margin.
o The elimination of quotas on WTO, member countries by 2005,
and the other effects of trade agreements among WTO countries,
would soon result in increased competition from developing
countries, which historically have lower labor costs,
including China and Taiwan, both of which recently became
members of the WTO.
3
Our withdrawal from our owned and operated facilities in Mexico on
September 1, 2003, has reduced our working capital requirements, eliminated the
need to accept low or negative margin orders to fill production capacity, and
permitted us to source production in the best locations world-wide. We believe
that our strong design, merchandising and sourcing capabilities are competitive
advantages that will enable us to overcome the desire by some retailers to
purchase merchandise directly from the manufacturer. Due to our change of
strategy in Mexico, at June 30, 2003, we wrote off approximately $19.5 million
in goodwill associated with certain assets we acquired in Mexico, and wrote down
$11 million of inventory in Mexico in anticipation of its liquidation at reduced
prices. See Note 7 of the "Notes to Consolidated Financial Statements."
BUSINESS STRATEGY
We believe that the following trends are currently affecting apparel
retailing and manufacturing:
o There is a decline in the dominance of the casual apparel
trend and the emergence of more upscale looks, which has put
pressure on the moderately priced casual apparel segment.
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 and private
brand 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.
We believe that we have the capabilities to take advantage of these
trends and remain a principal value-added supplier of casual, moderately priced
apparel as well as increase our share of the more upscaled market segment 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 Los Angeles 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 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.
QUALITY AND COMPETITIVELY PRICED PRODUCTS. We believe that our long
time presence in the Far East and our experienced product management teams
provide a superior supply chain that enables us to meet the individual needs of
our customers in terms of quality and lead time.
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PRODUCT DIVERSIFICATION. Our experiencing in designing and delivering
complete apparel collections for some of our customers has improved our overall
ability to deliver product classifications beyond our core casual bottoms
offerings, which has further diversified the merchandise we offer to other
customers.
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 sales of men's and children's
apparel. Our women's apparel products currently include jeans wear, casual
pants, t-shirts, shorts, blouses, shirts, knits and sweaters, 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 $3.0
to over $50.0 per garment.
Over the past three years, approximately 72% of net sales were derived
from the sales of pants and jeans, approximately 7% 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.
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.
The following table shows the percentage of our net sales in fiscal
years 2001, 2002 and 2003 attributable to each customer that accounted for more
than 5% of net sales.
PERCENTAGE OF NET SALES
---------------------------------
CUSTOMER 2001 2002 2003
- ------------------------------------ ------ ------ ------
The Limited (1) .................... 14.3 12.7 15.3
Lane Bryant ........................ 20.5 17.6 12.1
Lerner New York (2) ................ 8.5 9.9 8.3
Wal-Mart ........................... 12.2 9.7 8.7
Tommy Hilfiger ..................... 7.8 17.4 6.7
Kohl's ............................. 1.7 5.1 6.6
Mervyn's ........................... 7.9 7.3 5.9
- ----------
(1) Includes Express and Limited stores.
(2) Sold by Limited Brands Inc. in November 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, Wet Seal, J.C.
Penney, K-Mart, and Seven Licensing Company, LLC. During 2003, we launched our
private brands initiative, where we acquire ownership of or exclusively license
rights to a brand name and sell apparel products under this brand to a single
retail company within a geographic region. We sell products under our
company-owned brand "No Jeans" exclusively to Wet Seal, and our licensed brand
"American Rag Cie" to Federated stores. Additionally, we manufacture branded
merchandise for several major designers.
5
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 are divided between private label and private brands for 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
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.
As part of our merchandising strategy, we produce, at our own expense,
four collections a year in order to offer new designs and fabrics for customers
that rely on us for fashion direction. We produce samples at our facilities in
Guangdong Province, China and in Los Angeles, California. The facilities in
China and Los Angeles 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 order. 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
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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 India, Peru, Thailand, Egypt and Mexico.
Before we ceased manufacturing in Mexico on September 1, 2003, we sourced more
than 50% of our merchandise annually from our factories in Mexico. Our sourcing
strategy is based on a strong presence in Hong Kong and China, and expansion of
our Indonesia and India manufacturing network in the Far East. We are also
expanding our Western Hemisphere production in Peru and other Central and South
American countries, and continue to source production 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:
2001 2002 2003
----- ----- -----
INTERNATIONAL SOURCING:
Hong Kong and China ............... 29.3% 25.3% 28.6%
Other (1) ......................... 9.5% 13.3% 24.4%
DOMESTIC SOURCING:
United States ..................... 9.3% 6.1% 4.4%
Mexico and Central America ........ 51.9% 55.3% 42.6%
----------
(1) In 2003, such countries consisted of Thailand, Egypt, Bangladesh,
Macau, Mongolia, Nepal, the Philippines and Vietnam.
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.
Although we have adopted a code of vendor conduct and monitor the
compliance of our independent contractors with our code of conduct and
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. Additionally, certain of our customers may refuse to
do business with us based on our contractors' labor practices. 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
7
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 or lose business from our customers as a
result of violations of applicable labor laws by our contractors, or that such
sanctions or loss of business 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 a commitment to purchase six million yards of fabric
annually manufactured at the facilities in Mexico which we have leased to a
related third party, 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.
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 30 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 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 sourcing operations from our international
offices. At December 31, 2003, 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
8
allocation of quotas), natural disasters and cultural issues 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,
such as in India, Peru, Thailand and Central America, we still primarily
contract with manufacturers and suppliers located in Hong Kong and China for our
international sourcing needs, 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.
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 to our offices in Hong Kong 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 for delivery into the U.S. In some instances,
these measures have caused delays in the pre-planned delivery of products to
customers.
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 customer support. For
merchandise produced in the Middle East and destined for an East Coast customer
distribution center, the port of entry is New York. After Customs clearance, the
merchandise is trucked to an independent public warehouse
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in New Jersey. The independent warehouses are instructed in writing by the Los
Angeles office when to ship the merchandise to the customer.
BACKLOG
As of March 22, 2004, we had unfilled customer orders of approximately
$67 million as compared to approximately $135 million as of February 26, 2003.
We believe that all of our backlog of orders as of March 22, 2004 will be filled
before the end of the third quarter of fiscal 2004. 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
Our predominant business is the design, distribution and importation of
private label and private brand casual apparel. Substantially all our revenues
are from the sales of apparel. We are organized into three geographic regions:
the United States, Asia and Mexico. We evaluate performance of each region based
on profit or loss from operations before income taxes not including the
cumulative effect of change in accounting principles. For information regarding
the revenues and assets associated with our geographic regions, see Note 15 of
the "Notes to Consolidated Financial Statements."
IMPORT RESTRICTIONS
QUOTAS
We imported approximately 96% of our products sold in 2003.
Approximately 37% of this merchandise was imported from Mexico, which is subject
to special rules under NAFTA. NAFTA allows for the duty and quota free entry
into the United States of certain qualifying merchandise. We have been able to
avail ourselves of such preferential duty treatment for many of the products we
import from Mexico. While quotas have expired on non-qualifying Mexican origin
apparel at the end of 2003, most of such merchandise remains subject to duty.
A majority of the balance of the merchandise imported by us in 2003 was
manufactured in various countries (e.g., China) with which the U.S. has entered
into bilateral trade agreements. These agreements impose, among other things,
certain quantitative restraints (i.e., quotas) on textile and apparel in various
categories that can be imported into the U.S. from that country during a
particular quota year. Accordingly, our operations are subject to the
restrictions imposed by these trade agreements.
As of 2005, quota on apparel from all WTO countries, including China,
will be eliminated. As China is now a member of the WTO, its exports of textiles
and apparel to the U.S. will be covered by the WTO Agreement on Textiles and
Clothing, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." However, various statutory mechanisms
exist which could be invoked by the United States in order to impose "safeguard"
measures (i.e., additional duties or quotas) upon imports of products from
China. These measures arise out of the accession agreement that allowed China to
join the WTO. For example, the China textile "safeguard" authorizes the
imposition of quotas in response to a textile or apparel product of China being
imported into the United States in such increased quantities or under such
conditions as to cause or threaten to cause market disruption.
10
In 2003, approximately 22% of the product imported by us was of Hong
Kong origin, for which Hong Kong quota was utilized upon import. Certain
non-origin conferring production operations were performed in China in
connection with a large portion of our imported products of Hong Kong origin,
under the so-called Outward Processing Arrangement ("OPA").
DUTIES AND TARIFFS
As with all goods imported into the U.S., our imported merchandise is
subject to duty (unless statutorily exempt from duty) at rates established by
U.S. law. These rates range, depending on the type of product, from
approximately 2% to 61% of the appraised value of the product. In addition to
duties, in the ordinary course of our business, we are occasionally subject to
claims by the U.S. Bureau of Customs and Border Protection for penalties,
liquidated damages and other charges relating to import activities. Similarly,
we are at times entitled to refunds from Customs, resulting from the overpayment
of duties.
Products imported from China into the United States receive the same
preferential tariff treatment accorded goods from other countries granted Normal
Trade Relations ("NTR") status. This status has been in place conditionally for
a number of years and is now guaranteed on a more permanent basis by China's
accession to WTO membership in December 2001.
Our continued ability to source products from foreign countries may be
adversely affected by (or benefited by) future trade agreements and
restrictions, changes in U.S. 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 all imports or specified classes of 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 competition 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, and the
production flexibility that we enjoy as a result of our sourcing network.
EMPLOYEES
At December 31, 2003, we had approximately 150 full-time employees in
the United States, 900 in Mexico, 140 in Hong Kong, 110 in China and 10 in
Thailand.
ITEM 2. PROPERTIES
We currently conduct our operations from 15 facilities, 10 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 lease for this facility, under which we are responsible for the
payment of taxes, utilities and insurance, terminated in December 2003. The
lease is currently on a month-to-month basis pending to our planned relocation
to new premises. We also sublease an office at 9000 Sunset Boulevard, Los
Angeles at a base rent of $374,000 per year. Furthermore, we lease 146,000
square feet of warehouse space in South Gate, California for an annual rent of
$399,630 from an unrelated third
11
party. The lease for this facility terminates in March 2004. 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 $74,000. 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
June 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 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. Subsequent to December 31,
2003, we exchanged this lease with a tenant in the same building for a 4,000
square foot office with an annual base rental of approximately $146,000 for 2004
and $150,000 for 2005 to 2007, which lease will expire in 2007. We are currently
renting one storage facility at Tehuacan, Mexico at a monthly rental of $3,500.
No long-term contract has been signed for this lease. See Note 10 and Note 14 in
the relevant 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. Commencing
on September 1, 2003, we leased a substantial majority of these premises to an
affiliate of Mr. Kamel Nacif, one of our shareholders, for an annual rental of
$11 million. We have agreed to purchase annually, six million yards of fabric
manufactured at the facilities leased or operated by Mr. Nacif's affiliates at
market prices to be negotiated.
We believe that all of our existing facilities are well maintained, in
good operating condition and adequate to meet our current and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
PATRICK BENSIMON
Subsequent to December 31, 2003, we reached a settlement with Patrick
Bensimon relating to claims Mr. Bensimon made against Jane Doe International,
LLC relating to his employment agreement with this company. Jane Doe
International, LLC, which was beneficially owned 51% by us and 49% by Needletex
Inc., was formed for the purpose of acquiring assets from Needletex, Inc., a
company owned by Mr. Bensimon, pursuant to the terms of an Asset Purchase
Agreement. On January 21, 2003, Mr. Bensimon obtained an arbitration award of
$1,425,655 for salary and bonus plus interest accrued thereon and legal fees and
costs to be determined. On April 7, 2003, the panel issued a final award in
favor of Mr. Bensimon confirming the prior interim award and awarding Mr.
Bensimon costs and attorneys fees in the amount of $489,640. On April 28, 2003,
Mr. Bensimon sought a court order confirming the final award. We asked the court
to vacate or modify the final award.
In January 2004, we settled the employment issue with Mr. Bensimon for
$1.2 million in cash and forgiveness of approximately $859,000 in debts owed by
Needletex Inc. As part of the settlement, we received the remaining 49% interest
in Jane Doe International, LLC. An additional expense of approximately $379,000
was made in the fourth quarter of 2003 to cover the forgiveness of debts.
12
At the outset of the dispute, we tendered the claim by Mr. 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 arbitration award
was made, the insurance carrier denied coverage. After the final award by the
arbitration panel, we made demand on the insurance carrier, which was denied. We
then commenced suit against the insurance carrier in the Los Angeles County
Superior Court for breach of contract and related claims. Subsequent to December
31, 2003, the carrier has settled the case with a cash payment of $330,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 2003, we held a Special Meeting of Shareholders. At the
Special Meeting, there were 18,597,443 shares entitled to vote, and 14,012,698
shares (75%) were represented at the meeting in person or by proxy. The
following summarizes the vote results for those matters submitted to our
shareholders for action at the Special Meeting:
1. Proposal to approve the issuance of 8,817,320 shares of common
stock issuable upon conversion of the outstanding shares of Series A Convertible
Preferred Stock.
FOR AGAINST ABSTAIN BROKER NON-VOTES
10,076,862 56,393 20,716 3,858,727
2. Proposal to approve an amendment to the Tarrant's Articles of
Incorporation to increase the authorized number of shares of common stock from
35,000,000 to 100,000,000.
FOR AGAINST ABSTAIN BROKER NON-VOTES
13,554,357 245,925 20,816 191,600
3. Proposal to approve the grant of options to purchase 400,000
shares of common stock to Barry Aved, our President.
FOR AGAINST ABSTAIN BROKER NON-VOTES
8,285,152 119,803 25,016 5,582,727
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
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
---- ----
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
2003
- ----
First Quarter................................... 3.61 4.29
Second Quarter.................................. 2.83 4.03
Third Quarter................................... 2.72 4.10
Fourth Quarter.................................. 3.40 4.70
On March 26, 2004, the last reported sale price of our common stock as
reported by NASDAQ was $1.73. As of March 26, 2004, we had 36 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.
14
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2003.
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER EQUITY
WARRANTS AND RIGHTS RIGHTS COMPENSATION PLANS
----------------------- ------------------------- ----------------------------
Equity compensation
plans approved by
security holders ..... 8,926,087 $7.13 2,573,913
Equity compensation
plans not approved by
security holders ..... 881,732 $4.65 --
----------------------- ------------------------- ----------------------------
Total 9,807,819 $6.91 2,573,913
MATERIAL FEATURES OF INDIVIDUAL EQUITY COMPENSATION PLANS NOT APPROVED BY
SHAREHOLDERS
Sanders Morris Harris Inc. acted as placement agent in connection with
our October 2003 private placement financing transaction. As partial
consideration for their services as placement agent, we issued to Sanders Morris
Harris a warrant to purchase 881,732 shares of our common stock at an exercise
price of $4.65 per share. The warrant has a term of 5 years. The warrant vests
and becomes exercisable in full on April 17, 2004. See Note 12 to the "Notes to
Consolidated Financial Statements."
RECENT SALE OF UNREGISTERED SECURITIES
In October 2003, we issued and sold 881,732 shares of Series A
Convertible Preferred Stock (the "Series A Shares"), at $38 per share, to a
group of institutional investors and high net worth individuals and raised an
aggregate of approximately $31 million, after payment of commissions and
expenses. The Series A Shares were converted into an aggregate of 8,817,320
shares of common stock following approval of the conversion by our shareholders
at a special meeting held on December 4, 2003 in accordance with the original
conversion terms. Each of the investors represented to us that the investor was
an "accredited investor" within the meaning of Rule 501 of Regulation D under
the Securities Act of 1933, and that the investor was purchasing the securities
for investment and not in connection with a distribution thereof. The issuance
and sale of the Series A Shares was exempt from the registration and prospectus
delivery requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder as a transaction not
involving any public offering. The issuance and sale of the common stock upon
conversion of the Series A Shares was exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to Section
3(a)(9) of the Securities Act.
In November 2003, we issued an aggregate of 200,000 shares of common
stock to Antonio Haddad Haddad, Miguel Angel Haddad Yunes, Mario Alberto Haddad
Yunes, and Marco Antonio Haddad Yunes in partial settlement of the balance of
approximately $2.5 million in obligations owed these parties arising from our
acquisition of their factories in 1998. Each of these investors represented to
us that the investor was an "accredited investor" within the meaning of Rule 501
of Regulation D under the Securities Act of 1933, and that the investor was
purchasing the securities for investment and not in connection with a
distribution thereof. The issuance and sale of the common stock was exempt from
the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder as a transaction not involving any public offering. See Note 12 to
the "Notes to Consolidated Financial Statements."
15
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,
------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(In thousands, except per share data)
Income Statement Data:
Net sales................... $395,341 $395,169 $330,253 $347,391 $320,423
Cost of sales............... 329,131 332,333 277,525 302,082 288,445
-------- -------- -------- -------- --------
Gross profit.............. 66,210 62,836 52,728 45,309 31,978
Selling and distribution
expenses................... 13,692 17,580 14,345 10,757 11,329
General and administrative
expenses................... 25,259 40,327 33,136 30,082 31,767
Amortization of
intangibles(1)(3).......... 2,312 2,840 3,317 -- --
Impairment of assets........ -- -- -- -- 22,277
-------- -------- -------- -------- --------
Income from operations.... 24,947 2,089 1,930 4,470 (33,395)
Interest expense............ (5,771) (9,850) (7,808) (5,444) (5,603)
Interest income............. 396 1,295 3,256 4,748 425
Minority interest........... -- 1,313 (412) (4,581) 3,461
Other income(2)............. 920 1,350 1,853 2,648 4,784
Other expense(2)............ (172) (193) (856) (2,004) (1,425)
-------- -------- -------- -------- --------
Income before provision for
income taxes and cumulative
effect of accounting change 20,320 (3,996) (2,037) (163) (31,753)
Provision for income taxes.. (7,439) 1,478 852 1,051 4,132
-------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
accounting change.......... $ 12,881 $ (2,518) $ (2,889) $ (1,214) $(35,885)
Cumulative effect of
accounting change(3)....... -- -- -- (4,871) --
-------- -------- -------- -------- --------
Net income (loss)........... $ 12,881 $ (2,518) $ (2,889) $ (6,085) $(35,885)
======== ======== ======== ======== ========
Net income (loss) per share -
Basic:
Before cumulative effect of
accounting change......... $ 0.85 $ (0.16) $ (0.18) $ (0.08) $ (1.97)
Cumulative effect of
accounting change......... -- -- -- (0.30) --
-------- -------- -------- -------- --------
After cumulative effect of
accounting change......... $ 0.85 $ (0.16) $ (0.18) $ (0.38) $ (1.97)
Net income (loss) per share -
Diluted:
Before cumulative effect of
accounting change......... $ 0.79 $ (0.16) $ (0.18) $ (0.08) $ (1.97)
Cumulative effect of
accounting change......... -- -- -- (0.30) --
-------- -------- -------- -------- --------
After cumulative effect of
accounting change......... $ 0.79 $ (0.16) $ (0.18) $ (0.38) $ (1.97)
Weighted average shares
outstanding (000)
Basic...................... 15,200 15,815 15,825 15,834 18,215
Diluted.................... 16,314 15,815 15,825 15,834 18,215
As of December 31,
------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Working capital............. $ 25,196 $ 27,957 $ 25,109 $ 11,731 $(18,018)
Total assets................ 295,042 308,092 288,467 316,444 253,105
Bank borrowings and
long-term obligations...... 99,072 114,439 111,336 106,937 68,587
Shareholders' equity........ 139,403 130,489 125,164 121,161 107,709
- ----------
(1) See "Item 1. Business--Acquisitions."
(2) Major components of Other income (expense) (as presented above) include
rental and lease 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.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read together with the
Consolidated Financial Statements of Tarrant Apparel Group and the "Notes to
Consolidated Financial Statements" included elsewhere in this Form 10-K. This
discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of Tarrant
Apparel Group for the fiscal years ended December 31, 2001, 2002 and 2003.
Except for historical information, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward looking statements that involve risks and uncertainties and are based
upon judgments concerning various factors that are beyond our control. See
"Cautionary Statement Regarding Forward-Looking Statements."
OVERVIEW
Tarrant Apparel Group is a leading provider of casual apparel, serving
mass merchandisers, department stores, branded wholesalers and specialty chains
located primarily in the United States by designing, merchandising, contracting
for the manufacture of, manufacturing directly and selling casual apparel for
women, men and children.
We generate revenues from the sale of apparel merchandise to our
customers that we manufacture or have manufactured by third party contract
manufacturers located outside of the United States. Revenues and net loss for
the years ended December 31, 2001, 2002 and 2003 were as follows (dollars in
thousands):
REVENUES AND NET LOSS: 2001 2002 2003
--------- --------- ---------
Net sales ............................... $ 330,253 $ 347,391 $ 320,423
Net loss before cumulative effect of
accounting change .................... $ (2,889) $ (1,214) $ (35,885)
Net loss after cumulative effect of
accounting change .................... $ (2,889) $ (6,085) $ (35,885)
Cash flows for the years ended December 31, 2001, 2002 and 2003 were as
follows (dollars in thousands):
CASH FLOWS: 2001 2002 2003
-------- -------- --------
Net cash provided by operating activities .. $ 30,051 $ 15,493 $ 9,484
Net cash used in investing activities ...... $(15,445) $ (5,670) $ (1,053)
Net cash used in financing activities ...... $(15,916) $ (8,435) $ (6,295)
SIGNIFICANT DEVELOPMENTS IN 2003
RESTRUCTURING OF MEXICAN OPERATIONS
In August 2003, we determined to abandon our strategy of being both a
trading and vertically integrated manufacturing company, and commencing
September 1, 2003, we ceased directly operating nearly all of our equipment and
fixed assets in Mexico by leasing and outsourcing the management of a
substantial majority of our Mexican operations to affiliates of Mr. Kamel Nacif,
one of our shareholders. We made our determination based on many factors,
including the following:
17
o Our vertical integration strategy in Mexico required
significant working capital, which required us to
significantly increase debt to finance our Mexico operations.
Such financing was not available to us on commercially
reasonable terms.
o We faced the challenges of rising overhead costs and the need
to take low and sometimes negative margin orders in slow
seasons to fill capacity at our facilities, which reduced our
overall average gross margin.
o The elimination of quotas on WTO member countries by 2005, and
the other effects of trade agreements among WTO countries,
would soon result in increased competition from developing
countries, which historically have lower labor costs,
including China and Taiwan, both of which recently became
members of the WTO.
Our withdrawal from our owned and operated facilities in Mexico on
September 1, 2003, has reduced our working capital requirements, eliminated the
need to accept low or negative margin orders to fill production capacity, and
permitted us to source production in the best locations world-wide. We believe
that our strong design, merchandising and sourcing capabilities are competitive
advantages that will enable us to overcome the desire by some retailers to
purchase merchandise directly from the manufacturer. Due to our change of
strategy in Mexico, at June 30, 2003 we wrote off approximately $19.5 million in
goodwill associated with certain assets we acquired in Mexico, and wrote down
$11 million of inventory in Mexico in anticipation of its liquidation at reduced
prices. We will receive $11 million per annum from the lessor of our equipment
and facilities in Mexico over the 6-year term of the leases. We have agreed to
purchase annually, six million yards of fabric manufactured at the facilities
leased and/or operated by Mr. Nacif's affiliates at market prices to be
negotiated. See Note 7 and Note 14 of the "Notes to Consolidated Financial
Statements."
EQUITY FINANCINGS
In October 2003, we sold an aggregate of 881,732 shares of the Series A
Convertible Preferred Stock, at $38 per share, to a group of institutional
investors and high net worth individuals and raised an aggregate of
approximately $31 million, after payment of commissions and expenses. We used
the proceeds of this offering to pay accounts payable and reduce debts . The
preferred stock was converted into an aggregate of 8,817,320 shares of common
stock following a special meeting of shareholders held on December 4, 2003. We
have registered the shares of common stock issued upon conversion of the Series
A Preferred Stock with the Securities and Exchange Commission for resale by the
investors. In conjunction with the private placement transaction, we issued a
warrant to purchase 881,732 shares of common stock to the placement agent. The
warrant is exercisable beginning April 17, 2004 through October 17, 2008 and has
a per share exercise price of $4.65.
In January 2004, we sold an aggregate of 1,200,000 shares of our common
stock at a price of $3.35 per share, for aggregate proceeds to us of
approximately $3.7 million after payment of placement agent fees and other
offering expenses. We used the proceeds of this offering for working capital
purposes. The securities sold in the offering were registered under the
Securities Act of 1933, as amended, pursuant to our effective shelf registration
statement. In conjunction with this public offering, we issued a warrant to
purchase 30,000 shares of our common stock to the placement agent, the warrant
has an exercise price of $3.35 per share, is fully vested and exercisable and
has a term of five years.
PRIVATE BRANDS INITIATIVE
During 2003, we launched our private brands initiative, where we
acquire ownership of or exclusively license rights to a brand name and sell
apparel products under this brand to a single retail company within a geographic
region. In the second quarter of 2003, we acquired an equity interest in the
owner of the trademark "American Rag CIE," and the operator of American Rag
retail stores, and our subsidiary, Private Brands, Inc., acquired a license to
certain exclusive rights to this trademark. Private Brands then entered into a
multi-year exclusive distribution
18
agreement with Federated Merchandising Group ("FMG"), the sourcing arm of
Federated Department Stores, to supply FMG with American Rag CIE, a new casual
sportswear collection for juniors and young men. Beginning in August 2003, the
American Rag collection is available in approximately 100 select Macy's, the Bon
Marche, Burdines, Goldsmith's, Lazarus and Rich's-Macy's locations. During 2003,
we also began selling products under our owned brand "No Jeans" exclusively to
Wet Seal.
With a private brand relationship, we own and control the brand and
thus build equity in the brand as the product gains acceptance by consumers. In
a private label relationship, we source products for our customers who own and
control the brand and thus benefit from any increase in value of the brand. We
also control the production of private brand merchandise, unlike private label
merchandise where the brand owner controls sourcing. For instance, we
experienced a significant loss of business from Lane Bryant due to a change in
their management and the subsequent shift in their sourcing strategy.
We believe that forming private brand alliances with premier retailers
allows us greater penetration of apparel categories in addition to our core
casual bottoms business. In addition to the increased breadth of
classifications, we have improved our ability to compete for private label from
our private brand. We also receive higher margins for private branded
merchandise, which allows us to be more profitable on the same level of unit
sales.
INTERNAL REVENUE SERVICE AUDIT
In January 2004, the Internal Revenue Service completed its examination
of our Federal income tax returns for the years ended December 31, 1996 through
2001. The IRS has proposed adjustments to increase our income tax payable for
the six years under examination by an aggregate of approximately $14.5 million.
This adjustment would also result in additional state taxes and interest of
approximately $12.6 million. We believe that we have meritorious defenses to and
intend to vigorously contest the proposed adjustments. If the proposed
adjustments are upheld through the administrative and legal process, they could
have a material impact on our earnings and cash flow. We believe we have
provided adequate reserves for any reasonably foreseeable outcome related to
these matters on the balance sheet included in the Consolidated Financial
Statements under the caption "Income Taxes." We do not believe that the
adjustments, if any, arising from the IRS examination, will result in an
additional income tax liability beyond what is recorded in the accompanying
balance sheet.
While we do not anticipate any requirement to make significant cash
payments in the coming 12 to 18 months to the taxing authorities, we intend to
accumulate a contingency cash reserve from operations to meet a potential cash
outflow upon the ultimate resolution of these matters. Building this cash
reserve will require us to set aside on a periodic basis a significant portion
of our cash from operations, which we do not intend on using for other purposes.
LABOR DIFFICULTIES IN MEXICO
In connection with the restructuring of our Mexican operations, and the
resulting reduction in our Mexican work force, a group of laid off workers
attempted to form a new labor union and organized walkouts and demonstrations at
one of our sewing plants in Ajalpan, Mexico. These demonstrations took place in
August 2003 and were short-lived, but very well publicized. Workers rights
groups picked up the story and began an Internet campaign to publicize the
workers' grievances. In October 2003, a local labor board denied the group's
application to organize a new union. Nevertheless, we have remained the target
of workers rights activists who have picketed our customers, stuffed electronic
mailboxes with inaccurate, protest e-mails, and threatened customers with
retaliation for continuing business with us. While we have defended our position
to our customers, some of our larger customers for Mexico produced jeans wear
have been reluctant to place orders with us in response to actions taken and
contemplated by these activist
19
groups. As a consequence, we project a loss of approximately $75 million in
revenue from sales of Mexico-produced merchandise in 2004.
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 of the "Notes to Consolidated Financial
Statements."
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, 2003, the balance in the allowance for returns,
discounts and bad debts reserves was $4.2 million, compared to $4.3 million at
December 31, 2002.
INVENTORY
Our inventories are valued at the lower of cost or market. Under
certain market conditions, we use estimates and judgments regarding the
valuation of inventory to properly value inventory. Investory adjustments are
made for the difference between the cost of the inventory and the estimated
market value and charged to operations in the period in which the facts that
give rise to the adjustments become known.
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:
20
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.
We utilized the discounted cash flow methodology to estimate fair
value. At December 31, 2003, we have a goodwill balance of $8.6 million, and a
net property and equipment balance of $135.6 million, as compared to a goodwill
balance of $28.1 million and a net property and equipment balance of $160.0
million at December 31, 2002. Our goodwill balance reflects the write off of
$19.5 million of goodwill as discussed in "-- Significant Developments in 2003 -
Restructuring of Mexican Operations" and Note 7 of the "Notes to Consolidated
Financial Statements."
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.
In addition, accruals are also estimated for ongoing audits regarding
U.S. Federal tax issues that are currently unresolved, based on our estimate of
whether, and the extent to which, additional taxes will be due. We routinely
monitor the potential impact of these situations and believe that amounts are
properly accrued for. If we ultimately determine that payment of these amounts
is unnecessary, we will reverse the liability and recognize a tax benefit during
the period in which we determine that the liability is no longer necessary. We
will record an additional charge in our provision for taxes in any period we
determine that the original estimate of a tax liability is less than we expect
the ultimate assessment to be. See Note 9 of the "Notes to Consolidated
Financial Statements" for a discussion of current tax matters.
DEBT COVENANTS
Our debt agreements require the maintenance of certain financial ratios
and a minimum level of net worth as discussed in Note 8 of the "Notes to
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 80% 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 also believe that our lenders would
provide waivers if necessary. However, our expectations
21
of future operating results and continued compliance 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,
-----------------------
2001 2002 2003
----- ----- -----
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 84.0 87.0 90.0
----- ----- -----
Gross profit........................................ 16.0 13.0 10.0
Selling and distribution expenses................... 4.4 3.1 3.5
General and administration expenses................. 10.0 8.6 9.9
Amortization expense(1)(2).......................... 1.0 -- --
Impairment of assets................................ -- -- 7.0
----- ----- -----
Income (loss) from operations....................... 0.6 1.3 (10.4)
Interest expense.................................... (2.4) (1.6) (1.7)
Interest income..................................... 1.0 1.4 0.1
Minority interest................................... (0.1) (1.3) 1.0
Other income........................................ 0.6 0.8 1.5
Other expense....................................... (0.3) (0.6) (0.4)
----- ----- -----
Loss before provision for income taxes
and cumulative effect of accounting change........ (0.6) 0.0 (9.9)
Income taxes........................................ (0.3) (0.3) (1.3)
----- ----- -----
Loss before cumulative effect of accounting
change............................................ (0.9) (0.3) (11.2)
Cumulative effect of accounting change(2)........... -- (1.4) --
----- ----- -----
Net loss............................................ (0.9)% (1.7)% (11.2)%
===== ===== =====
- ----------
(1) Reflects amortization of the excess of cost over fair value of assets.
(2) Reflects the adoption of SFAS No. 142
COMPARISON OF 2003 TO 2002
Net sales decreased by $27.0 million, or 7.8%, from $347.4 million in
2002 to $320.4 million in 2003. The decrease in net sales was largely
attributable to a decrease in Mexican sourced sales from $186.9 million in 2002
to $139.1 million in 2003. The decrease in net sales was offset by additional
revenue of $20.5 million from our private brands.
Gross profit (which consists of net sales less product costs, direct
labor, manufacturing overhead, duty, quota, freight in, brokerage, and
warehousing) for 2003 was $32.0 million, or 10.0% of net sales,
22
compared to $45.3 million, or 13.0 % of net sales, for 2002, representing a
decrease of $13.3 million or 29.4%. The decrease in gross profit as a percentage
of net sales occurred primarily because of an inventory write-down of $11
million in the second quarter of 2003 and severance payments to Mexican workers
of approximately $2.5 million included as part of cost of goods sold in 2003.
This increase in cost of goods sold was partially offset by a reclassification
of depreciation and amortization in fourth quarter of 2003 of $3.2 million to
general and administration expense. Excluding the inventory write-down,
severance payments and reclassification of depreciation and amortization in
2003, gross profit would have decreased by $3.0 million or 6.6% to $42.3 million
or 13.2%.
Selling and distribution expenses increased by $572,000, or 5.3%, from
$10.8 million in 2002 to $11.3 million in 2003. As a percentage of net sales,
these variable expenses increased from 3.1% in 2002 to 3.5% in 2003. The
increase was primarily caused by an overall increase in warehousing and
distribution cost due to the private brands in smaller size shipments.
General and administrative expenses increased by $1.7 million, or 5.6%,
from $30.1 million in 2002 to $31.8 million in 2003. As a percentage of net
sales, these expenses increased from 8.6% in 2002 to 9.9% in 2003. This increase
was primarily caused by the reclassification of $3.2 million of depreciation
from cost of goods sold in the fourth quarter of 2003. The charge for the change
in the allowances for returns and discounts for 2003 was $183,000, or 0.1% of
sales, compared to such charge of $867,000, or 0.2% of sales, during 2002.
Impairment of assets expense was $22.3 million in 2003, compared to
$4.9 million in 2002 being classified as a cumulative effect of accounting
change in accordance with SFAS 142. This expense in 2003 is primarily due to our
decision to cease directly operating a substantial majority of our equipment and
fixed assets in Mexico commencing in the third quarter of 2003. See Note 7 to
the "Notes to Consolidated Financial Statements."
Loss from operations was $33.4 million in 2003, or (10.4)% of net
sales, compared to income from operations of $4.5 million in 2002, or 1.3% of
net sales, due to the factors described above.
Interest expense increased by $159,000, or 2.9%, from $5.4 million in
2002 to $5.6 million in 2003. This increase in interest expense was a result of
an increase in interest rate applicable to our main credit facility. Interest
income was $425,000 in 2003 compared to $4.7 million in 2002. Included in
interest income for 2002 was approximately $4.5 million from a related party
note receivable related to the sale of certain equipment pertaining to the twill
mill which we re-acquired in December 2002. Other income increased by $2.1
million, or 80.7%, from $2.6 million in 2002 to $4.8 million in 2003, due to
$3.7 million of lease income received for our facilities and equipment in Mexico
starting September 1, 2003, offset by a reduction of realized gain on foreign
currency of $819,000. Other expenses decreased from $2.0 million in 2002 to $1.4
million in 2003 due to a reduction in unrealized loss on foreign currency of
$454,000.
Losses allocated to minority interests in 2003 was $3.5 million,
representing the minority partner's share of profit in UAV of $3.5 million,
offset by $7.0 million attributed to the minority shareholder in Tarrant Mexico
for his 25% share in the loss including $4.4 million for his share in the
special write-down on goodwill and inventory of Tarrant Mexico. In 2002, we
allocated $4.6 million of profit to minority interest, which consisted of profit
shared by the minority partner in the UAV joint venture.
Loss before taxes and cumulative effect of accounting change was
$163,000 in 2002 and $31.8 million in 2003, representing 0.0% and (9.9)% of net
sales, respectively. The increase in loss before taxes and cumulative effect of
accounting change was due to the factors discussed above.
Provision for income taxes was $1.1 million in 2002 versus $4.1 million
in 2003. The increase in income tax expense is due to adjustments to the accrual
for potential IRS audits and increases in the valuation allowance.
23
Loss after taxes and cumulative effect of accounting change was $6.1
million in 2002 and $35.9 million in 2003, representing (1.7)% and (11.2)% of
net sales, respectively. Included in the $6.1 million loss in 2002 was a
non-cash charge of $4.9 million to reduce the carrying value of goodwill to the
estimated fair value, resulting from adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets." Included in the $35.9 million loss in 2003 were
non-cash charges of $22.3 million for the impairment of assets and an inventory
write-down of $11 million.
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.
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.
24
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.
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, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2003 2003 2003 2003
------- ------- ------- ------- ------- ------- ------- -------
(In millions)
Net sales ...... $ 65.2 $ 95.3 $ 94.3 $ 92.6 $ 78.7 $ 78.2 $ 96.5 $ 67.0
Gross profit ... 8.4 14.5 14.2 8.2 8.8 (0.4) 11.5 12.1
Operating income
(loss) ........ (0.8) 4.8 3.6 (3.1) (1.3) (34.4) 1.4 0.8
Net income
(loss) ........ (6.6) 1.3 1.1 (1.9) (3.9) (32.6) 0.1 0.4
Quarter Ended
----------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2003 2003 2003 2003
------- ------- ------- ------- ------- ------- ------- -------
Net sales ...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit ... 12.9 15.1 15.1 8.9 11.2 (0.6) 11.9 18.0
Operating income
(loss) ........ (1.3) 5.0 3.8 (3.4) (1.7) (44.0) 1.5 1.2
Net income
(loss) ........ (10.1) 1.4 1.2 (2.1) (4.9) (41.7) 0.1 0.6
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,
sales of equity securities, borrowing from affiliates and the proceeds from the
exercise of stock options.
25
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.
Cash flows for the years ended December 31, 2001, 2002 and 2003 were as
follows (dollars in thousands):
CASH FLOWS: 2001 2002 2003
-------- -------- --------
Net cash provided by operating activities .. $ 30,051 $ 15,493 $ 9,484
Net cash used in investing activities ...... $(15,445) $ (5,670) $ (1,053)
Net cash used in financing activities ...... $(15,916) $ (8,435) $ (6,295)
Net cash provided by operating activities was $9.5 million in 2003, as
compared to net cash provided by operations in 2002 of $15.5 million and $30.1
million in 2001. Net cash provided by operations in 2003 resulted primarily from
a net loss of $35.9 million offset by depreciation and amortization of $16.1
million, asset impairment of $22.3 million and inventory write-down of $11.0
million. In addition to these items, the components of working capital impacting
cash from operations included a decrease of $7.9 million in accounts receivable,
a decrease of $9.6 million in inventory, a decrease of $4.2 million in accounts
payable and an increase of $14.8 million in due from affiliates. Changes from
prior years were a result of net income provided and changes in working capital.
During 2003, cash flow used in investing activities was $1.1 million,
as compared to $5.7 million in 2001 and $15.4 million in 2001. Cash used in
investing activities in 2003 included approximately $984,000 for purchase of
other assets.
During 2003, cash used in financing activities was $6.3 million as
compared to $8.4 million in 2002 and $15.9 million in 2001. Cash used in
financing activities in 2003 included $36.5 million net repayment of
indebtedness under our credit facilities offset by $31.0 million of proceeds
from a private placement of equity securities.
26
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Following is a summary of our contractual obligations and commercial
commitments available to us as of December 31, 2003 (in millions):
PAYMENTS DUE BY PERIOD
----------------------------------------------------
CONTRACTUAL OBLIGATIONS Less than Between Between After
Total 1 year 2-3 years 4-5 years 5 years
- ------------------------ -------- ------- ------- ------- -------
Long-term debt ......... $ 39.3 $ 38.7 $ 0.6 $ 0 $ 0
Operating leases ....... $ 1.3 $ 0.8 $ 0.4 $ 0.1 $ 0
Minimum royalites ...... $ 10.1 $ 0.5 $ 1.2 $ 1.6 $ 6.8
Purchase commitment .... $ 108.0 $ 18.0 $ 36.0 $ 36.0 $ 18.0
Employment contracts ... $ 3.8 $ 1.4 $ 2.4 $ 0 $ 0
Total Contractual
Cash Obligations ..... $ 162.5 $ 59.4 $ 40.6 $ 37.7 $ 24.8
TOTAL AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
OTHER COMMERCIAL AMOUNTS ------------------------------------------
COMMITMENTS AVAILABLE COMMITTED Less than Between Between After
TO US TO US 1 year 2-3 years 4-5 years 5 years
- ------------------------ -------- ------- ------- ------- -------
Lines of credit ........ $ 123.1 $ 37.3 $ 85.8 -- --
Letters of credit
(within lines
of credit) .......... $ 27.9 $ 27.9 -- -- --
Total Commercial
Commitments ......... $ 123.1 $ 37.3 $ 85.8 -- --
On June 13, 2002, we 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, 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 of
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 our
subsidiaries, Fashion Resource (TCL) Inc. and Tarrant Luxembourg Sarl, Gerard
Guez, our Chairman, also signed a guarantee of $5 million in favor of UPS to
secure this facility. This facility bears interest at 4.5% per annum at December
31, 2003. Under this facility, we are subject to certain restrictive covenants,
including that we maintain a specified tangible net worth, fixed charge ratio,
and leverage ratio. We were in compliance with all the covenants in the third
quarter of 2002. In the fourth quarter of 2002, we violated the fixed charge
ratio covenant and obtained a waiver at a cost of $5,000. In the first quarter
of 2003, we were in violation of the no-consecutive-quarterly-losses covenant
and the fixed charge ratio covenant and obtained a waiver for the quarter for a
fee of $10,000. In the second quarter of 2003, we breached all the financial
covenants and obtained a waiver for the quarter for a fee of $25,000. In October
2003, we established new financial convenants with UPS for the period ended
September 30, 2003 and the remainder of fiscal 2003 based on our projections. We
were in compliance with all the covenants in the third and fourth quarters of
2003. Tangible net worth, fixed charge ratio and leverage ratio were fixed at
$65 million, 0.74 to 1 and 2.55 to 1, respectively, for the fourth quarter of
2003. Capital Expenditures were capped at $800,000 per quarter. In December
2003, a temporary additional line of credit consisting of a $2.8 million standby
letter of credit was made available to us against a restricted deposit of $2.8
million. This temporary facility was cancelled in February 2004 and the deposit
has since been released. The expiration date of our main credit facility with
UPS has been extended to December 31, 2004 with certain conditions. One of the
conditions requires that on or before May 31, 2004, we have to refinance the
Debt Facility currently provided by GMAC Commercial Credit LLC. If we fail to
satisfy this condition, we will incur a penalty of $100,000 payable to UPS. As
of December 31, 2003, $23.7 million was outstanding under this facility, and an
additional $350,000 was available for future borrowings. In addition, $1.2
million of open letters of credit was outstanding as of December 31, 2003.
Since March 2003, DBS Bank (Hong Kong) Limited (formerly known as Dao
Heng Bank) has made available a letter of credit facility of up to HKD 20
million (equivalent to US $2.6 million) to our subsidiaries in Hong Kong. This
is a demand facility and is secured by the pledge of our office property, which
is owned by Gerard Guez and Todd Kay, and Tarrant's guarantee. In August 2003,
the letter of
27
credit facility increased to HKD 23 million (equivalent to US $3.0 million). In
December 2003, a tax loan for HKD 2 million (equivalent to US $256,000) was also
made available to our Hong Kong subsidiaries. As of December 31, 2003, $2.9
million was outstanding under this facility. In addition, $0.3 million of open
letters of credit was outstanding as of December 31, 2003.
We are party to a revolving credit, factoring and security agreement
(the "Debt Facility") with GMAC Commercial Credit, LLC. The Debt Facility
provides a revolving facility of $90 million, including a letter of credit
facility not to exceed $20 million, and matures on January 31, 2005. The Debt
Facility also provides a term loan of $25 million, which is being repaid in
monthly installments of $687,500. The Debt Facility provides for interest at
LIBOR plus the LIBOR rate margin determined by the Total Leverage Ratio (as
defined), and is collateralized by our receivables, intangibles, inventory and
various other specified non-equipment assets. This facility bears interest at 6%
per annum at December 31, 2003. Under the facility, we are subject to various
financial covenants on tangible net worth, interest coverage, fixed charge ratio
and leverage ratio, and are prohibited from paying dividends. In 2002, we
violated the net worth and fixed charge covenants in the third quarter and
obtained a waiver for the quarter for a fee of $50,000. We complied with all the
covenants in the other three quarters. In the first and second quarters of 2003,
we were in violation of all the financial covenants and obtained waivers from
GMAC for each quarter at the cost of $45,000 and $100,000 respectively. In
October 2003, we established new financial covenants with GMAC for the period
ended September 30, 2003 and the remainder of fiscal 2003 based on our
projections. We were in compliance with all the covenants in the third and
fourth quarters of 2003. Tangible net worth, fixed charge ratio and leverage
ratio in the final quarter were fixed at $65 million, 0.74 to 1 and 2.55 to 1,
respectively.
The amount we can borrow under the Debt Facility is determined based on
a defined borrowing base formula related to eligible accounts receivable and
inventories. Our borrowing base availability ranged from approximately $30
million to $75 million from January 1, 2003 to December 31, 2003. A significant
decrease in eligible accounts receivable and inventories due to the aging of
receivables and inventories, among other factors, can have an adverse effect on
our borrowing capabilities under our credit facility, which may adversely affect
the adequacy of our working capital. In addition, we have typically experienced
seasonal fluctuations in sales volume. These seasonal fluctuations result in
sales volume decreases in the first and fourth quarters of each year due to the
seasonal fluctuations experienced by the majority of our customers. During these
quarters, borrowing availability under our credit facility may decrease as a
result of decreases in eligible accounts receivables generated from our sales. A
total of $31.6 million (of which $4.8 million related to the term portion) was
outstanding under the Debt Facility at December 31, 2003. Based on the borrowing
base formula, no additional amounts were available for borrowing under the Debt
Facility at December 31, 2003.
At December 31, 2003, Tarrant Mexico S. de R.L. de C.V., Famian
division is indebted to Banco Nacional de Comercio Exterior SNC in the amount of
$2.1 million pursuant to a credit facility assumed by Tarrant Mexico following
its merger with Grupo Famian. We are now repaying $250,000 plus interest (LIBOR
plus 6%) monthly on this facility.
We have an equipment loan with an initial borrowing of $16.25 million
from GE Capital Leasing ("GE Capital"), which matures in November 2005. The loan
is secured by equipment located in Puebla and Tlaxcala, Mexico. As of December
31, 2003, this facility had a balance of $3.6 million. Interest accrues at a
rate of 2.5% over LIBOR. Under this facility, we are subject to covenants on
tangible net worth of $30 million, leverage ratio of not more than two times at
the end of each financial year, and no losses for two consecutive quarters. In
the first quarter of 2002, we breached the no-consecutive-quarterly-losses
covenant and obtained a waiver at a cost of $10,000. We complied with all the
covenants in the other three quarters. In the first and second quarters of 2003,
we were in violation of the no-consecutive-quarterly-losses covenant and
obtained waivers at the cost of $25,000 and $50,000 respectively. We were in
compliance with all the covenants in the third and fourth quarters of 2003. The
waiver for breach of covenants in the previous quarter required additional
collateral in the form of a second lien on our headquarters, which is owned by
Messrs. Guez, our Chairman of the Board and Kay, our Vice Chairman. Due to an
objection by the first-lien holder to the second lien, we have agreed to
accelerate the monthly repayment installment by approximately $75,000 commencing
January 2004 in lieu of the additional collateral.
We also had an equipment loan of $5.2 million from Bank of America
Leasing ("BOA"). The amount outstanding as of December 31, 2002 was $2.4
million. In October 2003, we paid off the BOA facility in its entirety.
The Debt Facility with GMAC and the credit facilities with UPS and GE
Capital all carry cross-default clauses. A breach of a financial covenant set by
GMAC, UPS or GE Capital constitutes an event of default under all of the credit
facilities, entitling these financial institutions to demand payment in full of
all outstanding amounts under their respective debt and credit facilities.
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During 2000, we financed equipment purchases for a new manufacturing
facility with certain vendors. 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,
$4.0 million was outstanding as of December 31, 2003. Of the $4.0 million, $2.7
million is denominated in the Euro, and 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, 2003, $564,000 was outstanding
under this facility and $3.9 million of letters of credit were open under this
arrangement.
Unrealized losses of $1.0 million and $561,000 were recorded at
December 31, 2002 and 2003, respectively, related to foreign currency
fluctuations and were recorded in other income (expense) in the accompanying
statement of operations.
The effective interest rates on short-term bank borrowing as of
December 31, 2002 and 2003 were 4.1% and 5.3%, 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 our
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, banks, suppliers and major
shareholders. From time to time, we have had temporary over-advances from our
banks. Any withdrawal of support from these parties will have serious
consequences on our liquidity.
From time to time in the past, we borrowed funds from, and advanced
funds to, certain officers and principal shareholders, including Gerard Guez,
Todd Kay and Kamel Nacif. The greatest outstanding balance of such borrowings
from Mr. Kay in 2003 was $487,000. The greatest outstanding balance of such
advances to Mr. Guez during 2003 was approximately $4,879,000. As of December
31, 2003, we were indebted to Mr. Nacif and his affiliates in the amount of $5.4
million. Mr. Guez had an outstanding advance from us in the amount of $4,796,000
as of December 31, 2003 payable on demand. All advances to, and borrowings from,
Messrs. Guez and Kay bore interest at the rate of 7.75% during the period. Total
interest paid by Messrs. Guez and Kay were $368,000 and $374,000 for the years
ended December 31, 2002 and 2003, respectively. Since the enactment of the
Sarbanes-Oxley Act in 2002, no further personal loans (or amendments to existing
loans) have been or will be made to officers or directors of Tarrant.
We intend to accumulate a cash reserve to meet any payment obligations
we have to taxing authorities relating to the Internal Revenue Services'
examination of our Federal income tax returns for the years ended December 31,
1996 through 2001. We intend to fund this cash reserve from operations, which
will require us to set aside on a periodic basis a significant amount of our
cash, which cannot be used for other purposes. See "--Significant Developments
in 2003 -- Internal Revenue Service Audit."
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, sales of equity securities, 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.
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.
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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 Gerard Guez,
our Chairman and Chief Executive Officer, and Todd Kay, our Vice Chairman of the
Board of Directors. 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 2003 for rent for office and warehouse facilities at these
locations.
On October 16, 2003, we leased to affiliates of Mr. Kamel Nacif, one of
our shareholders, a substantial portion of our manufacturing facilities and
operations in Mexico including real estate and equipment. We leased our twill
mill in Tlaxcala, Mexico, and our sewing plant in Ajalpan, Mexico, for a period
of 6 years and for an annual rental fee of $11 million. The assets subject to
these leases have a net book value of approximately $92 million as of December
31, 2003. In connection with this transaction, we also entered into a management
services agreement pursuant to which Mr. Nacif's affiliates will manage the
operation of our remaining facilities in Mexico in exchange for the use of such
facilities. The term of the management services agreement is also for a period
of 6 years. We have agreed to purchase annually, six million yards of fabric
manufactured at the facilities leased and/or operated by Mr. Nacif's affiliates
at market prices to be negotiated. Based on current market price, the purchase
commitment would be approximately $18 million annually.
From time to time, we borrowed funds from, and advanced funds to,
certain officers and principal shareholders, including Gerard Guez, Todd Kay and
Kamel Nacif. The greatest outstanding balance of such borrowings from Mr. Kay in
2003 was $487,000. The greatest outstanding balance of such advances to Mr. Guez
during 2003 was approximately $4,879,000. As of December 31, 2003, we were
indebted to Mr. Nacif and his affiliates in the net amount of $5.4 million for
working capital lent by him to us to support our Mexican operations. Mr. Guez
had an outstanding advance from us in the amount of $4,796,000 as of December
31, 2003 payable upon demand. All advances to, and borrowings from, Messrs. Guez
and Kay bore interest at the rate of 7.75% during the period. Total interest
paid by the Chairman and Vice Chairman were $368,000 and $374,000 for the years
ended December 31, 2002 and December 31, 2003, respectively. Since the enactment
of the Sarbanes-Oxley Act in 2002, no further personal loans (or amendments to
existing loans) have been or will be made to officers or directors of Tarrant.
Since June 2003, United Apparel Venture LLC, a majority owned,
controlled and consolidated subsidiary of Tarrant, has been selling to Seven
Licensing Company, LLC, jeans wear bearing the brand "Seven7", which is
ultimately purchased by Express. Seven Licensing is beneficially owned by Gerard
Guez. Total sales during the year ended December 31, 2003 were $8.1 million.
On December 31, 2002, our wholly owned subsidiaries, Tarrant Mexico and
Tarrant Luxembourg Sarl (previously known as Machrima Luxembourg Sarl), 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 International, S.A. de C.V. ("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 Cuadros, S.A. de C.V. ("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,
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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. The Series A Preferred Stock was converted into
3,000,000 shares of common stock following approval of the conversion by our
shareholders at the annual shareholders' meeting held on May 28, 2003.
On July 1, 2001, we formed an entity to jointly market, share certain
risks and achieve economies of scale with Azteca Production International, Inc.
("Azteca"), called United Apparel Ventures, LLC ("UAV"). Azteca Production
International, Inc. is owned by Hubert Guez, the brother of Gerard Guez, our
Chairman and Chief Executive Officer. 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 and March 2003, UAV has begun to service both parties' business
with Express and Levi Strauss & Co., respectively. UAV makes purchases from two
related parties in Mexico, Azteca and Tag-It Pacific, Inc.
We purchased $5.8 million, $37.0 million and $37.1 million of finished
goods and service from Azteca and its affiliates for the years ended December
31, 2001, 2002 and 2003, respectively. Our total sales of fabric and service to
Azteca in 2001, 2002 and 2003 were $7.2 million, $2.9 million and $9.9 million,
respectively. Two and one half percent of gross sales as management fees were
paid in 2002 and 2003 to each of the members of UAV, per the operating
agreement.
At December 31, 2003, Messrs. Guez and Kay beneficially owned 1,018,000
and 1,005,000 shares, respectively, of common stock of Tag-It Pacific, Inc.
("Tag-It"), collectively representing 17.5% of Tag-It Pacific's common stock at
December 29, 2003. 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 $17.9 million, $23.9 million and $16.8 million of
trim from Tag-It during the years ended December 31, 2001, 2002 and 2003. We
also sold Tag-It $1.5 million from our trim and fabric inventory during the year
ended December 31, 2003. From time to time we have guaranteed the indebtedness
of Tag-It for the purchase of trim on our behalf. See Note 8 of the "Notes to
Consolidated Financial Statements."
We have adopted a policy that any future 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 Limited Stores and
Express) accounted for approximately 12.7% and 15.3% of our net sales in fiscal
years 2002 and 2003, respectively. Lane Bryant
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accounted for 17.6% and 12.1% of our net sales in fiscal years 2002 and 2003,
respectively. Lerner New York accounted for 9.9% and 8.3% of our net sales in
fiscal years 2002 and 2003, respectively. Kohl's accounted for 5.1% and 6.6% of
our net sales in fiscal years 2002 and 2003, respectively. We believe that
consolidation in the retail industry has centralized purchasing decisions and
given customers greater leverage over suppliers such as Tarrant, and we expect
this trend to continue. If this consolidation continues, our net sales and
results of operations may be increasingly sensitive to 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 generally do not
have long-term contracts with any of them, including Express. Purchases
generally occur on an order-by-order basis, and relationships exist as long as
there is a perceived benefit to both parties. A decision by a major customer,
whether motivated by competitive considerations, financial difficulties, and
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.
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.
FAILURE TO MANAGE OUR RESTRUCTURING IN MEXICO COULD IMPAIR OUR BUSINESS.
We have determined to cease directly operating a substantial majority
of our equipment and fixed assets in Mexico, and to lease a large portion of our
facilities and operations in Mexico to a related third party, which we
consummated effective September 1, 2003. As a consequence, we have become
primarily a trading company, relying on third party manufacturers to produce the
merchandise we sell to our customers. We face many challenges related to our
decision to cease directly operating a substantial majority of our equipment and
fixed assets in Mexico. Any failure on our part to successfully manage these
challenges, or other unanticipated consequences may result in loss of customers
and sales, which would have an adverse impact on operations. The challenges we
face include:
o We may lose customers who desire to purchase merchandise
directly from the manufacturer;
32
o We may experience unanticipated expenses in winding down
manufacturing operations in Mexico, including labor costs and
additional write down of inventory, which may adversely affect
our results of operations in the short term;
o The party to whom we lease our manufacturing operations in
Mexico may default in its obligations to us, in which case we
may not be able to lease the facilities to another party, or
recommence use of the facilities to manufacture goods without
significant cost; and
o We may not be able to transfer Mexico sales to our trading
model in time to replace direct to manufacturer orders we have
experienced in the past due, for instance, to difficulty in
finding third party manufacturers, and capital constraints.
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 charge backs in excess of
reserves and the timing of expenditures in anticipation of 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 in 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 FASHION-RIGHT AND
TIMELY 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 potential.
33
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.
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. Additionally, hackers and computer viruses have disrupted operations
at many 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 on hand and 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 shareholders. 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.
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OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.
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 lower labor costs, including China and
Taiwan, both of which recently became members of the World Trade Organization.
This potential increase in competition from developing countries is one of the
several reasons why we have determined to lease our manufacturing operations in
Mexico.
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 DEPENDENCE ON INDEPENDENT MANUFACTURERS REDUCES OUR ABILITY TO CONTROL THE
MANUFACTURING PROCESS, WHICH COULD HARM OUR SALES, REPUTATION AND OVERALL
PROFITABILITY.
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.
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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 96% of our products were imported from outside the U.S.
in fiscal 2003, and most of our fixed assets are located in Mexico. We are
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 cultural issues. Any changes
in those countries' labor laws and government regulations may have a negative
effect on our profitability.
WE CANNOT GUARANTEE THAT OUR FUTURE ACQUISITIONS WILL BE SUCCESSFUL.
In the future, we may seek to grow 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.
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;
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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.
OTHER RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
THE ULTIMATE RESOLUTION OF THE INTERNAL REVENUE SERVICE'S EXAMINATION OF OUR TAX
RETURNS MAY REQUIRE US TO INCUR AN EXPENSE BEYOND WHAT HAS BEEN RESERVED FOR ON
OUR BALANCE SHEET OR MAKE CASH PAYMENTS BEYOND WHAT WE ARE THEN ABLE TO PAY.
In January 2004, the Internal Revenue Service proposed adjustments to
increase our federal income tax payable for the years ended December 31, 1996
through 2001 by an aggregate of approximately $14.5 million. This adjustment
would also result in additional state taxes, penalties and interest of
approximately $12.6 million. If the proposed adjustments are upheld through the
administrative and legal process, they could have a material impact on our
earnings and cash flow. We believe we have provided adequate reserves for any
reasonably foreseeable outcome related to these matters on the balance sheet
included in the Consolidated Financial Statements. If the amount of any actual
liability, however, exceeds our reserves, we would experience an immediate
adverse earnings impact in the amount of such additional liability, which could
be material. Additionally, we anticipate that the ultimate resolution of these
matters will require that we make significant cash payments to the taxing
authorities. Presently we do not have sufficient cash or borrowing ability to
make any future payments that may be required. While we intend to accumulate a
cash reserve to meet this cash outflow contingency from operations, no assurance
can be given that we will have sufficient surplus cash from operations to build
and maintain this reserve by the time such payments are required. Additionally,
cash used to build this reserve will not be available for other corporate
purposes, which could have a material adverse effect on our financial condition
and results of operations.
37
THE FAILURE TO ESTABLISH FINANCIAL COVENANTS UNDER OUR CREDIT FACILITY IN A
TIMELY MANNER WOULD RESULT IN A DEFAULT UNDER OUR CREDIT AGREEMENTS, WHICH WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY.
Our credit agreement with GMAC requires the maintenance of certain
financial covenants, including minimum levels of tangible net worth, interest
coverage, fixed charge ratio and leverage ratio, as discussed in Note 8 to our
consolidated financial statements. We have agreed with GMAC to set new financial
covenants for fiscal 2004 based on our projections. In the event that the
financial covenants cannot be timely established on terms acceptable to GMAC on
or prior to May 15, 2004, such failure would be an event of default under the
credit agreement. In addition, due to cross-default provisions in a majority of
our debt agreements, approximately 80% of our long-term debt would become due in
full if any of the debt is in default. We have provided GMAC with our
projections and other necessary information in connection with setting the new
financial covenants, and are otherwise fully cooperating with GMAC on this
matter. However, there can be no guarantee that such financial covenants will be
established prior to the deadline, or that GMAC will not in its discretion
establish financial covenants with which we are unable to comply. If the debt
under our credit facilities is accelerated and becomes due and payable prior to
maturity, our default will entitle the creditors to exercise all of their rights
and remedies, including foreclosure on all of our assets which we pledged as
collateral to secure repayment of the debt.
INSIDERS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OUR
SHAREHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.
As of March 15, 2004, our executive officers and directors and their
affiliates owned approximately 36.3% of the outstanding shares of our common
stock. Gerard Guez, our Chief Executive Officer and Chairman, and Todd Kay, our
Vice Chairman, alone own approximately 22.8% and 11.8%, respectively, of the
outstanding shares of our common stock at March 15, 2004. Accordingly, our
executive officers and directors have the ability to affect the outcome of, or
exert considerable influence over, all matters requiring shareholder 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 shareholders from realizing a premium over the market prices
for their shares of common stock.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE PRICE OF
OUR COMMON STOCK.
Our shareholders rights plan, our ability to issue additional shares of
preferred stock and some provisions of our articles of incorporation and bylaws
could make it more difficult for a third party to make an unsolicited takeover
attempt of us. These anti-takeover measures may depress the price of our common
stock by making it more difficult for third parties to acquire us by offering to
purchase shares of our stock at a premium to its market price.
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
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. Additionally, we cannot pay
dividends on our common stock unless the terms of our bank credit facilities and
outstanding preferred stock, if any, permit the
38
payment of dividends on our common stock. Because we may not pay dividends, your
return on this investment likely depends on your selling our stock at a profit.
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 AND
FINANCIAL DISCLOSURE
During 2003, our prior independent public accountants, Ernst & Young,
LLP, advised us and discussed with the Audit Committee of our Board of Directors
that, due in part to certain acquisitions by our subsidiaries in Mexico and
modifications to our inventory costing methodology, certain improvements in the
internal controls of those subsidiaries were necessary to ensure reporting from
the subsidiaries would be sufficient for us to develop reliable financial
statements. We have and will continue to address the deficiencies identified by
Ernst & Young, LLP in consultation with Grant Thornton, LLP, our new independent
public accountants.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
As of December 31, 2003, 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.
39
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.
CHANGES IN CONTROLS AND PROCEDURES
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.
RECOMMENDATIONS OF OUR AUDITORS
During 2003, our prior independent public accountants, Ernst & Young,
LLP, advised us and discussed with the Audit Committee of our Board of Directors
that, due in part to certain acquisitions by our subsidiaries in Mexico and
modifications to our inventory costing methodology, certain improvements in the
internal controls of those subsidiaries were necessary to ensure reporting from
the subsidiaries would be sufficient for us to develop reliable financial
statements. We have and will continue to address the deficiencies identified by
Ernst & Young, LLP in consultation with Grant Thornton, LLP, our new independent
public accountants.
In connection with its audit of our consolidated financial statements
for the year ended December 31, 2003, Grant Thornton LLP, our independent
accountants, advised the Audit Committee and management of our need for
additional staff with expertise in preparing required disclosures in the notes
to the financial statements, and our need to develop greater internal resources
for researching and evaluating the appropriateness of complex accounting
principles and evaluating the effect of new accounting pronouncements on the
company. Grant Thornton LLP considers these matters to be significant
deficiencies as that term is defined under standards established by the American
Institute of Certified Public Accountants. We considered these matters in
connection with the preparation of the December 31, 2003 consolidated financial
statements included in this Form 10-K and also determined that no prior period
financial statements were materially affected by such matters. In response to
the observations made by Grant Thornton, LLP, in 2004 we will implement certain
enhancements to our financial reporting processes, including increased training
of staff on SEC financial reporting requirements and the acquisition of
accounting research tools. We believe these steps will address the matters
raised by Grant Thornton LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning our directors and executive officers will
appear 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"),
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation will appear in our
definitive Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information concerning the security ownership of certain beneficial
owners and management and related stockholder matters will appear in our
definitive Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions will appear in our definitive Proxy Statement and is incorporated
herein by reference.
40
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information concerning principal accountant fees and services will
appear in our definitive Proxy Statement and is incorporated herein by
reference.
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:
Current Report on Form 8-K, reporting Items 2, 5 and 7, filed
as of October 27, 2003.
Current Report on Form 8-K, reporting Items 7 and 12, filed as
of November 13, 2003.
Current Report on Form 8-K, reporting Items 5 and 7, filed as
of November 21, 2003.
Current Report on Form 8-K, reporting Items 5 and 7, filed as
of December 10, 2003.
Current Report on Form 8-K/A, filed as of December 12, 2003,
amending Item 7 of Current Report on Form 8-K filed as of
November 21, 2003.
(c) Exhibits. See the Exhibit Index attached to this Form 10-K
annual report.
42
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Financial Statements
Report of Independent Certified Public Accountants,
Grant Thornton LLP...................................................F-2
Report of Independent Auditors, Ernst & Young LLP.......................F-3
Consolidated Balance Sheets--December 31, 2002 and 2003.................F-4
Consolidated Statements of Operations--Three year period
ended December 31, 2003..............................................F-5
Consolidated Statements of Shareholders' Equity--Three year
period ended December 31, 2003.......................................F-6
Consolidated Statements of Cash Flows--Three year period
ended December 31, 2003..............................................F-7
Notes to Consolidated Financial Statements..............................F-8
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts.........................F-35
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Tarrant Apparel Group
We have audited the consolidated balance sheet of Tarrant Apparel Group and
subsidiaries as of December 31, 2003, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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, 2003 and the consolidated results of
their operations and their consolidated cash flows for the year ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America.
We have also audited Schedule II of Tarrant Apparel Group for the year ended
December 31, 2003. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respect, the information therein.
/S/GRANT THORNTON LLP
----------------------
Los Angeles, California
April 2, 2004
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Tarrant Apparel Group
We have audited the accompanying consolidated balance sheet of Tarrant Apparel
Group and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 15(a) for the years
ended December 31, 2001 and 2002. 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, 2002 and the consolidated results of
their operations and their cash flows for each of the two 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 for the years ended December 31, 2001 and 2002 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-3
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2002 2003
------------- -------------
ASSETS
------
Current assets:
Cash and cash equivalents .................. $ 1,388,482 $ 3,319,964
Restricted cash ............................ -- 2,759,742
Accounts receivable, net ................... 65,287,902 57,165,926
Due from related parties ................... 8,967,493 18,056,488
Inventory .................................. 44,782,154 23,251,591
Prepaid expenses and other receivables ..... 5,135,672 1,776,142
Income taxes receivable .................... 280,200 277,695
------------- -------------
Total current assets ..................... 125,841,903 106,607,548
Property and equipment, net ................ 159,998,629 135,645,751
Other assets ............................... 2,539,040 2,269,011
Excess of cost over fair value of net assets
acquired, net ............................. 28,064,019 8,582,845
------------- -------------
Total assets ............................. $ 316,443,591 $ 253,105,155
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term bank borrowings ................. $ 29,326,924 $ 29,293,323
Accounts payable ........................... 27,722,445 23,514,894
Accrued expenses ........................... 12,566,475 11,194,421
Income taxes ............................... 12,640,388 16,497,939
Due to related parties ..................... 9,661,647 5,418,795
Due to shareholders ........................ 486,875 496
Current portion of long-term obligations ... 21,706,502 38,705,240
------------- -------------
Total current liabilities ................ 114,111,256 124,625,108
Long-term obligations ........................ 55,903,976 588,272
Deferred tax liabilities ..................... 407,751 275,129
Minority interest in UAV ..................... 3,205,167 5,141,620
Minority interest in Tarrant Mexico .......... 21,654,538 14,766,215
Commitments and contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized;
100,000 shares (2002) and no shares (2003)
issued and outstanding .................... 8,820,573 --
Common stock, no par value, 35,000,000 shares
(2002) and 100,000,000 shares (2003)
authorized; 15,846,315 shares (2002) and
27,614,763 shares (2003) issued and
outstanding ............................... 69,368,239 107,891,426
Warrant to purchase common stock ............. -- 1,798,733
Contributed capital .......................... 1,434,259 1,505,831
Retained earnings ............................ 56,873,094 20,988,434
Notes receivable from officer/shareholder .... (5,601,804) (4,796,428)
Accumulated other comprehensive loss ......... (9,733,458) (19,679,185)
------------- -------------
Total shareholders' equity ............... 121,160,903 107,708,811
------------- -------------
Total liabilities and shareholders' equity $ 316,443,591 $ 253,105,155
============= =============
See accompanying notes.
F-4
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------
2001 2002 2003
------------ ------------ ------------
Net sales........................... $330,253,548 $347,390,930 $320,422,850
Cost of sales....................... 277,525,010 302,082,144 288,445,173
------------ ------------ ------------
Gross profit........................ 52,728,538 45,308,786 31,977,677
Selling and distribution expenses... 14,345,356 10,757,029 11,329,414
General and administrative
expenses........................... 33,136,008 30,082,061 31,767,122
Amortization of excess of cost over
fair value of net assets acquired.. 3,317,428 -- --
Write-off of prepaid expenses....... -- -- 2,771,989
Impairment of excess of cost over
fair value of net assets acquired.. -- -- 19,504,521
------------ ------------ ------------
Income (loss) from operations....... 1,929,746 4,469,696 (33,395,369)
Interest expense.................... (7,807,918) (5,443,995) (5,602,556)
Interest income..................... 3,255,843 4,748,144 424,518
Minority interest................... (412,022) (4,580,766) 3,461,243
Other income....................... 1,853,066 2,647,975 4,784,479
Other expense ..................... (855,994) (2,004,073) (1,425,346)
------------ ------------ ------------
Loss before provision for income
taxes and cumulative effect of
accounting change.................. (2,037,279) (163,019) (31,753,031)
Provision for income taxes.......... 851,977 1,051,018 4,131,629
------------ ------------ ------------
Loss before cumulative effect of
accounting change.................. (2,889,256) (1,214,037) (35,884,660)
Cumulative effect of accounting
change............................. -- (4,871,244) --
------------ ------------ ------------
Net loss ........................... $(2,889,256) $(6,085,281) $(35,884,660)
============ ============ ============
Net loss per share - Basic and
Diluted:
Before cumulative effect of
accounting change................. $ (0.18) $ (0.08) $ (1.97)
Cumulative effect of accounting
change............................ -- (0.30) --
------------ ------------ ------------
After cumulative effect of
accounting change................. $ (0.18) $ (0.38) $ (1.97)
============ ============ ============
Weighted average shares outstanding:
Basic and Diluted................. 15,824,750 15,834,122 18,215,071
See accompanying notes.
F-5
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Preferred Number Common Number Contributed Retained
Stock of Shares Stock of Shares Warrant Capital Earnings
----------- ----------- ------------ ---------- ----------- ----------- ------------
Balance at December 31, 2000.. $ -- -- $ 69,302,683 15,820,315 -- $ 1,434,259 $ 65,847,631
Net loss.................... -- -- -- -- -- -- (2,889,256)
Currency translation........ -- -- -- -- -- -- --
Comprehensive income........ -- -- -- -- -- -- --
Exercise of stock options... -- -- 33,750 20,500 -- -- --
Income tax benefit from
exercise of stock options.. -- -- 4,657 -- -- -- --
Advances to shareholders,
net........................ -- -- -- -- -- -- --
----------- ----------- ------------ ---------- ----------- ----------- ------------
Balance at December 31, 2001.. -- -- 69,341,090 15,840,815 -- 1,434,259 62,958,375
Net loss.................... -- -- -- -- -- -- (6,085,281)
Currency translation........ -- -- -- -- -- -- --
Comprehensive loss.......... -- -- -- -- -- -- --
Exercise of stock options... -- -- 24,135 5,500 -- -- --
Income tax benefit from
exercise of stock options.. -- -- 3,014 -- -- -- --
Issuance of preferred stock. 8,820,573 100,000 -- -- -- -- --
Repayment from shareholders,
net........................ -- -- -- -- -- -- --
----------- ----------- ----------- ---------- ----------- ----------- ------------
Balance at December 31, 2002.. 8,820,573 100,000 69,368,239 15,846,315 -- 1,434,259 56,873,094
Net loss.................... -- -- -- -- -- -- (35,884,660)
Currency translation........ -- -- -- -- -- -- --
Comprehensive loss.......... -- -- -- -- -- -- --
Conversion of preferred
stock to common stock...... (8,820,573) (100,000) 8,820,573 3,000,000 -- -- --
Issuance of preferred stock
and warrant, net........... 29,226,041 881,732 -- -- 1,798,733 -- --
Conversion of preferred
stock to common stock...... (29,226,041) (881,732) 29,226,041 8,817,320 -- -- --
Issuance of common stock.... -- -- 788,000 200,000 -- -- --
Retirement of stock......... -- -- (311,427) (248,872) -- -- --
Compensation expense........ -- -- -- -- -- 71,572 --
Repayment from shareholders. -- -- -- -- -- -- --
----------- ----------- ------------ ---------- ----------- ----------- ------------
Balance at December 31, 2003.. $ -- -- $107,891,426 27,614,763 $ 1,798,733 $ 1,505,831 $ 20,988,434
=========== =========== ============ ========== =========== =========== ============
Accumulated
Other Notes Total
Comprehensive from Shareholders
Income (Loss) Shareholders Equity
------------ ------------- ------------
Balance at December 31, 2000..$ (719,004) $ (5,376,486) $130,489,083
Net loss.................... -- -- (2,889,256)
Currency translation........ 4,268,523 -- 4,268,523
------------
Comprehensive income........ -- -- 1,379,267
Exercise of stock options... -- -- 33,750
Income tax benefit from
exercise of stock options.. -- -- 4,657
Advances to shareholders,
net........................ -- (6,742,287) (6,742,287)
------------ ------------ ------------
Balance at December 31, 2001.. 3,549,519 (12,118,773) 125,164,470
Net loss.................... -- -- (6,085,281)
Currency translation........ (13,282,977) -- (13,282,977)
------------
Comprehensive loss.......... -- -- (19,368,258)
Exercise of stock options... -- -- 24,135
Income tax benefit from
exercise of stock options.. -- -- 3,014
Issuance of preferred stock. -- -- 8,820,573
Repayment from shareholders,
net........................ -- 6,516,969 6,516,969
------------ ------------ ------------
Balance at December 31, 2002.. (9,733,458) (5,601,804) 121,160,903
Net loss.................... -- -- (35,884,660)
Currency translation........ (9,945,727) -- (9,945,727)
------------
Comprehensive loss.......... -- -- (45,830,387)
Conversion of preferred
stock to common stock...... -- -- --
Issuance of preferred stock
and warrant, net........... -- -- 31,024,774
Conversion of preferred
stock to common stock...... -- -- --
Issuance of common stock.... -- -- 788,000
Retirement of stock......... -- -- (311,427)
Compensation expense........ -- -- 71,572
Repayment from shareholders. -- 805,376 805,376
------------ ------------ ------------
Balance at December 31, 2003..$(19,679,185) $ (4,796,428) $107,708,811
============ ============ ============
See accompanying notes
F-6
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2002 2003
------------- ------------- -------------
Operating activities:
Net loss ........................................... $ (2,889,256) $ (6,085,281) $ (35,884,660)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Deferred taxes ................................... 1,273,305 (107,162) (132,622)
Depreciation and amortization .................... 14,564,623 10,130,132 16,097,595
Accrued interest on note receivable .............. -- (4,452,490) --
Cumulative effect of accounting change ........... -- 4,871,244 --
Asset impairments ................................ -- -- 22,276,510
Inventory write-down ............................. -- -- 10,986,153
Loss on sale of fixed assets ..................... 26,861 5,291 593,626
Unrealized (gain) loss on foreign currency ....... (103,705) 1,014,696 560,602
Minority interest ................................ 757,927 4,426,080 (3,218,069)
Gain on legal settlement ......................... -- (473,041) (235,785)
Compensation expense related to stock option ..... -- -- 71,572
Change in the provision for returns and discounts 1,830,841 453,167 (324,387)
Changes in operating assets and liabilities:
Restricted cash ................................ -- -- (2,759,742)
Accounts receivable ............................ 5,902,995 (7,141,536) 7,856,700
Due to/from related parties .................... (2,102,811) (673,650) (14,801,324)
Inventory ...................................... 10,474,030 5,818,431 9,626,509
Temporary quota ................................ (142,221) 369,849 --
Prepaid expenses and other receivables ......... 1,385,875 1,551,324 590,046
Accounts payable ............................... 2,343,419 (3,772,979) (4,207,552)
Accrued expenses and income tax payable ........ (3,270,616) 8,211,770 2,388,976
------------- ------------- -------------
Net cash provided by operating activities ........ 30,051,267 15,493,145 9,484,148
Investing activities:
Purchase of fixed assets ........................... (3,918,602) (2,984,547) (368,113)
Proceeds from sale of fixed assets ................. -- -- 209,788
Acquisitions, net of cash .......................... (6,750,391) (2,355,954) --
Collection on note receivable ...................... 2,036,924 -- --
(Increase) decrease in other assets ................ (594,660) 509,524 (983,593)
Advances to shareholders/officers .................. (6,218,458) (1,008,591) --
Collection of advances from shareholders/officers .. -- 169,991 88,723
------------- ------------- -------------
Net cash used in investing activities ............ (15,445,187) (5,669,577) (1,053,195)
Financing activities:
Short-term bank borrowings, net .................... (16,927,528) 7,241,576 (161,194)
Proceeds from long-term obligations ................ 52,894,023 198,551,201 239,280,109
Payment of long-term obligations and bank borrowings (40,376,783) (211,894,730) (275,640,677)
Repayments of borrowings from shareholders/officers (11,543,640) (2,359,847) (486,379)
Proceeds from issuance of preferred stock and
warrant ........................................... -- -- 31,024,774
Repurchase of shares ............................... -- -- (311,427)
Exercise of stock options including related tax
benefit ........................................... 38,407 27,149 --
------------- ------------- -------------
Net cash used in financing activities ............ (15,915,521) (8,434,651) (6,294,794)
Effect of exchange rate on cash .................... 184,591 (1,524,882) (204,677)
------------- ------------- -------------
Increase (decrease)in cash and cash equivalents .... (1,124,850) (135,965) 1,931,482
Cash and cash equivalents at beginning of year ..... 2,649,297 1,524,447 1,388,482
------------- ------------- -------------
Cash and cash equivalents at end of year ........... $ 1,524,447 $ 1,388,482 $ 3,319,964
============= ============= =============
See accompanying notes
F-7
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.") ,
and its majority owned Subsidiaries located primarily in the U.S., Mexico, and
Asia. At December 31, 2003, we own 75% of our subsidiaries in Mexico, 51% of
Jane Doe International, LLC ("JDI"), and 50.1% of United Apparel Ventures
("UAV"). In January 2004, we acquired the remaining 49% interest in JDI. We
consolidate these entities and reflect the minority interests in earnings
(losses) of the ventures in the accompanying financial statements. All
inter-company amounts are eliminated in consolidation. The 25% minority interest
in our subsidiaries in Mexico are owned by affiliates of Mr. Kamel Nacif, one of
our shareholders. The 49.9% minority interest in UAV is owned by Azteca
Production International, a corporation owned by the brothers of our Chairman,
Gerard Guez.
We serve specialty retail, mass merchandise and department store chains and
major international brands by designing, merchandising, contracting for the
manufacture of, manufacturing directly and selling casual apparel for women, men
and children under private label. Commencing in 1999, we expanded our operations
from sourcing apparel to sourcing and operating our own vertically integrated
manufacturing facilities. In August 2003, we determined to abandon our strategy
of being both a trading and vertically integrated manufacturing company, and
effective September 1, 2003, we leased and outsourced operation of our
manufacturing facilities in Mexico to affiliates of Mr. Kamel Nacif, one of our
shareholders. (See Note 14).
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.
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.
SHIPPING AND HANDLING COSTS
Freight charges are included in selling and distribution expenses in the
statement of operations and amounted to $2,509,000, $2,136,000 and $1,817,000
for the years ended December 31, 2001, 2002 and 2003, respectively.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash equivalents consist of cash and highly liquid investments with an original
maturity of three months or less when purchased. Restricted cash refers to cash
deposit(s) held as collateral by landing institution(s) to either guarantee our
liabilities and/or loans. Cash and cash equivalents, including restricted cash,
held in foreign financial institutions totaled to $982,000 and $3,930,000 as of
December 31, 2002 and 2003, respectively. Restricted cash is not considered a
cash equivalent for purposes of the statement of cash flow.
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 uncollectible 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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Under certain market conditions, we use estimates and judgments regarding the
valuation of inventory to properly value inventory. Inventory adjustments are
made for the difference between the cost of the inventory and the estimated
market value and charged to operations in the period in which the facts that
give rise to the adjustments become known.
F-8
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
COST OF SALES
Cost of sales includes costs related to product costs, direct labor,
manufacturing overhead, duty, quota, freight in, brokerage and warehousing.
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 production samples) amounted to approximately $1,621,000,
$1,225,000 and $1,306,000 in 2001, 2002 and 2003, respectively.
QUOTA
We purchase quota rights to be used in the importation of our 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 were fully amortized at
December 31, 2002 and 2003.
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
is 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. At December 31, 2002 and 2003, there were no temporary quota rights
included in current assets.
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
F-9
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, we
adopted Statement of Financial Accounting Standards ("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. 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.
This amount is presented as cumulative effect of accounting change in our
Consolidated Statements of Operations and Cash Flows.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of long-lived assets 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, $638,000
and $327,000 at December 31, 2001, 2002 and 2003, respectively. These costs of
obtaining financing are being amortized as interest expense over the term of the
related debt.
INCOME TAXES
We utilize 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. A valuation allowance is recorded to
reduce deferred taxes to the amount that is more likely than not to be realized.
Our Hong Kong corporate affiliates are taxed at an effective Hong Kong rate of
17.5%. As of December 31, 2003, no domestic tax provision has been provided for
$59.5 million of un-remitted retained earnings of these Hong Kong corporations,
as we intend to maintain these amounts outside of the U.S. on a permanent basis.
NET INCOME (LOSS) PER SHARE
Basic and diluted income (loss) per share has been computed in accordance with
SFAS No. 128, "Earnings Per Share". All options and warrants have been excluded
from the computation in 2001, 2002 and 2003 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 we transact 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.
F-10
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 we 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 our variable rate
borrowings under the various short-term borrowings and long-term debt
arrangements approximate fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose us to concentration of credit
risk, consist primarily of cash equivalents, trade accounts receivable, related
party receivables and amounts due from factor.
Our 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. We make substantial sales to a relatively few,
large customers. In order to minimize the risk of loss, we assign certain of our
domestic accounts receivable to a factor without recourse or requires letters of
credit from our 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. At December 31, 2002 approximately
31.7% of accounts receivable were due from two customers. At December 31, 2003
approximately 15.6% of accounts receivable were due from one customer. The
following table presents the percentage of net sales concentrated with certain
customers. Customer A represents a group of customers under common ownership.
2001 2002 2003
---- ---- ----
Customer A................................................. 14.3% 12.7% 15.3%
Customer B................................................. 20.5% 17.6% 12.1%
Customer C................................................. 12.2% 9.7% 8.7%
Customer D................................................. 8.5% 9.9% 8.3%
Customer E................................................. 7.8% 17.4% 6.7%
We maintain 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. Significant estimates used by us in preparation of the
financial statements include allowance for returns, discounts and bad debts,
valuation of long-lived and intangible assets and goodwill, and tax provision.
Actual results could differ from those estimates.
EMPLOYEE STOCK OPTIONS
We account 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. For the periods ended December 31, 2001 and 2002, no compensation
cost was reflected in net income related to our stock options. For period ended
December 31, 2003, $72,000 was recorded as an expense.
Pro forma information regarding net income and earnings per share is required by
SFAS 148, and has been determined as if we had accounted for our 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
F-11
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the following weighted-average assumptions: weighted-average risk-free interest
rate of 6% for 2001, 4% for 2002 and 2003; dividend yields of 0% for 2001, 2002
and 2003; weighted-average volatility factors of the expected market price of
our common stock of 1.22 for 2001, 0.65 for 2002 and 2003; and a
weighted-average expected life of the option of four years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma
information follows:
2001 2002 2003
----------- ----------- ------------
Pro forma net loss.................. $(7,035,501) $(9,519,060) $(39,928,351)
Pro forma compensation expense, net
of tax............................ $(4,146,245) $(3,433,779) $ (4,043,691)
Net loss as reported................ $(2,889,256) $(6,085,281) $(35,884,660)
Pro forma loss per share
Basic and diluted................. $ (0.44) $ (0.60) $ (2.19)
Net loss per share
Basic and diluted................. $ (0.18) $ (0.38) $ (1.97)
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes all changes in equity (net assets)
from non-owner sources such as foreign currency translation adjustments. We
account for other comprehensive income (loss) in accordance with SFAS 130,
"Reporting Comprehensive Income."
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No.146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under previous
guidance, a liability for an exit cost was recognized at the date of the
commitment to an exit plan. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002 and will
be applied prospectively, as applicable. We applied the provisions of SFAS No.
146 to the costs associated with our decision in 2003 to abandon its strategy of
being both a trading and vertically integrated manufacturing company, as
discussed in Notes 7 and 14 to the financial statements.
In November 2002, FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that guarantees issued
after December 31, 2002 are recorded as liabilities at fair value, with the
offsetting entry recorded based on the circumstances in which the guarantee was
issued. Adoption of FIN 45 did not have a material impact on our financial
statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS 123." This
statement provides alternate methods of transition for a voluntary
F-12
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
change to the fair value method of accounting for stock-based compensation. This
statement also amends the disclosure requirements of SFAS 123 and APB Opinion
28, "Interim Financial Reporting" to require prominent disclosure 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. We have
adopted the disclosure provisions of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 addresses when a company
should consolidate in its financial statements the assets, liabilities and
activities of a variable interest entity ("VIE"). It defines VIEs as entities
that either do not have any equity investors with a controlling financial
interest, or have equity investors that do not provide sufficient financial
resources for the entity to support its activities without additional
subordinated financial support. FIN 46 also requires disclosures about VIE's
that a company is not required to consolidate, but in which it has a significant
variable interest. The consolidation requirements of FIN 46 applied immediately
to variable interest entities created after January 31, 2003. We have not
obtained an interest in a VIE subsequent to that date. A modification to FIN 46
(FIN 46(R)) was released in December 2003. FIN 46(R) delayed the effective date
for VIEs created before February 1, 2003, with the exception of special-purpose
entities, until the first fiscal year or interim period ending after March 15,
2004. FIN 46(R) delayed the effective date for special-purpose entities until
the first fiscal year or interim period after December 15, 2003. We are not the
primary beneficiary of any SPEs at December 31, 2003. We will adopt FIN 46(R)
for non-SPE entities as of March 31, 2004. The adoption of FIN 46 did not result
in the consolidation of any VIEs, nor is the adoption of FIN 46(R) expected to
result in the consolidation of any VIEs. We are continuing to evaluate the
impact FIN 46(R) will have on its financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 as of July 1, 2003 did not have a material impact on our consolidated
financial condition or results of operations.
CURRENCY RATE HEDGING
We manufacture in a number of countries throughout the world, including Hong
Kong and Mexico, and, as a result, are exposed to movements in foreign currency
exchange rates. Periodically we will enter into various currency rate hedges.
The primary purpose of our foreign currency hedging activities is to manage the
volatility associated with foreign currency purchases of materials and equipment
in the normal course of business. We utilize forward exchange contracts with
maturities of one to three months. We do not enter into derivative financial
instruments for speculative or trading purposes. We enter into certain foreign
currency derivative instruments that do not meet hedge accounting criteria. As a
result, we mark to market all derivative instruments with the gain or loss
included in other income (expense) (see Note 17). These instruments are intended
to protect against exposure related to financing transactions (equipment) and
income from international operations. The fair value of the exchange contracts
was not significant at December 31, 2002 and 2003.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-13
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
December 31,
------------------------
2002 2003
----------- -----------
U.S. trade accounts receivable..................... $42,979,762 $30,729,774
Foreign trade accounts receivable.................. 16,445,868 24,528,500
Due from factor.................................... 4,176,598 955,534
Other receivables.................................. 6,002,295 5,178,501
Allowance for returns, discounts and bad debts..... (4,316,621) (4,226,383)
----------- -----------
$65,287,902 $57,165,926
=========== ===========
The Debt Facility includes a factoring arrangement whereby GMAC advances against
receivables from customers with debt ratings above BBB and factors the other
receivables with credit insurance. We do not receive advances against
receivables covered by credit insurance of GMAC, and are paid only upon
collection of proceeds. For this credit insurance arrangement, we pay the factor
a commission of 60 basis points.
3. INVENTORY
Inventory consists of the following:
December 31,
------------------------
2002 2003
----------- -----------
Raw materials, fabric and trim accessories.......... $12,451,447 $ 5,859,558
Raw cotton.......................................... 1,017,963 --
Work-in-process..................................... 9,948,700 1,094,786
Finished goods shipments-in-transit................. 4,877,002 7,522,464
Finished goods...................................... 16,487,042 8,774,783
----------- -----------
$44,782,154 $23,251,591
=========== ===========
We recorded a write down of our inventory totaling $10,986,153 in 2003 following
our decision to withdraw from our owned and operated facilities in Mexico
effective September 1, 2003. The write down reflected an adjustment to net
realizable value of inventory identified for liquidation at reduced prices.
F-14
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
---------------------------------
2002 2003
------------- -------------
Land ........................ $ 4,592,991 $ 4,301,138
Buildings ................... 58,389,310 54,871,724
Equipment ................... 120,270,968 111,742,558
Furniture and fixtures ...... 2,428,858 2,441,058
Leasehold improvements ...... 10,657,364 11,357,892
Vehicles .................... 1,099,538 496,942
------------- -------------
197,439,029 $ 185,211,312
Less accumulated depreciation
and amortization ........... (37,440,400) (49,565,561)
------------- -------------
$ 159,998,629 $ 135,645,751
============= =============
Depreciation expense, including amortization of assets recorded under capital
leases, totaled $10,903,237, $10,056,154 and $15,663,248 for the years ended
December 31, 2001, 2002 and 2003, respectively.
5. ACQUISITIONS
TWILL MILL
On December 2, 1998, we 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 we would take possession of this facility in fiscal 2000. On
October 16, 2000, we revised our agreement regarding the fully operational
facility to extend our option to purchase the facility.
On December 31, 2002, we acquired certain assets of this twill mill located in
Puebla, Mexico from Tex Transas, S.A. de C.V. ("Tex Transas") and Inmobiliaria
Cuadros, S.A. de C.V. ("Cuadros"), both of which were affiliated with Kamel
Nacif. The price paid for the asset acquisition consisted of 100,000 shares (the
Shares) of our Series A Preferred Stock 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
resulting in a total purchase price of $87.4 million. The acquisition of the
twill mill had 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 us. As discussed in Note 7, we ceased operating our
facilities in Mexico and leased these assets back to affiliates of Mr. Kamel
Nacif.
On December 31, 2002, we 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, we 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 brothers 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 our
branded business. UAV is owned 50.1% by Tag Mex, Inc., our
F-15
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
wholly owned subsidiary, 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 gain and losses eliminated through the minority interest line
in our financial statements. Since October 2002 and March 2003, UAV has begun to
service both parties' business with Express and Levi Strauss & Co.,
respectively. UAV makes purchases from two related parties in Mexico, an
affiliate of Azteca and Tag-It Pacific, Inc.
AJALPAN
On March 29, 2001, we 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, one of our shareholders. We used this facility, which was newly
constructed during 1999 and commenced operations in 2000, for production during
2000 and 2001. The results of Ajalpan have been consolidated into our results
commencing on March 29, 2001.
We paid $11 million for this operating facility. This entire amount had been
paid in cash and the transfer of certain of our receivables to the seller. The
assets acquired include land, buildings and all equipment. This transfer had
been accounted for as a purchase and the purchase price had 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 in 2002 was a $1.7 million impairment loss related to
Ajalpan. We wrote off the remaining goodwill balance of $2.7 million during the
year ended December 31, 2003, in connection with the restructuring of our Mexico
operations, as discussed in Note 7.
JANE DOE
On April 12, 2000, we 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 was owned 51% by Fashion Resource (TCL),
Inc., our subsidiary, and 49% by Needletex, Inc. In connection with the
establishment of JDI, JDI entered into an employment agreement with Patrick
Bensimon, the principal shareholder of Needeltex, Inc., which provided for the
payment of a salary to Patrick 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 Patrick
Bensimon's continuing guaranty of the loan obligations, the assumption of the
loan obligations by JDI and a guaranty of those obligations by us. We received
an express indemnity by Needletex, Inc. and Patrick Bensimon to reimburse us for
all amounts we paid to those lenders for the account of Needletex and Patrick
Bensimon. The amounts paid to those lenders totaled $1.4 million and was
recorded as additional goodwill. The goodwill was included in the 2002 SFAS 142
impairment charge.
In March 2001, we 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.
Thereafter a dispute arose as to whether Patrick 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, Patrick
Bensimon commenced an arbitration preceding against his employer, JDI, Fashion
Resource (TCL), Inc., the managing member of Jane Doe International and us. The
licensing activities on this trademark have been largely dormant since 2002
pending the outcome of the litigation with Patrick Bensimon. Included in the
SFAS No. 142 charge in 2002 was a $3.2 million impairment loss related to JDI,
see Note 7.
On January 21, 2003, after hearing, the arbitration panel issued an interim
award in favor of Patrick Bensimon awarding him $1,425,655 for salary and bonus
plus interest accrued thereon and legal fees and costs to be determined. On
April 7, 2003, the panel issued a final award in favor of Patrick Bensimon
confirming the prior interim award and awarding Patrick Bensimon costs and
attorneys fees in the amount of $489,640. We had a total of $1.6 million reserve
for litigation as of December 31, 2002. In January 2004, we settled the
employment litigation with Patrick Bensimon for $1.2 million in cash and
forgiveness of approximately $859,000 in debts owed by Needletex Inc. As part of
the settlement, we received the remaining 49% interest in JDI. We also settled
with our insurance carrier for a cash payment of $330,000. An additional expense
of approximately $379,000 was made in the fourth quarter of 2003 to cover the
forgiveness of debts.
F-16
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. OTHER ASSETS
In the second quarter of 2003, we acquired a 45% equity interest in the owner of
the trademark "American Rag CIE" and the operator of American Rag retail stores
for $1.4 million, and our subsidiary, Private Brands, Inc., acquired a license
to certain exclusive rights to this trademark. We have guaranteed the payment to
the licensor of minimum royalties of $10.4 million over the initial 10 year term
of the agreement. Private Brands also entered into a multi-year exclusive
distribution agreement with Federated Merchandising Group ("FMG"), the sourcing
arm of Federated Department Stores, to supply FMG with American Rag CIE, a new
casual sportswear collection for juniors and young men. Private Brands will
design and manufacture a full collection of American Rag apparel, which will be
distributed by FMG exclusively to Federated stores across the country. Beginning
in August 2003, the American Rag collection was available in approximately 100
select Macy's, the Bon Marche, Burdines, Goldsmith's, Lazarus and Rich's-Macy's
locations. The investment in American Rag, LLC totaling $1.4 million at December
31, 2003 is accounted for under the equity method and included in other assets.
7. IMPAIRMENT OF ASSETS
IMPAIRMENT OF GOODWILL
Goodwill is classified as "excess of costs over fair value of net assets
acquired" on the accompanying balance sheets. SFAS No. 142, "Goodwill and Other
Intangible Assets," 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, we recorded a non-cash charge of $4.9 million in the first quarter of
2002 to reduce the carrying value of goodwill to the estimated fair value.
The following table presents our results on a comparable basis:
Year Ended December 31,
------------------------------------------------
2001 2002 2003
------------- ------------- --------------
Reported net loss .................... $ (2,889,256) $ (1,214,037) $ (35,884,660)
Goodwill amortization, net of tax .... 2,089,980 -- --
------------- ------------- --------------
Adjusted net loss before cumulative
effect of accounting change .......... (799,276) (1,214,037) (35,884,660)
Cumulative effect of accounting change -- (4,871,244) --
------------- ------------- --------------
Adjusted net loss .................... $ (799,276) $ (6,085,281) $ (35,884,660)
------------- ------------- --------------
Basic and diluted earnings per common
share:
Reported loss before cumulative effect
of accounting change ................ $ (0.18) $ (0.08) $ (1.97)
Goodwill amortization, net of taxes .. 0.13 -- --
------------- ------------- --------------
Adjusted loss before cumulative effect
of accounting change ................ (0.05) (0.08) (1.97)
Cumulative effect of accounting change -- (0.30) --
------------- ------------- --------------
Adjusted net loss .................... $ (0.05) $ (0.38) $ (1.97)
============= ============= ==============
F-17
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 2003, we ceased directly operating a substantial majority of our equipment
and fixed assets in Mexico, and started leasing a large portion of our
manufacturing facilities and operations in Mexico to affiliates of Mr. Kamel
Nacif, one of our shareholders, effective September 1, 2003. During 2003, we
made an interim review of our goodwill and intangible assets and wrote off all
goodwill and intangible assets affected by our strategic changes in Mexico.
Write-offs included $9.1 million and $2.7 million directly relating to Tarrant
Mexico - Famian and Ajalpan divisions, respectively, and another $7.5 million
relating to of Rocky Apparel LLC ("Rocky"). It is unlikely that Tommy Hilfiger,
whose business we acquired in the Rocky acquisition, will continue to purchase
merchandise from UAV following implementation of the restructuring in Mexico. In
2003, we had also written off the remaining goodwill of $150,000 relating to the
acquisition of JDI due to the litigation with the minority shareholder.
The following table displays the change in the gross carrying amount of goodwill
by reporting units at the end of December 31, 2003:
REPORTING
UNITS
----------------------------------------------------------------------------
TARRANT TARRANT TAG MEX INC. FR TCL. -
MEXICO - MEXICO - - ROCKY CHAZZZ & MGI
TOTAL JANE DOE AJALPAN FAMIAN DIVISION DIVISION
------------ ------------ ------------ ------------ ------------ ------------
Balance as of
December 31, 2001 ........ $ 29,196,886 $ 1,904,529 $ 4,427,843 $ 7,260,133 $ 7,521,536 $ 8,082,845
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 9,069,922 7,521,536 8,582,845
Impairment losses .......... (19,504,521) (150,338) (2,739,378) (9,093,269) (7,521,536) --
Foreign currency translation 23,347 -- -- 23,347 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance as of
December 31, 2003 ........ $ 8,582,845 $ 0 $ 0 $ 0 $ 0 $ 8,582,845
============ ============ ============ ============ ============ ============
IMPAIRMENT OF OTHER ASSETS
On June 28, 2000, we signed an exclusive production agreement with Manufactures
Cheja ("Cheja") through February 2002. We had 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. In June 2003, we determined that we no
longer expected to recoup advances to Cheja related to the production agreement.
In June 2003, we wrote off $2.8 million of remaining advances to Cheja.
F-18
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. DEBT
Debt consists of the following:
December 31,
------------------------------
2002 2003
------------ ------------
Short term bank borrowings:
Import trade bills payable ............... $ 5,686,327 $ 3,113,030
Bank direct acceptances .................. 11,272,375 12,660,945
Other Hong Kong credit facilities ........ 6,206,103 11,375,363
Other Mexican credit facilities .......... 4,968,309 2,143,985
Uncleared checks ......................... 1,193,810 --
------------ ------------
$ 29,326,924 $ 29,293,323
============ ============
Long term debt:
Vendor financing ......................... $ 7,257,683 $ 3,971,490
Equipment financing ...................... 9,682,290 3,710,355
Debt facility ............................ 58,193,505 31,611,667
Other debt (including capital leases) .... 2,477,000 --
------------ ------------
77,610,478 39,293,512
Less current portion ..................... (21,706,502) (38,705,240)
------------ ------------
$ 55,903,976 $ 588,272
============ ============
IMPORT TRADE BILLS PAYABLE AND BANK DIRECT ACCEPTANCES
On June 13, 2002, we 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, 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 of 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 our
subsidiaries, Fashion Resource (TCL) Inc. and Tarrant Luxembourg Sarl, Gerard
Guez, our Chairman, also signed a guarantee of $5 million in favor of UPS to
secure this facility. This facility bears interest at 4.5% per annum at December
31, 2003. Under this facility, we are subject to certain restrictive covenants,
including that we maintain a specified tangible net worth, fixed charge ratio,
and leverage ratio. We were in compliance with all the covenants in the third
quarter of 2002. In the fourth quarter of 2002, we violated the fixed charge
ratio covenant and obtained a waiver at a cost of $5,000. In the first quarter
of 2003, we were in violation of the no-consecutive-quarterly-losses covenant
and the fixed charge ratio covenant and obtained a waiver for the quarter for a
fee of $10,000. In the second quarter of 2003, we breached all the financial
covenants and obtained a waiver for the quarter for a fee of $25,000. In October
2003, we established new financial covenants with UPS for the period ended
September 30, 2003 and the remainder of fiscal 2003 based on projection. We were
in compliance with all the covenants in the third and fourth quarters of 2003.
Tangible net worth, fixed charge ratio and leverage ratio were fixed at $65
million, 0.74 to 1 and 2.55 to 1, respectively, for the fourth quarter of 2003.
Capital Expenditures were capped at $800,000 per quarter. As of December 31,
2003, we were in compliance with these covenants. In December 2003, a temporary
additional line of credit consisting of a $2.8 million standby letter of credit
was made available to us against a restricted deposit $2.8 million. This
temporary facility was cancelled in February 2004 and the deposit has since been
released. The expiration date of our main credit facility with UPS has been
extended to December 31, 2004 with certain conditions. One of the conditions
requires that on or before May 31, 2004, we have to refinance the Debt Facility
currently provided by GMAC Commercial Credit LLC. If we fail to satisfy this
condition, we will incur a penalty of $100,000 payable to UPS. As of December
31, 2003, $23.7 million was outstanding under this facility, and an additional
$350,000 was available for future borrowings. In addition, $1.2 million of open
letters of credit was outstanding as of December 31, 2003.
F-19
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Since March 2003, DBS Bank (Hong Kong) Limited (formerly known as Dao Heng Bank)
has made available a letter of credit facility of up to HKD 20 million
(equivalent to US $2.6 million) to our subsidiaries in Hong Kong. This is a
demand facility and is secured by the pledge of our office property, which is
owned by Gerard Guez and Todd Kay, and our guarantee. In August 2003, the letter
of credit facility increased to HKD 23 million (equivalent to US $3.0 million).
In December 2003, a tax loan for HKD 2 million (equivalent to US $256,000) was
also made available to our Hong Kong subsidiaries. As of December 31, 2003, $2.9
million was outstanding under this facility. In addition, $0.3 million of open
letters of credit was outstanding as of December 31, 2003.
OTHER MEXICAN CREDIT FACILITIES
At December 31, 2003, Tarrant Mexico S. de R.L. de C.V., Famian division is
indebted to Banco Nacional de Comercio Exterior SNC in the amount of $2.1
million pursuant to a credit facility assumed by Tarrant Mexico following its
merger with Grupo Famian. We are now repaying $250,000 plus interest (LIBOR plus
6%) monthly on this facility.
VENDOR FINANCING
During 2000, we financed equipment purchases for a manufacturing facility with
certain vendors. 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, which commenced in February 2000. Of this amount, $4.0
million was outstanding as of December 31, 2003. Of the $4.0 million, $2.7
million is denominated in Euros and the remainder is payable in U.S. dollars.
An unrealized gain of $104,000 and unrealized losses of $1.0 million and
$561,000 were recorded at December 31, 2001, 2002 and 2003, respectively,
related to foreign currency fluctuations and were recorded in other income in
the accompanying financial statements.
From time to time, we open letters of credit under an uncommitted credit
arrangement with Aurora Capital Associates, which issues these credits through
Israeli Discount Bank. As of December 31, 2003, $564,000 was outstanding under
this facility and $3.9 million of letters of credit were open under this
arrangement.
EQUIPMENT FINANCING
We have an equipment loan with an initial borrowing of $16.25 million from GE
Capital Leasing ("GE Capital"), which matures in November 2005. The loan is
secured by equipment located in Puebla and Tlaxcala, Mexico. As of December 31,
2003, this facility had a balance of $3.6 million. Interest accrues at a rate of
2.5% over LIBOR. Under this facility, we are subject to covenants on tangible
net worth of $30 million, leverage ratio of not more than two times at the end
of each financial year, and no losses for two consecutive quarters. In the first
quarter of 2002, we breached the no-consecutive-quarterly-losses covenant and
obtained a waiver at a cost of $10,000. We complied with all the covenants in
the other three quarters. In the first and second quarters of 2003, we were in
violation of the no-consecutive-quarterly-losses covenant and obtained waivers
at the cost of $25,000 and $50,000 respectively. We were in compliance with all
the covenants in the third and fourth quarters of 2003. The waiver for breach of
covenants in the previous quarter required additional collateral in the form of
a second lien on our headquarters, which is owned by Messrs. Guez, our Chairman
of the Board and Kay, our Vice Chairman. Due to an objection by the first-lien
holder to the second lien, we have agreed to accelerate the monthly repayment
installment by approximately $75,000 commencing January 2004 in lieu of the
additional collateral. In addition, there was approximately $100,000 of notes
payable to various vendors.
We also had an equipment loan of $5.2 million from Bank of America Leasing
("BOA"). The amount outstanding as of December 31, 2002 was $2.4 million. In
October 2003, we paid off the BOA facility in its entirety.
The Debt Facility with GMAC Commercial Credit, LLC ("GMAC") (described below)
and the credit facilities with GE Capital and UPS all carry cross-default
clauses. A breach of a financial covenant set by GMAC, UPS or GE
F-20
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
DEBT FACILITY
We are party to a revolving credit, factoring and security agreement (the "Debt
Facility") with GMAC Commercial Credit, LLC. The Debt Facility provides a
revolving facility of $90 million, including a letter of credit facility not to
exceed $20 million, and matures on January 31, 2005. The Debt Facility also
provides a term loan of $25 million, which is being repaid in monthly
installments of $687,500. The amount we can borrow under the Debt Facility is
determined based on a defined borrowing base formula related to eligible
accounts receivable and inventories. The Debt Facility provides for interest at
LIBOR plus the LIBOR rate margin determined by the Total Leverage Ratio (as
defined), and is collateralized by our receivables, intangibles, inventory and
various other specified non-equipment assets. This facility bears interest at 6%
per annum at December 31, 2003. Under the facility, we are subject to various
financial covenants on tangible net worth, interest coverage, fixed charge ratio
and leverage ratio, and are prohibited from paying dividends. In 2002, we
violated the net worth and fixed charge covenants in the third quarter and
obtained a waiver for the quarter for a fee of $50,000. We complied with all the
covenants in the other three quarters. In the first and second quarters of 2003,
we were in violation of all the financial covenants and obtained waivers from
GMAC for each quarter at the cost of $45,000 and $100,000 respectively. In
October 2003, we established new financial covenants with GMAC for the period
ended September 30, 2003 and the remainder of fiscal 2003 based on our
projections. We were in compliance with all the covenants in the third and
fourth quarters of 2003. Tangible net worth, fixed charge ratio and leverage
ratio in the final quarter were fixed at $65 million, 0.74 to 1 and 2.55 to 1,
respectively. A total of $31.6 million (of which $4.8 million related to the
term portion) was outstanding under the Debt Facility at December 31, 2003.
Based on the borrowing base formula, no additional amounts were available for
borrowing under the Debt Facility at December 31, 2003.
Debt covenants for the GMAC facility and UPS facility have not been established
for fiscal 2004 and are expected to be set before the end of April 2004. We
believe that the covenants will be no more restrictive than the covenants set in
2003.
The Debt Facility with GMAC and the credit facilities with UPS and GE Capital
all carry cross-default clauses. A breach of a financial covenant set by GMAC,
UPS or GE Capital constitutes an event of default under all of the credit
facilities, entitling these financial institutions to demand payment in full of
all outstanding amounts under their respective debt and credit facilities.
Annual maturities for the long term debt and capital lease obligations are
$38,705,240 (2004), $543,670 (2005), $12,854 (2006), $13,647 (2007), $14,489
(2008) and $3,613 (thereafter). The effective interest rate on short-term bank
borrowing as of December 31, 2001, 2002 and 2003 were 6.7%, 4.1% and 5.3%,
respectively.
GUARANTEES
Guarantees have been issued since 2001 in favor of YKK, Universal Fasteners, and
RVL Inc. for $750,000, $500,000 and unspecified amount, respectively, to cover
trim purchased by Tag-It Pacific Inc. on our behalf. We have not reported a
liability for these guarantees. We issued the guarantees to cover trim purchased
by Tag-it in order to ensure our production in a timely manner. If Tag-it ever
defaults, we would have to pay the outstanding liability due to these vendors by
Tag-it for purchases made on our behalf. We have not had to perform under these
guarantees since inception. It is not predictable to estimate the fair value of
the guarantee; however, we do not anticipate that we will incur losses as a
result of these guarantees. As of December 31, 2003, Tag-It Pacific Inc. had
approximately $83,000 due to RVL Inc.
F-21
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. INCOME TAXES
The provision (credit) for domestic and foreign income taxes is as follows:
Year Ended December 31,
-------------------------------------------------
2001 2002 2003
----------- ----------- -----------
Current:
Federal ............. $(1,272,918) $ (307,684) $ 2,400,000
State ............... 1,079 293,055 (241,948)
Foreign ............. 850,511 1,162,798 2,106,199
----------- ----------- -----------
(421,328) 1,148,169 4,264,251
Deferred:
Federal ............. 999,201 -- --
State ............... 232,821 -- --
Foreign ............. 41,283 (97,151) (132,622)
----------- ----------- -----------
1,273,305 (97,151) (132,622)
----------- ----------- -----------
Total ............. $ 851,977 $ 1,051,018 $ 4,131,629
=========== =========== ===========
The source of loss before the provision for taxes and cumulative effect of
accounting change is as follows:
Year Ended December 31,
------------------------------------------
2001 2002 2003
------------ ------------ ------------
Federal............................ $ (8,582,448) $(11,061,937) $(18,609,818)
Foreign............................ 6,545,169 10,898,918 (13,143,213)
------------ ------------ ------------
Total.......................... $ (2,037,279) $ (163,019) $(31,753,031)
============ ============ ============
Our effective tax rate differs from the statutory rate principally due to the
following reasons: (1) A full valuation allowance has been provided for deferred
tax assets as a result of the operating losses in the United States and Mexico,
since recoverability of those assets has not been assessed as more likely than
not; (2) Although we have taxable losses in Mexico, it is subject to a minimum
tax; and (3) The earnings of our Hong Kong subsidiary are taxed at a rate of
17.5% versus the 35% U.S. federal rate.
F-22
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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,
------------------------------------------
2001 2002 2003
----------- ----------- ------------
Income tax (benefit) based on
federal statutory rate .......... $ (713,048) $(1,761,992) $(11,113,561)
State income taxes, net of federal
benefit ......................... 152,035 190,486 (157,266)
Effect of foreign income taxes ... 1,494,708 1,162,798 2,862,550
Nondeductible goodwill impairment -- -- 4,141,426
Increase in tax reserve .......... -- -- 2,400,000
Increase (decrease) in valuation
allowance and other ............. (81,718) 1,459,726 5,998,480
----------- ----------- ------------
$ 851,977 $ 1,051,018 $ 4,131,629
=========== =========== ============
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,
----------------------------
2002 2003
------------ ------------
Deferred tax assets:
Provision for doubtful accounts and unissued
credits ..................................... $ 835,980 $ 1,149,051
Provision for other reserves ................ 1,347,609 2,711,566
Domestic and foreign loss carry forwards and
foreign tax credits ......................... 850,326 2,050,179
Deferred compensation and benefits ........... 238,232 197,486
Goodwill impairment .......................... 1,260,492 4,422,837
------------ ------------
Total deferred tax assets .................. 4,532,639 10,531,119
Deferred tax liabilities:
Other ........................................ (407,751) (275,129)
------------ ------------
(407,751) (275,129)
Valuation allowance for deferred tax assets .... (4,532,639) (10,531,119)
------------ ------------
Net deferred tax liabilities ................... $ (407,751) $ (275,129)
============ ============
In January 2004, the Internal Revenue Service completed its examination of our
Federal income tax returns for the years ended December 31, 1996 through 2001.
The IRS has proposed adjustments to increase our income tax payable for the six
years under examination by an aggregate of approximately $14.5 million. This
adjustment would
F-23
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
also result in additional state taxes and interest of approximately $12.6
million. We believe that we have meritorious defenses to and intend to
vigorously contest the proposed adjustments. If the proposed adjustments are
upheld through the administrative and legal process, they could have a material
impact on our earnings and cash flow. We believe we have provided adequate
reserves for any reasonably foreseeable outcome related to these matters on the
balance sheet included in the Consolidated Financial Statements under the
caption "Income Taxes". We do not believe that the adjustments, if any, arising
from the IRS examination, will result in an additional income tax liability
beyond what is recorded in the accompanying balance sheet.
10. COMMITMENTS AND CONTINGENCIES
We have 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. We record 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
---------- ----------
2004.................................................. $ 336,774 $ 479,633
2005.................................................. -- 195,459
2006.................................................. -- 156,083
2007.................................................. -- 102,163
2008.................................................. -- --
Thereafter............................................ -- --
---------- ----------
Total future minimum lease payments................. $ 336,774 $ 933,338
========== ==========
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 $2,968,000,
$3,166,000 and $3,101,000 for 2001, 2002 and 2003, respectively.
We had open letters of credit of $17,778,561, $15,458,189 and $5,975,908 as of
December 31, 2001, 2002 and 2003, respectively.
We have two employment contracts dated January 1, 1998 with two executives
providing for base compensation and other incentives. On April 1, 2003, we
amended each of these contracts to extend the term through March 31, 2006, and
to provide for base salary per annum of $500,000 for the period from April 1,
2003 to March 31, 2004, $750,000 for the period from April 1, 2004 to March 31,
2005, and $1,000,000 for the period from April 1, 2005 to March 31, 2006.
Additionally, we agreed to pay each of these executives an annual bonus (the
"Annual Bonus") for fiscal years ended December 31, 2003, 2004 and 2005 in an
amount, if any, equal to ten percent (10%) of the amount by which our actual
pre-tax income for such fiscal year exceeds the amount of projected pre-tax
income set forth in our annual budget for the same fiscal year as approved by
our Board of Directors. No bonuses were paid to these executives for the fiscal
year ended December 31, 2003.
F-24
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On October 16, 2003, we entered into a lease with affiliates of Mr. Kamel Nacif,
a substantial portion of our manufacturing facilities and operations in Mexico
including real estate and equipment. The lease was effective as of September 1,
2003. We leased our twill mill in Tlaxcala, Mexico, and our sewing plant in
Ajalpan, Mexico, for a period of 6 years and for an annual rental fee of $11
million. Mr. Nacif is one of our stockholders. In connection with this
transaction, we also entered into a management services agreement pursuant to
which Mr. Nacif's affiliates will manage the operation of our remaining
facilities in Mexico in exchange for use of the remaining facilities. The term
of the management services agreement is also for a period of 6 years.
Additionally, we have agreed to purchase annually, six million yards of fabric
manufactured at the facilities leased and/or operated by Mr. Nacif's affiliates
at market prices to be negotiated. See Note 14. Using current market prices, the
purchase commitment would be approximately $18 million per year.
Following the reduction in workforce in our Mexico operations, we became the
target of workers rights activists who have picketed our customers, stuffed
electronic mailboxes with protests and threatened our customers with retaliation
for continuing business with us. While we have defended our position to our
customers, some of our larger customers for Mexico produced jeans wear have been
reluctant to place orders with us in response to actions taken and contemplated
by these activist groups. As a consequence, we project a loss of approximately
$75 million in revenue from sales of Mexico-produced merchandise for 2004.
We are involved from time to time in routine legal matters incidental to our
business. In our opinion, resolution of such matters will not have a material
effect on our financial position or results of operations.
11. EQUITY
We have 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 our employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Our Employee Incentive Plan, formerly the 1995 Stock Option Plan, as amended and
restated in May 1999 (the Plan), 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 our 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. At
December 31, 2003, the Plan has 2,573,913 options available for future grant.
In October 1998, we granted 1,000,000 non-qualified stock options not under the
Plan. The options were granted to our Chairman and Vice Chairman 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. In May 2002, we granted
3,000,000 non-qualified stock options not under the Plan. The options were
granted to our Chairman, Vice Chairman and Mr. Kamel Nacif at
F-25
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$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. In May 2003, we
granted 2,000,000 non-qualified stock options not under the Plan to our Chairman
and Vice Chairman. The options were granted at $3.65 per share, the closing
sales price of the common stock on the day of the grant. The options expire in
2013 and vest over four years. In December 2003, we granted 400,000
non-qualified stock options not under the Plan to our President. The options
were granted at $3.94 per share, the closing sales price of the common stock on
the day of the grant. The options expire in 2013 and vest over four years.
A summary of our stock option activity, and related information is as follows:
December 31,
-----------------------------------------------------------
2001 2002 2003
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning
of year................ 2,697,487 $14.29 3,520,737 $11.90 6,376,487 $ 8.89
Granted............... 955,000 5.18 3,004,000 5.50 3,288,100 3.67
Exercised............. (8,500) 3.97 (5,500) 4.39 -- --
Forfeited............. (123,250) 12.65 (142,750) 12.14 (738,500) 6.91
--------- --------- ---------
Outstanding at end of
year................... 3,520,737 $11.90 6,376,487 $ 8.89 8,926,087 $ 7.13
========= ========= =========
Exercisable at end of
year................... 2,173,587 $14.29 3,535,487 $11.35 4,028,487 $10.56
Weighted average per
option fair value
of options granted
during the year........ $ 3.89 $ 2.89 $ 1.92
F-26
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ------------------------------------------------------ ----------------------
$2.84 - 3.65 2,688,100 9.5 $3.63 -- $ 0.00
3.94 - 5.09 1,121,862 8.0 4.47 487,862 4.87
5.50 3,004,000 8.3 5.50 1,501,000 5.50
5.55 - 9.97 503,000 4.6 7.03 430,500 7.20
13.50 - 15.50 1,026,000 4.7 13.51 1,026,000 13.51
18.44 - 18.54 39,625 4.7 18.49 39,625 18.49
25.00 500,000 5.3 25.00 500,000 25.00
33.13 - 39.97 41,500 5.2 39.31 41,500 39.31
45.50 2,000 5.3 45.50 2,000 45.50
---------- -----------
$2.84 - 45.50 8,926,087 7.8 $7.13 4,028,487 $10.56
========== ===========
12. EQUITY TRANSACTIONS
In connection with the twill mill acquisition in December 2002, we issued
100,000 Series A Convertible 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 had been
converted into 3,000,000 shares of common stock at the annual meeting held on
May 28, 2003 in accordance with the original conversion terms. We 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 our liquidation, dissolution or
winding-up, the Preferred Shares were 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.
In October 2003, we sold an aggregate of 881,732 shares of the Series A
Convertible Preferred Stock, at $38 per share, to a group of institutional
investors and high net worth individuals and raised an aggregate of
approximately $31 million, after payment of commissions and expenses. We used
the proceeds of this offering to pay down vendors and reduce debts. The
preferred stock was converted into an aggregate of 8,817,320 shares of common
stock following a special meeting of shareholders held on December 4, 2003 in
accordance with the original conversion terms. We have registered the shares of
common stock issued upon conversion of the Series A Preferred Stock with the
Securities and Exchange Commission for resale by the investors. In conjunction
with the private placement transaction, we issued a warrant to purchase 881,732
shares of common stock to the placement agent. The warrants are exercisable
beginning April 17, 2004 through October 17, 2008 and have a per share exercise
price of $4.65. Warrant was valued using the Black-Scholes option valuation
model with the following assumptions: risk-free interest rate of 4%; dividend
yields of 0%; volatility factors of the expected market price of our common
stock of 0.51; and an expected life of four years.
In November 2003, we issued an aggregate of 200,000 shares of common stock to
Antonio Haddad Haddad, Miguel Angel Haddad Yunes, Mario Alberto Haddad Yunes,
and Marco Antonio Haddad Yunes in partial settlement of the balance of
F-27
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
approximately $2.5 million in obligations owed these parties arising from our
acquisition of their factories in 1998. The fair value of the common stock
issued on the date of issuance was $3.94 per share, resulting in a reduction of
our obligation by $788,000. Each of these investors represented to us that the
investor was an "accredited investor" within the meaning of Rule 501 of
Regulation D under the Securities Act of 1933, and that the investor was
purchasing the securities for investment and not in connection with a
distribution thereof. The issuance and sale of the common stock was exempt from
the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder as a transaction not involving any public offering.
During the year of 2003, we retired a total of 248,872 shares of common stock
relating to shares repurchased but uncancelled before 2001 and shares
repurchased this year from Gabe Zeitouni, upon exercising his put option under
an agreement dated July 10, 2000.
In November 2003, our board of directors adopted a shareholders rights plan.
Pursuant to the plan, we issued a dividend of one right for each share of our
common stock held by shareholders of record as of the close of business on
December 12, 2003. Each right initially entitled shareholders to purchase a
fractional share of our Series B Preferred Stock for $25.00. However, the rights
are not immediately exercisable and will become exercisable only upon the
occurrence of certain events. Generally, if a person or group acquires, or
announces a tender or exchange offer that would result in the acquisition of 15%
or more of our common stock while the shareholder rights plan remains in place,
then, unless the rights are redeemed by us for $0.001 per right, the rights will
become exercisable, by all rights holders other than the acquiring person or
group, for our shares or shares of the third party acquirer having a value of
twice the right's then-current exercise price. The shareholder rights plan is
designed to guard against partial tender offers and other coercive tactics to
gain control of our company without offering a fair and adequate price and terms
to all of our shareholders. The plan was not adopted in response to any efforts
to acquire our company, and we are not aware of any such efforts.
Our credit agreement prohibits the payment of dividends during the term of the
agreement.
13. SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
2001 2002 2003
----------- ----------- -----------
Cash paid for interest ....... $ 4,473,000 $ 2,361,000 $ 2,856,000
=========== =========== ===========
Cash paid (refunded) for
income taxes .............. $(2,554,000) $(5,086,000) $ 378,000
=========== =========== ===========
During 2001, we transferred $5.5 million in receivables to the seller in
connection with the purchase of Ajalpan. In 2002, we 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 our wholly-owned subsidiary, Tarrant Mexico and the cancellation of
approximately $56.9 million of certain notes and accounts receivable due from
the sellers and their affiliates for a total purchase price of $87.4 million.
These non-cash transactions have been excluded from the respective statements of
cash flows.
In 1999, we acquired Industrial Exportadora Famian from the Haddad family. In
accordance with the acquisition agreement, we had to pay certain amount of
earnouts to the vendors annually. As of October 31, 2003, total earnouts accrued
but not paid amounted to about $2.5 million. In November 2003, we entered into
an agreement with the Haddad family to satisfy the amount owed by issuing to
four family members a total of 200,000 shares of common stock, with a fair value
of $788,000. In addition, we gave them 400,000 yards of our stock fabric,
100,000 pairs of pants, and a fleet of old vehicles, with an aggregate book
value of approximately $1.5 million. Included in other income was a gain of
$236,000 resulting from this settlement.
In 2003, we reduced a shareholder receivable for $722,000 from Mr. Kamel Nacif
against vendor payables owed to entities controlled by Mr. Nacif.
14. RELATED-PARTY TRANSACTIONS
Related-party transactions, consisting primarily of purchases and sales of
finished goods and raw materials, are as follows:
2001 2002 2003
----------- ----------- -----------
Sales to related parties .............. $ 8,340,000 $ 4,864,000 $22,296,000
Purchases from related parties ........ $32,095,000 $76,231,000 $72,329,000
As of December 31, 2002 and 2003, related party affiliates were indebted to us
in the amounts of $14.6 million and $22.9 million, respectively. These include
amounts due from our shareholders of $5.6 million and $4.8 million at December
31, 2002 and 2003, respectively, which have been shown as reductions to
shareholders' equity in the accompanying financial statements. Total interest
paid by related party affiliates, the Chairman and the Vice Chairman were
$368,000 and $374,000 for the years ended December 31, 2002 and 2003,
respectively. During
F-28
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2001, Kamel Nacif advanced us a total of $18.1 million for working capital
purposes. Such advances were short-term and were paid back within 30 days of the
advance.
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 during 2003 was $487,000. The
maximum amount of such advances to Mr. Guez during 2003 was approximately
$4,879,000. Mr. Guez had an outstanding advance from us in the amount of
$4,796,000 as of December 31, 2003. As of December 31, 2002, we were indebted to
Mr. Kay in the amount of $487,000. Mr. Guez had an outstanding advance from us
of $4,879,000 as of December 31, 2002. As of December 31, 2002 Mr. Kamel Nacif
was indebted to us for $723,000. All advances to, and borrowings from, Mr. Guez
and Mr. Kay in 2003 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.
Since June 2003, United Apparel Venture, LLC has been selling to Seven Licensing
Company, LLC ("Seven Licensing"), jeans wear bearing the brand "Seven7", which
is ultimately purchased by Express. Seven Licensing is beneficially owned by
Gerard Guez. Total sales to Seven Licensing during the year ended December 31,
2003 was $8.1 million. In 1998, a California limited liability company owned by
our Chairman and Vice Chairman 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. Starting from 1998, Tag-It assumed the
responsibility for managing and sourcing all trim and packaging used in
connection with products manufactured by or on behalf of us in Mexico. This
arrangement is terminable by 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 $17.9 million; $23.9 million and $16.8 million of trim inventory from
Tag-It for the years ended December 31, 2001, 2002 and 2003, respectively. We
also sold to Tag-It $1.5 million from our trim and fabric inventory for the year
ended December 31, 2003. We purchased $5.8 million, $37.0 million and $37.1
million of finished goods and service from Azteca and its affiliates for the
years ended December 31, 2001, 2002 and 2003, respectively. Our total sales of
fabric and service to Azteca in 2001, 2002 and 2003 were $7.2 million, $2.9
million and $9.9 million, respectively. Two and one half percent of gross sales
as management fees were paid in 2002 and 2003 to each of the members of UAV, per
the operating agreement. The amount paid to Azteca, the minority member of UAV,
totaled $2.0 million and $1.7 million in 2002 and 2003, respectively. Net
amounts due from these related parties as of December 31, 2002 and 2003 were
$3.2 million and $17.5 million, respectively.
On December 31, 2002, our wholly owned subsidiaries, Tarrant Mexico and Tarrant
Luxembourg Sarl (previously known as Machrima Luxembourg Sarl), 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
International, S.A. de C.V. ("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
Cuadros, S.A. de C.V. ("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 100,000 shares of our newly created, non-voting
Series A Convertible Preferred Stock, which shares will become convertible into
3,000,000 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. The
Series A Preferred Stock was converted into 3,000,000 shares of common stock
following approval of the conversion by our shareholders at the annual
shareholders' meeting held on May 28, 2003.
F-29
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. We purchased
$8.5 million, $12.3 million and $14.9 million of fabric from Trans Textil in
2001, 2002 and 2003, respectively. We sold $0.3 million, $2.0 million and $2.6
million of fabric to Trans Textil in 2001, 2002 and 2003, respectively. We
purchased $3.6 million of fabric from Acabados y Terminados, an affiliate of Mr.
Nacif, in the year ended December 31, 2003.
On October 16, 2003, we entered into a lease with affiliates of Mr. Kamel Nacif,
a substantial portion of our manufacturing facilities and operations in Mexico
including real estate and equipment. The lease was effective as of September 1,
2003. We leased our twill mill in Tlaxcala, Mexico, and our sewing plant in
Ajalpan, Mexico, for a period of 6 years and for an annual rental fee of $11
million. The assets subject to these leases have a net book value of
approximately $92 million as of December 31, 2003. Mr. Nacif is one of our
shareholders. In connection with this transaction, we also entered into a
management services agreement pursuant to which Mr. Nacif's affiliates will
manage the operation of our remaining facilities in Mexico. The term of the
management services agreement is also for a period of 6 years. Additionally, we
entered into a purchase commitment agreement with Mr. Nacif's affiliates to
purchase annually, six million yards of fabric manufactured at the facilities
leased and/or operated by Mr. Nacif's affiliates at market prices to be
negotiated. See Note 10, "Commitments and Contingencies." Using current market
prices, the purchase commitment would be approximately $18 million per year.
We were indebted to Mr. Kamel Nacif and his affiliates in the amount of $5.2
million and $5.4 million as of December 31, 2002 and December 31, 2003,
respectively.
Under lease agreements entered into between two entities owned by the Chairman,
Vice Chairman and us, we paid $1,299,000 in 2001, $1,330,000 in 2002 and
$1,330,000 in 2003 for rent for office and warehouse facilities. One of these
lease agreements expires in June 2004; the second lease is currently on a
month-to-month basis pending our planned relocation.
We reimbursed our principal shareholder for fuel and related expenses whenever
our executives used the aircraft for business purposes from 477 Aviation LLC,
which is wholly owned by our principal shareholder.
At December 31, 2002 and 2003, we had various employee receivables totaling
$457,000 and $450,000, respectively, included in due from related parties.
We entered lease agreements with the former owners of Industrial Exportadora
Famian and our former employees. Under theses leases, we paid $832,000 in 2001,
$843,000 in 2002 and $943,000 in 2003 for rent for sewing and washing facilities
in Tehuacan, Mexico. All these lease agreements were cancelled in November 2003.
On February 12, 2001, we entered into an agreement with Aris Industries, Inc.
("Aris") under which Aris issued 1.5 million shares of its common stock to us
and undertook to repay either $2.5 million in cash or its equivalent in common
stock to us on December 31, 2001 in full satisfaction of the debt of
approximately $5.8 million. As of February 20, 2002, Aris had issued us an
aggregate of 8,117,647 shares of its common stock including 1.5 million shares
previously issued in full satisfaction of this debt. On March 27, 2002, we 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-30
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. OPERATIONS BY GEOGRAPHIC AREAS
Our predominant business is the design, distribution and importation of private
label and private brand casual apparel. Substantially all of our revenues are
from the sales of apparel. We are organized into three geographic regions: the
United States, Asia and Mexico. We evaluate performance of each region based on
profit or loss from operations before income taxes not including the cumulative
effect of change in accounting principles. Information about our operations in
the United States, Asia, and Mexico 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
------------ ------------ ------------ ------------- ------------
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
============ ============ ============ ============= ============
Interest income................ $ -- $ 2,000 $ 3,254,000 $ -- $ 3,256,000
============ ============ ============ ============= ============
Interest expense............... $ 7,373,000 $ 33,000 $ 402,000 $ -- $ 7,808,000
============ ============ ============ ============= ============
Provision for depreciation
and amortization.............. $ 3,537,000 $ 2,057,000 $ 8,971,000 $ -- $ 14,565,000
============ ============ ============ ============= ============
Capital expenditures........... $ 764,000 $ 35,000 $ 3,120,000 $ -- $ 3,919,000
============ ============ ============ ============= ============
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
============ ============ ============ ============= ============
Interest income................ $ 287,000 $ 4,453,000 $ 8,000 $ -- $ 4,748,000
============ ============ ============ ============= ============
Interest expense............... $ 5,160,000 $ -- $ 284,000 $ -- $ 5,444,000
============ ============ ============ ============= ============
Provision for depreciation
and amortization.............. $ 1,231,000 $ 452,000 $ 8,447,000 $ -- $ 10,130,000
============ ============ ============ ============= ============
Capital expenditures........... $ 367,000 $ 34,000 $ 2,584,000 $ -- $ 2,985,000
============ ============ ============ ============= ============
Total assets................... $165,036,000 $107,266,000 $292,113,000 $ 247,971,000 $316,444,000
============ ============ ============ ============= ============
2003
- ----
Sales.......................... $291,993,000 $ 7,359,000 $ 21,071,000 $ -- $320,423,000
Inter-company sales............ 33,441,000 112,481,000 75,716,000 (221,638,000) --
------------ ------------ ------------ ------------- ------------
Total revenue.................. $325,434,000 $119,840,000 $ 96,787,000 $(221,638,000) $320,423,000
============ ============ ============ ============= ============
Income (loss) from operations.. $(25,537,000) $ 7,556,000 $(15,414,000) $ -- $(33,395,000)
============ ============ ============ ============= ============
Interest income................ $ 419,000 $ -- $ 6,000 $ -- $ 425,000
============ ============ ============ ============= ============
Interest expense............... $ 5,215,000 $ 41,000 $ 347,000 $ -- $ 5,603,000
============ ============ ============ ============= ============
Provision for depreciation
and amortization.............. $ 1,547,000 $ 261,000 $ 14,290,000 $ -- $ 16,098,000
============ ============ ============ ============= ============
Capital expenditures........... $ 94,000 $ 84,000 $ 190,000 $ -- $ 368,000
============ ============ ============ ============= ============
Total assets................... $128,058,000 $117,783,000 $201,050,000 $(193,786,000) $253,105,000
============ ============ ============ ============= ============
F-31
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. EMPLOYEE BENEFIT PLANS
On August 1, 1992, Tarrant Hong Kong 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 Hong Kong. Participants may contribute
up to 5% of their salary to the plan. We make annual matching contributions.
Costs of the plan charged to operations for 2001, 2002 and 2003 amounted to
approximately $155,000, $149,000 and $157,000 respectively.
On July 1, 1994, we established a defined contribution retirement plan covering
all of our U.S. employees whose period of service exceeds 12 months. Plan assets
are monitored by a third-party investment manager and are segregated from those
of ours. Participants may contribute from 1% to 15% of their pre-tax
compensation up to effective limitations specified by the Internal Revenue
Service. Our 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, we may also
make a discretionary annual contribution to the plan. Costs of the plan charged
to operations for 2001, 2002 and 2003 amounted to approximately $289,000,
$249,000 and $256,000 respectively.
On December 27, 1995, we established a deferred compensation plan for executive
officers. Participants may contribute a specific portion of their salary to such
plan. We do not contribute to the Plan.
17. OTHER INCOME AND EXPENSE
Other income and expense consists of the following:
2001 2002 2003
---------- ---------- ----------
Rental and lease income ................. $ 586,305 $ 495,754 $3,957,365
Unrealized gain on foreign currency ..... 103,705 -- --
Realized gain on foreign currency ....... -- 1,123,076 304,060
Royalty income .......................... 180,833 62,166 --
Sales of damaged goods and samples ...... 192,680 -- --
Gain on legal settlement ................ -- 473,041 235,785
Other items ............................. 789,543 493,938 287,269
---------- ---------- ----------
Total other income ...................... $1,853,066 $2,647,975 $4,784,479
========== ========== ==========
Royalty expense ......................... $ 500,000 $ 655,691 $ 242,426
Unrealized loss on foreign currency ..... -- 1,014,696 560,602
Loss on sale of fixed assets ............ -- -- 593,626
Other items ............................. 355,994 333,686 28,692
---------- ---------- ----------
Total other expense ..................... $ 855,994 $2,004,073 $1,425,346
========== ========== ==========
F-32
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2003:
Quarter Ended Year
----------------------------------------------- Ended
Mar. 31(1) Jun. 30 Sept. 30 Dec. 31 Dec. 31
--------- --------- --------- --------- ---------
(In thousands, except per share data)
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
2003
- ----
Net sales ............. $ 78,736 $ 78,194 $ 96,458 $ 67,035 $ 320,423
Gross profit .......... 8,802 (432) 11,514 12,094 31,978
Operating income
(loss) ............... (1,310) (34,367) 1,448 834 (33,395)
Income (loss) before
cumulative effect of
accounting change .... $ (3,879) $ (32,571) $ 138 $ 427 $ (35,885)
Net income (loss) ..... $ (3,879) $ (32,571) $ 138 $ 427 $ (35,885)
Income (loss) per share
before cumulative
effect of accounting
change:
Basic ............... $ (0.24) $ (1.94) $ 0.01 $ 0.02 $ (1.97)
Diluted ............. $ (0.24) $ (1.94) $ 0.01 $ 0.02 $ (1.97)
Net income (loss) per
common share:
Basic ............... $ (0.24) $ (1.94) $ 0.01 $ 0.02 $ (1.97)
Diluted ............. $ (0.24) $ (1.94) $ 0.01 $ 0.02 $ (1.97)
Weighted average shares
outstanding:
Basic ............... 15,837 16,832 18,765 21,426 18,215
Diluted ............. 15,837 16,832 18,767 26,250 18,215
F-33
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- ----------
(1) Effective January 1, 2002, we 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. We 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.
19. SUBSEQUENT EVENTS
In January 2004, we sold an aggregate of 1,200,000 shares of our common stock at
a price of $3.35 per share, for aggregate proceeds to us of approximately $3.7
million after payment of placement agent fees and other offering expenses. We
used the proceeds of this offering for working capital purposes. The securities
sold in the offering were registered under the Securities Act of 1933, as
amended, pursuant to our effective shelf registration statement. In conjunction
with this public offering, we issued a warrant to purchase 30,000 shares of our
common stock to the placement agent. The warrant has an exercise price of $3.35
per share, is fully vested and exercisable, and has a term of five years.
F-34
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, 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
=========== =========== =========== =========== ===========
For the year ended
December 31, 2003
Allowance for returns
and discounts ........ $ 3,134,768 $ -- $ -- $ (324,387) $ 2,810,381
Allowance for bad debt $ 1,181,853 $ 234,149 $ -- $ -- $ 1,416,002
=========== =========== =========== =========== ===========
F-35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly 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, and each of them,
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.
Pursuant to the requirements of the Securities Exchange Act of 1934,
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 April 7, 2004
- ----------------------- Chairman of the Board of
Gerard Guez Directorsd
/S/ TODD KAY Vice Chairman of the Board of April 7, 2004
- ----------------------- Directors
Todd Kay
/S/ PATRICK CHOW Chief Financial Officer, Treasurer April 7, 2004
- ----------------------- and Director
Patrick Chow
/S/ BARRY AVED (Principal Financial and Accounting April 7, 2004
- ----------------------- Officer) President and Director
Barry Aved
/S/ LARRY RUSS Director April 7, 2004
- -----------------------
Larry Russ
/S/ STEPHANE FAROUZE Director April 7, 2004
- -----------------------
Stephane Farouze
/S/ MITCHELL SIMBAL Director April 7, 2004
- -----------------------
Mitchell Simbal
/S/ JOSEPH MIZRACHI Director April 7, 2004
- -----------------------
Joseph Mizrachi
/S/ MILTON KOFFMAN Director April 7, 2004
- -----------------------
Milton Koffman
TARRANT APPAREL GROUP
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. (16)
3.1.2 Certificate of Amendment of Restated Articles of
Incorporation. (16)
3.1.3 Certificate of Amendment of Restated Articles of
Incorporation. (25)
3.2 Restated Bylaws of the Company. (1)
4.1 Specimen of Common Stock Certificate. (2)
4.2 Rights Agreement dated as of November 21, 2003, by and between
the Company and Computershare Trust Company, as Rights Agent,
including the Form of Rights Certificate and the Summary of
Rights to Purchase Preferred Stock, attached thereto as
Exhibits B and C, respectively. (24)
4.3 Certificate of Determination of Preferences, Rights and
Limitations of Series B Preferred Stock. (26)
10.1 1995 Stock Option Plan dated as of May 1, 1995. (1)
10.2 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)
10.3 Services Agreement dated as of October 1, 1994, by and between
the Company and Lynx International Limited. (1)
10.4 Indemnification Agreement dated as of March 14, 1995, by and
among the Company, Gerard Guez and Todd Kay. (2)
10.5 Registration Rights Agreement dated as of July 28, 1995, by
and among the Company and Limited Direct Associates, L.P.(3)
10.6 Reorganization and Tax Indemnification Agreement dated as of
June 13, 1995, by and among the Company and its shareholders.
(3)
10.7 Employment Agreement effective January 1, 1998, by and between
the Company and Gerard Guez. (6)
10.7.1 First amendment to Employment Agreement dated as of January
10, 2000 by and between Gerard Guez and the Company. (12)
i
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
10.7.2 Second Amendment to Employment Agreement dated April 1, 2003
between Tarrant Apparel Group and Gerard Guez. (20)
10.8 Employment Agreement effective January 1, 1998, by and between
the Company and Todd Kay. (6)
10.8.1 First Amendment to Employment Agreement dated as of January
10, 2000 by and between Todd Kay and the Company. (12)
10.8.2 Second Amendment to Employment Agreement dated April 1, 2003
between Tarrant Apparel Group and Todd Kay. (20)
10.9 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)
10.10 Guaranty, Pledge & Security Agreement entered into as of March
25, 1996, by and between Gerard Guez and the Company. (4)
10.11 Guaranty, Pledge & Security Agreement entered into as of March
25, 1996, by and between Todd Kay and the Company. (4)
10.12 Form of Indemnification Agreement with directors and certain
executive officers. (5)
10.13 Special Deposit Account Agreement. (5)
10.14 Employment Agreement effective as of the twenty-third day of
March, 1999, by and between Charles Ghailian and the Company
to pay CMG Inc. (7)
10.15 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. (8)
10.16 Loan Agreement dated September 1, 1999 by and between General
Electric Capital Corporation and Tarrant Apparel Group (8)
10.16.1 Amendment No. 1 to Loan Agreement dated September 12, 1999 by
and between General Electric Capital Corporation and Tarrant
Apparel Group (8)
10.16.2 Modification Agreement entered into as of June 7, 2002, by and
between General Electric Capital Corporation and Tarrant
Apparel Group. (16)
10.17 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. (8)
10.18 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. (8)
10.18.1 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 (8)
ii
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
10.19 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 (8)
10.19.1 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
(8)
10.20 Loan Agreement dated December 30, 1999 by and between Standard
Chartered Bank and Tarrant Apparel Group. (9)
10.21 Factoring Agreement dated November 24, 1999 by and between MTB
Bank and Rocky Apparel, LLC. (9)
10.22 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. (9)
10.23 Revolving Credit, Factoring and Security Agreement dated
January 21, 2000 by and between Tarrant Apparel Group, Tag
Mex, Inc., and GMAC Commercial Credit LLC. (9)
10.23.1 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,
(11)
10.23.2 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,
(11)
10.23.3 Third 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.
(11)
10.23.4 Letter agreement dated June 29,2001 by and between the Company
and GMAC Commercial Credit. (13)
10.23.5 Waiver agreement dated November 2001 by and between Tarrant
Apparel Group And GMAC Commercial Credit LLC. (14)
10.23.6 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. (15)
10.23.7 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. (18)
10.23.8 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. (18)
iii
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
10.23.9 Letter Amendment dated May 9, 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. (19)
10.23.10 Letter Amendment dated August 14, 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. (23)
10.23.11 Letter Amendment dated October 28, 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. (23)
10.24 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).
(10)
10.25 Promissory note dated February 28, 2001 in the amount of US
$4,119,545.06 to pay to the order of Standard Chartered Bank
(11)
10.26 Amended and Restated Limited Liability Company Operating
Agreement of United Apparel Ventures, dated as of October 1,
2002, between Azteca Production International, Inc. and Tag
Mex, Inc. (19)
10.27 Employment Agreement effective January 7, 2002 by and between
Patrick Chow and the Company. (14)
10.27.1 First Amendment to Employment Agreement dated April 1, 2003
between Tarrant Apparel Group and Patrick Chow. (20)
10.28 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. (14)
10.29 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. (16)
10.29.1 Conditional Consent Agreement dated December 31, 2002, between
UPS Capital Global Trade Finance Corporation and Fashion
Resource (TCL), Inc. (18)
10.30 Guaranty Agreement dated as of May 30, 2002 by and between UPS
Capital Global Trade Finance Corporation and Gerard Guez. (16)
iv
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
10.31 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. (16)
10.31.1 Charge Over Shares dated June 13, 2002 by Fashion Resource
(TCL), Inc. in favor of UPS Capital Global Trade Finance
Corporation. (16)
10.31.2 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. (16)
10.31.3 Fourth Deed of Variation to Syndicated Letter of Credit
Facility dated June 18, 2003 among Tarrant Company Limited,
Marble Limited and Trade Link Holdings Limited and UPS Capital
Global Trade Finance Corporation (20)
10.31.4 Letter Agreement dated September 1, 2003, among Tarrant
Company Limited, Marble Limited, Trade Link Holdings Limited
and UPS Capital Global Trade Finance Corporation. (23)
10.31.5 Fifth Deed of Variation to Syndicated Letter of Credit
Facility dated December 23, 2003 among Tarrant Company
Limited, Marble Limited and Trade Link Holdings Limited and
UPS Capital Global Trade Finance Corporation
10.32 Assignment of Promissory Note by Tarrant Apparel Group to
Tarrant Company Limited and to Trade Link Holdings Company
dated December 26, 2001. (16)
10.33 Promissory Note dated July 1, 2002 by Tarrant Apparel Group in
favor of Todd Kay. (16)
10.33.1 Amendment to Promissory Note dated January 2, 2003, between
Todd Kay and the Company. (18)
10.34 Agreement for Purchase of Assets and Stock dated December 31,
2002, by and among the Company, 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.+ (17)
10.35 Exclusive Distribution Agreement dated April 1, 2003, between
Federated Merchandising Group, an unincorporated division of
Federated Department Stores, and Private Brands, Inc. (19)
10.36 Unconditional Guaranty of Performance dated April 1, 2003, by
Tarrant Apparel Group. (19)
10.37 Charge Over Shares dated February 26, 2003, between Machrima
Luxembourg International Sarl and UPS Global Trade Finance
Corporation. (19)
10.38 Promissory Note dated May 31, 2003 made by Gerard Guez in
favor of Tarrant Apparel Group. (20)
10.39 Indemnification Agreement dated April 10, 2003 between Tarrant
Apparel Group and Seven Licensing Company, LLC. (20)
v
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
10.40 Form of Subscription Agreement, by and among the Company and
the Purchaser to be identified therein. (21)
10.41 Registration Rights Agreement dated October 17, 2003, by and
among the Company and Sanders Morris Harris Inc. as agent and
attorney-in-fact for the Purchasers identified therein. (21)
10.42 Placement Agent Agreement dated October 13, 2003, by and among
the Company and Sanders Morris Harris Inc. (21)
10.43 Common Stock Purchase Warrant dated October 17, 2003, by and
between the Company and Sanders Morris Harris Inc. (21)
10.44 Form of Voting Agreement, by and between Sanders Morris Harris
Inc. and the Shareholder to be identified therein. (22)
10.45 Lease Agreement, dated as of August 29, 2003, between Tarrant
Mexico S. de R.L. de C.V. and Acabados Y Cortes Textiles S.A.
de C.V. (21)
10.46 Lease Agreement, dated as of August 29, 2003, between Tarrant
Mexico S. de R.L. de C.V. and Acabados Y Cortes Textiles S.A.
de C.V. (21)
10.47 Purchase Commitment Agreement, dated October 16, 2003, between
Tarrant Mexico S. de R.L. de C.V. and Acabados Y Cortes
Textiles S.A. de C.V. (21)
10.48 Employment Agreement, effective as of September 1, 2003,
between the Company and Barry Aved. (23)
10.49 Employment Agreement, dated October 24, 2003, between the
Company and Henry Chu. (23)
10.50 Placement Agent Agreement dated January 23, 2004 between the
Company and Sanders Morris Harris Inc. (27)
10.51 Form of Subscription Agreement between the Company and the
investor to be identified therein. (27)
10.52 Common Stock Purchase Warrant dated January 26, 2004 between
the Company and Sanders Morris Harris Inc. (27)
14.1 Code of Ethical Conduct.
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ernst & Young LLP.
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities and Exchange Act of 1934, as
amended.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities and Exchange Act of 1934, as
amended.
32.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(b) under the Securities and Exchange Act of 1934, as
amended.
32.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(b) under the Securities and Exchange Act of 1934, as
amended.
- ----------
+ 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.
vi
(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 the Company's Annual Report on Form 10-K for the
year ended December 30, 1995.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(11) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2000.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2001.
(13) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2001.
(14) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2001.
(15) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2002.
(16) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2002.
(17) Filed as an exhibit to the Company's Current Report on Form 8K dated
December 31, 2002 and filed on January 15, 2003.
(18) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2002.
(19) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2003.
(20) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2003.
(21) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 16, 2003.
(22) Filed as an exhibit to the Company's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on October 30, 2003
(File No. 333-110090).
(23) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending September 30, 2003.
(24) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 12, 2003.
(25) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 4, 2003.
vii
(26) Filed as an exhibit to the Company's Amendment to Current Report on Form
8-K/A, filed December 12, 2003.
(27) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 23, 2004.
viii