<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the quarterly period ended June 30, 1996
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 of (I.R.S. Employer
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: (213) 780-8250
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 [ ]
Number of shares of Common Stock of the registrant outstanding as of July 30,
1996 was 6,500,000.
This report includes a total of 15 pages.
1
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TARRANT APPAREL GROUP
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 (Audited) . . . . . . . . 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1996 and June 30, 1995 . . 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and June 30, 1995 . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 9
</TABLE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements.
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 4,432,026 $ 7,881,210
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 42,316,167 29,232,849
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . 134,393 861,105
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,610,810 13,808,661
Temporary quota . . . . . . . . . . . . . . . . . . . . . . . . 2,073,916 1,373,368
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . 458,420 404,481
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . 1,036,580 866,577
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . 59,062,312 54,428,251
Property and equipment, net . . . . . . . . . . . . . . . . . . 2,894,363 3,011,192
Due from Original Shareholders . . . . . . . . . . . . . . . . 3,000,000 --
Permanent quota, net . . . . . . . . . . . . . . . . . . . . . 367,917 388,374
Trademarks, net . . . . . . . . . . . . . . . . . . . . . . . . -- 12,581
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . $65,324,592 $57,840,398
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . $ 9,272,103 $15,940,098
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 18,876,116 11,123,799
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 3,944,207 3,214,497
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,769,004 1,146,411
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . 33,861,430 31,424,805
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none issued -- --
and outstanding . . . . . . . . . . . . . . . . . . . . . . .
Common stock, no par value, 10,000,000 shares authorized;
6,500,000 shares, issued and outstanding . . . . . . . . . . 14,950,222 14,950,222
Contributed capital . . . . . . . . . . . . . . . . . . . . . . . 1,434,259 1,434,259
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 15,078,681 10,031,112
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . 31,463,162 26,415,593
----------- -----------
Total liabilities and shareholders' equity . . . . . . . $65,324,592 $57,840,398
=========== ===========
</TABLE>
See accompanying notes.
3
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TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1996 1995 1996 1995
-------------- ------------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $ 68,870,470 $ 57,582,675 $110,963,219 $ 102,846,132
Cost of sales . . . . . . . . . . . . . . . . . 57,603,417 48,378,388 92,629,101 86,718,097
------------- ------------- ------------ ---------------
Gross profit . . . . . . . . . . . . . . . . . 11,267,053 9,204,287 18,334,118 16,128,035
Selling and distribution expenses . . . . . . . 1,793,595 1,747,959 3,508,668 3,375,850
General and administrative expenses . . . . . . 3,969,167 3,803,330 6,961,312 7,049,896
------------- ------------- ------------ ---------------
Income from operations . . . . . . . . . . . . 5,504,291 3,652,998 7,864,138 5,702,289
Interest expense . . . . . . . . . . . . . . . (577,259) (1,362,098) (984,946) (2,581,820)
Interest income . . . . . . . . . . . . . . . . 63,735 335,217 128,798 562,791
Other income . . . . . . . . . . . . . . . . . 91,823 228,148 152,365 718,988
------------- ------------- ------------ ---------------
Income before provision for income taxes . . . 5,082,590 2,854,265 7,160,355 4,402,248
Provision for income taxes . . . . . . . . . . (1,524,778) (280,463) (2,112,786) (435,260)
------------- ------------- ------------ ---------------
Net income . . . . . . . . . . . . . . . . . . $ 3,557,812 $ 2,573,802 $ 5,047,569 $ 3,966,988
============= ============= ============ ===============
PRO FORMA DATA:
Income before provision for income taxes . . . $ 5,082,590 $ 2,854,265 $ 7,160,355 $ 4,402,248
Pro forma provision for taxes . . . . . . . . (1,524,778) (690,593) (2,112,786) (1,141,272)
------------- ------------- ------------ ---------------
Pro forma net income after adjustment for
pro forma taxes . . . . . . . . . . . . . . $ 3,557,812 $ 2,163,672 $ 5,047,569 $ 3,260,976
============= ============= ============ ===============
Pro forma net income per share after
provision for income taxes . . . . . . . . $ 0.55 $ 0.48 $ 0.78 $ 0.72
============= ============= ============ ===============
Weighted average common and common
equivalent shares outstanding . . . . . . . 6,515,427 4,500,000 6,507,714 4,500,000
============= ============= ============ ===============
</TABLE>
See accompanying notes.
4
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TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $5,047,569 $3,966,988
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred tax provision . . . . . . . . . . . . . . . . . . (170,003) --
Depreciation and amortization . . . . . . . . . . . . . . 446,015 436,546
Loss on sale of fixed assets . . . . . . . . . . . . . . . -- 61,063
Allowance for returns and discounts . . . . . . . . . . . (294,346) 142,496
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (12,788,971) (12,513,200)
Due from affiliates . . . . . . . . . . . . . . . . . . 726,712 (1,866,729)
Inventory . . . . . . . . . . . . . . . . . . . . . . . 5,197,850 (2,052,561)
Temporary quota . . . . . . . . . . . . . . . . . . . . (700,548) (2,350,190)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (53,940) (67,744)
Prepaid income taxes . . . . . . . . . . . . . . . . . . -- (14,053)
Accounts payable . . . . . . . . . . . . . . . . . . . . 7,752,317 4,242,115
Accrued expenses . . . . . . . . . . . . . . . . . . . . 1,352,305 1,357,758
---------- ----------
Net cash provided by (used in) operating 6,514,960 (8,657,511)
activities . . . . . . . . . . . . . . . . . . . ---------- ----------
INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . . . . . . . . . (163,146) (537,460)
Purchase of permanent quota . . . . . . . . . . . . . . . . . (133,002) (341,170)
Investment in and advances to joint venture . . . . . . . . . -- 1,346,854
---------- ----------
Net cash (used in) provided by investing (296,148) 468,224
activities . . . . . . . . . . . . . . . . . . . ---------- ----------
FINANCING ACTIVITIES
Bank borrowings, net . . . . . . . . . . . . . . . . . . . . (6,667,996) 15,108,161
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . -- (174,720)
Due from Original Shareholders . . . . . . . . . . . . . . . (3,000,000) (5,405,235)
Long-term obligations . . . . . . . . . . . . . . . . . . . . -- (11,069)
Distribution to Original Shareholders . . . . . . . . . . . . -- (400,000)
---------- ----------
Net cash (used in) provided by financing (9,667,996) 9,117,137
activities . . . . . . . . . . . . . . . . . . . . . ---------- ----------
Increase (decrease) in cash and cash equivalents . . . . . . (3,449,184) 927,850
Cash and cash equivalents at beginning of period . . . . . . 7,881,210 502,565
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . $4,432,026 $1,430,415
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF CONSOLIDATION
On July 28, 1995, Tarrant Apparel Group, a California corporation (formerly
Fashion Resource, Inc.) (the Company) completed an initial public offering (the
Offering) of 2,000,000 shares of the Company's common stock at a price of $9.00
per share. The proceeds to the Company, net of underwriting discounts and
commissions and offering expenses, were $14.8 million.
In order to facilitate the Offering, Gerard Guez, the Chairman and Chief
Executive Officer of the Company, and Todd Kay, the President of the Company
(the Original Shareholders), contributed all of the capital stock of (i) NO!
Jeans, Inc., a California corporation, Tarrant Company Limited and Marble
Limited, both Hong Kong corporations, and (ii) a 49% interest in Tarrant Trading
Limited, a United Arab Emirates corporation, to the Company. As a result, these
affiliates became direct or indirect subsidiaries of the Company (the
Reorganization). In addition, a stock dividend of 14,999 shares for each
outstanding share of the Company was effected.
The accompanying financial statements include the accounts of the Company
and its consolidated subsidiaries for the three and six months ended June 30,
1996 and have been prepared on a combined basis for the three and six months
ended June 30, 1995 due to common ownership and business. The combination of
companies was accounted for in a manner similar to a pooling of interest. All
significant intercompany investments, transactions and balances have been
eliminated.
In 1994, the Company entered into a corporate joint venture, Litex, Ltd.
(Litex), a Hong Kong corporation, with a third party in Hong Kong to establish
and operate a garment manufacturing facility in the People's Republic of China.
The Company sold its interest in the joint venture to the third party in March
1995. The investment in Litex has been accounted for under the equity method.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of operations for the periods presented have been included.
The consolidated financial data at December 31, 1995 is derived from
audited financial statements which are included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, and should be read in
conjunction with the audited financial statements and notes thereto. Interim
results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
6
<PAGE> 7
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Concurrent with the closing of the Offering, the Parent Company changed its
tax status from an S Corporation, which is essentially a non-taxed, or
pass-through entity, to a taxed C Corporation for income tax purposes. As an S
Corporation the Parent Company paid a 1.5% income tax to the State of California
on its net taxable income.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
U.S. trade accounts receivable . . . . . . . . . $ 23,031,005 $ 12,020,557
Foreign trade accounts receivable . . . . . . . . 11,933,859 7,557,814
Due from factor . . . . . . . . . . . . . . . . . 8,950,566 11,417,866
Other receivables . . . . . . . . . . . . . . . . 391,297 584,362
Allowance for returns and discounts . . . . . . . (1,990,560) (2,347,750)
------------ ------------
$ 42,316,167 $ 29,232,849
============ ============
</TABLE>
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . $ 1,156,810 $ 1,726,598
Work-in-process . . . . . . . . . . . . . . . . . 1,439,664 714,286
Finished goods shipments-in-transit . . . . . . . 1,694,360 6,768,152
Finished goods . . . . . . . . . . . . . . . . . 4,319,976 4,599,625
----------- ------------
$ 8,610,810 $ 13,808,661
=========== ============
</TABLE>
Raw materials are composed of fabric and trim accessories
5. BANK BORROWINGS
Bank borrowings consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Hong Kong line of credit . . . . . . . . . . . . $ 1,012,997 $ 1,463,799
Import trade bills payable . . . . . . . . . . . 8,259,106 11,587,427
Advances against trade accounts receivable . . . -- 2,888,872
----------- ------------
$ 9,272,103 $ 15,940,098
=========== ============
</TABLE>
7
<PAGE> 8
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. PRO FORMA DATA
For federal and state income tax purposes, Tarrant Apparel Group was
treated as an S Corporation under Subchapter S of the Internal Revenue Code
of 1986, as amended, and comparable provisions of state income tax laws through
July 28, 1995, the effective date of the Reorganization.
Pro forma income taxes have been determined assuming that the Company
was a C Corporation for the three and six months ended June 30, 1995 and,
therefore, that its U.S. income was taxed at an effective pro forma tax rate
of 40% for that period. Based upon the Company's expressed intention to
permanently maintain its Hong Kong earnings outside the U.S., no federal or
state income tax has been provided on unremitted earnings of the Hong Kong
operations.
A pro forma presentation has been provided to reflect net income and
net income per common share adjusted for pro forma taxes.
The pro forma weighted average common and common equivalent shares
outstanding have been adjusted from the 4,900,000 shares previously reported
in the Form 10-Q for the quarterly period ended June 30, 1995 to reflect the
elimination of a 400,000 share adjustment originally made to account for the
capital in excess of earnings which was withdrawn by the Original Shareholders
prior to the Offering. Additional earnings recorded subsequent to the Offering
have necessitated that this adjustment be eliminated. Accordingly, the
earnings per share amounts of $0.48 and $0.72 for the three and six months
ended June 30, 1995, respectively, have been adjusted from the $0.44 and
$0.67 previously reported in the Form 10-Q for the quarterly period ended
June 30, 1995.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of
and selling casual, moderately priced apparel, primarily for women, under
private label. The Company's major customers include specialty retailers,
such as Lerner New York, Lane Bryant and The Limited Stores, among other
divisions of The Limited, Inc., and mass merchandisers, such as Target Stores.
The Company's products are manufactured in a variety of woven and knit
fabrications and include jeanswear, casual pants, t-shirts, shorts, blouses
and dresses.
Except for the historical information contained herein, the matters
addressed in this Item 2 constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are subject to a variety of risks and uncertainties, including those
discussed below that could cause actual results to differ materially from those
anticipated by the Company's management. The Private Securities Litigation
Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for
forward-looking statements. All forward-looking statements made in this
Quarterly Report on Form 10-Q are made pursuant to the Act.
The Company typically experiences significant shifts in its net sales on a
customer by customer and quarter by quarter basis. The Company believes that
these shifts are due primarily to the nature of the Company's business. As is
customary in the industry, the Company does not have long-term contracts with
its customers, and most of the Company's sales are derived from large bulk
orders. Thus, a change in the timing of receipt, shipment or number of orders
received by the Company could result in a significant shift in the timing or
amount of the Company's revenues. The Company may also experience significant
shifts in revenues if a customer decides, for fashion or other reasons, not to
re-order specific product lines that had previously accounted for a significant
amount of that customer's business with the Company.
Furthermore, significant fluctuations occur in the Company's product mix
from period to period because of changing fashion trends or customer tastes,
and the price at which a particular garment is sold by the Company will vary
significantly depending on, among other things, the fabric used, construction
and the country of origin (and, accordingly, the amount of time available to
manufacture the garment).
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in the Company's consolidated statements of income as a percentage of net
sales and as adjusted in the pro forma manner set forth in the footnote to the
table:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . 83.6 84.1 83.5 84.3
----- ----- ----- -----
Gross profit . . . . . . . . . . . . . . . . 16.4 15.9 16.5 15.7
Selling and distribution expenses . . . . . . 2.6 3.0 3.1 3.3
General and administration expenses . . . . . 5.8 6.6 6.3 6.8
----- ----- ----- -----
Operating income . . . . . . . . . . . . . . 8.0 6.3 7.1 5.6
Interest expense . . . . . . . . . . . . . . (0.8) (2.3) (0.9) (2.5)
Other income . . . . . . . . . . . . . . . . 0.2 1.0 0.2 1.2
----- ----- ----- -----
Income before income taxes . . . . . . . . . 7.4 5.0 6.4 4.3
Pro forma income taxes . . . . . . . . . . . (2.2) (1.2)(1) (1.9) (1.1)(1)
----- ----- ----- -----
Pro forma net income . . . . . . . . . . . . 5.2% 3.8% 4.5% 3.2%
===== ===== ===== =====
- --------------------------
</TABLE>
(1) Reflects an income tax provision which is the sum of (i) U.S. income taxes
computed as if the Company had been taxed as a C Corporation at an
effective tax rate of 40% for federal and state tax purposes for the period
it was an S Corporation and (ii) the historical tax provision of the
Company and its non-U.S. consolidated subsidiaries for all other periods.
SECOND QUARTER FISCAL 1996 COMPARED TO SECOND QUARTER FISCAL 1995
Net Sales increased by $11.3 million, or 19.6%, from $57.6 million in the
second quarter of 1995 to $68.9 million in the second quarter of 1996. The
increase in net sales included increases of $12.5 million to divisions of The
Limited, Inc. and $9.4 million to Target as offset in part by a decrease of
sales to Kmart of $8.7 million. Overall, sales to divisions of The Limited,
Inc. in the second quarter of 1996 amounted to 67.5% of total net sales, as
compared to 59.1% in the comparable prior period, whereas aggregate sales to
mass merchandisers (i.e., Sears, Kmart and Target) were 28.2% of total net
sales as compared to 32.8% in the same period last year. In the second quarter
of 1996, sales to Kmart were $3.7 million (or 5.3% of total net sales) as
compared to $12.4 million (or 21.5% of total net sales) for the same period
last year. The reduction of sales to Kmart resulted from the Company's
decision to discontinue certain low margin business and a slowdown in buying
activity related to Kmart's restructuring efforts.
The Company anticipates little or no sales to Kmart for the remainder of 1996
as compared to $18.5 million in the same period of 1995, of which $13.3 million
was recorded in the quarter ending September 30, 1995. However, the Company is
seeking to replace these sales for the remainder of 1996 with new business and
growth of existing relationships with, among others, Target and Lane Bryant.
Overall, sales for the second half of the year are expected to be close to
those achieved in last year's second half.
Gross Profit (which consists of net sales less product costs, duties and direct
costs attributable to production) for the second quarter of 1996 was $11.3
million, or 16.4% of net sales, compared to $9.2 million, or 15.9% of net
sales, in the comparable prior period, an increase in gross profit of 22.4%.
The 0.5% increase in the gross profit margin primarily resulted from a
reduction of certain low margin business with Kmart.
10
<PAGE> 11
Selling and Distribution Expenses increased from $1.7 million in the second
quarter of 1995 to $1.8 million in the second quarter of 1996. As a percentage
of net sales, these expenses declined from 3.0% in the second quarter of 1995 to
2.6% in the second quarter of 1996. This percentage decrease is primarily due
to a decrease in sales commission which amounted to 0.2% of net sales.
General and Administrative Expenses increased from $3.8 million in the second
quarter of 1995 to $4.0 million in the second quarter of 1996. As a percentage
of net sales, these expenses declined from 6.6% in the second quarter of 1995 to
5.8% in the second quarter of 1996. This percentage decrease resulted from a
decrease in the provision for bad debt, which includes a provision for returns
and discounts as well as bad debt expense. The provision for returns and
discounts is primarily based on a percentage of receivables which increases with
the age of the receivables, but is not a reflection on the credit worthiness of
the customer. The decrease in the provision for returns and discounts during
the second quarter of 1996 was $40,000, or 0.1% of net sales, compared to an
increase in such provision of $692,000, or 1.2% of net sales, during the second
quarter of 1995. The most significant portions of the increase in the provision
for returns and discounts resulted from changes in the amount and aging of
accounts receivable. Excluding the $732,000 net change in the provision for bad
debt, general and administrative expenses increased from $3.1 million, or 5.4%
of net sales, in the second quarter of 1995 to $4.0 million, or 5.8% of net
sales, in the second quarter of 1996. This percentage increase is primarily due
to an increase in professional fees including such fees as were necessitated by
the transition from a private to a public company.
Operating Income in the second quarter of 1996 was $5.5 million, or 8.0% of net
sales, compared to $3.7 million, or 6.3% of net sales, in the comparable prior
period, an increase in operating income of 50.7% due to the factors described
above. The 1.7% improvement in operating income as a percentage of net sales is
attributable to a 0.5% increase in gross profit margin and a 1.2% decrease in
operating expenses.
Other Income (which consists primarily of management fees and interest income)
decreased from $563,000, or 1.0% of net sales, in the second quarter of 1995, to
$156,000, or 0.2% of net sales, in the second quarter of 1996. The decrease
primarily resulted from $64,000 of interest and $30,000 of management fee income
in the second quarter of 1996 as compared to $335,000 and $214,000,
respectively, in the second quarter of 1995. Management fee income is derived
from an agreement with F.I.S., Inc. (FIS) which sourced and sold garments under
the B.U.M. Equipment label and is two-thirds owned by the Original Shareholders.
Since FIS has now elected to discontinue the sale of products bearing the B.U.M.
Equipment label, the resulting substantial reduction of the management fee
component of other income will continue in future periods.
FIRST SIX MONTHS FISCAL 1996 COMPARED TO FIRST SIX MONTHS FISCAL 1995
Net Sales increased by $8.1 million, or 7.9%, from $102.8 million in the first
six months of 1995 to $111.0 million in the first six months of 1996. The
increase in net sales included increases of $14.6 million to divisions of The
Limited, Inc. and $13.2 million to Target as offset in part by a decrease of
sales to Kmart of $16.7 million. Overall, sales to divisions of The Limited,
Inc. in the first six months of 1996 amounted to 65.7% of total net sales, as
compared to 56.7% in the comparable prior period, whereas aggregate sales to
mass merchandisers (i.e., Sears, Kmart and Target) were 28.0% of total net sales
as compared to 33.2% in the same period last year. In the first six months of
1996, sales to Kmart were $4.4 million (or 4.0% of total net sales) as compared
to $21.1 million (or 20.5% of total net sales) for the same period last year.
See net sales discussion in quarterly comparison.
Gross Profit (which consists of net sales less product costs, duties and direct
costs attributable to production) for the first six months of 1996 was $18.3
million, or 16.5% of net sales, compared to $16.1 million, or 15.7%
11
<PAGE> 12
of net sales, in the comparable prior period, an increase in gross profit of
13.7%. The 0.8% increase in the gross profit margin primarily resulted from a
reduction of certain low margin business with Kmart.
Selling and Distribution Expenses increased from $3.4 million in the first six
months of 1995 to $3.5 million in the first six months of 1996. As a percentage
of net sales, these expenses declined from 3.3% in the first six months of 1995
as compared to 3.1% in the first six months of 1996. This percentage decrease
resulted from a decrease in sales commission which amounted to 0.2% of net
sales.
General and Administrative Expenses were $7.0 million in the first six months of
1995 and 1996. As a percentage of net sales, these expenses declined from 6.8%
in the first six months of 1995 to 6.3% in the first six months of 1996. This
percentage decrease resulted from a decrease in the provision for bad debt,
which includes a provision for returns and discounts as well as bad debt
expense. The provision for returns and discounts is primarily based on a
percentage of receivables which increases with the age of the receivables, but
is not a reflection on the credit worthiness of the customer. The decrease in
the provision for returns and discounts during the first six months of 1996 was
$99,000, or 0.1% of net sales, compared to an increase in such provision of
$852,000, or 0.8% of net sales, during the first six months of 1995. The most
significant portions of the increase in the provision for returns and discounts
resulted from changes in the amount and aging of accounts receivable. Excluding
the $951,000 net change in the provision for bad debt, general and
administrative expenses increased from $6.2 million, or 6.0% of net sales, in
the first six months of 1995 to $7.1 million, or 6.4% of net sales, in the first
six months of 1996. This percentage increase is primarily due to an increase in
professional fees including such fees as were necessitated by the transition
from a private to a public company.
Operating Income in the second quarter of 1996 was $7.9 million, or 7.1% of net
sales, compared to $5.7 million, or 5.6% of net sales, in the comparable prior
period, an increase in operating income of 37.9% due to the factors described
above. The 1.5% improvement in operating income as a percentage of net sales is
attributable to a 0.8% increase in gross profit margin and a 0.7% decrease in
operating expenses.
Other Income (which consists primarily of management fees and interest income)
decreased from $1.3 million, or 1.2% of net sales, in the first six months of
1995, to $281,000, or 0.2% of net sales, in the first six months of 1996. The
decrease primarily resulted from $129,000 of interest and $52,000 of management
fee income in the first six months of 1996 as compared to $563,000 and $706,000,
respectively, in the first six months of 1995. Management fee income is derived
from an agreement with F.I.S., Inc. (FIS) which sourced and sold garments under
the B.U.M. Equipment label and is two-thirds owned by the Original Shareholders.
Since FIS has now elected to discontinue the sale of products bearing the B.U.M.
Equipment label, the resulting substantial reduction of the management fee
component of other income will continue in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds has been to finance inventory,
finished goods shipments-in-transit, and accounts receivable, including
receivables from the Company's contract manufacturers that relate primarily to
fabric purchased by the Company for use by those manufacturers. (The Company
generally purchases fabric for delivery directly to the manufacturer's factory.
The Company then invoices the manufacturer for the fabric, and reduces payments
to the manufacturer for finished goods by the amount of outstanding invoices.)
The Company's primary sources for working capital are cash flow from operations,
borrowings under the Company's bank credit agreement and factoring agreement and
proceeds from its initial public offering.
During the first six months of 1996, net cash provided by operating
activities was $6.5 million, which resulted from net income of $5.0 million and
a net decrease in working capital items of $1.5 million. The working capital
change included a $7.8 million increase in accounts payable and a decrease of
$5.1 million in inventory
12
<PAGE> 13
related to the timing of finished goods shipments-in-transit as partially offset
by a $12.8 million increase in accounts receivable, all of which resulted from
record shipment activity in this period.
During the first six months of 1996, cash flow used in investing activities
was $296,000, which consisted of capital expenditures and the purchase of
permanent quota.
In the six months ended June 30, 1996, cash flow used in financing
activities equaled $9.7 million, as a result of the repayment of $6.7 million of
bank borrowings and a $3.0 million loan to the Original Shareholders.
The Company has a $33.0 million credit facility with The Hongkong and
Shanghai Banking Corporation Limited ("HKSB") for direct borrowings and the
purchase and exportation of finished goods. Under this facility, which is
secured by a lien on certain inventory, the Company may arrange for the issuance
of letters of credit and bank acceptances, as well as cash borrowings for
working capital. This facility is subject to review at any time and the right
of HKSB to demand payment at any time. Interest on cash borrowings and bank
acceptances accrues at HKSB's U.S. best lending rate plus one-half to
three-quarters percent per annum. As of June 30, 1996, the U.S. best lending
rate equaled seven percent. The line of credit is subject to certain
restrictive covenants imposed by HKSB including a provision that the aggregate
net worth, as adjusted, of the Company will exceed $22.0 million plus 50% of net
income earned after December 31, 1995 (i.e., $24.5 million as of June 30, 1996).
Pursuant to an agreement (the "Factoring Agreement") with NationsBanc
Commercial Corporation ("NBCC"), NBCC acts as the Company's sole factor for its
accounts receivable. The Factoring Agreement, under which NBCC is secured by a
lien on certain accounts receivable, provides that NBCC will pay the Company an
amount equal to the gross amount of the Company's accounts receivable reduced by
certain offsets, including among other things, discounts, returns and a
commission payable by the Company to NBCC. The commission equals four-tenths of
one percent, plus an additional one-quarter of one percent of the gross amount
of its accounts receivable depending on the maturity of the account receivable.
Prior to the date upon which NBCC must pay for the Company's accounts
receivable, the Company may receive an advance of up to 85% of the purchase
price of its accounts receivable, less certain offsets, although NBCC may in its
discretion advance a greater amount to the Company. Interest on such advances
accrues at the rate of one-quarter of one percent per annum below the prime rate
charged from time to time by NBCC, except that the interest rate is in no event
less than five percent per annum. As of June 30, 1996, the prime rate equaled
eight and one-quarter percent. Under the Factoring Agreement, NBCC is
obligated to pay the Company for accounts receivable on the third business day
following payment of the account receivable or, with respect to all accounts
receivable for which NBCC has assumed the credit risk, the earlier of such date
or the 120th day after the due date of the account receivable. Subject to its
credit review procedures, NBCC may decline to accept the credit risk on certain
accounts receivable. The Factoring Agreement continues in force from year to
year and may be terminated by NBCC on any anniversary of its effective date
(September 28) or by the Company at any time, provided that in each case, the
terminating party gives sixty days prior written notice.
Beginning February 13, 1996, NBCC guaranteed the credit on only 70% of the
Company's accounts receivable from Kmart and the factoring commission for such
sales was increased to two and four-tenths percent. Effective June 14, 1996,
NBCC resumed assuming 100% of the credit risk represented by Kmart invoices
including those purchased invoices already existing and outstanding as of that
date, and reduced its factoring commission for such sales from two and
four-tenths percent to four-tenths of one percent, plus an additional
one-quarter of one percent of the gross amount of its accounts receivable
depending on the maturity of the accounts receivable.
The Company believes that its cash flow from operations and borrowings
under its current financing facilities should be sufficient to fund its
operations and capital expenditures for the foreseeable future.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its 1996 annual meeting of shareholders (the
"Meeting") on May 30, 1996. At the Meeting, the Company's
shareholders considered and voted upon the following matters:
1. Election of Directors. The re-election of the following seven
persons to the Board of Directors of the Company, to serve until
the next annual meeting of shareholders and until their successors
have been elected and qualified:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Name For Against Abstain
-----------------------------------------------------------------
<S> <C> <C> <C>
Gerard Gerard 5,923,614 --- 14,600
Donald Hecht 5,923,614 --- 14,600
Todd Kay 5,923,614 --- 14,600
Walter L. Krieger 5,923,614 --- 14,600
Mark B. Kristof 5,923,614 --- 14,600
Corazon R. Reyes 5,923,614 --- 14,600
Karen S. Wasserman 5,923,614 --- 14,600
</TABLE>
2. Ratification of 1995 Stock Option Plan. The ratification of
the 1995 Stock Option Plan.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
For Against Abstain
-----------------------------------------------------------------
<S> <C> <C> <C>
4,266,770 38,950 16,200
</TABLE>
3. Ratification of the Appointment of Independent Auditor. The
ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December
31, 1996.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
For Against Abstain
-------------------------------------------------------------------
<S> <C> <C> <C>
5,920,114 8,800 9,300
</TABLE>
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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
Date: July 30, 1996 By: /s/ Mark B. Kristof
----------------------------------
Mark B. Kristof
Vice President - Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH (B) JUNE 30, 1996 FORM 10-Q FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,432,026
<SECURITIES> 0
<RECEIVABLES> 44,306,727
<ALLOWANCES> 1,990,560
<INVENTORY> 8,610,810
<CURRENT-ASSETS> 59,062,312
<PP&E> 4,782,325
<DEPRECIATION> 1,887,962
<TOTAL-ASSETS> 65,324,592
<CURRENT-LIABILITIES> 33,861,430
<BONDS> 0
0
0
<COMMON> 14,950,222
<OTHER-SE> 16,512,940
<TOTAL-LIABILITY-AND-EQUITY> 65,324,592
<SALES> 110,963,219
<TOTAL-REVENUES> 111,244,382
<CGS> 92,629,101
<TOTAL-COSTS> 92,629,101
<OTHER-EXPENSES> 10,513,091
<LOSS-PROVISION> (43,111)
<INTEREST-EXPENSE> 984,946
<INCOME-PRETAX> 7,160,355
<INCOME-TAX> 2,112,786
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,047,569
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.78
</TABLE>
