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As filed with the Securities and Exchange Commission on March 7, 1997.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
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: (213) 780-8250
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Securities registered pursuant to Section 12(g) of the Act: None
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. [X]
As of February 26, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was approximately $36,250,399, based upon the
closing price of the Common Stock on that date.
Number of shares of Common Stock of the registrant outstanding as of February
26, 1997: 6,552,276.
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TABLE OF CONTENTS
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PAGE
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Item 1. BUSINESS.................................................................................................3
General ................................................................................................3
Business Strategy........................................................................................3
Products ................................................................................................4
Customers................................................................................................4
Design, Merchandising and Sales..........................................................................5
Sourcing and Distribution................................................................................6
Backlog ................................................................................................8
Management Fees..........................................................................................8
Import Restrictions......................................................................................8
Competition..............................................................................................9
Employees...............................................................................................10
Item 2. PROPERTIES..............................................................................................10
Item 3. LEGAL PROCEEDINGS.......................................................................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................10
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.....................................................................................11
NASDAQ Listing..........................................................................................11
Dividend Policy.........................................................................................11
Item 6. SELECTED FINANCIAL DATA.................................................................................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................................................13
General ...............................................................................................13
Factors That May Affect Future Results..................................................................13
Results of Operations ..................................................................................15
Quarterly Results of Operations.........................................................................18
Liquidity and Capital Resources.........................................................................18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................................................................20
Item 10. DIRECTORS AND EXECUTIVE OFFICERS........................................................................20
Item 11. EXECUTIVE COMPENSATION..................................................................................20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................................................................20
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................20
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................................21
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PART I
ITEM 1. BUSINESS
GENERAL
Tarrant Apparel Group (the "Company"), a leading provider of private
label casual apparel, 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. Since 1988, when the Company began designing and
supplying private label denim jeans to a single specialty retail store chain, it
has successfully expanded its product lines and built a private label business
which during 1996 served over 20 customers. The Company's five major customers
are Lerner New York, Limited Stores, Target Stores, Lane Bryant and Express,
which together represented approximately 91.4% of the Company's net sales in
fiscal 1996. In addition, in fiscal 1996, the Company's net sales to divisions
of The Limited, Inc. ("The Limited"), including Lerner New York, Limited Stores,
Lane Bryant and Express aggregated approximately 67.1% of net sales. The
Company's current products are manufactured in a variety of woven and knit
fabrications and include jeanswear, casual pants, t-shirts, shorts, blouses,
shirts and other tops, dresses, leggings and jackets. Prior to its initial
public offering in July 1995, the Company conducted its U.S. business under the
name "Fashion Resource" and the Company has continued using that name in
connection with its domestic operations.
Over the past five years, the Company has achieved a compound annual
growth rate in net sales of approximately 16.6% from $124.4 million in 1992 to
$229.9 million in 1996. Gross profit margins during this period have
consistently exceeded 15% and operating margins have shown steady improvement,
particularly in the last three years. Pre-tax income has risen approximately
39.0% on a compound annual basis, from $3.9 million in 1992 to $14.6 million in
1996.
BUSINESS STRATEGY
The Company believes that there has been a trend over the last several
years toward consumer acceptance of casual, moderately-priced, private label
apparel. For example, more than half of the top twenty-five Fortune 500
companies have instituted "casual Fridays," and other companies are following
this trend. The Company also believes that the number of people who work at home
is increasing substantially and that outside of the workplace, people's social
activities are focusing more on family life and a more casual lifestyle. In
particular, the Company believes that baby boomers are now rearing children and
engaging in more recreational activities or are spending evenings at home. The
Company also believes that in recent years apparel consumers have become more
cost-conscious and are bypassing premium brand name or designer products in
favor of quality products at lower prices. In partial response, apparel
retailers have focused on "private label" apparel bearing the retailer's own
name or a proprietary label. Private label apparel generally provides higher
margins for the retailer than brand name or designer products, as a result of
the lower wholesale costs of such apparel. Suppliers are able to sell these
garments at lower wholesale prices due to the significant economies which they
realize, including lower advertising and promotional costs, lack of brand name
license fees and royalties and absence of "markdowns" and other risks and
expenses inherent in the brand name apparel industry.
Management believes that the Company has taken advantage of these
trends by developing and refining the following strategies:
Customer-Focused Teams and Design and Test-Marketing
Capabilities. The Company serves its major customers through integrated
teams of designers, merchandisers and support personnel, some of whom
serve on more than one team. The Company believes that this team
approach fosters strong relationships with each major customer's staff
and enables its employees to develop an in-depth understanding of the
fashion, fabric and pricing strategies of the customer. The Company
also assists many of its customers with the market testing of selected
designs through its ability to source small quantities of selected
items for production within a short time frame. The Company believes
that its design, sample-making and test run capabilities have enhanced
the likelihood (but does not ensure) that it will receive a significant
portion of bulk orders for merchandise designed independently by the
Company or in
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collaboration with its customers. Management also believes that its
design capability is a major competitive advantage.
International Sourcing Network. The Company and its senior
executives have developed long-standing relationships with a network of
contract manufacturers and suppliers, who are used by the Company to
fulfill most of the Company's manufacturing needs. The Company is
aggressively expanding this network both within the countries where it
currently sources goods and to other countries including those in which
it has not previously sourced goods. The Company believes that this
network has sufficient production capacity and flexibility to enable
the Company to accept large orders, work on short production schedules
and produce a broad range of garments at a variety of possible prices
depending on the lead times required by the customer. Certain of these
manufacturers also have the capability to produce small quantity test
runs for the market test programs of the Company's customers.
Product Capabilities That Respond to Changing Fashion Needs.
The Company believes that it has established a reputation with its
customers as a "fashion resource" - a producer that is capable of
designing and producing a broad range of quality merchandise and
reacting rapidly to changing trends in fashion, fabrics and styles. In
management's view, this reputation has afforded the Company a
competitive advantage, because customers have been willing to place
orders with the Company for an expanding range of products not
previously sourced by the Company.
The Company believes that by employing these strategies, it can attract
new customers and increase sales to existing customers.
PRODUCTS
In 1988, the Company received its first orders for private label
women's denim jeans from Express, a division of The Limited. While women's jeans
have historically been, and continue to be, the Company's principal product, in
recent years the Company has expanded its sales of moderately-priced, women's
apparel to include casual, denim and non-denim woven tops and bottoms. The
Company's product lines currently include jeanswear, casual pants, t-shirts,
shorts, blouses, shirts and other tops, dresses, leggings 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 $6.00 to over
$25.00 per garment.
Over the past two years, management's best estimate is that
approximately forty percent of net sales were derived from the sale of pants and
jeans, approximately fifteen percent of net sales were derived from the sale of
shorts and shirts accounted for approximately one-eighth of net sales. The
balance of net sales consisted of sales of dresses, jackets, leggings and other
products. These estimates do not include any information relating to fabric
sales, net sales of Tarrant Company Limited, a wholly-owned subsidiary ("Tarrant
HK"), or net sales to non-combined affiliates for which, in each case, the
Company does not have data segregated by apparel category.
The Company, in the ordinary course of its business, regularly
evaluates new markets and potential acquisitions and believes that numerous
opportunities exist due, in part, to the adverse effect on the earnings of many
apparel companies of the recent decline in retail sales generally. Such
opportunities could include transactions involving acquisitions or brand
affiliations. Although the Company currently is evaluating several brand
affiliations, there are no existing commitments with respect to any acquisition
or affiliation.
CUSTOMERS
For the year ended December 31, 1996, affiliated stores owned by The
Limited, including Lerner New York, Limited Stores and Lane Bryant, accounted
for 67.1% of the Company's net sales and Target Stores accounted for 24.3% of
the Company's net sales. No other customer accounted for more than 10% of the
Company's net sales in 1996. In the same period, the predominant portion of the
Company's sales were of private label apparel. The Company currently serves over
20 customers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - General."
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The Company does not have long-term contracts with any of its customers
and, therefore, there can be no assurance that any customer will continue to
place orders with the Company 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. Various
retailers, including divisions of The Limited, have experienced sluggish sales
and declines in revenue and profits in recent periods. To the extent that these
financial difficulties continue or worsen, there can be no assurance that the
Company's financial condition and results of operations would not be adversely
affected. As a result of the importance of The Limited to the operations of the
Company, The Limited and its divisions have the ability to exert significant
influence over the Company's business decisions.
DESIGN, MERCHANDISING AND SALES
While many private label producers only arrange for the bulk production
of styles specified by their customers, the Company not only designs garments,
but also assists some of its customers in market testing new designs. The
Company believes that its design, sample-production and test-run capabilities
give it a competitive advantage in obtaining bulk orders from its customers. The
Company also often receives bulk orders for garments it has not designed because
many of its customers allocate bulk orders among more than one producer.
The Company has 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. These teams were initially created in 1992 to serve the specific
needs of each of Limited Stores and Lerner New York. Currently, in addition to
Limited Stores and Lerner New York, teams work with each of Target Stores,
Express and Lane Bryant.
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. In particular, 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 wishes 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, the Company and its customer can make
appropriate arrangements regarding any delay or other change in the order. The
Company believes that this team approach enables its employees to develop an
understanding of the customer's distinctive styles and production requirements
in order to respond effectively to the customer's needs.
As part of the Company's merchandising strategy, the Company produces,
at its own expense, one or more samples of garments embodying new designs. The
Company produces samples at its facilities in Guangdong Province, China, Hong
Kong and Los Angeles. The Chinese facility, which has 130 employees, currently
furnishes a significant portion of the Company's sample requirements.
From time to time and at scheduled seasonal meetings, the Company
presents its samples to the customer's buyers, who determine which, if any, of
those samples will be produced on a test run or a bulk scale. Samples are often
presented in coordinated groupings or as part of a product line. Some customers,
particularly specialty retail stores such as divisions of The Limited, may
require that a product be "tested" before placing a bulk order. Testing involves
the production of as few as several hundred copies of a given sample in
different size, fabric and color combinations. The customer pays for these test
items, which are placed in selected stores to gauge consumer response. The
production of test items enables the Company's customers to identify garments
that may appeal to consumers and also provides the Company with important
information regarding the cost and feasibility of the bulk production of the
tested garment. If the test is determined to be successful, the Company
generally receives a significant percentage of the customer's total bulk order
of the tested item. In addition, as is typical in the private label business,
the Company receives bulk production orders to produce merchandise designed by
its competitors or other designers, since most customers allocate bulk orders
among a number of suppliers.
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SOURCING AND DISTRIBUTION
When bidding for or filling an order, the Company's international
sourcing network enables it to choose from among a number of suppliers and
manufacturers based on the customer's price requirements, product specifications
and delivery schedules. The Company maintains its primary sourcing office in
Hong Kong. The Company's senior management has historically had and continues to
have strong relationships with suppliers and manufacturers located in Hong Kong
and China. In recent years, the Company has expanded its network to include
suppliers and manufacturers located in a number of additional countries. See "-
International Sourcing." In 1996, approximately 15% of the Company's
merchandise, on the basis of the free on board cost at the supplier's plant
("FOB Basis"), was manufactured in the U.S., and approximately 85% was
manufactured in Asia and other parts of the world.
The use of contractors and the resulting lack of direct control could
subject the Company to difficulty in obtaining timely delivery of products of
acceptable quality. In addition, as is customary in the industry, the Company
does not have any long-term contracts with its fabric suppliers or product
manufacturers. The loss of any of its major contractors, particularly its
product manufacturers, could have a material adverse effect on the Company's
financial condition and results of operations until alternative supplier
arrangements are secured.
The Company believes that it has the ability, through its production
network, to operate on production schedules with lead times as short as 30 days.
Typically, the Company's specialty retail customers attempt to respond quickly
to changing fashion themes 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 Target, are beginning to operate on shorter lead times,
they are occasionally able to estimate their needs as much as six months to one
year in advance for "program" business - basic products that do not change in
style significantly from season to season. The Company's ability to operate on
production schedules with a wide range of lead times helps it to meet its
customers' varying needs.
By allocating an order among different manufacturers, the Company can
fill the high-volume orders of its customers, while meeting their delivery
requirements. Upon receiving an order, the Company determines which of its
suppliers and manufacturers can best fill the order and meet the customer's
price, quality and delivery requirements. The Company considers, 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. The
Company's 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 the
Company stagger the delivery of products over several weeks.
The Company often purchases fabric to meet the specifications of the
customer's order. The Company has the fabric shipped directly to the factory and
invoices the factory for the fabric. Generally the factories pay the Company for
the fabric with offsets against the price of the finished goods. For its
longstanding program business, the Company may purchase fabric in advance of
receiving the order, but in accordance with the customer's specifications. The
Company's primary sources of working capital are cash flow from operations and
borrowings under the Company's bank credit agreements and factoring agreement.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
International Sourcing
The Company conducts and monitors the majority of its international
sourcing operations from its offices in Hong Kong. These offices comprise
approximately 36,250 square feet of leased office space. At January 31, 1997,
the Company had approximately 170 full-time employees in Hong Kong, many of whom
have extensive knowledge about and experience with sourcing and production in
Hong Kong and China, including purchasing, manufacturing and quality control.
Several times each year, members of the Company's senior management, including
those resident in Hong Kong and China, visit and inspect the facilities and
operations of the Company's international suppliers and manufacturers.
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The Company contracts with suppliers of raw materials and manufacturers
located primarily in Hong Kong, as well as in China, the U.S., Macau, Thailand
and the UAE among approximately twenty countries currently used by the Company
for sourcing. In 1996, the Company imported approximately 80% of its products
(on an FOB Basis) utilizing quota from Hong Kong and China, and approximately 5%
of its products (on an FOB Basis) were imported from other countries.
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 and other non-tariff barriers (including
changes in the allocation of quotas). In addition to these risk factors, the
Company faces additional risks arising from the uncertainty regarding the future
status of Hong Kong after resumption of Chinese sovereignty on July 1, 1997, the
continuation of favorable trade relations between the U.S. and China (in
particular the continuation of China's Most Favored Nation ("MFN") status for
tariff purposes), and the continuation of economic reform programs in China
which encourage private economic activity. Each of these factors could have a
material adverse effect on the Company.
While the Company is in the process of establishing business
relationships with manufacturers and suppliers located in countries other than
Hong Kong, the Company still contracts with manufacturers and suppliers located
primarily in Hong Kong, and currently expects that it will continue to do so.
Any significant disruption in the Company's operations or its relationships with
its manufacturers and suppliers located in Hong Kong could have a material
adverse effect on the Company.
Domestic Sourcing
The Company conducts its domestic sourcing from its Los Angeles
facility. This facility comprises approximately 100,000 square feet of leased
office and warehouse space. In general, the Company intends to utilize domestic
sourcing to deliver products ordered on a short delivery schedule, when a
customer desires to sell products with a "Made in the USA" label or when it
otherwise determines that domestic manufacturing is appropriate.
The Company also manufactures samples at its Los Angeles facility.
Samples are produced at the Company's expense and embody a particular design
idea that can be presented to a customer as a means of soliciting an order. See
"Business - Design, Merchandising and Sales." Because of its local sample-making
capacity, the Company is capable of responding quickly to customers' requests
for revisions to samples. As a result, management believes that this capability
gives the Company a competitive advantage.
The Sourcing Process
As is customary in the industry, the Company does not have any
long-term contracts with its manufacturers. The Company typically contracts (on
the basis of a written purchase order) with one to three manufacturers to
produce a bulk order. The Company often arranges on behalf of these
manufacturers for the purchase of fabric from one supplier for the entire order,
in which case the Company deducts the cost of the fabric when paying the
manufacturer's invoice. By procuring fabric for an entire order from one source,
the Company believes that production costs per garment are reduced and customer
specifications as to fabric quality and color can be controlled. In 1996, an
aggregate of approximately $32.7 million (on an FOB Basis) or 46.3% of fabric
for the Company's imported products was purchased from three suppliers located
in Hong Kong with weaving mills in China, and approximately $60.4 million (on an
FOB Basis) or approximately 47.5% of the Company's imported products were
purchased from five manufacturers with facilities in Hong Kong.
During the manufacturing process, the Company's 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
the Company's offices in Hong Kong and Los Angeles. The Company, in turn, keeps
its 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 the Company's plans to rectify them.
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BACKLOG
At February 15, 1997, the Company had unfilled customer orders of
approximately $81.6 million as compared to approximately $49.4 million as of
February 15, 1996. The Company believes that all of its backlog of orders as of
February 15, 1997 will be filled within the current fiscal year. Backlog is
based on the Company's 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 manufacture and shipping of the product
which, in some instances, depends on the customer's demands. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments. The Company's
experience has been that the cancellations, rejections or returns of orders have
not materially reduced the amount of sales realized from its backlog.
MANAGEMENT FEES
In 1992, the Company entered into a business arrangement with F.I.S.,
Inc. ("FIS"), a corporation which sourced and sold garments under the B.U.M.
Equipment label until it ceased operations in the second quarter of 1996. Under
this arrangement, the Company acted as a sourcing agent for and sold finished
garments to FIS. The price charged for these garments equaled the cost of the
goods (on an FOB Basis, including the cost of import quota) plus a 10%
commission. In addition, the Company provided FIS with certain management,
administrative and operations services, including, without limitation,
designing, merchandising, production and accounting services. In consideration
of the foregoing services, FIS paid the Company a fee based upon the net sales
of FIS.
IMPORT RESTRICTIONS
Quotas. The Company imported approximately 85% of its products (on an
FOB Basis) in 1996. Almost all of the products imported were manufactured in a
foreign jurisdiction (e.g., Hong Kong and China) with which the U.S. has entered
into a bilateral textile agreement that, among other restrictions, imposes
specific quantitative restraints, or "quotas," on the amounts of various
categories of textiles and apparel that can be imported into the U.S. from that
foreign jurisdiction during a particular quota year. These bilateral textile
agreements also include provisions which allow the U.S. to impose quotas on
categories of textiles and apparel not previously under quota or to "charge"
(i.e., impose deductions upon) the quotas for origin-related violations.
Accordingly, the Company's operations are subject to the restrictions imposed by
these bilateral agreements.
Until recently, the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Arrangement ("MFA"), provided the
international framework for the global regulation of the textile and apparel
trade. Pursuant to the MFA, the U.S. entered into these bilateral textile
agreements for the purpose of imposing quotas on the imports of textiles and
apparel. However, under "The Final Act Embodying the Results of the Uruguay
Round of Multilateral Trade Negotiations" (the "Uruguay Round Agreement") which
was agreed to on a preliminary basis in December 1993 by 117 member nations of
the General Agreement on Tariffs and Trade ("GATT"), and enacted into U.S.
domestic law in December 1994 under the Uruguay Round Agreements Act (the
"URAA"), the MFA has been replaced by the World Trade Organization Agreement on
Textiles and Clothing (the "ATC"). Under the ATC, quotas implemented under the
MFA on the importation of textiles and apparel from countries that are members
of the World Trade Organization (the "WTO," which is the successor organization
to GATT under the Uruguay Round Agreement) will be phased out over a ten-year
period that commenced on January 1, 1995 (with the U.S. phasing out quotas on
most of the sensitive categories at the end of this period). However, a member
country may, under the Uruguay Round Agreement on Safeguards, re-impose quotas
on textiles and apparel under certain specified conditions.
China is a signatory to the MFA, but was not a member of GATT and,
therefore, was not a party to the Uruguay Round Agreement. China has not been
admitted as a member of the WTO, although it is in the process of trying to
negotiate its accession to the WTO at this time. Because China is not a member
of the WTO, its exports of textiles and apparel to the U.S. are not covered by
the ATC. Accordingly, the U.S. continues to control imports of textiles and
apparel from China under the existing bilateral agreement between the U.S. and
China. On January 17, 1994, the U.S. and China signed a three-year agreement
which set the 1994 textile and apparel quotas from China at their 1993 levels
and increased the quota by 1.0% for each of 1995 and 1996. A new agreement, to
replace the expiring 1994 Agreement, was signed in February, 1997. It will
become effective January 1, 1998 for a four year period and will continue to
permit some growth in most quota categories.
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In the event that China eventually becomes a member of the WTO, it will
be afforded the rights granted other members under the ATC, including the
phase-out of textile and apparel quotas over the ten-year period that commenced
on January 1, 1995. However, there can be no assurance that China will become a
member of the WTO, particularly since the U.S. has expressed dissatisfaction
with China's progress in opening its domestic market in a number of areas.
In 1996, products imported using Hong Kong quota accounted for
approximately 79.4% of the Company's imported net sales (on an FOB Basis). Under
the U.S. and Hong Kong rules of origin currently in effect, the Company conducts
certain, non-origin conferring manufacturing operations in China for a
significant portion of the products it imports using Hong Kong quota. As part of
the URAA, the U.S. implemented new rules of origin which become effective on
July 1, 1996. These new rules of origin had little actual impact on the country
of origin of the merchandise imported by the Company. The Company is
nevertheless attempting to diversify its sourcing network to reduce reliance on
Hong Kong sources, in part to minimize the potential effects of this change in
the rule of origin. It is also taking steps to obtain additional quota from
China in the event that these new rules of origin result in changing the origin
of the products presently subject to Hong Kong quota.
Duties and Tariffs. Merchandise imported by the Company into the U.S.
is subject to rates of duty established by U.S. statute. In general, these rates
vary, depending on the type of product, from 3.0% to 34.6% of the appraised
value of the product. In addition to duties, in the ordinary course of its
business, the Company, from time to time, may become subject to claims by the
U.S. Customs Service for penalties, liquidated damage claims and other charges
relating to import activities. Similarly, from time to time, the Company may be
entitled to refunds from the U.S. Customs Service due to the overpayment of
duties.
Products imported from China into the U.S. currently receive the same
preferential tariff treatment accorded goods from countries granted MFN status.
China's MFN status, which is granted on an annual basis, expires in July 1997.
China's MFN status has been a contentious political issue for several years
because of concerns regarding labor and human rights practices, weapons
proliferation, trade policies and failure to protect U.S. intellectual property
rights. Previous legislation attaching conditions to China's MFN status has been
passed by both houses of the Congress, but did not survive presidential vetoes.
There can be no assurance that the U.S. will not revoke China's MFN status
entirely or place greater conditions or restrictions on this status, but absent
a major deterioration in U.S.- China relations, it is anticipated that China
will maintain its MFN status. If China's MFN status were to terminate, and
Chinese origin products had to enter the U.S. without the benefit of MFN status,
such goods will be subject to significantly higher duties than at present. Any
such increased duties would increase the cost or reduce the supply of the
Company's goods imported from China. In 1996, products imported using China
quota accounted for approximately 11.5% of the Company's imported net sales (on
an FOB Basis). The Company is taking steps to diversify its sourcing network to
reduce its dependence on Chinese-origin products.
The Company's continued ability to source products from foreign
jurisdictions may be adversely affected by additional bilateral and multilateral
agreements, unilateral trade restrictions, changes in trade policy, significant
decreases in import quotas, embargoes, the disruption of trade from exporting
countries as a result of political instability or the imposition of additional
duties, taxes and other charges or restrictions on imports.
COMPETITION
There is intense competition in the sectors of the apparel industry in
which the Company participates. The Company competes with many other
manufacturers, many of which are larger and have greater resources than the
Company. The Company also faces competition from its 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 the Company and
other private label apparel suppliers for orders from divisions of The Limited.
The Company believes that it competes favorably on the basis of design and
sample capabilities, quality and value of its products, price, the production
flexibility that it enjoys as a result of its sourcing network and the long-term
customer relationships it has developed.
9
<PAGE> 10
EMPLOYEES
At January 31, 1997, the Company had approximately 110 full-time
employees in Los Angeles, 170 full-time employees in Hong Kong and 130 in China.
None of the Company's employees is subject to a collective bargaining agreement.
The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company currently conducts its operations from three facilities,
all of which are leased. The Company's executive offices and warehouse
facilities are located at 3151 East Washington Boulevard, Los Angeles,
California 90023. The Company leases this facility for an annual rent of
$567,000 from a California corporation which is owned by Gerard Guez and Todd
Kay, the Company's Chief Executive Officer and President (the "Original
Shareholders"). The base rent is subject to increase on January 1, 1998 and
every two years thereafter by an amount equal to at least five percent but no
greater than ten percent. The lease for this facility, under which the Company
is responsible for the payment of taxes, utilities and insurance, terminates in
December 2003 subject to a renewal option for five additional years. The Company
also leases approximately 36,250 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 the Original Shareholders. The base rent is subject to increase every
two years in accordance with market rates. The lease for this facility, under
which the Company is responsible for the payment of taxes, utilities and
insurance, expires in June 2004. See Note 9 of Notes to Consolidated Financial
Statements for additional information with respect to these leases.
The Company believes that its other existing facilities are well
maintained, in good operating condition and adequate to meet its current and
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending or threatened legal
proceedings which the Company believes could reasonably be expected to have a
material adverse effect on the it's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of fiscal 1996.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
NASDAQ LISTING
The Company's Common Stock began trading on The Nasdaq Stock Market's
National Market ("NASDAQ") 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 the Company's Common Stock as reported by NASDAQ.
<TABLE>
<S> <C> <C>
1996 LOW HIGH
---- ----- ------
First Quarter ..................... $5.75 $ 8.25
Second Quarter .................... $7.50 $10.62
Third Quarter ..................... $7.25 $10.25
Fourth Quarter .................... $9.12 $14.75
1997 LOW HIGH
---- ------ ------
First Quarter (through February 26) $13.50 $18.25
</TABLE>
On February 26, 1997, the last reported sale price of the Company's
Common Stock as reported on NASDAQ was $17.75. Shareholders are urged to obtain
current market quotations for the Common Stock. As of February 26, 1997, there
were approximately 16 shareholders of record of the Company.
DIVIDEND POLICY
The Company intends to retain future earnings for use in its business
and therefore does 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 the Company's earnings, financial condition, capital
needs and other factors deemed relevant by the Board of Directors.
11
<PAGE> 12
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ................................................ $ 124,448 $ 147,017 $ 177,108 $ 205,174 $ 229,861
Cost of sales ............................................ 105,648 121,971 148,740 172,959 192,288
--------- --------- --------- --------- ---------
Gross profit ........................................ 18,800 25,046 28,368 32,215 37,573
Selling and distribution expenses ........................ 3,128 5,360 6,118 6,761 7,124
General and administrative expenses ...................... 8,088 11,636 12,359 13,493 13,990
Officers' bonus(1) ....................................... 2,061 3,000 -- -- --
LDA Option(2) ............................................ -- -- -- 1,734 --
--------- --------- --------- --------- ---------
Income from operations .............................. 5,523 5,050 9,891 10,227 16,459
Interest expense ......................................... (2,328) (3,410) (3,696) (4,003) (1,865)
Interest income .......................................... 580 210 78 773 337
Other income / (expense)(3) .............................. 112 2,359 1,367 1,274 (302)
--------- --------- --------- --------- ---------
Income before provision for income taxes and
cumulative effect of accounting change............ 3,887 4,209 7,640 8,271 14,629
Provision for income taxes(4) ............................ (474) (478) (597) (961) (4,627)
--------- --------- --------- --------- ---------
Income before cumulative effect of accounting change 3,413 3,731 7,043 7,310 10,002
Cumulative effect of accounting change(5) ................ -- -- 94 -- --
--------- --------- --------- --------- ---------
Net income .......................................... $ 3,413 $ 3,731 $ 7,137 $ 7,310 $ 10,002
========= ========= ========= ========= =========
PRO FORMA DATA(6):
Pro forma net income...................................... $ 2,845 $ 3,033 $ 5,358 $ 7,408(7) $ 10,002
Pro forma net income per common share .................... $ 0.63 $ 0.67 $ 1.19(7) $ 1.38(7) $ 1.53
Pro forma weighted average shares outstanding(8) ......... 4,500 4,500 4,500(9) 5,353 6,548
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 3,206 $ 3,242 $ 2,594 $ 23,003 $ 34,029
Total assets............................................. 52,109 44,376 44,017 57,840 63,420
Bank borrowings and long-term obligations................ 29,297 20,371 19,313 15,940 6,810
Shareholders' equity..................................... 7,093 7,163 7,848 26,416 36,953
</TABLE>
- ------------------------
(1) Consists of bonuses paid to enable the Original Shareholders to pay
their income taxes, including personal income taxes resulting from the
Company's S Corporation status.
(2) On the effective date of its initial public offering, the Company
incurred a non-recurring charge to earnings related to a grant by the
Original Shareholders to Limited Direct Associates, L.P., an affiliate
of The Limited, Inc., of a four-year option (the "LDA Option") to
purchase an aggregate of 649,999 shares, or 10% of the Company's Common
Stock, at an exercise price equal to $7.20 per share.
(3) Major components of Other income/(expense) (as presented above) include
fees paid by affiliate entities for management and administrative
services provided by the Company and royalty income. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations ."
(4) For federal and state tax purposes, Tarrant Apparel Group and certain
of the companies included in the historical results of operations were
treated as S corporations under Subchapter S of the Internal Revenue
Code of 1986, as amended, and comparable provisions of state income tax
laws.
(5) See Note 1 to Consolidated Financial Statements.
(6) 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. Fiscal 1996 has no adjustments since the Company was a C
Corporation for the full year.
(7) The 1994 amount has been adjusted from the $1.09 per share previously
reported in the Registration Statement on Form S-1, as amended, dated
May 4, 1995 (File No. 33-91874) (the "Form S-1") to reflect the
elimination of a 400,000 share adjustment, as described in Note 9 to
this table. The 1995 amounts reflect a $1.7 million adjustment related
to the grant of the LDA Option. The pro forma net income and pro forma
net income per common share amounts reflecting only the adjustment for
pro forma income taxes for 1995 would be $5.7 million and $1.06,
respectively. See "Consolidated Statements of Income," page F-5.
(8) Adjusted to give effect to a stock dividend of 14,999 shares for each
outstanding share and the sale by the Company of 2,000,000 shares in
its initial public offering (the "Offering") in July 1995.
(9) The 1994 amount has been adjusted from the 4,900,000 shares previously
reported in the Form S-1 due to 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.
12
<PAGE> 13
ITEM 7. 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, Limited Stores, Lane Bryant and Express, all of which are divisions of
The Limited, 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, shirts and other
tops, dresses, leggings and jackets.
On July 28, 1995, the Company closed 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. Concurrent with the
closing of the Offering, the Company changed its tax status from an S
Corporation to a C Corporation for income tax purposes.
Concurrent with the closing of the Offering, the Original Shareholders
granted a four-year option (the "LDA Option") to Limited Direct Associates, L.P.
("LDA"), a limited partnership, the general and limited partners of which are
subsidiaries of The Limited, and the Company granted registration rights to LDA
pertaining to the option shares. Historically, sales to divisions of The Limited
have represented a significant portion of the Company's sales. Subject to
certain anti-dilution provisions, the LDA Option grants LDA the right to
purchase an aggregate of approximately 9.9% (649,999 shares) of the Company's
outstanding Common Stock at a price per share of $7.20. For accounting purposes,
even though the LDA Option was granted by shareholders, and will not cover any
shares of the Company's unissued Common Stock, the LDA Option has been treated
as though it was granted by the Company. Accordingly, in the quarter ended
September 30, 1995, the Company recorded a non-recurring charge to earnings, in
the amount of $1.7 million, which equals the $1.4 million estimated fair market
value of the LDA Option plus the $300,000 estimated value of the expenses of
registration of the offer and sale of the option shares. The $1.4 million
component of this charge was offset by an equal credit to contributed capital
because the Company's capital structure was not affected by the grant of the LDA
Option. The $300,000 component of this charge was recorded as an accrued
expense. Because of the credit to contributed capital, the net impact of this
charge on shareholders' equity was $300,000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-K contains forward-looking statements which are
subject to a variety of risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below.
Variability of Quarterly Results. The Company has experienced, and
expects to continue to experience, a substantial variation in its net sales and
operating results from quarter to quarter. The Company believes that the factors
which influence this variability of quarterly results include the timing of the
Company's 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 the Company participates, the
timing of trade shows, the product mix of customer orders, the timing of the
placement or cancellation of customer orders, the occurrence of chargebacks in
excess of reserves and the timing of expenditures in anticipation of increased
sales and actions of competitors. Accordingly, a comparison of the Company's
results of operations from period to period is not necessarily meaningful, and
the Company's results of operations for any period are not necessarily
indicative of future performance.
Economic Conditions. The apparel industry historically has been subject
to substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits have in the past had, and may in the future have, a materially adverse
effect on the Company results of operations. In addition, certain retailers,
including some of the Company customers, have experienced in the past, and may
experience in the future, financial difficulties which increase the risk of
extending credit to such retailers. These retailers have attempted to improve
their own operating efficiencies by concentrating their purchasing power
13
<PAGE> 14
among a narrowing group of vendors. There can be no assurance that the Company
will remain a preferred vendor for its existing customers. A decrease in
business from or loss of a major customer could have a material adverse effect
on the Company's results of operations. The Company has entered into a
non-recourse accounts receivable factoring agreement. There can be no assurance
that the Company's 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,
the Company could either 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.
Reliance on Key Customers. In 1996, affiliated stores owned by The
Limited, including Lerner New York, Limited Stores and Lane Bryant, accounted
for 67.1% of the Company's net sales and Target Stores accounted for 24.3% of
the Company's net sales. The loss of any such customer could have a material
adverse effect on the Company's results of operations. From time to time,
certain of the Company's major customers have experienced financial
difficulties. The Company does not have long-term contracts with any of its
customers and, accordingly, there can be no assurance that any customer will
continue to place orders with the Company to the same extent it has in the past,
or at all. In addition, the Company's results of operations will depend to a
significant extent upon the commercial success of its major customers.
Dependence on Contract Manufacturers. All of the Company's products,
with the exception of certain test runs and samples, are manufactured by
independent cutting, sewing and finishing contractors. The use of contract
manufacturers and the resulting lack of direct control over the production of
its products could result in the Company's failure to receive timely delivery of
products of acceptable quality. Although the Company believes 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 the Company's results of operations until an alternative source is
located and has commenced producing the Company's products.
Price and Availability of Raw Materials. Cotton fabric is the principal
raw material used in the Company's apparel. Although the Company believes that
its suppliers will continue to be able to procure a sufficient supply of cotton
fabric for its production needs, the price and availability of cotton may
fluctuate significantly depending on supply, world demand, and currency
fluctuations, each of which may affect the price and availability of cotton
fabric. There can be no assurance that fluctuations in the price and
availability of cotton fabric or other raw materials used by the Company will
not have a material adverse effect on the Company's results of operations.
Management of Growth. Since its inception, the Company has experienced
rapid growth in sales. No assurance can be given that the Company will be
successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a
significant strain on the Company's management, management information systems,
inventory management, production capability, distribution facilities and
receivables management. Any disruption in the Company's 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 the Company distribution facilities. In addition, the failure
to timely enhance the Company's operating systems, or unexpected difficulties in
implementing such enhancements, could have a material adverse effect on the
Company's results of operations.
Foreign Manufacturing. Approximately 85% of the Company products were
imported in 1996. As a result, the Company's operations are subject to the
customary risks of doing business abroad, including, among other things,
transportation delays, economic or political instability, currency fluctuations,
restrictions on the transfer of funds and the imposition of tariffs, export
duties, quotas and other trade restrictions.
14
<PAGE> 15
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 footnotes to the
table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales ................................. 100.0% 100.0% 100.0%
Cost of sales ............................. 84.0 84.3 83.7
----- ----- -----
Gross profit .............................. 16.0 15.7 16.3
Selling and distribution expenses ......... 3.4 3.3 3.1
General and administration expenses ....... 7.0 6.6 6.1
Non-recurring charge related
to LDA Option(1) ........................ -- 0.8 --
----- ----- -----
Operating income .......................... 5.6 5.0 7.1
Interest expense .......................... (2.1) (2.0) (0.8)
Other income .............................. 0.8 1.0 0.0
----- ----- -----
Income before income taxes ................ 4.3 4.0 6.3
Income taxes(2) ........................... (1.4) (1.3) (2.0)
Adoption of FASB 115 ...................... 0.1 -- --
----- ----- -----
Net income ................................ 3.0% 2.7% 4.3%
===== ===== =====
</TABLE>
- --------------------
(1) On the effective date of the Offering, the Company incurred a
non-recurring charge to earnings related to a grant by the Original
Shareholders to Limited Direct Associates, L.P., an affiliate of The
Limited, Inc., of a four-year option to purchase an aggregate of 649,999
shares, or approximately 10% of the Company's then outstanding Common
Stock, at an exercise price equal to $7.20 per share.
(2) 1994 and 1995 amounts reflect a pro forma 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.
COMPARISON OF 1996 TO 1995
Net sales increased by $24.7 million, or 12.0%, from $205.2 million in
1995 to $229.9 million in 1996. The increase in net sales included an aggregate
increase in sales of $40.7 million to divisions of The Limited and $27.9 million
to Target, which were offset in part by a decrease of $35.1 million in sales to
Kmart.
Certain of the Company's customers, including divisions of The Limited,
experienced sluggish sales and declines in revenue and profits in 1996. To the
extent that these financial difficulties continue or worsen, the Company's
revenues and gross profit margins could be adversely affected.
Gross profit (which consists of net sales less product costs, duties
and direct costs attributable to production) for 1996 was $37.6 million, or
16.3% of net sales, compared to $32.2 million, or 15.7% of net sales, in 1995,
an increase of 16.6%. The increase in the gross profit margin primarily resulted
from the reduction of low margin sales to Kmart. The increase in the absolute
amount of gross profit was primarily due to the increase in net sales.
Selling and distribution expenses increased from $6.8 million in 1995
to $7.1 million in 1996. As a percentage of net sales, these expenses declined
from 3.3% in 1995 to 3.1% in 1996. This percentage decrease is primarily due to
a decrease in commission expenses.
15
<PAGE> 16
General and administrative expenses increased from $13.5 million in
1995 to $14.0 million in 1996. As a percentage of net sales, these expenses
declined from 6.6% in 1995 to 6.1% in 1996. This percentage decrease was
primarily due to a decrease in the provision for bad debt, which includes an
estimated provision for returns and discounts as well as bad debt expense. The
estimated 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
estimated provision for returns and discounts during 1996 was $180,000, or 0.1%
of net sales, compared to an increase in such provision of $314,000, or 0.2% of
net sales, during 1995. The most significant portions of the decrease in the
estimated provision for returns and discounts resulted from changes in the
amount and aging of accounts receivable. An additional favorable variance in the
provision for bad debt resulted from $179,000 of bad debt expense in 1996
compared to $532,000 of such expense in 1995. After adjusting for the decrease
in the provision for bad debt of $847,000, general and administrative expenses
increased by $1.3 million and were 6.2% of net sales in 1995 as compared to 6.1%
in 1996.
Operating income was $10.2 million in 1995, or 5.0% of net sales,
compared to $16.5 million in 1996, or 7.1% of net sales, due to the factors
described above. After adjusting for the decrease in the provision for bad debt
expense and the $1.7 million non-recurring charge related to the grant of the
LDA Option during 1995, operating income as a percentage of net sales increased
from 6.2% in 1995 to 7.1% in 1996. This increase in operating income as a
percentage of net sales was due to the increase in the gross profit margin,
which amounted to 0.6% of net sales, a decrease in selling and distribution
expenses, which amounted to 0.2% of net sales and a decrease in general and
administrative expenses, which amounted to 0.1% of net sales.
Other income decreased from $2.0 million, or 1.0% of net sales, in 1995
to $35,000 in 1996. This decrease is primarily the result of interest income of
$337,000 in 1996 compared to $773,000 in 1995, management fee income of $60,000
in 1996 compared to $1.1 million in 1995 and a non-operating expense accrual of
$400,000 in 1996 compared to no similar accrual in 1995. (See Note 9 to
Consolidated Financial Statements.) Management fee income was derived from an
agreement with FIS which sourced and sold garments under the B.U.M. Equipment
label until it ceased operations in the second quarter of 1996.
Income before income taxes was $8.3 million in 1995 and $14.6 million
in 1996, representing 4.0% and 6.3% of net sales, respectively. After adjusting
for the decrease in the provision for bad debt expense and the $1.7 million
non-recurring charge related to the grant of the LDA Option during 1995, income
before income taxes as a percentage of net sales increased from 5.2% in 1995 to
6.3% in 1996. This increase in income before taxes as a percentage of net sales
was due to the increase in the gross profit margin, which amounted to 0.6% of
net sales, a decrease in selling and distribution expenses, which amounted to
0.2% of net sales, a decrease in general and administrative expenses, which
amounted to 0.1% of net sales, and the decrease in interest expense, which
amounted to 1.2% of net sales, as offset by the decrease in other income, which
amounted to 1.0% of net sales.
COMPARISON OF 1995 TO 1994
Net sales increased by $28.1 million, or 15.8%, from $177.1 million in
1994 to $205.2 million in 1995. The increase in net sales included an increase
in sales of $31.3 million to Kmart and an aggregate increase of $5.3 million to
divisions of The Limited, which were offset in part by a one-time bulk sale of
$11.6 million in 1994 of two product items to a marketer of promotional items.
Gross profit (which consists of net sales less product costs, duties
and direct costs attributable to production) for 1995 was $32.2 million, or
15.7% of net sales, compared to $28.4 million, or 16.0% of net sales, in 1994,
an increase of 13.6%. The decrease in the gross profit margin resulted from a
doubling of sales to mass merchandiser customers (from $34.9 million in 1994 to
$70.1 million in 1995) at lower margins which were offset by an increase in
margins on sales to The Limited. The increase in the absolute amount of gross
profit was due to the increase in net sales.
Selling and distribution expenses increased from $6.1 million in 1994
to $6.8 million in 1995. As a percentage of net sales, these expenses declined
from 3.4% in 1994 to 3.3% in 1995. This percentage decrease is primarily due to
a decrease in freight charges.
16
<PAGE> 17
General and administrative expenses increased from $12.4 million in
1994 to $13.5 million in 1995. As a percentage of net sales, these expenses
declined from 7.0% in 1994 to 6.6% in 1995, due to a decrease in bad debt
expense.
Operating income was $9.9 million in 1994, or 5.6% of net sales,
compared to $10.2 million in 1995, or 5.0% of net sales, due to the factors
described above. After adjusting for the $873,000 bad debt expense taken during
the third quarter of 1994, the $293,000 bad debt expense taken during the fourth
quarter of 1995 and the $1.7 million non-recurring charge related to the grant
of the LDA Option during the third quarter of 1995, operating income as a
percentage of net sales decreased from 6.1% in 1994 to 6.0% in 1995. This
decrease in operating income as a percentage of net sales was due to the
decrease in the gross profit margin, which amounted to 0.3% of net sales, offset
by the decrease in selling and distribution expenses, which amounted to 0.2% of
net sales.
Other income increased from $1.4 million, or 0.8% of net sales, in 1994
to $2.0 million, or 1.0% of net sales, in 1995. This increase resulted primarily
from $773,000 of interest income in 1995 compared to $78,000 in 1994 and $1.1
million of management fee income in 1995 compared to $1.0 million in 1994, as
unfavorably offset by a decline in royalty income from $431,000 in 1994 to
$20,000 in 1995. Management fee income was derived from an agreement with FIS
which sourced and sold garments under the B.U.M. Equipment label until it ceased
operations in the second quarter of 1996.
Income before income taxes was $7.6 million in 1994 and $8.3 million in
1995, representing 4.3% and 4.0% of net sales, respectively. After adjusting for
the $873,000 bad debt expense recorded during the third quarter of 1994, the
$293,000 bad debt expense recorded during the fourth quarter of 1995 and the
$1.7 million non-recurring charge related to the grant of the LDA Option during
the third quarter of 1995, income before income taxes as a percentage of net
sales increased from 4.8% in 1994 to 5.0% in 1995. This decrease in income
before taxes as a percentage of net sales was primarily due to the decrease in
the gross profit margin, which amounted to 0.3% of net sales, as offset by the
decrease in selling and distribution expenses, which amounted to 0.2% of net
sales, and the increase in other income, which amounted to 0.2% of net sales.
17
<PAGE> 18
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in the Company's consolidated statements of income in millions of dollars
and as a percentage of net sales, as adjusted in the pro forma manner described
in the footnotes to the tables:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
Mar. 31, June 30, Sept. 30 Dec. 31, Mar. 31, June 30,
1994 1994 1994 1994 1995 1995
------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales ................. $ 28.0 $ 41.9 $ 58.7 $ 48.5 $ 45.3 $ 57.6
Gross profit .............. 5.3 6.6 8.8 7.7 6.9 9.2
Operating income .......... 2.1 2.7 3.4 1.7 2.0 3.7
Net income ................ 1.4 2.1 3.0 0.7 1.4 2.6
Pro forma net
income (1) ............. 0.8 1.7 2.3 0.6 1.1 2.2
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1995 1995 1996 1996 1996 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................. $ 58.1 $ 44.2 $ 42.1 $ 68.9 $ 50.0 $ 68.9
Gross profit .............. 8.9 7.2 7.1 11.3 8.2 11.0
Operating income .......... 2.8(2) 1.8 2.4 5.5 3.7 4.9
Net income ................ 2.0(2) 1.4 1.5 3.6 2.2 2.7
Pro forma net
income (1) ............. 1.0(2) 1.4 1.5 3.6 2.2 2.7
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
Mar. 31, June 30, Sept. 30 Dec. 31, Mar. 31, June 30,
1994 1994 1994 1994 1995 1995
------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............... 19.0 15.8 15.0 15.8 15.3 16.0
Operating income........... 7.5 6.4 5.8 3.6 4.5 6.3
Net income................. 4.9 5.1 5.1 1.4 3.1 4.5
Pro forma net
income (1).............. 2.7 4.0 3.9 1.3 2.4 3.8
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1995 1995 1996 1996 1996 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............... 15.3 16.3 16.8 16.4 16.5 16.0
Operating income........... 4.7(2) 4.0 5.6 8.0 7.5 7.1
Net income................. 3.4(2) 3.1 3.5 5.2 4.4 4.0
Pro forma net
income (1).............. 1.8(2) 3.1 3.5 5.2 4.4 4.0
</TABLE>
- ------------------
(1) 1994 and the first three quarters of 1995 reflect an income tax
provision which is the sum of (i) U.S. income taxes for the Company
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.
(2) Includes $1.7 million, or 3.0% of net sales, non-recurring charge in
the third quarter of 1995 related to the grant of the LDA Option by the
Original Shareholders.
As is typical for the Company, quarterly net sales fluctuated
significantly because the Company's customers typically place bulk orders with
the Company, 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
The Company's liquidity requirements arise from the funding of its
working capital needs, principally 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 and
borrowings under the Company's bank credit agreements and factoring agreement.
During 1996, net cash provided by operating activities was $2.3
million, which resulted primarily from net income of $10.0 million, as partially
offset by a net increase in working capital items, including an increase of
$14.8 million in accounts receivable, as partially offset by an increase of
accounts payable of $3.1 million and a decrease in inventory of $3.0 million.
The increase in accounts receivable resulted from an increase in sales as
partially offset by an increase in advances from the factor, which advances are
accounted for as an offset to accounts receivable. At December 31, 1996,
advances from the factor were approximately $2.1 million as compared to no such
advances at December 31, 1995.
18
<PAGE> 19
During 1996, cash flow used in investing activities was $381,000, which
was used for capital expenditures and the purchase of permanent quota.
In 1996, cash flow used in financing activities equaled $8.7 million,
primarily as a result of the repayment of bank borrowings.
The Company has credit facilities of $33.0 million and $10.0 million
with The Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for direct borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and bank acceptances, as well as cash
borrowings for working capital. These facilities are subject to review at any
time and the right of HKSB and/or SCB to demand payment at any time. Interest on
cash borrowings under HKSB's facility accrues at the U.S. best lending rate plus
one-half to three-quarters percent per annum. As of December 31, 1996, the U.S.
best lending rate equaled seven percent. Interest on cash borrowings under SCB's
facility accrues at SCB's prime rate for lending Hong Kong Dollars. As of
December 31, 1996 SCB's Hong Kong Dollar prime rate equaled eight and one-half
percent. These facilities are subject to certain restrictive covenants including
a provision that the aggregate net worth, as adjusted, of the Company will
exceed $27.0 million. See Note 7 of Notes to Consolidated Financial Statements.
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 provides that NBCC will pay the
Company an amount equal to the gross amount of the Company's accounts receivable
from customers 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 December
31, 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.
The Company believes that its cash flow from operations and borrowings
under its current financing facilities should be sufficient to fund its
operations for the foreseeable future.
The Company does 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K" for the Company's financial statements, and the notes thereto, and the
financial statement schedules filed as part of this report.
19
<PAGE> 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On December 29, 1995, the Company replaced its former independent
accounting firm, Coopers & Lybrand L.L.P. ("C&L"), with Ernst & Young LLP
("E&Y"). The decision to change independent accountants was made following a
review of competitive proposals submitted by C&L, E&Y and another major public
accounting firm, and was recommended by the Company's Audit Committee and
approved by the Company's Board of Directors.
C&L's reports on the Company's financial statements for 1994 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. Since the
Company originally engaged C&L in January 1994 through December 29, 1995,
there were no disagreements between the Company and C&L on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
C&L, would have caused C&L to make a reference to the subject matter of the
disagreement in connection with its reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning the directors and executive officers of the
Company is incorporated herein by reference from the section entitled "Proposal
1 - Election of Directors" contained in the definitive Proxy Statement of the
Company to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's last fiscal year (the "Proxy Statement").
Effective as of February 28, 1997, Walter L. Krieger resigned as a
Director of the Company for personal reasons.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is incorporated
herein by reference from the section entitled "Proposal 1 - Election of
Directors" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the sections
entitled "General Information - Security Ownership of Principal Shareholders and
Management" and "Proposal 1 - Election of Directors" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is incorporated herein by reference from the section entitled
"Proposal 1 - Election of Directors - Certain Relationships and Related
Transactions" contained in the Proxy Statement.
20
<PAGE> 21
PART IV
ITEM 14. 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. None.
(c) Exhibits. The following is a list of exhibits filed as a part of
this report.
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C>
3.1 Restated Articles of Incorporation of the Company (1).................................
3.2 Restated Bylaws of the Company (1)....................................................
4.1 Specimen of Common Stock Certificate (2)..............................................
10.1 Note in the principal amount of $2,600,000 dated March 15, 1995 in favor of
Imperial Bank (1).....................................................................
10.2 General Security Agreement dated March 15, 1995, by and between the Company
and Imperial Bank (1).................................................................
10.3 Factoring Agreement effective as of September 28, 1993, as amended, by and
between the Company and NationsBanc Commercial Corporation (1)........................
10.4 1995 Stock Option Plan dated as of May 1, 1995 (1)....................................
10.5 Letter Agreement dated February 17, 1995 between Tarrant Company Limited and
The Hongkong and Shanghai Banking Corporation Limited (1).............................
10.6 Letter dated April 18, 1995 from The Hongkong and Shanghai Banking
Corporation Limited to Tarrant Company Limited regarding the
release of certain security interests (1).............................................
10.7 Commercial Lease dated January 1, 1994 and GET and the Company (1)....................
10.8 Tenancy Agreement dated July 15, 1994 between Lynx International Limited and
Tarrant Company Limited, as amended by that certain Supplementary
Tenancy Agreement dated December 30, 1994 and that certain Second Supplementary
Tenancy Agreement dated December 31, 1994 (1).........................................
10.9 Lease Agreement dated June 10, 1994, between Yip Sik Kin and Tarrant
Company Limited (translated from Chinese) (1).........................................
10.10 Tenancy Contract effective as of December 24, 1994, between Khalifa al Muhairi
and Tarrant Trading Co. Ltd. (1)......................................................
10.11 Agreement dated as of June 1, 1995, by and among Pret-A-Porter, the Company,
French Designers, Inc., Bernard Aidan, Gerard Guez and Todd Kay (5)...................
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C>
10.12 Services Agreement dated as of April 1, 1995, by and between F.I.S., Inc. and the
Company (2)...........................................................................
10.13 Services Agreement dated as of October 1, 1994, by and between the Company
and GET (1)...........................................................................
10.14 Services Agreement dated as of October 1, 1994, by and between the Company and
Lynx International Limited (1)........................................................
10.15 Indemnification Agreement dated as of March 14, 1995, by and among the Company,
Gerard Guez and Todd Kay (2)..........................................................
10.16 Promissory Note in the initial principal amount of $2 million dated February 8, 1995,
by Gerard Guez in favor of the Company (2)............................................
10.17 Promissory Note in the initial principal amount of $1 million dated February 8, 1995,
by Todd Kay in favor of the Company (2)...............................................
10.18 Promissory Note in the principal amount of $1,334,566.71 dated December 31, 1994,
by F.I.S., Inc. in favor of the Company (2)...........................................
10.19 Release dated as of June 1, 1995, by and between the Company and certain other
parties signatory thereto (2).........................................................
10.20 Option Agreement dated as of July 28, 1995, by and among Limited Direct
Associates, L.P., Gerard Guez, Todd Kay and the Company (5)...........................
10.21 Registration Rights Agreement dated as of July 28, 1995, by and among the
Company and Limited Direct Associates, L.P. (5).......................................
10.22 Reorganization and Tax Indemnification Agreement dated as of June 13, 1995,
by and among the Company and its shareholders (5).....................................
10.23 Employment Agreement dated as of January 1, 1995, by and between the Company
and Gerard Guez (2)...................................................................
10.24 Agreement dated as of January 1, 1995, by and between the Company and
Todd Kay (1)..........................................................................
10.25 Employment Agreement dated as of January 1, 1994, by and between the Company
and Jimmy Esebag, as amended, by that certain Amendment No. 1 dated as of
June 1, 1995 (2)......................................................................
10.26 Employment Agreement dated as of November 18, 1994, by and between the
Company and Mark B. Kristof (1).......................................................
10.27 Employment Agreement dated as of July 5, 1994, by and between the Company
and Bradley R. Kenson (1).............................................................
10.28 License Agreement dated January 1, 1994, by and between the Company and GET (1).......
10.29 Assignment dated as of June 1, 1995 with respect to the GET! trademark, executed
by GET in favor of the Company (2)....................................................
10.30 Amendment No. 1 to Commercial Lease dated as of April 1, 1995, by and between
GET and the Company (2)...............................................................
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C>
10.31 Lease and Services Agreement dated as of June 1, 1995, by and between Tarrant
Company Limited and French Designers, Inc. (2)........................................
10.32 Note in the principal amount of $2,600,000 dated May 15, 1995, by the Company
in favor of Imperial Bank (2).........................................................
10.33 Letter Agreement dated May 17, 1995, by and between Tarrant Company Limited
and The Hongkong and Shanghai Banking Corporation Limited (2).........................
10.34 Buying Agency Agreement executed as of December 19, 1992, between F.I.S., Inc.
and Tarrant Company Ltd. (2)..........................................................
10.35 Buying Agency Agreement executed as of April 4, 1995, by Azteca Production
International, Inc. and Tarrant Company Ltd., with the Company acknowledging as
to certain matters (2)................................................................
10.36 Tripartite Agreement Assignment of Factoring Proceeds (Advances)
executed and delivered June 6, 1995, by the Company, and accepted
and agreed to by The Hongkong and Shanghai Banking Corporation Limited
and NationsBanc Commercial Corporation (2)............................................
10.37 Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) entered into as of June 6,
1995, by and between The Hongkong and Shanghai Banking Corporation Limited
and the Company (2)...................................................................
10.38 Security Agreement (Tarrant Co. Ltd. Draft Acceptance) entered into as of June 6,
1995, by and between The Hongkong and Shanghai Banking Corporation Limited
and the Company (2)...................................................................
10.39 Agreement dated March 14, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong (3)......................
10.40 Agreement dated March 17, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong (3)......................
10.41 Underwriting Agreement dated as of July 24, 1995, by and among the Company,
Gerard Guez, Todd Kay and Prudential Securities Incorporated (5)......................
10.42 Letter agreement dated August 10, 1995, by and among the Company and
NationsBanc Commercial Corporation(4).................................................
10.43 Letter agreement dated January 30, 1996, by and between Tarrant Company Limited
and The Hongkong and Shanghai Banking Corporation Limited (5).........................
10.44 Promissory Note in the principal amount of $3 million dated March 25, 1996,
by GET in favor of the Company (6)....................................................
10.45 Deed of Trust dated March 25, 1996 by and between GET and the Company (6).............
10.46 Guaranty, Pledge & Security Agreement entered into as of March 25, 1996, by and
between Gerard Guez and the Company (6)...............................................
10.47 Guaranty, Pledge & Security Agreement entered into as of March 25, 1996, by and
between Todd Kay and the Company (6)..................................................
10.48 Letter agreement dated February 22, 1996, by and between Tarrant Company Limited
and Standard Chartered Bank........................................................... 57
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C>
10.49 Letter agreement dated March 8, 1996, by and between Tarrant Company Limited
and Standard Chartered Bank........................................................... 61
10.50 Guarantee Agreement entered into as of August 30, 1996, by and between Standard
Chartered Bank and the Company........................................................ 63
10.51 Letter of Undertaking entered into as of August 30, 1996, by and between Standard
Chartered Bank and the Company........................................................ 68
10.52 Intercreditor Agreement entered into as of November 1, 1996, between The Hongkong
and Shanghai Banking Corporation Limited, Standard Chartered Bank and Tarrant
Company Limited...................................................................... 69
10.53 Security Agreement entered into as of November 1, 1996, by and between Standard
Chartered Bank and the Company....................................................... 73
10.54 Amendment to Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) entered into
as of November 1, 1996, between The Hongkong and Shanghai Banking Corporation
Limited and the Company.............................................................. 84
10.55 Agreement dated January 29, 1997 by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong......................... 86
23 Consent of Ernst & Young LLP......................................................... 91
</TABLE>
- -------------------------
(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 June 15,
1995.
(3) Filed as an exhibit to Amendment No. 2 to Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on July 11,
1995.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 30, 1995.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996.
24
<PAGE> 25
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Report of Independent Auditors - Ernst & Young, L.L.P............................................................. F-2
Report of Independent Auditors - Coopers & Lybrand, L.L.P......................................................... F-3
Consolidated Balance Sheets - December 31, 1995 and 1996.......................................................... F-4
Consolidated Statements of Operations - Three year period ended December 31, 1996................................. F-5
Consolidated Statements of Shareholders' Equity - Three year period ended December 31, 1996....................... F-6
Consolidated Statements of Cash Flows - Three year period ended December 31, 1996................................. F-7
Notes to Consolidated Financial Statements........................................................................ F-8
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts................................................................... F-31
</TABLE>
F-1
<PAGE> 26
Report of Independent Auditors
Board of Directors
Tarrant Apparel Group
We have audited the accompanying consolidated balance sheets of Tarrant Apparel
Group and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows the
years then ended. Our audits also included the financial statement schedule for
the years ended December 31, 1995 and 1996, listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1995 and 1996 and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule for the years ended December 31, 1995
and 1996, when considered in relation to the basic financial statements, taken
as a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Los Angeles, California
February 18, 1997
F-2
<PAGE> 27
Report of Independent Accountants
To the Shareholders of
Tarrant Apparel Group and Affiliates
We have audited the accompanying Tarrant Apparel Group and Affiliates (the
Company), as identified in Note 1 of the Notes To Combined Financial Statements
combined statement of operations, shareholders' equity and cash flows for the
year ended December 31, 1994. Our audit also included the financial statement
schedule for the year ended December 31, 1994 listed in the Index at Item 14(a).
These combined financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 out audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the Tarrant Apparel Group and Affiliates
combined results of its operations and its combined cash flows for the year
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule for
the year ended December 31, 1994, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the combined financial statements, in 1994 the Company
changed its method of accounting for its investments in debt and equity
securities.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 31, 1995
F-3
<PAGE> 28
Tarrant Apparel Group
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996
--------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,881,210 $ 1,120,456
Accounts receivable, net (Note 3) 29,232,849 44,483,884
Due from affiliates (Note 12) 861,105 96,416
Inventory (Note 4) 13,808,661 10,820,169
Temporary quota 1,373,368 1,723,085
Prepaid expenses 404,481 458,087
Prepaid income taxes - 990,771
Deferred tax asset 866,577 803,482
--------------------------------------
Total current assets 54,428,251 60,496,350
Property and equipment, net (Note 5) 3,011,192 2,618,869
Permanent quota, net 388,374 211,085
Other assets 12,581 93,394
--------------------------------------
Total assets $ 57,840,398 $ 63,419,698
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings (Note 7) $ 15,940,098 $ 6,809,676
Accounts payable 11,123,799 14,200,229
Accrued expenses 3,214,497 4,880,115
Income taxes 1,146,411 576,947
--------------------------------------
Total current liabilities 31,424,805 26,466,967
Long-term obligations - -
Commitments and contingencies (Note 9)
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 (1995), 6,552,276 shares (1996) issued and
outstanding 14,950,222 15,485,734
Contributed capital 1,434,259 1,434,259
Retained earnings 10,031,112 20,032,738
--------------------------------------
Total shareholders' equity 26,415,593 36,952,731
--------------------------------------
Total liabilities and shareholders' equity $ 57,840,398 $ 63,419,698
======================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 29
Tarrant Apparel Group
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1995 1996
-----------------------------------------------------
<S> <C> <C> <C>
Net sales $ 177,107,555 $ 205,173,716 $ 229,861,024
Cost of sales 148,739,611 172,959,246 192,287,596
-----------------------------------------------------
Gross profit 28,367,944 32,214,470 37,573,428
Selling and distribution expenses 6,117,939 6,761,320 7,124,732
General and administrative expenses 12,359,215 13,492,382 13,989,826
Nonrecurring charge related to LDA option - 1,734,259 -
-----------------------------------------------------
Income from operations 9,890,790 10,226,509 16,458,870
Interest expense (3,695,567) (4,002,518) (1,864,734)
Interest income 78,562 772,766 336,785
Other income (expense) (Note 9) 1,366,915 1,273,777 (301,509)
-----------------------------------------------------
Income before provision for income taxes and cumulative
effect of accounting change 7,640,700 8,270,534 14,629,412
Provision for income taxes (Note 8) 597,382 960,256 4,627,786
-----------------------------------------------------
Income before cumulative effect of accounting change 7,043,318 7,310,278 10,001,626
Cumulative effect of change in accounting for investments
in debt and equity securities (net of tax of $20,000) 94,043 - -
-----------------------------------------------------
Net income $ 7,137,361 $ 7,310,278 $ 10,001,626
=====================================================
Proforma data - 1994 and 1995 (Note 16, unaudited)
Income before provision for
income taxes and cumulative
effect of accounting change $ 7,640,700 $ 8,270,534 $ 14,629,412
Pro forma adjustment to eliminate LDA option - 1,734,259 -
-----------------------------------------------------
Pro forma income before income taxes and cumulative
effect of change in accounting 7,640,700 10,004,793 14,629,412
Pro forma provision for income taxes (2,376,681) (2,596,562) (4,627,786)
Cumulative effect of change in accounting 94,043 - -
-----------------------------------------------------
Pro forma net income after adjustment for nonrecurring
charge and pro forma provision for income taxes $ 5,358,062 $ 7,408,231 $ 10,001,626
=====================================================
Pro forma net income per share $1.19 $1.38 $1.53
=====================================================
Income before provision for income taxes and cumulative
effect of accounting change $ 8,270,534
Pro forma provision for taxes (2,596,562)
-------------------
Pro forma net income after adjustment for pro forma taxes $ 5,673,972
===================
Pro forma net income per share after provision for
income taxes $1.06
===================
Weighted average shares outstanding 4,500,000 5,353,261 6,547,831
=====================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 30
Tarrant Apparel Group
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK CONTRIBUTED DUE FROM RETAINED SHAREHOLDERS'
CAPITAL SHAREHOLDERS EARNINGS EQUITY
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 281,923 $ 1,364,566 $ (2,690,034)$ 8,206,077 $ 7,162,532
Net income - - - 7,137,361 7,137,361
Distribution to Original - - - (2,519,787) (2,519,787)
Shareholders
Forgiveness of indebtedness of
non-combined affiliates - - - (1,009,149) (1,009,149)
Noncash distribution to
Original Shareholders - - 2,690,034 (2,690,034) -
Distribution of previously
combined entities to
Original Shareholders (155,000) (1,364,566) - (1,403,634) (2,923,200)
----------------------------------------------------------------------------------
Balance at December 31, 1994 126,923 - - 7,720,834 7,847,757
Net income - - - 7,310,278 7,310,278
LDA option - 1,434,259 - - 1,434,259
Initial public offering 14,823,299 - - - 14,823,299
Distribution to Original - - - (5,000,000) (5,000,000)
Shareholders
----------------------------------------------------------------------------------
Balance at December 31, 1995 14,950,222 1,434,259 - 10,031,112 26,415,593
Net income - - - 10,001,626 10,001,626
Exercise of stock options 446,634 - - - 446,634
Income tax benefit from
exercise of
stock options 88,878 - - - 88,878
----------------------------------------------------------------------------------
Balance at December 31, 1996 $ 15,485,734 $ 1,434,259 $ - $ 20,032,738 $ 36,952,731
==================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 31
Tarrant Apparel Group
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1995 1996
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,137,361 $ 7,310,278 $ 10,001,626
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Nonrecurring charge related to LDA option - 1,734,259 -
Deferred taxes - (866,577) 127,372
Cumulative effect of accounting change (94,043) - -
Depreciation and amortization 607,069 881,924 905,786
(Gain) loss on sale of fixed assets - - 57,375
Stock compensation expense - - 66,050
Provision for returns and discounts 356,618 1,097,499 (432,594)
Changes in operating assets and liabilities:
Marketable securities 4,042,274 - -
Accounts receivable 1,911,384 (14,275,674) (14,818,441)
Due from affiliates (165,445) (354,070) 764,689
Inventory (652,590) (2,319,707) 2,988,492
Temporary quota (592,183) (116,799) (349,717)
Prepaid expenses (376,698) 1,329,633 (147,000)
Prepaid income taxes (62,595) 264,225 (990,771)
Accounts payable (3,677,179) (10,272) 3,076,430
Accrued expenses 1,629,373 549,869 1,031,877
-------------------------------------------------------
Net cash provided by (used in) operating activities 10,063,346 (4,775,412) 2,281,174
INVESTING ACTIVITIES
Purchase of fixed assets (1,722,715) (658,495) (466,272)
Sale of fixed assets 48,375 94,874 218,306
Purchase of permanent quota (466,064) (341,928) (133,002)
Investment in and advances to joint venture (1,887,885) 1,346,854 -
-------------------------------------------------------
Net cash (used in) provided by investing activities (4,028,289) 441,305 (380,968)
FINANCING ACTIVITIES
Bank borrowings, net 156,859 (2,772,863) (9,130,422)
Restricted cash (4,760,900) 4,760,900 -
Due to factor (399,996) - -
Long-term obligations 81,019 (98,584) -
Distribution to Original Shareholders (2,519,787) (5,000,000) -
Net proceeds from issuance of common stock - 14,823,299 -
Exercise of stock options including related tax benefit - - 469,462
-------------------------------------------------------
Net cash (used in) provided by financing activities (7,442,805) 11,712,752 (8,660,960)
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,407,748) 7,378,645 (6,760,754)
Cash and cash equivalents at beginning of year 1,910,313 502,565 7,881,210
=======================================================
Cash and cash equivalents at end of year $ 502,565 $ 7,881,210 $ 1,120,456
=======================================================
</TABLE>
See accompanying notes.
F-7
<PAGE> 32
Tarrant Apparel Group
Notes to Consolidated Financial Statements
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF CONSOLIDATION
On July 28, 1995, Tarrant Apparel Group, a California Corporation (formerly
Fashion Resource, Inc.) (the Parent Company or the Company) completed an initial
public offering (the Offering) of 2,000,000 shares of the Parent Company's
common stock at a price of $9.00 per share. The net proceeds to the Company, net
of underwriting discounts and commissions and offering expenses, were $14.8
million.
The accompanying financial statements for fiscal 1994 and through the
reorganization in July 1995 consist of the combination of Tarrant Apparel Group;
the following affiliated United States corporations: Alpine Summit Licensing Co.
Inc. (Alpine), G.T.S. Fabrics, Inc. (GTS), NO! Jeans, Inc. (NO) and GET, Inc.
(GET); the following Hong Kong corporations: Tarrant Company Limited (Tarrant
HK), Tarrant International Company Limited (Tarrant International) and Marble
Limited (Marble); and Tarrant Trading Limited, a United Arab Emirates
corporation (Tarrant UAE). NO and Marble are wholly-owned subsidiaries of
Tarrant HK. Tarrant HK owns a 49% interest in Tarrant UAE. However, since
Tarrant HK effectively controls Tarrant UAE, the results of Tarrant UAE had been
consolidated. The third-party interest in Tarrant UAE is immaterial.
Prior to the reorganization, these entities were collectively referred to as
Tarrant Apparel Group and Affiliates (the Combined Group). Alpine, GTS, GET and
Tarrant International, which became inactive, were distributed to Gerard Guez
and Todd Kay (the Original Shareholders) in September 1994 and accordingly,
ceased to be included in the Combined Group.
In order to facilitate the Offering, the Original Shareholders of the affiliates
contributed all of the capital stock of the affiliates and their minority
interest in Tarrant UAE to Tarrant Apparel Group and as a result, the affiliates
became direct or indirect wholly-owned subsidiaries of the Company (the
Reorganization). In addition, a stock dividend of 14,999 shares for each
outstanding share of Tarrant Apparel Group was effected.
The Company serves both specialty retail and mass merchandise store chains by
designing, merchandising and contracting for the manufacture and selling of
casual, moderately priced apparel, primarily for women under private label.
F-8
<PAGE> 33
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The accompanying financial statements have been prepared on a combined basis
through the Reorganization noted above 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. The combination excludes certain other entities under
common ownership or control of the Original Shareholders, since these entities
engage in unrelated business lines and, in certain instances, have ceased
operations.
REVENUE RECOGNITION
Revenues are recorded, net of anticipated returns, at the time of shipment of
merchandise. Licensing revenues are recognized on an accrual basis, pursuant to
the terms of the underlying license agreements and are included in other income.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
QUOTA
The Company purchases quota rights to be used in the importation of its products
from certain foreign countries. The effect of quota transactions is accounted
for as product costs.
Permanent quota entitlements were principally obtained through free allocations
by the Hong Kong Government pursuant to an import restraint between Hong Kong
and the United States and are renewable on an annual basis, based upon the prior
year utilization. Permanent quota entitlements acquired from outside parties are
amortized over three years on a straight-line basis, and amounted to $388,374,
net of amortization of $419,617 at December 31, 1995 and $211,085, net of
amortization of $729,909 at December 31, 1996.
F-9
<PAGE> 34
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the current year
utilization has been assigned to inventory purchases while the cost of temporary
quota acquired for usage in the year following the balance sheet date is
recorded as a current asset.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Additions and betterments are
capitalized while repair and maintenance costs are charged to operations as
incurred. Depreciation of property and equipment is provided for by the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized using the straight-line method over the lesser of their estimated
useful life 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 income.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which prescribes the use of the liability method
to compute the differences between the tax basis of assets and liabilities and
the related financial reporting amounts using currently enacted tax laws and
rates.
The Company and its U.S. affiliates (other than NO and GTS) were treated as
Subchapter S Corporations for federal and California income tax purposes through
the termination date of the S Corporation status on July 28, 1995 in connection
with the Reorganization. S Corporations pay tax to the State of California on
their taxable incomes at rates of 1-1/2%. Effective with the termination, the
Parent Company is subject to federal and state corporate income taxes.
F-10
<PAGE> 35
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Upon termination of the Subchapter S election, deferred income taxes became an
asset of the Company and were recorded in the balance sheet with a corresponding
credit to the statement of income. The deferred tax asset, principally relating
to the temporary difference arising from the treatment of the allowance for
returns and discounts for book and tax purposes, as of July 31, 1995 was
approximately $785,000.
The Company's Hong Kong corporate affiliates are taxed at an effective Hong Kong
rate of 16-1/2%. No domestic tax provision has been provided for $23,059,597 of
unremitted retained earnings of these Hong Kong corporations, as the Company
intends to maintain these amounts in Hong Kong on a permanent basis in support
of its working capital requirements.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share for 1994 was calculated using a pro forma net
income and based on 4,500,000 weighted average shares outstanding. The pro forma
weighted average shares outstanding are based on (i) 300 shares outstanding for
the Parent Company, as adjusted for a stock dividend of 14,999 shares for each
outstanding share effected in connection with the Reorganization in July 1995
immediately prior to the closing of the Offering. Pro forma net income per share
in 1995 is based on the weighted average of the 4,500,000 shares outstanding
prior to the Offering and the 2,000,000 shares issued pursuant to the Offering.
The computation of net income per share in 1996 is based upon the weighted
average number of common shares outstanding during the period plus the dilutive
effect of common shares contingently issuable from the assumed exercise of stock
options to purchase common shares.
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 income (excluding the costs of
manufacturing samples) amounted to approximately $1,194,000, $1,475,000 and
$1,419,000 in 1994, 1995 and 1996, respectively.
F-11
<PAGE> 36
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Hong Kong and United Arab Emirates corporations
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 principal foreign currency in which the Company transacts
business is the Hong Kong dollar. Foreign currency gains and losses resulting
from transactions are not material and are included in the statements of income.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Unless otherwise
described, the fair values of financial instruments approximate their recorded
values.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments In Debt and Equity
Securities" (SFAS No. 115). Under SFAS No. 115, marketable securities portfolios
consisting of debt and equity securities held primarily for sale in the near
term (trading securities) are valued at fair value, with realized and unrealized
holding gains and losses included in the statements of income. On January 1,
1994, market value of trading securities, as an approximation of fair value,
exceeded cost by approximately $114,000. The cumulative effect of adoption of
SFAS No. 115 amounted to a gain of approximately $94,000 ($114,000 net of tax of
$20,000). The Company realized losses on the sale of marketable securities of
approximately $303,000, $0 and $15,531 in 1994, 1995 and 1996, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentration of
credit risk consist primarily of cash equivalents, trade accounts receivable and
amounts due from factor.
F-12
<PAGE> 37
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's products are primarily sold to mass merchandisers and specialty
retail stores. These customers can be significantly affected by changes in
economic, competitive or other factors. The Company makes substantial sales to a
relatively few, large customers. In order to minimize the risk of loss, the
Company assigns a significant portion of its domestic accounts receivable to a
factor without recourse or requires letters of credit from its customers prior
to the shipment of goods. For nonfactored receivables, credit limits, ongoing
credit evaluations and account monitoring procedures are utilized to minimize
the risk of loss. Collateral is generally not required. The following table
presents the percentage of net sales concentrated with certain customers.
Customer A represents a group of customers under common ownership.
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------------------
<S> <C> <C> <C>
Customer A 61.1% 55.3% 67.1%
Customer B 14.8 13.6 24.3
Customer C 4.7 19.3 1.9
</TABLE>
Products representing approximately 85% of the Company's net sales, on the basis
of the free on board cost at the supplier's plant, were manufactured by third
party contractors located in foreign countries. There can be no assurance that
the Company will not experience difficulties with third parties responsible for
the manufacture of its products.
The Company maintains demand deposits with several major banks. At times, cash
balances may be in excess of Federal Deposit Insurance Corporation or equivalent
foreign insurance limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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.
F-13
<PAGE> 38
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. The Company has elected to account for its stock
compensation arrangements under the provisions of APB 25, "Accounting for Stock
Issued to Employees." The Company adopted the provisions for pro forma
disclosure requirements of SFAS 123 in fiscal 1996.
2. TREATMENT OF PREVIOUSLY COMBINED ENTITIES
In September 1994, the Company's shareholders decided to no longer combine the
following four corporations which prior thereto had been included in the
Company's combined financial statements: Alpine, GTS, GET and Tarrant
International (collectively the Excluded Group). As of that date, all of the
entities within the Excluded Group had become inactive, except for the property
rental activity described below. The entities had originally been included as
affiliates in the Combined Group because their operational history comprised the
design, manufacture and importation of moderately priced casual wear apparel.
All of the operations of the Excluded Group are now being conducted by the
Company. The noncash distribution to shareholders reflected in the statement of
shareholders' equity for the year ended December 31, 1994, is comprised of the
remaining net assets of the Excluded Group which are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets:
Property and equipment, net $ 2,902,607
Due from affiliates 2,819,538
-----------
Total assets $ 5,722,145
===========
</TABLE>
F-14
<PAGE> 39
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
2. TREATMENT OF PREVIOUSLY COMBINED ENTITIES (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Liabilities and shareholders' equity:
Accounts payable $ 103,772
Due to shareholders 1,799,438
Long-term obligations 895,735
------------
Total liabilities 2,798,945
Shareholders' equity:
Common stock 155,000
Contributed capital 1,364,566
Retained earnings 1,403,634
------------
Total shareholders' equity 2,923,200
------------
Total liabilities and shareholders' equity $ 5,722,145
============
</TABLE>
One of the significant tangible assets of the corporations in the Excluded Group
consists of office and warehousing premises located in Los Angeles, California
(the Facility), together with the related mortgage. On January 1, 1994, the
Company entered into a ten-year lease agreement with GET for the Facility's use
as the Company's corporate offices and warehouse, with an annual rental of
$600,000. Had the Excluded Group not been treated as described herein, the
Company's 1994 net income would have been reduced by approximately $330,000,
representing the difference between rental expense and depreciation.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996
-------------------------------
<S> <C> <C>
U.S. trade accounts receivable $ 12,020,557 $ 22,024,048
Foreign trade accounts receivable 7,557,814 8,198,978
Due from factor 11,417,866 16,034,018
Other receivables 584,362 141,996
Allowance for returns and discounts (2,347,750) (1,915,156)
-------------------------------
$ 29,232,849 $ 44,483,884
===============================
</TABLE>
F-15
<PAGE> 40
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE (CONTINUED)
Pursuant to the terms of a factoring agreement, which is renewable in September
1997, the Company assigns a significant portion of its accounts receivable to a
factor on a preapproved, nonrecourse basis. The factoring charge amounts to 0.4%
of the receivables assigned. The factor may make advances of up to 85% of
approved receivables assigned. These advances approximated $0 and $2.1 million
at December 31, 1995 and 1996, respectively. Interest is charged at prime
(8-1/4% at December 31, 1996) less 1/4% per annum on such advances. The
Company's obligations to the factor are collateralized by an interest in the
Company's U.S. accounts receivable.
Included in U.S. trade accounts receivable are amounts due from one U.S.
retailer against which the Company has received advances from a bank amounting
to $2,888,872 and $0 as of December 31, 1995 and 1996, respectively. Advances
against specific invoices are collateralized by the retailer's related letters
of credit. Interest on such advances is charged at the bank's base lending rate
(7-1/2% and 7% at December 31, 1995 and 1996, respectively) plus 3/4% per annum.
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996
------------------------------
<S> <C> <C>
Raw materials $ 1,726,598 $ 2,113,849
Work-in-process 714,286 1,701,023
Finished goods shipments-in-transit 6,768,152 2,252,118
Finished goods 4,599,625 4,753,179
------------------------------
$ 13,808,661 $ 10,820,169
==============================
</TABLE>
Raw materials are composed of fabric and trim accessories.
F-16
<PAGE> 41
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1996
------------------------------
<S> <C> <C>
Equipment, furniture and fixtures $ 2,670,812 $ 2,641,250
Leasehold improvements 1,873,834 2,098,986
Vehicles 74,826 69,826
------------------------------
4,619,472 4,810,062
Less accumulated depreciation and amortization 1,608,280 2,191,193
------------------------------
$ 3,011,192 $ 2,618,869
==============================
</TABLE>
In May 1995, the Company agreed to transfer certain residential real property to
one of the Original Shareholders in exchange for the assumption by the Original
Shareholder of the mortgage loan relating to the property.
6. INVESTMENT IN AND ADVANCES TO JOINT VENTURE
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 50% interest in the joint venture to the third party in March
1995. The 50% investment in Litex has been accounted for under the equity
method.
For the year ended December 31, 1994, the Company had sales of fabric of
$1,661,000 to Litex and purchases of $10,752,000 of finished garments from
companies controlled by the joint venture partners of Litex. For the year ended
December 31, 1995, the Company had sales of fabric of $2,011,000 and purchases
of $2,739,000 of finished garments.
In March 1995, the Company entered an agreement with the third party in the
Litex joint venture whereby the third party acquired the Company's interest in
Litex for consideration of $2,000,000, of which $545,000 was paid in cash with
the balance to be received through deductions taken against a future production
purchase agreement with the third party ($391,000 and $225,000 was received
through deductions taken against 1995 and 1996 production, respectively). The
deferred gain on the sale of approximately $839,000 was settled by the payment
of approximately $419,000 from the third party to the Company in February 1997.
F-17
<PAGE> 42
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
7. BANK BORROWINGS
Bank borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996
-------------------------------
<S> <C> <C>
Hong Kong line of credit $ 1,463,799 $ -
Import trade bills payable 11,587,427 6,809,676
Advances against non-factored
trade accounts receivable 2,888,872 -
-------------------------------
$ 15,940,098 $ 6,809,676
===============================
</TABLE>
The Company's Hong Kong affiliate, Tarrant HK, has $43,000,000 of lines of
credit with two Hong Kong banks for direct borrowings and the purchase and
exportation of finished goods. These lines of credit are guaranteed by the
Company and subject to the right of the banks to demand repayment at any time.
Interest on borrowings is charged and payable monthly at 1/2% - 3/4% per annum
above one bank's base lending rate for U.S. dollar borrowings (7-1/2% and 7% at
December 31, 1995 and 1996, respectively) and at the other bank's base lending
rate for Hong Kong dollar borrowings (8-1/2% at December 31, 1996). Prior to the
Offering, one of the banks had also received guarantees from certain affiliates
and a guarantee from the Original Shareholders for $18,000,000. The lines of
credit are collateralized by an interest in substantially all of the assets of
Tarrant HK. One of the banks is a named beneficiary of a life insurance policy
covering one of the Original Shareholders in the amount of $6,000,000 and
receives 30% of the proceeds of all factored accounts receivable. The lines of
credit are subject to certain restrictive covenants imposed by the banks,
including a provision that the aggregate net worth, as adjusted, of the Company
will exceed approximately $27,000,000. As of December 1996, this aggregate net
worth, as adjusted, amounted to approximately $36,900,000. As of December 31,
1995 and 1996, there were outstanding borrowings of $13,051,226 and $0,
respectively, included within bank direct acceptances, Hong Kong line of credit
and import trade bills payable.
F-18
<PAGE> 43
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
The provision for domestic and foreign income taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-----------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 637,565 $ 2,673,505
State 70,909 66,046 757,017
Foreign 526,473 996,439 1,324,636
-----------------------------------------------
597,382 1,700,050 4,755,158
Deferred (credit):
Federal - (572,527) (70,081)
State - (163,080) (53,704)
Foreign - (4,187) (3,587)
-----------------------------------------------
(739,794) (127,372)
-----------------------------------------------
Total $ 597,382 $ 960,256 $ 4,627,786
===============================================
</TABLE>
The source of income before the provision for taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-----------------------------------------------
<S> <C> <C> <C>
United States $ 4,609,216 $ 2,396,904 $ 7,425,497
Foreign 3,031,484 5,873,630 7,203,915
-----------------------------------------------
Total $ 7,640,700 $ 8,270,534 $ 14,629,412
===============================================
</TABLE>
For federal and state income tax purposes for fiscal 1994 and 1995 through the
Reorganization, no deferred taxes had been recognized because the taxpaying
entities within the Company and its affiliates were S Corporations. The
effective rate paid by these S Corporations is immaterial to the financial
statements. Foreign deferred income taxes result primarily from temporary
differences in the recognition of bad debt and depreciation expenses for tax and
financial reporting purposes. The resulting foreign deferred income tax
liability amounted to approximately $66,000 and $62,000 at December 31, 1995 and
1996, respectively.
Upon termination of the Subchapter S election, federal and state deferred income
taxes were recognized as an asset by the Company with a corresponding credit to
the statement of income.
F-19
<PAGE> 44
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax provision to the reported
tax provision on income is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------------------------------------------------
<S> <C> <C> <C>
Income tax based on federal statutory rate $ 2,597,838 $ 2,811,981 $ 4,974,000
State income taxes 70,909 43,590 464,186
Effect of Subchapter S tax status (1,575,133) (191,223) -
Deferred income taxes recorded upon change in
tax status from an S Corporation to a
C Corporation - (785,375) -
Effect of foreign income taxes at lower
tax rates (496,232) (1,000,595) (1,128,282)
Other - (12,355) 40,628
Valuation allowance - 94,233 277,254
--------------------------------------------------
$ 597,382 $ 960,256 $ 4,627,786
==================================================
</TABLE>
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 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1996
-------------------------------
<S> <C> <C>
Current deferred tax assets:
Provision for doubtful accounts and unissued credits
$ 714,526 $ 557,961
Provision for other reserves 246,284 617,008
-------------------------------
Total current deferred tax assets 960,810 1,174,969
Valuation allowance for deferred tax assets (94,233) (371,487)
-------------------------------
Net current deferred tax asset $ 866,577 $ 803,482
===============================
</TABLE>
F-20
<PAGE> 45
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into various noncancelable operating lease agreements,
principally for executive office and warehousing facilities, with unexpired
terms in excess of one year. The future minimum lease payments under these
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
--------------------------------
<C> <C> <C>
1997 $ 1,240,548 $ 118,815
1998 1,268,898 8,750
1999 1,268,898 -
2000 1,298,666 -
2001 1,298,666 -
Thereafter 2,996,617 -
--------------------------------
Total future minimum lease payments $ 9,372,293 $ 127,565
================================
</TABLE>
Certain of the operating leases contain provisions for additional rent based
upon increases in the operating costs, as defined, of the premises. Total rent
expense under the operating leases amounted to approximately $660,000,
$1,468,000 and $1,535,000 for 1994, 1995 and 1996, respectively.
The Company had open letters of credit of $14,790,000 and $16,534,000 as of
December 31, 1995 and 1996, respectively.
The Company has two employment agreements with certain executives providing for
base compensation and other incentives. Commitments under these agreements for
base compensation amount to $1,500,000 for 1997.
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of the Company's management, resolution of such
matters will not have a material effect on its financial position or results of
operations.
The Company recorded a $400,000 charge in other expense during the year ended
December 31, 1996 to reflect potential obligations to the Original Shareholders
with respect to an agreement entered into concurrently with the Offering.
F-21
<PAGE> 46
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
10. EQUITY
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company's 1995 Stock Option 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 800,000 shares of the Company's common
stock. The exercise price of incentive options must be equal to 100% of fair
market value of common stock on the date of grant and the exercise price of
non-qualified options must not be less than the par value of a share of common
stock on the date of grant.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1995
and 1996: weighted-average risk-free interest rate of 6%; dividend yields of 0%;
weighted-average volatility factors of the expected market price of the
Company's common stock of .52; and a weighted-average expected life of the
option of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in the
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-22
<PAGE> 47
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
10. EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1995 1996
------------------------------------
<S> <C> <C>
Pro forma net income $ 7,189,607 $ 9,681,860
Pro forma earnings per share $1.34 $1.47
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1996
------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 545,665 $ 9.00
Granted 545,665 9.00 376,000 12.18
Exercised - - (52,276) 7.28
Forfeited - - (121,834) 8.80
------------------------------------------------------
Outstanding at end of year 545,665 $ 9.00 747,555 $ 10.75
======================================================
Exercisable at end of year 50,000 148,164
Weighted average per option fair
value of options granted during
the year $ 4.21 $ 5.93
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$6.00 to $14.75. The weighted average remaining contractual life of those
options is 9.3 years. Options vest over a period of three or four years from
respective grant dates.
F-23
<PAGE> 48
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
11. SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
--------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $ 3,623,854 $ 3,433,049 $ 525,690
==================================================
Cash paid for income taxes $ 321,373 $ 1,036,908 $ 6,036,049
==================================================
Noncash investing and financing transactions:
Distribution to Original Shareholders applied to
advances to Original Shareholders $ 2,690,034 $ - $ -
Distribution to Original Shareholders applied to
advances to noncombined affiliates 1,009,149 - -
Distribution to Original Shareholders of previously
combined corporations 2,923,200 - -
</TABLE>
12. RELATED-PARTY TRANSACTIONS
The Company has provided management and administrative services to noncombined
affiliates, including executive and employee compensation. The management fees
were based on a percentage of the noncombined affiliates' gross sales through
December 31, 1994 and based on net sales thereafter until the last such
noncombined affiliate ceased to operate in the second quarter of 1996. The
Company charged management and administrative fees of $1,022,000, $1,068,000 and
$60,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
Other related-party transactions, consisting primarily of purchases and sales of
finished goods and raw materials, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-----------------------------------------------
<S> <C> <C> <C>
Sales to noncombined affiliates $ 5,711,000 $ 4,399,000 $ 248,000
Sales to other related parties 1,000 809,000 139,000
Purchases from other related parties 14,000 3,379,000 19,000
</TABLE>
F-24
<PAGE> 49
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
12. RELATED-PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1995 and 1996, noncombined affiliates were indebted to the
Company in the amounts of $861,000 and $96,000, respectively. Total interest
paid by noncombined affiliates and the Original Shareholders was $340,935 and
$140,000 for the year ended December 31, 1995 and 1996, respectively. The
Company charged one affiliate interest of $79,128 in the year ended December 31,
1994 on outstanding receivables.
The Company has, from time to time, advanced funds to the Original Shareholders
and to corporations owned by them. The maximum outstanding amounts of such loans
during 1995 and 1996 were $4.7 million and $3.0 million, respectively. Loans
made to the Original Shareholders in 1995 bore interest at the lesser of 12% or
the highest rate permissible by law. These loans were repaid in full, in part by
offset against distributions made to the Original Shareholders, at the closing
of the Offering. Loans in 1996 bore interest at the rate of 8% per annum and
were secured by the borrowers' interest in the Company's principal executive
offices and certain other assets.
In 1996, the Company advanced an aggregate of $2.0 million without interest to a
corporation controlled by parties related to one of the Original Shareholders.
Each such advance was repaid within 15 days.
Under a lease agreement entered into between the Company and another entity
owned by the Original Shareholders, the Company paid $337,000 in 1994,
$1,259,000 in 1995 and $1,240,548 in 1996, for rent for office and warehouse
facilities.
F-25
<PAGE> 50
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
13. OPERATIONS BY GEOGRAPHIC AREAS
The Company operates primarily in one industry segment, the design,
manufacturing and importation of private label, moderately-priced, casual
apparel. Information about the Company's operations in the United States and
Asia is presented below. Intercompany revenues and assets have been eliminated
to arrive at the consolidated amounts.
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED AND
STATES ASIA ELIMINATIONS TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Sales $ 168,847,801 $ 8,259,754 $ - $ 177,107,555
Intercompany sales 2,648,740 88,613,994 (91,262,734) -
----------------------------------------------------------------------
Total revenue $ 171,496,541 $ 96,873,748 $ (91,262,734) $ 177,107,555
======================================================================
Income from operations $ 6,898,560 $ 2,992,230 $ - $ 9,890,790
======================================================================
Total assets $ 24,714,678 $ 32,889,563 $ (13,586,913) $ 44,017,328
======================================================================
1995
Sales $ 200,006,020 $ 5,167,696 $ - $ 205,173,716
Intercompany sales - 117,216,683 (117,216,683) -
----------------------------------------------------------------------
Total revenue $ 200,006,020 $ 122,384,379 $ (117,216,683) $ 205,173,716
======================================================================
Income from operations $ 5,089,066 $ 5,137,443 $ - $ 10,226,509
======================================================================
Total assets $ 45,705,989 $ 39,457,225 $ (27,322,816) $ 57,840,398
======================================================================
1996
Sales $ 226,919,733 $ 2,941,291 $ - $ 229,861,024
Intercompany sales - 140,167,389 (140,167,389) -
----------------------------------------------------------------------
Total revenue $ 226,919,733 $ 143,108,680 $ (140,167,389) $ 229,861,024
======================================================================
Income from operations $ 9,478,767 $ 6,980,103 $ - $ 16,458,870
======================================================================
Total assets $ 51,149,844 $ 41,675,253 $ (29,405,399) $ 63,419,698
======================================================================
</TABLE>
F-26
<PAGE> 51
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
14. EMPLOYEE BENEFIT PLANS
On August 1, 1992, Tarrant HK established a defined contribution retirement plan
covering all of its Hong Kong employees whose period of service exceeds 12
months. Plan assets are monitored by a third-party investment manager and are
segregated from those of Tarrant HK. Participants may contribute up to 5% of
their salary to the plan. Annual matching contributions are made by the Company.
Costs of the plan charged to operations for 1994, 1995 and 1996 amounted to
approximately $18,500 $27,500 and $45,600, respectively.
On July 1, 1994, the Parent Company established a defined contribution
retirement plan covering all of its U.S. employees whose period of service
exceeds 12 months. Plan assets are monitored by a third-party investment manager
and are segregated from those of the Parent Company. Participants may contribute
from 1% to 15% of their pre-tax compensation up to effective limitations
specified by the Internal Revenue Service. The Company's contributions to the
plan are based on a 50% (100% effective July 1, 1995) matching of participants'
contributions, not to exceed 6% (5% effective July 1, 1995) of the participants'
annual compensation. In addition, the Company may also make a discretionary
annual contribution to the plan. Costs of the plan charged to operations for
1994, 1995 and 1996 amounted to approximately $23,000, $68,000 and $120,800,
respectively.
On December 27, 1995, the Company established a deferred compensation plan for
executive officers. Participants may contribute a specific portion of their
salary to such plan. The Company does not contribute to the Plan.
On December 20, 1996, the Compensation Committee of the Company's Board of
Directors established the 1997 Incentive Compensation Plan, which provides for
both discretionary bonuses and bonus amounts upon achieving certain earnings
thresholds for certain members of management. The adoption of the plan is
subject to shareholder approval at the 1997 annual shareholders' meeting.
15. LDA OPTION
The consolidated statements of income reflect a charge related to the granting
by the Original Shareholders of a four-year option (the LDA Option) to Limited
Direct Associates, L.P. (LDA), a limited partnership, the general and limited
partners of which are subsidiaries of The Limited, Inc. and the granting by the
Parent Company of
F-27
<PAGE> 52
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
15. LDA OPTION (CONTINUED)
registration rights to LDA pertaining to the option shares. Historically sales
to divisions of The Limited, Inc. have represented a significant portion of the
Company's sales. Subject to certain anti-dilution provisions, the LDA Option
grants LDA the right to purchase from the Original Shareholders an aggregate of
approximately 10% (649,999 shares) of the Parent Company's common stock at a
price per share of $7.20. For accounting purposes, even though the LDA Option
was granted by the Original Shareholders and will not cover any shares of the
Parent Company's unissued common stock, the LDA Option has been treated as
though it was granted by the Parent Company.
Accordingly, in the quarter ended September 30, 1995, the Parent Company
recorded a nonrecurring charge to earnings, in the amount of $1.7 million, which
equals the $1.4 million estimated fair market value of the LDA Option plus the
$300,000 estimated value of expenses of registration for the offer and sale of
the option shares. The $1.4 million component of this charge was offset by an
equal credit to contributed capital because the Parent Company's capital
structure was not affected by the grant of the LDA Option. The $300,000
component of this charge was recorded as an accrued expense. Because of the
credit to contributed capital, the net impact of this charge on shareholders'
equity was $300,000.
16. PRO FORMA DATA (UNAUDITED)
For federal and state income tax purposes, Tarrant Apparel Group and certain of
its affiliates were treated as S Corporations under Subchapter S of the Internal
Revenue Code of 1986, as amended, and comparable provisions of state income tax
laws through termination on July 28, 1995 in connection with the Reorganization.
Pro forma income taxes have been determined assuming that the Company was a C
Corporation for 1994 and 1995, and therefore, that its U.S. income is taxed at
an effective pro forma tax rate of 40% for each of those years. 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 and the elimination of the
nonrecurring charge to earnings related to the LDA Option in 1995 (Note 16).
Such charge is considered an unusual event and not indicative of the operations
of the on-going entity. In addition, in 1995, pro forma net income and income
per common share has been presented adjusted only for income taxes.
F-28
<PAGE> 53
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------- YEAR ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
----------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1995
Net sales $ 45,264 $ 57,583 $ 58,135 $ 44,192 $ 205,174
Gross profit 6,924 9,205 8,866 7,220 32,215
Operating income 2,049 3,654 2,759(2) 1,765 10,227(2)
Net income 1,393 2,574 1,972(2) 1,371 7,310(2)
Pro forma net income(3) 1,097 2,164 1,042(2) 1,371 5,674(2)
Pro forma net income -
adjusted for LDA
Option (4) - - 2,776 - 7,408
Pro forma net income per
common share(6) $ .24 $ .48 $ .18(2) $ .21 $ 1.06(2)
Pro forma net income per
common share-
adjusted(5) $ - $ - $ .47 $ - $ 1.38
Pro forma weighted
average shares
outstanding (1) 4,500 4,500 5,913 6,500 5,353
1996
Net sales $ 42,093 $ 68,870 $ 50,008 $ 68,890 $ 229,861
Gross profit 7,067 11,267 8,237 11,002 37,573
Operating income 2,360 5,504 3,739 4,856 16,459
Net income 1,490 3,558 2,209 2,745 10,002
Net income per common
share $ .23 $ .55 $ .34 $ .41 $ 1.53
Weighted average shares
outstanding (1) 6,500 6,515 6,513 6,663 6,548
</TABLE>
F-29
<PAGE> 54
Tarrant Apparel Group
Notes to Consolidated Financial Statements (continued)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
(1) Adjusted to give effect to a stock dividend of 14,999 shares for each
outstanding share and the sale by the Parent Company of 2,000,000 shares
in the Offering.
The pro forma weighted average shares outstanding for the quarter ended
March 31, 1995 and quarter ended June 30, 1995 of 4,500 shares have been
adjusted from the 4,900 shares previously reported in the Registration
Statement on Form S-1, as amended, dated May 4, 1995 (the Form S-1) and
Form 10-Q for the quarterly period ended June 30, 1995. The 4,900 shares
included a 400 share adjustment 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.
The pro forma weighted average shares outstanding for the quarter ended
September 30, 1995 of 5,913 shares has been adjusted from the 6,500
shares reported in the Form 10-Q for the quarterly period ended September
30, 1995 to reflect the shares issued in the Offering as outstanding from
the date of issuance rather than January 1, 1995.
(2) Includes $1,734 nonrecurring charge related to the grant by the Original
Shareholders of the LDA Option (Note 15).
(3) Reflects pro forma adjustment for C Corporation income taxes.
(4) Reflects pro forma adjustments for C Corporation taxes and the
elimination of the nonrecurring charge for the LDA Option. The third
quarter pro forma net income of $2,776 has been adjusted from the $3,561
previously reported in the Form 10-Q for the quarterly period ended
September 30, 1995 due to the reversal of a tax credit of $785 from the
pro forma tax provision since this was a one-time benefit of the
termination of the S Corporation status.
(5) Pro forma net income per common share as adjusted reflects both the
effect of the provision for C Corporation taxes and the elimination of
the LDA Option. As noted in (4) above, the per share amount of $.47 for
the third quarter of 1995 has been adjusted from the $.55 previously
reported in the Form 10-Q for the quarterly period ended September 30,
1995 due to the reversal of the tax credit.
(6) Pro forma net income per common share reflects the elimination of the 400
share adjustment as noted in (1) above. Accordingly, the per share
amounts of $.24 and $.48 have been adjusted from the $.22 and $.44
previously reported in the Form S-1 and Form 10-Q for the quarterly
period ended June 30, 1995, respectively.
F-30
<PAGE> 55
Schedule II
Tarrant Apparel Group
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
YEAR EXPENSES ACCOUNTS DEDUCTIONS(1) OF YEAR
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31,
1994
Allowance for returns and
discounts $ 893,633 $ 1,324,085 $ - $ (967,467) $ 1,250,251
For the year ended December 31,
1995
Allowance for returns and
discounts $ 1,250,251 $ 1,251,789 $ - $ (154,290) $ 2,347,750
For the year ended December 31,
1996
Allowance for returns and
discounts $ 2,347,750 $ (432,594) $ - $ - $ 1,915,156
(1) Amounts represent direct write-off.
</TABLE>
F-31
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 5, 1997.
TARRANT APPAREL GROUP
By /s/ GERARD GUEZ
----------------------------
Gerard Guez
Chief Executive Officer
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
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GERARD GUEZ Chairman, Chief Executive Officer and Director March 5, 1997
- ----------------------- (Principal Executive Officer)
Gerard Guez
/s/ TODD KAY President and Director March 5, 1997
- -----------------------
Todd Kay
/s/ CORAZON R. REYES Chief Operating Officer, Secretary and Director March 5, 1997
- -----------------------
Corazon R. Reyes
/s/ MARK B. KRISTOF Vice President - Finance, Chief Financial March 5, 1997
- ----------------------- Officer and Director (Principal Financial and
Mark B. Kristof Accounting Officer)
/s/ KAREN S. WASSERMAN Executive Vice President, General March 5, 1997
- ----------------------- Merchandising Manager and Director
Karen S. Wasserman
/s/ DONALD HECHT Director March 5, 1997
- -----------------------
Donald Hecht
/s/ BARRY S. AVED Director March 5, 1997
- -----------------------
Barry S. Aved
</TABLE>
<PAGE> 1
EXHIBIT 10.48
STANDARD CHARTERED
------------------
Date: 22nd February 1996 Corporate Banking Group
Your Ref: 9/F Chiwan Tower Park Lane Square
Our Ref: CBG/KLN/T&G2/BEJ 1-23 Kimberley Road Tsimshatsui
Kowloon Hong Kong
Telephone (852) 2820 3333
CONFIDENTIAL
- ------------
Tarrant Co. Ltd.
13/F and 14/F Lladro Centre
72-80 Hoi Yuen Road
Kwun Tong, Kowloon
Attn: Mr. Eddy T. Y. Yuen/Mr. Paul P.L. Lau
- --------------------------------------------
Dear Sirs,
BANKING FACILITIES: TARRANT CO. LTD.
We are pleased to confirm that the Bank is willing to make available to your
company (the "Company") the following working capital facilities up to the
amounts indicated.
1. IMPORT FACILITIES - USD10,000,000.-
Sight and usance documentary letters of credit, secured by the underlying goods
and covering the procurement of working capital merchandise, with a
corresponding trust receipt loan facility up to USD10,000,000.- Within this
facility sight and usance documentary letters of credit not secured by the
underlying goods, with a corresponding import loan facility, are available up
to a limited of USD10,000,000.- The combined usance and loan period for any
one transaction is not to exceed 60 days. Prior evidence of insurance will be
required for all "free on board" and "cost and freight" shipments.
The Overdraft and Export Facilities mentioned below will be treated as
sub-limits of the Import Facilities, so that the combined outstandings are not
to exceed the amount of the Import Facilities.
2. CURRENT ACCOUNT OVERDRAFT - HKD10,000,000.-
<PAGE> 2
STANDARD CHARTERED Page 2
- ------------------
Tarrant Co. Ltd.
3. EXPORT FACILITIES - USD7,000,000.-
Purchase of documentary bills unsecured by goods, at sight or on a "documents
against acceptance - D/A" basis with usances of up to 45 days drawn on Tarrant
Apparel Group is available up to a limit of USD5,000,000.-
Negotiation of discrepant documents, secured or unsecured by goods, presented
under export letters of credit issued by banks acceptable to us up to a limited
USD2,000,000.-
INTEREST, COMMISSIONS AND FEES
Unless otherwise specified, interest on all sums advanced will be payable
monthly in arrears at Prime. A default rate of Prime plus 8% per annum will
apply to amounts not pad when due or in excess of agreed facility amounts.
"Prime" means the rate which we announce or apply from time to time as our prim
rate for lending Hong Kong Dollars. Commissions will be charged at our
standard rates unless otherwise stipulated. Hong Kong Dollar export and import
bills will be financed at Prime and United States Dollar export and import
bills will be financed at our standard bills finance rates plus 0.25% per
annum. All past due bills shall bar interest at 3% per annum above the rates
charged on your regular bills outstandings.
Letters of credit commission:
- -----------------------------
1st USD50,000.- 0.25%
2nd USD50,000.- 0.125%
Thereafter 0.0625%
Export commission in lieu of exchange:
- --------------------------------------
1st USD50,000.- 0.25%
Thereafter 0.125%
You will reimburse the Bank for all legal fees and other expenses incurred in
arranging the above facilities.
AVAILABILITY AND REPAYMENT
The above facilities are subject to the Bank's periodic review, and it is
expressly agreed that they will at all times be available at the sole
discretion of the Bank. Notwithstanding any other provisions contained in this
letter or in any other document, the Bank will at all times have the right to
require immediate payment and/or cash collateralisation of all or part of any
sums actually or contingently owing to it.
<PAGE> 3
STANDARD CHARTERED Page 3
- ------------------
Tarrant Co. Ltd.
DOCUMENTATION
Before the above facilities may be used, the enclosed copy of this letter and
the Bank's standard form General Customer Agreement must be signed and returned
to us together with a certified copy of appropriate authorizing board
resolutions.
The following documentation will also be required:
o Corporate guarantee by Tarrant Apparel Group, limited to the principal
amount of USD10,000,000.- plus interest and other charges. Legal
opinion required at least for the first execution.
o UCC filing over the inventory of Tarrant Apparel Group in the U.S.
(excluding domestic inventory and those imported inventory under
letters of credit issued by Wells Fargo Trade Bank).
o Letter from Tarrant Apparel Group undertaking to maintain minimum
tangible networth at not less than USD22,000,000.- and debt-to-equity
ratio not to exceed 2.0:1 at each audited financial year end. Defined
as Total Liabilities (current and long term) divided by Tangible
Networth.
o Negative pledge over the assets of the Company.
o A signed original copy of the Company's audited financial statements
within 9 months after its financial year end. Quarterly results
announcement of Tarrant Apparel Group within 90 days after each period
end and half yearly management accounts of the Company within 120 days
after each period end. Such other information as the Bank may request
from time to time.
UNDERTAKINGS
The Company undertakes to the Bank that it will:
o Allocate Import Letter of Credit business of no less than
USD40,000,000.- per annum to the Bank.
o Maintain pari-passu status amongst all lenders except:-
1. The Hongkong and Shanghai Banking Corporation Ltd. has the right to
receive 30% of the factored of Tarrant Apparel Group against the D/A
bills drawn by the Company on Tarrant Apparel Group.
2. The Hongkong and Shanghai Banking Corporation Ltd. has the key-man
insurance of USD6,000,000.- from Mr. Gerard Guez.
<PAGE> 4
STANDARD CHARTERED Page 4
- ------------------
Tarrant Co. Ltd.
3. Lodgement of Letters of Credit issued by Lerner New York.
o Achieve with The Hongkong and Shanghai Banking Corporation Ltd. actual
release of the debenture over the Company's assets by 31st May 1996.
o Immediately inform the Bank of any proposed change of the Company's
directors or beneficial shareholders or amendment of its memorandum or
articles of association.
By acceptance of this letter the Company gives consent to the Bank to disclose
to the head office and any branch, related company, associate, agent or
representative of Standard Chartered Bank details of the Company's account
relationship with the Bank including credit balances and any security given for
the facilities.
Please sign the enclosed copy of this letter and return it to the Bank's Credit
Administration Unit at its Kowloon Main Office, 9th Floor, Chiwan Tower, Park
Lane Square, 1-23 Kimberley Road, Tsimshatsui, Kowloon, for the attention of
Ms. Kim Yang, within one month after the date of this letter, after which this
offer will lapse. When accepted, this letter will supersede any previous
facility letter which the Bank has issued to the Company. This letter will be
governed by Hong Kong law.
We enclose a set of documents which should also be completed and returned to
the Bank at the above mentioned address. If you have any queries, please
contact Ms. Kim Yang, whose telephone number is 2378-6430.
We are pleased to be of service to you and take this opportunity to thank you
for your custom.
Yours faithfully,
For and on behalf of STANDARD CHARTERED BANK
/s/ Ann Lam /s/ Bernie Ip
- -------------------------- --------------------------
Ann Lam Bernie Ip
Senior Relationship Manager Senior Manager
BI/AL/SL/KY/bn
Encl.
Agreed.
For and on Behalf of TARRANT CO. LTD.
/s/ Paul Lau Po Law /s/ Eddy Yuen Tak Yu
- -------------------------- --------------------------
Paul Lau Po Law Eddy Yuen Tak Yu
<PAGE> 1
EXHIBIT 10.49
STANDARD CHARTERED
Date: 8th March 1996 Corporate Banking Group
9/F Chiwan Tower Park Lane Square
Our Ref: CBG/KLN/T&G2/BEJ 1-23 Kimberley Road Tsimshatsui
Kowloon Hong Kong
Telephone (852) 2820 3333
CONFIDENTIAL
Tarrant Co. Ltd.
13/F and 14/F Lladro Centre
72-80 Hoi Yuen Road
Kwun Tong, Kowloon
Attn: Mr. Eddy T. Y. Yuen/Mr. Paul P.L. Lau
- --------------------------------------------
Dear Sirs,
BANKING FACILITIES: TARRANT CO. LTD.
We refer to our letter dated 22nd February 1996 setting out the facilities made
available to your company (the "Company").
Following our recent discussions, we are pleased to confirm that the terms of
the facilities will be varied as follows:
INTEREST, COMMISSIONS AND FEES
The words 'All past due bills shall bear interest at 3% per annum above the
rates charged on your regular bills outstandings' under this heading will be
replaced by 'All past due bills shall bear interest at 1.5% and 3% per annum
above the rates charged on your regular bills outstandings respectively for
first 60 days overdue and thereafter'.
UNDERTAKINGS
The following Undertaking will no longer be required:-
The Company undertakes to the Bank that it will achieve with The Hongkong and
Shanghai Banking Corporation Ltd. actual release of the debenture over the
Company's assets by 31st May 1996.
<PAGE> 2
STANDARD CHARTERED Page 2
Tarrant Co. Ltd.
CONDITION (New)
The Company will endeavor to achieve with The Hongkong and Shanghai Banking
Corporation Ltd. actual release of the debenture over the Company's assets by
31st May 1996 on the best efforts basis.
The variations set out above will take effect when we have received:
o The enclosed copy of this letter signed by the Company together with
appropriate authorizing board resolutions.
Please sign the enclosed copy of this letter and return it to the Bank's Credit
Administration Unit at its Kowloon Main Office, 9th Floor, Chiwan Tower, Park
Lane Square, 1-23 Kimberley Road, Kowloon, for the attention of Ms. Kim Yang
within one month after the date of this letter, after which this offer of
variations will lapse. When the variations take effect, this letter will amend
the terms of the existing facility letter which the Bank has issued to the
Company, as set out above. In all other respects, the terms of the existing
facility letter will remain in full force and effect. This letter will be
governed by Hong Kong law.
We enclose a set of documents which should also be completed and returned to
the Bank at the above mentioned address. If you have any queries, please
contact Ms. Kim Yang, whose telephone number is 2378-6430.
We are pleased to be of service to you and take this opportunity to thank you
again for your custom.
Yours faithfully,
For and on behalf of STANDARD CHARTERED BANK
/s/ Ann Lam /s/ Bernie Ip
- --------------------------- ---------------------------
Ann Lam Bernie Ip
Senior Relationship Manager Senior Manager
BI/AL/SL/KY/bn
Agreed:
For and on behalf of TARRANT CO. LTD.
/s/ Paul Lau Po Law /s/ Eddy Yuen Tak Yu
- --------------------------- ---------------------------
Paul Lau Po Law Eddy Yuen Tak Yu
<PAGE> 1
EXHIBIT 10.50
STANDARD CHARTERED GUARANTEE - G3 LIMITED (92)
---------------------------
(BY ONE OR MORE LIMITED COMPANIES/
CORPORATIONS)
To: Standard Chartered Bank
1. In consideration of STANDARD CHARTERED BANK (hereinafter called "the
Bank", which expression shall include and extend to its successors and assigns)
granting or continuing banking facilities or other accommodation for so long as
the Bank may think fit to Tarrant Co. Ltd. (hereinafter called the "Customer')
We Tarrant Apparel Group, 3151 East Washington Boulevard, Los Angeles, CA 90023
hereby unconditionally guarantee, undertake and agree on written demand by the
Bank:
(a) to pay and discharge the following (hereinafter called the
"Liabilities"):
(i) all moneys now or hereafter advanced to or paid for or on
account of the Customer (whether alone or jointly with any other
person) by the Bank; and
(ii) all other liabilities of the Customer to the Bank whatsoever,
whether actual or contingent, present or future and including, without
limitation, liabilities incurred as a guarantor or surely together
with all interest thereon and commission, costs, charges and expenses
chargeable by the Bank to the Customer (including legal fees), from
time to time remaining unpaid and undischarged;
PROVIDED ALWAYS that (subject as mentioned in Clause 12) the amount
for which we shall be liable to the Bank under this sub-clause (and
not including any amounts due under sub-clauses (b) and (c) of this
Clause) shall not exceed United States Dollars Ten Million only
(USD 10,000,000.00) plus interest, commission, cost, charges
and expenses as aforesaid;
(b) to pay interest, in the currency in which such sums are denominated,
in the Bank's books on all sums due from us to the Bank under this Guarantee
(hereinafter called the "Guaranteed Sums") or the outstanding balance thereof
from time to time during the period from the date of demand by the Bank as
aforesaid or from the date of discontinuance of this Guarantee by us until the
date when the Guaranteed Sums are discharged in full (after as well as before
judgment) at a rate or rates per annum conclusively certified by the Bank to
be one and one half of one per cent. (1-1/2%) above the rate or rates at which
the Customer would have been liable to pay interest on the amounts demanded by
the Bank under the facilities or other accommodation extended by the Bank to
the Customer (and to the extent permitted by law the Bank shall be entitled to
compound such interest monthly);
(c) to pay all costs and expenses (on a full indemnity basis) arising out
of or in connection with the recovery or attempted recovery by the Bank of
moneys due to the Bank under this Guarantee.
2. This Guarantee shall extend to cover
(a) in the case of the death, bankruptcy or liquidation of the Customer,
all sums which would have been owing to the Bank by the Customer if such death
had occurred or such bankruptcy or liquidation had commenced at the time when
the Bank received actual notice thereof and notwithstanding such death,
bankruptcy or liquidation;
(b) all moneys obtained from or liabilities incurred to the Bank
notwithstanding that the borrowing or the incurring of such liabilities may
have been invalid or in excess of the powers of the Customer or of any
director, attorney, agent or other person purporting to borrow or act on behalf
of the Customer and notwithstanding any other irregularity in the borrowing or
the incurring of such liabilities;
(c) in the event of the discontinuance by any means of this Guarantee, all
cheques, drafts, bills, notes and negotiable instruments drawn by or for the
account of the Customer on the Bank and purporting to be dated on or before the
date when such discontinuance became known to the Bank or (in the case of
notice to discontinue
<PAGE> 2
given hereunder) took effect although presented to or paid by the Bank under
that date and all liabilities of the Customer to the Bank at such date whether
actual or contingent and whether payable forthwith or at some future time and
also all credits then established by the Bank for the Customer.
3. We shall be deemed to be liable as the sole or principal debtor(s) for
the Liabilities and this Guarantee shall be binding on us notwithstanding that
the Customer is not so bound either because the Customer is an infant or under
a disability or is an unincorporated body which is under no liability to
discharge obligations undertaken or purported to be undertaken on its behalf or
for any other reason whatsoever.
4. If this Guarantee is given in respect of the Liabilities of a firm it
shall apply to all moneys borrowed and Liabilities incurred until receipt by
the Bank of actual notice of dissolution of the firm but if there shall be any
other changes in the constitution of the firm this Guarantee shall continue
and, In addition to securing the debts and Liabilities of the firm as
constituted before the change, shall apply to the debts and Liabilities of the
firm as constituted after such change.
5. The Bank may at all times without prejudice to this Guarantee and
without discharging or in any way affecting our liability hereunder:
(a) determine, vary or increase any credit to the Customer;
(b) grant to the Customer or to any other person any time or indulgence;
(c) renew any bills, notes or other negotiable instruments or securities;
(d) deal with, exchange, release, modify or abstain from perfecting or
enforcing any securities or other guarantees or rights which the Bank may now
or hereafter have from or against the Customer or any other person;
(e) compound with the Customer or with any other person or guarantor.
6. This Guarantee shall not be affected by any failure on the Bank's part
to take any security or by the invalidity of any security taken or by any
existing or future agreement by the Bank as to the application of any advances
made or to be made to the Customer. Our liability here under shall not be
discharged or in any way affected by any act or omission on the part of the
Bank under or in relation to this Guarantee or by any course of dealing between
the Bank and us.
7. This Guarantee shall not be considered as satisfied or discharged by
any intermediate payment or satisfaction of the whole or any part of the
Liabilities or by any other matter or thing whatsoever but shall constitute and
be a continuing guarantee to the Bank and shall extend to cover the ultimate
balance of the Liabilities and shall be binding upon us until the expiration of
one month after the receipt by the Bank from us of notice in writing to
discontinue it.
8. This Guarantee shall be in addition to and is not to prejudice or be
prejudiced by any other guarantee or other security whether by way of mortgage,
charge, Iien or otherwise which the Bank may now or at any time hereafter have
or hold from us, the Customer or any other party for all or any part of the
Liabilities and on discharge by payment or otherwise shall remain the property
of the Bank.
9. In the event of this Guarantee being determined or ceasing from any
cause to be binding as a continuing guarantee on us:
a) it shall be lawful for the Bank to continue to provide facilities (as
hereinbefore mentioned) to the Customer and to continue any account with the
Customer notwithstanding such event and our liability for the amount of the
Liabilities at the date this Guarantee is determined shall continue
notwithstanding any subsequent payment to or drawing upon or advance by the
Bank by or to or for or on behalf of the Customer; and
<PAGE> 3
(b) the Bank may forthwith without thereby affecting its rights under this
Guarantee open a new or separate account with the Customer and, if the Bank
does not open a new or separate account, the Bank shall nevertheless be treated
as if it had done so at the time (the "relevant time") that the Bank received
notice or became aware that this Guarantee had determined or ceased to be
binding as a continuing guarantee and as from the relevant time all moneys paid
by or on behalf of the Customer shall be credited or be treated as having been
credited to the new or separate account and shall on settlement of any claim in
respect of this Guarantee not operate to reduce the amount due from the
Customer at the relevant time or the interest thereon unless the person or
persons paying in such moneys shall at the time of payment direct the Bank in
writing to appropriate the sum specially to that purpose.
10. The Bank shall be entitled at all times to place and keep in a
separate or suspense account or accounts to our credit or to the credit of such
other person as the Bank may think fit any moneys received under this Guarantee
or as a result of the exercise of any of its rights against the Customer or any
other surety in respect of the Liabilities for so long and in such manner as
the Bank may determine without any intermediate obligation to apply the same or
any part thereof in or towards the discharge of the Liabilities and the Bank
shall be entitled to prove against us as if any amount standing to the credit
of such account had not been received. We hereby irrevocably waive any right of
appropriation in respect of any sums paid by us.
11. Until all the Liabilities have been fully paid and discharged (and
notwithstanding that we may have discharged the amount of this Guarantee), we
shall not take any step to enforce any right against the Customer or his/their
representatives in respect of this Guarantee or of any moneys paid hereunder or
prove in any bankruptcy, liquidation, administration, winding up or other
proceeding having an effect equivalent thereto of the Customer (each of which
proceedings are hereinafter called a "Liquidation") in respect thereof in
competition with the Bank or claim the benefit of any securities held by the
Bank.
12. We have not taken and, until the Liabilities and Guaranteed Sums have
been discharged and satisfied in full, will not take without the Bank's prior
written consent any security (which for the purposes of this Clause shall
include any promissory note, cheque or bill of exchange) from the Customer in
connection with this Guarantee; and in the event of our having taken or taking
any security in contravention of this provision we will hold the same on trust
for the Bank as further security for the Bank and will forthwith deposit the
same and all documents relating thereto with the Bank and we will account to
the Bank for all moneys at any time received by us in respect thereof and in
default of our so doing the maximum amount for which we are to be liable under
this Guarantee (as set out in Clause 1 (a) above) shall be increased by the
amount by which any dividend in the bankruptcy or in the Liquidation of the
Customer or otherwise payable by the Customer to the Bank is thereby
diminished.
13. Any settlement or discharge between us and the Bank shall be
conditional upon no security (including without limitation, any guarantee)
furnished or payment made to the Bank by the Customer or any other person being
avoided or reduced by virtue of any relevant statutory provisions or enactments
relating to bankruptcy, winding up or liquidation or other proceeding having an
equivalent effect to any of the foregoing for the time being in force in any
jurisdiction and the Bank shall be entitled to retain any security held in
respect of our liability hereunder (hereinafter called the "Guarantee
Security") until the expiration of the period or periods under such provisions
or enactments within which such payment or security could be avoided or reduced
and if within any such period the payment or security is so avoided or reduced
the Bank shall be entitled to retain the Guarantee Security or any part thereof
for and during such further period as the Bank in its entire discretion shall
determine.
14. In any proceedings under or for any other purpose of this Guarantee a
certificate signed by any officer or representative of the Bank certifying the
amount of the Liabilities shall be accepted by us as conclusive evidence
thereof.
15. (a) We will pay and discharge the Liabilities and any interest payable
by us pursuant to Clause 1 (b) hereof, in whatever currency or currencies the
Liabilities are entered in the books of the Bank and if any part of the
Liabilities is entered in a different currency from any other part or parts of
the Liabilities we shall pay and discharge each part of the Liabilities and any
interest payable by us pursuant to Clause 1 (b) hereof, in the currency in which
such part or as the case may be such interest is entered in the books of the
Bank and if any such payment or discharge is subject to any withholding or other
tax, duty, levy, impost or charge imposed or levied by or on behalf of any
government or any political subdivision or taxing authority thereof we shall pay
to the Bank such additional amounts as may be necessary to ensure the receipt by
the Bank of the full amount of the Liabilities and any such interest.
<PAGE> 4
(b) For the purposes of ascertaining at any time and in
particular on the date of any demand hereunder the maximum amount (if any) for
which we are to be liable in accordance with Clause 1 (a) hereof if some or all
of the Liabilities are entered in the books of the Bank in a currency or
currencies other than the currency in which such maximum amount is denominated
(the "Limit Currency") those parts of the Liabilities denominated in currencies
other than the Limit Currency will be converted, notionally, into the Limit
Currency at the rate at which the Bank would sell to us, in accordance with its
usual practices, the currency in which such other parts of the Liabilities are
denominated provided always and we agree that if some or all of the Liabilities
are entered in the books of the Bank in a currency other than the Limit
Currency, and the amount of the Liabilities exceeds the maximum amount
stipulated in Clause 1 (a), the Bank shall be at liberty to elect which parts
of the Liabilities shall be and form part of the Guaranteed Sums.
16. We agree that in addition to any general lien, right to combine or
consolidate accounts, right of set-off or other similar right to which the Bank
may be entitled by law or pursuant to any other agreement, the Bank shall be
entitled at any time and from time to time without notice to us to set-off,
transfer or apply all or any of the moneys from time to time standing to the
credit of any account in our name(s) or of which we are the beneficial owner
with the Bank (regardless of (i) the branch of the Bank at which, or the
currency in which, such account is maintained or (ii) whether such account has
matured or not or is subject to notice or not) in or towards the discharge of
the Liabilities or any other of our obligations under this guarantee and to
purchase therewith for our account any other currency required for such
purpose.
17. Any notice or demand hereunder shall be in writing and shall be deemed
to have been sufficiently given if sent by prepaid (and, if posted to a place
outside Hong Kong, air mail) post to the address of the person to whom such
notice or demand is to be given as appearing herein or to such other address as
such person may from time to time have notified to the Bank and any notice or
demand so sent shall be deemed to have been served on the day following the
date of posting if posted in Hong Kong to an address in Hong Kong and on the
eighth day following posting if posted to or from a place outside Hong Kong and
in proving such service it shall be sufficient to prove that the envelope
containing the notice was properly addressed, stamped and posted.
18. If any one or more of the provisions of this Guarantee or any part or
parts thereof shall be declared or adjudged to be illegal, invalid or
unenforceable under any applicable law, such illegality, invalidity or
unenforceable shall not vitiate any other provisions of this Guarantee and this
Guarantee shall be construed as if such illegal, invalid or unenforceable
provisions were not contained herein.
19. In this Guarantee wherever the context so requires or admits (i) where
the Customer comprises two or more persons all references to the Customer shall
be construed as references to all or any of such persons, (ii) the singular
shall include the plural and vice versa, (iii) the expression "person" shall
mean and include a company, society, corporation, firm or an individual and in
the case of an individual his or her executors, administrators, committee,
receiver or other person lawfully acting on behalf of every such person, (iv)
the expression "this Guarantee" shall be construed as including and extending
to any separate or independent stipulation or agreement herein contained, and
(v) any reference to any statutory provision or enactment shall be deemed to
include a reference to any modification or re-enactment thereof for the time
being in force.
20. Where this Guarantee is signed by more than one party our liability
hereunder shall be joint and several and every agreement and undertaking on our
part shall be construed accordingly and all references to us in this Guarantee
shall, where the context requires or admits, be construed as references to all
or any of us and the Bank shall be at liberty to release or discharge any of us
from the liabilities of this Guarantee or to accept any composition from or
make any other arrangements with any of us without releasing or discharging the
other or others of us or otherwise prejudicing or affecting the rights and
remedies of the Bank against the other or others of us and no one of us shall
be nor shall this Guarantee be released or discharged by any take over,
reconstruction, amalgamation, merger, liquidation or change in the constitution
of any of us.
<PAGE> 5
21. This Guarantee shall remain valid and binding for all purposes
notwithstanding any change by amalgamation, consolidation or otherwise which
may be made in the constitution of the company or corporation by which the
business of the Bank may from time to time be carried on and shall be available
to the company carrying on that business for the time being.
22. This Guarantee is and will remain the property of the Bank
notwithstanding the payment in full of any claim or claims of the Bank
hereunder.
23. This Guarantee shall be governed by and construed in accordance with
the laws of Hong Kong and we hereby submit to the non-exclusive jurisdiction of
the Hong Kong courts.
24. We hereby appoint the person named below (if any) as our agent to
accept service of any legal process in Hong Kong in connection with this
Guarantee. We agree that any writ, summons, order, judgment or other document
shall be deemed duly and sufficiently served on us if addressed to us or to the
said agent and left at, or sent by post to the respective address of us or the
said agent last known to the Bank. The foregoing shall not limit the rights of
the Bank to serve process on us in any manner permitted by law in any
jurisdiction.
25. We agree that the Chinese translation shall not apply in construing
this security and that the English version shall govern for all purposes.
Dated 30th day of August 1996.
---------- ------------------
Name of Process Agent (if any): Tarrant Company Limited
------------------------------------------------
Address of Process Agent: 13F, Lladro Centre
------------------------------------------------
72 Hoi Yuen Road, Kwun Tong
------------------------------------------------
Kowloon, Hong Kong
------------------------------------------------
Corporate Signatory
- -------------------
Signed by:
Gerard Guez, Chairman /s/ Gerard Guez
- ---------------------------- ------------------------------
(Signature of Director)
in the presence of:
Name of Witness: Corazon R. Reyes
---------------------------
I/D Card No.
(or equivalent)
of Witness: N5495511
---------------------------
Address of Witness: 8374 Denise Lane
---------------------------
West Hills, CA 91304
---------------------------
Occupation of Witness: Corporate Secretary /s/ Corazon R. Reyes
------------------------ ----------------------------
Tarrant Apparel Group Signature of Witness
<PAGE> 1
EXHIBIT 10.51
To: Standard Chartered Bank 30th day of August 1996
Hong Kong
LETTER OF UNDERTAKING
---------------------
Dear Sirs,
We refer to the banking facilities made, or to be made available by
Standard Chartered Bank ("the Bank") to Tarrant Company Ltd. ("the Company").
In consideration of the Bank providing or continuing banking
facilities or other accommodation or services to the Company for so long as the
Bank may think fit, and as a continuing security for the payment and discharge
to the Bank on demand of all moneys, obligations and liabilities, whether
actual or contingent, now or at any time hereafter due, owing or incurred by
the Company to the Bank, we hereby undertake to:
* i) maintain minimum tangible net worth no less than
USD22,000,000.-; and
* ii) debt-to equity ratio not to exceed 2.0:1 at each audited
financial year end. Defined as Total Liabilities (current and long term)
divided by Tangible Net Worth.
For the purposes of this undertaking the net worth shall be the
aggregate of:
(a) the amount paid up or credited as paid up on the
issued share capital and
(b) the amounts standing to the credit of the capital
and revenue reserves
all as shown by the latest accounts but after making such adjustments
as the Bank considers appropriate (including deductions for any amount which is
attributable to intangible assets or which has been or is to be distributed to
its shareholders or is necessary to take account of any minority or other
interest in any other company).
We further undertake that we will, promptly on becoming aware of
the same, notify the Bank of any circumstance which gives rise, or may give
rise, to the debt-to-equity ratio being over the figure and the net worth
falling below the figure as stated above.
This letter of undertaking shall be governed by and construed in
accordance with the laws of Hong Kong and we hereby irrevocably submit to the
non-exclusive jurisdiction of the Hong Kong courts.
Yours faithfully,
* Undertakings i) and ii /s/ Mark B. Kristof
apply to consolidated amounts ----------------------
reported by Tarrant Apparel signed by Mark B. Kristof
Group ("TAGS"). The Company a Director
is a 100% subsidiary of TAGS. for and on behalf of
Tarrant Apparel Group
<PAGE> 1
EXHIBIT 10.52
INTERCREDITOR AGREEMENT
-----------------------
This Intercreditor Agreement ("Agreement") is entered into as of
NOVEMBER 1, 1996 between HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
("HKSB") and STANDARD CHARTERED BANK ("SCB"), collectively and singularly
referred to herein as "Lender(s)".
R E C I T A L S
----------------------
A. HKSB has an existing credit facility with Tarrant Company
Limited ("Company") in the aggregate sum of $33,000,000 USD.
B. SCB has committed to lend to Company the aggregate sum of
$10,000,000 USD.
C. From time to time, the Lenders may make advances to Company on
their respective credit facilities and each desires to be secured with respect
to such advances by its respective security interest in Tarrant Apparel Group's
("T.A.G.") inventory.
D. The Lenders desire to enter an agreement upon their respective
rights as regards to T.A.G.'s inventory in which both of them has or may
hereafter have a security interest (see definition of Collateral below).
NOW, THEREFORE, in consideration of the promises and mutual covenants
and agreements contained herein, the parties hereto agree as follows:
1. Definitions
(a) "Credit Facility" means the entire
lending/borrowing facility committed to Company by both Lenders, including but
not limited to, all revolving lines of credit, import/export lines of credit,
term loans and all types of letters of credit.
(b) "Collateral" shall mean inventory, excluding
that certain inventory subject to a Specific Security Interest (defined
hereinafter), now owned or at any time hereinafter acquired by T.A.G. or in
which T.A.G. now has or at any time in the future may acquire any right, title
or interest in, including, but not limited to, all raw materials, work in
progress, finished goods, merchandise, parts and supplies of every kind and
description, including inventory temporarily out of T.A.G.'s custody or
possession, together with all returns on accounts now acquired or to be
acquired by T.A.G. from the Company. Collateral shall also include all books
and records, including electronic data, relating to the foregoing inventory and
information storage devices and media containing such books and records, now
existing or hereafter made, compiled or acquired.
(c) "Event of Default" shall mean (i) the failure
of Company to pay the Obligations (hereinafter defined) on the date when due or
(ii) an Event of Default as that term is defined in the Security Agreement
(defined below) between T.A.G. and HKSB or (iii) an Event of Default as that
term is defined in the Security Agreement (defined below) between T.A.G. and
SCB.
1
<PAGE> 2
(d) "Majority Lender" shall mean the Lender that
has an amount greater than 50% of the Obligations outstanding in the Event of
Default.
(e) "Minority Lender" shall mean the Lender that
has an amount less than 50% of the Obligations outstanding in the Event of a
Default.
(f) "Obligations" shall mean all indebtedness for
borrowed money and other liabilities, direct or contingent, of the Company, and
whether or not yet matured, now or hereafter due or to become due from the
Company to either of the Lenders.
(g) "Pro Rata Share" shall mean that portion of
the Collateral in which each Lender has a security interest and the entitlement
to liquidate, foreclose or otherwise dispose of such Collateral upon an Event
of Default by the Company, equal to the ratio which the Obligations to that
respective Lender bears to the aggregate sum of all Obligations before the
application of any rights of set-off, bankers' liens or the realization upon a
Specific Security Interest.
(h) "Security Agreement(s)" shall mean the
Security Agreement (Guaranty of Tarrant Co., Ltd. Debt) dated June 6, 1995
between HKSB and T.A.G., and the Security Agreement between SCB and T.A.G.
executed on substantially even date herewith.
(i) "Specific Security Interest" means a valid
and perfected security interest of a Lender in goods as to which
(a) the Lender controls possession of
the goods through a document of title, including but without limitation, a bill
of lading; or
(b) the goods are specifically listed or
described in a Trust Receipt or security agreement arising from or related to
an acceptance financing arrangement and delivered to the Lender at or about the
time the security interest attaches.
All other terms contained in this Agreement shall, unless the context
indicates otherwise, have the meanings provided by the California Commercial
Code to the extent the same are defined therein.
2. Priority of Security Interests
(a) A Specific Security Interest of a Lender in goods has
priority to the extent of all Liabilities of the Company to such Lender secured
thereby over any security interest of the other Lender in the same goods
arising under the Security Agreement of the other Lender specified in 1(h).
(b) Other than as set forth herein, this agreement is not
intended to affect HKSB rights or priorities under the Security Agreement
(Tarrant Co. Ltd. draft acceptances) dated June 6, 1995 between HKSB and T.A.G.
3. Liquidation in Event of Default
(a) Upon an Event of Default by Company, the
Lender declaring a default shall notify the other Lender in writing within ten
(10) days of such declaration. The Majority Lender shall then determine, in its
sole and absolute discretion, whether to allow the commencement of liquidation
of the Collateral. In the event Majority Lender decides to proceed with
liquidation of the Collateral, Majority Lender shall act as Minority Lender's
agent and agrees to liquidate the Collateral for the benefit of both Lenders.
Majority Lender shall distribute to Minority Lender the Pro Rata Share of
Minority Lender from the proceeds of the liquidation of the Collateral after
deduction of reasonable expenses (including selling expenses and attorneys'
fees) incurred as a result of the sale, assignment, foreclosure or other
disposition of the Collateral and payment of Majority Lender's Pro Rata Share.
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(b) The Minority Lender shall not, without prior
written approval of Majority Lender, commence to foreclose, liquidate, assign
or otherwise dispose of any Collateral, including Collateral subject to a
purchase money security interest. In the event the Company is in default on
its Obligations to Minority Lender or pursuant to the Security Agreement, the
failure by Majority Lender to liquidate the Collateral shall not constitute a
waiver of any rights and/or remedies Minority Lender may have against the
Company directly.
4. Pari Passu Status Notwithstanding the time of
perfection of each Lender's respective security interest in the Collateral
granted under the respective Security Agreement(s), UCC filings, or otherwise,
each Lender's respective interest in such Collateral shall rank equally in
priority with that of the other Lender, and shall for purposes of this
Agreement be allocated between the Lenders in accordance with that Lender's
respective Pro Rata Share.
5. No Right to Set-Off
(a) If either Lender shall recover an amount in
excess of its Pro Rata Share as a result of the (i) receipt or other
realization of any monies or other property with respect to or on account of
any of the Collateral, including without limitation as a result of the
application of any rights of setoff, bankers' lien or the enforcement of a
Specific Security Interest, or (ii) payment or prepayment by the Company of any
of the Obligations, then such Lender shall either directly transfer or convey
the excess amount to the other Lender or shall make such other arrangements in
respect of such excess as shall result in each Lender receiving its Pro Rata
Share.
(b) The foregoing principles shall also apply in
the event either Lender shall receive any property pursuant to bankruptcy court
order or otherwise, in substitution for monies realized or realizable through
application or availability of the right of setoff.
6. Miscellaneous
(a) The Agreement shall be governed by and
construed according to the laws of the State of California.
(b) This Agreement is solely for the benefit of
the undersigned parties, their respective successors and assigns. No other
person, firm, entity or corporation shall have any right, benefit, priority or
interest under or due to the existence of this Agreement.
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(c) This agreement shall remain in effect until
one Lender gives written notice to the other Lender of its intention to
terminate. No notice of termination shall impair any Specific Security
Interest or other security interest acquired by any Lender prior to the notice
or affect the priorities thereof hereunder.
THE HONGKONG AND SHANGHAI BANKING
CORPORATION LIMITED
By: /s/ James Benoit
------------------------------------
James Benoit
Its: Corporate Relationship Manager
-----------------------------------
Textiles & Garments Division, CIB
STANDARD CHARTERED BANK
By: /s/ Bernie Yip
-----------------------------------
Bernie Yip
Its: Senior Manager, CBG/T&G2
-----------------------------------
-----------------------------------
CONSENT OF TARRANT
-----------------------------------
The undersigned, being the above mentioned Company, having read the
within Agreement, but without in any way confirming the provisions thereof and
without waiving rights it may have against either party, does hereby agree that
if either party to said Agreement purchases a participating interest in the
obligations of the other, then the purchaser shall have all of the rights of
setoff, bankers lien and counterclaim with respect to the Obligations so
purchased as if said Obligations had originally been due or to become due from
the Company directly to the purchaser.
TARRANT COMPANY LIMITED
By: /s/ Paul Lau Po Law
-----------------------------------
Paul Lau Po Law
Title: Director & Financial Controller
--------------------------------
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<PAGE> 1
EXHIBIT 10.53
SECURITY AGREEMENT
------------------
This Security Agreement is made and entered into as of this 1ST day of
NOVEMBER, 1996 by and between STANDARD CHARTERED BANK (the "Bank") and TARRANT
APPAREL GROUP dba FASHION RESOURCE, a California corporation (the "Debtor").
1. Grant of Security Interest. For value received, the Debtor
hereby grants to the Bank a first priority (unless expressly noted otherwise
herein) security interest in and to all of the following property, whether now
owned or existing or hereafter arising, created or acquired (hereinafter
collectively referred to as the "Collateral").
A. Inventory. All inventory now owned or hereafter
acquired by the Debtor from Tarrant Co. Ltd. ("Tarrant"), or its affiliates,
including but not limited to, all raw materials, work in progress, finished
goods, merchandise, parts and supplies of every kind and description, including
inventory temporarily out of the Debtor's custody or possession, together with
all returns on accounts, now acquired or to be acquired by Debtor (the
"Inventory").
B. Books and Records. All now existing or hereafter
made, compiled or acquired books and records, including electronic data,
relating to the foregoing Inventory and information storage device and media
containing such books and records ("Books and Records").
The Bank's security interest in the Collateral shall be a continuing
lien and shall include all proceeds and products of the Collateral including,
but not limited to, the proceeds of any insurance, indemnity, warranty or
guaranty payable to the Debtor from time to time thereon.
2. Security.
(i) The security interest and assignment of rights
contained herein is granted to secure the payment and performance of:
(a) any and all indebtedness, obligations and
liabilities of Debtor to Bank evidenced by or arising
under the facility letter dated February 22, 1996, by
and between Tarrant and Bank (the "Facility Letter")
now or hereafter existing, all renewals, extensions
and modifications thereto, together with all fees
incurred thereon ("Indebtedness") including
Indebtedness which arose pursuant to said Facility
Letter on or after May 8, 1996.
(b) all costs and expenses reasonably incurred by
Bank to obtain, preserve, perfect and enforce the
security interest granted hereby and all other liens
and security interests securing payment of the
Indebtedness, to collect the Indebtedness and to
maintain, preserve and collect the Collateral,
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including, but not limited to, taxes, assessments,
insurance premiums, repairs, reasonable attorneys'
fees and legal expenses, rent, storage charges,
advertising costs, brokerage fees and expenses of
sale;
(c) each and every covenant and condition
contained in this Security Agreement.
(ii) Prior to or concurrently with the execution and
delivery of this Security Agreement, the Company shall file such
financing statements and other documents in such offices as the Bank
may reasonably request to perfect the security interests granted by
this Security Agreement.
3. Debtor's Representations and Warranties. The Debtor hereby
makes the following representations and warranties to the Bank, which
representations and warranties are continuing.
A. Status. If the Debtor is other than an individual
who is not conducting business as a sole proprietorship, the Debtor is a
corporation duly organized and validly existing under the laws of the State of
California and is properly licensed, qualified to do business and in good
standing in, and, where necessary to maintain the Debtor's rights and
privileges, has complied with the fictitious name statute of every jurisdiction
in which the Debtor is doing business.
B. Authority. The execution, delivery and performance
by the Debtor of this Security Agreement and any document, instrument or
agreement required hereunder have been duly authorized and do not and will not:
(i) violate any provision of any law, rule, regulation, writ, judgment or
injunction presently in effect affecting the Debtor; (ii) result in a breach of
or constitute a default under any material agreement to which the Debtor is a
party or by which it or its assets may be bound or affected; (iii) require any
consent or approval of its stockholders or violate any provision of its
articles of incorporation or by-laws, if the Debtor is a corporation; or (iv)
violate any provision of its partnership agreement, if the Debtor is a
partnership.
C. Legal Effect. This Security Agreement constitutes,
and any document, instrument or agreement required hereunder when executed and
delivered will constitute legal, valid and binding obligations of the Debtor
enforceable against the Debtor in accordance with their respective terms.
D. Title to Collateral; Permitted Liens. The Debtor has
good and marketable title to the Collateral and the same is not now and shall
not become subject to any security interest, encumbrance, lien or claim of any
third person other than: (i) liens and security interests to secure the
Indebtedness or other indebtedness owed to the Bank; (ii) liens for taxers,
assessments or similar charges either not yet due or being duly contested in
good faith; (iii) liens of mechanics, materialmen, warehousemen or other like
liens arising in the ordinary course of business and securing obligations which
are not delinquent; (iv) liens and security interests which, as of the date
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<PAGE> 3
hereof, have been disclosed to and approved by the Bank in writing which, as of
the date of this Security Agreement consists solely of those certain UCC-1
Financing Statements recorded by NationsBanc Commercial Corporation as
Instrument Nos. 93-201729 and 94-148385; (v) liens and security interest which,
as of the date hereof, have been disclosed to and approved by the Bank in
writing which, as of the date of this Security Agreement consist of those
certain UCC-2 Financing Statements recorded by Hongkong and Shanghai Banking
Corporation Limited ("HKSB") as Instrument Nos. 95-16360313, 95-16360317 and
95-163603051; and (vi) purchase money liens or purchase money security
interests upon or in any property acquired or held by the Debtor in the
ordinary course of business (collectively "Permitted Liens").
E. Financial Statements. All financial statements,
information and other data now or hereafter submitted to the Bank in connection
with the transaction with respect to which this Security Agreement is entered
into are true, accurate and correct and have been applied. Since the most
recent submission of any such financial statement, information or other data to
the Bank, the Debtor represents and warrants that no material adverse change in
the financial condition or operations as disclosed therein or thereby has
occurred which has not been fully disclosed to the Bank in writing.
F. Litigation. Except as have been disclosed to the
Bank in writing, there are no actions, suits or proceedings pending or, to the
knowledge of the Debtor, threatened against or affecting the Debtor or Tarrant
or their respective properties before any court or administrative agency which,
if determined adversely to the Debtor or Tarrant as the case may be, would have
a material adverse effect on the Debtor's financial condition or operations or
on the Collateral.
G. Taxes. The Debtor and Tarrant have filed all tax
returns required to be filed and paid all taxes shown thereon to be due,
including interest and penalties, other than taxes which are currently payable
without penalty or interest or those which are being duly contested in good
faith.
H. Priority of Security Interest. Debtor hereby grants
Bank a security interest in the Collateral, subject only to the UCC-1 Financing
Statements filed by NationsBanc Commercial Corporation as instrument nos.
93-201729 and 94-148385; the UCC-1 Financing Statements filed by HKSB as
instrument nos. 95-16360313, 95-16360317 and 95-16360305; and to Permitted
Liens for purchase money under subparagraph D(vi) above.
I. Ownership of Debtor. 31% of Debtor's outstanding
shares are publicly traded; 69% of its shares are owned by Mr. Gerald Guez
(66.7% of the 69%) and Mr. Todd Kay (33.3% of the 69%).
J. Ownership of Tarrant. Tarrant is a wholly-owned
subsidiary of Debtor.
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<PAGE> 4
K. Benefits to Debtor; Solvency. The Guarantee by
Debtor of Tarrant's indebtedness to Bank and this Security Agreement are given
by Debtor in consideration, inter alia, of the Bank's conditional agreement to
provide credit facilities to Tarrant. Debtor and Tarrant are interdependent
corporations that, inter alia, Tarrant is a principal supplier of new materials
to Debtor. The extension of credit by Bank to Tarrant substantially benefits
Debtor both directly and indirectly. Debtor is not insolvent and has
sufficient working capital for the conduct of its business, nor would Debtor be
insolvent nor its working capital be impaired if Debtor were required to
satisfy all indebtedness of Tarrant to Bank.
4. Debtor's Covenants. The Debtor covenants and agrees
that, unless the Bank otherwise consents in writing, the Debtor shall at all
times:
A. Maintenance of Insurance. Keep and maintain the
Collateral insured for not less than its full replacement value against all
risks of loss and damage and maintain such other insurance as is usually
carried by companies engaged in similar businesses and owning similar
properties in the same general areas in which the Debtor operates and maintain
such other insurance and coverage as may be required by the Bank. All such
insurance shall be in form and amount and with companies satisfactory to the
Bank. With respect to insurance covering the Collateral, such insurance shall
name the Bank as loss payee pursuant to a loss payable endorsement satisfactory
to Bank or as an additional insured, as its interest may appear, and shall not
be altered or canceled except upon 10 days' prior written notice to the Bank.
Upon the Bank's request, the Debtor shall furnish the Bank with the original
policy or binder of all such insurance.
B. Maintenance of Collateral. Except for Permitted
Liens, keep and maintain the Collateral free and clear of all levies, liens,
encumbrances and other security interests (including, but not limited to, any
lien of attachment, judgment or execution) and defend the Collateral against
any such levy, lien, encumbrance or security interest; comply with all laws,
statutes and regulations pertaining to the Collateral, its use and operation;
execute , file and record such statements, notices and agreements, take such
actions and obtain such certificates and other documents necessary to perfect,
evidence and continue the Bank's security interest in the Collateral and the
priority thereof; maintain accurate and complete records of the Collateral; and
properly care for, house, store and maintain the Collateral in good
condition, free of misuse, abuse and deterioration, other than normal wear
and tear.
C. Intentionally omitted.
D. Location of Inventory. The Inventory is now and
shall at all times hereafter be of good and merchantable quality and free from
defects; is not now and shall not at any time hereafter be stored with a
bailee, warehouseman or similar party without the Bank's prior written consent;
shall at all times be in the Debtor's physical possession except customary
samples; shall not be held by others on consignment, sale on approval, or sale
or return; and shall be kept at the following location(s): 3151 East
Washington Boulevard, Los Angeles, California 90023 and such other locations as
may be designated by Debtor and approved by Bank in writing.
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<PAGE> 5
E. Inspection Rights. At any reasonable time and from
time to time, permit the Bank or any representative thereof to examine and make
copies of the Books and Records and visit the properties of the Debtor and
discuss the business and operations of the Debtor with any employee or
representative thereof. If the Debtor now or at any time hereafter maintains
any Books and Records (including, but not limited to, computer generated
records and computer programs for the generation of such records) in the
possession of a third party, the Debtor hereby agrees to notify such third
party to permit the Bank free access to such Books and Records at all
reasonable times and to provide the Bank with copies of any Books and Records
it may request, all at the Debtor's expense, the amount of which shall be
payable immediately upon demand.
F. Reporting Requirements. Furnish, or cause to be
furnished, to the Bank within ninety (90) days after the end of each fiscal
year of the Debtor, consolidated statements of income, balance sheet, capital
accounts and cash flows of the Debtor and its consolidated subsidiaries for
such fiscal year, setting forth in comparative form the figures as at the end
of and for the previous fiscal year and certified without qualification by
independent certified public accountants of recognized standing reasonably
satisfactory to the Bank, whose opinion shall be in scope and substance
satisfactory to the Bank. Promptly upon the Bank's request, deliver or cause
to be delivered to the Bank such other information pertaining to the Debtor,
the Collateral or such other matters as the Bank may reasonably request.
G. Transfer of Collateral. Not sell, contract for sale,
convey, transfer, assign, lease or sublet any of the Collateral except in the
ordinary course of business as presently conducted by the Debtor and then, only
for full, fair and reasonable consideration.
H. Payment of Obligations. Pay, and cause Tarrant to
pay, all their respective liabilities and obligations, when due.
I. Compensation of Employees. Compensate its employees
for services rendered at an hourly rate at least qual to the minimum hourly
rate prescribed by any applicable federal or state law or regulation.
J. Notices. Give the Bank prompt written notice of:
(i) any change in its place of business; (ii) any proposed or actual change in
its name, identity or business nature; (iii) any Event of Default; (iv)
litigation, arbitration or administrative proceedings to which the Debtor is a
party and in which the claim or liability exceeds 10% of Tangible Net Worth
(which means the gross book value of Debtor's assets (exclusive of goodwill,
patents, trademarks, trade names, organization expense, treasury stock,
deferred research and development costs, deferred marketing expenses and other
like intangibles), less liabilities of Debtor) or which affects the Collateral
in any way; and (v) any other matter which has resulted in, or might result in,
a material adverse change on the Collateral or the financial condition or
business operations of the Debtor.
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<PAGE> 6
K. Delivery of Documents. Promptly deliver, upon Bank's
request, any further information or documentation required to establish due
authorization of this Agreement and/or to further perfect or otherwise carry
out the intentions of Bank and Debtor.
L. Indemnity. The Debtor will indemnify and hold
harmless the Bank and its respective employees, representatives, officers and
directors from and against any and all claims, liabilities, losses, damages,
actions, and demands by any party (other than with respect to any claims,
actions or demands made by other such indemnified parties or any liabilities,
losses or damages caused thereby) against the Bank, resulting from any breach
or alleged breach by the Debtor of any representation or warranty made
hereunder, or otherwise arising out of the commitment of the making or
administration of the Indebtedness unless the Bank is determined to have acted
or failed to act with gross negligence or willful misconduct.
5. Events of Default. Any one or more of the following described
events shall constitute an event of default ("Event of Default") hereunder:
A. The occurrences of a default by Debtor with respect
to the Indebtedness.
B. The failure by Debtor in any material respect to
perform or observe any term, covenant or agreement contained in this Security
Agreement, or any other agreement memorializing, securing or supporting the
Indebtedness.
C. The occurrence of a default by Tarrant Co. Ltd. under
its obligations to the Bank under the Facility Letter.
D. Any representation or warranty made under this
Security Agreement shall prove incorrect or misleading in any material respect
when made.
E. There shall be entered a decree or order by a court
having jurisdiction in the premises constituting an order for relief in respect
of the Debtor under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other applicable federal or state bankruptcy law or
other similar law, or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator or similar official of the Debtor or of any substantial
part of its property, or ordering the winding-up or liquidation of the affairs
of the Debtor or an involuntary petition or case is filed or commenced against
the Debtor, and a temporary stay entered and any such decree or order shall
continue unstayed and in effect for a period of forty-five (45) consecutive
days or similar events shall occur with respect to Tarrant under Hong Kong law.
F. The Debtor shall file a petition, answer or consent
seeking relief under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other applicable federal or state bankruptcy law or
other similar law, or the Debtor shall consent to the institution of proceedings
thereunder or to the filing of any such petition or to the appointment or taking
of possession of a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Debtor or of any substantial part
of its property, or the Debtor shall fail generally to pay its debts as they
become due, or admit in writing its inability to pay its debts as they become
due, or the Debtor shall authorize any such action, or Tarrant shall take
similar actions under Hong Kong law.
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<PAGE> 7
6. Bank's Rights and Remedies on Default. Upon the occurrence of
any Event of Default, the Bank may, at its sole and absolute election, without
demand and only upon such notice as may be required by law:
A. Acceleration. Declare the Indebtedness and any or
all other indebtedness owing to the Bank by the Debtor or any obligor on the
Indebtedness (however such indebtedness may be evidenced or secured)
immediately due and payable, whether or not otherwise due and payable.
B. Cease Extending Credit. Cease extending credit to or
for the account of the Tarrant, Debtor or any other guarantor of Tarrant's
indebtedness to Bank under any agreement now existing or hereafter entered into
with the Bank.
C. Termination. Terminate any agreement as to any
future obligation of the Bank without affecting the Debtor's obligations to the
Bank or the Bank's rights and remedies under this Security Agreement or under
any other document, instrument or agreement.
D. Segregate Collections. Require the Debtor to
segregate all collections and proceeds of the Collateral so that they are
capable of identification and to deliver such collections and proceeds to the
Bank, in kind, without commingling, at such times and in such manner as
required by the Bank.
E. Records of Collateral. Require the Debtor to deliver
periodically to the Bank all Books and Records and any other information
showing the status, condition and location of the Collateral and such contracts
or other matters which affect the Collateral. In connection herewith, the Bank
may conduct such audits or other examination of such records, including, but
not limited to, verification of balances owing by any account debtor of the
Debtor, as the Bank, in its sole and absolute discretion, deems necessary.
F. Notification of Account Debtors. Notify any or all
of the Debtor's account debtors, buyers or transferees of the Collateral, or
other persons of the Bank's interest in the Collateral and the proceeds thereof
and instruct such person(s) to thereafter make any payment due the Debtor
directly to the Bank.
The Debtor hereby irrevocably constitutes and appoints the Bank
as its attorney-in-fact to (i) endorse the Debtor's name on any notes,
acceptances, checks, drafts, money orders or other evidence of payment that may
come into the Bank's possession; (ii) sign the Debtor's name on any invoice or
bill of lading relating to any of the Collateral; (iii) notify post office
authorities to change the address for delivery of mail addressed to the Debtor
to such address as the Bank may designate and take possession of and open mail
addressed to the Debtor and remove therefrom proceeds of and payments on the
Collateral; and (iv) demand, receive and enforce payment and give receipts,
releases and satisfactions for and sue for all money payable to the Debtor. All
of the preceding may be done either in the name of the Bank or in the name of
the Debtor with the same force and effect as the Debtor could have done had this
Security Agreement not been entered into.
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<PAGE> 8
G. Compromise. Grant extensions, compromise claims and
settle any accounts for less than the amount owing thereunder, all without
notice to the Debtor or any obligor on or any guarantor of the Indebtedness.
H. Protection of Security Interest in Collateral. Make
such payments and do such acts as the Bank, in its sole judgment, considers
necessary and reasonable to protect its security interest in the Collateral.
The Debtor hereby irrevocably authorizes the Bank to pay, purchase, contest or
compromise any encumbrance, lien or claim which the Bank, in its sole judgment,
deems to be prior or superior to its security interest. Further, the Debtor
hereby agrees to pay to the Bank, upon demand therefor, all expenses and
expenditures (including attorneys' fees) incurred in connection with the
foregoing.
I. Foreclosure. Enforce any security interest or lien
given or provided for under this Security Agreement or under any other document
relating to the Collateral, in such manner and such order, as to all or any
part of the Collateral, as the Bank, in its sole judgment, deems to be
necessary or appropriate and the Debtor hereby waives any and all rights,
obligations or defenses now or hereafter established by law relating to the
foregoing. In the enforcement of its security interest in the Collateral, the
Bank is authorized to enter upon the premises where any Collateral is located
and take possession of the Collateral or any part thereof, together with the
Debtor's records pertaining thereto, or the Bank may require the Debtor to
assemble the Collateral and records pertaining thereto and make such Collateral
and records available to the Bank at a place designated by the Bank. The Bank
may sell the Collateral or any portions thereof, together with all additions,
accessions and accessories thereto, giving only such notices and following only
such procedures as are required by law, at either a public or private sale, or
both, with or without having the Collateral present at the time of sale, which
sale shall be on such terms and conditions and conducted in such manner as the
Bank determines in its sole judgment to be commercially reasonable. Any
deficiency which exists after the disposition or liquidation of the Collateral
shall be a continuing liability of any obligor on or any guarantor of the
Indebtedness and shall be immediately paid to the Bank.
J. Non-Exclusivity of Remedies. Exercise one or more of
the Bank's rights set forth herein or seek such other rights or pursue such
other remedies as may be provided by law, in equity or in any other agreement
now existing or hereafter entered into between the Bank and the Debtor or any
obligor on or guarantor of the Indebtedness, or otherwise.
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<PAGE> 9
K. Application of Proceeds. All amounts in deposit
accounts held and received by the Bank as proceeds from the disposition or
liquidation of the Collateral shall be applied as follows: first, to the costs
and expenses of collection, including court costs and reasonable attorneys'
fees, whether or not suit is commenced by the Bank; next, to those costs and
expenses incurred by the Bank in protecting, preserving, enforcing, collecting,
selling or disposing of the Collateral; next, to the payment of accrued and
unpaid interest or fees on all of the Indebtedness; next, to the payment of the
outstanding principal balance of the Indebtedness; and last, to the payment of
any other indebtedness owed by the Debtor to the Bank. Such application may be
made in the case of cash or monies including funds in Bank's possession prior
to an Event of Default or after, without the necessity of a sale of Collateral,
and such application shall not constitute retention of Collateral in
satisfaction of the Indebtedness. Any excess Collateral or excess proceeds
existing after the collection or disposition or liquidation of the Collateral
will be returned or paid by the Bank to the Debtor.
L. Cumulative Rights. The rights, powers and remedies
of Bank under this Security Agreement shall be in addition to all rights,
powers and remedies given to Bank by virtue of any statute or rule of law, the
loan documents between Bank and Tarrant or any other agreement, all of which
rights, powers and remedies shall be cumulative and may be exercised
successively or concurrently without impairing Bank's interest in the
Collateral.
7. Miscellaneous.
A. Amounts Payable Under This Security Agreement. If
the Debtor fails to pay on demand the amount of any obligation referred to in
this Security Agreement, the Bank may pay such amount at its option and without
any obligation to do so and without waiving any default occasioned by the
Debtor's failure to pay such amount. All amounts so paid by the Bank, together
with reasonable attorneys' fees and all other costs, charges and expenses
relating to the Indebtedness, shall be a part of the Indebtedness and shall
bear interest at the highest rate chargeable on any Indebtedness until paid in
full.
B. Other Terms. Terms not otherwise defined in this
Security Agreement shall have the meanings attributed to such terms in the
California Uniform Commercial Code.
C. Reliance. Each warranty, representation, covenant
and agreement contained in this Security Agreement shall be conclusively
presumed to have been relied upon by the Bank regardless of any investigation
made or information possessed by the Bank and shall be cumulative and in
addition to any other warranties, representations, covenants or agreements
which the Debtor shall now or hereafter give, or cause to be given, to the
Bank.
D. Attorneys' Fees. In the event of any action in
relation to this Security Agreement, the Collateral or any document, instrument
or agreement secured hereby or related hereto, the prevailing party, in
addition to all other sums to which it may be entitled, shall be entitled to
reasonable attorneys' fees.
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<PAGE> 10
E. Notices. All notices, payments, requests,
information and demands which either party hereto may desire, or be required to
give or make to the other party, shall be given or delivered to such party in
writing by telecopier to the telecopier numbers as specified below, addressed
to the address set forth below such party's signature to this Security
Agreement or to such other address as may be specified from time to time in
writing by either party to the other.
F. Waiver. Neither the failure nor delay by the Bank in
exercising any right hereunder or under any document, instrument or agreement
mentioned herein shall operate as a waiver thereof, nor shall any single or
partial exercise of any right hereunder or under any other document, instrument
or agreement mentioned herein preclude other or further exercise thereof or the
exercise of any other right nor shall any waiver of any right or default
hereunder or under any other document, instrument or agreement mentioned herein
constitute a waiver of any other right or default or constitute a waiver of any
other default of the same or any other term or provision.
G. Assignment. This Security Agreement shall be binding
upon and inure to the benefit of the Debtor and the Bank and their respective
successors and assigns, except that the Debtor shall not have the right to
assign its rights hereunder or any interest herein without the Bank's prior
written consent. The Bank may sell or assign all or any portion of its rights
and benefits hereunder and, in connection therewith, may deliver to such
prospective buyer or assignee financial statements and other relevant
information pertaining to the Debtor or any obligor on the Indebtedness.
H. Severability. If any provision hereof is invalid and
unenforceable in any jurisdiction, then, to the fullest extent permitted by
law, (i) the other provisions hereof shall remain in fully force and effect in
such jurisdiction and shall be liberally construed in favor of the Bank in
order to carry out the intentions of the parties hereto as nearly as may be
possible, (ii) such provision shall be ineffective, but only to the extent of
such invalidity and unenforceability, and (iii) the invalidity or
unenforceability of any provision hereof in any jurisdiction shall not affect
the validity or enforceability of such provision in any other jurisdiction.
I. Jurisdiction. This Security Agreement and the rights
of the parties hereunder to and concerning the Collateral, and any documents,
instruments or agreements mentioned or referred to herein, shall be governed by
and construed according to the laws of the State of California.
J. WAIVER OF JURY TRIAL. THE DEBTOR AND THE BANK HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING IN ANY WAY ARISING OUT OF OR RELATED TO THIS AGREEMENT
AND AGREE THAT ANY SUCH ACTION OR PROCEEDINGS SHALL BE TRIED BEFORE A COURT AND
NOT BEFORE A JURY. THE DEBTOR REPRESENTS AND WARRANTS THAT NO REPRESENTATIVE
OR AGENT OF THE BANK WAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE BANK
WILL NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THIS WAIVER OF
10
<PAGE> 11
JURY TRIAL. THE DEBTOR ACKNOWLEDGES THAT THE BANK HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT IN RELIANCE UPON, AMONG OTHER THINGS, THE PROVISIONS OF
THIS PARAGRAPH.
K. Counterparts. This Security Agreement may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument and either of the parties hereto may
execute this Security Agreement by signing any such counterpart.
L. Legal Representation. Walker, Wright, Tyler & Ward
acted as scrivener for this agreement but did not represent the Secured Party
nor the Debtor in negotiating this agreement and is not responsible to either
of said parties for the form or content of the agreement.
DEBTOR:
TARRANT APPAREL GROUP dba
FASHION RESOURCE, a California
corporation
By: /s/ Mark B. Kristof
-----------------------------------
Mark B. Kristof
Its: Vice President-Finance & C.F.O.
-----------------------------------
Address: 3151 East Washington Boulevard
Los Angeles, CA 90023
Telecopier: (213) 780-0751
BANK:
STANDARD CHARTERED BANK
By: /s/ Bernie Yip
-----------------------------------
Bernie Yip
Its: Senior Manager, CBG/T&G2
----------------------------------
Address: Room 705-6, Tower 1
Cheung Sha Wan Plaza
Kowloon, Hong Kong
Attention: Corporate Banking Group
Telecopier: 011-852-2371-2953
11
<PAGE> 1
EXHIBIT 10.54
AMENDMENT TO
SECURITY AGREEMENT
(Guaranty of Tarrant Co. Ltd. Debt)
Dated June 6, 1995
The Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) dated June
6, 1995, (the "Security Agreement") between THE HONGKONG AND SHANGHAI BANKING
CORPORATION LIMITED (the "Bank") and TARRANT APPAREL GROUP dba FASHION
RESOURCE, a California corporation (the "Debtor") is hereby amended as of
NOVEMBER 1, 1996:
Paragraphs 1.A., 3.I., 3.J., 4.G., 4.J. and 7.E. are amended in their
entirety to read as follows:
1.A.
A. Inventory. All inventory now owned or hereafter
acquired by the Debtor from Tarrant Co. Ltd. ("Tarrant"), or its affiliates,
including, but not limited to, all raw materials, work in process, finished
goods, merchandise, parts and supplies of every kind and description, including
inventory temporarily out of the Debtor's custody or possession (the
"Inventory").
3.I.
I. Ownership of Debtor. 31% of Debtor's outstanding
shares are publicly traded; 69% of its shares are owned by Mr. Gerald Guez
(66.7% of the 69%) and Mr. Todd Kay (33.3% of the 69%).
3.J.
J. Ownership of Tarrant. Tarrant is a wholly-owned
subsidiary of Debtor.
4.G.
G. Transfer of Collateral. Not sell, contract for sale,
convey, transfer, assign, lease or sublet any of the Collateral except in the
ordinary course of business as presently conducted by the Debtor.
4.J.
J. Notices. Give the Bank prompt written notice of: (i)
any change in its place of business; (ii) any proposed or actual change in its
name, identity or business nature; (iii) any Event of Default; (iv) litigation,
arbitration or administrative proceedings to which the Debtor is a party and in
which the claim or liability exceeds 10% of Tangible Net Worth (which means the
gross book value of Debtor's assets (exclusive of goodwill, patents,
trademarks, tradenames, organization expense, treasury stock, deferred research
and development costs, deferred marketing expenses and other like intangibles),
less liabilities of Debtor) or which affects the Collateral; and (v) any other
matter which has resulted in, or is likely to result in, a material adverse
change in the Collateral or the financial condition or business operations of
the Debtor.
<PAGE> 2
7.E.
E. Notices. All notices, payments, requests,
information and demands which either party hereto may desire, or be required to
give or make to the other party, shall be given or made to such party by
telecopier to the telecopier numbers as specified below, by hand delivery or
through deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed to the address set forth below such party's signature to
this Security Agreement or to such other address as may be specified from time
to time in writing by either party to the other.
Paragraphs 5E, 5F and 6F are deleted in their entirety.
Address: HONGKONG AND SHANGHAI
1 Queens Road Central BANKING CORPORATION LIMITED
Hong Kong
Telecopier: 011-852-2877-5442 By: /s/ James Benoit
---------------------------------
James Benoit
Its: Corporate Relationship Manager
--------------------------------
Address: TARRANT APPAREL GROUP, dba
3151 East Washington Boulevard FASHION RESOURCE, a California
Los Angeles, California 90023 corporation
Telecopier: (213) 881-0368
By: /s/ Mark B. Kristof
---------------------------------
Mark B. Kristof
Its: Vice President-Finance & C.F.O.
--------------------------------
<PAGE> 1
EXHIBIT 10.55
THIS AGREEMENT is made the 29th day of January 97.
BETWEEN: -
(1) TARRANT COMPANY LIMITED ("TCL")
(2) CHEUNG SHING HONG HOLDING LTD ("CSHHL")
(3) YIP SIK KIN and LAM KIN FONG ("Mr. & Mrs. Yip")
WHEREAS: -
(1) By a Preliminary Agreement dated 14th March 1995 as supplemented by a
Supplementary Agreement dated 17th March 1995 and a Supplementary
Agreement dated 20th January, 1996 (hereinafter called the "S/P
Agreement"), Mr. & Mrs. Yip agreed to purchase from TCL 50% of the
issued shares in Litex Limited (the "Company") for the consideration
of US$2,000,000.00 ("Share Consideration") and subject to and on the
terms and conditions therein contained.
(2) Pursuant to the S/P Agreement, Mr. & Mrs. Yip have made part payment
of the Share Consideration and have procured Champion Pacific Limited
("CPL") to supply TCL with certain quantities of garments.
(3) As at the date hereof, the amount of Share Consideration remaining
unpaid by Mr. & Mrs. Yip is HK $6,500,575.05, a break-down of which is
as follows: -
<TABLE>
<S> <C>
Share Consideration (US$2,000,000.00 at the rate
of US $1 to US $7.75) 15,500,000.00
Amount Paid on 22/3/95 4,220,000.00
Less: Deduction from Garments supplied by CPL 4,779,424.95
-------------
$6,500,575.05
=============
</TABLE>
(4) Disputes have arisen between the parties as to whether TCL has placed
sufficient orders for garments with CPL to allow deductions to be made
from garment purchases, with which to pay the Share Consideration.
(5) After negotiations, both parties have agreed to resolve their disputes
amicably on the following terms and conditions.
1
<PAGE> 2
NOW IT IS HEREBY AGREED as follows :
1. The parties hereto shall complete the sale and purchase of the 50% of
the issued shares in the Company owned by TCL ("Litex Shares") in the
following manner: -
1.1 Two (2) copies of this Agreement shall be first signed by
Mr. and Mrs. Yip and CSHHL and sent to Deacons Graham & James
("DGJ").
1.2 Within two (2) business days from receipt of the Agreement by
DGJ, TCL shall return or procure the following to Gallant Y. T.
& Ho ("GYTHO"):
(a ) a copy of this Agreement duly executed by TCL;
(b) the necessary instruments of transfer and contract notes
duly executed by TCL to transfer the Litex Shares to CSHHL;
(c) the necessary instruments of transfer and contract notes
relating to 5,000 shares in CPL held by Ms. Tam Yuet Ngan
("Ms. Tam") duly executed by Ms. Tam to transfer the said
shares in CPL to Ms. Wong Yuen Kwan;
(d) the appointment of new directors of the Company as
assigned by Mr. and Mrs. Yip duly signed by TCL;
(e) the appointment of Messrs. Peter Y.C. Lau & Co. as the
Company's accountants duly signed by TCL;
(f) the share certificates of the Litex Shares;
(g) the bank drafts referred to in Clause 3 below; and
(h) confirmation for audit purposes as at the date of
completion as follows:
(i) no payment is due to CPL by Ms. Tam and vise versa;
(ii) no payment is due to the Company by TCL and vice
versa;
(iii) no payment is due to CPL by TCL and vice versa;
(iv) no payment is due to CSHHL by TCL and vice versa;
(v) no payment is due to Multi-Delight Industrial
Limited ("MIL") by TCL and vice versa;
(vi) no payment is due to Ms. Lam Kin Fong by TCL and
vice versa; and
2
<PAGE> 3
(vii) no payment is due to Mr. Yip Sik Kin by TCL and
vice versa.
1.3 Upon confirmation by GYTHO of safe receipt of the documents
referred to in Clause 1.2 above, Mr. and Mrs. Yip shall send
within two days a bank draft in the sum of HK$3,250,287.50 (the
"P/P Bank Draft") to DGJ. Upon confirmation of receipt of the
P/P bank Draft to GYTHO by DGJ, GYTHO may release the bank drafts
referred to in Clause 3 below to Mr. and Mrs Yip and all the
executed instruments of transfer and contact notes and other
corporate documents relating to this transaction shall be
forwarded to the accountants of the Company, Messrs. Peter Y. C.
Lau & Co., to handle the stamping and subsequent corporate
secretarial work.
2. Upon completion of the sale and purchase of the Litex Shares pursuant
to Clause 1 above and the settlement of outstanding accounts between
TCL and the companies associated with Mr. and Mrs. Yip pursuant to
Clause 3 below, each the parties hereto shall be deemed to have
completely performed their respective obligations under the S/P
Agreement and in particular:
(a) the Share Consideration shall be deemed to have been fully paid
and satisfied by Mr. and Mrs. Yip.
(b) TCL has no obligation to place further orders with CPL and CPL
has no obligation to accept further orders from TCL.
3. In order to settle all outstanding trading matters between TCL and the
companies associated with Mr. and Mrs. Yip, TCL shall also provide the
following to Mr. and Mrs. Yip upon completion of the sale and purchase
of the Litex Shares pursuant to Clause 1 above:
(a) TCL shall pay to CPL HK$280,929.85 by bank draft in settlement
of outstanding debts due by TCL to CPL for garments, accessories
and fabric supplied by CPL to TCL between February, 1995 and
November, 1996;
(b) TCL shall pay to MIL HK$8,486.83 by bank draft in settlement of
outstanding debts due by TCL to MIL for fabric supplied by MIL
to CPL in February, 1995 and transportation charges; and
(c) Wearbest Garment Manufacturing Co. Ltd. ("WGM") shall pay to CPL
for HK$608,337.18 by bank draft in settlement of outstanding
debts due by WGM to CPL for garments supplied by CPL to WGM in
September, 1996.
4. For the avoidance of doubt, the parties hereto acknowledge that Mr. &
Mrs. Yip had not been consulted prior to the issue of the prospectus
by TCL and Mr & Mrs. Yip accept no responsibility should the
references made to the Company and/or CPL in the prospectus have been
inaccurate or incorrect.
3
<PAGE> 4
5. The parties hereto acknowledge and agree that, TCL, Ms. Tam, Mr. Yuen
Tak Yu and Mr. Lau Po Law have no knowledge and have received no
details of the accounts and tax position of the Company and CPL for
1994-1997, and accept no liabilities or responsibilities whatsoever in
relation to the accounts, tax returns and tax payment of the Company
and CPL for 1994-1997. TCL shall not and shall procure that Mr. Yuen
Tak Yu, Mr. Lau Po Law and Ms. Tam shall not take any actions or suits
or make any claims or demands whatsoever against Mr. and Mrs. Yip,
the Company and CPL in respect of accounting and tax matters of the
Company and CPL for 1994-1997. Mr. and Mrs. Yip agree and shall
procure the Company and CPL to agree to indemnify TCL, Mr. Yuen Tak
Yu, Mr. Lau Po Law and Ms. Tam for and against any loss, damages and
costs arising from any actions, suits, claim or demands whatsoever
raised by any third parties in respect of accounting and tax matters
of the Company and CPL for 1994-1997 save and except where such
actions, suits, claims or demands arose as a result of any actions
taken or documents signed by TCL, Mr. Yuen Tak Yu, Mr. Lau Po Law
and/or Ms. Tam during their tenure as shareholders and/or directors of
the Company and CPL without the consent of Mr. and Ms. Yip in respect
of which the person(s) taking such actions or signing such documents
shall assume personal responsibility therefor.
6. Each party shall pay their own costs for and incidental to the
preparation of this Agreement and the transfer of the Litex Shares by
TCL to CSHHL. Stamp duty payable on the transfer of the Litex Shares
shall be paid by CSHHL.
7. This Agreement shall supersede all and any previous proposals,
representations, warranties, agreements or arrangements between the
parties hereto or any of them relating to the subject matter of this
Agreement and no variation or modification of this Agreement shall be
effective unless made in writing and signed by each of the parties.
8. This Agreement shall be governed by and construed in accordance with
the laws of Hong Kong.
4
<PAGE> 5
<TABLE>
<S> <C> <C>
TARRANT COMPANY LTD. CHEUNG SHING HONG YIP SIK KIN &
HOLDING LTD. LAM KIN FONG
/s/ Yuen Tak Yu /s/ Yip Sik Kin /s/ Yip Sik Kin
- ----------------------------------- ---------------------------------- --------------------------
Name: Yuen Tak Yu Name: Yip Sik Kin Yip Sik Kin
For and on behalf of CHEUNG
SHING HONG HOLDING LTD. /s/ Lam Kin Fong
-----------------------
Lam Kin Fong
Witness: Witness: Witness:
/s/ Lau Po Law /s/ Yip Laz Z. /s/ Lam Yuk Fun
- ----------------------------------- ------------------------------------ ------------------------
Name: Lau Po Law Name: Yip Laz Z. Name: Lam Yuk Fun
</TABLE>
5
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-3448) pertaining to the 1995 Stock Option Plan of Tarrant Apparel
Group our report dated February 18, 1997, with respect to the consolidated
financial statements and schedules of Tarrant Apparel Group included in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Los Angeles, California
February 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH DECEMBER 31, 1996 FORM 10-K FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,120,456
<SECURITIES> 0
<RECEIVABLES> 46,399,040
<ALLOWANCES> 1,915,156
<INVENTORY> 10,820,169
<CURRENT-ASSETS> 60,496,350
<PP&E> 4,810,062
<DEPRECIATION> 2,191,193
<TOTAL-ASSETS> 63,419,698
<CURRENT-LIABILITIES> 21,466,967
<BONDS> 0
0
0
<COMMON> 15,485,734
<OTHER-SE> 21,466,997
<TOTAL-LIABILITY-AND-EQUITY> 63,419,698
<SALES> 229,861,024
<TOTAL-REVENUES> 229,896,300
<CGS> 192,287,596
<TOTAL-COSTS> 192,287,596
<OTHER-EXPENSES> 21,114,558
<LOSS-PROVISION> 179,025
<INTEREST-EXPENSE> 1,864,737
<INCOME-PRETAX> 14,629,412
<INCOME-TAX> 4,627,786
<INCOME-CONTINUING> 10,001,626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,001,626
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 0
</TABLE>
