<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the quarterly period ended June 30, 1997
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the transition period from _____________ to
_____________
Commission File Number: 0-26430
TARRANT APPAREL GROUP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4181026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3151 EAST WASHINGTON BOULEVARD
LOS ANGELES, CALIFORNIA 90023
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (213) 780-8250
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares of Common Stock of the registrant outstanding as of July 29,
1997 was 6,601,414.
1
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TARRANT APPAREL GROUP
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996 (Audited)..................... 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1997 and June 30, 1996........ 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and June 30, 1996.................. 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 15
Item 2. Changes in Securities............................................. 15
Item 3. Defaults Upon Senior Securities................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 5. Other Information................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
SIGNATURES........................................................ 17
INDEX TO EXHIBITS................................................. 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
--------------------
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------------- -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 650,594 $ 1,120,456
Accounts receivable, net............................................... 55,422,690 44,483,884
Due from affiliates.................................................... 948,263 96,416
Inventory.............................................................. 19,593,298 10,820,169
Temporary quota........................................................ 2,149,894 1,723,085
Prepaid expenses....................................................... 883,402 458,087
Prepaid income taxes................................................... -- 990,771
Deferred tax asset..................................................... 579,143 803,482
----------------- -----------------
Total current assets.............................................. 80,227,284 60,496,350
Property and equipment, net.............................................. 2,776,098 2,618,869
Permanent quota, net..................................................... 232,162 211,085
Other assets............................................................. 110,290 93,394
----------------- -----------------
Total assets...................................................... $ 83,345,834 $ 63,419,698
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings........................................................ $ 10,840,593 $ 6,809,676
Accounts payable....................................................... 21,154,360 14,200,229
Accrued expenses....................................................... 7,082,864 4,880,115
Income taxes........................................................... 1,506,779 576,947
----------------- -----------------
Total current liabilities......................................... 40,584,596 26,466,967
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none issued
and outstanding...................................................... -- --
Common stock, no par value, 10,000,000 shares authorized;
6,601,414 shares (1997) and 6,552,276 shares (1996), issued
and outstanding...................................................... 16,007,627 15,485,734
Contributed capital.................................................... 1,434,259 1,434,259
Retained earnings...................................................... 25,319,352 20,032,738
----------------- -----------------
Total shareholders' equity........................................ 42,761,238 36,952,731
----------------- -----------------
Total liabilities and shareholders' equity........................ $ 83,345,834 $ 63,419,698
================= =================
</TABLE>
See accompanying notes.
3
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------------
1997 1996 1997 1996
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.......................................... $73,879,357 $68,870,470 $127,484,058 $110,963,219
Cost of sales...................................... 62,811,599 57,603,417 107,633,633 92,629,101
------------ ------------ ------------- -------------
Gross profit....................................... 11,067,758 11,267,053 19,850,425 18,334,118
Selling and distribution expenses.................. 2,167,411 1,793,595 4,250,174 3,508,668
General and administrative expenses................ 3,808,834 3,969,167 7,116,096 6,961,312
------------ ------------ ------------- -------------
Income from operations............................. 5,091,513 5,504,291 8,484,155 7,864,138
Interest expense................................... (295,642) (577,259) (757,866) (984,946)
Interest income.................................... 14,527 63,735 49,939 128,798
Other income....................................... 4,841 91,823 10,386 152,365
------------ ------------ ------------- -------------
Income before provision for income taxes........... 4,815,239 5,082,590 7,786,614 7,160,355
Provision for income taxes......................... (1,550,000) (1,524,778) (2,500,000) (2,112,786)
------------ ------------ ------------- -------------
Net income......................................... $ 3,265,239 $ 3,557,812 $ 5,286,614 $ 5,047,569
============ ============ ============= =============
Net income per share............................... $ 0.48 $ 0.55 $ 0.78 $ 0.78
============ ============ ============= =============
Weighted average common and common
equivalent shares outstanding.................... 6,796,313 6,515,427 6,783,965 6,507,714
============ ============ ============= =============
</TABLE>
See accompanying notes.
4
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TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997 1996
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................... $ 5,286,614 $ 5,047,569
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred tax provision.................................................... 224,338 (170,003)
Depreciation and amortization............................................. 400,015 446,015
Allowance for returns and discounts....................................... (183,521) (294,346)
Changes in operating assets and liabilities:
Accounts receivable..................................................... (10,755,285) (12,788,971)
Due from affiliates..................................................... (851,847) 726,712
Inventory............................................................... (8,773,129) 5,197,850
Temporary quota......................................................... (426,809) (700,548)
Prepaid expenses........................................................ (442,212) (53,940)
Prepaid income taxes.................................................... 990,771 --
Accounts payable........................................................ 6,954,131 7,752,317
Accrued expenses........................................................ 2,202,750 689,494
Income taxes payable.................................................... 929,832 662,811
---------------- ----------------
Net cash provided by (used in) operating activities................. (4,444,352) 6,514,960
---------------- ----------------
INVESTING ACTIVITIES
Purchase of fixed assets...................................................... (462,535) (163,146)
Purchase of permanent quota................................................... (115,786) (133,002)
---------------- ----------------
Net cash used in investing activities............................... (578,321) (296,148)
---------------- ----------------
FINANCING ACTIVITIES
Bank borrowings, net.......................................................... 4,030,917 (6,667,996)
Due from Original Shareholders................................................ -- (3,000,000)
Exercise of stock options including related tax benefit....................... 521,894 --
---------------- ----------------
Net cash provided by (used in) financing activities................. 4,552,811 (9,667,996)
---------------- ----------------
Decrease in cash and cash equivalents......................................... (469,862) (3,449,184)
Cash and cash equivalents at beginning of period.............................. 1,120,456 7,881,210
---------------- ----------------
Cash and cash equivalents at end of period.................................... $ 650,594 $ 4,432,026
================ ================
</TABLE>
See accompanying notes.
5
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF CONSOLIDATION
On July 28, 1995, Tarrant Apparel Group, a California corporation (formerly
"Fashion Resource, Inc.") (the "Company") completed an initial public offering
(the "Offering") of 2,000,000 shares of the Company's Common Stock at a price of
$9.00 per share. The proceeds to the Company, net of underwriting discounts and
commissions and offering expenses, were $14.8 million.
The accompanying financial statements include the accounts of the Company
and its consolidated subsidiaries. All significant intercompany investments,
transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of operations for the periods presented have been included.
The consolidated financial data at December 31, 1996 is derived from
audited financial statements which are included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, and should be read in
conjunction with the audited financial statements and notes thereto. Interim
results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------------- -------------------
<S> <C> <C>
U.S. trade accounts receivable............. $ 28,078,103 $ 22,024,048
Foreign trade accounts receivable.......... 15,784,361 8,198,978
Due from factor............................ 12,823,523 16,034,018
Other receivables.......................... 468,338 141,996
Allowance for returns and discounts........ (1,731,635) (1,915,156)
------------------- -------------------
$ 55,422,690 $ 44,483,884
=================== ===================
</TABLE>
Due from factor consists of $19.5 million and $18.1 million of unmatured
accounts receivable assigned to the factor, less $6.7 million and $2.1 million
of advances received from the factor, at June 30, 1997 and December 31, 1996,
respectively.
6
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TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Company has accounts receivable-secured credit facilities with
NationsBanc Commercial Corporation ("NBCC") and The CIT Group/Commercial
Services, Inc. ("CIT"). The NBCC facility was amended in May 1997 and the CIT
facility was added in July 1997. NBCC acts as the Company's factor for accounts
receivable from the Company's major customers other than Lerner New York and
Target Stores. The Company may receive an advance from NBCC of up to 90% of the
purchase price of factored accounts receivable plus 90% of certain receivables
that are not factored. CIT will advance up to 100% of the amount of accounts
receivable from Lerner New York and Target Stores plus an over-advance of $10
million, up to a maximum amount of $25 million.
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Raw materials............................. $ 3,117,463 $ 2,113,849
Work-in-process........................... 6,591,424 1,701,023
Finished goods shipments-in-transit....... 3,769,795 2,252,118
Finished goods............................ 6,114,616 4,753,179
------------------- -------------------
$ 19,593,298 $ 10,820,169
=================== ===================
</TABLE>
Raw materials are composed of fabric.and trim accessories.
5. BANK BORROWINGS
Bank borrowings consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Import trade bills payable................ $ 9,351,227 $ 6,809,676
Hong Kong line of credit.................. 1,489,366 ---
------------------- -------------------
$ 10,840,593 $ 6,809,676
=================== ===================
</TABLE>
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 50% investment in Litex was accounted for under the equity method. In March
1995, the Company entered an agreement with the third party 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 future production purchased by the Company from 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.
7
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TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. PRO FORMA EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
"Earnings Per Share" (Statement No. 128) establishing standards for computing
and presenting earnings per share for publicly-held common stock or potential
common stock. Statement No. 128 supersedes the standards for computing earnings
per share previously found in APB Opinion No. 15, Earning Per Share and
simplifies the standards for computing earnings per share. In addition,
Statement No. 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share, requires dual presentation of basic
and diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation. The
statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997, with earlier application not permitted.
However, an entity is permitted to disclose pro forma earnings per share prior
to adoption in the notes to the financial statements.
Pro forma disclosure pursuant to Statement No. 128 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
PRO FORMA BASIC EPS COMPUTATION
Numerator........................... $ 3,265,239 $ 3,557,812 $ 5,286,614 $ 5,047,569
------------- ------------ ------------ ------------
Denominator
Weighted average common shares
outstanding.................... 6,589,098 6,500,000 6,572,165 6,500,000
------------- ------------ ------------ ------------
Total shares..................... 6,589,098 6,500,000 6,572,165 6,500,000
------------- ------------ ------------ ------------
Pro forma diluted EPS............... $ 0.50 $ 0.55 $ 0.80 $ 0.78
============= ============ ============ ============
PRO FORMA DILUTED EPS COMPUTATION
Numerator........................... $ 3,265,239 $ 3,557,812 $ 5,286,614 $ 5,047,569
------------- ------------ ------------ ------------
Denominator
Weighted average common shares
outstanding.................... 6,589,098 6,500,000 6,572,165 6,500,000
Incremental shares from assumed
conversion of options.......... 207,215 15,427 211,800 7,714
------------- ------------ ------------ ------------
Total shares..................... 6,796,313 6,515,427 6,583,965 6,507,714
------------- ------------ ------------ ------------
Pro forma diluted EPS............... $ 0.48 $ 0.55 $ 0.78 $ 0.78
============= ============ ============ ============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
GENERAL
The Company primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of and
selling casual, moderately-priced apparel, primarily for women, under private
label. The Company's major customers include specialty retailers, such as Lerner
New York, 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 completed an initial public offering (the
"Offering") of 2,000,000 shares of the Company's Common Stock at a price of
$9.00 per share. The proceeds to the Company, net of underwriting discounts and
commissions and offering expenses, were $14.8 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-Q 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 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 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
9
<PAGE>
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. Affiliated stores owned by The Limited
(including Lerner New York, Limited Stores, Express and Lane Bryant) and Target
Stores accounted for 69.5% and 21.2%, respectively, of the Company's net sales
in the first six months of 1997 and 67.1% and 24.3%, respectively, of the
Company's net sales for all of 1996. 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.
Although the Company monitors the compliance of its independent contractors
with applicable labor laws, the Company does not control its contractors or
their labor practices. The violation of federal or state labor laws by one of
the Company's contractors can result in the Company being subject to fines and
the Company's goods which are manufactured in violation of such laws being
seized or their sale in interstate commerce being prohibited. From time to
time, the Company has been notified by federal or state authorities that certain
of its contractors are the subject of investigations or have been found to have
violated applicable labor laws. To date, the Company has not been subject to
any sanctions that, individually or in the aggregate, could have a material
adverse effect upon the Company, and the Company is not aware of any facts on
which any such sanctions could be based. There can be no assurance, however,
that in the future the Company will not be subject to sanctions as a result of
violations of applicable labor laws by its contractors, or that such sanctions
will not have a material adverse effect on the Company. In addition, certain of
the Company's customers, including The Limited and Target Stores, require strict
compliance by their apparel manufacturers, including the Company, with
applicable labor laws. There can be no assurance that the violation of
applicable labor laws by one of the Company's contractors will not have a
material adverse effect on the Company's relationship with its customers.
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
10
<PAGE>
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.
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:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 85.0 83.6 84.4 83.5
--------- --------- --------- ---------
Gross profit.................................. 15.0 16.4 15.6 16.5
Selling and distribution expenses............. 2.9 2.6 3.3 3.1
General and administration expenses........... 5.2 5.8 5.6 6.3
--------- --------- --------- -------
Income from operations........................ 6.9 8.0 6.7 7.1
Interest expense.............................. (0.4) (0.8) (0.6) (0.9)
Other income.................................. --- 0.2 --- 0.2
--------- --------- --------- --------
Income before income taxes.................... 6.5 7.4 6.1 6.4
Income taxes.................................. (2.1) (2.2) (1.9) (1.9)
--------- --------- --------- --------
Net income.................................... 4.4% 5.2% 4.2% 4.5%
========= ========= ========= ========
</TABLE>
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
Net Sales increased by $5.0 million, or 7.3%, from $68.9 million in the second
quarter of 1996 to $73.9 million in the second quarter of 1997. The increase in
net sales included an increase of $9.5 million to divisions of The Limited
as offset by a decrease in sales of $4.5 million to Target Stores. Overall,
sales to divisions of The Limited in the second quarter of 1997 amounted to
75.7%
11
<PAGE>
of total net sales, as compared to 67.5% in the comparable prior period, whereas
sales to Target Stores were 15.4% of total net sales as compared to 23.0% in the
same period last year.
Gross Profit (which consists of net sales less product costs, duties and direct
costs attributable to production) for the second quarter of 1997 was $11.1
million, or 15.0% of net sales, compared to $11.3 million, or 16.4% of net
sales, in the comparable prior period, a decrease in gross profit of 1.8%. The
1.4% decrease in the gross profit margin resulted from the realization of
approximately a 4% gross margin on $11.8 million of net sales sourced
domestically, reflecting costs and inefficiencies related to the expansion of
the Company's domestic sourcing capabilities. The gross margin realized on $62.1
million of imported net sales was approximately 17%.
Selling and Distribution Expenses increased from $1.8 million in the second
quarter of 1996 to $2.2 million in the second quarter of 1997. As a
percentage of net sales, these expenses increased from 2.6% in the second
quarter of 1996 to 2.9% in the second quarter of 1997. This percentage increase
is primarily due to increases in freight and warehouse labor expenses, both of
which amounted to 0.1% of net sales.
General and Administrative Expenses decreased from $4.0 million in the second
quarter of 1996 to $3.8 million in the second quarter of 1997. As a percentage
of net sales, these expenses decreased from 5.8% in the second quarter of 1996
to 5.2% in the second quarter of 1997. This percentage decrease was primarily
due to the effect of the increase in net sales.
Operating Income in the second quarter of 1997 was $5.1 million, or 6.9% of net
sales, compared to $5.5 million, or 8.0% of net sales, in the comparable prior
period, a decrease in operating income of 7.5% due to the factors described
above. The 1.1% decrease in operating income as a percentage of net sales is
attributable to a 1.4% decrease in gross profit margin as offset by a 0.3%
decrease in operating expenses.
Other Income decreased from $156,000, or 0.2% of net sales, in the second
quarter of 1996, to $19,000 in the second quarter of 1997. This decrease
primarily resulted from a decrease in interest and management fee income from
$64,000 and $30,000, respectively, in the second quarter of 1996, to $15,000 and
$0 of such income, respectively, in the second quarter of 1997.
FIRST SIX MONTHS 1997 COMPARED TO FIRST SIX MONTHS 1996
Net Sales increased by $16.5 million, or 14.9%, from $111.0 million in the first
six months of 1996 to $127.5 million in the first six months of 1997. The
increase in net sales included increases of $15.6 million to divisions of The
Limited and $0.8 million to Target Stores. Overall, sales to divisions of The
Limited in the first six months of 1997 amounted to 69.5% of total net sales, as
compared to 65.7% in the comparable prior period, whereas aggregate sales to
Target Stores were 21.2% of total net sales as compared to 23.6% in the same
period last year.
Gross Profit (which consists of net sales less product costs, duties and direct
costs attributable to production) for the first six months of 1997 was $19.9
million, or 15.6% of net sales, compared to $18.3 million, or 16.5% of net
sales, in the comparable prior period, an increase in gross profit of 8.3%. The
0.9% decrease in the gross profit margin primarily resulted from the realization
of approximately a 4% gross margin on $19.4 million of net sales sourced
domestically, reflecting costs and inefficiencies related to the expansion of
the Company's domestic sourcing capabilities. The gross margin realized on
$108.1 million of imported net sales was approximately 17.5%.
12
<PAGE>
Selling and Distribution Expenses increased from $3.5 million in the first six
months of 1996 to $4.3 million in the first six months of 1997. As a percentage
of net sales, these expenses increased from 3.1% in the first six months of 1996
to 3.3% in the first six months of 1997. This percentage increase resulted from
an increase in sales commission which amounted to 0.2% of net sales.
General and Administrative Expenses increased from $7.0 million in the first six
months of 1996 to $7.1 million in the first six months of 1997. As a percentage
of net sales, these expenses decreased from 6.3% in the first six months of 1996
to 5.6% in the first six months of 1997. This percentage decrease is primarily
due to the increase in net sales.
Operating Income in the first six months of 1997 was $8.5 million, or 6.7% of
net sales, compared to $7.9 million, or 7.1% of net sales, in the comparable
prior period, an increase in operating income of 7.9% due to the factors
described above. The 0.4% decrease in operating income as a percentage of net
sales is attributable to a 0.9% decrease in gross profit margin as offset by a
0.5% decrease in operating expenses.
Other Income decreased from $281,000, or 0.2% of net sales, in the first six
months of 1996, to $60,000 in the first six months of 1997. This decrease
primarily resulted from $129,000 and $52,000 of interest and management fee
income, respectively, in the first six months of 1996 as compared to $50,000 and
$0 of such income, respectively, in the first six months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds has been to finance inventory, finished
goods shipments-in-transit, and accounts receivable, including receivables from
the Company's contract manufacturers that relate primarily to fabric purchased
by the Company for use by those manufacturers. (The Company generally purchases
fabric for delivery directly to the manufacturer's factory. The Company then
invoices the manufacturer for the fabric, and reduces payments to the
manufacturer for finished goods by the amount of outstanding invoices.) The
Company's primary sources of working capital are cash flow from operations,
borrowings under the Company's credit facilities and proceeds from its initial
public offering.
During the first six months of 1997, net cash used in operating activities
was $4.4 million, which primarily resulted from net income of $5.3 million and a
net increase in working capital items of $10.2 million.
During the first six months of 1997, cash flow used in investing activities
was $578,000, which consisted of capital expenditures and the purchase of
permanent quota.
In the six months ended June 30, 1997, cash flow provided by financing
activities equaled $4.6 million, primarily as a result of a $4.0 million
increase in bank borrowings.
The Company has credit facilities of $33 million and $10 million with the
Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and acceptances, as well as cash advances.
These facilities are subject to review at any time and the right of either
lender to demand payment at any time. Interest on cash advances under HKSB's
facility accrues at HKSB's prime rate for lending U.S. dollars plus one-half to
three-quarters percent per annum. As of June 30,
13
<PAGE>
1997, HKSB's U.S. dollar prime rate equaled seven and one-quarter percent.
Interest on cash advances under SCB's facility accrues at SCB's prime rate for
lending Hong Kong dollars. As of June 30, 1997, SCB's Hong Kong dollar prime
rate equaled eight and three-quarters percent. These facilities are subject to
certain restrictive covenants including a provision that the aggregate net
worth, as adjusted, of the Company will exceed $30 million, that the Company
will not incur two consecutive quarterly losses and that the Company will
maintain a certain debt to equity ratio.
The Company has accounts receivable-secured credit facilities with
NationsBanc Commercial Corporation ("NBCC") and The CIT Group/Commercial
Services, Inc. ("CIT"). NBCC acts as the Company's factor for accounts
receivable from the Company's major customers other than Lerner New York and
Target Stores. Subject to a shared risk arrangement, NBCC will pay the Company
an amount equal to the gross amount of the Company's accounts receivable reduced
by certain offsets, including discounts, returns and commission. The commission
is two-tenths of one percent on accounts as to which NBCC and the Company share
the credit risk, which principally include affiliates of The Limited, and six-
tenths of one percent on all other accounts. On shared risk accounts, the
Company must incur an aggregate loss in excess of $1 million in any twelve-month
period before NBCC must pay for uncollectible accounts receivable whereas NBCC
pays 100% of uncollectible accounts receivable on all other obligors, if
approved. The Company may receive an advance from NBCC of up to 90% of the
purchase price of factored accounts receivable plus 90% of certain receivables
that are not factored. CIT will advance up to 100% of the amount of accounts
receivable from Lerner New York and Target Stores plus an over-advance of $10
million, up to a maximum amount of $25 million. The CIT facility is subject to
the same restrictive covenants as apply to the HKSB and SCB facilities.
Interest on advances from both NBCC and CIT accrues at the rate of one and one-
quarter percent below the bank's respective prime rates or, at the option of the
Company, one and one-quarter percent over the respective LIBOR rates. As of
June 30, 1997, the prime rates equaled eight and one-half percent and the LIBOR
rates equaled five and seven-tenths percent.
The Company believes that its cash flow from operations and borrowings under
its current credit facilities should be sufficient to fund its operations for
the foreseeable future.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-----------------
On June 30, 1997, the United States District Court for the Central
District of California ordered the previously disclosed lawsuit
brought by the American Textile Manufacturers Institute ("ATMI") to be
transferred to the United States District Court for the Southern
District of Ohio at Columbus.
On May 23, 1997, the Company, along with Gerard Guez, its Chairman and
Chief Executive Officer, and Todd Kay, its President, were named as
defendants in a lawsuit brought by Mark Kasky on behalf of himself and
the general public in San Francisco Superior Court (Case No. 986780).
The allegations of this lawsuit are identical to those contained in
the complaint filed by ATMI, and this lawsuit seeks injunctive relief
and an unspecified amount of restitution, disgorgement of profits,
costs and attorneys fees. The Company is not yet able to evaluate the
potential outcome or to estimate the amount or likelihood of potential
damages, if any, of this lawsuit.
ITEM 2. CHANGES IN SECURITIES. None.
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
The Company held its 1997 annual meeting of shareholders (the
"Meeting") on May 2, 1997. At the Meeting, the Company's
shareholders considered and voted upon the following matters:
1. Election of Directors. The re-election of the following seven
persons to the Board of Directors of the Company, to serve until the
next annual meeting of shareholders and until their successors have
been elected and qualified:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Name For Against Abstain
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gerard Guez 6,253,944 --- 5,675
Donald Hecht 6,253,944 --- 5,675
Todd Kay 6,253,944 --- 5,675
Barry S. Aved 6,253,944 --- 5,675
Mark B. Kristof 6,253,944 --- 5,675
Corazon R. Reyes 6,253,944 --- 5,675
Karen S. Wasserman 6,253,944 --- 5,675
</TABLE>
2. Amendment of 1995 Stock Option Plan. To approve an amendment and
restatement of the 1995 Stock Option Plan.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For Against Abstain
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
4,904,177 498,945 7,803
</TABLE>
15
<PAGE>
3. Ratification of the Appointment of Independent Auditor. The
ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1997 .
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For Against Abstain
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6,255,346 605 3,668
</TABLE>
ITEM 5. OTHER INFORMATION.
-----------------
Effective as of July 29, 1997, Corazon R. Reyes has resigned from the
Company's Board of Directors, and James R. Miller has been appointed
by the Board of Directors to fill the vacancy. Ms. Reyes will continue
to serve as Chief Operating Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits: Reference is made to the Index to Exhibits, at page 18
for a list of exhibits filed as part of this Report on Form 10-Q.
(b) Reports on Form 8-K: None.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRANT APPAREL GROUP
Date: July 29, 1997 By: /s/ Mark B. Kristof
-------------------------
Mark B. Kristof
Vice President-Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
17
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.36.1 Amendment to Three Party Special Deposit Account Agreement
10.42.1 Amendment dated June 9, 1997 to Factoring Agreement effective as of September 28, 1993,
as amended, by and between the Company and NationsBanc Commercial Corporation
10.43.1 Letter agreement dated May 28, 1996, by and between Tarrant Company Limited
and The Hongkong Shanghai Banking Corporation Limited
10.56 Form of Indemnification Agreement with directors and certain executive officers
10.57 Special Deposit Account Agreement
10.58 Accounts Receivable Financing Agreement dated June 13, 1997 by and between
the Company and The CIT Group/Commercial Services, Inc.
27 Financial Data Scheule
</TABLE>
18
<PAGE>
EXHIBIT 10.36.1
---------------
AMENDMENT TO THREE PARTY SPECIAL
DEPOSIT ACCOUNT AGREEMENT
SPECIAL INSTRUCTIONS
This Amendment amends and modifies the Three Party Special Deposit Account
Agreement ("Agreement") entered into effective May_____, 1997, among Union Bank
of California, N.A., The Hongkong and Shanghai Banking Corp., Ltd. and Tarrant
Apparel Group dba Fashion Resource. In the event of an inconsistency between the
terms of this Amendment and the Agreement, the terms of this Amendment will
prevail, but only to the extent necessary to avoid the inconsistency.
The parties agree as follows:
1. Except as otherwise instructed by Secured Party, Bank is to transfer
collected funds in the Special Deposit Account on a per request basis
Via Fedwire to:
Marine Midland Bank - New York
ABA # 021001088
TO CREDIT: Hongkong and Shanghai Banking Corp. New York
Account # 0102991
TO FURTHER CREDIT:
BENEFICIARY: TARRANT CO., LTD. ACCOUNT # 567-208-400-0004
Hong Kong
Except as otherwise instructed by Secured Party, Bank is to transfer
collected funds. Secured Party and Borrower represent and warrant that
the above account number is correct and recognize that a beneficiary
bank or intermediate bank involved in a wire transfer may pay a wire
solely on the basis of the account number even if the beneficiary's
name and account number do not agree. (See Uniform Commercial Code
section 4A 11-207). Borrower shall pay all fees associated with
Fedwires to and from the Special Deposit Account and Borrower shall be
responsible for all account maintenance fees associated with the
Special Deposit Account. Attached as Exhibit 1 is a sample facsimile
wire transfer request from Secured Party.
2. Except as otherwise instructed by Secured Party, Bank is to transfer
collected funds in the Special Deposit Account on a per request basis
via telephone and confirmed by facsimile from Secured Party to:
Union Bank Account # 2100690988
Attached as Exhibit 2 is a sample facsimile transfer request from
Secured Party.
1
<PAGE>
The foregoing is acknowledged.
THE HONGKONG AND SHANGHAI BANKING CORP., LTD.
By: /s/ James Benoit
----------------------------------
Title: Corporate Relationship Manager
-------------------------------
TARRANT APPAREL GROUP DBA FASHION TARRANT APPAREL GROUP DBA FASHION
RESOURCE RESOURCE
By: /s/ Mark B. Kristof By: /s/ Corazon R. Reyes
-------------------------------- ------------------------------
Title: Vice President-Finance & CFO Title: Chief Operating Officer
----------------------------- ----------------------------
UNION BANK OF CALIFORNIA
By: /s/ Debra Jamin Heller
-------------------------
Title: Vice President
----------------------
2
<PAGE>
To: Ms. Nafi Sedaghat (cc Mark Kristof, Paul Lau, Union Bank)
Tarrant Apparel Group
Los Angeles, CA
Fax No: (213) 780-0751 / HK 2343-2801 / Union
From: J K D Benoit
Corporate Relationship Manager
Textiles & Institutional Banking, Hong Kong Office
Fax No: 852-2877 5442 Telephone /Telex: 2822 3515
Title: BLOCKED ACCOUNT WITH UNION BANK
-------------------------------
_________________________________________________________________________
Dear Nafi:
Authorization No.
- -----------------
We have no objections to your requesting Union Bank to exceptionally transfer up
-------------
to USD ____________ from the blocked account number 2100691003 to:
Marine Midland Bank - New York
ABA # 021001088
TO CREDIT: Hongkong & Shanghai Banking Corporation Ltd.
New York, New York
Account # 0102991
TO FURTHER
CREDIT: Tarrant Co. Ltd.
Hong Kong
Account # 567-208400-0004
Yours Sincerely,
JKD Benoit
Sig. No. 1940
EXHIBIT 1
<PAGE>
To: Ms. Nafi Sedaghat (cc Mark Kristof, Paul Lau, Union Bank)
Tarrant Apparel Group
Los Angeles, CA
Fax No: (213) 780-0751 / HK 2343-2801 / Union
From: J K D Benoit
Corporate Relationship Manager
Textiles & Garments Division
Corporate & Institutional Banking, Hong Kong Office
Fax No: 852-2877 5442 Telephone /Telex: 2822 3515
Title: BLOCKED ACCOUNT WITH UNION BANK
-------------------------------
_________________________________________________________________________
Dear Nafi:
Authorization No.
- -----------------
We have no objections to your requesting Union Bank to exceptionally transfer up
-------------
to USD ____________ from the blocked account number 2100691003 to your normal
operating account 2100690988.
Yours Sincerely,
JKD Benoit
Sig. No. 1940
EXHIBIT 2
<PAGE>
EXHIBIT 10.42.1
---------------
NATIONSBANC COMMERCIAL CORPORATION
P.O. Box 4095
Atlanta, GA 30302-4095
June 9, 1997
Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, CA 90023
Attn.: Mark Kristof
Re: Factoring Agreement Between Us Dated September 28, 1993
(as amended, the "Factoring Agreement")
Gentlemen:
We hereby agree with you that the Factoring Agreement is amended as follows:
1. Delete the definition of "Sales" in Section 1.12 and replace it with the
----- ------------
following:
1.12 "Sales" shall mean the sale of goods and/or the rendition of services
by us in the ordinary course of business to Customers in the United States
of America and Puerto Rico other than sales to Lerner New York, a division
of The Limited Corporation, and Target Stores, a division of Dayton Hudson
Corporation
2. Delete Section 2.3 and replace it with the following:
-----------
2.3 All orders for Sales shall be submitted to you for credit approval
prior to shipment of the goods or rendition of the services so ordered, and
each approved Sale shall be made only in accordance with such approval. All
credit approvals must be in writing. Receivables arising from orders not so
approved by you, in whole or in part, shall be with full recourse to us to
the extent and in the respects not so approved. A credit approval shall not
be effective if (a) the approved terms of sale are changed, (b) delivery of
the goods to the Customer is not made by us within forty-five (45) days
after the shipping date specified in our request for credit approval, or,
if no such date is specified, within forty-five (45) days after the date of
the credit approval,
<PAGE>
Tarrant Apparel Group
Page 2
or (c) the invoice representing the Sale is not delivered to you within
twenty (20) days after the shipment date. Credit approval may be by credit
line. While a credit line remains in force, Receivables (or parts thereof)
in excess of such line will succeed amounts within the line which are paid
by or credited to the Customer; the succession of Receivables (or parts
thereof) shall take place in the order of maturity and shall be limited to
amounts then so paid or credited. The right of succession ceases when the
line is cancelled. On all credit-approved Sales you assume the Credit Risk
up to the amount so approved and will bear the credit loss on the amount of
the uncollected Receivables if a Customer, after delivery/rendition and
acceptance of the goods/services, fails on due date to pay in full solely
because of financial inability, but you are not to be responsible where
nonpayment results from any Customer Dispute, acts of God, war, civil
strife, currency restrictions, or foreign political impediments, because we
assume all other risks; provided, however, that all credit-approved
Receivables to the Customers listed on Annex I attached hereto (the
-------
"Specific Customers") shall be with full recourse to us until we have
established in any Contract Year, with respect to credit-approved
Receivables purchased by you with respect to Sales to the Specific
Customers, aggregate Ultimate Net Credit Losses in excess of our Maximum
Initial Loss Liability. As used herein, "Contract Year" shall mean the
twelve (12) month period commencing on May 1, 1997 and each succeeding
twelve (12) month period thereafter; "Ultimate Net Credit Loss" shall mean
the amount reasonably determined by you to be the difference between the
Net Amount of the affected Receivable and the recovery with respect to that
Receivable as of the date when the amount of such recovery can be
reasonably determined under all relevant facts and circumstances, when
nonpayment results from the Customer's financial inability; and "Maximum
Initial Loss Liability" shall mean as to each Contract Year US One Million
Dollars (US$1,000,000). Credit approvals, once granted, may be withdrawn by
you prior to shipment/rendition of the goods/services. With regard to Sales
without credit approval or in excess of any approved amount of credit, as
to any given Customer, we agree that any payments or credits on any
Receivables owing from such Customer may be applied first to any credit-
approved Receivables which may at any time be unpaid, regardless of the
respective dates such Sales occurred and regardless of any notations on
payment items, or may be applied in such other manner as you in your sole
discretion shall deem appropriate.
<PAGE>
Tarrant Apparel Group
Page 3
3. Delete Section 2.5 and replace it with the following:
-----------
2.5 The purchase price of Receivables is to be the Net Amount thereof,
which, less any charges and reserves, will be due and payable on Payment
Date. We shall pay you a commission in an amount equal to (a) two-tenths of
one percent (0.20%) of the gross amount of such Receivables, in the case of
Sales to Specific Customers (as defined in Section 2.3 hereof), for the
first sixty (60) day term or part thereof, and (b) six-tenths of one
percent (0.60%) of the gross amount of such Receivables, in the case of
Sales to other Customers, for the first sixty (60) day term or part
thereof. You may reasonably retain from sums payable to us a reserve, which
reserve may be revised from time to time at your discretion, in order to
provide for Customer Disputes, possible credit losses on unapproved
Receivables, sums owing to you for goods/services purchased by us from any
other firm factored or otherwise financed by you, and the Obligations. A
discount, credit, or allowance after issuance or granting may not be
claimed by us, but may be claimed solely by the Customer; no third party
beneficiary rights are created hereby.
4. Delete Section 2.6 and replace it with the following:
-----------
2.6 Prior to Payment Date, upon our request and at your sole discretion,
you may advance to us up to (a) ninety percent (90%) of the purchase price
of Receivables less charges and reserves plus (b) ninety percent (90%) of
the face value of Eligible Receivables due and owing at such time less
charges and reserves. As used herein, "Eligible Receivables" shall mean all
non-factored Receivables except: (i) those which are past due sixty (60)
days or more; (ii) those arising from sales to affiliates; (iii) those
subject to Customer Dispute; (iv) those with respect to which we have
breached any warranty or representation; (v) those with respect to a
Customer that is more than sixty (60) days past due on more than fifty
percent (50%) of the Receivables for which it is obligated; (vi)
Receivables from Sales to federal, state or local governmental entities or
agencies; (vii) those for which you are not or do not continue to be, in
your sole discretion, satisfied with the credit standing of the Customer in
relation to the amount of credit extended; (viii) those for which letters
of credit have been issued unless such letters of credit have been
transferred to you under documents satisfactory to you; (ix) those arising
from Sales for which the terms are more than ninety (90) days; (x) those
<PAGE>
Tarrant Apparel Group
Page 4
arising from Sales in which our performance has been bonded; and (xi) those
which you in your sole discretion deem to be ineligible. At any time that
advances are outstanding against Eligible Receivables, we shall submit to
you a borrowing base certificate by the tenth day of the month (as of the
last day of the preceding month), in form acceptable to you, setting forth
the calculations necessary to determine the maximum amount of advances
hereunder. We represent and warrant that each Receivable included in a
borrowing base certificate as an "Eligible Receivable" shall meet the
criteria enumerated above.
5. Delete Section 3 and replace it with the following:
---------
SECTION 3. INTEREST
Interest shall be charged for the number of days that advances of the
purchase price are made prior to Payment Date and for the number of days
that advances or other charges to our account remain outstanding at a rate
equal to one and one-quarter percent (1.25%) per annum plus the applicable
LIBOR Index Rate (unless it becomes illegal or impracticable for you to
obtain funds at the LIBOR Index Rate in which case the rate shall be equal
to the Prime Rate minus one and one-quarter percent (1.25%)); except,
however, in either case, that the interest rate shall in no event be less
than five percent (5.0%) per annum. As used herein, "LIBOR Index Rate"
shall mean the rate of interest as determined by you, as of the last
Banking Day of each calendar month, as the rate at which you are able, in
accordance with your normal practice, to acquire U.S. Dollar deposits in
the London Interbank Market or comparable market for a period of thirty
(30) days, adjusted to compensate you for reserve requirements, FDIC
insurance, and any increased costs resulting from changes in any law, rule
or regulation or in the interpretation of any thereof. Interest shall be
computed on the basis of a year of three hundred sixty (360) days, for
actual days elapsed. Changes in the interest rate applicable to LIBOR Index
Rate advances (or, in the event the Prime Rate is applicable in accordance
with this Section 3, applicable to Prime Rate advances) shall be effected
monthly to reflect changes in the LIBOR Index Rate (or Prime Rate), as
follows: The rate shall be adjusted on the first day of each month based on
the LIBOR Index Rate (or the Prime Rate) in effect at the close of business
on the last Banking Day of the immediately preceding month. After
termination, we shall pay interest on our
<PAGE>
Tarrant Apparel Group
Page 5
obligations hereunder at the rate of the Prime Rate minus one and one-
quarter percent (1.25%) per annum with changes to such rate of interest to
take effect as hereinbefore provided. For the purpose of interest
calculation, commissions earned during each month shall be deemed charged
to our account on the fifteenth (15th) day of each month.
6. Delete Section 5 and replace it with the following:
---------
SECTION 5. SECURITY INTEREST
We hereby grant you a security interest in all of our present and
future accounts, instruments, contract rights, chattel paper, documents and
general intangibles, (whether arising before or after termination of this
Agreement) and all returned, repossessed, and reclaimed goods, and books
and records relating thereto, arising out of or in any way related to the
Sales, to secure all of the Obligations. We further sell and assign to you
all our title and/or interest in the goods (unless released by you)
represented by Receivables as well as goods returned by or repossessed from
Customers, all of our rights as an unpaid vendor or lienor, all of our
rights of stoppage in transit, replevin and reclamation relating thereto,
and all of our rights against third parties with respect thereto; we will
cooperate with you in exercising any rights with respect to the goods. In
addition, we hereby grant you a security interest in the reserve
established pursuant to Section 2.5 hereof, to secure all of the
Obligations.
This amendment shall be effective as of May 1,1997.
<PAGE>
Tarrant Apparel Group
Page 6
All other terms and conditions of the Factoring Agreement shall continue in full
force and effect.
Please signify your agreement to the foregoing by signing where indicated below.
NATIONSBANC COMMERCIAL CORPORATION
By: /s/ Richard L. Zimmermann
--------------------------
Title: Senior Vice President
-----------------------
Read and agreed:
TARRANT APPAREL GROUP
By: /s/ Mark B. Kristof
-------------------------------
Title: Vice President-Finance & CFO
----------------------------
<PAGE>
ANNEX I
1. Wal-Mart and its affiliates
2. Sears and its affiliates
3. The Limited and its affiliates and subsidiaries
4. Dayton Hudson Stores and its affiliates and subsidiaries (including
Target and Mervyns)
<PAGE>
EXHIBIT 10.43.1
---------------
[LETTERHEAD OF THE HONGKONG AND SHANGHAI CORPORATION LIMITED]
Ref: Corporate & Institutional Banking
Textiles & Garments Division
CONFIDENTIAL
Tarrant Co. Ltd.
13/F & 14/F, Lladre Centre
72-80 Hoi Yuen Road, Kwun Tong
Kowloon 28 May 1997
Attention: Mr. Mark Kristof
Dear Sirs:
BANKING FACILITIES
We refer to our recent discussions and are pleased to advise that we have
reviewed your banking facilities and offer a renewal within the following
limits. These facilities are subject to review at any time and, in any event by
30 November 1997 and also subject to our overriding right of withdrawal and
repayment on demand, including the right to call for cash cover on demand for
prospective and contingent liabilities.
New Previously
--- ----------
<TABLE>
<CAPTION>
Import/Export Facilities
- -----------------------------------------
<S> <C> <C>
Documentary Credits to your suppliers USD33,000,000 USD33,000,000
on an `export-will-buy' basis. or HKD equivalent or HKD equivalent
Bills received under these Documentary
Credits will be paid from purchase
proceeds of export D/P and DC bills.
within which
- ------------
Goods under your control and/or Trust (USD25,000,000) (USD25,000,000)
Receipts and/or D/A bills purchased or HKD equivalent or HKD equivalent
for finished goods and fabric on
approved drawees. Such D/A bills to
have a fixed maturity date of 45 days
from date of bill of exchange for
finished goods only.
</TABLE>
<PAGE>
Tarrant Co Ltd 28 May 1997
Page 2
- --------------------------------------------------------------------------------
Within the above Import/Export (TR/DA) limits, you may issue documentary credits
to your suppliers covering fabric purchases up to USD15,000,000 or equivalent
with import loan facilities in either HKD or foreign currency for up to 45 days.
Interest on import loans in (a) HKD will be charged on a daily basis at 1/2% per
annum over our best lending rate and (b) in foreign currencies at 1/2% per annum
over the respective foreign currency best lending rate, payable monthly in
arrears to the debit of your current accounts.
Interest on D/A will be charged on a daily basis at our best lending rate, and
payable monthly in arrears to the debit of your current account.
Within the above Import/Export (TR/DA) limits, you may utilize overdraft
facilities up to HKD7,800,000. Interest will be charged on daily balances at
3/4% per annum over our HKD best lending rate and payable monthly in arrears to
the debit of your current account.
Our HKD and USD best lending rates are currently 8.75% per annum and 7.25% per
annum respectively, but subject to fluctuation at our discretion.
Guarantee issued on your behalf in favour of:
- --------------------------------------------
China Light & Power Co Ltd HKD 115,000
Security
- --------
As security, we continue to hold:
1) An original key man life insurance policy covering Mr. Gerard Guez for
USD6,000,000 assigned to our favour.
2) A UCC-1 filling on the inventory of Tarrant Apparel Group in the USA
(excluding domestic inventory).
3) Intercreditor Agreement dated 1 November 1996 regarding Inventory charged
by UCC-1 filing between ourselves and Standard Chartered Bank.
4) A Tripartite Agreement between Hongkong Bank, NationsBanc Commercial
Corporation and Tarrant Apparel Group whereby 30% of factored proceeds are
assigned to us and used to retire DA bills drawn on Tarrant Apparel Group
(dba Fashion Resource Inc) by Tarrant Co Ltd.
5) A security agreement between ourselves and Tarrant Apparel Group dated 6
June 1995 relating to bills of exchange drawn by Tarrant Company Limited on
Tarrant Apparel Group (dba Fashion Resource Inc).
<PAGE>
Tarrant Co Ltd 28 May 1997
Page 3
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6) An Unlimited Continuing Guarantee dated 11 March 1996 from Tarrant Apparel
Group dba Fashion Resource Inc together with resolution and Certificate of
Incumbency both dated 11 March 1996 and Counsel Opinion dated 13 March
1996.
7) A security agreement between ourselves and Tarrant Apparel Group dated 6
June 1995 relating to the guarantee dated 30 October 1992 from Tarrant
Apparel Group dba Fashion Resource Inc securing these facilities.
8) A Letter of Undertaking from Tarrant Apparel Group with board resolution
stating that:
a) Tarrant Apparel Group will maintain its tangible net worth at a level
in excess of USD22,000,000 at 31 December 1995. Thereafter, the
company's minimum tangible net worth shall increase by at least 50% of
the company's net profit after tax at each financial quarter end.
Tangible net worth is defined as the aggregate of the paid up capital,
reserves and retained profits, or losses, after deducting all amounts
attributable to goodwill, licenses and all other assets which would be
treated as intangibles under generally accepted accounting principles
in Hong Kong or the USA.
b) Tarrant Apparel Group's debt to equity ratio must not exceed 2.0:1 at
each audited financial year end.
The debt to equity ratio is defined as total liabilities (current &
long term) divided by tangible net worth.
c) Tarrant Apparel Group's operations may not have net losses in any two
consecutive quarters.
d) Any mergers or acquisitions which are approved by Tarrant Apparel
Group's board of directors will be notified to us in writing within 24
hours.
9. A Negative Pledge dated 14 February 1996 from Tarrant Co Ltd together with
Minutes of Meeting dated 14 February 1996.
10. Letter dated 12 January 1996 acknowledged by Tarrant Apparel Group dba
Fashion Resource Inc regarding Blocked Account with Imperial Bank.
<PAGE>
Tarrant Co Ltd 28 May 1997
Page 4
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Additional Security
- -------------------
1) An amended Tripartite Agreement per item 4 above will be required to
reflect the change from Imperial Bank to Union Bank.
2) A Special Deposit Account Agreement to replace item 10 above will be
required to reflect the change from Imperial Bank to Union Bank. We agree
that you may have access to the "blocked account" while there are no D/A or
Loans Against Imports outstanding and we will advise Union Bank separately
in writing as necessary from time to time.
3) A new Letter of Undertaking with board resolution in replacement of 8a
above will be required stating that:
Tarrant Apparel Group will maintain its tangible net worth at a level in
excess of USD30,000,000 at all times.
Tangible net worth is defined as the aggregate of the paid up capital,
reserves and retained profits, or losses, after deducting all amounts
attributable to goodwill, licenses and all other assets which would be
treated as intangibles under generally accepted accounting principles in
Hong Kong or the USA.
Please arrange for the authorized signatories of your company, in accordance
with the terms of the mandates given to the Bank, to sign and return to us the
duplicate copy of this letter to signify your confirmation as to the correctness
of the security held, and your continued understanding and acceptance of the
terms and conditions under which these facilities are granted.
A review fee of USD1,000 will be charged to the debit of your current account
upon receipt of your acceptance to the facilities.
The above offer will remain open for your acceptance until 11 June 1997 and if
not accepted by that date will be deemed to have lapsed.
We are please to be of continued assistance.
Yours faithfully,
/s/ James Benoit
- -----------------
James Benoit
Corporate Relationship Manager
Enc
/al
<PAGE>
EXHIBIT 10.56
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INDEMNIFICATION AGREEMENT
This Indemnification Agreement, dated as of the ________ day of
_______________________, is made by and between TARRANT APPAREL GROUP, a
California corporation (the "Company"), and ________, an officer or director of
the Company (the "Indemnitee").
RECITALS
A. The Company and the Indemnitee recognize that the present state of the
law is too uncertain to provide the Company's officers and directors with
adequate and reliable advance knowledge or guidance with respect to the legal
risks and potential liabilities to which they may become personally exposed as a
result of performing their duties for the Company;
B. The Company and the Indemnitee are aware of the substantial growth in
the number of lawsuits filed against corporate officers and directors in
connection with their activities in such capacities and by reason of their
status as such;
C. The Company and the Indemnitee recognize that the cost of defending
against such lawsuits, whether or not meritorious, is typically beyond the
financial resources of most officers and directors of the Company;
D. The Company and the Indemnitee recognize that the legal risks and
potential liabilities, and the threat thereof, associated with proceedings filed
against the officers and directors of the Company bear no reasonable
relationship to the amount of compensation received by the Company's officers
and directors;
E. The Company, after reasonable investigation prior to the date hereof,
has determined that the liability insurance coverage available to the Company as
of the date hereof is inadequate, unreasonably expensive or both. The Company
believes, therefore, that the interest of the Company and its current and future
shareholders would be best served by a combination of (i) such insurance as the
Company may obtain pursuant to the Company's obligations hereunder and (ii) a
contract with its officers and directors, including the Indemnitee, to indemnify
them to the fullest extent permitted by law (as in effect on the date hereof,
or, to the extent any amendment may expand such permitted indemnification, as
hereafter in effect) against personal liability for actions taken in the
performance of their duties to the Company;
F. Section 317 of the California General Corporation Law empowers
California corporations to indemnify their officers and directors and further
states that the indemnification provided by Section 317 "shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent such
additional rights to indemnification are authorized in
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the articles of the corporation"; thus, Section 317 does not by itself limit the
extent to which the Company may indemnify persons serving as its officers and
directors;
G. The Company's Articles of Incorporation and Bylaws authorize the
indemnification of the officers and directors of the Company in excess of that
expressly permitted by Section 317, subject to the limitations set forth in
Section 204(a)(11) of the California General Corporation Law, or limitations set
forth in a statute, regulation or rule promulgated by any state or federal
agency with jurisdiction over the Company's activities;
H. The Board of Directors of the Company has concluded that, to retain
and attract talented and experienced individuals to serve as officers and
directors of the Company and to encourage such individuals to take the business
risks necessary for the success of the Company, it is necessary for the Company
to contractually indemnify its officers and directors, and to assume for itself
liability for expenses and damages in connection with claims against such
officers and directors in connection with their service to the Company, and has
further concluded that the failure to provide such contractual indemnification
could result in great harm to the Company and its shareholders;
I. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director or officer of the Company, free from undue
concern for the risks and potential liabilities associated with such services to
the Company; and
J. The Indemnitee is willing to serve, or continue to serve, the Company,
provided, and on the expressed condition, that the Indemnitee is furnished with
the indemnification provided for herein.
AGREEMENT
NOW, THEREFORE, the Company and Indemnitee agree as follows:
1 DEFINITIONS.
(a) "Change of Control" means any of the following events:
(i) Unless approved by the affirmative vote of at least
two-thirds (2/3) of those members of the Board of Directors who are not
employees of the Company and who are in office immediately prior to the
occurrence of any one or more of the following event(s):
(1) the merger or consolidation of the Company with,
or the sale of all or substantially all of the assets of the Company to, any
person or entity or group of associated persons or entities; or
(2) the direct or indirect beneficial ownership in the
aggregate of securities of the Company representing twenty percent (20%) or more
of the total
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combined voting power of the Company's then issued and outstanding securities by
any person or entity, or group of associated persons or entities acting in
concert, not affiliated (within the meaning of the Securities Act of 1933) with
the Company as of the date of this Agreement; or
(3) the shareholders of the Company approve any plan
or proposal for the liquidation or dissolution of the Company.
(ii) A change in the composition of the Board of Directors,
at any time during any consecutive twenty-four (24) month period such that the
"Continuity Directors" cease for any reason to constitute at least a two-thirds
(2/3) majority of the Board of Directors. For purposes of this clause (ii),
"Continuity Directors" means those members of the Board of Directors who
either:
(1) were directors at the beginning of such
consecutive twenty-four (24) month period; or
(2) were elected by, or on the nomination or
recommendation of, at least a two-thirds (2/3) majority of the then-existing
Board of Directors.
(b) "Expenses" means, for the purposes of this Agreement, all
direct and indirect costs of any type or nature whatsoever (including, without
limitation, any fees and disbursements of Indemnitee's counsel, accountants and
other experts and other out-of-pocket costs) actually and reasonably incurred by
the Indemnitee in connection with the investigation, preparation, defense or
appeal of a Proceeding; provided, however, that Expenses shall not include
judgments, fines, penalties or amounts paid in settlement of a Proceeding.
(c) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the Company
or Indemnitee in any matter material to either such party, or (ii) any other
party to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement.
(d) "Proceeding" means, for the purposes of this Agreement, any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (including an action brought by or in the right
of the Company) in which Indemnitee may be or may have been involved as a party
or otherwise, by reason of the fact that Indemnitee is or was a director or
officer of the Company, by reason of any action taken by the Indemnitee or of
any inaction on the part of the Indemnitee while acting as such director or
officer or by reason of the fact that the Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director or officer of the foreign or domestic corporation
which was a predecessor corporation to the Company or of another enterprise at
the request of such predecessor
3
<PAGE>
corporation, whether or not the Indemnitee is serving in such capacity at the
time any liability or expense is incurred for which indemnification or
reimbursement can be provided under this Agreement.
2. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to
serve as a director or officer of the Company to the best of the Indemnitee's
abilities at the will of the Company or under separate contract, if such
contract exists, for so long as Indemnitee is duly elected or appointed and
qualified or until such time as the Indemnitee tenders a resignation in writing.
Nothing contained in this Agreement is intended to create in Indemnitee any
right to continued employment.
3. INDEMNIFICATION.
(a) THIRD PARTY PROCEEDINGS. The Company shall indemnify
Indemnitee against Expenses, judgments, fines, penalties or amounts paid in
settlement (if the settlement is approved in advance by the Company) actually
and reasonably incurred by Indemnitee in connection with a Proceeding (other
than a Proceeding by or in the right of the Company) if Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in the best interests
of the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any Proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that Indemnitee did not act in good faith and in a manner which Indemnitee
reasonably believed to be in the best interests of the Company, or, with respect
to any criminal Proceeding, had no reasonable cause to believe that Indemnitee's
conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. To the fullest
extent permitted by law, the Company shall indemnify Indemnitee against Expenses
and amounts paid in settlement, actually and reasonably incurred by Indemnitee
in connection with a Proceeding by or in the right of the Company to procure a
judgment in its favor if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the best interests of the Company and
its shareholders. Notwithstanding the foregoing, no indemnification shall be
made in respect of any claim, issue or matter as to which Indemnitee shall have
been adjudged liable to the Company in the performance of Indemnitee's duty to
the Company and its shareholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine.
(c) RELIANCE. For purposes of any determination of whether
Indemnitee acted in good faith, Indemnitee shall be deemed to have acted in good
faith if Indemnitee's action was based on the records or books of account of the
Company, including financial statements, or on information supplied to
Indemnitee by the officers of the Company in the course of their duties, or on
the advice of legal counsel for the Company or on information or records given
or reports made to the Company by an independent certified public accountant or
by
4
<PAGE>
an appraiser or other expert selected by the Company. The provisions of this
Section 3(c) shall not be deemed to be exclusive or to limit in any way the
other circumstances in which the Indemnitee may be deemed to have met the
applicable standard of conduct set forth in this Agreement. The knowledge or
actions, or failure to act, of any director, officer, agent or employee of the
Company shall not be imputed to Indemnitee for purposes of determining the right
to indemnification under this Agreement.
(d) SCOPE. Notwithstanding any other provision of this Agreement
but subject to Section 14(b), the Company shall indemnify the Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by other provisions of this Agreement, the Company's
Articles of Incorporation, the Company's Bylaws or by statute.
4. LIMITATIONS ON INDEMNIFICATION. Any other provision herein to
the contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement:
(a) EXCLUDED ACTS. To indemnify Indemnitee for any acts or
omissions or transactions from which a director may not be relieved of liability
under Section 204 of the California General Corporation Law;
(b) EXCLUDED INDEMNIFICATION PAYMENTS. To indemnify or advance
Expenses in violation of any prohibition or limitation on indemnification under
the statutes, regulations or rules promulgated by any state or federal
regulatory agency having jurisdiction over the Company.
(c) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
Expenses to Indemnitee with respect to Proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 of the California General Corporation Law, but such indemnification
or advancement of Expenses may be provided by the Company in specific cases if
the Board of Directors has approved the initiation or bringing of such suit;
(d) LACK OF GOOD FAITH. To indemnify Indemnitee for any
Expenses incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous;
(e) INSURED CLAIMS. To indemnify Indemnitee for Expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to or on behalf of Indemnitee by an insurance carrier
under a policy of directors' and officers' liability insurance
5
<PAGE>
maintained by the Company or any other policy of insurance maintained by the
Company or Indemnitee;
(f) CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for
Expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
5. DETERMINATION OF RIGHT TO INDEMNIFICATION.
(a) To obtain indemnification under this Agreement, Indemnitee
shall submit to the Company a written request therefor, including therein or
therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Company shall
promptly advise the Board of Directors in writing that Indemnitee has requested
indemnification.
(b) Upon receipt of a written claim addressed to the Board of
Directors for indemnification pursuant to this Agreement, the Company shall
determine by any of the methods set forth in Section 317(e) of the California
General Corporation Law whether and to what extent Indemnitee is entitled to
indemnification; provided, however, that (i) unless otherwise expressly
--------
prohibited by law, such determination shall be made by Independent Counsel in a
written opinion to the Board of Directors, a copy of which opinion shall be
delivered to Indemnitee, and (ii) if such determination may not then be made by
Independent Counsel and a Change of Control has occurred, then prior to such
determination by any means other than by Independent Counsel, the Company shall
obtain a written opinion of Independent Counsel as to whether and to what extent
Indemnitee is entitled to indemnification, a copy of which opinion shall be
delivered to Indemnitee.
(c) If a claim to indemnification under this Agreement is not
paid in full by the Company within ninety (90) days after such written claim has
been received by the Company, the Indemnitee may at any time thereafter bring
suit against the Company to recover the unpaid amount of the claim and, unless
such action is dismissed by the court as frivolous or brought in bad faith, the
Indemnitee shall be entitled to be paid also the expense of prosecuting such
claim. The court in which such action is brought shall determine whether
Indemnitee or the Company shall have the burden of proof concerning whether
Indemnitee has or has not met the applicable standard of conduct.
(d) In the event the opinion of Independent Counsel is sought as
to the entitlement of Indemnitee, the Independent Counsel shall be selected,
paid and discharged in the following manner:
(i) If a Change of Control has not occurred, the
Independent Counsel shall be selected by the Board of Directors, and the Company
shall give written notice to Indemnitee advising Indemnitee of the identity of
the Independent Counsel so selected.
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(ii) If a Change of Control has occurred, the Independent
Counsel shall be selected by Indemnitee (unless Indemnitee shall request that
such selection be made by the Board of Directors, in which event clause (i) of
this section shall apply), and Indemnitee shall give written notice to the
Company advising it of the identity of the Independent Counsel so selected.
(iii) Following the initial selection described above,
Indemnitee or the Company, as the case may be, may, within seven (7) days after
such written notice of selection has been given, deliver to the other party a
written objection to such selection. Such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements
of "Independent Counsel" as defined in Section 1 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall
act as Independent Counsel. If such written objection is made, the Independent
Counsel so selected may not serve as Independent Counsel unless and until a
court has determined that such objection is without merit.
(iv) Either the Company or Indemnitee may petition any court
of competent jurisdiction, if the parties have been unable to agree on the
selection of Independent Counsel within twenty (20) days after submission by
Indemnitee of a written request for indemnification. Such petition may request
a determination whether an objection to the party's selection is without merit
or seek the appointment as Independent Counsel of a person selected by the Court
or by such other person as the Court shall designate.
(v) The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to this Agreement, and the Company shall pay all
reasonable fees and expenses incident to the procedures of this Section 5
regardless of the manner in which such Independent Counsel was selected or
appointed.
6. ADVANCEMENT AND REPAYMENT OF EXPENSES.
Subject to Section 4 hereof, the Expenses incurred by Indemnitee
in defending and investigating any Proceeding shall be paid by the Company in
advance of the final disposition of such Proceeding within 30 days after
receiving from Indemnitee the copies of invoices presented to Indemnitee for
such Expenses, if Indemnitee shall provide an undertaking to the Company to
repay such amount to the extent it is ultimately determined that Indemnitee is
not entitled to indemnification. In determining whether or not to make an
advance hereunder, the ability of Indemnitee to repay shall not be a factor.
Notwithstanding the foregoing, in a proceeding brought by the Company directly,
in its own right (as distinguished from an action bought derivatively or by any
receiver or trustee), the Company shall not be required to make the advances
called for hereby if the Board of Directors determines, in its sole discretion,
that it does not appear that Indemnitee has met the standards of conduct which
make it permissible under applicable law to indemnify Indemnitee and the
advancement of Expenses would not be in the best interests of the Company and
its shareholders.
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7. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification or advancement by the Company of
some or a portion of any Expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, penalties, and amounts paid in
settlement) incurred by the Indemnitee in the investigation, defense, settlement
or appeal of a Proceeding, but is not entitled to indemnification or advancement
of the total amount thereof, the Company shall nevertheless indemnify or pay
advancements to the Indemnitee for the portion of such Expenses or liabilities
to which the Indemnitee is entitled.
8. NOTICE TO COMPANY BY INDEMNITEE. Indemnitee shall notify the
Company in writing of any matter with respect to which Indemnitee intends to
seek indemnification hereunder as soon as reasonably practicable following the
receipt by Indemnitee of written notice thereof; provided, however, that any
delay in so notifying the Company shall not constitute a waiver by Indemnitee of
her rights hereunder. The written notification to the Company shall be
addressed to the Board of Directors and shall include a description of the
nature of the Proceeding and the facts underlying the Proceeding and be
accompanied by copies of any documents filed with the court in which the
Proceeding is pending. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
9. MAINTENANCE OF LIABILITY INSURANCE.
(a) Subject to Section 4 hereof, the Company hereby agrees that
so long as Indemnitee shall continue to serve as a director or officer of the
Company and thereafter so long as Indemnitee shall be subject to any possible
Proceeding, the Company, subject to Section 9(b), shall use reasonable
commercial efforts to obtain and maintain in full force and effect directors'
and officers' liability insurance ("D&O Insurance") which provides Indemnitee
the same rights and benefits as are accorded to the most favorably insured of
the Company's directors, if Indemnitee is a director; or of the Company's
officers, if Indemnitee is not a director of the Company but is an officer.
(b) Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain D&O Insurance if the Company determines in good
faith that such insurance is not reasonably available, the premium costs for
such insurance are disproportionate to the amount of coverage provided, the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or the Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
(c) If, at the time of the receipt of a notice of a claim
pursuant to Section 8 hereof, the Company has D&O Insurance in effect, the
Company shall give prompt notice of the commencement of such Proceeding to the
insurers in accordance with the procedures set forth in the respective policies.
The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Indemnitee, all amounts payable as a
result of such Proceeding in accordance with the terms of such policies.
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10. DEFENSE OF CLAIM. In the event that the Company shall be
obligated under Section 6 hereof to pay the Expenses of any Proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such Proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election to do so. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same Proceeding,
provided that (i) Indemnitee shall have the right to employ counsel in any such
Proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by
Indemnitee has been previously authorized by the Company, or (B) Indemnitee
shall have reasonably concluded that there may be a conflict of interest between
the Company and the Indemnitee in the conduct of such defense or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
Proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
11. ATTORNEYS' FEES. In the event that Indemnitee or the Company
institutes an action to enforce or interpret any terms of this Agreement, the
Company shall reimburse Indemnitee for all of the Indemnitee's reasonable fees
and expenses in bringing and pursuing such action or defense, unless as part of
such action or defense, a court of competent jurisdiction deter mines that the
material assertions made by Indemnitee as a basis for such action or defense
were not made in good faith or were frivolous.
12. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
the Company contained herein shall continue during the period the Indemnitee is
a director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and shall
continue thereafter so long as the Indemnitee shall be subject to any possible
proceeding by reason of the fact that Indemnitee served in any capacity referred
to herein.
13. SUCCESSORS AND ASSIGNS. This Agreement establishes contract
rights that shall be binding upon, and shall inure to the benefit of, the
successors, assigns, heirs and legal representatives of the parties hereto.
14. NON-EXCLUSIVITY.
(a) The provisions for indemnification and advancement of
expenses set forth in this Agreement shall not be deemed to be exclusive of any
other rights that the Indemnitee may have under any provision of law, the
Company's Articles of Incorporation or Bylaws, the vote of the Company's
shareholders or disinterested directors, other agreements or otherwise, both as
to action in Indemnitee's official capacity and action in another capacity while
occupying Indemnitee's position as a director or officer of the Company.
(b) In the event of any changes, after the date of this
Agreement, in any applicable law, statute, or rule which expand the right of a
California corporation to indemnify its officers and directors, Indemnitee's
rights and the Company's obligations under this Agreement
9
<PAGE>
shall be expanded to the full extent permitted by such changes. In the event of
any changes in any applicable law, statute or rule, which narrow the right of a
California corporation to indemnify a director or officer, such changes, to the
extent not otherwise required by such law, statute or rule to be applied to this
Agreement, shall have no effect on this Agreement or the parties' rights and
obligations hereunder.
15. EFFECTIVENESS OF AGREEMENT. To the extent that the
indemnification permitted under the terms of certain provisions of this
Agreement exceeds the scope of the indemnification provided for in the
California General Corporation Law, such provisions shall not be effective
unless and until the Company's Articles of Incorporation authorize such
additional rights of indemnification. In all other respects, the balance of this
Agreement shall be effective as of the date set forth on the first page and may
apply to acts of omissions of Indemnitee which occurred prior to such date if
Indemnitee was an officer, director, employee or other agent of the Company, or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, at the time such act or omission occurred.
16. SEVERABILITY. Nothing in this Agreement is intended to require
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 16. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee to the full extent permitted by
any applicable portion of this Agreement that shall not have been invalidated,
and the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
17. GOVERNING LAW. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of California. To the extent permitted
by applicable law, the parties hereby waive any provisions of law which render
any provision of this Agreement unenforceable in any respect.
18. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
19. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee
acknowledge that in certain instances, federal law or applicable public policy
may prohibit the Company from indemnifying its directors and officers under this
Agreement or otherwise. Indemnitee understands and acknowledges that the Company
has undertaken or may be required in the future to undertake with the
appropriate state or federal regulatory agency to submit for approval any
request for indemnification, and has undertaken or may be required in the future
to undertake with the Securities and Exchange Commission to submit the question
of indemnification
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to a court in certain circumstances for a determination of the Company's right
under public policy to indemnify Indemnitee.
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
21. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
TARRANT APPAREL GROUP
By_______________________________
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
INDEMNITEE:
________________________________
Name:
Address:
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EXHIBIT 10.57
-------------
SPECIAL DEPOSIT ACCOUNT AGREEMENT
(SECURITY INTEREST IN DEPOSIT ACCOUNT)
To: Union Bank of California, N.A.
Office: Los Angeles Headquarters Office
445 South Figueroa
Los Angeles, California 90071
Attention: Debra Jamin Heller
Re: Borrower: Tarrant Apparel Group dba Fashion Resource
Secured Party: The Hongkong and Shanghai Banking Corporation, Ltd.,
Title of Special Deposit Account: Tarrant Apparel Group dba Fashion
Resource
Special Deposit Account for Hongkong Bank
Special Deposit Account Number: 2100691003
1. SECURITY INTEREST IN SPECIAL DEPOSIT ACCOUNT. This shall serve as notice
to Union Bank of California, N.A. ("Bank") that Tarrant Apparel Group dba
Fashion Resource ("Borrower") has assigned and granted to the Hongkong and
Shanghai Banking Corporation, Limited ("Secured Party") a security interest in
certain assets of Borrower, including among other things, all checks, drafts,
and other instruments deposited in account number 2100691003 ("Special Deposit
Account") maintained by Borrower with Bank, and any and all future deposits
thereto, and any and all proceeds thereof, including any interest earned
thereon.
2. BANK ACKNOWLEDGMENT. Bank acknowledges and agrees that Bank has received
notice of Secured Party's security interest in the Special Deposit Account.
Borrower has assigned to Secured Party all funds deposited in the Special
Deposit Account, and Bank shall act as Secured Party's agent with respect to the
receipt, processing, and application of those funds. For so long as this
Agreement remains in effect, Bank waives its rights of charge back, setoff
and/or banker's lien against the Special Deposit Account. Provided, however,
that nothing herein constitutes a waiver of, and Bank expressly reserves all of
its present and future rights (whether described as rights of setoff, banker's
lien, chargeback or otherwise and whether available to Bank at law, in equity,
under the Commercial Code, under any other agreement between Bank and Borrower
concerning the Special Deposit Account or otherwise) with respect to (a) Items
deposited to the Special Deposit Account that are returned unpaid, whether for
insufficient funds or for any other reason; (b) claims of breach of the
Commercial Code's warranties of good title or of no-material-alterations made
against Bank in connection with Items deposited to the Special Deposit Account;
and (c) Bank's usual and customary charges for services rendered in connection
with the Special Deposit Account. Secured Party acknowledges and agrees that
its security interest in the Special Deposit Account is subordinate to the
rights reserved by Bank in this paragraph.
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3. RETURNED ITEMS AND FEES. Bank will charge a separate deposit account
(#2100690988) to be maintained by Borrower for Items deposited to the Special
Deposit Account that are returned unpaid or returned for any reason and for
Bank's fees and charges relating to the Special Deposit Account. In the event
that there are insufficient funds in Borrower's separate account to cover the
amount of Bank's fees, charges, or returned Items, Bank may charge the Special
Deposit Account for the insufficiency. Bank reserves the right to place a hold
on funds deposited to the Special Deposit Account to the extent permitted by
Federal Reserve Regulation CC. Upon demand, Secured Party agrees to reimburse
Bank for Bank's fees, charges, and returned Items if there are insufficient
funds in Borrower's separate account for the Special Deposit Account to cover
such fees, charges, and returned Items.
4. SECURED PARTY'S ORDERS. Borrower hereby irrevocably authorizes and directs
Bank to honor only such withdrawal and transfer orders respecting the Special
Deposit Account as Secured Party may issue, notwithstanding any inconsistent or
conflicting orders given to Bank by Borrower.
5. RELEASE OF SECURITY INTEREST; TERMINATION OF AGREEMENT. This Agreement
shall remain in full force and effect until Bank receives at the Banking Office
Secured Party's written notice of release of its interest in, or assignment to
Borrower of, the Special Deposit Account. Notwithstanding the foregoing, either
Secured Party or Bank may terminate this Agreement by giving 30 days' written
notice to the other and to Borrower. Following such termination Bank shall
follow Secured Party's instructions for the payment of any balance of funds in
the Special Deposit Account. Termination shall not affect the duties or
responsibilities of any party hereto arising out of transactions occurring prior
to termination.
6. DEPOSITS BY BORROWER OR SECURED PARTY. For so long as this Agreement
remains in force, Bank may accept for deposit into the Special Deposit Account,
any checks, drafts, or other instruments for the payment of money (as used in
this Agreement, each an "Item" and collectively "Items") payable or endorsed to
Borrower, to Secured Party, to both of them, or to cash or bearer, whether
endorsed or unendorsed.
7. BANK'S DISCLAIMERS; SCOPE. Secured Party and Borrower acknowledge and
agree that (a) Bank makes no representations or warranties, express or implied,
concerning the validity, perfection, or priority of Secured Party's security
interest in the Special Deposit Account; (b) this Agreement applies only to the
Special Deposit Account designated above, but not to any other deposit account
which Borrower may now or hereafter maintain with Bank.
8. INDEMNIFICATION OF BANK BY BORROWER. Borrower agrees to defend, indemnify
and hold Bank, its directors, officers, employees, attorneys, successors and
assigns, harmless from and against any and all loss, liability, cost, damage and
expense, including, without limitation, legal and accounting fees and expenses,
arising in any manner whatsoever out of: (a) the acts, errors or omissions of
Borrower or Secured Party or the agent of either; and (b) Bank's acting in
accordance with the provisions of this
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Agreement, excepting only liability occasioned solely by Bank's gross negligence
or willful misconduct. In no event shall Bank be liable for any consequential,
indirect, punitive, or special damage relating to its performance of its duties
under this Agreement, excepting only damages caused by Bank's willful misconduct
or fraud.
9. INDEMNIFICATION OF BANK BY SECURED PARTY. Secured party agrees to
indemnify, release, and hold Bank, its directors, officers, employees,
attorneys, successors and assigns, harmless from and against any and all loss,
liability, cost, damage and expense including, without limitation, legal and
accounting fees and expenses, arising in any manner whatsoever out of Bank's
acting on any notice, orders or instructions concerning the Special Deposit
Account given to Bank by Secured Party.
10. BANKRUPTCY; LEGAL PROCESS. In the event that Borrower becomes subject to
voluntary or involuntary proceedings under the U.S. Bankruptcy Code, or if the
Bank is served with legal process which the Bank in good faith believes affects
the Special Deposit Account, Bank shall have the right to place a hold on funds
deposited to the Special Deposit Account until such time as the Bank receives an
appropriate court order or other assurances satisfactory to Bank establishing
that the funds may be disbursed according to the provisions of this Agreement.
Bank shall immediately provide Borrower and Secured Party notice of any hold
placed by Bank under this paragraph.
11. NOTICES. Any notice given by any party under this Agreement shall be
effective only if (a) given in writing and (b) personally delivered, sent by
United States mail, postage prepaid, or sent by telecopier or other
authenticated message, charges prepaid and addressed to the respective address
set forth herein or in Bank's records for Borrower and Secured Party,
respectively. Either Secured Party, Borrower, or Bank may change the place to
which notices, requests, and other communications are to be sent by giving
written notice of such change to the others.
Notwithstanding the foregoing, Bank shall have no obligation to act upon any
Orders, Secured Party's Release, or other notices or instructions given to Bank
hereunder until received in writing at the address specified below.
Union Bank of California, N.A. (Bank)
Office: Los Angeles Headquarters Office
445 South Figueroa
Los Angeles, Ca 90071
Telecopier: 800-738-2329
Telex: 188612 UNIONBK UT
Telephone: 800-298-6466
Attention: Juanita Balagtas or Karen Hall or Francine Alfaro
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Tarrant Apparel Group dba Fashion Resource (Borrower)
3151 East Washington Blvd., Los Angeles, California 90023
Telecopier: (213)881-0368
Telephone: (213)881-0331
Attention: Nafi Sedaghat
The Hongkong and Shanghai Banking Corporation, Ltd., (Secured Party)
Level 10, 1 Queens Road Central
Hong Kong
Telecopier: 852-2877-5442
Telex: 73205 HSBC HX
Telephone: 852-2822-3515
Attention: James Benoit, CFA
12. SUCCESSORS AND ASSIGNS; NO THIRD PARTY RIGHTS; ENTIRE AGREEMENT;
AMENDMENTS; CALIFORNIA LAW; COUNTERPARTS; CAPTIONS; NON-WAIVER; RIGHTS
CUMULATIVE; CORPORATE/PARTNERSHIP AUTHORITY. The provisions of this Agreement
shall be binding upon and inure to the benefit of Bank, Secured Party and
Borrower and their respective successors and assigns and to no other person,
firm or entity; provided, however, that neither Secured Party nor Borrower may
assign any of its rights hereunder without Bank's prior written consent. This
Agreement constitutes the entire agreement between Bank, on the one hand, and
Secured Party and Borrower on the other hand, concerning the subject matter
hereof. Except to the extent inconsistent herewith, all other agreements
between Bank and Secured Party or Borrower concerning the Special Deposit
Account shall remain in full force and effect. This Agreement shall be
construed and interpreted in accordance with California law. This Agreement may
be executed in counterparts, each of which shall be an original, and all of
which shall constitute but one and the same instrument. Each person signing on
behalf of a party hereto warrants that such party has performed all corporate or
partnership actions necessary to make this Agreement a binding obligation,
enforceable in accordance with its terms. No modification, amendment or
alteration of this Agreement will be effective against any party hereto unless
specifically agreed upon in a writing signed by that party.
13. ARBITRATION. Any controversy or claim between or among the parties arising
out of or relating to this Agreement, or the breach thereof, shall at the
request of any party be determined by mandatory and binding arbitration. The
arbitration shall be conducted in accordance with the United States Arbitration
Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this
Agreement, and under the Commercial Rules of the American Arbitration
Association
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("AAA"). The arbitration shall be conducted within the County of Los Angeles,
California. The arbitrator(s) shall give effect to statutes of limitation in
determining any claim. Any controversy concerning whether an issue is arbitrable
shall be determined by the arbitrator(s). Judgment upon the arbitration award
may be entered in any court having jurisdiction.
The foregoing is hereby acknowledged and agreed to, effective _____________,
1997.
THE HONGKONG AND SHANGHAI BANK CORP., LTD.
By: /s/ James Benoit
---------------------------------
Title: Corporate Relationship Manager
------------------------------
TARRANT APPAREL GROUP DBA FASHION RESOURCE TARRANT APPAREL GROUP DBA FASHION
RESOURCE
By: /s/ Mark B. Kristof By: /s/ Corazon R. Reyes
------------------------------- ------------------------
Title: Vice President-Finance & CFO Title: Chief Operating Officer
---------------------------- -----------------------
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Debra Jamin Heller
------------------------
Title: Vice President
---------------------
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EXHIBIT 10.58
-------------
[LETTERHEAD OF THE CIT GROUP/COMMERCIAL SERVICES, INC.]
Date: June 13, 1997
TARRANT APPAREL GROUP
3151 E. Washington Blvd.
Los Angeles, Ca 90023
ACCOUNTS RECEIVABLE FINANCING AGREEMENT
---------------------------------------
Ladies and Gentlemen:
In consideration of our extending loans and other financial accommodations to
you on one or more occasions, the following shall constitute the accounts
receivable financing agreement (the "Agreement") between us.
I. DEFINITIONS
1.1 All terms used herein and defined in the California Uniform Commercial Code
shall have the meanings given therein unless otherwise defined herein.
1.2 "Accounts" shall mean and include all of your accounts and accounts
receivable created by or arising from your sales of goods or rendition of
services to Lerner New York, a division of The Limited Corporation and to Target
Stores, a division of Dayton Hudson Corporation, (including, without limitation,
all accounts and accounts receivable arising from sales made or services
rendered under any of your trade names (such as Fashion Resources) or styles, or
through any of your divisions), and all instruments, documents, contract rights,
chattel paper, and general intangibles arising out of such sales or rendition of
-----------------------------------------
services.
- --------
1.3 "Business Day" shall mean a day other than a Saturday, Sunday or legal
holiday under the laws of the States of California and/or New York.
1.4 "Chase Rate" shall mean the per annum rate of interest publicly announced
by The Chase Manhattan Bank in New York, New York, from time to time as its
prime rate. The Chase Rate shall be determined by us at the close of business
on the last Business Day of each calendar month. (The prime rate is not intended
to be the lowest rate of interest charged by The Chase Manhattan Bank to its
borrowers.)
1.5 "Collateral" shall mean and include: (a) Accounts; (b) all of your present
and future monies, securities and other property now or hereafter held or
received by or in transit to us from or for your account, whether for
safekeeping, pledge, custody, transmission, collection or otherwise; (c) all of
your present and future deposits, balances, sums and credits in our possession
or control; arising out of the Accounts, (d) all of your present and future
liens, security interests, rights, remedies, title and interest in, to and in
respect of the Accounts including, without limitation; (i) rights and
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remedies under or relating to guaranties, contracts of suretyship, letters of
credit, credit insurance, or other types of credit enhancements, (ii) rights of
stoppage in transit, rescission, replevin, repossession, reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, (iii) goods
described in invoices, documents, contracts or instruments with respect to, or
otherwise representing or evidencing Accounts, including, without limitation,
returned, repossessed and reclaimed goods, and (iv) deposits by and property of
Customers or other persons securing the Obligations of Customers; (e) all of
your books of account of every kind or nature, purchase and sale agreements,
invoices, ledger cards, computer programs, bills of lading and other shipping
evidence, statements, correspondence, memoranda, credit files and other data
(written, electronic or otherwise) relating to the Collateral or any Customer,
together with the file cabinets or containers in which the foregoing are stored
("Records"); (f) all proceeds and products of the foregoing, in any form,
including, without limitation, insurance proceeds and any claims against third
parties for loss or damage to or destruction of any or all of the foregoing.
1.6 "Customer" shall mean Lerner New York, a division of the Limited
Corporation and Target Stores, a division of Dayton Hudson Corporation.
1.7 "Eligible Accounts" shall mean the Accounts arising in the ordinary course
of your business which are evidenced by an invoice or other documentation
reasonably satisfactory to us. An Account shall not be deemed eligible in any
event unless such Account is subject to our first priority perfected security
interest and is not subject to any other lien or security interest. In
addition, no Account shall be an Eligible Account if:
(i) it arises out of a sale made by you to your affiliate or to a person,
firm, corporation, or other entity controlled by you or your affiliate; or
(ii) it is due or unpaid more than ninety (90) days after the original
invoice date; or
(iii) any representation, warranty or covenant contained in this
Agreement with respect to such Account has, in our reasonable determination,
been breached; or
(iv) the Customer is also your creditor or supplier (unless prior to our
acceptance, a no-offset letter has been received by and is, in our sole
discretion, acceptable to us); or
(v) the Customer shall (a) apply for, suffer, or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property or call
a meeting of its creditors, (b) admit in writing its inability, or be generally
unable, to pay its debts as they become due, (c) cease or materially decrease
operation of its present business, (d) make a general assignment for the benefit
of creditors, (e) commence a voluntary case under any State or Federal
bankruptcy or insolvency law (as now or hereafter in effect), (f) be adjudicated
a bankrupt or insolvent, (g) file a petition seeking to take advantage of any
other law providing for the relief of debtors, (h) acquiesce to, or fail to have
dismissed, any petition which is filed against it in an involuntary case under
any such bankruptcy or insolvency law, or (i) take any action for the purpose of
effecting any of the foregoing; or
(vi) it arises out of a sale made by you to a Customer on a bill-and-hold,
guaranteed sale, sale-or-return, sale on approval, consignment or any other
repurchase or return basis or is evidenced by chattel paper; or
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(vii) the goods giving rise to such Account have not been shipped and
delivered to and accepted by the Customer or the services giving rise to such
Account have not been completely performed by you and accepted by the Customer
or the Account otherwise does not represent a final sale or performance; or
(viii) the Accounts from such Customer exceed a credit limit
determined by us, in our sole discretion, to the extent such Account exceeds
such limit; or
(ix) the Customer has disputed liability, or the Customer has made any
claim with respect to any other Account due from such Customer to you, or the
Account otherwise is or may become subject to any set-off or recoupment by the
Customer, or the Account is contingent in any respect or for any reason; or
(x) you have allowed or made any agreement with any Customer for any
deduction therefrom, except for discounts or allowances made in the ordinary
course of business for prompt payment, all of which discounts or allowances are
reflected in the calculation of the face value of each respective invoice
related thereto.
1.8 "Net Amount of Eligible Accounts" shall mean and include the gross amount
of Eligible Accounts less (a) returns, discounts, claims, credits and allowances
of any nature at any time issued, owing, granted, outstanding, available or
claimed with respect thereto, and (b) amounts thereof which are not paid by the
subject Customer due to an existing or alleged dispute, offset, recoupment or
counterclaim.
1.9 "LIBOR Rate" shall mean the rate of interest per annum at which deposits in
U.S. dollars are offered to major banks for a thirty day period in the London
Interbank market at approximately 11:00 a.m. (London time), as reported by the
Telerate System on page 3750 (or such other page as may replace such page 3750
on such system for the purpose of reporting London Interbank Offered Rates of
major banks) under the heading for British Bankers Association Interest
Settlement Rates in the column designated "USD" (U.S. Dollar) on the last
Business Day of each calendar month.
1.10 "Obligations" shall mean and include: (a) any and all of your
indebtedness, liabilities and obligations to us of every kind, nature and
description, direct or indirect, secured or unsecured, joint or several,
absolute or contingent, due or to become due, now existing or hereafter arising,
regardless of how they arise or were acquired or by what agreement or instrument
they may be evidenced or whether evidenced by any agreement or instrument, but
not including, all amounts owing by you to us by reason of purchases made by you
from other entities factored or financed by us; (b) any and all of your
obligations to us to perform acts or refrain from taking any action; and (c) any
and all amounts of charges, commissions, interest, costs, expenses and
attorneys' fees chargeable in connection with all of the foregoing all of which
indebtedness, liabilities, obligations and amounts, whether or not matured and
whether or not disputed, may be charged to your account hereunder, without prior
notice to you.
II. GRANT OF SECURITY INTEREST
2.1 To secure the prompt payment, performance and observance in full of all
Obligation, you hereby pledge, transfer, set over and assign to us, and grant to
us a continuing general security interest in, a lien upon and a right of set-off
against, all of the Collateral. Records shall, until delivered to or removed by
us, be kept by you in trust for us and without cost to us in appropriate
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containers in safe places on your premises. Each confirmatory assignment
schedule or other form of assignment at any time executed by you shall be deemed
to include the foregoing pledge, transfer, assignment and grant whether or not
same appears therein.
2.2 At such time as a Default has occurred and is continuing hereunder, you
will, upon our written request, provide us with (a) confirmatory assignment
schedules; and (b) such further schedules and/or information as we may
reasonably request. The items to be provided under this paragraph are to be in
form reasonably satisfactory to us and executed and delivered to us from time to
time so that we can confirm and maintain records of the Collateral. Your
failure to give any of such items to us or to otherwise comply with the
provisions hereof shall not affect, terminate, modify, diminish or otherwise
limit our lien upon or security interest in the Collateral, or your
representations, warranties or covenants under this Agreement.
III. ADVANCES AND INTEREST
3.1 Subject to the terms and conditions of this Agreement, we shall make
advances of up to $25,000,000.00 outstanding at any one time (the "Maximum
Credit Facility") available to you upon your request therefor, as follows:
(a) we will make revolving credit advances, in amounts of up to one hundred
percent (100%) of the Net Amount of Eligible Accounts; and
(b) over-advances, in our sole discretion, in an amount not to exceed
$10,000,000.00 at any time, and, with the amount of any revolving credit
advances, not to exceed the Maximum Credit Facility.
3.3 All loans and advances (including, without limitation, any over-advances,
if any) by us to you under this Agreement shall constitute Obligations secured
by our security interest in all of the Collateral granted hereunder. All loans
or advances (including, without limitation, any over-advances, if any) shall be
charged to your account on our books, and shall be payable on demand at our
offices or at such other place as we may from time to time designate.
3.4 Interest shall be payable by you (and charged to your account as of the end
of each month) on the average of the net balances owing by you to us in your
account at the close of each day during such month at your option, interest on
all amounts outstanding will accrue at one of the following two rates:
(1) The Chase Rate minus 1.25%
or
(2) The LIBOR Rate plus 1.25%
You must inform us in writing, using a form of letter that we will provide to
you, that you will fax to us no later than three (3) Business Days before the
last day of each calendar month, which interest rate you have elected for the
succeeding calendar month If we do not receive written notice from you as
required above, then the interest rate currently in effect, i.e. either the
Chase Rate minus 1.25% or the LIBOR Rate plus 1.25%, will stay in effect until
we receive such a notice from you.
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Interest shall be calculated based on a 360-day year. Interest shall be charged
on all advances (including, without limitation, any over-advances, if any), all
charges hereunder, and any debit balance in your account. We shall be entitled
to charge your account at the rate provided for herein until all Obligations
have been paid and satisfied in full. In no event shall the rate charged
hereunder exceed the highest rate permissible under applicable law; however, in
the event that we receive or have received interest hereunder in excess of the
highest rate permissible under applicable law, such excess shall be applied in
reduction of the principal amount of the Obligation.
3.5. A facility fee of $2,500.00 shall be due and payable by you as of the date
set forth above and shall be charged to your account as of such date. Such
facility fee shall be deemed earned when due and shall not be subject to rebate
or proration for any reason.
3.6 We shall render to you each month a statement of your account which shall
be deemed to be correct and accepted by and binding upon you, and shall
constitute an account stated between us except to the extent that we receive a
written statement of your specific exceptions within sixty (60) days after such
statement has been rendered to you.
IV. REPRESENTATIONS, WARRANTIES AND COVENANTS
You hereby make the following representations, warranties and covenants which
shall survive the execution and delivery of this Agreement, shall be deemed to
be incorporated by reference in each confirmatory assignment schedule or other
form of assignment submitted by you to us, shall be deemed repeated and
confirmed every time we make a new advance to you, and shall be deemed repeated
and confirmed with respect to each item of Collateral as it is created or
otherwise acquired:
4.1 You are a duly organized and validly existing corporation, limited
liability company, partnership, or other business entity, qualified to do
business in all states where required; except as previously disclosed to us by
you, there are no actions, suits or other legal proceedings of any kind or
nature pending against you which involve the possibility of materially and
adversely affecting your business, assets, operations, condition or prospects,
financial or otherwise, or the Collateral, or your ability to perform this
Agreement; the execution, delivery and performance hereof are within your
corporate (or other business entity) powers, have been duly authorized, and are
not in contravention of any law or the terms of your certificate of
incorporation or bylaws (or other documents establishing your legal status), or
of any indenture, agreement or undertaking to which you are a party or by which
you or your properties are bound; and the most recent financial statements
provided to us by you fairly present your financial condition and there has been
no material adverse change in your financial condition since the date of such
financial statements.
4.2 Except for the security interests held by NationsBanc Commercial
Corporation (which is the subject of a separate agreement between us and
NationsBanc Commercial Corporation being delivered concurrently herewith) with
respect to each item of Collateral at the time our security interest attaches
thereto: (a) you shall be the sole owner, free and clear of all liens, claims,
security interests and encumbrances except in our favor, and fully authorized to
sell, transfer, pledge and grant a security interest in, such item of
Collateral; (b) each Account shall be genuine, valid and legally enforceable,
and represent an undisputed bona fide indebtedness incurred by the Customer
therein named, for a fixed sum as set forth in the invoice relating thereto with
respect to an absolute sale and delivery of goods upon your stated terms or
services theretofore rendered by you as of the date each Account is created; (c)
no Account is or shall be subject to any offset, recoupment, deduction, defense,
dispute, claim, counterclaim, discount or allowance except as may be stated in
the copy of the invoice delivered by you to us; (d) all statements made and all
unpaid balances appearing
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in the invoices, documents and agreements relating to each Account shall be true
and correct in all respects and what they purport to be; (e) none of the
Accounts arise from sales to consumers of goods to be used for personal, family
or household purposes; (f) all signatures and endorsements that appear thereon
shall be genuine and all signatories and endorsers shall have full capacity to
contract; and (g) none of the transactions underlying or giving rise to any item
of Collateral shall violate any applicable state or federal laws or regulations,
and all documents relating to such item of Collateral shall be legally
sufficient under such laws or regulations and shall be legally enforceable in
accordance with their terms.
4.3 All recording, filing and other requirements of giving public notice under
any applicable law or ordinance have been duly complied with by you. You will
from time to time, at your expense, perform all acts and execute all documents
requested by us, including, without limitation, the obtaining, executing,
delivering or filing of financing statements, landlord's or mortgagee's waivers,
third party processor letters, and other notices, and amendments and renewals
thereof, in order to create, perfect, maintain and enforce a valid first lien
upon, pledge of, or security interest in all of the Collateral in our favor.
All charges, expenses and fees we may incur in obtaining or filing any of the
foregoing, or in searching any public records in connection therewith, shall be
charged to your account and added to the Obligations.
4.4 Except as set forth in our separate agreement with NationsBanc Commercial
Corporation referred from section 4.2 above, you shall not pledge, sell, assign,
transfer, create or suffer to exist any security interest in or other lien or
encumbrance on any part of the Collateral to anyone other than us without our
prior written consent. You hereby agree to defend the same against any and all
persons whatsoever.
4.5 Each Customer, guarantor or endorser is to the best of your knowledge
solvent and will continue to be fully able to pay all Accounts on which it is
obligated in full when due.
4.6 You shall maintain your books, records and accounts in accordance with
generally accepted accounting principles consistently applied. You shall, at any
time and from time to time, furnish to us such balance sheets, earnings
statements, financial statements and other reasonable information regarding your
business affairs and financial condition, including, without limitation
schedules, agings and reports, as we may request, and in any event you shall
furnish us: (a) as soon as possible, but not later than one hundred twenty (120)
days after the close of each of your fiscal years, your financial statements as
of the end of such year, on a consolidated basis audited by a firm of
independent certified public accountants of recognized standing, selected by you
and reasonably acceptable to us; and (b) as soon as possible, but not later than
one hundred twenty (120) days after the end of each quarter hereafter, your
unaudited interim financial statements as of the end of such period and of the
portion of your fiscal year then elapsed, on a consolidated basis certified by
your principal financial officer prepared in accordance with generally accepted
accounting principles consistently applied, and fairly presenting the financial
position and results of your operations for such period. All such financial
statements do or shall fairly present your financial condition as of the dates
thereof or the results of your operations for the periods for which the same are
furnished All such other information is or shall be, at the time the same is so
furnished accurate and correct in all material respects and complete insofar as
completeness may be necessary to give us a true and accurate depiction of the
subject matter thereof.
6
<PAGE>
4.7 You shall keep all your insurable properties and properties in which you
have an interest insured against the hazards of fire, flood, sprinkler leakage,
those hazards covered by extended coverage insurance and such other hazards, and
for such amounts, as is customary in the case of companies engaged in businesses
similar to yours. You shall pay when due all premiums on any insurance policies
for your properties or assets. You shall also pay when due and discharge all
taxes, assessments, contributions and other charges upon or against you or your
properties or assets, including the Collateral. If any such premium, tax,
assessment, contribution or other charge remains unpaid after the date fixed for
the payment of same, or if any lien shall be claimed, we may after 10 days prior
written notice to you pay such premium, tax, assessment, contribution, charge or
claim, and the amount thereof shall be payable on demand, and until paid by you,
shall be charged to your account and added to and deemed part of the
Obligations.
4.8 You shall be liable for any tax or penalty imposed upon any transaction
under this Agreement or giving rise to the Account or which we may be required
to withhold or pay for any reason; you agree to indemnify and hold us harmless
with respect thereto, and to repay to us on demand the amount thereof, and until
paid by you, such amount shall be charged to your account and added to and
deemed part of the Obligations. If any Account includes a charge for any tax
payable to any governmental taxing authority, we are hereby authorized in our
sole discretion to pay the amount thereof to the proper taxing authority for
your account and to charge your account therefor. You shall notify us if any
Account includes any tax due to any such taxing authority and in the absence of
your notice, we shall have the right to retain the full proceeds of such
Account.
4.9 You shall comply with all laws, rules, regulations and orders of any
legislative, administrative or judicial body or official, applicable to your
properties and assets, including the Collateral, or to the operation of your
business except where any failure of compliance would not be materially adverse
to our interests.
4.10 Any mergers or acquisitions which are approved by Tarrant Apparel Group's
Board of directors will be notified to us in writing within 24 hours.
4.11 Your Records and chief executive office shall be kept at your address as
it appears on the first page of this Agreement. You shall give us thirty (30)
days' prior written notice of any change in your name, trade names or styles, or
location(s).
4.12 You shall from time to time make such payments to us as we shall request
so that the aggregate balance in your loan account shall not at any time exceed
the Maximum Credit Facility.
4.13 You shall maintain at all times a minimum Tangible Net Worth of
$30,000,000.00. For purposes hereof, your Tangible Net Worth is defined as the
aggregate of your paid up capital, reserves and retained profits, or losses,
after deducting all amounts attributable to goodwill, licenses and all other
assets that would be treated as intangibles pursuant to generally accepted
accounting principles in the United States of America in effect from time to
time and consistently applied.
4.14 You shall maintain at the end of each of your fiscal years a Debt to
Equity Ratio of not more than 2.0:1.0. The Debt to Equity Ratio is defined as
total liabilities (current and long term) divided by Tangible Net Worth.
4.15 You shall not have two consecutive fiscal quarters where you have
sustained net losses.
7
<PAGE>
V. CUSTODY, INSPECTION, COLLECTION AND HANDLING
OF COLLATERAL AND RECORDS
5.1 Until we have advised you to the contrary, you may and will enforce,
collect and receive all amounts owing on the Accounts, for our benefit and on
our behalf, but at your expense; such privilege shall terminate automatically
upon the occurrence and/or continuance of a Default Any and all checks, cash,
notes or other instruments or property received by you with respect to Accounts
shall be held by you in trust for us, separate from your own or anyone else's
property and funds, and immediately turned over to us with proper assignments or
endorsements. This shall be accomplished by your instructing all of your
Customers to remit funds to a lock box, which lock box shall be maintained at
such bank or banks as are reasonably acceptable to us, and which shall be under
our exclusive control. We shall provide you with copies of the deposit slips
for each day's deposits on the next following business day, and on the first
business day of each week we shall provide you with a report of all collections
for the preceding week showing the gross amount of such Accounts and the net
amount collected thereon. All amounts received by us in payment of Accounts
will be credited to your account immediately upon our receipt of "good funds".
No checks, drafts or other instruments received by us shall constitute final
payment to us unless and until such instruments have actually cleared and been
collected. We shall be entitled to charge your account with amounts we receive
in payment of Accounts and which we may thereafter be required to turn over or
return for any reason.
Upon automatic termination of your privilege to enforce, collect and
receive all amounts owing on the Accounts for our benefit and on our behalf, or
at any other time and without any cause or notice thereof to you, we shall have
the right to send notice(s) of assignment or notice(s) of our security interest
to any Customers or any other persons obligated on, holding or otherwise
concerned with any of the collateral, and thereafter we shall have the sole
right to collect the Accounts and/or take possession of the Collateral and the
Records. Any and all of our collection expenses, including, but not limited to,
the reasonable fees and expenses of our independent attorneys, the fees of our
collection agencies, stationery and postage, telephone and facsimile expenses,
shall be charged to your account and added to the Obligations.
5.2 You shall keep and maintain, at your cost and expense, the Records and all
books and records pertaining to the Collateral in such detail, form and scope as
is indicated by generally accepted accounting standards. You will mark your
Records with appropriate notations satisfactory to us, disclosing that such
Collateral has been pledged, assigned, and transferred to us and that you have
granted to us a security interest therein.
5.3 At all reasonable times, and upon 24 hours prior notice to you we shall
have: full access to, and the right to check inspect, examine and make abstracts
and copies from, your Records and all other books, records, audits,
correspondence and papers relating to the Collateral; the right to confirm and
verify all Accounts; and the right to do whatever we may deem necessary to
preserve or protect our interests in the Obligations and the Collateral, and in
furtherance thereof, we may, without cost or expense to us, use such of your
personnel, supplies and space as may be reasonably necessary. Upon 24
hours,prior notice to you, we or our agents may enter upon any of your premises
at any time and from time to time during business hours for the purpose of
inspecting the Collateral and any and all Records pertaining thereto. At any
time we may make copies of and remove or require you to deliver any or all such
Records. In order to cover any costs and expenses we may incur in connection
with performing any of the aforementioned checks, verifications, inspections or
examinations (collectively, "Examinations"), we shall be entitled to charge your
account a fee for each day or part thereof in which such Examinations are
conducted, plus any additional out-of-pocket
8
<PAGE>
costs and expenses we incur as a result of conducting such Examinations.
5.4 You shall, immediately upon obtaining knowledge thereof, notify us of any
reclamation, return or repossession of goods; any claim or dispute asserted by
any Customer or other obligor; any loss or destruction of, or substantial damage
to, any of the Collateral; and any other matter affecting the value,
enforceability or collectibility of any of the Collateral. Except in the normal
course of business and consistent with your historical practices, you shall not,
without our consent, settle, compromise or adjust any Account (or extend the
time for payment thereof) or grant any additional discounts, allowances or
credits thereon.
5.5 You hereby constitute us and any of our agents or designees, as your
attorneys-in-fact, at your own cost and expense, to exercise at any time after
the occurrence of a Default, all or any of the following powers, which being
coupled with an interest, shall be irrevocable until all Obligations have been
paid in full: to receive, take, endorse, assign, deliver, accept and deposit, in
our name or yours, any and all checks, notes, remittances, wire transfers or
other electronic forms of payment, drafts and other documents and instruments
and documents relating to the Collateral; to receive, open and dispose of all
mail addressed to you and to notify postal authorities to change the address for
delivery of mail to such address as we may designate; to give Customers notice
of our interest in the Accounts and to request from Customers at any time, in
your name or ours or that of our designee, information concerning the Accounts;
to notify Customers to make payment directly to us; to execute in your name and
on your behalf any financing statements (including, without limitation, any
continuations thereof or amendments thereto); and to take or bring, in your name
or ours, all steps, actions or proceedings deemed by us necessary or desirable
to effect collection of the Collateral or to preserve, protect or enforce our
interest therein.
5.6 Nothing herein contained shall be construed to constitute you as our agent
for any purpose whatsoever. We shall not be responsible nor liable for any
shortage, discrepancy, damage, loss or destruction of any Collateral wherever
the same may be located and regardless of the cause thereof We shall not, under
any circumstances or in any event whatsoever, have any liability for an error or
omission or delay of any kind occurring in the settlement, collection or payment
of any of the Accounts or any instrument received in payment thereof or for any
damage resulting therefrom. If permitted under the provisions of this Agreement,
we may, without notice to or consent from you, sue upon or otherwise collect,
extend the time of payment of, or compromise or settle for cash, credit or
otherwise upon any terms, any of the Accounts or any securities, instruments or
insurance applicable thereto and release the obligor thereon, free of any claims
or defenses based upon suretyship law or the like. We are authorized and
empowered to accept the return of goods represented by any of the Accounts,
without notice to or consent by you, all without discharge or in any way
affecting your liability hereunder. We do not, by anything herein or in any
assignment or otherwise, assume any of your obligations under any contract or
agreement, and we shall not be responsible in any way for the performance by you
of any of the terms and conditions thereof.
5.7 We have the right at any time and from time to time to employ and have
present on any of your premises one or more custodians selected by us, each of
whom shall have the right to exercise any and all of our rights hereunder. You
hereby agree to cooperate with any such custodian and to do whatever we may
reasonably request by way of preserving and protecting the Collateral. All
expenses incurred by us by reason of the employment of the custodian shall be
payable on demand, and until paid by you, shall be charged to your account and
added to and deemed part of the Obligations.
9
<PAGE>
5.8 You shall pay and we shall be entitled to charge your account with, and add
to and deem part of the Obligations, all costs and expenses incurred by us in
connection with the enforcement of this Agreement and the protection,
maintenance, disposition, preservation and enforcement of the Obligations, the
Collateral, or the pledges, liens and security interests granted to us
hereunder. The foregoing costs and expenses shall include, without limitation,
all reasonable fees and expenses of our independent attorneys, all search fees,
the cost of all public record filings, and wire transfer charges.
VI. EVENTS OF DEFAULT; ACCELERATION
6.1 All Obligations shall, at our option and notwithstanding any time or credit
allowed by any instrument evidencing or representing same, be immediately due
and payable without notice or demand upon the occurrence of any one or more of
the following events of default ("Default"): (a) default in the payment or
performance, of any of the Obligations within 5 business days of our written
notice to you that same is due and payable including, without limitation, your
failure to pay to us any Obligation due on demand; (b) default by any guarantor,
endorser or other person liable on the Obligations under any guarantee,
endorsement, suretyship agreement or other agreement of such person with or in
favor of us; (c) your making any material misrepresentation, orally or in
writing, to us whether for the purpose of obtaining credit or an extension of
credit, or otherwise; (d) the passage of 5 business days after written notice by
us to you and of your breach of any representation, warranty or covenant
contained in this Agreement or in any other agreement, supplement, note or
schedule with or in favor of us; (e) the discontinuance or suspension of the
operation of your present business, or your becoming unable to meet your debts
as they mature, or your becoming insolvent; (f) your calling any meeting of
creditors, or having a creditors' committee appointed; (g) the commencement by
you of any action, case or proceeding for relief under any provision of the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency, or other similar law, or your making a general assignment for the
benefit of creditors, or the appointment of a receiver, custodian or trustee of
any kind for you or any of your property; or if any such action, case or
proceeding is commenced against you and is not dismissed within sixty (60) days
thereafter.
VII. RIGHTS AND REMEDIES AFTER DEFAULT
7.1 Upon the occurrence of any Default, and at any time thereafter if such or
any other Default shall then be continuing, we shall have the right (in addition
to any other rights we may have under this Agreement or otherwise) without the
issuance of any further notice or demand to you: (a) to appropriate, set-off and
apply to the payment of any or all of the Obligations, any or all Collateral, in
such manner as we shall in our sole discretion determine; (b) to enforce payment
of the Obligations or any Collateral; (c) to settle, compromise or release, in
whole or in part, any amounts owing on the Collateral; (d) to prosecute any
action suit or proceeding with respect to the Collateral; (e) to extend the time
of payment of any and all Collateral, to make allowances and adjustments with
respect thereto and to issue credits in your or our name; and (f) to sell,
assign and deliver the Collateral (or any part thereof), at public or private
sale, for cash, upon credit or otherwise, at our sole option and discretion, and
we may bid or become purchaser at any such sale, if public, free from any right
of redemption which is hereby expressly waived. If applicable law requires
issuance of a notice designating the place and time of any public sale or of the
time after which any private sale or other intended disposition of the
Collateral is to be made, you agree that the giving of five (5) days notice by
us to your address shown on the first page hereof (or such other address of
which we have received notice as provided herein) shall be deemed to be
reasonable notice thereof and you waive any other notice with respect thereto
unless such notice is contrary to applicable law. The net cash proceeds
resulting from the exercise of any of the foregoing rights or remedies shall be
applied by us
10
<PAGE>
to the payment of the Obligations in such order as we may elect, and you shall
remain liable to us for any deficiency.
7.2 We shall have the right in our sole discretion to determine which rights or
remedies, and in which order any of the same, are to be exercised, and we may at
any time pursue, relinquish, subordinate, modify or take any other action with
respect thereto, without in any way modifying or affecting any of them. We may,
at all times, proceed directly against you to enforce payment of the Obligations
and shall not be required to take any action of any kind to preserve, collect or
protect our or your rights in the Collateral.
7.3 The enumeration of the foregoing rights and remedies is not intended to be
exclusive, and such rights and remedies are in addition to, and not by way of
limitation of, any other rights or remedies we may have under applicable law
including the California Uniform Commercial Code. The exercise of any right or
remedy shall not preclude the exercise of any other right or remedy, all of
which shall be cumulative and not alternative.
VIII. WAIVERS
8.1 You hereby waive notice of dishonor, demand, presentment, protest and
notice of protest with respect to any and all instruments included in or
evidencing any of the Obligations or the Collateral, notice of acceptance
hereof, notice of loans or advances made, credit extended, Obligations incurred,
Collateral received, delivered, or released, or any other action taken in
reliance hereof and any and all other demands and notices of any description,
except such as are expressly provided for herein.
8.2 No act, delay or omission on our part in exercising any right or remedy
shall operate as a waiver of such or any other right or remedy. No single or
partial waiver by us of any provision of this Agreement, or breach or default
hereunder, or of any right or remedy shall operate as a waiver of such or any
other provision breach default, right or remedy on a future occasion.
IX. TERMINATION; APPLICABLE LAW AND WAIVER
OF JURY TRIAL; MISCELLANEOUS
9.1 Upon acceptance by us, this Agreement shall become effective as of the date
appearing on the first page hereof, and shall continue in full force and effect
until one year (1) year(s) from the date of such acceptance and from year to
year thereafter, unless sooner terminated as herein provided. Each of us may
terminate this Agreement at any time by giving the other party written notice
stating a termination date not less than sixty (60) days from the date such
notice is given. We shall have the right to terminate this Agreement
immediately at any time without prior notice upon the occurrence or during the
continuance of a Default. Unless sooner demanded, all of your Obligations shall
become due and payable as of any termination, and pending a final accounting, we
may withhold any balances in your account (unless supplied with an indemnity
satisfactory to us) to cover all of your Obligations.
9.2 Notwithstanding any termination of this Agreement, all of our rights, liens
and security interests hereunder shall continue in full force and effect until
all Obligations have been paid and satisfied in full.
11
<PAGE>
9.3 This Agreement, together with any written and duly executed supplement(s),
contains the entire understanding between us with respect to the subject matter
hereof. Neither this Agreement nor any portion or provision hereof may be
changed, modified, amended, waived, supplemented, discharged, canceled or
terminated orally or by any course of dealing between us, or in any manner other
than by an agreement in writing, expressly referring hereto and signed by the
party to be charged. The section titles contained in this Agreement are intended
for convenience only and do not constitute and shall not be interpreted as part
of this Agreement.
9.4 Except as otherwise provided herein, all notices, requests and demands
hereunder shall be: (a) addressed to the party to be served at the address shown
on the first page hereof, or to such other address as either party may designate
by written notice to the other in accordance with this provision; and (b) deemed
to have been given or made: if by hand, immediately upon delivery; if by telex
or facsimile, immediately upon sending; if by overnight delivery service, one
day after dispatch; and if by ordinary mail or registered/certified mail-return
receipt requested (with proper postage prepaid), three (3) days after mailing.
9.5 This Agreement shall be binding upon and inure to the benefit of each of
the parties hereto and their respective successors and assigns, except that you
may not assign or transfer any of our rights or obligations under this Agreement
without prior written consent of the other party.
9.6 The parties hereto acknowledge that each party and its counsel have
reviewed this Agreement and that the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any amendments or
supplements thereto.
9.7 This Agreement shall be deemed to have been made in Los Angeles, California
and shall be interpreted, and the rights and liabilities of the parties hereto
shall be determined, in accordance with the laws of the State of California. As
part of the consideration for new value this day given, you hereby consent to
the jurisdiction of any state or federal court located within the State of
California. Nothing herein shall affect the right to serve process in any manner
permitted by law or shall limit our right to bring proceedings against you in
the courts of any other jurisdiction. You waive any objection to jurisdiction
and venue of any action instituted hereunder and shall not assert any defense
based on lack of jurisdiction or venue or based upon forum non conveniens.
--------------------
9.8 If any provision of this Agreement, including, without limitation, any
provision relating to charges constituting interest payable by you under this
Agreement is contrary to, prohibited by, or deemed invalid under applicable laws
or regulations, such provision shall be inapplicable and deemed omitted to the
extent so contrary, prohibited or invalid, but the remainder hereof shall not be
invalidated thereby and shall be given effect so far as possible.
9.9 TO THE EXTENT PERMITTED BY APPLICABLE LAW, WE HEREBY MUTUALLY WAIVE ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT OR ANY OTHER AGREEMENTS OR TRANSACTIONS BETWEEN US.
12
<PAGE>
If the foregoing is in accordance with your understanding, please so indicate by
signing and returning to us the original and one copy of this Agreement. After
being accepted below by one of our officers in California, we shall forward a
copy to you with signatures completed for your files.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By /s/ Robert K. Lewin
------------------------
Name: Robert K. Lewin
Title: Vice President
Read and Agreed to:
TARRANT APPAREL GROUP
By /s/ Mark B. Kristof
-------------------------
Name: Mark B. Kristof
Title: Vice President-Finance & CFO
Accepted at Los Angeles, California
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By /s/ Martin Eckstein
---------------------------
Name: Martin Eckstein
Title: Vice President
13
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