<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the quarterly period ended March 31, 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 April 29,
1997 was 6,571,164.
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TARRANT APPAREL GROUP
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996 (Audited) . . . . . . . . . . . . . 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and March 31, 1996 . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and March 31, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 3,343,507 $ 1,120,456
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 41,335,963 44,483,884
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . 376,741 96,416
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,112,899 10,820,169
Temporary quota . . . . . . . . . . . . . . . . . . . . . . . . 3,833,062 1,723,085
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 463,622 458,087
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . 506,022 990,771
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . 776,559 803,482
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . 63,748,375 60,496,350
Property and equipment, net . . . . . . . . . . . . . . . . . . 2,565,716 2,618,869
Permanent quota, net . . . . . . . . . . . . . . . . . . . . . 281,387 211,085
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 109,047 93,394
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 66,704,525 $ 63,419,698
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . $ 7,793,012 $ 6,809,676
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 12,672,175 14,200,229
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 6,346,371 4,880,115
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 692,277 576,947
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . 27,503,835 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;
6,571,164 shares (1997), 6,552,276 shares (1996), issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . 15,712,318 15,485,734
Contributed capital . . . . . . . . . . . . . . . . . . . . . . 1,434,259 1,434,259
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 22,054,113 20,032,738
------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . . 39,200,690 36,952,731
------------ ------------
Total liabilities and shareholders' equity . . . . . . . $ 66,704,525 $ 63,419,698
============ ============
</TABLE>
See accompanying notes.
3
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TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,604,701 $42,092,749
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 44,822,034 35,025,684
----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 8,782,667 7,067,065
Selling and distribution expenses . . . . . . . . . . . . . . . 2,082,763 1,715,073
General and administrative expenses . . . . . . . . . . . . . . 3,307,262 2,992,145
----------- -----------
Income from operations . . . . . . . . . . . . . . . . . . . . 3,392,642 2,359,847
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (462,224) (407,687)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 35,412 65,063
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 5,545 60,542
----------- -----------
Income before provision for income taxes . . . . . . . . . . . 2,971,375 2,077,765
Provision for income taxes . . . . . . . . . . . . . . . . . . (950,000) (588,008)
----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,021,375 $ 1,489,757
=========== ===========
Net income per share . . . . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.23
=========== ===========
Weighted average common and common equivalent
shares outstanding 6,771,617 6,500,000
=========== ===========
</TABLE>
See accompanying notes.
4
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TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,021,375 $ 1,489,757
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 194,072 247,337
(Gain) Loss on sale of fixed assets . . . . . . . . . . . 150 (2,083)
Provision for returns and discounts . . . . . . . . . . . 253,424 (428,806)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . 2,894,497 4,499,388
Due from affiliates . . . . . . . . . . . . . . . . . . (280,325) 648,886
Inventory . . . . . . . . . . . . . . . . . . . . . . . (2,292,730) 5,055,143
Temporary quota . . . . . . . . . . . . . . . . . . . . (2,109,977) (2,311,640)
Prepaid expenses . . . . . . . . . . . . . . . . . . . (21,188) (407,094)
Prepaid income taxes . . . . . . . . . . . . . . . . . 511,672 --
Accounts payable . . . . . . . . . . . . . . . . . . . (1,528,054) (3,647,286)
Accrued expenses . . . . . . . . . . . . . . . . . . . 1,581,586 (297,260)
----------- -----------
Net cash provided by operating activities . . . . . 1,224,457 4,846,338
----------- -----------
INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . (95,540) (40,274)
Purchase of permanent quota . . . . . . . . . . . . . . . . . . (115,786) (112,452)
----------- -----------
Net cash used in investing activities . . . . . . . (211,326) (152,726)
FINANCING ACTIVITIES
Bank borrowings, net . . . . . . . . . . . . . . . . . . . . . 983,336 (4,995,878)
Exercise of stock options including related tax benefit . . . . 226,584 --
----------- -----------
Net cash provided by (used in) financing activities 1,209,920 (4,995,878)
----------- -----------
Increase (decrease) in cash and cash equivalents . . . . . . . 2,223,051 (302,266)
Cash and cash equivalents at beginning of period . . . . . . . 1,120,456 7,881,210
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . $ 3,343,507 $ 7,578,944
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF CONSOLIDATION
On July 28, 1995, Tarrant Apparel Group, a California corporation
(formerly Fashion Resource, Inc.) (the Company) completed an initial public
offering (the Offering) of 2,000,000 shares of the Company's common stock at a
price of $9.00 per share. The proceeds to the Company, net of underwriting
discounts and commissions and offering expenses, were $14.8 million.
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>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
U.S. trade accounts receivable . . . . . . . . . . . $ 15,334,862 $ 22,024,048
Foreign trade accounts receivable . . . . . . . . . 9,395,379 8,198,978
Due from factor . . . . . . . . . . . . . . . . . . 18,164,311 16,034,018
Other receivables . . . . . . . . . . . . . . . . . 543,028 141,996
Allowance for returns and discounts . . . . . . . . (2,101,617) (1,915,156)
------------ ------------
$ 41,335,963 $ 44,483,884
============ ============
</TABLE>
Due from factor consists of $22.4 million and $18.1 million of unmatured
accounts receivable assigned to the factor, less $4.2 million and $2.1
million of advances received from the factor, at March 31, 1997 and
December 31, 1996, respectively.
6
<PAGE> 7
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . $ 3,359,949 $ 2,113,849
Work-in-process . . . . . . . . . . . . . . . . . 2,489,702 1,701,023
Finished goods shipments-in-transit . . . . . . . 1,499,039 2,252,118
Finished goods . . . . . . . . . . . . . . . . . . 5,764,209 4,753,179
------------ ------------
$ 13,112,899 $ 10,820,169
============ ============
</TABLE>
Raw materials are composed of fabric and trim accessories.
5. BANK BORROWINGS
Bank borrowings consist of import trade bills payable.
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. 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.
7
<PAGE> 8
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Pro forma disclosure pursuant to Statement No. 128 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1996
---------- ----------
<S> <C> <C>
PRO FORMA BASIC EPS COMPUTATION
Numerator . . . . . . . . . . . . . . . . . . . . . . . $2,021,375 $1,489,757
Denominator
Common shares outstanding . . . . . . . . . . . . . . 6,555,231 6,500,000
---------- ----------
Total shares . . . . . . . . . . . . . . . . . . . . . 6,555,231 6,500,000
---------- ----------
Pro forma basic EPS . . . . . . . . . . . . . . . . . . . $ 0.31 $ 0.23
========== ==========
PRO FORMA DILUTED EPS COMPUTATION
Numerator . . . . . . . . . . . . . . . . . . . . . . . . $2,021,375 $1,489,757
---------- ----------
Denominator
Common shares outstanding . . . . . . . . . . . . . . 6,555,231 6,500,000
Incremental shares from assumed conversion of
options . . . . . . . . . . . . . . . . . . . . . 216,386 --
---------- ----------
Total shares . . . . . . . . . . . . . . . . . . . . . 6,771,617 6,500,000
---------- ----------
Pro forma diluted EPS . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.23
========== ==========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of
and selling casual, moderately-priced apparel, primarily for women, under
private label. The Company's major customers include specialty retailers, such
as Lerner New York, 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> 10
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 60.9% and 29.2%, respectively, of the Company's net sales
in the first quarter 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.
Price and Availability of Raw Materials. Cotton fabric is the principal
raw material used in the Company's apparel. Although the Company believes that
its suppliers will continue to be able to procure a sufficient supply of cotton
fabric for its production needs, the price and availability of cotton may
fluctuate significantly depending on supply, world demand, and currency
fluctuations, each of which may affect the price and availability of cotton
fabric. There can be no assurance that fluctuations in the price and
availability of cotton fabric or other raw materials used by the Company will
not have a material adverse effect on the Company's results of operations.
Management of Growth. Since its inception, the Company has experienced
rapid growth in sales. No assurance can be given that the Company will be
successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a
significant strain on the Company's management, management information systems,
inventory management, production capability, distribution facilities and
receivables management. Any disruption in the Company's order processing,
sourcing or distribution systems could cause orders to be shipped late, and
under industry practices, retailers generally can cancel orders or refuse to
accept goods due to late shipment. Such cancellations and returns would result
in a reduction in revenue, increased administrative and shipping costs and a
further burden on the Company distribution facilities. In addition, the
failure to timely enhance the Company's operating systems, or unexpected
difficulties in implementing such enhancements, could have a material adverse
effect on the Company's results of operations.
Foreign Manufacturing. Approximately 85% of the Company products were
imported in 1996. As a result, the Company's operations are subject to the
customary risks of doing business abroad, including, among other things,
transportation delays, economic or political instability, currency
fluctuations, restrictions on the transfer of funds and the imposition of
tariffs, export duties, quotas and other trade restrictions.
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<PAGE> 11
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
ENDED MARCH 31,
----------------------
1997 1996
------ ------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . 83.6 83.2
------ ------
Gross profit . . . . . . . . . . . . . . . . . . . 16.4 16.8
Selling and distribution expenses . . . . . . . . . 3.9 4.1
General and administration expenses . . . . . . . . 6.2 7.1
------ ------
Operating income . . . . . . . . . . . . . . . . . 6.3 5.6
Interest expense . . . . . . . . . . . . . . . . . (0.9) (1.0)
Other income . . . . . . . . . . . . . . . . . . . 0.1 0.3
------ ------
Income before income taxes . . . . . . . . . . . . 5.5 4.9
Income taxes . . . . . . . . . . . . . . . . . . . (1.7) (1.4)
------ ------
Net income . . . . . . . . . . . . . . . . . . . . 3.8% 3.5%
====== ======
</TABLE>
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Net Sales increased by $11.5 million, or 27.3%, from $42.1 million in the first
quarter of 1996 to $53.6 million in the first quarter of 1997. The increase in
net sales resulted from an increase of sales to Target and divisions of The
Limited of $5.3 million and $6.2 million, respectively. Overall, sales to
divisions of The Limited in the first quarter of 1997 amounted to 60.9% of
total net sales, as compared to 62.8% in the comparable prior period, whereas
sales to Target were 29.2% of total net sales as compared to 24.6% 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 quarter of 1997 was $8.8
million, or 16.4% of net sales, compared to $7.1 million, or 16.8% of net
sales, in the comparable prior period, an increase in gross profit of 24.3%,
The decrease in the gross profit margin resulted from the expansion of domestic
knit production, which had an unfavorable impact on the gross profit margin of
0.5%.
Selling and Distribution Expenses increased from $1.7 million in the first
quarter of 1996 to $2.1 million in the first quarter of 1997. As a percentage
of net sales, these expenses decreased from 4.1% in the first quarter of 1996
to 3.9% in the first quarter of 1997. This percentage decrease resulted from
the increase in net sales as partially offset by a 0.5% increase in commission
expense related to the expansion of domestic knit production.
General and Administrative Expenses increased from $3.0 million in the first
quarter of 1996 to $3.3 million in the first quarter of 1997. As a percentage
of net sales, these expenses decreased from 7.1% in the first quarter of 1996
to 6.2% in the first quarter of 1997. This percentage decrease was primarily
due to the increase in net sales.
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<PAGE> 12
Operating Income in the first quarter of 1997 was $3.4 million, or 6.3% of net
sales, compared to $2.4 million, or 5.6% of net sales, in the comparable prior
period, an increase in operating income of 43.8% due to the factors described
above. The 0.7% improvement in operating income as a percentage of net sales
is attributable to a 1.1% decrease in operating expenses, offset by a 0.4%
decrease in gross profit margin.
Other Income (which consists primarily of interest income) decreased from
$126,000, or 0.3% of net sales, in the first quarter of 1996, to $41,000, or
0.1% of net sales, in the first quarter of 1997. The decrease primarily
resulted from a decrease in interest income from $65,000 in the first quarter
of 1996 to $35,000 in the first quarter 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 for working capital are cash flow from
operations, borrowings under the Company's bank credit agreement and factoring
agreement and proceeds from its initial public offering.
During the first three months of 1997, net cash provided by operating
activities was $1.2 million, which resulted primarily from net income of $2.0
million and a net increase in working capital items of $1.2 million.
During the first three months of 1997, cash flow used in investing
activities was $211,000, which consisted of capital expenditures and the
purchase of permanent quota.
In the three months ended March 31, 1997, cash flow provided by financing
activities equaled $1.2 million, primarily as a result of the additional bank
borrowings.
The Company has credit facilities of $33.0 million and $10.0 million with
The Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for direct borrowings and the purchase
and exportation of finished goods. Under these facilities, the Company may
arrange for the issuance of letters of credit and bank acceptances, as well as
cash borrowings for working capital. These facilities are subject to review at
any time and the right of HKSB and/or SCB to demand payment at any time.
Interest on cash borrowings under HKSB's facility accrues at the U.S. best
lending rate plus one-half to three-quarters percent per annum. As of March
31, 1997, the U.S. best lending rate equaled seven and one-quarter percent.
Interest on cash borrowings under SCB's facility accrues at SCB's prime rate
for lending Hong Kong Dollars. As of March 31, 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 approximately
$28.0 million.
Pursuant to an agreement (the "Factoring Agreement") with NationsBanc
Commercial Corporation ("NBCC"), NBCC acts as the Company's sole factor for its
accounts receivable. The Factoring Agreement provides that NBCC will pay the
Company an amount equal to the gross amount of the Company's accounts
receivable from customers reduced by certain offsets, including among other
things, discounts, returns and a commission payable by the Company to NBCC.
The commission equals four-tenths of one percent, plus an additional
one-quarter of one percent of the gross amount of its accounts receivable
depending on the maturity of the account receivable. Prior to the date upon
which NBCC must pay for the Company's accounts receivable, the Company may
12
<PAGE> 13
receive an advance of up to 85% of the purchase price of its accounts
receivable, less certain offsets, although NBCC may in its discretion advance a
greater amount to the Company. Interest on such advances accrues at the rate
of one-quarter of one percent per annum below the prime rate charged from time
to time by NBCC, except that the interest rate is in no event less than five
percent per annum. As of March 31, 1997, the prime rate equaled eight and
one-half percent. Under the Factoring Agreement, NBCC is obligated to pay the
Company for accounts receivable on the third business day following payment of
the account receivable or, with respect to all accounts receivable for which
NBCC has assumed the credit risk, the earlier of such date or the 120th day
after the due date of the account receivable. Subject to its credit review
procedures, NBCC may decline to accept the credit risk on certain accounts
receivable. The Factoring Agreement continues in force from year to year and
may be terminated by NBCC on any anniversary of its effective date (September
28) or by the Company at any time, provided that in each case, the terminating
party gives sixty days prior written notice.
The Company believes that its cash flow from operations and borrowings
under its current financing facilities should be sufficient to fund its
operations for the foreseeable future.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Tarrant Apparel Group, along with Gerard Guez, its Chairman and
Chief Executive Officer and Todd Kay, its President, have been named
co-defendants in a civil lawsuit brought by the American Textile
Manufacturers Institute on behalf of the United States in the United
States District Court for the District of Los Angeles (Case No.
CV96-6765 HLH). The United States has declined to intervene in the
lawsuit. The Limited, Inc. of Columbus, Ohio, Mast Industries, Inc.
of Andover, Massachusetts and other defendants related to The Limited
were also named as co-defendants. The lawsuit alleges, among other
things, that the defendants knowingly filed improper statements about
the country of origin of imported merchandise with the United States
Customs Service. The complaint seeks an unspecified amount of
monetary damages. Since receiving notification of the lawsuit,
Tarrant's management has contacted its customers to explain the
Company's longstanding manufacturing and monitoring procedures to
ensure against unlawful activities. The Company and its counsel are
not yet able to evaluate the likelihood of an unfavorable outcome or
to estimate the amount or range of potential loss.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRANT APPAREL GROUP
Date: April 30, 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)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH MARCH 31, 1997 FORM 10-Q REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,343,507
<SECURITIES> 0
<RECEIVABLES> 43,437,580
<ALLOWANCES> 2,101,617
<INVENTORY> 13,412,899
<CURRENT-ASSETS> 63,748,375
<PP&E> 4,905,475
<DEPRECIATION> 2,339,759
<TOTAL-ASSETS> 66,704,525
<CURRENT-LIABILITIES> 27,503,835
<BONDS> 0
15,712,318
0
<COMMON> 0
<OTHER-SE> 23,488,372
<TOTAL-LIABILITY-AND-EQUITY> 66,704,525
<SALES> 53,604,701
<TOTAL-REVENUES> 53,645,658
<CGS> 44,822,034
<TOTAL-COSTS> 44,822,034
<OTHER-EXPENSES> 5,390,025
<LOSS-PROVISION> (142,755)
<INTEREST-EXPENSE> 462,224
<INCOME-PRETAX> 2,971,375
<INCOME-TAX> 950,000
<INCOME-CONTINUING> 2,021,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,021,375
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0
</TABLE>
