<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, 1998
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 August 5,
1998 was 13,557,030.
1
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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
June 30, 1998 and December 31, 1997 (Audited) .............................. 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1998 and June 30, 1997 ................ 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and June 30, 1997 ........................... 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 .......................................................... 17
Item 2. Changes in Securities ...................................................... 17
Item 3. Defaults Upon Senior Securities ............................................ 17
Item 4. Submission of Matters to a Vote of Security Holders ........................ 17
Item 5. Other Information .......................................................... 17
Item 6. Exhibits and Reports on Form 8-K ........................................... 17
SIGNATURES ................................................................. 18
INDEX TO EXHIBITS .......................................................... 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
--------------------
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 2,306,521 $ 5,305,129
Accounts receivable, net........................................ 79,177,565 34,078,352
Due from officers and affiliates................................ 2,903,822 1,605,140
Inventory....................................................... 25,837,697 23,266,196
Temporary quota................................................. 5,765,082 2,874,382
Prepaid expenses................................................ 1,433,183 1,203,931
Prepaid income taxes............................................ 478,050 478,050
------------ -----------
Total current assets....................................... 117,901,920 68,811,180
Property and equipment, net....................................... 2,575,105 2,707,257
Permanent quota, net.............................................. 230,347 145,268
Other assets...................................................... 3,517,105 196,973
Excess of cost over fair value of net assets acquired, net........ 5,627,223 ---
------------ -----------
Total assets............................................... $129,851,700 $71,860,678
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings............................................... $ 34,954,567 $ 4,287,518
Short-term debt............................................... 1,000,000 ---
Accounts payable.............................................. 17,312,622 12,549,961
Accrued expenses.............................................. 10,301,688 5,117,183
Income taxes.................................................. 2,660,579 969,115
Deferred tax liability........................................ 1,276,751 582,957
------------ -----------
Total current liabilities................................ 67,506,207 23,506,734
Long-term obligations........................................... 2,371,500 ---
------------ -----------
Total liabilities........................................ 69,877,707 23,506,734
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none issued
and outstanding............................................. --- ---
Common stock, no par value, 20,000,000 shares authorized;
13,453,918 shares (1998), 13,219,928 shares (1997), issued
and outstanding............................................. 17,717,421 16,100,483
Contributed capital........................................... 1,434,259 1,434,259
Retained earnings............................................. 40,822,313 30,819,202
------------ -----------
Total shareholders' equity............................... 59,973,993 48,353,944
------------ -----------
Total liabilities and shareholders' equity.............. $129,851,700 $71,860,678
============ ===========
</TABLE>
See accompanying notes.
3
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TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1998 1997 1998 1997
------------ ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $100,100,120 $73,879,357 $164,357,297 $127,484,058
Cost of sales 79,835,469 62,811,599 133,145,179 107,633,633
------------ ----------- ------------ ------------
Gross profit 20,264,651 11,067,758 31,212,118 19,850,425
Selling and distribution expenses 2,416,235 2,167,411 4,514,156 4,250,174
General and administrative expenses 6,174,666 3,808,834 10,466,369 7,116,096
------------ ----------- ------------ -----------
Income from operations 11,673,750 5,091,513 16,231,593 8,484,155
Interest expense (547,305) (295,642) (871,567) (757,866)
Interest income 97,601 14,527 148,719 49,939
Other income 18,706 4,841 84,366 10,386
------------ ----------- ------------ -----------
Income before provision for income taxes 11,242,752 4,815,239 15,593,111 7,786,614
Provision for income taxes (4,020,000) (1,550,000) (5,590,000) (2,500,000)
------------ ----------- ------------ -----------
Net income 7,222,752 $ 3,265,239 $ 10,003,111 $ 5,286,614
============ =========== ============ ===========
Net income per share
Basic $0.54 $0.25 $0.75 $0.40
============ =========== ============ ===========
Diluted $0.51 $0.24 $0.71 0.39
============ =========== ============ ===========
Weighted average common and common
equivalent shares outstanding
Basic 13,432,451 13,178,196 13,356,856 13,144,330
============ =========== ============ ===========
Diluted 14,253,822 13,592,626 14,004,961 13,567,930
============ =========== ============ ===========
</TABLE>
See accompanying notes.
4
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TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 10,003,111 $ 5,286,614
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred tax provision.................................... 693,794 224,338
Depreciation and amortization............................. 816,086 400,015
Provision for returns and discounts....................... 1,224,277 (183,521)
Changes in operating assets and liabilities:
Accounts receivable....................................... (46,323,490) (10,755,285)
Due from affiliates and officers.......................... (1,298,682) (851,847)
Inventory................................................. (2,571,501) (8,773,129)
Temporary quota........................................... (2,890,700) (426,809)
Prepaid expenses.......................................... (229,253) (442,212)
Prepaid income taxes...................................... --- 990,771
Accounts payable.......................................... 4,762,661 6,954,131
Accrued expenses.......................................... 5,184,506 2,202,750
Income taxes payable...................................... 1,691,494 929,832
----------- ------------
Net cash used in operating activities............... (28,937,727) (4,444,352)
----------- ------------
INVESTING ACTIVITIES
Purchase of fixed assets..................................... (226,723) (462,535)
Acquisition of MGI........................................... (6,027,223) ---
Purchase of permanent quota.................................. (142,290) (115,786)
Increase in other assets..................................... (3,320,132) ---
----------- ------------
Net cash used in investing activities.............. (9,716,368) (578,321)
----------- ------------
FINANCING ACTIVITIES
Bank borrowings, net......................................... 30,667,049 4,030,917
Issuance of short-term debt.................................. 1,000,000 ---
Issuance of long-term debt................................... 2,371,500 ---
Exercise of stock options including related tax benefit 1,616,938 521,894
----------- ------------
Net cash provided by financing activities.......... 35,655,487 4,552,811
----------- ------------
Decrease in cash and cash equivalents........................ (2,998,608) (469,862)
Cash and cash equivalents at beginning of period............. 5,305,129 1,120,456
----------- ------------
Cash and cash equivalents at end of period................... $ 2,306,521 $ 650,594
=========== ============
</TABLE>
See accompanying notes.
5
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TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF CONSOLIDATION
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, 1997 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, 1997, 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.
Assets and liabilities of the Hong Kong and United Arab Emirates
subsidiaries are translated at the rate of exchange in effect on the balance
sheet date; income and expenses are translated at the average rates of exchange
prevailing during the year. The principal foreign currency in which the Company
transacts business is the Hong Kong dollar.
Foreign currency gains and losses resulting from translation of assets and
liabilities are included in the statements of income. Historically, such gains
and losses have been immaterial. At June 30, 1998, the Hong Kong subsidiaries
had shareholders' equity of $35.4 million and an intercompany receivable due
from Tarrant Apparel Group of $29.5 million.
3. STOCK SPLIT
On April 27, 1998, the Company announced a two-for-one stock split
effective on May 8, 1998. Accordingly, all share and per share amounts have been
adjusted to reflect this split.
6
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TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
U.S. trade accounts receivable............... $ 72,969,831 $13,411,719
Foreign trade accounts receivable............ 19,142,796 9,466,193
Due (to) from factor......................... (10,549,194) 12,028,633
Other receivables............................ 594,220 727,619
Allowance for returns and discounts.......... (2,980,088) (1,555,812)
------------ -----------
$ 79,177,565 $34,078,352
============ ===========
</TABLE>
Due (to) from factor consists of $0.3 million and $17.5 million of
unmatured accounts receivable assigned to the factor, less $10.9 million and
$11.8 million of advances received from the factor, at June 30, 1998 and
December 31, 1997, respectively. Effective January 1, 1998, the Company
substantially reduced the volume of receivables assigned to the factor.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials
Fabric and trim accessories.......... $ 5,241,559 $ 4,022,298
Raw cotton........................... 4,450,042 --
Work-in-process.............................. 6,470,835 4,315,703
Finished goods shipments-in-transit.......... 2,913,478 5,655,461
Finished goods............................... 6,761,783 9,272,734
----------- -----------
$25,837,697 $23,266,196
=========== ===========
</TABLE>
6. BANK BORROWINGS
Bank borrowings consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ----------
<S> <C> <C>
Import trade bills payable..................... $12,011,222 $4,287,518
Other Hong Kong credit facilities.............. 1,408,867 --
Bank direct acceptances........................ 8,694,432 --
United States credit facilities................ 12,840,046 --
----------- ----------
$34,954,567 $4,287,518
=========== ==========
</TABLE>
7
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TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. RECENT ACQUISITIONS
On July 2, 1998, the Company purchased the partnership interests in Rocky
Apparel, L.P., a Delaware limited partnership ("Rocky"). Rocky operates
manufacturing facilities in Mississippi and sources in Mexico. The purchase
price consists of $7,500,000 in cash and 80,890 shares of common stock of the
Company, payable on closing. The purchase price will be adjusted based on the
net equity of Rocky at closing. In addition, the Company was required to repay
$3.4 million of debt to one of the sellers on closing and to guarantee the bank
indebtedness of Rocky in the amount of $5.0 million. The Company was granted a
security interest in the 80,890 shares to secure the performance of obligations
under the purchase agreement, including, without limitation, the indemnification
obligations.
Rocky designs, develops and contracts for the manufacture of men's, womens
and childrens denim apparel, for Abercrombie & Fitch, Limited Stores, Express
and Structure. The purchase price was financed by the Company from a new credit
facility and cash flow from operations. For a description of such credit
facility, see "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
In connection with this acquisition, Rocky extended the term of an existing
employment agreement with Gabriel Zeitouni, the President and a former principal
owner of Rocky. Under this employment agreement, Mr. Zeitouni will continue to
be employed as the President of Rocky for a term ending on December 31, 2002,
unless extended by the mutual agreement of the Company and Mr. Zeitouni, will be
paid a base salary which increases from $350,000 for 1998 to $450,000 for 2002
and will receive cash bonuses based upon certain performance criteria. Also, Mr.
Zeitouni was awarded a stock option for 75,000 shares of the Company's common
stock which vests periodically through December 31, 2002. In the event the
Company terminates his employment without cause, Mr. Zeitouni shall be entitled
to receive (i) a lump sum payment equal to his base salary for the shorter of
the balance of the term or two years and (ii) accrued bonus, if any, through the
date of termination. In the event the Company terminates Mr. Zeitouni's
employment with cause, the Company is obligated to pay the compensation required
by the agreement only through the date of termination. In addition, Mr. Zeitouni
has agreed not to compete with the Company during the two years following the
termination of his employment for cause.
On February 23, 1998, the Company purchased certain assets of MGI
International Limited, a Turks and Caicos corporation. The assets purchased
consist primarily of pending orders and related inventory. The purchase price
consists of (i) $5,050,000, together with an amount equal to seller's cost of
the inventory purchased, payable in cash on closing, (ii) $500,000 paid on July
21, 1998, together with interest at 7% per annum, and (iii) 2% of the net sales
of goods booked by the Company's newly formed Men's Division for delivery during
1999, provided the orders accepted for delivery in 1999 on March 1, 1999 meet
specified gross profit and gross profit margin requirements.
On February 23, 1998, the Company also purchased certain assets of
Marshall Gobuty International U.S.A., Inc., a California corporation ("MGI
USA"). The assets purchased consist primarily of pending orders and related
inventory. The purchase price consists of (i) $1,000,000, together with an
amount equal to seller's cost of the inventory purchased, payable in cash on
closing and (ii) $500,000 paid on July 21, 1998, together with interest at 7%
per annum.
MGI International Limited and MGI USA ("MGI") each designs, develops and
contracts for the manufacture of men's apparel, including knit and woven tops,
shirts and outerwear (including jackets), for national chain department stores,
including J.C. Penney and Goody's. The purchase price was financed by the
Company from its cash flow from operations.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
GENERAL
The Company primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of and
selling casual, moderately-priced apparel, primarily for women, under private
label. The Company's major customers include specialty retailers, such as Lerner
New York, Limited Stores, Lane Bryant, Structure and Express, all of which are
divisions of The Limited, mass merchandisers, Abercrombie & Fitch and J.C.
Penney. 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.
The Company continues to geographically diversify its worldwide sourcing
operations. During the third quarter of 1997, the Company substantially expanded
its use of independent cutting, sewing and finishing contractors in Mexico,
primarily for its increasing sales of commodity products.
In late 1997, the Company commenced the vertical integration of its
business. Key elements of this strategy may include (i) establishing cutting,
sewing, finishing and packaging operations through the acquisition of
established contractors or the construction of new facilities and (ii)
establishing fabric production capability through the acquisition of established
mills or the construction of new mills. The Company believes that additional
costs and inefficiencies that may occur as a result of this strategy may, over
time, be offset by the benefits of lower cost production and greater control
over the quality and reliability of its products.
On July 2, 1998, the Company acquired Rocky Apparel, L.P. which designs,
contracts for the manufacture of and sells private label apparel for men and
women to national retailers, including Abercombie & Fitch and three divisions of
The Limited.
On February 23, 1998, the Company acquired certain assets of Marshall
Gobuty International U.S.A., Inc. and MGI International Limited which design,
contract for the manufacture of and sell private label apparel for men and boys
to national retailers, including J.C. Penney (the "Gobuty Acquisition").
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.
9
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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 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, Structure and Lane Bryant)
accounted for approximately 63% of the Company's net sales in the first six
months of 1998 and approximately 70% of the Company's net sales in 1997. The
loss of 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 state, federal or
foreign 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 state, federal
or foreign 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
10
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such sanctions will not have a material adverse effect on the Company. In
addition, certain of the Company's customers, including The Limited 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 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's 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 1997. 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.
Impact of Year 2000. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has determined that it will be required to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The Company also has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. The Company presently believes that with modifications to existing
software and conversions to new software, the cost of which is not expected to
be material to the Company's results of operation or financial position, the
Year 2000 Issue will not pose significant operational problems for its computer
systems. The Company will use both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project prior to
11
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any anticipated impact on its operating systems. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material adverse effect on the operations of the Company. Likewise,
there can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted and would not have a material
adverse effect on the Company's systems.
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,
--------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 79.8 85.0 81.0 84.4
------ ------ ------ ------
Gross profit.............................. 20.2 15.0 19.0 15.6
Selling and distribution expenses......... 2.4 2.9 2.7 3.3
General and administration expenses *..... 6.2 5.2 6.4 5.6
------ ------ ------ ------
Income from operations.................... 11.6 6.9 9.9 6.7
Interest expense.......................... (0.5) (0.4) (0.5) (0.6)
Other income.............................. 0.1 --- 0.1 ---
------ ------ ------ ------
Income before income taxes................ 11.2 6.5 9.5 6.1
Income taxes.............................. (4.0) (2.1) (3.4) (1.9)
------ ------- ------ ------
Net income................................ 7.2% 4.4% 6.1% 4.2%
====== ======= ======= ======
</TABLE>
*Includes amortization of excess of cost over fair value of net assets
acquired.
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Net Sales increased by $26.2 million, or 35.5%, from $73.9 million in the second
quarter of 1997 to $100.1 million in the second quarter of 1998. The increase in
net sales included an aggregate increase in sales of $7.8 million to divisions
of The Limited, $4.6 million to mass merchandisers, primarily as a result of an
increased volume of unit sales, and $17.8 million as a result of the Gobuty
Acquisition, as offset by a $4.0 million decrease to other customers. Overall,
sales to divisions of The Limited in the second quarter of 1998 amounted to
63.6% of total net sales, as compared to 75.7% in the comparable prior period,
whereas sales to mass merchandisers were 17.2% of total net sales as compared to
17.1% 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 1998 was $20.3
million, or 20.2% of net sales, compared to $11.1 million, or 15.0% of net
sales, in the comparable prior period, an increase in gross profit of 83.1%. The
5.2% increase in the gross profit margin included benefits of 1.5% from a
reduction in returns and inventory markdown, 0.7% from domestic production of
the Men's Division, 0.4% from a reduction of direct costs attributable to
production as a percentage of net sales, reflects the elimination of costs and
inefficiencies related to the expansion of the Company's sourcing in Mexico, as
previously reported, and is offset by a $1.2 million, or 1.2% of net sales,
increase in the allowance for returns and discounts included within general and
administrative expenses.
12
<PAGE>
Selling and Distribution Expenses were $2.4 million in the second quarter of
1998 and $2.2 million in the second quarter of 1997. As a percentage of net
sales, these expenses decreased from 2.9% in the second quarter of 1997 to 2.4%
in the second quarter of 1998. After adjusting for expenses related to the
Gobuty Acquisition of $505,000, as compared to no such expenses in the second
quarter of 1997, selling and distribution expenses decreased by $256,000 in the
second quarter of 1998 as compared to the second quarter of 1997.
General and Administrative Expenses (which include amortization of excess of
cost over fair value of net assets acquired) increased from $3.8 million in the
second quarter of 1997 to $6.2 million in the second quarter of 1998. As a
percentage of net sales, these expenses increased from 5.2% in the second
quarter of 1997 to 6.2% in the second quarter of 1998. This percentage increase
included increases in the allowance for bad debt, amortization of the excess of
cost over fair value of net assets acquired, bonus accruals and expenses related
to the Gobuty Acquisition. The allowance for bad debt includes an allowance for
returns and discounts as well as bad debt expense. The allowance for returns and
discounts is primarily based on a percentage of receivables which increases with
the age of the receivables, but is not a reflection on the credit worthiness of
the customer. The decrease in the allowance for returns and discounts during the
second quarter of 1997 was $288,000, or 0.4% of net sales, compared to an
increase in such allowance of $946,000, or 0.9% of net sales, during the second
quarter of 1998. The most significant portions of the increase in the allowance
for returns and discounts resulted from changes in the amount and aging of
accounts receivable. Bad debt expense was $300,000 in the second quarter of 1997
as compared to $164,000 in the second quarter of 1998. Bonus accruals were
$254,000 in the second quarter of 1997 as compared to $645,000 in the second
quarter of 1998. After adjusting for the net increase in the allowance for bad
debt of $1.1 million, the $300,000 amortization of the excess of cost over fair
value of net assets acquired in the second quarter of 1998, as compared to no
such amortization in the second quarter of 1997, the $391,000 increase in bonus
accruals and expenses related to the Gobuty Acquisition of $753,000 in the
second quarter of 1998 as compared to no such expenses in the second quarter of
1997, general and administrative expenses decreased by $176,000 in the second
quarter of 1998 as compared to the second quarter of 1997, as summarized below:
<TABLE>
<CAPTION>
Quarter Ended June 30,
---------------------------- Increase /
1998 1997 (Decrease)
---------------------------- ----------
<S> <C> <C> <C>
6,175,000 3,809,000 2,366,000
Less: Bad Debt Expense 164,000 300,000 (136,000)
Allowance for Returns & Discounts 946,000 (288,000) 1,234,000
------------------------------------------------
Allowance for Bad Debt 1,110,000 12,000 1,098,000
Amortization of Goodwill 300,000 -0- 300,000
Bonus Accruals 645,000 254,000 391,000
Men's Division (Gobuty Acquisition) 753,000 -0- 753,000
------------------------------------------------
3,367,000 3,543,000 (176,000)
========= ========= =======
</TABLE>
Operating Income in the second quarter of 1998 was $11.7 million, or 11.6% of
net sales, compared to $5.1 million, or 6.9% of net sales, in the comparable
prior period, an increase in operating income of 129.3% due to the factors
described above. The 4.7% improvement in operating income as a percentage of
net sales is attributable to a 5.2% increase in gross profit margin as offset by
a 0.5% increase in operating expenses.
13
<PAGE>
Other Income increased from $19,000 in the second quarter of 1997, to $116,000,
or 0.1% of net sales, in the second quarter of 1998. The increase primarily
resulted from an increase in interest income from $15,000 in the second quarter
of 1997 to $98,000 in the second quarter of 1998.
FIRST SIX MONTHS 1998 COMPARED TO FIRST SIX MONTHS 1997
Net Sales increased by $36.9 million, or 28.9%, from $127.5 million in the first
six months of 1997 to $164.4 million in the first six months of 1998. The
increase in net sales included an aggregate increase in sales of $15.3 million
to divisions of The Limited, $5.7 million to mass merchandisers, primarily as a
result of an increased volume of unit sales, and $21.0 million as a result of
the Gobuty Acquisition, as offset by a $5.1 million decrease to other customers.
Overall, sales to divisions of The Limited in the first six months of 1998
amounted to 63.2% of total net sales, as compared to 69.5% in the comparable
prior period, whereas aggregate sales to mass merchandisers were 21.5% of total
net sales as compared to 23.3% 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 1998 was $31.2
million, or 19.0% of net sales, compared to $19.9 million, or 15.6% of net
sales, in the comparable prior period, an increase in gross profit of 57.2%. The
3.4% increase in the gross profit margin included benefits of 1.9% from a
reduction in returns and inventory markdown, 0.5% from domestic production of
the Men's Division, 0.3% from a reduction of direct costs attributable to
production as a percentage of net sales, reflects the elimination of costs and
inefficiencies related to the expansion of the Company's sourcing in Mexico, as
previously reported, and is offset by a $1.3 million, or 0.8% of net sales,
increase in the allowance for returns and discounts included within general and
administrative expenses.
Selling and Distribution Expenses increased from $4.3 million in the first six
months of 1997 to $4.5 million in the first six months of 1998. As a percentage
of net sales, these expenses decreased from 3.3% in the first six months of 1997
to 2.7% in the first six months of 1998. After adjusting for expenses related to
the Gobuty Acquisition of $637,000, as compared to no such expenses in the first
six months of 1997, selling and distribution expenses decreased by $373,000 in
the first six months of 1998 as compared to the first six months of 1997.
General and Administrative Expenses (which include amortization of excess of
cost over fair value of net assets acquired) increased from $7.1 million in the
first six months of 1997 to $10.5 million in the first six months of 1998. As a
percentage of net sales, these expenses increased from 5.6% in the first six
months of 1997 to 6.4% in the first six months of 1998. This percentage
increase included increases in the allowance for bad debt, amortization of the
excess of cost over fair value of net assets acquired, bonus accruals and
expenses related to the Gobuty Acquisition. The allowance for bad debt includes
an allowance for returns and discounts as well as bad debt expense. The
allowance for returns and discounts is primarily based on a percentage of
receivables which increases with the age of the receivables, but is not a
reflection on the credit worthiness of the customer. The decrease in the
allowance for returns and discounts during the first six months of 1997 was
$203,000, or 0.2% of net sales, compared to an increase in such allowance of
$1.1 million or 1.1% of net sales, during the first six months of 1998. The
most significant portions of the increase in the allowance for returns and
discounts resulted from changes in the amount and aging of accounts receivable.
Bad debt expense was $157,000 in the first six months of 1997 as compared to
$131,000 in the first six months of 1998. Bonus accruals were $683,000 in the
first six months of 1997 as compared to $1.3 million in the first six months of
1998. After adjusting for the net increase in the allowance for bad debt of
$1.2 million, the $400,000 amortization of the excess of cost over fair value of
net assets acquired in the first six months of 1998, as compared to no such
amortization in the first six months of 1997, the $648,000 increase in bonus
accruals and expenses related to the Gobuty Acquisition of $1.0 million, as
compared to no such expenses in the first six months of 1997, general and
administrative expenses
14
<PAGE>
increased by $43,000 in the first six months of 1998 as compared to the first
six months of 1997, as summarized below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------- Increase /
1998 1997 (Decrease)
------------ --------- ----------
<S> <C> <C> <C>
10,466,000 7,116,000 3,350,000
Less: Bad Debt Expense 131,000 157,000 (26,000)
Allowance for Returns & Discounts 1,071,000 (203,000) 1,274,000
-----------------------------------------
Allowance for Bad Debt 1,202,000 (46,000) 1,248,000
Amortization of Goodwill 400,000 -0- 400,000
Bonus Accruals 1,331,000 683,000 648,000
Men's Division (Gobuty Acquisition) 1,011,000 -0- 1,011,000
-----------------------------------------
6,522,000 6,479,000 43,000
========== ========= =========
</TABLE>
Operating Income in the first six months of 1998 was $16.2 million, or 9.9% of
net sales, compared to $8.5 million, or 6.7% of net sales, in the comparable
prior period, an increase in operating income of 91.3% due to the factors
described above. The 3.2% increase in operating income as a percentage of net
sales is attributable to a 3.4% increase in gross profit margin as offset by a
0.2% increase in operating expenses.
Other Income increased from $60,000 in the first six months of 1997 to $233,000,
or 0.1% of net sales, in the first six months of 1998. This increase primarily
resulted from $50,000 and $0 of interest and management fee income,
respectively, in the first six months of 1997 as compared to $149,000 and
$54,000 of such income, respectively, in the first six months of 1998.
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 facilities and proceeds from its
initial public offering.
During the first six months of 1998, net cash used in operating activities
was $28.9 million, which resulted primarily from net income of $10.0 million and
a net increase in working capital items of $41.7 million.
During the first six months of 1998, cash flow used in investing activities
was $9.7 million which primarily consisted of $6.0 million for the Gobuty
Acquisition and $3.3 million of capital expenditure commitments related to
vertical integration programs, as further described below.
In the six months ended June 30, 1998, cash flow provided by financing
activities equaled $35.7 million, a result of $30.7 million of additional bank
borrowings, the issuance of $1.0 million of short-term debt to fund a portion of
the Gobuty Acquisition, the issuance of $2.4 million of long-
15
<PAGE>
term debt to fund capital expenditure commitments related to vertical
integration programs and $1.6 million of proceeds from the exercise of stock
options.
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, 1998, HKSB's U.S. Dollar prime
rate equaled eight and one-half percent. Interest on cash advances under SCB's
facility accrues at SCB's prime rate for lending Hong Kong dollars. As of June
30, 1998, SCB's Hong Kong dollar prime rate equaled ten 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"). Prior to January 1, 1998, NBCC acted as the Company's
factor for accounts receivable. Effective January 1, 1998, the Company
substantially reduced the volume of receivables assigned to the factor. The
Company may receive an advance from NBCC of up to 90% of accounts receivable,
except receivables from Lerner New York and Target Stores. CIT will advance up
to 100% of the amount of accounts receivable from Lerner New York and Target
Stores plus an over-advance of up to $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, 1998, the prime rates equaled eight
and one-half percent and the LIBOR rates equaled five and seven-tenths percent.
The Company has an unsecured $10 million credit facility with SCB which is
available for general corporate purposes. This facility is cross-defaulted to
the Company's other bank credit facilities and interest on advances accrues at
the rate of one and one-quarter percent over LIBOR.
The Company guarantees a $5 million credit facility for Rocky Apparel, LLC,
a wholly-owned subsidiary of the Company which acquired the partnership
interests in Rocky Apparel, L.P., a Delaware limited partnership. See Note 7
(Recent Acquisitions) to Notes to Financial Statements.
The Company has financed its operations to date from its cash flow from
operations, borrowings under its bank credit facilities and the proceeds from
its initial public offering. The Company believes that its cash flow from
operations and borrowings under its current financing facilities should be
sufficient to fund its current operations for the foreseeable future.
In late 1997, the Company commenced the vertical integration of its
business. Key elements of this strategy may include (i) establishing cutting,
sewing, finishing and packaging operations through the acquisition of
established contractors or the construction of new facilities and (ii)
establishing fabric production capability through the acquisition of established
mills or the construction of new mills. To date, capital expenditure and working
capital commitments aggregating $6.9 million and $4.5 million, respectively,
have been made with respect to vertical integration programs by the Company. The
success of the Company's vertical integration strategy may depend, in part, on
its ability to obtain financing therefore. There can be no assurance that
additional capital, if and when required, will be available on terms acceptable
to the Company, or at all.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
-----------------
ITEM 2. CHANGES IN SECURITIES. None.
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
The Company held its 1998 annual meeting of shareholders (the "Meeting")
on May 1, 1998. 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>
Barry S. Aved 5,991,195 --- 49,221
Gerard Guez 5,991,110 --- 49,306
Todd Kay 5,991,110 --- 49,306
James R. Miller 5,988,745 --- 51,671
Mark B. Kristof 5,991,195 --- 49,221
Karen S. Wasserman 5,991,195 --- 49,221
</TABLE>
2. Ratification of 1998 Employee Incentive Awards. To ratify the grant
of 1998 awards to certain executive officers pursuant to the
Employee Incentive Plan.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
For Against Abstain
-----------------------------------------------------------------
<S> <C> <C>
5,915,280 114,961 10,175
</TABLE>
3. Ratification of the Appointment of Independent Auditor. To ratify
the appointment of Ernst & Young LLP as the Company's Independent
Auditors for the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
For Against Abstain
-----------------------------------------------------------------
<S> <C> <C>
6,034,106 4,121 2,189
</TABLE>
ITEM 5. OTHER INFORMATION. None.
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits: Reference is made to the Index to Exhibits on page 19 for
a description of the exhibit filed as part of this Report on Form
10-Q.
(b) Reports on Form 8-K: None.
17
<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: August 5, 1998 By: /s/ Mark B. Kristof
------------------------------
Mark B. Kristof
Vice President - Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
18
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.59 Loan Agreement, dated as of July 1, 1998, between Tarrant Apparel Group and Standard Chartered Bank
10.60 Partnership Interest Purchase Agreement, dated as of July 2, 1998, among Rocky Acquisition, LLC,
Tarrant Apparel Group, Limited Direct Associates, L.P., Rocky Apparel, Inc., and Gabriel
Manufacturing Company
10.61 Escrow Agreement made as of July 2, 1998, by and among Tarrant Apparel Group, Gabriel Manufacturing
Company and Rocky Apparel, Inc.
27 Financial Summary
</TABLE>
19
<PAGE>
EXHIBIT 10.59
- --------------------------------------------------------------------------------
U.S. $10,000,000
LOAN AGREEMENT
between
TARRANT APPAREL GROUP
and
STANDARD CHARTERED BANK
acting through its New York Branch
- --------------------------------------------------------------------------------
Dated as of July 1, 1998
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of July 1, 1998, is made between TARRANT APPAREL
GROUP, a California corporation (the "Borrower"), and STANDARD CHARTERED BANK
--------
(the "Bank").
----
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
Defined Terms. As used in this Agreement, the following terms have the
- -------------
following meanings (terms defined in the singular to have the same meaning when
used in the plural and vice versa):
"Advance" means each advance made by the Bank to the Borrower pursuant to
-------
Section 2.1.
"Affiliate" of any Person means any Person that, directly or indirectly,
---------
controls or is controlled by or is under common control with such Person. For
the purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities or by contract
or otherwise.
"Agreement" means this Loan Agreement, as amended, supplemented or modified
---------
from time to time.
"Base Rate" means the fluctuating rate of interest per annum established by
---------
the Bank, from time to time, as its prime or base rate in effect at its office
in New York City (each change in such Base Rate to be effective on the date such
change is established as effective), which rate may or may not be the lowest
rate which the Bank charges to its customers.
"Borrowing Date" means, with respect to any particular Advance, the date
--------------
upon which the Bank makes funds constituting the Advance available to the
Borrower pursuant to a timely submitted Notice of Borrowing.
2
<PAGE>
"Business Day" means (i) any day other than a Saturday, Sunday, or other
------------
day on which commercial banks in New York, New York are authorized or required
to close under applicable law and (ii) in the case of the calculation of LIBOR,
any day on which dealings are carried on in the London interbank market.
"Code" means the Internal Revenue Code of 1986, as amended from time to
----
time.
"Contractual Obligation" means as to any Person, any provision of any
----------------------
security issued by such Person or of any agreement, instrument or undertaking to
which such Person is a party or by which it or any of its property is bound.
"Default" means any condition or event which with the giving of notice or
-------
the lapse of time, or both, would become an Event of Default.
"Dollars" (or "$") means the lawful currency of the United States of
-------
America.
"Event of Default" means any of the events specified in Article 7 hereof.
----------------
"GAAP" means United States generally accepted accounting principles, as in
----
effect from time to time and applied on a consistent basis.
"Governmental Authority" means any nation or government, any state or other
----------------------
political subdivision thereof, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Interest Period" means with respect to each Advance, the period commencing
---------------
on the Borrowing Date thereof and ending one, two, three or four months
thereafter as selected by the Borrower in its Notice of Borrowing given to the
Bank pursuant to Section 2.4 hereof;
provided, however, that:
- -------- -------
(y) any Interest Period which would otherwise end on a day which is not a
Business Day shall be extended to the next succeeding Business Day; and
(z) each Interest Period must end on or before the Maturity Date.
"Lending Office" means the branch, office or Affiliate designated by the
--------------
Bank from time to time as the branch, office or Affiliate at which the Loan is
to be made and maintained.
3
<PAGE>
"LIBOR" means with respect to any Advance, the rate for deposits in Dollars
-----
for a period approximately equal to the duration of the relevant Interest Period
and in an amount approximately equal to the amount of such Advance, which
appears on the Reuters Screen LIBO Page (or such other page as may replace such
LIBO Page for the purpose of displaying London interbank offered rates) as of
11:00 a.m. (London time) two Business Days before the first day of such Interest
Period.
"Lien" means (a) any judgment lien or execution, attachment, levy,
----
distraint or similar legal process and (b) any mortgage, pledge, hypothecation,
assignment, lien, charge, encumbrance or other security interest of any kind or
nature whatsoever (including, without limitation, the interest of a lessor under
any capital lease and the interest of a seller under any conditional sale or
other title retention agreement), which secures or purports to secure any
indebtedness or other obligations.
"Loan" means the aggregate principal amount of up to Ten Million United
----
States Dollars (US$10,000,000) to be lent to the Borrower hereunder, or where
the context may require, such lesser amount thereof then outstanding.
"Loan Documents" means this Agreement, the Note and all other documents,
--------------
instruments and agreements executed in connection herewith or therewith.
"Material Adverse Effect" means an effect that causes or results in or has
-----------------------
a reasonable likelihood of causing or resulting in any material adverse change
in (a) the property, business, operations, financial condition, prospects,
liabilities or capitalization of the Borrower, (b) the ability of the Borrower
to perform its obligations under any Loan Document to which it is a party,
including the timely payment of principal or interest on the Loan or of other
amounts payable hereunder, or (c) the rights and remedies of the Bank under any
Loan Document.
"Maturity Date" means the date that is the last Business Day prior to the
-------------
first anniversary of the date hereof.
"Note" means the note described in Section 2.5 hereof.
----
"Person" means an individual, partnership, corporation, business trust,
------
joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Requirement of Law" means as to any Person, the certificate of
------------------
incorporation and by-laws or other organizational or governing documents of such
Person, and any law, treaty, rule
4
<PAGE>
or regulation, or determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is
subject.
"Responsible Officer" means as to each of the Borrower at any particular
-------------------
date, its treasurer, chief financial officer or chief accounting officer.
"Regulatory Development" means, after the date hereof: (a) the adoption of
----------------------
any applicable law, rule, regulation, or guideline or any change therein or in
the interpretation or administration thereof, by any Governmental Authority,
central bank, or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank (or its Lending Office) with
any requirement or directive (whether or not having the force of law) of any
such Governmental Authority, central bank, or comparable agency; or (b) the
application to the Bank of any such existing law, rule, regulation or guideline,
not presently applicable to it (or its Lending Office).
"Subsidiary" means, with respect to any Person, at any particular time, any
----------
corporation, association or other business entity of which at least a majority
of the securities or other interests having ordinary voting power shall, at the
time of determination, be owned or controlled (i) by such Person or (ii) by one
or more of its Subsidiaries or (iii) by such Person and one or more of its
Subsidiaries.
SECTION 1.1 Other Definitional Provisions.
-----------------------------
(a) All terms defined in this Agreement shall have the defined
meanings when used in the Note or any certificate or other document made or
delivered pursuant hereto.
(b) As used herein, accounting terms not defined in Section 1.1, and
accounting terms partly defined in Section 1.1 to the extent not defined, shall
have the respective meanings given to them under GAAP.
ARTICLE 2
TERMS OF THE LOAN
-----------------
SECTION 2.1 Agreement to Lend. Subject to and upon the terms and
-----------------
conditions set forth in this Agreement, the Bank agrees to make Advances to the
Borrower from time to time before the Maturity Date as requested by the Borrower
in the relevant Notice of Borrowing, the
5
<PAGE>
aggregate outstanding principal balance of which shall not exceed Ten Million
Dollars ($10,000,000). Amounts repaid may be reborrowed prior to the Maturity
Date but not on or after the Maturity Date.
SECTION 2.2 Advances. Provided that all of the conditions precedent
--------
specified in Article 4 hereof have been satisfied, not later than 2:00 p.m. (New
York City time) on the Borrowing Date the Bank shall make available the relevant
Advance to the Borrower in immediately available funds.
SECTION 2.3 Notice of Borrowing. Whenever the Borrower desires to obtain
-------------------
an Advance, it shall give the Bank written notice (or telephonic notice promptly
confirmed in writing), such notice to be given to the Bank no later than 12:00
p.m. (New York City time) three Business Days prior to the Borrowing Date. Each
such notice (each a "Notice of Borrowing") shall be irrevocable and
-------------------
substantially in the form of Exhibit A hereto and shall specify (i) the
---------
aggregate principal amount of the Advance, (ii) the Borrowing Date (which shall
be a Business Day) and (iii) the Interest Period applicable thereto.
SECTION 2.4 Interest Rate; Payment Dates.
----------------------------
(a) Each Advance shall bear interest for each day from (and including)
the Borrowing Date to (but excluding) the date on which such Advance shall be
repaid in full, on the unpaid principal amount thereof at a rate per annum equal
at all times during each Interest Period to the sum of LIBOR for such Advance
for such Interest Period, as applicable, plus 1.25%. With respect to each
----
Advance, accrued interest shall be paid in full in arrears on the last day of
each Interest Period and on the Maturity Date.
(b) If all or a portion of (i) the principal amount of the Loan, (ii)
any interest payable thereon, or (iii) any other amounts payable hereunder or
pursuant hereto to the Bank shall not be paid to the Bank when due (whether at
the stated maturity, by acceleration or otherwise), such overdue amount shall
bear interest for each day from the date of such non-payment until paid in full
(both before and after judgment) at a rate per annum equal to the Base Rate plus
five percent (5%), payable on demand.
(c) Interest shall be calculated on the basis of a year of 360 days
for the actual number of days elapsed.
SECTION 2.5 Note. The Borrower's obligation to repay the Loan shall be
----
evidenced by a promissory note (the "Note"), payable to the order of the Bank,
----
in such form as the Borrower and the Bank may agree to.
6
<PAGE>
SECTION 2.6 Repayment.
---------
(a) The Borrower shall repay the principal amount of each Advance by
12:00 noon on the last day of the Interest Period for such Advance.
(b) Notwithstanding anything herein to the contrary, the entire
principal amount of the Loan then outstanding and all accrued and unpaid
interest shall be due and payable on the Maturity Date.
SECTION 2.7 Prepayments.
-----------
(a) The Borrower may, on not less than five (5) Business Days' prior
written notice to the Bank (which notice shall be irrevocable), prepay any
Advance on a day other than the last day of an Interest Period for such Advance,
in whole or in part, with accrued interest to the date of such prepayment on the
amount prepaid. Any such prepayment made shall be made with the amount required
under Sections 2.10 and 8.6 hereof.
SECTION 2.8 Payments.
--------
(a) Any payments made hereunder shall be applied in the Bank's
discretion against costs, expenses and indemnities due hereunder; default
interest, if any; interest due; and the principal amount due and payable.
Should all of the foregoing be satisfied, such payments shall be applied to the
prepayment of the Loan in accordance with Section 2.7.
(b) Whenever any payment hereunder or under the Note shall be stated
to be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in each such case
be included in the computation of interest due hereunder or thereunder.
(c) The Bank shall open and maintain on its books a loan account in
the Borrower's name which shall show the outstanding principal amount of the
Loan owing to the Bank, prepayments, repayments, the computation and payment of
interest, and other amounts due and sums paid hereunder. Each such loan account
shall be conclusive and binding on the Borrower as to the amount at any time due
from the Borrower, absent manifest error in computation.
SECTION 2.9 Illegality. Notwithstanding any other provision of this
----------
Agreement, if any Regulatory Development shall make it unlawful for the Bank to
make or maintain the Loan as contemplated by this Agreement (a) the Bank shall
promptly notify the Borrower thereof, (b)
7
<PAGE>
the commitment of the Bank hereunder to continue as such shall forthwith be
canceled and (c) the balance of the Loan then outstanding, if any, shall be
repaid on the last day of the then applicable Interest Period or within such
earlier period as required by law. The Bank agrees to use reasonable efforts
(consistent with legal and regulatory restrictions) to avoid the result of the
preceding sentence, provided such efforts would not, in the Bank's good faith
determination, be otherwise disadvantageous to it. The Borrower agrees promptly
to pay the Bank, upon its demand, any additional amounts necessary to compensate
the Bank for any loss or expense reasonably incurred by the Bank in making any
repayment in accordance with this Section including, but not limited to, any
loss or expense incurred in liquidating or employing deposits from third
parties. A certificate as to any additional amounts payable pursuant to this
Section submitted by the Bank to the Borrower shall be conclusive in the absence
of manifest error.
SECTION 2.10 Indemnity. The Borrower hereby agrees to indemnify the Bank
---------
and to hold the Bank harmless from any loss or expense which the Bank may
sustain or incur as a consequence of (a) default by the Borrower in any payment
of principal or interest hereunder, (b) default by the Borrower in making any
prepayment after the Bank had been given a notice of prepayment in accordance
with Section 2.7 hereof and/or (c) the making by the Borrower of a prepayment on
a day which is not the last day of an Interest Period, in each case including,
but not limited to, any such loss or expense incurred in liquidating or
employing deposits from third parties or otherwise reemploying amounts prepaid
for the balance of the applicable Interest Period. A certificate specifying in
reasonable detail (i) any additional amounts payable pursuant to this Section
and (ii) the basis for calculating such amounts, submitted by the Bank to the
Borrower, shall be conclusive in the absence of manifest error.
SECTION 2.11 Increased Costs.
---------------
(a) If any Regulatory Development shall (i) impose, modify or deem
applicable any reserve, special deposit insurance assessment, fee or similar
requirement against loans made by, or other assets held by, or deposits in or
for the account of, the Bank or (ii) impose on the Bank any other condition
regarding this Agreement or the Note, and the result of any event referred to in
clause (i) or (ii) of this subsection (a) shall be to increase the cost to the
Bank of making or maintaining the Loan, then the Borrower shall forthwith pay to
the Bank all additional amounts which are necessary to compensate the Bank for
such increased costs. A certificate as to such increased costs setting forth
the additional amount or amounts to be paid to it hereunder and setting forth in
reasonable detail the basis therefor and the method of calculation thereof shall
be prepared in good faith and submitted by the Bank to the Borrower and shall be
conclusive (absent manifest error) as to the amount thereof.
8
<PAGE>
(b) If the Bank shall determine that any Regulatory Development
regarding capital adequacy has or would have the effect of reducing the rate of
return on the capital of the Bank (or any holding company for the Bank) as a
consequence of its obligations hereunder to a level below that which the Bank
(or such holding company) could have achieved but for such Regulatory
Development then, upon notice of such change by the Bank by submission to the
Borrower of the certificate hereinafter described, the Borrower shall forthwith
upon receipt of such notice, pay to the Bank such additional amount or amounts
as will compensate the Bank for such reduction. A certificate of the Bank
claiming compensation under this subsection (b) and setting forth the additional
amount or amounts to be paid to it hereunder and setting forth in reasonable
detail the basis therefor and the manner of calculation thereof shall be
prepared in good faith and submitted by the Bank to the Borrower and shall be
conclusive in the absence of manifest error.
SECTION 2.12 Taxes.
-----
(a) All payments by the Borrower to the Bank hereunder shall be made
free and clear of and without deduction or withholding for, or on account of,
any present or future taxes, levies, imposts, duties or other charges whatsoever
(other than franchise taxes and taxes on the net income of the Bank levied or
imposed by the jurisdiction of its incorporation or by the jurisdiction in which
its Lending Office is located) (all such non-excluded taxes, levies, imposts,
duties or other charges being hereinafter referred to as "Taxes"). If the
-----
Borrower shall be required to withhold or deduct Taxes from any sum payable to
the Bank hereunder, (i) the sum payable to the Bank shall be increased as may be
necessary so that the Bank receives an amount equal to the sum it would have
received had no such withholdings or deductions been made, (ii) the Borrower
shall make such necessary withholdings and deductions, and (iii) the Borrower
shall pay the full amount withheld or deducted to the relevant authority
according to applicable law so that the Bank shall not be required to make any
deduction or payment of such Taxes.
(b) The Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or under the Note or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or the Note (collectively, "Other Taxes").
-----------
(c) The Borrower will indemnify the Bank on demand for the full amount
of Taxes or Other Taxes paid in good faith by the Bank and for any liability
(including, without limitation, penalties, additions to tax, interest and
expenses) arising therefrom or with respect thereto and paid by the Bank.
9
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce the Bank to enter into this Agreement and to make the Loan,
the Borrower represents and warrants to the Bank that:
SECTION 3.1 Corporate Existence. The Borrower is a corporation duly
-------------------
incorporated, validly existing and in good standing under the laws of
California, has the corporate power and authority to own or lease its properties
and to carry on its business as now being conducted and is duly qualified as a
foreign corporation to do business in, and in good standing under the laws of,
each jurisdiction where its ownership, lease or operation of property or the
conduct of its business requires such qualification and where its failure to be
so qualified would have a Material Adverse Effect.
SECTION 3.2 Corporate Authorization; No Violation. The execution,
-------------------------------------
delivery and performance by the Borrower of this Agreement and the Note are
within the Borrower's corporate powers, have been duly authorized by all
necessary corporate action on the part of the Borrower, and do not violate,
breach or contravene in any material respect any Requirement of Law or
Contractual Obligation of the Borrower or result in the creation of a Lien on
any of its assets.
SECTION 3.3 No Defaults. There are no defaults with respect to any
-----------
Contractual Obligation to which the Borrower is a party or under which the
Borrower is bound that would have a Material Adverse Effect.
SECTION 3.4 Government Authorization. No authorization or approval or
------------------------
other action by, and no notice to or filing with, any Governmental Authority is
required to be obtained or made by the Borrower for the due execution, delivery
and performance by the Borrower of this Agreement and the Note.
SECTION 3.5 Enforceable Obligations of Borrower. This Agreement and the
-----------------------------------
Note have been duly executed and delivered on behalf of the Borrower and
constitute the legal, valid and binding obligation of the Borrower enforceable
in accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity.
10
<PAGE>
SECTION 3.6 Financial Condition. The most recent balance sheet of the
-------------------
Borrower and the related consolidated statements of income, copies of which have
been delivered to the Bank, present fairly the financial position of the
Borrower as of the date thereof, and the results of its operations for the
fiscal year then ended. Such financial statements, including the related
schedules and notes thereto, have been prepared in accordance with GAAP. As of
the date thereof, the Borrower had no asset, liability, contingent obligation,
liability for taxes, long-term lease or unusual forward or long-term commitment
material to the financial condition of the Borrower, which was not reflected in
the foregoing statements. Since the date thereof, there has been no material
adverse change in the business, financial condition, results of operations or
prospects of the Borrower.
SECTION 3.7 No Material Litigation. No litigation, investigation or
----------------------
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or
against any of its properties or revenues (a) with respect to this Agreement or
the Note or any of the transactions contemplated hereby or thereby, or (b)
which, if determined adversely to the interests of the Borrower, would have
(either individually or in the aggregate) a Material Adverse Effect.
SECTION 3.8 Taxes. The Borrower has filed or caused to be filed all tax
-----
returns which are required to be filed by it, and has paid all taxes shown to be
due and payable on said returns or on any assessments made against it or any of
its property and all other taxes, fees and other charges imposed on it or any of
its property by any Governmental Authority (other than those the amount or
validity of which are currently being contested in good faith by appropriate
proceedings and with respect to which reserves in conformity with GAAP, if any,
have been provided on the books of the Borrower).
SECTION 3.9 No Misrepresentation. The information, reports, financial
--------------------
statements, exhibits and schedules furnished by or on behalf of the Borrower to
the Bank in connection with the negotiation, preparation or delivery of this
Agreement or included herein or delivered pursuant hereto and the
representations and warranties by the Borrower contained herein or in any
certificate or other document furnished by the Borrower pursuant hereto do not
contain any untrue statement of material fact, or omit to state a material fact
necessary to make the statements herein or therein not misleading in light of
the circumstances under which they were made. There is no fact known to the
Borrower that would have a Material Adverse Effect that has not been disclosed
herein or in a report, financial statement, exhibit, schedule or other writing
furnished to the Bank for use in connection with this Agreement.
11
<PAGE>
SECTION 3.10 Investment Company. The Borrower is not an "investment
------------------
company" within the meaning of the Investment Company Act of 1940, as amended.
SECTION 3.11 Public Utility Holding Company Act. Neither the Borrower nor
----------------------------------
any of its Subsidiaries is a "holding company" or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company," within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
SECTION 3.12 Compliance With Laws. The Borrower has complied with each
--------------------
Requirement of Law, the non-compliance with which would have a Material Adverse
Effect.
ARTICLE 4
CONDITIONS PRECEDENT
--------------------
The obligation of the Bank to make each Advance to the Borrower is subject to
the prior satisfaction of each of the following conditions precedent:
(a) Agreement. The Bank shall have received a counterpart of this
---------
Agreement, executed by a duly authorized officer of the Borrower.
(b) Note. The Bank shall have received the Note executed by a duly
----
authorized officer of the Borrower.
(c) Teletransmission Agreement. The Bank shall have received the
--------------------------
Bank's form of Teletransmission Agreement executed by a duly authorized officer
of the Borrower.
(d) Borrower Certificate. The Bank shall have received a certificate
--------------------
of the Secretary or an Assistant Secretary of the Borrower, dated the date
hereof, certifying (1) that attached thereto is a true and complete copy of
resolutions adopted by the Board of Directors of the Borrower authorizing the
execution and delivery of this Agreement and the Note and the borrowings
hereunder, and that such resolutions have not been modified or rescinded and are
in full force and effect on such date, (2) that attached thereto are true and
complete copies of the Articles of Incorporation and Bylaws of the Borrower and
all amendments thereto as in effect on such date and (3) the incumbency and
specimen signatures of the officers of the Borrower authorized to execute this
Agreement, the Note and any certificates or instruments furnished pursuant
hereto.
12
<PAGE>
(e) Financial Statements. The Bank shall have received consolidated
--------------------
financial statements of the Borrower, as of and for the most recent fiscal
period, which financial statements shall have been prepared in accordance with
GAAP, and shall be in form and substance satisfactory to the Bank, and such
financial statements shall not, in the judgment of the Bank, reflect any
material adverse change in the consolidated financial condition of the Borrower,
as reflected in the financial statements or projections previously delivered to
the Bank.
(f) Representations and Warranties. The representations and
------------------------------
warranties made by the Borrower herein shall be true and correct in all material
respects.
(g) No Default or Event of Default. No Default or Event of Default
------------------------------
shall have occurred and be continuing as of the date hereof or any Borrowing
Date.
ARTICLE 5
AFFIRMATIVE COVENANTS
---------------------
The Borrower hereby covenants and agrees that so long as any portion of the Loan
remains outstanding and unpaid or any other amount is owing hereunder to the
Bank:
SECTION 5.1 Financial Statements. The Borrower shall furnish to the Bank:
--------------------
(a) as soon as available and in any event within 45 days after the end
of each of the first three fiscal quarters of each fiscal year of the borrower,
an unaudited balance sheet of the Borrower as at the end of such quarter and
related unaudited statements of income of the borrower for such quarter and for
the period from the beginning of such fiscal year until the end of such quarter,
setting forth in each case in comparative form the corresponding figures for the
corresponding periods of the preceding fiscal year; and
(b) as soon as available and in any event within 120 days after the
end of each fiscal year of the Borrower, an audited balance sheet of the
Borrower as at the end of such year and related audited statements of income,
retained earnings and cash flow of the Borrower for such year, setting forth in
each case in comparative form the corresponding figures for the preceding fiscal
year, and accompanied by the report thereon of independent certified public
accountants, which report shall not be qulaified as to the scope of the audit or
as a result of nonconformity with GAAP.
13
<PAGE>
SECTION 5.2 Notices; Certificates; Other Information. The Borrower shall
----------------------------------------
furnish to the Bank:
(a) concurrently with the delivery of the financial statements
referred to in Section 5.1, a certificate of a Responsible Officer of the
Borrower, stating that such officer has no knowledge of any Default or Event of
Default or specifying the nature and extent of any Default or Event of Default
known to such officer and any corrective action taken or proposed to be taken
with respect thereto; and
(b) promptly, such additional financial and other information as Bank
may from time to time reasonably request.
SECTION 5.3 Payment of Taxes. The Borrower shall maintain, in accordance
----------------
with GAAP, appropriate reserves for the accrual of taxes and all other
obligations, liabilities and claims. The Borrower shall file all tax returns
required to be filed and pay and discharge at or before the same become
delinquent, all taxes and other similar levies, charges and imposts of any
Governmental Authority except where the same are being contested in good faith
by appropriate proceedings diligently pursued.
SECTION 5.4 Maintenance of Corporate Existence; Maintenance of Properties.
-------------------------------------------------------------
The Borrower shall maintain its corporate existence, rights and franchises
necessary to continue its business.
SECTION 5.5 Notices. The Borrower shall promptly give notice in writing
-------
to the Bank of (a) the occurrence of any Default or Event of Default specifying
the nature and extent thereof and the corrective action proposed to be taken
with respect thereto, and (b) any development that has resulted in, or could
reasonably be expected to result in, a Material Adverse Effect.
SECTION 5.6 Compliance with Laws. The Borrower shall comply in all
--------------------
material respects with all Requirements of Law, the failure to comply with which
would have a Material Adverse Effect.
SECTION 5.7 Use of Proceeds. The Borrower shall use the proceeds of the
---------------
Loan exclusively for general corporate purposes.
SECTION 5.8 Keeping of Records. The Borrower shall keep proper books of
------------------
record and account, in which full and correct entries shall be made of financial
transactions and the assets and business of the Borrower in accordance with
GAAP.
14
<PAGE>
ARTICLE 6
NEGATIVE COVENANTS
------------------
The Borrower hereby covenants and agrees that so long as any portion of the Loan
remains outstanding and unpaid or any other amount is owing to the Bank
hereunder:
SECTION 6.1 Limitation on Mergers and Sales. The Borrower shall not merge
-------------------------------
or consolidate with, or convey or sell in one transaction or a series of related
transactions all or substantially all of its assets or business, except for
mergers with Affiliates of the Borrower in which the Borrower is the surviving
corporation. The Borrower shall promptly forward to the Bank a copy of any
agreement or document entered into or executed by the Borrower pursuant to this
Section.
SECTION 6.2 Transactions with Affiliates. The Borrower shall not effect
----------------------------
any transaction with any Affiliate on a basis less favorable to the Borrower
than would at the time be obtainable for a comparable transaction in arms-length
dealing with an unrelated third party.
SECTION 6.3 Margin Regulations. The Borrower shall not use any portion of
------------------
the proceeds of the Loan directly or indirectly for the purpose of purchasing or
carrying any margin stock (as defined in Regulation U of the Board of Governors
of the Federal Reserve System (the "Board")) or otherwise for any purpose which
-----
entails a violation of, or which is inconsistent with, Regulations G, T, U or X
of the Board. Borrower shall promptly provide to Bank upon Bank's request a
properly prepared and executed Form U-1.
ARTICLE 7
EVENTS OF DEFAULT
-----------------
Upon the occurrence of any of the following events (each, an "Event of
--------
Default"):
- -------
(a) the Borrower shall fail to make any payment of any principal,
interest, or other amount payable hereunder or under the Note when due (whether
at maturity, by acceleration or otherwise) in accordance with the terms hereof
or thereof; or
15
<PAGE>
(b) any representation or warranty made by the Borrower herein or
which is contained in any certificate, document or financial or other statement
furnished at any time under or in connection with this Agreement shall prove to
have been false or misleading on or as of the date made in any material respect;
or
(c) the Borrower shall default in the observance or performance of any
agreement, covenant or term contained in any Loan Document, and in the event
that such default may be cured, fails to promptly take steps to cure such
default and complete the cure of such default within thirty (30) days after the
Borrower becomes aware of such default; or
(d) the Borrower shall (i) default in any payment or payments on any
indebtedness (other than the Loan), or any guarantee thereof, beyond the period
of grace, if any, provided in the instrument or agreement under which such
indebtedness was created or (ii) default in the observance or performance of any
other agreement or condition relating to any indebtedness contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event shall occur or condition exist, the effect of which default or other event
or condition is to cause, or to permit the holder or holders of such
indebtedness (or a trustee or agent on behalf of such holder or holders) to
cause, such indebtedness to become due prior to its stated maturity; or
(e) one or more final judgments or decrees shall be entered against
the Borrower involving in the aggregate a liability (not paid or fully covered
by insurance) of $100,000 or more and shall have been unpaid for a period of 30
days or a stay of execution is not procured within 30 days after the date of
entry of a judgment (or in the event that a stay of execution is obtained, the
judgment is not satisfied within 30 days after the stay of execution is lifted
or otherwise extinguished); or
(f) the validity or enforceability of any Loan Document shall be
challenged by the Borrower or any Loan Document shall be determined to be
invalid or unenforceable or shall cease to remain in full force and effect for
any reason other than in accordance with its express terms; or
(g) a breach or default by the Borrower under the Guaranty made in
favor of the Bank dated August 30, 1996 shall occur and be continuing; or any
breach or default under any agreement or instrument between any Affiliate of the
Borrower and the Bank shall occur and be continuing; or
(h) an event shall occur, which would cause the dissolution of the
Borrower; or
16
<PAGE>
(i) the Borrower shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, or shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due, or shall
take any action to authorize any of the foregoing; or
(j) an involuntary case or other proceeding shall be commenced against
the Borrower seeking liquidation, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days;
then, and in any such event, (i) the Bank's obligation to make further Advances
shall cease immediately; (ii) if such event is an Event of Default specified in
clause (i) or (j) above, automatically the Loan (with accrued interest thereon)
and all other amounts owing under this Agreement and the Note shall immediately
become due and payable; and (iii) if such event is any other Event of Default,
the Bank may by notice to the Borrower, declare the entire unpaid principal
amount of the Loan (with accrued interest thereon) and all other amounts owing
to the Bank under this Agreement and the Note to be due and payable forthwith,
whereupon the same shall immediately become due and payable. Except as
expressly provided above in this Article 7, presentment, demand, protest and all
other notices of any kind are hereby expressly waived by the Borrower.
ARTICLE 8
MISCELLANEOUS
-------------
SECTION 8.1 Amendments. No amendment or waiver of any provision of this
----------
Agreement or the Note, nor consent to any departure by the Borrower herefrom or
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Bank. Such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
17
<PAGE>
SECTION 8.2 Notices. All notices and other communications provided for
-------
hereunder shall, unless otherwise specified herein, be in writing and sent by
first-class mail, facsimile transmission, nationally recognized overnight
courier or hand-delivered as follows:
(a) if to the Borrower:
Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
Attn: Chief Financial Officer
Telephone number: 213-780-8250
Facsimile number: 213-881-0368
(b) if to the Bank:
Standard Chartered Bank
7 World Trade Center
New York, New York 10048
Attn: David Cutting
Telephone number: 212-667-0469
Facsimile number: 212-665-0535
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party hereto. All such notices and
communications shall, when so mailed or otherwise delivered, be effective five
days after being deposited in the mails or, in all other cases, when received or
delivered.
SECTION 8.3 No Waiver; Remedies. No failure on the part of the Bank to
-------------------
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
SECTION 8.4 Right of Set-off. Upon the occurrence and during the
----------------
continuance of an Event of Default, the Bank is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or
18
<PAGE>
demand, provisional or final) at any time held and other indebtedness at any
time owing by the Bank (including, without limitation, its respective branches
and offices) to or for the credit or the account of the Borrower against any and
all of the obligations of the Borrower now or hereafter existing under this
Agreement and the Note. The Bank agrees promptly to notify the Borrower after
any such set-off and application, provided that the failure to give such notice
shall not affect the validity of such set-off and application. The rights of the
Bank under this Section are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which the Bank may have.
SECTION 8.5 Costs and Expenses. The Borrower shall pay to the Bank on
------------------
demand all costs and expenses (including reasonable attorneys' fees and
expenses) incurred by the Bank in connection with the enforcement of, and
preservation of rights under, this Agreement and the other Loan Documents,
regardless of whether a Default or Event of Default has occurred.
SECTION 8.6 Indemnity. The Borrower hereby agrees to indemnify and hold
---------
harmless the Bank and its officers, directors, employees and Affiliates from and
against any and all losses, damages, liabilities, claims or expenses (including
the reasonable fees and expenses of counsel) incurred by any of them as a result
of or in connection with any act or omission of the Borrower relating to this
Agreement and the other Loan Documents, any use of the proceeds of the Loan or
the transactions contemplated herein. Any such losses, damages, liabilities or
expenses shall be reimbursed by the Borrower upon the demand of the Bank.
SECTION 8.7 Successors and Assigns. This Agreement and the Note shall be
----------------------
binding upon and inure to the benefit of the Borrower and the Bank and their
respective successors and assigns. The Borrower may not assign or transfer any
of its rights or obligations hereunder without the prior written consent of the
Bank.
SECTION 8.8 Participations. The Bank may sell participations to one or
--------------
more other financial institutions in all or any part of, the Bank's rights
hereunder and/or under the Note. The Bank may, in connection with any such
participation or proposed participation, disclose to the participant or to the
proposed participant any information relating to the Borrower (including without
limitation, any confidential information) furnished to the Bank by or on behalf
of the Borrower, provided that any such participant or proposed participant
shall have agreed not to disclose any such information which is confidential.
SECTION 8.9 Governing Law. This Agreement and the Note shall be governed
-------------
by, and construed in accordance with, the laws of the State of New York.
19
<PAGE>
SECTION 8.10 Severability. In the event any one or more of the provisions
------------
contained in this Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby.
SECTION 8.11 Submission to Jurisdiction; Waivers. The Borrower hereby
-----------------------------------
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement or the Note, or for recognition and
enforcement of any judgment in respect thereof, to the non-exclusive general
jurisdiction of the Courts of the State of New York, the Courts of the United
States of America for the Southern District of New York and appellate courts
from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or thereafter have to venue of
any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to the Borrower at its
address set forth in subsection 8.2 or at such other address of which the
applicable Bank shall have been notified pursuant thereto; and
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction.
SECTION 8.12 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY
--------------------
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR THE NOTE AND FOR ANY COUNTERCLAIM
THEREIN.
SECTION 8.13 Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made under this Agreement and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the Note,
regardless of any investigation made by the Bank or on its behalf.
20
<PAGE>
SECTION 8.14 Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 8.15 Headings. Section headings in this Agreement are included
--------
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
TARRANT APPAREL GROUP
By: /s/ Mark B. Kristof
--------------------------------
Name: Mark B. Kristof
Title: Vice President & CFO
STANDARD CHARTERED BANK
By: /s/ David D. Cutting
-------------------------------
Name: David D. Cutting
Title: Senior Vice President
By: /s/ Natalie Yang
-------------------------------
Name: Natalie Yang
Title:
<PAGE>
EXHIBIT A
---------
FORM OF NOTICE OF BORROWING
Date: _________
Standard Chartered Bank
7 World Trade Center
New York, New York 10048
Re: Notice for Advance
------------------
We request the following Advance under the Loan Agreement dated July ___, 1998:
Amount: __________________
Proposed Borrowing Date: __________________
Interest Period: ____________ months
TARRANT APPAREL GROUP, INC.
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.60
PARTNERSHIP INTEREST PURCHASE AGREEMENT, dated as of July 2, 1998,
among ROCKY ACQUISITION, LLC, a Delaware limited liability company (the
"Purchaser"), TARRANT APPAREL GROUP, a California corporation ("TAG"), LIMITED
DIRECT ASSOCIATES, L.P., a Delaware limited partnership ("LDA"), ROCKY APPAREL,
INC., a New York corporation ("RAI"), and GABRIEL MANUFACTURING COMPANY, a
Mississippi corporation ("GMC," and together with LDA and RAI, the "Sellers").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, pursuant to a certain limited partnership agreement, dated
May 27, 1994 (the "Limited Partnership Agreement"), LDA, RAI and GMC own 49, 20
and 31 partnership units, respectively, of Rocky Apparel, L.P., a Delaware
limited partnership ("Rocky"), as limited partners and RAI owns an additional 1
partnership unit of Rocky as a general partner;
WHEREAS, the Purchaser has been formed by TAG for the purpose of
acquiring 100% of the partnership interests in Rocky from the Sellers pursuant
to the terms and conditions of this Agreement;
WHEREAS, the Sellers desire to sell, and the Purchaser desires to
purchase 100% of the partnership interests in Rocky on the terms and subject to
the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the representations, warranties
and agreements herein contained, the parties hereto agree as follows:
Section 1. Sale and Purchase. In reliance upon the representations
-----------------
and warranties contained herein and subject to the terms and conditions hereof,
(a) each of the Sellers, severally and not jointly, will sell to the Purchaser,
and the Purchaser will purchase, on the Closing Date (as defined in Section 2),
the partnership units (the "Units") owned by each of the Sellers set forth
opposite such Seller's name on Schedule 1, which in the aggregate represent 100%
of the partnership interests (collectively, the "Partnership Interests") in
Rocky. The sale and purchase of the Units will be effective as of 12:01 a.m.
(Los Angeles time) on July 1, 1998.
-1-
<PAGE>
Section 2. Closing.
-------
2.1 Place and Date. The closing of the sale and purchase of the
--------------
Partnership Interests (the "Closing") shall take place at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York at 10:00 a.m. on July
2, 1998, or at such other time and place as the parties to this Agreement shall
agree (the "Closing Date").
2.2 Payment of Purchase Price. Subject to the terms and conditions
-------------------------
of this Agreement and the Escrow Agreement, the Purchaser shall deliver at the
Closing to each of the Sellers cash and/or common stock of TAG (the "TAG Stock")
in the amount set forth opposite such Seller's name on Schedule 2.2(a), which
amounts shall total $7,500,000 plus 80,890 shares of TAG Stock in the aggregate
for all of the Sellers (the "Initial Purchase Price"), with such cash amounts
payable by wire transfer of immediately available funds to the account or
accounts described on Schedule 2.2(b) of the Agreement or otherwise designated
by each of the Sellers at least two business days prior to the Closing Date.
Section 3. Purchase Price Adjustment. (a) Delivery and Review of
------------------------- ----------------------
Closing Balance Sheet. As promptly as practicable, but no later than 60 days
- ---------------------
after the Closing Date, the Sellers will cause Rocky to prepare and deliver to
the Purchaser (i) a draft balance sheet of Rocky, dated as of June 30, 1998 (the
-
"Closing Balance Sheet"), accompanied by a draft auditors' report thereon from
Pricewaterhouse Coopers LLC ("PC") and (ii) a draft certificate of an officer of
--
Rocky, setting forth the Closing Net Worth together with supporting calculations
in reasonable detail (the "Adjustment Certificate"). The Closing Balance Sheet
shall be prepared in accordance with generally accepted accounting principles.
The Purchaser shall have 45 days from the date on which the Closing Balance
Sheet and the Adjustment Certificate are delivered to it and the PC work papers
are available for review in Los Angeles, California to review such documents
(the "Review Period"). The Purchaser and its accountants shall be provided with
full access to the PC work papers at the Purchaser's Los Angeles, California
office in connection with such review. If the Purchaser disagrees in any
respect with any item or amount shown or reflected in the Closing Balance Sheet
or the Adjustment Certificate or with the calculation of the Closing Net Worth,
the Purchaser may, on or prior to the last
-2-
<PAGE>
day of the Review Period, deliver a notice to the Sellers setting forth, in
reasonable detail, each disputed item or amount and the basis for the
Purchaser's disagreement therewith, together with supporting calculations (the
"Dispute Notice"). It is mutually agreed that estimates used in the preparation
of the Closing Balance Sheet may be conclusively disputed by actual results
which differ from such estimates prior to the end of the Review Period. The
Dispute Notice shall set forth the Purchaser's position as to the proper Closing
Net Worth. If no Dispute Notice is received by the Purchaser on or prior to the
last day of the Review Period, the Closing Balance Sheet and the Adjustment
Certificate shall become final and be deemed accepted by the Purchaser. The
Purchaser's rights to indemnification pursuant to Sections 13 and 14 (and any
limitations on such rights) shall not be deemed to limit, supersede or otherwise
affect the Purchaser's rights to a full purchase price adjustment pursuant to
this Section 3.
(b) The Accountant. Within 15 days after the Sellers' receipt of a
--------------
Dispute Notice and unless the matters in the Dispute Notice have otherwise been
resolved by mutual agreement of the parties, the Purchaser and the Sellers shall
mutually agree upon and jointly contact an independent accounting firm with
experience in the apparel industry, which shall be retained to resolve the
issues set forth in the Dispute Notice. If the Purchaser and the Sellers cannot
agree on the independent accounting firm to be retained, the Purchaser and the
Sellers shall each submit the name of one accounting firm that satisfies the
qualifications set forth in this Section 3, and the independent accounting firm
shall be selected by lot from those two firms. The independent accounting firm
retained by the Purchaser and the Sellers (the "Accountant") shall conduct such
review of the Closing Balance Sheet, any related work papers of Rocky's
accountants, the Adjustment Certificate and the Dispute Notice, and any
supporting documentation as the Accountant in its sole discretion deems
necessary, and the Accountant shall conduct such hearings or hear such
presentations by the parties as the Accountant in its sole discretion deems
necessary.
(c) The Adjustment Report. The Accountant shall, as promptly as
---------------------
practicable and in no event later than 45 days following the date of its
retention, deliver to the Purchaser and the Sellers a report (the "Adjustment
Report"), in which the Accountant shall, after considering all matters set forth
in the Dispute Notice, determine what
-3-
<PAGE>
adjustments, if any, should be made to the Closing Balance Sheet in order for it
to comply with this Section 3, and shall determine the appropriate Closing Net
Worth on that basis. The Adjustment Report shall set forth, in reasonable
detail, the Accountant's determination with respect to each of the disputed
items or amounts specified in the Dispute Notice, and the revisions, if any, to
be made to the Closing Balance Sheet, the Adjustment Certificate and the Closing
Net Worth, together with supporting calculations. The Sellers shall pay one-
half, and the Purchaser shall pay one-half, of the fees and expenses of the
Accountant incurred in connection with the matters referred to in this Section
3. The Adjustment Report shall be final and binding upon the Purchaser and the
Sellers, and shall be deemed a final arbitration award that is enforceable
pursuant to the terms of the Federal Arbitration Act, 9 U.S.C. (S)(S) 1 et seq.
-- ---
(d) Adjustment and Payment. Effective upon the end of the Review
----------------------
Period (if a timely Dispute Notice is not delivered), or upon the resolution of
all matters set forth in the Dispute Notice by agreement of the parties or by
the issuance of the Adjustment Report (if a timely Dispute Notice is delivered),
the Initial Purchase Price shall be reduced by the amount, if any, by which the
Closing Net Worth is less than $0, or increased by the amount, if any, by which
the Closing Net Worth is greater than $0. Any adjustment to the Initial
Purchase Price pursuant to this Section 3 shall be paid by the Purchaser or the
Sellers, as the case may be, on the fifth business day following the end of the
Review Period (if a timely Dispute Notice is not delivered), or five business
days after the date on which the Adjustment Report has been received by the
Sellers and the Purchaser (if a timely Dispute Notice is delivered). Any such
payment shall be made by wire transfer of immediately available funds to the
account or accounts designated by the Sellers or the Purchaser, as the case may
be, at least two business days prior to the date on which such payment is
scheduled to be made. "Purchase Price" shall mean the Initial Purchase Price,
as adjusted pursuant to this Section 3.
(e) Definitions. For purposes of this Section 3:
-----------
"Closing Net Worth" shall mean tangible assets (including fixed assets
at Rocky's book value) less liabilities of Rocky, all as shown on the Closing
Balance Sheet, as of the Closing Date and, except for the transfer of the USPA
Assets to GMC in
-4-
<PAGE>
accordance with Section 4.6, prior to giving effect to the consummation of the
transactions contemplated by this Agreement.
(f) Within 100 days after the Closing Date, Rocky will report to the
Purchaser and the Sellers in writing the dollar amount of accounts receivable
that appeared on the Closing Balance Sheet, without taking into account any
reserve (the "Gross CBS Receivables"), and that were collected on or within 90
days after the Closing Date (the "Collected Receivables"). If such amount
exceeds (x) the amount of the Gross CBS Receivables, less (y) the reserve for
- -
uncollectible receivables taken into account in the Closing Balance Sheet (such
difference, the "Net CBS Receivables"), then the Initial Purchase Price shall be
increased by, and the Purchaser shall promptly pay to the Sellers, an amount
equal to such excess. If such amount is less than the Net CBS Receivables, then
the Initial Purchase Price shall be reduced by, and the Sellers shall promptly
pay to the Purchaser, an amount equal to such shortfall. If after such 90-day
period, additional payments are received by Rocky in respect of Gross CBS
Receivables, such payments shall be paid to the Sellers. Disputes regarding the
calculations required by this subsection (f) (which may be raised by either the
Sellers or the Purchaser) shall be resolved by the Accountant in accordance with
the procedure set forth in subsections (b) and (c) of this Section 3.
(g) Allocation of the Purchase Price Adjustment and Accounts
--------------------------------------------------------
Receivable Adjustment; Limitation. Each of LDA, GMC and RAI shall receive from
- ---------------------------------
the Purchaser or pay to the Purchaser, as the case may be, 49%, 31% and 20%,
respectively, of any adjustment to the Initial Purchase Price pursuant to
subsections (d) or (f) of Section 3. Any such adjustment to the Initial
Purchase Price shall be deemed either an addition or a reduction to the Initial
Purchase Price for the Partnership Interests purchased by the Purchaser from the
Sellers. Notwithstanding anything else contained in this Section 3, the Sellers
or the Purchaser, as the case may be, shall not be required to pay any
adjustment to the Initial Purchase Price pursuant to subsections (d) or (f) of
this Section 3 unless the aggregate net adjustment to the Initial Purchase
Price, after application of both subsections, exceeds $50,000.
Section 4. Conditions to the Obligations of the Purchaser and TAG.
------------------------------------------------------
The
-5-
<PAGE>
obligations of the Purchaser and TAG under this Agreement are subject to the
fulfillment prior to or at the Closing of the following conditions:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of each of the Sellers set forth herein shall be true and correct
when made and in all material respects at and as of the Closing.
4.2 Performance. Each of the Sellers shall have performed and
-----------
complied, in all material respects, with all covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing, unless the same shall have been waived.
4.3 Closing Certificate. Each of the Sellers shall have delivered to
-------------------
the Purchaser a certificate signed by an officer of such Seller dated the
Closing Date, certifying that the conditions specified in Sections 4.1 and 4.2
have been fulfilled with respect to such Seller.
4.4 Consents. All consents or waivers required in connection with the
--------
transactions contemplated hereby shall have been obtained or waived.
4.5 Escrow Agreements. A share escrow and security agreement between
-----------------
TAG, RAI and GMC, in form and substance reasonably acceptable to TAG, RAI and
GMC (the "Escrow Agreement") shall have been executed and delivered on or prior
to the Closing Date.
4.6 U.S. Polo Association Assets. Rocky's receivable from the U.S.
----------------------------
Polo Association and any related inventory and any rights in the U.S.P.A. master
license (collectively, the "USPA Assets") shall have been transferred to GMC
immediately prior to Closing.
4.7 Employment Arrangements. The Purchaser and Gabriel Zeitouni
-----------------------
("Zeitouni") shall have negotiated in good faith and entered into mutually
satisfactory employment arrangements (the "Employment Agreement") relating to
Zeitouni's
-6-
<PAGE>
employment by Rocky.
4.8 Proceedings and Documents. All proceedings in connection with the
-------------------------
transactions contemplated hereby and all documents and instruments incidental
thereto shall be reasonably satisfactory in substance and form to the Purchaser,
and the Purchaser shall have received all such originals or certified or other
copies of such documents as the Purchaser may reasonably request.
Section 5. Conditions to the Obligations of the Sellers. The
--------------------------------------------
obligations of each of the Sellers under this Agreement are subject to the
fulfillment prior to or at the Closing of the following conditions.
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Purchaser and TAG set forth herein shall be true and correct
when made and in all material respects at and as of the Closing.
5.2 Performance. Each of the Purchaser and TAG shall have performed
-----------
and complied, in all material respects, with all covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing unless same shall have been waived.
5.3 Closing Certificate. Each of the Purchaser and TAG shall have
-------------------
delivered to the Sellers a certificate signed by an officer, dated the Closing
Date, certifying that the conditions specified in Sections 5.1 and 5.2 have been
fulfilled with respect to such person.
5.4 Ancillary Agreements. The Escrow Agreement and the Employment
--------------------
Agreement (collectively, the "Ancillary Agreements") shall have been executed
and delivered on or prior to the Closing Date.
5.5 U.S. Polo Association Assets. The USPA Assets shall have been
----------------------------
transferred to GMC immediately prior to Closing.
-7-
<PAGE>
5.6 Repayment of Certain Borrowings. All amounts owed (approximately
-------------------------------
$3,409,242) by Rocky to LDA or its affiliates shall have been paid in full on
the Closing Date by the Purchaser by wire transfer of immediately available
funds, to the same account as LDA's portion of the Initial Purchase Price is
wired. All amounts owed by Zeitouni to LDA, or their respective affiliates
shall have been paid in full on the Closing Date by Zeitouni or restructured in
a manner satisfactory to LDA in its sole discretion.
5.7 Employment Arrangements. The Purchaser and Zeitouni shall have
-----------------------
negotiated in good faith and entered into the Employment Agreement relating to
Zeitouni's employment by Rocky.
5.8 Proceedings and Documents. All proceedings in connection with the
-------------------------
transactions contemplated hereby and all documents and instruments incidental
thereto shall be reasonably satisfactory in substance and form to each of the
Sellers, and each of the Sellers shall have received all such originals or
certified or other copies of such documents as such Seller may reasonably
request.
Section 6. Representations and Warranties of GMC and RAI. GMC and
---------------------------------------------
RAI, jointly and severally, represent and warrant to the Purchaser and TAG as
follows:
6.1 Organization and Standing of Rocky. Rocky is a limited
----------------------------------
partnership duly organized and validly existing under the laws of the State of
Delaware. Each of RAI and GMC is a corporation duly organized and validly
existing under the laws of their respective states of incorporation. Rocky is
duly qualified and in good standing as a foreign corporation authorized to do
business in all jurisdictions where the nature of its business or the character
of its assets requires such qualification except where the failure to so qualify
would not have a material adverse effect on the business of Rocky. Each of
Rocky, RAI and GMC has all requisite corporate power and authority to own and
operate its respective properties, to carry on the business conducted by it and
to enter into this Agreement and the Escrow Agreement and the transactions
contemplated herein and therein and to perform its obligations under this
Agreement and such contemplated transactions.
-8-
<PAGE>
6.2 Capitalization of Rocky. (a) Each of GMC and RAI have the full
-----------------------
capacity, right and lawful authority to transfer the Partnership Interests owned
by GMC and RAI to the Purchaser. Schedule 1 contains a complete and correct
list of all outstanding partnership interests in Rocky, together with a list of
owners thereof. Each of GMC and RAI owns beneficially and of record, the
Partnership Interests as indicated on Schedule 1, free and clear of any liens,
claims or encumbrances ("Liens"). Assuming that the Purchaser is acquiring the
Partnership Interests in good faith, upon the delivery of and payment by the
Purchaser of the Initial Purchase Price in the manner described in Section 2.2,
the Purchaser shall acquire good and valid title to the Partnership Interests
from GMC and RAI, free and clear of any Liens.
(b) All outstanding partnership interests of Rocky, including the
Units, are duly authorized, validly issued, fully paid and nonassessable.
(c) There are no preemptive or similar rights on the part of any
holders of any class of securities of Rocky and no subscriptions, options,
warrants, conversion or other rights, agreements, commitments, arrangements or
understandings of any kind obligating Rocky, GMC or RAI, contingently or
otherwise, to issue or sell, or cause to be issued or sold, any partnership
interest of Rocky, or any securities convertible into or exchangeable for any
such interests, are outstanding, and no authorization therefor has been given.
There are no outstanding contractual or other rights or obligations to or of
Rocky, GMC or RAI to repurchase, redeem or otherwise acquire any outstanding
partnership interests or other securities of Rocky.
6.3 Investments. Assuming the liquidation and dissolution of AC
-----------
Designs LLC and AC Designs Inc., Rocky does not own any shares of capital stock
or other securities of, or interest in, any other person.
6.4 Agreement. This Agreement and the Escrow Agreement have been duly
---------
authorized by all necessary action on the part of each of Rocky, GMC and RAI,
have been duly executed and delivered by each of them and constitute the legal,
valid and binding obligations of each of them, enforceable against each of them
in accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy,
-9-
<PAGE>
reorganization, insolvency, moratorium or other similar laws affecting the
rights of creditors generally.
6.5 No Conflicting Instruments. Except as set forth on Schedule 6.5
--------------------------
or contemplated by Section 9, the execution, delivery and performance of this
Agreement and the Escrow Agreement and the transactions contemplated herein and
therein by each of Rocky, GMC or RAI will not violate or conflict with its
certificate of incorporation or certificate of limited partnership, or by-laws
or limited partnership agreement, as the case may be, and will not violate,
conflict with, or constitute a default under, any agreement or instrument to
which any of Rocky, GMC or RAI is a party or by which any of Rocky, GMC or RAI
is bound, or any judgment, decree, order, statute, rule or governmental
regulation applicable to any of Rocky, GMC or RAI.
6.6 Governmental Consent. Except for the Mississippi governmental
--------------------
consent as set forth on Schedule 6.5, no consent, approval or authorization of,
or registration, qualification, designation, declaration or filing with, any
governmental authority is required in connection with the execution, delivery or
performance of this Agreement or the Escrow Agreement or of any of the
transactions contemplated hereby or thereby by any of Rocky, GMC or RAI that has
not been obtained.
6.7 No Undisclosed Liabilities. Except to the extent reflected or
--------------------------
reserved against on its balance sheet as at December 31, 1997, disclosed in this
Section 6 or incurred in the ordinary course of business since December 31,
1997, Rocky has no liabilities, whether absolute, accrued, contingent or
otherwise, and whether due or to become due.
6.8 Inventories. All inventories of Rocky, including raw materials,
-----------
parts, supplies, work in process and finished goods, reflected on the balance
sheet of Rocky, dated as of December 31, 1997 (the "Balance Sheet") or on the
books of Rocky on the Closing Date are of good, usable and merchantable quality
(subject to normal shrinkage, damage and the occurrence of seconds).
6.9 Patents, Trademarks, etc. Rocky does not own any patents, trade
------------------------
names,
-10-
<PAGE>
trademarks, copyrights and other similar property rights.
6.10 Financial Statements and Information. Rocky has delivered to the
------------------------------------
Purchaser copies of the audited balance sheet, statement of operations and
retained earnings and statement of cash flows of Rocky as at, and for the year
ended, December 31, 1997. All such financial statements have been or will be
prepared in accordance with generally accepted accounting principles, applied
consistently throughout the periods covered thereby, and fairly present the
financial condition of Rocky as at the dates indicated and the results of its
operations for the periods indicated.
6.11 Compliance with Laws. Rocky is not in violation of any
--------------------
applicable law, rule or regulation of any governmental authority or of any term
of any applicable order, judgment or decree of any court, arbitrator or
governmental authority, the effect of which violation could adversely affect the
business, condition (financial or other) or prospects of Rocky.
6.12 Taxes. Except as disclosed on Schedule 6.12, (a) Rocky has or
-----
will have duly and timely filed with the appropriate governmental agencies all
tax returns and reports required to be filed by it on or before the Closing Date
or obtained extensions therefor; (b) all taxes, assessments and other
governmental charges upon Rocky or upon any of its respective properties,
assets, income, receipts, payrolls, transactions, capital, net worth or
franchises (including any interest, penalties or additions to tax payable in
respect thereof) ("Taxes") that are shown as due and payable on such returns or
reports and other Taxes that are due and payable on or before the Closing Date
have been or will be paid; (c) Rocky has duly and timely withheld all Taxes
required to be withheld in connection with its business or assets and such
withheld Taxes have been either duly and timely paid to the proper governmental
authorities or properly set aside in accounts for such purpose; (d) Rocky is not
currently the beneficiary of any extension of time to file any Tax return; and
(e) no claim or assessment (other than a claim or assessment that has been
finally settled) concerning any liability for Taxes of Rocky has been asserted,
raised or threatened by any taxing authority. Rocky is and has been treated as
a partnership for U.S. federal income tax purposes for all relevant taxable
periods.
-11-
<PAGE>
6.13 Environmental Matters. (a) Rocky has not (i) breached or been
--------------------- -
notified by any governmental or regulatory authority to have breached any
Environmental Law, (ii) released any Hazardous Substance or (iii) become aware
-- ---
of the release or presence of any Hazardous Substance, except in amounts not
constituting a breach of any Environmental Law, on any property owned, leased or
occupied by Rocky. There are no underground storage tanks on property owned,
leased or occupied by Rocky.
(b) For purposes of this Section 6.13, (i) "Environmental Law" means
-
all Laws relating to the protection of the environment, to human health and
safety, or to any environmental activity, including, without limitation, (x) the
-
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act, and the Occupational Safety and Health
Act, (y) all other requirements pertaining to reporting, licensing, permitting,
-
investigation or remediation of emissions, discharges, releases or threatened
releases of any Hazardous Substance into the air, surface water, groundwater or
land, or relating to the manufacture, processing, distribution, use, sale,
treatment, receipt, storage, disposal, transport or handling of any Hazardous
Substance and (z) all other requirements pertaining to the protection of the
-
health and safety of employees or the public, and (ii) "Hazardous Substance"
--
means any substance that (x) is or contains asbestos, urea formaldehyde foam
-
insulation, poly chlorinated biphenyls, petroleum or petroleum-derived
substances or wastes, radon gas or related materials, (y) requires
-
investigation, removal or remediation under any Environmental Law, or is
defined, listed or identified as a "hazardous waste" or "hazardous substance"
thereunder or (z) is toxic, explosive, corrosive, flammable, infectious,
-
radioactive, carcinogenic, mutagenic, or otherwise hazardous and is regulated by
any governmental authority or Environmental Law.
6.14 No Brokers or Finders. No person has or will have, as a result
---------------------
of the transactions contemplated by this Agreement, any right, interest or valid
claim against the Purchaser or TAG, for any commission, fee or other
compensation as a finder or broker because of any act or omission by Rocky, RAI
or GMC or any of their agents.
6.15 Actions to Closing. During the period from December 31, 1997 to
------------------
and including the date hereof, and from the date hereof to and including the
Closing Date,
-12-
<PAGE>
except as otherwise consented to in writing by the Purchaser, Rocky has and
shall have:
(a) carried on its business in, and only in, the usual, regular and
ordinary course in substantially the same manner as conducted prior to December
31, 1997 and, to the extent consistent with such business, has retained the
services of its present employees, and preserved its relationships with
customers, suppliers and others having business dealings with Rocky;
(b) (i) not mortgaged, pledged or subjected to any encumbrance any of
-
the assets, other than encumbrances that do not, individually or in the
aggregate, materially detract from the value of the property subject thereto or
impair the use of such property in the operation of the business of Rocky, (ii)
--
not purchased or otherwise acquired, or sold or otherwise disposed of, any
material assets, except in the ordinary course of business and (iii) not
---
incurred any indebtedness for borrowed money, incurred any capital lease
obligations or made any distribution to any holders of its partnership interests
other than a tax distribution; and
(c) advised the Purchaser of any event or condition of any character,
materially and adversely affecting, either in any case or in the aggregate, the
condition (financial or other), assets, liabilities, revenues, business or
prospects of Rocky other than matters of a general economic or political nature
that do not affect the business of Rocky uniquely.
6.16 Labor; Employee Benefits. Schedule 6.16 contains a complete and
------------------------
correct list of all of Rocky's retirement, pension, savings, profit-sharing,
stock option or other equity plan, health benefit and welfare plan, multi-
employer plans, bonus incentive plans, deferred compensation or similar plans or
other employee benefit plans, and all collective bargaining agreements,
employment agreements, consulting agreements, severance agreements, change of
control agreements or retention and termination agreements to which Rocky is a
party. Rocky has not incurred (either directly or indirectly, including as a
result of any indemnification obligation or statutory joint and several
liability obligation) any liability under or pursuant to Title I or IV of ERISA
or the penalty, excise tax or joint and several liability provisions of the
Internal Revenue Code
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<PAGE>
relating to employee benefit plans and no event, transaction or condition has
occurred or exists which could result in any such liability to Rocky or,
following the Closing, the Purchaser or its affiliates. Since December 31, 1997,
the Company has not experienced any actual or threatened work stoppages, slow-
downs or other actions and neither Rocky, GMC nor RAI has any knowledge of any
planned work stoppages, slow-downs or other job actions or of any union
organizing efforts involving employees of Rocky.
6.17 Litigation. Schedule 6.17 contains a complete and correct list
----------
of all suits, actions or legal, administrative, arbitration or other proceedings
or investigations pending, filed or threatened by, against or directly involving
Rocky. There is no action, proceeding or investigation pending or to the
knowledge of GMC or RAI threatened against GMC or RAI that questions the
validity of this Agreement or any action taken or to be taken by GMC or RAI in
connection herewith.
6.18 Employees. GMC or RAI has previously provided to the Purchaser a
---------
complete and correct list of all employees, agents and consultants of Rocky and
their respective rates of compensation.
6.19 Assets. GMC or RAI has previously provided to the Purchaser a
------
complete and correct list of all assets (including, but not limited to, all real
property, machinery, furniture, fixtures, equipment and other tangible assets)
used in, or necessary for the conduct of, the business of Rocky as presently
conducted, other than any item the original cost of which was less than $500.
Except as set forth on such list, all such assets are owned or leased by Rocky
free and clear of all liens, claims, charges and encumbrances of any kind or
nature and are in good working condition and repair (subject to normal wear and
tear) and are adequate for their intended uses. The leases pursuant to which
Rocky holds any such assets are in full force and effect and are enforceable
against each party thereto in accordance with their terms; each party to such
leases are in compliance thereunder; and no event has occurred which through the
giving of notice or the lapse of time could cause or constitute a default or the
acceleration of any obligation of any party thereto or the creation of a lien or
encumbrance upon any such asset.
6.20 Agreements. Schedule 6.20 contains a complete and correct list
----------
of all
-14-
<PAGE>
leases, contracts, agreements and commitments, whether written or oral, to which
Rocky is a party or by which it is bound, other than any agreement providing for
the payment of consideration of $5,000 or less in the aggregate. Each such
agreement is in full force and effect and is valid and is enforceable against
each party thereto in accordance with its terms; each party thereto is in
compliance thereunder, and no event has occurred which through the giving of
notice or the lapse of time could cause or constitute a default or the
acceleration of any obligation of any party thereto or the creation of a lien or
encumbrance upon any property or assets of Rocky.
6.21 Material Misstatements or Omissions. No representations,
-----------------------------------
warranties or information furnished by GMC, RAI or Zeitouni to the Purchaser or
TAG in connection with the transactions contemplated hereby contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements and facts contained therein not misleading.
Section 7. Representations and Warranties of LDA. LDA represents
-------------------------------------
and warrants to the Purchaser as follows:
7.1 Organization and Standing. LDA is a limited partnership duly
-------------------------
organized, validly existing and in good standing under the laws of the state of
Delaware and has all requisite power to enter into and perform its obligations
under this Agreement.
7.2 Validity of Partnership Interests. LDA has the full capacity,
---------------------------------
right and lawful authority to transfer the Partnership Interests owned by LDA to
the Purchaser. LDA owns beneficially and of record, the Partnership Interests
as indicated on Schedule 1, free and clear of any Liens. Assuming that the
Purchaser is acquiring the Partnership Interests in good faith, upon the
delivery of and payment by the Purchaser of the Purchase Price in the manner
described in Section 2.2, the Purchaser shall acquire good and valid title to
the Partnership Interests from LDA, free and clear of any Liens other than Liens
created by the Purchaser.
7.3 Agreement. This Agreement has been duly authorized by all
---------
necessary action on the part of LDA, has been duly executed and delivered by LDA
and constitutes
-15-
<PAGE>
the legal, valid and binding obligation of LDA, enforceable against LDA in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium or other similar
laws affecting the rights of creditors generally.
7.4 No Brokers or Finders. No person has or will have, as a result
---------------------
of the transactions contemplated by this Agreement, any right, interest or valid
claim against the Purchaser or TAG for any commission, fee or other compensation
as a finder or broker because of any act or omission by LDA or any of its
agents.
7.5 No Conflicting Instruments. The execution, delivery and
--------------------------
performance of this Agreement by LDA and the transactions contemplated herein
will not violate or conflict with its certificate of limited partnership or
limited partnership agreement and will not violate, conflict with or constitute
a default under any agreement or instrument to which LDA is a party or by which
LDA is bound, or any judgment, decree, order, statute, rule or governmental
regulation applicable to LDA.
7.6 Governmental Consent. No consent, approval or authorization of,
--------------------
or registration, qualification, designation, declaration or filing with, any
governmental authority is required in connection with the execution, delivery or
performance of this Agreement or the performance by LDA of any of the
transactions contemplated hereby by LDA.
7.7 Litigation. There is no action, proceeding or investigation
----------
pending or to LDA's knowledge threatened against LDA that questions the validity
of this Agreement or any action taken or to be taken by LDA in connection
herewith.
Section 8. Representations and Warranties of the Purchaser and TAG.
-------------------------------------------------------
The Purchaser and TAG, jointly and severally, represent and warrant to the
Sellers as follows:
8.1 Organization and Standing. The Purchaser is a limited liability
-------------------------
company duly organized, validly existing and in good standing under the laws of
the state of Delaware and TAG is a corporation duly organized, validly existing
and in good standing
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<PAGE>
under the laws of the state of California. Each of the Purchaser and TAG has all
requisite power to enter into and perform its obligations under this Agreement
and the Ancillary Agreements to which it is a party.
8.2 Agreement. This Agreement and each of the Ancillary Agreements to
---------
which the Purchaser or TAG is a party have been duly authorized by all necessary
action on the part of the Purchaser or TAG, have been duly executed and
delivered by the Purchaser or TAG and constitute the legal, valid and binding
obligation of the Purchaser or TAG, enforceable against the Purchaser or TAG in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium or other similar
laws affecting the rights of creditors generally.
8.3 No Brokers or Finders. No person has or will have, as a result
---------------------
of the transactions contemplated by this Agreement, any right, interest or valid
claim against any of the Sellers for any commission, fee or other compensation
as a finder or broker because of any act or omission by the Purchaser, TAG or
any of their agents.
8.4 No Conflicting Instruments. The execution, delivery and
--------------------------
performance of this Agreement or any of the Ancillary Agreements by the
Purchaser or TAG will not violate or conflict with its certificate of formation
or certificate of incorporation, or limited liability company agreement or by-
laws, as the case may be, and will not violate, conflict with or constitute a
default under any agreement or instrument to which the Purchaser or TAG is a
party or by which the Purchaser or TAG is bound, or any judgment, decree, order,
statute, rule or governmental regulation applicable to the Purchaser or TAG.
8.5 Governmental Consent. No consent, approval or authorization of,
--------------------
or registration, qualification, designation, declaration or filing with, any
governmental authority is required in connection with the execution, delivery or
performance of this Agreement or any of the Ancillary Agreements or the
performance of any of the transactions contemplated hereby or thereby by the
Purchaser or TAG.
8.6 Reports. TAG has filed all required reports, schedules, forms,
-------
statements
-17-
<PAGE>
and other documents required to be filed by it with the Securities and Exchange
Commission (the "SEC") since January 1, 1996 (collectively, including all
exhibits thereto and any registration statement filed with the SEC since such
date, the "TAG Disclosure Documents"). None of the TAG Disclosure Documents, as
of their respective dates (and, if amended or superseded by a filing prior to
the date of this Agreement or the Closing Date, then on the date of such
filing), contained or will contain any untrue statement of a material fact or
omitted or will omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. All of the TAG Disclosure Documents, as of
their respective dates (and as of the date of any amendment), complied as to
form in all material respects with the applicable requirements of the Securities
Act of 1933, as amended (the "1933 Act"), the Securities Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
8.7 Litigation. There is no action, proceeding or investigation
----------
pending or to the Purchaser's or TAG's knowledge threatened against the
Purchaser or TAG that questions the validity of this Agreement or any action
taken or to be taken by the Purchaser or TAG in connection herewith.
8.8 TAG Stock. Except as provided in the Escrow Agreement, upon the
---------
delivery by the Purchaser, each of GMC and RAI shall acquire good and valid
title to the TAG Stock from TAG, free and clear of any Lien, and the TAG Stock
will be duly authorized, validly issued, fully paid and non-assessable.
8.9 Investment Representation. The Purchaser is acquiring the
-------------------------
Partnership Interests for its own account and not with a view to, or for sale in
connection with, any distribution thereof that would require registration under
the 1933 Act.
Section 9. Post-Closing Covenants. (a) Following the Closing, the
----------------------
Purchaser will offer continued employment to all employees of Rocky, and the
Purchaser and TAG will be jointly and severally responsible for severance or
termination costs, costs relating to compliance with the Worker Adjustment and
Retraining and Notification Act (29 U.C.S. (S)(S) 2101 et seq.), plant closing
-- ---
costs and the costs of compliance with any other
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<PAGE>
applicable laws or regulations relating to the rights of employees.
(b) Following the Closing, the Purchaser and TAG will cause Rocky to
timely satisfy all of its liabilities existing as of the Closing Date and
reflected on the Closing Balance Sheet.
(c) Following the Closing, in the event that any tax returns of Rocky
for any period up to and including June 30, 1998 shall be audited by any taxing
authority, Purchaser shall permit any of the Sellers (at such Seller's expense),
to participate in the audit process and shall provide to such Seller all
appropriate documents. The Purchaser shall not settle or compromise any
contested amounts without the consent of each of the Sellers which consent shall
not be unreasonably withheld.
(d) Following the Closing, RAI and GMC shall deliver good and
marketable title to the properties located in the State of Mississippi listed on
Schedule 9 to Rocky and shall deliver all required governmental consents in
connection therewith within 75 days after the Closing Date.
(e) Zeitouni shall pay all amounts owed to Rocky (approximately
$30,147) in full within 30 days of the Closing Date.
Section 10. Public Communications. Except as required by law, there
---------------------
shall be no public communications (including communications to members of the
trade) regarding this Agreement, the Ancillary Agreements or the transactions
contemplated herein or therein without the prior consent of the Purchaser and
the Sellers.
Section 11. Further Assurances. After the Closing, for no further
------------------
consideration, each of the parties shall perform all such other actions and
shall execute, acknowledge and deliver all such documents as the other parties
or their respective counsel may reasonably request to vest in the Purchaser, and
protect the Purchaser's right, title and interest in, and enjoyment of, the
Partnership Interests.
Section 12. Survival of Representations and Warranties. The
------------------------------------------
representations
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<PAGE>
and warranties of the parties hereto contained in this Agreement or otherwise
made in writing in connection with the transactions contemplated herein and the
indemnification obligations of the parties hereto in respect of such
representations and warranties shall survive the making of this Agreement and
any examination by or on behalf of such parties, (i) in respect of the
-
representations and warranties regarding Taxes set forth in Section 6.13 of this
Agreement, until the expiration of the statute of limitations applicable to any
tax liability for which such representations and warranties are made, (ii) in
--
respect of any representations and warranties set forth in Section 6, for three
years from the Closing Date and (iii) in respect of any representations and
---
warranties set forth in Section 7 of this Agreement, for one year from the
Closing Date.
Section 13. Indemnification by GMC and RAI.
------------------------------
(a) GMC and RAI (the "Indemnifying Parties"), jointly and severally,
shall defend, indemnify and hold harmless the Purchaser, TAG and their
respective officers, directors, shareholders, members, employees, attorneys,
accountants, affiliates, agents, successors and assigns and any person who
controls or is deemed to control any of them (the "Indemnified Parties") from,
against and in respect of any and all payments, damages, claims, demands,
losses, expenses, costs, obligations and liabilities (including, but not limited
to, attorneys' fees and costs, and costs of investigation and preparation) (a
"Loss") which, directly or indirectly, arise or result from or are related to
(i) any breach by either of the Indemnifying Parties of any of its
representations, warranties, covenants or commitments contained in this
Agreement or the Escrow Agreement or the transactions to which they relate, (ii)
--
the business, operations, liquidation or dissolution of AC Designs LLC and AC
Designs Inc., (iii) any matter described on Schedule 6.17, (iv) that certain
--- --
Agreement dated February 14, 1997 between USPA Properties, Inc. and Quade, Inc.,
as amended to date, or the transaction described in Section 4.6 or (v) the
-
failure to pay any Tax with respect to the business or operations of Rocky prior
to the Closing Date. The Indemnifying Parties, jointly and severally, shall
reimburse each Indemnified Party on demand for any payment made or loss suffered
by it at any time after the date hereof, based upon the judgment of any court of
competent jurisdiction or pursuant to a bona fide compromise or settlement of
claims, demands or actions to which the foregoing indemnity relates.
Consummation of the transactions contemplated by this Agreement
-20-
<PAGE>
shall not be deemed or construed to be a waiver of any right or remedy of any
Indemnified Party hereunder, nor shall this section or any other provision of
this Agreement be deemed or construed to be a waiver of any ground of defense by
it. The obligation to advance or pay promptly on demand all amounts as they are
incurred shall exist irrespective of the ultimate final judicial determination,
and in the event of a dispute about amounts owed, such amounts shall be advanced
as they are incurred pending resolution and final judicial determination.
(b) Notwithstanding anything to the contrary contained in this
Agreement, the Indemnifying Parties shall not be liable to the Purchaser or TAG
under this Section 13, as a result of the breach of any representation,
warranty, covenant or commitment of an Indemnifying Party contained in this
Agreement unless and until the aggregate amount of the Losses suffered by the
Purchaser and TAG as a result of all such breaches shall exceed $50,000 and in
such case, the Indemnifying Parties shall only be liable for Losses in excess of
such $50,000.
(c) Each Indemnified Party shall promptly notify the Indemnifying
Parties of the existence of any claim, demand or other matter involving
liabilities to third parties to which the Indemnifying Parties' indemnification
obligations could apply and shall give the Indemnifying Parties a reasonable
opportunity to defend the same at their expense and with counsel of their own
selection (who shall be approved by the Indemnified Party, which approval shall
not be withheld unreasonably); provided, however, that (i) the Indemnified
-------- -
Party shall at all times also have the right to fully participate in the defense
at its own expense, (ii) if (other than in connection with the matters described
--
in Schedule 6.17), in the reasonable judgment of the Indemnified Party, based
upon the written advice of counsel, a conflict of interest may exist between the
Indemnified Party and any of the Indemnifying Parties, the Indemnifying Parties
shall not have the right to assume such defense on behalf of such Indemnified
Party and (iii) the failure to so notify the Indemnifying Parties shall not
---
relieve the Indemnifying Parties from any liabilities that they may have
hereunder or otherwise, except to the extent that such failure so to notify the
Indemnifying Parties materially prejudices the rights of the Indemnifying
Parties. If the Indemnifying Parties shall, within a reasonable time after said
notice, fail to defend, the Indemnified Party shall have the right, but not the
obligation, to undertake the defense
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<PAGE>
of, and to compromise or settle the claim or other matter on behalf, for the
account and at the risk and expense of the Indemnifying Parties. The
Indemnifying Parties shall not compromise or settle the claim or other matter
(other than the matters described in Schedule 6.17) without the written consent
of the Indemnified Party (which consent shall not be unreasonably withheld). If
the claim is one that cannot by its nature be defended solely by the
Indemnifying Parties, the Indemnified Party shall make available all information
and assistance that the Indemnifying Parties may reasonably request; provided,
--------
however, that any associated expenses shall be paid by the Indemnifying Parties.
(d) If the indemnification provided for in this Section 13 is
unavailable as a matter of law or public policy to any Indemnified Party in
respect of any Loss, then the Indemnifying Parties, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by the
Indemnified Party as a result of such Loss, in such proportion as is appropriate
to reflect the relative fault of the Indemnifying Parties, taken as a whole, on
the one hand, and such Indemnified Party, on the other, in connection with the
actions, statements or omissions which resulted in such Loss, as well as any
other relevant equitable considerations. The relative fault of the Indemnifying
Parties, taken as a whole, on the one hand, and such Indemnified Party, on the
other, shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of material
fact or omission or alleged omission to state a material fact, has been taken
by, or relates to information supplied by, either an Indemnifying Party or such
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent any such action, statement or
omission. The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 13 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above.
(e) The Indemnifying Parties' obligations hereunder shall be in
addition to any liability that they or any other person may otherwise have to
the Indemnified Parties, and shall be binding upon, and inure to the benefit of,
their successors and assigns, and shall inure to the benefit of the heirs,
personal representatives, successors and assigns of each
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<PAGE>
Indemnified Party.
Section 14. Indemnification by LDA.
----------------------
(a) LDA shall defend, indemnify and hold harmless the Purchaser and
TAG and their respective successors and assigns (the "LDA Indemnified Parties")
from, against and in respect of any and all payments, damages, claims, demands,
losses, expenses, costs, obligations and liabilities (including, but not limited
to, attorneys' fees and costs, and costs of investigation and preparation) (a
"LDA Loss") which, directly or indirectly, arise or result from or are related
to (i) any breach by LDA of any of its representations, warranties, covenants or
-
commitments contained in this Agreement, or (ii) the failure of LDA to pay any
--
Tax with respect to the business or operations of Rocky prior to the Closing
Date that is as a matter of law imposed on LDA in its capacity as a limited
partner of Rocky. LDA shall reimburse each LDA Indemnified Party on demand for
any payment made or loss suffered by it at any time after the date hereof, based
upon the judgment of any court of competent jurisdiction or pursuant to a bona
fide compromise or settlement of claims, demands or actions to which the
foregoing indemnity relates. Consummation of the transactions contemplated by
this Agreement shall not be deemed or construed to be a waiver of any right or
remedy of any LDA Indemnified Party hereunder, nor shall this section or any
other provision of this Agreement be deemed or construed to be a waiver of any
ground of defense by it. The obligation to advance or pay promptly on demand
all amounts as they are incurred shall exist irrespective of the ultimate final
judicial determination, and in the event of a dispute about amounts owed, such
amounts shall be advanced as they are incurred pending resolution and final
judicial determination.
(b) Notwithstanding anything to the contrary contained in this
Agreement, LDA shall not be liable to the Purchaser or TAG under this Section
14, as a result of the breach of any representation, warranty, covenant or
commitment of LDA contained in this Agreement (i) unless and until the aggregate
-
amount of the LDA Losses suffered by the Purchaser and TAG as a result of all
such breaches shall exceed $50,000 and in such case, LDA shall only be liable
for LDA Losses in excess of such $50,000 or (ii) for an amount in excess of
--
$4,500,000.
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<PAGE>
(c) Each LDA Indemnified Party shall promptly notify LDA of the
existence of any claim, demand or other matter involving liabilities to third
parties to which LDA's indemnification obligations could apply and shall give
LDA a reasonable opportunity to defend the same at their expense and with
counsel of their own selection (who shall be approved by the LDA Indemnified
Party, which approval shall not be withheld unreasonably); provided, however,
--------
that (i) the LDA Indemnified Party shall at all times also have the right to
-
fully participate in the defense at its own expense, (ii) if, in the reasonable
--
judgment of the LDA Indemnified Party, based upon the written advice of counsel,
a conflict of interest may exist between the LDA Indemnified Party and LDA, LDA
shall not have the right to assume such defense on behalf of such LDA
Indemnified Party and (iii) the failure to so notify LDA shall not relieve LDA
---
from any liabilities that it may have hereunder or otherwise, except to the
extent that such failure so to LDA materially prejudices the rights of LDA. If
LDA shall, within a reasonable time after said notice, fail to defend, the LDA
Indemnified Party shall have the right, but not the obligation, to undertake the
defense of, and to compromise or settle the claim or other matter on behalf, for
the account and at the risk and expense of LDA. LDA shall not compromise or
settle the claim or other matter without the written consent of the LDA
Indemnified Party (which consent shall not be unreasonably withheld). If the
claim is one that cannot by its nature be defended solely by LDA, the LDA
Indemnified Party shall make available all information and assistance that LDA
may reasonably request; provided, however, that any associated expenses shall be
--------
paid by LDA.
(d) LDA's sole obligations hereunder arising out of the breach of its
representations, warranties, covenants or commitments contained in this
Agreement shall be pursuant to this Section 14 and LDA shall not have any other
liability to the LDA Indemnified Parties.
Section 15. Expenses, etc. Each of the Purchaser and the Sellers
-------------
shall pay such party's own expenses and costs incidental to the preparation of
this Agreement and to the consummation of the transactions contemplated hereby.
Section 16. Notices. All notices and other communications hereunder
-------
shall be
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<PAGE>
in writing and shall be delivered by hand or sent by first-class mail, postage
prepaid, as follows:
If to the Purchaser or TAG, at:
Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
Attention: Chief Financial Officer
with a copy to:
Manatt, Phelps & Phillips, LLP
11355 West Olympic Boulevard
Los Angeles, California 90064
Attention: Peter M. Menard, Esq.
If to LDA, at:
Limited Direct Associates, L.P.
c/o The Limited, Inc.
Three Limited Parkway
Columbus, Ohio 43230
Attention: General Counsel
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Robert F. Quaintance, Jr.
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<PAGE>
If to RAI or GMC, to such party at:
c/o Rocky Apparel, L.P.
1384 Broadway, 14th Floor
New York, New York 10018
Attention: Gabriel Zeitouni
with a copy to:
Steven M. Gerber, Esq.
1114 Avenue of the Americas, 45th Floor
New York, New York 10036
or, in each case, at such address and to the attention of such person as either
party shall have furnished to the other by notice.
Section 17. Miscellaneous. Each of the parties hereto hereby
-------------
irrevocably and unconditionally consents to submit to the exclusive
jurisdictions of the courts of the State of New York and of the United States of
America, in each case located in the County of New York, for any litigation
arising out of or relating to this Agreement or the transactions contemplated
hereby, and further agrees that service of any process, summons, notice or
document by U.S. registered mail to its respective address set forth in Section
16 of this Agreement shall be effective service of process for any litigation
brought against it in any court. Each of the parties hereto hereby irrevocably
and unconditionally waives any objection to the laying of venue of any
litigation arising out of this Agreement or the transactions contemplated hereby
in the courts of the State of New York or the United States and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such litigation brought in any such court has been brought
in an inconvenient forum. This Agreement together with the Escrow Agreement
contemplated in Section 4.5 constitute the entire understanding between the
parties hereto. This Agreement may be modified or terminated only by an
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<PAGE>
instrument in writing signed by the parties hereto. This Agreement shall be
binding on and shall inure to the benefit of the successors and legal assigns of
the parties hereto. This Agreement shall be governed by the laws of the State
of New York as applied to contracts made and fully performed in New York. This
Agreement may be executed in one or more separate counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument. The headings of the sections of this Agreement are solely
for convenience of reference and shall not affect the meaning of any of the
provisions hereof.
Section 18. Transfer Taxes. The Sellers shall pay all stock transfer
--------------
and other transfer taxes required to be paid in connection with the sale to the
Purchaser of the Partnership Interests. Rocky and the Sellers shall file,
independently or jointly with the Purchaser, as the law requires, all real
property and other transfer tax filings required to be filed by it in connection
with the sale and delivery to the Purchaser of the Partnership Interests.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as
of the date first above-written.
ROCKY ACQUISITION, LLC
By: /s/ Mark B. Kristof
-----------------------------------------
Name: Mark B. Kristof
Title: Vice President
TARRANT APPAREL GROUP
By: /s/ Mark B. Kristof
---------------------------------------
Name: Mark B. Kristof
Title: Vice President
LIMITED DIRECT ASSOCIATES, L.P.
By: Limited Direct, Inc., as General Partner
By: /s/ Kenneth Gilman
-------------------------------------
Name: Kenneth Gilman
Title: President
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<PAGE>
ROCKY APPAREL, INC.
By: /s/ Gabriel Zeitouni
---------------------------------------
Name: Gabriel Zeitouni
Title: President
GABRIEL MANUFACTURING COMPANY
By: /s/ Gabriel Zeitouni
--------------------------------------
Name: Gabriel Zeitouni
Title: President
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<PAGE>
EXHIBIT 10.61
ESCROW AGREEMENT
----------------
THIS ESCROW AGREEMENT is made and entered into as the second day of July,
1998, by and among TARRANT APPAREL GROUP, a California corporation (the
"Company"), GABRIEL MANUFACTURING COMPANY, a Mississippi corporation ("GMC") and
ROCKY APPAREL, INC., a New York corporation ("RAI"), with respect to the
following facts:
A. Pursuant to that certain Partnership Interest Purchase Agreement dated
as of July 2, 1998 (the "Purchase Agreement"), by and among the Company, Rocky
Acquisition, LLC, a Delaware limited liability company (the "Subsidiary"),
Limited Direct Associates, LP, a Delaware limited partnership ("Limited"), GMC
and RAI, the Subsidiary, a wholly owned subsidiary of the Company, will purchase
all the outstanding partnership interests in Rocky Apparel, LP, a Delaware
limited partnership ("Rocky"), from Limited, GMC and RAI.
B. In partial consideration for the purchase of such partnership
interests, the Company will issue to GMC and RAI an aggregate of 80,890 shares
of the Common Stock of the Company.
C. GMC and RAI have agreed, jointly and severally, to defend, indemnify
and hold harmless the Company, the Subsidiary and certain associated persons
from and against certain liabilities, all as more fully set forth in the
Purchase Agreement.
D. GMC and RAI each desire to grant each such indemnified person a
security interest in such shares and all distributions thereon as security for
the performance of their obligations under the Purchase Agreement.
ACCORDINGLY, subject to the terms and conditions set forth below, and on
the basis of the premises, covenants and undertakings contained herein, the
parties hereto agree as follows:
1. PLEDGE.
1.1 Pledge. GMC and RAI each hereby deliver to the Company, and authorize
------
and direct the Company to hold pursuant to the terms and conditions of this
Agreement, certificates representing 80,890 shares of the issued and outstanding
Common Stock of the Company, as set forth on Schedule 1.1 hereto (the "Shares"),
------------
together with a stock power duly executed in blank, receipt of which hereby is
-1-
<PAGE>
acknowledged. The Shares and any other property which may be held by the
Company under Section 1.2 hereof shall be held by it as partial security for the
performance of the obligations of GMC and RAI under the Purchase Agreement.
1.2 Additional Collateral. GMC and RAI each shall deliver or cause to be
---------------------
delivered to the Company, and hereby authorize and direct the Company to hold
pursuant to the terms and conditions of this Agreement, all distributions made
during the term hereof on the Shares, whether in the form of securities, cash or
other property, as additional collateral subject to this Agreement. The Shares
and all distributions on the Shares shall be referred to herein as the "Escrow
Fund."
1.3 Voting Rights and Distributions. During the term of this Agreement
-------------------------------
and as long as neither GMC nor RAI is in default under the Purchase Agreement,
GMC and RAI each shall have the right to vote the Shares and any additional
shares of the capital stock of the Company held on their behalf hereunder and to
receive all cash distributions thereon subject to the limitations set forth in
Section 1.2.
1.4 Notice of Claims.
----------------
(a) The Company shall give prompt written notice (a "Demand Notice")
to GMC and RAI of any claim against GMC or RAI under the Purchase Agreement by
the Company, the Subsidiary or any other person entitled to indemnification or
contribution under Section 13 of the Purchase Agreement (an "Indemnified
Person"), including, but not limited to, any claim that (i) any representation
or warranty of GMC or RAI made in the Purchase Agreement or any Ancillary
Agreement (as such term is defined in the Purchase Agreement) was not true and
complete in all respects when made, (ii) GMC or RAI have failed to timely
perform any obligation to be performed by any of them under the Purchase
Agreement or any Ancillary Agreement or (iii) the Company, the Subsidiary or any
Indemnified Person is entitled to indemnification or contribution under Section
13 of the Purchase Agreement. The Demand Notice shall include a summary
description of the factual and legal bases for the claim and an estimate of the
amount of the claim. GMC and RAI shall have the right to contest any claim
described in a Demand Notice by giving written notice (a "Dispute Notice") to
the Company within ten (10) calendar days of the Demand Notice. In the event
GMC or RAI does not give a Dispute Notice within such ten (10) day period, the
description of the claim contained in the Demand Notice (including, but not
limited to, the factual and legal bases therefor and the estimate of the amount
of the claim) shall be deemed conclusively to be true and complete; provided,
--------
however, that the Company shall be entitled thereafter to submit additional
Demand Notices pursuant to this Section 1.4 with respect to the same claims as
were described in such initial Demand Notice and GMC and RAI shall have
-2-
<PAGE>
the right to contest any such additional demand Notice, all as set forth above.
(b) In the event GMC or RAI shall timely deliver a Dispute Notice with
respect to any claim (other than a claim based upon the demand of a person other
than an Indemnified Person (a "third party claim")) and such claim shall not
have been conclusively resolved on or before July 31, 2001, the parties shall
attempt to resolve the dispute through mediation. In the event such mediation
shall not resolve the claim, either the Indemnified Party or GMC or RAI may
require binding arbitration of the claim pursuant to Section 2.13 of this
Agreement.
1.5 Distribution of Escrow Fund.
---------------------------
(a) The Company shall distribute to GMC and RAI their respective
shares of the Escrow Fund in three equal installments on June 30, 1999, 2000 and
2001 (a "Distribution Date"). Notwithstanding the foregoing, any portion of the
Escrow Fund to be distributed to GMC or RAI on a Distribution Date shall be
reduced by (i) that portion of the Escrow Fund which previously had been
distributed pursuant hereto to an Indemnified Party, and (ii) that portion of
such distribution which has a value, determined pursuant to Section 1.6, equal
as nearly as practicable to the aggregate claims set forth in any unresolved
Demand Notice. Upon the later to occur of July 31, 2001 and the resolution of
all claims (including third party claims) set forth in all Demand Notices
delivered hereunder on or prior to June 30, 2001, the Trustee shall distribute
to GMC and RAI their respective shares of the Escrow Fund as the same has been
reduced by that portion of the Escrow Fund which previously had been distributed
to an Indemnified Party.
(b) In the event GMC or RAI shall fail to timely deliver a Dispute
Notice with respect to any claim set forth in a Demand Notice (other than a
third party claim), or such claim is resolved by the agreement of the parties or
by arbitration as set forth in Section 2.13, the Company, promptly after the
last day on which such Dispute Notice could have been timely given or after
receipt by the Company of a written notice of such agreement signed by GMC and
RAI or of such arbitration decision, shall deliver to the Indemnified Party, on
the one hand, or to GMC and RAI, on the other hand, that portion of the Escrow
Fund which has a value, determined pursuant to Section 1.6, equal as nearly as
practicable to the value of the claim as set forth in the Demand Notice, if a
Dispute Notice with respect thereto was not timely delivered, or as determined
by the agreement of the parties or the arbitration, as the case may be.
(c) In the event a third party claim set forth in a Demand Notice is
finally determined by a decision from which no appeal may be taken, the Company
shall distribute to the Indemnified Party, on the one hand, or to GMC and
-3-
<PAGE>
RAI, on the other hand, that portion of the Escrow Fund which has a value,
determined pursuant to Section 1.6, equal as nearly as practicable to the value
of the claim as so finally determined.
1.6 Valuation of Escrow Fund. The fair market value of a share of the
------------------------
Common Stock of the Company shall be determined for purposes of this Agreement
by reference to the closing price on the principal stock exchange on which such
shares are then listed, or, if such shares are not then listed on a stock
exchange, by reference to the closing price (if approved for quotation on the
Nasdaq National Market) or the mean between the bid and the asked price (if
other over-the-counter issue) of a share as supplied by the National Association
of Securities Dealers, Inc. through Nasdaq (or its successor in function), in
each case as reported by The Wall Street Journal, for the business day
-----------------------
immediately preceding the date on which such determination of value shall be
made (or, if for any reason no such price is available, in such other manner as
the Company may deem appropriate to reflect the then fair market value thereof).
2. MISCELLANEOUS.
2.1 Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be deemed to have been given (i) if
personally delivered, when so delivered, (ii) if mailed, one (1) week after
being placed in the United States mail, registered or certified, postage
prepaid, addressed to the party to whom it is directed at the address set forth
on the signature page hereof, or (iii) if given by telecopier, when such notice
or communication is transmitted to the telecopier number set forth on the
signature page hereof and written confirmation of receipt is received. Each of
the parties shall be entitled to specify a different address by giving the other
parties notice as aforesaid.
2.2 Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether oral
or written, relating to the subject matter of this Agreement. No supplement,
modification, waiver or termination of this Agreement shall be valid unless
executed by the party to be bound thereby. No waiver of any of the provisions
of this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver, unless otherwise expressly provided.
2.3 Headings. Section and subsection headings are not to be considered
--------
part of this Agreement and are included solely for convenience and reference and
are not intended to be full or accurate descriptions of the content thereof.
-4-
<PAGE>
2.4 Successors and Assigns. All of the terms, provisions and obligations
----------------------
of this Agreement shall inure to the benefit of and shall be binding upon the
parties hereto and their respective heirs, representatives, successors and
assigns.
2.5 Governing Law. The validity, construction and interpretation of this
-------------
Agreement shall be governed in all respects by the laws of the State of
California applicable to contracts made and to be performed wholly within that
State.
2.6 Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts, each one of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
2.7 Third Parties. Nothing in this Agreement, expressed or implied, is
-------------
intended to confer upon any person other than the parties hereto and their
respective heirs, representatives, successors and assigns any rights or remedies
under or by reason of this Agreement.
2.8 Attorney's Fees. In the event any party takes legal action to enforce
---------------
any of the terms of this Agreement, the unsuccessful party to such action shall
pay the successful party's expenses (including, but not limited to, attorneys'
fees and costs) incurred in such action.
2.9 Further Assurances. Each party hereto shall, from time to time at and
------------------
after the date hereof, execute and deliver such instruments, documents and
assurances and take such further actions as the other parties reasonably may
request to carry out the purpose and intent of this Agreement.
2.10 Injunctive Relief. Each of the parties hereto acknowledges and agrees
-----------------
that it would be difficult to fully compensate the other parties for damages
resulting from the breach or threatened breach of any provision of this
Agreement and, accordingly, that each party shall be entitled to temporary and
injunctive relief, including temporary restraining orders, preliminary
injunctions and permanent injunctions, to enforce such provisions without the
necessity of proving actual damages or being required to post any bond or
undertaking in connection with any such action. This provision with respect to
injunctive relief shall not diminish, however, the right of any party to any
other relief or to claim and recover damages.
2.11 Consent To Jurisdiction. Each party hereto, to the fullest extent it
-----------------------
may effectively do so under applicable law, irrevocably (i) submits to the
exclusive jurisdiction of any court of the State of California or the United
States of America sitting in the City of Los Angeles over any suit, action or
proceeding arising out of or
-5-
<PAGE>
relating to this Agreement, (ii) waives and agrees not to assert, by way of
motion, as a defense or otherwise, any claim that it is not subject to the
jurisdiction of any such court, any objection that it may now or hereafter have
to the establishment of the venue of any such suit, action or proceeding brought
in any such court and any claim that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum, (iii) agrees that a
judgment in any such suit, action or proceeding brought in any such court shall
be conclusive and binding upon such party and may be enforced in the courts of
the United States of America or the State of California (or any other courts to
the jurisdiction of which such party is or may be subject) by a suit upon such
judgment and (iv) consents to process being served in any such suit, action or
proceeding by mailing a copy thereof by registered or certified air mail,
postage prepaid, return receipt requested, to the address of such party
specified in or designated pursuant to Section 2.1. Each party agrees that such
service (i) shall be deemed in every respect effective service of process upon
such party in any such suit, action or proceeding and (ii) shall, to the fullest
extent permitted by law, be taken and held to be valid personal service upon and
personal delivery to such party.
2.12 Arbitration. Any controversy arising out of or relating to this
-----------
Agreement or the transactions contemplated hereby shall be referred to
arbitration before the American Arbitration Association strictly in accordance
with the terms of this Agreement and the substantive law of the State of
California. The board of arbitrators shall convene at a place mutually
acceptable to the parties in the State of California and, if the place of
arbitration cannot be agreed upon, arbitration shall be conducted in Los
Angeles. The parties hereto agree to accept the decision of the board of
arbitrators, and judgment upon any award rendered hereunder may be entered in
any court having jurisdiction thereof. No party shall institute a proceeding
hereunder until that party has furnished to the other party, by registered mail,
at least thirty (30) days prior written notice of its intent to do so. This
Section 2.13 shall not limit the right of any party to seek injunctive relief in
the courts of the State of California or the United States of America.
2.13 Construction. This Agreement was reviewed by legal counsel for each
------------
party hereto and is the product of informed negotiations between the parties
hereto. If any part of this Agreement is deemed to be unclear or ambiguous, it
shall be construed as if it were drafted jointly by the parties. Each party
hereto acknowledges that no party was in a superior bargaining position
regarding the substantive terms of this Agreement.
2.14 Investment Representations. GMC and RAI each hereby represent,
--------------------------
warrant and agree to and with the Company as follows:
(a) It is acquiring the Shares for its own account, for
-6-
<PAGE>
investment only and not with a view toward the resale or distribution thereof.
(b) It understands that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), nor qualified under
the securities laws of any state, and neither the Securities and Exchange
Commission nor any state securities commissioner nor any other regulatory
authority has passed upon the accuracy or adequacy of any disclosure made by the
Company to the undersigned or endorsed the merits of a purchase of the Shares.
(c) It understands and agrees that, prior to consummation of any sale,
transfer, assignment, pledge, hypothecation or other disposition of the Shares,
or any part thereof, a written opinion of counsel must be delivered to the
Company to the effect that, under the Securities Act and the rules and
regulations promulgated thereunder, the proposed disposition may occur without
registration or that all registration requirements of the Securities Act and
--
such rules have been or are being met.
(d) It understands and agrees that the following legends will be
placed on certificates evidencing the Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE RESTRICTED SECURITIES. THE
RESTRICTED SECURITIES HAVE BEEN ACQUIRED FOR THE HOLDER'S OWN ACCOUNT AND
NOT WITH A VIEW TO DISTRIBUTE THEM TO THE PUBLIC. RESTRICTED SECURITIES
MUST BE HELD INDEFINITELY UNLESS THEY ARE SUBSEQUENTLY REGISTERED UNDER THE
ACT, OR AN OPINION OF COUNSEL FOR THE PROPOSED TRANSFEROR IS DELIVERED TO
THE COMPANY, WHICH OPINION SHALL, IN FORM AND SUBSTANCE, BE REASONABLY
SATISFACTORY TO THE COMPANY AND ITS COUNSEL AND SHALL STATE THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
THIS CERTIFICATE AND THE SHARES EVIDENCED HEREBY MAY BE SOLD, TRANSFERRED,
ASSIGNED, HYPOTHECATED, PLEDGED OR OTHERWISE ALIENATED ONLY IN ACCORDANCE
WITH AND SUBJECT TO THE PROVISIONS OF THAT CERTAIN ESCROW AGREEMENT DATED
AS OF JULY 2, 1998, A
-7-
<PAGE>
COPY OF WHICH IS ON FILE AT THE CORPORATION'S PRINCIPAL OFFICE.
(e) It understands and agrees that, in order to ensure that no
unlawful resales or other dispositions of the Shares are allowed to occur,
appropriate stop-transfer instructions restricting resale or disposition of the
Shares will be placed against such Shares with the transfer agent of the
Company.
(f) It understands that the foregoing representations, warranties and
agreements are made in part to induce the Company to rely on certain exemptions
from the registration and qualification provisions of the Securities Act and the
securities laws of various states with respect to the issuance of the Shares
pursuant to the Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first set forth above.
TARRANT APPAREL GROUP
By /s/ Mark B. Kristof
---------------------------------------
Authorized Representative
GABRIEL MANUFACTURING COMPANY
By /s/ Gabriel Zeitouni
-------------------------------------
Authorized Representative
ROCKY APPAREL, INC.
By /s/ Gabriel Zeitouni
--------------------------------------
Authorized Representative
-8-
<PAGE>
SCHEDULE 1.1
<TABLE>
<CAPTION>
Pledgor Number of Shares
------- ----------------
<S> <C>
GMC 31,722
RAI 49,168
</TABLE>
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 6/30/98
FORM 10-Q REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,306,521
<SECURITIES> 0
<RECEIVABLES> 81,957,653
<ALLOWANCES> (2,780,088)
<INVENTORY> 25,837,697
<CURRENT-ASSETS> 117,901,920
<PP&E> 5,730,179
<DEPRECIATION> (3,155,074)
<TOTAL-ASSETS> 129,851,700
<CURRENT-LIABILITIES> 67,506,207
<BONDS> 0
0
0
<COMMON> 17,717,421
<OTHER-SE> 42,256,572
<TOTAL-LIABILITY-AND-EQUITY> 129,851,700
<SALES> 164,357,297
<TOTAL-REVENUES> 164,590,382
<CGS> 133,145,179
<TOTAL-COSTS> 133,145,179
<OTHER-EXPENSES> 14,980,525
<LOSS-PROVISION> 130,892
<INTEREST-EXPENSE> 871,567
<INCOME-PRETAX> 15,593,111
<INCOME-TAX> 5,590,000
<INCOME-CONTINUING> 10,003,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,003,111
<EPS-PRIMARY> .75
<EPS-DILUTED> .71
</TABLE>
