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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-26430
TARRANT APPAREL GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 95-4181026
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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3151 EAST WASHINGTON BOULEVARD
LOS ANGELES, CALIFORNIA 90023
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (213) 780-8250
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of February 10, 1998, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was approximately $38,339,361, based upon
the closing price of the Common Stock on that date.
Number of shares of Common Stock of the registrant outstanding as of February
10, 1998: 6,609,964.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with
Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 1998 Annual Meeting are incorporated by reference into Part III of
this Report. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's fiscal year
ended December 31, 1997.
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TABLE OF CONTENTS
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PAGE
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Item 1. BUSINESS...................................................... 3
General....................................................... 3
Business Strategy............................................. 3
Recent Acquisition............................................ 4
Products...................................................... 5
Customers..................................................... 5
Design, Merchandising and Sales............................... 6
Sourcing...................................................... 6
Backlog....................................................... 9
Import Restrictions........................................... 9
Competition................................................... 11
Employees..................................................... 11
Item 2. PROPERTIES.................................................... 11
Item 3. LEGAL PROCEEDINGS............................................. 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 12
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................... 13
NASDAQ Listing................................................ 13
Dividend Policy............................................... 13
Item 6. SELECTED FINANCIAL DATA....................................... 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 15
General....................................................... 15
Factors That May Affect Future Results........................ 15
Results of Operations......................................... 18
Quarterly Results of Operations............................... 21
Liquidity and Capital Resources............................... 21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 22
Item 10. DIRECTORS AND EXECUTIVE OFFICERS.............................. 23
Item 11. EXECUTIVE COMPENSATION........................................ 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 23
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
Item 14. K............................................................. 24
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PART I
ITEM 1. BUSINESS
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GENERAL
Tarrant Apparel Group (the "Company"), a leading provider of private label
casual apparel, primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of
and selling casual, moderately-priced apparel, primarily for women, under
private label. Since 1988, when the Company began designing and supplying
private label denim jeans to a single specialty retail store chain, it has
successfully expanded its product lines and built a private label business
which during 1997 served over [20] customers. The Company's current products
are manufactured in a variety of woven and knit fabrications and include
jeanswear, casual pants, t-shirts, shorts, blouses, shirts and other tops,
dresses, leggings and jackets. See "Business -- Products" and "-- Customers."
Over the past five years, the Company has achieved a compound annual growth
rate in net sales of approximately 15.3% from $147.0 million in 1993 to $260.1
million in 1997. Gross profit margins during this period have consistently
exceeded 15%. Pre-tax income has risen approximately 39.7% on a compound
annual basis, from $4.2 million in 1993 to $16.0 million in 1997.
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").
See "Business -- Recent Acquisition."
BUSINESS STRATEGY
The Company believes that there has been a trend over the last several years
toward consumer acceptance of casual, moderately-priced, private label
apparel. For example, more than half of the top twenty-five Fortune 500
companies have instituted "casual Fridays," and other companies are following
this trend. The Company also believes that the number of people who work at
home is increasing substantially and that outside of the workplace, people's
social activities are focusing more on family life and a more casual
lifestyle. In particular, the Company believes that baby boomers are now
rearing children and engaging in more recreational activities or are spending
evenings at home. The Company also believes that in recent years apparel
consumers have become more cost-conscious and are bypassing premium brand name
or designer products in favor of quality products at lower prices. In partial
response, apparel retailers have focused on "private label" apparel bearing
the retailer's own name or a proprietary label. Private label apparel
generally provides higher margins for the retailer than brand name or designer
products, as a result of the lower wholesale costs of such apparel. Suppliers
are able to sell these garments at lower wholesale prices due to the
significant economies which they realize, including lower advertising and
promotional costs, lack of brand name license fees and royalties and absence
of "markdowns" and other risks and expenses inherent in the brand name apparel
industry.
Management believes that the Company has taken advantage of these trends by
developing and refining the following strategies:
Customer-Focused Teams and Design and Test-Marketing Capabilities. The
Company serves its major customers through integrated teams of designers,
merchandisers and support personnel, some of whom serve on more than one
team. Generally, separate teams exist for domestic (i.e., U.S. and Mexico)
and international (e.g., Hong Kong and China) sourcing activities. The
Company believes that this staff alignment fosters strong relationships
with each major customer's staff and enables its employees to develop an
in-depth understanding of the fashion, fabric and pricing strategies of the
customer. The Company also assists many of its customers with the market
testing of selected designs through its ability to source small quantities
of selected items for production within a short time frame. The Company
believes that its design, sample-making and test run capabilities have
enhanced the likelihood (but does not ensure) that it will
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receive a significant portion of bulk orders for merchandise designed
independently by the Company or in collaboration with its customers.
Management also believes that its design capability is a major competitive
advantage.
International Sourcing Network. The Company and its senior executives
have developed long-standing relationships with a network of contract
manufacturers and suppliers, who are used by the Company to fulfill most of
the Company's manufacturing needs. The Company is aggressively expanding
this network both within the countries where it currently sources goods and
to other countries including those in which it has not previously sourced
goods. The Company believes that this network has sufficient production
capacity and flexibility to enable the Company to accept large orders, work
on short production schedules and produce a broad range of garments at a
variety of possible prices depending on the lead times required by the
customer. Certain of these manufacturers also have the capability to
produce small quantity test runs for the market test programs of the
Company's customers.
Product Capabilities That Respond to Changing Fashion Needs. The Company
believes that it has established a reputation with its customers as a
"fashion resource" -- a producer that is capable of designing and producing
a broad range of quality merchandise and reacting rapidly to changing
trends in fashion, fabrics and styles. In management's view, this
reputation has afforded the Company a competitive advantage, because
customers have been willing to place orders with the Company for an
expanding range of products not previously sourced by the Company.
Vertical Integration. In late 1997, the Company commenced the vertical
integration of its business. Key elements of this strategy 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. In late
1997, the Company commenced negotiations to acquire a denim mill in Puebla,
Mexico and initiated constructing a twill plant. There can be no assurance
that either such transaction will be consummated.
The Company believes that by employing these strategies, it can attract new
customers and increase sales to existing customers.
RECENT ACQUISITION
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
consisted of (i) $4,550,000, together with an amount equal to seller's cost of
the inventory purchased, payable in cash on closing, (ii) $500,000 payable on
July 31, 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 consisted of (i) $500,000, together with an amount equal to
seller's cost of the inventory purchased, payable in cash on closing and (ii)
$500,000 payable on July 31, 1998, together with interest at 7% per annum.
MGI International Limited and MGI USA each designs, contracts for the
manufacture of and sells private label apparel for men and boys, including
knit and woven tops, jackets and other outerwear to national retailers,
including J.C. Penney and Goody's Family Clothing. The purchase price was
financed by the Company from its cash flow from operations.
In connection with this acquisition, the Company entered into employment
agreements with Marshall Gobuty, the President and principal shareholder of
the sellers, and four senior employees of MGI USA. Under his employment
agreement, Mr. Gobuty will be employed as the Vice President -- Men's of the
Company for a
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term commencing on February 23, 1998 and ending on February 23, 1999, unless
extended by the mutual agreement of the Company and Mr. Gobuty, and will be
paid an annual base salary of $375,000 and will receive such benefits and
perquisites as are provided by the Company to its executive officers
generally. In the event the Company terminates his employment without cause,
Mr. Gobuty shall be entitled to receive (i) a lump sum payment equal to his
base salary for the balance of the term and (ii) continuation of group medical
and disability insurance of the balance of the term. In the event the Company
terminates Mr. Gobuty's employment with cause, the Company is obligated to pay
the compensation required by the agreement only through the date of
termination. In addition, the sellers and Mr. Gobuty have agreed not to
compete with the Company during the two years following the termination of his
employment for any reason.
PRODUCTS
In 1988, the Company received its first orders for private label women's
denim jeans from Express, a division of The Limited, Inc. ("The Limited").
While women's jeans have historically been, and continue to be, the Company's
principal product, in recent years the Company has expanded its sales of
moderately-priced, women's apparel to include casual, denim and non-denim
woven tops and bottoms and has commenced the sale of men's apparel, including
knit and woven tops, shirts and outerwear (including jackets), as a result of
the Gobuty Acquisition on February 23, 1998. The Company's women's apparel
currently include jeanswear, casual pants, t-shirts, shorts, blouses, shirts
and other tops, dresses, leggings and jackets. These products are manufactured
in petite, standard and large sizes and are sold at a variety of wholesale
prices generally ranging from less than $6.00 to over $25.00 per garment.
Over the past two years, management's best estimate is that approximately
fifty percent of net sales were derived from the sale of pants and jeans,
approximately fifteen percent of net sales were derived from the sale of
shorts and shirts accounted for approximately ten percent of net sales. The
balance of net sales consisted of sales of dresses, jackets, leggings and
other products. These estimates do not include any information relating to
fabric sales, net sales of Tarrant Company Limited, a wholly-owned subsidiary
("Tarrant HK"), or net sales to non-combined affiliates for which, in each
case, the Company does not have data segregated by apparel category.
The Company, in the ordinary course of its business, regularly evaluates new
markets and potential acquisitions and believes that numerous opportunities
exist due, in part, to the adverse effect on the earnings of many apparel
companies of the recent decline in retail sales generally. Such opportunities
could include transactions involving acquisitions or brand affiliations.
Although the Company currently is evaluating several acquisitions, there are
no existing commitments with respect to any acquisition or affiliation, except
as described under "Business -- Recent Acquisition."
CUSTOMERS
For the year ended December 31, 1997, affiliated stores owned by The
Limited, including Express, Lerner New York, Limited Stores and Lane Bryant,
accounted for approximately 70% of the Company's net sales and one mass
merchandise store chain accounted for approximately 20% of the Company's net
sales. No other customer accounted for more than 10% of the Company's net
sales in 1997. In the same period, the predominant portion of the Company's
sales were of private label apparel. The Company currently serves over 20
customers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General."
The Company does not have long-term contracts with any of its customers and,
therefore, there can be no assurance that any customer will continue to place
orders with the Company of the same magnitude as it has in the past, or at
all. In addition, the apparel industry historically has been subject to
substantial cyclical variation, with consumer spending for purchases of
apparel and related goods tending to decline during recessionary periods.
Various retailers, including divisions of The Limited, have experienced
sluggish sales and declines in revenue and profits in recent periods. To the
extent that these financial difficulties continue or worsen, there can be no
assurance that the Company's financial condition and results of operations
would not be adversely affected. As a result of the importance of The Limited
to the operations of the Company, The Limited and its divisions have the
ability to exert significant influence over the Company's business decisions.
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DESIGN, MERCHANDISING AND SALES
While many private label producers only arrange for the bulk production of
styles specified by their customers, the Company not only designs garments,
but also assists some of its customers in market testing new designs. The
Company believes that its design, sample-production and test-run capabilities
give it a competitive advantage in obtaining bulk orders from its customers.
The Company also often receives bulk orders for garments it has not designed
because many of its customers allocate bulk orders among more than one
producer.
The Company has developed integrated teams of design, merchandising and
support personnel, some of whom serve on more than one team, that focus on
designing and producing merchandise that reflects the style and image of their
customers. Teams generally are divided between import and domestic sourcing
operations.
Each team is responsible for all aspects of its customer's needs, including
designing products, developing product samples and test items, obtaining
orders, coordinating fabric choices and procurement, monitoring production and
delivering finished products. In particular, the team seeks to identify
prevailing fashion trends that meet its customer's retail strategies and
design garments incorporating those trends. The team also works with the
buyers of its customer to revise designs as necessary to better reflect the
style and image that the customer wishes to project to consumers. During the
production process, the team is responsible for informing the customer about
the progress of the order, including any difficulties that might affect the
timetable for delivery. In this way, the Company and its customer can make
appropriate arrangements regarding any delay or other change in the order. The
Company believes that this team approach enables its employees to develop an
understanding of the customer's distinctive styles and production requirements
in order to respond effectively to the customer's needs.
As part of the Company's merchandising strategy, the Company produces, at
its own expense, one or more samples of garments embodying new designs. The
Company produces samples at its facilities in Guangdong Province, China, Hong
Kong and Los Angeles. The Chinese facility, which has 120 employees, currently
furnishes a significant portion of the Company's sample requirements.
From time to time and at scheduled seasonal meetings, the Company presents
its samples to the customer's buyers, who determine which, if any, of those
samples will be produced on a test run or a bulk scale. Samples are often
presented in coordinated groupings or as part of a product line. Some
customers, particularly specialty retail stores such as divisions of The
Limited, may require that a product be "tested" before placing a bulk order.
Testing involves the production of as few as several hundred copies of a given
sample in different size, fabric and color combinations. The customer pays for
these test items, which are placed in selected stores to gauge consumer
response. The production of test items enables the Company's customers to
identify garments that may appeal to consumers and also provides the Company
with important information regarding the cost and feasibility of the bulk
production of the tested garment. If the test is determined to be successful,
the Company generally receives a significant percentage of the customer's
total bulk order of the tested item. In addition, as is typical in the private
label business, the Company receives bulk production orders to produce
merchandise designed by its competitors or other designers, since most
customers allocate bulk orders among a number of suppliers.
SOURCING
General
When bidding for or filling an order, the Company's international sourcing
network enables it to choose from among a number of suppliers and
manufacturers based on the customer's price requirements, product
specifications and delivery schedules. Historically, the Company has
manufactured its products through independent cutting, sewing and finishing
contractors located primarily in Hong Kong and China and has purchased its
fabric from independent fabric manufacturers with weaving mills located
primarily in Hong Kong and China. In recent years, the Company has expanded
its network to include suppliers and manufacturers located in a number of
additional countries, including Mexico. Key elements of the Company's sourcing
strategy include (i) continuing to expand its production of basic denim and
twill products in Mexico and Central America
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through both independent contractors and the acquisition or construction of
cutting, sewing and finishing facilities and (ii) seeking to acquire or
construct denim and twill weaving mills in Mexico. The following table sets
forth the percent of the Company's merchandise, on the basis of the free on
board cost at the suppliers's plant ("FOB Basis"), by country for the periods
indicated:
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1995 1996 1997
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International Sourcing
Hong Kong and China..................................... 64.8% 78.3% 60.5%
Other(1)................................................ 12.7 7.7 13.7
Domestic Sourcing
United States........................................... 22.5 13.8 14.9
Mexico and Central America.............................. -- 0.2 10.9
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(1) In 1997, such countries consisted of Thailand (3.0%), Macau (4.0%),
Philippines (2.6%), UAE/Oman (1.4%) and Indonesia (1.3%).
In late 1997, the Company commenced negotiations to acquire a denim mill in
Puebla, Mexico and initiated constructing a twill plant. There can be no
assurance that either such transaction will be consummated.
Dependence on Contract Manufacturers
All of the Company's products, with the exception of certain test runs and
samples, currently are manufactured by independent cutting, sewing and
finishing contractors. The use of contract manufacturers and the resulting
lack of direct control over the production of its products could result in the
Company's failure to receive timely delivery of products of acceptable
quality. Although the Company believes that alternative sources of cutting,
sewing and finishing services are readily available, the loss of one or more
contract manufacturers could have a materially adverse effect on the Company's
results of operations until an alternative source is located and has commenced
producing the Company's products.
Although the Company monitors the compliance of its independent contractors
with applicable labor laws, the Company does not control its contractors or
their labor practices. The violation of federal or state labor laws by one of
the Company's contractors can result in the Company being subject to fines and
the Company's goods which are manufactured in violation of such laws being
seized or their sale in interstate commerce being prohibited. From time to
time, the Company has been notified by federal or state authorities that
certain of its contractors are the subject of investigations or have been
found to have violated applicable labor laws. To date, the Company has not
been subject to any sanctions that, individually or in the aggregate, could
have a material adverse effect upon the Company, and the Company is not aware
of any facts on which any such sanctions could be based. There can be no
assurance, however, that in the future the Company will not be subject to
sanctions as a result of violations of applicable labor laws by its
contractors, or that such sanctions will not have a material adverse effect on
the Company. In addition, certain of the Company's customers, including The
Limited and Target Stores, require strict compliance by their apparel
manufacturers, including the Company, with applicable labor laws. There can be
no assurance that the violation of applicable labor laws by one of the
Company's contractors will not have a material adverse effect on the Company's
relationship with its customers.
In addition, as is customary in the industry, the Company does not have any
long-term contracts with its fabric suppliers. The loss of any of its major
contractors or fabric suppliers could have a material adverse effect on the
Company's financial condition and results of operations until alternative
supplier arrangements are secured.
Diversified Production Network
The Company believes that it has the ability, through its production
network, to operate on production schedules with lead times as short as 30
days. Typically, the Company's specialty retail customers attempt to respond
quickly to changing fashion themes and are increasingly less willing to assume
the risk that goods
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ordered on long lead times will be out of fashion when delivered. These
retailers, including divisions of The Limited, frequently require production
schedules with lead times ranging from 30 to 120 days. Although mass
merchandisers, such as Target, are beginning to operate on shorter lead times,
they are occasionally able to estimate their needs as much as six months to
one year in advance for "program" business -- basic products that do not
change in style significantly from season to season. The Company's ability to
operate on production schedules with a wide range of lead times helps it to
meet its customers' varying needs.
By allocating an order among different manufacturers, the Company can fill
the high-volume orders of its customers, while meeting their delivery
requirements. Upon receiving an order, the Company determines which of its
suppliers and manufacturers can best fill the order and meet the customer's
price, quality and delivery requirements. The Company considers, among other
things, the price charged by each manufacturer and the manufacturer's
available production capacity to complete the order, as well as the
availability of quota for the product from various countries and the
manufacturer's ability to produce goods on a timely basis subject to the
customer's quality specifications. The Company's personnel also consider the
transportation lead times required to deliver an order from a given
manufacturer to the customer. In addition, some customers prefer not to carry
excess inventory and therefore require that the Company stagger the delivery
of products over several weeks.
International Sourcing
The Company conducts and monitors the majority of its international sourcing
operations from its offices in Hong Kong. At January 31, 1998, the Company had
approximately 180 full-time employees in Hong Kong, many of whom have
extensive knowledge about and experience with sourcing and production in Hong
Kong and China, including purchasing, manufacturing and quality control.
Several times each year, members of the Company's senior management, including
those resident in Hong Kong and China, visit and inspect the facilities and
operations of the Company's international suppliers and manufacturers.
Foreign manufacturing is subject to a number of risk factors, including,
among other things, transportation delays and interruptions, political
instability, expropriation, currency fluctuations and the imposition of
tariffs, import and export controls and other non-tariff barriers (including
changes in the allocation of quotas). In addition to these risk factors, the
Company faces additional risks arising from the uncertainty regarding the
future status of Hong Kong since resumption of Chinese sovereignty on July 1,
1997, the continuation of favorable trade relations between the U.S. and China
(in particular the continuation of China's Most Favored Nation ("MFN") status
for tariff purposes), and the continuation of economic reform programs in
China which encourage private economic activity. Each of these factors could
have a material adverse effect on the Company.
While the Company is in the process of establishing business relationships
with manufacturers and suppliers located in countries other than Hong Kong or
China, the Company still contracts with manufacturers and suppliers located
primarily in Hong Kong and China, and currently expects that it will continue
to do so for the foreseeable future. Any significant disruption in the
Company's operations or its relationships with its manufacturers and suppliers
located in Hong Kong or China could have a material adverse effect on the
Company.
Domestic Sourcing
The Company commenced manufacturing basic denim and twill products through
independent contractors in Mexico and Central America in the second quarter of
1997, and anticipates continuing to expand its use of manufacturing facilities
in this region. The Company believes that the further diversification of its
international sourcing network by increasing the use of manufacturing
facilities in the United States, Mexico and Central America will (i) reduce
its cost of goods, (ii) enhance the proximity of the Company's sourcing
operations to the Company's customers and the Company's executive offices,
thereby improving delivery times and increasing management's control, (iii)
lessen certain risks of doing business in Asia and (iv) enable the Company to
provide products to customers who require a "Made in USA" label.
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The Company currently conducts its domestic, Mexico and Central American
sourcing from its Los Angeles facilities. The Company also manufactures
samples at one of its Los Angeles facilities. Samples are produced at the
Company's expense and embody a particular design idea that can be presented to
a customer as a means of soliciting an order. See "Business -- Design,
Merchandising and Sales." Because of its local sample-making capacity, the
Company is capable of responding quickly to customers' requests for revisions
to samples. As a result, management believes that this capability gives the
Company a competitive advantage.
The Sourcing Process
As is customary in the industry, the Company does not have any long-term
contracts with its manufacturers. The Company typically contracts (on the
basis of a written purchase order) with one to three manufacturers to produce
a bulk order. The Company often arranges on behalf of these manufacturers for
the purchase of fabric from one supplier for the entire order, in which case
the Company deducts the cost of the fabric when paying the manufacturer's
invoice. By procuring fabric for an entire order from one source, the Company
believes that production costs per garment are reduced and customer
specifications as to fabric quality and color can be controlled. In 1997, an
aggregate of approximately $59.5 million (on an FOB Basis) or approximately
46.1% of the Company's imported products were purchased from five
manufacturers with facilities in Hong Kong and China.
During the manufacturing process, the Company's quality control personnel
visit each factory to inspect garments when the fabric is cut, as it is being
sewn and as the garment is being finished. Daily information on the status of
each order is transmitted from the various manufacturing facilities to the
Company's offices in Hong Kong and Los Angeles. The Company, in turn, keeps
its customers apprised, often through daily telephone calls and frequent
written reports. These calls and reports include candid assessments of the
progress of a customer's order, including a discussion of the difficulties, if
any, that have been encountered and the Company's plans to rectify them.
The Company often purchases fabric to meet the specifications of the
customer's order. The Company has the fabric shipped directly to the factory
and invoices the factory for the fabric. Generally the factories pay the
Company for the fabric with offsets against the price of the finished goods.
For its longstanding program business, the Company may purchase fabric in
advance of receiving the order, but in accordance with the customer's
specifications. The Company's primary sources of working capital are cash flow
from operations and borrowings under the Company's bank credit agreements and
factoring agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
BACKLOG
At February 23, 1998, the Company had unfilled customer orders of
approximately $125 million as compared to approximately $82 million as of
February 15, 1997. The Company believes that all of its backlog of orders as
of February 23, 1998 will be filled within the current fiscal year. Backlog is
based on the Company's estimates derived from internal management reports. The
amount of unfilled orders at a particular time is affected by a number of
factors, including the scheduling of manufacture and shipping of the product
which, in some instances, depends on the customer's demands. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments. The
Company's experience has been that the cancellations, rejections or returns of
orders have not materially reduced the amount of sales realized from its
backlog.
IMPORT RESTRICTIONS
Quotas
The Company imported approximately 85% of its products (on an FOB Basis) in
1997, including approximately 10% imported from Mexico. Most of the products
imported were manufactured in a foreign
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jurisdiction (e.g., Hong Kong and China) with which the U.S. has entered into
a bilateral textile agreement that, among other restrictions, imposes specific
quantitative restraints, or "quotas," on the amounts of various categories of
textiles and apparel that can be imported into the U.S. from that foreign
jurisdiction during a particular quota year. These bilateral textile
agreements also include provisions which allow the U.S. to impose quotas on
categories of textiles and apparel not previously under quota or to "charge"
(i.e., impose deductions upon) the quotas for origin-related violations.
Accordingly, the Company's operations are subject to the restrictions imposed
by these bilateral agreements.
Until recently, the Arrangement Regarding International Trade in Textiles,
known as the Multifiber Arrangement ("MFA"), provided the international
framework for the global regulation of the textile and apparel trade. Pursuant
to the MFA, the U.S. entered into these bilateral textile agreements for the
purpose of imposing quotas on the imports of textiles and apparel. However,
under "The Final Act Embodying the Results of the Uruguay Round of
Multilateral Trade Negotiations" (the "Uruguay Round Agreement") which was
agreed to on a preliminary basis in December 1993 by 117 member nations of the
General Agreement on Tariffs and Trade ("GATT"), and enacted into U.S.
domestic law in December 1994 under the Uruguay Round Agreements Act (the
"URAA"), the MFA has been replaced by the World Trade Organization Agreement
on Textiles and Clothing (the "ATC"). Under the ATC, quotas implemented under
the MFA on the importation of textiles and apparel from countries that are
members of the World Trade Organization (the "WTO," which is the successor
organization to GATT under the Uruguay Round Agreement) will be phased out
over a ten-year period that commenced on January 1, 1995 (with the U.S.
phasing out quotas on most of the sensitive categories at the end of this
period). However, a member country may, under the Uruguay Round Agreement on
Safeguards, re-impose quotas on textiles and apparel under certain specified
conditions.
China is a signatory to the MFA, but was not a member of GATT and,
therefore, was not a party to the Uruguay Round Agreement. China has not been
admitted as a member of the WTO, although it is in the process of trying to
negotiate its accession to the WTO at this time. Because China is not a member
of the WTO, its exports of textiles and apparel to the U.S. are not covered by
the ATC. Accordingly, the U.S. continues to control imports of textiles and
apparel from China under the existing bilateral agreement between the U.S. and
China. On January 17, 1994, the U.S. and China signed a three-year agreement
which set the 1994 textile and apparel quotas from China at their 1993 levels
and increased the quota by 1.0% for each of 1995 and 1996. A new agreement, to
replace the expiring 1994 Agreement, was signed in February 1997, covering the
period January 1, 1997 to December 31, 2000. This agreement continues to
permit some growth in most quota categories.
In the event that China eventually becomes a member of the WTO, it will be
afforded the rights granted other members under the ATC, including the phase-
out of textile and apparel quotas over the ten-year period that commenced on
January 1, 1995. However, there can be no assurance that China will become a
member of the WTO, particularly since the U.S. has expressed dissatisfaction
with China's progress in opening its domestic market in a number of areas.
In 1997, products imported using Hong Kong quota accounted for approximately
67% of the Company's imported net sales (on an FOB Basis). Under the U.S. and
Hong Kong rules of origin currently in effect, the Company conducts certain,
non-origin conferring manufacturing operations in China for a significant
portion of the products it imports using Hong Kong quota. As part of the URAA,
the U.S. implemented new rules of origin which become effective on July 1,
1996. These new rules of origin had little actual impact on the country of
origin of the merchandise imported by the Company. The Company is nevertheless
attempting to diversify its sourcing network to reduce reliance on Hong Kong
sources, in part to minimize the potential effects of this change in the rule
of origin. It is also taking steps to obtain additional quota from China in
the event that these new rules of origin result in changing the origin of the
products presently subject to Hong Kong quota.
Duties and Tariffs
Merchandise imported by the Company into the U.S. is subject to rates of
duty established by U.S. statute. In general, these rates vary, depending on
the type of product, from 3.0% to 34.6% of the appraised value of the
10
<PAGE>
product. In addition to duties, in the ordinary course of its business, the
Company, from time to time, may become subject to claims by the U.S. Customs
Service for penalties, liquidated damage claims and other charges relating to
import activities. Similarly, from time to time, the Company may be entitled
to refunds from the U.S. Customs Service due to the overpayment of duties.
Products imported from China into the U.S. currently receive the same
preferential tariff treatment accorded goods from countries granted MFN
status. China's MFN status, which is granted on an annual basis, expires in
July 1998. China's MFN status has been a contentious political issue for
several years because of concerns regarding labor and human rights practices,
weapons proliferation, trade policies and failure to protect U.S. intellectual
property rights. Previous legislation attaching conditions to China's MFN
status has been passed by both houses of the Congress, but did not survive
presidential vetoes. There can be no assurance that the U.S. will not revoke
China's MFN status entirely or place greater conditions or restrictions on
this status, but absent a major deterioration in U.S.-China relations, it is
anticipated that China will maintain its MFN status. If China's MFN status
were to terminate, and Chinese origin products had to enter the U.S. without
the benefit of MFN status, such goods will be subject to significantly higher
duties than at present. Any such increased duties would increase the cost or
reduce the supply of the Company's goods imported from China. In 1997,
products imported using China quota accounted for approximately 15% of the
Company's imported net sales (on an FOB Basis). The Company is taking steps to
diversify its sourcing network to reduce its dependence on Chinese-origin
products.
The Company's continued ability to source products from foreign
jurisdictions may be adversely affected by additional bilateral and
multilateral agreements, unilateral trade restrictions, changes in trade
policy, significant decreases in import quotas, embargoes, the disruption of
trade from exporting countries as a result of political instability or the
imposition of additional duties, taxes and other charges or restrictions on
imports.
COMPETITION
There is intense competition in the sectors of the apparel industry in which
the Company participates. The Company competes with many other manufacturers,
many of which are larger and have greater resources than the Company. The
Company also faces competition from its own customers and potential customers,
many of which have established, or may establish, their own internal product
development and sourcing capabilities. For example, The Limited's wholly-owned
subsidiary, Mast Industries, Inc., competes with the Company and other private
label apparel suppliers for orders from divisions of The Limited. The Company
believes that it competes favorably on the basis of design and sample
capabilities, quality and value of its products, price, the production
flexibility that it enjoys as a result of its sourcing network and the long-
term customer relationships it has developed.
EMPLOYEES
At January 31, 1998, the Company had approximately 150 full-time employees
in Los Angeles, 180 full-time employees in Hong Kong and 120 in China. None of
the Company's employees is subject to a collective bargaining agreement. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
----------
The Company currently conducts its operations from three facilities, all of
which are leased. The Company's executive offices and warehouse facilities are
located at 3151 East Washington Boulevard, Los Angeles, California 90023. The
Company leases this facility for an annual rent of $595,000 from a California
corporation which is owned by Gerard Guez and Todd Kay, the Company's Chief
Executive Officer and President (the "Original Shareholders"). The base rent
is subject to increase on January 1, 2000 and every two years thereafter by an
amount equal to at least five percent but no greater than ten percent. The
lease for this facility, under which the Company is responsible for the
payment of taxes, utilities and insurance, terminates in December 2003 subject
to a renewal option for five additional years. The Company also leases 146,000
square feet of warehouse
11
<PAGE>
space in South Gate, California for an annual rent of $170,000 from an
unrelated third party. The Company also leases approximately 36,000 square
feet of warehouse and office space in Hong Kong for an annual rent of $674,000
from a Hong Kong corporation that is owned by the Original Shareholders. The
base rent is subject to increase every two years in accordance with market
rates. The lease for this facility, under which the Company is responsible for
the payment of taxes, utilities and insurance, expires in June 2004. See Note
8 of Notes to Consolidated Financial Statements for additional information
with respect to these leases.
The Company believes that its other existing facilities are well maintained,
in good operating condition and adequate to meet its current and foreseeable
needs.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On December 22, 1997, the Federal judge in the civil lawsuit brought by the
American Textile Manufacturers Institute ("ATMI") against, among others, the
Company, Gerard Guez, its Chairman and Chief Executive Officer, and Todd Kay,
its President, granted ATMI's motion to excuse himself from the case. At the
same time, the judge denied the motion to vacate the decision and judgment
previously entered dismissing the case. Consequently, a new judge will
consider whether the decision should be altered or amended.
The Company is not involved in any other pending or threatened legal
proceedings which the Company believes could reasonably be expected to have a
material adverse effect on the its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of fiscal 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
NASDAQ LISTING
The Company's Common Stock began trading on The Nasdaq Stock Market's
National Market ("NASDAQ") under the symbol "TAGS" on July 24, 1995.
The following table sets forth, for the periods indicated, the range of high
and low sale prices for the Company's Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
1996
First Quarter............................................... $ 5.75 $ 8.25
Second Quarter.............................................. $ 7.50 $10.62
Third Quarter............................................... $ 7.25 $10.25
Fourth Quarter.............................................. $ 9.12 $14.75
1997
First Quarter............................................... $12.25 $19.75
Second Quarter.............................................. $13.75 $18.00
Third Quarter............................................... $13.94 $19.25
Fourth Quarter.............................................. $11.50 $17.50
1998
First Quarter (through February 10)......................... $14.75 $17.75
</TABLE>
On February 10, 1997, the last reported sale price of the Company's Common
Stock as reported on NASDAQ was $17.75. Shareholders are urged to obtain
current market quotations for the Common Stock. As of February 10, 1997, there
were approximately 16 shareholders of record of the Company. However, proxy
data indicates that there are over 1,000 beneficial owners of shares of the
Common Stock.
DIVIDEND POLICY
The Company intends to retain future earnings for use in its business and
therefore does not anticipate declaring or paying any cash dividends in the
foreseeable future. The declaration and payment of any cash dividends in the
future will depend upon the Company's earnings, financial condition, capital
needs and other factors deemed relevant by the Board of Directors.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data is qualified in its entirety by, and
should be read in conjunction with, the other information and financial
statements, including the notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................ $147,017 $177,108 $205,174 $229,861 $260,093
Cost of sales............ 121,971 148,740 172,959 192,288 220,996
-------- -------- -------- -------- --------
Gross profit........... 25,046 28,368 32,215 37,573 39,097
Selling and distribution
expenses................ 5,360 6,118 6,761 7,124 8,499
General and
administrative expenses. 11,636 12,359 13,493 13,990 13,518
Officers' bonus(1)....... 3,000 -- -- -- --
LDA Option(2)............ -- -- 1,734 -- --
-------- -------- -------- -------- --------
Income from operations. 5,050 9,891 10,227 16,459 17,080
Interest expense......... (3,410) (3,696) (4,003) (1,865) (1,471)
Interest income.......... 210 78 773 337 171
Other
income/(expense)(3)..... 2,359 1,367 1,274 (302) 242
-------- -------- -------- -------- --------
Income before provision
for income taxes and
cumulative effect of
accounting change....... 4,209 7,640 8,271 14,629 16,022
Provision for income
taxes(4)................ (478) (597) (961) (4,627) (5,235)
-------- -------- -------- -------- --------
Income before cumulative
effect of accounting
change.................. 3,731 7,043 7,310 10,002 10,787
Cumulative effect of
accounting change(5).... -- 94 -- -- --
-------- -------- -------- -------- --------
Net income............... $ 3,731 $ 7,137 $ 7,310 $ 10,002 $ 10,787
======== ======== ======== ======== ========
PRO FORMA DATA(6):
Pro forma net income..... $ 3,033 $ 5,358 $ 7,408(7) $ 10,002 $ 10,787
Pro forma net income per
common share
Basic.................. $ 0.67 $ 1.19(7) $ 1.38(7) $ 1.54 $ 1.64
Diluted................ $ 0.67 $ 1.19(7) $ 1.38(7) $ 1.53 $ 1.59
Pro forma weighted
average shares
outstanding(8)
Basic.................. 4,500 4,500(9) 5,353 6,508 6,588
Diluted................ 4,500 4,500(9) 5,353 6,548 6,784
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......... $ 3,242 $ 2,594 $ 23,003 $ 34,029 $ 45,304
Total assets............. 44,376 44,017 57,840 63,420 71,861
Bank borrowings and long-
term obligations........ 20,371 19,313 15,940 6,810 4,288
Shareholders' equity..... 7,163 7,848 26,416 36,953 48,335
</TABLE>
- ---------
(1) Consists of bonuses paid to enable the Original Shareholders to pay their
income taxes, including personal income taxes resulting from the Company's
S Corporation status.
(2) On the effective date of its initial public offering, the Company incurred
a non-recurring charge to earnings related to a grant by the Original
Shareholders to Limited Direct Associates, L.P., an affiliate of The
Limited, Inc., of a four-year option (the "LDA Option") to purchase an
aggregate of 649,999 shares, or 10% of the Company's Common Stock, at an
exercise price equal to $7.20 per share.
(3) Major components of Other income/(expense) (as presented above) include
fees paid by affiliate entities for management and administrative services
provided by the Company and royalty income. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) For federal and state tax purposes, Tarrant Apparel Group and certain of
the companies included in the historical results of operations were
treated as S Corporations under Subchapter S of the Internal Revenue Code
of 1986, as amended, and comparable provisions of state income tax laws.
(5) See Note 1 to Consolidated Financial Statements.
(6) Reflects an income tax provision which is the sum of (i) U.S. income taxes
computed as if the Company had been taxed as a C Corporation at an
effective tax rate of 40% for federal and state tax purposes for the
period it was an S Corporation and (ii) the historical tax provision of
the Company and its non-U.S. consolidated subsidiaries for all other
periods. 1996 and 1997 have no adjustments since the Company was a C
Corporation in such years.
(7) The 1994 amount has been adjusted from the $1.09 per share previously
reported in the Registration Statement on Form S-1, as amended, dated May
4, 1995 (File No. 33-91874) (the "Form S-1") to reflect the elimination of
a 400,000 share adjustment, as described in Note 9 to this table. The 1995
amounts reflect a $1.7 million adjustment related to the grant of the LDA
Option. The pro forma net income and pro forma net income per common share
amounts reflecting only the adjustment for pro forma income taxes for 1995
would be $5.7 million and $1.06, respectively. See "Consolidated
Statements of Income," page F-4.
(8) Adjusted to give effect to a stock dividend of 14,999 shares for each
outstanding share and the sale by the Company of 2,000,000 shares in its
initial public offering (the "Offering") in July 1995.
(9) The 1994 amount has been adjusted from the 4,900,000 shares previously
reported in the Form S-1 due to the elimination of a 400,000 share
adjustment originally made to account for the capital in excess of
earnings which was withdrawn by the Original Shareholders prior to the
Offering. Additional earnings recorded subsequent to the Offering have
necessitated that this adjustment be eliminated.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
The Company primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of
and selling casual, moderately-priced apparel, primarily for women, under
private label. The Company's major customers include specialty retailers, such
as Lerner New York, Limited Stores, Lane Bryant and Express, all of which are
divisions of The Limited, and mass merchandisers. The Company's products are
manufactured in a variety of woven and knit fabrications and include
jeanswear, casual pants, t-shirts, shorts, blouses, shirts and other tops,
dresses, leggings and jackets.
On July 28, 1995, the Company completed an initial public offering (the
"Offering") of 2,000,000 shares of the Company's Common Stock at a price of
$9.00 per share. The proceeds to the Company, net of underwriting discounts
and commissions and offering expenses, were $14.8 million.
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.
The Company intends to continue to attempt to geographically balance its
sourcing operations. The Company believes that the benefits of a more
diversified sourcing base will include increasing the Company's access to
emerging providers of low cost production, enhancing the proximity of the
Company's sourcing base to the Company's customers and principal executive
offices and lessening certain risks associated with doing business abroad
(including 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).
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").
See "Business--Recent Acquisition."
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-K contains forward-looking statements which are
subject to a variety of risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below.
Variability of Quarterly Results. The Company has experienced, and expects
to continue to experience, a substantial variation in its net sales and
operating results from quarter to quarter. The Company believes that the
factors which influence this variability of quarterly results include the
timing of the Company's introduction of new product lines, the level of
consumer acceptance of each new product line, general economic and industry
conditions that affect consumer spending and retailer purchasing, the
availability of manufacturing capacity, the seasonality of the markets in
which the Company participates, the timing of trade shows, the product mix of
customer orders, the timing of the placement or cancellation of customer
orders, the occurrence of chargebacks in excess of reserves and the timing of
expenditures in anticipation of increased sales and actions of competitors.
Accordingly, a comparison of the Company's results of operations from period
to period is not necessarily meaningful, and the Company's results of
operations for any period are not necessarily indicative of future
performance.
Economic Conditions. The apparel industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer
spending habits have in the past had, and may in the future have, a materially
adverse effect on the Company results of operations. In addition, certain
retailers, including some of the Company customers, have experienced in the
past, and may experience in the future, financial difficulties which increase
the risk of extending credit to such retailers. These retailers have attempted
to improve their own operating efficiencies by concentrating their purchasing
power 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
15
<PAGE>
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 and Lane Bryant) accounted
for approximately 70% of the Company's net sales in 1997 and 1996. 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 federal or state labor laws by one of
the Company's contractors can result in the Company being subject to fines and
the Company's goods which are manufactured in violation of such laws being
seized or their sale in interstate commerce being prohibited. From time to
time, the Company has been notified by federal or state authorities that
certain of its contractors are the subject of investigations or have been
found to have violated applicable labor laws. To date, the Company has not
been subject to any sanctions that, individually or in the aggregate, could
have a material adverse effect upon the Company, and the Company is not aware
of any facts on which any such sanctions could be based. There can be no
assurance, however, that in the future the Company will not be subject to
sanctions as a result of violations of applicable labor laws by its
contractors, or that such sanctions will not have a material adverse effect on
the Company. In addition, certain of the Company's customers, including The
Limited and Target Stores, require strict compliance by their apparel
manufacturers, including the Company, with applicable labor laws. There can be
no assurance that the violation of applicable labor laws by one of the
Company's contractors will not have a material adverse effect on the Company's
relationship with its customers.
Price and Availability of Raw Materials. Cotton fabric is the principal raw
material used in the Company's apparel. Although the Company believes that its
suppliers will continue to be able to procure a sufficient supply of cotton
fabric for its production needs, the price and availability of cotton may
fluctuate significantly depending on supply, world demand and currency
fluctuations, each of which may affect the price and availability of cotton
fabric. There can be no assurance that fluctuations in the price and
availability of cotton fabric or other raw materials used by the Company will
not have a material adverse effect on the Company's results of operations.
Management of Growth. Since its inception, the Company has experienced
rapid growth in sales. No assurance can be given that the Company will be
successful in maintaining or increasing its 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
16
<PAGE>
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 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.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of income as a percentage of net sales
and as adjusted in the pro forma manner set forth in the footnotes to the
table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Cost of sales........................................... 84.3 83.7 84.9
----- ----- -----
Gross profit............................................ 15.7 16.3 15.1
Selling and distribution expenses....................... 3.3 3.1 3.3
General and administration expenses..................... 6.6 6.1 5.2
Non-recurring charge related to LDA Option(1)........... 0.8 -- --
----- ----- -----
Operating income........................................ 5.0 7.1 6.6
Interest expense........................................ (2.0) (0.8) (0.6)
Other income............................................ 1.0 0.0 0.2
----- ----- -----
Income before income taxes.............................. 4.0 6.3 6.2
Income taxes(2)......................................... (1.3) (2.0) (2.0)
----- ----- -----
Net income.............................................. 2.7% 4.3% 4.2%
===== ===== =====
</TABLE>
- ----------
(1) On the effective date of the Offering, the Company incurred a non-
recurring charge to earnings related to a grant by the Original
Shareholders to Limited Direct Associates, L.P., an affiliate of The
Limited, Inc., of a four-year option to purchase an aggregate of 649,999
shares, or approximately 10% of the Company's then outstanding Common
Stock, at an exercise price equal to $7.20 per share.
(2) The 1995 amount reflects a pro forma income tax provision which is the sum
of (i) U.S. income taxes computed as if the Company had been taxed as a C
Corporation at an effective tax rate of 40% for federal and state tax
purposes for the period it was an S Corporation and (ii) the historical
tax provision of the Company and its non-U.S. consolidated subsidiaries
for all other periods.
Comparison of 1997 to 1996
Net sales increased by $30.2 million, or 13.2%, from $229.9 million in 1996
to $260.1 million in 1997. The increase in net sales included an aggregate
increase in sales of $27.2 million to divisions of The Limited and
$3.6 million to mass merchandisers.
Certain of the Company's customers, including divisions of The Limited,
experienced sluggish sales and declines in revenue and profits in 1997. To the
extent that these financial difficulties continue or worsen, the Company's
revenues and gross profit margins could be adversely affected.
Gross profit (which consists of net sales less product costs, duties and
direct costs attributable to production) for 1997 was $39.1 million, or 15.1%
of net sales, compared to $37.6 million, or 16.3% of net sales, in 1996, an
increase of 4.1% in gross profit. The decrease in the gross profit margin
primarily resulted from nonrecurring costs and inefficiencies related to the
Company's domestic sourcing. The increase in the absolute amount of gross
profit was primarily due to the increase in net sales.
Selling and distribution expenses increased from $7.1 million in 1996 to
$8.5 million in 1997. As a percentage of net sales, these expenses increased
from 3.1% in 1996 to 3.3% in 1997. This percentage increase is primarily due
to an increase in freight and commission expenses, each of which amounted to
0.1% of net sales.
General and administrative expenses decreased from $14.0 million in 1996 to
$13.5 million in 1997. As a percentage of net sales, these expenses declined
from 6.1% in 1996 to 5.2% in 1997. This percentage decrease was primarily due
to a $608,000 decrease in discretionary bonuses awarded to executive officers
in 1997, which amounted to 0.2% of net sales, combined with the effect of the
increase in net sales. After adjusting for the
18
<PAGE>
decrease in executive bonuses, general and administrative expenses increased
by $136,000 and were 5.4% of net sales in 1997 as compared to 6.1% in 1996.
Operating income was $16.5 million in 1996, or 7.1% of net sales, compared
to $17.1 million in 1997, or 6.6% of net sales, due to the factors described
above. This decrease in operating income as a percentage of net sales was due
to the decrease in the gross profit margin, which amounted to 1.2% of net
sales, an increase in selling and distribution expenses, which amounted to
0.2% of net sales, and a decrease in general and administrative expenses,
which amounted to 0.9% of net sales.
Other income increased from $35,000 in 1996 to $413,000, or 0.2% of net
sales, in 1997. This increase is primarily the result of interest income of
$337,000 in 1996 compared to $171,000 in 1997, the realization of no gains on
the sale of securities in 1996 as compared to $237,000 of such income in 1997,
management fee income of $60,000 in 1996 compared to no such income in 1997
and a non-operating expense accrual of $400,000 in 1996 compared to no similar
accrual in 1997. (See Note 8 to Consolidated Financial Statements.) Management
fee income was derived from an agreement with FIS which sourced and sold
garments under the B.U.M. Equipment label until it ceased operations in the
second quarter of 1996.
Income before income taxes was $14.6 million in 1996 and $16.0 million in
1997, representing 6.3% and 6.2% of net sales, respectively. This decrease in
income before taxes as a percentage of net sales was due to the decrease in
the gross profit margin, which amounted to 1.2% of net sales, an increase in
selling and distribution expenses, which amounted to 0.2% of net sales, a
decrease in general and administrative expenses, which amounted to 0.9% of net
sales, and the decrease in interest expense, which amounted to 0.2% of net
sales, as offset by the increase in other income, which amounted to 0.2% of
net sales.
Comparison of 1996 to 1995
Net sales increased by $24.7 million, or 12.0%, from $205.2 million in 1995
to $229.9 million in 1996. The increase in net sales included an aggregate
increase in sales of $40.7 million to divisions of The Limited and
$27.9 million to mass merchandisers.
Gross profit (which consists of net sales less product costs, duties and
direct costs attributable to production) for 1996 was $37.6 million, or 16.3%
of net sales, compared to $32.2 million, or 15.7% of net sales, in 1995, an
increase of 16.6%. The increase in the gross profit margin primarily resulted
from the reduction of low margin sales to Kmart. The increase in the absolute
amount of gross profit was primarily due to the increase in net sales.
Selling and distribution expenses increased from $6.8 million in 1995 to
$7.1 million in 1996. As a percentage of net sales, these expenses declined
from 3.3% in 1995 to 3.1% in 1996. This percentage decrease is primarily due
to a decrease in commission expenses.
General and administrative expenses increased from $13.5 million in 1995 to
$14.0 million in 1996. As a percentage of net sales, these expenses declined
from 6.6% in 1995 to 6.1% in 1996. This percentage decrease was primarily due
to a decrease in the provision for bad debt, which includes an estimated
provision for returns and discounts as well as bad debt expense. The estimated
provision for returns and discounts is primarily based on a percentage of
receivables which increases with the age of the receivables, but is not a
reflection on the credit worthiness of the customer. The decrease in the
estimated provision for returns and discounts during 1996 was $180,000, or
0.1% of net sales, compared to an increase in such provision of $314,000, or
0.2% of net sales, during 1995. The most significant portions of the decrease
in the estimated provision for returns and discounts resulted from changes in
the amount and aging of accounts receivable. An additional favorable variance
in the provision for bad debt resulted from $179,000 of bad debt expense in
1996 compared to $532,000 of such expense in 1995. After adjusting for the
decrease in the provision for bad debt of $847,000, general and administrative
expenses increased by $1.3 million and were 6.2% of net sales in 1995 as
compared to 6.1% in 1996.
19
<PAGE>
Operating income was $10.2 million in 1995, or 5.0% of net sales, compared
to $16.5 million in 1996, or 7.1% of net sales, due to the factors described
above. After adjusting for the decrease in the provision for bad debt expense
and the $1.7 million non-recurring charge related to the grant of the LDA
Option during 1995, operating income as a percentage of net sales increased
from 6.2% in 1995 to 7.1% in 1996. This increase in operating income as a
percentage of net sales was due to the increase in the gross profit margin,
which amounted to 0.6% of net sales, a decrease in selling and distribution
expenses, which amounted to 0.2% of net sales and a decrease in general and
administrative expenses, which amounted to 0.1% of net sales.
Other income decreased from $2.0 million, or 1.0% of net sales, in 1995 to
$35,000 in 1996. This decrease is primarily the result of interest income of
$337,000 in 1996 compared to $773,000 in 1995, management fee income of
$60,000 in 1996 compared to $1.1 million in 1995 and a non-operating expense
accrual of $400,000 in 1996 compared to no similar accrual in 1995. (See Note
8 to Consolidated Financial Statements.) Management fee income was derived
from an agreement with FIS which sourced and sold garments under the B.U.M.
Equipment label until it ceased operations in the second quarter of 1996.
Income before income taxes was $8.3 million in 1995 and $14.6 million in
1996, representing 4.0% and 6.3% of net sales, respectively. After adjusting
for the decrease in the provision for bad debt expense and the $1.7 million
non-recurring charge related to the grant of the LDA Option during 1995,
income before income taxes as a percentage of net sales increased from 5.2% in
1995 to 6.3% in 1996. This increase in income before taxes as a percentage of
net sales was due to the increase in the gross profit margin, which amounted
to 0.6% of net sales, a decrease in selling and distribution expenses, which
amounted to 0.2% of net sales, a decrease in general and administrative
expenses, which amounted to 0.1% of net sales, and the decrease in interest
expense, which amounted to 1.2% of net sales, as offset by the decrease in
other income, which amounted to 1.0% of net sales.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of income in millions of dollars and as
a percentage of net sales, as adjusted in the pro forma manner described in
the footnotes to the tables:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $45.3 $57.6 $58.1 $44.2 $42.1 $68.9 $50.0 $68.9 $53.6 $73.9 $69.2 $63.4
Gross profit.... 6.9 9.2 8.9 7.2 7.1 11.3 8.2 11.0 8.8 11.1 9.7 9.6
Operating
income......... 2.0 3.7 2.8(2) 1.8 2.4 5.5 3.7 4.9 3.4 5.1 4.1 4.5
Net income...... 1.4 2.6 2.0(2) 1.4 1.5 3.6 2.2 2.7 2.0 3.3 2.7 2.8
Pro forma net
income(1)...... 1.1 2.2 1.0(2) 1.4 1.5 3.6 2.2 2.7 2.0 3.3 2.7 2.8
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.... 15.3 16.0 15.3 16.3 16.8 16.4 16.5 16.0 16.4 15.0 14.0 15.1
Operating
income......... 4.5 6.3 4.7(2) 4.0 5.6 8.0 7.5 7.1 6.3 6.9 5.9 7.2
Net income...... 3.1 4.5 3.4(2) 3.1 3.5 5.2 4.4 4.0 3.8 4.4 3.9 4.4
Pro forma net
income(1)...... 2.4 3.8 1.8(2) 3.1 3.5 5.2 4.4 4.0 3.8 4.4 3.9 4.4
</TABLE>
- ---------
(1) The first three quarters of 1995 reflect an income tax provision which is
the sum of (i) U.S. income taxes for the Company computed as if the
Company had been taxed as a C Corporation at an effective tax rate of 40%
for federal and state tax purposes for the period it was an S Corporation
and (ii) the historical tax provision of the Company and its non-U.S.
consolidated subsidiaries for all other periods.
(2) Includes $1.7 million, or 3.0% of net sales, non-recurring charge in the
third quarter of 1995 related to the grant of the LDA Option by the
Original Shareholders.
As is typical for the Company, quarterly net sales fluctuated significantly
because the Company's customers typically place bulk orders with the Company,
and a change in the number of orders shipped in any one period may have a
material effect on the net sales for that period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of its working
capital needs, principally inventory, finished goods shipments-in-transit, and
accounts receivable, including receivables from the Company's contract
manufacturers that relate primarily to fabric purchased by the Company for use
by those manufacturers. (The Company generally purchases fabric for delivery
directly to the manufacturer's factory. The Company then invoices the
manufacturer for the fabric, and reduces payments to the manufacturer for
finished goods by the amount of outstanding invoices.) The Company's primary
sources for working capital are cash flow from operations and borrowings under
the Company's bank credit agreements and factoring agreement.
During 1997, net cash provided by operating activities was $7.0 million,
which resulted primarily from net income of $10.8 million, as partially offset
by a net increase in working capital items, including a decrease of $10.8
million in accounts receivable, as partially offset by an increase in
inventory of $12.4 million and an increase in cash of $4.2 million. The
increase in accounts receivable resulted from an increase in sales as
partially offset by an increase in advances from the factor, which advances
are accounted for as an offset to accounts receivable. At December 31, 1997,
advances from the factor were approximately $11.8 million as compared to $2.1
million of such advances at December 31, 1996.
During 1997, cash flow used in investing activities was $906,000, which was
used for capital expenditures and the purchase of permanent quota.
In 1997, cash flow used in financing activities equaled $1.9 million,
primarily as a result of the repayment of bank borrowings.
21
<PAGE>
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 December 31, 1997, HKSB's
U.S. dollar prime rate equaled seven and one-quarter percent. Interest on cash
advances under SCB's facility accrues at SCB's prime rate for lending Hong
Kong dollars. As of December 31, 1997, SCB's Hong Kong dollar prime rate
equaled nine and one-half percent. These facilities are subject to certain
restrictive covenants including a provision that the aggregate net worth, as
adjusted, of the Company will exceed $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 eliminated its use of 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 December 31, 1997, the prime rates equaled eight
and one-half percent and the LIBOR rates equaled six percent.
The Company has financed its operations to date from its cash flow from
operations, borrowings under its financing facilities and the proceeds from
its initial public offering in July 1995. 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 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. See "Item 1. Business --
General -- Business Strategy -- Vertical Integration" and "Item 1.
Business -- Sourcing." The success of the Company's vertical integration
strategy may depend, in part, on its ability to obtain financing therefor.
There can be no assurance that additional capital, if and when required, will
be available on terms acceptable to the Company, or at all.
The Company does not believe that the moderate levels of inflation in the
United States in the last three years have had a significant effect on net
sales or profitability.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K" for the Company's financial statements, and the notes thereto, and the
financial statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning the directors and executive officers of the
Company is incorporated herein by reference from the section entitled
"Proposal 1 -- Election of Directors" contained in the definitive Proxy
Statement of the Company to be filed pursuant to Regulation 14A within 120
days after the end of the Company's last fiscal year (the "Proxy Statement").
Effective as of July 29, 1997, Cora R. Reyes resigned as a director of the
Company for personal reasons and was replaced by James R. Miller. Effective as
of February 28, 1998, Donald Hecht resigned as a director of the Company for
personal reasons and was not replaced. Concurrently with his resignation as a
director, Mr. Hecht entered into a three-year consulting arrangement with the
Company pursuant to which he will provide such financial and accounting
services as the Company may from time to time request and, in consideration
therefor, has been granted an option to purchase up to 100,000 shares of
Common Stock of the Company at an exercise price of $16.63, the last reported
sales price on the day of grant. The option will vest in four equal annual
installments commencing on the date of the grant, and each of the first three
anniversary dates thereof, and shall have a term of ten years.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is incorporated herein by
reference from the section entitled "Proposal 1 -- Election of Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the sections
entitled "General Information -- Security Ownership of Principal Shareholders
and Management" and "Proposal 1 -- Election of Directors" contained in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is
incorporated herein by reference from the section entitled "Proposal 1 --
Election of Directors -- Certain Relationships and Related Transactions"
contained in the Proxy Statement.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedule. Reference is made to the Index to
Financial Statements and Schedule on page F-1 for a list of financial
statements and the financial statement schedule filed as part of this report.
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's financial statements or the
related notes thereto.
(b) Reports on Form 8-K. None.
(c) Exhibits. The following is a list of exhibits filed as a part of this
report.
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
3.1 Restated Articles of Incorporation of the Company(/1/).
3.2 Restated Bylaws of the Company(/1/)....................
4.1 Specimen of Common Stock Certificate(/2/)..............
10.1 Note in the principal amount of $2,600,000 dated March
15, 1995 in favor of Imperial Bank(/1/)................
10.2 General Security Agreement dated March 15, 1995, by and
between the Company and Imperial Bank(/1/).............
10.3 Factoring Agreement effective as of September 28, 1993,
as amended, by and between the Company and NationsBanc
Commercial Corporation(/1/)............................
10.4 1995 Stock Option Plan dated as of May 1, 1995(/1/)....
10.5 Letter Agreement dated February 17, 1995 between
Tarrant Company Limited and The Hongkong and Shanghai
Banking Corporation Limited(/1/).......................
10.6 Letter dated April 18, 1995 from The Hongkong and
Shanghai Banking Corporation Limited to Tarrant Company
Limited regarding the release of certain security
interests(/1/).........................................
10.7 Commercial Lease dated January 1, 1994 and GET and the
Company(/1/)...........................................
10.8 Tenancy Agreement dated July 15, 1994 between Lynx
International Limited and Tarrant Company Limited, as
amended by that certain Supplementary Tenancy Agreement
dated December 30, 1994 and that certain Second
Supplementary Tenancy Agreement dated December 31,
1994(/1/)..............................................
10.9 Lease Agreement dated June 10, 1994, between Yip Sik
Kin and Tarrant Company Limited (translated from
Chinese)(/1/)..........................................
10.10 Tenancy Contract effective as of December 24, 1994,
between Khalifa al Muhairi and Tarrant Trading Co.
Ltd.(/1/)..............................................
10.11 Agreement dated as of June 1, 1995, by and among Pret-
A-Porter, the Company, French Designers, Inc., Bernard
Aidan, Gerard Guez and Todd Kay(/5/)...................
10.12 Services Agreement dated as of April 1, 1995, by and
between F.I.S., Inc. and the Company(/2/)..............
10.13 Services Agreement dated as of October 1, 1994, by and
between the Company and GET(/1/).......................
10.14 Services Agreement dated as of October 1, 1994, by and
between the Company and Lynx International
Limited(/1/)...........................................
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.15 Indemnification Agreement dated as of March 14, 1995,
by and among the Company, Gerard Guez and Todd
Kay(/2/)...............................................
10.16 Promissory Note in the initial principal amount of $2
million dated February 8, 1995, by Gerard Guez in favor
of the Company(/2/)....................................
10.17 Promissory Note in the initial principal amount of $1
million dated February 8, 1995, by Todd Kay in favor of
the Company(/2/).......................................
10.18 Promissory Note in the principal amount of
$1,334,566.71 dated December 31, 1994, by F.I.S., Inc.
in favor of the Company(/2/)...........................
10.19 Release dated as of June 1, 1995, by and between the
Company and certain other parties signatory
thereto(/2/)...........................................
10.20 Option Agreement dated as of July 28, 1995, by and
among Limited Direct Associates, L.P., Gerard Guez,
Todd Kay and the Company(/5/)..........................
10.21 Registration Rights Agreement dated as of July 28,
1995, by and among the Company and Limited Direct
Associates, L.P.(/5/)..................................
10.22 Reorganization and Tax Indemnification Agreement dated
as of June 13, 1995, by and among the Company and its
shareholders(/5/)......................................
10.23 Employment Agreement dated as of January 1, 1995, by
and between the Company and Gerard Guez(/2/)...........
10.24 Agreement dated as of January 1, 1995, by and between
the Company and Todd Kay(/1/)..........................
10.25 Employment Agreement dated as of January 1, 1994, by
and between the Company and Jimmy Esebag, as amended,
by that certain Amendment No. 1 dated as of June 1,
1995(/2/)..............................................
10.26 Employment Agreement dated as of November 18, 1994, by
and between the Company and Mark B. Kristof(/1/).......
10.27 Employment Agreement dated as of July 5, 1994, by and
between the Company and Bradley R. Kenson(/1/).........
10.28 License Agreement dated January 1, 1994, by and between
the Company and GET(/1/)...............................
10.29 Assignment dated as of June 1, 1995 with respect to the
GET! trademark, executed by GET in favor of the
Company(/2/)...........................................
10.30 Amendment No. 1 to Commercial Lease dated as of April
1, 1995, by and between GET and the Company(/2/).......
10.31 Lease and Services Agreement dated as of June 1, 1995,
by and between Tarrant Company Limited and French
Designers, Inc.(/2/)...................................
10.32 Note in the principal amount of $2,600,000 dated May
15, 1995, by the Company in favor of Imperial
Bank(/2/)..............................................
10.33 Letter Agreement dated May 17, 1995, by and between
Tarrant Company Limited and The Hongkong and Shanghai
Banking Corporation Limited(/2/).......................
10.34 Buying Agency Agreement executed as of December 19,
1992, between F.I.S., Inc. and Tarrant Company
Ltd.(/2/)..............................................
10.35 Buying Agency Agreement executed as of April 4, 1995,
by Azteca Production International, Inc. and Tarrant
Company Ltd., with the Company acknowledging as to
certain matters(/2/)...................................
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.36 Tripartite Agreement Assignment of Factoring Proceeds
(Advances) executed and delivered June 6, 1995, by the
Company, and accepted and agreed to by The Hongkong and
Shanghai Banking Corporation Limited and NationsBanc
Commercial Corporation(/2/)............................
10.36.1 Amendment to Three Party Special Deposit Account
Agreement(/8/).........................................
10.37 Security Agreement (Guaranty of Tarrant Co. Ltd. Debt)
entered into as of June 6, 1995, by and between The
Hongkong and Shanghai Banking Corporation Limited and
the Company(/2/).......................................
10.38 Security Agreement (Tarrant Co. Ltd. Draft Acceptance)
entered into as of June 6, 1995, by and between The
Hongkong and Shanghai Banking Corporation Limited and
the Company(/2/).......................................
10.39 Agreement dated March 14, 1995, by and among Tarrant
Company Limited, Cheung Shing Hong Holding Ltd., Yip
Sik Kin and Lam Kin Fong(/3/)..........................
10.40 Agreement dated March 17, 1995, by and among Tarrant
Company Limited, Cheung Shing Hong Holding Ltd., Yip
Sik Kin and Lam Kin Fong(/3/)..........................
10.41 Underwriting Agreement dated as of July 24, 1995, by
and among the Company, Gerard Guez, Todd Kay and
Prudential Securities Incorporated(/5/)................
10.42 Letter agreement dated August 10, 1995, by and among
the Company and NationsBanc Commercial
Corporation(/4/).......................................
10.42.1 Amendment dated June 9, 1997 to Factoring Agreement
effective as of September 28, 1993, as amended, by and
between the Company and NationsBanc Commercial
Corporation(/8/).......................................
10.43 Letter agreement dated January 30, 1996, by and between
Tarrant Company Limited and The Hongkong Shanghai
Banking Corporation Limited(/5/).......................
10.43.1 Letter agreement dated May 28, 1996, by and between
Tarrant Company Limited and The Hongkong and Shanghai
Banking Corporation Limited(/8/).......................
10.44 Promissory Note in the principal amount of $3 million
dated March 25, 1996, by GET in favor of the
Company(/6/)...........................................
10.45 Deed of Trust dated March 25, 1996 by and between GET
and the Company(/6/)...................................
10.46 Guaranty, Pledge & Security Agreement entered into as
of March 25, 1996, by and between Gerard Guez and the
Company(/6/)...........................................
10.47 Guaranty, Pledge & Security Agreement entered into as
of March 25, 1996, by and between Todd Kay and the
Company(/6/)...........................................
10.48 Letter agreement dated February 22, 1996, by and
between Tarrant Company Limited and Standard Chartered
Bank(/7/)..............................................
10.49 Letter agreement dated March 8, 1996, by and between
Tarrant Company Limited and Standard Chartered
Bank(/7/)..............................................
10.50 Guarantee Agreement entered into as of August 30, 1996,
by and between Standard Chartered Bank and the
Company(/7/)...........................................
10.51 Letter of Undertaking entered into as of August 30,
1996, by and between Standard Chartered Bank and the
Company(/7/)...........................................
10.52 Intercreditor Agreement entered into as of November 1,
1996, between The Hongkong and Shanghai Banking
Corporation Limited, Standard Chartered Bank and
Tarrant Company Limited(/7/)...........................
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.53 Security Agreement entered into as of November 1, 1996,
by and between Standard Chartered Bank and the
Company(/7/)...........................................
10.54 Amendment to Security Agreement (Guaranty of Tarrant
Co. Ltd. Debt) entered into as of November 1, 1996,
between The Hongkong and Shanghai Banking Corporation
Limited and the Company(/7/)...........................
10.55 Agreement dated January 29, 1997 by and among Tarrant
Company Limited, Cheung Shing Hong Holding Ltd., Yip
Sik Kin and Lam Kin Fong(/7/)..........................
10.56 Form of Indemnification Agreement with directors and
certain executive officers(/8/)........................
10.57 Special Deposit Account Agreement(/8/).................
10.58 Accounts Receivable Financing Agreement dated June 13,
1997, by and between the Company and The CIT
Group/Commercial Services, Inc.(/8/)...................
10.58.1 Letter Agreement dated October 1, 1997 regarding
Accounts Receivable Financing Agreement, by and between
the Company and The CIT Group/Commercial Services,
Inc.(/9/)..............................................
10.59*+ Asset Purchase Agreement dated February 18, 1998, by
and between Marble Limited and MGI International
Limited................................................
10.60*+ Asset Purchase Agreement dated February 18, 1998, by
and between the Company and Marshall Gobuty
International U.S.A., Inc..............................
10.61 Employment Agreement dated February 23, 1998, by and
between the Company and Marshall Gobuty................
10.62 Noncompetition Agreement dated February 23, 1998, by
and between Marshall Gobuty International U.S.A., Inc.
and Marshall Gobuty, on the one hand, and the Company,
on the other hand......................................
10.63 Noncompetition Agreement dated February 23, 1998, by
and between MGI International Limited and Marshall
Gobuty, on the one hand, and the Company, on the other
hand...................................................
23 Consent of Ernst & Young LLP...........................
27 Financial Data Summary.................................
</TABLE>
- ----------
* Confidential treatment has been requested for portions of this document.
+ All schedules and exhibits have been omitted. Any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange
Commission upon request.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on May 4, 1995 (File No.
33-91874).
(2) Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on June 15, 1995.
(3) Filed as an exhibit to Amendment No. 2 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 11, 1995.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 30, 1995.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements
Report of Independent Auditors -- Ernst & Young, LLP..................... F-2
Consolidated Balance Sheets -- December 31, 1996 and 1997................ F-3
Consolidated Statements of Income -- Three year period ended December 31,
1997.................................................................... F-4
Consolidated Statements of Shareholders' Equity -- Three year period
ended December 31, 1997................................................. F-5
Consolidated Statements of Cash Flows -- Three year period ended December
31, 1997................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts......................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Tarrant Apparel Group
We have audited the accompanying consolidated balance sheets of Tarrant
Apparel Group and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years ended December 31, 1997. Our audits also
included the financial statement schedule for each of the three years in the
period ended December 31, 1997, listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tarrant
Apparel Group and subsidiaries at December 31, 1996 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule for each of the three years in the period ended December
31, 1997, when considered in relation to the basic financial statements, taken
as a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Los Angeles, California
February 20, 1998
F-2
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 1,120,456 $ 5,305,129
Accounts receivable, net (Note 2)..................... 44,483,884 34,078,352
Due from affiliates (Note 12)......................... 96,416 3,470
Due from officers (Note 12)........................... -- 1,601,670
Inventory (Note 3).................................... 10,820,169 23,266,196
Temporary quota....................................... 1,723,085 2,874,382
Prepaid expenses...................................... 458,087 1,203,931
Prepaid income taxes.................................. 990,771 478,050
Deferred tax asset.................................... 803,482 --
----------- -----------
Total current assets............................... 60,496,350 68,811,180
Property and equipment, net (Note 4)................... 2,618,869 2,707,257
Permanent quota, net................................... 211,085 145,268
Other assets........................................... 93,394 196,973
----------- -----------
Total assets....................................... $63,419,698 $71,860,678
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings (Note 6).............................. $ 6,809,676 $ 4,287,518
Accounts payable...................................... 14,200,229 12,549,961
Accrued expenses...................................... 4,880,115 5,117,183
Income taxes.......................................... 576,947 969,115
Deferred tax liability................................ -- 582,957
----------- -----------
Total current liabilities.......................... 26,466,967 23,506,734
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none
issued and outstanding............................... -- --
Common stock, no par value, 10,000,000 shares
authorized;
6,552,276 shares (1996) and 6,609,964 (1997) issued
and outstanding...................................... 15,485,734 16,100,483
Contributed capital................................... 1,434,259 1,434,259
Retained earnings..................................... 20,032,738 30,819,202
----------- -----------
Total shareholders' equity......................... 36,952,731 48,353,944
----------- -----------
Total liabilities and shareholders' equity......... $63,419,698 $71,860,678
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................ $205,173,716 $229,861,024 $260,092,777
Cost of sales........................ 172,959,246 192,287,596 220,995,754
------------ ------------ ------------
Gross profit......................... 32,214,470 37,573,428 39,097,023
Selling and distribution expenses.... 6,761,320 7,124,732 8,498,976
General and administrative expenses.. 13,492,382 13,989,826 13,518,441
Nonrecurring charge related to LDA
option.............................. 1,734,259 -- --
------------ ------------ ------------
Income from operations............... 10,226,509 16,458,870 17,079,606
Interest expense..................... (4,002,518) (1,864,734) (1,470,762)
Interest income...................... 772,766 336,785 171,385
Other income (expense) (Note 8)...... 1,273,777 (301,509) 241,235
------------ ------------ ------------
Income before provision for income
taxes............................... 8,270,534 14,629,412 16,021,464
Provision for income taxes (Note 7).. 960,256 4,627,786 5,235,000
------------ ------------ ------------
Net income........................... $ 7,310,278 $ 10,001,626 $ 10,786,464
============ ============ ============
Net income per share:
Basic............................... $ 1.37 $ 1.54 $ 1.64
============ ============ ============
Diluted............................. $ 1.37 $ 1.53 $ 1.59
============ ============ ============
Pro forma data--1995 (Note 16,
unaudited)
Income before provision for income
taxes.............................. $ 8,270,534
Pro forma adjustment to eliminate
LDA option......................... 1,734,259
------------
Pro forma income before income
taxes.............................. 10,004,793
Pro forma provision for income
taxes.............................. (2,596,562)
------------
Pro forma net income after
adjustment for nonrecurring charge
and pro forma provision for income
taxes.............................. $ 7,408,231
============
Pro forma net income per share...... $ 1.38
============
Income before provision for income
taxes.............................. $ 8,270,534
Pro forma provision for income
taxes.............................. (2,596,562)
------------
Pro forma net income after
adjustment for pro forma taxes..... $ 5,673,972
============
Pro forma net income per share...... $ 1.06
============
Weighted average shares outstanding:
Basic............................... 5,353,261 6,507,933 6,587,628
Diluted............................. 5,353,261 6,547,831 6,783,627
</TABLE>
See accompanying notes.
F-4
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON CONTRIBUTED RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1994....................... $ 126,923 $ -- $ 7,720,834 $ 7,847,757
Net income................. -- -- 7,310,278 7,310,278
LDA option................. -- 1,434,259 -- 1,434,259
Initial public offering.... 14,823,299 -- -- 14,823,299
Distribution to Original
Shareholders.............. -- -- (5,000,000) (5,000,000)
----------- ---------- ----------- -----------
Balance at December 31,
1995....................... 14,950,222 1,434,259 10,031,112 26,415,593
Net income................. -- -- 10,001,626 10,001,626
Exercise of stock options.. 446,634 -- -- 446,634
Income tax benefit from
exercise
of stock options.......... 88,878 -- -- 88,878
----------- ---------- ----------- -----------
Balance at December 31,
1996....................... 15,485,734 1,434,259 20,032,738 36,952,731
Net income................. -- -- 10,786,464 10,786,464
Exercise of stock options.. 495,254 -- -- 495,254
Income tax benefit from
exercise of stock options. 119,495 -- -- 119,495
----------- ---------- ----------- -----------
Balance at December 31,
1997....................... $16,100,483 $1,434,259 $30,819,202 $48,353,944
=========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $ 7,310,278 $ 10,001,626 $ 10,786,464
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Nonrecurring charge related to LDA
option............................ 1,734,259 -- --
Deferred taxes..................... (866,577) 127,372 598,273
Depreciation and amortization...... 881,924 905,786 867,022
(Gain) loss on sale of fixed
assets............................ -- 57,375 3,698
Stock compensation expense......... -- 66,050 --
Provision for returns and
discounts......................... 1,097,499 (432,594) (359,344)
Changes in operating assets and
liabilities:
Accounts receivable............... (14,275,674) (14,818,441) 10,764,877
Due from affiliates and officers.. (354,070) 764,689 (1,508,724)
Inventory......................... (2,319,707) 2,988,492 (12,446,028)
Temporary quota................... (116,799) (349,717) (1,151,297)
Prepaid expenses.................. 1,329,633 (147,000) (849,422)
Prepaid income taxes.............. 264,225 (990,771) 1,300,887
Accounts payable.................. (10,272) 3,076,430 (1,650,268)
Accrued expenses and income tax
payable.......................... 549,869 1,031,877 629,236
------------ ------------ ------------
Net cash (used in) provided by
operating activities............ (4,775,412) 2,281,174 6,985,374
INVESTING ACTIVITIES
Purchase of fixed assets............. (658,495) (466,272) (764,087)
Sale of fixed assets................. 94,874 218,306 --
Purchase of permanent quota.......... (341,928) (133,002) (129,205)
Investment in and advances to joint
venture............................. 1,346,854 -- --
------------ ------------ ------------
Net cash provided by (used in)
investing activities............ 441,305 (380,968) (893,292)
FINANCING ACTIVITIES
Bank borrowings, net................. (2,772,863) (9,130,422) (2,522,158)
Restricted cash...................... 4,760,900 -- --
Long-term obligations................ (98,584) -- --
Distribution to Original
Shareholders........................ (5,000,000) -- --
Net proceeds from issuance of common
stock............................... 14,823,299 -- --
Exercise of stock options including
related tax benefit................. -- 469,462 614,749
------------ ------------ ------------
Net cash provided by (used in)
financing activities............ 11,712,752 (8,660,960) (1,907,409)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents......................... 7,378,645 (6,760,754) 4,184,673
Cash and cash equivalents at
beginning of year................... 502,565 7,881,210 1,120,456
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 7,881,210 $ 1,120,456 $ 5,305,129
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Consolidation
On July 28, 1995, Tarrant Apparel Group, a California Corporation (formerly
Fashion Resource, Inc.) (the Parent Company or the Company) completed an
initial public offering (the Offering) of 2,000,000 shares of the Parent
Company's common stock at a price of $9.00 per share. The net proceeds to the
Company, net of underwriting discounts and commissions and offering expenses,
were $14.8 million.
The accompanying financial statements for fiscal 1995 through the
Reorganization, as defined below, in July 1995 consist of the combination of
Tarrant Apparel Group; the following affiliated United States corporations:
Alpine Summit Licensing Co. Inc. (Alpine), G.T.S. Fabrics, Inc. (GTS), NO!
Jeans, Inc. (NO) and GET, Inc. (GET); the following Hong Kong corporations:
Tarrant Company Limited (Tarrant HK), Tarrant International Company Limited
(Tarrant International) and Marble Limited (Marble); and Tarrant Trading
Limited, a United Arab Emirates corporation (Tarrant UAE). NO and Marble are
wholly-owned subsidiaries of Tarrant HK. Tarrant HK owns a 49% interest in
Tarrant UAE. However, since Tarrant HK effectively controls Tarrant UAE, the
results of Tarrant UAE had been consolidated. The third-party interest in
Tarrant UAE is immaterial.
Prior to the Reorganization, these entities were collectively referred to as
Tarrant Apparel Group and Affiliates (the Combined Group). Alpine, GTS, GET
and Tarrant International, which became inactive, were distributed to Gerard
Guez and Todd Kay (the Original Shareholders) in September 1994 and
accordingly, ceased to be included in the Combined Group.
In order to facilitate the Offering, the Original Shareholders of the
affiliates contributed all of the capital stock of the affiliates and their
minority interest in Tarrant UAE to Tarrant Apparel Group and as a result, the
affiliates became direct or indirect wholly-owned subsidiaries of the Company
(the Reorganization). In addition, a stock dividend of 14,999 shares for each
outstanding share of Tarrant Apparel Group was effected.
The Company serves both specialty retail and mass merchandise store chains
by designing, merchandising and contracting for the manufacture and selling of
casual, moderately priced apparel, primarily for women under private label.
The accompanying financial statements have been prepared on a combined basis
through the Reorganization due to common ownership and business. The
combination of companies was accounted for in a manner similar to a pooling of
interest. All significant intercompany investments, transactions and balances
have been eliminated. The combination excludes certain other entities under
common ownership or control of the Original Shareholders, since these entities
engage in unrelated business lines and, in certain instances, have ceased
operations.
Revenue Recognition
Revenues are recorded, net of anticipated returns, at the time of shipment
of merchandise. Licensing revenues are recognized on an accrual basis,
pursuant to the terms of the underlying license agreements and are included in
other income.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased.
F-7
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Quota
The Company purchases quota rights to be used in the importation of its
products from certain foreign countries. The effect of quota transactions is
accounted for as product costs.
Permanent quota entitlements were principally obtained through free
allocations by the Hong Kong Government pursuant to an import restraint
between Hong Kong and the United States and are renewable on an annual basis,
based upon the prior year utilization. Permanent quota entitlements acquired
from outside parties are amortized over three years on a straight-line basis,
and amounted to $211,000, net of amortization of $730,000 at December 31, 1996
and $145,000, net of amortization of $925,000 at December 31, 1997.
Temporary quota represents quota rights acquired from other permanent quota
entitlement holders on a temporary basis. Temporary quota has a maximum life
of twelve months. The cost of temporary quota purchased for the current year
utilization has been assigned to inventory purchases while the cost of
temporary quota acquired for usage in the year following the balance sheet
date is recorded as a current asset.
Property and Equipment
Property and equipment is recorded at cost. Additions and betterments are
capitalized while repair and maintenance costs are charged to operations as
incurred. Depreciation of property and equipment is provided for by the
straight-line method over their estimated useful lives, 5 to 7 years.
Leasehold improvements are amortized using the straight-line method over the
lesser of their estimated useful life or the term of the lease. Upon
retirement or disposal of property and equipment, the cost and related
accumulated depreciation are eliminated from the accounts and any gain or loss
is reflected in the statements of income.
Income Taxes
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which prescribes the use of the liability
method to compute the differences between the tax basis of assets and
liabilities and the related financial reporting amounts using currently
enacted tax laws and rates.
The Company and its U.S. affiliates (other than NO and GTS) were treated as
Subchapter S Corporations for federal and California income tax purposes
through the termination date of the S Corporation status on July 28, 1995 in
connection with the Reorganization. S Corporations pay tax to the State of
California on their taxable incomes at rates of 1 1/2%. Effective with the
termination, the Parent Company is subject to federal and state corporate
income taxes.
Upon termination of the Subchapter S election, deferred income taxes became
an asset of the Company and were recorded in the balance sheet with a
corresponding credit to the statement of income. The deferred tax asset,
principally relating to the temporary difference arising from the treatment of
the allowance for returns and discounts for book and tax purposes, as of July
31, 1995 was approximately $785,000.
The Company's Hong Kong corporate affiliates are taxed at an effective Hong
Kong rate of 16 1/2%. No domestic tax provision has been provided for $30.2
million of unremitted retained earnings of these Hong Kong corporations, as
the Company intends to maintain these amounts in Hong Kong on a permanent
basis in support of its working capital requirements.
F-8
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Income Per Share
Net income per share has been computed in accordance with Financial
Accounting Standard Board (FASB) Statement No. 128, "Earnings Per Share" (see
Note 10).
Pro forma net income per share in 1995 is based on the weighted average of
the 4,500,000 shares outstanding prior to the Offering and the 2,000,000
shares issued pursuant to the Offering.
Product Design, Advertising and Sales Promotion Costs
Product design, advertising and sales promotion costs are expensed as
incurred. Product design, advertising and sales promotion costs included in
operating expenses in the accompanying statements of income (excluding the
costs of manufacturing samples) amounted to approximately $1,475,000,
$1,419,000 and $1,528,000 in 1995, 1996 and 1997, respectively.
Foreign Currency Translation
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 December 31, 1997, the Hong Kong
subsidiaries have retained earnings of $30.2 million and an intercompany
receivable due from Tarrant Apparel Group of $30.9 million.
Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Unless
otherwise described, the fair values of financial instruments approximate
their recorded values.
The Company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115). Under SFAS No. 115, marketable securities portfolios consisting of debt
and equity securities held primarily for sale in the near term (trading
securities) are valued at fair value, with realized and unrealized holding
gains and losses included in the statements of income. The Company realized
losses on the sale of marketable securities of approximately $0 and $16,000 in
1995 and 1996, respectively, and a gain of $237,000 in 1997.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of cash equivalents, trade accounts
receivable and amounts due from factor.
F-9
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's products are primarily sold to mass merchandisers and
specialty retail stores. These customers can be significantly affected by
changes in economic, competitive or other factors. The Company makes
substantial sales to a relatively few, large customers. In order to minimize
the risk of loss, the Company assigns a significant portion of its domestic
accounts receivable to a factor without recourse or requires letters of credit
from its customers prior to the shipment of goods. For nonfactored
receivables, credit limits, ongoing credit evaluations and account monitoring
procedures are utilized to minimize the risk of loss. Collateral is generally
not required. The following table presents the percentage of net sales
concentrated with certain customers. Customer A represents a group of
customers under common ownership.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Customer A............................................... 55.3% 67.1% 69.7%
Customer B............................................... 13.6 24.3 18.7
Customer C............................................... 19.3 1.9 --
</TABLE>
Products representing approximately 85% of the Company's net sales, on the
basis of the free on board cost at the supplier's plant, were manufactured by
third party contractors located in foreign countries. There can be no
assurance that the Company will not experience difficulties with third parties
responsible for the manufacture of its products.
The Company maintains demand deposits with several major banks. At times,
cash balances may be in excess of Federal Deposit Insurance Corporation or
equivalent foreign insurance limits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. The Company has elected to account for its stock
compensation arrangements under the provisions of APB 25, "Accounting for
Stock Issued to Employees." The Company adopted the provisions for pro forma
disclosure requirements of SFAS 123 in fiscal 1996.
F-10
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
U.S. trade accounts receivable................... $22,024,048 $13,411,719
Foreign trade accounts receivable................ 8,198,978 9,466,193
Due from factor.................................. 16,034,018 12,028,633
Other receivables................................ 141,996 727,619
Allowance for returns and discounts.............. (1,915,156) (1,555,812)
----------- -----------
$44,483,884 $34,078,352
=========== ===========
</TABLE>
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 eliminated its use of the factor. The Company may receive an
advance from NBCC of up to 90% of certain accounts receivable. Such advances
approximated $2.1 million and $11.8 million at December 31, 1996 and 1997,
respectively. CIT will advance up to 100% of the amount of certain accounts
receivable plus an over-advance of up to $10 million, up to a maximum amount
of $25 million. 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 December 31, 1997, the prime rates equaled eight
and one-half percent and the LIBOR rates equaled six percent.
3.INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Raw materials..................................... $ 2,113,849 $ 4,022,298
Work-in-process................................... 1,701,023 4,315,703
Finished goods shipments-in-transit............... 2,252,118 5,655,461
Finished goods.................................... 4,753,179 9,272,734
----------- -----------
$10,820,169 $23,266,196
=========== ===========
</TABLE>
Raw materials are composed of fabric and trim accessories.
4.PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Equipment, furniture and fixtures.................... $2,641,250 $3,300,921
Leasehold improvements............................... 2,098,986 2,147,474
Vehicles............................................. 69,826 94,826
---------- ----------
4,810,062 5,543,221
Less accumulated depreciation and amortization....... 2,191,193 2,835,964
---------- ----------
$2,618,869 $2,707,257
========== ==========
</TABLE>
F-11
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1995, the Company agreed to transfer certain residential real
property to one of the Original Shareholders in exchange for the assumption by
the Original Shareholder of the mortgage loan relating to the property.
5.INVESTMENT IN AND ADVANCES TO JOINT VENTURE
In 1994, the Company entered into a corporate joint venture, Litex Ltd.
(Litex), a Hong Kong corporation, with a third party in Hong Kong to establish
and operate a garment manufacturing facility in the People's Republic of
China. The Company sold its 50% interest in the joint venture to the third
party in March 1995. The 50% investment in Litex has been accounted for under
the equity method.
For the year ended December 31, 1995, the Company had sales of fabric of
$2,011,000 and purchases of $2,739,000 of finished garments from companies
controlled by the joint venture partners of Litex.
In March 1995, the Company entered an agreement with the third party in the
Litex joint venture whereby the third party acquired the Company's interest in
Litex for consideration of $2,000,000, of which $545,000 was paid in cash with
the balance to be received through deductions taken against a future
production purchase agreement with the third party ($391,000 and $225,000 was
received through deductions taken against 1995 and 1996 production,
respectively). The deferred gain on the sale of approximately $839,000 was
settled by the payment of approximately $419,000 from the third party to the
Company in February 1997.
6.BANK BORROWINGS
Bank borrowings consist of import trade bills payable of $6,810,000 and
$4,288,000 as of December 31, 1996 and 1997, respectively.
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 December 31, 1997, HKSB's
U.S. dollar prime rate equaled seven and one-quarter percent. Interest on cash
advances under SCB's facility accrues at SCB's prime rate for lending Hong
Kong dollars. As of December 31, 1997, SCB's Hong Kong dollar prime rate
equaled nine and one-half percent. These facilities are subject to certain
restrictive covenants including a provision that the aggregate net worth, as
adjusted, of the Company will exceed $30 million, that the Company will not
incur two consecutive quarterly losses and that the Company will maintain a
certain debt to equity ratio. As of December 31, 1997, this aggregate net
worth, as adjusted, amounted to approximately $48 million and as of December
31, 1996 and 1997, there were no outstanding borrowings, under the HKSB and
SCB facilities.
F-12
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.INCOME TAXES
The provision for domestic and foreign income taxes is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................ $ 637,565 $2,673,505 $2,470,848
State.................................. 66,046 757,017 741,581
Foreign................................ 996,439 1,324,636 1,424,298
---------- ---------- ----------
1,700,050 4,755,158 4,636,727
Deferred (credit):
Federal................................ (572,527) (70,081) 702,539
State.................................. (163,080) (53,704) (112,257)
Foreign................................ (4,187) (3,587) 7,991
---------- ---------- ----------
(739,794) (127,372) 598,273
---------- ---------- ----------
Total................................ $ 960,256 $4,627,786 $5,235,000
========== ========== ==========
</TABLE>
The source of income before the provision for taxes is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
United States............................. $2,396,904 $ 7,425,497 $ 7,459,582
Foreign................................... 5,873,630 7,203,915 8,561,882
---------- ----------- -----------
Total................................... $8,270,534 $14,629,412 $16,021,464
========== =========== ===========
</TABLE>
For federal and state income tax purposes for fiscal 1995 through the
Reorganization, no deferred taxes had been recognized because the taxpaying
entities within the Company and its affiliates were S Corporations. The
effective rate paid by these S Corporations is immaterial to the financial
statements. Foreign deferred income taxes result primarily from temporary
differences in the recognition of bad debt and depreciation expenses for tax
and financial reporting purposes. The resulting foreign deferred income tax
liability amounted to approximately $62,000 and $70,000 at December 31, 1996
and 1997, respectively.
Upon termination of the Subchapter S election, federal and state deferred
income taxes were recognized as an asset by the Company with a corresponding
credit to the statement of income.
A reconciliation of the statutory federal income tax provision to the
reported tax provision on income is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income tax based on federal statutory
rate.................................. $ 2,811,981 $ 4,974,000 $ 5,447,297
State income taxes..................... 43,590 464,186 415,354
Effect of Subchapter S tax status...... (191,223) -- --
Deferred income taxes recorded upon
change in tax status from an
S Corporation to a C Corporation...... (785,375) -- --
Effect of foreign income taxes at lower
tax rates............................. (1,000,595) (1,128,282) (1,478,751)
Valuation allowance and other.......... 81,878 317,882 851,100
----------- ----------- -----------
$ 960,256 $ 4,627,786 $ 5,235,000
=========== =========== ===========
</TABLE>
F-13
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Current deferred tax assets:
Provision for doubtful accounts and unissued
credits........................................ $ 557,961 $ 370,691
Provision for other reserves.................... 271,185 363,309
Deferred compensation and benefits.............. 95,439 150,108
State taxes..................................... 250,384 242,724
---------- -----------
Total current deferred tax assets............ 1,174,969 1,126,832
Current deferred tax liabilities:
Accounts receivable valuation................... -- (479,929)
Other........................................... -- (858,373)
---------- -----------
-- (1,338,302)
Valuation allowance for deferred tax assets...... (371,487) (371,487)
---------- -----------
Net current deferred tax asset (liability)....... $ 803,482 $ (582,957)
========== ===========
</TABLE>
8.COMMITMENTS AND CONTINGENCIES
The Company has entered into various noncancelable operating lease
agreements, principally for executive office and warehousing facilities, with
unexpired terms in excess of one year. The future minimum lease payments under
these noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
---------- --------
<S> <C> <C>
1998.................................................. $1,268,898 $ 95,880
1999.................................................. 1,268,898 7,303
2000.................................................. 1,298,666 --
2001.................................................. 1,298,666 --
2002.................................................. 1,329,924 --
Thereafter............................................ 1,666,698 --
---------- --------
Total future minimum lease payments................. $8,131,750 $103,183
========== ========
</TABLE>
Certain of the operating leases contain provisions for additional rent based
upon increases in the operating costs, as defined, of the premises. Total rent
expense under the operating leases amounted to approximately $1,468,000,
$1,535,000, and $1,509,000 for 1995, 1996, and 1997, respectively.
The Company had open letters of credit of $16,534,000 and $14,432,000 as of
December 31, 1996 and 1997, respectively.
The Company had two employment agreements, which expired December 31, 1997,
with the Original Shareholders providing for base compensation and other
incentives. Commitments under these agreements for base compensation amounted
to $1,500,000 for 1997. The Company currently is negotiating to extend the
terms of these agreements.
The Company recorded a $400,000 charge in other expense during the year
ended December 31, 1996 to reflect potential obligations to the Original
Shareholders with respect to an agreement entered into concurrently with the
Offering.
F-14
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Company's management,
resolution of such matters will not have a material effect on its financial
position or results of operations.
In 1997 the Company and the Original Shareholders were named, among others,
as co-defendents in a civil lawsuit brought by the American Textile
Manufacturers Institute (ATMI). The civil lawsuit alleges, among other things,
that the defendents knowingly filed improper statements about the country of
origin of imported merchandise with the United States Customs Service. On
November 13, 1997 the civil lawsuit was dismissed with prejudice and final
judgement was entered to that effect, subject to appeal. On December 22, 1997,
the Federal judge granted ATMI's motion to excuse himself from the case. At
the same time, the judge denied the motion to vacate the decision and judgment
previously entered dismissing the case. Consequently, a new judge will
consider whether the decision should be altered or amended. In the opinion of
the Company's management, resolution of such matter will not have a material
effect on its financial position or results of operations.
9.EQUITY
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The Company's 1995 Stock Option Plan, as amended and restated in January
1997 (the Plan), has authorized the grant of both incentive and non-qualified
stock options to officers, employees, directors and consultants of the Company
for up to 1,300,000 shares of the Company's common stock. The exercise price
of incentive options must be equal to 100% of fair market value of common
stock on the date of grant and the exercise price of non-qualified options
must not be less than the par value of a share of common stock on the date of
grant. The Plan was also amended to expand the types of awards which may be
granted pursuant thereto to include stock appreciation rights, restricted
stock and other performance-based benefits.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: weighted-average risk-free interest rate of 6% for 1996 and 1997;
dividend yields of 0% for 1996 and 1997; weighted-average volatility factors
of the expected market price of the Company's common stock of 0.52 for 1996
and 0.53 for 1997; and a weighted-average expected life of the option of four
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in the management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-15
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Pro forma net income................................ $9,681,860 $9,999,383
Pro forma earnings per share........................ $ 1.47 $ 1.50
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1997
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 545,665 $ 9.00 747,555 $10.75
Granted...................... 376,000 12.18 39,000 15.24
Exercised.................... (52,276) 7.28 (57,688) 8.59
Forfeited.................... (121,834) 8.80 (19,000) 7.17
-------- ------ ------- ------
Outstanding at end of year.... 747,555 $10.75 709,867 $11.27
======== ====== ======= ======
Exercisable at end of year.... 148,164 284,283
Weighted average per option
fair value of options granted
during the year.............. $ 5.93 $ 3.42
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$6.00 to $18.875. The weighted average remaining contractual life of those
options is 8.75 years. Options vest over a period of three or four years from
respective grant dates.
10.EARNINGS PER SHARE
In February 1997, the FASB issued "Earnings Per Share" (Statement No. 128)
establishing standards for computing and presenting earnings per share for
publicly-held common stock or potential common stock. Statement No. 128
supersedes the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings Per Share and simplifies the standards for
computing earnings per share. In addition, Statement No. 128 replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share, requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation. The statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997, with earlier application not permitted. All periods
presented reflect the adoption of Statement No. 128. The impact of amounts
previously reported was not material.
F-16
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the numerator and denominator of basic earnings per
share and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Basic EPS Computation:
Numerator.................................. $7,310,278 $10,001,626 $10,786,464
Denominator:
Weighted average common shares
outstanding.............................. 5,353,261 6,507,933 6,587,628
---------- ----------- -----------
Total shares............................ 5,353,261 6,507,933 6,587,628
---------- ----------- -----------
Basic EPS................................... $ 1.37 $ 1.54 $ 1.64
========== =========== ===========
Diluted EPS Computation:
Numerator.................................. $7,310,278 $10,001,626 $10,786,464
Denominator:
Weighted average common shares
outstanding.............................. 5,353,261 6,507,933 6,587,628
Incremental shares from assumed exercise
of options............................... -- 39,898 195,999
---------- ----------- -----------
Total shares............................ 5,353,261 6,547,831 6,783,627
---------- ----------- -----------
Diluted EPS................................. $ 1.37 $ 1.53 $ 1.59
========== =========== ===========
</TABLE>
11.SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest..................... $3,433,049 $ 525,690 $ 659,599
========== ========== ==========
Cash paid for income taxes................. $1,036,908 $6,036,049 $2,824,753
========== ========== ==========
</TABLE>
12.RELATED-PARTY TRANSACTIONS
The Company has provided management and administrative services to
noncombined affiliates, including executive and employee compensation. The
management fees were based on net sales until the last such noncombined
affiliate ceased to operate in the second quarter of 1996. The Company charged
management and administrative fees of $1,068,000, $60,000 and $0 for the years
ended December 31, 1995, 1996, and 1997, respectively.
Other related-party transactions, consisting primarily of purchases and
sales of finished goods and raw materials, are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- -------- ----------
<S> <C> <C> <C>
Sales to noncombined affiliates.............. $4,399,000 $248,000 $ --
Sales to other related parties............... 809,000 139,000 3,531,000
Purchases from other related parties......... 3,379,000 19,000 620,000
</TABLE>
As of December 31, 1996 and 1997, noncombined affiliates were indebted to
the Company in the amounts of $96,000 and $3,000, respectively. Total interest
paid by noncombined affiliates and the Original Shareholders was $140,000 and
$71,000 for the years ended December 31, 1996 and 1997, respectively.
F-17
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has, from time to time, advanced funds to officers including the
Original Shareholders and to corporations owned by the Original Shareholders.
The maximum outstanding amounts of such loans during 1996 and 1997 were $3.0
million and $1.6 million, respectively. Loans made to the Original
Shareholders in 1995 bore interest at the lesser of 12% or the highest rate
permissible by law. These loans were repaid in full, in part by offset against
distributions made to the Original Shareholders at the closing of the
Offering. Loans in 1996 and 1997 bore interest at the rate of 8% and 7% per
annum, respectively.
In each of 1996 and 1997, the Company advanced an aggregate of $2.0 million
to a corporation controlled by parties related to one of the Original
Shareholders. Such advances were repaid within 30 days.
Under lease agreements entered into between the Company and two entities
owned by the Original Shareholders, the Company paid $1,259,000 in 1995 and
$1,241,000 in 1996 and 1997, for rent for office and warehouse facilities.
13.OPERATIONS BY GEOGRAPHIC AREAS
The Company operates primarily in one industry segment, the design,
manufacturing and importation of private label, moderately-priced, casual
apparel. Information about the Company's operations in the United States and
Asia is presented below. Intercompany revenues and assets have been eliminated
to arrive at the consolidated amounts.
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED AND
STATES ASIA ELIMINATIONS TOTAL
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
1995
Sales..................... $200,006,020 $ 5,167,696 $ -- $205,173,716
Intercompany sales........ -- 117,216,683 (117,216,683) --
------------ ------------ ------------- ------------
Total revenue............. $200,006,020 $122,384,379 $(117,216,683) $205,173,716
============ ============ ============= ============
Income from operations.... $ 5,089,066 $ 5,137,443 $ -- $ 10,226,509
============ ============ ============= ============
Total assets.............. $ 45,705,989 $ 39,457,225 $ (27,322,816) $ 57,840,398
============ ============ ============= ============
1996
Sales..................... $226,919,733 $ 2,941,291 $ -- $229,861,024
Intercompany sales........ -- 140,167,389 (140,167,389) --
------------ ------------ ------------- ------------
Total revenue............. $226,919,733 $143,108,680 $(140,167,389) $229,861,024
============ ============ ============= ============
Income from operations.... $ 9,478,767 $ 6,980,103 $ -- $ 16,458,870
============ ============ ============= ============
Total assets.............. $ 51,149,844 $ 41,675,253 $ (29,405,399) $ 63,419,698
============ ============ ============= ============
1997
Sales..................... $252,136,375 $ 7,956,402 $ -- $260,092,777
Intercompany sales........ -- 148,613,075 (148,613,075) --
------------ ------------ ------------- ------------
Total revenue............. $252,136,375 $156,569,477 $(148,613,075) $260,092,777
============ ============ ============= ============
Income from operations.... $ 8,580,940 $ 8,498,666 $ -- $ 17,079,606
============ ============ ============= ============
Total assets.............. $ 56,351,902 $ 46,656,041 $ (31,147,265) $ 71,860,678
============ ============ ============= ============
</TABLE>
F-18
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.EMPLOYEE BENEFIT PLANS
On August 1, 1992, Tarrant HK established a defined contribution retirement
plan covering all of its Hong Kong employees whose period of service exceeds
12 months. Plan assets are monitored by a third-party investment manager and
are segregated from those of Tarrant HK. Participants may contribute up to 5%
of their salary to the plan. Annual matching contributions are made by the
Company. Costs of the plan charged to operations for 1995, 1996 and 1997
amounted to approximately $28,000, $46,000 and $59,000, respectively.
On July 1, 1994, the Parent Company established a defined contribution
retirement plan covering all of its U.S. employees whose period of service
exceeds 12 months. Plan assets are monitored by a third-party investment
manager and are segregated from those of the Parent Company. Participants may
contribute from 1% to 15% of their pre-tax compensation up to effective
limitations specified by the Internal Revenue Service. The Company's
contributions to the plan are based on a 50% (100% effective July 1, 1995)
matching of participants' contributions, not to exceed 6% (5% effective July
1, 1995) of the participants' annual compensation. In addition, the Company
may also make a discretionary annual contribution to the plan. Costs of the
plan charged to operations for 1995, 1996 and 1997 amounted to approximately
$68,000, $121,000 and $143,000 respectively.
On December 27, 1995, the Company established a deferred compensation plan
for executive officers. Participants may contribute a specific portion of
their salary to such plan. The Company does not contribute to the Plan.
On December 20, 1996, the Compensation Committee of the Company's Board of
Directors established the Incentive Compensation Plan, which provides for both
discretionary bonuses and bonus amounts upon achieving certain earnings
thresholds for certain members of management. The adoption of this plan
received shareholder approval at the 1997 annual meeting.
15.LDA OPTION
The consolidated statements of income reflect a charge related to the
granting by the Original Shareholders of a four-year option (the LDA Option)
to Limited Direct Associates, L.P. (LDA), a limited partnership, the general
and limited partners of which are subsidiaries of The Limited, Inc. and the
granting by the Parent Company of registration rights to LDA pertaining to the
option shares. Historically sales to divisions of The Limited, Inc. have
represented a significant portion of the Company's sales. Subject to certain
anti-dilution provisions, the LDA Option grants LDA the right to purchase from
the Original Shareholders an aggregate of approximately 10% (649,999 shares)
of the Parent Company's common stock at a price per share of $7.20. For
accounting purposes, even though the LDA Option was granted by the Original
Shareholders and will not cover any shares of the Parent Company's unissued
common stock, the LDA Option has been treated as though it was granted by the
Parent Company.
Accordingly, in the quarter ended September 30, 1995, the Parent Company
recorded a nonrecurring charge to earnings, in the amount of $1.7 million,
which equals the $1.4 million estimated fair market value of the LDA Option
plus the $300,000 estimated value of expenses of registration for the offer
and sale of the option shares. The $1.4 million component of this charge was
offset by an equal credit to contributed capital because the Parent Company's
capital structure was not affected by the grant of the LDA Option. The
$300,000 component of this charge was recorded as an accrued expense. Because
of the credit to contributed capital, the net impact of this charge on
shareholders' equity was $300,000.
F-19
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16.PRO FORMA DATA (UNAUDITED)
For federal and state income tax purposes, Tarrant Apparel Group and certain
of its affiliates were treated as S Corporations under Subchapter S of the
Internal Revenue Code of 1986, as amended, and comparable provisions of state
income tax laws through termination on July 28, 1995 in connection with the
Reorganization.
Pro forma income taxes have been determined assuming that the Company was a
C Corporation for 1995, and therefore, that its U.S. income is taxed at an
effective pro forma tax rate of 40% for each of those years. Based upon the
Company's expressed intention to permanently maintain its Hong Kong earnings
outside the U.S., no federal or state income tax has been provided on
unremitted earnings of the Hong Kong operations.
A pro forma presentation has been provided to reflect net income and net
income per common share adjusted for pro forma taxes and the elimination of
the nonrecurring charge to earnings related to the LDA Option in 1995 (Note
15). Such charge is considered an unusual event and not indicative of the
operations of the on-going entity. In addition, in 1995, pro forma net income
and income per common share has been presented adjusted only for income taxes.
17.SUBSEQUENT EVENT (UNAUDITED)
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) $4,550,000, together with an amount equal to seller's cost of
the inventory purchased, payable in cash on closing, (ii) $500,000 payable on
July 31, 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) $500,000, together with an amount equal to
seller's cost of the inventory purchased, payable in cash on closing and (ii)
$500,000 payable on July 31, 1998, together with interest at 7% per annum.
MGI International Limited and MGI USA each designs, contracts for the
manufacture of and sells men's and boy's apparel, including knit and woven
tops, jackets and other outerwear, for national retailers. The purchase price
was financed by the Company from its cash flow from operations.
F-20
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18.QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------- YEAR ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
-------- ------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1996
Net sales............... $42,093 $68,870 $50,008 $68,890 $229,861
Gross profit............ 7,067 11,267 8,237 11,002 37,573
Operating income........ 2,360 5,504 3,739 4,856 16,459
Net income.............. $ 1,490 $ 3,558 $ 2,209 $ 2,745 $ 10,002
Net income per common
share(1):
Basic................. $ .23 $ .55 $ .34 $ .42 $ 1.54
Diluted............... $ .23 $ .55 $ .34 $ .41 $ 1.53
Weighted average shares
outstanding(1):
Basic................. 6,500 6,500 6,500 6,532 6,508
Diluted............... 6,500 6,515 6,513 6,663 6,548
1997
Net sales............... $53,605 $73,879 $69,218 $63,391 $260,093
Gross profit............ 8,782 11,068 9,690 9,557 39,097
Operating income........ 3,393 5,091 4,063 4,533 17,080
Net income.............. $ 2,022 $ 3,265 $ 2,711 $ 2,789 $ 10,787
Net income per common
share(1):
Basic................. $ .31 $ .50 $ .41 $ .42 $ 1.64
Diluted............... $ .30 $ .48 $ .40 $ .41 $ 1.59
Weighted average shares
outstanding(1)
Basic................. 6,555 6,589 6,601 6,605 6,588
Diluted............... 6,772 6,796 6,806 6,760 6,784
</TABLE>
- ----------
(1) Pursuant to the adoption of FASB Statement No. 128, "Earnings Per Share,"
basic and diluted earnings per share have been presented for all periods
(see Note 10).
F-21
<PAGE>
SCHEDULE II
TARRANT APPAREL GROUP
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO ADDITIONS BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
OF YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS(1) YEAR
---------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1995
Allowance for returns
and discounts........ $1,250,251 $1,251,789 $ -- $(154,290) $2,347,750
========== ========== ===== ========= ==========
For the year ended
December 31, 1996
Allowance for returns
and discounts........ $2,347,750 $ (432,594) $ -- $ -- $1,915,156
========== ========== ===== ========= ==========
For the year ended
December 31, 1997
Allowance for returns
and discounts........ $1,915,156 $ (359,344) $ -- $ -- $1,555,812
========== ========== ===== ========= ==========
</TABLE>
- ----------
(1) Amounts represent direct write-off.
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on February 23, 1998.
TARRANT APPAREL GROUP
/s/ Gerard Guez
By: _________________________________
Gerard Guez,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gerard Guez Chairman Chief Executive February 23, 1998
____________________________________ Officer and Director
Gerard Guez (Principal Executive
Officer)
/s/ Todd Kay President and Director February 23, 1998
____________________________________
Todd Kay
/s/ Mark B. Kristof Vice President--Finance, February 23, 1998
____________________________________ Chief Financial Officer and
Mark B. Kristof Director (Principal
Financial and Accounting
Officer)
/s/ Karen S. Wasserman Executive Vice President, February 23, 1998
____________________________________ General Merchandising
Karen S. Wasserman Manager and Director
/s/ Barry Aved Director February 23, 1998
____________________________________
Barry Aved
/s/ Donald Hecht Director February 23, 1998
____________________________________
Donald Hecht
/s/ James R. Miller Director February 23, 1998
____________________________________
James R. Miller
</TABLE>
<PAGE>
EXHIBIT 10.59
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *")
REFLECT PORTIONS WHICH HAVE BEEN REDACTED.
THE UNREDACTED EXHIBIT HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION AS
PART OF A REQUEST FOR CONFIDENTIAL TREATMENT
BY AND BETWEEN
MGI INTERNATIONAL LIMITED
("SELLER")
AND
MARBLE LIMITED
("BUYER")
DATED AS OF FEBRUARY 18, 1998
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT 1.1(a) LIST OF ORDERS
EXHIBIT 1.1(b) LIST OF FURNITURE, FIXTURES AND EQUIPMENT
EXHIBIT 1.1(c) LIST OF INVENTORY
EXHIBIT 1.4-1 FORM OF PROMISSORY NOTE 1
EXHIBIT 1.4-2 FORM OF NOTE 1 LETTER OF CREDIT
EXHIBIT 1.4-3 FORM OF PROMISSORY NOTE 2
EXHIBIT 1.4-4 FORM OF NOTE 2 LETTER OF CREDIT
EXHIBIT 1.5(b) DETERMINATION OF GROSS MARGIN
EXHIBIT 1.5(c) DISPUTE RESOLUTION PROCEDURES
EXHIBIT 1.7 PURCHASE PRICE ALLOCATION
EXHIBIT 7.4(b) FORM OF NONCOMPETITION AGREEMENT
ALL SCHEDULES AND EXHIBITS HAVE BEEN OMITTED. ANY OMITTED
SCHEDULE OR EXHIBIT WILL BE FURNISHED SUPPLEMENTALLY TO THE
SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.
-2-
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
February 18, 1998 by and between MARBLE LIMITED, a Hong Kong Corporation
("Buyer"), an indirect wholly-owned subsidiary of TARRANT APPAREL GROUP, a
California corporation ("TAG"), and MGI INTERNATIONAL LIMITED, a Turks and
Caicos corporation ("Seller").
RECITALS
--------
A. Seller is in the business of designing, developing and
manufacturing 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 "Business").
B. Seller desires to sell, and Buyer desires to purchase, the
Business and, in connection therewith, Buyer shall assume certain obligations
and liabilities related to the Business, in accordance with the terms and
conditions set forth in this Agreement.
C. Upon consummation of the transactions contemplated hereby, Buyer
shall establish the New Division (as hereinafter defined).
D. All negotiations with respect to this Agreement and the
consummation of the transactions contemplated hereby have occurred and shall
occur outside Hong Kong.
E. Seller intends to cease carrying on the Business immediately
following consummation of the transactions contemplated hereby.
AGREEMENT
---------
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
-3-
<PAGE>
ARTICLE 1
---------
SALE AND PURCHASE OF ASSETS
---------------------------
1.1 Sale and Purchase of Assets. Subject to the terms and conditions
---------------------------
set forth in this Agreement, on the Closing Date (as hereinafter defined),
Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer, and
Buyer hereby agrees to purchase from Seller, only the following:
(i) all of Seller's rights under orders pending at the close of
business on the day before the Closing Date or arising thereafter ("Orders")
including, but not limited to, those forth on Exhibit 1.1(a) hereto (which
--------------
exhibit shall be updated through the Closing Date to reflect new orders that
have been shipped and a revised Exhibit 1.1(a) shall be delivered by Seller at
--------------
the Closing which shall show all Orders pending at the time of Closing (the
"Closing Date Orders Schedule");
(ii) all of Seller's furniture, fixtures, equipment, computers and
other personal property used in connection with the business of Seller
including, but not limited to, those set forth on Exhibit 1.1(b) hereto ("FFE");
--------------
(iii) any inventory for Orders that is on hand at time of Closing as
described on Exhibit 1.1(c) hereto, including work in process (the "Inventory"),
--------------
which schedule shall be delivered by Seller to Buyer no later than three (3)
business days immediately preceding the Closing Date;
(iv) all of Seller's rights under the Vendor Orders (as hereinafter
defined);
(v) Seller's books and records directly related to the Orders, the
FFE, the Inventory and the Vendor Orders;
The assets set forth in the preceding subparagraphs (i) through (v) are referred
to collectively hereinafter as the "Assets."
1.2 Excluded Assets. Notwithstanding anything contained herein to
---------------
the contrary, the Assets shall not include any other assets of Seller
(including, but not limited to, the "Handcuffs" license (the "License"), orders
or inventory related thereto or other assets directly related thereto) (the
"Excluded Assets"). The Excluded Assets are specifically excluded from the
Assets and shall be retained by Seller.
-4-
<PAGE>
1.3 Assumption of Liabilities.
-------------------------
(a) Assumed Liabilities. Upon the terms and subject to the
-------------------
conditions contained herein, at the Closing Date, Buyer shall assume all of the
following obligations of Seller (other than obligations which are then payable
or as to which Seller is then in default on the Closing Date) (collectively, the
"Assumed Liabilities"): (i) the obligations of Seller to perform the Orders, and
(ii) the obligations of Seller under orders submitted by Seller to third parties
in order to fulfill Seller's obligations under the Orders (the "Vendor Orders").
Except as otherwise expressly provided in this Section 1.3(a), Buyer shall
acquire the Assets free and clear of all liens, claims, charges, encumbrances,
liabilities, obligations and debts, known or unknown, absolute, contingent,
accrued or otherwise, including, but not limited to:
(A) any liability, responsibility or obligation with respect
to the employment prior to the Closing Date or termination of employment by
Seller of its employees;
(B) except as provided in Section 1.9 below, liabilities for
taxes of any kind, whether federal, state, local or foreign, including, but not
limited to, interest, additions to tax or penalties applicable thereto with
respect to the operation of Seller's business or the transactions contemplated
hereby;
(C) any liability for claims with respect to accidents or
occurrences with respect to the operation of Seller's business or any product
liability claims or injuries, property damage or other losses arising with
respect to products sold or services provided by Seller with respect thereto;
(D) any liabilities for any chargebacks or returns by any
customer of Seller for products sold by Seller;
(E) any liability for any default in the performance of or
breach of any contract, agreement or commitment of Seller prior to the Closing
Date; and
(F) any and all liability arising out of or in connection
with any litigation.
(b) Copies of Orders, Vendor Orders, Invoices for Inventory. At least
-------------------------------------------------------
three (3) business days prior to the Closing, Seller will provide Buyer with
-5-
<PAGE>
copies of the Orders (the "Orders Copies"), the Vendor Orders ("Vendor Orders
Copies") and invoices (the "Inventory Copies") documenting the Inventory Amount
(as hereinafter defined).
(c) Factory Rating. Upon the execution of this Agreement,
--------------
Seller shall provide Buyer with copies which are in Seller's possession of the
factory ratings (the "Factory Ratings Copies") of J.C. Penney Company, Inc.
("JCP") for such of the Factories (as hereinafter defined) as to which the
Factory Ratings Copies relate.
1.4 Purchase Price and Other Payments at Closing.
--------------------------------------------
(a) Assets and Assumed Liabilities. The purchase price
------------------------------
("Purchase Price") for the Assets shall be:
(i) U.S.$5,050,000 payable as follows: (A) $4,550,000 in cash (by
wire transfer) to Seller at the Closing, (B) a promissory note
substantially in the form of Exhibit 1.4-1 hereto delivered at the
-------------
Closing in the principal amount of $300,000 bearing interest at a per
annum rate of seven percent (7%), with principal and accrued interest
due on or before July 31, 1998 ("Note 1"), secured by an irrevocable
letter of credit in favor of Seller (the "Note 1 Letter of Credit"),
payable upon presentment, from an institution and in a form
satisfactory to Seller and containing the draw provisions set forth on
Exhibit 1.4-2 hereto, and (C) a promissory note substantially in the
-------------
form of Exhibit 1.4-3 hereto delivered at the Closing in the principal
-------------
amount of $200,000 bearing interest at a per annum rate of seven
percent (7%), with principal and accrued interest due on or before
July 31, 1998 ("Note 2"), secured by an irrevocable letter of credit
in favor of Seller (the "Note 2 Letter of Credit"), payable upon
presentment, from an institution and in a form satisfactory to Seller
and containing the draw provisions set forth on Exhibit 1.4-4 hereto;
-------------
(ii) an amount (the "Inventory Amount") equal to Seller's cost of the
Inventory payable in cash (by wire transfer) at the Closing; and
(iii) the assumption of the Assumed Liabilities.
(b) Offset Right. Note 2 shall be subject to a right of
------------
offset solely for any liability incurred by Buyer as a result of chargebacks or
returns with respect to goods shipped by Seller prior to the Closing.
-6-
<PAGE>
(c) Escrow. In the event that the terms of the Note 1 Letter
------
of Credit and/or Note 2 Letter of Credit as set forth herein are not acceptable
to the institution requested to deliver the same or such institution imposes
conditions which are not consistent with the effect intended therefor as set
forth in this Agreement (including, without limitation, Exhibit 1.4-2 and/or
-------------
Exhibit 1.4-4), the parties hereby agree to enter into an escrow agreement
- --------------
containing the terms and conditions set forth herein and establish an escrow for
the purpose of administering the rights and obligations of the parties as
provided herein.
1.5 Purchase Price Adjustment.
-------------------------
(a) General. The Purchase Price shall be adjusted ("Purchase
-------
Price Adjustment") upward in an amount equal to two percent (2%) of all orders
accepted by the New Division for delivery during the period of January 1, 1999
through December 31, 1999 provided that the orders for the New Division that
exist on March 1, 1999 and have been shipped from January 1, 1999 through such
date (excluding the Orders) shall reflect (i) an average gross margin of at
least [ * * ] (the "Percentage Threshold"), and (ii) a total gross profit of at
least [ * * ] (the "Dollar Threshold").
(b) Procedures for Determining Purchase Price Adjustment.
----------------------------------------------------
(i) All determinations of average gross margins and total
gross profits shall be made in a manner consistent with the determinations of
gross margins and gross profits previously used by Seller and set forth on
Exhibit 1.5(b) hereto.
- --------------
(ii) Marshall Gobuty ("Gobuty") shall be entitled to
determine which orders the New Division accepts for calendar year 1999. In the
event any orders are accepted without Gobuty's approval, such orders shall be
included in the determination of the amount of total gross profit for purposes
of calculating whether the Dollar Threshold has been satisfied but shall be
excluded in determining average gross margin for purposes of calculating whether
the Percentage Threshold has been satisfied.
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED. THE UNREDACTED EXHIBIT HAS BEEN FILED SEPERATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT
-7-
<PAGE>
(iii) For purposes of determining the Purchase Price
Adjustment, all orders received from JCP and Goody's Family Clothing, Inc.
("Goody's") following the Closing shall be credited to the New Division.
(iv) For purposes of determining whether an order has been
scheduled for delivery in the period from January 1, 1999 through December 31,
1999, the initial scheduled delivery date shall be used for such purpose
notwithstanding any postponement or delay of the actual delivery date to a date
later than December 31, 1999.
(v) Any sales relating to the Orders acquired by Buyer
pursuant to this Agreement shall not be included in the determination of
Purchase Price Adjustment.
(vi) The Purchase Price Adjustment shall be paid quarterly
within 45 days after the end of each quarter in which such sales are invoiced,
less returns, allowances, discounts or markdowns related to previous invoices,
commencing with the quarter ending March 31, 1999, in installments equal to the
amounts so invoiced until the Purchase Price Adjustment is paid in full. Any
payments of Purchase Price Adjustment due to Seller and not timely paid shall
bear interest at the rate of seven percent (7%) per annum.
(c) Returns; Chargebacks. In the event Buyer has paid Seller any
--------------------
amount as a Purchase Price Adjustment and there occurs thereafter any returns or
chargebacks with respect to the goods as to which such Purchase Price Adjustment
was determined and no adjustment has been made as provided for in Section
1.5(b)(vi) above, Seller shall promptly reimburse Buyer for the amount of
Purchase Price Adjustment relating to such returns and chargebacks following
written notice thereof by Buyer to Seller. Any dispute with respect to the
foregoing shall be resolved pursuant to the dispute resolution procedures of
Exhibit 1.5(c) hereto.
- --------------
1.6 Payment of Purchase Price. At the Closing, Buyer shall pay
-------------------------
the Purchase Price (including the Inventory Amount) to Seller in U.S. dollars by
wire transfer of immediately available funds to an account or accounts
designated by Seller.
1.7 Allocation of Purchase Price and Purchase Price Adjustment.
----------------------------------------------------------
The Purchase Price shall be allocated among the Assets as set forth on Exhibit
-------
1.7 hereto. Seller and Buyer shall so allocate the Purchase Price and shall
- ---
allocate the Purchase
-8-
<PAGE>
Price Adjustment to the Orders on all tax returns filed by them and shall not
take any position on any tax return inconsistent with such allocation.
1.8 [Intentionally Omitted]
1.9 Transfer Taxes. All transfer taxes which may be payable as a
--------------
result of the transactions contemplated hereby shall be paid by Seller.
ARTICLE 2
---------
CLOSING
-------
2.1 Closing Date. The closing of the transactions provided for
------------
herein shall take place at the offices of Manatt, Phelps & Phillips LLP, 11355
W. Olympic Boulevard, Los Angeles, California, at 10:00 a.m. on February 23,
1998, or at such other place, time or date as to which the parties may mutually
agree in writing, such date being referred to herein as the "Closing Date" or
the "Closing;" provided, however, that the Closing shall not occur until after
each of the conditions set forth in Articles 7 and 8 hereto have been materially
satisfied or waived by the relevant party.
2.2 Transfer of Possession. On the Closing Date, Seller,
----------------------
through its officers, agents and employees, will put Buyer into full possession
of the Assets.
2.3 Instruments of Transfer and Assumption.
--------------------------------------
(a) At the Closing, Seller will execute and deliver to Buyer:
(i) a Bill of Sale in form and substance satisfactory to
the parties (the "Bill of Sale"); and
(ii) an Assumption of Liabilities Agreement in form and
substance satisfactory to the parties evidencing Buyer's assumption of the
Assumed Liabilities (the "Assumption of Liabilities Agreement").
(b) From time to time after the Closing, Seller shall execute
and provide such other endorsements, assignments, assumptions and other
instruments of transfer in form and substance reasonably satisfactory to Buyer,
in each case, with such other appropriate instruments of title and consents of
third parties, reasonably necessary to effectively transfer the Assets and the
Assumed Liabilities.
-9-
<PAGE>
2.4 Other Matters. On the Closing Date, each of the Ancillary
-------------
Agreements (as hereinafter defined) shall be executed and delivered by the
parties thereto, and Buyer and Seller shall deliver the certificates and other
matters described in Articles 7 and 8.
ARTICLE 3
---------
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller hereby represents and warrants to Buyer as set forth in this
Article 3. All representations and warranties made by Seller with respect to
the transactions contemplated hereby shall be limited exclusively to the
representations and warranties set forth in this Article 3 and no other
representations and warranties of Seller or its shareholders, officers,
directors and agents shall be deemed to be made or to have been made in
connection therewith.
3.1 Ownership of Assets; Inventory. Seller has valid title to the
------------------------------
Assets, including work-in-progress inventory, if any, free and clear of any
liens, encumbrances, claims and demands whatsoever. The Orders constitute valid
and binding orders received by Seller in the ordinary course of its business.
The Inventory is merchantable and fit for the purpose for which it was
manufactured and subject to open orders which can be timely consummated.
3.2 Authorization of Transaction. Seller has full power and
----------------------------
authority to execute and deliver this Agreement and each Ancillary Agreement to
which it is a party and to perform its obligations hereunder and thereunder.
This Agreement and each Ancillary Agreement to which it is a party constitute
the valid and legally binding obligations of Seller, enforceable against Seller
in accordance with its respective terms and conditions. Except with respect to
the Orders, Seller need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any third party, including without
limitation, any government or governmental agency in order to consummate the
transactions contemplated by this Agreement or any Ancillary Agreement.
3.3 No Conflicts with Agreements and Laws. Neither the execution and
-------------------------------------
the delivery of this Agreement or any Ancillary Agreement, nor the consummation
of the transactions contemplated hereby or thereby, will conflict with, result
in a breach of or constitute a default under any material agreement or any
statute, order,
-10-
<PAGE>
judgment, writ, injunction, decree, rule or regulation to which Seller is a
party or by which it is bound or to which any of its assets is subject.
3.4 [Intentionally Omitted]
3.5. Litigation. Seller (i) is not subject to any outstanding
----------
injunction, judgment, order, decree, ruling, or charge and (ii) is not a party
and, to the knowledge of Seller, is not threatened to be made a party to, any
action, suit, proceeding, hearing, or investigation of, in, or before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator.
3.6 Legal Compliance. To Seller's knowledge, Seller has complied
-----------------
with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof),
except where the failure to comply would not have a material adverse effect on
the Assets, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.
3.7 Copies. The Orders Copies, the Vendor Orders Copies and the
------
Inventory Copies will be, when delivered pursuant to Section 1.3(a) above, true
and correct in all material respects. The Factory Ratings Copies are in the
form as provided to Seller by JCP.
3.8 Amount of Orders. Seller represents that it and its affiliate
----------------
has received orders to be shipped after the date of Closing but prior to
December 31, 1998 aggregating at least [* *] at average gross margins
aggregating at least [* *] (it being understood that all determinations of
average gross margins shall be made in a manner consistent with Exhibit 1.5(b)
--------------
hereto). The foregoing shall not be deemed to constitute a guarantee in any way
that the amounts set forth in the preceding sentence shall in fact be achieved
after the Closing, and Seller shall have no liability hereunder, and Buyer
expressly waives any claim against Buyer, if such amounts ultimately are not
achieved.
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED. THE UNREDACTED EXHIBIT HAS BEEN FILED SEPERATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT
-11-
<PAGE>
ARTICLE 4
---------
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants to Seller as set forth in this
Article 4. All representations and warranties made by Buyer with respect to the
transactions contemplated hereby shall be limited exclusively to the
representations and warranties set forth in this Article 4 and no other
representations and warranties of Buyer or its shareholders, officers, directors
and agents shall be deemed to be made or to have been made in connection
therewith.
4.1 Authorization of Transaction. Buyer has full power and authority
----------------------------
to execute and deliver this Agreement and each Ancillary Agreement to which it
is a party and to perform its obligations hereunder and thereunder. This
Agreement and each Ancillary Agreement to which it is a party constitute the
valid and legally binding obligations of Buyer, enforceable against Buyer in
accordance with their respective terms and conditions. Buyer need not give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any third party, including without limitation, any government or
governmental agency in order to consummate the transactions contemplated by this
Agreement or any Ancillary Agreement.
4.2. No Conflicts with Agreements and Laws. Neither the execution and
-------------------------------------
the delivery of this Agreement or any Ancillary Agreement, nor the consummation
of the transactions contemplated hereby or thereby, will conflict with, result
in a breach of or constitute a default under any material agreement or any
statute, order, judgment, writ, injunction, decree, rule or regulation to which
Buyer is a party or by which it is bound or to which any of its assets is
subject.
ARTICLE 5
---------
COVENANTS AND AGREEMENTS OF SELLER
----------------------------------
5.1 Conduct of Business. During the period from the date hereof
-------------------
until the Closing, Seller shall use commercially reasonable efforts to conduct
the business of Seller only in the ordinary course consistent with past practice
except as contemplated by this Agreement.
5.2 Conditions. Seller agrees that from the date hereof to the
----------
Closing Date it will use commercially reasonable efforts:
-12-
<PAGE>
(a) To satisfy the conditions precedent to consummation of the
transactions contemplated by this Agreement to the extent they are to be
performed by it, its agents or representatives.
(b) To cooperate with Buyer to obtain any consents required to be
obtained by Buyer pursuant to this Agreement.
(c) To obtain the consents required to be obtained by Seller
pursuant to this Agreement.
(d) To fulfill all pending orders in the ordinary course of
business consistent with past practice.
5.3 Corporate Examinations and Investigations.
-----------------------------------------
(a) General. Buyer and its authorized representatives shall be
-------
permitted to conduct a business review of Seller, its business, assets and
prospects, subject to Seller's cooperation as set forth below and the provisions
of the Confidentiality Agreement dated February 5, 1998, as amended from time to
time (as amended, the "Confidentiality Agreement"). Subject to the
Confidentiality Agreement, Seller shall cooperate with Buyer's due diligence
review and shall afford Buyer and its representatives reasonable access to the
books, records, employees, agents and properties of Seller to enable Buyer to
make such investigations, audits or appraisals as it deems necessary or
advisable in connection with the transactions contemplated hereby. As part of
its due diligence investigation, Buyer shall be permitted to contact JCP and
Goody's prior to Closing, subject to Seller's prior reasonable approval as to
the timing and manner of such contacts.
(b) Factories. Following the execution of the Agreement and
---------
as a condition to Closing, Seller will provide Buyer with a list of the
factories used by Seller (the "Factories"). In the event the transactions
contemplated hereby are not consummated for any reason whatsoever, for a period
of two years after the date hereof, Buyer agrees (i) to keep confidential and
not to disclose to any party without Seller's prior written consent, which may
be withheld in its sole and absolute discretion, the identity of the Factories,
(ii) not to enter into any business relationships with the Factories or
otherwise use the Factories for the benefit of the Buyer, and (iii) not to,
directly or indirectly, solicit any contractual counterparty (which shall not be
deemed to include a customer or client) of Seller (other than a Factory with
which Buyer has had business relationships prior to the date hereof).
-13-
<PAGE>
5.4 Further Assurances. Seller shall execute such documents and
------------------
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby (including, without limitation, the establishment of new vendor
identification numbers and the transfer of the Orders to Buyer). Seller shall
use its best efforts to fulfill or obtain the fulfillment of the conditions to
the Closing as promptly as practicable.
5.5 [Intentionally Omitted]
5.6 Orderly Transition. Following Closing, Seller shall cooperate
------------------
with Buyer to effect an orderly transition of employees to other facilities and
as otherwise Buyer may deem to be necessary or desirable.
5.7 Return of Buyer Funds. In the event following the Closing any
---------------------
funds intended for the benefit of Buyer are paid to or received by Seller,
Seller shall promptly pay or forward such funds to Buyer within five (5) days of
receipt thereof.
ARTICLE 6
---------
COVENANTS AND AGREEMENTS OF BUYER
---------------------------------
6.1 Conditions. Buyer agrees that from the date hereof to the
----------
Closing Date, it will use commercially reasonable efforts:
(a) To satisfy the conditions precedent to consummation of the
transactions contemplated by this Agreement to the extent they are to be
performed by it, its agents or representatives.
(b) To cooperate with Seller to obtain any consents required to
be obtained by Seller pursuant to this Agreement.
(c) To obtain the consents required to be obtained by Buyer
pursuant to this Agreement.
6.2 Further Assurances. Buyer shall execute such documents and
------------------
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby. Buyer shall use its best efforts to fulfill or obtain the fulfillment
of the conditions to the Closing as promptly as practicable.
-14-
<PAGE>
6.3 Records. After the Closing, the New Division shall maintain,
-------
and Buyer shall cause the New Division to maintain, all books and records in an
orderly and businesslike fashion and shall permit Seller to have reasonable
access at Seller's expense to such books, records and data of which Seller has
no copy in connection with the preparation of Seller's financial reports, tax
returns, tax audits, the defense or prosecution of litigation (including
arbitration), or any other reasonable need of Seller to consult such records and
data in order to satisfy their obligations herein. Such information shall be
deemed to be Buyer's Confidential Information (as defined in the Confidentiality
Agreement) and Seller shall be deemed to be a Receiving Party (as defined in the
Confidentiality Agreement) and bound by the obligations applicable to a
Receiving Party with respect thereto.
6.4 [Intentionally Omitted]
6.5 Orderly Transition. Following Closing, Buyer shall cooperate
------------------
with Seller to effect an orderly transition of employees to other facilities and
as otherwise Buyer may deem to be necessary or desirable.
6.6 [Intentionally Omitted]
6.7 Pre-Closing Profits. Buyer agrees that all profits earned by
-------------------
Seller with respect to sales consummated by Seller prior to the Closing
(including, but not limited to, sales with respect to the License) are for the
benefit of Seller and shall be retained by Seller following the Closing.
6.8 New Division. Upon consummation of the transactions contemplated
------------
hereby, Buyer and its affiliates shall establish the New Division for the
purpose of conducting business with JCP and Goody's and their respective
affiliates, successors and assigns and all such business shall be engaged in by
Buyer, its affiliates and successors, through the New Division at least through
December 31, 1999. Despite the foregoing, for purposes of Section 1.5 above, all
such business shall be deemed to be conducted by the New Division thereafter.
6.9 Employee Matters. Upon Closing, Seller shall terminate all
----------------
Seller's employees and pay to them all accrued but unpaid wages, including
vacation pay, and Buyer will offer to hire all Seller's employees on terms and
conditions similar to their current employment. If at any time within three
years following the Closing Buyer terminates any employee that accepts
employment (other than Gobuty or Connie Fisher, Garrett Kam, Johnny Ku or Ronnie
Lau (collectively, the "Senior Employees"))
-15-
<PAGE>
for any reason other than "cause" as defined in the employment agreements to be
entered into with Buyer by Gobuty and the Senior Employees (as applicable to the
subject employee, "Cause"), such employee shall receive a lump sum payment equal
to [ * * ] salary then applicable to such employee for each full year of service
with Seller or its predecessor, MGI (HK) Limited, prior to the Closing and with
Buyer following the Closing with a minimum payment of [ * * ] salary. If at any
time within three years following the Closing the employment of any such
employee is terminated for any reason (except if such termination by Buyer is
without Cause), such employee shall forego his or her rights to receive the
severance benefits applicable to such employee as described above.
6.10 Return of Seller Funds. In the event following the Closing any
----------------------
funds intended for the benefit of Seller are paid to or received by Buyer, Buyer
shall promptly pay or forward such funds to Seller within five (5) days of
receipt thereof..
ARTICLE 7
---------
CONDITIONS TO THE OBLIGATIONS OF SELLER
---------------------------------------
The obligation of Seller to enter into and complete the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it, to the extent
permitted by law.
7.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as though made at and as of that
date, except changes that occur as a result of the passage of time.
7.2 Compliance with Covenants. Buyer shall in all material respects
-------------------------
have performed and complied with all terms, agreements, covenants and conditions
of this Agreement to be performed or complied with by it on or prior to the
Closing Date.
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED. THE UNREDACTED EXHIBIT HAS BEEN FILED SEPERATELY WITH THE SECURITIES
AND EXCHANGE COMISSION AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT
-16-
<PAGE>
7.3 Absence of Litigation. No action, suit, or proceeding shall be
---------------------
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or cause any of the transactions contemplated by this Agreement
to be rescinded following consummation.
7.4 Payment of Purchase Price, Execution and Delivery of Ancillary
--------------------------------------------------------------
Agreements. Buyer shall have:
- ----------
(a) made payment of the Purchase Price as provided herein, and
(b) executed and delivered to each applicable counterparty (i) the
Noncompetition Agreement substantially in the form of Exhibit 7.4(b) hereto (the
--------------
"Noncompetition Agreement"), (ii) Note 1 (together with the Note 1 Letter of
Credit), (iii) Note 2 (together with the Note 2 Letter of Credit), (iv) the Bill
of Sale, and (v) the Assumption of Liabilities Agreement. The agreements and
documents referred to in this Section 7.4 are referred to collectively herein as
the "Ancillary Agreements."
7.5 No Public Announcement. There shall have occurred no public
----------------------
announcement or other disclosure by a party of the transactions contemplated
hereby (other than as contemplated by this Agreement or to Buyer's professional
advisors who are bound by a duty of confidentiality with respect thereto)
without the prior written consent of the other party provided that this
condition shall be deemed satisfied if such announcement or other disclosure is
required to be made by Buyer under applicable securities laws except as a result
of a breach of any provision of the Confidentiality Agreement by Buyer or
Buyer's Representatives (as defined in the Confidentiality Agreement); provided
--------
that solely for purposes of this Agreement, in determining whether there has
been a breach of the Confidentiality Agreement under Section 6 thereof, any
press release or announcement by Buyer or its affiliates with respect to the
Transaction (as defined in the Confidentiality Agreement) shall be deemed a
breach of Section 6 unless (i) Seller has provided its prior written consent
thereto, or (ii) such press release or announcement was required as set forth in
said Section 6 as a result of actions taken by any parties other than Buyer or
Buyer's representatives.
-17-
<PAGE>
ARTICLE 8
---------
CONDITIONS TO THE OBLIGATIONS OF BUYER
--------------------------------------
The obligation of Buyer to enter into and complete the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it, to the extent
permitted by law.
8.1 Representations and Covenants. The representations and
-----------------------------
warranties of Seller contained in this Agreement shall be true and correct in
all material respects on and as of the Closing Date as though made at and as of
that date, except changes that occur as a result of the passage of time.
8.2 Compliance with Covenants. Seller shall in all material respects
-------------------------
have performed and complied with all terms, agreements, covenants and conditions
of this Agreement to be performed or complied with by it on or prior to the
Closing Date.
8.3 Absence of Litigation. No action, suit, or proceeding shall be
---------------------
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or cause any of the transactions contemplated by this Agreement
to be rescinded following consummation.
8.4 Consents and Approvals. All waivers, licenses, agreements,
----------------------
permits, consents, approvals or authorizations of third parties or governmental
agencies or any modifications or amendments to existing agreements with third
parties required to be obtained by Seller or Buyer (other than with respect to
the Orders) shall have been obtained and shall be in full force and effect and
without conditions or limitations which unreasonably restrict the ability of the
parties hereto to carry out the transactions contemplated hereby and Buyer shall
have been furnished with appropriate evidence, reasonably satisfactory to it and
its counsel, of the granting of same. With respect to the Orders, Buyer shall
have been furnished with the consents of JCP and Goody's to the transfer of the
Orders.
8.5 Due Diligence Review. Buyer shall have conducted its due
--------------------
diligence review pursuant to Section 5.3(a) above and shall be reasonably
satisfied (i) with respect to its review of the Orders, the Factories and the
relationships with JCP
-18-
<PAGE>
and Goody's, and (ii) that there has been no breach of the representations and
warranties or the pre-closing covenants of Seller made pursuant to this
Agreement.
8.6 Execution and Delivery of Ancillary Agreements. Seller and the
----------------------------------------------
other parties to the Ancillary Agreements shall have executed and delivered to
Buyer this Agreement and each Ancillary Agreement to which it is a party, and
Seller shall deliver the Closing Date Orders Schedule, Orders Copies, the Vendor
Orders Copies and the Inventory Copies.
8.8 Gobuty Medical Examination. At least three (3) business days
--------------------------
prior to Closing, Buyer shall have received the results of a medical examination
of Gobuty (the "Medical Examination"), which results shall reasonably
demonstrate to Buyer that Gobuty will be capable of performing the duties under
the Gobuty Employment Agreement.
ARTICLE 9
---------
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
------------------------------------------
9.1 All of the representations and warranties of the parties hereto
shall expire one (1) year after the Closing Date and shall thereafter be of no
force and effect. Subject to the preceding sentence, all representations,
warranties, covenants and agreements of the parties hereto shall survive the
Closing Date notwithstanding any investigations made by or on behalf of the
parties.
ARTICLE 10
----------
INDEMNIFICATION
---------------
10.1 Indemnification of Buyer. Subject to the limitations set forth
------------------------
herein, Seller shall indemnify and hold Buyer harmless from, against, for and in
respect of any and all damages, losses, settlement payments, obligations,
liabilities, claims, costs and expenses (collectively, "Costs") incurred or paid
by Buyer arising out of (i) the breach of any representation, warranty or
covenant of Seller in this Agreement, (ii) any liability relating to the
business of Seller or the transactions contemplated hereby other than an Assumed
Liability, or (iii) any liability incurred by Buyer as a result of chargebacks
or returns with respect to goods shipped by Seller prior to the Closing.
-19-
<PAGE>
Notwithstanding the foregoing:
(a) no indemnification shall be made with respect to any matter to the
extent that insurance proceeds have been collected by Buyer with respect to such
matter; and
(b) the aggregate amount of actual amounts paid by Seller for breach
of any representation, warranty or covenant of Seller in this Agreement shall
not exceed the sum of the Purchase Price and the Purchase Price Adjustment (but
only, in each such case, to the extent actually paid).
10.2 Indemnification of Seller. Subject to the limitations
-------------------------
hereinafter set forth, Buyer shall indemnify and hold Seller harmless from,
against, for and in respect of any and all Costs paid by Seller arising out of
(i) the breach of any representation, warranty or covenant of Buyer in this
Agreement, (ii) the Assumed Liabilities, or (iii) the operation of the New
Division following the Closing.
10.3 Rules Regarding Indemnification.
-------------------------------
(a) The obligations and liabilities of each indemnifying party
hereunder shall be subject to the following terms and conditions:
(i) The indemnified party shall give prompt written notice to the
indemnifying party of any claim which might give rise to a claim by the
indemnified party against the indemnifying party based on the indemnity
agreements contained in Sections 10.1 and 10.2 hereof, stating the nature and
basis of said claims and the amounts thereof, to the extent known.
(ii) In the event any action, suit or proceeding is brought against
the indemnified party, with respect to which the indemnifying party may have
liability under the indemnity agreements contained in Sections 10.1 and 10.2
hereof, the action, suit or proceeding shall, upon the written acknowledgment by
the indemnifying party that it is obligated to indemnify under such indemnity
agreement, be defended (including all proceedings on appeal or for review) by
the indemnifying party; provided, however, that if the indemnifying party does
-----------------
not promptly undertake such defense, the indemnified party shall be entitled to
assume the defense thereof. The indemnified party shall have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the indemnified party's own expense. In such cases, the indemnified
party shall make available to the indemnifying party and its attorneys and
accountants all books and records of the indemnified party
-20-
<PAGE>
relating to such proceedings or litigation and the parties hereto agree to
render to each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of any such action,
suit or proceeding.
(b) Neither the indemnified party nor the indemnifying party shall
make any settlement of any claims without the written consent of the other
party, which consent shall not be unreasonably withheld or delayed. In
addition, if, within ten (10) days of receipt of notice of a proposed settlement
amount, the indemnified party notifies the indemnifying party that the terms of
such proposed settlement are unacceptable to the indemnified party then the
indemnified party shall undertake the defense of the litigation and the
liability of the indemnifying party shall be limited to the amount of the
proposed settlement. Further, if for any reason the indemnified party
determines that it is in its best interests to handle the defense of a claim for
which it is entitled to indemnification from the indemnifying party, the
indemnified party and indemnifying party shall endeavor in good faith to reach
an agreement by which the indemnified party shall release the indemnifying party
in consideration for the payment by the indemnifying party to the indemnified
party of the estimated value of the claim.
(c) Each party's sole and exclusive remedy against the other for any
breach of a representation, warranty, covenant or other obligation made in or
imposed by this Agreement with respect to such party shall be a claim for
indemnification subject to the limitations set forth in this Article 10.
(d) With respect to any matter for which indemnification has been
provided hereunder the indemnified party hereby covenants and agrees to
cooperate with the indemnifying party to assign any of its rights under any
insurance policy in the indemnified party's name against a loss covered by such
policy.
10.4 Tax Benefits. In determining the amount of any claims of a party
-------------
("Claims"), such amount shall be reduced by the amount of any tax benefit
effects (collectively, the "Tax Effects") accruing to such party related to the
-----------
Claims or to the payments made pursuant to such Claims. The Tax Effects shall
be determined by taking into account all facts and circumstances existing at the
Closing Date through the future date(s) to which such benefits run (to the
extent of the present value thereof, discounted at the applicable short term
applicable federal rate, as of the date of such indemnification). For purposes
of determining the time or times at which Tax Effects shall be taken into
account to reduce any indemnification claims hereunder, the parties agree that
Tax Effects shall reduce the amount of any indemnification claims under this
Article 10 only if, as and when actually realized by a party. In the event a
party has paid for an indemnification claim which is later subject to reduction
due to a Tax
-21-
<PAGE>
Effect, the party which has received such payment shall promptly pay such amount
to the paying party at the time actually realized by the receiving party.
ARTICLE 11
----------
TERMINATION OF AGREEMENT
------------------------
11.1 Termination. This Agreement may be terminated prior to the
-----------
Closing by either party without liability therefor (except as expressly provided
in Section 12.7) as follows:
(a) At the election of Seller or Buyer, if for any reason the
Closing has not occurred on or before February 23, 1998 (time being of the
essence in respect of the transactions contemplated by this Agreement);
(b) At the election of Seller or Buyer, if any legal proceeding
is threatened or commenced by any governmental or regulatory body or person
(other than Seller or Buyer or any affiliate of Seller or Buyer) to restrain,
modify or prevent the carrying out of the transactions contemplated under this
Agreement and either Seller or Buyer, as the case may be, reasonably and in good
faith deems it impractical or inadvisable to proceed in view of such legal
proceeding or threat thereof;
(c) At any time on or prior to the Closing Date, by written
agreement of Seller or Buyer;
(d) By Seller, if there has been: (i) a material
misrepresentation on the part of Buyer of Buyer's representations and warranties
contained in this Agreement; or (ii) a material breach by Buyer of any covenant
or agreement of Buyer contained in this Agreement; or
(e) By Buyer, if there has been: (i) a material misrepresentation
on the part of Seller of the representations and warranties of Seller contained
in this Agreement; or (ii) a material breach by Seller of any covenant or
agreement of Seller contained in this Agreement.
11.2 Survival. In the event this Agreement is terminated pursuant to
--------
Section 11.1 and the transactions contemplated hereby are not consummated as
described above, this Agreement shall be of no further force and effect, except
for the
-22-
<PAGE>
provisions of this Section 11.2 and Sections 5.3(b),12.3 and 12.7, which shall
survive in accordance with their own respective terms.
ARTICLE 12
----------
MISCELLANEOUS
-------------
12.1 Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally or sent by
facsimile transmission and shall be deemed given when so delivered personally or
sent by facsimile transmission as follows:
(i) If to Seller to:
MGI International Limited
Suite 2310-2311 Hung To Road
Kwun Tong, Kowloon
Hong Kong
Attention: President
Telecopier: 011-852-2790-8103
with a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attention: Lawrence M. Braun, Esquire
Telecopier: (213) 620-1398
(ii) If to Buyer to:
Marble Limited
c/o Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
Attention: Chief Financial Officer
Telecopier: (213) 881-0368
with a copy to:
-23-
<PAGE>
Manatt, Phelps & Phillips LLP
11355 W. Olympic Boulevard
Los Angeles, California 90064-1614
Attention: Peter M. Menard, Esquire
Telecopier: (310) 312-4224
Any party may by notice given in accordance with this Section 12.1 to
the other parties designate another address or person for receipt of notices
hereunder.
12.2 Entire Agreement. This Agreement (including the Schedules
----------------
hereto), the Ancillary Agreements and the Confidentiality Agreement contain the
entire agreement of the parties with respect to the purchase of the Assets and
related transactions, and supersede all prior agreements written or oral with
respect thereto.
12.3 No Publicity; Employee Letters. Notwithstanding anything to the
------------------------------
contrary in the Confidentiality Agreement, the parties agree not to disclose the
terms of this Agreement without the other party's prior written consent, which
may be withheld in the sole and absolute discretion of such party, except for
such disclosure as counsel for Buyer shall deem to be required by SEC rules
and/or applicable securities laws; provided that any such disclosure to be made
--------
by Buyer shall be subject to prior review and reasonable approval of Seller
(including without limitation prior review of SEC filings and press releases
regarding the transactions contemplated hereby). Buyer and Seller agree that
such disclosure requirements will include a public filing of the Agreement and
related description of the transactions contemplated hereby in either a Form 8-K
or Form 10-K and concurrent news release (subject to prior review and consent in
accordance with this Section 12.3). The parties agree to jointly prepare a
letter to be delivered to each of Seller's employees with regard to the
transactions contemplated hereby. Notwithstanding anything herein to the
contrary, with respect to any SEC filing or other required disclosure under
applicable securities laws, Buyer shall seek "confidential treatment" from the
SEC and other applicable securities authorities in respect of any disclosure of
gross margins of Seller hereunder (such as in Sections 1.5 or 3.8 hereof or in
the exhibits attached hereto) or otherwise and the second and third sentences of
Section 6.9 and shall immediately provide copies to Seller of any filings or
other correspondence relating to such confidential treatment request.
12.4 Bulk Sales. The parties waive compliance with the procedures of
----------
the "Bulk Sales Act" or any similar law. Seller hereby agrees that the
indemnity provisions of Section 10.1 (other than Section 10.1(b)) hereof shall
apply to any Costs of Buyer arising out of or resulting from the failure to
comply with such laws.
-24-
<PAGE>
12.5 Waivers and Amendments; Non-Contractual Remedies; Preservation of
-----------------------------------------------------------------
Remedies. This Agreement may be amended, superseded, canceled, renewed or
- --------
extended, and the terms hereof may be waived, only by a written instrument
signed by each of the parties or, in the case of a waiver, by the party waiving
compliance. From time to time prior to the Closing Date, Seller shall promptly
supplement or amend any representations and warranties of Seller herein or in
the schedules hereto which would have been required to be set forth or described
in such representations, warranties and schedules which is necessary to correct
any information which has become inaccurate therein, provided, however, that any
-----------------
such supplement or amendment shall not affect Buyer's right to terminate the
Agreement as a result thereof. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or relinquishment of any right
granted hereunder or of the future performance of any such term or condition. No
waiver on the part of any party of any right, power or privilege, nor any single
or partial exercise of any such right, power or privilege, shall preclude any
further exercise thereof or the exercise of any other such right, power or
privilege. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies that any party may otherwise have at law or
in equity. The rights and remedies of any party based upon, arising out of or
otherwise in respect of any inaccuracy in or breach of any representation,
warranty, covenant or agreement contained in this Agreement shall in no way be
limited by (i) the fact that the act, omission, occurrence or other state of
facts upon which any claim of any such inaccuracy or breach is based may also be
the subject matter of any other representation, warranty, covenant or agreement
contained in this Agreement (or in any other agreement between the parties) as
to which there is no inaccuracy or breach, or (ii) any investigation or
knowledge of the inaccuracy or breach by either party.
12.6 Governing Law; Submission to Jurisdiction. This Agreement shall
-----------------------------------------
be governed by and construed in accordance with the substantive and procedural
laws of the State of California applicable to agreements made and to be
performed entirely within such State. Each of the parties submits to the
jurisdiction of any state or federal court sitting in Los Angeles, California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto. Any
party may make service on any other party by sending or delivering a copy of the
process to
-25-
<PAGE>
the party to be served at the address and in the manner provided for the giving
of notices in Section 12.1 above. Each party agrees that a final judgment in any
action or proceeding so brought shall be conclusive and may be enforced by suit
on the judgment or in any other manner provided by law or at equity.
12.7 Expenses. Each party shall bear its own out-of-pocket expenses
--------
incurred in connection herewith or pursuant to the negotiation and preparation
of the Agreement, including, without limitation, all legal, accounting,
investment banking, travel and other similar fees and expenses. In the event
(i) the transactions contemplated hereby are not consummated on or prior to
February 23, 1998 as the result of the intentional failure by a party to use
commercially reasonable efforts to satisfy a condition to Closing which
condition is within the control of such party, or (ii) Buyer causes the
condition specified in Section 7.5 not to be satisfied as a result of the
actions of Buyer, or its directors, officers or agents, with respect to clause
(i) above, such party shall reimburse the other party, and with respect to
clause (ii) above, Buyer shall reimburse Seller, for its costs and expenses
(including attorneys' fees and costs); provided that so long as an event does
not occur with respect to clause (ii) above, Buyer shall not be required to pay
Seller's costs if Buyer reasonably determines not to consummate the transactions
contemplated hereby as a result of its due diligence investigation relating to
the Orders, the relationships with JCP or Goody's, the Factories or the Medical
Examination. The provisions of this Section 12.7 shall be a party's sole and
exclusive remedy with respect to the termination of this Agreement prior to
Closing.
12.8 Binding Effect; Assignment. This Agreement shall be binding
--------------------------
upon and inure to the benefit of the parties and their respective successors and
assigns and legal representatives. Neither this Agreement, nor any right
hereunder, may be assigned by any party without the written consent of the other
party hereto. Any non-permitted assignment or attempted assignment shall be
void.
12.9 No Third Party Beneficiaries. Nothing in this Agreement is
----------------------------
intended or shall be construed to give any person any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
12.10 Counterparts; Facsimiles. This Agreement may be executed by the
------------------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto. Delivery of an executed counterpart of the signature
page to this Agreement by facsimile shall
-26-
<PAGE>
be as effective as delivery of a manually executed counterpart of this
Agreement; provided, that any party so delivering an executed counterpart by
facsimile shall thereafter promptly deliver a manually executed counterpart of
this Agreement to the other party, but failure to deliver such manually executed
counterpart shall not affect the validity, enforceability and binding effect of
this Agreement.
12.11 Schedules. The Schedules are a part of this Agreement as if
---------
fully set forth herein. All references herein to Articles, Sections, paragraphs
and Schedules shall be deemed references to such parts of this Agreement unless
otherwise specified.
12.12 Headings. The headings in this Agreement are for reference only
--------
and shall not affect the interpretation of this Agreement.
12.13 Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
12.14 Time of Essence. Time is of the essence for each and every
---------------
provision of this Agreement.
12.15 Attorneys' Fees. If any legal action or other proceeding is
---------------
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
12.16 Reference to U.S. Dollars. All references in this Agreement
--------------------------
to amounts of money expressed in dollars are references to United States
dollars, unless express reference is made to currency of another country.
-27-
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have duly executed and delivered
this Agreement as of the date first above written.
MGI INTERNATIONAL LIMITED,
a Turks and Caicos corporation
By /s/ Marshall Gobuty
---------------------------------------
Marshall Gobuty, President
MARBLE LIMITED,
a Hong Kong corporation
By /s/ Mark B. Kristof
-------------------------------------
Title Vice President
-----------------------------------
GUARANTEE
---------
This Guarantee dated as of February 16, 1998 is issued by Tarrant
Apparel Group, a California corporation ("Guarantor") with reference to the
Asset Purchase Agreement (as at any time amended, the "Agreement") of even date
herewith between Marble Limited, a Hong Kong corporation and an indirect wholly-
owned subsidiary of Guarantor ("Sub"), and MGI International Limited, a Turks
and Caicos corporation (the "Company"). Guarantor hereby unconditionally
guarantees the full and prompt payment and performance when due, whether by
acceleration or otherwise, and at all times thereafter, of all obligations of
Sub under the Agreement and each of the instruments, documents and agreements
now or hereafter executed by Sub in connection with the Agreement, whether
direct or indirect, absolute or contingent, or now or hereafter existing or due
or to become due (all such obligations are herein referred to collectively as
the "Obligations"). This Guarantee is issued for benefit of the Company and
the shareholders of the Company (collectively, "Beneficiaries"). Guarantor
further agrees to pay all expenses (including attorneys' fees and expenses) paid
or incurred by Beneficiaries in endeavoring to collect the Obligations, or any
part thereof, and in enforcing this Guarantee.
This Guarantee is a continuing, absolute and unconditional Guarantee,
and shall remain in full force and effect so long as the Obligations remain
outstanding.
-28-
<PAGE>
Guarantor further agrees that, if at any time all or any part of any
payment theretofore applied by Beneficiaries to any of the Obligations is or
must be rescinded or returned by Beneficiaries for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy or reorganization of
the Company), the Obligations shall, for the purposes of this Guarantee, to the
extent that such payment is or must be rescinded or returned, be deemed to have
continued in existence, notwithstanding such application by Beneficiaries, and
this Guarantee shall continue to be effective or be reinstated, as the case may
be, as to the Obligations, all as though such application had not been made by
Beneficiaries.
Beneficiaries may, from time to time, whether before or after any
discontinuance of this Guarantee, in their sole discretion and without notice to
Guarantor, take any or all of the following actions: (a) obtain a security
interest in any property to secure any of the Obligations or any obligation
hereunder; (b) retain or obtain the primary or secondary obligation of any
obligor or obligors, in addition to Guarantor, with respect to any of the
Obligations; (c) extend or renew for one or more periods (whether or not longer
than the original period), alter or exchange any of the Obligations; (d)
release, waive or compromise any obligation of Guarantor hereunder or any
obligation of any nature of any other obligor primarily or secondarily obligated
with respect to any of the Obligations; and (e) resort to Guarantor for payment
of any of the Obligations, whether or not Beneficiaries shall have resorted to
any property securing any of the Obligations or any obligation hereunder or
shall have proceeded against any other obligor primarily or secondarily
obligated with respect to any of the Obligations.
Any amounts received by Beneficiaries from whatever source on account
of the Obligations may be applied by Beneficiaries toward the payment of such of
the Obligations, and in such order of application, as Beneficiaries may from
time to time elect; and, notwithstanding any payments made by or for the account
of Guarantor pursuant to this Guarantee, Guarantor shall have no right of
subrogation, reimbursement, exoneration, indemnity, contribution or any other
rights that would result in Guarantor being deemed a creditor, under the federal
Bankruptcy Code or any other law or for any other purpose, of the Company or any
other person directly or contingently liable for the obligations guaranteed
hereunder and Guarantor hereby irrevocably waives all such rights, the right to
assert any such rights and any right to enforce any remedy which Beneficiaries
now or may hereafter have against the Company and hereby irrevocably waives any
benefit of and any right to participate in, any security now or hereafter held
by Beneficiaries, whether any of the foregoing rights arise in equity, at law or
by contract. Guarantor further agrees that nothing contained herein or otherwise
shall prevent Beneficiaries from pursuing concurrently or successively all
rights and remedies available to it at law and/or in equity or under any of the
documents evidencing the Obligations and the exercise of any of its rights or
remedies shall not constitute a discharge of any of Guarantors' obligations
hereunder, it being the purpose and intent of Guarantor that their obligations
hereunder shall be absolute, independent and unconditional under any and all
circumstances whatsoever.
-29-
<PAGE>
Guarantor hereby expressly waives: (a) notice of the acceptance by
Beneficiaries of this Guarantee; (b) notice of the existence or creation or non-
payment of all or any of the Obligations; (c) presentment, demand, notice of
dishonor, protest, notice of protest and all other notices whatsoever; (d) any
defense, right of set-off or other claim which Guarantor may have against the
Company or which Guarantor or the Company may have against Beneficiaries; (e)
all diligence in collection or protection of or realization upon the Obligations
or any thereof, any obligation hereunder, or any security for or Guarantee of
any of the foregoing; (f) any requirement of Beneficiaries to marshal; and (g)
any failure by Beneficiaries to inform Guarantor of any facts Beneficiaries may
now or hereafter know about the Company and the Obligations, it being understood
and agreed that Beneficiaries have no duty so to inform and that Guarantor is
fully responsible for being and remaining informed by the Company of all
circumstances bearing on the existence or creation, or the risk of nonpayment or
nonperformance of the Obligations.
No delay in the exercise of any right or remedy shall operate as a
waiver thereof, and no single or partial exercise by Beneficiaries of any right
or remedy shall preclude other or further exercise thereof or the exercise of
any other right or remedy; nor shall any modification or waiver of any of the
provisions of this Guarantee be binding upon Beneficiaries, except as expressly
set forth in a writing duly signed and delivered by all Beneficiaries. No
action of Beneficiaries permitted hereunder shall in any way affect or impair
the rights of Beneficiaries and the obligations of Guarantor under this
Guarantee.
This Guarantee shall not be discharged, impaired or affected by (a)
the power or authority or lack thereof of Sub to incur the Obligations; (b) the
validity or invalidity of the documents evidencing the Obligations or securing
the same; (c) any claims or defenses whatsoever that Sub or anyone else may or
might have to the payment or performance of the Obligations; (d) the existence
or non-existence of Sub as a legal entity; or (e) any right of offset,
counterclaim or defense (other than payment in full and performance in full of
all of the Obligations in accordance with the terms of the documents evidencing
and securing the Obligations) that Guarantor or Sub may or might have to their
undertakings under the Agreement, the related instruments, documents or
agreements referred to above, or the Obligations, each and every such defense
being hereby waived by Guarantor to the extent permitted by law.
This Guarantee shall be binding upon Guarantor and its successors and
assigns and shall inure to benefit of Beneficiaries and their respective
successors and assigns. No provision of this Guarantee may be waived by the
Company without the consent in writing of the other Beneficiaries.
All notices required or permitted to be given hereunder shall be in
writing and shall be either personally delivered or sent by United States
certified or registered mail, return receipt requested.
-30-
<PAGE>
This Guarantee has been delivered for acceptance by Beneficiaries in
Los Angeles, California and shall be governed by and construed in accordance
with the internal laws (as opposed to the conflicts of law provisions) of the
State of California. Guarantor hereby (i) irrevocably submits to the
jurisdiction of any state or federal court located in Los Angeles County,
California, over any action or proceeding to enforce or defend any matter
arising from or related to this Guarantee; (ii) irrevocably waives, to the
fullest extent Guarantor may effectively do so, the defense of an inconvenient
forum to the maintenance of any such action or proceeding; (iii) agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in any other jurisdictions by suit on the judgment or in any other
manner provided by law; and (iv) agrees not to institute any legal action or
proceeding against Beneficiaries or any of Beneficiaries' directors, officers,
employees, agents or property, concerning any matter arising out of or relating
to this Guarantee in any court other than one located in Los Angeles County,
California. Nothing in this paragraph shall affect or impair Beneficiaries'
right to serve legal process in any manner permitted by law or Beneficiaries'
right to bring any action or proceeding against Guarantor or its property in the
courts of any other jurisdiction. Wherever possible each provision of this
Guarantee shall be interpreted as to be effective and valid under applicable
law, but if any provision of this Guarantee shall be prohibited by or invalid
under such law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Guarantee.
Tarrant Apparel Group
By: ___________________________
Title: _______________________
-31-
<PAGE>
EXHIBIT 10.60
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *")
REFLECT PORTIONS WHICH HAVE BEEN REDACTED.
THE UNREDACTED EXHIBIT HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION AS
PART OF A REQUEST FOR CONFIDENTIAL TREATMENT
BY AND BETWEEN
MARSHALL GOBUTY INTERNATIONAL U.S.A., INC.
("SELLER")
AND
TARRANT APPAREL GROUP
("BUYER")
DATED AS OF FEBRUARY 18, 1998
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<S> <C>
EXHIBIT 1.1(a) LIST OF ORDERS
EXHIBIT 1.1(b)-1 LIST OF TRANSFERRED FURNITURE, FIXTURES AND EQUIPMENT
EXHIBIT 1.1(b)-2 LIST OF RETAINED FURNITURE, FIXTURES AND EQUIPMENT
EXHIBIT 1.1(c) LIST OF INVENTORY
EXHIBIT 1.1(d)-1 CULVER CITY LEASE
EXHIBIT 1.1(d)-2 HONG KONG LEASE
EXHIBIT 1.4-1 FORM OF PROMISSORY NOTE 1
EXHIBIT 1.4-2 FORM OF NOTE 1 LETTER OF CREDIT
EXHIBIT 1.4-3 FORM OF PROMISSORY NOTE 2
EXHIBIT 1.4-4 FORM OF NOTE 2 LETTER OF CREDIT
EXHIBIT 1.7 PURCHASE PRICE ALLOCATION
EXHIBIT 1.8 DISPUTE RESOLUTION PROCEDURES
EXHIBIT 3.8 DETERMINATION OF GROSS MARGIN
EXHIBIT 7.4(b)-1 FORM OF GOBUTY EMPLOYMENT AGREEMENT
EXHIBIT 7.4(b)-2 FORM OF NONCOMPETITION AGREEMENT
EXHIBIT 7.4(b)-3 TERMS OF SENIOR EMPLOYEES EMPLOYMENT
EXHIBIT 7.4(b)-4 FORM OF SENIOR EMPLOYEES EMPLOYMENT AGREEMENT
</TABLE>
-2-
<PAGE>
SCHEDULES
<TABLE>
<S> <C>
SCHEDULE 3.1 TITLE TO ASSETS
SCHEDULE 3.5 LITIGATION
</TABLE>
ALL SCHEDULES AND EXHIBITS HAVE BEEN OMITTED. ANY OMITTED
SCHEDULE OR EXHIBIT WILL BE FURNISHED SUPPLEMENTALLY TO THE
SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.
-3-
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
February 18, 1998 by and between TARRANT APPAREL GROUP, a California corporation
("Buyer"), and MARSHALL GOBUTY INTERNATIONAL U.S.A., INC., a California
corporation ("Seller").
RECITALS
--------
A. Seller owns certain assets which it uses in the conduct of its
business.
B. Seller desires to sell, and Buyer desires to purchase, such
assets and, in connection therewith, Buyer shall assume certain obligations and
liabilities related to such assets, in accordance with the terms and conditions
set forth in this Agreement.
C. Upon consummation of the transactions contemplated hereby, Buyer
shall establish the New Division (as hereinafter defined).
AGREEMENT
---------
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
ARTICLE 1
---------
SALE AND PURCHASE OF ASSETS
---------------------------
1.1 Sale and Purchase of Assets. Subject to the terms and conditions
---------------------------
set forth in this Agreement, on the Closing Date (as hereinafter defined),
Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer, and
Buyer hereby agrees to purchase from Seller, the following:
(i) all of Seller's rights under orders pending at the close of
business on the day before the Closing Date or arising thereafter ("Orders")
including, but not
-4-
<PAGE>
limited to, those forth on Exhibit 1.1(a) hereto (which exhibit shall be
--------------
updated through the Closing Date to reflect new orders that have been shipped
and a revised Exhibit 1.1(a) shall be delivered by Seller at the Closing which
--------------
shall show all Orders pending at the time of Closing (the "Closing Date Orders
Schedule"));
(ii) all of Seller's furniture, fixtures, equipment, computers and
other personal property used in connection with the business of Seller
including, but not limited to, those set forth on Exhibit 1.1(b)-1 hereto,
----------------
except with respect to leasehold improvements to the extent limited by the
provisions of the Culver City Lease and the Hong Kong Lease, each as hereinafter
defined ("FFE"), but excluding FFE set forth on Exhibit 1.1(b)-2 which shall be
----------------
retained by Seller following the Closing;
(iii) any inventory for Orders that is on hand at time of Closing as
described on Exhibit 1.1(c) hereto, including work in process (the "Inventory"),
--------------
which schedule shall be delivered by Seller to Buyer no later than three (3)
business days immediately preceding the Closing Date;
(iv) all of Seller's rights under the Vendor Orders (as hereinafter
defined);
(v) the security deposit (the "Culver City Security Deposit") held
under the lease attached as Exhibit 1.1(d)-1 hereto (the "Culver City Lease")
----------------
in the amount of U.S.$9,699.50, and subject to Section 5.5 below, the security
deposit (the "Hong Kong Security Deposit" and together with the Culver City
Security Deposit, the "Security Deposits") held under the lease attached as
Exhibit 1.1(d)-2 hereto (the "Hong Kong Lease" and together with the Culver
- ----------------
City Lease, the "Leases") in the amount of HK$132,900; and
(vi) Seller's books and records directly related to the Orders, the
FFE, the Inventory, the Vendor Orders and the Security Deposits.
The assets set forth in the preceding subparagraphs (i) through (vi) are
referred to collectively hereinafter as the "Assets."
1.2 Excluded Assets. Notwithstanding anything contained herein to
---------------
the contrary, the Assets shall not include any other assets of Seller
(including, but not limited to, the "NFL" license (the "License"), orders or
inventory related thereto or other assets directly related thereto) (the
"Excluded Assets"). The Excluded Assets are specifically excluded from the
Assets and shall be retained by Seller.
-5-
<PAGE>
1.3 Assumption of Liabilities.
-------------------------
(a) Assumed Liabilities. Upon the terms and subject to the conditions
-------------------
contained herein, at the Closing Date, Buyer shall assume all of the following
obligations of Seller (other than obligations which are then payable or as to
which Seller is then in default on the Closing Date): (i) the obligations of
Seller to perform the Orders, (ii) the obligations of Seller under orders
submitted by Seller to third parties in order to fulfill Seller's obligations
under the Orders (the "Vendor Orders")), and (iii) the obligations of Seller
under the Culver City Lease and, subject to Section 5.5 below, the obligations
of MGI (HK) Limited (the "Hong Kong Lessee") under the Hong Kong Lease
(collectively, the "Assumed Liabilities"). Except as otherwise expressly
provided in this Section 1.3(a), Buyer shall acquire the Assets free and clear
of all liens, claims, charges, encumbrances, liabilities, obligations and debts,
known or unknown, absolute, contingent, accrued or otherwise, including, but not
limited to:
(A) any liability, responsibility or obligation with
respect to the employment prior to the Closing Date or termination of employment
by Seller of its employees;
(B) except as provided in Section 1.9 below, liabilities
for taxes of any kind, whether federal, state, local or foreign, including, but
not limited to, interest, additions to tax or penalties applicable thereto with
respect to the operation of Seller's business or the transactions contemplated
hereby;
(C) any liability for claims with respect to accidents or
occurrences with respect to the operation of Seller's business or any product
liability claims or injuries, property damage or other losses arising with
respect to products sold or services provided by Seller with respect thereto;
(D) any liabilities for any chargebacks or returns by any
customer of Seller for products sold by Seller;
(E) any liability for any default in the performance of or
breach of any contract, agreement or commitment of Seller prior to the Closing
Date; and
-6-
<PAGE>
(F) any and all liability arising out of or in connection
with any litigation, including but not limited to the litigation disclosed in
Schedule 3.5 hereto.
- ------------
(b) Copies of Orders, Vendor Orders, Invoices for Inventory. At least
-------------------------------------------------------
three (3) business days prior to the Closing, Seller will provide Buyer with
copies of the Orders (the "Orders Copies"), the Vendor Orders ("Vendor Orders
Copies") and invoices (the "Inventory Copies") documenting the Inventory Amount
(the "Inventory Copies").
(c) Factory Rating. Upon the execution of this Agreement, Seller shall
--------------
provide Buyer with copies which are in Seller's possession of the factory
ratings (the "Factory Ratings Copies") of J.C. Penney Company, Inc. ("JCP") for
each of the Factories (as hereinafter defined) as to which the Factory Ratings
Copies relate.
1.4 Purchase Price and Other Payments at Closing.
--------------------------------------------
(a) Assets and Assumed Liabilities. The purchase price
------------------------------
("Purchase Price") for the Assets shall be:
(i) U.S.$1,000,000 payable as follows: (A) $500,000 in cash (by wire
transfer) to Seller at the Closing, (B) a promissory note
substantially in the form of Exhibit 1.4-1 hereto delivered at the
-------------
Closing in the principal amount of $300,000 bearing interest at a per
annum rate of seven percent (7%), with principal and accrued interest
due on or before July 31, 1998 ("Note 1"), secured by an irrevocable
letter of credit in favor of Seller (the "Note 1 Letter of Credit"),
payable upon presentment, from an institution and in a form
satisfactory to Seller and containing the draw provisions set forth on
Exhibit 1.4-2 hereto, and (C) a promissory note substantially in the
-------------
form of Exhibit 1.4-3 hereto delivered at the Closing in the principal
-------------
amount of $200,000 bearing interest at a per annum rate of seven
percent (7%), with principal and accrued interest due on or before
July 31, 1998 ("Note 2"), secured by an irrevocable letter of credit
in favor of Seller (the "Note 2 Letter of Credit"), payable upon
presentment, from an institution and in a form satisfactory to Seller
and containing the draw provisions set forth on Exhibit 1.4-4 hereto;
-------------
(ii) an amount (the "Inventory Amount") equal to Seller's cost of the
Inventory payable in cash (by wire transfer) at the Closing; and
-7-
<PAGE>
(iii) the assumption of the Assumed Liabilities.
(b) Offset Right. Note 1 shall be subject to a right of offset solely
------------
for (i) the breach by Seller of any of its representations and warranties
hereunder, and (ii) any liability incurred by Buyer as a result of chargebacks
or returns with respect to goods shipped by Seller prior to the Closing.
(c) Culver City Security Deposit. At Closing, Buyer shall reimburse
----------------------------
Seller (by wire transfer) for the amount of the Culver City Security Deposit.
(d) Escrow. In the event that the terms of the Note 1 Letter of
------
Credit and/or Note 2 Letter of Credit as set forth herein are not acceptable to
the institution requested to deliver the same or such institution imposes
conditions which are not consistent with the effect intended therefor as set
forth in this Agreement (including, without limitation, Exhibit 1.4-2 and/or
-------------
Exhibit 1.4-4), the parties hereby agree to enter into an escrow agreement
- --------------
containing the terms and conditions set forth herein and establish an escrow for
the purpose of administering the rights and obligations of the parties as
provided herein.
1.5 [Intentionally Omitted]
-----------------------
1.6 Payment of Purchase Price and Culver City Security Deposit. At
----------------------------------------------------------
the Closing, Buyer shall pay the Purchase Price (including the Inventory Amount)
and the Culver City Security Deposit to Seller in U.S. dollars by wire transfer
of immediately available funds to an account or accounts designated by Seller.
1.7 Allocation of Purchase Price. The Purchase Price shall be
----------------------------
allocated among the Assets as set forth on Exhibit 1.7 hereto. Seller and Buyer
-----------
shall so allocate the Purchase Price on all tax returns filed by them and shall
not take any position on any tax return inconsistent with such allocation.
1.8 Pro-Ration and Transfer of Utilities.
------------------------------------
(a) Apportionment. The following items (the "Utilities") shall be
-------------
apportioned between the parties as of the Closing Date so that all obligations
occurring before such date shall be obligations of Seller and all obligations
occurring after such date shall be obligations of Buyer: rent, service charges
for telephones, water, sewage, gas, utilities, electricity, oil and similar
services provided by third parties. Within thirty (30) days following the
Closing Date, Seller shall provide to Buyer a statement showing in reasonable
detail such apportionment (the "Statement").
-8-
<PAGE>
Within ten (10) days following receipt thereof, Buyer shall provide written
notice to Seller stating whether Buyer agrees or disagrees with such
apportionment. In the event Buyer agrees with such apportionment, Buyer shall
promptly pay the amount shown as due on the Statement. In the event the parties
cannot agree upon such apportionment, the parties shall use the average of the
two amounts proposed by the parties and payment by Buyer shall promptly be made
and such disagreement shall be resolved pursuant to the dispute resolution
provisions set forth on Exhibit 1.8 hereto.
-----------
(b) Use of Hong Kong Facilities; Payment of Utilities. Following
-------------------------------------------------
the Closing Date and prior to the effective date of the assumption by Buyer of
the Hong Kong Lease (the "Assumption Date"), Seller shall use its reasonable
efforts to make the facilities covered by the Hong Kong Lease available to Buyer
and Buyer shall be responsible for payment of all costs related thereto,
including, but not limited to, rent, utilities and insurance. In the event the
Hong Kong Lease is not assigned to Buyer, Buyer's obligations to make such
payments shall cease as of the effective time that Buyer no longer occupies such
facilities. Following the Assumption Date, Buyer shall cause the Utilities to be
transferred into the name of Buyer.
1.9 Sales Taxes. All sales taxes which may be payable as a result of
-----------
the transactions contemplated hereby shall be paid by Buyer.
ARTICLE 2
---------
CLOSING
-------
2.1 Closing Date. The closing of the transactions provided for
------------
herein shall take place at the offices of Manatt, Phelps & Phillips LLP, 11355
W. Olympic Boulevard, Los Angeles, California , at 10:00 a.m. on February 23,
1998, or at such other place, time or date as to which the parties may mutually
agree in writing, such date being referred to herein as the "Closing Date" or
the "Closing"; provided, however, that the Closing shall not occur until after
each of the conditions set forth in Articles 7 and 8 hereto have been materially
satisfied or waived by the relevant party.
2.2 Transfer of Possession. On the Closing Date, Seller, through its
----------------------
officers, agents and employees, will put Buyer into full possession of the
Assets.
2.3 Instruments of Transfer and Assumption.
--------------------------------------
-9-
<PAGE>
(a) At the Closing or the Assumption Date (as hereinafter defined),
as applicable, Seller will (and Seller shall cause the Hong Kong Lessee, as
applicable, to) execute and deliver to Buyer:
(i) on the Closing Date, a Bill of Sale in form and substance
satisfactory to the parties (the "Bill of Sale");
(ii) on the Closing Date, an Assignment of Lease (the "Assignment
of Lease") in form and substance satisfactory to the parties with respect to the
Culver City Lease;
(iii) on the Assumption Date, an Assignment of Lease in form and
substance satisfactory to the parties with respect to the Hong Kong Lease; and
(iv) an Assumption of Liabilities Agreement in form and substance
satisfactory to the parties evidencing Buyer's assumption of the Assumed
Liabilities (the "Assumption of Liabilities Agreement").
(b) From time to time after the Closing, Seller shall execute and
provide (and shall cause the Hong Kong Lessee to execute and provide) such other
endorsements, assignments, assumptions and other instruments of transfer in form
and substance reasonably satisfactory to Buyer, in each case, with such other
appropriate instruments of title and consents of third parties, reasonably
necessary to effectively transfer the Assets and the Assumed Liabilities.
2.4 Other Matters. On the Closing Date, each of the Ancillary
-------------
Agreements (as hereinafter defined) shall be executed and delivered by the
parties thereto, and Buyer and Seller shall deliver the certificates and other
matters described in Articles 7 and 8.
ARTICLE 3
---------
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller hereby represents and warrants to Buyer as set forth in this
Article 3. All representations and warranties made by Seller with respect to
the transactions contemplated hereby shall be limited exclusively to the
representations and warranties set forth in this Article 3 and no other
representations and warranties of Seller or its
-10-
<PAGE>
shareholders, officers, directors and agents shall be deemed to be made or to
have been made in connection therewith.
3.1 Ownership of Assets; Inventory. Except as set forth on Schedule
------------------------------ --------
3.1 hereto, Seller has valid title to the Assets, including work-in-progress
- ---
inventory, if any, free and clear of any liens, encumbrances, claims and demands
whatsoever. The Orders constitute valid and binding orders received by Seller
in the ordinary course of its business. The Inventory is merchantable and fit
for the purpose for which it was manufactured and subject to open orders which
can be timely consummated.
3.2 Authorization of Transaction. Seller has full power and
----------------------------
authority to execute and deliver this Agreement and each Ancillary Agreement to
which it is a party and to perform its obligations hereunder and thereunder.
This Agreement and each Ancillary Agreement to which it is a party constitute
the valid and legally binding obligations of Seller, enforceable against Seller
in accordance with its respective terms and conditions. Except with respect to
the Orders, the Leases and the liens set forth on Schedule 3.1 hereto (the
------------
"Liens"), Seller need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any third party, including without
limitation, any government or governmental agency in order to consummate the
transactions contemplated by this Agreement or any Ancillary Agreement.
3.3 No Conflicts with Agreements and Laws. Except as provided in
-------------------------------------
credit agreements pursuant to which the Liens were created, neither the
execution and the delivery of this Agreement or any Ancillary Agreement, nor the
consummation of the transactions contemplated hereby or thereby, will conflict
with, result in a breach of or constitute a default under any material agreement
or any statute, order, judgment, writ, injunction, decree, rule or regulation to
which Seller is a party or by which it is bound or to which any of its assets is
subject.
3.4 Leases. The Leases are valid and in full force and effect and,
------
to Seller's knowledge, no party to the Leases is in breach or default, and no
event has occurred which, with notice or lapse of time, would constitute a
breach or default or permit termination, modification, or acceleration
thereunder.
3.5. Litigation. Schedule 3.5 hereto sets forth each instance in
---------- ------------
which Seller (i) is subject to any outstanding injunction, judgment, order,
decree, ruling, or charge or (ii) is a party or, to the knowledge of Seller, is
threatened to be made a party to any action, suit, proceeding, hearing, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator.
-11-
<PAGE>
3.6 Legal Compliance. To Seller's knowledge, Seller has complied
-----------------
with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof),
except where the failure to comply would not have a material adverse effect on
the Assets, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.
3.7 Copies. The Orders Copies, the Vendor Orders Copies and the
------
Inventory Copies will be, when delivered pursuant to Section 1.3(a) above, true
and correct in all material respects. The Factory Ratings Copies are in the
form as provided to Seller by JCP.
3.8 Amount of Orders. Seller represents that it has received orders
----------------
to be shipped after the date of Closing but prior to December 31, 1998
aggregating at least [* *] at average gross margins aggregating at least [* *]
(it being understood that all determinations of average gross margins shall be
made in a manner consistent with Exhibit 3.8 hereto). The foregoing shall
------------
not be deemed to constitute a guarantee in any way that the amounts set forth in
the preceding sentence shall in fact be achieved after the Closing, and Seller
shall have no liability hereunder, and Buyer expressly waives any claim against
Buyer, if such amounts ultimately are not achieved.
ARTICLE 4
---------
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants to Seller as set forth in this
Article 4. All representations and warranties made by Buyer with respect to the
transactions contemplated hereby shall be limited exclusively to the
representations and warranties set forth in this Article 4, and no other
representations and warranties of Buyer or its shareholders, officers, directors
and agents shall be deemed to be made or to have been made in connection
therewith.
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED. THE UNREDACTED EXHIBIT HAS BEEN FILED SEPERATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT
-12-
<PAGE>
4.1 Authorization of Transaction. Buyer has full power and authority
----------------------------
to execute and deliver this Agreement and each Ancillary Agreement to which it
is a party and to perform its obligations hereunder and thereunder. This
Agreement and each Ancillary Agreement to which it is a party constitute the
valid and legally binding obligations of Buyer, enforceable against Buyer in
accordance with their respective terms and conditions. Buyer need not give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any third party, including without limitation, any government or
governmental agency in order to consummate the transactions contemplated by this
Agreement or any Ancillary Agreement.
4.2. No Conflicts with Agreements and Laws. Neither the execution and
-------------------------------------
the delivery of this Agreement or any Ancillary Agreement, nor the consummation
of the transactions contemplated hereby or thereby, will conflict with, result
in a breach of or constitute a default under any material agreement or any
statute, order, judgment, writ, injunction, decree, rule or regulation to which
Buyer is a party or by which it is bound or to which any of its assets is
subject.
ARTICLE 5
---------
COVENANTS AND AGREEMENTS OF SELLER
----------------------------------
5.1 Conduct of Business. During the period from the date hereof
-------------------
until the Closing, Seller shall use commercially reasonable efforts to conduct
the business of Seller only in the ordinary course consistent with past practice
except as contemplated by this Agreement.
5.2 Conditions. Seller agrees that from the date hereof to the
----------
Closing Date it will use commercially reasonable efforts:
(a) To satisfy the conditions precedent to consummation of the
transactions contemplated by this Agreement to the extent they are to be
performed by it, its agents or representatives.
(b) To cooperate with Buyer to obtain any consents required to
be obtained by Buyer pursuant to this Agreement.
(c) To obtain the consents required to be obtained by Seller
pursuant to this Agreement.
-13-
<PAGE>
(d) To fulfill all pending orders in the ordinary course of
business consistent with past practice.
5.3 Corporate Examinations and Investigations.
-----------------------------------------
(a) General. Buyer and its authorized representatives shall be
-------
permitted to conduct a business review of Seller, its business, assets and
prospects, subject to Seller's cooperation as set forth below and the provisions
of the Confidentiality Agreement dated February 5, 1998 as amended from time to
time (as amended, the "Confidentiality Agreement"). Subject to the
Confidentiality Agreement, Seller shall cooperate with Buyer's due diligence
review and shall afford Buyer and its representatives reasonable access to the
books, records, employees, agents and properties of Seller to enable Buyer to
make such investigations, audits or appraisals as it deems necessary or
advisable in connection with the transactions contemplated hereby. As part of
its due diligence investigation, Buyer shall be permitted to contact JCP and
Goody's Family Clothing, Inc. ("Goody's") prior to Closing, subject to Seller's
prior reasonable approval as to the timing and manner of such contacts.
(b) Factories. Following the execution of the Agreement and
---------
as a condition to Closing, Seller will provide Buyer with a list of the
factories used by Seller (the "Factories"). In the event the transactions
contemplated hereby are not consummated for any reason whatsoever, for a period
of two years after the date hereof, Buyer agrees (i) to keep confidential and
not to disclose to any party without Seller's prior written consent, which may
be withheld in its sole and absolute discretion, the identity of the Factories,
(ii) not to enter into any business relationships with the Factories or
otherwise use the Factories for the benefit of the Buyer, and (iii) not to,
directly or indirectly, solicit any contractual counterparty (which shall not be
deemed to include a customer or client) of Seller (other than a Factory with
which Buyer has had business relationships prior to the date hereof).
5.4 Further Assurances. Seller shall execute such documents and
------------------
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby (including, without limitation, the establishment of new vendor
identification numbers and the transfer of the Orders to Buyer). Seller shall
use its best efforts to fulfill or obtain the fulfillment of the conditions to
the Closing as promptly as practicable.
5.5 Assignment of Leases.
--------------------
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<PAGE>
(a) Culver City Lease. Seller shall use commercially
-----------------
reasonable efforts prior to the Closing to obtain the consent from the landlord
under the Culver City Lease and assurance from such landlord confirming there
are no existing defaults under the Culver City Lease. If such consent is
obtained, Seller shall assign the Culver City Lease to Buyer.
(b) Hong Kong Lease. The parties acknowledge and agree that
---------------
prior to the Closing no action shall be taken with respect to the Hong Kong
Lease. Immediately following the Closing, Seller shall use reasonable commercial
efforts (and shall cause the Hong Kong Lessee to use commercially reasonable
efforts) to obtain the consent of the landlord to the assumption by Buyer of the
Hong Kong Lease and assurance from such landlord confirming there are no
existing defaults under the Hong Kong Lease. If such consent is obtained, Seller
shall (and shall cause the Hong Kong Lessee to) assign the Hong Kong Lease to
Buyer. In the event the landlord under the Hong Kong Lease does not provide such
consent and the Hong Kong Lease is not assumed by Buyer, Seller and Buyer shall
cooperate to effect an orderly transition of employees to other facilities.
5.6 Orderly Transition. Following Closing, Seller shall cooperate
------------------
with Buyer to effect an orderly transition of employees to other facilities and
as otherwise Buyer may deem to be necessary or desirable.
5.7 Return of Buyer Funds. In the event following the Closing any
---------------------
funds intended for the benefit of Buyer are paid to or received by Seller,
Seller shall promptly pay or forward such funds to Buyer within five (5) days of
receipt thereof.
ARTICLE 6
---------
COVENANTS AND AGREEMENTS OF BUYER
---------------------------------
6.1 Conditions. Buyer agrees that from the date hereof to the
----------
Closing Date, it will use commercially reasonable efforts:
(a) To satisfy the conditions precedent to consummation of the
transactions contemplated by this Agreement to the extent they are to be
performed by it, its agents or representatives.
(b) To cooperate with Seller to obtain any consents required to
be obtained by Seller pursuant to this Agreement.
-15-
<PAGE>
(c) To obtain the consents required to be obtained by Buyer
pursuant to this Agreement.
6.2 Further Assurances. Buyer shall execute such documents and
------------------
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby. Buyer shall use its best efforts to fulfill or obtain the fulfillment
of the conditions to the Closing as promptly as practicable.
6.3 Records. After the Closing, the New Division shall maintain,
-------
and Buyer shall cause the New Division to maintain, all books and records in an
orderly and businesslike fashion and shall permit Seller to have reasonable
access at Seller's expense to such books, records and data of which Seller has
no copy in connection with the preparation of Seller's financial reports, tax
returns, tax audits, the defense or prosecution of litigation (including
arbitration), or any other reasonable need of Seller to consult such records and
data in order to satisfy their obligations herein. Such information shall be
deemed to be Buyer's Confidential Information (as defined in the Confidentiality
Agreement) and Seller shall be deemed to be a Receiving Party (as defined in the
Confidentiality Agreement) and bound by the obligations applicable to a
Receiving Party with respect thereto.
6.4 [Intentionally Omitted]
6.5 Orderly Transition. Following Closing, the Buyer shall cooperate
------------------
with Seller to effect an orderly transition of employees to other facilities and
as otherwise Buyer may deem to be necessary or desirable. In addition, for a
twelve-month period after the Closing, Buyer shall make office space available
to a personal employee of Marshall Gobuty ("Gobuty"), free of charge to Gobuty,
at the same location as Gobuty's office provided by Buyer is located.
6.6 Releases. Prior to the Closing, Buyer shall use commercially
--------
reasonable efforts to assist Seller to obtain a release of liability (the
"Culver City Release") from the landlord under the Culver City Lease (if the
Culver City Lease is assumed by Buyer), provided that the foregoing shall not be
deemed to be a condition for Buyer assuming the Culver City Lease. Following
the Closing, Buyer shall use commercially reasonable efforts to assist Seller
and the Hong Kong Lessee to obtain a release of liability (the "Hong Kong
Release") from the landlord under the Hong Kong Lease (if the Hong Kong Lease is
assumed by Buyer), provided that the foregoing shall not be deemed to be a
condition for Buyer assuming the Hong Kong Lease.
-16-
<PAGE>
6.7 Security Deposits. On the Closing Date, Buyer shall reimburse
-----------------
Seller (by wire transfer) for the amount of the Culver City Security Deposit and
on the Assumption Date, Buyer shall reimburse Seller (by wire transfer) for the
amount of the Hong Kong Security Deposit.
6.8 Pre-Closing Profits. Buyer agrees that all profits earned by
-------------------
Seller with respect to sales consummated by Seller prior to the Closing
(including, but not limited to, sales with respect to the License) are for the
benefit of Seller and shall be retained by Seller following the Closing.
6.9 New Division. Upon consummation of the transactions contemplated
------------
hereby, Buyer and its affiliates shall establish the New Division for the
purpose of conducting business with JCP and Goody's and their respective
affiliates, successors and assigns and all such business shall be engaged in by
Buyer, its affiliates and successors, through the New Division at least through
December 31, 1999. Despite the foregoing, all such business shall be deemed to
be conducted by the New Division thereafter.
6.10 Employee Matters. Upon Closing, Seller shall terminate all
----------------
Seller's employees and pay to them all accrued but unpaid wages, including
vacation pay, and Buyer will offer to hire all Seller's employees on terms and
conditions similar to their current employment. If at any time within three
years following the Closing Buyer terminates any employee that accepts
employment (other than Gobuty or the Senior Employees (as hereinafter defined))
for any reason other than "cause" as defined in the Gobuty Employment Agreement
or the Senior Employee Employment Agreements (as applicable to the subject
employee, "Cause"), such employee shall receive a lump sum payment equal to [*
*] salary then applicable to such employee for each full year of service with
Seller or its predecessor, MGI (HK) Limited, prior to the Closing and with Buyer
following the Closing with a minimum payment of [* *] salary. If at any time
within three years following the Closing the employment of any such employee is
terminated for any reason (except if such termination by Buyer is without
Cause), such employee shall forego his or her rights to receive the severance
benefits applicable to such employee as described above.
6.11 Return of Seller Funds. In the event following the Closing any
----------------------
funds intended for the benefit of Seller are paid to or received by Buyer, Buyer
shall promptly pay or forward such funds to Seller within five (5) days of
receipt thereof.
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED. THE UNREDACTED EXHIBIT HAS BEEN FILED SEPERATELY WITH THE SECURITIES
AND EXCHANGE COMISSION AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT
-17-
<PAGE>
ARTICLE 7
---------
CONDITIONS TO THE OBLIGATIONS OF SELLER
---------------------------------------
The obligation of Seller to enter into and complete the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it, to the extent
permitted by law.
7.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as though made at and as of that
date, except changes that occur as a result of the passage of time.
7.2 Compliance with Covenants. Buyer shall in all material respects
-------------------------
have performed and complied with all terms, agreements, covenants and conditions
of this Agreement to be performed or complied with by it on or prior to the
Closing Date.
7.3 Absence of Litigation. No action, suit, or proceeding shall be
---------------------
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or cause any of the transactions contemplated by this Agreement
to be rescinded following consummation.
7.4 Payment of Purchase Price and Culver City Security Deposit,
-----------------------------------------------------------
Execution and Delivery of Ancillary Agreements. Buyer shall have:
- ----------------------------------------------
(a) made payment of the Purchase Price and the Culver City Security
Deposit as provided herein,
(b) executed and delivered to each applicable counterparty (i) an
Employment Agreement between Buyer and Gobuty substantially in the form of
Exhibit 7.4(b)-1 hereto (the "Gobuty Employment Agreement"), (i) the
- ----------------
Noncompetition Agreement substantially in the form of Exhibit 7.4(b)-2 hereto
---------------
(the "Noncompetition Agreement"), (iii) an Employment Agreement between Buyer
and each employee set forth on Exhibit 7.4(b)-3 hereto (the "Senior Employees")
----------------
substantially in the form of Exhibit 7.4(b)-4 hereto (the "Senior Employee
----------------
Employment Agreements") and containing the terms set forth for each such
employee on Schedule 7.4(b)-3, (iv) Note 1 (together with the Note 1 Letter of
-----------------
Credit), (v) Note
-18-
<PAGE>
2 (together with the Note 2 Letter of Credit), (vi) the Bill of Sale, (vii) the
Assumption of Liabilities Agreement, and (viii) the Assignment of Lease with
respect to the Culver City Lease. The agreements and documents referred to in
this Section 7.4 are referred to collectively herein as the "Ancillary
Agreements."
(c) provided evidence that Gobuty shall be covered under Buyer's
insurance policy covering its directors and officers.
7.5 No Public Announcement. There shall have occurred no public
----------------------
announcement or other disclosure by a party of the transactions contemplated
hereby (other than as contemplated by this Agreement or to Buyer's professional
advisors who are bound by a duty of confidentiality with respect thereto)
without the prior written consent of the other party provided that this
condition shall be deemed satisfied if such announcement or other disclosure is
required to be made by Buyer under applicable securities laws except as a result
of a breach of any provision of the Confidentiality Agreement by Buyer or
Buyer's Representatives (as defined in the Confidentiality Agreement); provided
--------
that solely for purposes of this Agreement, in determining whether there has
been a breach of the Confidentiality Agreement under Section 6 thereof, any
press release or announcement by Buyer with respect to the Transaction (as
defined in the Confidentiality Agreement) shall be deemed a breach of Section 6
unless (i) Seller has provided its prior written consent thereto, or (ii) such
press release or announcement was required as set forth in said Section 6 as a
result of actions taken by any parties other than Buyer or Buyer's
representatives.
7.6 Consents and Approvals. All waivers, licenses, agreements,
----------------------
permits, consents, approvals or authorizations of third parties or governmental
agencies or any modifications or amendments to existing agreements with third
parties required to be obtained by Seller or Buyer (other than with respect to
the Orders and the Leases) shall have been obtained and shall be in full force
and effect and without conditions or limitations which unreasonably restrict the
ability of the parties hereto to carry out the transactions contemplated hereby,
and Buyer shall have been furnished with appropriate evidence, reasonably
satisfactory to it and its counsel, of the granting of same. With respect to
the Orders, Buyer shall have been furnished with the consents of JCP and Goody's
to the transfer of the Orders.
7.7 Release of Liens. The Liens shall have been released.
----------------
-19-
<PAGE>
ARTICLE 8
---------
CONDITIONS TO THE OBLIGATIONS OF BUYER
--------------------------------------
The obligation of Buyer to enter into and complete the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it, to the extent
permitted by law.
8.1 Representations and Covenants. The representations and
-----------------------------
warranties of Seller contained in this Agreement shall be true and correct in
all material respects on and as of the Closing Date as though made at and as of
that date, except changes that occur as a result of the passage of time.
8.2 Compliance with Covenants. Seller shall in all material respects
-------------------------
have performed and complied with all terms, agreements, covenants and conditions
of this Agreement to be performed or complied with by it on or prior to the
Closing Date.
8.3 Absence of Litigation. No action, suit, or proceeding shall be
---------------------
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or cause any of the transactions contemplated by this Agreement
to be rescinded following consummation.
8.4 Consents and Approvals. All waivers, licenses, agreements,
----------------------
permits, consents, approvals or authorizations of third parties or governmental
agencies or any modifications or amendments to existing agreements with third
parties required to be obtained by Seller or Buyer (other than with respect to
the Orders and the Leases) shall have been obtained and shall be in full force
and effect and without conditions or limitations which unreasonably restrict the
ability of the parties hereto to carry out the transactions contemplated hereby,
and Buyer shall have been furnished with appropriate evidence, reasonably
satisfactory to it and its counsel, of the granting of same. With respect to
the Orders, Buyer shall have been furnished with the consents of JCP and Goody's
to the transfer of the Orders.
8.5 Due Diligence Review. Buyer shall have conducted its due
--------------------
diligence review pursuant to Section 5.3(a) above and shall be reasonably
satisfied (i) with respect to its review of the Orders, the Factories and the
relationships with JCP
-20-
<PAGE>
and Goody's, and (ii) that there has been no breach of the representations and
warranties or the pre-closing covenants of Seller made pursuant to this
Agreement.
8.6 Execution and Delivery of Ancillary Agreements. Seller and the
----------------------------------------------
other parties to the Ancillary Agreements shall have executed and delivered to
Buyer this Agreement and each Ancillary Agreement to which it is a party, and
Seller shall deliver the Closing Date Orders Schedule, the Orders Copies, the
Vendor Orders Copies and the Inventory Copies.
8.8 Gobuty Medical Examination. At least three (3) business days
--------------------------
prior to Closing, Buyer shall have received the results of a medical examination
of Gobuty (the "Medical Examination"), which results shall reasonably
demonstrate to Buyer that Gobuty will be capable of performing the duties under
the Gobuty Employment Agreement.
8.9 Release of Liens. The Liens shall have been released and
----------------
evidence thereof provided to Buyer, which shall be satisfactory to Buyer in all
material respects.
ARTICLE 9
---------
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
------------------------------------------
9.1 All of the representations and warranties of the parties hereto
shall expire one (1) year after the Closing Date and shall thereafter be of no
force and effect. Subject to the preceding sentence, all representations,
warranties, covenants and agreements of the parties hereto shall survive the
Closing Date notwithstanding any investigations made by or on behalf of the
parties.
ARTICLE 10
----------
INDEMNIFICATION
---------------
10.1 Indemnification of Buyer. Subject to the limitations set forth
------------------------
herein, Seller shall indemnify and hold Buyer harmless from, against, for and in
respect of any and all damages, losses, settlement payments, obligations,
liabilities, claims, costs and expenses (collectively, "Costs") incurred or paid
by Buyer arising out of (i) the breach of any representation, warranty or
covenant of Seller in this Agreement, (ii) any liability relating to the
business of Seller or the transactions
-21-
<PAGE>
contemplated hereby other than an Assumed Liability, or (iii) any liability
incurred by Buyer as a result of chargebacks or returns with respect to goods
shipped by Seller prior to the Closing.
Notwithstanding the foregoing:
(a) no indemnification shall be made with respect to any matter
to the extent that insurance proceeds have been collected by Buyer with respect
to such matter; and
(b) the aggregate amount of actual amounts paid by Seller for
breach of any representation, warranty or covenant of Seller in this Agreement
shall not exceed the Purchase Price (but only to the extent actually paid).
10.2 Indemnification of Seller. Subject to the limitations
-------------------------
hereinafter set forth, Buyer shall indemnify and hold Seller (and, with respect
to clause (iii) below, the Hong Kong Lessee) harmless from, against, for and in
respect of any and all Costs paid by Seller arising out of (i) the breach of any
representation, warranty or covenant of Buyer in this Agreement, (ii) if the
Culver City Release is not obtained, for any liability arising under the Culver
City Lease following the Closing, (iii) if the Hong Kong Lease is assumed by
Buyer following the Closing and the Hong Kong Release is not obtained, for any
liability arising under the Hong Kong Lease following the Closing, (iv) the
Assumed Liabilities, or (v) the operation of the New Division following the
Closing.
10.3 Rules Regarding Indemnification.
-------------------------------
(a) The obligations and liabilities of each indemnifying party
hereunder shall be subject to the following terms and conditions:
(i) The indemnified party shall give prompt written notice to the
indemnifying party of any claim which might give rise to a claim by the
indemnified party against the indemnifying party based on the indemnity
agreements contained in Sections 10.1 and 10.2 hereof, stating the nature and
basis of said claims and the amounts thereof, to the extent known.
(ii) In the event any action, suit or proceeding is brought
against the indemnified party, with respect to which the indemnifying party may
have liability under the indemnity agreements contained in Sections 10.1 and
10.2 hereof, the action, suit or proceeding shall, upon the written
acknowledgment by the
-22-
<PAGE>
indemnifying party that it is obligated to indemnify under such indemnity
agreement, be defended (including all proceedings on appeal or for review) by
the indemnifying party; provided, however, that if the indemnifying party does
-----------------
not promptly undertake such defense, the indemnified party shall be entitled to
assume the defense thereof. The indemnified party shall have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the indemnified party's own expense. In such cases, the indemnified
party shall make available to the indemnifying party and its attorneys and
accountants all books and records of the indemnified party relating to such
proceedings or litigation and the parties hereto agree to render to each other
such assistance as they may reasonably require of each other in order to ensure
the proper and adequate defense of any such action, suit or proceeding.
(b) Neither the indemnified party nor the indemnifying party shall
make any settlement of any claims without the written consent of the other
party, which consent shall not be unreasonably withheld or delayed. In
addition, if, within ten (10) days of receipt of notice of a proposed settlement
amount, the indemnified party notifies the indemnifying party that the terms of
such proposed settlement are unacceptable to the indemnified party then the
indemnified party shall undertake the defense of the litigation and the
liability of the indemnifying party shall be limited to the amount of the
proposed settlement. Further, if for any reason the indemnified party
determines that it is in its best interests to handle the defense of a claim for
which it is entitled to indemnification from the indemnifying party, the
indemnified party and indemnifying party shall endeavor in good faith to reach
an agreement by which the indemnified party shall release the indemnifying party
in consideration for the payment by the indemnifying party to the indemnified
party of the estimated value of the claim.
(c) Each party's sole and exclusive remedy against the other for any
breach of a representation, warranty, covenant or other obligation made in or
imposed by this Agreement with respect to such party shall be a claim for
indemnification subject to the limitations set forth in this Article 10.
(d) With respect to any matter for which indemnification has been
provided hereunder the indemnified party hereby covenants and agrees to
cooperate with the indemnifying party to assign any of its rights under any
insurance policy in the indemnified party's name against a loss covered by such
policy.
10.4 Tax Benefits. In determining the amount of any claims of a party
-------------
("Claims"), such amount shall be reduced by the amount of any tax benefit
effects (collectively, the "Tax Effects") accruing to such party related to the
-----------
Claims or to the payments made pursuant to such Claims. The Tax Effects shall
be determined by
-23-
<PAGE>
taking into account all facts and circumstances existing at the Closing Date
through the future date(s) to which such benefits run (to the extent of the
present value thereof, discounted at the applicable short term applicable
federal rate, as of the date of such indemnification). For purposes of
determining the time or times at which Tax Effects shall be taken into account
to reduce any indemnification claims hereunder, the parties agree that Tax
Effects shall reduce the amount of any indemnification claims under this Article
10 only if, as and when actually realized by a party. In the event a party has
paid for an indemnification claim which is later subject to reduction due to a
Tax Effect, the party which has received such payment shall promptly pay such
amount to the paying party at the time actually realized by the receiving party.
ARTICLE 11
----------
TERMINATION OF AGREEMENT
------------------------
11.1 Termination. This Agreement may be terminated prior to the
-----------
Closing by either party without liability therefor (except as expressly provided
in Section 12.7) as follows:
(a) At the election of Seller or Buyer, if for any reason the Closing
has not occurred on or before February 23, 1998 (time being of the essence in
respect of the transactions contemplated by this Agreement);
(b) At the election of Seller or Buyer, if any legal proceeding is
threatened or commenced by any governmental or regulatory body or person (other
than Seller or Buyer or any affiliate of Seller or Buyer) to restrain, modify or
prevent the carrying out of the transactions contemplated under this Agreement
and either Seller or Buyer, as the case may be, reasonably and in good faith
deems it impractical or inadvisable to proceed in view of such legal proceeding
or threat thereof;
(c) At any time on or prior to the Closing Date, by written agreement
of Seller or Buyer;
(d) By Seller, if there has been: (i) a material misrepresentation on
the part of Buyer of Buyer's representations and warranties contained in this
Agreement; or (ii) a material breach by Buyer of any covenant or agreement of
Buyer contained in this Agreement; or
-24-
<PAGE>
(e) By Buyer, if there has been: (i) a material
misrepresentation on the part of Seller of the representations and warranties of
Seller contained in this Agreement; or (ii) a material breach by Seller of any
covenant or agreement of Seller contained in this Agreement.
11.2 Survival. In the event this Agreement is terminated pursuant to
--------
Section 11.1 and the transactions contemplated hereby are not consummated as
described above, this Agreement shall be of no further force and effect, except
for the provisions of this Section 11.2 and Sections 5.3(b), 12.3 and 12.7,
which shall survive in accordance with their own respective terms.
ARTICLE 12
----------
MISCELLANEOUS
-------------
12.1 Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally or sent by
facsimile transmission and shall be deemed given when so delivered personally or
sent by facsimile transmission as follows:
(i) If to Seller to:
Marshall Gobuty International U.S.A., Inc.
6076 Bristol Parkway, Suite 106
Culver City, California 90230
Attention: President
Telecopier: (818) 501-5835
-25-
<PAGE>
with a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attention: Lawrence M. Braun, Esquire
Telecopier: (213) 620-1398
(ii) If to Buyer to:
Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
Attention: Chief Financial Officer
Telecopier: (213) 881-0368
with a copy to:
Manatt, Phelps & Phillips LLP
11355 W. Olympic Boulevard
Los Angeles, California 90064-1614
Attention: Peter M. Menard, Esquire
Telecopier: (310) 312-4224
Any party may by notice given in accordance with this Section 12.1 to
the other parties designate another address or person for receipt of notices
hereunder.
12.2 Entire Agreement. This Agreement (including the Schedules
----------------
hereto), the Ancillary Agreements and the Confidentiality Agreement contain the
entire agreement of the parties with respect to the purchase of the Assets and
related transactions, and supersede all prior agreements written or oral with
respect thereto.
12.3 No Publicity; Employee Letters. Notwithstanding anything to the
------------------------------
contrary in the Confidentiality Agreement, the parties agree not to disclose the
terms of this Agreement without the other party's prior written consent, which
may be withheld in the sole and absolute discretion of such party, except for
such disclosure as counsel for Buyer shall deem to be required by SEC rules
and/or applicable securities laws; provided that any such disclosure to be made
--------
by Buyer shall be subject to prior review and reasonable approval of Seller
(including without limitation prior review of SEC
-26-
<PAGE>
filings and press releases regarding the transactions contemplated hereby).
Buyer and Seller agree that such disclosure requirements will include a public
filing of the Agreement and related description of the transactions contemplated
hereby in either a Form 8-K or Form 10-K and concurrent news release (subject to
prior review and consent in accordance with this Section 12.3). The parties
agree to jointly prepare a letter to be delivered to each of Seller's employees
with regard to the transactions contemplated hereby. Notwithstanding anything
herein to the contrary, with respect to any SEC filing or other required
disclosure under applicable securities laws, Buyer shall seek "confidential
treatment" from the SEC and other applicable securities authorities in respect
of any disclosure of gross margins of Seller hereunder (such as in Section 3.8
hereof and the employment agreements that are exhibits hereto) or otherwise and
the second and third sentences of Section 6.10 and shall immediately provide
copies to Seller of any filings or other correspondence relating to such
confidential treatment request.
12.4 Bulk Sales. The parties waive compliance with the procedures of
----------
the "Bulk Sales Act" or any similar law. Seller hereby agrees that the
indemnity provisions of Section 10.1 (other than Section 10.1(b)) hereof shall
apply to any Costs of Buyer arising out of or resulting from the failure to
comply with such laws.
12.5 Waivers and Amendments; Non-Contractual Remedies; Preservation of
-----------------------------------------------------------------
Remedies. This Agreement may be amended, superseded, canceled, renewed or
- --------
extended, and the terms hereof may be waived, only by a written instrument
signed by each of the parties or, in the case of a waiver, by the party waiving
compliance. From time to time prior to the Closing Date, Seller shall promptly
supplement or amend any representations and warranties of Seller herein or in
the schedules hereto which would have been required to be set forth or described
in such representations, warranties and schedules which is necessary to correct
any information which has become inaccurate therein, provided, however, that any
-----------------
such supplement or amendment shall not affect Buyer's right to terminate the
Agreement as a result thereof. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or relinquishment of any right
granted hereunder or of the future performance of any such term or condition. No
waiver on the part of any party of any right, power or privilege, nor any single
or partial exercise of any such right, power or privilege, shall preclude any
further exercise thereof or the exercise of any other such right, power or
privilege. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies that any party may otherwise have at law or
in equity. The rights and remedies of any party based upon, arising out of or
otherwise in respect of any inaccuracy in or breach of any representation,
warranty, covenant or
-27-
<PAGE>
agreement contained in this Agreement shall in no way be limited by (i) the fact
that the act, omission, occurrence or other state of facts upon which any claim
of any such inaccuracy or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach, or (ii) any investigation or knowledge of the
inaccuracy or breach by either party.
12.6 Governing Law; Submission to Jurisdiction. This Agreement shall
-----------------------------------------
be governed by and construed in accordance with the substantive and procedural
laws of the State of California applicable to agreements made and to be
performed entirely within such State. Each of the parties submits to the
jurisdiction of any state or federal court sitting in Los Angeles, California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto. Any
party may make service on any other party by sending or delivering a copy of the
process to the party to be served at the address and in the manner provided for
the giving of notices in Section 12.1 above. Each party agrees that a final
judgment in any action or proceeding so brought shall be conclusive and may be
enforced by suit on the judgment or in any other manner provided by law or at
equity.
12.7 Expenses. Each party shall bear its own out-of-pocket expenses
--------
incurred in connection herewith or pursuant to the negotiation and preparation
of the Agreement, including, without limitation, all legal, accounting,
investment banking, travel and other similar fees and expenses. In the event
(i) the transactions contemplated hereby are not consummated on or prior to
February 23, 1998 as the result of the intentional failure by a party to use
commercially reasonable efforts to satisfy a condition to Closing which
condition is within the control of such party, or (ii) Buyer causes the
condition specified in Section 7.5 not to be satisfied as a result of the
actions of Buyer, or its directors, officers or agents, with respect to clause
(i) above, such party shall reimburse the other party, and with respect to
clause (ii) above, Buyer shall reimburse Seller, for its costs and expenses
(including attorneys' fees and costs); provided that so long as an event does
not occur with respect to clause (ii) above, Buyer shall not be required to pay
Seller's costs if Buyer reasonably determines not to consummate the transactions
contemplated hereby as a result of its due diligence investigation relating to
the Orders, the relationships with JCP or Goody's, the Factories or the Medical
Examination. The provisions of this Section 12.7 shall be a
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party's sole and exclusive remedy with respect to the termination of this
Agreement prior to Closing.
12.8 Binding Effect; Assignment. This Agreement shall be binding upon
--------------------------
and inure to the benefit of the parties and their respective successors and
assigns and legal representatives. Neither this Agreement, nor any right
hereunder, may be assigned by any party without the written consent of the other
party hereto. Any non-permitted assignment or attempted assignment shall be
void.
12.9 No Third Party Beneficiaries. Nothing in this Agreement is
----------------------------
intended or shall be construed to give any person any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
12.10 Counterparts; Facsimiles. This Agreement may be executed by the
------------------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto. Delivery of an executed counterpart of the signature
page to this Agreement by facsimile shall be as effective as delivery of a
manually executed counterpart of this Agreement; provided, that any party so
delivering an executed counterpart by facsimile shall thereafter promptly
deliver a manually executed counterpart of this Agreement to the other party,
but failure to deliver such manually executed counterpart shall not affect the
validity, enforceability and binding effect of this Agreement.
12.11 Schedules. The Schedules are a part of this Agreement as if
---------
fully set forth herein. All references herein to Articles, Sections, paragraphs
and Schedules shall be deemed references to such parts of this Agreement unless
otherwise specified.
12.12 Headings. The headings in this Agreement are for reference only
--------
and shall not affect the interpretation of this Agreement.
12.13 Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
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<PAGE>
12.14 Time of Essence. Time is of the essence for each and every
---------------
provision of this Agreement.
12.15 Attorneys' Fees. If any legal action or other proceeding is
---------------
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
12.16 Reference to U.S. Dollars. All references in this Agreement
--------------------------
to amounts of money expressed in dollars are references to United States
dollars, unless express reference is made to currency of another country.
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<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have duly executed and delivered
this Agreement as of the date first above written.
MARSHALL GOBUTY INTERNATIONAL U.S.A.,
INC., a California corporation
By /s/ Marshall Gobuty
---------------------------------
Marshall Gobuty, President
TARRANT APPAREL GROUP,
a California corporation
By: /s/ Mark B. Kristof
-------------------------------
Title: Vice President
-------------------------------
<PAGE>
EXHIBIT 10.61
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement"), effective as of February 23,
1998 ("Effective Date"), is entered into between Marshall Gobuty ("Executive")
and Tarrant Apparel Group, a California corporation (the "Company"), with
reference to the following facts:
A. The Company desires to establish its right to the services of
Executive, in the capacities described below, on the terms and conditions
hereinafter set forth, and Executive is willing to accept such employment on
such terms and conditions.
NOW, THEREFORE, IN CONSIDERATION OF the mutual agreements hereinafter
set forth, Executive and the Company agree as follows:
1. EMPLOYMENT WITH THE COMPANY.
---------------------------
1.1 Duties. The Company does hereby employ Executive as a Vice
------
President-Men's of the Company, and Executive does hereby accept and agree to
such employment. Subject to the supervision and control of the Board of
Directors, President and Chief Executive Officer of the Company, Executive shall
have responsibility for the management of a new division of the Company which
is established to conduct all business of the Company and its affiliates,
wherever located, with J.C. Penney Company, Inc. and Goody's Family Clothing,
their affiliates, successors and assigns (the "Division") and shall do and
perform all services necessary or advisable to exercise such responsibility and
to otherwise carry out his duties and responsibilities under this Agreement.
Executive agrees to devote substantially all of his working time and efforts
exclusively to the business of the Company. The foregoing shall not, however,
limit the right of Executive to wind down the affairs of his businesses that
have been sold to the Company and its affiliates and to continue to participate
in Executive's businesses related to the licensed "Handcuffs" product line or
NFL licenses (the "Permitted Businesses"); provided, that such participation
does not materially and adversely affect Executive's ability to carry out his
duties and responsibilities under this Agreement; and provided further, that
from and after four (4) months after the Effective Date, Employee shall not be
active in the Permitted Businesses.
1.2 Place of Performance. In connection with Executive's
--------------------
employment by the Company, Executive shall be based at the principal executive
offices of the Company in Los Angeles County, California.
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<PAGE>
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
-----------------
commence on the Effective Date and shall continue for a period of one year. No
longer than 30 days prior to the expiration of the initial Term, the parties
shall attempt to negotiate in good faith (without obligation) an extension of
the Term which would include, without limitation, the issuance of stock options
to Executive, the payment of a target (i.e., for future periods) incentive bonus
to Executive and other mutually agreeable benefits and perquisites.
3. COMPENSATION.
------------
3.1 Base Salary. The Company shall pay Executive an annual base
-----------
salary at the rate of $375,000 per year ("Base Salary"), payable in equal
biweekly installments or at such other time or times as Executive and the
Company shall agree. Except as otherwise provided herein, the Company's
obligation to pay Executive's Base Salary under this Agreement shall cease as of
the date of termination of Executive's employment.
3.2 Fringe Benefits. Executive shall be entitled to participate
---------------
in any fringe and other benefit programs adopted from time to time by the
Company for the benefit of its senior executive employees, including but not
limited to, vacation, sick leave, reimbursement of business expenses, life
insurance, dental, medical and similar plans.
4. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
-------------------------------------
4.1 Death. In the event Executive's employment hereunder is
-----
terminated by reason of Executive's death, the Company shall pay to Executive's
estate any amounts accrued hereunder to the date of death.
4.2 Disability. If, as a result of Executive's incapacity due
----------
to physical or mental illness ("Disability"), Executive shall have been absent
from the full-time performance of his duties with the Company for a period of
six (6) consecutive months and, within thirty (30) days after written notice is
provided to him by the Company, he shall not have returned to the full-time
performance of his duties, Executive's employment under this Agreement may be
terminated by the Company for Disability. Upon such termination, the Company
shall pay Executive any amounts accrued hereunder to the date of such
termination reduced to the extent of payments Executive has received through
disability insurance provided and paid for by the Company or payments received
from governmental programs. During any period prior to such termination during
which Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay
-2-
<PAGE>
Executive his Base Salary at the rate in effect at the commencement of such
period of Disability.
4.3 Termination for Cause. The Company may terminate
---------------------
Executive's employment under this Agreement for "Cause" at any time prior to
expiration of the Term of this Agreement. For this purpose, "Cause" shall mean
(a) the willful and material breach of this Agreement by Executive which is not
cured within 30 days of Executive's receipt of written notice from the Company
describing in reasonable detail the nature of such breach, (b) fraud,
misappropriation or embezzlement or other act of material misconduct against the
Company, (c) conviction of or a plea of nolo contendere to a felony involving
moral turpitude, (d) a charge or indictment of a felony involving moral
turpitude, the defense of which renders Executive substantially unable to
perform his services hereunder, or (e) habitual neglect to perform Executive's
duties if Executive has failed to cure such neglect within 30 days following
receipt of written notice from the Company describing in reasonable detail such
neglect. Except as provided above, Executive's employment may be terminated for
Cause by the Board of Directors immediately without advance written notice.
Upon its termination by the Board of Directors pursuant to this Section 4.3,
this Agreement shall terminate without further obligation by the Company, except
for payment of amounts of Base Salary accrued through the date of written
notice.
4.4 Termination by the Company Other Than for Death, Disability
-----------------------------------------------------------
or Cause. If Executive's employment is terminated by the Company for any reason
- --------
other than Executive's death, Disability or for Cause, the Company may terminate
Executive's employment upon notice so long as simultaneously with such notice
Company shall pay Executive in a single lump sum payment an amount equal to the
full amount of unpaid Base Salary for the remainder of the Term and Executive
shall continue to be entitled to all insurance benefits which he then receives
pursuant to Section 3.3 through the remainder of the Term. Except for the
obligations provided for in this section, Executive shall be treated as an "at-
will" employee, and Company has made no representation to Executive with respect
to the duration of employment or renewal of this Agreement.
4.5 Termination by Executive. If Executive terminates his
------------------------
employment with the Company, Executive shall give the Company 30 days' written
notice of such termination. Upon such termination, this Agreement shall
terminate without further obligation by the Company or Executive, except as
otherwise provided herein and except for payment by the Company of amounts of
Base Salary accrued through the date of termination.
4.6 No Mitigation Required. Executive shall not be required in
----------------------
any way to mitigate the amount of any payment or benefit provided for in this
Section 4,
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<PAGE>
including, but not limited to, by seeking other employment, nor shall the amount
of any payment or benefit provided for in this Section 4 be reduced, except as
otherwise provided herein, by any compensation earned by Executive as the result
of employment with or services provided to another employer after the date of
Executive's termination, or otherwise.
5. ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS.
------------------------------------------
5.1 Definition of "Inventions". As used herein, the term
--------------------------
"Inventions" shall mean all inventions, discoveries, improvements, trade
secrets, formulas, techniques, data, programs, systems, specifications,
documentation, algorithms, flow charts, logic diagrams, source codes, processes
and other information, including works-in-progress, whether or not subject to
patent, trademark, copyright, trade secret, or mask work protection, and whether
or not reduced to practice, which are made, created, authored, conceived or
reduced to practice by Executive, either alone or jointly with others, during
the period of employment with the Company which (A) relate to the actual or
anticipated business, activities, research or investigations of the Company or
(B) result from or is suggested by work performed by Executive for the Company
(whether or not made or conceived during normal working hours or on the premises
of the Company), or (C) which result, to any extent, from use of the Company's
premises or property; provided, that "Inventions" shall not include any of the
foregoing related to the Permitted Businesses.
5.2 Work for Hire. Executive expressly acknowledges that all
-------------
copyrightable aspects of the Inventions (as defined above) are to be considered
"works made for hire" within the meaning of the Copyright Act of 1976, as
amended (the "Act"), and that the Company is to be the "author" within the
meaning of such Act for all purposes. All such copyrightable works, as well as
all copies of such works in whatever medium, fixed or embodied, shall be owned
exclusively by the Company as of the date of creation, and Executive hereby
expressly disclaims any and all interest in any of such copyrightable works and
waives any right of droit morale or similar rights.
----- ------
5.3 Assignment. Executive acknowledges and agrees that all
----------
Inventions constitute trade secrets of the Company and shall be the sole
property of the Company or any other entity designated by the Company. In the
event that title to any or all of the Inventions, or any part or element
thereof, may not, by operation of law, vest in the Company, or such Inventions
may be found as a matter of law not to be "works made for hire" within the
meaning of the Act, Executive hereby conveys and irrevocably assigns to the
Company, without further consideration, all his right, title and interest,
throughout the universe and in perpetuity, in all Inventions and all copies of
them, in whatever medium, fixed or embodied, and in all written records,
graphics, diagrams, notes or reports
-4-
<PAGE>
relating thereto in Executive's possession or under his control, including, with
respect to any of the foregoing, all rights of copyright, patent, trademark,
trade secret, mask work, and any and all other proprietary rights therein, the
right to modify and create derivative works, the right to invoke the benefit of
any priority under any international convention, and all rights to register and
renew same.
6. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
--------------------------------------------
6.1 Confidentiality. Executive acknowledges that in his
---------------
employment hereunder he will occupy a position of trust and confidence.
Executive shall not, except as may be required to perform his duties hereunder
or as required by applicable law, without limitation in time or until such
information shall have become public other than by Executive's unauthorized
disclosure, disclose to others or use, whether directly or indirectly, any
Confidential Information regarding the Company. "Confidential Information" shall
mean information about the Company, its subsidiaries and affiliates and their
respective clients and customers that is not disclosed by the Company for
financial reporting purposes and that was learned by Executive in the course of
his employment by the Company, including (without limitation) any proprietary
knowledge, trade secrets, data, formulae, information and client and customer
lists and all papers, resumes and records (including computer records) of the
documents containing such Confidential Information. The term Confidential
Information does not include any information that was or becomes generally
available to the public other than as a result of disclosure by Executive or
that is information related to the Permitted Businesses. Executive acknowledges
that such Confidential Information is specialized, unique in nature and of great
value to the Company, and that such information gives the Company a competitive
advantage. The Executive agrees to (i) deliver or return to the Company, at the
Company's request at any time or upon termination or expiration of his
employment or as soon thereafter as possible, (A) all documents, computer tapes
and disks, records, lists, data, drawings, prints, notes and written information
(and all copies thereof) furnished by the Company or prepared by the Executive
during the term of his employment that relates to the Company and (B) all
notebooks and other data relating to research or experiments or other work
conducted by Executive in the scope of employment or any Inventions made,
created, authored, conceived or reduced to practice by Executive, either alone
or jointly with others, and (iii) make full disclosure relating to any
Inventions.
-5-
<PAGE>
6.2 Non-Competition. During the Term of this Agreement,
---------------
Executive shall not, directly or indirectly, without the prior written consent
of the Company in each instance, provide consulting services or otherwise
provide services to (whether as an employee or a consultant, with or without
pay), own, manage, operate, join, control, participate in, or be connected with
(as a stockholder, partner or otherwise), any business, individual, partner,
firm, corporation, or other entity that is then a competitor of the Company
(each such competitor a "Competitor of the Company"); provided, that the
"beneficial ownership" by Executive, either individually or as a member of a
"group," as such terms are used in Rule 13d of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of
not more than one percent (1%) of the voting stock of any publicly held
corporation shall not alone constitute a violation of this Agreement and
Executive shall not be prohibited hereunder from winding down the affairs of his
businesses that have been sold to the Company and its affiliates or
participating in the Permitted Businesses in accordance with Section 1.1 above.
It is further expressly agreed that the Company will or would suffer irreparable
injury if Executive were to compete with the Company or any subsidiary or
affiliate of the Company in violation of this Agreement and that the Company
would by reason of such competition be entitled to injunctive relief in a court
of appropriate jurisdiction. Executive and the Company acknowledge and agree
that the business of the Company is global in nature, and that the terms of the
non-competition agreement set forth herein shall apply on a worldwide basis, and
shall specifically apply to each city and county in the State of California and
each other state in the United States.
6.3 Non-Solicitation of Customers and Suppliers. During the
-------------------------------------------
Term of this Agreement and for a period of two years thereafter, Executive shall
not, directly or indirectly, influence or attempt to influence customers or
suppliers of the Company or any of its subsidiaries or affiliates, to divert
their business to any Competitor of the Company. The foregoing shall in no
event preclude Executive from participating in the Permitted Businesses in
accordance with Section 1.1 above.
6.4 Non-Solicitation of Employees. Executive recognizes that he
-----------------------------
possesses and will possess confidential information about other employees of the
Company relating to their education, experience, skills, abilities, compensation
and benefits, and inter-personal relationships with customers of the Company.
Executive recognizes that the information he possesses and will possess about
these other employees is not generally known, is of substantial value to the
Company in developing its business and in securing and retaining customers, and
has been and will be acquired by him because of his business position with the
Company. Executive agrees that, during the Term of this Agreement and for a
period of two years thereafter, he will not, directly or indirectly, solicit or
recruit any employee of the Company for the purpose of being employed by him or
by any Competitor of the Company and that he will not convey any
-6-
<PAGE>
such confidential information or trade secrets about other employees of the
Company to any other person.
7. INDEMNIFICATION; D&O INSURANCE
------------------------------
7.1 Indemnification. The Company agrees that if Executive is
---------------
made a party or is threatened to be made a party to any action, suit or
proceeding by reason of the fact that he is or was a director, officer or
employee of the Company or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation or entity, he shall
be indemnified by the Company to the fullest extent required or permitted by the
Company's articles of incorporation and by-laws as in effect from time to time
(but no less than as in effect as of the Effective Date), but only to the extent
that such indemnification is then permitted by California law, against expenses,
liabilities and losses reasonably incurred or suffered by Executive in
connection therewith. Any expenses incurred by Executive in any action, suit or
proceeding shall be paid by the Company in advance and on or prior to the date
when payment of such expense is due. To the extent that Executive has
personally paid any expenses which the Company would otherwise have been
obligated to advance hereunder, the Company shall reimburse Executive for all
expenses so paid within two business days after Executive provides proof of such
payment to the Company.
7.2 D&O Insurance. During the Term, to the extent the Company
-------------
maintains a directors and officers insurance policy for any of its directors and
officers, Executive shall be an insured thereunder on at least as favorable
limits and terms.
8. SURVIVAL OF PROVISIONS. The obligations contained in Subsections
----------------------
4.2, 4.3, 4.4, 4.5, 4.6, 6.1, 6.3 and 6.4 and Section 7 shall survive the
termination or expiration of Executive's employment with the Company and shall
be fully enforceable thereafter.
9. NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by fax or first class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three (3) days after mailing or twenty-four (24) hours
after transmission of a fax (at the individual's then current fax number) to the
respective persons named below:
If to Company: Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, CA 90023
Attn: Chief Executive Officer
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<PAGE>
If to Executive: Mr. Marshall Gobuty
c/o Marshall Gobuty International U.S.A., Inc.
6076 Bristol Parkway, Suite 106
Culver City, CA 90230
Fax: (818) 501-5835
With a copy to: Sheppard, Mullin, Richter & Hampton
333 South Hope Street, 48th Floor
Los Angeles, CA 90071
Attn: Lawrence M. Braun, Esquire
Telecopier: (213) 620-1398
Either party may change such party's address for notices by notice duly given
pursuant hereto.
10. ATTORNEYS' FEES. If any legal action is necessary to enforce the
---------------
terms and conditions of this Agreement, the prevailing party shall be entitled
to recover all costs of suit and reasonable attorneys' fees.
11. ENTIRE AGREEMENT. This Agreement constitutes the parties' entire
----------------
agreement with respect to the subject matter hereof and supersedes all prior
statements or agreements, both written and oral.
12. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature
----------------------
and neither of the parties hereto shall, without the consent of the other,
assign or transfer this Agreement or any rights or obligations hereunder;
provided that, in the event of the merger, consolidation, transfer or sale of
all or substantially all of the assets of the Company with or to any other
individual or entity, this Agreement shall, subject to the provisions hereof, be
binding upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties and obligations of the
Company hereunder.
13. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement shall
-----------------------------------------
be governed by and construed in accordance with the substantive and procedural
laws of the State of California applicable to agreements made and to be
performed entirely within such State. Each of the parties submits to the
jurisdiction of any state or federal court sitting in Los Angeles, California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the parties waives any defense of inconvenient forum to the maintenance
-8-
<PAGE>
of any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto. Any
party may make service on any other party by sending or delivering a copy of the
process to the party to be served at the address and in the manner provided for
the giving of notices in Section 9 above. Each party agrees that a final
judgment in any action or proceeding so brought shall be conclusive and may be
enforced by suit on the judgment or in any other manner provided by law or at
equity.
14. WITHHOLDING. The Company shall make such deductions and withhold
-----------
such amounts from each payment made to the Executive hereunder as may be
required from time to time by law, governmental regulation or order.
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.
16. WAIVER; MODIFICATION. Failure to insist upon strict compliance
--------------------
with any of the terms, covenants or conditions hereof shall not be deemed a
waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of, or failure to insist upon strict compliance with, any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times. This Agreement shall not be
amended or modified in any respect except by a writing executed by each party
hereto.
17. SEVERABILITY. In the event that a court of competent
------------
jurisdiction determines that any portion of this Agreement is in violation of
any statue or public policy, only the portions of this Agreement that violate
such statute or public policy shall be stricken. All portions of this Agreement
that do not violate any statute or public policy shall continue in full force
and effect. Further, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Agreement.
18. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has hereunto signed
this Agreement, as of the date first above written.
-9-
<PAGE>
Company:
TARRANT APPAREL GROUP
By: /s/ Mark B. Kristof
-----------------------------------
Mark B. Kristof, Vice President
Executive:
/s/ Marshall Gobuty
----------------------------------------
MARSHALL GOBUTY
-10-
<PAGE>
EXHIBIT 10.62
NONCOMPETITION AGREEMENT
------------------------
This Noncompetition Agreement ("Agreement"), effective as of February
23, 1998 ("Effective Date"), is entered into between Marshall Gobuty ("Gobuty")
and Marshall Gobuty International U.S.A., Inc., a California corporation
("MGI"), on the one hand, and Tarrant Apparel Group, a California corporation
(the "Company"), on the other hand, with reference to the following facts:
A. MGI and the Company are parties to that certain Asset Purchase
Agreement dated as of February 18, 1998 (the "Purchase Agreement").
B. The execution and delivery of this Agreement is a condition to the
closing of the transactions contemplated by the Purchase Agreement (the
"Transaction").
NOW, THEREFORE, IN CONSIDERATION OF the mutual agreements hereinafter
set forth, MGI, Gobuty and the Company agree as follows:
1. NON-COMPETITION. During the Term of this Agreement, MGI and
---------------
Gobuty shall not, directly or indirectly, without the prior written consent of
the Company, provide consulting services or otherwise provide services to
(whether as an employee or a consultant, with or without pay), own, manage,
operate, join, control, participate in, or be connected with (as a stockholder,
partner or otherwise), any business, individual, partner, firm, corporation, or
other entity that is a competitor of MGI's business (the "Business") acquired by
the Company pursuant to the Purchase Agreement (a "Competitor"); provided, that
the "beneficial ownership" by MGI, either individually or as a member of a
"group," as such terms are used in Rule 13d of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of
not more than one percent (1%) of the voting stock of any publicly held
corporation shall not alone constitute a violation of this Agreement and neither
Gobuty nor MGI shall be prohibited hereunder from participating in the Permitted
Businesses (as defined below), provided that from and after four (4) months
after the date hereof, neither MGI nor Gobuty shall be active in the Permitted
Businesses. For purposes of this Agreement, "Permitted Businesses" shall mean
winding down the affairs of MGI and conducting the businesses related to the
"NFL" licenses.
2. NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the Term of
-------------------------------------------
this Agreement, MGI and Gobuty shall not, directly or indirectly, influence or
attempt to influence customers or suppliers of the Company or any of its
subsidiaries or affiliates, to divert their business to any Competitor. The
foregoing shall in no event preclude Gobuty or MGI from participating in the
Permitted Businesses in accordance with Section 1 above.
<PAGE>
3. NON-SOLICITATION OF EMPLOYEES. MGI and Gobuty agree that, during
-----------------------------
the Term of this Agreement, they will not, directly or indirectly, solicit or
recruit any employee of the Company for the purpose of being employed by any of
them or by any Competitor.
4. INJUNCTIVE RELIEF. It is expressly agreed that the Company will
-----------------
or would suffer irreparable injury if MGI and Gobuty were to compete with the
Company or any subsidiary or affiliate of the Company in violation of this
Agreement and that the Company would by reason of such competition be entitled
to injunctive relief in a court of appropriate jurisdiction. MGI, Gobuty and
the Company acknowledge and agree that the Business is global in nature, and
that the terms of the non-competition agreement set forth herein shall apply on
a worldwide basis, and shall specifically apply to each city and county in the
State of California and each other state in the United States.
5. TERM. This Agreement shall terminate two years after the
----
termination of Gobuty's employment by the Company (the "Term").
6. SEVERABILTY. It is the desire and intent of the parties hereto
-----------
that the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. If any particular provision or a portion of this
Agreement shall be adjudicated to be invalid or unenforceable, this Agreement
shall be deemed amended to delete therefrom such provision or portion
adjudicated to be invalid or unenforceable, such amendment to apply only with
respect to the operation of this Agreement in the particular jurisdiction in
which such adjudication is made.
7. NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by fax or first class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three days after mailing or 24 hours after transmission of
a fax (at the individual's then current fax number) to the respective persons
named below:
If to Company: Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, CA 90023
Attn: Chief Executive Officer
Telecopier: (213) 881-0368
If to Gobuty: Mr. Marshall Gobuty
c/o Marshall Gobuty International U.S.A., Inc.
6076 Bristol Parkway, Suite 106
Culver City, CA 90230
Fax: (818) 501-5835
If to MGI: Marshall Gobuty International U.S.A., Inc.
<PAGE>
6076 Bristol Parkway, Suite 106
Culver City, CA 90230
Attn: President
Fax: (818) 501-5835
with a copy to: Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, CA 90071
Attn: Lawrence M. Braun, Esq.
Fax: (213) 620-1398
Either party may change such party's address for notices by notice duly given
pursuant hereto.
8. ATTORNEYS' FEES. If any legal action is necessary to enforce the
---------------
terms and conditions of this Agreement, the prevailing party shall be entitled
to recover all costs of suit and reasonable attorneys' fees.
9. ENTIRE AGREEMENT. This Agreement constitutes the parties' entire
----------------
agreement with respect to the subject matter hereof and supersedes all prior
statements or agreements, both written and oral.
10. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature
----------------------
and none of the parties hereto shall, without the consent of the other, assign
or transfer this Agreement or any rights or obligations hereunder; provided
that, in the event of the merger, consolidation, transfer or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor.
11. 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.
12. WAIVER; MODIFICATION. Failure to insist upon strict compliance
--------------------
with any of the terms, covenants or conditions hereof shall not be deemed a
waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of, or failure to insist upon strict compliance with, any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times. This Agreement shall not be
amended or modified in any respect except by a writing executed by each party
hereto.
<PAGE>
13. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement shall
-----------------------------------------
be governed by and construed in accordance with the substantive and procedural
laws of the State of California applicable to agreements made and to be
performed entirely within such State. Each of the parties submits to the
jurisdiction of any state or federal court sitting in Los Angeles, California,
in any action or proceeding arising out of or related to this Agreement in any
other court. Each of the parties waives the defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond, surety,
or other security that might be required of any other party with respect
thereto. Any party may make service on any other party by sending or delivering
a copy of the process to the party to be served at the address and in the manner
provided for the giving of notices in Section 7 above. Each party agrees that a
final judgment in any action or proceeding so brought shall be conclusive and
may be enforced by suit on the judgment or in any other manner provided by law
or at equity.
14. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Company:
TARRANT APPAREL GROUP
By /s/ Mark B. Kristof
---------------------------------
Mark B. Kristof, Vice President
Gobuty:
/s/ Marshall Gobuty
---------------------------------------
MARSHALL GOBUTY
MGI:
MARSHALL GOBUTY INTERNATIONAL U.S.A.,
INC.
By /s/ Marshall Gobuty
---------------------------------
_________________________________
[Printed Name and Title]
<PAGE>
EXHIBIT 10.63
NONCOMPETITION AGREEMENT
------------------------
This Noncompetition Agreement ("Agreement"), effective as of February
23, 1998 ("Effective Date"), is entered into between Marshall Gobuty ("Gobuty")
and MGI International Limited, a Turks and Caicos corporation ("MGI Limited"),
on the one hand, and Marble Limited, a Hong Kong corporation (the "Company"), on
the other hand, with reference to the following facts:
A. MGI Limited and the Company are parties to that certain Asset Purchase
Agreement dated as of February 18, 1998 (the "Purchase Agreement").
B. The execution and delivery of this Agreement is a condition to the
closing of the transactions contemplated by the Purchase Agreement (the
"Transaction").
NOW, THEREFORE, IN CONSIDERATION OF the mutual agreements hereinafter
set forth, MGI Limited, Gobuty and the Company agree as follows:
1. NON-COMPETITION. During the Term of this Agreement, MGI Limited
---------------
and Gobuty shall not, directly or indirectly, without the prior written consent
of the Company, provide consulting services or otherwise provide services to
(whether as an employee or a consultant, with or without pay), own, manage,
operate, join, control, participate in, or be connected with (as a stockholder,
partner or otherwise), any business, individual, partner, firm, corporation, or
other entity that is a competitor of MGI Limited's business (the "Business")
acquired by the Company pursuant to the Purchase Agreement (a "Competitor");
provided, that the "beneficial ownership" by MGI Limited, either individually or
as a member of a "group," as such terms are used in Rule 13d of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of not more than one percent (1%) of the voting stock of any
publicly held corporation shall not alone constitute a violation of this
Agreement and neither Gobuty nor MGI Limited shall be prohibited hereunder from
participating in the Permitted Businesses (as defined below); provided that
from and after four (4) months after the date hereof, neither MGI Limited nor
Gobuty shall be active in the Permitted Businesses. For purposes of this
Agreement, "Permitted Businesses" shall mean winding down the affairs of MGI
Limited.
-1-
<PAGE>
2. NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the Term of
-------------------------------------------
this Agreement, MGI Limited and Gobuty shall not, directly or indirectly,
influence or attempt to influence customers or suppliers of the Company or any
of its subsidiaries or affiliates, to divert their business to any Competitor.
The foregoing shall in no event preclude Gobuty or MGI Limited from
participating in the Permitted Businesses in accordance with Section 1 above.
3. NON-SOLICITATION OF EMPLOYEES. MGI Limited and Gobuty agree
-----------------------------
that, during the Term of this Agreement, they will not, directly or indirectly,
solicit or recruit any employee of the Company for the purpose of being employed
by any of them or by any Competitor.
4. INJUNCTIVE RELIEF. It is expressly agreed that the Company will
-----------------
or would suffer irreparable injury if MGI Limited and Gobuty were to compete
with the Company or any subsidiary or affiliate of the Company in violation of
this Agreement and that the Company would by reason of such competition be
entitled to injunctive relief in a court of appropriate jurisdiction. MGI
Limited, Gobuty and the Company acknowledge and agree that the Business is
global in nature, and that the terms of the non-competition agreement set forth
herein shall apply on a worldwide basis, and shall specifically apply to each
city and county in the State of California and each other state in the United
States.
5. TERM. This Agreement shall terminate two years after the
----
termination of Gobuty's employment by the Company (the "Term").
6. SEVERABILTY. It is the desire and intent of the parties hereto
-----------
that the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. If any particular provision or a portion of this
Agreement shall be adjudicated to be invalid or unenforceable, this Agreement
shall be deemed amended to delete therefrom such provision or portion
adjudicated to be invalid or unenforceable, such amendment to apply only with
respect to the operation of this Agreement in the particular jurisdiction in
which such adjudication is made.
7. NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by fax or first class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three days after mailing or 24 hours after transmission of
a fax (at the individual's then current fax number) to the respective persons
named below:
-2-
<PAGE>
If to Company: Marble Limited
c/o Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
Attention: Chief Financial Officer
Telecopier: (213) 881-0368
If to Gobuty: Mr. Marshall Gobuty
c/o MGI International Limited
Suite 2310-2311 Hung To Road
Kwun Tong, Kowloon
Hong Kong
Telecopier: 011-852-2790-8103
If to MGI Limited: MGI International Limited
Suite 2310-2311 Hung To Road
Kwun Tong, Kowloon
Hong Kong
Attention: President
Telecopier: 011-852-2790-8103
with a copy to: Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, CA 90071
Attn: Lawrence M. Braun, Esq.
Fax: (213) 620-1398
Either party may change such party's address for notices by notice duly given
pursuant hereto.
8. ATTORNEYS' FEES. If any legal action is necessary to enforce the
---------------
terms and conditions of this Agreement, the prevailing party shall be entitled
to recover all costs of suit and reasonable attorneys' fees.
9. ENTIRE AGREEMENT. This Agreement constitutes the parties' entire
----------------
agreement with respect to the subject matter hereof and supersedes all prior
statements or agreements, both written and oral.
10. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature
----------------------
and none of the parties hereto shall, without the consent of the other, assign
or transfer this Agreement or any rights or obligations hereunder; provided
that, in the event
-3-
<PAGE>
of the merger, consolidation, transfer or sale of all or substantially all of
the assets of the Company with or to any other individual or entity, this
Agreement shall, subject to the provisions hereof, be binding upon and inure to
the benefit of such successor.
11. 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.
12. WAIVER; MODIFICATION. Failure to insist upon strict compliance
--------------------
with any of the terms, covenants or conditions hereof shall not be deemed a
waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of, or failure to insist upon strict compliance with, any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times. This Agreement shall not be
amended or modified in any respect except by a writing executed by each party
hereto.
13. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement shall
-----------------------------------------
be governed by and construed in accordance with the substantive and procedural
laws of the State of California applicable to agreements made and to be
performed entirely within such State. Each of the parties submits to the
jurisdiction of any state or federal court sitting in Los Angeles, California,
in any action or proceeding arising out of or related to this Agreement in any
other court. Each of the parties waives the defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond, surety,
or other security that might be required of any other party with respect
thereto. Any party may make service on any other party by sending or delivering
a copy of the process to the party to be served at the address and in the manner
provided for the giving of notices in Section 7 above. Each party agrees that a
final judgment in any action or proceeding so brought shall be conclusive and
may be enforced by suit on the judgment or in any other manner provided by law
or at equity.
14. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MARBLE LIMITED
By /s/ Mark B. Kristof
----------------------------------
Mark B. Kristof, Vice President
Gobuty:
/s/ Marshall Gobuty
---------------------------------------
MARSHALL GOBUTY
MGI INTERNATIONAL LIMITED
By /s/ Marshall Gobuty
----------------------------------
_________________________________
[Printed Name and Title]
-5-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-3448) pertaining to the 1995 Stock Option Plan of Tarrant
Apparel Group our report dated February 20, 1997, with respect to the
consolidated financial statements and schedules of Tarrant Apparel Group
included in the Annual Report (Form 10-K) for the year ended December 31,
1997.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,305,129
<SECURITIES> 0
<RECEIVABLES> 35,634,164
<ALLOWANCES> 1,555,812
<INVENTORY> 23,266,196
<CURRENT-ASSETS> 68,811,180
<PP&E> 5,543,221
<DEPRECIATION> 2,835,964
<TOTAL-ASSETS> 71,860,678
<CURRENT-LIABILITIES> 23,506,734
<BONDS> 0
0
0
<COMMON> 16,100,483
<OTHER-SE> 32,253,461
<TOTAL-LIABILITY-AND-EQUITY> 71,860,678
<SALES> 260,092,777
<TOTAL-REVENUES> 260,505,397
<CGS> 220,995,754
<TOTAL-COSTS> 220,995,754
<OTHER-EXPENSES> 22,017,417
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,470,762
<INCOME-PRETAX> 16,021,464
<INCOME-TAX> 5,235,000
<INCOME-CONTINUING> 10,786,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,786,464
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.59
</TABLE>
