<PAGE>
As filed with the Securities and Exchange Commission on May 8, 1999.
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the quarterly period ended March 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the transition period from _____________ to
_____________
Commission File Number: 0-26430
TARRANT APPAREL GROUP
(Exact name of registrant as specified in its charter)
California 95-4181026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3151 East Washington Boulevard
Los Angeles, California 90023
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (323) 780-8250
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of Common Stock of the registrant outstanding as of May 3,
1999: 15,942,205.
<PAGE>
TARRANT APPAREL GROUP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 (Audited)........................ 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1999 and March 31, 1998... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and March 31, 1998... 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
<CAPTION>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 15
Item 2. Changes in Securities.................................. 15
Item 3. Defaults Upon Senior Securities........................ 15
Item 4. Submission of Matters to a Vote of Security Holders.... 15
Item 5. Other Information...................................... 15
Item 6. Exhibits and Reports on Form 8-K....................... 15
SIGNATURES............................................. 16
INDEX TO EXHIBITS...................................... 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- ---------------
ASSETS (Unaudited)
<S> <C> C>
Current assets:
Cash and cash equivalents................................... $ 2,059,098 4,318,520
Accounts receivable, net.................................... 54,958,442 65,946,055
Due from affiliates......................................... 290,721 2,143,527
Due from officers........................................... 5,075,543 4,477,461
Inventory................................................... 51,248,173 49,230,847
Temporary quota............................................. 3,228,527 1,192,888
Prepaid expenses............................................ 1,693,975 1,527,392
Prepaid income taxes........................................ 478,050 501,334
-------------- ---------------
Total current assets................................... 119,032,529 129,338,024
Property and equipment, net................................... 5,823,774 5,306,308
Permanent quota, net.......................................... 859,167 245,464
Other assets.................................................. 11,525,101 4,468,517
Excess of cost over fair value of net assets acquired......... 20,090,659 14,532,193
-------------- ---------------
Total assets........................................... $ 157,331,230 153,890,506
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings............................................. $ 31,419,406 $ 33,288,267
Accounts payable............................................ 19,133,267 24,200,202
Accrued expenses............................................ 7,451,099 8,738,522
Due to affiliates........................................... 1,890,421 --
Income taxes................................................ 6,514,921 5,048,288
Deferred tax liability...................................... 50,785 --
Current portion of long-term obligations.................... 969,732 981,124
-------------- ---------------
Total current liabilities.............................. 67,429,631 72,256,403
Long-term obligations......................................... 4,500,464 2,424,439
-------------- ---------------
Total liabilities...................................... 71,930,095 74,680,842
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none
issued and outstanding................................... -- --
Common stock, no par value, 20,000,000 shares
authorized; 13,942,205 shares (1999) and 13,832,955
shares (1998), issued and outstanding.................... 23,882,671 22,290,539
Contributed capital......................................... 1,434,259 1,434,259
Retained earnings........................................... 60,084,205 55,484,866
-------------- ---------------
Total shareholders' equity............................. 85,401,135 79,209,664
-------------- ---------------
Total liabilities and shareholders' equity............. $ 157,331,230 $ 153,890,506
============== ===============
</TABLE>
See accompanying notes.
3
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
(Unaudited)
Net sales $ 84,063,292 $ 64,257,177
Cost of sales 68,075,452 53,309,710
--------------- --------------
Gross profit 15,987,840 10,947,467
Selling and distribution expenses 2,820,515 2,097,921
General and administrative expenses 4,765,026 4,191,702
Amortization of excess of cost over fair value
of net assets acquired.............................. 466,459 100,000
--------------- --------------
Income from operations................................. 7,935,840 4,557,844
Interest expense....................................... (858,442) (324,262)
Interest income........................................ 191,559 51,118
Other income........................................... 30,382 65,659
--------------- --------------
Income before provision for income taxes............... 7,299,339 4,350,359
Provision for income taxes............................. (2,700,000) (1,570,000)
--------------- --------------
Net income............................................. $ 4,599,339 $ 2,780,359
=============== ==============
Net income per share
Basic............................................. $ 0.33 $ 0.21
=============== ==============
Diluted........................................... $ 0.30 $ 0.20
=============== ==============
Weighted average common and common equivalent shares
Basic............................................. 13,853,461 13,281,262
=============== ==============
Diluted........................................... 15,524,066 13,756,100
=============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1999 1998
-------------------------------------
<S> <C> <C>
(Unaudited)
Operating activities
Net income................................................... $ 4,599,339 $ 2,780,359
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 888,420 265,067
Loss on sale of fixed assets............................... -- 43,375
Deferred taxes............................................. 74,069 --
Provision for returns and discounts........................ (351,492) 225,670
Changes in operating assets and liabilities:
Accounts receivable.................................... 11,339,105 (20,190,231)
Due from affiliates and officers....................... 3,145,145 (1,805,027)
Inventory.............................................. (2,017,326) 1,208,486
Temporary quota........................................ (2,035,639) (1,085,586)
Prepaid expenses....................................... (166,583) (887,686)
Accounts payable....................................... (5,066,935) 932,587
Accrued expenses....................................... 179,211 1,747,120
---------------- ----------------
Net cash provided by (used in) operating activities.... 10,587,314 (16,765,866)
---------------- ---------------
Investing activities
Purchase of fixed assets..................................... (424,180) (53,232)
Acquisition of MGI........................................... -- (6,050,000)
Acquisition of CMG........................................... (4,275,000) --
Purchase of permanent quota.................................. (705,474) (29,445)
Increase in other assets..................................... (7,056,985) --
---------------- ---------------
Net cash used in investing activities.................. (12,461,639) (6,132,677)
---------------- ---------------
Financing activities
Bank borrowings, net......................................... (1,880,253) 17,917,330
Issuance of short-term debt.................................. -- 1,000,000
Paydown of long term obligations............................. (96,975) --
Exercise of stock options including related tax benefit...... 1,592,132 1,174,986
---------------- ---------------
Net cash provided by (used in) financing activities..... (385,097) 20,092,316
---------------- ---------------
Decrease in cash and cash equivalents........................ (2,259,422) (2,806,227)
Cash and cash equivalents at beginning of period............. 4,318,520 5,305,129
---------------- ---------------
Cash and cash equivalents at end of period................... $ 2,059,098 $ 2,498,902
================ ===============
</TABLE>
See accompanying notes.
5
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Consolidation
The accompanying financial statements include the accounts of the Company
and its consolidated subsidiaries. All significant intercompany investments,
transactions and balances have been eliminated.
2. Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of operations for the periods presented have been included.
The consolidated financial data at December 31, 1998 is derived from
audited financial statements which are included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, and should be read in
conjunction with the audited financial statements and notes thereto. Interim
results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Assets and liabilities of the Hong Kong 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. A majority of all significant
transactions in Mexico are transacted in U.S. dollars.
3. Accounts Receivable
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
U.S. trade accounts receivable..... $ 56,345,182 $ 53,693,368
Foreign trade accounts receivable.. 9,956,166 8,406,558
Due (to) from factor............... (11,234,169) 4,725,869
Other receivables.................. 1,786,778 1,367,266
Allowance for returns and discounts (1,895,515) (2,247,006)
----------------- ----------------
$ 54,958,442 $ 65,946,055
================= ================
</TABLE>
Due (to) from factor consists of $3.6 million and $5.7 million of
unmatured accounts receivable assigned to the factor, less $14.8 million and
$1.0 million of advances received from the factor, at March 31, 1999 and
December 31, 1998, respectively. Effective January 1, 1998, the Company
substantially eliminated its use of the factor.
6
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
4. Inventory
<TABLE>
<CAPTION>
Inventory consists of the following: March 31, December 31,
1999 1998
--------------- -----------------
<S> <C> <C>
Raw materials
Fabric and trim accessories.............. $ 14,634,096 $ 10,424,416
Raw cotton............................... 872,826 1,043,449
Work-in-process............................. 7,646,702 7,620,403
Finished goods shipments-in-transit......... 5,590,822 10,331,867
Finished goods.............................. 22,503,727 19,810,712
--------------- -----------------
$ 51,248,173 $ 49,230,847
=============== =================
</TABLE>
5. Bank Borrowings
Bank borrowings consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- -----------------
<S> <C> <C>
Import trade bills payable.......... $ 3,628,010 $ 4,466,119
Direct bank acceptances............. 13,311,617 16,969,565
Other Hong Kong credit facilities... --- 47,603
United States credit facilities..... 14,479,779 11,804,980
--------------- -----------------
$ 31,419,406 $ 33,288,267
=============== =================
</TABLE>
6. Acquisition of Chazzz
On March 23, 1999, the Company purchased certain assets of CMG, Inc., a
California corporation ("CMG"). CMG designs, produces and sells private label
and "CHAZZZ"(R) branded woven (denim and twill) and knit apparel for women,
children and men for national chain stores, including J.C. Penney, Sears and
Mervyns. The purchase price consisted of (i) $4,275,000 and an amount equal to
seller's cost of the inventory purchased, payable in cash on closing, (ii) a
$2,500,000 noninterest-bearing promissory note payable in three equal annual
installments on the first three anniversary dates of the closing convertible
into 62,550 shares of common stock of the Company, (iii) $500,000 payable in two
equal installments of $250,000 on the second and third anniversary dates of
closing, and (iv) $1,500,000 payable in three equal installments of $500,000 on
the first three anniversary dates of closing provided the CMG Division meets
specified net sales and pretax income requirements. The purchase price paid on
closing was financed by the Company from its cash flow from operations. The
Company was granted a security interest in the 62,550 shares to secure the
performance of obligations under the purchase agreement, including, without
limitation, the indemnification obligations. This transaction has been
accounted for as a purchase, and the purchase price has been allocated based on
the fair value of assets acquired and liabilities assumed. The excess of cost
over fair value of net assets acquired is being amortized over 15 years. The
operations of CMG have been included with those of the Company commencing on
March 23, 1999.
The Company has entered into an employment agreement with Charles Ghailian,
the sole shareholder of CMG, under which he is employed as President - Chazzz
Division of the Company for a term commencing on March 23, 1999 and ending on
March 31, 2002, and will be paid an annual base salary of $480,000. In the event
the Company terminates his employment without cause, Mr. Ghailian shall be
entitled to receive a lump sum payment of $480,000. In addition, Mr. Ghailian
has agreed not to compete with the Company during the two years following the
termination of his employment for any reason.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
General
The Company primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of and
selling casual, moderately-priced apparel for women, men and children, under
private label. The Company's major customers include specialty retailers, such
as Lerner New York, Limited Stores, Lane Bryant, Structure and Express, all of
which are divisions of The Limited, as well as Target Stores and Mervyns
(divisions of Dayton Hudson), Abercrombie & Fitch, Sears and J.C. Penney. The
Company's products are manufactured in a variety of woven and knit fabrications
and include jeanswear, casual pants, t-shirts, shorts, blouses, shirts and other
tops, dresses, leggings and jackets.
The Company continues to geographically diversify its worldwide sourcing
operations. Commencing in the third quarter of 1997, the Company has
substantially expanded its use of independent cutting, sewing and finishing
contractors in Mexico, primarily for its increasing sales of basic garments,
through its office in Tehuacan, Mexico ("Tag Mex"). The Company has also
commenced the vertical integration of its business through the development and
acquisition of fabric and production capacity in Mexico. The Company believes
that these strategies will create a more diversified sourcing base, increase the
Company's access to emerging providers of low cost production, enhance the
proximity of the Company's sourcing base to the Company's customers and lessen
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 22, 1999, the Company agreed to acquire a denim mill in Puebla,
Mexico with an annual capacity of approximately 18 million meters of denim. The
purchase price for such mill consisted of $22 million in cash paid on May 7,
1999 and two million shares of the Common Stock of the Company issued upon
closing of this acquisition on April 1, 1999.
On December 2, 1998, the Company contracted to acquire a turn-key facility
being constructed in Puebla, Mexico by an affiliate of the seller of the denim
mill described above. This facility is ultimately expected to have an annual
capacity of approximately 18 million meters of twill and will also house
ancillary facilities. Construction of this facility commenced in the third
quarter of 1998, and it is anticipated that the Company will take possession of
this facility by the year 2000. The Company anticipates that the cost of this
facility will be approximately $75 million.
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 "MGI Acquisition"). On July
2, 1998, the Company acquired Rocky Apparel, L.P. which designs, contracts for
the manufacture of and sells private label apparel for men and women to national
retailers, including Abercrombie & Fitch and three divisions of The Limited (the
"Rocky Acquisition"). On March 23, 1999, the Company acquired certain assets
of CMG, Inc. which designs, produces and sells private label and "CHAZZZ"(R)
branded woven (denim and twill) and knit apparel for women, children and men for
national chain stores, including J.C. Penney, Sears and Mervyns (the "Chazzz
Acquisition").
On April 27, 1999, the Company and Burlington Industries, Inc. announced
that they had signed a letter of intent to form a 50/50 joint venture company to
produce denim and twill casual apparel products in Mexico for branded customers.
This transaction is subject to standard conditions, including due diligence,
regulatory and Board approvals of both companies.
8
<PAGE>
Factors That May Affect Future Results
This Report on Form 10-Q contains forward-looking statements which are
subject to a variety of risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below.
Vertical Integration. In 1997, the Company commenced the vertical
integration of its business. Key elements of this strategy include (i)
establishing cutting, sewing, washing, finishing, packing, shipping or
distribution activities in company-owned facilities or through the acquisition
of established contractors and (ii) establishing fabric production capability
through the acquisition of established mills or the construction of new mills.
The Company has no history of operating textile mills or cutting, sewing,
washing, finishing, packing or shipping operations upon which an evaluation of
the prospects of the Company's vertical integration strategy can be based. In
addition, such operations are subject to the customary risks associated with
owning a manufacturing business, including, but not limited to, the maintenance
and management of manufacturing facilities, equipment, employees and
inventories.
Acquisition Strategy. A principal component of the Company's growth
strategy is to acquire smaller apparel manufacturers with customers or product
lines that complement the Company's existing business. The Company's ability to
maintain or exceed its historical growth rate may depend in part on its ability
to execute successfully its acquisition strategy. The successful execution of
this strategy will depend on the Company's ability to identify and to compete
for appropriate acquisition candidates, to consummate such acquisitions on terms
favorable to the Company (including obtaining acquisition financing, if
necessary), to retain and expand the sales and profitability of the acquired
businesses and to integrate the acquired businesses into its product
development, manufacturing, marketing, financial control and data processing
systems. See "--Management of Growth." The success of the Company's
acquisition strategy also is subject to the Company's ability to anticipate the
changes that continued growth would impose on these systems and management.
There can be no assurance that the Company will be successful in executing its
strategy. Although the Company regularly evaluates potential acquisition
candidates, and believes that numerous acquisition opportunities exist due, in
part, to the adverse effect on the earnings of many apparel manufacturers of the
continuing consolidation in its industry, there are no existing commitments or
agreements with respect to any acquisition, other than as described above.
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's results of operations. In addition, certain retailers,
including some of the Company
9
<PAGE>
customers, have experienced in the past, and may experience in the future,
financial difficulties which increase the risk of extending credit to such
retailers. These retailers have attempted to improve their own operating
efficiencies by concentrating their purchasing power among a narrowing group of
vendors. There can be no assurance that the Company will remain a preferred
vendor for its existing customers. A decrease in business from or loss of a
major customer could have a material adverse effect on the Company's results of
operations. 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, Structure, Express and Lane Bryant)
accounted for approximately two thirds and one-half of the Company's net sales
in 1998 and the first quarter of 1999, respectively. 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 material 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, state or foreign labor laws by
one of the Company's contractors can result in the Company being subject to
fines and the Company's goods which are manufactured in violation of such laws
being seized or their sale in interstate commerce being prohibited. From time
to time, the Company has been notified by federal, state or foreign authorities
that certain of its contractors are 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, 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.
10
<PAGE>
Management of Growth. Since its inception, the Company has experienced
rapid growth in sales. No assurance can be given that the Company will be
successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a
significant strain on the Company's management, management information systems,
inventory management, production capability, distribution facilities and
receivables management. Any disruption in the Company's order processing,
sourcing or distribution systems could cause orders to be shipped late, and
under industry practices, retailers generally can cancel orders or refuse to
accept goods due to late shipment. Such cancellations and returns would result
in a reduction in revenue, increased administrative and shipping costs and a
further burden on the Company's distribution facilities. In addition, the
failure to timely enhance the Company's operating systems, or unexpected
difficulties in implementing such enhancements, could have a material adverse
effect on the Company's results of operations.
Foreign Manufacturing. Approximately 95% of the Company products were
imported in 1998. 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.
Year 2000 Issue. The Year 2000 issue is primarily the result of computer
programs being written using two-digits, as opposed to four digits, to indicate
the year. Any of the Company's computer programs or hardware that have time-
sensitive software or embedded chips may be unable to interpret dates beyond the
year 1999. This could result in a system failure or miscalculations, leading to
disruption in operation of such systems, including, among other things,
inability to process transactions, send invoices or engage in similar normal
business activities. In 1997, the Company designated the MIS department to
coordinate the project of Year 2000 compliance.
The Company is currently evaluating, replacing or upgrading its information
systems in an effort to make them Year 2000 compliant, and expects to have
remediation efforts completed for its critical computer systems by June of 1999.
This includes the implementation of a new packaged software system, hardware and
EDI system for its U.S. and Mexico operations. The developer of this
information system has provided the Company with written assurance that the
system will correctly function across the year 2000, as verified by previous
system tests. The Company's Hong Kong operations have completed remediation and
expect to complete software and hardware upgrades, including testing, by July of
1999. The testing and remediation of voice/data communication systems, such as
network hubs, routers and phone/voice mail, is expected to be completed by the
end of the second quarter of 1999. Although the Company expects successful
completion of remediation and testing by the target dates, foreign testing and
implementation of procedures may not be as timely as in the United States.
As part of the Company's compliance program, formal communications with
customers, suppliers and other support service providers have been initiated.
All of the Company's customers which are established as EDI trading partners are
testing interface capability of the EDI program. The Company anticipates
completion of testing no later than June 1999. To date, the Company is not
aware of any supplier or subcontractor with a Year 2000 issue that would
materially affect the Company's results of operations, liquidity or capital
resources. The Company will continue to monitor the Year 2000 compliance of
third parties with which it does business.
The costs associated with the Year 2000 Compliance Program are not expected
to be substantial. To date, approximately $500,000 has been allocated to address
the Year 2000 issue, substantially all of which had been incurred as of March
31, 1999. The Company does not expect future costs to have a material effect on
the Company's financial condition or results of operations.
11
<PAGE>
While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of the new and
upgraded information systems, or a failure to identify all Year 2000
dependencies in the Company's systems and the systems of its suppliers and
customers could have material adverse consequences, including inability to take
customer orders, manufacture and ship products, invoice customers or collect
payments. In addition, disruptions in the economy generally resulting from Year
2000 issues could also adversely affect the Company. The amount of potential
loss of revenue cannot be reasonably estimated at this time.
Results of Operations
The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of income as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales.............................. 100.0% 100.0%
Cost of sales.......................... 81.0 82.9
--------- ---------
Gross profit........................... 19.0 17.1
Selling and distribution expenses...... 3.4 3.3
General and administration expenses*... 6.2 6.7
--------- ---------
Operating income....................... 9.4 7.1
Interest expense....................... (1.0) (0.5)
Other income........................... 0.3 0.2
--------- ---------
Income before income taxes............. 8.7 6.8
Income taxes........................... (3.2) (2.5)
--------- ---------
Net income............................. 5.5% 4.3%
========= =========
</TABLE>
* Includes amortization of excess of cost over fair value of net assets
acquired.
First Quarter 1999 Compared to First Quarter 1998
Net Sales increased by $19.8 million, or 30.8%, from $64.3 million in the
first quarter of 1998 to $84.1 million in the first quarter of 1999. The
increase in net sales included an aggregate increase in sales of $6.9 million to
mass merchandisers and $10.0 million as a result of the MGI, Rocky and Chazzz
Acquisitions (the "Acquisitions") as offset by an aggregate decrease of $2.6
million to divisions of The Limited. Excluding the Acquisitions, sales
increased by $9.8 million, or 16.1% over last year. Overall, sales to divisions
of The Limited in the first quarter of 1999 amounted to 44.7% of total net
sales, as compared to 62.5% in the comparable prior period, whereas sales to
mass merchandisers were 29.9% of total net sales as compared to 28.3% in the
same period last year. Due to sales growth on account of both the Acquisitions
and core business, particularly the new relationships with J.C. Penney, Mervyns
and Abercrombie & Fitch, sales concentration with The Limited is expected to be
maintained in the 40% range for the foreseeable future.
Gross Profit (which consists of net sales less product costs, duties and
direct costs attributable to production) for the first quarter of 1999 was $16.0
million, or 19.0% of net sales, compared to $10.9 million, or 17.1% of
12
<PAGE>
net sales, in the comparable prior period, an increase in gross profit of 1.9%.
The increase in the gross profit margin resulted from a decrease in inventory
markdown, equivalent to 1.0% of net sales, and an overall favorable sourcing
mix.
Selling and Distribution Expenses increased from $2.1 million in the first
quarter of 1998 to $2.8 million in the first quarter of 1999. As a percentage
of net sales, these expenses increased from 3.3% in the first quarter of 1998 to
3.4% in the first quarter of 1999. These increases included $1.5 million of
expenses related to the Acquisitions and Tag Mex in the first quarter of 1999 as
compared to $1.0 million of such expenses in the same period last year. After
adjusting for the $509,000 increase in such expenses, selling and distribution
expenses were $1.1 million in the first quarter of 1998 as compared to $1.3
million in the first quarter of 1999.
General and Administrative Expenses (which include amortization of excess of
cost over fair value of net assets acquired) increased from $4.3 million in the
first quarter of 1998 to $5.2 million in the first quarter of 1999. As a
percentage of net sales, these expenses decreased from 6.7% in the first quarter
of 1998 to 6.2% in the first quarter of 1999. This percentage decrease included
a decrease in bonus accruals, as offset by increases in amortization of the
excess of cost over fair value of net assets acquired and expenses related to
the Acquisitions and Tag Mex. Bonus accruals were $655,000 in the first quarter
of 1998 as compared to $127,000 in the first quarter of 1999. After adjusting
for $466,000 of amortization of the excess of cost over fair value of net assets
acquired in the first quarter of 1999, as compared to $100,000 of such
amortization in the first quarter of 1998, the $528,000 decrease in bonus
accruals and expenses related to the Acquisitions and Tag Mex of $2.1 million in
the first quarter of 1999 as compared to $1.4 million of such expenses in the
first quarter of 1998, general and administrative expenses increased to $2.6
million in the first quarter of 1999 from $2.1 million in the first quarter of
1998.
Operating Income in the first quarter of 1999 was $7.9 million, or 9.4% of net
sales, compared to $4.6 million, or 7.1% of net sales, in the comparable prior
period, an increase in operating income of 74.1% due to the factors described
above. The 2.3% improvement in operating income as a percentage of net sales is
attributable to a 0.4% decrease in operating expenses and a 1.9% increase in
gross profit margin.
Other Income increased from $117,000 in the first quarter of 1998, or 0.2% of
net sales, to $222,000 in the first quarter of 1999, or 0.3% of net sales. This
increase primarily resulted from an increase in interest income from $51,000 in
the first quarter of 1998 to $192,000 in the first quarter of 1999.
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, work-
in-process 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 and capital expenditures are cash flow from
operations, borrowings under the Company's bank credit facilities, issuance of
long-term debt and the proceeds from the exercise of stock options.
During the first three months of 1999, net cash provided by operating
activities was $10.6 million, which resulted primarily from net income of
$4.6 million and a net increase in working capital items of $5.4
million, cash flow used in investing activities was $12.5 million, which
primarily consisted of the Chazzz Acquisition and investment in capital
expenditures related to vertical integration programs in Mexico, and cash flow
used in financing activities equaled $0.4 million, a result of a $2.0
million reduction of bank borrowings, the issuance of a $2.5 million
noninterest-bearing promissory note convertible into 62,550 shares of common
stock of the Company to fund a portion of the Chazzz Acquisition and $1.6
million of proceeds from the exercise of stock options.
13
<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 March 31, 1999, HKSB's U.S. dollar
prime rate equaled seven and three-quarters percent. Interest on cash advances
under SCB's facility accrues at SCB's prime rate for lending Hong Kong dollars.
As of March 31, 1999, SCB's Hong Kong dollar prime rate equaled eight and three-
quarters percent. These facilities are subject to certain restrictive covenants
including a provision that the aggregate net worth, as adjusted, of the Company
will exceed $30 million, that the Company will not incur two consecutive
quarterly losses and that the Company will maintain a certain debt to equity
ratio.
The Company has accounts receivable-secured credit facilities with
NationsBanc Commercial Corporation ("NBCC") and The CIT Group/Commercial
Services, Inc. ("CIT"). 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, Structure and Target Stores. CIT will advance up to 100% of
the amount of accounts receivable from Lerner New York, Structure 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 March 31, 1999, the prime rates equaled seven
and three-quarters percent and the LIBOR rates averaged four and nine-tenths
percent.
The Company has an unsecured $10 million credit facility with SCB maturing
June 30, 1999 which is available for general corporate purposes. This facility
is cross-defaulted to the Company's other bank credit facilities and interest on
advances accrues at the rate of one and one-quarter percent over LIBOR.
The Company guarantees a $5 million credit facility for Rocky Apparel, LLC,
a wholly-owned subsidiary of the Company which acquired the partnership
interests in Rocky Apparel, L.P., a Delaware limited partnership.
The Company has financed its operations from its cash flow from operations,
borrowings under its bank credit facilities and the proceeds from the exercise
of stock options. The Company believes that these sources of cash should be
sufficient to fund its existing operations for the foreseeable future.
The Company has commenced a capital investment program in Mexico under
which it will invest approximately $150 million in the acquisition of a denim
mill and the construction of a facility which will produce twill and house
ancillary facilities. The Company may seek to finance future capital investment
programs through various methods, including, but not limited to, borrowings
under the Company's bank credit facilities, issuance of long-term debt, leases
and long-term financing provided by the sellers of facilities or the suppliers
of certain equipment used in such facilities. Through March 31, 1999, capital
expenditure and working capital commitments aggregating $10.1 million and $0.9
million, respectively, have been made with respect to vertical integration
programs initiated by the Company, excluding $22 million in cash payable May 6,
1999 and two million shares of the Common Stock of the Company issued upon
closing of the acquisition of a denim mill on April 1, 1999. 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 such financing, if and
when required, will be available on terms acceptable to the Company, or at all.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
-----------------
Item 2. Changes in Securities. None.
---------------------
Item 3. Defaults Upon Senior Securities. None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. None.
---------------------------------------------------
Item 5. Other Information. None.
-----------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits: Reference is made to the Index to Exhibits on page 17 for a
description of the exhibits filed as part of this Report on
Form 10-Q.
(b) Reports on Form 8-K: None.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRANT APPAREL GROUP
Date: May 8, 1999 By: /s/ Mark B. Kristof
-----------------------------
Mark B. Kristof
Vice President-Finance and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
16
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
10.69 Agreement for Purchase of Assets effective as of the twenty-third
day of March, 1999, by and among CMG, Inc., Charles Ghailian,
CHAZZZ Acquisition, L.L.C. and the Company
10.70 Employment Agreement effective as of the twenty-third day of
March, 1999, by and between Charles Ghailian and the Company
10.71 Non-Negotiable Promissory Note dated March 23, 1999
10.72 Escrow Agreement, by and among the Company, Tarrant Mexico, S. de
R.L. de C.V. and Jamil Textil, S.A. de C.V. dated as of April 1,
1999.
10.73 Employment Agreement dated as of April 1, 1999 by and between
Kamel Nacif and Tarrant Mexico, S. de R.L. de C.V.
27 Financial Data
<PAGE>
EXHIBIT 10.69
AGREEMENT FOR PURCHASE OF ASSETS
--------------------------------
THIS AGREEMENT FOR PURCHASE OF ASSETS is made and effective as of the
twenty-third day of March, 1999, by and among CMG, INC., a California
corporation (the "Seller"), CHARLES GHAILIAN (the "Shareholder"), CHAZZZ
ACQUISITION, L.L.C., a Delaware limited liability company (the "Purchaser"),
and, with respect only to Section 7.20, TARRANT APPAREL GROUP, a California
corporation (the "Parent"), with respect to the following facts:
A. The Seller is engaged in the design, development, production and sale
of apparel.
B. The Shareholder owns all the issued and outstanding capital stock of
the Seller.
C. The Purchaser is a wholly-owned subsidiary of the Parent.
D. The Purchaser desires to purchase from the Seller, and the Seller
desires to sell to the Purchaser, certain assets, all upon the terms and
conditions contained herein.
ACCORDINGLY, subject to the terms and conditions of this Agreement,
and on the basis of the premises, representations, warranties and agreements
contained herein, the parties hereto agree as follows:
1. PURCHASE AND SALE OF ASSETS
---------------------------
1.1 Purchase and Sale.
-----------------
(a) The Seller shall sell, assign, transfer, convey and deliver to the
Purchaser, and the Purchaser shall purchase and take from the Seller, (i) on the
Closing Date (as defined below), those property and assets of the Seller set
forth on Schedule 1.1(a), as the same shall exist on the Closing Date and (ii)
---------------
from time to time after the Closing Date, any inventory (including any work-in-
process, finished goods, fabric, trim or accessories) held by the Seller against
customer orders or anticipated orders which provide for an average gross profit
margin of at least 15% (the "Inventory"). The term "Assets" shall mean all
property and assets of the Seller purchased by the Purchaser under this
Agreement.
(b) From time to time after the Closing Date, the Purchaser shall have
the right, but not the obligation, to purchase from the Seller, and the Seller
shall sell to the Purchaser, at the Seller's actual cost, any inventory not
purchased pursuant to Section 1.1(a).
(c) Notwithstanding anything to the contrary contained herein, the
Seller shall not sell, assign, transfer, convey or deliver to the Purchaser
hereunder, and shall retain, the property and assets of the Seller set forth on
Schedule 1.1(c).
- ---------------
1.2 Purchase Price.
--------------
(a) In consideration of the sale of the Assets to the Purchaser, the
Purchaser shall pay or deliver to the Seller the following (the "Purchase
Price") (subject to adjustment as provided in Section 1.3(d)):
(i) the sum of $4,275,000 shall be paid in cash on the
Closing Date;
(ii) the sum of $500,000 shall be paid in cash in two
equal annual installments of $250,000 each, without interest, on
the second and third anniversary dates of the Closing Date;
-1-
<PAGE>
(iii) the sum of $1,500,000 shall be paid in cash in three
equal annual installments of $500,000 each, without interest, on
the March 23 following each period set forth below, provided the
net sales and the adjusted pre-tax income of the Purchaser
(including, but not limited to, all sales of the Parent and any
of its subsidiaries to JC Penney - All except Men's sales, Sears,
Montgomery Wards and Mervyns - All except Large Size and Missy
Wovens) in such period equal or exceed the following targets:
<TABLE>
<CAPTION>
Adjusted
Period Net Sales Pre-tax Income
------ ---------- ---------------
<C> <S> <C>
03/23/99-12/31/99 $39.5 million 9.7%
01/01/00-12/31/00 $60.0 million 11.0%
01/01/01-12/31/01 $72.0 million 11.0%
</TABLE>
(iv) an amount equal to the Seller's actual cost for the
Inventory, payable upon the earlier to occur of the delivery of
the same and April 1, 1999; and
(v) a Non-Negotiable Promissory Note in the form attached
hereto as Exhibit A (the "Note") subject to the right of off-set
---------
set forth in Section 1.2(d).
(b) The Purchase Price shall be allocated among the Assets as set
forth on Schedule 1.2(b).
---------------
(c) The term "net sales" shall mean all revenues, less returns,
discounts and allowances, determined in accordance with generally accepted
accounting principles. The term "adjusted pre-tax income" shall mean pre-tax
income determined in accordance with generally accepted accounting principles,
less (i) 4% of the FOB cost of orders produced by the Parent or any of its
subsidiaries in Asia on or before the first anniversary hereof and 5%
thereafter, (ii) such allocation of the overhead attributable to orders produced
by the Parent or any of its subsidiaries in Mexico as may be agreed upon by the
Parent and the Purchaser from time to time, (iii) any amount paid pursuant to
Section 1.2(a)(iii) and (iv) any amount paid pursuant to Section 1.6. The
parties hereby acknowledge that the Purchaser shall not be required to source
product from the Parent or its subsidiaries.
(d) Notwithstanding anything to the contrary contained herein, the
Purchaser shall have the right to set-off against any amount otherwise due
pursuant to Section 1.1(a)(v) any obligation of the Seller or the Shareholder to
the Purchaser or the Parent under this Agreement (a "claim"); provided, however,
--------
that the undersigned first shall have delivered to the Seller in writing a
summary description of the factual and legal bases for such claim and an
estimate of the amount thereof. In the event that a claim is based upon the
demand of a person other than the undersigned or the Parent and subject to the
parties respective rights therein under this Agreement, which demand is finally
determined by a decision from which no appeal may be taken, the amount of such
claim shall be deemed to have been finally determined thereby and not to be
subject to further arbitration. The foregoing right of off-set shall terminate
as of August 30, 2000 with respect to any claim which has not accrued as of such
date.
1.3 Assumption of Liabilities.
-------------------------
(a) Except as provided in Section 1.3(c), the Purchaser shall purchase
and take the Assets free and clear of all liens, claims, charges, encumbrances,
security interests, equities, restrictions on use, liabilities, obligations,
expenses and debts ("liabilities"), known and unknown, whether absolute,
contingent, accrued or otherwise, including, but not limited to, those
liabilities set forth in Schedule 1.3(a).
---------------
(b) The Seller and the Shareholder, jointly and severally, shall pay
or perform, and shall defend, indemnify and hold harmless the Parent and the
Purchaser from, any and all liabilities which arise or result from or are
related to, directly or indirectly, (i) the Assets, if such liabilities arise
before the Closing Date, or
-2-
<PAGE>
(ii) the business or operations with the Seller or the Shareholder, whether such
liabilities arise before or after the Closing Date, other than those liabilities
expressly assumed by the Purchaser under Section 1.3(c).
(c) Notwithstanding anything to the contrary contained in this Section
1.3, the Purchaser shall assume, perform and hold the Seller harmless from those
liabilities set forth on Schedule 1.3(c) (other than such liabilities as are
---------------
payable on or before the Closing Date or as to which the Seller is then in
default).
(d) The Purchaser shall have the right, but not the obligation, to
perform any obligation of the Seller or the Shareholder if the Purchaser, in its
reasonable discretion, determines that the failure to perform such obligation
could have a material adverse effect on the Assets or the business of the
Purchaser associated therewith; provided, however, that before the Purchaser
--------
shall perform any such obligation it first shall notify the Seller or the
Shareholder in writing of its intention to do so and shall give the Seller or
the Shareholder ten (10) days to cure or contest such failure. The Purchase
Price shall be reduced by the cost to the Purchaser of any such obligation
performed. The Purchaser shall have the right (i) to set off any such cost
against any portion of the Purchase Price then payable or (ii) to demand that
the Seller and the Shareholder reimburse the Purchaser therefor promptly on
demand, and the Seller and the Shareholder, jointly and severally, shall do so.
The Purchaser's rights under this Section 1.3(d) shall be in addition to any
other rights or remedies of the Purchaser under this Agreement or applicable
law.
(e) The Purchaser shall reimburse the Seller for any prepaid operating
expenses attributable to the Assets for any period after the Closing Date
promptly upon receipt of a written demand therefor, together with such
documentation relating to such expense as the Purchaser reasonably may request
to verify the existence and amount thereof.
1.4 Delivery of Assets.
------------------
(a) Delivery of possession of the Assets shall be deemed to have
occurred for all purposes at 11:59 P.M. (local time) on the day before the
Closing Date, and all risk of loss, whether or not covered by insurance, shall
be on the Seller until such date and time and on the Purchaser thereafter.
(b) On the Closing Date, the Seller shall deliver to the Purchaser
physical possession of the Assets wherever located. With respect to any Assets
which cannot be physically delivered because they are in the possession of third
parties, or otherwise, the Seller shall give irrevocable instructions to the
party in possession thereof that all right, title and interest in and to the
same shall have been vested in the Purchaser, and shall take such further action
and execute and deliver such further documents, at the Seller's sole cost and
expense, as the Purchaser reasonably may request to cause any such person to
deliver physical possession of any Assets held by it to the Purchaser.
(c) On the Closing Date, and from time to time thereafter, at the
request of the Purchaser, the Seller and the Shareholder shall execute and
deliver to the Purchaser all such bills of sale, endorsements, assignments,
consents and other documents and instruments of conveyance, transfer, assignment
and further assurances as shall be necessary or desirable, in the reasonable
opinion of counsel to the Purchaser, to vest in or to confirm in the Purchaser
good title in and to the Assets. On the Closing Date, and from time to time
thereafter, at the request of the Seller, the Purchaser shall execute and
deliver to the Seller all such instruments of assumption as shall be necessary
or desirable, in the reasonable opinion of counsel to the Seller, to reflect the
assumption by the Purchaser of those liabilities of the Seller expressly assumed
by the Purchaser under Section 1.3(c).
1.5 Closing. The purchase and sale of the Assets contemplated by
-------
this Agreement shall take place at 10:00 A.M. (local time) on March 23, 1999 at
the offices of Sheppard, Mullin, Richter & Hampton LLP located at 333 South Hope
Street, 48th Floor, Los Angeles, California 90071, or at such other time or
place as may be mutually agreed upon by the parties in writing. The date on
which the purchase and sale of the Assets contemplated by this Agreement shall
take place is referred to herein as the "Closing Date." The obligation of any
party to consummate the purchase and sale of the Assets contemplated by this
Agreement may be terminated by such party after March 23, 1999, if such purchase
and sale shall not have occurred by the close of business on that date,
-3-
<PAGE>
providing the terminating party is not in default of any of its obligations
hereunder. On the Closing Date, the Seller and the Shareholder shall deliver to
the Purchaser the Assets in accordance with Section 1.4(b) and the instruments
of transfer referred to in Section 1.4(c), against receipt of the Purchase Price
then payable, including, without limitation, delivery of the Note, and the
instruments of assumption referred to in Section 1.4(c). All deliveries shall
be considered to have taken place simultaneously as a single transaction, and no
delivery shall be considered to have been made until all deliveries are
completed.
1.6 Use of Facilities. The Seller shall use commercially reasonable
-----------------
efforts to provide the Purchaser the undisturbed use of those facilities set
forth on Schedule 1.6 and, in consideration therefor, the Purchaser shall
------------
reimburse the Seller for any rent, utilities or other amounts separately
itemized on landlord statements consistent with past practice and actually paid
by the Seller with respect to such facilities pursuant to those leases set forth
on Schedule 1.1(c); provided, however, that such use and reimbursement
--------------- --------
obligation shall terminate on June 30, 1999 for the Seller's New York showroom
and December 31, 1999 for the Seller's Los Angeles facilities; provided,
--------
further, that any reimbursement obligation accrued as of such date shall
survive.
1.7 Release of Guaranty. Promptly after the Closing Date, the
-------------------
Purchaser shall take such action as may be necessary to cause Finova Capital
Corporation to release the Shareholder from any personal guarantee of the
obligations of the Seller.
1.8 Employees.
---------
(a) On the Closing Date, the Purchaser shall offer to each of the key
employees of the Seller listed on Schedule 1.8A employment on an "at will" basis
-------------
and with such annual salary, bonus and perquisites as are set forth thereon.
(b) On the Closing Date, the Purchaser shall offer to each of the
employees of the Seller listed on Schedule 1.8B employment on an "at will" basis
-------------
and on such terms and conditions as may be acceptable to the Purchaser in its
sole and absolute discretion; provided, however, that each such employee (i)
--------
shall be credited with his period of service to the Seller for the purposes of
all benefit plans of the Purchaser (other than the 401(k) plan maintained by the
Parent for the employees of the Parent and its subsidiaries), (ii) shall be
entitled to receive as of April 1, 1999 such medical and dental insurance as is
available to the employees of the Parent and its subsidiaries generally and
(iii) shall be entitled to participate as of July 1, 2001 in the 401(k) plan of
the Parent. Notwithstanding the foregoing, the Seller shall remain solely
responsible for any vacation pay, sick pay or similar benefits accrued but
unpaid as of the Closing Date.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE SHAREHOLDER
----------------------------------------------------------------
The Seller and the Shareholder, jointly and severally, hereby
represent and warrant to the Purchaser that the statements set forth in Sections
2.1 through 2.18 are true and correct.
2.1 Authority to Enter Agreement and Enforceability. The Seller and
-----------------------------------------------
the Shareholder each has all requisite right, power and authority to execute,
deliver and perform its or his respective obligations under this Agreement and
the other agreements and instruments contemplated hereby, including, but not
limited to, the sale, assignment, transfer, conveyance and delivery of the
Assets to the Purchaser, without obtaining the approval or consent of any other
party, governmental body or authority; all proceedings have been taken and all
authorizations have been secured by the Seller and the Shareholder which are
necessary to authorize the execution, delivery and performance of this Agreement
and the other agreements and instruments contemplated hereby; and this Agreement
and each of the other agreements and instruments contemplated hereby to which
each is a party is a legal, valid and binding agreement of the Seller and the
Shareholder and is enforceable against each of them in accordance with its
terms.
2.2 Organization and Standing. The Seller is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
California, with all requisite power and authority (corporate and
-4-
<PAGE>
other) to own, lease and operate its property and assets as now owned, leased or
operated and to carry on its businesses as now conducted, and is duly qualified
to do business and is in good standing in each jurisdiction in which the conduct
of its businesses or the ownership, lease or use of its properties makes such
qualification necessary.
2.3 Ownership of Shares. The Shareholder owns all the issued and
-------------------
outstanding shares of the capital stock of the Seller. There are no options,
warrants, rights or other agreements or commitments outstanding or in existence
which provide for the issuance of capital stock or other securities of the
Seller, and there are no securities outstanding or in existence which are
convertible into or exchangeable for capital stock or other securities of the
Seller.
2.4 Trademarks, Patents, Etc. Except for the Mark (as defined on
------------------------
Schedule 1.1(a)), the Seller uses and owns no trade names, trademarks, patents,
- ----------------
copyrights or registrations or applications therefor in connection with, and
none is required for, the business of the Seller as presently conducted. The
Seller is not infringing any trade name, trademark, patent, copyright or other
similar right of any third party in connection with its business. The Seller
has not granted to any person any interest in the Mark and, to the best
knowledge of the Seller and the Shareholder, no person is infringing upon the
Seller's rights in the Mark.
2.5 Financial Statements. Schedule 2.5A hereto contains (i) the
-------------------- -------------
audited balance sheets of the Seller as of December 31, 1996 and 1997 and the
audited statements of operations, changes in stockholders' equity and cash flows
of the Seller for the twelve month periods then ended and (ii) the unaudited
balance sheet of the Seller as of December 31, 1998 and the unaudited statements
of operations, changes in stockholders' equity and cash flows of the Seller for
the twelve months then ended. Except as set forth on Schedule 2.5B, the
-------------
foregoing financial statements (i) were prepared in accordance with generally
accepted accounting consistently applied throughout the period and (ii) fairly
present the Seller's financial condition and results of operations as at the
dates and for the periods therein specified in all material respects, subject,
in the case of such unaudited financial statements, to audit and normal year-end
adjustments (the effect of which will not, individually or in the aggregate, be
materially adverse) and the absence of notes (that reflect facts which are
materially adverse to the Seller). On the date hereof, the Seller has no
material liabilities or obligations, whether contingent or absolute, direct or
indirect, or matured or unmatured, which are not shown or provided for on its
December 31, 1998 balance sheet or set forth on Schedule 2.5B hereto, and the
-------------
Shareholder does not know of any basis for the assertion of any such liabilities
or obligations.
2.6 Tax Matters. The Seller has properly prepared and filed returns
-----------
for and paid in full all federal, state, local and foreign taxes, assessments
and penalties to the extent such filings and payments are required prior to the
date hereof, and there is no outstanding or proposed deficiency by any federal,
state, local or foreign government with respect to any tax period.
2.7 Insurance. The Seller maintains, and will maintain from the date
---------
hereof to the Closing Date, in full force and effect insurance policies with
financially sound and reputable insurers on the Assets (other than inventory
located in Mexico) of a character usually insured by companies engaged in the
same or similar businesses against loss or damage of the kinds and in the
amounts customarily insured against by such companies.
2.8 Litigation. Except as set forth on Schedule 2.8, there are no
---------- ------------
suits, actions or legal, administrative, arbitration or other proceedings or
investigations pending or threatened by, against or involving the Seller or,
with respect only to those suits, actions, proceedings or investigations arising
out of the Seller's business, pending or threatened by, against or involving the
Shareholder or any of the Seller's officers, directors, shareholders, employees
or agents.
2.9 Compliance with Laws and Other Instruments. The Seller's
------------------------------------------
businesses have been and are being conducted in all material respects in
accordance with all applicable laws, ordinances, rules and regulations of all
authorities. The Seller is not in violation of, or in default under, any term
or provision of its Articles of Incorporation or Bylaws (as amended or revised)
or of any lien, indenture, mortgage, lease, agreement, instrument, contract,
commitment or other arrangement, or subject to any restriction of any kind or
character, which could have a material adverse effect on the Seller's businesses
or the Assets. The execution and delivery of this Agreement and the other
agreements and instruments contemplated hereby, and the consummation of the
transactions contemplated
-5-
<PAGE>
herein and therein, will not conflict with or result in the breach of any term
or provision of, or constitute a default under, the Articles of Incorporation or
the Bylaws (as amended or revised) of the Seller, or any statute, order,
judgment, writ, injunction, decree, license, permit, approval, authorization,
rule or regulation of any court or any governmental or regulatory body, or any
agreement, lease (except to the extent the arrangements set forth in Section 1.6
may conflict with any provision thereof), contract, document, instrument,
commitment, obligation or arrangement of any kind or nature to which the Seller
or the Shareholder is a party or by which it or he is bound, unless such breach
will not have a material adverse effect on the Assets or business or operations
of the Seller.
2.10 Brokerage and Finder's Fees. Neither the Seller nor the
---------------------------
Shareholder has incurred any liability to any broker, finder or agent for any
brokerage fees, finder's fees or commissions with respect to the transactions
contemplated by this Agreement.
2.11 Employment Agreements. Schedule 2.11 contains a complete and
--------------------- -------------
correct list of all agreements with employees or independent contractors not
cancelable at will and all employee benefit plans, including, but not limited
to, (i) any collective bargaining agreement, (ii) any agreement or plan which
contains any obligation, liability or commitment for any vacation pay, severance
or termination pay, sick or disability pay, pension or retirement benefits,
bonuses or profit sharing, deferred or delayed wages of any kind, commissions or
incentive compensation or (iii) any group medical, dental, vision, health,
hospitalization or disability insurance plan relating to the Seller's business.
The Seller has performed all of its obligations required to be performed under
all such agreements and plans, and is not in default or in arrears under any of
the respective terms thereof. The Seller's relationship with all employees or
independent contractors is satisfactory.
2.12 Assets. Schedule 2.12A contains a true and complete list of all
------ --------------
tangible assets (including, but not limited to, all furniture, fixtures,
machinery, instruments, equipment, computers, motor vehicles, tooling, spare
parts, supplies, and other tangible personal property and assets) used in, or
necessary for the conduct of, the Seller's business as presently conducted,
other than inventory and assets to be retained by the Seller pursuant to Section
1.1(c). Except as set forth on Schedule 2.12B, all such assets are owned by the
--------------
Seller free and clear of all liens, claims, charges, encumbrances, security
interests, equities or restrictions on use of any kind or nature (collectively,
"Liens") and are in good working condition and repair (subject to normal wear
and tear) and are adequate for their intended uses. Upon the Closing Date, the
Purchaser will receive from the Seller good and marketable title to the Assets
free and clear of any Liens, other than Liens set forth on Schedule 2.12B.
--------------
2.13 Absence of Certain Changes. Since January 1, 1999, there has
--------------------------
not been any material adverse change in the condition (financial or other), net
worth, property, assets, earnings, liabilities, capitalization, business or
results of operations of the business conducted with the Assets. Since January
1, 1999, the Seller has operated its businesses and the Assets as now operated
and only in the ordinary course and, by way of illustration only and not
limitation, has taken each such action as is set forth on Schedule 4.1.
------------
2.14 Customer Orders.
---------------
(a) Schedule 2.14 sets forth a true and complete list of (i) all
-------------
customer orders for apparel pending on the date hereof and (ii) all Vendor
Orders (as defined in Schedule 1.1(a)) pending on the date hereof. All such
----------------
orders represent bona fide obligations of the customer to purchase and take the
goods subject thereto, arise from bona fide transactions in the ordinary course
of business and are not subject to any defense, claim or right of setoff (other
than chargebacks arising in the ordinary course of business).
(b) On the date hereof, the Seller has, and on the Closing Date, the
Seller shall have, a backlog of customer orders of at least $10 million,
including no less than $2.2 million of orders for shipment in the period from
March 23 to March 31, 1999 and $10 million in the period from March 23 to June
30, 1999 of (i) private label Junior, Missy and Kids apparel primarily for J.C.
Penney, Sears and Mervyns with an average gross profit margin of at least 15%
before returns, discounts and allowances and (ii) branded apparel under the
"Chazzz" label with an average gross profit margin of at least 20% before
returns, discounts and allowances. For purposes of this Section 2.14(b), the
term "orders" shall include revisions, supplements and substitutions to orders
made after the Closing Date consistent with the Seller's past practice.
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<PAGE>
2.15 Investment in the Shares.
------------------------
(a) The Seller will hold the Shares for investment and not with a view
to, or for resale in connection with, any distribution thereof in violation of
the Securities Act of 1933, as amended (the "Securities Act"). The Seller does
not have any present intention of selling, offering to sell or otherwise
disposing of or distributing the Shares.
(b) The Seller acknowledges that the Purchaser has disclosed that the
Shares have not been registered under the Securities Act and, therefore, cannot
be resold unless they are registered under the Securities Act or unless an
exemption from registration is available.
(c) The Seller is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Shares.
(d) The Seller has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the acquisition of the Shares and
have had full access to such other information concerning the Parent as it has
requested.
(e) The Seller is able to bear the economic risk of its investment in
the Shares for an indefinite period of time, recognizing that the Shares have
not been registered under the Securities Act and, therefore, cannot be sold
unless subsequently registered under the Securities Act or an exemption from
such registration is available.
(f) The Seller acknowledges that until such time as the Shares have
been registered, or are otherwise eligible, for resale in accordance with the
Securities Act, each certificate representing the Shares shall be endorsed with
the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES LAWS, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE FIRST BEEN
REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE
CORPORATION SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER,
EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE CORPORATION
(WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION).
2.16 Business Names. Since January 1, 1997, neither the Seller nor
--------------
the Shareholder has conducted business under any name other than "CMG" and
"Chazzz" in any jurisdiction.
2.17 Inventory. Except as set forth in Schedule 2.17, the Inventory
--------- -------------
(i) consists of items of merchantable quality and quantity usable or salable in
the ordinary course of business, (ii) is salable at prevailing market prices not
less than the book value amounts thereof, and (iii) is not obsolete, damaged,
slow-moving or defective, and any inventory purchased by the Purchaser under a
Vendor Order will, upon its purchase by the Purchaser, satisfy the conditions
set forth in clauses (i), (ii) and (iii). The value at which the Inventory
carried on the Seller's financial statements reflects the customary inventory
valuation policy of the Seller (which fairly reflects the value of obsolete,
spoiled or excess inventory) for stating Inventory in accordance with generally
accepted accounting purposes consistently applied.
-7-
<PAGE>
2.18 Material Misstatements or Omissions. No representations,
---- -----------------------------------
warranties or information furnished by the Seller or the Shareholder to the
Purchaser, the Parent or any of their respective employees or agents, including,
but not limited to, Ernst & Young LLP, in connection with the transactions
contemplated hereby contain any untrue statement of a material fact or omit to
state a material fact known to the Seller or the Shareholder necessary to make
the statements and facts contained therein not misleading.
3. REPRESENTATION AND WARRANTIES OF THE PURCHASER
----------------------------------------------
The Purchaser represents and warrants to the Seller and the
Shareholder that the statements set forth in Sections 3.1 through 3.4 hereof are
true and correct.
3.1 Authority to Enter Agreement and Enforceability. The Purchaser
-----------------------------------------------
has all requisite right, power and authority to execute, deliver and perform its
obligations under this Agreement and the other agreements and instruments
contemplated hereby without obtaining the approval or consent of any other
party, governmental body or authority; all proceedings have been taken and all
authorizations have been secured by the Purchaser which are necessary to
authorize the execution, delivery and performance of this Agreement and the
other agreements and instruments contemplated hereby; and this Agreement and
each of the other agreements and instruments contemplated hereby to which it is
a party is a legal, valid and binding agreement of the Purchaser and is
enforceable against it in accordance with its terms.
3.2 Compliance with the Law and other Instruments. The Parent's
---------------------------------------------
businesses have been and are being conducted in all material respects in
accordance with all applicable laws, ordinances, rules and regulations of all
authorities. Neither the Parent nor the Purchaser is in violation of, or in
default under, any term or provision of its Articles of Incorporation or Bylaws
(as amended or revised) or of any lien, indenture, mortgage, lease, agreement,
instrument, contract, commitment or other arrangement, or subject to any
restriction of any kind or character, which could have a material adverse effect
on its respective businesses. The execution and delivery of this Agreement and
the other agreements and instruments contemplated hereby, and the consummation
of the transactions contemplated herein and therein will not conflict with or
result in the breach of any term or provision of, or constitute a default under
any statute, order, judgment, writ, injunction, decree, license, permit,
approval, authorization, rule or regulation of any court or any governmental or
regulatory body, or any agreement, lease, contract, document, instrument,
commitment, obligation or arrangement of any kind or nature to which the
Purchaser is a party or by which it is bound, unless such breach will not have a
material adverse effect on the business or operations of the Purchaser.
3.3 Brokerage and Finder's Fees. The Purchaser has not incurred any
---------------------------
liability to any broker, finder or agent for any brokerage fees, finder's fees
or commissions with respect to the transactions contemplated by this Agreement.
3.4 1934 Act Reports. The reports filed by the Parent with the
----------------
Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, taken as a whole, (i) comply in all
material respects with the requirements of such Act and (ii) do not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements and facts contained therein not misleading.
4. COVENANTS
---------
4.1 Operation of the Assets. During the period from the date of this
-----------------------
Agreement to the Closing Date, the Seller shall operate its businesses and the
Assets as now operated and only in the ordinary course, and the Shareholder
shall cause the Seller to do so. By way of illustration only and not
limitation, the Seller shall take each such action as is set forth in Schedule
--------
4.1 hereto, and the Shareholder shall cause the Seller to do so.
- ---
4.2 Access to Information. The Seller and the Shareholder shall give
---------------------
to the Purchaser and its counsel, accountants and other representatives full
access during normal business hours throughout the period from
-8-
<PAGE>
the date of this Agreement to the Closing Date to all of its property, assets,
books and records and all employees, independent contractors and agents, and
shall furnish the Purchaser during such period with all such information
concerning their businesses or the Assets as the Purchaser may reasonably
request, and the Shareholder shall cause the Seller to do so. No investigation
or inquiry made by or on behalf of the Purchaser hereunder shall in any way
affect or lessen the representations and warranties made by the Seller and the
Shareholder under this Agreement.
4.3 Release of Liens. On or before April 6, 1999, the Seller shall
----------------
cause those Liens set forth on Schedule 2.12B to be released.
--------------
4.4 Accounts Payable. On or before June 30, 1999, the Seller shall
----------------
have paid or otherwise resolved to the Purchaser's reasonable satisfaction all
amounts due and payable by the Seller on the date hereof, including, but not
limited to, any liability or obligation set forth on Schedule 2.5B (other than
-------------
any liability or obligation which the Seller then is disputing in good faith).
4.5 Repurchase of Inventory. On or before July 31, 1999, the Seller
-----------------------
will repurchase from the Purchaser at the Purchaser's request any finished goods
inventory not shipped before such date (other than as a result of the
cancellation of a customer order or a production overrun) or work-in-process,
trim, accessories or fabric inventory not held against customer orders.
5. CONDITIONS PRECEDENT
--------------------
5.1 Conditions Precedent to the Obligations of the Purchaser. The
--------------------------------------------------------
obligation of the Purchaser to consummate the transactions contemplated by this
Agreement is expressly subject to the following conditions (compliance with
which or the occurrence of which may be waived in whole or in part by the
Purchaser in writing):
(a) All representations and warranties of the Seller and the
Shareholder contained in this Agreement shall be true and correct in all
material respects on the date hereof and as of the Closing Date as if made at
and as of such date.
(b) The Seller and the Shareholder each shall have performed and
satisfied in all material respects all covenants and conditions required by this
Agreement to be performed or satisfied by it or him on or prior to the Closing
Date.
(c) No action or proceeding shall have been instituted or threatened
prior to or at the Closing Date or, in the reasonable opinion of counsel to the
Purchaser, is likely to be instituted before any court or governmental body or
authority the result of which could prevent or make illegal the consummation of
the transactions contemplated hereunder, or which could adversely affect the
Purchaser's use of the Assets.
(d) The Shareholder shall have executed and delivered to the Parent an
employment agreement in the form of and containing the terms and conditions set
forth in Exhibit B hereto (the "Employment Agreement").
---------
(e) There shall not have occurred any material adverse change in the
business, property, assets, operations, condition (financial or other) or
prospects of the business conducted with the Assets since January 1, 1999.
5.2 Conditions Precedent to the Obligations of the Seller and the
-------------------------------------------------------------
Shareholder. The obligation of the Seller and the Shareholder to consummate the
- -----------
transactions contemplated by this Agreement is expressly subject to the
following conditions (compliance with which or the occurrence of which may be
waived in whole or in part by the Seller or the Shareholder, as the case may be,
in writing):
(a) All representations and warranties of the Purchaser contained in
this Agreement shall be true and correct in all material respects on the date
hereof and as of the Closing Date as if made at and as of such date.
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<PAGE>
(b) The Purchaser shall have performed and satisfied in all material
respects all covenants and conditions required by this Agreement to be performed
or satisfied by it on or prior to the Closing Date.
(c) No action or proceeding shall have been instituted or threatened
prior to or at the Closing Date or, in the reasonable opinion of counsel to the
Seller or the Shareholder, is likely to be instituted before any court or
governmental body or authority the result of which could prevent or make illegal
the consummation of the transactions contemplated hereunder.
(d) The Parent shall have executed and delivered to the Shareholder
the Employment Agreement.
6. NONCOMPETITION
--------------
6.1 Competitive Activity. As used in this Agreement, the term
--------------------
"Competitive Activity" shall mean any participation in, assistance of,
employment by, ownership of any interest in, acceptance of business from or
assistance, promotion or organization of any person, partnership, corporation,
firm, association or other business organization, entity or enterprise which,
directly or indirectly, is engaged in, or hereinafter engages in, the
development, production, marketing, or selling of any product which is the same
as or in competition with any line of business in which the Seller is now
engaged, whether as an agent, consultant, employee, officer, director, investor,
partner, shareholder, proprietor or in any other individual or representative
capacity, but excluding the holding for investment of less than five percent
(5%) of the outstanding securities of any corporation which are regularly traded
on a recognized stock exchange or The Nasdaq Stock Market.
6.2 Restriction on Competitive Activities. Until the earlier to
-------------------------------------
occur of (i) eighteen months after the termination of the employment of the
Shareholder by the Purchaser pursuant to the Employment Agreement without
"cause" (as defined therein) or (ii) two years after the termination of such
employment for any other reason, the Seller and the Shareholder shall refrain,
without the prior written consent of the Purchaser in each instance, from
engaging in any Competitive Activity in any of the following geographic areas:
(i) the counties of Los Angeles, Riverside, San
Bernardino, Santa Barbara, Orange, San Diego, and
Ventura;
(ii the State of California;
(ii the States of California and New York;
(iv the United States; and
(v) the United States and Mexico.
6.3 Injunctive Relief. The Seller and the Shareholder hereby
-----------------
acknowledge and agree that it would be difficult to fully compensate the
Purchaser for damages resulting from the breach or threatened breach of Section
6.2 and, accordingly, that the Purchaser shall be entitled to temporary and
injunctive relief, including temporary restraining orders, preliminary
injunctions and permanent injunctions, to enforce such provision. This
provision with respect to injunctive relief shall not, however, diminish the
Purchaser's right to claim and recover damages.
6.4 Termination. The obligations of the Seller and the Shareholder
-----------
under Section 6.2 shall terminate before the end of the stated term in the event
Gerard Guez shall cease to be the Chief Executive Officer of the Parent.
-10-
<PAGE>
7. MISCELLANEOUS
-------------
7.1 Survival of Representations, Warranties and Agreements. All
------------------------------------------------------
representations, warranties and agreements made by the parties in this Agreement
(including, but not limited to, statements contained in any exhibit, schedule
or certificate or other instrument delivered by or on behalf of any party hereto
or in connection with the transactions contemplated hereby) shall survive the
Closing Date notwithstanding any investigations, inspections, examinations or
audits made by or on behalf of any party.
7.2 Indemnification.
---------------
(a) The Seller and the Shareholder (the "Indemnifying Parties"),
jointly and severally, shall indemnify, defend and hold harmless the Parent, the
Purchaser and their respective officers, directors, shareholders, employees,
affiliates, agents, successors and assigns, and any person who controls or is
deemed to control any of them (the "Indemnified Parties"), from, against and in
respect of any and all payments, damages, claims, demands, losses, expenses,
costs, obligations and liabilities (including, but not limited to, reasonable
attorneys' fees and costs, and the costs of investigation and preparation) (a
"Loss") which, directly or indirectly, arise or result from or are related to
(i) any breach by any of the Indemnifying Parties of any of its or his
representations, warranties, covenants or commitments under this Agreement, (ii)
the conduct of the Seller's business prior to the Closing Date or (iii) any
liabilities of the Seller (other than any liability expressly assumed by the
Purchaser pursuant to Section 1.3(c)). Consummation of the transactions
contemplated hereunder shall not be deemed or construed to be a waiver of any
right or remedy of any Indemnified Party, nor shall this section or any other
provision of this Agreement be deemed or construed to be a waiver of any ground
of defense by it. The Indemnifying Parties' obligations hereunder shall be in
addition to any liability that they or any other person otherwise may have to
the Indemnified Parties, and shall be binding upon, and inure to the benefit of,
their heirs, representatives, successors and assigns, and shall inure to the
benefit of the heirs, representatives, successors and assigns of each
Indemnified Party.
(b) The Purchaser (the "Indemnifying Party") shall indemnify, defend
and hold harmless the Seller, the Shareholder and their respective officers,
directors, shareholders, employees, affiliates, agents, successors and assigns,
and any person who controls or is deemed to control any of them (the
"Indemnified Parties"), from, against and in respect of any and all payments,
damages, claims, demands, losses, expenses, costs, obligations and liabilities
(including, but not limited to, reasonable attorneys' fees and costs, and the
costs of investigation and preparation) (a "Loss") which, directly or
indirectly, arise or result from or are related to (i) any breach by the
Purchaser of any of its representations, warranties, covenants or commitments
under this Agreement, (ii) the conduct of the Purchaser's business after the
Closing Date or (iii) any liabilities of the Seller expressly assumed by the
Purchaser.
(c) In no event shall the Indemnifying Parties be required to
indemnify the Indemnified Parties for more than the Purchase Price by virtue of
Section 7.2(a).
7.3 Third-Party Claims. The Indemnified Party shall promptly notify
------------------
the Indemnifying Parties of the existence of any claim, demand or other matter
involving liabilities to third parties to which the Indemnifying Parties'
indemnification obligations could apply and shall give the Indemnifying Parties
a reasonable opportunity to defend the same at their expense and with counsel of
their own selection (who shall be approved by the Indemnified Party, which
approval shall not be withheld unreasonably); provided, however, that (i) the
--------
Indemnified Party shall at all times also have the right to fully participate in
the defense at its own expense, and (ii) the failure to so notify the
Indemnifying Parties shall not relieve the Indemnifying Parties from any
liabilities that they may have hereunder or otherwise, except to the extent that
such failure so to notify the Indemnifying Parties materially prejudices the
rights of the Indemnifying Parties. If the Indemnifying Parties shall, within a
reasonable time after said notice, fail to defend, the Indemnified Party shall
have the right, but not the obligation, to undertake the defense of, and to
compromise or settle the claim or other matter on behalf, for the account and at
the risk and expense of the Indemnifying Parties. The Indemnifying Parties
shall not compromise or settle the claim or other matter for any consideration
other than the payment of money without the prior written consent of the
Indemnified Parties. The
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<PAGE>
Indemnified Parties shall make available all information and assistance that the
Indemnifying Parties may reasonably request; provided, however, that any
--------
associated expenses shall be paid by the Indemnifying Parties as incurred.
7.4 Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing in the English language and shall be deemed to
have been given (i) if personally delivered, when so delivered, (ii) if mailed,
one (1) week after being placed in the United States mail, registered or
certified, postage prepaid, addressed to the party to whom it is directed at the
address set forth on the signature page hereof or (iii) if given by telecopier,
when such notice or communication is transmitted to the telecopier number set
forth on the signature page hereof and written confirmation of receipt is
received. Each of the parties shall be entitled to specify a different address
by giving the other parties notice as aforesaid.
7.5 Entire Agreement. This Agreement and the schedules and exhibits
----------------
hereto (which are incorporated herein by reference) constitute the entire
agreement between the parties hereto pertaining to the subject matter hereof and
supersede all prior agreements, understandings, negotiations and discussions,
whether oral or written, relating to the subject matter of this Agreement. No
supplement, modification, waiver or termination of this Agreement shall be valid
unless executed by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provisions hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver, unless otherwise expressly provided.
7.6 Headings. Section and subsection headings are not to be
--------
considered part of this Agreement and are included solely for convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
7.7 Successors and Assigns. All of the terms, provisions and
----------------------
obligations of this Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns.
7.8 Governing Law. The validity, construction and interpretation of
-------------
this Agreement shall be governed in all respects by the laws of the State of
California applicable to contracts made and to be performed wholly within that
State.
7.9 Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, each one of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
7.10 Third Parties. Nothing in this Agreement, expressed or implied,
-------------
is intended to confer upon any person other than the parties hereto and their
respective heirs, representatives, successors and assigns any rights or remedies
under or by reason of this Agreement.
7.11 Attorneys' Fees. In the event any party takes legal action to
---------------
enforce any of the terms of this Agreement, the unsuccessful party to such
action shall pay the successful party's expenses (including, but not limited to,
reasonable attorneys' fees and costs) incurred in such action.
7.12 Further Assurances. Each party hereto shall, from time to time
------------------
at and after the date hereof, execute and deliver such instruments, documents
and assurances and take such further actions as the other parties reasonably may
request to carry out the purpose and intent of this Agreement.
7.13 Arbitration. Any controversy arising out of or relating to this
-----------
Agreement or the transactions contemplated hereby shall be referred to
arbitration before the American Arbitration Association strictly in accordance
with the terms of this Agreement and the substantive law of the State of
California. The board of arbitrators shall convene at a place mutually
acceptable to the parties in the State of California and, if the place of
arbitration cannot be agreed upon, arbitration shall be conducted in Los
Angeles. The parties hereto agree to accept the decision of the board of
arbitrators, and judgment upon any award rendered hereunder may be entered in
any
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<PAGE>
court having jurisdiction thereof. Neither party shall institute a proceeding
hereunder until that party has furnished to the other party, by registered mail,
at least thirty (30) days prior written notice of its intent to do so.
7.14 Construction. This Agreement was reviewed by legal counsel for
------------
each party hereto and is the product of informed negotiations between the
parties hereto. If any part of this Agreement is deemed to be unclear or
ambiguous, it shall be construed as if it were drafted jointly by the parties.
Each party hereto acknowledges that no party was in a superior bargaining
position regarding the substantive terms of this Agreement.
7.15 Consent to Jurisdiction. Subject to Section 7.13, each party
-----------------------
hereto, to the fullest extent it may effectively do so under applicable law,
irrevocably (i) submits to the exclusive jurisdiction of any court of the State
of California or the United States of America sitting in the City of Los Angeles
over any suit, action or proceeding arising out of or relating to this
Agreement, (ii) waives and agrees not to assert, by way of motion, as a defense
or otherwise, any claim that it is not subject to the jurisdiction of any such
court, any objection that it may now or hereafter have to the establishment of
the venue of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum, (iii) agrees that a final judgment in any
such suit, action or proceeding brought in any such court shall be conclusive
and binding upon such party and may be enforced in the courts of the United
States of America or the State of California (or any other courts to the
jurisdiction of which such party is or may be subject) by a suit upon such
judgment and (iv) consents to process being served in any such suit, action or
proceeding by mailing a copy thereof by United States mail, registered or
certified, postage prepaid, return receipt requested, to the address set forth
below. Each party agrees that such service (i) shall be deemed in every respect
effective service of process upon such party in any such suit, action or
proceeding and (ii) shall, to the fullest extent permitted by law, be taken and
held to be valid personal service upon and personal delivery to such party.
7.16 Expenses. Each party shall bear the expenses incurred by it in
--------
connection with the negotiation, execution and delivery of this Agreement and
the other agreements and instruments contemplated hereby and the consummation of
the transactions contemplated hereby and thereby; provided, however, that if
-------- -------
either party breaches its obligation to consummate the purchase and sale of the
Assets substantially on the terms set forth herein, such party shall reimburse
each other party for its reasonable and documented out-of-pocket expenses.
7.17 Severable Provisions. The provisions of this Agreement are
--------------------
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable. For the purpose of determining the scope of the
covenant set forth in Section 6.2, each of subparagraphs (i), (ii), (iii), (iv)
and (v) shall be considered a separate covenant such that if the geographic
scope of any such subparagraph shall be determined by a court of competent
jurisdiction to be excessive and invalid, such subparagraph shall be severed and
the remaining subparagraphs shall be deemed enforceable and remain in full force
and effect.
7.18 Taxes. The Purchaser shall pay timely any sales taxes which may
-----
become due or payable by virtue of the transactions contemplated by this
Agreement.
7.19 Bulk Sales. Each of the parties waives compliance with the
----------
procedures of the "bulk sales act" or any similar law. The Seller and the
Shareholder hereby agree that the indemnity provisions of Sections 7.2 and 7.3
hereof shall apply to any Loss of the Purchaser arising out of or resulting from
the failure of either party to comply with such laws.
7.20 Obligation of the Parent. The Parent shall cause (i) the
------------------------
Purchaser to timely perform its obligations under this Agreement and the Note,
(ii) the Purchaser to operate its business in substantially the same manner as
the Seller and (iii) to be available to the Purchaser capital adequate to
conduct its business as currently contemplated at a cost equal to the Parent's
cost of funds.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first set forth above.
Purchaser: CHAZZZ ACQUISITION, L.L.C.
By /s/ Mark B. Kristof
--------------------
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Telecopier: (323) 881-0368
Seller: CMG, INC.
By /s/ Charles Ghailian
-----------------------
Authorized Representative
110 East Ninth Street
Suite B-1245
Los Angeles, California 90079
Telecopier: (213) 627-1771
Shareholder: /s/ Charles Ghailian
-----------------------
CHARLES GHAILIAN
110 East Ninth Street
Suite B-1245
Los Angeles, California 90079
Telecopier: (213) 627-1771
Parent: TARRANT APPAREL GROUP
By /s/ Mark B. Kristof
----------------------
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Telecopier: (323) 881-0368
-14-
<PAGE>
SCHEDULES INTENTIONALLY OMITTED.
<PAGE>
EXHIBIT 10.70
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made and effective as of the twenty-third
day of March, 1999, by and between TARRANT APPAREL GROUP, a California
corporation (the "Company"), and CHARLES GHAILIAN (the "Employee"), with respect
to the following facts:
The Company desires to be assured of the continued association and
services of the Employee in order to take advantage of his experience, knowledge
and abilities in the Company's business, and is willing to employ the Employee,
and the Employee desires to be so employed, on the terms and conditions set
forth in this Agreement.
ACCORDINGLY, on the basis of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
1. EMPLOYMENT
----------
1.1 Employment. The Company hereby employs the Employee as
----------
President of Chazzz Acquisition, L.L.C., a wholly-owned subsidiary of the
Company ("Chazzz"), and the Employee hereby accepts such employment, on the
terms and conditions set forth below, to perform during the term of this
Agreement such services as are required hereunder. Employee shall be
responsible for managing all sales recorded by Chazzz, including product of the
Company sold to customers of Chazzz (i.e., JC Penney - All except Men's sales;
Sears-All Sales; Montgomery Wards-All Sales; and Mervyns-All except Large Size
and Missy Wovens) plus all current customers of CMG, Inc. and knits (developed
and sold by Chazzz) for all customers.
1.2 Duties. The Employee shall render such services to the
------
Company, and shall perform such duties and acts, as reasonably may be required
by the Company's Board of Directors in connection with any aspect of Chazzz's
business.
1.3 Performance of Duties.
---------------------
(a) The Employee shall devote such time, ability and attention to his
duties hereunder as may be necessary or advisable to discharge his duties
hereunder in a professional and businesslike manner and shall diligently and
conscientiously use his best efforts to further the Company's business.
(b) In connection with the Employee's employment by the Company, the
Employee shall be based in Los Angeles County, California.
(c) The Employee shall have the right to devote such time as may be
necessary to wind-down the business of CMG, Inc. prior to September 30, 1999;
provided, however, that no such activity shall have a material adverse effect on
- --------
the Employee's performance of his obligations hereunder.
1.4 Trade Secrets. The Employee shall not, without the prior
-------------
written consent of the Company's Board of Directors in each instance, disclose
or use in any way, either during his employment by the Company or thereafter,
except as required in the course of such employment, any confidential business
or technical information or trade secret of the Company acquired in the course
of such employment, whether or not patentable, copyrightable or otherwise
protected by law, and whether or not conceived of or prepared by him
(collectively, the "Trade Secrets"), including, without limitation, any
confidential information concerning customer lists, products, procedures,
operations, investments, financing, costs, employees, purchasing, accounting,
marketing, merchandising, sales, salaries, pricing, profits and plans for future
development, the identity, requirements, preferences, practices and methods of
doing business of specific parties with whom the Company transacts business, and
all other information which is related to any product, service or business of
the Company, other than information which is generally known in the industry in
which the Company transacts business or is acquired from public sources or was
-1-
<PAGE>
known to the Employee prior to the date hereof; all of which Trade Secrets are
the exclusive and valuable property of the Company.
1.5 Tangible Items. All files, accounts, records, documents,
--------------
books, forms, notes, reports, memoranda, studies, compilations of information,
correspondence and all copies, abstracts and summaries of the foregoing, and all
other physical items related to the Company, other than a merely personal item,
whether of a public nature or not, and whether prepared by the Employee or not,
are and shall remain the exclusive property of the Company and shall not be
removed from the premises of the Company, except as required in the course of
employment by the Company, without the prior written consent of the Company's
Board of Directors in each instance, and the same shall be promptly returned to
the Company by the Employee on the expiration or termination of his employment
by the Company or at any time prior thereto upon the request of the Company.
1.6 Solicitation of Employees. During his employment by the
-------------------------
Company and for one (1) year thereafter (such period not to include any period
of violation hereof by the Employee or period which is required for litigation
to enforce this paragraph and during which the Employee is in violation hereof),
the Employee shall not, directly or indirectly, either for his own benefit
purposes or the benefit of purposes of any other person employ or offer to
employ, call on, solicit, interfere with or attempt to divert or entice away any
employee or independent contractor of the Company (or any person whose
employment or status as an independent contractor has terminated within the
twelve (12) months preceding the date of such solicitation) in any capacity if
that person possesses or has knowledge of any Trade Secrets of the Company.
1.7 Injunctive Relief. The Employee hereby acknowledges and
-----------------
agrees that it would be difficult to fully compensate the Company for damages
resulting from the breach or threatened breach of Sections 1.4, 1.5 and 1.6 and,
accordingly, that the Company shall be entitled to temporary and injunctive
relief, including temporary restraining orders, preliminary injunctions and
permanent injunctions, to enforce such provisions without the necessity of
proving actual damages and without the necessity of posting any bond or other
undertaking in connection therewith. This provision with respect to injunctive
relief shall not, however, diminish the Company's right to claim and recover
damages.
2. COMPENSATION
------------
(a) As the total consideration for the services which the Employee
renders hereunder, the Employee shall be entitled to the following:
(i) an annual base salary of $480,000, subject to such
periodic increases, if any, as the Board of Directors may deem to be
appropriate in its sole discretion, less any applicable deduction
therefrom for income tax or other applicable withholdings, payable in
accordance with the Company's standard practices and procedures;
(ii) a bonus of $133,100 for the period from the date hereof
through December 31, 1999 if, but only if, Chazzz's net sales for such
period equal or exceed $39,500,000 and Chazzz's pre-tax income for
such period equals or exceeds 10% of Chazzz's net sales for such
period, payable as set forth in Section 2(c);
(iii) an annual bonus of $170,000 for each twelve-month
period ended on December 31, 2000 and 2001 if, but only if, Chazzz's
net sales and net income for such twelve-month period equals or
exceeds the amount set forth below, payable as set forth in Section
2(c):
<TABLE>
<CAPTION>
Twelve Months Bonus Trigger Amounts
--------------------------
Ended December 31, Net Sales Pre-tax Income
- ---------------------- --------- --------------
(In millions)
<S> <C> <C>
2000 $60.0 $6.00
2001 72.0 7.20
</TABLE>
-2-
<PAGE>
(iv) an additional bonus equal to 10% of Chazzz's pre-tax
income over $4,332,000 for the period from the date hereof through
December 31, 1999, payable as set forth in Section 2(c), and,
thereafter during the Term, such additional bonuses as to which the
Company and the Employee mutually may agree;
(v) reimbursement of any and all reasonable and documented
expenses (including, but not limited to, air fare, car rental,
lodging, meals, business telephone and related travel expenses)
incurred by the Employee from time to time in the performance of his
duties hereunder, which reimbursement shall be made in accordance with
the Company's policies and procedures as the same may be amended from
time to time;
(vi) four (4) weeks vacation taken in accordance with the
Company's standard policies and procedures;
(vi) participation in all plans or programs sponsored by the
Company for employees in general, including, but not limited to,
participation in any group health plan, medical reimbursement plan,
life insurance plan, pension and profit sharing plan, or stock option
plan; and
(vi) the right to purchase up to 36,000 shares of the Common
Stock of the Parent on the terms and conditions set forth on Exhibit
-------
A.
-
(b) The term "net sales" shall mean all revenues (including
J.C. Penney - All except Men's sales, Sears - All sales,
Montgomery Wards - All sales, and Mervyn's - All except Large Size and
Missy Wovens), less returns, discounts and allowances, determined in
accordance with generally accepted accounting principles. The term
"pre-tax income" shall mean pre-tax income determined in accordance
with generally accepted accounting principles.
(c) The bonuses set forth in Sections 2(a)(ii), (iii) and (iv) shall
be advanced to the Employee within 45 days after the end of each calendar
quarter if and as earned. For purposes of this Section 2(c), the performance
targets in Sections 2(a)(ii), (iii) and (iv) shall be prorated for the period
commencing on the beginning of each test period to the end of each fiscal
quarter. In the event that the aggregate amount advanced to the Employee with
respect to the period from the date hereof through December 31, 1999 or the
twelve-month period ending December 31, 1999 or the twelve-month period ending
December 31, 2000 or 2001 shall exceed the amount to which the Employee is
entitled under Section 2(a), then the Employee shall reimburse the Company for
the amount of such overpayment promptly upon request.
3. TERM AND TERMINATION
--------------------
3.1 Term. Unless sooner terminated pursuant to Section 3.2
----
hereof, the term of the Employee's relationship with the Company under Section
1.1 shall be for the period (the "Term") commencing on the date hereof and
ending on March 31, 2002.
3.2 At Will Relationship. The Employee and the Company each
--------------------
hereby acknowledges and agrees that, except as expressly set forth in Section
3.3, (i) the Employee's relationship with the Company under this Agreement is AT
WILL and can be terminated at the option of either the Employee or the Company
in his or its sole and absolute discretion, for any or no reason whatsoever,
with or without cause, (ii) no representations, warranties or assurances have
been made concerning the length of such relationship or the aggregate amount of
compensation to be received by the Employee and (iii) after the termination of
his employment by the Company, the Employee shall have no right, title or
interest in or claim to any revenues received by the Company from any person for
any goods sold or services rendered by the Company to such person, whether or
not the Employee was the cause, in whole or in part, for such person to purchase
such goods from the Company or to retain the Company to perform such services.
-3-
<PAGE>
3.3 Duties Upon Termination.
-----------------------
(a) In the event that the Employee's employment by the Company under
this Agreement is terminated, neither the Company nor the Employee shall have
any remaining duties or obligations hereunder, except that (i) the Company shall
promptly pay to the Employee, or his estate, all reimbursable expenses incurred
by the Employee hereunder as of such date and such compensation as is due
pursuant to Section 2.1, prorated through the date of termination, and (ii) the
Employee shall continue to be bound by Sections 1.4, 1.5, 1.6 and 1.7; provided,
--------
however, that if Employee is terminated without cause, an additional $480,000
will be payable upon termination.
(b) The term "cause" shall mean (i) the willful and material breach of
this Agreement by the Employee which is not cured within 30 days of the
Employee's receipt of written notice from the Company describing in reasonable
detail the nature of such breach, (ii) fraud, misappropriation or embezzlement
or other act of material misconduct against the Company, (iii) conviction of or
a plea of nolo contendere to a felony involving moral turpitude, (iv) a charge
or indictment of a felony, the defense of which renders the Employee
substantially unable to perform his services hereunder, or (v) habitual neglect
to perform the Employee's duties if the Employee has failed to cure such neglect
within 30 days following receipt of written notice from the Company describing
in reasonable detail such neglect.
4. MISCELLANEOUS
-------------
4.1 Severable Provisions. The provisions of this Agreement are
--------------------
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
4.2 Successors and Assigns. All of the terms, provisions and
----------------------
obligations of this Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns. Notwithstanding the foregoing, neither this Agreement nor any
rights hereunder shall be assigned, pledged, hypothecated or otherwise
transferred by the Employee without the prior written consent of the Company in
each instance.
4.3 Governing Law. The validity, construction and
-------------
interpretation of this Agreement shall be governed in all respects by the laws
of the State of California applicable to contracts made and to be performed
wholly within that State.
4.4 Consent to Jurisdiction. Each party hereto, to the fullest
-----------------------
extent it may effectively do so under applicable law, irrevocably (i) submits to
the exclusive jurisdiction of any court of the State of California or the United
States of America sitting in the City of Los Angeles over any suit, action or
proceeding arising out of or relating to this Agreement, (ii) waives and agrees
not to assert, by way of motion, as a defense or otherwise, any claim that it is
not subject to the jurisdiction of any such court, any objection that it may now
or hereafter have to the establishment of the venue of any such suit, action or
proceeding brought in any such court and any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum,
(iii) agrees that a final judgment in any such suit, action or proceeding
brought in any such court shall be conclusive and binding upon such party and
may be enforced in the courts of the United States of America or the State of
California (or any other courts to the jurisdiction of which such party is or
may be subject) by a suit upon such judgment and (iv) consents to process being
served in any such suit, action or proceeding by mailing a copy thereof by
registered or certified air mail, postage prepaid, return receipt requested, to
the address of such party specified in or designated pursuant to Section 4.7.
Each party agrees that such service (i) shall be deemed in every respect
effective service of process upon such party in any such suit, action or
proceeding and (ii) shall, to the fullest extent permitted by law, be taken and
held to be valid personal service upon and personal delivery to such party.
-4-
<PAGE>
4.5 Headings. Section and subsection headings are not to be
--------
considered part of this Agreement and are included solely for convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
4.6 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, relating to the subject matter of this
Agreement. No supplement, modification, waiver or termination of this Agreement
shall be valid unless executed by the party to be bound thereby. No waiver of
any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
Nothing in this Agreement shall impede the parties' exercise of their respective
rights under that certain Agreement for Purchase of Assets of even date
herewith, between the parties hereto, among others, or the other agreements
referred to therein.
4.7 Notices. Any notice or other communication required or
-------
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, (ii) if mailed, one (1) week
after having been placed in the United States mail, registered or certified,
postage prepaid, addressed to the party to whom it is directed at the address
set forth below or (iii) if given by telex or telecopier, when such notice or
other communication is transmitted to the telex or telecopier number specified
below and the appropriate answerback or telephonic confirmation is received.
Either party may change the address to which such notices are to be addressed by
giving the other party notice in the manner herein set forth.
4.8 Attorneys' Fees. In the event any party takes legal action
---------------
to enforce any of the terms of this Agreement, the unsuccessful party to such
action shall pay the successful party's expenses, including attorneys' fees,
incurred in such action.
4.9 Third Parties. Nothing in this Agreement, expressed or
-------------
implied, is intended to confer upon any person other than the Company or the
Employee any rights or remedies under or by reason of this Agreement.
4.10 Construction. This Agreement was reviewed by legal counsel
------------
for each party hereto and is the product of informed negotiations between the
parties hereto. If any part of this Agreement is deemed to be unclear or
ambiguous, it shall be construed as if it were drafted jointly by the parties.
Each party hereto acknowledges that no party was in a superior bargaining
position regarding the substantive terms of this Agreement.
4.11 Arbitration. Any controversy arising out of or relating to
-----------
this Agreement or the transactions contemplated hereby shall be referred to
arbitration before the American Arbitration Association strictly in accordance
with the terms of this Agreement and the substantive law of the State of
California. The board of arbitrators shall convene at a place mutually
acceptable to the parties in the State of California and, if the place of
arbitration cannot be agreed upon, arbitration shall be conducted in Los
Angeles. The parties hereto agree to accept the decision of the board of
arbitrators, and judgment upon any award rendered hereunder may be entered in
any court having jurisdiction thereof. Neither party shall institute a
proceeding hereunder until that party has furnished to the other party, by
registered mail, at least thirty (30) days prior written notice of its intent to
do so.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date and year first set forth above.
Company: TARRANT APPAREL GROUP
By /s/ Mark B. Kristof
------------------------------------------
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Attention: President
Telecopier: (323) 881-0368
Employee: /s/ Charles Ghailian
-----------------------------------------
CHARLES GHAILIAN
3900 Lake Vista Court
Encino, California 91316
Telecopier: (818) 881-2798
-6-
<PAGE>
EXHIBIT A
TARRANT APPAREL GROUP
1997 EMPLOYEE INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
------------------------------------
This Stock Option Agreement ("Agreement") is made and entered into as
of the Date of Grant indicated below by and between Tarrant Apparel Group, a
California corporation (the "Company"), and the person named below
("Participant").
WHEREAS, Participant is an employee, director or independent
contractor of the Company or one or more of its subsidiaries; and
WHEREAS, pursuant to the Company's 1997 Employee Incentive Plan (the
"Plan"), the committee of the Board of Directors of the Company administering
the Plan (the "Committee") has approved the grant to Participant of an option to
purchase shares of the common stock of the Company (the "Common Stock"), on the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. Grant Of Option; Certain Terms and Conditions.
---------------------------------------------
(a) The Company hereby grants to Participant, and Participant hereby
accepts, as of the Date of Grant, an option to purchase the number of shares of
Common Stock indicated below (the "Option Shares") at the Exercise Price per
share indicated below, which option shall expire at 5:00 p.m., California time,
on the Expiration Date indicated below and shall be subject to all of the terms
and conditions set forth in this Agreement (the "Option"). On each anniversary
of the Date of Grant, the option shall become exercisable to purchase, and shall
vest with respect to, that number of Option Shares (rounded to the nearest whole
share) equal to the total number of Option Shares multiplied by the Annual
Vesting Rate indicated below.
<TABLE>
<S> <C>
Participant: CHARLES GHAILIAN
Date of Grant: April 8, 1999
Number of shares purchasable: 36,000
Exercise Price per share: $39.96875
Expiration Date: April 8, 2009
Annual Vesting Rate: 33.333%
</TABLE>
The Option is not intended to qualify as an incentive stock option under Section
422 of the Internal Revenue Code of 1986, as amended (an "Incentive Stock
Option").
(b) Notwithstanding anything to the contrary contained herein, in the
event the net sales or the pre-tax income of Chazzz Acquisition, Inc., a
Delaware limited liability company, (as determined by the Company) shall be
less than the amount set forth below for any period, then the right of the
Participant to purchase that number of Option Shares which first would have
become purchasable hereunder on the next succeeding anniversary of the Date of
Grant shall be deferred until the date ten business days before the Expiration
Date.
-7-
<PAGE>
<TABLE>
<CAPTION>
Option Vesting Trigger
-----------------------
Pretax
Period Net Sales Income
- ------------ --------- ----------------------
(In millions)
<S> <C> <C>
03/23/99- $ 39.5 $ 3.95
12/31/99
01/01/00-
12/31/00 60.0 6.00
01/01/01- 72.0 7.20
12/31/01
</TABLE>
2. Acceleration and Termination of Option.
--------------------------------------
(a) Termination of Employment.
-------------------------
(i) Death or Permanent Disability. If Participant shall cease to
-----------------------------
be an employee of the Company or any of its subsidiaries (such event shall
be referred to herein as the "Termination" of Employee's "Employment") by
reason of the death or Permanent Disability (as hereinafter defined) of
Participant, then (A) the portion of the Option that has not vested on or
prior to the date of such Termination of Employment shall terminate on such
date and (B) the remaining vested portion of the Option shall terminate
upon the earlier of the Expiration Date or the first anniversary of the
date of such Termination of Employment. "Permanent Disability" shall mean
the inability to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment that can be
expected to result in death or that has lasted or can be expected to last
for a continuous period of not less than 12 months. Participant shall not
be deemed to have a Permanent Disability until proof of the existence
thereof shall have been furnished to the Board in such form and manner, and
at such times, as the Board may require. Any determination by the Board
that Participant does or does not have a Permanent Disability shall be
final and binding upon the Company and Participant.
(ii) Other Termination. If Participant's Employment is
-----------------
Terminated for no reason, or for any reason other than death or Permanent
Disability, then (A) the portion of the Option that has not vested on or
prior to the date of such Termination of Employment shall terminate on such
date and (B) the remaining vested portion of the Option shall terminate 90
days after the date of such Termination of Employment.
(b) Death Following Termination of Employment. Notwithstanding
-----------------------------------------
anything to the contrary contained in this Agreement, if Participant shall die
at any time after the Termination of his or her Employment and prior to the
Expiration Date, then (i) the portion of the Option that has not vested on or
prior to the date of such death shall terminate on such date and (ii) the
remaining vested portion of the Option shall terminate.
(c) Acceleration of Option. The Committee, in its sole discretion,
----------------------
may accelerate the exercisability of the Option at any time and for any reason.
(d) Termination of Option. Notwithstanding anything to the contrary
---------------------
contained in this Agreement, the Option shall terminate upon the consummation of
any of the following events, or, if later, the thirtieth day following the first
date upon which such event shall have been approved by both the Board and the
shareholders of the Company:
(i) the dissolution or liquidation of the Company; or
(ii) a sale of substantially all of the property and assets of
the Company, unless the terms of such sale shall provide otherwise.
-8-
<PAGE>
3. Adjustments. In the event that the outstanding securities of the
-----------
class then subject to the Option are increased, decreased or exchanged for or
converted into cash, property or a different number or kind of securities, or
cash, property or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, reclassification, dividend (other than a
regular cash dividend) or other distribution, stock split, reverse stock split
or the like, or in the event that substantially all of the property and assets
of the Company are sold, then, unless such event shall cause the Option to
terminate pursuant to Section 2(d) hereof, the Committee shall make appropriate
and proportionate adjustments in the number and type of shares or other
securities or cash or other property that may thereafter be acquired upon the
exercise of the Option; provided, however, that any such adjustments in the
-------- -------
Option shall be made without changing the aggregate Exercise Price of the then
unexercised portion of the Option.
4. Exercise.
--------
(a) The Option shall be exercisable during Participant's lifetime only
by Participant or by his or her guardian or legal representative, and after
Participant's death only by the person or entity entitled to do so under
Participant's last will and testament or applicable intestate law. The Option
may only be exercised by (i) the delivery to the Company of a written notice of
such exercise, which notice shall specify the number of Option Shares to be
purchased (the "Purchased Shares") and the aggregate Exercise Price for such
shares (the "Exercise Notice"), together with payment in full of such aggregate
Exercise Price in cash or by check payable to the Company; provided, however,
-------- -------
that payment of such aggregate Exercise Price may instead be made, in whole or
in part, by (i) the delivery to the Company of a certificate or certificates
representing shares of Common Stock, duly endorsed or accompanied by a duly
executed stock powers, which delivery effectively transfers to the Company good
and valid title to such shares, free and clear of any pledge, commitment, lien,
claim or other encumbrance (such shares to be valued on the basis of the
aggregate Fair Market Value (as defined below) thereof on the date of such
exercise), provided that the Company is not then prohibited from purchasing or
acquiring such shares of Common Stock, or (ii) the Participant authorizing a
third party to sell a portion of the Purchased Shares and remitting to the
Company a sufficient portion of the sale proceeds to pay the entire Exercise
Price and any tax withholding resulting from such exercise.
(b) The "Fair Market Value" of a Common Share on any date (the
"Determination Date") shall be equal to the closing price per Common Share on
the business day immediately preceding the Determination Date, as reported in
The Wall Street Journal, Western Edition, or, if no closing price was so
reported for such immediately preceding business day, the closing price for the
next preceding business day for which a closing price was so reported, or, if no
closing price was so reported for any of the 30 business days immediately
preceding the Determination Date, the average of the high bid and low asked
prices per Common Share on the business day immediately preceding the
Determination Date in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ")
or such other system then in use, or, if the Common Shares were not quoted by
any such organization on such immediately preceding business day, the average of
the closing bid and asked prices on such day as furnished by a professional
market maker making a market in the Common Shares selected by the Board.
5. Payment of Withholding Taxes. If the Company becomes obligated
----------------------------
to withhold an amount on account of any tax imposed as a result of the exercise
of the Option, including, without limitation, any federal, state, local or other
income tax, or any F.I.C.A., state disability insurance tax or other employment
tax, then Participant shall, on the first day upon which the Company becomes
obligated to pay such amount to the appropriate taxing authority, pay such
amount to the Company in cash or by check payable to the Company. At the
election of the Participant, and subject to such rules as the Company may
establish, such withholding obligations may be satisfied through the surrender
of Common Shares which the Participant already owns or to which the Participant
otherwise is entitled under the Plan.
6. Notices. All notices and other communications required or
-------
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, to the Company at
3151 East Washington Boulevard, Los Angeles, California 90023, Attention: Chief
Financial Officer, or to Participant at the address set forth beneath his or her
signature on the signature page hereto, or at such other addresses as they may
designate by written notice in the manner aforesaid.
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<PAGE>
7. Stock Exchange Requirements; Applicable Laws. Notwithstanding
--------------------------------------------
anything to the contrary in this Agreement, no shares of stock purchased upon
exercise of the Option, and no certificate representing all or any part of such
shares, shall be issued or delivered if (i) such shares have not been admitted
to listing upon official notice of issuance on each stock exchange upon which
shares of that class are then listed or (ii) in the opinion of counsel to the
Company, such issuance or delivery would cause the Company to be in violation of
or to incur liability under any federal, state or other securities law, or any
requirement of any stock exchange listing agreement to which the Company is a
party, or any other requirement of law or of any administrative or regulatory
body having jurisdiction over the Company; provided, however, that the Company
--------
will use commercially reasonable efforts to cause such shares to be so listed
and such issuance and delivery to comply with any such law or requirement.
8. Transferability. Neither the Option nor any interest therein may
---------------
be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner other than by will or the laws of descent and
distribution.
9. Plan. The Option is granted pursuant to the Plan, as in effect
----
on the Date of Grant, and is subject to all the terms and conditions of the
Plan, as the same may be amended from time to time; provided, however, that no
-------- -------
such amendment shall deprive Participant, without his or her consent, of the
Option or of any of Participant's rights under this Agreement. The
interpretation and construction by the Committee of the Plan, this Agreement,
the Option and such rules and regulations as may be adopted by the Committee for
the purpose of administering the Plan shall be final and binding upon
Participant. Until the Option shall expire, terminate or be exercised in full,
the Company shall, upon written request therefor, send a copy of the Plan, in
its then-current form, to Participant or any other person or entity then
entitled to exercise the Option.
10. Shareholder Rights. No person or entity shall be entitled to
------------------
vote, receive dividends or be deemed for any purpose the holder of any Option
Shares until the Option shall have been duly exercised to purchase such Option
Shares in accordance with the provisions of this Agreement.
11. Employment or Contract Rights. No provision of this Agreement or
-----------------------------
of the Option granted hereunder shall (i) confer upon Participant any right to
continue in the employ of or contract with the Company or any of its
subsidiaries, (ii) affect the right of the Company and each of its subsidiaries
to terminate the employment or contract of Participant, with or without cause,
or (iii) confer upon Participant any right to participate in any employee
welfare or benefit plan or other program of the Company or any of its
subsidiaries other than the plan. Participant hereby acknowledges and agrees
that the Company and each of its subsidiaries may terminate the employment or
contract of Participant at any time and for any reason, or for no reason, unless
Participant and the Company or such subsidiary are parties to a written
employment or independent contractor agreement that expressly provides
otherwise. Governing Law. This Agreement and the Option granted hereunder shall
- -------------------------
be governed by and construed and enforced in accordance with the laws of the
State of California without reference to choice or conflict of law principles.
IN WITNESS WHEREOF, the Company and Participant have duly executed
this Agreement as of the Date of Grant.
TARRANT APPAREL GROUP
By _____________________________________
Authorized Representative
PARTICIPANT
________________________________________
CHARLES GHAILIAN
3900 Lake Vista Court
Encino, California 91316
Telecopier: (818) 881-2798
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<PAGE>
EXHIBIT 10.71
NON-NEGOTIABLE PROMISSORY NOTE
$2,500,000.00 March 23, 1999
FOR VALUE RECEIVED, the undersigned hereby promises to pay to CMG,
Inc. (the "Seller") Two Million Five Hundred Thousand Dollars ($2,500,000.00),
without interest, in three equal annual installments of $833,333.33 on each of
March 23, 2000, 2001 and 2002, at the principal executive offices of the
undersigned, 3151 East Washington Boulevard, Los Angeles, California, or at such
other place in the City of Los Angeles as may be designed by the undersigned to
the Seller in writing from time to time.
At the election of either the Seller or the undersigned, any
installment of principal due under this Note shall be converted into the right
to receive 20,850 fully paid and nonassessable shares of the common stock (the
"Common Stock") of Tarrant Apparel Group (the "Parent") as adjusted for any
stock splits, stock dividends or similar transactions. Any such delivery of
shares shall be deemed to have occurred at the close of business on the day of
such delivery, and the rights of the Seller hereunder shall thereupon cease with
respect to such installment of principal, and the Seller shall thereupon be
deemed for all purposes to have become the holder of record of the shares of
Common Stock so delivered. The election of either the Seller or the undersigned
to convert any installment of principal due hereunder into the right to receive
Common Stock as set forth above may be exercised by giving written notice to the
undersigned or the Seller, respectively, not more than 30 days and not less than
10 days before the date such installment shall be due.
Notwithstanding anything to the contrary contained herein or in the
Purchase Agreement (as defined below), the undersigned shall have the right to
set-off against any amount otherwise due hereunder any obligation of the Seller
or the Shareholder (as defined below) to the undersigned or the Parent under the
Purchase Agreement (as defined below) (a "claim"); provided, however, that the
--------
undersigned first shall have delivered to the Seller in writing a summary
description of the factual and legal bases for such claim or obligation and an
estimate of the amount thereof. In the event that a claim is based upon the
demand of a person other than the undersigned or the Parent and subject to the
parties respective rights therein under the Purchase Agreement, which demand is
finally determined by a decision from which no appeal may be taken, the amount
of such claim shall be deemed to have been finally determined thereby and not to
be subject to further arbitration. The foregoing right of off-set shall
terminate as of August 30, 2000 with respect to any claim which has not accrued
as of such date.
The undersigned shall not be required to deliver fractions of shares
of Common Stock under this Note. If a fraction of a share of Common Stock
otherwise would be deliverable, in lieu thereof the undersigned shall pay to the
Seller the cash value of such fractional share as determined above.
The Seller shall not be considered a shareholder of the Parent for any
purpose by virtue of the ownership of this Note, nor shall anything in this Note
be construed to confer upon the Seller any rights as a shareholder of the
Parent, including, without limitation, any right to vote, give or withhold
consent to any corporate action, receive notice of meetings of shareholders or
receive dividends.
This Note is the promissory note referred to in Section 1.2(a)(v) of
that certain Agreement for Purchase of Assets dated as of March 23, 1999 (the
"Purchase Agreement"), by and among the Seller, the undersigned, the Parent,
and Charles Ghailian, the sole shareholder of the Seller (the "Shareholder"),
and which contains provisions for the offset of certain claims or obligations of
the Parent or the undersigned against the Seller or the Shareholder upon the
happening of certain stated events.
Neither this Note nor any rights hereunder shall be assigned, pledged,
hypothecated or otherwise transferred by the Seller without the prior written
consent of the undersigned in each instance and then subject to the right of
off-set set forth above.
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<PAGE>
The validity, construction and interpretation of this Note shall be
governed in all respects by the laws of the State of California applicable to
contracts made and to be performed wholly within that State.
The Seller and the undersigned each, to the fullest extent it may
effectively do so under applicable law, irrevocably (i) submits to the exclusive
jurisdiction of any court of the State of California or the United States of
America sitting in the City of Los Angeles over any suit, action or proceeding
arising out of or relating to this Agreement, (ii) waives and agrees not to
assert, by way of motion, as a defense or otherwise, any claim that it is not
subject to the jurisdiction of any such court, any objection that it may now or
hereafter have to the establishment of the venue of any such suit, action or
proceeding brought in any such court and any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum,
(iii) agrees that a final judgment in any such suit, action or proceeding
brought in any such court shall be conclusive and binding upon such party and
may be enforced in the courts of the United States of America or the State of
California (or any other courts to the jurisdiction of which such party is or
may be subject) by a suit upon such judgment and (iv) consents to process being
served in any such suit, action or proceeding by mailing a copy thereof by
registered or certified air mail, postage prepaid, return receipt requested, to
the address of such party specified in or designated pursuant to Section 7.4 of
the Purchase Agreement. The Seller and the undersigned each agrees that such
service (i) shall be deemed in every respect effective service of process upon
such party in any such suit, action or proceeding and (ii) shall, to the fullest
extent permitted by law, be taken and held to be valid personal service upon and
personal delivery to such party.
Subject to the preceding paragraph, any controversy arising out of or
relating to this Note shall be referred to arbitration before the American
Arbitration Association strictly in accordance with the terms of this Note and
the substantive law of the State of California. The board of arbitrators shall
convene at a place mutually acceptable to the parties in the State of California
and, if the place of arbitration cannot be agreed upon, arbitration shall be
conducted in Los Angeles. The Seller and the undersigned agree to accept the
decision of the board of arbitrators, and judgment upon any award rendered
hereunder may be entered in any court having jurisdiction thereof. Neither party
shall institute a proceeding hereunder until that party has furnished to the
other party, by registered mail, at least thirty (30) days prior written notice
of its intent to do so.
Nothing in this Note, expressed or implied, is intended to confer upon
any person other than the Seller any rights or remedies under or by reason of
this Note.
This Note has been reviewed by legal counsel for the Seller and the
undersigned and is the product of informed negotiations between such parties.
If any part of this Note is deemed to be unclear or ambiguous, it shall be
construed as if it were drafted jointly by such parties. Each such party
acknowledges that no party was in a superior bargaining position regarding the
substantive terms of this Note.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed as of the day and year first set forth above.
CHAZZZ ACQUISITION, L.L.C.
By /s/ Mark B. Kristof
------------------------------
Authorized Representative
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<PAGE>
EXHIBIT 10.72
ESCROW AGREEMENT
----------------
THIS ESCROW AGREEMENT is made and effective as of the first day of
April, 1999, by and among TARRANT APPAREL GROUP, a California corporation (the
"Parent"), TARRANT MEXICO, S. de R.L. de C.V., a limited liability company
organized under the laws of the Republic of Mexico (the "Purchaser"), and JAMIL
TEXTIL, S.A. de C.V., and INMOBILIARIA CUADROS, S.A. de C.V., corporations
organized under the laws of the Republic of Mexico (collectively the "Sellers"),
with respect to the following facts:
A. Pursuant to that certain Agreement for Purchase of Assets dated as
of February 22, 1999 (the "Purchase Agreement"), by and among the Purchaser, the
Sellers, and Kamel Nacif and Irma Benavides Montes De Oca, the sole shareholders
of the Sellers (collectively, the "Shareholders"), the Purchaser, a wholly owned
subsidiary of the Parent, will purchase certain assets of the Sellers.
B. In partial consideration for the purchase of such assets, the
Purchaser will deliver to the Sellers an aggregate of 2,000,000 shares of the
Common Stock of the Parent.
C. The Sellers and the Shareholders have agreed, jointly and
severally, to indemnify, defend and hold harmless the Parent, the Purchaser and
certain associated persons from and against certain liabilities, all as more
fully set forth in the Purchase Agreement.
D. The Sellers desire to grant each such indemnified person a security
interest in such shares and all distributions thereon as security for the
performance of the obligations of the Sellers or the Shareholders under the
Purchase Agreement.
E. The Sellers desire to obtain from the Parent, and the Parent
desires to grant to the Sellers, certain rights to cause the Shares to be
registered under the Securities Act of 1933, as amended. The Parent shall have
no obligations under this Agreement, except as expressly set forth in Section 2.
ACCORDINGLY, subject to the terms and conditions of this Agreement, and
on the basis of the premises, covenants and undertakings contained herein, the
parties hereto agree as follows:
1. PLEDGE
------
1.1 Pledge. The Sellers hereby deliver to the Purchaser, and
------
authorize and direct the Purchaser to hold pursuant to the terms and conditions
of this Agreement, certificates representing 2,000,000 shares of the Common
Stock of the Parent (the "Shares"), together with a stock power duly executed in
blank, receipt of which hereby is acknowledged. The Shares and any other
property which may be delivered to the Purchaser under Section 1.2 hereof shall
be held by the Purchaser as partial security for the performance of the
obligations of the Sellers and the Shareholders under the Purchase Agreement,
including, but not limited to, the obligation of the Sellers under Section 4.3
of the Purchase Agreement with respect to certain breaches of environmental
laws.
1.2 Additional Collateral. The Sellers shall deliver or cause
---------------------
to be delivered to the Purchaser, and hereby authorize and direct the Purchaser
to hold pursuant to the terms and conditions of this Agreement, all
distributions made during the term hereof on the Shares, whether in the form of
securities, cash or other property, as additional collateral subject to this
Agreement. The Shares and all distributions on the Shares shall be referred to
herein as the "Escrow Fund."
1.3 Voting Rights and Distributions. During the term of this
-------------------------------
Agreement, the Sellers shall have the right (i) to vote the Shares and any
additional shares of the capital stock of the Company held by the Purchaser
hereunder on each issue presented to the shareholders of the Parent and (ii) to
receive all cash distributions thereon subject to the limitations set forth in
Section 1.2.
-1-
<PAGE>
1.4 Notice of Claims.
----------------
(a) The Company shall give prompt written notice (a "Demand
Notice") to the Sellers of any claim against the Sellers or the Shareholders
under the Purchase Agreement by the Company or any other person entitled to
indemnification or contribution under Section 6.2 of the Purchase Agreement (an
"Indemnified Person"), including, but not limited to, any claim that (i) any
representation or warranty of the Sellers or the Shareholders made in the
Purchase Agreement was not true and complete in all respects when made, (ii) the
Sellers or the Shareholders have failed to timely perform any obligation to be
performed by any of them under the Purchase Agreement or (iii) any Indemnified
Person is entitled to indemnification under Section 6.2 of the Purchase
Agreement. The Demand Notice shall include a summary description of the factual
and legal bases for the claim and an estimate of the amount of the claim. The
Sellers shall have the right to contest any claim described in a Demand Notice
by giving written notice (a "Dispute Notice") to the Company within ten (10)
calendar days of the Demand Notice. In the event the Sellers do not give a
Dispute Notice within such ten (10) day period, the description of the claim
contained in the Demand Notice (including, but not limited to, the factual and
legal bases therefor and the estimate of the amount of the claim) shall be
deemed conclusively to be true and complete; provided, however, that the Company
--------
shall be entitled thereafter to submit additional Demand Notices pursuant to
this Section 1.4 with respect to the same claims as were described in such
initial Demand Notice and the Sellers shall have the right to contest any such
additional demand Notice, all as set forth above.
(b) In the event the Sellers shall timely deliver a Dispute
Notice with respect to any claim (other than a claim based upon the demand of a
person other than an Indemnified Person (a "third party claim")) and such claim
shall not have been conclusively resolved on or before September 30, 2002, the
parties shall attempt to resolve the dispute through mediation. In the event
such mediation shall not resolve the claim, either the Indemnified Party or the
Sellers may require binding arbitration of the claim pursuant to Section 3.12 of
this Agreement.
1.5 Distribution of Escrow Fund.
---------------------------
(a) The Purchaser shall distribute to the Sellers the Escrow
Fund in three equal installments on April 1, 2000, 2001 and 2002 (a
"Distribution Date"); provided, however, that no portion of the Escrow Fund
-------- -------
shall be to the Sellers until the Sellers have complied in full with its
obligations under Section 4.3 of the Purchase Agreement. Notwithstanding the
foregoing, any portion of the Escrow Fund to be distributed to the Sellers on a
Distribution Date shall be reduced by (i) that portion of the Escrow Fund which
previously had been distributed pursuant hereto to an Indemnified Party, (ii)
that portion of such distribution which has a value, determined pursuant to
Section 1.6, equal as nearly as practicable to the aggregate claims set forth in
any unresolved Demand Notice, and (iii) that portion of such distribution
(determined before any reduction required by clause (i) or (ii)) which is
determined by multiplying (x) the amount of such distribution (before any such
reduction) by the quotient the numerator of which is (y) the difference between
15,000,000 square yards and the number of square yards of denim of marketable
quality actually produced by the Plant (as defined in the Purchase Agreement)
and the denominator of which is (z) 15,000,000 square yards. Upon the later to
occur of October 1, 2002, and the resolution of all claims (including third
party claims) set forth in all Demand Notices delivered hereunder on or prior to
October 1, 2002, the Purchaser shall distribute to the Sellers the Escrow Fund
as the same has been reduced by that portion of the Escrow Fund which previously
had been distributed to an Indemnified Party.
(b) In the event the Sellers shall fail to timely deliver a
Dispute Notice with respect to any claim set forth in a Demand Notice (other
than a third party claim), or such claim is resolved by the agreement of the
parties or by arbitration as set forth in Section 3.12, the Purchaser, promptly
after the last day on which such Dispute Notice could have been timely given or
after receipt by the Purchaser of a written notice of such agreement signed by
the Purchaser and the Sellers or of such arbitration decision, the Purchaser
shall deliver to the Indemnified Party, on the one hand, or to the Sellers, on
the other hand, that portion of the Escrow Fund which has a value, determined
pursuant to Section 1.6, equal as nearly as practicable to the value of the
claim as set forth in the Demand Notice, if a Dispute Notice with respect
thereto was not timely delivered, or as determined by the agreement of the
parties or the arbitration, as the case may be.
(c) In the event a third party claim set forth in a Demand
Notice is finally determined by a decision from which no appeal may be taken,
the Purchaser shall distribute to the Indemnified Party,
-2-
<PAGE>
on the one hand, or to the Sellers, on the other hand, that portion of the
Escrow Fund which has a value, determined pursuant to Section 1.6, equal as
nearly as practicable to the value of the claim as so finally determined.
1.6 Valuation of Escrow Fund. The fair market value of a share of
------------------------
the Common Stock of the Parent shall be determined for purposes of this
Agreement by an investment banker of national reputation mutually acceptable to
the Purchaser and the Sellers. In the event the Purchaser and the Sellers
cannot agree on such investment banker, each party shall select an investment
banker and the two investment bankers so selected shall select a third
investment banker of national reputation who shall determine the fair market
value of a share of the Common Stock of the Parent. In the event either the
Purchaser or the Sellers shall fail to select an investment banker as aforesaid
within five days of the written request therefor by the other, the investment
banker selected by the requesting party shall make the determination of value
required by this Section 1.6. Any such determination shall be made by reference
to the price which the Purchaser would realize, net of all costs and expenses,
from the sale of such shares in the open market, taking into account the effect
of such sale on the market price of the Common Stock of the Parent, together
with such other factors as such investment banker may deem appropriate.
1.7 Use of Shares as Collateral. Pursuant to that certain
---------------------------
Facility Development Agreement dated December 11, 1998, between the Purchaser
and Tex Transas, S.A. de C.V., a corporation under common control with the
Purchaser (the "Developer"), the Developer has agreed to develop and construct
a turn-key facility for the production of twill fabric (the "Facility"), and the
Purchaser shall have the right, but not the obligation, to purchase or lease the
Facility. The Purchaser and the Sellers jointly may agree, from time to time,
that the Sellers may pledge the Shares to secure any indebtedness incurred by
the Sellers or the Developer in developing or constructing the Facility or
purchasing equipment for use in the Facility, all on such further terms and
conditions as may be mutually acceptable to the Purchaser and the Sellers.
2. REGISTRATION RIGHTS
-------------------
2.1 Piggy-Back Registration Rights.
------------------------------
(a) In the event that after April 1, 2001, the Parent
proposes to register any of its securities under the Securities Act of 1933, as
amended (the "Securities Act"), and the registration form to be used therefor
may be used for the registration of the Common Stock of the Parent (other than
Forms S-8 or S-4 or any successor thereto), the Parent shall give prompt written
notice to all holders of the Shares of its intention to effect such a
registration and, subject to the terms and conditions contained in this Section
2, shall include in such registration all Shares with respect to which the
Company has received written requests for inclusion therein within fifteen (15)
days after the giving of the Parent's notice; provided, however, that in no
-------- -------
event shall the Parent be required to register any Shares which then are held by
the Purchaser pursuant to Section 1 of this Agreement.
(b) If a registration subject to subparagraph (a) above is
an underwritten registration, and the managing underwriters advise the Parent in
writing that in their opinion the number of securities to be included in such
registration exceeds the number which can be sold in such offering, the Parent
shall include in such registration (i) first, the securities the Parent proposes
to sell and (ii) second, such number of the Shares and other securities
requested to be included in such registration as the managing underwriters
believe can be sold in such offering, pro rata among the holders of such Shares
and other securities on the basis of the number of shares of the Common Stock of
the Parent owned by each such holder, and those Shares which are excluded from
the registration shall be withheld from the market by the holders thereof for
such period, not to exceed 180 days, which the managing underwriters reasonably
determine to be necessary in order to effect the registration.
2.2 General.
-------
If any registration subject to this Section 2 is an underwritten offering, the
selection of the investment bankers and managers for the offering shall be made
by the Parent in its sole and absolute discretion.
(a) The holders of any Shares included in any registration
statement pursuant to this Section 2 shall enter into such customary agreements
(including an underwriting agreement in customary form) and use their best
efforts to take all such other actions as the Parent or the underwriters, if
any, reasonably request in order to expedite or facilitate the disposition of
such Shares.
-3-
<PAGE>
(b) Each holder of Shares included in any registration
statement pursuant to this Section 2 shall indemnify, to the extent permitted by
law, the Parent, its officers and directors and each person who controls the
Parent (within the meaning of the Securities Act of 1933, as amended) against
all losses, claims damages, liabilities and expenses caused by any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent the same
are caused by or contained in any information furnished in writing to the Parent
by such holder expressly for use therein or by such holder's failure to deliver
a copy of the registration statement or prospectus or any amendments or
supplements thereto after the Parent has furnished such holder with a sufficient
number of copies of the same. In connection with an underwritten offering, such
holder shall indemnify the underwriters, their officers and directors and each
person who controls such underwriters (within the meaning of the Securities Act
of 1933, as amended) to the same extent as provided above with respect to the
indemnification of the Parent.
(c) With respect to each inclusion of Shares in a
registration statement pursuant to this Section 2, all fees, costs and expenses
of and incidental to such registration and public offering in connection
therewith shall be borne by the Parent; provided, however, that the holders of
--------
Shares included in any such registration statement shall bear their pro rata
share of the underwriting discount and commissions and shall bear their own
legal and accounting expenses incurred in reviewing independently of the Parent
the registration statement or prospectus.
(d) Any Shares which are included in an underwritten
registration pursuant to this Section 2 shall be sold by the holder thereof
pursuant to the terms of the underwriting agreement among the Parent, the
managing underwriters and the holders of the securities included in such
registration.
3. MISCELLANEOUS
-------------
3.1 Notices. Any notice or other communication required or
-------
permitted hereunder shall be in writing in the English language and shall be
deemed to have been given (i) if personally delivered, when so delivered, (ii)
if mailed, one (1) week after being placed in the United States mail, registered
or certified, postage prepaid, addressed to the party to whom it is directed at
the address set forth on the signature page hereof, or (iii) if given by
telecopier, when such notice or communication is transmitted to the telecopier
number set forth on the signature page hereof and written confirmation of
receipt is received. Each of the parties shall be entitled to specify a
different address by giving the other parties notice as aforesaid.
3.2 Entire Agreement. This Agreement constitutes the entire
----------------
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written, relating to the subject matter of this Agreement. No
supplement, modification, waiver or termination of this Agreement shall be valid
unless executed by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver, unless otherwise expressly provided.
3.3 Headings. Section and subsection headings are not to be
--------
considered part of this Agreement and are included solely for convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
3.4 Successors and Assigns. All of the terms, provisions and
----------------------
obligations of this Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns.
3.5 Governing Law. The validity, construction and interpretation
-------------
of this Agreement shall be governed in all respects by the laws of the State of
California applicable to contracts made and to be performed wholly within that
State.
3.6 Counterparts. This Agreement may be executed simultaneously
------------
in two or more counterparts, each one of which shall be deemed an original, but
all of which shall constitute one and the same instrument.
-4-
<PAGE>
3.7 Third Parties. Nothing in this Agreement, expressed or
-------------
implied, is intended to confer upon any person other than the parties hereto and
their respective heirs, representatives, successors and assigns any rights or
remedies under or by reason of this Agreement.
3.8 Attorney's Fees. In the event any party takes legal action to
---------------
enforce any of the terms of this Agreement, the unsuccessful party to such
action shall pay the successful party's expenses (including, but not limited to,
attorneys' fees and costs) incurred in such action.
3.9 Further Assurances. Each party hereto shall, from time to
------------------
time at and after the date hereof, execute and deliver such instruments,
documents and assurances and take such further actions as the other parties
reasonably may request to carry out the purpose and intent of this Agreement.
3.10 Injunctive Relief. Each of the parties hereto acknowledges
-----------------
and agrees that it would be difficult to fully compensate the other parties for
damages resulting from the breach or threatened breach of any provision of this
Agreement and, accordingly, that each party shall be entitled to temporary and
injunctive relief, including temporary restraining orders, preliminary
injunctions and permanent injunctions, to enforce such provisions without the
necessity of proving actual damages or being required to post any bond or
undertaking in connection with any such action. This provision with respect to
injunctive relief shall not diminish, however, the right of any party to any
other relief or to claim and recover damages.
3.11 Consent To Jurisdiction. Subject to Section 3.12, each party
-----------------------
hereto, to the fullest extent it may effectively do so under applicable law,
irrevocably (i) submits to the exclusive jurisdiction of any court of the State
of California or the United States of America sitting in the City of Los Angeles
over any suit, action or proceeding arising out of or relating to this
Agreement, (ii) waives and agrees not to assert, by way of motion, as a defense
or otherwise, any claim that it is not subject to the jurisdiction of any such
court, any objection that it may now or hereafter have to the establishment of
the venue of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum, (iii) agrees that a judgment in any such
suit, action or proceeding brought in any such court shall be conclusive and
binding upon such party and may be enforced in the courts of the United States
of America, the State of California or the Republic of Mexico (or any other
courts to the jurisdiction of which such party is or may be subject) by a suit
upon such judgment and (iv) consents to process being served in any such suit,
action or proceeding by mailing a copy thereof by United States mail, registered
or certified, postage prepaid, return receipt requested, to CT Corporation at
818 West Seventh Street, Los Angeles, California 90017 (and each party hereby
irrevocably appoints CT Corporation as its lawful agent to accept such service
of process on behalf of such party). Each party agrees that such service (i)
shall be deemed in every respect effective service of process upon such party in
any such suit, action or proceeding and (ii) shall, to the fullest extent
permitted by law, be taken and held to be valid personal service upon and
personal delivery to such party.
3.12 Arbitration. Any controversy arising out of or relating to
-----------
this Agreement or the transactions contemplated hereby shall be referred to
arbitration before the American Arbitration Association strictly in accordance
with the terms of this Agreement and the substantive law of the State of
California. The board of arbitrators shall convene at a place mutually
acceptable to the parties in the State of California and, if the place of
arbitration cannot be agreed upon, arbitration shall be conducted in Los
Angeles. The parties hereto agree to accept the decision of the board of
arbitrators, and judgment upon any award rendered hereunder may be entered in
any court having jurisdiction thereof. No party shall institute a proceeding
hereunder until that party has furnished to the other party, by registered mail,
at least thirty (30) days prior written notice of its intent to do so. This
Section 3.12 shall not limit the right of any party to seek injunctive relief in
the courts of the State of California or the United States of America.
3.13 Construction. This Agreement was reviewed by legal counsel
------------
for each party hereto and is the product of informed negotiations between the
parties hereto. If any part of this Agreement is deemed to be unclear or
ambiguous, it shall be construed as if it were drafted jointly by the parties.
Each party hereto acknowledges that no party was in a superior bargaining
position regarding the substantive terms of this Agreement.
-5-
<PAGE>
3.14 Legend. The Sellers understand and agree that the following
------
legend will be placed on the certificates evidencing the Shares:
THIS CERTIFICATE AND THE SHARES EVIDENCED HEREBY MAY BE SOLD,
TRANSFERRED, ASSIGNED, HYPOTHECATED, PLEDGED OR OTHERWISE ALIENATED
ONLY IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THAT CERTAIN
ESCROW AGREEMENT DATED AS OF APRIL 1, 1999. A COPY OF WHICH IS ON
FILE AT THE CORPORATION'S PRINCIPAL OFFICE.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date and year first set forth above.
Parent: TARRANT APPAREL GROUP
By /s/ Gerard Guez
_________________________________________
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Telecopier: (323) 881-0368
Purchaser: TARRANT MEXICO, S. de R.I. de C.V.
By /s/ Gerard Guez
_________________________________________
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Telecopier: (323) 881-0368
Sellers: JAMIL TEXTIL, S.A. de C.V.
By /s/ Kamel Nacif
_________________________________________
Authorized Representative
Edgar Allen Poe #231
Col. Polanco, C.P. 11550
Mexico, D.F.
Telecopier: (525) 255-1009
INMOBILIARIA CUADROS, S.A. de C.V.
By /s/ Kamel Nacif
_________________________________________
Authorized Representative
Edgar Allen Poe #231
Col. Polanco, C.P. 11550
Mexico, D.F.
Telecopier: (525) 255-1009
-6-
<PAGE>
EXHIBIT 10.73
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made and effective as of the first day of
April, 1999, by and between TARRANT MEXICO, S. de R.L. de C.V., a corporation
organized under the laws of the Republic of Mexico (the "Company"), and KAMEL
NACIF (the "Employee"), with respect to the following facts:
The Company desires to be assured of the continued association and
services of the Employee in order to take advantage of his experience, knowledge
and abilities in the Company's business, and is willing to employ the Employee,
and the Employee desires to be so employed, on the terms and conditions set
forth in this Agreement.
ACCORDINGLY, on the basis of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
1. EMPLOYMENT
----------
1.1 Employment. The Company hereby employs the Employee as
----------
President, and the Employee hereby accepts such employment, on the terms and
conditions set forth below, to perform during the term of this Agreement such
services as are required hereunder.
1.2 Duties. The Employee shall render such services to the
------
Company, and shall perform such duties and acts, as reasonably may be required
by the Company's Board of Directors in connection with any aspect of the
Company's business.
1.3 Performance of Duties. The Employee shall devote such
---------------------
time, ability and attention to his duties hereunder as may be necessary or
advisable to discharge his duties hereunder in a professional and businesslike
manner and shall diligently and conscientiously use his best efforts to further
the Company's business.
1.4 Noncompetition / Trade Secrets. During his employment
------------------------------
by the Company and for three (3) years thereafter (such period not to include
any period of violation hereof by Employee or period which is required for
litigation to enforce this paragraph and during which the Employee is in
violation hereof), the Employee shall refrain, without the prior written consent
of the Company in each instance, from engaging in any Competitive Activity, as
defined below, which would be reasonably likely, as determined by the Company in
its reasonable discretion, to result in the disclosure or use of any Trade
Secrets, as defined below. Employee shall not, without the prior written consent
of the Company's Board of Directors in each instance, disclose or use in any
way, except as required in the course of such employment, any confidential
business or technical information or trade secret of the Company acquired in the
course of such employment, whether or not patentable, copyrightable or otherwise
protected by law, and whether or not conceived of or prepared by him
(collectively, the "Trade Secrets"), including, without limitation, any
information concerning customer lists, products, procedures, operations,
investments, financing, costs, employees, purchasing, accounting, marketing,
merchandising, sales, salaries, pricing, profits and plans for future
development, the identity, requirements, preferences, practices and methods of
doing business of specific parties with whom the Company transacts business, and
all other information which is related to any product, service or business of
the Company, other than information which is generally known in the industry in
which the Company transacts business or is acquired from public sources; all of
which Trade Secrets are the exclusive and valuable property of the Company. As
used in this Agreement, the term "Competitive Activity" shall mean any
participation in, assistance of, employment by, ownership of any interest in,
acceptance of business from or assistance, promotion or organization of any
person, partnership, corporation, firm, association or other business
organization, entity or enterprise which, directly or indirectly, is engaged in,
or hereinafter engages in, the production of any apparel product, whether as an
agent, consultant, employee, officer, director, investor, partner, shareholder,
proprietor or in any other individual or representative capacity, but excluding
the holding for investment of less than five percent (5%) of the outstanding
securities of any corporation which are regularly traded on a recognized stock
exchange.
1.5 Tangible Items. All files, accounts, records,
---------------
documents, books, forms, notes, reports, memoranda, studies, compilations of
information, correspondence and all copies, abstracts and summaries of the
foregoing, and all other physical items related to the Company, other than a
merely personal item, whether of a public nature or not, and whether prepared by
the Employee or not, are and shall remain the exclusive property of the Company
and shall not be removed from the premises of the Company, except as required in
the course of employment by the Company, without the prior written consent of
the Company's Board of Directors in each instance, and the same shall be
promptly returned to the Company by the Employee on the expiration or
termination of his employment by the Company or at any time prior thereto upon
the request of the Company.
-1-
<PAGE>
1.6 Solicitation of Employees. During his employment by the
-------------------------
Company and for one (1) year thereafter (such period not to include any period
of violation hereof by the Employee or period which is required for litigation
to enforce this paragraph and during which the Employee is in violation hereof),
the Employee shall not, directly or indirectly, either for his own benefit
purposes or the benefit of purposes of any other person employ or offer to
employ, call on, solicit, interfere with or attempt to divert or entice away any
employee or independent contractor of the Company (or any person whose
employment or status as an independent contractor has terminated within the
twelve (12) months preceding the date of such solicitation) in any capacity if
that person possess or has knowledge of any Trade Secrets of the Company.
1.7 Injunctive Relief. The Employee hereby acknowledges and
-----------------
agrees that it would be difficult to fully compensate the Company for damages
resulting from the breach or threatened breach of Sections 1.4, 1.5 and 1.6 and,
accordingly, that the Company shall be entitled to temporary and injunctive
relief, including temporary restraining orders, preliminary injunctions and
permanent injunctions, to enforce such provisions without the necessity of
proving actual damages and without the necessity of posting any bond or other
undertaking in connection therewith. This provision with respect to injunctive
relief shall not, however, diminish the Company's right to claim and recover
damages.
2. COMPENSATION
------------
2.1 Compensation. As the total consideration for the
------------
services which the Employee renders hereunder, the Employee shall be entitled to
the following:
(a) an annual base salary of U.S. $1,000,000.00,
subject to such periodic increases, if any, as the Board of Directors may deem
to be appropriate in its sole discretion, less any applicable deduction
therefrom for income tax or other applicable withholdings;
(b) reimbursement of any and all reasonable and
documented expenses (including, but not limited to, air fare, car rental,
lodging, meals, business telephone and related travel expenses) incurred by the
Employee from time to time in the performance of his duties hereunder, which
reimbursement shall be made in accordance with the Company's policies and
procedures as the same may be amended from time to time;
(c) participation in all plans or programs sponsored
by the Company for employees in general, including, but not limited to,
participation in any group health plan, medical reimbursement plan, life
insurance plan, or pension and profit sharing plan; and
(d) the right to purchase up to 500,000 shares of the
Common Stock of Tarrant Apparel Group, a California corporation, on the terms
and conditions set forth on Exhibit A.
---------
3. TERM AND TERMINATION
--------------------
3.1 Term. Unless sooner terminated pursuant to Section 3.2
----
hereof, the term of the Employee's relationship with the Company under Section
1.1 shall be for a three-year period (the "Term") commencing on the date hereof
and ending on April 1, 2002.
3.2 At Will Relationship. The Employee and the Company each
--------------------
hereby acknowledges and agrees that, except as expressly set forth in Section
3.3, (i) the Employee's relationship with the Company under this Agreement is AT
WILL and can be terminated at the option of either the Employee or the Company
in his or its sole and absolute discretion, for any or no reason whatsoever,
with or without cause, (ii) no representations, warranties or assurances have
been made concerning the length of such relationship or the aggregate amount of
compensation to be received by the Employee and (iii) after the termination of
his employment by the Company, the Employee shall have no right, title or
interest in or claim to any revenues received by the Company from any person for
any goods sold or services rendered by the Company to such person, whether or
not the Employee was the cause, in whole or in part, for such person to purchase
such goods from the Company or to retain the Company to perform such services.
3.3 Duties Upon Termination. In the event that the
-----------------------
Employee's employment by the Company under this Agreement is terminated, neither
the Company nor the Employee shall have any remaining duties or obligations
hereunder, except that (i) the Company shall promptly pay to the Employee, or
his estate, all
-2-
<PAGE>
reimbursable expenses incurred by the Employee hereunder as of such date and
such compensation as is due pursuant to Section 2.1, prorated through the date
of termination, and (ii) the Employee shall continue to be bound by Sections
1.4, 1.5, 1.6 and 1.7.
4. MISCELLANEOUS
-------------
4.1 Severable Provisions. The provisions of this Agreement
--------------------
are severable, and if any one or more provisions may be determined to be illegal
or otherwise unenforceable, in whole or in part, the remaining provisions, and
any partially unenforceable provisions to the extent enforceable, shall
nevertheless be binding and enforceable.
4.2 Successors and Assigns. All of the terms, provisions
----------------------
and obligations of this Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective heirs, representatives,
successors and assigns. Notwithstanding the foregoing, neither this Agreement
nor any rights hereunder shall be assigned, pledged, hypothecated or otherwise
transferred by the Employee without the prior written consent of the Company in
each instance.
4.3 Governing Law. The validity, construction and
-------------
interpretation of this Agreement shall be governed in all respects by the laws
of the State of California applicable to contracts made and to be performed
wholly within that State.
4.4 Consent to Jurisdiction. Each party hereto, to the
------------------------
fullest extent it may effectively do so under applicable law, irrevocably (i)
submits to the exclusive jurisdiction of any court of the State of California or
the United States of America sitting in the City of Los Angeles over any suit,
action or proceeding arising out of or relating to this Agreement, (ii) waives
and agrees not to assert, by way of motion, as a defense or otherwise, any claim
that it is not subject to the jurisdiction of any such court, any objection that
it may now or hereafter have to the establishment of the venue of any such suit,
action or proceeding brought in any such court and any claim that any such suit,
action or proceeding brought in any such court has been brought in an
inconvenient forum, (iii) agrees that a judgment in any such suit, action or
proceeding brought in any such court shall be conclusive and binding upon such
party and may be enforced in the courts of the United States of America or the
State of California (or any other courts to the jurisdiction of which such party
is or may be subject) by a suit upon such judgment and (iv) consents to process
being served in any such suit, action or proceeding by mailing a copy thereof by
registered or certified air mail, postage prepaid, return receipt requested, to
the address of such party specified in or designated pursuant to Section 4.7.
Each party agrees that such service (i) shall be deemed in every respect
effective service of process upon such party in any such suit, action or
proceeding and (ii) shall, to the fullest extent permitted by law, be taken and
held to be valid personal service upon and personal delivery to such party.
4.5 Headings. Section and subsection headings are not to be
--------
considered part of this Agreement and are included solely for convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
4.6 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, relating to the subject matter of this
Agreement. No supplement, modification, waiver or termination of this Agreement
shall be valid unless executed by the party to be bound thereby. No waiver of
any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
4.7 Notices. Any notice or other communication required or
-------
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, (ii) if mailed, one (1) week
after having been placed in the United States mail, registered or certified,
postage prepaid, addressed to the party to whom it is directed at the address
set forth below or (iii) if given by telex or telecopier, when such notice or
other communication is transmitted to the telex or telecopier number specified
below and the
-3-
<PAGE>
appropriate answerback or telephonic confirmation is received. Either party may
change the address to which such notices are to be addressed by giving the other
party notice in the manner herein set forth.
4.8 Attorneys' Fees. In the event any party takes legal
---------------
action to enforce any of the terms of this Agreement, the unsuccessful party to
such action shall pay the successful party's expenses, including attorneys'
fees, incurred in such action.
4.9 Third Parties. Nothing in this Agreement, expressed or
-------------
implied, is intended to confer upon any person other than the Company or the
Employee any rights or remedies under or by reason of this Agreement.
4.1 Construction. This Agreement was reviewed by legal
------------
counsel for each party hereto and is the product of informed negotiations
between the parties hereto. If any part of this Agreement is deemed to be
unclear or ambiguous, it shall be construed as if it were drafted jointly by the
parties. Each party hereto acknowledges that no party was in a superior
bargaining position regarding the substantive terms of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date and year first set forth above.
Company: TARRANT APPAREL GROUP
By /s/ Gerard Guez
______________________________________
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Attention: President
Telecopier: (323) 881-0368
Employee:
/s/ Kamel Nacif
______________________________________
KAMEL NACIF
Edgar Allen Poe #231
Col. Polanco, C.P. 11550
Mexico, D.F.
Telecopier: (525) 255-1009
-4-
<PAGE>
EXHIBIT A
TARRANT APPAREL GROUP
1997 EMPLOYEE INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
------------------------------------
This Stock Option Agreement ("Agreement") is made and entered into as
of the Date of Grant indicated below by and between Tarrant Apparel Group, a
California corporation (the "Company"), and the person named below
("Participant").
WHEREAS, Participant is an employee, director or independent
contractor of the Company or one or more of its subsidiaries; and
WHEREAS, pursuant to the Company's 1997 Employee Incentive Plan (the
"Plan"), the committee of the Board of Directors of the Company administering
the Plan (the "Committee") has approved the grant to Participant of an option to
purchase shares of the common stock of the Company (the "Common Stock"), on the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. Grant Of Option; Certain Terms and Conditions.
---------------------------------------------
(a) The Company hereby grants to Participant, and Participant hereby
accepts, as of the Date of Grant, an option to purchase the number of shares of
Common Stock indicated below (the "Option Shares") at the Exercise Price per
share indicated below, which option shall expire at 5:00 p.m., California time,
on the Expiration Date indicated below and shall be subject to all of the terms
and conditions set forth in this Agreement (the "Option"). On each anniversary
of the Date of Grant, the option shall become exercisable to purchase, and shall
vest with respect to, that number of Option Shares (rounded to the nearest whole
share) equal to the total number of Option Shares multiplied by the Annual
Vesting Rate indicated below.
Participant: KAMEL NACIF
Date of Grant: ________, 1999
Number of shares purchasable: _______
Exercise Price per share: ________________
Expiration Date: ________, 2009
Annual Vesting Rate: 33.333%
The Option is not intended to qualify as an incentive stock option under Section
422 of the Internal Revenue Code of 1986, as amended (an "Incentive Stock
Option").
(b) Notwithstanding anything to the contrary contained herein, in the
event the EBITDA of Jamil and Twillmex (as determined by the Company) shall be
less than the amount set forth below for any fiscal year, then the right of the
Participant to purchase that number of Option Shares which first would have
become purchasable hereunder on the next succeeding anniversary of the Date of
Grant shall be deferred until the date ten business days before the Expiration
Date.
-5-
<PAGE>
Fiscal Year
Ended Operating
December 31 Income
----------- ----------
1999 $12 million
2000 $30 million
2001 $33 million
2. Acceleration and Termination of Option.
--------------------------------------
(a) Termination of Employment.
-------------------------
(i) Retirement. If Participant shall cease to be an
employee of the Company or any of its subsidiaries (such an event shall be
referred to herein as the "Termination of Employee's Employment") by reason
of Participant's retirement in accordance with the Company's then current
retirement policy ("Retirement"), then (A) the portion of the Option that
has not vested on or prior to the date of such Retirement shall terminate
on such date and (B) the remaining vested portion of the Option shall
terminate upon the Expiration Date.
(ii) Death or Permanent Disability. If Participant's
-----------------------------
Employment is Terminated by reason of the death or Permanent Disability (as
hereinafter defined) of Participant, then (A) the portion of the Option
that has not vested on or prior to the date of such Termination of
Employment shall terminate on such date and (B) the remaining vested
portion of the Option shall terminate upon the earlier of the Expiration
Date or the first anniversary of the date of such Termination of
Employment. "Permanent Disability" shall mean the inability to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or
that has lasted or can be expected to last for a continuous period of not
less than 12 months. Participant shall not be deemed to have a Permanent
Disability until proof of the existence thereof shall have been furnished
to the Board in such form and manner, and at such times, as the Board may
require. Any determination by the Board that Participant does or does not
have a Permanent Disability shall be final and binding upon the Company and
Participant.
(iii) Other Termination. If Participant's Employment is
-----------------
Terminated for no reason, or for any reason other than Retirement, death or
Permanent Disability, then the Option shall terminate upon the date of such
Termination of Employment.
(b) Death Following Termination of Employment. Notwithstanding
-----------------------------------------
anything to the contrary contained in this Agreement, if Participant shall die
at any time after the Termination of his or her Employment and prior to the
Expiration Date, then (i) the portion of the Option that has not vested on or
prior to the date of such death shall terminate on such date and (ii) the
remaining vested portion of the Option shall terminate.
(c) Acceleration of Option. The Committee, in its sole discretion,
----------------------
may accelerate the exercisability of the Option at any time and for any reason.
(d) Termination of Option. Notwithstanding anything to the contrary
---------------------
contained in this Agreement, the Option shall terminate upon the consummation of
any of the following events, or, if later, the thirtieth day following the first
date upon which such event shall have been approved by both the Board and the
shareholders of the Company:
(i) the dissolution or liquidation of the Company; or
(ii) a sale of substantially all of the property and
assets of the Company, unless the terms of such sale shall provide
otherwise.
3. Adjustments. In the event that the outstanding securities of the
-----------
class then subject to the Option are increased, decreased or exchanged for or
converted into cash, property or a different number or kind of securities, or
cash, property or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization,
-6-
<PAGE>
merger, consolidation, recapitalization, reclassification, dividend (other than
a regular cash dividend) or other distribution, stock split, reverse stock split
or the like, or in the event that substantially all of the property and assets
of the Company are sold, then, unless such event shall cause the Option to
terminate pursuant to Section 2(d) hereof, the Committee shall make appropriate
and proportionate adjustments in the number and type of shares or other
securities or cash or other property that may thereafter be acquired upon the
exercise of the Option; provided, however, that any such adjustments in the
-------- -------
Option shall be made without changing the aggregate Exercise Price of the then
unexercised portion of the Option.
4. Exercise.
--------
(a) The Option shall be exercisable during Participant's
lifetime only by Participant or by his or her guardian or legal representative,
and after Participant's death only by the person or entity entitled to do so
under Participant's last will and testament or applicable intestate law. The
Option may only be exercised by (i) the delivery to the Company of a written
notice of such exercise, which notice shall specify the number of Option Shares
to be purchased (the "Purchased Shares") and the aggregate Exercise Price for
such shares (the "Exercise Notice"), together with payment in full of such
aggregate Exercise Price in cash or by check payable to the Company; provided,
--------
however, payment of such aggregate Exercise Price may instead be made, in whole
- -------
or in part, by (i) the delivery to the Company of a certificate or certificates
representing shares of Common Stock, duly endorsed or accompanied by a duly
executed stock powers, which delivery effectively transfers to the Company good
and valid title to such shares, free and clear of any pledge, commitment, lien,
claim or other encumbrance (such shares to be valued on the basis of the
aggregate Fair Market Value (as defined below) thereof on the date of such
exercise), provided that the Company is not then prohibited from purchasing or
acquiring such shares of Common Stock, or (ii) the Participant authorizing a
third party to sell a portion of the Purchased Shares and remitting to the
Company a sufficient portion of the sale proceeds to pay the entire Exercise
Price and any tax withholding resulting from such exercise.
(b) The "Fair Market Value" of a Common Share on any date (the
"Determination Date") shall be equal to the closing price per Common Share on
the business day immediately preceding the Determination Date, as reported in
The Wall Street Journal, Western Edition, or, if no closing price was so
reported for such immediately preceding business day, the closing price for the
next preceding business day for which a closing price was so reported, or, if no
closing price was so reported for any of the 30 business days immediately
preceding the Determination Date, the average of the high bid and low asked
prices per Common Share on the business day immediately preceding the
Determination Date in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ")
or such other system then in use, or, if the Common Shares were not quoted by
any such organization on such immediately preceding business day, the average of
the closing bid and asked prices on such day as furnished by a professional
market maker making a market in the Common Shares selected by the Board.
5. Payment of Withholding Taxes. If the Company becomes obligated
----------------------------
to withhold an amount on account of any tax imposed as a result of the exercise
of the Option, including, without limitation, any federal, state, local or other
income tax, or any F.I.C.A., state disability insurance tax or other employment
tax, then Participant shall, on the first day upon which the Company becomes
obligated to pay such amount to the appropriate taxing authority, pay such
amount to the Company in cash or by check payable to the Company. At the
election of the Participant, and subject to such rules as the Company may
establish, such withholding obligations may be satisfied through the surrender
of Common Shares which the Participant already owns or to which the Participant
otherwise is entitled under the Plan.
6. Notices. All notices and other communications required or
-------
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, to the Company at
3151 East Washington Boulevard, Los Angeles, California 90023, Attention: Chief
Financial Officer, or to Participant at the address set forth beneath his or her
signature on the signature page hereto, or at such other addresses as they may
designate by written notice in the manner aforesaid.
7. Stock Exchange Requirements; Applicable Laws. Notwithstanding
--------------------------------------------
anything to the contrary in this Agreement, no shares of stock purchased upon
exercise of the Option, and no certificate representing all or any part of such
shares, shall be issued or delivered if (i) such shares have not been admitted
to listing upon official notice of issuance on each stock exchange upon which
shares of that class are then listed or (ii) in the opinion of counsel to the
Company, such issuance or delivery would cause the Company to be in violation of
or to incur liability under any federal, state or other securities law, or any
requirement of any stock exchange listing agreement to which the Company is a
party, or any other requirement of law or of any administrative or regulatory
body having jurisdiction over the Company.
-7-
<PAGE>
8. Transferability. Neither the Option nor any interest therein may
---------------
be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner other than by will or the laws of descent and
distribution.
9. Plan. The Option is granted pursuant to the Plan, as in effect
----
on the Date of Grant, and is subject to all the terms and conditions of the
Plan, as the same may be amended from time to time; provided, however, that no
-------- -------
such amendment shall deprive Participant, without his or her consent, of the
Option or of any of Participant's rights under this Agreement. The
interpretation and construction by the Committee of the Plan, this Agreement,
the Option and such rules and regulations as may be adopted by the Committee for
the purpose of administering the Plan shall be final and binding upon
Participant. Until the Option shall expire, terminate or be exercised in full,
the Company shall, upon written request therefor, send a copy of the Plan, in
its then-current form, to Participant or any other person or entity then
entitled to exercise the Option.
10. Shareholder Rights. No person or entity shall be entitled to
------------------
vote, receive dividends or be deemed for any purpose the holder of any Option
Shares until the Option shall have been duly exercised to purchase such Option
Shares in accordance with the provisions of this Agreement.
11. Employment or Contract Rights. No provision of this Agreement or
-----------------------------
of the Option granted hereunder shall (i) confer upon Participant any right to
continue in the employ of or contract with the Company or any of its
subsidiaries, (ii) affect the right of the Company and each of its subsidiaries
to terminate the employment or contract of Participant, with or without cause,
or (iii) confer upon Participant any right to participate in any employee
welfare or benefit plan or other program of the Company or any of its
subsidiaries other than the plan. Participant hereby acknowledges and agrees
that the Company and each of its subsidiaries may terminate the employment or
contract of Participant at any time and for any reason, or for no reason, unless
Participant and the Company or such subsidiary are parties to a written
employment or independent contractor agreement that expressly provides
otherwise.
12. Governing Law. This Agreement and the Option granted hereunder
-------------
shall be governed by and construed and enforced in accordance with the laws of
the State of California without reference to choice or conflict of law
principles.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company and Participant have duly executed
this Agreement as of the Date of Grant.
TARRANT APPAREL GROUP
By ________________________________
Authorized Representative
PARTICIPANT
___________________________________
KAMEL NACIF
Edgar Allen Poe #231
Col. Polanco, C.P. 11550
Mexico, D.F.
Telecopier: (525) 255-1009
-9-
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