<PAGE>
As filed with the SEC on August 12, 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 June 30, 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 July 27,
1999: 15,804,815.
<PAGE>
TARRANT APPAREL GROUP
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998 (Audited)................. 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1999 and June 30, 1998... 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and June 30, 1998.............. 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 19
Item 2. Changes in Securities......................................... 19
Item 3. Defaults Upon Senior Securities............................... 19
Item 4. Submission of Matters to a Vote of Security Holders........... 19
Item 5. Other Information............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
SIGNATURES.............................................. 21
INDEX TO EXHIBITS....................................... 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 4,032,928 $ 4,318,520
Accounts receivable, net........................................ 60,487,027 65,946,055
Due from affiliates............................................. 1,017,729 2,143,527
Due from officers............................................... 6,193,063 4,477,461
Inventory....................................................... 67,136,206 49,230,847
Temporary quota................................................. 2,509,812 1,192,888
Prepaid expenses................................................ 3,244,425 1,527,392
Deferred tax asset.............................................. 389,257 23,284
Prepaid income taxes............................................ 478,050 478,050
---------------- -----------------
Total current assets...................................... 145,488,497 129,338,024
Property and equipment, net...................................... 79,123,489 5,306,308
Permanent quota, net............................................. 758,809 245,464
Other assets..................................................... 11,344,816 4,468,517
Excess of cost over fair value of net assets acquired, net....... 20,094,079 14,532,193
---------------- -----------------
Total assets.............................................. $ 256,809,690 $ 153,890,506
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings................................................. $ 62,786,311 $ 33,288,267
Accounts payable................................................ 35,425,568 24,200,202
Accrued expenses................................................ 6,514,377 8,738,522
Income taxes.................................................... 9,074,432 5,048,288
Current portion of long-term obligations........................ 938,244 981,124
---------------- -----------------
Total current liabilities................................. 114,738,932 72,256,403
Long-term obligations............................................ 4,156,716 2,424,439
---------------- -----------------
Total liabilities......................................... 118,895,648 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; 15,698,705 shares (1999) and 13,832,955
shares (1998), issued and outstanding......................... 70,743,412 22,290,539
Contributed capital............................................ 1,434,259 1,434,259
Retained earnings.............................................. 65,736,371 55,484,866
---------------- -----------------
Total shareholders' equity................................ 137,914,042 79,209,664
---------------- -----------------
Total liabilities and shareholders' equity................ $ 256,809,690 $ 153,890,506
================ =================
</TABLE>
See accompanying notes.
3
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales........................................ $109,761,967 $100,100,120 $193,825,258 $164,357,297
Cost of sales.................................... 90,753,462 79,835,469 158,828,914 133,145,179
------------ ------------ ------------ ------------
Gross profit..................................... 19,008,505 20,264,651 34,996,344 31,212,118
Selling and distribution expenses................ 3,030,495 2,416,235 5,851,010 4,514,156
General and administrative expenses.............. 5,688,901 5,874,666 10,453,927 10,066,369
Amortization of excess of cost over fair value 567,476 300,000 1,033,935 400,000
of net assets acquired.....................
------------ ------------ ------------ ------------
Income from operations........................... 9,721,633 11,673,750 17,657,472 16,231,593
Interest expense................................. (1,172,801) (547,305) (2,031,243) (871,567)
Interest income.................................. 92,434 97,601 283,993 148,719
Other income..................................... 205,901 18,706 236,283 84,366
------------ ------------ ------------ ------------
Income before provision for income taxes......... 8,847,167 11,242,752 16,146,505 15,593,111
Provision for income taxes....................... (3,195,000) (4,020,000) (5,895,000) (5,590,000)
------------ ------------ ------------ ------------
Net income....................................... $ 5,652,167 $ 7,222,752 $ 10,251,505 $ 10,003,111
============ ============ ============ ============
Net income per share
Basic....................................... $ 0.37 $ 0.54 $ 0.70 $ 0.75
============ ============ ============ ============
Diluted..................................... $ 0.33 $ 0.51 $ 0.63 $ 0.71
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding
Basic....................................... 15,361,364 13,432,451 14,607,413 13,356,856
============ ============ ============ ============
Diluted...................................... 17,130,923 14,253,822 16,327,495 14,004,961
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
(Unaudited)
Operating activities
Net income......................................................... $ 10,251,505 $ 10,003,111
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred tax provision.......................................... (365,973) 693,794
Depreciation and amortization................................... 3,397,935 816,086
Provision for returns and discounts............................. (132,746) 1,224,277
Changes in operating assets and liabilities:
Accounts receivable.......................................... 5,591,774 (46,323,490)
Due from affiliates and officers............................. (589,804) (1,298,682)
Inventory.................................................... (17,905,359) (2,571,501)
Temporary quota.............................................. (1,316,924) (2,890,700)
Prepaid expenses............................................. (1,717,033) (229,253)
Accounts payable............................................. 11,225,366 4,762,661
Accrued expenses............................................. (2,442,426) 5,184,506
Income taxes payable......................................... 4,026,143 1,691,464
--------------- --------------
Net cash provided by (used in) operating activities.......... 10,022,458 (28,937,727)
--------------- --------------
Investing activities
Purchase of fixed assets........................................... (30,611,571) (226,723)
Acquisition of MGI................................................. -- (6,027,223)
Acquisition of CMG................................................. (4,312,254) --
Purchase of permanent quota........................................ (691,124) (142,290)
Increase in other assets........................................... (6,876,700) (3,320,132)
--------------- --------------
Net cash used in investing activities........................ (42,491,649) (9,716,368)
--------------- --------------
Financing activities
Bank borrowings, net............................................... 29,498,044 30,667,049
Issuance of short-term debt........................................ (42,880) 1,000,000
Issuance of long-term debt......................................... (440,723) 2,371,500
Exercise of stock options including related tax benefit............ 3,169,158 1,616,938
--------------- --------------
Net cash provided by financing activities.................... 32,183,599 35,655,487
--------------- --------------
Decrease in cash and cash equivalents.............................. (285,592) (2,998,608)
Cash and cash equivalents at beginning of period................... 4,318,520 5,305,129
--------------- --------------
Cash and cash equivalents at end of period......................... $ 4,032,928 $ 2,306,521
=============== ===============
</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>
June 30, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
U.S. trade accounts receivable........ $ 62,234,658 $ 53,693,368
Foreign trade accounts receivable..... 11,027,148 8,406,558
Due (to) from factor.................. (16,885,792) 4,725,869
Other receivables..................... 6,225,273 1,367,266
Allowance for returns and discounts... (2,114,260) (2,247,006)
--------------- ----------------
$ 60,487,027 $ 65,946,055
=============== ================
</TABLE>
Due (to) from factor consists of $2.2 million and $5.7 million of
unmatured accounts receivable assigned to the factor, less $19.1 million and
$1.0 million of advances received from the factor, at June 30, 1999 and December
31, 1998, respectively. Effective January 1, 1998, the Company substantially
eliminated its use of the factor for credit verification and approval purposes.
6
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
4. Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Raw materials
Fabric and trim accessories............ $ 20,070,464 $ 10,424,416
Raw cotton............................. 1,513,155 1,043,449
Work-in-process............................. 18,376,279 7,620,403
Finished goods shipments-in-transit......... 3,564,390 10,331,867
Finished goods.............................. 23,611,918 19,810,712
-------------- ----------------
$ 67,136,206 $ 49,230,847
============== ================
</TABLE>
5. Property and Equipment
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Land................................... $ 1,332,109 $ 85,000
Buildings........................... 11,198,694 559,240
Equipment, furniture and fixtures... 63,369,368 3,123,630
Leasehold improvements................. 2,130,750 1,322,765
Vehicles............................... 1,092,568 215,673
-------------- ----------------
$ 79,123,489 $ 5,306,308
============== ================
</TABLE>
6. Bank Borrowings
Bank borrowings consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Import trade bills payable.......... $ 5,413,253 $ 4,466,119
Direct bank acceptances............. 21,579,401 16,969,565
Other Hong Kong credit facilities... 1,431,788 47,603
United States credit facilities..... 34,361,869 11,804,980
-------------- ----------------
$ 62,786,311 $ 33,288,267
============== ================
</TABLE>
7. Acquisitions
The Company has entered into an agreement to purchase effective as of
August 1, 1999 all of the outstanding stock of Industrial Exportadora Famian,
S.A. de C.V. and Coordinados Elite, S.A. de C.V., both Mexican corporations
("Grupo Famian"). Grupo Famian operates seven apparel production facilities in
and near Tehuacan, Mexico which have the capacity to provide finished package
production of 110,000 units per week. The purchase price consists of (i)
$1,000,000 paid on closing, (ii) a $3,000,000 noninterest-bearing promissory
note payable in three installments of $1,000,000 on each of September 30,
October 29 and November 30, 1999 and (iii) $8,000,000 payable in installments of
$833,000, $3,000,000, $1,667,000, $1,667,000 and $883,000 on each of March
31, 2000, August 31, 2000, March 31, 2001, March 31, 2002 and September 30, 2002
provided, except with respect to the payment due August 31, 2000, that the Grupo
Famian subsidiary meets specified pretax income requirements. The purchase
price paid on closing will be financed
7
<PAGE>
by the Company under its existing bank credit facilities. The former
shareholders of Grupo Famian were granted a security interest in the shares of
Grupo Famian which will be released when the $3,000,000 promissory note is paid
in full. This transaction will be accounted for as a purchase, and the purchase
price will be allocated based on the fair value of assets acquired and
liabilities assumed. The excess of cost over fair value of net assets acquired
will be amortized over 15 years. The operations of Grupo Famian will be included
with those of the Company commencing on August 1, 1999.
On April 18, 1999, the Company finalized an agreement to acquire
certain assets of a denim mill located in Puebla, Mexico with an annual
capacity of 18 million meters ("Jamil"). The purchase price consisted of $22.0
million in cash paid on May 7, 1999 and 1,724,000 shares (the "Shares") of the
Company's Common Stock issued on May 24, 1999 valued at $45.3 million. (The
common stock component of the purchase price was thereby reduced by 276,000
shares from the 2,000,000 shares previously disclosed.) The Shares will be
distributed to the sellers in three equal installments on April 1, 2000, 2001
and 2002; provided, however, that any distribution (i) shall be offset by any
claims of the Company against the sellers under the asset purchase agreement and
(ii) will be proportionally reduced in the event the assets fail to produce at
least 15 million yards of marketable denim in the fiscal year immediately
preceding the dates of such distributions of Shares. In addition, the Company
has granted the holders of the Shares certain registration rights and the right
to vote the Shares.
The Company will also assume the obligations of the sellers under an
existing collective bargaining agreement; provided, however, that the sellers
shall reimburse the Company for any costs (including, but not limited to,
salaries and benefits) arising before the closing date or as a result of this
acquisition.
The Company has entered into a three-year employment agreement with
Mr. Nacif, the principal shareholder of the sellers, pursuant to which Mr. Nacif
shall be entitled to receive (i) an annual base salary of $1 million, subject to
such periodic increases, if any, as the Company may deem to be appropriate, (ii)
reimbursement of all reasonable and documented business expenses, (iii)
participation in all plans sponsored by the Company for employees in general and
(iv) the right (the "Option") for ten years to purchase up to 500,000 shares of
the Company's Common Stock at an exercise price of $25 per share. The Option
will vest in three equal installments on April 1, 2000, 2001 and 2002 and will
terminate upon the termination of Mr. Nacif's employment by the Company;
provided, however, that (i) the vesting of any installment shall be deferred to
the date ten business days before the stated expiration date in the event the
operating income of the Company's Mexican operations does not reach certain
levels, and (ii) if such termination of employment results from Mr. Nacif's
death or permanent disability, any vested portion shall terminate on the earlier
of the stated expiration date or the first anniversary of such termination of
employment. In the event the Company terminates Mr. Nacif's employment without
cause (as defined) the Company shall remain obligated to pay Mr. Nacif an amount
equal to his base salary for the remainder of the stated term. In the event Mr.
Nacif's employment is terminated for any other reason (including death,
disability, resignation or termination with cause), neither party shall have any
further obligation to the other, except that the Company shall pay to Mr. Nacif,
or his estate, all reimbursable expenses and such compensation as is due
prorated through the date of termination.
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.
8
<PAGE>
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.
9
<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 Express, Lane Bryant, Limited Stores, Lerner New York and Structure, all of
which are divisions of The Limited, as well as Target Stores, Walmart 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 identified changing needs of its customers and developed a
strategy to reposition its sourcing in order to better serve a diverse customer
base. The Company has geographically diversified its sourcing operations.
Commencing in the third quarter of 1997, the Company substantially expanded its
use of independent cutting, sewing and finishing contractors in Mexico,
primarily for its increasing sales of basic garments, through its office in
Tehuacan, Mexico ("Tag Mex"). The Company also commenced the vertical
integration of its business through the development and acquisition of fabric
and production capacity in Mexico. The Company believes that continuing to
expand its presence in Mexico will increase access to emerging providers of
efficient production, bring a sourcing arm closer to its 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).
The Company has entered into an agreement to purchase effective as of
August 1, 1999 all of the outstanding stock of Grupo Famian, which is composed
of two Mexican corporations which operate seven apparel production facilities in
and near Tehuacan, Mexico which have the capacity to provide finished package
production (i.e., cut, sew, launder, finish and pack) of 110,000 units per week.
For a description of the Grupo Famian acquisition, see Note 7 to Notes to
Consolidated Financial Statements.
On April 18, 1999, the Company finalized an agreement 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 1,724,000 shares of the Common Stock of the Company
issued on May 24, 1999.
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 letter of intent was subsequently terminated on May 26, 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 currently anticipates that the
cost of this facility will be approximately $88 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
10
<PAGE>
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").
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
11
<PAGE>
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 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 four-tenths of the Company's net
sales in 1998 and the first half 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 except for facilities acquired with
Grupo Famian. 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.
12
<PAGE>
Price and Availability of Raw Materials. Cotton fabric is the principal raw
material used in the Company's apparel. Although the Company believes that its
suppliers will continue to be able to procure a sufficient supply of cotton
fabric for its production needs, the price and availability of cotton may
fluctuate significantly depending on supply, world demand and currency
fluctuations, each of which may affect the price and availability of cotton
fabric. There can be no assurance that fluctuations in the price and
availability of cotton fabric or other raw materials used by the Company will
not have a material adverse effect on the Company's results of operations.
Management of Growth. Since its inception, the Company has experienced
rapid growth in sales. No assurance can be given that the Company will be
successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a
significant strain on the Company's management, management information systems,
inventory management, production capability, distribution facilities and
receivables management. Any disruption in the Company's order processing,
sourcing or distribution systems could cause orders to be shipped late, and
under industry practices, retailers generally can cancel orders or refuse to
accept goods due to late shipment. Such cancellations and returns would result
in a reduction in revenue, increased administrative and shipping costs and a
further burden on the Company's distribution facilities. In addition, the
failure to timely enhance the Company's operating systems, or unexpected
difficulties in implementing such enhancements, could have a material adverse
effect on the Company's results of operations.
Foreign Manufacturing. Approximately 95% of the Company products were
imported in 1998 and the first six months of 1999. 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 has evaluated, replaced and/or upgraded its information systems
in an effort to make them Year 2000 compliant, and remediation efforts have been
completed for its critical computer systems. 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 also completed remediation and software and hardware upgrades, including
testing. 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 third 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 or have confirmed interface capability of the EDI program. 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.
13
<PAGE>
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 June 30,
1999. The Company does not expect future costs to have a material effect on the
Company's financial condition or results of operations.
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 Six Months
Ended June 30, Ended June 30,
------------------ --------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 82.7 79.8 82.0 81.0
------ ------ ------ ------
Gross profit............................ 17.3 20.2 18.0 19.0
Selling and distribution expenses....... 2.7 2.4 3.0 2.7
General and administration expenses *... 5.7 6.2 5.9 6.4
------ ------ ------ ------
Income from operations 8.9 11.6 9.1 9.9
Interest expense........................ (1.1) (0.5) (1.1) (0.5)
Other income............................ 0.3 0.1 0.3 0.1
------ ------ ------ ------
Income before income taxes.............. 8.1 11.2 8.3 9.5
Income taxes............................ 2.9 4.0 3.0 3.4
------ ------ ------ ------
Net income.............................. 5.2% 7.2% 5.3% 6.1%
====== ====== ====== ======
</TABLE>
* Includes amortization of excess of cost over
fair value of net assets acquired.
Second Quarter 1999 Compared to Second Quarter 1998
Net Sales increased by $9.7 million, or 9.7%, from $100.1 million in the second
quarter of 1999 to $109.8 million in the second quarter of 1999. The increase in
net sales included an aggregate increase in sales of $13.0 million to mass
merchandisers and $10.9 million as a result of the MGI, Rocky and Chazzz
acquisitions (the "Acquisitions"), as offset by an aggregate decrease of $19.1
million to divisions of the Limited. Sales to divisions of The Limited in the
second quarter of 1999 amounted to 40.6% of total net sales, as compared to
63.6% in the comparable prior period, whereas sales to mass merchandisers were
27.6% of total net sales as compared to 17.2% in the same period last year. As
previously disclosed, the Company expects that sales to The Limited will
continue to be in the range of approximately 40% of total sales for the
foreseeable future.
14
<PAGE>
Sales were approximately $12 million less than expected in the second quarter of
1999 because of the inability of the Company to ship certain orders scheduled
for delivery in the latter part of the period due to production delays including
disruption caused by an earthquake which struck the Tehuacan, Mexico area in
June 1999. Substantially all of these orders were subsequently shipped in the
third quarter of 1999.
Gross Profit (which consists of net sales less product costs, duties and direct
costs attributable to production) for the second quarter of 1999 was $19.0
million, or 17.3% of net sales, compared to $20.3 million, or 20.2% of net
sales, in the comparable prior period, a decrease in gross profit of 6.2%. The
2.9% decrease in the gross profit margin included a 1.1% increase in direct
costs attributable to production as a percentage of net sales and 0.7% decrease
in benefit from domestic production of the Men's Division. Gross margins in the
second quarter of 1999 were less than expected in part because unanticipated
costs were incurred to fill certain orders and reduced Mexican shipments
resulted in lower consumption of proprietary denim which substantially
eliminated the profit contribution of Jamil.
Selling and Distribution Expenses were $3.0 million in the second quarter of
1999 and $2.4 million in the second quarter of 1998. As a percentage of net
sales, these expenses increased from 2.4% in the second quarter of 1998 to 2.7%
in the second quarter of 1999. After adjusting for expenses related to the Rocky
and Chazzz Acquisitions of $908,000, as compared to no such expenses in the
second quarter of 1998, selling and distribution expenses decreased by $294,000
in the second quarter of 1999 as compared to the second quarter of 1998.
General and Administrative Expenses (which include amortization of excess of
cost over fair value of net assets acquired) increased from $6.2 million in the
second quarter of 1998 to $6.3 million in the second quarter of 1999. As a
percentage of net sales, these expenses decreased from 6.2% in the second
quarter of 1998 to 5.7% in the second quarter of 1999. This percentage decrease
included decreases in the allowance for bad debt and 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. The allowance for bad debt
includes an allowance for returns and discounts as well as bad debt expense. The
allowance for returns and discounts is primarily based on a percentage of
receivables which increases with the age of the receivables, but is not a
reflection on the credit worthiness of the customer. The most significant
portions of the increase in the allowance for returns and discounts resulted
from changes in the amount and aging of accounts receivable. After adjusting for
the items specifically identified below, general and administrative expenses
increased by $746,000 in the second quarter of 1999 as compared to the second
quarter of 1998, as a result of overhead related to the Mexico initiatives, as
summarized below:
<TABLE>
<CAPTION>
Quarter Ended June 30,
------------------------ Increase /
1999 1998 (Decrease)
---------- ---------- ---------
<S> <C> <C> <C>
$6,256,000 $6,175,000 $ 81,000
Less: Bad Debt Expense 31,000 164,000 (133,000)
Allowance for Returns & Discounts 163,000 946,000 (783,000)
---------- ---------- ---------
Allowance for Bad Debt 194,000 1,110,000 (916,000)
Amortization of Goodwill 567,000 300,000 267,000
Bonus Accruals 115,000 645,000 (530,000)
Acquisitions 1,267,000 753,000 514,000
---------- ---------- ---------
$4,113,000 $3,367,000 $ 746,000
========== ========== =========
</TABLE>
15
<PAGE>
Operating Income in the second quarter of 1999 was $9.7 million, or 8.9% of net
sales, compared to $11.7 million, or 11.6% of net sales, in the comparable prior
period, a decrease in operating income of 16.7% due to the factors described
above. The 2.7% reduction in operating income as a percentage of net sales is
attributable to a 2.9% decrease in gross profit margin as offset by a 0.2%
decrease in operating expenses.
Other Income increased from $116,000, or 0.1% of net sales, in the second
quarter of 1998, to $298,000, or 0.3% of net sales, in the second quarter of
1999.
First Six Months 1999 Compared to First Six Months 1998
Net Sales increased by $29.5 million, or 17.9%, from $164.4 million in the first
six months of 1998 to $193.8 million in the first six months of 1999. The
increase in net sales included an aggregate increase in sales of $20.0 million
to mass merchandisers and $20.7 million as a result of the Acquisitions, as
offset by an aggregate decrease of $21.7 million to divisions of The Limited.
Overall, sales to divisions of The Limited in the first six months of 1999
amounted to 42.4% of total net sales, as compared to 63.2% in the comparable
prior period, whereas aggregate sales to mass merchandisers were 28.6% of total
net sales as compared to 21.5% in the same period last year. As previously
disclosed, the Company expects that sales to The Limited will continue to be in
the range of approximately 40% of total sales for the foreseeable future.
Gross Profit (which consists of net sales less product costs, duties and direct
costs attributable to production) for the first six months of 1999 was $35.0
million, or 18.0% of net sales, compared to $31.2 million, or 19.0% of net
sales, in the comparable prior period, an increase in gross profit of 12.1%. The
1.0% decrease in the gross profit margin included a 0.8% increase in direct
costs attributable to production as a percentage of net sales.
Selling and Distribution Expenses increased from $4.5 million in the first six
months of 1998 to $5.9 million in the first six months of 1999. As a percentage
of net sales, these expenses increased from 2.7% in the first six months of 1998
to 3.0% in the first six months of 1999. After adjusting for expenses related to
the Acquisitions of $1.8 million, as compared to $637,000 of such expenses in
the first six months of 1998, selling and distribution expenses increased by
$181,000 in the first six months of 1999 as compared to the first six months of
1998.
General and Administrative Expenses (which include amortization of excess of
cost over fair value of net assets acquired) increased from $10.5 million in the
first six months of 1998 to $11.5 million in the first six months of 1999. As a
percentage of net sales, these expenses decreased from 6.4% in the first six
months of 1998 to 5.9% in the first six months of 1999. This percentage decrease
included decreases in the allowance for bad debt and 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. The allowance for bad debt
includes an allowance for returns and discounts as well as bad debt expense. The
allowance for returns and discounts is primarily based on a percentage of
receivables which increases with the age of the receivables, but is not a
reflection on the credit worthiness of the customer. The most significant
portions of the increase in the allowance for returns and discounts resulted
from changes in the amount and aging of accounts receivable. After adjusting for
the specified items below, general and administrative expenses increased by $1.5
million in the first six months of 1999 as compared to the first six months of
1998, as a result of overhead related to the Mexico initiatives, as summarized
below:
16
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------- Increase /
1999 1998 (Decrease)
----------- ----------- -----------
<S> <C> <C> <C>
$11,488,000 $10,466,000 $1,022,000
Less: Bad Debt Expense 73,000 131,000 (58,000)
Allowance for Returns & Discounts 154,000 1,071,000 (917,000)
----------- ----------- -----------
Allowance for Bad Debt 227,000 1,202,000 (975,000)
Amortization of Goodwill 1,034,000 400,000 634,000
Bonus Accruals 242,000 1,331,000 (1,089,000)
Acquisitions 1,918,000 1,011,000 907,000
----------- ----------- ----------
$ 8,067,000 $ 6,522,000 $1,545,000
=========== =========== ==========
</TABLE>
Operating Income in the first six months of 1999 was $17.7 million, or 9.1% of
net sales, compared to $16.2 million, or 9.9% of net sales, in the comparable
prior period, an increase in operating income of 8.8% due to the factors
described above. The 0.8% decrease in operating income as a percentage of net
sales is attributable to a 1.0% decrease in gross profit margin as offset by a
0.2% decrease in operating expenses.
Other Income increased from $233,000, or 0.1% of net sales, in the first six
months of 1998 to $520,000, or 0.3% of net sales, in the first six months of
1999. This increase primarily resulted from $149,000 and $54,000 of interest and
management fee income, respectively, in the first six months of 1998 as compared
to $284,000 and $0 of such income, respectively, in the first six months of
1999.
Liquidity and Capital Resources
The Company's liquidity requirements arise from acquisitions and 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 (including debt to or arranged by vendors of
equipment purchased for the Mexican twill and production facility) and the
proceeds from the exercise of stock options.
During the first six months of 1999, net cash provided by operating
activities was $10.0 million, which resulted primarily from net income of $10.3
million and a net decrease in working capital items of $3.1 million, cash flow
used in investing activities was $42.5 million, which primarily consisted of the
Jamil and Chazzz Acquisitions and investment in capital expenditures related to
vertical integration programs in Mexico, and cash flow provided by financing
activities equaled $32.2 million, a result of a $29.5 million increase in 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 $3.2 million of proceeds from the exercise of
stock options.
The Company has credit facilities of $33 million and $10 million with the
Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and acceptances, as well as cash advances.
These facilities are subject to review at any time and the right of either
lender to demand payment at any time. Interest on cash advances under HKSB's
facility accrues at HKSB's prime rate for lending U.S. dollars plus one-half to
three-quarters percent
17
<PAGE>
per annum. As of June 30, 1999, HKSB's U.S. dollar prime rate equaled six and
one-half percent. Interest on cash advances under SCB's facility accrues at
SCB's prime rate for lending Hong Kong dollars. As of June 30, 1999, SCB's Hong
Kong dollar prime rate equaled eight and one quarter 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"), The CIT Group/Commercial Services,
Inc. ("CIT") and Finova Capital Corporation ("FCC"). 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 for credit
verification and approval purposes. The Company may receive advances from NBCC
and FCC of up to 90% of certain accounts receivable, and CIT will advance up to
100% of the amount of other accounts receivable plus an over-advance of up to
$15 million through August 15, 1999, up to a maximum amount of $40 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, FCC and CIT accrues at
the rate of one and one-quarter percent below the bank's respective prime rates
or, at the option of the Company, one and one-quarter percent over the
respective LIBOR rates. As of June 30, 1999, the prime rates averaged seven and
eight-tenths percent and the LIBOR rates averaged five percent.
The Company has an unsecured $10 million credit facility with SCB maturing
December 31, 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 received commitments totaling $25 million from General
Electric Credit Corporation and Bank of America Leasing for loans secured by
equipment located in the Puebla, Mexico denim mill. Interest will accrue at
the rate of two and one-quarter percent over the LIBOR rate and the
final maturity of these loans will be in the year 2005. These facilities will
be subject to the same restrictive covenants as apply to the HKSB and SCB
facilities. It is anticipated that these loans will be closed by August 31,
1999.
The Company has financed its operations from its cash flow from operations,
borrowings under its bank credit facilities, issuance of long-term debt
(including debt to or arranged by vendors of equipment purchased for the Mexican
twill and production facility) 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 $170 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 June 30, 1999, capital expenditure
commitments aggregating $83.7 million have been made with respect to vertical
integration programs initiated by the Company, including $22 million in cash
paid May 7, 1999 and 1,724,000 shares of the Common Stock of the Company issued
as of May 24, 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.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
-----------------
Item 2. Changes in Securities. None.
---------------------
Item 3. Defaults Upon Senior Securities. None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The Company held its 1999 annual meeting of shareholders (the
"Meeting") on May 3, 1999. At the Meeting, the Company's shareholders
considered and voted upon the following matters:
1. Election of Directors. The re-election of the following three
persons on the Board of Directors of the Company, to serve until
the 2001 annual meeting of shareholders and until their successors
have been elected and qualified:
<TABLE>
<CAPTION>
------------------------------------------------------
Name For Against Abstain
------------------------------------------------------
<S> <C> <C> <C>
James R. Miller 12,381,250 --- 87,711
Mark B. Kristof 12,245,750 --- 223,331
Karen S. Wasserman 12,245,700 --- 223,361
</TABLE>
2. Amendment of Employee Incentive Plan. To approve an amendment of
the Employee Incentive Plan increasing from 2,600,000 to 3,600,000
the number of shares of the Company's Common Stock which may be
subject to awards granted pursuant thereto.
<TABLE>
<CAPTION>
-------------------------------------------
For Against Abstain Non-Votes
-------------------------------------------
<S> <C> <C> <C>
9,468,274 1,833,355 12,904 1,154,528
</TABLE>
3. Ratification of 1999 Employee Incentive Awards. To ratify the
grant of 1999 awards to certain executive officers pursuant to the
Employee Incentive Plan.
<TABLE>
<CAPTION>
------------------------------------------
For Against Abstain Non-Votes
------------------------------------------
<S> <C> <C> <C>
12,365,106 76,658 13,260 14,037
</TABLE>
4. Ratification of Stock Option Grants. To ratify the grant of
options to purchase an aggregate of 1,000,000 shares of Common
Stock of the Company to certain executive officers.
<TABLE>
<CAPTION>
--------------------------------------------
For Against Abstain Non-Votes
--------------------------------------------
<S> <C> <C> <C>
9,664,971 1,635,333 14,229 1,154,528
</TABLE>
5. Ratification of the Appointment of Independent Auditor. To ratify
the appointment of Ernst & Young LLP as the Company's Independent
Auditors for the fiscal year ending December 31, 1999.
<TABLE>
<CAPTION>
--------------------------------------------------------
For Abstain Against Non-Votes
--------------------------------------------------------
<S> <C> <C> <C>
12,454,412 9,252 5,297 ---
</TABLE>
19
<PAGE>
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 22 for
a description of the exhibits filed as part of this Report on Form
10-Q.
(b) Reports on Form 8-K: None.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRANT APPAREL GROUP
Date: August 11, 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)
21
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.68.1 Final Agreement for Purchase of Assets dated as of April 18, 1999, by and among Tarrant
Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de C.V., Inmobiliaria Cuadros, S.A. de C.V.,
Kamel Nacif and Irma Benavides Montes De Oca
10.72.1 Final Escrow Agreement dated as of May 24, 1999, by and among Tarrant Apparel Group,
Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de C.V., Inmobiliaria Cuadros, S.A. de
C.V., Kamel Nacif and Irma Benavides Montes De Oca
10.74 Agreement for Purchase of Stock dated as of August 1, 1999, by and among Tag Mex, Inc.,
NO! Jeans, Inc., Antonio Haddad Haddad, Tarrant Apparel Group and the shareholders of
Industrial Exportadora Famian, S.A. de C.V. and Coordinados Elite, S.A. de C.V. *
27 Financial Data Summary
</TABLE>
__________________
* Schedules have been omitted, but will be provided to the Securities and
Exchange Commission upon request.
22
<PAGE>
EXHIBIT 10.68.1
FINAL AGREEMENT FOR PURCHASE OF ASSETS
--------------------------------------
THIS FINAL AGREEMENT FOR PURCHASE OF ASSETS is made and effective as of
the eighteenth day of April, 1999, by and among TARRANT MEXICO, S. de R.L. de
C.V., a corporation organized under the laws of the Republic of Mexico (the
"Purchaser"), 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"), and KAMEL NACIF and IRMA BENAVIDES MONTES DE OCA (collectively,
the "Shareholders"), with respect to the following facts:
A. The Sellers are engaged in the production of denim and the
manufacturing of apparel, among other businesses.
B. The Shareholders own all the issued and outstanding capital stock of
the Sellers.
C. The Purchaser is a wholly-owned, indirect subsidiary of Tarrant
Apparel Group, a California corporation (the "Parent").
D. The Purchaser desires to purchase from the Sellers, and the Sellers
desire 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) Except as provided in Section 1.1(b), the Sellers shall sell,
assign, transfer, convey and deliver to the Purchaser, and the Purchaser shall
purchase and take from the Sellers, on the Closing Date (as defined below), all
property and assets of the Sellers which are used in connection with the
production of denim, as the same shall exist on the Closing Date (the "Assets"),
including, but not limited to, the property and assets set forth on Schedule
1.1(a).
(b) Notwithstanding Section 1.1(a), the Sellers shall not sell,
assign, transfer, convey or deliver to the Purchaser hereunder, and shall
retain, the property and assets of the Sellers set forth on Schedule 1.1(b).
1.2 Purchase Price.
--------------
(a) In consideration of the sale of the Assets to the Purchaser,
the Purchaser shall pay or deliver to the Sellers the following (the "Purchase
Price") (subject to adjustment as provided in Section 1.3(d)):
(i) the sum of U.S. $22,000,000.00 evidenced by a
promissory note (the "Note") of the Purchaser in the form attached
hereto as Exhibit D; and
(ii) a purchase price premium of up to U.S. $45,283,716
payable in shares (the "Shares") of the Common Stock of the Parent valued
at the closing sales price on the Determination Date (as defined below)
shall be delivered to, and earned by the Seller on the terms set forth in
the Escrow Agreement (as defined below).
(b) The term "Determination Date" shall mean the later of (i)the
date on which FMV Opinions, Inc. shall determine the valuation of the Shares,
such valuation to consider minority discounts, liquidity discounts and other
factors deemed relevant by FMV Opinions,Inc., or (ii) June 30,1999.
(c) The Purchase Price shall be allocated between the Sellers as
set forth on Schedule 1.2(c)A and shall be allocated among the Assets as set
forth on Schedule 1.2(c)B.
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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 Sellers and the Shareholders, jointly and severally,
shall pay or perform, and shall defend, indemnify and hold harmless the
Purchaser from, any and all liabilities which arise or result from or are
related to, directly or indirectly, the Assets or the business or operations
with the Sellers or the Shareholders, or any of them, whether the same 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 Sellers 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 Sellers are then
in default).
(d) The Purchaser shall have the right, but not the obligation,
to pay any amount or to perform any obligations which the Purchaser, in its sole
and absolute discretion, determines is payable or is required to be performed by
the Sellers or the Shareholders under that certain Contrato Colectivo de
Trabajo, dated May 22, 1997, between Jamil Textil, S.A. de C.V. and Sindicato
Industrial de Obreros Textiles y Similares (the "Collective Bargaining
Agreement"). The Purchase Price shall be reduced by any such amount paid or the
cost to the Purchaser of any such obligation performed. The Purchaser shall have
the right (i) to set off any such amount or cost against any portion of the
Purchase Price then payable or (ii) to demand that the Sellers and the
Shareholders reimburse the Purchaser therefor promptly on demand, and the
Sellers and the Shareholders, jointly and severally, shall do so.
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 Sellers until such date and time and on the Purchaser thereafter.
(b) On the Closing Date, the Sellers shall deliver to the
Purchaser at the Plant 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 Sellers 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 Sellers' sole cost and expense, as the Purchaser reasonably
may request to cause any such person to deliver any Assets held by it to the
Purchaser at the Plant. The term "Plant" shall mean that certain denim mill
located at Lote 5, 6, 7 y 15, Calle "C" Mant. 6, ParqueInd. Puebla 2000, Puebla,
Mexico, capable of producing 20 million meters per year of 68" OE/OE denim
fabric.
(c) On the Closing Date, and from time to time thereafter, at the
request of the Purchaser, the Sellers and the Shareholders shall execute and
deliver to the Purchaser all such deeds, 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 Sellers, the Purchaser shall
execute and deliver to the Sellers all such instruments of assumption as shall
be necessary or desirable, in the reasonable opinion of counsel to the Sellers,
to reflect the assumption by the Purchaser of those liabilities of the Sellers
expressly assumed by the Purchaser under Section 1.3(c).
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<PAGE>
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 the third business
day after the conditions set forth in Section 5 have been satisfied or waived 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 July 31, 1999, if such purchase
and sale shall not have occurred by the close of business on that date,
providing the terminating party is not in default of any of its obligations
hereunder. On the Closing Date, the Sellers and the Shareholders 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 (subject, in the case of the Shares, to the terms of the Escrow
Agreement) 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.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE SHAREHOLDERS
------------------------------------------------------------------
The Sellers and the Shareholders, jointly and severally, hereby
represent and warrant to the Purchaser that the statements set forth in Sections
2.1 through 2.19 are true and correct.
2.1 Authority to Enter Agreement and Enforceability. The Sellers and
-----------------------------------------------
the Shareholders 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, other than as described in Section
5.1(k); all proceedings have been taken and all authorizations have been secured
by the Sellers and the Shareholders 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 is a legal, valid and binding
agreement of the Sellers and the Shareholders and is enforceable against each of
them in accordance with its terms.
2.2 Organization and Standing. Each of the Sellers is a corporation
-------------------------
duly organized, validly existing and in good standing under the laws of the
Republic of Mexico, with all requisite power and authority (corporate and 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 Shareholders own all the issued and
-------------------
outstanding shares of the capital stock of the Sellers free and clear of any
liens, claims, encumbrances, security interests, equities, restrictions on
transfer, preemptive rights or other defects in title of any kind or
description. 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 Sellers, and there are no securities
outstanding or in existence which are convertible into or exchangeable for
capital stock or other securities of the Sellers.
2.4 Financial Data. Schedule 2.4A hereto contains a statement of the
-------------- -------------
salaries of all employees of the Sellers as of the date hereof. Schedule 2.4B
hereto contains a true and complete list of all liabilities or obligations of
the Sellers, whether contingent or absolute, direct or indirect, matured or
unmatured, as of the date hereof, and neither the Sellers nor the Shareholders
3
<PAGE>
knows of any basis for the assertion of any such liabilities or obligations
which are not set forth on Schedule 2.4B. Such schedules (i) were compiled
from the accounting books and records of the Sellers and (ii) accurately and
completely set forth the information contained in such accounting books and
records with respect to the salaries and liabilities set forth thereon.
2.5 Trademarks, Patents, Etc. The Sellers use and own no trade
------------------------
names, trademarks, patents, copyrights or registrations or applications therefor
in connection with, and none is required for, the production of denim by means
of the Assets. The Sellers are not infringing any trade name, trademark,
patent, copyright or other right of any third party in connection with its denim
production business.
2.6 Tax Matters. The Sellers have 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.
As of the date hereof, the Sellers are not the beneficiary of any extension of
time to file any tax return or pay any taxes and have no liability with respect
to taxes of any kind, whether or not assessed. The Sellers have properly
registered before all federal, state and local tax authorities and the Instituto
Mexicano del Seguro Social ("IMSS"), Instituto del Fondo Nacional Para La
Vivienda de Los Trabajadores ("Infonavit"), Fondo Nacional Para El Consumo de
Los Trabajadores ("Fonacot") and Sistema de Ahorro Para El Retiro ("SAR"). The
term "taxes" shall include, but is not limited to, income taxes, value added
taxes, asset taxes, payroll taxes, import duties, real property taxes,
contributions payments and assessments regarding IMSS, Infonavit, Fonacot and
SAR.
2.7 Insurance. The Sellers maintain, 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 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. There are no suits, actions or legal,
----------
administrative, arbitration or other proceedings or investigations pending or
threatened by, against or involving the Sellers or, with respect only to those
suits, actions, proceedings or investigations arising out of the Sellers'
business, pending or threatened by, against or involving the Shareholders or any
of the Sellers' officers, directors, shareholders, employees or agents.
2.9 Compliance with Laws and Other Instruments. Except as set forth
------------------------------------------
in Schedule 2.13, the Sellers' businesses have been and are being conducted in
accordance with all applicable laws, ordinances, rules and regulations of all
authorities. The Sellers are not in violation of, or in default under, any term
or provision of their respective Escritura Constitutiva or Estatutos Sociales
(as amended or revised) or of any lien, indenture, mortgage, lease, agreement,
instrument, commitment or other arrangement, or subject to any restriction of
any kind or character, which could adversely affect the Sellers' 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 herein and therein, will not conflict with or result
in the breach of any term or provision of, or constitute a default under, the
respective Escritura Constitutiva or Estatutos Sociales (as amended or revised)
of the Sellers, 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, contract, document,
instrument, commitment, obligation or arrangement of any kind or nature to which
it is a party or by which either of the Sellers is bound.
2.10 Brokerage and Finder's Fees. The Sellers and the Shareholders
---------------------------
have 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.
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<PAGE>
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 plans, relating to the production of
denim by means of the Assets, or to any person employed in connection therewith.
The Sellers have performed all of their 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 Sellers' relationship with all
employees or independent contractors is satisfactory.
2.12 Inventories. All inventory of the Sellers, including, but not
-----------
limited to, raw materials, work in process and finished goods, are of good,
usable and merchantable quality.
2.13 Environmental Matters.
---------------------
(a) Except as set forth on Schedule 2.13, the Sellers have not
(i) breached or been notified by any governmental or regulatory authority that
they have breached any Environmental Law (as defined below), (ii) released any
Hazardous Substance (as defined below) or (iii) become aware of the release or
presence of any Hazardous Substance on any property owned, leased or occupied by
the Sellers. There are no underground storage tanks on property owned, leased or
occupied by the Sellers.
(b) For purposes of this Section 2.13, (i) "Environmental Law"
means all laws relating to the protection of the environment, to human health
and safety or to any environmental activity, including, without limitation, (x)
Ley General del Equilibrio Ecologico y La Proteccion al Ambiente, its related
regulations and administrative orders or provisions, including, but not limited
to, those pertaining to environmental impact, hazardous waste, air pollution,
water pollution or noise pollution, and any other specific laws, regulations or
administrative orders or provisions relating to air, soil, ground or water
pollution or contamination, (y) all other requirements pertaining to the
reporting, licensing, permitting, investigation or remediation of emissions,
discharges, releases or threatened releases of any Hazardous Substance into the
air, surface water, groundwater or land, or relating to the manufacture,
processing, distribution, use, sale, treatment, receipt, storage, disposal,
transport or handling of any Hazardous Substance and (z) all other requirements
pertaining to the protection of the health and safety of employees or the
public, and (ii) "Hazardous Substance" means any substance that (x) is or
contains asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls,
petroleum or petroleum-derived substances or wastes, radon gas or related
materials, (y) requires investigation, removal or remediation under any
Environmental Law, or is defined, listed or identified as a "hazardous waste" or
"hazardous substance" thereunder or (z) is toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous or is regulated by any governmental authority or Environmental Law.
2.14 Employees. The Sellers have fully complied with its obligations
---------
under the Ley Federal de Trabajo, including, but not limited to, the timely
payment in full of all wages, salaries, overtime payments, vacation and
vacation bonus payments, seventh day payments, severance payments, holiday
payments, Sunday work bonuses, seniority bonuses and annual bonuses
("aguinaldo") and the timely performance in full of all obligations relating to
health and safety, training, internal regulations, working conditions and any
other legally or contractually mandated fringe benefits or obligations.
2.15 Assets. Schedule 2.15 contains a complete and correct list of
------
all assets (including, but not limited to, all real property, machinery,
furniture, fixtures, equipment and other tangible assets) used in, or necessary
for the conduct of, the Sellers' denim production business as presently
conducted, other than any item the original cost of which was less than U.S.
5
<PAGE>
$500. All such assets are owned or leased by the Sellers 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. Each of the leases pursuant to which the
Sellers hold any such assets is in full force and effect and is a legal, valid
and binding agreement of each party thereto and is enforceable against each
party thereto in accordance with its terms; each party to any such lease is in
compliance thereunder; and no event has occurred which through the giving of
notice or the lapse of time could cause or constitute a default or the
acceleration of any obligation of any party thereto or the creation of a Lien
upon any such asset. Upon the Closing Date, the Purchaser will receive from the
Sellers good and marketable title to the Assets free and clear of any Liens.
2.16 Agreements. Schedule 2.16 contains a complete and correct list
----------
of all leases, contracts, agreements and commitments, whether written or oral,
to which either of the Sellers is a party or by which it is bound. Each such
agreement is in full force and effect and is a legal, valid and binding
agreement of each party thereto and is enforceable against each party thereto in
accordance with its terms; each party thereto is in compliance thereunder; and
no event has occurred which through the giving of notice or the lapse of time
could cause or constitute a default or the acceleration of any obligation of any
party thereto or the creation of a lien or encumbrance upon the Assets.
2.17 Absence of Certain Changes. Since January 1, 1998, there has not
--------------------------
been any material adverse change in the condition (financial or other), net
worth, property, assets, earnings, liabilities, capitalization, business,
results of operations or prospects of either of the Sellers or the Assets.
2.18 Investment in the Shares.
------------------------
(a) The Sellers will hold the Shares for investment and not with
a view to, or for resale in connection with, any distribution thereof within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"). The
Sellers do not have any present intention of selling, offering to sell or
otherwise disposing of or distributing the Shares.
(b) The Sellers acknowledge 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 Sellers are sophisticated in financial matters and are
able to evaluate the risks and benefits of the investment in the Shares.
(d) The Sellers have 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 they have requested.
(e) The Sellers are able to bear the economic risk of their
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 Sellers acknowledge 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).
6
<PAGE>
2.19 Material Misstatements or Omissions. No representations,
-----------------------------------
warranties or information furnished by the Sellers or the Shareholders to the
Purchaser, the Parent or any of their respective employees or agents, including,
but not limited to, Ernst & Young LLP or Kurt Salmon Associates, in connection
with the transactions contemplated hereby contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
and facts contained therein not misleading.
3. REPRESENTATION AND WARRANTIES OF THE PURCHASER
----------------------------------------------
The Purchaser represents and warrants to the Sellers and the
Shareholders that the statements set forth in Sections 3.1 through 3.3 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, other than as described in Section
5.1(k); 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 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 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.
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.
4. COVENANTS
---------
4.1 Operation of the Assets. During the period from the date of this
-----------------------
Agreement to the Closing Date, the Sellers shall operate their businesses and
the Assets as now operated and only in the ordinary course and shall take such
actions as may be necessary to ensure that the representations and warranties of
the Sellers set forth in this Agreement will be true and correct as of the
Closing Date, and the Shareholders shall cause the Sellers to do so. By way of
illustration only and not limitation, the Sellers shall take each such action as
is set forth in Schedule 4.1 hereto, and the Shareholders shall cause the
Sellers to do so.
4.2 Access to Information. The Sellers and the Shareholders shall
---------------------
give to the Purchaser and its counsel, accountants and other representatives
full access during normal business hours throughout the period from 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 request, and the Shareholders
shall cause the Sellers 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 Sellers and the Shareholders under
this Agreement.
4.3 Environmental Matters. On or before December 31, 1999, the
---------------------
Sellers shall (i) remedy any breach of any Environmental Law arising before the
7
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Closing Date in connection with or related to the Assets, the Plant or the
Sellers' denim production business, including, but not limited to, those
breaches of Environmental Laws set forth on Schedule 2.13 or (ii) obtain the
release of any liability therefor from the appropriate governmental or
regulatory authority, in each case without any material condition or restriction
on the operation of the Plant, which remedy or release shall be acceptable to
the Purchaser in all material respects.
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 Sellers and the
Shareholders contained in this Agreement shall be true and correct in all
respects on the date hereof and as of the Closing Date as if made at and as of
such date.
(b) The Sellers and the Shareholders each shall have performed and
satisfied 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 Sellers shall have executed and delivered to the Purchaser
an escrow and registration rights agreement in the form of and containing the
terms and con ditions set forth in Exhibit A hereto (the "Escrow Agreement").
(e) Kamel Nacif shall have executed and delivered to the Purchaser
an employment agreement in the form of and containing the terms and conditions
set forth in Exhibit B hereto (the "Employment Agreement").
(f) Jamil Textil, S.A. de C.V. shall have executed and delivered
to the Purchaser an agreement in the form of and containing the terms and
conditions set forth in Exhibit C (the "Individual Work Contract").
(g) There shall not have occurred any adverse change in the
business, property, assets, operations, condition (financial or other) or
prospects of the businesses of the Sellers or the Assets.
(h) The Board of Directors of the Parent, in its good faith
judgment, after consultation with legal counsel, shall not have withdrawn or
modified its approval or recommendation of this Agreement and the transactions
contemplated hereby (having determined that it is necessary to do so to comply
with its fiduciary duties to the shareholders of the Parent under applicable
law).
(i) The Shares shall have been approved for listing on the Nasdaq
National Market subject to official notice of issuance.
(j) The Parent shall have received the opinion of Wedbush Morgan
Securities ("Wedbush") on the date on which the Parent's Board of Directors
voted to approve this Agreement and the written opinion of Wedbush, dated on the
Closing Date, that the terms of the transactions contemplated by this Agreement
are fair to the Parent and its shareholders from a financial point of view, and
such opinion shall not have been withdrawn or modified in any respect.
(k) The Sellers, the Shareholders and the Purchaser each shall have
obtained any required prior approval of the transactions contemplated hereby
from the Federal Competition Commission pursuant to Article 12, I, Ley Federal
de Competencia Economica.
5.2 Conditions Precedent to the Obligations of the Sellers and the
--------------------------------------------------------------
8
<PAGE>
Shareholders. The obligation of the Sellers and the Shareholders 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 Sellers or the Shareholders, 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 respects on the date hereof
and as of the Closing Date as if made at and as of such date.
(b) The Purchaser shall have performed and satisfied 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 Sellers or the Shareholders, 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 Purchaser shall have executed and delivered to the Sellers
and the Shareholders the Escrow Agreement, the Employment Agreement and the
Individual Work Contract.
(e) The Sellers, the Shareholders and the Purchaser each shall
have obtained any required prior approval of the transactions contemplated
hereby from the Federal Competition Commission pursuant to Article 12, I, Ley
Federal de Competencia Economica.
6. MISCELLANEOUS
-------------
6.1 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.
6.2 Indemnification. The Sellers and the Shareholders (the
---------------
"Indemnifying Parties"), jointly and severally, shall indemnify, defend and hold
harmless the Parent, the Purchaser and their respective officers, directors,
shareholders, employees, attorneys, accountants, affiliates, agents, successors
and assigns, and any person who controls or is deemed to control any of them
(the "Indemnified Parties"), from, against and in respect of any and all
payments, damages, claims, demands, losses, expenses, costs, obligations and
liabilities (including, but not limited to, 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 any breach by any
of the Indemnifying Parties of any of its or his representations, warranties,
covenants or commitments under this Agreement, the Escrow Agreement, the
Employment Agreement or the Individual Work Contract. The Indemnifying Parties,
jointly and severally, shall reimburse each Indemnified Party on demand for any
payment made or loss suffered by it at any time after the date hereof, based
upon the judgment of any court of competent jurisdiction or pursuant to a bona
fide compromise or settlement of claims, demands or actions in respect of any
damages to which the foregoing indemnity relates. 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 obligation to advance or pay promptly on
demand all amounts as they are incurred shall exist irrespective of the ultimate
final judicial determination, and in the event of a dispute about amounts owed,
such amounts shall be advanced as they are incurred pending resolution and final
judicial determination. 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.
9
<PAGE>
6.3 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, (ii) if, in the reasonable judgment of the
Indemnified Party, based upon the written advice of counsel, a conflict of
interest may exist between the Indemnified Party and any of the Indemnifying
Parties, the Indemnifying Parties shall not have the right to assume such
defense on behalf of such Indemnified Party and (iii) the failure to so notify
the Indemnifying Parties shall not relieve the Indemnifying Parties from any
liabilities that they may have hereunder or otherwise, except to the extent that
such failure so to notify the Indemnifying Parties materially prejudices the
rights of the Indemnifying Parties. If the Indemnifying Parties shall, within a
reasonable time after said notice, fail to defend, the Indemnified Party shall
have the right, but not the obligation, to undertake the defense 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 without the prior written
consent of the Indemnified Parties. If the claim is one that cannot by its
nature be defended solely by the Indemnifying Parties, the 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.
6.4 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.
6.5 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.
6.6 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.
6.7 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.
6.8 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.
6.9 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.
10
<PAGE>
6.10 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.
6.11 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.
6.12 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.
6.13 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 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.
6.14 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.
6.15 Consent to Jurisdiction. Subject to Section 6.13, 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 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.
6.16 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.
11
<PAGE>
6.17 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.
6.18 Taxes. The Sellers shall pay timely any transfer, sales or other
-----
taxes which may become due or payable by virtue of the transactions contemplated
by this Agreement, other than the 2% transfer tax payable on the value of land
and building and the 15% value added tax payable on the purchase price of the
Assets other than land.
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first set forth above.
Purchaser: TARRANT MEXICO, S. de R.L. de C.V.
By /s/ Gerard Guez
----------------------------------------
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Telecopier: (323) 881-0368
Sellers: 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
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
Shareholders: /s/ Kamel Nacif
-----------------------------------------------
KAMEL NACIF
Edgar Allen Poe #231
Col. Polanco, C.P. 11550
Mexico, D.F.
Telecopier: (525) 255-1009
/s/ Irma Benavides Montes de Oca
-----------------------------------------------
IRMA BENAVIDES MONTES DE OCA
Edgar Allen Poe #231
Col. Polanco, C.P. 11550
Mexico, D.F.
(525) 255-1009
SCHEDULES AND EXHIBITS INTENTIONALLY OMITTED.
13
<PAGE>
EXHIBIT 10.72.1
FINAL ESCROW AGREEMENT
----------------------
THIS FINAL ESCROW AGREEMENT is made and effective as of the twenty-fourth
day of May, 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 Final Agreement for Purchase of Assets dated
as of April 18, 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 1,724,000 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 1,724,000 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
<PAGE>
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.
1.4 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
<PAGE>
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, 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.
<PAGE>
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
<PAGE>
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.
(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.
<PAGE>
(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.
<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.
<PAGE>
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.
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 MAY 24, 1999. A COPY OF WHICH IS ON FILE AT THE CORPORATION'S
PRINCIPAL OFFICE.
<PAGE>
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
<PAGE>
EXHIBIT 10.74
AGREEMENT FOR PURCHASE OF STOCK
THIS AGREEMENT FOR PURCHASE OF STOCK is made and effective as of the first
day of August, 1999, by and among those individuals whose names appear on the
signature pages under the caption "Shareholders" (collectively, the
"Shareholders"), TAG MEX, INC., a California corporation, and NO! JEANS, INC., a
California corporation (collectively, the "Purchasers"), ANTONIO HADDAD HADDAD
as the paying agent for the Shareholders (the "Paying Agent") and, with respect
only to Section 6.19, TARRANT APPAREL GROUP, a California corporation (the
"Parent"), with respect to the following facts:
A. Industrial Exportadora Famian, S.A. de C.V. and Coordinados Elite,
S.A. de C.V., corporations formed under the laws of the United Mexican
States (the "Companies"), are engaged in the production of apparel.
B. The Shareholders own all the issued and outstanding capital stock of
the Companies.
C. The Purchasers are wholly-owned subsidiaries of the Parent.
D. The Purchasers desire to purchase from the Shareholders, and the
Shareholders desire to sell to the Purchasers, all of the issued and
outstanding shares of the capital stock of the Companies (the
"Shares"), 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 STOCK
1.1. Purchase and Sale. The Shareholders shall sell, assign, transfer,
-----------------
convey and deliver to the Purchasers, and the Purchasers shall purchase and take
from the Shareholders, on the Closing Date (as defined below) all the Shares.
Each of the Purchasers shall purchase from each of the Shareholders the number
of Shares set forth on Schedule 1.1(a).
---------------
1.2. Purchase Price.
--------------
As full payment for the Shares, the Purchasers shall pay to the
Shareholders the following (the "Purchase Price") (subject to adjustment as
provided below):
(i) the sum of U.S. $1,000,000 shall be paid in cash on the Closing
Date; and
(ii) the sum of U.S. $3,000,000 shall be evidenced by a Non-
Negotiable Promissory Note in the form attached hereto as Exhibit A (the
---------
"Note").
The Purchase Price shall be allocated among the Shareholders as set forth
on Schedule 1.2(b).
---------------
Each of the Shareholders hereby irrevocably constitutes and appoints the
Paying Agent as the agent of such Shareholder to receive any portion of the
Purchase Price payable to such Shareholder hereunder and to hold or disburse
the same as directed by such Shareholder. The Purchasers shall be entitled to
rely on any notice, certificate, affidavit, letter, document or other
communication which they believe to be genuine and to have been signed or sent
by the Paying Agent with respect to the payment of any portion of the Purchase
Price, and may rely on statements contained therein without further inquiry
or investigation.
1
<PAGE>
Notwithstanding anything to the contrary contained herein, the Purchasers
shall have the right to set-off against any amount otherwise due pursuant to
Section 1.2(a) any obligation of the Shareholders to the Purchasers under this
Agreement or any agreement or instrument delivered pursuant hereto, including,
but not limited to, a claim for indemnification or contribution under Section
6.2 (a "claim"); provided, however, that the Purchasers first shall have
--------
delivered to the Shareholders 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
Purchasers, 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 Purchasers shall have the right, but not the obligation, to pay any
amount or to perform any obligation of any of the Shareholders if the
Purchasers, in their sole and absolute discretion, determines that the failure
to pay such amount or to perform such obligation could have a material adverse
effect on the Companies or the business of the Purchasers associated therewith;
provided, however, that before the Purchasers shall pay any such amount or
--------
perform any such obligation they first shall notify the respective Shareholder
in writing of their intention to do so and shall give such Shareholder ten (10)
days to cure or contest such failure. The Purchase Price shall be reduced by
the cost to the Purchasers of any such amount paid or obligation performed.
The Purchasers shall have the right (i) to set off any such amount or cost
against any portion of the Purchase Price then payable or (ii) to demand that
the Shareholders, jointly and severally, reimburse the Purchasers therefor
promptly on demand, and the Shareholders, jointly and severally, shall do so.
The Purchasers' rights under this Section 1.2(f) shall be in addition to any
other rights or remedies of the Purchasers under this Agreement or applicable
law.
1.3. Closing. The purchase and sale of the Shares contemplated by this
-------
Agreement shall take place at 10:00 A.M. (local time) on August 24, 1999 at the
offices of Sheppard, Mullin, Richter & Hampton, LLP, 333 South Hope Street,
Forty-Eighth 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 Shares 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 Shares contemplated by this
Agreement may be terminated by such party after August 31, 1999, if such
purchase and sale shall not have occurred by the close of business on that date,
providing the terminating party is not in default of any of its obligations
hereunder. On the Closing Date, the Shareholders shall deliver to the Purchasers
the certificates evidencing all the Shares, duly endorsed for transfer to the
Purchasers in proportion to their respective interests therein or accompanied by
stock assignments separate from certificates duly executed in favor of the
Purchasers, against receipt of the Purchase Price then payable pursuant to
Section 1.2(a)(i) and the Note. 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.
1.4. Employees. On the date hereof, Tag Mex, Inc. shall offer to each of
----------
the key employees of the Companies listed on Schedule 1.4 (the "Key Employees")
-------------
employment on an "at will" basis and with such annual salary as are set forth
thereon, all on the terms and conditions set forth in the Employment Agreements
(as defined below).
2. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
--------------------------------------------------
The Shareholders, jointly and severally, hereby represent and warrant
to the Purchasers that the statements set forth in Sections 2.1 through 2.20 are
true and correct.
2.1. Authority to Enter Agreement and Enforceability. Each of the
-----------------------------------------------
Shareholders has all requisite right, power and authority to execute, deliver
and perform his or her 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 to the Purchasers of the
Shares owned by such Shareholder, 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 each of the Shareholders 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
2
<PAGE>
and instruments contemplated hereby to which any Shareholder is a party is a
legal, valid and binding agreement of such Shareholder and is enforceable
against such Shareholder in accordance with its terms.
2.2. Organization and Standing. Each of the Companies is a corporation
-------------------------
duly organized, validly existing and in good standing under the laws of the
United Mexican States, with all requisite power and authority (corporate and
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 Shareholders own all the issued and
-------------------
outstanding shares of the capital stock of the Companies free and clear of any
liens, claims, encumbrances, security interests, equities, restrictions on
transfer, preemptive rights or other defects in title of any kind or description
(a "lien"). 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 Companies, and there are no securities
outstanding or in existence which are convertible into or exchangeable for
capital stock or other securities of the Companies. Upon the Closing Date, the
Purchasers shall receive from the Shareholders good and marketable title to the
Shares free and clear of all liens. The number of shares of the capital stock of
each of the Companies owned by each of the Shareholders is set forth on Schedule
--------
2.3.
- ----
2.4. Trademarks, Patents, Etc. The Companies use and own no trade names,
-------------------------
trademarks, patents, copyrights or registrations or applications therefore in
connection with, and none is required for, the businesses of the Companies as
presently conducted. The Companies are not infringing any trade name,
trademark, patent, copyright or other similar right of any third party in
connection with their businesses.
2.5. Financial Statements. Schedule 2.5A hereto contains (i) the audited
-------------------- -------------
combined balance sheet of the Companies as of December 31, 1998, the audited
combined statements of income, changes in shareholders' equity and changes in
financial position of the Companies for the twelve month period then ended and
the notes thereto and the report of independent auditors (Mancera, S.C.) thereon
and (ii) the unaudited combined balance sheet of the Companies as of June 30,
1999 and the unaudited combined statements of income of each of the Companies
for the six months then ended. Except as set forth on Schedule 2.5B, the
-------------
foregoing financial statements (i) were prepared in accordance with generally
accepted accounting principles consistently applied throughout the period and
(ii) fairly present the Companies' consolidated financial condition and results
of operations as at the dates and for the periods therein specified, subject, in
the case of such unaudited financial statements, to normal year-end adjustments
(the effect of which will not, individually or in the aggregate, be materially
adverse) and the absence of notes. On the date hereof, the Companies have no
material liabilities or obligations, whether contingent or absolute, direct or
indirect, or matured or unmatured, which are not shown or provided for on the
June 30, 1999 balance sheet or set forth on Schedule 2.5B hereto, and the
-------------
Shareholders do not know of any basis for the assertion of any such liabilities
or obligations.
2.6. Tax Matters. The Companies have 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. As of the
date hereof, the Companies are not the beneficiary of any extension of time to
file any tax return or pay any taxes and have no liability with respect to taxes
of any kind, whether or not assessed. The Companies have properly registered
before all federal, state and local tax authorities and the Sistema Unico de
Aportaciones ("SUA"), including the Instituto Mexicano del Seguro Social
("IMSS"), Instituto del Fondo Nacional para la Vivienda de los Trabajadores
("Infonavit"), and Sistema de Ahorro Para El Retiro ("SAR"). The term "taxes"
shall include, but is not limited to, income taxes, value added taxes, asset
taxes, payroll taxes, import duties, real property taxes, contributions payments
and assessments regarding IMSS, Infonavit and SAR.
2.7. Insurance. The Companies maintain in full force and effect insurance
---------
policies with financially sound and reputable insurers of a character usually
insured by companies engaged in the same
3
<PAGE>
or similar businesses against loss or damage of the kinds and in the amounts
customarily insured against by such companies.
2.8. Litigation. There are no suits, actions or legal, administrative,
----------
arbitration or other proceedings or investigations pending or threatened by,
against or involving the Companies or the Shareholders or any of the Companies'
officers, directors, shareholders, employees or agents.
2.9. Compliance with Laws and Other Instruments. The Companies'
------------------------------------------
businesses have been and are being conducted in accordance with all applicable
laws, ordinances, rules and regulations of all authorities. The Companies are
not in violation of, or in default under, any term or provision of their
respective Escritura Constitutiva or Estatutos Sociales (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 Companies'
businesses or assets. 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, the
respective Escritura Constitutiva or Estatutos Sociales (as amended or revised)
of the Companies, 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, contract, document,
instrument, commitment, obligation or arrangement of any kind or nature to which
any of the Companies or the Shareholders is a party or by which it, he or she is
bound.
2.10. Brokerage and Finder's Fees. The Companies and the Shareholders
---------------------------
have 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.
2.11. Employees.
---------
The Companies have fully complied with their obligations under the Ley
Federal de Trabajo, including, but not limited to, the timely payment in full
of all wages, salaries, overtime payments, vacation and vacation bonus
payments, seventh day payments, severance payments, holiday payments, Sunday
work bonuses, seniority bonuses and annual bonuses ("aguinaldo") and the timely
performance in full of all obligations relating to health and safety, training,
internal regulations, working conditions and any other legally or contractually
mandated fringe benefits or obligations.
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 Companies' businesses. The Companies have
performed all of their respective obligations required to be performed under
all such agreements and plans, and are not in default or in arrears under any
of the respective terms thereof. The Companies' relationships with all
employees or independent contractors are satisfactory.
2.12. Assets. Schedule 2.12A contains a true and complete list of all
------ --------------
tangible assets as of June 30, 1999 (including, but not limited to, all real
property, furniture, fixtures, leasehold improvements, machinery, instruments,
equipment, computers, motor vehicles, tooling, spare parts, inventory, supplies,
and other tangible personal property and assets) used in, or necessary for the
conduct of the Companies' businesses as presently conducted. Except as set forth
on Schedule 2.12B, all such assets are owned by the Companies 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. Each of the leases pursuant to which the
Companies hold any such assets is in full force and effect and is a legal, valid
and binding agreement of each party thereto and is enforceable against each
party thereto in accordance with its
4
<PAGE>
terms; each party to any such lease is in compliance thereunder; and no event
has occurred which through the giving of notice or the lapse of time could cause
or constitute a default or the acceleration of any obligation of any party
thereto or the creation of a Lien upon any such asset.
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,
results of operations or prospects of any of the Companies. Since January 1,
1999, the Companies have operated their respective businesses as now operated
and only in the ordinary course.
2.14. Inventories. All inventory of the Companies, including, but not
-----------
limited to, raw materials, are of good, usable and merchantable quality.
2.15. Environmental Matters.
---------------------
Except as set forth on Schedule 4.4, the Companies have not (i) breached or
------------
been notified by any governmental or regulatory authority that they have
breached any Environmental Law (as defined below), (ii) released any Hazardous
Substance (as defined below) or (iii) become aware of the release or presence
of any Hazardous Substance on any property owned, leased or occupied by the
Companies. There are no underground storage tanks on property owned, leased or
occupied by the Companies.
For purposes of this Section 2.15, (i) "Environmental Law" means all laws
relating to the protection of the environment, to human health and safety or to
any environmental activity, including, without limitation, (x) Ley General del
Equilibrio Ecologico y La Proteccion al Ambiente, its related regulations and
administrative orders or provisions, including, but not limited to, those
pertaining to environmental impact, hazardous waste, air pollution, water
pollution or noise pollution, and any other specific laws, regulations or
administrative orders or provisions relating to air, soil, ground or water
pollution or contamination, (y) all other requirements pertaining to the
reporting, licensing, permitting, investigation or remediation of emissions,
discharges, releases or threatened releases of any Hazardous Substance into the
air, surface water, groundwater or land, or relating to the manufacture,
processing, distribution, use, sale, treatment, receipt, storage, disposal,
transport or handling of any Hazardous Substance and (z) all other requirements
pertaining to the protection of the health and safety of employees or the
public, and (ii) "Hazardous Substance" means any substance that (x) is or
contains asbestos, urea formaldehyde foam insulation, polychlorinated
biphenyls, petroleum or petroleum-derived substances or wastes, radon gas or
related materials, (y) requires investigation, removal or remediation under any
Environmental Law, or is defined, listed or identified as a "hazardous waste"
or "hazardous substance" thereunder or (z) is toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous or is regulated by any governmental authority or Environmental Law.
2.16. Agreements. Schedule 2.16 contains a complete and correct list of
---------- -------------
all leases, contracts, agreements and commitments, whether written or oral, to
which any of the Companies is a party or by which it is bound. Each such
agreement is in full force and effect and is a legal, valid and binding
agreement of each party thereto and is enforceable against each party thereto in
accordance with its terms; each party thereto is in compliance thereunder; and
no event has occurred which through the giving of notice or the lapse of time
could cause or constitute a default or the acceleration of any obligation of any
party thereto or the creation of a lien or encumbrance upon any assets of the
Companies.
2.17. Customer Orders. Schedule 2.17 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).
2.18. Facilities. All real property and the building and improvements
----------
thereon used by the Companies (the "Facilities") are sufficient for the conduct
of the businesses of the Companies as now
5
<PAGE>
conducted. On the Closing Date, the Companies will have the right under valid
existing leases or other agreements to occupy and use all Facilities. Neither
the whole nor any portion of the Facilities has been condemned, requisitioned or
otherwise taken by any governmental authority, and the Companies have not
received any notice that any such condemnation, requisition or taking is
threatened, which condemnation, requisition or taking would preclude or
materially impair the current use thereof. All Facilities are in satisfactory
condition and have been reasonably maintained, normal wear and tear excepted.
All Facilities have received all required approval of governmental authorities
(including, without limitation, permits and a certificate of occupancy or other
similar certificate permitting lawful occupancy of the Facilities) required in
connection with the operation thereof and have been operated and maintained in
accordance with applicable laws, rules and regulations. All Facilities are
supplied with utilities (including, without limitation, water, sewage, disposal,
electricity, gas and telephone) and other services necessary for the operation
of such Facilities as currently operated. The improvements constructed on the
Facilities, including, without limitation, all leasehold improvement, and all
fixtures, equipment and other tangible assets owned, leased or used by the
Companies at the Facilities are (i) insured to the extent and in a manner
customary in the industry, (ii) structurally sound with no known material
defect, (iii) in good operation, condition and repair, subject to ordinary wear
and tear, (iv) not in need of maintenance or repair except for ordinary routine
maintenance and repair the cost of which would not be material, (v) sufficient
for the operation of the Companies' businesses as presently conducted and (vi)
in conformity with all applicable laws, ordinances, orders, regulations and
other requirements relating thereto currently in effect.
2.19. Affiliate Transactions. Since January 1, 1999, there has been no
----------------------
transaction (an "affiliate transaction") between either of the Companies and any
of their officers, directors or shareholders (or any person in which any of them
has a financial interest), including, but not limited to, any loan or any
distribution.
2.20. Material Misstatements or Omissions. No representations, warranties
-----------------------------------
or information furnished by the Companies or the Shareholders to the Purchasers
or any of their employees or agents, including, but not limited to, Mancera,
S.C., 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
Companies or the Shareholders necessary to make the statements and facts
contained therein not misleading. The English translations of all documents
provided by the Companies or the Shareholders to the Purchasers or any of their
employees or agents, including, but not limited to, Mancera, S.C., are true and
correct.
3. REPRESENTATION AND WARRANTIES OF THE PURCHASERS
-----------------------------------------------
The Purchasers, jointly and severally, represent and warrant to the
Shareholders that the statements set forth in Sections 3.1 through 3.3 hereof
are true and correct.
3.1. Authority to Enter Agreement and Enforceability. Each of the
-----------------------------------------------
Purchasers 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 each of the Purchasers 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 each of the Purchasers and
is enforceable against it in accordance with its terms.
3.2. Compliance with Laws and Other Instruments. 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 either of the Purchasers 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 Purchasers.
6
<PAGE>
3.3. Brokerage and Finder's Fees. The Purchasers have 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.
4. COVENANTS
---------
4.1. Operation of the Companies.
--------------------------
During the period from the date of this Agreement to the Closing Date, the
Shareholders shall cause the Companies to operate their businesses as now
operated and only in the ordinary course except as otherwise provided in
Section 4.1(b). By way of illustration only and not limitation, the
Shareholders shall cause the Companies to take each such action as is set forth
in Schedule 4.1 hereto.
------------
On or before the Closing Date the Companies shall transfer to the
Shareholders all real property currently owned by the Companies subject to the
leases described in Section 5.1(f). In the event that the Companies are not
able to transfer all real property currently owned by them to the Shareholders
on or before August 31, 1999, but all conditions precedent to the obligation of
the parties to consummate the transactions contemplated by this Agreement have
been satisfied (other than such transfer and the execution and delivery of the
leases relating to such real property described in Section 5.1(f)), the
Purchasers may elect to consummate such transactions notwithstanding anything
to the contrary contained herein; provided, however, that (i) after the Closing
--------
Date the Purchasers shall use all reasonable commercial efforts to cause the
Companies to transfer such real property to the Shareholders as quickly as
practicable and (ii) concurrently with such transfer the Shareholders shall
cause to be executed and delivered the leases thereon described in Section
5.1(f). All costs and expenses relating to the transfer of real property
pursuant to this Section 4.1(b), including, but not limited to, any transfer
tax payable on the value of land and buildings, shall be borne by the
Shareholders.
4.2. Access to Information. The Shareholders shall cause the Companies to
---------------------
give to the Purchasers and their counsel, accountants and other representatives
full access during normal business hours throughout the period from the date of
this Agreement to the Closing Date to all of their property, assets, books and
records and all employees, independent contractors and agents, and to furnish
the Purchasers during such period with all such information concerning their
businesses as the Purchasers may reasonably request. No investigation or inquiry
made by or on behalf of the Purchasers hereunder shall in any way affect or
lessen the representations and warranties made by the Shareholders under this
Agreement.
4.3. Release of Liens. On or before August 31, 1999, the Shareholders
----------------
shall cause those Liens set forth on Schedule 2.12B to be released.
--------------
4.4. Environmental Matters.
---------------------
The Shareholders promptly after the Closing Date shall commence, and shall
cause to be performed, at the Shareholders' sole cost and expense, all
preventative and corrective actions required by any governmental or regulatory
authority in connection with, relating to or affecting the businesses of the
Companies, including, but not limited to, those preventative and corrective
actions described on Schedule 4.4 and the various audit reports, audit plans,
------------
administrative resolutions, minutes, executive summaries and other books,
records and documents referred to therein. The Purchasers shall cause the
Companies to reimburse the Shareholders for such costs and expenses incurred by
them in performing, or causing to be performed, any preventative or corrective
actions described on Schedule 4.4.
-------------
(b) The Shareholders promptly from time to time after the Closing Date at
the request of the Purchasers, at the Shareholders' sole cost and expense,
shall (i) remedy any breach of any Environmental Law arising before the date
hereof in connection with or related to the businesses of the Companies or (ii)
obtain the release of any liability therefor from the appropriate governmental
or regulatory authority, in each case without any material condition or
restriction on the operation of the businesses of the Companies, which remedy
or release shall be acceptable to the Purchasers in all material respects.
7
<PAGE>
5. CONDITIONS PRECEDENT
--------------------
5.1. Conditions Precedent to the Obligations of the Purchaser. The
--------------------------------------------------------
obligation of the Purchasers 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
Purchasers in writing):
(a) All representations and warranties of the Shareholders contained in
this Agreement shall be true and correct in all respects on the date hereof and
as of the Closing Date as if made at and as of such date.
(b) Each of the Shareholders shall have performed and satisfied in all
respects all covenants and conditions required by this Agreement to be
performed or satisfied by him or her 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
Purchasers, 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
Purchasers' operation of the businesses of the Companies.
(d) Each of the Key Employees shall have executed and delivered to Tag Mex,
Inc. an employment agreement in the form of and containing the terms and
conditions set forth in Exhibit B hereto (an "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 either of the Companies since January 1, 1999.
(f) The owner of each of the premises listed on Schedule 5.1(f) shall have
---------------
executed and delivered to the Companies a lease of such premises, in the form
and containing the terms and conditions set forth in Exhibit C hereto;
---------
provided, however, that the rent on such premises and other selected terms of
--------
such leases shall be as set forth on Schedule 5.1(f).
------
8
<PAGE>
5.2. Conditions Precedent to the Obligations of the Shareholders. The
-----------------------------------------------------------
obligation of the Shareholders 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
Shareholders in writing):
(a) All representations and warranties of the Purchasers contained in this
Agreement shall be true and correct in all respect on the date hereof and as of
the Closing Date as if made at and as of such date.
(b) The Purchasers shall have performed and satisfied in all respects all
covenants and conditions required by this Agreement to be performed or
satisfied by them 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
Shareholders, 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) Tag Mex, Inc. shall have executed and delivered to the Key Employees
the Employment Agreements.
(e) The Purchasers shall have executed and delivered to the Shareholders a
pledge agreement in the form of and containing the terms and conditions set
forth in Exhibit E hereto.
---------
6. MISCELLANEOUS
-------------
6.1. 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
consummation of the transaction contemplated hereby notwithstanding any
investigations, inspections, examinations or audits made by or on behalf of any
party.
6.2. Indemnification.
---------------
The Shareholders (the "Indemnifying Parties"), jointly and severally, shall
indemnify, defend and hold harmless the Purchasers and their 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 his or her representations, warranties,
covenants or commitments under this Agreement or any agreement or instrument
delivered in connection herewith, (ii) the conduct of the Companies' businesses
prior to the date hereof, (iii) any chargebacks or returns by any customer for
products sold by the Companies, or (iv) any preventative or corrective actions
described in Section 4.4(a) or any breach of any Environmental Law or release
described in Section 4.4(b). 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
9
<PAGE>
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. The obligation to advance or pay promptly on demand all
amounts as they are incurred shall exist irrespective of the ultimate final
judicial determination, and in the event of a dispute about amounts owed, such
amounts shall be advanced as they are incurred pending resolution and final
judicial determination.
The Purchasers (the "Indemnifying Parties") shall indemnify, defend and
hold harmless, the Shareholders and their respective employees, affiliates,
agents, successors and assigns (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
representations, warranties, covenants or commitments under this Agreement or
(ii) the conduct of the Purchasers' business after the Closing Date.
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, (ii) if, in the reasonable judgment of the
Indemnified Party, based upon the written advice of counsel, a conflict of
interest may exist between the Indemnified Party and any of the Indemnifying
Parties, the Indemnifying Parties shall not have the right to assume such
defense on behalf of such Indemnified Party, and (iii) the failure to so notify
the Indemnifying Parties shall not relieve the Indemnifying Parties from any
liabilities that they may have hereunder or otherwise, except to the extent
that such failure so to notify the Indemnifying Parties materially prejudices
the rights of the Indemnifying Parties. If the Indemnifying Parties shall,
within a reasonable time after such 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 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.
6.3. 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.
6.4. 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.
10
<PAGE>
6.5. 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.
6.6. 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.
6.7. 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.
6.8. 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.
6.9. 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.
6.10. 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.
6.11. 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.
6.12. 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. 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.
6.13. 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.
6.14. Consent to Jurisdiction. Subject to Section 6.12, 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 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, the State of California or the United Mexican States (or any
other courts to the jurisdiction of which such party is or may be subject) by
11
<PAGE>
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.
6.15. 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.
6.16. 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.
6.17. Taxes. The Shareholders shall pay timely any transfer, sales or
-----
other taxes which may become due or payable by virtue of the transactions
contemplated by this Agreement.
6.18. Obligation of the Parent. The Parent shall cause the Purchasers to
------------------------
timely perform their obligations under the Note.
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first set forth above.
Purchasers: TAG MEX, INC.
By /s/ Gerard Guez
-------------------------------------
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Telecopier: (323) 881-0368
NO! JEANS, INC.
By /s/ Gerard Guez
-------------------------------------
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California 90023
Telecopier: (323) 881-0368
Shareholders:
/s/ Antonio Haddad Haddad
-------------------------------------
ANTONIO HADDAD HADDAD
Calle Guillermo Prieto No. 200
Fraccionamiento Reforma, C.P. 75770
Tehuacan, Puebla
/s/ Miguel Angel Haddad Yunes
-------------------------------------
MIGUEL ANGEL HADDAD YUNES
Calle Reforma Norte No. 131
Colonia Centro, C.P. 75770
Tehuacan, Puebla
/s/ Mario Alberto Haddad Yunes
-------------------------------------
MARIO ALBERTO HADDAD YUNES
Calle Guillermo Prieto No. 200
Fraccionamiento Reforma, C.P. 75770
Tehuacan, Puebla
/s/ Marco Antonio Haddad Yunes
-------------------------------------
MARCO ANTONIO HADDAD YUNES
Calle Miguel de Cervantes Saavedra No. 170
Fraccionamiento El Mollino, C.P. 75699
Tehuacan, Puebla
13
<PAGE>
/s/ Rosa Maria Yunes Haddad
-------------------------------------
ROSA MARIA YUNES HADDAD
Calle Guillermo Prieto No. 200
Fraccionamiento Reforma, C.P. 75770
Tehuacan, Puebla
/s/ Maria Andrea Haddad Yunes
-------------------------------------
MARIA ANDREA HADDAD YUNES
Calle Guillermo Prieto No. 200
Fraccionamiento Reforma, C.P. 75770
Tehuacan, Puebla
Parent: TARRANT APPAREL GROUP
By /s/ Gerard Guez
-------------------------------------
Authorized Representative
3151 East Washington Boulevard
Los Angeles, California
Telecopier: (323) 881-0368
14
<PAGE>
SCHEDULES INTENTIONALLY OMITTED.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,032,928
<SECURITIES> 0
<RECEIVABLES> 62,601,287
<ALLOWANCES> 2,114,260
<INVENTORY> 67,136,206
<CURRENT-ASSETS> 145,488,497
<PP&E> 84,932,214
<DEPRECIATION> 5,808,725
<TOTAL-ASSETS> 256,809,690
<CURRENT-LIABILITIES> 114,738,932
<BONDS> 0
0
0
<COMMON> 70,743,412
<OTHER-SE> 67,170,630
<TOTAL-LIABILITY-AND-EQUITY> 256,809,690
<SALES> 193,825,258
<TOTAL-REVENUES> 194,345,534
<CGS> 158,828,914
<TOTAL-COSTS> 158,828,914
<OTHER-EXPENSES> 17,338,872
<LOSS-PROVISION> 72,963
<INTEREST-EXPENSE> 2,031,243
<INCOME-PRETAX> 16,146,505
<INCOME-TAX> 5,895,000
<INCOME-CONTINUING> 10,251,505
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,251,505
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.63
</TABLE>
