TARRANT APPAREL GROUP, 10-K405, 1999-03-09

TARRANT APPAREL GROUP
10-K405, 1999-03-09
WOMEN'S, MISSES', AND JUNIORS OUTERWEAR

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As filed with the Securities and Exchange Commission on March 9, 1999

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1998
or

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from to

Commission File Number: 0-26430

TARRANT APPAREL GROUP
(Exact name of registrant as specified in its charter)

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<S> <C>
California 95-4181026
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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3151 East Washington Boulevard
Los Angeles, California 90023
(Address of principal executive offices) (Zip code)

(Registrant's telephone number, including area code): (323) 780-8250

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

As of March 1, 1999, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was approximately $241,700,000, based upon
the closing price of the Common Stock on that date.

Number of shares of Common Stock of the registrant outstanding as of March 1,
1999: 13,836,955.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with
Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 1999 Annual Meeting are incorporated by reference into Part III of
this Report. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's fiscal year
ended December 31, 1998.

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TABLE OF CONTENTS

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Page
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Item 1. BUSINESS....................................................... 3
General........................................................ 3
Business Strategy.............................................. 4
Acquisitions................................................... 5
Vertical Integration........................................... 6
Products....................................................... 7
Customers...................................................... 7
Design, Merchandising and Sales................................ 8
Sourcing....................................................... 9
Backlog........................................................ 11
Import Restrictions............................................ 12
Competition.................................................... 13
Employees...................................................... 13

Item 2. PROPERTIES..................................................... 14

Item 3. LEGAL PROCEEDINGS.............................................. 14

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 14

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 15
NASDAQ Listing................................................. 15
Dividend Policy................................................ 15
Stock Split.................................................... 15

Item 6. SELECTED FINANCIAL DATA........................................ 16

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 17
General........................................................ 17
Factors That May Affect Future Results......................... 17
Results of Operations.......................................... 21
Quarterly Results of Operations................................ 23
Liquidity and Capital Resources................................ 23

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 25

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 25

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 25

Item 10. DIRECTORS AND EXECUTIVE OFFICERS............................... 26

Item 11. EXECUTIVE COMPENSATION......................................... 26

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 26

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 26

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
K.............................................................. 27
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PART I

Item 1. BUSINESS

General

This 1998 Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Those statements include statements regarding the intent,
belief or current expectations of the Company and its management. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-
looking statements. Such risks and uncertainties include, among other things,
competitive and economic factors in the textile and apparel markets, raw
materials and other costs, weather-related delays, general economic conditions
and other risks and uncertainties that may be detailed herein.

Tarrant Apparel Group (the "Company"), a leading provider of private label
casual apparel, primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of
and selling casual, moderately-priced apparel for women, men and children,
under private label. In 1998, management responsibilities were divided between
two operating divisions, one responsible for the production of "fashion"
garments and the other for "basic" garments. Since 1988, when the Company
began designing and supplying private label denim jeans to a single specialty
retail store chain, it has successfully expanded its product lines and built a
private label business which during 1998 served over 20 customers. The
Company's current products are manufactured in a variety of woven and knit
fabrications and include jeanswear, casual pants, t-shirts, shorts, blouses,
shirts and other tops, dresses, leggings and jackets. See "Business--Products"
and "--Customers."

Over the past five years, the Company has achieved a compound annual growth
rate in net sales of approximately 20% from $177.1 million in 1994 to $378.2
million in 1998. Pre-tax income has risen approximately 50% on a compound
annual basis, from $7.6 million in 1994 to $37.1 million in 1998.

The Company continues to geographically diversify its worldwide sourcing
operations. Commencing in the second 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.
The gross sales of products sourced in Mexico was $103.7 million in 1998.

On February 22, 1999, the Company agreed to acquire a denim mill in Puebla,
Mexico with an annual capacity of approximately 18 million meters of denim.
The purchase price for such mill will consist of $22 million in cash payable
on May 6, 1999 and two million shares of the Common Stock of the Company. The
Company anticipates that this acquisition will be consummated on or about
April 1, 1999. See "--Vertical Integration" and "Note 16 to Notes to
Consolidated Financial Statements--Subsequent Events--Acquisitions."

On December 2, 1998, the Company contracted to acquire a turn-key facility
being constructed near Puebla, Mexico by an affiliate of the seller of the
denim mill described above. This facility is ultimately expected to have an
annual capacity of approximately 18 million meters of twill and will also
house ancillary facilities. Construction of this facility commenced in the
third quarter of 1998, and it is anticipated that the Company will take
possession of this facility by the year 2000. The Company anticipates that the
cost of this facility will be approximately $75 million. See "--Vertical
Integration" and "Note 16 to Notes to Consolidated Financial Statements--
Subsequent Events--Acquisitions."

The Company has no previous history of owning and operating fabric
production facilities and has purchased textile raw materials from third party
sources in the past.

On July 2, 1998, the Company acquired Rocky Apparel, L.P. ("Rocky") which
designs, contracts for the manufacture of and sells private label apparel for
men and women to national retailers, including Abercrombie

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& Fitch and three divisions of The Limited, Inc. ("The Limited"). See "--
Acquisitions" and "Note 5 to Notes to Consolidated Financial Statements--
Acquisitions."

On February 23, 1998, the Company acquired certain assets of Marshall Gobuty
International U.S.A., Inc. and MGI International Limited (collectively, "MGI")
which design, contract for the manufacture of and sell private label apparel
for men and boys to national retailers, including J.C. Penney. See "--
Acquisitions" and "Note 5 to Notes to Consolidated Financial Statements--
Acquisitions."

Business Strategy

Management believes that the following trends currently are shaping apparel
retailing and manufacturing:

. The increasing acceptance of casual apparel in the workplace and
emphasis on a casual, active lifestyle has increased the demand for
casual, moderately-priced, private label products.

. Consolidation among apparel retailers has increased their ability to
demand value-added services from apparel manufacturers, including
fashion expertise, rapid sourcing, just-in-time delivery and favorable
pricing.

. A decline in brand loyalty and increased competition among retailers due
to consolidation have resulted in an increased demand for private label
apparel which generally offers retailers higher margins and permits them
to differentiate their products.

. The North American Free Trade Agreement ("NAFTA") has reduced many trade
barriers that previously limited apparel production in Mexico. Because
of competitive labor costs and shorter transportation distances, Mexico
represents a cost efficient and timely alternative for certain types of
apparel production.

. The current fashion cycle has increased the demand for apparel
manufacturers who have demonstrated their ability to rapidly identify
changes in fashion trends.

The Company's strategy to take advantage of these trends to become a
principal value-added supplier of casual, moderately-priced, private label
apparel includes the following key elements:

. The Company believes that it has established a reputation with its
customers as a fashion resource--a manufacturer that is capable of
designing and producing a broad range of quality merchandise and
reacting rapidly to changing fashion trends.

. The Company has developed a diversified network of international
contract manufacturers and fabric suppliers which enables the Company to
accept orders of varying size and delivery schedules and to produce a
broad range of garments at varying prices depending upon lead time and
other requirements of the customer.

. The Company seeks to develop an in-depth understanding of the fashion
and pricing strategies of its customers and to support those strategies
with its design expertise, sample-making capability and ability to
assist customers in market-testing designs by the rapid production of
small, "test order" quantities of products.

. The Company has commenced the vertical integration of its business
through the development and acquisition of fabric and production
capacity in Mexico. The Company believes that this strategy will
increase its production capacity, increase its control over the
production process, lower costs and shorten lead times.

. The Company's size, access to public capital and ability to use its
stock as currency in acquisitions provides the Company flexibility not
afforded to other, smaller private label manufacturers.

The Company believes that by employing these strategies it can attract new
customers and increase sales to existing customers.

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Acquisitions

Rocky

On July 2, 1998, the Company purchased the partnership interests of Rocky
Apparel, L.P., a Delaware limited partnership ("Rocky"). Rocky operates
manufacturing facilities in Mississippi and also sources garments in Mexico.
The purchase price consisted of $7.4 million in cash and 81,000 shares of the
Common Stock of the Company, valued at $1.4 million, paid on closing. In
addition, the Company was required to repay $3.4 million of debt to one of the
sellers on closing and to guarantee the bank indebtedness of Rocky in the
amount of $5.0 million. The Company was granted a security interest in the
81,000 shares to secure the performance of obligations under the purchase
agreement, including, without limitation, the indemnification obligations.
This transaction has been accounted for as a purchase, and the purchase price
has been allocated based on the fair value of assets acquired and liabilities
assumed. The excess of cost over fair value of net assets acquired is being
amortized over 15 years. The operations of Rocky have been included with those
of the Company commencing on July 1, 1998.

Rocky designs, develops and contracts for the manufacture of men's, women's
and children's denim apparel, for Abercrombie & Fitch, Limited Stores, Express
and Structure. The purchase price was financed by the Company from a new
credit facility and cash flow from operations. For a description of such
credit facility, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

In connection with this acquisition, Rocky extended the term of an existing
employment agreement with Gabriel Zeitouni, the President and a former
principal owner of Rocky. Under this employment agreement, Mr. Zeitouni will
continue to be employed as the President of Rocky for a term ending on
December 31, 2002, unless extended by the mutual agreement of the Company and
Mr. Zeitouni, will be paid a base salary which increases from $350,000 for
1998 to $450,000 for 2002 and will receive cash bonuses based upon certain
performance criteria. Also, Mr. Zeitouni was awarded a stock option for 75,000
shares of the Company's Common Stock which vests periodically through December
31, 2002 subject to certain performance criteria. In the event the Company
terminates his employment without cause, Mr. Zeitouni shall be entitled to
receive (i) a lump sum payment equal to his base salary for the shorter of the
balance of the term or two years and (ii) accrued bonus, if any, through the
date of termination. In the event the Company terminates Mr. Zeitouni's
employment with cause, the Company is obligated to pay the compensation
required by the agreement only through the date of termination. In addition,
Mr. Zeitouni has agreed not to compete with the Company during the two years
following the termination of his employment for cause.

MGI

On February 23, 1998, the Company purchased certain assets of MGI
International Limited, a Turks and Caicos corporation. The assets purchased
consisted primarily of inventory. The purchase price consisted of (i) $4.6
million, together with an amount equal to the seller's cost of the inventory
purchased, paid in cash on closing and (ii) $500,000 paid on July 21, 1998,
together with interest at 7% per annum.

On February 23, 1998, the Company also purchased certain assets of Marshall
Gobuty International U.S.A., Inc., a California corporation ("MGI USA"). The
assets purchased consisted primarily of inventory. The purchase price
consisted of (i) $500,000, together with an amount equal to the seller's cost
of the inventory purchased, paid in cash on closing and (ii) $500,000 paid on
July 21, 1998, together with interest at 7% per annum.

MGI International Limited and MGI USA (collectively, "MGI") each designs,
develops and contracts for the manufacture of men's apparel, including knit
and woven tops, shirts and outerwear (including jackets), for national chain
department stores, including J.C. Penney and Goody's. The purchase price was
financed by the Company from its cash flow from operations. This transaction
has been accounted for as a purchase and the

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purchase price has been allocated based on the fair value of the assets
acquired and liabilities assumed. The excess of cost over fair value of net
assets acquired is being amortized over five years. The operations of MGI have
been included with those of the Company commencing on February 23, 1998.

Vertical Integration

Acquisition of Denim Mill

On February 22, 1999, the Company agreed to purchase certain assets of a
denim mill located in Puebla, Mexico with an annual capacity of 18 million
meters. The purchase price will consist of $22 million in cash payable on May
6, 1999 and two million shares (the "Shares") of the Company's Common Stock.
The Shares will be distributed to the sellers in three equal installments on
the first three anniversary dates of the closing date; 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.
Closing is anticipated to occur on or about April 1, 1999.

The Company also will 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 equal to the average
closing price for the ten trading days prior to the closing date. The Option
will vest in three equal installments on the first three anniversary dates of
the closing date 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.

Acquisition of Twill Mill and Production Facility

On December 2, 1998, the Company contracted with an affiliate of Mr. Nacif
for the construction of a turn-key facility near Puebla, Mexico for the
production of twill fabric which will also house ancillary facilities. The
purchase price of the facility shall be the sum of (i) the cost of
construction and equipment installed, which cost will not include operating
expenses, estimated to be approximately $47 million, and (ii) a promissory
note of the Company (the "Note") in the principal amount of $28 million.

The principal balance of the Note will be payable on the third anniversary
date of the closing date, and interest on the unpaid principal balance from
time to time outstanding will be payable semi-annually in arrears on each June
30 and December 31 at the rate of 7% per annum. Payment under the Note will be
subject to the right of the Company to set off any amount payable by (i) the
developer to the Company under the facility

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development agreement, including, but not limited to, any amount payable under
the indemnification provisions of the facility development agreement upon the
breach by the developer of any representations, warranties or agreements
contained in the facility development agreement, or (ii) the sellers of the
denim mill assets under the asset purchase agreement, including, but not
limited to, any amount payable under the indemnification provisions of such
agreement.

Products

In 1988, the Company received its first orders for private label women's
denim jeans from Express, a division of The Limited. While women's jeans have
historically been, and continue to be, the Company's principal product, in
recent years the Company has expanded its sales of moderately-priced, women's
apparel to include casual, denim and non-denim woven tops and bottoms and has
commenced the sale of men's apparel, including knit and woven tops, shirts and
outerwear (including jackets), as a result of the acquisition of MGI on
February 23, 1998. The Company's women's apparel products currently include
jeanswear, casual pants, t-shirts, shorts, blouses, shirts and other tops,
dresses, leggings and jackets. These products are manufactured in petite,
standard and large sizes and are sold at a variety of wholesale prices
generally ranging from less than $3.00 to over $25.00 per garment.

Over the past three years, approximately fifty percent of net sales were
derived from the sale of pants and jeans, approximately fifteen percent from
the sale of shorts and approximately ten percent from the sale of shirts. The
balance of net sales consisted of sales of dresses, jackets, leggings and
other products.

The Company, in the ordinary course of its business, regularly evaluates new
markets and potential acquisitions and believes that numerous opportunities
exist due, in part, to the adverse effect on the earnings of many apparel
companies of the recent decline in retail sales generally. Such opportunities
could include transactions involving acquisitions or brand affiliations.
Although the Company currently is evaluating several acquisitions, there are
no existing commitments with respect to any acquisition or affiliation, except
as described under "Business--Acquisitions" and "Vertical Integration."

Customers

For the year ended December 31, 1998, affiliated stores owned by The
Limited, including Express, Lerner New York, Limited Stores, Structure and
Lane Bryant, accounted for approximately two-thirds of the Company's net
sales. No other customer accounted for more than 10% of the Company's net
sales in 1998. In the same period, virtually all of the Company's sales were
of private label apparel. The Company currently serves over 20 customers which
also include Target Stores (a division of Dayton Hudson), Abercrombie & Fitch
and J.C. Penney. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."

The Company generally targets only high-volume retailers that it believes
could grow into major accounts. By limiting its customer base to a select
group of larger accounts, the Company seeks to build stronger long-term
relationships and leverage its operating costs against large bulk orders.
Although the Company continues to diversify its customer base, the majority of
any growth in sales is expected to come from existing customers, as they
consolidate their buying power over fewer key vendors.

On October 22, 1998, Limited Direct Associates LP, an entity 100% owned by
The Limited ("LDA"), acquired one million shares of the Company's Common Stock
(or approximately 7.2% of the Common Stock outstanding as of March 1, 1999)
through the exercise of an option granted by Mr. Guez and Mr. Kay, the
Chairman and President, respectively, of the Company, to LDA at the time of
the Company's initial public offering. The option granted LDA the right to
purchase 10% of the total shares of Common Stock outstanding at the time of
the initial public offering, or 1,299,998 shares, at a price of $3.60 per
share (as adjusted for a two-for-one stock split effective May 8, 1998). The
transaction was done on a cashless basis, whereby Mr. Guez and Mr. Kay
transferred ownership of one million shares to LDA and, in lieu of receiving
cash, Mr. Guez and Mr. Kay

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retained ownership of the remaining 299,998 shares. The one million shares are
subject to a lockup provision, which prohibits LDA from selling the shares
until October 9, 1999. Messrs. Guez and Kay will continue to have the right to
vote the shares for one year following the exercise of the option, and will
also have a right of first refusal to purchase such shares, subject to certain
exceptions.

The Company does not have long-term contracts with any of its customers and,
therefore, there can be no assurance that any customer will continue to place
orders with the Company of the same magnitude as it has in the past, or at
all. In addition, the apparel industry historically has been subject to
substantial cyclical variation, with consumer spending for purchases of
apparel and related goods tending to decline during recessionary periods.
Various retailers, including divisions of The Limited, have experienced
sluggish sales and declines in revenue and profits in recent periods. To the
extent that these financial difficulties continue or worsen, there can be no
assurance that the Company's financial condition and results of operations
would not be adversely affected. As a result of the importance of The Limited
to the operations of the Company, The Limited and its divisions have the
ability to exert significant influence over the Company's business decisions.

Design, Merchandising and Sales

While many private label producers only arrange for the bulk production of
styles specified by their customers, the Company not only designs garments,
but also assists some of its customers in market testing new designs. The
Company believes that its design, sample-production and test-run capabilities
give it a competitive advantage in obtaining bulk orders from its customers.
The Company also often receives bulk orders for garments it has not designed
because many of its customers allocate bulk orders among more than one
producer.

The Company has developed integrated teams of design, merchandising and
support personnel, some of whom serve on more than one team, that focus on
designing and producing merchandise that reflects the style and image of their
customers. Teams generally are divided between import and domestic sourcing
operations.

Each team is responsible for all aspects of its customer's needs, including
designing products, developing product samples and test items, obtaining
orders, coordinating fabric choices and procurement, monitoring production and
delivering finished products. In particular, the team seeks to identify
prevailing fashion trends that meet its customer's retail strategies and
design garments incorporating those trends. The team also works with the
buyers of its customer to revise designs as necessary to better reflect the
style and image that the customer wishes to project to consumers. During the
production process, the team is responsible for informing the customer about
the progress of the order, including any difficulties that might affect the
timetable for delivery. In this way, the Company and its customer can make
appropriate arrangements regarding any delay or other change in the order. The
Company believes that this team approach enables its employees to develop an
understanding of the customer's distinctive styles and production requirements
in order to respond effectively to the customer's needs.

As part of the Company's merchandising strategy, the Company produces, at
its own expense, one or more samples of garments embodying new designs. The
Company produces samples at its facilities in Guangdong Province, China, Hong
Kong and Mexico. The Chinese facility, which has 120 employees, currently
furnishes a significant portion of the Company's sample requirements.

From time to time and at scheduled seasonal meetings, the Company presents
its samples to the customer's buyers, who determine which, if any, of those
samples will be produced on a test run or a bulk scale. Samples are often
presented in coordinated groupings or as part of a product line. Some
customers, particularly specialty retail stores such as divisions of The
Limited, may require that a product be "tested" before placing a bulk order.
Testing involves the production of as few as several hundred copies of a given
sample in different size, fabric and color combinations. The customer pays for
these test items, which are placed in selected stores to gauge consumer
response. The production of test items enables the Company's customers to
identify garments that may appeal to consumers and also provides the Company
with important information regarding the cost and feasibility of the bulk
production of the tested garment. If the test is determined to be successful,
the Company generally

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receives a significant percentage of the customer's total bulk order of the
tested item. In addition, as is typical in the private label business, the
Company receives bulk production orders to produce merchandise designed by its
competitors or other designers, since most customers allocate bulk orders
among a number of suppliers.

Sourcing

General

When bidding for or filling an order, the Company's international sourcing
network enables it to choose from among a number of suppliers and
manufacturers based on the customer's price requirements, product
specifications and delivery schedules. Historically, the Company has
manufactured its products through independent cutting, sewing and finishing
contractors located primarily in Hong Kong and China and has purchased its
fabric from independent fabric manufacturers with weaving mills located
primarily in Hong Kong and China. In recent years, the Company has expanded
its network to include suppliers and manufacturers located in a number of
additional countries, including Mexico. Key elements of the Company's sourcing
strategy include (i) continuing to expand its production of basic denim and
twill products in Mexico through both independent contractors and the
acquisition or construction of cutting, sewing and finishing facilities and
(ii) seeking to acquire or construct denim and twill weaving mills in Mexico.
The following table sets forth the percent of the Company's merchandise, on
the basis of the free on board cost at the supplier's plant ("FOB Basis"), by
country for the periods indicated:

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1996 1997 1998
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International Sourcing
Hong Kong and China..................................... 78.3% 60.5% 50.4%
Other(1)................................................ 7.7 13.7 10.0
Domestic Sourcing
United States........................................... 13.8 14.9 5.7
Mexico and Central America.............................. 0.2 10.9 33.9
</TABLE>
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(1)In 1998, such countries consisted of Thailand (3.9%), Philippines (2.5%),
UAE/Oman (1.8%) and Indonesia (0.8%).

Dependence on Contract Manufacturers

All of the Company's products, with the exception of certain test runs and
samples, currently are manufactured by independent cutting, sewing and
finishing contractors. The use of contract manufacturers and the resulting
lack of direct control over the production of its products could result in the
Company's failure to receive timely delivery of products of acceptable
quality. Although the Company believes that alternative sources of cutting,
sewing and finishing services are readily available, the loss of one or more
contract manufacturers could have a materially adverse effect on the Company's
results of operations until an alternative source is located and has commenced
producing the Company's products.

Although the Company monitors the compliance of its independent contractors
with applicable labor laws, the Company does not control its contractors or
their labor practices. The violation of federal, 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 the subject of investigations
or have been found to have violated applicable labor laws. To date, the
Company has not been subject to any sanctions that, individually or in the
aggregate, could have a material adverse effect upon the Company, and the
Company is not aware of any facts on which any such sanctions could be based.
There can be no assurance, however, that in the future the Company will not be
subject to sanctions as a result of violations of applicable labor laws by its
contractors, or that such sanctions will not have a material adverse effect on
the Company. In addition, the Company's customers require strict compliance by
their apparel manufacturers, including the Company, with applicable labor
laws. There can

9
<PAGE>

be no assurance that the violation of applicable labor laws by one of the
Company's contractors will not have a material adverse effect on the Company's
relationship with its customers.

In addition, as is customary in the industry, the Company does not have any
long-term contracts with independent fabric suppliers. The loss of any of its
major fabric suppliers could have a material adverse effect on the Company's
financial condition and results of operations until alternative arrangements
are secured.

Diversified Production Network

The Company believes that it has the ability, through its production
network, to operate on production schedules with lead times as short as 30
days. Typically, the Company's specialty retail customers attempt to respond
quickly to changing fashion trends and are increasingly less willing to assume
the risk that goods ordered on long lead times will be out of fashion when
delivered. These retailers, including divisions of The Limited, frequently
require production schedules with lead times ranging from 30 to 120 days.
Although mass merchandisers, such as Target Stores, are beginning to operate
on shorter lead times, they are occasionally able to estimate their needs as
much as six months to one year in advance for "program" business--basic
products that do not change in style significantly from season to season. The
Company's ability to operate on production schedules with a wide range of lead
times helps it to meet its customers' varying needs.

By allocating an order among different manufacturers, the Company seeks to
fill the high-volume orders of its customers, while meeting their delivery
requirements. Upon receiving an order, the Company determines which of its
suppliers and manufacturers can best fill the order and meet the customer's
price, quality and delivery requirements. The Company considers, among other
things, the price charged by each manufacturer and the manufacturer's
available production capacity to complete the order, as well as the
availability of quota for the product from various countries and the
manufacturer's ability to produce goods on a timely basis subject to the
customer's quality specifications. The Company's personnel also consider the
transportation lead times required to deliver an order from a given
manufacturer to the customer. In addition, some customers prefer not to carry
excess inventory and therefore require that the Company stagger the delivery
of products over several weeks.

International Sourcing

The Company conducts and monitors its international sourcing operations from
its offices in Hong Kong and Mexico. At January 31, 1999, the Company had
approximately 180 and 125 full-time employees in Hong Kong and Mexico,
respectively, many of whom have extensive knowledge about and experience with
sourcing and production in their respective regions, including purchasing,
manufacturing and quality control. Several times each year, members of the
Company's senior management, including local staff, visit and inspect the
facilities and operations of the Company's international suppliers and
manufacturers.

Foreign manufacturing is subject to a number of risk factors, including,
among other things, transportation delays and interruptions, political
instability, expropriation, currency fluctuations and the imposition of
tariffs, import and export controls and other non-tariff barriers (including
changes in the allocation of quotas). In addition to these risk factors, the
Company faces additional risks arising from the uncertainty regarding the
future status of Hong Kong since resumption of Chinese sovereignty on July 1,
1997, the continuation of favorable trade relations between the U.S. and China
(in particular the continuation of China's Most Favored Nation ("MFN") status
for tariff purposes), and the continuation of economic reform programs in
China which encourage private economic activity. Each of these factors could
have a material adverse effect on the Company.

While the Company is in the process of establishing business relationships
with manufacturers and suppliers located in countries other than Hong Kong or
China, the Company still primarily contracts with manufacturers and suppliers
located primarily in Hong Kong and China, and currently expects that it will
continue to do so for the foreseeable future. Any significant disruption in
the Company's operations or its relationships with its

10
<PAGE>

manufacturers and suppliers located in Hong Kong or China could have a
material adverse effect on the Company.

The Company commenced manufacturing basic denim and twill products through
independent contractors in Mexico in the second quarter of 1997, and
anticipates continuing to expand its use of manufacturing facilities in this
region. The Company believes that the further diversification of its
international sourcing network by increasing the use of manufacturing
facilities in Mexico will (i) reduce its cost of goods, (ii) enhance the
proximity of the Company's sourcing operations to the Company's customers and
the Company's executive offices, thereby improving delivery times and
increasing management's control, and (iii) lessen certain risks of doing
business in Asia. See "--Vertical Integration."

The Sourcing Process

As is customary in the industry, the Company does not have any long-term
contracts with its manufacturers. The Company typically contracts (on the
basis of a written purchase order) with one to three manufacturers to produce
a bulk order. During the manufacturing process, the Company's quality control
personnel visit each factory to inspect garments when the fabric is cut, as it
is being sewn and as the garment is being finished. Daily information on the
status of each order is transmitted from the various manufacturing facilities
to the Company's offices in Hong Kong, Mexico and Los Angeles. The Company, in
turn, keeps its customers apprised, often through daily telephone calls and
frequent written reports. These calls and reports include candid assessments
of the progress of a customer's order, including a discussion of the
difficulties, if any, that have been encountered and the Company's plans to
rectify them.

The Company often arranges on behalf of manufacturers for the purchase of
fabric from a single supplier. The Company has the fabric shipped directly to
the factory and invoices the factory for the fabric. Generally, the factories
pay the Company for the fabric with offsets against the price of the finished
goods. For its longstanding program business, the Company may purchase fabric
in advance of receiving the order, but in accordance with the customer's
specifications. By procuring fabric for an entire order from one source, the
Company believes that production costs per garment are reduced and customer
specifications as to fabric quality and color can be better controlled. The
Company's primary sources of working capital are cash flow from operations and
borrowings under the Company's bank credit facilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

Backlog

At February 23, 1999, the Company had unfilled customer orders of
approximately $137 million as compared to approximately $125 million at
February 23, 1998. The Company believes that all of its backlog of orders as
of February 23, 1999 will be filled within the current fiscal year. Backlog is
based on the Company's estimates derived from internal management reports. The
amount of unfilled orders at a particular time is affected by a number of
factors, including the scheduling of manufacturing and shipping of the product
which, in some instances, depends on the customer's demands. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments. The
Company's experience has been that the cancellations, rejections or returns of
orders have not materially reduced the amount of sales realized from its
backlog.

11
<PAGE>

Import Restrictions

Quotas

The Company imported approximately 95% of its products (on an FOB Basis) in
1998, including approximately 35% imported from Mexico. In the case of Mexico,
imports are subject to special rules under the North American Free Trade
Agreement ("NAFTA"), which limits certain types of apparel imports into the
United States from Mexico, but not nearly to the extent that imports are
restricted from countries subject to bilateral textile agreements. Most of the
remaining products imported were manufactured in a foreign jurisdiction (e.g.,
Hong Kong and China) with which the U.S. has entered into a bilateral textile
agreement that, among other restrictions, imposes specific quantitative
restraints, or "quotas," on the amounts of various categories of textiles and
apparel that can be imported into the U.S. from that foreign jurisdiction
during a particular quota year. These bilateral textile agreements also
include provisions which allow the U.S. to impose quotas on categories of
textiles and apparel not previously under quota or to "charge" (i.e., impose
deductions upon) the quotas for origin-related violations. Accordingly, the
Company's operations are subject to the restrictions imposed by these
bilateral agreements.

Until recently, the Arrangement Regarding International Trade in Textiles,
known as the Multifiber Arrangement ("MFA"), provided the international
framework for the global regulation of the textile and apparel trade. Pursuant
to the MFA, the U.S. entered into these bilateral textile agreements for the
purpose of imposing quotas on the imports of textiles and apparel. However,
under "The Final Act Embodying the Results of the Uruguay Round of
Multilateral Trade Negotiations" (the "Uruguay Round Agreement") which was
agreed to on a preliminary basis in December 1993 by 117 member nations of the
General Agreement on Tariffs and Trade ("GATT"), and enacted into U.S.
domestic law in December 1994 under the Uruguay Round Agreements Act (the
"URAA"), the MFA has been replaced by the World Trade Organization Agreement
on Textiles and Clothing (the "ATC"). Under the ATC, quotas implemented under
the MFA on the importation of textiles and apparel from countries that are
members of the World Trade Organization (the "WTO," which is the successor
organization to GATT under the Uruguay Round Agreement) will be phased out
over a ten-year period that commenced on January 1, 1995 (with the U.S.
phasing out quotas on most of the sensitive categories at the end of this
period). However, a member country may, under the Uruguay Round Agreement on
Safeguards, re-impose quotas on textiles and apparel under certain specified
conditions.

China is a signatory to the MFA, but was not a member of GATT and,
therefore, was not a party to the Uruguay Round Agreement. China has not been
admitted as a member of the WTO, although it is in the process of trying to
negotiate its accession to the WTO at this time. Because China is not a member
of the WTO, its exports of textiles and apparel to the U.S. are not covered by
the ATC. Accordingly, the U.S. continues to control imports of textiles and
apparel from China under the existing bilateral agreement between the U.S. and
China. On January 17, 1994, the U.S. and China signed a three-year agreement
which set the 1994 textile and apparel quotas from China at their 1993 levels
and increased the quota by 1.0% for each of 1995 and 1996. A new agreement, to
replace the expiring 1994 Agreement, was signed in February 1997, covering the
period January 1, 1997 to December 31, 2000. This agreement continues to
permit some growth in most quota categories.

In the event that China eventually becomes a member of the WTO, it will be
afforded the rights granted other members under the ATC, including the phase-
out of textile and apparel quotas over the ten-year period that commenced on
January 1, 1995. However, there can be no assurance that China will become a
member of the WTO, particularly since the U.S. has expressed dissatisfaction
with China's progress in opening its domestic market in a number of areas.

In 1998, products imported using Hong Kong quota accounted for approximately
35% of the Company's net sales (on an FOB Basis). Under the U.S. and Hong Kong
rules of origin currently in effect, the Company conducts certain, non-origin
conferring manufacturing operations in China for a significant portion of the
products it imports using Hong Kong quota. As part of the URAA, the U.S.
implemented new rules of origin which become effective on July 1, 1996. These
new rules of origin had little actual impact on the country of origin of the
merchandise imported by the Company. The Company is nevertheless attempting to
diversify its

12
<PAGE>

sourcing network to reduce reliance on Hong Kong sources, in part to minimize
the potential effects of this change in the rule of origin. It is also taking
steps to obtain additional quota from China in the event that these new rules
of origin result in changing the origin of the products presently subject to
Hong Kong quota.

Duties and Tariffs

Merchandise imported by the Company into the U.S. is subject to rates of
duty established by U.S. statute. In general, these rates vary, depending on
the type of product, from 3.0% to 34.6% of the appraised value of the product.
In addition to duties, in the ordinary course of its business, the Company,
from time to time, may become subject to claims by the U.S. Customs Service
for penalties, liquidated damages claims and other charges relating to import
activities. Similarly, from time to time, the Company may be entitled to
refunds from the U.S. Customs Service due to the overpayment of duties.

Products imported from China into the U.S. currently receive the same
preferential tariff treatment accorded goods from countries granted MFN
status. China's MFN status, which is granted on an annual basis, expires in
July 1999. China's MFN status has been a contentious political issue for
several years because of concerns regarding labor and human rights practices,
weapons proliferation, trade policies and failure to protect U.S. intellectual
property rights. Previous legislation attaching conditions to China's MFN
status has been passed by both houses of the Congress, but did not survive
presidential vetoes. There can be no assurance that the U.S. will not revoke
China's MFN status entirely or place greater conditions or restrictions on
this status, but absent a major deterioration in U.S.-China relations, it is
anticipated that China will maintain its MFN status. If China's MFN status
were to terminate, and Chinese origin products had to enter the U.S. without
the benefit of MFN status, such goods would be subject to significantly higher
duties than at present. Any such increased duties would increase the cost or
reduce the supply of the Company's goods imported from China. In 1998,
products imported using China quota accounted for approximately 15% of the
Company's net sales (on an FOB Basis). The Company is taking steps to
diversify its sourcing network to reduce its dependence on Chinese-origin
products.

The Company's continued ability to source products from foreign
jurisdictions may be adversely affected by additional bilateral and
multilateral agreements, unilateral trade restrictions, changes in trade
policy, significant decreases in import quotas, embargoes, the disruption of
trade from exporting countries as a result of political instability or the
imposition of additional duties, taxes and other charges or restrictions on
imports.

Competition

There is intense competition in the sectors of the apparel industry in which
the Company participates. The Company competes with many other manufacturers,
many of which are larger and have greater resources than the Company. The
Company also faces competition from its own customers and potential customers,
many of which have established, or may establish, their own internal product
development and sourcing capabilities. For example, The Limited's wholly-owned
subsidiary, Mast Industries, Inc., competes with the Company and other private
label apparel suppliers for orders from divisions of The Limited. The Company
believes that it competes favorably on the basis of design and sample
capabilities, quality and value of its products, price, the production
flexibility that it enjoys as a result of its sourcing network and vertical
integration initiatives and the long-term customer relationships it has
developed.

Employees

At January 31, 1999, the Company had approximately 440 full-time employees
in the United States, 125 in Mexico, 180 in Hong Kong and 125 in China. The
Company considers its relations with its employees to be good.

13
<PAGE>

Item 2. PROPERTIES

The Company currently conducts its operations from ten facilities, eight of
which are leased. The Company's executive offices and warehouse facilities are
located at 3151 East Washington Boulevard, Los Angeles, California 90023. The
Company leases this facility for an annual rent of $595,000 from a California
corporation which is owned by Mr. Guez and Mr. Kay. The base rent is subject
to increase on January 1, 2000 and every two years thereafter by an amount
equal to at least five percent but no greater than ten percent. The lease for
this facility, under which the Company is responsible for the payment of
taxes, utilities and insurance, terminates in December 2003 subject to a
renewal option for five additional years. The Company also leases 146,000
square feet of warehouse space in South Gate, California for an annual rent of
$170,000 from an unrelated third party. The Company also leases approximately
36,000 square feet of warehouse and office space in Hong Kong for an annual
rent of $674,000 from a Hong Kong corporation that is owned by Mr. Guez and
Mr. Kay. The base rent is subject to increase every two years in accordance
with market rates. The lease for this facility, under which the Company is
responsible for the payment of taxes, utilities and insurance, expires in June
2004. The Company leases approximately 50,000 square feet which it uses to
operate its sample-making facility in Guangdong Province, China. The lease for
this facility terminates in 2001 and the annual rent is $55,000. The Company
also owns two facilities in Ruleville, Mississippi and leases two facilities
in Greenwood, Mississippi with an aggregate of 161,000 square feet. These
facilities are production, distribution, and administrative offices, the
annual rent is $28,000 and the leases expire on and after the year 2005. The
Company also leases a 5,000 square foot showroom in New York City. The annual
rent is $104,000 and this lease expires in May, 2003. The Company also leases
1,600 square feet of office space in Tehaucan, Mexico for an annual rent of
$19,000 and this lease expires in November, 1999. See "Note 8 to Notes to
Consolidated Financial Statements" for additional information with respect to
these facilities.

On February 22, 1999, the Company agreed to acquire a 250,000 square foot
denim mill in Puebla, Mexico with an annual capacity of approximately 18
million meters of denim. In addition, on December 2, 1998, the Company
contracted to acquire a 750,000 square foot turn-key facility being
constructed near Puebla, Mexico which is ultimately expected to have an annual
capacity of approximately 18 million meters of twill. See "Item 1. Business--
Vertical Integration."

The Company believes that all of its existing facilities are well
maintained, in good operating condition and adequate to meet its current and
foreseeable needs.

Item 3. LEGAL PROCEEDINGS

On November 14, 1997, the Federal judge in the civil lawsuit brought by the
American Textile Manufacturers Institute ("ATMI") against, among others, the
Company, Mr. Guez and Mr. Kay, dismissed, with prejudice, ATMI's complaint. On
December 22, 1997, the judge granted ATMI's motion to excuse himself from the
case, and denied ATMI's motion to vacate the decision and judgment previously
entered dismissing the case. On May 21, 1998, the dismissal of ATMI's
complaint and denial of ATMI's motion to vacate the decision and judgment
previously entered was reaffirmed. On June 5, 1998, ATMI filed a motion to
appeal these decisions which is currently pending.

The Company is not involved in any other pending or threatened legal
proceedings which the Company believes could reasonably be expected to have a
material adverse effect on the its financial condition or results of
operations.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of fiscal 1998.

14
<PAGE>

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

NASDAQ Listing

The Company's Common Stock began trading on The Nasdaq Stock Market's
National Market ("NASDAQ") under the symbol "TAGS" on July 24, 1995.

The following table sets forth, for the periods indicated, the range of high
and low sale prices for the Company's Common Stock as reported by NASDAQ.

<TABLE>
<CAPTION>
Low High
------ ------
<S> <C> <C>
1997
First Quarter............................................... $ 6.13 $ 9.88
Second Quarter.............................................. $ 6.88 $ 9.00
Third Quarter............................................... $ 6.97 $ 9.63
Fourth Quarter.............................................. $ 5.75 $ 8.75
1998
First Quarter............................................... $ 7.38 $12.31
Second Quarter.............................................. $11.50 $19.50
Third Quarter............................................... $17.50 $25.50
Fourth Quarter.............................................. $13.50 $41.25
1999
First Quarter (through March 1)............................. $34.75 $43.69
</TABLE>

On March 1, 1999, the last reported sale price of the Company's Common Stock
as reported on NASDAQ was $41.50. Shareholders are urged to obtain current
market quotations for the Common Stock. As of March 1, 1999, there were 23
shareholders of record of the Company. However, proxy data indicates that
there are over 1,000 beneficial owners of shares of the Common Stock.

Dividend Policy

The Company intends to retain future earnings for use in its business and
therefore does not anticipate declaring or paying any cash dividends in the
foreseeable future. The declaration and payment of any cash dividends in the
future will depend upon the Company's earnings, financial condition, capital
needs and other factors deemed relevant by the Board of Directors.

Stock Split

On April 27, 1998, the Company announced a two-for-one stock split effective
on May 8, 1998. Accordingly, all share and per share amounts have been
adjusted to reflect this split.

15
<PAGE>

Item 6. SELECTED FINANCIAL DATA

The following selected financial data is qualified in its entirety by, and
should be read in conjunction with, the other information and financial
statements, including the notes thereto, appearing elsewhere herein.

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............... $ 177,108 $ 205,174 $ 229,861 $ 260,093 $ 378,155
Cost of sales........... 148,740 172,959 192,288 220,996 307,077
--------- --------- --------- --------- ---------
Gross profit........... 28,368 32,215 37,573 39,097 71,078
Selling and distribution
expenses............... 6,118 6,761 7,124 8,499 11,274
General and
administrative
expenses............... 12,359 13,493 13,990 13,518 19,896
Amortization of excess
of cost over fair
market value of net
assets acquired(1)..... -- -- -- -- 1,337
LDA Option(2)........... -- 1,734 -- -- --
--------- --------- --------- --------- ---------
Income from operations. 9,891 10,227 16,459 17,080 38,571
Interest expense........ (3,696) (4,003) (1,865) (1,471) (2,423)
Interest income......... 78 773 337 171 360
Other
income/(expense)(3).... 1,367 1,274 (302) 242 568
--------- --------- --------- --------- ---------
Income before provision
for income taxes and
cumulative effect of
accounting change...... 7,640 8,271 14,629 16,022 37,076
Provision for income
taxes(4)............... (597) (961) (4,627) (5,235) (12,410)
--------- --------- --------- --------- ---------
Income before cumulative
effect of accounting
change................. 7,043 7,310 10,002 10,787 24,666
Cumulative effect of
accounting change(5)... 94 -- -- -- --
--------- --------- --------- --------- ---------
Net income.............. $ 7,137 $ 7,310 $ 10,002 $ 10,787 $ 24,666
========= ========= ========= ========= =========
Net income per common
share
Basic.................. $ 0.60(6) $ 0.69(6) $ 0.77 $ 0.82 $ 1.82
Diluted................ $ 0.60(6) $ 0.69(6) $ 0.76 $ 0.80 $ 1.71
Weighted average shares
outstanding
Basic.................. 9,000 10,707 13,016 13,175 13,520
Diluted................ 9,000 10,707 13,096 13,567 14,417
<CAPTION>
As of December 31,
---------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $ 2,594 $ 23,003 $ 34,029 $ 45,304 $ 57,082
Total assets............ 44,017 57,840 63,420 71,861 153,891
Bank borrowings and
long-term obligations.. 19,313 15,940 6,810 4,288 36,694
Shareholders' equity.... 7,848 26,416 36,953 48,335 79,210
</TABLE>
- -------
(1) See "Item 1. Business--Acquisitions."
(2) On the effective date of its initial public offering, the Company
incurred a non-recurring charge to earnings related to a grant by Messrs.
Guez and Kay to Limited Direct Associates, L.P., an affiliate of The
Limited, Inc., of a four-year option (the "LDA Option") to purchase an
aggregate of 1,299,998 shares, or 10% of the Company's Common Stock, at
an exercise price equal to $3.60 per share. See "Item 1. Business--
Customers" and "Note 15 to Notes to Consolidated Financial Statements."
(3) Major components of Other income/(expense) (as presented above) include
fees paid by affiliate entities for management and administrative
services provided by the Company and royalty income. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(4) For federal and state tax purposes in 1994 and 1995, Tarrant Apparel
Group and certain of the companies included in the historical results of
operations were treated as S Corporations under Subchapter S of the
Internal Revenue Code of 1986, as amended, and comparable provisions of
state income tax laws. (See Note 6 below.)
(5) Reflects the cumulative effect of the adoption on January 1, 1994 of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investment in Debt and Equity Securities."
(6) Reflects, in 1994 and 1995 only, income per common share based upon pro
forma net income of $5,358 (1994) and $7,408 (1995) adjusted by providing
an income tax provision which is the sum of (i) U.S. income taxes
computed as if the Company had been taxed as a C Corporation at an
effective tax rate of 40% for federal and state tax purposes for the
period it was an S Corporation and (ii) the historical tax provision of
the Company and its non-U.S. consolidated subsidiaries for all other
periods. 1996, 1997 and 1998 have no adjustments since the Company was a
C Corporation in such years. The 1995 pro forma net income reflects a
$1.7 million adjustment related to the grant of the LDA Option.

16
<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General

The Company primarily serves both specialty retail and mass merchandise
store chains by designing, merchandising, contracting for the manufacture of
and selling casual, moderately-priced apparel for women, men and children,
under private label. The Company's major customers include specialty
retailers, such as Lerner New York, Limited Stores, Lane Bryant, Structure and
Express, all of which are divisions of The Limited, as well as Target Stores
(a division of Dayton Hudson), Abercrombie & Fitch and J.C. Penney. The
Company's products are manufactured in a variety of woven and knit
fabrications and include jeanswear, casual pants, t-shirts, shorts, blouses,
shirts and other tops, dresses, leggings and jackets.

The Company continues to geographically diversify its worldwide sourcing
operations. Commencing in the third quarter of 1997, the Company has
substantially expanded its use of independent cutting, sewing and finishing
contractors in Mexico, primarily for its increasing sales of basic garments.
The gross sales of products sourced in Mexico were approximately $19 million
and $104 million in 1997 and 1998, respectively. The Company has also
commenced the vertical integration of its business through the development and
acquisition of fabric and production capacity in Mexico. The Company believes
that these strategies will create a more diversified sourcing base, increase
the Company's access to emerging providers of low cost production, enhance the
proximity of the Company's sourcing base to the Company's customers and lessen
certain risks associated with doing business abroad (including transportation
delays, economic or political instability, currency fluctuations, restrictions
on the transfer of funds and the imposition of tariffs, export duties, quotas
and other trade restrictions).

On December 2, 1998, the Company contracted to acquire a turn-key facility
being constructed in Puebla, Mexico by an affiliate of the seller of the denim
mill described above. This facility is ultimately expected to have an annual
capacity of approximately 18 million meters of twill and will also house
ancillary facilities. Construction of this facility commenced in the third
quarter of 1998, and it is anticipated that the Company will take possession
of this facility by the year 2000. The Company anticipates that the cost of
this facility will be approximately $75 million. See "Item 1. Business--
Vertical Integration."

On February 23, 1998, the Company acquired certain assets of Marshall Gobuty
International U.S.A., Inc. and MGI International Limited which design,
contract for the manufacture of and sell private label apparel for men and
boys to national retailers, including J.C. Penney (the "Gobuty Acquisition").
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"). See "Item 1. Business--General" and
"--Acquisitions."

Factors That May Affect Future Results

This Report on Form 10-K contains forward-looking statements which are
subject to a variety of risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below.

17
<PAGE>

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. See "Item 1. Business--Vertical Integration" and "--Foreign
Manufacturing."

Variability of Quarterly Results. The Company has experienced, and expects
to continue to experience, a substantial variation in its net sales and
operating results from quarter to quarter. The Company believes that the
factors which influence this variability of quarterly results include the
timing of the Company's introduction of new product lines, the level of
consumer acceptance of each new product line, general economic and industry
conditions that affect consumer spending and retailer purchasing, the
availability of manufacturing capacity, the seasonality of the markets in
which the Company participates, the timing of trade shows, the product mix of
customer orders, the timing of the placement or cancellation of customer
orders, the occurrence of chargebacks in excess of reserves and the timing of
expenditures in anticipation of increased sales and actions of competitors.
Accordingly, a comparison of the Company's results of operations from period
to period is not necessarily meaningful, and the Company's results of
operations for any period are not necessarily indicative of future
performance.

Economic Conditions. The apparel industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer
spending habits have in the past had, and may in the future have, a materially
adverse effect on the Company results of operations. In addition, certain
retailers, including some of the Company customers, have experienced in the
past, and may experience in the future, financial difficulties which increase
the risk of extending credit to such retailers. These retailers have attempted
to improve their own operating efficiencies by concentrating their purchasing
power among a narrowing group of vendors. There can be no assurance that the
Company will remain a preferred vendor for its existing customers. A decrease
in business from or loss of a major customer could have a material adverse
effect on the Company's results of operations. 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 two thirds of the Company's net sales in 1998 and 1997. The loss of such
customer could have a material adverse effect on the Company's results of
operations. From time to time, certain of the Company's major customers have
experienced financial difficulties. The Company does not have long-term
contracts with any of its customers and, accordingly, there can be no
assurance that any customer will continue to place orders with the Company to
the same extent it has in the past, or at all. In addition, the Company's
results of operations will depend to a significant extent upon the commercial
success of its major customers.

Dependence on Contract Manufacturers. All of the Company's products, with
the exception of certain test runs and samples, are manufactured by
independent cutting, sewing and finishing contractors. The use of contract
manufacturers and the resulting lack of direct control over the production of
its products could result in the Company's failure to receive timely delivery
of products of acceptable quality. Although the Company believes that
alternative sources of cutting, sewing and finishing services are readily
available, the loss of one or more contract manufacturers could have a
materially adverse effect on the Company's results of operations until an
alternative source is located and has commenced producing the Company's
products.

18
<PAGE>

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 the subject of investigations
or have been found to have violated applicable labor laws. To date, the
Company has not been subject to any sanctions that, individually or in the
aggregate, could have a material adverse effect upon the Company, and the
Company is not aware of any facts on which any such sanctions could be based.
There can be no assurance, however, that in the future the Company will not be
subject to sanctions as a result of violations of applicable labor laws by its
contractors, or that such sanctions will not have a material adverse effect on
the Company. In addition, certain of the Company's customers, including The
Limited, require strict compliance by their apparel manufacturers, including
the Company, with applicable labor laws. There can be no assurance that the
violation of applicable labor laws by one of the Company's contractors will
not have a material adverse effect on the Company's relationship with its
customers.

Price and Availability of Raw Materials. Cotton fabric is the principal raw
material used in the Company's apparel. Although the Company believes that its
suppliers will continue to be able to procure a sufficient supply of cotton
fabric for its production needs, the price and availability of cotton may
fluctuate significantly depending on supply, world demand and currency
fluctuations, each of which may affect the price and availability of cotton
fabric. There can be no assurance that fluctuations in the price and
availability of cotton fabric or other raw materials used by the Company will
not have a material adverse effect on the Company's results of operations.

Management of Growth. Since its inception, the Company has experienced rapid
growth in sales. No assurance can be given that the Company will be successful
in maintaining or increasing its sales in the future. Any future growth in
sales will require additional working capital and may place a significant
strain on the Company's management, management information systems, inventory
management, production capability, distribution facilities and receivables
management. Any disruption in the Company's order processing, sourcing or
distribution systems could cause orders to be shipped late, and under industry
practices, retailers generally can cancel orders or refuse to accept goods due
to late shipment. Such cancellations and returns would result in a reduction
in revenue, increased administrative and shipping costs and a further burden
on the Company's distribution facilities. In addition, the failure to timely
enhance the Company's operating systems, or unexpected difficulties in
implementing such enhancements, could have a material adverse effect on the
Company's results of operations.

Foreign Manufacturing. Approximately 95% of the Company products were
imported in 1998. As a result, the Company's operations are subject to the
customary risks of doing business abroad, including, among other things,
transportation delays, economic or political instability, currency
fluctuations, restrictions on the transfer of funds and the imposition of
tariffs, export duties, quotas and other trade restrictions.

Year 2000 Issue. The Year 2000 issue is primarily the result of computer
programs being written using two-digits, as opposed to four digits, to
indicate the year. Any of the Company's computer programs or hardware that
have time-sensitive software or embedded chips may be unable to interpret
dates beyond the year 1999. This could result in a system failure or
miscalculations, leading to disruption in operation of such systems, including
among other things, inability to process transactions, send invoices or engage
in similar normal business activities. In 1997, the Company designated the MIS
department to coordinate the project of Year 2000 compliance.

The Company is currently evaluating, replacing or upgrading its information
systems in an effort to make them Year 2000 compliant, and expects to have
remediation efforts completed for its critical computer systems by June of
1999. This includes the implementation of a new packaged software system,
hardware and EDI system for its U.S. and Mexico operations. The developer of
this information system has provided the Company with written assurance that
the system will correctly function across the year 2000, as verified by
previous system

19
<PAGE>

tests. The Company's Hong Kong operations have completed remediation and
expect to complete software and hardware upgrades, including testing, by April
of 1999. The testing and remediation of voice/data communication systems, such
as network hubs, routers and phone/voice mail, is expected to be completed by
the end of the second quarter of 1999. Although the Company expects successful
completion of remediation and testing by the target dates, foreign testing and
implementation of procedures may not be as timely as in the United States.

As part of the Company's compliance program, formal communications with
customers, suppliers and other support service providers have been initiated.
All of the Company's customers which are established as EDI trading partners
are testing interface capability of the EDI program. The Company anticipates
completion of testing no later than June 1999. To date, the Company is not
aware of any supplier or subcontractor with a Year 2000 issue that would
materially affect the Company's results of operations, liquidity or capital
resources. The Company will continue to monitor the Year 2000 compliance of
third parties with which it does business.

The costs associated with the Year 2000 Compliance Program are not expected
to be substantial. To date, approximately $500,000 has been allocated to
address the Year 2000 issue, substantially all of which had been incurred as
of December 31, 1998. The Company does not expect future costs to have a
material effect on the Company's financial condition or results of operation.

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 lost revenue cannot be reasonably estimated at this time.

The Company is currently gathering data in an effort to assess the potential
effects of the failure of its Year 2000 compliance program. This evaluation is
expected to be completed in July 1999 and will determine whether a contingency
plan is necessary. If necessary, the Company is committed to allocating
additional personnel during the millennium transition to immediately address
any potential Year 2000 problems that may arise.

20
<PAGE>

Results of Operations

The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of income as a percentage of net sales:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0%
Cost of sales.................................... 83.7 84.9 81.2
------- ------- -------
Gross profit..................................... 16.3 15.1 18.8
Selling and distribution expenses................ 3.1 3.3 3.0
General and administration expenses.............. 6.1 5.2 5.2
Amortization of excess of cost over fair value of
net assets acquired(1).......................... -- -- 0.4
------- ------- -------
Operating income................................. 7.1 6.6 10.2
Interest expense................................. (0.8) (0.6) (0.6)
Other income..................................... 0.0 0.2 0.2
------- ------- -------
Income before income taxes....................... 6.3 6.2 9.8
Income taxes..................................... (2.0) (2.0) (3.3)
------- ------- -------
Net income....................................... 4.3% 4.2% 6.5%
======= ======= =======
</TABLE>
- --------
(1) Reflects amortization of the excess of cost over fair value of assets
acquired in acquisitions of MGI and Rocky.

Comparison of 1998 to 1997

Net sales increased by $118.1 million, or 45.4%, from $260.1 million in 1997
to $378.2 million in 1998. The increase in net sales included an aggregate
increase in sales (excluding Rocky) of $36.7 million to divisions of The
Limited, primarily as a result of an increased volume of unit sales, $75.8
million as a result of the MGI and Rocky Acquisitions and $2.7 million to mass
merchandisers. Excluding acquisitions, sales increased by $42.3 million, or
16.3% over last year. Overall, sales to divisions of The Limited in 1998
amounted to 63.3% of total net sales, as compared to 69.7% in 1997.

Gross profit (which consists of net sales less product costs, duties and
direct costs attributable to production) for 1998 was $71.1 million, or 18.8%
of net sales, compared to $39.1 million, or 15.1% of net sales, in 1997, an
increase of 81.8% in gross profit. The 3.7% increase in the gross profit
margin included benefits of 1.5% from a reduction in returns and inventory
markdown, 0.4% from domestic production of the Men's Division, 0.3% from a
reduction of direct costs attributable to production as a percentage of net
sales and the elimination of certain nonrecurring costs incurred in 1997 on
the Company's production in the U.S. and Mexico.

Selling and distribution expenses increased from $8.5 million in 1997 to
$11.3 million in 1998. As a percentage of net sales, these expenses decreased
from 3.3% in 1997 to 3.0% in 1998. This percentage decrease is primarily due
to a decrease in freight and commission expenses, each of which amounted to
0.1% of net sales.

General and administrative expenses increased from $13.5 million in 1997 to
$19.9 million in 1998. As a percentage of net sales, these expenses were 5.2%
in both years. Overall, 1998 expenses included increases in the allowance for
bad debt, bonus accrual and expenses related to the operations of MGI and
Rocky. 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 increase in the allowance for returns and discounts during 1998
was $541,000, or 0.1% of net sales, compared to a decrease in such allowance
of $282,000 during 1997. The most significant portions of the decrease in the
allowance for returns and discounts resulted from changes in the amount and
aging of accounts receivable. Bad debt expense

21
<PAGE>

was $189,000 in 1997 as compared to a recovery of $7,000 in 1998. Bonus
accrual was $910,000 in 1997 as compared to $3.0 million in 1998. After
adjusting for the net increase in the allowance for bad debt of $627,000, the
$2.1 million increase in bonus accrual and expenses generated by the
operations of MGI and Rocky of $2.4 million in 1998 as compared to no such
expenses in 1997, general and administrative expenses increased by $1.3
million in 1998 as compared to 1997, as summarized below:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 Increase/(Decrease)
----------- ----------- -------------------
<S> <C> <C> <C>
$19,897,000 $13,518,000 $6,379,000
Less: Bad debt expense*...... (7,000) 189,000 (196,000)
Allowance for returns and
discounts*................ 541,000 (282,000) 823,000
----------- ----------- ----------
Allowance for bad debt*.... 534,000 (93,000) 627,000
Bonus accruals*............ 2,964,000 910,000 2,054,000
MGI and Rocky operations... 2,352,000 -0- 2,352,000
----------- ----------- ----------
$14,047,000 $12,701,000 $1,346,000
=========== =========== ==========
</TABLE>
- --------
* Excluding MGI and Rocky.

Operating income was $17.1 million in 1997, or 6.6% of net sales, compared
to $38.6 million in 1998, or 10.2% of net sales, due to the factors described
above. This increase in operating income as a percentage of net sales was due
to the increase in the gross profit margin, which amounted to 3.7% of net
sales, a decrease in selling and distribution expenses, which amounted to 0.3%
of net sales, and an increase in amortization of excess of cost over fair
value of net assets acquired, which amounted to 0.4% of net sales.

Other income increased from $413,000, or 0.2% of net sales, in 1997 to
$928,000, or 0.2% of net sales, in 1998. This increase is primarily the result
of interest income of $171,000 in 1997 compared to $361,000 in 1998, the
realization of no gains on the sale of securities in 1998 as compared to
$237,000, or 0.1% of net sales, of such income in 1997, and management fee
income of $441,000, or 0.1% of net sales, in 1998 compared to no such income
in 1997.

Income before income taxes was $16.0 million in 1997 and $37.1 million in
1998, representing 6.2% and 9.8% of net sales, respectively. This increase in
income before taxes as a percentage of net sales was due to the increase in
the gross profit margin, which amounted to 3.7% of net sales, a decrease in
selling and distribution expenses, which amounted to 0.3% of net sales, and
the increase in amortization of excess of cost over fair value of net assets
acquired, which amounted to 0.4% of net sales.

Comparison of 1997 to 1996

Net sales increased by $30.2 million, or 13.2%, from $229.9 million in 1996
to $260.1 million in 1997. The increase in net sales included an aggregate
increase in sales of $27.2 million to divisions of The Limited and $3.6
million to mass merchandisers.

Certain of the Company's customers, including divisions of The Limited,
experienced sluggish sales and declines in revenue and profits in 1997. To the
extent that these financial difficulties continue or worsen, the Company's
revenues and gross profit margins could be adversely affected.

Gross profit (which consists of net sales less product costs, duties and
direct costs attributable to production) for 1997 was $39.1 million, or 15.1%
of net sales, compared to $37.6 million, or 16.3% of net sales, in 1996, an
increase of 4.1% in gross profit. The decrease in the gross profit margin
primarily resulted from nonrecurring costs and inefficiencies related to the
Company's domestic sourcing. The increase in the absolute amount of gross
profit was primarily due to the increase in net sales.

Selling and distribution expenses increased from $7.1 million in 1996 to
$8.5 million in 1997. As a percentage of net sales, these expenses increased
from 3.1% in 1996 to 3.3% in 1997. This percentage increase is primarily due
to an increase in freight and commission expenses, each of which amounted to
0.1% of net sales.

22
<PAGE>

General and administrative expenses decreased from $14.0 million in 1996 to
$13.5 million in 1997. As a percentage of net sales, these expenses declined
from 6.1% in 1996 to 5.2% in 1997. This percentage decrease was primarily due
to a $608,000 decrease in discretionary bonuses awarded to executive officers
in 1997, which amounted to 0.2% of net sales, combined with the effect of the
increase in net sales. After adjusting for the decrease in executive bonuses,
general and administrative expenses increased by $136,000 and were 5.4% of net
sales in 1997 as compared to 6.1% in 1996.

Operating income was $16.5 million in 1996, or 7.1% of net sales, compared
to $17.1 million in 1997, or 6.6% of net sales, due to the factors described
above. This decrease in operating income as a percentage of net sales was due
to the decrease in the gross profit margin, which amounted to 1.2% of net
sales, an increase in selling and distribution expenses, which amounted to
0.2% of net sales, and a decrease in general and administrative expenses,
which amounted to 0.9% of net sales.

Other income increased from $35,000 in 1996 to $413,000, or 0.2% of net
sales, in 1997. This increase is primarily the result of interest income of
$337,000 in 1996 compared to $171,000 in 1997, the realization of no gains on
the sale of securities in 1996 as compared to $237,000 of such income in 1997,
management fee income of $60,000 in 1996 compared to no such income in 1997
and a non-operating expense accrual of $400,000 in 1996 compared to no similar
accrual in 1997. See "Note 8 to Consolidated Financial Statements." Management
fee income was derived from an agreement with FIS which sourced and sold
garments under the B.U.M. Equipment label until it ceased operations in the
second quarter of 1996.

Income before income taxes was $14.6 million in 1996 and $16.0 million in
1997, representing 6.3% and 6.2% of net sales, respectively. This decrease in
income before taxes as a percentage of net sales was due to the decrease in
the gross profit margin, which amounted to 1.2% of net sales, an increase in
selling and distribution expenses, which amounted to 0.2% of net sales, a
decrease in general and administrative expenses, which amounted to 0.9% of net
sales, and the decrease in interest expense, which amounted to 0.2% of net
sales, as offset by the increase in other income, which amounted to 0.2% of
net sales.

Quarterly Results of Operations

The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of income in millions of dollars and as
a percentage of net sales:

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $42.1 $68.9 $50.0 $68.9 $53.6 $73.9 $69.2 $63.4 $64.3 $100.1 $114.9 $98.9
Gross profit.... 7.1 11.3 8.2 11.0 8.8 11.1 9.7 9.6 10.9 20.3 19.7 20.2
Operating
income......... 2.4 5.5 3.7 4.9 3.4 5.1 4.1 4.5 4.5 11.7 11.4 11.0
Net income...... 1.5 3.6 2.2 2.7 2.0 3.3 2.7 2.8 2.8 7.2 7.1 7.6
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.... 16.8 16.4 16.5 16.0 16.4 15.0 14.0 15.1 17.0 20.2 17.1 20.4
Operating
income......... 5.6 8.0 7.5 7.1 6.3 6.9 5.9 7.2 7.1 11.7 9.9 11.1
Net income...... 3.5 5.2 4.4 4.0 3.8 4.4 3.9 4.4 4.3 7.2 6.2 7.7
</TABLE>

As is typical for the Company, quarterly net sales fluctuated significantly
because the Company's customers typically place bulk orders with the Company,
and a change in the number of orders shipped in any one period may have a
material effect on the net sales for that period.

Liquidity and Capital Resources

The Company's liquidity requirements arise from the funding of its working
capital needs, principally inventory, finished goods shipments-in-transit,
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

23
<PAGE>

purchases fabric for delivery directly to the manufacturer's factory. The
Company then invoices the manufacturer for the fabric, and reduces payments to
the manufacturer for finished goods by the amount of outstanding invoices.)
The Company's primary sources for working capital and capital expenditures are
cash flow from operations, borrowings under the Company's bank credit
facilities, issuance of long-term debt and the proceeds from the exercise of
stock options.

During 1998, net cash used in operating activities was $10.5 million, which
resulted primarily from net income of $24.7 million, as offset by a net
increase in working capital items, including an increase of $28.8 million in
accounts receivable and an increase in inventory of $18.2 million. The
increase in accounts receivable resulted from an increase in sales and a $10.8
million decrease in advances from the factor, which advances are accounted for
as an offset to accounts receivable. At December 31, 1998, advances from the
factor were $1.0 million as compared to $11.8 million of such advances at
December 31, 1997.

During 1998, cash flow used in investing activities was $23.1 million, which
included $17.1 million for the MGI and Rocky acquisitions and $4.2 million of
capital expenditures for Mexican investment programs.

In 1998, cash flow provided by financing activities equaled $32.6 million,
including $25.5 million of bank borrowings, $4.8 million from the exercise of
stock options and $2.6 million of proceeds from issuance of long-term
obligations.

The Company has credit facilities of $33 million and $10 million with the
Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and acceptances, as well as cash
advances. These facilities are subject to review at any time and the right of
either lender to demand payment at any time. Interest on cash advances under
HKSB's facility accrues at HKSB's prime rate for lending U.S. dollars plus
one-half to three-quarters percent per annum. As of December 31, 1998, HKSB's
U.S. dollar prime rate equaled seven and three-quarters percent. Interest on
cash advances under SCB's facility accrues at SCB's prime rate for lending
Hong Kong dollars. As of December 31, 1998, SCB's Hong Kong dollar prime rate
equaled nine 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, the Company will not incur two
consecutive quarterly losses and the Company will maintain a certain debt to
equity ratio. As of December 31, 1998 there were $21.5 million of outstanding
borrowings under these facilities.

The Company has accounts receivable-secured credit facilities with
NationsBanc Commercial Corporation ("NBCC") and The CIT Group/Commercial
Services, Inc. ("CIT"). Prior to January 1, 1998, NBCC acted as the Company's
factor for accounts receivable. Effective January 1, 1998, the Company
substantially eliminated its use of the factor. The Company may receive an
advance from NBCC of up to 90% of accounts receivable, except certain
receivables which are liened to CIT. CIT will advance up to 100% of the amount
of accounts receivable liened to it plus an over-advance of up to $10 million,
up to a maximum amount of $25 million. The CIT facility is subject to the same
restrictive covenants as apply to the HKSB and SCB facilities. Interest on
advances from both NBCC and CIT accrues at the rate of one and one-quarter
percent below the bank's respective prime rates or, at the option of the
Company, one and one-quarter percent over the respective LIBOR rates. As of
December 31, 1998, the prime rates equaled seven and three-quarters percent
and the LIBOR rates averaged five and three-tenths percent. As of December 31,
1998 there were $1.4 million of outstanding advances under these facilities.

The Company has an unsecured $10 million credit facility with SCB maturing
June 30, 1999 which is available for general corporate purposes. This facility
is cross-defaulted to the Company's other bank credit facilities and interest
on advances accrues at the rate of one and one-quarter percent over LIBOR. At
December 31, 1998, $10.0 million was outstanding under this facility.

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.

24
<PAGE>

At December 31, 1998, $1.2 million was outstanding under this facility. See
"Business--Acquisitions" and "Note 5 to Notes to Consolidated Financial
Statements--Acquisitions."

The Company has financed its operations from its cash flow from operations,
borrowings under its bank credit facilities, issuance of long-term debt and
the proceeds from the exercise of stock options. The Company believes that
these sources of cash should be sufficient to fund its existing operations for
the foreseeable future.

The Company has commenced a capital investment program in Mexico under which
it will invest approximately $150 million in the acquisition of a denim mill
and the construction of a facility which will produce twill and house
ancillary facilities. See "Item 1. Business--General and--Acquisitions." 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. To date, capital expenditure and working capital
commitments aggregating $9.1 million and $1.1 million, respectively, have been
made with respect to vertical integration programs initiated by the Company.
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.

The Company does not believe that the moderate levels of inflation in the
United States in the last three years have had a significant effect on net
sales or profitability.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K" for the Company's financial statements, and the notes thereto, and the
financial statement schedules filed as part of this report.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

25
<PAGE>

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS

The information concerning the directors and executive officers of the
Company is incorporated herein by reference from the section entitled
"Proposal 1--Election of Directors" contained in the definitive Proxy
Statement of the Company to be filed pursuant to Regulation 14A within 120
days after the end of the Company's last fiscal year (the "Proxy Statement").

Item 11. EXECUTIVE COMPENSATION

The information concerning executive compensation is incorporated herein by
reference from the section entitled "Proposal 1--Election of Directors"
contained in the Proxy Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the sections
entitled "General Information--Security Ownership of Principal Shareholders
and Management" and "Proposal 1--Election of Directors" contained in the Proxy
Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information concerning certain relationships and related transactions is
incorporated herein by reference from the section entitled "Proposal 1--
Election of Directors--Certain Relationships and Related Transactions"
contained in the Proxy Statement.

26
<PAGE>

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements and Schedule. Reference is made to the Index to
Financial Statements and Schedule on page F-1 for a list of financial
statements and the financial statement schedule filed as part of this report.
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's financial statements or the
related notes thereto.

(b) Reports on Form 8-K. None.

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Restated Articles of Incorporation of the Company(/1/)
3.2 Restated Bylaws of the Company(/1/)
4.1 Specimen of Common Stock Certificate(/2/)
10.1 Note in the principal amount of $2,600,000 dated March 15, 1995 in
favor of Imperial Bank(/1/)
10.2 General Security Agreement dated March 15, 1995, by and between the
Company and Imperial Bank(/1/)
10.3 Factoring Agreement effective as of September 28, 1993, as amended, by
and between the Company and NationsBanc Commercial Corporation(/1/)
10.4 1995 Stock Option Plan dated as of May 1, 1995(/1/)
10.5 Letter Agreement dated February 17, 1995 between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation Limited(/1/)
10.6 Letter dated April 18, 1995 from The Hongkong and Shanghai Banking
Corporation Limited to Tarrant Company Limited regarding the release
of certain security interests(/1/)
10.7 Commercial Lease dated January 1, 1994 and GET and the Company(/1/)
10.8 Tenancy Agreement dated July 15, 1994 between Lynx International
Limited and Tarrant Company Limited, as amended by that certain
Supplementary Tenancy Agreement dated December 30, 1994 and that
certain Second Supplementary Tenancy Agreement dated December 31,
1994(/1/)
10.9 Lease Agreement dated June 10, 1994, between Yip Sik Kin and Tarrant
Company Limited (translated from Chinese)(/1/)
10.10 Tenancy Contract effective as of December 24, 1994, between Khalifa al
Muhairi and Tarrant Trading Co. Ltd.(/1/)
10.11 Agreement dated as of June 1, 1995, by and among Pret-A-Porter, the
Company, French Designers, Inc., Bernard Aidan, Gerard Guez and Todd
Kay(/5/)
10.12 Services Agreement dated as of April 1, 1995, by and between F.I.S.,
Inc. and the Company(/2/)
10.13 Services Agreement dated as of October 1, 1994, by and between the
Company and GET(/1/)
10.14 Services Agreement dated as of October 1, 1994, by and between the
Company and Lynx International Limited(/1/)
10.15 Indemnification Agreement dated as of March 14, 1995, by and among the
Company, Gerard Guez and Todd Kay(/2/)
10.16 Promissory Note in the initial principal amount of $2 million dated
February 8, 1995, by Gerard Guez in favor of the Company(/2/)
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.17 Promissory Note in the initial principal amount of $1 million dated
February 8, 1995, by Todd Kay in favor of the Company(/2/)
10.18 Promissory Note in the principal amount of $1,334,566.71 dated
December 31, 1994, by F.I.S., Inc. in favor of the Company(/2/)
10.19 Release dated as of June 1, 1995, by and between the Company and
certain other parties signatory thereto(/2/)
10.20 Option Agreement dated as of July 28, 1995, by and among Limited
Direct Associates, L.P., Gerard Guez, Todd Kay and the Company(/5/)
10.21 Registration Rights Agreement dated as of July 28, 1995, by and among
the Company and Limited Direct Associates, L.P.(/5/)
10.22 Reorganization and Tax Indemnification Agreement dated as of June 13,
1995, by and among the Company and its shareholders(/5/)
10.23 Employment Agreement January 1, 1995, by and between the Company and
Gerard Guez(/2/)
10.23.1 Employment Agreement effective January 1, 1998, by and between the
Company and Gerard Guez
10.24 Agreement dated as of January 1, 1995, by and between the Company and
Todd Kay(/1/)
10.24.1 Employment Agreement effective January 1, 1998, by and between the
Company and Todd Kay
10.25 Employment Agreement dated as of January 1, 1994, by and between the
Company and Jimmy Esebag, as amended, by that certain Amendment No. 1
dated as of June 1, 1995(/2/)
10.26 Employment Agreement dated as of November 18, 1994, by and between the
Company and Mark B. Kristof(/1/)
10.27 Employment Agreement dated as of July 5, 1994, by and between the
Company and Bradley R. Kenson(/1/)
10.28 License Agreement dated January 1, 1994, by and between the Company
and GET(/1/)
10.29 Assignment dated as of June 1, 1995 with respect to the GET!
trademark, executed by GET in favor of the Company(/2/)
10.30 Amendment No. 1 to Commercial Lease dated as of April 1, 1995, by and
between GET and the Company(/2/)
10.31 Lease and Services Agreement dated as of June 1, 1995, by and between
Tarrant Company Limited and French Designers, Inc.(/2/)
10.32 Note in the principal amount of $2,600,000 dated May 15, 1995, by the
Company in favor of Imperial Bank(/2/)
10.33 Letter Agreement dated May 17, 1995, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation Limited(/2/)
10.34 Buying Agency Agreement executed as of December 19, 1992, between
F.I.S., Inc. and Tarrant Company Ltd.(/2/)
10.35 Buying Agency Agreement executed as of April 4, 1995, by Azteca
Production International, Inc. and Tarrant Company Ltd., with the
Company acknowledging as to certain matters(/2/)
10.36 Tripartite Agreement Assignment of Factoring Proceeds (Advances)
executed and delivered June 6, 1995, by the Company, and accepted and
agreed to by The Hongkong and Shanghai Banking Corporation Limited and
NationsBanc Commercial Corporation(/2/)
10.36.1 Amendment to Three Party Special Deposit Account Agreement(/8/)
10.37 Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) entered into as
of June 6, 1995, by and between the Hongkong and Shanghai Banking
Corporation Limited and the Company(/2/)
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.38 Security Agreement (Tarrant Co. Ltd. Draft Acceptance) entered into as
of June 6, 1995, by and between The Hongkong and Shanghai Banking
Corporation Limited and the Company(/2/)
10.39 Agreement dated March 14, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/3/)
10.40 Agreement dated March 17, 1995, by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/3/)
10.41 Underwriting Agreement dated as of July 24, 1995, by and among the
Company, Gerard Guez, Todd Kay and Prudential Securities
Incorporated(/5/)
10.42 Letter agreement dated August 10, 1995, by and among the Company and
NationsBanc Commercial Corporation(/4/)
10.42.1 Amendment dated June 9, 1997 to Factoring Agreement effective as of
September 28, 1993, as amended, by and between the Company and
NationsBanc Commercial Corporation(/8/)
10.43 Letter agreement dated January 30, 1996, by and between Tarrant
Company Limited and The Hongkong Shanghai Banking Corporation
Limited(/5/)
10.43.1 Letter agreement dated May 28, 1996, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation Limited(/8/)
10.43.2 Letter agreement dated April 16, 1998, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation
Limited(/11/)
10.44 Promissory Note in the principal amount of $3 million dated March 25,
1996, by GET in favor of the Company(/6/)
10.45 Deed of Trust dated March 25, 1996 by and between GET and the
Company(/6/)
10.46 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Gerard Guez and the Company(/6/)
10.47 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Todd Kay and the Company(/6/)
10.48 Letter agreement dated February 22, 1996, by and between Tarrant
Company Limited and Standard Chartered Bank(/7/)
10.49 Letter agreement dated March 8, 1996, by and between Tarrant Company
Limited and Standard Chartered Bank(/7/)
10.50 Guarantee Agreement entered into as of August 30, 1996, by and between
Standard Chartered Bank and the Company(/7/)
10.51 Letter of Undertaking entered into as of August 30, 1996, by and
between Standard Chartered Bank and the Company(/7/)
10.52 Intercreditor Agreement entered into as of November 1, 1996, between
The Hongkong and Shanghai Banking Corporation Limited, Standard
Chartered Bank and Tarrant Company Limited(/7/)
10.53 Security Agreement entered into as of November 1, 1996, by and between
Standard Chartered Bank and the Company(/7/)
10.54 Amendment to Security Agreement (Guaranty of Tarrant Co. Ltd. Debt)
entered into as of November 1, 1996, between The Hongkong and Shanghai
Banking Corporation Limited and the Company(/7/)
10.55 Agreement dated January 29, 1997 by and among Tarrant Company Limited,
Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong(/7/)
10.56 Form of Indemnification Agreement with directors and certain executive
officers(/8/)
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.57 Special Deposit Account Agreement(/8/)
10.58 Accounts Receivable Financing Agreement dated June 13, 1997, by and
between the Company and The CIT Group/Commercial Services, Inc.(/8/)
10.58.1 Letter Agreement dated October 1, 1997 regarding Accounts Receivable
Financing Agreement, by and between the Company and The CIT
Group/Commercial Services, Inc.
10.59*+ Asset Purchase Agreement dated February 18, 1998, by and between
Marble Limited and MGI International Limited(/10/)
10.60*+ Asset Purchase Agreement dated February 18, 1998, by and between the
Company and Marshall Gobuty International U.S.A., Inc.(/10/)
10.61 Employment Agreement dated February 23, 1998, by and between the
Company and Marshall Gobuty(/10/)
10.62 Noncompetition Agreement dated February 23, 1998, by and between
Marshall Gobuty International U.S.A., Inc. and Marshall Gobuty, on the
one hand, and the Company, on the other hand(/10/)
10.63 Noncompetition Agreement dated February 23, 1998, by and between MGI
International Limited and Marshall Gobuty, on the one hand, and the
Company, on the other hand(/10/)
10.64 Loan Agreement dated as of July 1, 1998, between the Company and
Standard Chartered Bank(/12/)
10.65 Partnership Interest Purchase Agreement dated as of July 2, 1998,
among Rocky Acquisition, LLC, the Company, Limited Direct Associates,
L.P., Rocky Apparel, Inc., and Gabriel Manufacturing Company
10.66 Escrow Agreement made as of July 2, 1998, by and among the Company,
Gabriel Manufacturing Company and Rocky Apparel, Inc.
10.67 Facility Development Agreement dated as of December 2, 1998, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V.
10.68+ Agreement for Purchase of Assets dated as of February 22, 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.
23 Consent of Ernst & Young LLP
27 Financial Data Summary
</TABLE>
- ----------
* Confidential treatment has been requested for portions of this document.

+ All schedules and/or exhibits have been omitted. Any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange
Commission upon request.

(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on May 4, 1995 (File
No. 33-91874).

(2) Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on June 15, 1995.

(3) Filed as an exhibit to Amendment No. 2 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 11, 1995.

(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995.

(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 30, 1995.

(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996.

(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.

(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.

(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.

(10) Filed as exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.

(11) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.

(12) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.

30
<PAGE>

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Report of Independent Auditors--Ernst & Young, LLP....................... F-2
Consolidated Balance Sheets--December 31, 1997 and 1998.................. F-3
Consolidated Statements of Income--Three year period ended December 31,
1998.................................................................... F-4
Consolidated Statements of Shareholders' Equity--Three year period ended
December 31, 1998....................................................... F-5
Consolidated Statements of Cash Flows--Three year period ended December
31, 1998................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts........................... F-21
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Tarrant Apparel Group

We have audited the accompanying consolidated balance sheets of Tarrant
Apparel Group and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tarrant
Apparel Group and subsidiaries at December 31, 1996, 1997 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic financial
statements, taken as a whole, presents fairly in all material respects the
information set forth therein.

Ernst & Young LLP

Los Angeles, California
February 26, 1999

F-2
<PAGE>

TARRANT APPAREL GROUP

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 5,305,129 $ 4,318,520
Accounts receivable, net (Note 2)................... 34,078,352 65,946,055
Due from affiliates (Note 12)....................... 3,470 2,143,527
Due from officers (Note 12)......................... 1,601,670 4,477,461
Inventory (Note 3).................................. 23,266,196 49,230,847
Temporary quota..................................... 2,874,382 1,192,888
Prepaid expenses.................................... 1,203,931 1,527,392
Income taxes........................................ 478,050 501,334
----------- ------------
Total current assets.............................. 68,811,180 129,338,024
Property and equipment, net (Note 4).................. 2,707,257 5,306,308
Permanent quota, net.................................. 145,268 245,464
Other assets.......................................... 196,973 4,468,517
Excess of cost over fair value of net assets acquired,
net.................................................. -- 14,532,193
----------- ------------
Total assets...................................... $71,860,678 $153,890,506
=========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings (Note 6)............................ $ 4,287,518 $ 33,288,267
Accounts payable.................................... 12,549,961 24,200,202
Accrued expenses.................................... 5,117,183 8,738,522
Income taxes........................................ 969,115 5,048,288
Deferred tax liability.............................. 582,957 --
Current portion of long-term obligations............ -- 981,124
----------- ------------
Total current liabilities......................... 23,506,734 72,256,403
Long-term obligations................................. -- 2,424,439
----------- ------------
Total liabilities................................. 23,506,734 74,680,842
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none
issued and outstanding............................. -- --
Common stock, no par value, 20,000,000 shares
authorized; 13,219,928 shares (1997) and 13,832,955
(1998) issued and outstanding...................... 16,100,483 22,290,539
Contributed capital................................. 1,434,259 1,434,259
Retained earnings................................... 30,819,202 55,484,866
----------- ------------
Total shareholders' equity........................ 48,353,944 79,209,664
----------- ------------
Total liabilities and shareholders' equity........ $71,860,678 $153,890,506
=========== ============
</TABLE>

See accompanying notes.

F-3
<PAGE>

TARRANT APPAREL GROUP

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................ $229,861,024 $260,092,777 $378,155,527
Cost of sales........................ 192,287,596 220,995,754 307,077,111
------------ ------------ ------------
Gross profit......................... 37,573,428 39,097,023 71,078,416
Selling and distribution expenses.... 7,124,732 8,498,976 11,274,384
General and administrative expenses.. 13,989,826 13,518,441 19,896,522
Amortization of excess of cost over
fair value of net assets acquired... -- -- 1,336,791
------------ ------------ ------------
Income from operations............... 16,458,870 17,079,606 38,570,719
Interest expense..................... (1,864,734) (1,470,762) (2,423,482)
Interest income...................... 336,785 171,385 360,580
Other income (expense) (Note 8)...... (301,509) 241,235 567,847
------------ ------------ ------------
Income before provision for income
taxes............................... 14,629,412 16,021,464 37,075,664
Provision for income taxes (Note 7).. 4,627,786 5,235,000 12,410,000
------------ ------------ ------------
Net income........................... $ 10,001,626 $ 10,786,464 $ 24,665,664
============ ============ ============
Net income per share:
Basic.............................. $ 0.77 $ 0.82 $ 1.82
============ ============ ============
Diluted............................ $ 0.76 $ 0.80 $ 1.71
============ ============ ============
Weighted average shares outstanding:
Basic.............................. 13,015,866 13,175,256 13,519,517
Diluted............................ 13,095,662 13,567,254 14,416,850
</TABLE>

See accompanying notes.

F-4
<PAGE>

TARRANT APPAREL GROUP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Total
Common Contributed Retained Shareholders'
Stock Capital Earnings Equity
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995...................... $14,950,222 $1,434,259 $10,031,112 $26,415,593
Net income................ -- -- 10,001,626 10,001,626
Exercise of stock options. 446,634 -- -- 446,634
Income tax benefit from
exercise of stock
options.................. 88,878 -- -- 88,878
------------ ---------- ----------- -----------
Balance at December 31,
1996...................... 15,485,734 1,434,259 20,032,738 36,952,731
Net income................ -- -- 10,786,464 10,786,464
Exercise of stock options. 495,254 -- -- 495,254
Income tax benefit from
exerciseof stock options. 119,495 -- -- 119,495
------------ ---------- ----------- -----------
Balance at December 31,
1997...................... 16,100,483 1,434,259 30,819,202 48,353,944
Net income................ -- -- 24,665,664 24,665,664
Exercise of stock options. 3,343,492 -- -- 3,343,492
Issuance of shares for
acquisition.............. 1,350,000 -- -- 1,350,000
Income tax benefit from
exercise of stock
options.................. 1,496,564 -- -- 1,496,564
------------ ---------- ----------- -----------
Balance at December 31,
1998...................... $ 22,290,539 $1,434,259 $55,484,866 $79,209,664
============ ========== =========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE>

TARRANT APPAREL GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income............................ $ 10,001,626 $ 10,786,464 $ 24,665,664
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:................
Deferred taxes...................... 127,372 598,273 (606,241)
Depreciation and amortization....... 905,786 867,022 2,356,259
Loss on sale of fixed assets........ 57,375 3,698 21,587
Stock compensation expense.......... 66,050 -- --
Provision for returns and discounts. (432,594) (359,344) 593,447
Changes in operating assets and
liabilities:
Accounts receivable............... (14,818,441) 10,764,877 (28,785,228)
Due from affiliates and officers.. 764,689 (1,508,724) (5,015,848)
Inventory......................... 2,988,492 (12,446,028) (18,215,979)
Temporary quota................... (349,717) (1,151,297) 1,681,494
Prepaid expenses.................. (147,000) (849,422) (185,579)
Prepaid income taxes.............. (990,771) 1,300,887 --
Accounts payable.................. 3,076,430 (1,650,268) 5,906,194
Accrued expenses and income tax
payable.......................... 1,031,877 629,236 7,100,702
------------ ------------ ------------
Net cash (used in) provided by
operating activities........... 2,281,174 6,985,374 (10,483,528)
Investing activities
Purchase of fixed assets.............. (466,272) (764,087) (1,490,728)
Acquisition of MGI.................... -- -- (6,108,685)
Acquisition of Rocky, net of cash..... -- -- (10,993,407)
Sale of fixed assets.................. 218,306 -- --
Purchase of permanent quota........... (133,002) (129,205) (226,115)
Increase in other assets.............. -- -- (4,245,981)
------------ ------------ ------------
Net cash used in investing
activities....................... (380,968) (893,292) (23,064,916)
Financing activities
Bank borrowings, net.................. (9,130,422) (2,522,158) 25,547,109
Proceeds from long term obligations... -- -- 2,635,000
Paydown of long term obligations...... -- -- (460,330)
Exercise of stock options including
related tax benefit.................. 469,462 614,749 4,840,056
------------ ------------ ------------
Net cash provided by (used in)
financing activities............. (8,660,960) (1,907,409) 32,561,835
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents.......................... (6,760,754) 4,184,673 (986,609)
Cash and cash equivalents at beginning
of year.............................. 7,881,210 1,120,456 5,305,129
------------ ------------ ------------
Cash and cash equivalents at end of
year................................. $ 1,120,456 $ 5,305,129 $ 4,318,520
============ ============ ============
</TABLE>

See accompanying notes.

F-6
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998

1. Summary of Significant Accounting Policies

Organization and Basis of Consolidation

The accompanying financial statements consist of the consolidation of
Tarrant Apparel Group, a California Corporation (formerly Fashion Resource,
Inc.) (the Parent Company or the Company), NO! Jeans, Inc. (NO), Rocky Mexico,
Inc. (RM), Rocky Apparel, L.L.C. (RA) and Tag Mex, Inc., United States
corporations; the following Hong Kong corporations: Tarrant Company Limited
(Tarrant HK) and Marble Limited (Marble); Tarrant Trading Limited, a United
Arab Emirates corporation (Tarrant UAE); and Tag Mex, S.A., a Mexican
corporation which is a wholly-owned subsidiary of Tag Mex, Inc. NO, RM and
Marble are wholly-owned subsidiaries of Tarrant Apparel Group, Tag Mex, Inc.
and Tarrant HK, respectively. Tag Mex, Inc. and RA are wholly-owned
subsidiaries of Tarrant Apparel Group. Tarrant HK owns a 49% interest in
Tarrant UAE. However, since Tarrant HK effectively controls Tarrant UAE, the
results of Tarrant UAE had been consolidated. The third-party interest in
Tarrant UAE is immaterial.

The Company serves both specialty retail and mass merchandise store chains
by designing, merchandising and contracting for the manufacture and selling of
casual, moderately priced apparel, for women, men and children under private
label.

Revenue Recognition

Revenues are recorded, net of anticipated returns, at the time of shipment
of merchandise.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market.

Quota

The Company purchases quota rights to be used in the importation of its
products from certain foreign countries. The effect of quota transactions is
accounted for as product cost.

Permanent quota entitlements were principally obtained through free
allocations by the Hong Kong Government pursuant to an import restraint
between Hong Kong and the United States and are renewable on an annual basis,
based upon the prior year utilization. Permanent quota entitlements acquired
from outside parties are amortized over three years on a straight-line basis,
and amounted to $145,000, net of amortization of $925,000 at December 31, 1997
and $245,000, net of amortization of $1.1 million at December 31, 1998.

Temporary quota represents quota rights acquired from other permanent quota
entitlement holders on a temporary basis. Temporary quota has a maximum life
of twelve months. The cost of temporary quota purchased for the current year
utilization has been assigned to inventory purchases while the cost of
temporary quota acquired for usage in the year following the balance sheet
date is recorded as a current asset.

F-7
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and Equipment

Property and equipment is recorded at cost. Additions and betterments are
capitalized while repair and maintenance costs are charged to operations as
incurred. Depreciation of property and equipment is provided for by the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized using the straight-line method over the lesser of their
estimated useful life or the term of the lease. Upon retirement or disposal of
property and equipment, the cost and related accumulated depreciation are
eliminated from the accounts and any gain or loss is reflected in the
statements of income.

Intangibles

The excess of cost over fair value of net assets acquired is being amortized
over five to fifteen years. Accumulated amortization at December 31, 1997 and
1998 was $0 and $1,337,000, respectively.

Income Taxes

The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which prescribes the use of the liability
method to compute the differences between the tax basis of assets and
liabilities and the related financial reporting amounts using currently
enacted tax laws and rates.

The Company's Hong Kong corporate affiliates are taxed at an effective Hong
Kong rate of 16%. No domestic tax provision has been provided for $41.7
million of unremitted retained earnings of these Hong Kong corporations, as
the Company intends to maintain these amounts in Hong Kong on a permanent
basis in support of its working capital requirements.

Net Income Per Share

Net income per share has been computed in accordance with Financial
Accounting Standard Board (FASB) Statement No. 128, "Earnings Per Share" (see
Note 10). A two-for-one stock split became effective May 8, 1998. All share
and per share amounts have been restated to reflect the split.

Product Design, Advertising and Sales Promotion Costs

Product design, advertising and sales promotion costs are expensed as
incurred. Product design, advertising and sales promotion costs included in
operating expenses in the accompanying statements of income (excluding the
costs of manufacturing samples) amounted to approximately $1,419,000,
$1,528,000, and $840,000 in 1996, 1997 and 1998, respectively.

Foreign Currency Translation

Assets and liabilities of the Hong Kong and United Arab Emirates
subsidiaries are translated at the rate of exchange in effect on the balance
sheet date; income and expenses are translated at the average rates of
exchange prevailing during the year. The principal foreign currency in which
the Company transacts business is the Hong Kong dollar. A majority of all
significant transactions in Mexico are conducted in U.S. dollars.

Foreign currency gains and losses resulting from translation of assets and
liabilities are included in the statements of income. Historically, such gains
and losses have been immaterial. At December 31, 1998, the Hong Kong
subsidiaries have retained earnings of $41.7 million and an intercompany
receivable due from Tarrant Apparel Group of $37.0 million.

F-8
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Financial Instruments

The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Unless
otherwise described, the fair values of financial instruments approximate
their recorded values.

The Company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115). Under SFAS No. 115, marketable securities portfolios consisting of debt
and equity securities held primarily for sale in the near term (trading
securities) are valued at fair value, with realized and unrealized holding
gains and losses included in the statements of income. The Company realized
losses on the sale of marketable securities of approximately $0 and $16,000 in
1998 and 1996, respectively, and a gain of $237,000 in 1997.

Concentration of Credit Risk

Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of cash equivalents, trade accounts
receivable and amounts due from factor.

The Company's products are primarily sold to mass merchandisers and
specialty retail stores. These customers can be significantly affected by
changes in economic, competitive or other factors. The Company makes
substantial sales to a relatively few, large customers. In order to minimize
the risk of loss, the Company assigns certain of its domestic accounts
receivable to a factor without recourse or requires letters of credit from its
customers prior to the shipment of goods. For nonfactored receivables, account
monitoring procedures are utilized to minimize the risk of loss. Collateral is
generally not required. The following table presents the percentage of net
sales concentrated with certain customers. Customer A represents a group of
customers under common ownership.

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer A............................................... 67.1% 69.7% 63.3%
Customer B............................................... 24.3 18.7 8.6
</TABLE>

Products representing over 90% of the Company's net sales, on the basis of
the free on board cost at the supplier's plant, were manufactured by third
party contractors located in foreign countries. There can be no assurance that
the Company will not experience difficulties with third parties responsible
for the manufacture of its products.

The Company maintains demand deposits with several major banks. At times,
cash balances may be in excess of Federal Deposit Insurance Corporation or
equivalent foreign insurance limits.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based

F-9
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

compensation plans. However, SFAS 123 allows an entity to continue to measure
compensation costs using the principles of APB 25 if certain pro forma
disclosures are made. The Company has elected to account for its stock
compensation arrangements under the provisions of APB 25, "Accounting for
Stock Issued to Employees." The Company adopted the provisions for pro forma
disclosure requirements of SFAS 123 in fiscal 1996.

2. Accounts Receivable

Accounts receivable consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
U.S. trade accounts receivable................... $13,411,719 $53,693,368
Foreign trade accounts receivable................ 9,466,193 8,406,558
Due from factor.................................. 12,028,633 4,725,869
Other receivables................................ 727,619 1,367,266
Allowance for returns and discounts.............. (1,555,812) (2,247,006)
----------- -----------
$34,078,352 $65,946,055
=========== ===========
</TABLE>

The Company has accounts receivable-secured credit facilities with
NationsBanc Commercial Corporation ("NBCC") and The CIT Group/Commercial
Services, Inc. ("CIT"). Prior to January 1, 1998, NBCC acted as the Company's
factor for accounts receivable. Effective January 1, 1998, the Company
substantially eliminated its use of the factor. The Company may receive an
advance from NBCC of up to 90% of certain accounts receivable. Such advances
approximated $11.8 million and $1.0 million at December 31, 1997 and 1998,
respectively. CIT will advance up to 100% of the amount of certain accounts
receivable plus an over-advance of up to $10 million, up to a maximum amount
of $25 million. Such advances approximated $0 and $435,000 at December 31,
1997 and 1998, respectively. Interest on advances from both NBCC and CIT
accrues at the rate of one and one-quarter percent below the bank's respective
prime rates or, at the option of the Company, one and one-quarter percent over
the respective LIBOR rates. As of December 31, 1998, the prime rates equaled
seven and three quarters percent and the LIBOR rates averaged five and three
tenths percent.

3. Inventory

Inventory consists of the following:

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Raw materials
Fabric and trim accessories..................... $ 4,022,298 $10,424,416
Raw cotton...................................... -- 1,043,449
Work-in-process................................... 4,315,703 7,620,403
Finished goods shipments-in-transit............... 5,655,461 10,331,867
Finished goods.................................... 9,272,734 19,810,712
----------- -----------
$23,266,196 $49,230,847
=========== ===========
</TABLE>

F-10
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Equipment, furniture and fixtures.................. $3,300,921 $6,265,367
Leasehold improvements............................. 2,147,474 2,402,965
Vehicles........................................... 94,826 260,480
---------- ----------
5,543,221 8,928,812
Less accumulated depreciation and amortization..... (2,835,964) (3,622,504)
---------- ----------
$2,707,257 $5,306,308
========== ==========
</TABLE>

5. Acquisitions

Rocky

On July 2, 1998, the Company purchased the partnership interests of Rocky
Apparel, L.P., a Delaware limited partnership ("Rocky"). Rocky operates
manufacturing facilities in Mississippi and also sources garments in Mexico.
The purchase price consisted of $7.4 million in cash and 81,000 shares of the
Common Stock of the Company, valued at $1.4 million, paid on closing. In
addition, the Company was required to repay $3.4 million of debt to one of the
sellers on closing and to guarantee the bank indebtedness of Rocky in the
amount of $5.0 million of which $1.2 million was outstanding at December 31,
1998. The Company was granted a security interest in the 81,000 shares to
secure the performance of obligations under the purchase agreement, including,
without limitation, the indemnification obligations. This transaction has been
accounted for as a purchase, and the purchase price has been allocated based
on the fair value of assets acquired and liabilities assumed. The excess of
cost over fair value of net assets acquired is being amortized over 15 years.
The operations of Rocky have been included with those of the Company
commencing on July 1, 1998.

MGI

On February 23, 1998, the Company purchased certain assets of MGI
International Limited, a Turks and Caicos corporation. The assets purchased
consist primarily of related inventory. The purchase price consisted of (i)
$4.6 million together with an amount equal to seller's cost of the inventory
purchased, paid in cash on closing and (ii) $500,000 paid on July 21, 1998,
together with interest at 7% per annum.

On February 23, 1998, the Company also purchased certain assets of Marshall
Gobuty International U.S.A., Inc., a California corporation ("MGI USA"). The
assets purchased consist primarily of related inventory. The purchase price
consisted of (i) $500,000, together with an amount equal to seller's cost of
the inventory purchased, paid in cash on closing and (ii) $500,000 paid on
July 21, 1998, together with interest at 7% per annum.

F-11
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Company from its cash flow from operations. 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 five years. The
operations of MGI have been included with those of the Company commencing on
February 23, 1998.

6. Debt

Bank borrowings consist of the following:

<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- -----------
<S> <C> <C>
Import trade bills payable......................... $4,287,518 $ 4,466,119
Bank direct acceptances............................ -- 16,969,565
Other Hong Kong credit facilities.................. -- 47,603
United States credit facilities.................... -- 11,804,980
---------- -----------
$4,287,518 $33,288,267
========== ===========
</TABLE>

The Company has credit facilities of $33 million and $10 million with the
Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and acceptances, as well as cash
advances. These facilities are subject to review at any time and the right of
either lender to demand payment at any time. Interest on cash advances under
HKSB's facility accrues at HKSB's prime rate for lending U.S. dollars plus
one-half to three-quarters percent per annum. As of December 31, 1998, HKSB's
U.S. dollar prime rate equaled seven and three-quarters percent. Interest on
cash advances under SCB's facility accrues at SCB's prime rate for lending
Hong Kong dollars. As of December 31, 1998, SCB's Hong Kong dollar prime rate
equaled nine 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, the Company will not incur two
consecutive quarterly losses and the Company will maintain a certain debt to
equity ratio. As of December 31, 1998, this aggregate net worth, as adjusted,
amounted to approximately $65 million. At December 31, 1997 and 1998, there
were $4.3 million and $21.5 million of outstandings under the HKSB and SCB
facilities, respectively.

At December 31, 1998, long term debt consisted of a $2.4 million term loan
and $1.1 million in capital lease obligations. The term loan is due in May
2003 and bears interest at 7% per annum. Annual maturities for the long term
debt and capital lease obligations are $981,000 (1999), $860,000 (2000),
$576,000 (2001), $579,000 (2002), $318,000 (2003) and $92,000 thereafter.

F-12
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Income Taxes

The provision for domestic and foreign income taxes is as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal............................... $2,673,505 $2,470,848 $ 8,684,999
State................................. 757,017 741,581 2,220,313
Foreign............................... 1,324,636 1,424,298 2,271,961
---------- ---------- -----------
4,755,158 4,636,727 13,177,273
Deferred (credit):
Federal............................... (70,081) 702,539 (748,629)
State................................. (53,704) (112,257) (11,157)
Foreign............................... (3,587) 7,991 (7,487)
---------- ---------- -----------
(127,372) 598,273 (767,273)
---------- ---------- -----------
Total............................... $4,627,786 $5,235,000 $12,410,000
========== ========== ===========
</TABLE>

The source of income before the provision for taxes is as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
United States.......................... $ 7,425,497 $ 7,459,582 $23,401,514
Foreign................................ 7,203,915 8,561,882 13,674,150
----------- ----------- -----------
Total................................ $14,629,412 $16,021,464 $37,075,664
=========== =========== ===========
</TABLE>

Foreign deferred income taxes result primarily from temporary differences in
the recognition of bad debt and depreciation expenses for tax and financial
reporting purposes. The resulting foreign deferred income tax liability
amounted to approximately $70,000 and $63,000 at December 31, 1997 and 1998,
respectively.

A reconciliation of the statutory federal income tax provision to the
reported tax provision on income is as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income tax based on federal statutory
rate................................ $ 4,974,000 $ 5,447,297 $12,976,482
State income taxes................... 464,186 415,354 1,443,203
Effect of foreign income taxes at
lower tax rates..................... (1,128,282) (1,478,751) (2,521,479)
Valuation allowance and other........ 317,882 851,100 511,794
----------- ----------- -----------
$ 4,627,786 $ 5,235,000 $12,410,000
=========== =========== ===========
</TABLE>

F-13
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred tax assets are as follows:

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current deferred tax assets:
Provision for doubtful accounts and unissued
credits...................................... $ 370,691 $ 763,218
Provision for other reserves.................. 363,309 664,495
Deferred compensation and benefits............ 150,108 220,863
State taxes................................... 242,724 655,745
----------- -----------
Total current deferred tax assets........... 1,126,832 2,304,321
Current deferred tax liabilities:
Accounts receivable valuation................. (479,929) (308,930)
Other......................................... (858,373) (1,600,620)
----------- -----------
(1,338,302) (1,909,550)
Valuation allowance for deferred tax assets..... (371,487) (371,487)
----------- -----------
Net current deferred tax asset (liability)...... $ (582,957) $ 23,284
=========== ===========
</TABLE>

8. Commitments and Contingencies

The Company has entered into various noncancelable operating lease
agreements, principally for executive office, warehousing facilities and
production facilities with unexpired terms in excess of one year. The future
minimum lease payments under these noncancelable operating leases are as
follows:

<TABLE>
<CAPTION>
Related
Party Other
---------- --------
<S> <C> <C>
1999.................................................. $1,268,898 $169,395
2000.................................................. 1,298,666 132,592
2001.................................................. 1,298,666 112,334
2002.................................................. 1,329,924 43,414
2003.................................................. 1,329,924 --
Thereafter............................................ 336,774 --
---------- --------
Total future minimum lease payments................. $6,862,852 $457,735
========== ========
</TABLE>

Certain of the operating leases contain provisions for additional rent based
upon increases in the operating costs, as defined, of the premises. Total rent
expense under the operating leases amounted to approximately $1,535,000,
$1,509,000 and $1,768,000 for 1996, 1997 and 1998, respectively.

The Company had open letters of credit of $14,432,000 and $18,276,000 as of
December 31, 1997 and 1998, respectively.

The Company has two employment contracts dated January 1, 1998 with two
executives providing for base compensation and other incentives. Commitments
under these agreements for base compensation amount to $1,000,000 for each of
the two executives annually through December 31, 2002. Each contract also
provides for annual bonuses of up to $2,000,000 for each executive and vesting
of stock options based on attaining specified performance criteria. In
addition, in connection with two acquisitions (see Notes 5 and 16) the Company
has or will enter into employment agreements with two additional executives.
Such agreements extend through 2002

F-14
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and initially provide for base compensation of $1,350,000, annually,
increasing to $1,450,000 over the term. These agreements also provide for cash
bonuses and vesting of stock options based on attaining specified performance
criteria.

The Company recorded a $400,000 charge in other expense during the year
ended December 31, 1996 to reflect potential obligations to the Chairman and
President with respect to an agreement entered into concurrently with the
Offering.

The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Company's management,
resolution of such matters will not have a material effect on its financial
position or results of operations.

On November 14, 1997, the Federal judge in the civil lawsuit brought by the
American Textile Manufacturers Institute ("ATMI") against, among others, the
Company, Gerard Guez, its Chairman and Chief Executive Officer, and Todd Kay,
its President, dismissed, with prejudice, ATMI's complaint. On December 22,
1997, the judge granted ATMI's motion to excuse himself from the case, and
denied ATMI's motion to vacate the decision and judgment previously entered
dismissing the case. On May 21, 1998, the dismissal of ATMI's complaint and
denial of ATMI's motion to vacate the decision and judgment previously entered
was reaffirmed. On June 5, 1998, ATMI filed a motion to appeal these decisions
which is currently pending. In the opinion of the Company's management,
resolution of such matter will not have a material effect on its financial
position or results of operations.

9. Equity

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

The Company's 1995 Stock Option Plan, as amended and restated in January
1997 (the Plan), has authorized the grant of both incentive and non-qualified
stock options to officers, employees, directors and consultants of the Company
for up to 2,600,000 shares (as adjusted for a stock split effective May 1998)
of the Company's common stock. The exercise price of incentive options must be
equal to 100% of fair market value of common stock on the date of grant and
the exercise price of non-qualified options must not be less than the par
value of a share of common stock on the date of grant. The Plan was also
amended to expand the types of awards which may be granted pursuant thereto to
include stock appreciation rights, restricted stock and other performance-
based benefits.

In October 1998 the Company granted 1,000,000 non-qualified stock options
not under the Plan. The options were granted to the Chairman and President of
the Company at $13.50 per share, the closing sales price of the Common Stock
on the day of the grant. The options expire in 2008 and vest over four years,
subject to certain performance criteria.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: weighted-average risk-free interest rate of 6%

F-15
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

for 1996, 1997 and 1998; dividend yields of 0% for 1996, 1997 and 1998;
weighted-average volatility factors of the expected market price of the
Company's common stock of 0.52 for 1996, 0.53 for 1997 and 0.58 for 1998; and
a weighted-average expected life of the option of four years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in the management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Pro forma net income.................... $9,682,000 $9,999,000 $21,251,000
Pro forma earnings per share............ $ 0.74 $ 0.75 $ 1.56
</TABLE>

A summary of the Company's stock option activity, and related information
for the years ended December 31 (as adjusted for a two-for-one stock split
effective May 8, 1998) follows:

<TABLE>
<CAPTION>
1996 1997 1998
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,091,330 $4.50 1,495,110 $5.38 1,419,734 $ 5.64
Granted................ 752,000 6.09 78,000 7.62 1,624,000 13.94
Exercised.............. (104,552) 3.64 (115,376) 4.30 (532,137) 6.28
Forfeited.............. (243,668) 4.40 (38,000) 3.59 (110,000) 6.53
--------- ----- --------- ----- --------- ------
Outstanding at end of
year................... 1,495,110 $5.38 1,419,734 $5.64 2,401,597 $11.06
========= ===== ========= ===== ========= ======
Exercisable at end of
year................... 296,328 568,566 759,667
Weighted average per
option fair value of
options granted during
the year............... $2.97 $1.71 $ 7.22
</TABLE>

Exercise prices for options outstanding as of December 31, 1998 ranged from
1,019,722 options at $3.00 to $9.40, 1,363,375 options at $13.50 to $18.50 and
18,500 options at $31.00 to $33.125. The weighted average remaining
contractual life of those options is 8.9 years. Options vest over a period of
three or four years from respective grant dates.

10. Earnings Per Share

In February 1997, the FASB issued "Earnings Per Share" (Statement No. 128)
establishing standards for computing and presenting earnings per share for
publicly-held common stock or potential common stock. Statement No. 128
supersedes the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings Per Share and simplifies the standards for
computing earnings per share. In addition, Statement No. 128 replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share, requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation. The statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997, with earlier application not permitted. All periods
presented reflect the adoption of Statement No. 128. The impact of amounts
previously reported was not material.

F-16
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A reconciliation of the numerator and denominator of basic earnings per
share and diluted earnings per share is as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Basic EPS Computation:
Numerator................................. $10,001,626 $10,786,464 $24,665,664
Denominator:
Weighted average common shares
outstanding............................. 13,015,866 13,175,256 13,519,517
----------- ----------- -----------
Total shares........................... 13,015,866 13,175,256 13,519,517
----------- ----------- -----------
Basic EPS.................................. $ 0.77 $ 0.82 $ 1.82
=========== =========== ===========
Diluted EPS Computation:
Numerator................................. $10,001,626 $10,786,464 $24,665,664
Denominator:
Weighted average common shares
outstanding............................. 13,015,866 13,175,256 13,519,517
Incremental shares from assumed exercise
of options.............................. 79,796 391,998 897,333
----------- ----------- -----------
Total shares........................... 13,095,662 13,567,254 14,416,850
----------- ----------- -----------
Diluted EPS................................ $ 0.76 $ 0.80 $ 1.71
=========== =========== ===========
</TABLE>

11. Supplemental Schedule of Cash Flow Information

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest..................... $ 526,000 $ 660,000 $2,079,000
========== ========== ==========
Cash paid for income taxes................. $6,036,000 $2,825,000 $7,816,000
========== ========== ==========
</TABLE>

12. Related-Party Transactions

Related-party transactions, consisting primarily of purchases and sales of
finished goods and raw materials, are as follows:

<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- --------
<S> <C> <C> <C>
Sales to related parties....................... $387,000 $3,531,000 $ --
Purchases from related parties................. 19,000 620,000 725,000
</TABLE>

As of December 31, 1997 and 1998, noncombined affiliates were indebted to
the Company in the amounts of $3,000 and $2.1 million respectively. Total
interest paid by noncombined affiliates and the Chairman and President was
$71,000 and $195,000 for the years ended December 31, 1997 and 1998,
respectively.

The Company has, from time to time, advanced funds to officers including the
Chairman and President and to corporations owned by the Chairman and
President. The maximum outstanding amounts of such loans during 1997 and 1998
were $1.6 million and $4.0 million, respectively. Loans made to these persons
in 1997 and 1998 bore interest at the rate of 7% per annum.

In each of 1997 and 1998, the Company advanced an aggregate of $2.0 million
to a corporation controlled by parties related to one of the Original
Shareholders. Such advances were repaid within 90 days.

F-17
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Under lease agreements entered into between the Company and two entities
owned by the Chairman and President, the Company paid $1,241,000 in 1997 and
$1,269,000 in 1998, for rent for office and warehouse facilities.

In 1998, a California limited liability company owned by the Chairman and
President of the Company purchased 2,300,000 shares of the Common Stock of
Tag-It Pacific, Inc. ("Tag-It") (or approximately 37% of such Common Stock
then outstanding). Tag-It is a provider of brand identity programs to
manufacturers and retailers of apparel and accessories. On December 1, 1998,
Tag-It assumed the responsibility for managing and sourcing all trim and
packaging used in connection with products manufactured by or on behalf of the
Company in Mexico. The Company transferred $3.0 million of trim inventory to
Tag-It in December 1998. This arrangement is terminable by either the Company
or Tag-It at any time. The Company believes that the terms of this
arrangement, which is subject to the acceptance of the Company's customers,
are no less favorable to the Company than could be obtained from unaffiliated
third parties.

13. Operations by Geographic Areas

The Company operates primarily in one industry segment, the design,
manufacturing and importation of private label, moderately-priced, casual
apparel. Information about the Company's operations in the United States and
Asia is presented below. Intercompany revenues and assets have been eliminated
to arrive at the consolidated amounts.
<TABLE>
<CAPTION>
Adjustments
and
United States Asia Eliminations Total
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
1996
Sales.................... $226,920,000 $ 2,941,000 $ -- $229,861,000
Intercompany sales....... -- 140,167,000 (140,167,000) --
------------ ------------ ------------- ------------
Total revenue............ $226,920,000 $143,108,000 $(140,167,000) $229,861,000
============ ============ ============= ============
Income from operations... $ 9,479,000 $ 6,980,000 $ -- $ 16,459,000
============ ============ ============= ============
Total assets............. $ 51,150,000 $ 41,675,000 $ (29,405,000) $ 63,420,000
============ ============ ============= ============
1997
Sales.................... $252,136,000 $ 7,956,000 $ -- $260,092,000
Intercompany sales....... -- 148,613,000 (148,613,000) --
------------ ------------ ------------- ------------
Total revenue............ $252,136,000 $156,569,000 $(148,613,000) $260,092,000
============ ============ ============= ============
Income from operations... $ 8,581,000 $ 8,499,000 $ -- $ 17,080,000
============ ============ ============= ============
Total assets............. $ 56,352,000 $ 46,656,000 $ (31,147,000) $ 71,861,000
============ ============ ============= ============
1998
Sales.................... $345,685,000 $ 32,471,000 $ -- $378,156,000
Intercompany sales....... 11,289,000 151,957,000 (163,246,000) --
------------ ------------ ------------- ------------
Total revenue............ $356,974,000 $184,428,000 $(163,246,000) $378,156,000
============ ============ ============= ============
Income from operations... $ 24,751,000 $ 13,820,000 $ -- $ 38,571,000
============ ============ ============= ============
Total assets............. $143,211,000 $ 78,431,000 $ (67,751,000) $153,891,000
============ ============ ============= ============
</TABLE>

The Company commenced sourcing operations in Mexico in 1997. Sales of such
operations were approximately $104 million and $19 million in 1998 and 1997,
respectively, and total assets at December 31, 1998 and 1997 were $1.1 million
and $0, respectively.

F-18
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Employee Benefit Plans

On August 1, 1992, Tarrant HK established a defined contribution retirement
plan covering all of its Hong Kong employees whose period of service exceeds
12 months. Plan assets are monitored by a third-party investment manager and
are segregated from those of Tarrant HK. Participants may contribute up to 5%
of their salary to the plan. Annual matching contributions are made by the
Company. Costs of the plan charged to operations for 1996, 1997 and 1998
amounted to approximately $46,000, $59,000 and $84,000, respectively.

On July 1, 1994, the Parent Company established a defined contribution
retirement plan covering all of its U.S. employees whose period of service
exceeds 12 months. Plan assets are monitored by a third-party investment
manager and are segregated from those of the Parent Company. Participants may
contribute from 1% to 15% of their pre-tax compensation up to effective
limitations specified by the Internal Revenue Service. The Company's
contributions to the plan are based on a 50% (100% effective July 1, 1995)
matching of participants' contributions, not to exceed 6% (5% effective July
1, 1995) of the participants' annual compensation. In addition, the Company
may also make a discretionary annual contribution to the plan. Costs of the
plan charged to operations for 1996, 1997 and 1998 amounted to approximately
$121,000, $143,000 and $166,000, respectively.

On December 27, 1995, the Company established a deferred compensation plan
for executive officers. Participants may contribute a specific portion of
their salary to such plan. The Company does not contribute to the Plan.

On December 20, 1996, the Compensation Committee of the Company's Board of
Directors established the Incentive Compensation Plan, which provides for both
discretionary bonuses and bonus amounts upon achieving certain earnings
thresholds for certain members of management. The adoption of this plan
received shareholder approval at the 1997 annual meeting.

15. LDA Option

On October 22, 1998, Limited Direct Associates LP, an entity 100% owned by
The Limited ("LDA"), acquired 1,000,000 shares of the Company's Common Stock
(or approximately 7.2% of the Common Stock outstanding as of March 1, 1999).
The shares were acquired through the exercise of an option granted by Mr. Guez
and Mr. Kay to LDA at the time of the Company's initial public offering. The
option granted LDA the right to purchase 10% of the total shares of Common
Stock outstanding at the time of the initial public offering, or 1,299,998
shares, at a price of $3.60 per share (as adjusted for a two-for-one stock
split effective May 8, 1998). The transaction was done on a cashless basis,
whereby Mr. Guez and Mr. Kay transferred ownership of 1,000,000 shares to LDA
and, in lieu of receiving cash, Mr. Guez and Mr. Kay retained ownership of the
remaining 299,998 shares. The 1,000,000 shares are subject to a lockup
provision, which prohibits LDA from selling the shares until October 9, 1999.
Messrs. Guez and Kay will continue to have the right to vote the shares for
one year following the exercise of the option, and will also have a right of
first refusal to purchase such shares, subject to certain exceptions.

16. Subsequent Events--Acquisitions (unaudited)

On February 22, 1999, the Company agreed to purchase certain assets of a
denim mill located in Puebla, Mexico with an annual capacity of 18 million
meters. The purchase price will consist of $22 million in cash payable on May
6, 1999 and two million shares (the "Shares") of the Company's Common Stock.
The Shares will be distributed to the sellers in three equal installments on
the first three anniversary dates of the closing date; 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
distribution of Shares. In addition, the Company has granted the holders of
the Shares certain registration rights and the right to vote the Shares.
Closing is anticipated to occur on April 1, 1999.

F-19
<PAGE>

TARRANT APPAREL GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On December 2, 1998, the Company contracted with an affiliate of the seller
of the denim mill described above for the construction of a turn-key facility
near Puebla, Mexico for the production of twill fabric which will also house
ancillary facilities. The cost of this facility will be the sum of (i) the
cost of construction and equipment installed, which cost will not include
operating expenses, estimated to be approximately $47 million, and (ii) a
promissory note of the Company (the "Note") in the principal amount of $28
million.

17. Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the
years ended December 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------ Year Ended
March 31 June 30 September 30 December 31 December 31
-------- -------- ------------ ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1996
Net sales............... $42,093 $ 68,870 $ 50,008 $68,890 $229,861
Gross profit............ 7,067 11,267 8,237 11,002 37,573
Operating income........ 2,360 5,504 3,739 4,856 16,459
Net income.............. $ 1,490 $ 3,558 $ 2,209 $ 2,745 $ 10,002
Net income per common
share:
Basic................. $ .11 $ .27 $ .17 $ .21 $ 0.77
Diluted............... $ .11 $ .27 $ .17 $ .21 $ 0.76
Weighted average shares
outstanding:
Basic................. 13,000 13,000 13,000 13,064 13,016
Diluted............... 13,000 13,030 13,026 13,326 13,096

1997
Net sales............... $53,605 $ 73,879 $ 69,218 $63,391 $260,093
Gross profit............ 8,782 11,068 9,690 9,557 39,097
Operating income........ 3,393 5,091 4,063 4,533 17,080
Net income.............. $ 2,022 $ 3,265 $ 2,711 $ 2,789 $ 10,787
Net income per common
share:
Basic................. $ .15 $ .25 $ .21 $ .21 $ .82
Diluted............... $ .15 $ .24 $ .20 $ .21 $ .80
Weighted average shares
outstanding:
Basic................. 13,110 13,178 13,202 13,210 13,176
Diluted............... 13,544 13,592 13,612 13,520 13,568

1998
Net sales............... $64,257 $100,100 $114,948 $98,850 $378,155
Gross profit............ 10,947 20,265 19,690 20,176 71,078
Operating income........ 4,558 11,674 11,374 10,965 38,571
Net income.............. $ 2,780 $ 7,223 $ 7,094 $ 7,569 $ 24,666
Net income per common
share:
Basic................. $ .21 $ .54 $ .52 $ .55 $ 1.82
Diluted............... $ .20 $ .51 $ .49 $ .50 $ 1.71
Weighted average shares
outstanding:
Basic................. 13,281 13,432 13,592 13,773 13,520
Diluted............... 13,756 14,254 14,454 15,204 14,417
</TABLE>

F-20
<PAGE>

SCHEDULE II

TARRANT APPAREL GROUP

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Additions
Balance at Charged to Additions
Beginning of Costs and Charged to Balance at
Year Expenses Other Accounts Deductions End of Year
------------ ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1996
Allowance for returns
and discounts......... $2,347,750 $(432,594) $ -- $ -- $1,915,156
========== ========= ===== ===== ==========
For the year ended
December 31, 1997
Allowance for returns
and discounts......... $1,915,156 $(359,344) $ -- $ -- $1,555,812
========== ========= ===== ===== ==========
For the year ended
December 31, 1998
Allowance for returns
and discounts......... $1,555,812 $ 691,194 $ -- $ -- $2,247,006
========== ========= ===== ===== ==========
</TABLE>

F-21
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 8, 1999.

TARRANT APPAREL GROUP

/s/ Gerard Guez
By: _________________________________
Gerard Guez,
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Gerard Guez Chairman, Chief Executive March 8, 1998
____________________________________ Officer and Director
Gerard Guez (Principal Executive
Officer)

/s/ Todd Kay President and Director March 8, 1998
____________________________________
Todd Kay

/s/ Mark B. Kristof Vice President--Finance, March 8, 1998
____________________________________ Chief Financial Officer and
Mark B. Kristof Director (Principal
Financial and Accounting
Officer)

/s/ Karen S. Wasserman Executive Vice President, March 8, 1998
____________________________________ General Merchandising
Karen S. Wasserman Manager and Director

/s/ Barry Aved Director March 8, 1998
____________________________________
Barry Aved

/s/ James R. Miller Director March 8, 1998
____________________________________
James R. Miller
</TABLE>

S-1
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.23.1 Employment Agreement effective January 1, 1998, between the Company
and Gerard Guez
10.24.1 Employment Agreement effective January 1, 1998, between the Company
and Todd Kay
10.58.1 Letter Agreement dated October 1, 1997 regarding Accounts Receivable
Financing Agreement
10.65 Partnership Interest Purchase Agreement, dated as of July 2, 1998,
among Rocky Acquisition, LLC, Tarrant Apparel Group, Limited Direct
Associates, L.P., Rocky Apparel, Inc., and Gabriel Manufacturing
Company
10.66 Escrow Agreement made as of July 2, 1998, by and among Tarrant Apparel
Group, Gabriel Manufacturing Company and Rocky Apparel, Inc.
10.67 Facility Development Agreement dated as of December 2, 1998, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V.
10.68 Agreement for Purchase of Assets dated as of February 22, 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
23 Consent of Ernst & Young LLP
27 Financial Data Summary
</TABLE>

<PAGE>

EXHIBIT 10.23.1
EMPLOYMENT AGREEMENT

1. Parties. The parties to this Employment Agreement (the "Agreement")
-------
effective as of January 1, 1998 are as follows:

1.1 Gerard Guez ("Executive"); and

1.2 Tarrant Apparel Group (including any successors, the "Company").

2. Employment and Duties. Executive is hereby employed as the Chief
---------------------
Executive Officer of the Company. Executive shall report directly to the Board
of Directors (the "Board") and Executive shall perform such executive duties and
functions as shall be specified from time to time by the Board consistent with
Executive's position as Chief Executive Officer of the Company, including such
duties as are customarily performed by the chief executive officer of a
corporation. Executive hereby accepts such employment and agrees to perform the
services contemplated herein faithfully, diligently, to the best of Executive's
ability and in the best interests of the Company. Executive shall devote
substantially all his business time and efforts to the rendition of such
services. Executive's principal place of employment and the Company's principal
place of business will be in Los Angeles, California .

3. Term of Agreement. The term of this Agreement shall commence on
-----------------
January 1, 1998 and, unless earlier terminated pursuant to the provisions of
Section 5, shall continue until December 31, 2002 (the "Term").

4. Compensation and Other Benefits. The Company shall provide the
-------------------------------
following compensation and other benefits to Executive during the Term as
compensation for the performance by Executive of his obligations under this
Agreement:

4.1 Base Salary. The Company shall pay to Executive an annual base
-----------
salary (the "Base Salary") at the rate of $1,000,000 per annum (or such
increased amount as the Board, its sole discretion, from time to time may
determine), payable in approximately equal periodic installments pursuant to the
general policy of the Company from time to time, but not less frequently than
monthly. Executive's Base Salary may not be decreased during the Term of this
Agreement.

4.2 Annual Bonus.
------------

4.2.1 Amount. In addition to the Base Salary, the Company shall
------
pay to Executive an annual bonus (the "Annual Bonus") for the twelve month
period ended December 31, 1998 in the amount of $1,000,000 and for each twelve
month period ended December 31, 1999, 2000, 2001 and 2002 in the amount of
$2,000,000, in each case payable not later than 90 days after the end of such
twelve month period.

-1-
<PAGE>

4.2.2 Repayment of Indebtedness. Notwithstanding anything to the
-------------------------
contrary contained herein, $500,000 of the Annual Bonus for each of the twelve
month periods ended December 31, 1999, 2000, 2001 and 2002 will be applied by
the Company first to pay any interest which has accrued as of the date such
Annual Bonus is payable on any indebtedness of Executive to the Company and then
against the unpaid principal balance of such indebtedness, and the balance, if
any, shall be paid to Executive.

4.2 Pre-Tax Income. Notwithstanding anything to the contrary
--------------
contained herein, each Annual Bonus shall be reduced by the percentage set forth
in column (A) below in the event the Company's pre-tax income computed after
bonus for the twelve month period ended on the immediately preceding December 31
("Milestone Pre-Tax Income") shall bear the relationship set forth in column (B)
below to the milestone for such twelve month period set forth in columns (C) and
(D):
<TABLE>
<CAPTION>

Less Than Greater
Or Equal To Than
----------- -------

<S> <C> <C> <C> <C>
0% N/A 100%

10% 99.9% 90% 1998 $ 35,000,000

20% 89.9% 80% 1999 $ 55,000,000

30% 79.9% 70% 2000 $ 69,000,000

40% 69.9% 60% 2001 $ 91,000,000

100% 59.9% 0% 2002 $119,000,000
</TABLE>

4.3 Employee Benefit Plans. During the Term, Executive shall be
----------------------
entitled to participate in such pension, welfare, and medical and life insurance
plans and programs as are maintained by the Company from time to time for the
general benefit of its executive employees (with respect to each of the
foregoing, a "Plan" and, collectively, the "Plans").

4.4 Fringe Benefits. Executive shall be entitled to such fringe
---------------
benefits and perquisites ("Fringe Benefits") as are generally made available to
executives of the Company pursuant to Company policy or which are normal to
Executive's position, and such other fringe benefits as may be determined by the
Board during the Term.

2
<PAGE>

4.5 Stock Option. The Company shall grant to Executive the right to
------------
purchase up to 666,668 shares of the Common Stock of the Company at an exercise
price of $13.50 per share, which right shall expire on November 12, 2008 and
shall first become exercisable in the four equal installments of 166,667 shares
on December 31, 1998, 1999, 2000 and 2001, all on the further terms and
conditions set forth on Exhibit A hereto; provided, however, that (i) the right
--------- --------
to purchase any such shares which theretofore has not become exercisable shall
become exercisable on November 2, 2008 and (ii) the number of shares in each
such installment shall be reduced by the percentage set forth in column (A)
below in the event the Company's pre-tax income computed after bonus for the
twelve month period ended on the immediately preceding December 31 ("Milestone
Pre-Tax Income") shall bear the relationship set forth in column (B) below to
the milestone for such twelve month period set forth in columns (C) and (D):
<TABLE>
<CAPTION>

Less Than Greater
Or Equal To Than
----------- -------
<S> <C> <C> <C> <C>
0% N/A 100%

10% 99.9% 90% 1998 $ 35,000,000

20% 89.9% 80% 1999 $ 55,000,000

30% 79.9% 70% 2000 $ 69,000,000

40% 69.9% 60% 2001 $ 91,000,000

100% 59.9% 0% 2002 $119,000,000
</TABLE>

5. Termination of Employment.
-------------------------

5.1 Termination for Cause.
---------------------

5.1.1 Entitlements Upon Termination for Cause. The Company shall
---------------------------------------
have the right to terminate Executive's employment prior to the expiration of
the Term for "Cause," as defined in subsection 5.1.2. If Executive's employment
is so terminated, Executive shall be entitled to receive (i) payment of the pro
rata portion of Executive's then current Base Salary through and including the
date of termination, plus a pro rata portion of Executive's Annual Bonus, if any
and if such amount is determinable, for the current year and (ii) payment for
all accrued and unused vacation time existing as of the date of termination as
reflected in the Company's personnel records, payment of which will be made at a
rate calculated in accordance with Executive's then current Base Salary.
Executive shall not be eligible to receive Base Salary,

3
<PAGE>

Annual Bonus, or to participate in any Plans or to receive any Fringe Benefits
with respect to future periods after the date of such termination, except for
the right to receive benefits under any Plan in which Executive participates in
accordance with the terms of such Plan, provided that nothing in this subsection
shall require the Company to make any contribution or payment to any such Plan
after termination of Executive's employment.

5.1.2 Cause Defined. For the purposes of this Agreement, "Cause"
-------------
shall mean: (a) Executive's continual and material failure or refusal (whether
intentional, reckless or negligent) to perform his duties under this Agreement;
(b) a material breach by Executive of his fiduciary duties to the Company; or
(c) Executive's indictment of a crime (whether or not denominated a felony)
involving dishonesty or moral turpitude.

5.1.3 Termination Date; Notice. If acts giving rise to the
------------------------
Company's right to terminate under subsection 5.1 exist, Company shall provide
specific details of such acts in a written notice of termination delivered by
Company to Executive and Executive shall have a reasonable period of time (not
less than thirty (30) days and not more than sixty (60) days) to cure such acts.
If Executive fails to cure within such period, Executive shall be terminated
effective the date written notice of failure to cure is given. If such acts
involve fraudulent conduct or moral turpitude, no opportunity to cure shall
exist and the date of termination of employment by the Company under subsection
5.1 shall be the date set forth in the written notice of termination delivered
by the Company to Executive, unless no such date is specified in such notice, in
which case the date of termination shall be the date of receipt by Executive of
written notice of termination and such notice shall provide specific details of
the fraudulent conduct and/or moral turpitude.

5.2 Death. If Executive dies prior to the expiration of the Term,
-----
his beneficiary or estate shall be entitled to receive such amount of the then
current Base Salary, Annual Bonus and other compensation and disbursement of
benefits as would have been payable to Executive under a termination for Cause
under subsection 5.1 as of the date of death. Executive's beneficiary or estate
shall also be entitled to receive such amounts, if any, as are payable to
Executive under any applicable insurance policies.

5.3 Disability. If Executive becomes Permanently Disabled (as
----------
defined below) prior to the expiration of the Term, this Agreement shall be
terminated as of the date of such disability. In the event of such termination,
Executive shall be entitled to receive such amounts of Base Salary, Annual Bonus
and other compensation and disbursement of benefits as would have been payable
to Executive under a termination for Cause under subsection 5.1 as of the date
on which Executive became Permanently Disabled as defined below. Executive
shall also be entitled to receive such amounts, if any, as are payable to
Executive under any applicable insurance policies. For the purposes of this
subsection, "Permanently Disabled" shall mean the incapacity of Executive due to
illness, accident, or other incapacity to perform his duties for a period of
ninety (90) consecutive days as determined by the Board.

4
<PAGE>

5.4 Termination Without Cause. If Executive is terminated by the
-------------------------
Company without Cause, the Company shall continue to make the payments provided
for in Section 4 at the rate then being paid to Executive through the end of the
Term; provided, however, that any salary or bonus Executive may receive from any
other employment which he obtains subsequent to such termination shall be offset
against and reduce the payments the Company is required to make to Executive
hereunder. Executive shall not be required or obligated to obtain other
employment to mitigate the payments due him hereunder.

5.5 Termination of Relationship. In the event of the termination of
---------------------------
the employment relationship between the Company and Executive, Executive shall
be deemed to have resigned any and all positions then held by Executive
including, without limitation, officerships or governing body memberships in
subsidiary corporations of the Company, if any.

6. Assignment. This Agreement shall inure to the benefit of the
----------
Company's successors, assigns, grantees and its associated, affiliated,
subsidiary and parent companies as may now or hereafter exist. This Agreement
shall be binding on Executive, his heirs, executors or administrators, and legal
representatives but shall not be assignable by Executive and the obligations of
Executive may not be delegated.

7. Severability. In the event that any provision of this Agreement
------------
should be held to be void, voidable, unlawful or for any reason unenforceable,
the remaining provisions or portions of this Agreement shall remain in full
force and effect.

8. Notices. Any notice, request, demand, or other communication required
-------
or permitted to be given under this Agreement shall be sufficient if in writing
and delivered personally or sent by certified or registered mail to the Company
at its principal executive offices and to Executive at his residence address as
shown on the records of the Company.

9. No Third-Party Benefits. None of the provisions of this Agreement
-----------------------
shall be for the benefit of, or enforceable by, any third-party beneficiary.

10. Amendment; Waiver. This Agreement may not be modified, amended or
-----------------
waived in any manner except by an instrument in writing signed by both Executive
and the Company. The waiver by either party of compliance with any provision of
this Agreement by the other party shall not operate or be construed as a waiver
of any other provision of this Agreement, or of any subsequent breach by such
party of a provision of this Agreement.

11. Applicable Law. This Agreement, Executive's employment relationship
--------------
with the Company, and any and all matters or claims arising out of or related to
this Agreement or Executive's employment relationship with the Company, shall be
governed by, and construed in accordance with, the laws of the State of
California regardless of the choice of laws provisions of California or any
other jurisdiction.

5
<PAGE>

12. Supersedes Previous Agreements. This Agreement constitutes the entire
------------------------------
agreement and understanding between the parties to this Agreement and supersedes
all prior and contemporaneous negotiations and understandings between the
parties whether oral or written, expressed or implied.

13. Counterparts. This Agreement may be executed by the parties in
------------
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.

14. Headings. The headings of sections and subsections of this Agreement
--------
are included solely for convenience of reference and shall not control the
meaning or interpretation of any of the provisions of this Agreement.

15. Attorneys' Fees. In the event of any dispute or controversy arising
---------------
out of this Agreement, the prevailing party shall be entitled to reimbursement
of its reasonable costs, including court and arbitration costs and attorneys'
fees and costs.

IN WITNESS WHEREOF, the Company has caused its duly authorized
representative to execute, and Executive has executed, this Agreement as of the
date first above written.

TARRANT APPAREL GROUP

By: /s/ James R. Miller
-----------------------------------------
James R. Miller
Chairman of the Compensation
Committee of the Board of Directors

/s/ Gerard Guez
-----------------------------------------
GERARD GUEZ

6
<PAGE>

EXHIBIT A
---------

NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------

THIS NONQUALIFIED STOCK OPTION AGREEMENT is made as of the thirteenth day
of October, 1998, between TARRANT APPAREL GROUP, a California corporation (the
"Company"), and Gerard Guez ("Optionee").

R E C I T A L S
---------------

A. The Compensation Committee (the "Committee") of the Board of Directors of
the Company has determined that it is to the advantage and in the best
interests of the Company and its shareholders to grant a nonqualified stock
option to Optionee covering 666,668 shares of the Company's Common Stock
(or any class of stock into which such Common Stock is converted or
reclassified) ("Common Stock") as an inducement to remain in the service of
the Company and as an incentive for increased effort during such service,
and has approved the execution of this Nonqualified Stock Option Agreement
between the Company and Optionee.

B. The option granted hereby is not intended to qualify as an "incentive stock
---
option" under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").

NOW, THEREFORE, the parties hereto agree as follows:

1. Grant of Option. The Company grants to Optionee the right and option
---------------
("Option") to purchase on the terms and conditions hereinafter set forth, all or
any part of an aggregate of 666,668 shares of Common Stock at the purchase price
of $13.50 per share, which price is equal to the fair market value of such stock
(as determined pursuant to Section 4 hereof) on the date of this Agreement. The
Option shall be exercisable from time to time in accordance with the provisions
of this Agreement during a period expiring on October 12, 2008 (the "Expiration
Date").

2. Vesting. The Option shall first become exercisable in the four equal
-------
installments of 166,667 shares on December 31, 1998, 1999, 2000 and 2001;

provided, however, that (i) the right to purchase any such shares which
- --------
theretofore has not become exercisable shall become exercisable on October 11,
2008 and (ii) the number of shares in each such installment shall be reduced by
the percentage set forth in column (A) below in the event the Company's pre-tax
income for the twelve month period ended on the immediately preceding December
31 ("Milestone Pre-Tax Income") shall bear the

7
<PAGE>

relationship set forth in column (B) below to the milestone for such twelve
month period set forth in columns (C) and (D):

Less Than Greater
Or Equal To Than
------------- --------

<S> <C> <C> <C> <C>
0% N/A 100%

10% 99.9% 90% 1998 $35,000,000

20% 89.9% 80% 1999 $55,000,000

30% 79.9% 70% 2000 $69,000,000

40% 69.9% 60% 2001 $91,000,000

100% 59.9% 0% 2002 $119,000,000
</TABLE>

3. Manner of Exercise. Each exercise of this Option shall be by means of
------------------
a written notice of exercise delivered to the Company, specifying the number of
shares to be purchased and accompanied by payment to the Company of the full
purchase price of the shares to be purchased solely (i) in cash or by check
payable to the order of the Company, (ii) by delivery of shares of Common Stock
of the Company already owned by, and in the possession of, Optionee, valued at
their fair market value, as determined in accordance with Section 4 hereof, or
(iii) (x) by a promissory note made by Optionee in favor of the Company, upon
the terms and conditions determined by the Committee including, to the extent
the Committee determines appropriate, a security interest in the shares issuable
upon exercise or other property, or (y) through a "cashless exercise," in either
case complying with applicable law (including, without limitation, state and
federal margin requirements), or any combination thereof. Shares of Common
Stock used to satisfy the exercise price of this Option shall be valued at their
fair market value determined (in accordance with Section 4 hereof) on the date
of exercise (or if such date is not a business day, as of the close of the
business day immediately preceding such date). This Option may not be exercised
for a fraction of a share and no partial exercise of this Option may be for less
than (a) one hundred (100) shares or (b) the total number of shares then
eligible for exercise, if less than one hundred (100) shares.

8
<PAGE>

This Option may be exercised (i) during the lifetime of Optionee only by
Optionee; (ii) to the extent permitted by the Committee or by the terms of this
Agreement, Optionee's spouse if such spouse obtained the Option pursuant to a
qualified domestic relations order as defined by the Code or Title I of ERISA,
or the rules thereunder ("Qualified Domestic Relations Order"); and (iii) after
Optionee's death by his or her transferees by will or the laws of descent or
distribution.

4. Fair Market Value of Common Stock. The fair market value of a share
---------------------------------
of Common Stock shall be determined for purposes of this Agreement by reference
to the closing price on the principal stock exchange on which such shares are
then listed or, if such shares are not then listed on a stock exchange, by
reference to the closing price (if approved for quotation on the NASDAQ National
Market) or the mean between the bid and asked price (if other over-the-counter
issue) of a share as supplied by the National Association of Securities Dealers,
Inc. through NASDAQ (or its successor in function), in each case as reported by

The Wall Street Journal, for the business day immediately preceding the date on
- -----------------------
which the option is granted (which, for all purposes, shall be the date of this
Agreement) or exercised (or, if for any reason no such price is available, in
such other manner as the Committee may deem appropriate to reflect the then fair
market value thereof).

5. Shares to be Issued in Compliance with Federal Securities Laws and
------------------------------------------------------------------
Exchange Rules. By accepting the Option, Optionee represents and agrees, for
- --------------
Optionee and his legal successors (by will or the laws of descent and
distribution or through a Qualified Domestic Relations Order), that none of the
shares purchased upon exercise of the Option will be acquired with a view to any
sale, transfer or distribution of said shares in violation of the Securities Act
of 1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, or any applicable state "blue sky" laws. If required by
the Committee at the time the Option is exercised, Optionee or any other person
entitled to exercise the Option shall furnish evidence satisfactory to the
Company (including a written and signed representation) to such effect in form
and substance satisfactory to the Company, including an indemnification of the
Company in the event of any violation of the Securities Act or state blue sky
laws by such person. The Company shall use its reasonable efforts to take all
necessary and appropriate action to assure that the shares issuable upon the
exercise of this Option shall be issued in full compliance with the Securities
Act, state blue sky laws and all applicable listing requirements of any
principal securities exchange on which shares of the same class are listed.

6. Withholding of Taxes. Upon the exercise of this Option, the Company
--------------------
shall have the right to require Optionee or Optionee's legal successor to pay
the Company the amount of any taxes which the Company may be required to
withhold with respect to such shares.

9
<PAGE>

7. No Assignment. This Option and all other rights and privileges
-------------
granted hereby shall not be transferred, either voluntarily or by operation of
law otherwise than by will or the laws of descent and distribution or pursuant
to a Qualified Domestic Relations Order. Upon any attempt to so transfer or
otherwise dispose of this Option or any other right or privileges granted hereby
contrary to the provisions hereof, this Option and all rights and privileges
contained herein shall immediately become null and void and of no further force
or effect.

8. Adjustment for Reorganizations, Stock Splits, etc. If the outstanding
-------------------------------------------------
shares of Common Stock of the Company (or any other class of shares or
securities which shall have become issuable upon the exercise of this Option
pursuant to this sentence) are increased or decreased or changed into or
exchanged for a different number or kind of shares or securities of the Company
through reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar transaction, an appropriate
and proportionate adjustment shall be made in the maximum number and kind of
shares receivable upon the exercise of this Option, without change in the
aggregate purchase price applicable to the unexercised portion of this Option,
but with a corresponding adjustment in the price for each share or other unit of
any security covered by this Option.

Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all the property or more than eighty percent
(80%) of the then outstanding stock of the Company to another corporation, this
Option shall terminate; provided, however, that notwithstanding the foregoing,
-------- -------
the Committee shall provide in writing in connection with such transaction for
the appropriate satisfaction of this Option by one or more of the following
alternatives (separately or in combinations): (i) for the Option to become
immediately exercisable notwithstanding the provisions of Sections 2 and 3; (ii)
for the assumption by the successor corporation of this Option or the
substitution by such corporation therefor of a new option covering the stock of
the successor corporation or its affiliates with appropriate adjustments as to
the number and kind of shares and prices; (iii) for the continuance of the
Option by such successor corporation in the manner and under the terms provided
herein; or (iv) for the payment in cash or stock in lieu of and in complete
satisfaction of this Option.

Adjustments under this Section 8 shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of stock shall be
issued under this Option on any such adjustment.

10
<PAGE>

9. Participation by Optionee in Other Company Plans. Nothing herein
------------------------------------------------
contained shall affect the right of Optionee to participate in and receive
benefits under and in accordance with the then current provisions of any
pension, insurance, profit sharing or other employee welfare plan or program of
the Company or of any subsidiary of the Company.

10. No Rights as a Shareholder Until Issuance of Stock Certificate.
--------------------------------------------------------------
Neither Optionee nor any other person legally entitled to exercise this Option
shall be entitled to any of the rights or privileges of a shareholder of the
Company in respect of any shares issuable upon any exercise of this Option
unless and until a certificate or certificates representing such shares shall
have been actually issued and delivered to Optionee. No shares shall be issued
and delivered upon the exercise of this Option unless and until there shall have
been full compliance with all applicable requirements of the Securities Act
(whether by registration or satisfaction of exemption conditions), all
applicable listing requirements of any national securities exchange on which
shares of the same class are then listed and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and delivery.

11. Not an Employment or Service Contract. Nothing herein contained shall
-------------------------------------
be construed as an agreement by the Company or any of its affiliates, express or
implied, to employ Optionee or contract for Optionee's services, to restrict
the Company's or such affiliate's right to discharge Optionee or cease
contracting for Optionee's services or to modify, extend or otherwise affect in
any manner whatsoever, the terms of any employment agreement or contract for
services which may exist between Optionee and the Company or any of its
affiliates.

11
<PAGE>

12. Execution. The interpretation, performance and enforcement of this
---------
Agreement shall be governed by the internal substantive laws of the State of
California.

TARRANT APPAREL GROUP

By ___________________________
Mark B. Kristof,
Vice President - Finance and
Chief Financial Officer

OPTIONEE

______________________________
Gerard Guez

By her signature below, the spouse of Optionee agrees to be bound by all of
the terms and conditions of the foregoing Agreement.

OPTIONEE'S SPOUSE

________________________________
JACQUELINE ROSE GUEZ

<PAGE>

EXHIBIT 10.24.1

EMPLOYMENT AGREEMENT

1. Parties. The parties to this Employment Agreement (the "Agreement")
-------
effective as of January 1, 1998 are as follows:

1.1 Todd Kay ("Executive"); and

1.2 Tarrant Apparel Group (including any successors, the "Company").

2. Employment and Duties. Executive is hereby employed as the President
---------------------
of the Company. Executive shall report directly to the Board of Directors (the
"Board") and Executive shall perform such executive duties and functions as
shall be specified from time to time by the Board consistent with Executive's
position as President of the Company, including such duties as are customarily
performed by the president of a corporation. Executive hereby accepts such
employment and agrees to perform the services contemplated herein faithfully,
diligently, to the best of Executive's ability and in the best interests of the
Company. Executive shall devote substantially all his business time and efforts
to the rendition of such services. Executive's principal place of employment
and the Company's principal place of business will be in Los Angeles,
California.

4.2 Annual Bonus.
------------

4.2.1 Amount. In addition to the Base Salary, the Company shall pay
------
to Executive an annual bonus (the "Annual Bonus") for the twelve month period
ended December 31, 1998 in the amount of $1,000,000 and for each twelve month
period ended

-1-
<PAGE>

December 31, 1999, 2000, 2001 and 2002 in the amount of $2,000,000, in
each case payable not later than 90 days after the end of such twelve month
period.

4.2 Repayment of Indebtedness. Notwithstanding anything to the
-------------------------
contrary contained herein, $500,000 of the Annual Bonus for each of the twelve
month periods ended December 31, 1999, 2000, 2001 and 2002 will be applied by
the Company first to pay any interest which has accrued as of the date such
Annual Bonus is payable on any indebtedness of Executive to the Company and then
against the unpaid principal balance of such indebtedness, and the balance, if
any, shall be paid to Executive.

4.2.3 Pre-Tax Income. Notwithstanding anything to the contrary
--------------
contained herein, each Annual Bonus shall be reduced by the percentage set forth
in column (A) below in the event the Company's pre-tax income computed after
bonus for the twelve month period ended on the immediately preceding December 31
("Milestone Pre-Tax Income") shall bear the relationship set forth in column (B)
below to the milestone for such twelve month period set forth in columns (C) and
(D):

(B) (C) (D)
(A) Relationship of Twelve Months Milestone
Reduction In Actual to Milestone Ended Pre-Tax
Annual Bonus Pre-Tax Income December 31 Income
------------ ------------------- -------------- ---------
Less Than Greater
Or Equal To Than
----------- -------
0% N/A 100%
10% 99.9% 90% 1998 $35,000,000
20% 89.9% 80% 1999 $55,000,000
30% 79.9% 70% 2000 $69,000,000
40% 69.9% 60% 2001 $91,000,000
100% 59.9% 0% 2002 $119,000,000

4.4 Fringe Benefits. Executive shall be entitled to such fringe
---------------
benefits and perquisites ("Fringe Benefits") as are generally made available to
executives of the Company

-2-
<PAGE>

pursuant to Company policy or which are normal to Executive's position, and such
other fringe benefits as may be determined by the Board during the Term.

4.5 Stock Option. The Company shall grant to Executive the right to
------------
purchase up to 333,332 shares of the Common Stock of the Company at an exercise
price of $13.50 per share, which right shall expire on November 12, 2008 and
shall first become exercisable in the four equal installments of 83,333 shares
on December 31, 1998, 1999, 2000 and 2001, all on the further terms and
conditions set forth on Exhibit A hereto; provided, however, that (i) the right
--------- --------
to purchase any such shares which theretofore has not become exercisable shall
become exercisable on November 2, 2008 and (ii) the number of shares in each
such installment shall be reduced by the percentage set forth in column (A)
below in the event the Company's pre-tax income computed after bonus for the
twelve month period ended on the immediately preceding December 31 ("Milestone
Pre-Tax Income") shall bear the relationship set forth in column (B) below to
the milestone for such twelve month period set forth in columns (C) and (D):
<TABLE>
<CAPTION>

(B) (C) (D)
(A) Relationship of Twelve Months Milestone
Reduction In Actual to Milestone Ended Pre-Tax
Annual Bonus Pre-Tax Income December 31 Income
------------ ---------------------------- ------------- ------------
Less Than Greater
Or Equal To Than
----------- -------
<S> <C> <C> <C> <C>
0% N/A 100%
10% 99.9% 90% 1998 $ 35,000,000
20% 89.9% 80% 1999 $ 55,000,000
30% 79.9% 70% 2000 $ 69,000,000
40% 69.9% 60% 2001 $ 91,000,000
100% 59.9% 0% 2002 $119,000,000
</TABLE>

5. Termination of Employment.
-------------------------

5.1 Termination for Cause.
---------------------

-3-
<PAGE>

for all accrued and unused vacation time existing as of the date of termination
as reflected in the Company's personnel records, payment of which will be made
at a rate calculated in accordance with Executive's then current Base Salary.
Executive shall not be eligible to receive Base Salary, Annual Bonus, or to
participate in any Plans or to receive any Fringe Benefits with respect to
future periods after the date of such termination, except for the right to
receive benefits under any Plan in which Executive participates in accordance
with the terms of such Plan, provided that nothing in this subsection shall
require the Company to make any contribution or payment to any such Plan after
termination of Executive's employment.

5.1.3 Termination Date; Notice. If acts giving rise to the Company's
------------------------
right to terminate under subsection 5.1 exist, Company shall provide specific
details of such acts in a written notice of termination delivered by Company to
Executive and Executive shall have a reasonable period of time (not less than
thirty (30) days and not more than sixty (60) days) to cure such acts. If
Executive fails to cure within such period, Executive shall be terminated
effective the date written notice of failure to cure is given. If such acts
involve fraudulent conduct or moral turpitude, no opportunity to cure shall
exist and the date of termination of employment by the Company under subsection
5.1 shall be the date set forth in the written notice of termination delivered
by the Company to Executive, unless no such date is specified in such notice, in
which case the date of termination shall be the date of receipt by Executive of
written notice of termination and such notice shall provide specific details of
the fraudulent conduct and/or moral turpitude.

-4-
<PAGE>

9. No Third-Party Benefits. None of the provisions of this Agreement
-----------------------
shall be for the benefit of, or enforceable by, any third-party beneficiary.

-5-
<PAGE>

IN WITNESS WHEREOF, the Company has caused its duly authorized
representative to execute, and Executive has executed, this Agreement as of the
date first above written.

TARRANT APPAREL GROUP

By: /s/ James R. Miller
--------------------------------
James R. Miller
Chairman of the Compensation
Committee of the Board of Directors

/s/ Todd Kay
--------------------------------------
TODD KAY

-6-
<PAGE>

EXHIBIT A
---------

NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------

THIS NONQUALIFIED STOCK OPTION AGREEMENT is made as of the thirteenth day
of October, 1998, between TARRANT APPAREL GROUP, a California corporation (the
"Company"), and Todd Kay ("Optionee").

R E C I T A L S
---------------

15.1 The Compensation Committee (the "Committee") of the Board of
Directors of the Company has determined that it is to the advantage and in the
best interests of the Company and its shareholders to grant a nonqualified stock
option to Optionee covering 333,332 shares of the Company's Common Stock (or any
class of stock into which such Common Stock is converted or reclassified)
("Common Stock") as an inducement to remain in the service of the Company and as
an incentive for increased effort during such service, and has approved the
execution of this Nonqualified Stock Option Agreement between the Company and
Optionee.

15.2 The option granted hereby is not intended to qualify as an
---
"incentive stock option" under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").

NOW, THEREFORE, the parties hereto agree as follows:

15.2.1 Grant of Option. The Company grants to Optionee the right and
---------------
option ("Option") to purchase on the terms and conditions hereinafter set forth,
all or any part of an aggregate of 333,332 shares of Common Stock at the
purchase price of $13.50 per share, which price is equal to the fair market
value of such stock (as determined pursuant to Section 4 hereof) on the date of
this Agreement. The Option shall be exercisable from time to time in accordance
with the provisions of this Agreement during a period expiring on October 12,
2008 (the "Expiration Date").

15.2.2 Vesting. The Option shall first become exercisable in the
-------
four equal installments of 83,333 shares on December 31, 1998, 1999, 2000 and
2001; provided, however, that (i) the right to purchase any such shares which
--------
theretofore has not become exercisable shall become exercisable on October 11,
2008 and (ii) the number of shares in each such installment shall be reduced by
the percentage set forth in column (A) below in the event the Company's pre-tax
income for the twelve month period ended on the immediately preceding December
31 ("Milestone Pre-Tax Income") shall bear the

-7-
<PAGE>

relationship set forth in column (B) below to the milestone for such twelve
month period set forth in columns (C) and (D):
<TABLE>
<CAPTION>

(B) (C) (D)
(A) Relationship of Twelve Months Milestone
Reduction In Actual to Milestone Ended Pre-Tax
Vesting Pre-Tax Income December 31 Income
- --------------- ---------------------------- -------------- -------------
Less Than Greater
Or Equal To Than
-------------- -----------
<S> <C> <C> <C> <C>
0% N/A 100%
10% 99.9% 90% 1998 $ 35,000,000
20% 89.9% 80% 1999 $ 55,000,000
30% 79.9% 70% 2000 $ 69,000,000
40% 69.9% 60% 2001 $ 91,000,000
100% 59.9% 0% 2002 $119,000,000
</TABLE>

15. Manner of Exercise. Each exercise of this Option shall be by
------------------
means of a written notice of exercise delivered to the Company, specifying the
number of shares to be purchased and accompanied by payment to the Company of
the full purchase price of the shares to be purchased solely (i) in cash or by
check payable to the order of the Company, (ii) by delivery of shares of Common
Stock of the Company already owned by, and in the possession of, Optionee,
valued at their fair market value, as determined in accordance with Section 4
hereof, or (iii) (x) by a promissory note made by Optionee in favor of the
Company, upon the terms and conditions determined by the Committee including, to
the extent the Committee determines appropriate, a security interest in the
shares issuable upon exercise or other property, or (y) through a "cashless
exercise," in either case complying with applicable law (including, without
limitation, state and federal margin requirements), or any combination thereof.
Shares of Common Stock used to satisfy the exercise price of this Option shall
be valued at their fair market value determined (in accordance with Section 4
hereof) on the date of exercise (or if such date is not a business day, as of
the close of the business day immediately preceding such date). This Option may
not be exercised for a fraction of a share and no partial exercise of this
Option may be for less than (a) one hundred (100) shares or (b) the total number
of shares then eligible for exercise, if less than one hundred (100) shares.

-8-
<PAGE>

15.2.4 Fair Market Value of Common Stock. The fair market value of a
---------------------------------
share of Common Stock shall be determined for purposes of this Agreement by
reference to the closing price on the principal stock exchange on which such
shares are then listed or, if such shares are not then listed on a stock
exchange, by reference to the closing price (if approved for quotation on the
NASDAQ National Market) or the mean between the bid and asked price (if other
over-the-counter issue) of a share as supplied by the National Association of
Securities Dealers, Inc. through NASDAQ (or its successor in function), in each
case as reported by The Wall Street Journal, for the business day immediately
-----------------------
preceding the date on which the option is granted (which, for all purposes,
shall be the date of this Agreement) or exercised (or, if for any reason no such
price is available, in such other manner as the Committee may deem appropriate
to reflect the then fair market value thereof).

15.2.5 Shares to be Issued in Compliance with Federal Securities Laws
--------------------------------------------------------------
and Exchange Rules. By accepting the Option, Optionee represents and agrees,
- ------------------
for Optionee and his legal successors (by will or the laws of descent and
distribution or through a Qualified Domestic Relations Order), that none of the
shares purchased upon exercise of the Option will be acquired with a view to any
sale, transfer or distribution of said shares in violation of the Securities Act
of 1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, or any applicable state "blue sky" laws. If required by
the Committee at the time the Option is exercised, Optionee or any other person
entitled to exercise the Option shall furnish evidence satisfactory to the
Company (including a written and signed representation) to such effect in form
and substance satisfactory to the Company, including an indemnification of the
Company in the event of any violation of the Securities Act or state blue sky
laws by such person. The Company shall use its reasonable efforts to take all
necessary and appropriate action to assure that the shares issuable upon the
exercise of this Option shall be issued in full compliance with the Securities
Act, state blue sky laws and all applicable listing requirements of any
principal securities exchange on which shares of the same class are listed.

15.2.6. Withholding of Taxes. Upon the exercise of this Option, the
--------------------
Company shall have the right to require Optionee or Optionee's legal successor
to pay the

-9-
<PAGE>

Company the amount of any taxes which the Company may be required to withhold
with respect to such shares.

15.2.7 No Assignment. This Option and all other rights and privileges
-------------
granted hereby shall not be transferred, either voluntarily or by operation of
law otherwise than by will or the laws of descent and distribution or pursuant
to a Qualified Domestic Relations Order. Upon any attempt to so transfer or
otherwise dispose of this Option or any other right or privileges granted hereby
contrary to the provisions hereof, this Option and all rights and privileges
contained herein shall immediately become null and void and of no further force
or effect.

15.2.8 Adjustment for Reorganizations, Stock Splits, etc. If the
-------------------------------------------------
outstanding shares of Common Stock of the Company (or any other class of shares
or securities which shall have become issuable upon the exercise of this Option
pursuant to this sentence) are increased or decreased or changed into or
exchanged for a different number or kind of shares or securities of the Company
through reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar transaction, an appropriate
and proportionate adjustment shall be made in the maximum number and kind of
shares receivable upon the exercise of this Option, without change in the
aggregate purchase price applicable to the unexercised portion of this Option,
but with a corresponding adjustment in the price for each share or other unit of
any security covered by this Option.

Adjustments under this Section 8 shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final,

-10-
<PAGE>

binding and conclusive. No fractional shares of stock shall be issued under this
Option on any such adjustment.

15.2.9 Participation by Optionee in Other Company Plans. Nothing
------------------------------------------------
herein contained shall affect the right of Optionee to participate in and
receive benefits under and in accordance with the then current provisions of any
pension, insurance, profit sharing or other employee welfare plan or program of
the Company or of any subsidiary of the Company.

15.2.10 No Rights as a Shareholder Until Issuance of Stock
--------------------------------------------------
Certificate. Neither Optionee nor any other person legally entitled to exercise
- -----------
this Option shall be entitled to any of the rights or privileges of a
shareholder of the Company in respect of any shares issuable upon any exercise
of this Option unless and until a certificate or certificates representing such
shares shall have been actually issued and delivered to Optionee. No shares
shall be issued and delivered upon the exercise of this Option unless and until
there shall have been full compliance with all applicable requirements of the
Securities Act (whether by registration or satisfaction of exemption
conditions), all applicable listing requirements of any national securities
exchange on which shares of the same class are then listed and any other
requirements of law or of any regulatory bodies having jurisdiction over such
issuance and delivery.

15.2.11 Not an Employment or Service Contract. Nothing herein
-------------------------------------
contained shall be construed as an agreement by the Company or any of its
affiliates, express or implied, to employ Optionee or contract for Optionee's
services, to restrict the Company's or such affiliate's right to discharge
Optionee or cease contracting for Optionee's services or to modify, extend or
otherwise affect in any manner whatsoever, the terms of any employment agreement
or contract for services which may exist between Optionee and the Company or any
of its affiliates .

-11-
<PAGE>

15.2.12 Execution. The interpretation, performance and enforcement
---------
of this Agreement shall be governed by the internal substantive laws of the
State of California.

TARRANT APPAREL GROUP

By ___________________________
Mark B. Kristof,
Vice President - Finance and
Chief Financial Officer

OPTIONEE

______________________________
Todd Kay

By her signature below, the spouse of Optionee agrees to be bound by all of
the terms and conditions of the foregoing Agreement.

OPTIONEE'S SPOUSE

______________________________
KIMBERLY SMITH KAY

-12-

<PAGE>

The CIT Group/Commercial Services, Inc. EXHIBIT 10.58.1
300 South Grand Avenue
Los Angeles, CA 90071
213-513-2400

Date: October 1, 1997

TARRANT APPAREL GROUP
3151 East Washington Blvd.
Los Angeles, CA 90023

Ladies and Gentlemen:

Reference is made to the Accounts Receivable Financing Agreement (herein
the "Agreement") between us dated June 13, 1997.

Pursuant to mutual understanding and agreement, section 3.1(b) of the
Agreement is hereby deleted in its entirety, and the following is inserted in
lieu thereof:

"(b) over-advances, in our sole discretion, with respect to goods invoiced
to either Lerner New York, a division of the Limited Corporation or Target
Stores, a division of the Dayton Hudson Corporation, which goods have not yet
cleared through customs, in an amount up to the aggregate invoice amounts but
not to exceed $10,000,000.00 at any time, and, with the amount of any revolving
credit advances, not to exceed the Maximum Credit Facility."

Except as herein specifically provided, the Agreement remains in full force
and effect in accordance with its terms, and no other change in the terms or
provisions of the Agreement is intended or implied. If you are in agreement
with the foregoing, please sign and return to us the enclosed copy of this
letter to so indicate.

Very truly yours,

THE CIT GROUP/COMMERCIAL SERVICES, INC.

/s/ Robert Lewin
---------------------------------------------------
Robert Lewin
Vice President

Read and Agreed to:

TARRANT APPAREL GROUP

By: /s/ Mark B. Kristof
----------------------------
Name: Mark B. Kristof
----------------------------
Title: Vice President-Finance & CFO
----------------------------

<PAGE>

EXHIBIT 10.65

PARTNERSHIP INTEREST PURCHASE AGREEMENT, dated as of July 2, 1998,
among ROCKY ACQUISITION, LLC, a Delaware limited liability company (the
"Purchaser"), TARRANT APPAREL GROUP, a California corporation ("TAG"), LIMITED
DIRECT ASSOCIATES, L.P., a Delaware limited partnership ("LDA"), ROCKY APPAREL,
INC., a New York corporation ("RAI"), and GABRIEL MANUFACTURING COMPANY, a
Mississippi corporation ("GMC," and together with LDA and RAI, the "Sellers").

W I T N E S S E T H :
- - - - - - - - - -

WHEREAS, pursuant to a certain limited partnership agreement, dated
May 27, 1994 (the "Limited Partnership Agreement"), LDA, RAI and GMC own 49, 20
and 31 partnership units, respectively, of Rocky Apparel, L.P., a Delaware
limited partnership ("Rocky"), as limited partners and RAI owns an additional 1
partnership unit of Rocky as a general partner;

WHEREAS, the Purchaser has been formed by TAG for the purpose of
acquiring 100% of the partnership interests in Rocky from the Sellers pursuant
to the terms and conditions of this Agreement;

WHEREAS, the Sellers desire to sell, and the Purchaser desires to
purchase 100% of the partnership interests in Rocky on the terms and subject to
the conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the representations, warranties
and agreements herein contained, the parties hereto agree as follows:

Section 1. Sale and Purchase. In reliance upon the representations
-----------------
and warranties contained herein and subject to the terms and conditions hereof,
(a) each of the Sellers, severally and not jointly, will sell to the Purchaser,
-
and the Purchaser will purchase, on the Closing Date (as defined in Section 2),
the partnership units (the "Units") owned by each of the Sellers set forth
opposite such Seller's name on Schedule 1, which in the aggregate represent 100%
of the partnership interests (collectively, the "Partnership Interests") in
Rocky. The sale and purchase of the Units will be effective as of 12:01 a.m.
(Los Angeles time) on July 1, 1998.

Section 2. Closing.
-------

2.1 Place and Date. The closing of the sale and purchase of the
--------------
Partnership Interests (the "Closing") shall take place at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York at 10:00 a.m. on July
2, 1998, or at such other time and place as the parties to this Agreement shall
agree (the "Closing Date").

-1-
<PAGE>

2.2 Payment of Purchase Price. Subject to the terms and conditions
-------------------------
of this Agreement and the Escrow Agreement, the Purchaser shall deliver at the
Closing to each of the Sellers cash and/or common stock of TAG (the "TAG Stock")
in the amount set forth opposite such Seller's name on Schedule 2.2(a), which
amounts shall total $7,500,000 plus 80,890 shares of TAG Stock in the aggregate
for all of the Sellers (the "Initial Purchase Price"), with such cash amounts
payable by wire transfer of immediately available funds to the account or
accounts described on Schedule 2.2(b) of the Agreement or otherwise designated
by each of the Sellers at least two business days prior to the Closing Date.

Section 3. Purchase Price Adjustment. (a) Delivery and Review of
------------------------- ----------------------
Closing Balance Sheet. As promptly as practicable, but no later than 60 days
- ---------------------
after the Closing Date, the Sellers will cause Rocky to prepare and deliver to
the Purchaser (i) a draft balance sheet of Rocky, dated as of June 30, 1998 (the
-
"Closing Balance Sheet"), accompanied by a draft auditors' report thereon from
Pricewaterhouse Coopers LLC ("PC") and (ii) a draft certificate of an officer of
--
Rocky, setting forth the Closing Net Worth together with supporting calculations
in reasonable detail (the "Adjustment Certificate"). The Closing Balance Sheet
shall be prepared in accordance with generally accepted accounting principles.
The Purchaser shall have 45 days from the date on which the Closing Balance
Sheet and the Adjustment Certificate are delivered to it and the PC work papers
are available for review in Los Angeles, California to review such documents
(the "Review Period"). The Purchaser and its accountants shall be provided with
full access to the PC work papers at the Purchaser's Los Angeles, California
office in connection with such review. If the Purchaser disagrees in any
respect with any item or amount shown or reflected in the Closing Balance Sheet
or the Adjustment Certificate or with the calculation of the Closing Net Worth,
the Purchaser may, on or prior to the last day of the Review Period, deliver a
notice to the Sellers setting forth, in reasonable detail, each disputed item or
amount and the basis for the Purchaser's disagreement therewith, together with
supporting calculations (the "Dispute Notice"). It is mutually agreed that
estimates used in the preparation of the Closing Balance Sheet may be
conclusively disputed by actual results which differ from such estimates prior
to the end of the Review Period. The Dispute Notice shall set forth the
Purchaser's position as to the proper Closing Net Worth. If no Dispute Notice
is received by the Purchaser on or prior to the last day of the Review Period,
the Closing Balance Sheet and the Adjustment Certificate shall become final and
be deemed accepted by the Purchaser. The Purchaser's rights to indemnification
pursuant to Sections 13 and 14 (and any limitations on such rights) shall not be
deemed to limit, supersede or otherwise affect the Purchaser's rights to a full
purchase price adjustment pursuant to this Section 3.

(b) The Accountant. Within 15 days after the Sellers' receipt of a
--------------
Dispute Notice and unless the matters in the Dispute Notice have otherwise been
resolved by mutual agreement of the parties, the Purchaser and the Sellers shall
mutually agree upon and jointly contact an independent accounting firm with
experience in the apparel industry, which shall be retained to resolve the
issues set forth in the Dispute Notice. If the Purchaser

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<PAGE>

and the Sellers cannot agree on the independent accounting firm to be retained,
the Purchaser and the Sellers shall each submit the name of one accounting firm
that satisfies the qualifications set forth in this Section 3, and the
independent accounting firm shall be selected by lot from those two firms. The
independent accounting firm retained by the Purchaser and the Sellers (the
"Accountant") shall conduct such review of the Closing Balance Sheet, any
related work papers of Rocky's accountants, the Adjustment Certificate and the
Dispute Notice, and any supporting documentation as the Accountant in its sole
discretion deems necessary, and the Accountant shall conduct such hearings or
hear such presentations by the parties as the Accountant in its sole discretion
deems necessary.

(c) The Adjustment Report. The Accountant shall, as promptly as
---------------------
practicable and in no event later than 45 days following the date of its
retention, deliver to the Purchaser and the Sellers a report (the "Adjustment
Report"), in which the Accountant shall, after considering all matters set forth
in the Dispute Notice, determine what adjustments, if any, should be made to the
Closing Balance Sheet in order for it to comply with this Section 3, and shall
determine the appropriate Closing Net Worth on that basis. The Adjustment Report
shall set forth, in reasonable detail, the Accountant's determination with
respect to each of the disputed items or amounts specified in the Dispute
Notice, and the revisions, if any, to be made to the Closing Balance Sheet, the
Adjustment Certificate and the Closing Net Worth, together with supporting
calculations. The Sellers shall pay one-half, and the Purchaser shall pay one-
half, of the fees and expenses of the Accountant incurred in connection with the
matters referred to in this Section 3. The Adjustment Report shall be final and
binding upon the Purchaser and the Sellers, and shall be deemed a final
arbitration award that is enforceable pursuant to the terms of the Federal
Arbitration Act, 9 U.S.C. (S)(S) 1 et seq.
-- ---

(d) Adjustment and Payment. Effective upon the end of the Review
----------------------
Period (if a timely Dispute Notice is not delivered), or upon the resolution of
all matters set forth in the Dispute Notice by agreement of the parties or by
the issuance of the Adjustment Report (if a timely Dispute Notice is delivered),
the Initial Purchase Price shall be reduced by the amount, if any, by which the
Closing Net Worth is less than $0, or increased by the amount, if any, by which
the Closing Net Worth is greater than $0. Any adjustment to the Initial
Purchase Price pursuant to this Section 3 shall be paid by the Purchaser or the
Sellers, as the case may be, on the fifth business day following the end of the
Review Period (if a timely Dispute Notice is not delivered), or five business
days after the date on which the Adjustment Report has been received by the
Sellers and the Purchaser (if a timely Dispute Notice is delivered). Any such
payment shall be made by wire transfer of immediately available funds to the
account or accounts designated by the Sellers or the Purchaser, as the case may
be, at least two business days prior to the date on which such payment is
scheduled to be made. "Purchase Price" shall mean the Initial Purchase Price,
as adjusted pursuant to this Section 3.

-3-
<PAGE>

(e) Definitions. For purposes of this Section 3:
-----------

"Closing Net Worth" shall mean tangible assets (including fixed assets
at Rocky's book value) less liabilities of Rocky, all as shown on the Closing
Balance Sheet, as of the Closing Date and, except for the transfer of the USPA
Assets to GMC in accordance with Section 4.6, prior to giving effect to the
consummation of the transactions contemplated by this Agreement.

(f) Within 100 days after the Closing Date, Rocky will report to the
Purchaser and the Sellers in writing the dollar amount of accounts receivable
that appeared on the Closing Balance Sheet, without taking into account any
reserve (the "Gross CBS Receivables"), and that were collected on or within 90
days after the Closing Date (the "Collected Receivables"). If such amount
exceeds (x) the amount of the Gross CBS Receivables, less (y) the reserve for
- -
uncollectible receivables taken into account in the Closing Balance Sheet (such
difference, the "Net CBS Receivables"), then the Initial Purchase Price shall be
increased by, and the Purchaser shall promptly pay to the Sellers, an amount
equal to such excess. If such amount is less than the Net CBS Receivables, then
the Initial Purchase Price shall be reduced by, and the Sellers shall promptly
pay to the Purchaser, an amount equal to such shortfall. If after such 90-day
period, additional payments are received by Rocky in respect of Gross CBS
Receivables, such payments shall be paid to the Sellers. Disputes regarding the
calculations required by this subsection (f) (which may be raised by either the
Sellers or the Purchaser) shall be resolved by the Accountant in accordance with
the procedure set forth in subsections (b) and (c) of this Section 3.

(g) Allocation of the Purchase Price Adjustment and Accounts
--------------------------------------------------------
Receivable Adjustment; Limitation. Each of LDA, GMC and RAI shall receive from
- ---------------------------------
the Purchaser or pay to the Purchaser, as the case may be, 49%, 31% and 20%,
respectively, of any adjustment to the Initial Purchase Price pursuant to
subsections (d) or (f) of Section 3. Any such adjustment to the Initial Purchase
Price shall be deemed either an addition or a reduction to the Initial Purchase
Price for the Partnership Interests purchased by the Purchaser from the Sellers.
Notwithstanding anything else contained in this Section 3, the Sellers or the
Purchaser, as the case may be, shall not be required to pay any adjustment to
the Initial Purchase Price pursuant to subsections (d) or (f) of this Section 3
unless the aggregate net adjustment to the Initial Purchase Price, after
application of both subsections, exceeds $50,000.

Section 4. Conditions to the Obligations of the Purchaser and TAG.
------------------------------------------------------
The obligations of the Purchaser and TAG under this Agreement are subject to the
fulfillment prior to or at the Closing of the following conditions:

4.1 Representations and Warranties. The representations and
------------------------------

-4-
<PAGE>

warranties of each of the Sellers set forth herein shall be true and correct
when made and in all material respects at and as of the Closing.

4.2 Performance. Each of the Sellers shall have performed and
-----------
complied, in all material respects, with all covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing, unless the same shall have been waived.

4.3 Closing Certificate. Each of the Sellers shall have delivered to
-------------------
the Purchaser a certificate signed by an officer of such Seller dated the
Closing Date, certifying that the conditions specified in Sections 4.1 and 4.2
have been fulfilled with respect to such Seller.

4.4 Consents. All consents or waivers required in connection with the
--------
transactions contemplated hereby shall have been obtained or waived.

4.5 Escrow Agreements. A share escrow and security agreement between
-----------------
TAG, RAI and GMC, in form and substance reasonably acceptable to TAG, RAI and
GMC (the "Escrow Agreement") shall have been executed and delivered on or prior
to the Closing Date.

4.6 U.S. Polo Association Assets. Rocky's receivable from the U.S.
----------------------------
Polo Association and any related inventory and any rights in the U.S.P.A. master
license (collectively, the "USPA Assets") shall have been transferred to GMC
immediately prior to Closing.

4.7 Employment Arrangements. The Purchaser and Gabriel Zeitouni
-----------------------
("Zeitouni") shall have negotiated in good faith and entered into mutually
satisfactory employment arrangements (the "Employment Agreement") relating to
Zeitouni's employment by Rocky.

4.8 Proceedings and Documents. All proceedings in connection with the
-------------------------
transactions contemplated hereby and all documents and instruments incidental
thereto shall be reasonably satisfactory in substance and form to the Purchaser,
and the Purchaser shall have received all such originals or certified or other
copies of such documents as the Purchaser may reasonably request.

Section 5. Conditions to the Obligations of the Sellers. The
--------------------------------------------
obligations of each of the Sellers under this Agreement are subject to the
fulfillment prior to or at the Closing of the following conditions.

5.1 Representations and Warranties. The representations and
------------------------------

-5-
<PAGE>

warranties of the Purchaser and TAG set forth herein shall be true and correct
when made and in all material respects at and as of the Closing.

5.2 Performance. Each of the Purchaser and TAG shall have performed
-----------
and complied, in all material respects, with all covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing unless same shall have been waived.

5.3 Closing Certificate. Each of the Purchaser and TAG shall have
-------------------
delivered to the Sellers a certificate signed by an officer, dated the Closing
Date, certifying that the conditions specified in Sections 5.1 and 5.2 have been
fulfilled with respect to such person.

5.4 Ancillary Agreements. The Escrow Agreement and the Employment
--------------------
Agreement (collectively, the "Ancillary Agreements") shall have been executed
and delivered on or prior to the Closing Date.

5.5 U.S. Polo Association Assets. The USPA Assets shall have
----------------------------
been transferred to GMC immediately prior to Closing.

5.6 Repayment of Certain Borrowings. All amounts owed (approximately
-------------------------------
$3,409,242) by Rocky to LDA or its affiliates shall have been paid in full on
the Closing Date by the Purchaser by wire transfer of immediately available
funds, to the same account as LDA's portion of the Initial Purchase Price is
wired. All amounts owed by Zeitouni to LDA, or their respective affiliates
shall have been paid in full on the Closing Date by Zeitouni or restructured in
a manner satisfactory to LDA in its sole discretion.

5.7 Employment Arrangements. The Purchaser and Zeitouni shall have
-----------------------
negotiated in good faith and entered into the Employment Agreement relating to
Zeitouni's employment by Rocky.

5.8 Proceedings and Documents. All proceedings in connection with the
-------------------------
transactions contemplated hereby and all documents and instruments incidental
thereto shall be reasonably satisfactory in substance and form to each of the
Sellers, and each of the Sellers shall have received all such originals or
certified or other copies of such documents as such Seller may reasonably
request.

Section 6. Representations and Warranties of GMC and RAI. GMC and
---------------------------------------------
RAI, jointly and severally, represent and warrant to the Purchaser and TAG as
follows:

6.1 Organization and Standing of Rocky. Rocky is a limited
----------------------------------
partnership duly organized and validly existing under the laws of the State of
Delaware.

-6-
<PAGE>

Each of RAI and GMC is a corporation duly organized and validly existing under
the laws of their respective states of incorporation. Rocky is duly qualified
and in good standing as a foreign corporation authorized to do business in all
jurisdictions where the nature of its business or the character of its assets
requires such qualification except where the failure to so qualify would not
have a material adverse effect on the business of Rocky. Each of Rocky, RAI and
GMC has all requisite corporate power and authority to own and operate its
respective properties, to carry on the business conducted by it and to enter
into this Agreement and the Escrow Agreement and the transactions contemplated
herein and therein and to perform its obligations under this Agreement and such
contemplated transactions.

6.2 Capitalization of Rocky. (a) Each of GMC and RAI have the full
-----------------------
capacity, right and lawful authority to transfer the Partnership Interests owned
by GMC and RAI to the Purchaser. Schedule 1 contains a complete and correct
list of all outstanding partnership interests in Rocky, together with a list of
owners thereof. Each of GMC and RAI owns beneficially and of record, the
Partnership Interests as indicated on Schedule 1, free and clear of any liens,
claims or encumbrances ("Liens"). Assuming that the Purchaser is acquiring the
Partnership Interests in good faith, upon the delivery of and payment by the
Purchaser of the Initial Purchase Price in the manner described in Section 2.2,
the Purchaser shall acquire good and valid title to the Partnership Interests
from GMC and RAI, free and clear of any Liens.

(b) All outstanding partnership interests of Rocky, including the
Units, are duly authorized, validly issued, fully paid and nonassessable.

(c) There are no preemptive or similar rights on the part of any
holders of any class of securities of Rocky and no subscriptions, options,
warrants, conversion or other rights, agreements, commitments, arrangements or
understandings of any kind obligating Rocky, GMC or RAI, contingently or
otherwise, to issue or sell, or cause to be issued or sold, any partnership
interest of Rocky, or any securities convertible into or exchangeable for any
such interests, are outstanding, and no authorization therefor has been given.
There are no outstanding contractual or other rights or obligations to or of
Rocky, GMC or RAI to repurchase, redeem or otherwise acquire any outstanding
partnership interests or other securities of Rocky.

6.3 Investments. Assuming the liquidation and dissolution of AC
-----------
Designs LLC and AC Designs Inc., Rocky does not own any shares of capital stock
or other securities of, or interest in, any other person.

6.4 Agreement. This Agreement and the Escrow Agreement have been duly
---------
authorized by all necessary action on the part of each of Rocky, GMC and RAI,
have been duly executed and delivered by each of them and constitute the legal,
valid and binding obligations of each of them, enforceable against each of them
in accordance with

-7-
<PAGE>

their terms, except as such enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws
affecting the rights of creditors generally.

6.5 No Conflicting Instruments. Except as set forth on Schedule 6.5
--------------------------
or contemplated by Section 9, the execution, delivery and performance of this
Agreement and the Escrow Agreement and the transactions contemplated herein and
therein by each of Rocky, GMC or RAI will not violate or conflict with its
certificate of incorporation or certificate of limited partnership, or by-laws
or limited partnership agreement, as the case may be, and will not violate,
conflict with, or constitute a default under, any agreement or instrument to
which any of Rocky, GMC or RAI is a party or by which any of Rocky, GMC or RAI
is bound, or any judgment, decree, order, statute, rule or governmental
regulation applicable to any of Rocky, GMC or RAI.

6.6 Governmental Consent. Except for the Mississippi governmental
--------------------
consent as set forth on Schedule 6.5, no consent, approval or authorization of,
or registration, qualification, designation, declaration or filing with, any
governmental authority is required in connection with the execution, delivery or
performance of this Agreement or the Escrow Agreement or of any of the
transactions contemplated hereby or thereby by any of Rocky, GMC or RAI that has
not been obtained.

6.7 No Undisclosed Liabilities. Except to the extent reflected or
--------------------------
reserved against on its balance sheet as at December 31, 1997, disclosed in this
Section 6 or incurred in the ordinary course of business since December 31,
1997, Rocky has no liabilities, whether absolute, accrued, contingent or
otherwise, and whether due or to become due.

6.8 Inventories. All inventories of Rocky, including raw materials,
-----------
parts, supplies, work in process and finished goods, reflected on the balance
sheet of Rocky, dated as of December 31, 1997 (the "Balance Sheet") or on the
books of Rocky on the Closing Date are of good, usable and merchantable quality
(subject to normal shrinkage, damage and the occurrence of seconds).

6.9 Patents, Trademarks, etc. Rocky does not own any patents, trade
------------------------
names, trademarks, copyrights and other similar property rights.

6.10 Financial Statements and Information. Rocky has delivered to the
------------------------------------
Purchaser copies of the audited balance sheet, statement of operations and
retained earnings and statement of cash flows of Rocky as at, and for the year
ended, December 31, 1997. All such financial statements have been or will be
prepared in accordance with generally accepted accounting principles, applied
consistently throughout the periods covered

-8-
<PAGE>

thereby, and fairly present the financial condition of Rocky as at the dates
indicated and the results of its operations for the periods indicated.

6.11 Compliance with Laws. Rocky is not in violation of any
--------------------
applicable law, rule or regulation of any governmental authority or of any term
of any applicable order, judgment or decree of any court, arbitrator or
governmental authority, the effect of which violation could adversely affect the
business, condition (financial or other) or prospects of Rocky.

6.12 Taxes. Except as disclosed on Schedule 6.12, (a) Rocky has or
-----
will have duly and timely filed with the appropriate governmental agencies all
tax returns and reports required to be filed by it on or before the Closing Date
or obtained extensions therefor; (b) all taxes, assessments and other
governmental charges upon Rocky or upon any of its respective properties,
assets, income, receipts, payrolls, transactions, capital, net worth or
franchises (including any interest, penalties or additions to tax payable in
respect thereof) ("Taxes") that are shown as due and payable on such returns or
reports and other Taxes that are due and payable on or before the Closing Date
have been or will be paid; (c) Rocky has duly and timely withheld all Taxes
required to be withheld in connection with its business or assets and such
withheld Taxes have been either duly and timely paid to the proper governmental
authorities or properly set aside in accounts for such purpose; (d) Rocky is not
currently the beneficiary of any extension of time to file any Tax return; and
(e) no claim or assessment (other than a claim or assessment that has been
finally settled) concerning any liability for Taxes of Rocky has been asserted,
raised or threatened by any taxing authority. Rocky is and has been treated as a
partnership for U.S. federal income tax purposes for all relevant taxable
periods.

6.13 Environmental Matters. (a) Rocky has not (i) breached or been
--------------------- -
notified by any governmental or regulatory authority to have breached any
Environmental Law, (ii) released any Hazardous Substance or (iii) become aware
-- ---
of the release or presence of any Hazardous Substance, except in amounts not
constituting a breach of any Environmental Law, on any property owned, leased or
occupied by Rocky. There are no underground storage tanks on property owned,
leased or occupied by Rocky.

(b) For purposes of this Section 6.13, (i) "Environmental Law" means
-
all Laws relating to the protection of the environment, to human health and
safety, or to any environmental activity, including, without limitation, (x) the
-
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act, and the Occupational Safety and Health
Act, (y) all other requirements pertaining to reporting, licensing, permitting,
-
investigation or remediation of emissions, discharges, releases or threatened
releases of any Hazardous Substance into the air, surface water, groundwater or
land, or relating to the manufacture, processing, distribution, use, sale,
treatment, receipt, storage, disposal, transport or handling of any Hazardous
Substance and

-9-
<PAGE>

(z) all other requirements pertaining to the protection of the health and
-
safety of employees or the public, and (ii) "Hazardous Substance" means any
--
substance that (x) is or contains asbestos, urea formaldehyde foam insulation,
-
poly chlorinated biphenyls, petroleum or petroleum-derived substances or wastes,
radon gas or related materials, (y) requires investigation, removal or
-
remediation under any Environmental Law, or is defined, listed or identified as
a "hazardous waste" or "hazardous substance" thereunder or (z) is toxic,
-
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is regulated by any governmental authority
or Environmental Law.

6.14 No Brokers or Finders. No person has or will have, as a result
---------------------
of the transactions contemplated by this Agreement, any right, interest or valid
claim against the Purchaser or TAG, for any commission, fee or other
compensation as a finder or broker because of any act or omission by Rocky, RAI
or GMC or any of their agents.

6.15 Actions to Closing. During the period from December 31, 1997 to
------------------
and including the date hereof, and from the date hereof to and including the
Closing Date, except as otherwise consented to in writing by the Purchaser,
Rocky has and shall have:

(a) carried on its business in, and only in, the usual, regular and
ordinary course in substantially the same manner as conducted prior to December
31, 1997 and, to the extent consistent with such business, has retained the
services of its present employees, and preserved its relationships with
customers, suppliers and others having business dealings with Rocky;

(b) (i) not mortgaged, pledged or subjected to any encumbrance any of
-
the assets, other than encumbrances that do not, individually or in the
aggregate, materially detract from the value of the property subject thereto or
impair the use of such property in the operation of the business of Rocky, (ii)
--
not purchased or otherwise acquired, or sold or otherwise disposed of, any
material assets, except in the ordinary course of business and (iii) not
---
incurred any indebtedness for borrowed money, incurred any capital lease
obligations or made any distribution to any holders of its partnership interests
other than a tax distribution; and

(c) advised the Purchaser of any event or condition of any character,
materially and adversely affecting, either in any case or in the aggregate, the
condition (financial or other), assets, liabilities, revenues, business or
prospects of Rocky other than matters of a general economic or political nature
that do not affect the business of Rocky uniquely.

6.16 Labor; Employee Benefits. Schedule 6.16 contains a complete and
------------------------
correct list of all of Rocky's retirement, pension, savings, profit-sharing,
stock option or other equity plan, health benefit and welfare plan, multi-
employer plans, bonus incentive

-10-
<PAGE>

plans, deferred compensation or similar plans or other employee benefit plans,
and all collective bargaining agreements, employment agreements, consulting
agreements, severance agreements, change of control agreements or retention and
termination agreements to which Rocky is a party. Rocky has not incurred (either
directly or indirectly, including as a result of any indemnification obligation
or statutory joint and several liability obligation) any liability under or
pursuant to Title I or IV of ERISA or the penalty, excise tax or joint and
several liability provisions of the Internal Revenue Code relating to employee
benefit plans and no event, transaction or condition has occurred or exists
which could result in any such liability to Rocky or, following the Closing, the
Purchaser or its affiliates. Since December 31, 1997, the Company has not
experienced any actual or threatened work stoppages, slow-downs or other actions
and neither Rocky, GMC nor RAI has any knowledge of any planned work stoppages,
slow-downs or other job actions or of any union organizing efforts involving
employees of Rocky.

6.17 Litigation. Schedule 6.17 contains a complete and correct list
----------
of all suits, actions or legal, administrative, arbitration or other proceedings
or investigations pending, filed or threatened by, against or directly involving
Rocky. There is no action, proceeding or investigation pending or to the
knowledge of GMC or RAI threatened against GMC or RAI that questions the
validity of this Agreement or any action taken or to be taken by GMC or RAI in
connection herewith.

6.18 Employees. GMC or RAI has previously provided to the Purchaser a
---------
complete and correct list of all employees, agents and consultants of Rocky and
their respective rates of compensation.

6.19 Assets. GMC or RAI has previously provided to the Purchaser a
------
complete and correct list of all assets (including, but not limited to, all real
property, machinery, furniture, fixtures, equipment and other tangible assets)
used in, or necessary for the conduct of, the business of Rocky as presently
conducted, other than any item the original cost of which was less than $500.
Except as set forth on such list, all such assets are owned or leased by Rocky
free and clear of all liens, claims, charges and encumbrances of any kind or
nature and are in good working condition and repair (subject to normal wear and
tear) and are adequate for their intended uses. The leases pursuant to which
Rocky holds any such assets are in full force and effect and are enforceable
against each party thereto in accordance with their terms; each party to such
leases are in compliance thereunder; and no event has occurred which through the
giving of notice or the lapse of time could cause or constitute a default or the
acceleration of any obligation of any party thereto or the creation of a lien or
encumbrance upon any such asset.

6.20 Agreements. Schedule 6.20 contains a complete and correct list
----------
of all leases, contracts, agreements and commitments, whether written or oral,
to which Rocky is a party or by which it is bound, other than any agreement
providing for the payment

-11-
<PAGE>

of consideration of $5,000 or less in the aggregate. Each such agreement is in
full force and effect and is valid and is enforceable against each party thereto
in accordance with its terms; each party thereto is in compliance thereunder,
and no event has occurred which through the giving of notice or the lapse of
time could cause or constitute a default or the acceleration of any obligation
of any party thereto or the creation of a lien or encumbrance upon any property
or assets of Rocky.

6.21 Material Misstatements or Omissions. No representations,
-----------------------------------
warranties or information furnished by GMC, RAI or Zeitouni to the Purchaser or
TAG in connection with the transactions contemplated hereby contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements and facts contained therein not misleading.

Section 7. Representations and Warranties of LDA. LDA represents and
-------------------------------------
warrants to the Purchaser as follows:

7.1 Organization and Standing. LDA is a limited partnership duly
-------------------------
organized, validly existing and in good standing under the laws of the state of
Delaware and has all requisite power to enter into and perform its obligations
under this Agreement.

7.2 Validity of Partnership Interests. LDA has the full capacity,
---------------------------------
right and lawful authority to transfer the Partnership Interests owned by LDA to
the Purchaser. LDA owns beneficially and of record, the Partnership Interests as
indicated on Schedule 1, free and clear of any Liens. Assuming that the
Purchaser is acquiring the Partnership Interests in good faith, upon the
delivery of and payment by the Purchaser of the Purchase Price in the manner
described in Section 2.2, the Purchaser shall acquire good and valid title to
the Partnership Interests from LDA, free and clear of any Liens other than Liens
created by the Purchaser.

7.3 Agreement. This Agreement has been duly authorized by all
---------
necessary action on the part of LDA, has been duly executed and delivered by LDA
and constitutes the legal, valid and binding obligation of LDA, enforceable
against LDA in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other similar laws affecting the rights of creditors generally.

7.4 No Brokers or Finders. No person has or will have, as a result
---------------------
of the transactions contemplated by this Agreement, any right, interest or valid
claim against the Purchaser or TAG for any commission, fee or other compensation
as a finder or broker because of any act or omission by LDA or any of its
agents.

7.5 No Conflicting Instruments. The execution, delivery and
--------------------------

-12-
<PAGE>

performance of this Agreement by LDA and the transactions contemplated herein
will not violate or conflict with its certificate of limited partnership or
limited partnership agreement and will not violate, conflict with or constitute
a default under any agreement or instrument

to which LDA is a party or by which LDA is bound, or any judgment, decree,
order, statute, rule or governmental regulation applicable to LDA.

7.6 Governmental Consent. No consent, approval or authorization of,
--------------------
or registration, qualification, designation, declaration or filing with, any
governmental authority is required in connection with the execution, delivery or
performance of this Agreement or the performance by LDA of any of the
transactions contemplated hereby by LDA.

7.7 Litigation. There is no action, proceeding or investigation
----------
pending or to LDA's knowledge threatened against LDA that questions the validity
of this Agreement or any action taken or to be taken by LDA in connection
herewith.

Section 8. Representations and Warranties of the Purchaser and TAG.
-------------------------------------------------------
The Purchaser and TAG, jointly and severally, represent and warrant to the
Sellers as follows:

8.1 Organization and Standing. The Purchaser is a limited liability
-------------------------
company duly organized, validly existing and in good standing under the laws of
the state of Delaware and TAG is a corporation duly organized, validly existing
and in good standing under the laws of the state of California. Each of the
Purchaser and TAG has all requisite power to enter into and perform its
obligations under this Agreement and the Ancillary Agreements to which it is a
party.

8.2 Agreement. This Agreement and each of the Ancillary Agreements to
---------
which the Purchaser or TAG is a party have been duly authorized by all necessary
action on the part of the Purchaser or TAG, have been duly executed and
delivered by the Purchaser or TAG and constitute the legal, valid and binding
obligation of the Purchaser or TAG, enforceable against the Purchaser or TAG in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium or other similar
laws affecting the rights of creditors generally.

8.3 No Brokers or Finders. No person has or will have, as a result
---------------------
of the transactions contemplated by this Agreement, any right, interest or valid
claim against any of the Sellers for any commission, fee or other compensation
as a finder or broker because of any act or omission by the Purchaser, TAG or
any of their agents.

8.4 No Conflicting Instruments. The execution, delivery and
--------------------------

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<PAGE>

performance of this Agreement or any of the Ancillary Agreements by the
Purchaser or TAG will not violate or conflict with its certificate of formation
or certificate of incorporation, or limited liability company agreement or by-
laws, as the case may be, and will not violate, conflict with or constitute a
default under any agreement or instrument to which the Purchaser or TAG is a
party or by which the Purchaser or TAG is bound, or any judgment, decree, order,
statute, rule or governmental regulation applicable to the Purchaser or TAG.

8.5 Governmental Consent. No consent, approval or authorization of,
--------------------
or registration, qualification, designation, declaration or filing with, any
governmental authority is required in connection with the execution, delivery or
performance of this Agreement or any of the Ancillary Agreements or the
performance of any of the transactions contemplated hereby or thereby by the
Purchaser or TAG.

8.6 Reports. TAG has filed all required reports, schedules, forms,
-------
statements and other documents required to be filed by it with the Securities
and Exchange Commission (the "SEC") since January 1, 1996 (collectively,
including all exhibits thereto and any registration statement filed with the SEC
since such date, the "TAG Disclosure Documents"). None of the TAG Disclosure
Documents, as of their respective dates (and, if amended or superseded by a
filing prior to the date of this Agreement or the Closing Date, then on the date
of such filing), contained or will contain any untrue statement of a material
fact or omitted or will omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. All of the TAG
Disclosure Documents, as of their respective dates (and as of the date of any
amendment), complied as to form in all material respects with the applicable
requirements of the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Act of 1934, as amended, and the rules and regulations promulgated
thereunder.

8.7 Litigation. There is no action, proceeding or investigation
----------
pending or to the Purchaser's or TAG's knowledge threatened against the
Purchaser or TAG that questions the validity of this Agreement or any action
taken or to be taken by the Purchaser or TAG in connection herewith.

8.8 TAG Stock. Except as provided in the Escrow Agreement, upon the
---------
delivery by the Purchaser, each of GMC and RAI shall acquire good and valid
title to the TAG Stock from TAG, free and clear of any Lien, and the TAG Stock
will be duly authorized, validly issued, fully paid and non-assessable.

8.9 Investment Representation. The Purchaser is acquiring the
-------------------------
Partnership Interests for its own account and not with a view to, or for sale in
connection with, any distribution thereof that would require registration under
the 1933 Act.

Section 9. Post-Closing Covenants. (a) Following the Closing, the
----------------------

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<PAGE>

Purchaser will offer continued employment to all employees of Rocky, and the
Purchaser and TAG will be jointly and severally responsible for severance or
termination costs, costs relating to compliance with the Worker Adjustment and
Retraining and Notification Act (29 U.C.S. (S)(S) 2101 et seq.), plant closing
------
costs and the costs of compliance with any other applicable laws or regulations
relating to the rights of employees.

(b) Following the Closing, the Purchaser and TAG will cause Rocky to
timely satisfy all of its liabilities existing as of the Closing Date and
reflected on the Closing Balance Sheet.

(c) Following the Closing, in the event that any tax returns of Rocky
for any period up to and including June 30, 1998 shall be audited by any taxing
authority, Purchaser shall permit any of the Sellers (at such Seller's expense),
to participate in the audit process and shall provide to such Seller all
appropriate documents. The Purchaser shall not settle or compromise any
contested amounts without the consent of each of the Sellers which consent shall
not be unreasonably withheld.

(d) Following the Closing, RAI and GMC shall deliver good and
marketable title to the properties located in the State of Mississippi listed on
Schedule 9 to Rocky and shall deliver all required governmental consents in
connection therewith within 75 days after the Closing Date.

(e) Zeitouni shall pay all amounts owed to Rocky (approximately
$30,147) in full within 30 days of the Closing Date.

Section 10. Public Communications. Except as required by law, there
---------------------
shall be no public communications (including communications to members of the
trade) regarding this Agreement, the Ancillary Agreements or the transactions
contemplated herein or therein without the prior consent of the Purchaser and
the Sellers.

Section 11. Further Assurances. After the Closing, for no further
------------------
consideration, each of the parties shall perform all such other actions and
shall execute, acknowledge and deliver all such documents as the other parties
or their respective counsel may reasonably request to vest in the Purchaser, and
protect the Purchaser's right, title and interest in, and enjoyment of, the
Partnership Interests.

Section 12. Survival of Representations and Warranties. The
------------------------------------------
representations and warranties of the parties hereto contained in this Agreement
or otherwise made in writing in connection with the transactions contemplated
herein and the indemnification obligations of the parties hereto in respect of
such representations and warranties shall survive the making of this Agreement
and any examination by or on behalf

-15-
<PAGE>

of such parties, (i) in respect of the representations and warranties regarding
-
Taxes set forth in Section 6.13 of this Agreement, until the expiration of the
statute of limitations applicable to any tax liability for which such
representations and warranties are made, (ii) in respect of any representations
--
and warranties set forth in Section 6, for three years from the Closing Date and
(iii) in respect of any representations and warranties set forth in Section 7 of
---
this Agreement, for one year from the Closing Date.

Section 13. Indemnification by GMC and RAI.
------------------------------

(a) GMC and RAI (the "Indemnifying Parties"), jointly and severally,
shall defend, indemnify and hold harmless the Purchaser, TAG and their
respective officers, directors, shareholders, members, employees, attorneys,
accountants, affiliates, agents, successors and assigns and any person who
controls or is deemed to control any of them (the "Indemnified Parties") from,
against and in respect of any and all payments, damages, claims, demands,
losses, expenses, costs, obligations and liabilities (including, but not limited
to, attorneys' fees and costs, and costs of investigation and preparation) (a
"Loss") which, directly or indirectly, arise or result from or are related to
(i) any breach by either of the Indemnifying Parties of any of its
representations, warranties, covenants or commitments contained in this
Agreement or the Escrow Agreement or the transactions to which they relate, (ii)
--
the business, operations, liquidation or dissolution of AC Designs LLC and AC
Designs Inc., (iii) any matter described on Schedule 6.17, (iv) that certain
--- --
Agreement dated February 14, 1997 between USPA Properties, Inc. and Quade, Inc.,
as amended to date, or the transaction described in Section 4.6 or (v) the
-
failure to pay any Tax with respect to the business or operations of Rocky prior
to the Closing Date. The Indemnifying Parties, jointly and severally, shall
reimburse each Indemnified Party on demand for any payment made or loss suffered
by it at any time after the date hereof, based upon the judgment of any court of
competent jurisdiction or pursuant to a bona fide compromise or settlement of
claims, demands or actions to which the foregoing indemnity relates.
Consummation of the transactions contemplated by this Agreement shall not be
deemed or construed to be a waiver of any right or remedy of any Indemnified
Party hereunder, nor shall this section or any other provision of this Agreement
be deemed or construed to be a waiver of any ground of defense by it. The
obligation to advance or pay promptly on demand all amounts as they are incurred
shall exist irrespective of the ultimate final judicial determination, and in
the event of a dispute about amounts owed, such amounts shall be advanced as
they are incurred pending resolution and final judicial determination.

(b) Notwithstanding anything to the contrary contained in this
Agreement, the Indemnifying Parties shall not be liable to the Purchaser or TAG
under this Section 13, as a result of the breach of any representation,
warranty, covenant or commitment of an Indemnifying Party contained in this
Agreement unless and until the aggregate amount of the Losses suffered by the
Purchaser and TAG as a result of all such breaches shall exceed $50,000 and in
such case, the Indemnifying Parties shall only be liable for Losses in excess

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<PAGE>

of such $50,000.

(c) Each Indemnified Party shall promptly notify the Indemnifying
Parties of the existence of any claim, demand or other matter involving
liabilities to third parties to which the Indemnifying Parties' indemnification
obligations could apply and shall give the Indemnifying Parties a reasonable
opportunity to defend the same at their expense and with counsel of their own
selection (who shall be approved by the Indemnified Party, which approval shall
not be withheld unreasonably); provided, how ever, that (i) the Indemnified
-------- -
Party shall at all times also have the right to fully participate in the defense
at its own expense, (ii) if (other than in connection with the matters described
--
in Schedule 6.17), in the reasonable judgment of the Indemnified Party, based
upon the written advice of counsel, a conflict of interest may exist between the
Indemnified Party and any of the Indemnifying Parties, the Indemnifying Parties
shall not have the right to assume such defense on behalf of such Indemnified
Party and (iii) the failure to so notify the Indemnifying Parties shall not
---
relieve the Indemnifying Parties from any liabilities that they may have
hereunder or otherwise, except to the extent that such failure so to notify the
Indemnifying Parties materially prejudices the rights of the Indemnifying
Parties. If the Indemnifying Parties shall, within a reasonable time after said
notice, fail to defend, the Indemnified Party shall have the right, but not the
obligation, to undertake the defense of, and to compromise or settle the claim
or other matter on behalf, for the account and at the risk and expense of the
Indemnifying Parties. The Indemnifying Parties shall not compromise or settle
the claim or other matter (other than the matters described in Schedule 6.17)
without the written consent of the Indemnified Party (which consent shall not be
unreasonably withheld). If the claim is one that cannot by its nature be
defended solely by the Indemnifying Parties, the Indemnified Party shall make
available all information and assistance that the Indemnifying Parties may
reasonably request; provided, however, that any associated expenses shall be
--------
paid by the Indemnifying Parties.

(d) If the indemnification provided for in this Section 13 is
unavailable as a matter of law or public policy to any Indemnified Party in
respect of any Loss, then the Indemnifying Parties, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by the
Indemnified Party as a result of such Loss, in such proportion as is appropriate
to reflect the relative fault of the Indemnifying Parties, taken as a whole, on
the one hand, and such Indemnified Party, on the other, in connection with the
actions, statements or omissions which resulted in such Loss, as well as any
other relevant equitable considerations. The relative fault of the Indemnifying
Parties, taken as a whole, on the one hand, and such Indemnified Party, on the
other, shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of material
fact or omission or alleged omission to state a material fact, has been taken
by, or relates to information supplied by, either an Indemnifying Party or such
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent any such action, statement or
omission. The parties

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<PAGE>

hereto agree that it would not be just and equitable if contribution pursuant to
this Section 13 were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above.

(e) The Indemnifying Parties' obligations hereunder shall be in
addition to any liability that they or any other person may otherwise have to
the Indemnified Parties, and shall be binding upon, and inure to the benefit of,
their successors and assigns, and shall inure to the benefit of the heirs,
personal representatives, successors and assigns of each Indemnified Party.

Section 14. Indemnification by LDA.
----------------------

(a) LDA shall defend, indemnify and hold harmless the Purchaser and
TAG and their respective successors and assigns (the "LDA Indemnified Parties")
from, against and in respect of any and all payments, damages, claims, demands,
losses, expenses, costs, obligations and liabilities (including, but not limited
to, attorneys' fees and costs, and costs of investigation and preparation) (a
"LDA Loss") which, directly or indirectly, arise or result from or are related
to (i) any breach by LDA of any of its representations, warranties, covenants or
-
commitments contained in this Agreement, or (ii) the failure of LDA to pay any
--
Tax with respect to the business or operations of Rocky prior to the Closing
Date that is as a matter of law imposed on LDA in its capacity as a limited
partner of Rocky. LDA shall reimburse each LDA Indemnified Party on demand for
any payment made or loss suffered by it at any time after the date hereof, based
upon the judgment of any court of competent jurisdiction or pursuant to a bona
fide compromise or settlement of claims, demands or actions to which the
foregoing indemnity relates. Consummation of the transactions contemplated by
this Agreement shall not be deemed or construed to be a waiver of any right or
remedy of any LDA Indemnified Party hereunder, nor shall this section or any
other provision of this Agreement be deemed or construed to be a waiver of any
ground of defense by it. The obligation to advance or pay promptly on demand
all amounts as they are incurred shall exist irrespective of the ultimate final
judicial determination, and in the event of a dispute about amounts owed, such
amounts shall be advanced as they are incurred pending resolution and final
judicial determination.

(b) Notwithstanding anything to the contrary contained in this
Agreement, LDA shall not be liable to the Purchaser or TAG under this Section
14, as a result of the breach of any representation, warranty, covenant or
commitment of LDA contained in this Agreement (i) unless and until the aggregate
-
amount of the LDA Losses suffered by the Purchaser and TAG as a result of all

such breaches shall exceed $50,000 and in such case, LDA shall only be liable
for LDA Losses in excess of such $50,000 or (ii) for an amount in excess of
--
$4,500,000.

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<PAGE>

(c) Each LDA Indemnified Party shall promptly notify LDA of the
existence of any claim, demand or other matter involving liabilities to third
parties to which LDA's indemnification obligations could apply and shall give
LDA a reasonable opportunity to defend the same at their expense and with
counsel of their own selection (who shall be approved by the LDA Indemnified
Party, which approval shall not be withheld unreasonably); provided, however,
--------
that (i) the LDA Indemnified Party shall at all times also have the right to
-
fully participate in the defense at its own expense, (ii) if, in the reasonable
--
judgment of the LDA Indemnified Party, based upon the written advice of counsel,
a conflict of interest may exist between the LDA Indemnified Party and LDA, LDA
shall not have the right to assume such defense on behalf of such LDA
Indemnified Party and (iii) the failure to so notify LDA shall not relieve LDA
---
from any liabilities that it may have hereunder or otherwise, except to the
extent that such failure so to LDA materially prejudices the rights of LDA. If
LDA shall, within a reasonable time after said notice, fail to defend, the LDA
Indemnified Party shall have the right, but not the obligation, to undertake the
defense of, and to compromise or settle the claim or other matter on behalf, for
the account and at the risk and expense of LDA. LDA shall not compromise or
settle the claim or other matter without the written consent of the LDA
Indemnified Party (which consent shall not be unreasonably withheld). If the
claim is one that cannot by its nature be defended solely by LDA, the LDA
Indemnified Party shall make available all information and assistance that LDA
may reasonably request; provided, however, that any associated expenses shall be
--------
paid by LDA.

(d) LDA's sole obligations hereunder arising out of the breach of its
representations, warranties, covenants or commitments contained in this
Agreement shall be pursuant to this Section 14 and LDA shall not have any other
liability to the LDA Indemnified Parties.

Section 15. Expenses, etc. Each of the Purchaser and the Sellers
-------------
shall pay such party's own expenses and costs incidental to the preparation of
this Agreement and to the consummation of the transactions contemplated hereby.

Section 16. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be delivered by hand or sent by first-class mail,
postage prepaid, as follows:

If to the Purchaser or TAG, at:

Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
Attention: Chief Financial Officer

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<PAGE>

with a copy to:

Manatt, Phelps & Phillips, LLP
11355 West Olympic Boulevard
Los Angeles, California 90064
Attention: Peter M. Menard, Esq.

If to LDA, at:

Limited Direct Associates, L.P.
c/o The Limited, Inc.
Three Limited Parkway
Columbus, Ohio 43230
Attention: General Counsel

with a copy to:

Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Robert F. Quaintance, Jr.

If to RAI or GMC, to such party at:

c/o Rocky Apparel, L.P.
1384 Broadway, 14th Floor
New York, New York 10018
Attention: Gabriel Zeitouni

with a copy to:

Steven M. Gerber, Esq.
1114 Avenue of the Americas, 45th Floor
New York, New York 10036

or, in each case, at such address and to the attention of such person as either
party shall have furnished to the other by notice.

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<PAGE>

Section 17. Miscellaneous. Each of the parties hereto hereby
-------------
irrevocably and unconditionally consents to submit to the exclusive
jurisdictions of the courts of the State of New York and of the United States of
America, in each case located in the County of New York, for any litigation
arising out of or relating to this Agreement or the transactions contemplated
hereby, and further agrees that service of any process, summons, notice or
document by U.S. registered mail to its respective address set forth in Section
16 of this Agreement shall be effective service of process for any litigation
brought against it in any court. Each of the parties hereto hereby irrevocably
and unconditionally waives any objection to the laying of venue of any
litigation arising out of this Agreement or the transactions contemplated hereby
in the courts of the State of New York or the United States and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such litigation brought in any such court has been brought
in an inconvenient forum. This Agreement together with the Escrow Agreement
contemplated in Section 4.5 constitute the entire understanding between the
parties hereto. This Agreement may be modified or terminated only by an
instrument in writing signed by the parties hereto. This Agreement shall be
binding on and shall inure to the benefit of the successors and legal assigns of
the parties hereto. This Agreement shall be governed by the laws of the State
of New York as applied to contracts made and fully performed in New York. This
Agreement may be executed in one or more separate counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument. The headings of the sections of this Agreement are solely
for convenience of reference and shall not affect the meaning of any of the
provisions hereof.

Section 18. Transfer Taxes. The Sellers shall pay all stock transfer
--------------
and other transfer taxes required to be paid in connection with the sale to the
Purchaser of the Partnership Interests. Rocky and the Sellers shall file,
independently or jointly with the Purchaser, as the law requires, all real
property and other transfer tax filings required to be filed by it in connection
with the sale and delivery to the Purchaser of the Partnership Interests.

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have signed this
Agreement as of the date first above-written.

ROCKY ACQUISITION, LLC

By: /s/ Mark B. Kristof
-----------------------------------------
Name: Mark B. Kristof
Title: Vice President

TARRANT APPAREL GROUP

By: /s/ Mark B. Kristof
-----------------------------------------
Name: Mark B. Kristof
Title: Vice President

LIMITED DIRECT ASSOCIATES, L.P.

By: Limited Direct, Inc., as General Partner

By: /s/ Kenneth Gilman
-----------------------------------------
Name: Kenneth Gilman
Title: President

ROCKY APPAREL, INC.

By: /s/ Gabriel Zeitouni
-----------------------------------------
Name: Gabriel Zeitouni
Title: President

GABRIEL MANUFACTURING COMPANY

By: /s/ Gabriel Zeitouni
-----------------------------------------
Name: Gabriel Zeitouni
Title: President

-22-

<PAGE>

EXHIBIT 10.66

ESCROW AGREEMENT
----------------

THIS ESCROW AGREEMENT is made and entered into as the second day of July,
1998, by and among TARRANT APPAREL GROUP, a California corporation (the
"Company"), GABRIEL MANUFACTURING COMPANY, a Mississippi corporation ("GMC") and
ROCKY APPAREL, INC., a New York corporation ("RAI"), with respect to the
following facts:

A. Pursuant to that certain Partnership Interest Purchase Agreement dated
as of July 2, 1998 (the "Purchase Agreement"), by and among the Company, Rocky
Acquisition, LLC, a Delaware limited liability company (the "Subsidiary"),
Limited Direct Associates, LP, a Delaware limited partnership ("Limited"), GMC
and RAI, the Subsidiary, a wholly owned subsidiary of the Company, will purchase
all the outstanding partnership interests in Rocky Apparel, LP, a Delaware
limited partnership ("Rocky"), from Limited, GMC and RAI.

B. In partial consideration for the purchase of such partnership
interests, the Company will issue to GMC and RAI an aggregate of 80,890 shares
of the Common Stock of the Company.

C. GMC and RAI have agreed, jointly and severally, to defend, indemnify
and hold harmless the Company, the Subsidiary and certain associated persons
from and against certain liabilities, all as more fully set forth in the
Purchase Agreement.

D. GMC and RAI each desire to grant each such indemnified person a
security interest in such shares and all distributions thereon as security for
the performance of their obligations under the Purchase Agreement.

ACCORDINGLY, subject to the terms and conditions set forth below, and on
the basis of the premises, covenants and undertakings contained herein, the
parties hereto agree as follows:

1. PLEDGE.

1.1 Pledge. GMC and RAI each hereby deliver to the Company, and authorize
------
and direct the Company to hold pursuant to the terms and conditions of this
Agreement, certificates representing 80,890 shares of the issued and outstanding
Common Stock of the Company, as set forth on Schedule 1.1 hereto (the "Shares"),
------------
together with a stock power duly executed in blank, receipt of which hereby is
acknowledged. The Shares and any other property which may be held by the
Company under Section 1.2 hereof shall be held by it as partial security for the
performance of the obligations of GMC and RAI under the Purchase Agreement.

-1-
<PAGE>

1.2 Additional Collateral. GMC and RAI each shall deliver or cause to be
---------------------
delivered to the Company, and hereby authorize and direct the Company to hold
pursuant to the terms and conditions of this Agreement, all distributions made
during the term hereof on the Shares, whether in the form of securities, cash or
other property, as additional collateral subject to this Agreement. The Shares
and all distributions on the Shares shall be referred to herein as the "Escrow
Fund."

1.3 Voting Rights and Distributions. During the term of this Agreement
-------------------------------
and as long as neither GMC nor RAI is in default under the Purchase Agreement,
GMC and RAI each shall have the right to vote the Shares and any additional
shares of the capital stock of the Company held on their behalf hereunder and to
receive all cash distributions thereon subject to the limitations set forth in
Section 1.2.

1.4 Notice of Claims.
----------------

(a) The Company shall give prompt written notice (a "Demand Notice")
to GMC and RAI of any claim against GMC or RAI under the Purchase Agreement by
the Company, the Subsidiary or any other person entitled to indemnification or
contribution under Section 13 of the Purchase Agreement (an "Indemnified
Person"), including, but not limited to, any claim that (i) any representation
or warranty of GMC or RAI made in the Purchase Agreement or any Ancillary
Agreement (as such term is defined in the Purchase Agreement) was not true and
complete in all respects when made, (ii) GMC or RAI have failed to timely
perform any obligation to be performed by any of them under the Purchase
Agreement or any Ancillary Agreement or (iii) the Company, the Subsidiary or any
Indemnified Person is entitled to indemnification or contribution under Section
13 of the Purchase Agreement. The Demand Notice shall include a summary
description of the factual and legal bases for the claim and an estimate of the
amount of the claim. GMC and RAI shall have the right to contest any claim
described in a Demand Notice by giving written notice (a "Dispute Notice") to
the Company within ten (10) calendar days of the Demand Notice. In the event
GMC or RAI does not give a Dispute Notice within such ten (10) day period, the
description of the claim contained in the Demand Notice (including, but not
limited to, the factual and legal bases therefor and the estimate of the amount
of the claim) shall be deemed conclusively to be true and complete; provided,
--------
however, that the Company shall be entitled thereafter to submit additional
Demand Notices pursuant to this Section 1.4 with respect to the same claims as
were described in such initial Demand Notice and GMC and RAI shall have the
right to contest any such additional demand Notice, all as set forth above.

(b) In the event GMC or RAI shall timely deliver a Dispute Notice with
respect to any claim (other than a claim based upon the demand of a person other
than an Indemnified Person (a "third party claim")) and such claim shall not
have been conclusively resolved on or before July 31, 2001, the parties shall
attempt to resolve the dispute through mediation. In the event such mediation
shall not resolve the claim, either the Indemnified Party or GMC or RAI may
require binding arbitration of the claim pursuant to Section 2.13 of this
Agreement.

-2-
<PAGE>

1.5 Distribution of Escrow Fund.
---------------------------

(a) The Company shall distribute to GMC and RAI their respective
shares of the Escrow Fund in three equal installments on June 30, 1999, 2000 and
2001 (a "Distribution Date"). Notwithstanding the foregoing, any portion of the
Escrow Fund to be distributed to GMC or RAI on a Distribution Date shall be
reduced by (i) that portion of the Escrow Fund which previously had been
distributed pursuant hereto to an Indemnified Party, and (ii) that portion of
such distribution which has a value, determined pursuant to Section 1.6, equal
as nearly as practicable to the aggregate claims set forth in any unresolved
Demand Notice. Upon the later to occur of July 31, 2001 and the resolution of
all claims (including third party claims) set forth in all Demand Notices
delivered hereunder on or prior to June 30, 2001, the Trustee shall distribute
to GMC and RAI their respective shares of the Escrow Fund as the same has been
reduced by that portion of the Escrow Fund which previously had been distributed
to an Indemnified Party.

(b) In the event GMC or RAI shall fail to timely deliver a Dispute
Notice with respect to any claim set forth in a Demand Notice (other than a
third party claim), or such claim is resolved by the agreement of the parties or
by arbitration as set forth in Section 2.13, the Company, promptly after the
last day on which such Dispute Notice could have been timely given or after
receipt by the Company of a written notice of such agreement signed by GMC and
RAI or of such arbitration decision, shall deliver to the Indemnified Party, on
the one hand, or to GMC and RAI, on the other hand, that portion of the Escrow
Fund which has a value, determined pursuant to Section 1.6, equal as nearly as
practicable to the value of the claim as set forth in the Demand Notice, if a
Dispute Notice with respect thereto was not timely delivered, or as determined
by the agreement of the parties or the arbitration, as the case may be.

(c) In the event a third party claim set forth in a Demand Notice is
finally determined by a decision from which no appeal may be taken, the Company
shall distribute to the Indemnified Party, on the one hand, or to GMC and RAI,
on the other hand, that portion of the Escrow Fund which has a value, determined
pursuant to Section 1.6, equal as nearly as practicable to the value of the
claim as so finally determined.

1.6 Valuation of Escrow Fund. The fair market value of a share of the
------------------------
Common Stock of the Company shall be determined for purposes of this Agreement
by reference to the closing price on the principal stock exchange on which such
shares are then listed, or, if such shares are not then listed on a stock
exchange, by reference to the closing price (if approved for quotation on the
Nasdaq National Market) or the mean between the bid and the asked price (if
other over-the-counter issue) of a share as supplied by the National Association
of Securities Dealers, Inc. through Nasdaq (or its successor in function), in
each case as reported by The Wall Street Journal, for the business day
-----------------------
immediately preceding the date on which such determination of value shall be
made (or, if for any reason no such price is available, in such other manner as
the Company may deem appropriate to reflect the then fair market value thereof).

-3-
<PAGE>

2. MISCELLANEOUS.

2.1 Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be deemed to have been given (i) if
personally delivered, when so delivered, (ii) if mailed, one (1) week after
being placed in the United States mail, registered or certified, postage
prepaid, addressed to the party to whom it is directed at the address set forth
on the signature page hereof, or (iii) if given by telecopier, when such notice
or communication is transmitted to the telecopier number set forth on the
signature page hereof and written confirmation of receipt is received. Each of
the parties shall be entitled to specify a different address by giving the other
parties notice as aforesaid.

2.2 Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether oral
or written, relating to the subject matter of this Agreement. No supplement,
modification, waiver or termination of this Agreement shall be valid unless
executed by the party to be bound thereby. No waiver of any of the provisions
of this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver, unless otherwise expressly provided.

2.3 Headings. Section and subsection headings are not to be considered
--------
part of this Agreement and are included solely for convenience and reference and
are not intended to be full or accurate descriptions of the content thereof.

2.4 Successors and Assigns. All of the terms, provisions and obligations
----------------------
of this Agreement shall inure to the benefit of and shall be binding upon the
parties hereto and their respective heirs, representatives, successors and
assigns.

2.5 Governing Law. The validity, construction and interpretation of this
-------------
Agreement shall be governed in all respects by the laws of the State of
California applicable to contracts made and to be performed wholly within that
State.

2.6 Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts, each one of which shall be deemed an original, but all of
which shall constitute one and the same instrument.

2.7 Third Parties. Nothing in this Agreement, expressed or implied, is
-------------
intended to confer upon any person other than the parties hereto and their
respective heirs, representatives, successors and assigns any rights or remedies
under or by reason of this Agreement.

2.8 Attorney's Fees. In the event any party takes legal action to enforce
---------------
any of the terms

-4-
<PAGE>

of this Agreement, the unsuccessful party to such action shall pay the
successful party's expenses (including, but not limited to, attorneys' fees and
costs) incurred in such action.

2.9 Further Assurances. Each party hereto shall, from time to time at and
------------------
after the date hereof, execute and deliver such instruments, documents and
assurances and take such further actions as the other parties reasonably may
request to carry out the purpose and intent of this Agreement.

2.10 Injunctive Relief. Each of the parties hereto acknowledges and agrees
-----------------
that it would be difficult to fully compensate the other parties for damages
resulting from the breach or threatened breach of any provision of this
Agreement and, accordingly, that each party shall be entitled to temporary and
injunctive relief, including temporary restraining orders, preliminary
injunctions and permanent injunctions, to enforce such provisions without the
necessity of proving actual damages or being required to post any bond or
undertaking in connection with any such action. This provision with respect to
injunctive relief shall not diminish, however, the right of any party to any
other relief or to claim and recover damages.

2.11 Consent To Jurisdiction. Each party hereto, to the fullest extent it
-----------------------
may effectively do so under applicable law, irrevocably (i) submits to the
exclusive jurisdiction of any court of the State of California or the United
States of America sitting in the City of Los Angeles over any suit, action or
proceeding arising out of or relating to this Agreement, (ii) waives and agrees
not to assert, by way of motion, as a defense or otherwise, any claim that it is
not subject to the jurisdiction of any such court, any objection that it may now
or hereafter have to the establishment of the venue of any such suit, action or
proceeding brought in any such court and any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum,
(iii) agrees that a judgment in any such suit, action or proceeding brought in
any such court shall be conclusive and binding upon such party and may be
enforced in the courts of the United States of America or the State of
California (or any other courts to the jurisdiction of which such party is or
may be subject) by a suit upon such judgment and (iv) consents to process being
served in any such suit, action or proceeding by mailing a copy thereof by
registered or certified air mail, postage prepaid, return receipt requested, to
the address of such party specified in or designated pursuant to Section 2.1.
Each party agrees that such service (i) shall be deemed in every respect
effective service of process upon such party in any such suit, action or
proceeding and (ii) shall, to the fullest extent permitted by law, be taken and
held to be valid personal service upon and personal delivery to such party.

2.12 Arbitration. Any controversy arising out of or relating to this
-----------
Agreement or the transactions contemplated hereby shall be referred to
arbitration before the American Arbitration Association strictly in accordance
with the terms of this Agreement and the substantive law of the State of
California. The board of arbitrators shall convene at a place mutually
acceptable to the

-5-
<PAGE>

parties in the State of California and, if the place of arbitration cannot be
agreed upon, arbitration shall be conducted in Los Angeles. The parties hereto
agree to accept the decision of the board of arbitrators, and judgment upon any
award rendered hereunder may be entered in any court having jurisdiction
thereof. No party shall institute a proceeding hereunder until that party has
furnished to the other party, by registered mail, at least thirty (30) days
prior written notice of its intent to do so. This Section 2.13 shall not limit
the right of any party to seek injunctive relief in the courts of the State of
California or the United States of America.

2.13 Construction. This Agreement was reviewed by legal counsel for each
------------
party hereto and is the product of informed negotiations between the parties
hereto. If any part of this Agreement is deemed to be unclear or ambiguous, it
shall be construed as if it were drafted jointly by the parties. Each party
hereto acknowledges that no party was in a superior bargaining position
regarding the substantive terms of this Agreement.

2.14 Investment Representations. GMC and RAI each hereby represent,
--------------------------
warrant and agree to and with the Company as follows:

(a) It is acquiring the Shares for its own account, for investment
only and not with a view toward the resale or distribution thereof.

(b) It understands that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), nor qualified under
the securities laws of any state, and neither the Securities and Exchange
Commission nor any state securities commissioner nor any other regulatory
authority has passed upon the accuracy or adequacy of any disclosure made by the
Company to the undersigned or endorsed the merits of a purchase of the Shares.

(c) It understands and agrees that, prior to consummation of any sale,
transfer, assignment, pledge, hypothecation or other disposition of the Shares,
or any part thereof, a written opinion of counsel must be delivered to the
Company to the effect that, under the Securities Act and the rules and
regulations promulgated thereunder, the proposed disposition may occur without
registration or that all registration requirements of the Securities Act and
--
such rules have been or are being met.

(d) It understands and agrees that the following legends will be
placed on certificates evidencing the Shares:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE RESTRICTED
SECURITIES. THE RESTRICTED SECURITIES HAVE BEEN ACQUIRED FOR THE
HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO

-6-
<PAGE>

DISTRIBUTE THEM TO THE PUBLIC. RESTRICTED SECURITIES MUST BE HELD
INDEFINITELY UNLESS THEY ARE SUBSEQUENTLY REGISTERED UNDER THE ACT,
OR AN OPINION OF COUNSEL FOR THE PROPOSED TRANSFEROR IS DELIVERED TO
THE COMPANY, WHICH OPINION SHALL, IN FORM AND SUBSTANCE, BE
REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL AND SHALL
STATE THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.

THIS CERTIFICATE AND THE SHARES EVIDENCED HEREBY MAY BE SOLD,
TRANSFERRED, ASSIGNED, HYPOTHECATED, PLEDGED OR OTHERWISE ALIENATED
ONLY IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THAT CERTAIN
ESCROW AGREEMENT DATED AS OF JULY 2, 1998, A COPY OF WHICH IS ON FILE
AT THE CORPORATION'S PRINCIPAL OFFICE.

(e) It understands and agrees that, in order to ensure that no
unlawful resales or other dispositions of the Shares are allowed to occur,
appropriate stop-transfer instructions restricting resale or disposition of the
Shares will be placed against such Shares with the transfer agent of the
Company.

(f) It understands that the foregoing representations, warranties and
agreements are made in part to induce the Company to rely on certain exemptions
from the registration and qualification provisions of the Securities Act and the
securities laws of various states with respect to the issuance of the Shares
pursuant to the Purchase Agreement.

-7-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first set forth above.

TARRANT APPAREL GROUP

By /s/ Mark B. Kristof
---------------------------------------
Authorized Representative

GABRIEL MANUFACTURING COMPANY

By /s/ Gabriel Zeitouni
-------------------------------------
Authorized Representative

ROCKY APPAREL, INC.

By /s/ Gabriel Zeitouni
--------------------------------------
Authorized Representative

-8-

<PAGE>

EXHIBIT 10.67
FACILITY DEVELOPMENT AGREEMENT
------------------------------

THIS FACILITY DEVELOPMENT AGREEMENT is made and effective as of the
second day of December, 1998, by and between TARRANT MEXICO, S. de R.L. de C.V.,
a limited liability company formed under the laws of the Republic of Mexico (the
"Purchaser"), and TEX TRANSAS, S.A. de C.V., a corporation formed under the laws
of the Republic of Mexico (the "Seller"), with respect to the following facts:

A. The Seller is experienced in the development, construction and
management of facilities for the spinning, weaving, dyeing, finishing and
distribution of fabric and the cutting, sewing, finishing and distribution of
apparel.

B. The Purchaser is engaged in the design, development, manufacture
and sale of apparel.

C. The Purchaser desires to engage the Seller, and the Seller
desires to be so engaged, to develop, construct and sell to the Purchaser a
turn-key facility for certain processes in the manufacture and distribution of
fabric and apparel, all on 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. Development of the Facility.
---------------------------

(a) The Seller shall use its best efforts to develop and
construct a turn-key facility capable of performing such processes in connection
with the spinning, weaving, dyeing, finishing and distribution of fabric and the
cutting, sewing, finishing and distribution of apparel as the Purchaser may
request, all in accordance with the design goals, timetable and specifications
established pursuant to Section 1(d) (the "Facility").

(b) From time to time during the Development Term (as defined in
Section 3(a) below), the Seller shall provide such reports as the Purchaser
reasonably may request concerning the development of the Facility. The Purchaser
and its representatives, attorneys, consultants and agents shall have the right
from time to time during the Development Term, without notice to or the consent
of the Seller, to inspect the Facility.

(c) The Purchaser hereby appoints Gerard Guez and Todd Kay, and
the Seller hereby appoints Kamel Nacif, to supervise the development of the
Facility and grant such persons the authority to amend or waive any of the terms
or conditions of this Agreement on behalf of the party appointing such person.
The Purchaser and the Seller shall have the right from time to time to terminate
the foregoing appointments and to appoint substitute representatives by giving
written notice thereof to the other party.

(d) From time to time during the Development Term, the Purchaser
shall have the right to amend the design goals, timetable and specifications for
the Facility theretofore established by the Purchaser by delivering to the
Seller a written change order (a "Change Order") which shall describe in
reasonable detail the amendment effected thereby. The Seller shall use its best
efforts to implement promptly the changes in the design goals, timetable or
specifications for the Facility contained in each Change Order.

(e) The Seller (i) shall comply in all respects with all laws,
rules and regulations applicable to the development, construction and operation
of the Facility, (ii) shall obtain all permits, licenses and approvals of or
from all persons necessary for the development, construction and testing of the
Facility by the Seller and (iii) shall obtain, on behalf of the Purchaser, all
permits, licenses and approvals of or from all persons necessary for the
purchase and operation of the Facility by the Purchaser, including, but not
limited to, all those laws, rules, regulations, permits, licenses and approvals
relating to environmental matters which are set forth on Schedule 1 .
----------

-1-
<PAGE>

(f) On or before June 30, 1999, the Purchaser shall develop and
shall deliver to the Seller detailed written procedures (the "Approval
Procedures") for determining whether the Facility is capable of performing each
process in the manufacture and distribution of fabric and apparel in accordance
with the specifications theretofore established by the Purchaser. The Approval
Procedures, when delivered by the Purchaser to the Seller, shall become a part
of this Agreement. The Seller shall cooperate with the Purchaser in performing
the Approval Procedures at the direction and under the supervision and control
of the Purchaser.

(g) The Purchaser and the Seller jointly may agree, from time to
time, on such further terms and conditions as may be mutually acceptable, that
the Purchaser shall lend to the Seller an aggregate amount not to exceed U.S.
$10 million; provided, however, that such amount (i) shall be repaid in full
--------
concurrently with the purchase by the Purchaser of the Facility pursuant to
Section 4 and (ii) shall be used solely to purchase the real property on which
the Facility is located and to construct the Facility and not for any other
purpose, including, but not limited to, operating expenses of the Facility.

2. Delivery and Safekeeping of Equipment.
-------------------------------------

(a) The Purchaser shall purchase and cause to be delivered to the
Seller, at the following location, that machinery and equipment set forth on

Schedule 2, as the same may be amended from time to time, all at the sole cost
- ----------
and expense of the Purchaser (the "Equipment"):

1 Sur Edificio 110
Department 204
Colonia Centro 75700
Tehuacan, Puebla, Mexico

The Equipment shall not be moved from the foregoing location without the prior
written consent of the Purchaser in each instance.

(b) The Seller shall have the right to use the Equipment only to
the extent necessary (i) to install the Equipment in the Facility, (ii) to
determine that the Equipment operates in accordance with the specifications
established by the Purchaser or (iii) to perform the Approval Procedures.

(c) The Purchaser shall retain all right, title and interest in
and to the Equipment, and the Seller shall clearly identify the Equipment as the
property of the Purchaser. The Equipment shall remain personal property and
shall not become part of real property by annexation or otherwise. The Seller
shall not offer, loan, encumber, sell or otherwise transfer the Equipment or any
part thereof or interest therein to a third party.

(d) The Purchaser and its representatives, attorneys, consultants
and agents shall have the right at any time to enter the Facility and to remove
all or any part of the Equipment without notice to or the consent of the Seller.
The Purchaser shall not be responsible for any damage to the Facility, or any
damage, loss, liability, cost or expense incurred by the Seller, which is caused
by, arises in connection with or is related to any action by the Purchaser, or
its representatives, attorneys, consultants or agents, pursuant to the foregoing
sentence, except to the extent such damage, loss, liability, cost or expense was
caused solely by the gross negligence or willful misconduct of the Purchaser, or
its representatives, attorneys, consultants or agents.

(e) The Seller shall be liable for all loss or damage to the
Equipment while the Equipment is in the possession of the Seller. The Seller
shall provide to the Purchaser on or before December 13, 1998 evidence of
insurance for the Equipment in an amount no less than the invoice price thereof,
which insurance shall be payable to the Purchaser, and shall use its best
efforts to protect and maintain the Equipment, until the same is returned to the
possession and control of the Purchaser pursuant to Section 2(d) or 4(d).

-2-
<PAGE>

(f) From time to time during the Development Term and thereafter,
the Seller shall execute and deliver such documents and take such other actions
as the Purchaser reasonably may request to confirm in the Purchaser its right,
title and interest in and to the Equipment.

(g) The Seller shall not alter the Equipment in any manner
without the prior written consent of the Purchaser in each instance. In the
event the Purchaser shall fail to purchase the Facility pursuant to Section 4,
any alteration to the Equipment shall be the exclusive property of the
Purchaser.

(h) Promptly after the delivery to the Seller of each item of
Equipment, the Purchaser shall cause to be prepared, and the Seller promptly
shall execute and deliver to the Purchaser, a commodatum agreement substantially
in the form attached hereto as Exhibit A, but with such changes therein as the
---------
Purchaser may deem to be necessary or desirable to safeguard its right, title
and interest in and to the Equipment, and the Purchaser promptly shall file the
same with the Public Registry of Property and Commerce of the State of Puebla.

(i) Promptly after the date hereof, the Seller shall execute and
file with the Local Federal Tax Audit Administration in the City of Puebla a
letter of several liability substantially in the form attached hereto as
Exhibit B.
- ---------

(j) Notwithstanding the foregoing, the Purchaser and the Seller
jointly may agree, from time to time, on such further terms and conditions as
may be mutually acceptable, that the Seller shall purchase some or any part of
the Equipment. The Purchaser shall have no obligation with respect to any such
Equipment purchased by the Seller unless and until the Purchaser shall elect to
purchase the Facility, together with such Equipment, as provided in Section
4(a).

3. Term and Termination.
--------------------

(a) Unless otherwise terminated in accordance with Section 3(b),
the term (the "Development Term") for the development, construction and testing
of the Facility shall commence on the date hereof and shall end on December 31,
1999.

(b) The Development Term shall terminate prior to December 31,
1999 upon the happening of any of the following events:

(i) at the option of either party, if the other party shall
fail to perform in any material respect any material term, condition or
obligation to be performed by it under this Agreement and such failure is not
cured within ten (10) days after written notice of such failure is given by the
terminating party and received by the defaulting party; or

(ii) at the option of either party, immediately upon written
notice, if the other party shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official for it or any substantial part of its
property, or shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due, or shall
take any corporate action to authorize any of the foregoing; or

(iii) at the option of either party, immediately upon written
notice, if an involuntary case or other proceeding shall be commenced against
the other party seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case remains unstayed and in effect for more
than sixty (60) days; or

-3-
<PAGE>

(iv) at the option of either party, immediately upon written
notice, if the other party shall assign or attempt to assign any rights under
this Agreement without the prior written consent of the other party;

(v) at the option of the Purchaser, if a force majeure
condition (as defined in Section 25) shall continue for a period of sixty (60)
consecutive days; or

(vi) at the option of the Seller, if the Seller shall
reasonably believe that any Change Order is not technically feasible or would
materially increase the Seller's cost to construct the Facility; provided,
--------
however, that the Seller first shall have given the Purchaser a written notice
specifying such technical impediment or increase in cost and describing the same
in reasonable detail and shall have used its best efforts in good faith to
negotiate with the Purchaser a revised Change Order or an increase in the
purchase price for the Facility.

(c) Upon the termination of the Development Term, neither the
Purchaser nor the Seller shall have any remaining rights, duties or obligations
hereunder, except that (i) the Purchaser shall have the rights granted under
Section 2(d) to obtain possession of the Equipment, and the Seller shall
cooperate fully with the Purchaser's efforts to do so, (ii) the Seller shall
continue to have the duties under Section 2, including, but not limited to, the
duty to refrain from moving, to refrain from using and to identify, insure and
safeguard the Equipment, (iii) the Purchaser and the Seller shall continue to be
bound by Sections 5, 7, 8, 14, 17, 18, 19 and 21 hereof and (iv) the Purchaser
and the Seller shall use commercially reasonable efforts to effect the orderly
termination of the relationship established by this Agreement.

4. Purchase of the Facility.
------------------------

(a) At any time on or before March 31, 2000, the Purchaser shall
have the right, but not the obligation, to purchase from the Seller, and the
Seller shall sell to the Purchaser, the Facility free and clear of all liens,
claims, charges, encumbrances, security interests and other restrictions on the
ownership or use thereof by delivering to the Seller a written notice of its
intent to purchase the Facility (the "Purchase Notice").

(b) The purchase price of the Facility (the "Purchase Price")
shall be the sum of (i) the capitalizable cost of construction and equipment
installed by the Seller, which cost will not include operating expenses, payable
by wire transfer of immediately available funds to the account or accounts
designated in writing by the Seller at least two business days prior to the
Closing Date (as defined below) and (ii) a promissory note of the Purchaser in
the form attached hereto as Exhibit C .
---------

(c) The closing of the purchase and sale of the Facility (the
"Closing") shall take place at the place and on the date and at the time set
forth in the Purchase Notice, but in no event later than 12:00 p.m. (Los Angeles
time) on March 31, 2000 (the "Closing Date").

(d) On the Closing Date, the Seller (i) shall deliver to the
Purchaser physical possession of the Facility and the assets located therein and
(ii) 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
advisable, in the reasonable opinion of counsel to the Purchaser, to vest in or
to confirm in the Purchaser good title in and to the Facility and the assets
located therein, against receipt of the Purchase Price. 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.

5. Confidential Information. The Seller acknowledges that (i) it
------------------------
will obtain knowledge of confidential information of the Purchaser during the
Term ("Confidential Information"), and (ii) maintenance of the proprietary
character of the Confidential Information is important to the Purchaser and its
business operations. The Seller shall keep secret all Confidential Information,
shall not use Confidential Information for any purpose other than as expressly
authorized hereunder and shall not disclose Confidential Information to anyone

-4-
<PAGE>

except to the extent required in performing services hereunder or the
Confidential Information becomes publicly available through no fault of the
Seller. The Confidential Information shall constitute "trade secrets" within
the meaning of the Uniform Trade Secrets Act contained in California Civil Code
Section 3426 et. seq. (the "Act") and within the meaning of Article 82 of the
-------
"Ley de Fomento y Proteccion de la Propiedad Industrial" (the "Law"), and the
Purchaser shall receive all of the protections and be afforded all of the
remedies available under the Act and the Law. The Seller acknowledges that
Confidential Information is transmitted to the Seller as an authorized user
under Article 84 of the Law with a duty of confidentiality and non-disclosure.
The Seller shall take all necessary precautions and obtain all necessary or
appropriate covenants from its personnel according to the provisions of Articles
85 and 86 of the Law.

6. 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 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 and the Development Term notwithstanding any investigations,
inspections, examinations or audits made by or on behalf of any party.

7. Indemnification. Each party hereto (the "Indemnifying Party")
---------------
shall indemnify, defend and hold harmless the other party and its 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 the
Indemnifying Party of any of its representations, warranties, covenants or
commitments under this Agreement. The Indemnifying Party 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 Party's
obligations hereunder shall be in addition to any liability that it or any other
person otherwise may have to the Indemnified Parties, and shall be binding upon,
and inure to the benefit of its successors and assigns, and shall inure to the
benefit of the heirs, representatives, successors and assigns of each
Indemnified Party.

8. Third-Party Claims. The Indemnified Party shall promptly notify
------------------
the Indemnifying Party of the existence of any claim, demand or other matter
involving liabilities to third parties to which the Indemnifying Party's
indemnification obligations could apply and shall give the Indemnifying Party a
reasonable opportunity to defend the same at its expense and with counsel of its
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 the Indemnifying Party, the Indemnifying
Party shall not have the right to assume such defense on behalf of such
Indemnified Party and (iii) the failure to so notify the Indemnifying Party
shall not relieve the Indemnifying Party from any liabilities that it may have
hereunder or otherwise, except to the extent that such failure so to notify the
Indemnifying Party materially prejudices the rights of the Indemnifying Party.
If the Indemnifying Party 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 Party. Except as provided in the preceding sentence, the
Indemnifying Party shall not compromise or settle the claim or other matter
without the written consent of the Indemnified Party. If the claim is one that
cannot by its nature be defended solely by the Indemnifying Party, the
Indemnified Party shall make available all information and assistance that the

-5-
<PAGE>

Indemnifying Party may reasonably request; provided, however, that any
--------
associated expenses shall be paid by the Indemnifying Party.

9. 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.

10. 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.

11. Waiver. No failure to exercise, and no delay in exercising, any
------
right, power or remedy hereunder shall impair any right, power or remedy which
any party may have, nor shall any such delay be construed as a waiver of any
such rights, powers or remedies or an acquiescence in any breach or default
under this Agreement. The rights and remedies herein specified are cumulative
and not exhaustive of any rights or remedies which any party would have. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any provisions hereof (whether or not similar), not shall
such waiver constitute a continuing waiver unless otherwise expressly provided.

12. 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.

13. Successors and Assigns. The services to be provided by the
----------------------
Seller hereunder are personal, and neither this Agreement nor any rights,
obligations or duties hereunder may be assigned or transferred by the Seller
(whether voluntarily or involuntarily) without the prior written consent of the
Purchaser in each instance (which consent may be withheld by the Purchaser in
its sole and absolute discretion without cause). Subject to the foregoing, 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
permitted successors and assigns.

14. 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.

15. 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.

16. Third Parties. Nothing in this Agreement, expressed or implied,
-------------
is intended to confer upon any person other than the parties hereto and their
respective permitted successors and assigns any rights or remedies under or by
reason of this Agreement.

17. 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-
<PAGE>

18. 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 party reasonably may
request to carry out the purpose and intent of this Agreement.

19. 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.

20. 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.

21. Consent to Jurisdiction. Subject to Section 19, 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 the address of such
party specified in or designated pursuant to Section 9. 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.

22. Expenses. Each party shall bear the expenses incurred by it in
--------
connection with the negotiation, execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby.

23. 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.

24. Taxes. The Seller 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 any
assets other than land and building, which shall be borne by the Purchaser.

25. Force Majeure. Except for obligations of payment, neither party
-------------
hereto shall be liable for non-performance caused by any circumstances beyond
its reasonable control, including, but not limited to, lightning, earthquake,
storm, strike, lockout or other industrial disturbance, shortage of necessary
labor, shortage of necessary components, acts of enemies, sabotage, war,
blockage, insurrection, riot, epidemic, landslide, flood, fire, washout or the
order of any court or authority, which circumstance by the exercise of due
diligence the party invoking this Section 25 is unable to prevent or overcome;

provided, however, that (i) lack of financial capacity shall in no event be
- --------

-7-
<PAGE>

deemed to be a cause beyond a party's control and (ii) no party shall be
entitled to invoke this Section 25 if the failure to observe or perform any of
the covenants or obligations herein imposed upon it was caused by such party
failing to act in a reasonable and prudent manner under the circumstances, or
failing to remedy the condition with reasonable diligence, or failing to give
notice as soon as possible after determining that an event of force majeure has
occurred and specifying those covenants or conditions such party will be unable
to perform, or was the result of a knowing or negligent breach by such party of
any applicable laws, regulations, agreements or contracts.

-8-
<PAGE>

26. Injunctive Relief. Each party hereby acknowledges and agrees
-----------------
that it would be difficult to fully compensate the other party for damages
resulting from the breach or threatened breach of any provision of this
Agreement, and accordingly, notwithstanding anything to the contrary contained
in Section 19, 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 either party to any other
relief or to claim and recover damages.

27. Relationship of the Parties. Neither party hereto is or shall be
---------------------------
construed to be a partner, joint venturer, employee, agent, representative,
franchisee or participant of or with the other party for any purpose whatsoever.
Neither party shall have any right or authority whatsoever to assume or to
create any obligation or responsibility, express or implied, on behalf of or in
the name of the other party or to bind the other party in any capacity.

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: (213) 881-0368

Seller: TEX TRANSAS, 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

-9-
<PAGE>

EXHIBIT A
---------
COMMODATUM AGREEMENT

This COMMODATUM AGREEMENT is made and effective as of the second day of
December, 1998 by and between TARRANT MEXICO, S. de R.L. de C.V., a Sociedad de
Responsabilidad Limitada de Capital Variable formed under the laws of United
Mexican States ("TARRANT") with a conventional domicile at 1 Sur No. 110 Altos
203, 75700 Tehuacan, Puebla, Mexico and TEX-TRANSAS, S.A. de C.V. a Sociedad
Anonima de Capital Variable formed under the laws of the United Mexican States
("T.T.") with a conventional domicile at Edgar Allan Poe #231, Col. Polanco,
C.P. 11550 Mexico, D.F. under the following recitals and clauses:

W I T N E S S E T H

I. WHEREAS, TARRANT is an existing and subsisting mercantile corporation formed
pursuant to Public Deed 3303, dated April 16, 1998 before Lic. Jose Javier Leal
G., Notary Public # 111 exercising in Monterrey, N.L., and duly registered at
the Public Registry of Commerce with jurisdiction in Tehuacan, Puebla; and is
represented in this act by Mrs. Corazon Reyes whose authority is established by
Public Deed 3303, dated April 16, 1998, before Lic. Jose Javier Leal G., Notary
Public # 111 exercising in Monterrey, N.L., and which authority has not been
revoked or cancelled.

II. WHEREAS, T.T. is an existing and subsisting mercantile corporation formed
pursuant to Public Deed 17164, dated October 24, 1997, before Lic. Carlos
Roberto Sanchez Castaneda, Notary Public # 50 exercising in Puebla, Puebla, and
duly registered at the Public Registry of Commerce with jurisdiction in Puebla,
Puebla; and is represented in this act by Mr. Kamel Nacif Borge whose authority
is established by Public Deed 17164, dated October 24, 1997, before Lic. Carlos
Roberto Sanchez Castaneda, Notary Public # 50 exercising in Puebla, Puebla, and
which authority has not been revoked or cancelled.

III. WHEREAS, on the second day of December 1998, TARRANT and T.T. entered into
a certain Facility Development Agreement ("AGREEMENT") whereby T.T. shall
develop, construct and sell to TARRANT on a "turn key" basis, a productive
facility to be devoted to the manufacture and distribution of fabric and apparel
in the State of Puebla ("PLANT").

IV. WHEREAS, TARRANT and T.T. have agreed pursuant to the AGREEMENT, that
TARRANT shall deliver to T.T. the machinery and equipment listed in Exhibit "A"
of this
-1-
<PAGE>

agreement ("EQUIPMENT") for the exclusive purpose of installing, testing, and
determine if the EQUIPMENT operates in accordance with the specifications
established by the manufacturers of the EQUIPMENT set forth in Exhibit "B"
hereof ("PURPOSE").

V. WHEREAS TARRANT, in order to achieve the PURPOSE, has deemed convenient to
grant T.T. the temporary use of the EQUIPMENT without any compensation, and
subject to the terms and conditions of this agreement.

VI. WHEREAS T.T. has agreed to receive the EQUIPMENT and exclusively use it for
the PURPOSE under the terms and conditions of this agreement.

BOTH PARTIES, IN CONSIDERATION OF THE FOREGOING AND THE COVENANTS CONTAINED
HEREIN, DO HEREBY AGREE AS FOLLOWS:

C L A U S E S

FIRST.- TARRANT hereby agrees to deliver the EQUIPMENT to T.T., F.O.B. Veracruz,
Veracruz, Mexico and grant to T.T. its temporary use at the PLANT in order to
accomplish the PURPOSE without being entitled to any compensation or payment
from T.T. in consideration thereof, pursuant to article 2497 of the Civil Code
for the Federal District and its related article 2365 of the Civil Code for the
State of Puebla.

SECOND.- T.T. hereby agrees to receive and temporarily use the EQUIPMENT for the
PURPOSE, and further agrees to return precisely such EQUIPMENT upon termination
of this agreement, as provided in clause FOURTEENTH hereof; being liable to
TARRANT for any loss of the EQUIPMENT caused by any use inconsistent with the
PURPOSE, according to article 2504 of the Civil Code for the Federal District
and its related articles 2373 and 2374 of the Civil Code for the State of
Puebla.

THIRD.- TARRANT and T.T. agree that the EQUIPMENT shall be used by T.T.
exclusively for the PURPOSE at the PLANT, not being T.T. entitled to remove the
EQUIPMENT from such place nor to lose its possession or control, nor to erase,
obliterate, or in any other manner remove, alter or hide any of the data or
information that identifies or individualizes the EQUIPMENT; nor to sub-lease,
nor totally or partially transfer the use of the EQUIPMENT, without the prior
written consent of TARRANT; in the understanding that TARRANT shall be empowered
to enter at any time to the PLANT for the purpose of examining the EQUIPMENT

-2-
<PAGE>

and to verify compliance by T.T. of its obligations hereunder, without TARRANT
being considered as a trespassing or illegally depriving T.T. of the possession
of the EQUIPMENT; T.T. waiving hereby any action or right that may correspond to
it by virtue of article 1912 of the Civil Code for the Federal District and its
related article 2003 of the Civil Code for the State of Puebla.

FOURTH.- It is hereby agreed that TARRANT shall at all times retain all right,
title and interest in and to the EQUIPMENT, and that T.T. shall clearly identify
the EQUIPMENT as TARRANT's property; being further understood that the EQUIPMENT
shall not become part of the PLANT or the real estate on which the PLANT is
built, and that the EQUIPMENT shall not be considered as falling into any one of
the categories established by article 750 of the Civil Code for the Federal
District, and its related article 951 of the Civil Code for the State of Puebla.

FIFTH.- It is understood that, for as long as this agreement is in effect, T.T.
will preserve the EQUIPMENT in good and operating condition and under all
obligations inherent to a depository, without entitlement to any compensation,
and at all times acknowledging the EQUIPMENT as property of TARRANT, according
to articles 2516, 2517 and 2522 of the Civil Code for the Federal District and
its related articles 2389, 2396, 2403 and 2410 of the Civil Code for the State
of Puebla; being further agreed that T.T. shall not be entitled to charge
TARRANT any ordinary expenses required for the use or preservation of the
EQUIPMENT, as established in article 2508 of the Civil Code for the Federal
District and its related article 2379 of the Civil Code for the State of Puebla;
further waiving any right of reimbursement of extraordinary use or preservation
expenses from TARRANT as established in article 2513 of the Civil Code for the
Federal District and its related article 2380 of the Civil Code for the State of
Puebla.

SIXTH.- T.T. also agrees neither to sell nor to pledge the EQUIPMENT, nor to
transfer or encumber it under any concept or title, being such transactions null
and void pursuant to article 2270 of the Civil Code for the Federal District and
its related articles 2137 and 2138 of the Civil Code for the State of Puebla;
being further agreed that if a lien, attachment or any other legal seizure is
performed on the EQUIPMENT and such is not attributable to TARRANT, T.T. shall
obtain at its cost and expense the release and cancellation of such lien,
attachment or seizure at the satisfaction of TARRANT at the earliest possible
date.

SEVENTH.- T.T. further agrees and expressly stipulates:

-3-
<PAGE>

1. That all expenses, procedures, transactions, and other steps required for
the legal importation and entry into Mexican territory of the EQUIPMENT shall be
of its exclusive account and risk, provided that within (5) five days after such
importation, it shall provide to TARRANT a copy of the documents evidencing such
importation and entry.

2. To accept liability for Acts of God, pursuant to article 2505 of the
Civil Code for the Federal District and its related article 2375 of the Civil
Code for the State of Puebla.

3. That if during the period in which the EQUIPMENT remains at the PLANT,
the EQUIPMENT loses value or suffers any damage which in opinion of expert,
renders the EQUIPMENT unfit for its intended use, TARRANT shall be indemnified
by T.T. for the total amount of its value set forth in Exhibit "D" hereof,
pursuant to article 2502 of the Civil Code for the Federal District and its
related article 2371 of the Civil Code for the State of Puebla.

4. That it shall not withhold or retain the EQUIPMENT for any reason,
including, but not limited to, any pretended retention of the EQUIPMENT by
reason of any debts of TARRANT with T.T.

EIGHTH. It shall be at the sole cost and expense of T.T. all expenses and
payments related to the delivery, transfer, handling, installation and operation
of the EQUIPMENT, including without limitation, those relating to packing,
packaging, freight, importation, insurance, handling, storage, salaries and fees
of personnel, testing and installation costs, raw materials, electric or
calorific energy, spare parts, operation expenses and any other. In the event
that for any circumstance TARRANT has covered all or any of such expenses, it is
agreed that T.T. shall reimburse them in cash to TARRANT upon presentation of
the corresponding receipts or invoices, within five (5) days following the date
of such presentation, in the understanding that in case of failure to timely
reimbursement, the amounts indebted shall bear interest at the rate established
in clause NINTH of this agreement.

NINTH. T.T. accepts that: (i) in the event of any breach or violation by T.T.
of any clause of this agreement; (ii) in the event T.T. becomes insolvent,
bankrupt, or has assigned its property to its creditors, or has been judicially
or fiscally placed into receivership; all of the above whether in a voluntary or
involuntary manner; (iii) If T.T. is dissolved or liquidated; (iv) in the event
that T.T. materially breaches the AGREEMENT or if the AGREEMENT is terminated
for any reason; TARRANT may, at its option, demand the immediate return of the
EQUIPMENT at T.T.'s cost and expense, or be compensated with an amount equal to
the value set forth in

-4-
<PAGE>

Exhibit "D" hereof with interest at the rate of 2% percent per month, and
declare this agreement as terminated pursuant to article 1949 of the Civil Code
for the Federal District and its related article 1563 of the Civil Code for the
State of Puebla, being TARRANT empowered to seize, remove and withdraw the
EQUIPMENT from the PLANT without notice or liability to T.T.

TENTH. The parties agree that, for as long as this agreement is in effect, if
in TARRANT's opinion, a breach by T.T. of any of its obligations set forth in
this agreement exists, or if any natural or legal fact or act occurs, which in
TARRANT's judgment endangers or places at risk the integrity or safety of all or
part of the EQUIPMENT, TARRANT shall have the right of access at any time to the
PLANT, as well as to take possession of the EQUIPMENT, and to separate and
remove it from the PLANT or take other protective or preservation measures,
without TARRANT being considered as a trespassing or illegally depriving the
possession of the EQUIPMENT in prejudice of T.T. or its assignees, or causing
any damage or prejudice to them; T.T. waiving hereby any action or right that
may correspond to it by virtue of article 1912 of the Civil Code for the Federal
District and its related article 2003 of the Civil Code for the State of Puebla,
as well as to demand any payment or indemnification for damages or losses,
either direct, indirect or consequential, production or sales losses; expenses,
costs or similar charges; being TARRANT entitled to immediately terminate this
agreement without any liability, T.T. waiving hereby any right to demand payment
of any charge, indemnification or expense related to paid up amounts, damages,
losses, whether direct, indirect or consequential, production or sales losses,
expenses, costs, and any other similar charge or indemnification, whether
derived from this agreement or from the AGREEMENT. Any obstruction by T.T. or
its assignees to TARRANT's exercise of the foregoing TARRANT's right shall make
T.T. liable for any damage or loss that the EQUIPMENT may suffer as a result of
such obstruction.

ELEVENTH.- T.T. agrees to contract, acquire, and keep in force, for as long as
this agreement is in effect, insurance policy in the amount, coverage and under
the conditions set forth in Exhibit "C" of this agreement, being T.T. obligated
to deliver within five (5) days following the date of this agreement, certified
copies before notary public of the corresponding policies in which TARRANT shall
be designated as insured party or beneficiary of such insurance. it is
understood that TARRANT shall have at all times the right, but not the
obligation, to contract and keep in force such policy at the cost and expense of
T.T., as well as to collect insurance proceeds, grant settlements and other
related documents; being hereby appointed by T.T. as special attorney-in-fact
and representative for such effects pursuant to articles 2553 and 2554 of the
Civil Code for the Federal District and their related articles 2439 and 2440 of
the Civil Code for the State of Puebla, being TARRANT also empowered to appear
before any Notary

-5-
<PAGE>

Public and formalize such appointment. T.T. shall reimburse immediately and in
cash to TARRANT, upon presentation of the corresponding receipts, any charge,
expense or cost incurred by TARRANT pursuant to this Clause. In case of casualty
or total or partial loss of the EQUIPMENT, the corresponding insurance proceeds
shall be fully paid to TARRANT, who shall have the option to replace the
EQUIPMENT and continue this agreement, or terminate it without any liability on
its part.

TWELFTH.- T.T. expressly agrees that, for as long as this agreement is in
effect, it shall keep the EQUIPMENT duly protected against fire, loss, damage or
detriment, and shall be responsible of any losses or damages, whether or not
arising from Acts of God or force majeure, and to such effect it will adopt
those safety measures indicated by TARRANT; further agreeing to indemnify and
hold TARRANT harmless from any loss, damage, prejudice or detriment that the
EQUIPMENT suffers; as well as in regard to claims, attachments, confiscations or
other deprivations of property or possession, either civil, mercantile, tax,
labor or of other nature; T.T. waiving hereby any defense based on Acts of God
or lack of fault on its part.

THIRTEENTH.- It is expressly agreed that T.T.'s indemnification and
compensation obligations set forth in this agreement are extensive and cover all
kinds of claims, including, but not limited to, the use of the EQUIPMENT by
employees, workers and personnel of T.T. or of its contractors, as well as those
related to breaches, damages or infractions to any third parties, since TARRANT
does not guarantee the EQUIPMENT in any manner whatsoever. T.T. hereby waives
any right or claim against TARRANT based on article 2514 of the Civil Code for
the Federal District and its related article 2385 of the Civil Code for the
State of Puebla.

FOURTEENTH.- This agreement shall remain in effect from the date of its
execution and shall terminate: (i) Upon any breach or termination of the
AGREEMENT for any reason; (ii) Upon written notice given by TARRANT to T.T. with
fifteen (15) days of anticipation to the effective date of termination; (iii)
Upon any breach by T.T. of its obligations under this agreement or under
applicable law; (iv) Upon acquisition of the PLANT by TARRANT; (v) Upon any
event set forth in clause NINTH of this agreeement; being it understood that
upon any termination of this agreement TARRANT shall be entitled to withdraw and
remove the EQUIPMENT from the PLANT and T.T. shall be obligated to return
precisely such EQUIPMENT at the location specified by TARRANT in writing,
without prejudice of any actions, rights or claims that TARRANT may have against
T.T. as a result of such termination.

FIFTEENTH.- This agreement can not be assigned or transferred, nor its
performance delegated by T.T. without the prior written consent of TARRANT, and
such will not release T.T.

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<PAGE>

of any of its obligations pursuant to this agreement in case that its assignee
or delegate breaches it. This agreement can not be modified nor amended but
through an executed written instrument signed by authorized representatives or
attorneys of both parties.

SIXTEENTH.- Any notice or other communication required or permitted under this
agreement shall be made in writing and shall be deemed to have been given: (i)
if personally delivered, when so delivered; (ii) if mailed, one (1) calendar
week after its deposit by registered or certified mail, postage prepaid,
addressed to the party to whom it is directed at the address set forth below, or
(iii) if given by facsimile, when such notice or communication is transmitted to
the facsimile, number set forth below and written confirmation of receipt is
received. Each party may specify an address different to that set forth below by
giving the other party notice as aforesaid.
<TABLE>
<CAPTION>
<S> <C>

TARRANT: 1 Sur No. 110 Altos 203

Tehuacan, Puebla 75700

Telephone: (238) 128-97

Telefax: (238) 284-44

</TABLE>
T.T.: Edgar Allan Poe #231

Col. Polanco

C.P. 11550, Mexico, D.F.

Telephone: (525) 250-0525

Telefax: (525) 255-1009

TARRANT and T.T. hereby designate the above addresses as their respective
conventional domiciles for the purposes of this agreement, pursuant to article
34 of the Civil Code for the Federal District and article 62 of the Civil Code
of the State of Puebla.

SEVENTEENTH.- All expenses originated by the execution, entering and
registration of this agreement at the appropriate Public Registry of Property
and Commerce, as well as all corresponding taxes and duties, shall be borne by
T.T., who shall immediately reimburse them in cash to TARRANT upon presentation
of the corresponding receipts in the event that TARRANT, at its option, makes
and undertakes such expenses and registration.

EIGHTEENTH.- This agreement shall be governed by the laws of the State of
Puebla, and for the resolution of any dispute or claim arising out from the
interpretation or performance of this

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<PAGE>

agreement, the parties hereof expressly submit themselves to the jurisdiction of
either the competent courts located in the city of Tehuacan, Puebla or in the
city of Los Angeles, California, U.S.A. at the election of the Plaintiff,
waiving to the jurisdiction that due to their domiciles or any other cause may
correspond to them.

This agreement is executed by both parties through their legal representatives
in the City of Los Angeles, California, U.S.A. on the second day of December,
1998, before the witnesses that also execute it.

TARRANT MEXICO, S. DE R.L. TEX-TRANSAS, S.A. DE C.V.
DE C.V.
__________________________ _________________________

WITNESS WITNESS
__________________________ _________________________

EXHIBITS
- --------
A - LIST OF MACHINERY AND EQUIPMENT

B - SPECIFICATIONS AND STANDARDS OF PERFORMANCE OF THE MACHINERY AND EQUIPMENT

C - CONDITIONS AND TERMS OF INSURANCE ON THE MACHINERY AND EQUIPMENT

D - STATEMENT OF VALUE OF THE MACHINERY AND EQUIPMENT

-8-
<PAGE>

EXHIBIT B
---------

Administrator Local Federal Tax Audit Office
Tax Administration Service

Re: Letter of several liability to handle the merchandise
temporarily imported under the PITEX

Dear Sir:

I, Kamel Nacif Borge, in the name of and in representation of Tex-Transas, S.A.
de C.V., with tax ID number TTR-971024-BVO, as certified by notarized document
number 17164, attached hereto as exhibit I, with tax domicile to receive and
bear notifications at Lote 1 A,B,C, S/N, Corredor Industrial Ixtacuixtla, San
Diego, Xocoyucan, Tlaxcala C.P. 90700, hereby respectfully appear before you to
declare the following:

That in view of the fact that my Principal and the company, Twillmex, S. de R.L.
de C.V. have entered into a commodatum agreement, certain goods temporarily
imported by Twillmex, S. de R.L. de C.V., with tax ID number TME-980907T94,
shall be transferred to any Principal, under Twillmex, S. de R.L. de C.V.'s
PITEX number 1261/1998.

That such merchandise shall be under our custody until my Principal delivers the
production plant (building and production installations) to Twillmex, S. de R.L.
de C.V., and the letter accepts them as completed and functioning correctly.

In view of the foregoing, I hereby request that this Agency constitute my
Principal as severally liable for the tax obligations and/or credits that could
be derived from the imported goods indicated in exhibit II hereto, in the terms
contained in article 26, section VII of the Federal Tax Code.

In view of the above, I respectfully request that you:

Solely: Consider my Principal to be jointly and severally liable with Twillmex,
S. de R.L. de C.V., in the terms of article 26, section VIII of the
Federal Tax Code, for the tax obligations and credits that could be
derived from the importation and/or possession of the goods indicated
in exhibit II of this document.

Sincerely,
TEX-TRANSAS, S.A. de C.V.

Sr. Kamel Nacif Borge
Puebla, Puebla, November 16, 1998

cc: Delegate of the Ministry of Commerce and
Individual Development in Puebla, Puebla

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<PAGE>

EXHIBIT C

NON-NEGOTIABLE PROMISSORY NOTE

U.S. $28,000,000.00 _________________, 1999

FOR VALUE RECEIVED, the undersigned, TARRANT MEXICO, S. de R.L. de
C.V., a limited liability company formed under the laws of the Republic of
Mexico (the "Company"), hereby promises to pay to TEX TRANSAS, S.A. de C.V., a
corporation formed under the laws of the Republic of Mexico (the "Payee"), the
principal sum of Twenty Eight Million United States Dollars (U.S.
$28,000,000.00), together with interest from the date hereof on the unpaid
principal balance from time to time outstanding at the rate of seven percent
(7%) per year (computed on the basis of a 365-day year), net of applicable
withholding taxes, if any, at the times and place set forth below.

Principal of and interest on this Note shall be payable as follows:

(i) The entire principal balance hereof, and all accrued but unpaid
interest thereon, shall be paid in full on the third anniversary
of the date of this Note.

(ii) Interest hereon shall be paid semi-annually in arrears on each
June 30 and December 31, commencing on ________, 1999, for all
interest accrued hereon since the preceding interest payment date.

The principal of and interest on this Note shall be paid in lawful
money of the United States of America at the principal office of the Company,
3151 East Washington Boulevard, Los Angeles, California 90023 or at such other
place as, from time to time, may be agreed upon by the Payee and the Company.

In no event shall interest payable hereunder exceed the maximum rate
permitted by applicable law, and in the event that the rate of interest stated
herein shall at any time during the term hereof exceed such highest lawful rate,
the interest payable hereunder shall, during such period, be deemed to be the
highest lawful rate.

The Company shall have the right, at any time and from time to time,
to prepay all or any portion of this Note without penalty or premium, but any
such prepayment shall be applied first against interest which has accrued as of
the date thereof and then against the unpaid principal balance.

If this Note is not paid when due, the Company shall pay all costs of
collection incurred by the Payee, including, but not limited to, reasonable
attorneys' fees, whether or not suit is filed on this Note.

This Note is the promissory note referred to in Section 4(b) of that
certain Facility Development Agreement dated December 2, 1998 (the "Development
Agreement"), by and between the Company and the Payee. Payment hereunder is
subject to the right of the Company to set-off against any amount due hereunder
any amount payable by the Payee, Jamil Textil, S.A. de C.V., Inmobiliaria
Cuadros, S.A. de C.V., Kamel Nacif or Irma Benavides De Oca to the Company under
the Development Agreement or that certain Agreement for Purchase of Assets dated
February 22, 1999, by and among certain of such persons (the "Purchase
Agreement"), including, but not limited to, any such amount payable under
<PAGE>

Section 7 of the Development Agreement or Section 6.2 of the Purchase Agreement.
Neither this Note nor any rights or duties hereunder may be assigned or
transferred by the Payee without the prior written consent of the Company in
each instance.

Demand, presentment, notice, protest and notice of dishonor are hereby
waived by the Company.

This Note shall be governed by, and construed and enforced in
accordance with, the laws of the State of California applicable to contracts
made and to be performed wholly within that State.

IN WITNESS WHEREOF, the Company has caused this Note to be signed by
its authorized officer as of the ______________ day of
____________________, 1999.

TARRANT MEXICO, S. de R.L. de C.V.

By ____________________________
Authorized Representative
<PAGE>

SCHEDULES INTENTIONALLY OMITTED.

<PAGE>

EXHIBIT 10.68
AGREEMENT FOR PURCHASE OF ASSETS
--------------------------------

THIS AGREEMENT FOR PURCHASE OF ASSETS is made and effective as of the
twenty-second day of February, 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 2,000,000 shares (the
"Shares") of the Common Stock of the Parent shall be delivered to, and
earned by the Seller on the terms set forth in the Escrow Agreement
(as defined below).

(b) The Purchase Price shall be allocated between the Sellers as
set forth on Schedule 1.2(b)A and shall be allocated among the Assets as set
----------------
forth on Schedule 1.2(b)B.
----------------

1
<PAGE>

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).

2
<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 March 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
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.

3
<PAGE>

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.

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

4
<PAGE>

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.
$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

5
<PAGE>

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).

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.

6
<PAGE>

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
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
--------------------

7
<PAGE>

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
--------------------------------------------------------------
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):

8
<PAGE>

(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.

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

9
<PAGE>

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.

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.

10
<PAGE>

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.

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.

11
<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: (213) 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.
Telecopier: (525) 255-1009

12
<PAGE>

SCHEDULES AND EXHIBITS INTENTIONALLY OMITTED.

<PAGE>

EXHIBIT 23

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-3448) pertaining to the 1995 Stock Option Plan of Tarrant Apparel
Group of our report dated February 26, 1999 with respect to the consolidated
financial statements and schedule of the Company included in its Annual Report
(Form 10-K) for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.

ERNST & YOUNG LLP

Los Angeles, California
March 4, 1999

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,318,520
<SECURITIES> 0
<RECEIVABLES> 68,193,062
<ALLOWANCES> 2,247,007
<INVENTORY> 49,230,847
<CURRENT-ASSETS> 129,338,024
<PP&E> 8,928,812
<DEPRECIATION> 3,622,504
<TOTAL-ASSETS> 153,890,506
<CURRENT-LIABILITIES> 72,256,403
<BONDS> 2,424,439
0
0
<COMMON> 22,290,539
<OTHER-SE> 56,919,125
<TOTAL-LIABILITY-AND-EQUITY> 153,890,506
<SALES> 378,155,527
<TOTAL-REVENUES> 379,083,954
<CGS> 307,077,111
<TOTAL-COSTS> 307,077,111
<OTHER-EXPENSES> 32,507,697
<LOSS-PROVISION> (6,868)
<INTEREST-EXPENSE> 2,423,482
<INCOME-PRETAX> 37,075,664
<INCOME-TAX> 12,410,000
<INCOME-CONTINUING> 24,665,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,665,664
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.71

</TABLE>