<PAGE>
As filed with the Securities and Exchange Commission on May 15, 2000.
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the quarterly period ended March 31, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the transition period from _____________ to
_____________
Commission File Number: 0-26430
TARRANT APPAREL GROUP
(Exact name of registrant as specified in its charter)
California 95-4181026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3151 East Washington Boulevard
Los Angeles, California 90023
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (323) 780-8250
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares of Common Stock of the registrant outstanding as of May 3,
2000: 15,818,315.
<PAGE>
TARRANT APPAREL GROUP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 (Audited)......................... 3
Consolidated Statements of Income for the Three Months Ended March 31, 2000 and March 31, 1999......... 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000
and March 31, 1999..................................................................................... 5
Notes to Consolidated Financial Statements............................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 14
Item 2. Changes in Securities.................................................................................. 14
Item 3. Defaults Upon Senior Securities........................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 14
Item 5. Other Information...................................................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................................................... 14
SIGNATURES............................................................................................. 15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 468,684 2,239,511
Accounts receivable, net........................................................... 88,405,003 70,922,626
Due from affiliates................................................................ 667,342 1,031,879
Due from officers.................................................................. 1,449,519 1,891,739
Inventory.......................................................................... 59,891,398 62,362,409
Temporary quota.................................................................... 4,801,324 4,521,200
Prepaid expenses................................................................... 6,791,389 3,413,416
Prepaid income taxes............................................................... 102,449 296,681
------------ ------------
Total current assets............................................................... 162,577,108 146,679,461
Property and equipment, net 118,870,815 111,520,497
Permanent quota, net................................................................. 704,221 584,402
Other assets......................................................................... 15,248,637 11,658,832
Excess of cost over fair value of net assets acquired................................ 23,534,459 24,599,215
------------ ------------
Total assets....................................................................... $320,935,240 $295,042,407
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings..................................................................... $ 36,892,080 $ 55,144,818
Accounts payable.................................................................... 27,380,315 27,915,169
Accrued expenses.................................................................... 8,482,671 7,814,114
Income taxes........................................................................ 3,754,517 4,694,483
Deferred tax liability 255,233 --
Due to shareholders/officers 4,207,539 16,143,238
Current portion of long-term obligations............................................ 34,724,627 9,771,867
------------ ------------
Total current liabilities......................................................... 115,696,982 121,483,689
Long-term obligations................................................................ 61,418,585 34,155,247
------------ ------------
Total liabilities................................................................. 177,115,567 155,638,936
Commitments and contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized; none
issued and outstanding............................................................. -- --
Common stock, no par value, 20,000,000 shares
authorized; 15,802,315 shares (2000) and 13,832,955
shares (1999), issued and outstanding.............................................. 69,567,224 69,595,141
Contributed capital................................................................. 1,434,259 1,434,259
Retained earnings................................................................... 70,256,668 68,365,373
Accumulated other comprehensive income.............................................. 2,561,522 8,698
------------ ------------
Total shareholders' equity........................................................ 143,819,673 139,403,471
------------ ------------
Total liabilities and shareholders' equity........................................ $320,935,240 $295,042,407
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Net sales........................................................................... $102,415,815 $84,063,292
Cost of sales....................................................................... 85,472,864 68,075,452
------------ -----------
Gross profit........................................................................ 16,942,951 15,987,840
Selling and distribution expenses................................................... 4,201,174 2,820,515
General and administrative expenses................................................. 7,568,567 4,765,026
Amortization of excess of cost over fair value of net assets acquired............... 667,791 466,459
------------ -----------
Income from operations.............................................................. 4,505,419 7,935,840
Interest expense.................................................................... (1,941,762) (858,442)
Interest income..................................................................... 43,568 191,559
Other income........................................................................ 394,834 30,382
------------ -----------
Income before provision for income taxes............................................ 3,002,059 7,299,339
Provision for income taxes.......................................................... (1,110,762) (2,700,000)
------------ -----------
Net income.......................................................................... $ 1,891,297 $ 4,599,339
============ ===========
Net income per share
Basic.............................................................................
$0.12 $0.33
============ ===========
Diluted...........................................................................
$0.12 $0.30
============ ===========
Weighted average common and common equivalent shares
Basic.............................................................................
15,802,315 13,853,461
============ ===========
Diluted...........................................................................
15,953,117 15,524,066
============ ===========
</TABLE>
See accompanying notes.
4
<PAGE>
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Operating activities
Net income............................................................................ 1,891,297 $ 4,599,339
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization....................................................... 2,799,817 888,420
Deferred taxes...................................................................... 449,465 74,069
Provision for returns and discounts................................................. 35,010 (351,492)
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (17,517,387) 11,339,105
Due from affiliates and officers................................................. 751,855 3,145,145
Inventory........................................................................ 2,471,011 (2,017,326)
Temporary quota.................................................................. (280,124) (2,035,639)
Prepaid expenses................................................................. (3,377,973) (166,583)
Accounts payable................................................................. (534,854) (5,066,935)
Accrued expenses................................................................. (53,127) 179,211
----------- ------------
Net cash provided by (used in) operating activities.............................. (13,365,010) 10,587,314
----------- ------------
Investing activities
Purchase of fixed assets.............................................................. (9,064,867) (424,180)
Acquisition of CMG.................................................................... --- (4,275,000)
Purchase of permanent quota........................................................... (221,936) (705,474)
Increase in other assets.............................................................. (3,589,807) (7,056,985)
----------- ------------
Net cash used in investing activities............................................ (12,876,610) (12,461,639)
----------- ------------
Financing activities
Reduction in Bank borrowings, ........................................................ (18,252,738) (1,880,253)
Issuance of debt...................................................................... 55,519,944 --
Payment long term obligations......................................................... (3,303,846) (96,975)
Payment of advance from shareholders.................................................. (11,880,797)
Exercise of stock options including related tax benefit............................... (122,525) 1,592,132
Repurchase of stock 112,500 --
----------- ------------
Net cash provided by (used in) financing activities.............................. 22,072,538 (385,097)
----------- ------------
Effect of exchange rate on cash 2,398,255 --
----------- ------------
Net increase (decrease) in cash and cash equivalents.................................. (1,770,827) (2,259,422)
Cash and cash equivalents at beginning of period...................................... 2,239,511 4,318,520
----------- ------------
Cash and cash equivalents at end of period............................................ 468,684 $ 2,059,098
=========== ============
</TABLE>
See accompanying notes.
5
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Consolidation
The accompanying financial statements include the accounts of the Company and
its consolidated subsidiaries. All significant intercompany investments,
transactions and balances have been eliminated.
2. Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of operations for the periods presented have been included.
The consolidated financial data at December 31, 1999 is derived from audited
financial statements which are included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999, and should be read in conjunction
with the audited financial statements and notes thereto. Interim results are not
necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Assets and liabilities of the Mexico, 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 and peso in Mexico.
3. Accounts Receivable
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- -----------
<S> <C> <C>
U.S. trade accounts receivable.......................................... 74,524,060 $54,546,617
Foreign trade accounts receivable....................................... 11,760,304 10,954,919
Due from factor......................................................... 1,224,576 2,161,897
Other receivables....................................................... 4,139,391 6,467,511
Allowance for returns and discounts..................................... (3,243,328) (3,208,318)
---------- -----------
88,405,003 $70,922,626
========== ===========
</TABLE>
6
<PAGE>
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
4. Inventory
<TABLE>
<CAPTION>
Inventory consists of the following: March 31, December 31,
2000 1999
---------- -----------
<S> <C> <C>
Raw materials......................................................................
Fabric and trim accessories................................................. 20,202,135 $16,932,830
Raw cotton.................................................................. 1,760,527 1,555,752
Work-in-process.................................................................... 10,314,503 9,949,447
Finished goods shipments-in-transit................................................ 4,319,361 7,112,939
Finished goods..................................................................... 23,294,872 26,811,441
---------- -----------
59,891,398 $62,362,409
========== ===========
</TABLE>
5. Debt
Bank borrowings consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- -----------
<S> <C> <C>
Import trade bills payable......................................................... 3,129,418 $ 5,315,382
Direct bank acceptances............................................................ 20,625,181 15,697,171
Other foreign credit facilities.................................................... 1,772,399 2,536,033
United States credit facilities.................................................... 11,365,082 31,596,232
---------- -----------
36,892,080 $55,144,818
========== ===========
</TABLE>
Long term debt consists of certain secured and unsecured equipment financings
related to the capital investment program in Mexico. At total of $10.9 million
at March 31, 2000 of this debt is denominated in Deutsch marks and the Euro. The
Company bears the risk of any foreign currency fluctuation with regards to this
debt. The majority of the long term debt at March 31, 2000 pertains to a
revolving credit, factoring and security agreement ("Debt Facility") entered
into on January 21, 2000 with a syndicare of lending institutions. The Debt
Facility provides for a revolving facility of $105.0 million, including a letter
of credit facility not to exceed $20.0 million and matures on January 31, 2005.
The Debt Facility provides for interest at LIBOR plus LIBOR rate margin
determined by the Total Leverage Ratio, as defined. The facility is secured by
receivables, intangibles, inventory and various other specified non-equipment
assets of the Company. In addition the facility is subject to various financial
covenants including requirements for tangible net worth, fixed charge coverage
ratios, interest coverage ratios among others and prohibits the payment of
dividends.
6. Acquisition of Jane Doe
Subsequent to the end of this quarter, on April 12, 2000 the Company formed a
new company Jane Doe International, LLC, (JDI). This company was formed by
purchasing the assets of Needletex, Inc., owner of the Jane Doe brand. JDI is
owned 51% by Tarrant Apparel Group, and 49% by Needletex, Inc. The purchase
price was $1,200,000 cash paid at closing. The collection is manufactured in
various locations throughout the Far East and consists of t-shirts, sweaters,
dresses and sportswear that are sold in specialty stores and department stores
throughout the United States.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
- ----------------------
General
The Company serves specialty retail, mass merchandise and national department
store chains by designing, merchandising, contracting for the manufacture of,
manufacturing directly, 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, Mervyns,
Sears, K-Mart, Walmart 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 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 $104 million and $200 million in
1998 and 1999, 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 August 1, 1999 the Company acquired all of the outstanding stock of
Industrial Exportadora Famian. S.A. de C.V., and Coordinados Elite, S.A. de
C.V., both Mexican corporations ("Grupo Famian"). Grupo Famian operates seven
apparel production facilities in and near Tehucan, Mexico which have the
capacity to provide "full package production" (i.e., cut, sew, launder, finish
and pack) of 110,000 units per week. For a description of the terms of
acquisition see "--Vertical Integration" and "Business Acquisitions".
On April 18, 1999 the Company finalized an agreement to acquire certain assets
of a denim mill located in Puebla, Mexico with an annual capacity of 18 million
meters ("Jamil"). For a description of the terms of acquisition, see "--
Vertical Integration" and "Business Acquisitions".
On March 23, 1999, the Company purchased certain assets of CMG, Inc., a
California corporation ("CMG"). CMG designs, produces and sells private label
and "CHAZZZ" branded woven (denim and twill) and knit apparel for women,
children and men for national chain stores, including J.C. Penny, Sears and
Mervyns. For a description of the terms of acquisition, see "--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. During the fourth quarter of 1999 the Company began using this
facility for washing, finishing and packing. It is anticipated that the Company
will take full possession of this facility and begin spinning, weaving, dying
and cutting during the year 2000. The Company anticipates that the cost of this
facility will be approximately $90 million. See "--Vertical Integration".
During 1999, the Company began a consolidation strategy to gain efficiencies
as a result of its acquistions. As a result the Company has discontinued use of
two of the four Mississippi Rocky Apparel plants and shifted this production to
its Mexico facilities.
Management continues to focus much of its attention on transforming the
Company from a sourcing company to a fully vertical integrated manufacturer,
providing full package production from raw materials, (mostly cotton) to
finished garments. Its manufacturing operations were developed in Mexico
through acquistion and development of manufacturing plants, while its
traditional sourcing business continues at the same time predominantly out of
the Far East.
8
<PAGE>
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.
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 and 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 weather, transportation
delays, quotas, 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 approximately 43% and 39% of the Company's net sales in Fiscal 1999 and the
first quarter of 2000 respectively. The loss of such customer could have a
material adverse effect on the Company's results of operations. From time to
time, certain of the Company's major customers have experienced financial
difficulties. The Company does not have long-term contracts with any of its
customers and, accordingly, there can be no assurance that any customer will
continue to place orders with the Company to the same extent it has in the past,
or at all. In addition, the Company's results of operations will depend to a
significant extent upon the commercial success of its major customers.
Dependence on Contract Manufacturers. The Company has reduced its reliance on
outside third party contractors through its Mexico vertical integretion
strategy. However, all international and a portion of its domestic sourcing is
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.
9
<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 96% of the Company products were imported
(including Mexico) in 1999. As a result, the Company's operations are subject to
the customary risks of doing business abroad, including, among other things,
transportation delays, economic or political instability, currency fluctuations,
restrictions on the transfer of funds and the imposition of tariffs, export
duties, quotas and other trade restrictions.
Year 2000 Issue. In prior years , the Company discussed the nature and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
10
<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>
Three Months
Ended March 31,
-----------------
2000 1999
----- -----
<S> <C> <C>
Net sales....................................................................................... 100.0% 100.0%
Cost of sales................................................................................... 83.5 81.0
----- -----
Gross profit.................................................................................... 16.5 19.0
Selling and distribution expenses............................................................... 4.1 3.4
General and administration expenses*............................................................ 8.0 6.2
----- -----
Operating income................................................................................ 4.4 9.4
Interest expense................................................................................ (1.9) (1.0)
Other income.................................................................................... 0.4 0.3
----- -----
Income before income taxes...................................................................... 2.9 8.7
Income taxes.................................................................................... (1.1) (3.2)
----- -----
Net income...................................................................................... 1.8% 5.5%
===== =====
</TABLE>
* Includes amortization of excess of cost over fair value of net assets
acquired.
First Quarter 2000 Compared to First Quarter 1999
Net Sales increased by $18.3 million, or 21.8%, from $84.1 million in the
first quarter of 1999 to $102.4 million in the first quarter of 2000. The
increase in net sales included an aggregate increase in sales of $1.7 million to
mass merchandisers, an increase of $2.8 million to divisions of The Limited and
an increase of $11.4 million as a result of the Chazzz acquisition that was
completed on March 23, 1999. Overall, sales to divisions of the Limited in the
first quarter of 2000 amounted to 39% of net sales, as compared to 45% in the
comparable prior year.
Gross Profit (which consists of net sales less product costs, duties and
direct costs attributable to production) for the first quarter of 2000 was $16.9
million, or 16.5% of net sales, compared to $16.0 million, or 19.0% of net
sales, in the comparable prior period. The decrease in the gross profit margin
resulted from an increase in fixed costs related to production volume at the
Company's new Mexico facilities that are still in the start up phase and not yet
running at optimal capacity utilization. This relates primarily to new sewing
facilities and certain operations at the twillmill facility. In addition the
planned reduciton in certain excess inventory during the quarter at reduced
margins.
Selling and Distribution Expenses increased from $2.8 million in the first
quarter of 1999 to $4.2 million in the first quarter of 2000. As a percentage of
net sales, these expenses increased from 3.4% in 1999 to 4.1% in 2000. General
and Administrative Expenses (which include amortization of excess of cost over
fair value of net assets acquired) increased from $5.2 million in the first
quarter of 1999 to $8.2 million in the first quarter of 2000. As a percentage of
net sales, these expenses increased from 6.2% in the first quarter of 1999 to
8.0% in the first quarter of 2000. This increase is the result of the
Company's continuing transition from primarily a Far East sourcing company, to a
company that produces nearly 50% of its sales as a fully vertically integrated
manufacturer in Mexico. To accomplish this task the Company has increased its
corporate overhead to properly manage the transition and support the ongoing
business model.
Operating Income in the first quarter of 2000 was $4.5 million, or 4.4% of
net sales, compared to $7.9 million, or 9.4% of net sales, in the comparable
prior period as a result of the factors discussed above.
Other Income increased from $30,382 in the first quarter of 1999, to
$394,834 in the first quarter of 2000. This increase primarily resulted from a
gain on foreign currency on debt for new machinery financed with a credit
facility denominated in Deutsch Marks and Euro dollar. Net Interest expense
increased by $1.2 million in the first quarter of 2000, or 2.0% of net sales, to
$1.9 million as compared to $666,883 for the first quarter of 1999. This
increase was primarily attributable to the increase in long term debt to finance
the Mexico vertical integration strategy.
11
<PAGE>
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. In Hong Kong the Company generally purchases
fabric for delivery directly to the manufacturer's factory. The Company then
invoices the manufacturer for the fabric, and reduces payments to the
manufacturer for finished goods by the amount of outstanding invoices. The
Company's primary sources for working capital and capital expenditures are cash
flow from operations, borrowings under the Company's bank credit facilities,
issuance of long-term debt and the proceeds from the exercise of stock options.
During the first quarter of fiscal year 2000, net cash used in operating
activities was $13.4 million, which resulted primarily from net income of $1.9
million plus depreciation and amortization of $2.8 million, as offset by a net
decrease in working capital items of 18.5 million including an increase of $17.5
million in accounts receivable and a decrease in inventory of $2.5 million.
During 2000, cash flow used in investing activities was $12.9 million, which was
primarily equipment purchsed for Mexico to build production facilities.
In 2000, cash flow provided by financing activities equaled $22.1 million,
including $18.3 million of net reduction of bank borrowings and issuance of
$52.2 million long term debt. The Company paid back a shareholder $11.9 million
of interim bridge financing.
The Company has credit facilities of $33 million and $13 million with the
Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and acceptances, as well as cash advances.
These facilities are subject to review at any time and the right of either
lender to demand payment at any time. Interest on cash advances under HKSB's
facility accrues at HKSB's prime rate for lending U.S. dollars plus one-half to
three-quarters percent per annum. As of March 31, 2000, HKSB's U.S. dollar
prime rate equaled eight and one-half percent. Interest on cash advances under
SCB's facility accrues at SCB's prime rate for lending Hong Kong dollars. As of
March 31, 2000, SCB's Hong Kong dollar prime rate equaled eight and one-half
percent. These facilities are subject to certain restrictive covenants including
a provision that the aggregate net worth, as adjusted, of the Company will
exceed $30 million, the Company will not incur two consecutive quarterly losses
and the Company will maintain a certain debt to equity ratio. As of March 31,
2000 there were $21.0 million of outstanding borrowings under these facilities.
The Company had an unsecured $10 million credit facility with SCB which matured
on December 29, 1999 and has been replaced by an uncommitted and unsecured Money
Market Line for the same amount. The Money Market Line is cross defaulted to the
Company's other credit facilities and interest on advances accrues at the rate
of one an one quarter percent over Libor. At March 31, 2000, $10.9 million was
outstanding under this facility. This facility was fully repaid on April 18,
2000.
The Company guarantees a $2.5 million credit facility for Rocky Apparel, LLC, a
wholly-owned subsidiary of the Company which acquired the partnership interests
in Rocky Apparel, L.P., a Delaware limited partnership.
The Company assumed certain bank liabilities of Grupo Famian upon its
acquisition during the year. As of March 31, 2000 these amounted to $800,000
due to Banco Bilbao and $166,667 due to Banco International.
The Company had two equipment loans for $16.25 million and $5.2 million from GE
Capital Leasing and Bank of America Leasing respectively. The leases are secured
by equipment located in Puebla and Tlaxcala Mexico. The outstanding amounts as
of March 31, 2000 were $14.8 million due to GE Capital and $5.1 million due to
Bank of America. Interest accrues at a rate of 2 1/2% over LIBOR. The loan
from GE Capital will mature in the year 2005 and the loan from Bank of America
in the year 2004. These facilities are subject to the same restrictive covenants
as applicable to the HKSB and SCB facilities.
During 1999 the Company financed equipment purchases for the new manufacturing
facility with certain vendors of the related equipment. A total of $16.9 million
was financed with five year promissory notes which bear interest ranging from
7.0% to 7.5%, are payable in semiannual payments commencing in February 2000. Of
the $1.2 million outstanding as of March 31, 2000, $8.8 million is denominated
in Deutsch Marks and $0.9 million is denominated in the Euro. The remainder is
payable in U.S. dollars. The Company bears the risk of any foreign currency
fluctuation with regards to this debt.
The Company has financed its operations from its cash flow from operations,
borrowings under its bank credit facilities, issuance of long-term debt
(including debt to or arranged by vendors of equipment purchased for the Mexican
twill and production facility), and the proceeds from the exercise of stock
options. The Company believes that these sources of cash should be sufficient to
fund its existing operations for the foreseeable future.
On January 21, 2000 the Company entered into a new revolving credit, factoring
and security agreement ("Debt Facility") with a syndicate of lending
institutions. The Debt Facility provides a revolving facility of $105.0 million
including a letter of credit facility not to exceed $20.0 million and matures on
January 31, 2005. The Debt Facility provides an interest at libor plus libor
rate margin determined by the total leverage ratio as defined. The facility is
collaterized by receivables, intangibles, inventory and various other specified
non-equipment assets of the company. In addition the facility is subject to
various
12
<PAGE>
financial covenants including requirements for tangible net worth, fixed charge
coverage ratios, interest coverage ratios among others and prohibits the
payment of dividends. A total of $64 million was outstanding under the facility
at March 31, 2000.
The Company has commenced a capital investment program in Mexico under which
it will invest approximately $160 million in the acquisition of a denim mill and
the construction of a new facility which when fully operational will spin, weave
and dye twill fabric, and provide the capability to cut, launder, finish and
ship finished garments. 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 expenditures aggregating approximately $116
million have been made with respect to vertical integration programs initiated
by the Company.
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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
On October 2, 1999, summons were issued by the Hong Kong Special
Administrative Region Magistrate's Court to Tarrant Company Limited ("TCL"), a
wholly owned Hong Kong subsidiary of the Company. The summons alleged that TCL
exported apparel to the United States from Hong Kong improperly. During the
first quarter 2000 TCL received a ruling in its favor on this matter.
In September 1999, the Company was served with a complaint in an action
brought in the Supreme Court of the State of New York, New York County, by DLLC
and Direct Corp., LLC ("Direct"), as plaintiffs. The complaint alleges that the
Company and DLLC entered into a joint venture for the purpose of producing and
selling apparel products. The complaint further alleges that the Company
breached its obligations under the joint venture. The complaint seeks monetary
damages of $50,000,000, plus interest and further seeks permanent injunctive
relief. The Company has submitted its Answer to the Complaint which generally
denies the principal allegations therin, denies any liability to the plaintiffs
and alleges a number of affirmative defenses to the claims made by plaintiffs.
No discovery has taken place in the action to date. The Company believes that
it has valid defenses to the claims set forth in the plaintiff's complaint and
intends to vigorously defend against said claims. A subsidiary of the Company
has commenced a separate action against the plaintiffs in the Superior Court of
the State of California, Los Angeles County, seeking damages of $623,138.90 for
goods sold and delivered to plaintiffs.
Item 2. Changes in Securities. None.
---------------------
Item 3. Defaults Upon Senior Securities. None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. None.
---------------------------------------------------
Item 5. Other Information. None.
-----------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
Exhibit 27 Financial Data Summary
(a) Exhibits: Reference is made to the Index to Exhibits on page 16 for a
description of the exhibits filed as part of this Report on Form 10-Q.
(b) Reports on Form 8-K: None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRANT APPAREL GROUP
Date: May 15, 2000 By: /s/ Scott Briskie
-----------------------------
Scott Briskie
Vice President-Finance and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
15
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