TARRANT APPAREL GROUP, 10-K405/A, 2000-03-31

TARRANT APPAREL GROUP
10-K405/A, 2000-03-31
WOMEN'S, MISSES', AND JUNIORS OUTERWEAR

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As filed with the Securities and Exchange Commission on March 31, 2000
================================================================================

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

AMENDMENT NO. 1

FORM 10-K/A

[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, 1999
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)

California 95-4181026
(State or other jurisdiction (I.R.S. Employer
of 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

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, 2000, the aggregate market value of the Common Stock held by non-
affiliates of the registrant was approximately $118,511,003 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,
2000: 15,801,467.

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 2000 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, 1999.

================================================================================
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PART I

Item 1. BUSINESS
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General

This 1999 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, serves specialty retail, mass merchandise and discount
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. In 1999, 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 1999 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 19% from $205 million in 1995 to $395 million
in 1999. Pre-tax income has risen approximately 25% on a compound annual basis,
from $8.3 million in 1995 to $20.3 million in 1999.

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 approximately $200 million in 1999. The
Company expects that the costs and inefficiencies that initially will occur as a
result of this strategy will, over time, be offset by the benefits of lower cost
production and better quality control over its products.

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. The purchase price consisted of (i)
$1,000,000 cash paid at closing, (ii) a $3,000,000 non interest bearing
promissory note paid in three installments of $1,000,000 each on August 31,
September 30 and October 29, 1999 and (iii) $8,000,000 payable in installments
----------------
of $833,000, $3,000,000, $1,667,000, $1,667,000 and $833,000 on each of March
31, 2000, August 31, 2000, March 31, 2001, March 31, 2002, and September 30,
2002 provided, except with respect to the payment due August 31, 2000, the Grupo
Famian subsidiary meets specified pretax income requirements. See "--Vertical
Integration" and "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. The purchase price consisted of (i) $4,275,000 plus inventory at cost
payable at closing, (ii) a $2,500,000 non-interest bearing promissory note
payable in three equal installments on the first three anniversary dates of the
closing convertible into 62,550 shares of common stock of the Company, (iii)
$500,000 payable in two equal installments of $250,000 on the second and third
anniversary dates of the closing, and (iv) $1,500,000 payable in three equal
installments of $500,000 on the first three anniversary dates of the closing
provided the CMG division meets specified net sales and pretax income
requirements. See "--Acquisitions".

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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 to cut, launder and finish garment production. 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".

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.

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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

Grupo Famian

Effective August 1, 1999, the Company purchased all of the outstanding
stock of Industrial Exportadora Famian, S.A. de C.V. and Coordinados Elite, S.A.
de C.V., both Mexican corporations ("Grupo Famian"). Grupo Famian operates seven
apparel production facilities in and near Tehuacan, Mexico which have the
capacity to provide "full package production" (i.e., cut, sew, launder, finish
and pack) of 110,000 units per week. The purchase price consisted of (i)
$1,000,000 paid on closing, (ii) a $3,000,000 non-interest bearing promissory
note payable in three installments of $1,000,000 on each of August 31, September
30 and October 29, 1999 and (iii) $8,000,000 payable in installments of
$833,000, $3,000,000, $1,667,000, $1,667,000 and $883,000 on each of March 31,
2000, August 31, 2000, March 31, 2001, March 31, 2002 and September 30, 2002
provided, except with respect to the payment due August 31, 2000, that the Grupo
Famian subsidiary meets specified pretax income requirements. The purchase price
paid on closing was financed by the Company under its existing bank credit
facilities. The former shareholders of Grupo Famian were granted a security
interest in the shares of Grupo Famian which was released following the October
29, 1999 payment. This transaction has been accounted for as a purchase, and the
purchase price was allocated based on the fair value of assets acquired and
liabilities assumed. The excess of cost over fair value of net assets acquired
will be amortized over 15 years. The operations of Grupo Famian are included
with those of the Company commencing on August 1, 1999.

Jamil Denim Plant

On April 18, 1999, the Company finalized an agreement to acquire certain
assets of a denim mill located in Puebla, Mexico with an annual capacity of 18
million meters ("Jamil"). The purchase price consisted of $22.0 million in cash
paid on May 7, 1999 and 1,724,000 shares (the "Shares") of the Company's Common
Stock issued on May 24, 1999 valued at $45.3 million. The Shares will be
distributed to the sellers in three equal installments on April 1, 2000, 2001
and 2002; provided, however, that any distribution (i) shall be offset by any
claims of the Company against the sellers under the asset purchase agreement and
(ii) will be proportionally reduced in the event the assets fail to produce at
least 15 million yards of marketable denim in the fiscal year immediately
preceding the dates of such distributions of Shares. In addition, the Company
has granted the holders of the Shares certain registration rights and the right
to vote the Shares. The Company has also assumed the obligations of the
sellers under an existing collective bargaining agreement; provided, however,
that the sellers shall reimburse the Company for any costs (including, but not
limited to, salaries and benefits) arising before the closing date or as a
result of this acquisition.

The Company has entered into a three-year employment agreement with Mr.
Nacif, the principal shareholder of the sellers, pursuant to which Mr. Nacif
shall be entitled to receive (i) an annual base salary of $1 million, subject to
such periodic increases, if any, as the Company may deem to be appropriate, (ii)
reimbursement of all reasonable and documented business expenses, (iii)
participation in all plans sponsored by the Company for employees in general and
(iv) the right (the "Option") for ten years to purchase up to 500,000 shares of
the Company's Common Stock at an exercise price of $25 per share. The Option
will vest in three equal installments on April 1, 2000, 2001 and 2002 and will
terminate upon the termination of Mr. Nacif's employment by the Company;
provided, however, that (i) the vesting of any installment shall be deferred to
the date ten business days before the stated expiration date in the event the
operating income of the Company's Mexican operations does not reach certain
levels, and (ii) if such termination of employment results from Mr. Nacif's
death or permanent disability, any vested portion shall terminate on the earlier
of the stated expiration date or the first anniversary of such termination of
employment. In the event the Company terminates Mr. Nacif's employment without
cause (as defined) the Company shall remain obligated to pay Mr. Nacif an amount
equal to his base salary for the remainder of the stated term. In the event Mr.
Nacif's employment is terminated for any other reason (including death,
disability, resignation or termination with cause), neither party shall have any
further obligation to the other, except that the Company shall pay to Mr. Nacif,
or his estate, all reimbursable expenses and such compensation as is due
prorated through the date of termination.

C M G (Chazzz)

On March 23, 1999, the Company purchased certain assets of CMG, Inc., a
California corporation ("CMG"). CMG designs,produces and sells private label and
"CHAZZZ"(R) branded woven (denim and twill) and knit apparel for women, children
and men for national chain stores, including J.C. Penney, Sears and Mervyns. The
purchase price consisted of (i) $4,275,000 and an amount equal to seller's cost
of the inventory purchased, payable in cash on closing, (ii) a $2,500,000
non-interest bearing promissory note payable in three equal annual installments
on the first three anniversary dates of the closing convertible into 62,550
shares of common stock of the Company, (iii) $500,000 payable in two equal
installments of $250,000 on the second and third anniversary dates of closing,
and (iv) $1,500,000 payable in three equal installments of $500,000 on the first
three anniversary dates of closing provided the CMG Division meets specified net
sales and pretax income requirements. The purchase price paid on closing was
financed by the Company from its cash flow from operations. The Company was
granted a security interest in the 62,550 shares to secure the performance of
obligations under the purchase agreement, including, without

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limitation, the indemnification obligations. This transaction has been accounted
for as a purchase, and the purchase price has been allocated based on the fair
value of assets acquired and liabilities assumed. The excess of cost over fair
value of net assets acquired is being amortized over 15 years. The operations of
CMG have been included with those of the Company commencing on March 23, 1999.

The Company has entered into an employment agreement with Charles Ghailian,
the sole shareholder of CMG, under which he is employed as President - Chazzz
Division of the Company for a term commencing on March 23, 1999 and ending on
March 31, 2002, and will be paid an annual base salary of $480,000. In the event
the Company terminates his employment without cause, Mr. Ghailian shall be
entitled to receive a lump sum payment of $480,000. In addition, Mr. Ghailian
has agreed not to compete with the Company during the two years following the
termination of his employment for any reason.

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.

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.

During 1999, as part of the Company's consolidation effort to improve
efficiencies, the Company discontinued operations at two Rocky facilities and
moved this production to its Mexico based plants.

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 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. During 1999 management of operations for the MGI division was
consolidated with Chazzz.

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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.

Acquisition of Denim Mill

On April 18, 1999, the Company finalized an agreement to purchase certain
assets of a denim mill located in Puebla, Mexico with an annual capacity of 18
million meters. The purchase price consisted of $22 million in cash paid on May
6, 1999 and 1,724,000 shares (the "Shares") of the Company's Common Stock. The
Shares will be distributed to the sellers in three equal installments on April
1, 2000, 2001, 2002; provided, however, that any distribution (i) shall be
offset by any claims of the Company against the sellers under the asset purchase
agreement and (ii) will be proportionally reduced in the event the assets fail
to produce at least 15 million yards of marketable denim in the fiscal year
immediately preceding the dates of such distributions of Shares. In addition,
the Company has granted the holders of the Shares certain registration rights
and the right to vote the Shares.

The Company has also assumed 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,
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. The facility
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 $60 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 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. During the fourth quarter of 1999
the Company began using a portion of this facility to wash, finish and pack. The
building should be completed and fully operational by the end of fiscal year
2000.

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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, and consolidation among
retailers. 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, 1999, affiliated stores owned by The
Limited, including Express, Lerner New York, Limited Stores, Structure and Lane
Bryant, accounted for approximately 42.5% of the Company's net sales. In
addition in 1999 sales to Target Stores (a division of Dayton Hudson) and
Walmart accounted for approximately 12.4% and 11.4% of net sales respectively.
No other customer accounted for more than 10% of the Company's net sales. 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, K-Mart,
Mervyns, Sears, Abercrombie & Fitch and J.C. Penney. Additionally, the Company
manufactures "branded" merchandise for several major designers. 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 6.3% of the Common Stock outstanding as of March 1, 2000)
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
retained ownership of the remaining 299,998 shares. The one million shares were
subject to a lockup provision, which expired October 9, 1999.

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. To the extent
that these financial difficulties occur, there can be no assurance that the
Company's financial condition and results of operations would not be adversely
affected.

9
<PAGE>

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. During 1999, the Company opened an office
in Columbus, Ohio to support this approach and better service the needs of The
Limited.

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 121 employees, currently
furnishes a significant portion of the Company's sample requirements. As the
Company continues to develop its Mexico based operation a significant amount of
sample production has shifted to Mexico during 1999.

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

10
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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 Thailand,
Korea and 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) acquiring or constructing
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:

<TABLE>
<CAPTION>
1996 1997 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
International Sourcing
Hong Kong and China.......................................................... 78.3% 60.5% 50.4% 36.3%
Other(1)..................................................................... 7.7 13.7 10.0 12.3
Domestic Sourcing
United States................................................................ 13.8 14.9 5.7 2.6
Mexico and Central America................................................... 0.2 10.9 33.9 48.8
</TABLE>

__________________
(1) In 1999, such countries consisted of Thailand, Philippines, UAE/Oman, and
Indonesia and Korea.

Dependence on Contract Manufacturers

The Company has reduced its reliance on outside third party contractors
through its Mexico vertical integration strategy. However, all international and
a portion of its Mexico 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.

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 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. The impact of such a loss will may be offset in part by the
acquisition of or development of fabric mills and production facilities in
Mexico. See "____ Vertical Integration"

11
<PAGE>

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, (both owned and third party contractors) 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 international offices. At December 31, 1999, the Company had offices in
Hong Kong, China, Thailand, Korea and Mexico. The staff at these locations 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 Normal Trade Relations ("NTR") 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 for its international sourcing needs
(not including Mexico), and currently expects that it will continue to do so for
the foreseeable future. Any significant disruption in the Company's operations
or its relationships with its manufacturers and suppliers located in Hong Kong
or China could have a material adverse effect on the Company.

The Company commenced manufacturing basic denim and twill products through
independent contractors in Mexico in the second quarter of 1997, and is
continuing to expand its use of manufacturing facilities in this region. During
1999 the Company continued to expand its Mexico production capabilities, and
acquired several Mexico manufacturing operations. The Company believes that the
further diversification of its international sourcing network by increasing the
use of manufacturing facilities in Mexico along with its Vertical Integration
Strategy 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," and "Acquisitions".

12
<PAGE>

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 cutting 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,
or produce 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.

Backlog

At February 23, 2000, the Company had unfilled customer orders of
approximately $142 million as compared to approximately $137 million at February
23, 1999. The Company believes that all of its backlog of orders as of February
23, 2000 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 requirements. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments. The Company's
experience has been that the cancellations, rejections or returns of orders have
not materially reduced the amount of sales realized from its backlog.

Import Restrictions

Quotas

The Company imported approximately 96% of its products (on an FOB Basis) in
1999, including approximately 55% 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

13
<PAGE>

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 1999, products imported using Hong Kong quota accounted for
approximately 30% 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.

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 NTR status.
China's NTR status, which is granted on an annual basis, expires in July 2000.
China's NTR 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 NTR 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 NTR 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 NTR status. If China's NTR status were to terminate, and Chinese
origin products had to enter the U.S. without the benefit of NTR 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 1999, products imported using China quota
accounted for approximately 6% 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.

14
<PAGE>

Employees

At December 31, 1999, the Company had approximately 226 full-time employees
in the United States, 4,366 in Mexico (which includes all manufacturing labor to
produce fabric, and cut, sew, trim, wash and pack finished garments), 170 in
Hong Kong, 142 in China, 8 in Thailand and 3 in Korea. The Company considers its
relations with its employees to be good.

15
<PAGE>

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

General

The Company serves specialty retail, mass merchandise and discount 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.

Over the past five years, the Company has achieved a compound annual growth
rate in net sales of approximately 19% from $205 million in 1995 to $395 million
in 1999. Pre-tax income has risen approximately 25 % on a compound annual basis,
from $8.3 million in 1995 to $20.3 million in 1999.

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 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 focused much of its attention during 1999 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.

19
<PAGE>

The transition has been challenging and the Company has experienced lower gross
margins and higher operating expenses during 1999 as a result. In addition,
gross margins were impacted by inventory variance and markdowns, while the SGA
expenses were impacted by an increase in the reserve against accounts
receivable, and an asset impairment to write off its old computer systems.
During the year 2000 the company is installing new computer systems and
controls. Although, the integration process continues, the Company has made
significant progress at developing this strategy, and expects to begin to see
the benefits of lower productions costs, and greater control over quality and
delivery schedules during 2000.

Subsequent to the year-end 1999, the Company opened a new credit agreement
allowing it to borrow up to $105 million. The line of credit is granted by
three institutions, GMAC, Finova Capital Corporation, and Sanwa Bank of
California.

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 66% of the Company's net sales in 1999 and
1998, 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

20
<PAGE>

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,
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 expensed approximately $250,000 during 1999 in connection
with remediating its systems. 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.

21
<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,
---------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net sales....................................................................... 100.0% 100.0% 100.0%
Cost of sales................................................................... 84.9 81.2 83.3
----- ----- -----
Gross profit.................................................................... 15.1 18.8 16.7
Selling and distribution expenses............................................... 3.3 3.0 3.5
General and administration expenses............................................. 5.2 5.2 6.3
Amortization of excess of cost over fair value of net assets acquired(1)........ -- 0.4 0.6
----- ----- -----
Operating income................................................................ 6.6 10.2 6.3
Interest expense................................................................ (0.6) (0.6) (1.4)
Other income.................................................................... 0.2 0.2 0.2
----- ----- -----
Income before income taxes...................................................... 6.2 9.8 5.1
Income taxes.................................................................... ( 2.0) (3.3) (1.9)
----- ----- -----
Net income...................................................................... 4.2% 6.5% 3.2%
----- ----- -----
</TABLE>

(1) Reflects amortization of the excess of cost over fair value of assets
acquired in acquisitions of MGI and Rocky.

Comparison of 1999 to 1998

Net sales increased by $17.2 million or 4.5%, from $378.2 million in
1998 to $395.3 million in 1999. The increase in net sales includes $41.7
million in sales related to the acquired Chazzz division, which was
acquired in 1999, a decrease of approximately $70 million in sales to
divisions of The Limited, and an increase to other customers such as mass
merchants, discounters and branded designs. During 1999, sales to divisions
of The Limited accounted for 42.5% of total sales as compared to 63.3% in
1998.

Gross profit (which consists of net sales less product costs, duties
and direct costs attributable to production) for 1999 was $66.2 million, or
16.7% of net sales, compared to $71.1 million, or 18.8 % of net sales, a
decrease of 2.1%. The decrease was primarily attributable to production
inefficiencies that the Company experienced as it integrated its newly
acquired companies (Jamil, and Grupo Famian) into its operating structure.
In addition, the Company recorded a charge of approximately $2 million as a
result of year-end book to physical adjustments in the fourth quarter of
1999.

Selling and distribution expenses increased from $11.3 million in 1998
to $13.7 million in 1999. As a percentage of sales these expenses increased
from 3.0% in 1998 to 3.5% in 1999. This increase was caused by the
development of the personnel and infrastructure to support the development
of Mexico production facilites and the additional overhead of the Chazzz
division of $750,000 compared to zero in 1998.

General and administrative expenses increased from $19.9 million in
1998 to $25.3 million in 1999, an increase of 27%. Generally, this increase
was the result of the Company building its infrastructure to support the
development of Mexico manufacturing operations plus $2.6 million of
overhead expenses for the Chazzz division acquired during 1999. The Company
incurred approximately $1.0 million in charges to replace its old computer
systems, which are being replaced during 2000. This charge included both
costs to support the system in 1999 and costs related to the acceleration
of depreciation.

Operating income was $38.6 million in 1998, or 10.2% of net sales,
compared to $24.9 million in 1999 or 6.3% of net sales due to the factors
described above. The decrease in operating income as a percentage of net
sales was primarily due to a decrease in gross profit margin, which
amounted to 2.1% of net sales, an increase in general and adminstrative
expenses of 1.1% of net sales, and an increase in amortization of excess
cost over fair value of net assets acquired, which amounted to 0.1% of net
sales.

Other income increased from $928,000 in 1998 to $1,144,000 in 1999. As
a percentage of net sales there was no change. Included in other income in
1999 is a $668,000 foreign currency gain related to debt repayable in a
foreign currency.

22
<PAGE>

Income before taxes was $37.1 million in 1998 and $20.3 in 1999,
representing 9.8% and 5.1% of net sales respectively. The decrease in
income before taxes as a percentage of net sales was due to the decrease in
gross profit margin, an increase in general and administrative expense as
discussed above, and an increase in interest expense which amounted to 0.8%
of net sales associated with increased debt levels pertaining to the
expansion of Mexico operations.

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 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

23
<PAGE>

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.

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,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- --------- ---------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In millions)
Net sales............. $ 53.6 $ 73.9 $ 69.2 $ 63.4 $ 64.3 $100.1 $114.9 $ 98.9 $ 84.1
Gross profit.......... 8.8 11.1 9.7 9.6 10.9 20.3 19.7 20.2 16.0
Operating income...... 3.4 5.1 4.1 4.5 4.5 11.7 11.4 11.0 7.9
Net Income/(loss) 2.0 3.3 2.7 2.8 2.8 7.2 7.1 7.6 4.6

Net sales............. $109.8 $110.5 $ 90.9
Gross profit.......... 19.0 19.3 11.9
Operating income...... 9.7 9.0 (1.7)
Net Income/(loss) 5.7 4.9 (2.3)
</TABLE>

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <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%
Gross profit.......... 16.4 15.0 14.0 15.1 17.0 20.2 17.1 20.4 19.1
Operating Inc/(loss) 6.3 6.9 5.9 7.2 7.1 11.7 9.9 11.1 9.4
Net Income/(loss) 3.8 4.4 3.9 4.4 4.3 7.2 6.2 7.7 5.5

<CAPTION>
-------------------------------
June 30, Sept. 30, Dec. 31,
1999 1999 1999
-------- --------- --------
<S> <C> <C> <C>
Net sales............. 100.0% 100.0% 100.0%
Gross profit.......... 17.3 17.5 13.1
Operating Inc/(loss) 8.8 8.1 (1.9)
Net Income/(loss) 5.2 4.4 (2.5)
</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 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 1999, net cash provided by operating activities was $2.2 million, which
resulted primarily from net income of $12.9 million plus depreciation and
amortization of $8.0 million, as offset by a net increase in working capital
items, including an increase of $4.1 million in accounts receivable and an
increase in inventory of $13.1 million. The increase in inventory primarily
resulted from the company beginning to do its own manufacturing in Mexico as
part of its vertical integration strategy. The Company now carries inventories
on its books of raw materials, work in process, and finished goods as a result
of this operation.

During 1999, cash flow used in investing activities was $84.0 million, which
included $4.2 million for the CMG acquisition, $6.8 million for the Famian
acquisition. The remaining investment was used to acquire fixed assets and
construction costs in Mexico to build production facilities.

In 1999, cash flow provided by financing activities equaled $79.9 million,
including $61.7 million of net additional bank borrowings and long term debt.
The balance was $16.1 million interim financing from a shareholder, and $2.0
million from the exercise of stock options net of the companies stock repurchase
plan expenditures

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

24
<PAGE>

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, 1999, 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 December 31, 1999, 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
December 31, 1999 there were $21.0 million of outstanding borrowings under these
facilities.

The Company had accounts receivable-secured credit facilities with the CIT
Group/Commercial Services, Inc. ("CIT") and Finova Capital Corporation ("FCC").
Effective January 1, 1998 the Company substantially eliminated its use of a
factor for credit verification and approval purposes on major accounts. The
Company may receive advances from FCC of up to 90% of certain accounts
receivable, and advances from CIT up to 90-100% of the amount of other accounts
receivable. Subsequent to the year-end, these facilities from FCC and CIT have
been replaced by a syndicated facility of $105 million lead managed by GMAC
Commercial Credit and participated by GMAC, Finova, and Sanwa Bank of
California.

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 December 31,
1999, $4.0 million was outstanding under this facility.

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 December 31, 1999 these amounted to $1
million due to Banco Bilbao and $222,222 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 December 31, 1999 were $15.5 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 $16.9 million outstanding as of December 31, 1999, $10.9
million is denominated in Deutsch Marks and $1.1 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.

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.

25
<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 31, 2000.

TARRANT APPAREL GROUP

By: /s/ Gerard Guez
-----------------------------------
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 Officer March 31, 2000
- ------------------------ and Director (Principal
Gerard Guez Executive Officer)

/s/ Todd Kay Vice Chairman and President March 31, 2000
- ------------------------
Todd Kay

/s/ Scott Briskie Vice President Finance Chief March 31, 2000
- ------------------------ Financial Officer and Director
Scott Briskie (Principal Financial and
Accounting Officer)

/s/ Karen S. Wasserman Executive Vice President, General March 31, 2000
- ------------------------ Merchandising Manager and
Karen S. Wasserman Director

/s/ James R. Miller Director March 31, 2000
- ------------------------
James R. Miller

/s/ Nicolas Berggruen Director March 31, 2000
- ------------------------
Nicolas Berggruen

/s/ Barry Aved Director March 31, 2000
- ------------------------
Barry Aved
</TABLE>

S-1