UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number: 0-26430
TARRANT APPAREL GROUP
(Exact name of registrant as specified in its charter)
California 95-4181026
(State or other jurisdiction (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. [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [_] No [X]
As of June 28, 2002, the aggregate market value of the Common Stock
held by non-affiliates of the Registrant was approximately $38,126,931 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 15, 2003: 15,846,315.
DOCUMENTS INCORPORATED BY REFERENCE
None
AMENDMENT NO. 1
TO THE ANNUAL REPORT ON FORM 10-K FILED BY
TARRANT APPAREL GROUP ON APRIL 1, 2003
The following amends the Annual Report on Form 10-K filed by Tarrant
Apparel Group on April 1, 2003, as permitted by the rules and regulations
promulgated by the Securities and Exchange Commission. Item 15 of the Form 10-K
is hereby amended in its entirety as set forth herein.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedule. Reference is made to the Index
to Financial Statements and Schedule on page F-1 for a list of financial
statements and the financial statement schedule filed as part of this report.
All other schedules are omitted because they are not applicable or the required
information is shown in the Company's financial statements or the related notes
thereto.
(b) Reports on Form 8-K filed: None.
(c) Exhibits. The following exhibits are filed as part of this report.
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company(1)
3.1.1 Certificate of Amendment of Restated Articles of Incorporation.
(26)
3.1.2 Certificate of Amendment of Restated Articles of Incorporation.
(26)
3.1.3 Certificate of Determination of Preferences, Rights and Limitations
of Series A Preferred Stock of Tarrant Apparel Group. (28)
3.2 Restated Bylaws of the Company (1)
4.1 Specimen of Common Stock Certificate (2)
10.1 Note in the principal amount of $2,600,000 dated March 15, 1995 in
favor of Imperial Bank (1)
10.2 General Security Agreement dated March 15, 1995 by and between the
Company and Imperial Bank (1)
10.3 Factoring Agreement effective as of September 28, 1993, as amended,
by and between the Company and NationsBanc Commercial Corporation
(1) 10.4 1995 Stock Option Plan dated as of May 1, 1995 (1)
10.5 Letter Agreement dated February 17, 1995 between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation Limited
(1)
2
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------------
10.6 Letter dated April 18, 1995 from The Hongkong and Shanghai Banking
Corporation Limited to Tarrant Company Limited regarding the
release of certain security interest (1)
10.7 Commercial Lease dated January 1, 1994 and GET and the Company (1)
10.8 Tenancy Agreement dated July 15, 1994 between Lynx International
Limited and Tarrant Company Limited as amended by that certain
Supplementary Tenancy Agreement dated December 30, 1994 and that
certain Second Supplementary Tenancy Agreement dated December 31,
1994 (1)
10.9 Lease Agreement dated June 10, 1994, between Yip Sik Kin and
Tarrant Company Limited (translated from Chinese) (1)
10.10 Tenancy Contract effective as of December 24, 1994, between Khalifa
Muhairi and Tarrant Trading Co. Ltd. (1)
10.11 Agreement dated as of June 1, 1995, by and among Pret-A-Porter, the
Company, French Designers, Inc., Bernard Aidan, Gerard Guez and
Todd Kay (5)
10.12 Services Agreement dated as of April 1, 1995, by and between
F.I.S., Inc. and the Company (2)
10.13 Services Agreement dated as of October 1, 1994, by and between the
Company and GET (1)
10.14 Services Agreement dated as of October 1, 1994, by and between the
Company and Lynx International Limited (1)
10.15 Indemnification Agreement dated as of March 14, 1995, by and among
the Company, Gerard Guez and Todd Kay (2)
10.16 Promissory Note in the initial principal amount of $2 million dated
February 8, 1996, by Gerard Guez in favor of the Company (2)
10.17 Promissory Note in the initial principal amount of $1 million dated
February 8, 1995, by Todd Kay in favor of the Company (2)
10.18 Promissory Note in the principal amount of $1,334,566.71 dated
December 31, 1994, by P.I.S., Inc. in favor of the Company (2)
10.19 Release dated as of June 1, 1995, by and between the Company and
certain other parties signatory thereto (2)
10.20 Option Agreement dated as of July 28, 1995, by and among Limited
Direct Associates, L.P., Gerard Guez, Todd Kay and the Company (5)
10.21 Registration Rights Agreement dated as of July 28, 1995, by and
among the Company and Limited Direct Associates, L.P.(5)
3
EXHIBIT
NUMBER DESCRIPTION
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10.22 Reorganization and Tax Indemnification Agreement dated as of June
13, 1995, by and among the Company and its shareholders (5)
10.23 Employment Agreement January 1, 1995, by and between the Company
and Gerard Guez (2)
10.23.1 Employment Agreement effective January 1, 1998, by and between the
Company and Gerard Guez (13)
10.23.2 First amendment to Employment Agreement dated as of January 10,
2000 by and between Gerard Guez and the Company (21)
10.24 Agreement dated as of January 1, 1995, by and between the Company
and Todd Kay (1)
10.24.1 Employment Agreement effective January 1, 1998, by and between the
Company and Todd Kay (13)
10.24.2 First Amendment to Employment Agreement dated as of January 10,
2000 by and between Todd Kay and the Company
10.25 Employment Agreement dated as of January 1, 1994, by and between
the Company and Jimmy Esebag, as amended, by that certain Amendment
No. 1 dated as of June 1, 1995 (2)
10.26 Employment Agreement dated as of November 18, 1994, by and between
the Company and Mark B. Kristof (1)
10.27 Employment Agreement dated as July 5, 1994, by and between the
Company and Bradley R. Kenson (1)
10.28 License Agreement dated January 1, 1994, by and between the Company
and GET (1)
10.29 Assignment dates as of June 1, 1995 with respect to the GET!
trademark, executed by GET in favor of the Company (2)
10.30 Amendment No. 1 to Commercial Lease dated as of April 1, 1995 by
and between GET and the Company (2)
10.31 Lease and Services Agreement dated as of June 1, 1995, by and
between Tarrant Company Limited and French Designers, Inc. (2)
10.32 Note in the principal amount of $2,600,000 dated May 15, 1995, by
the Company in favor of Imperial Bank (2)
10.33 Letter Agreement dated May 17, 1995, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation Limited
(2)
10.34 Buying Agency Agreement executed as of December 19, 1992, between
P.I.S., Inc. and Tarrant Company Ltd. (2)
4
EXHIBIT
NUMBER DESCRIPTION
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10.35 Buying Agency Agreement executed as of April 4, 1995, by Azteca
Production International, Inc. and Tarrant Company Ltd., with the
Company acknowledging as to certain matters (2)
10.36 Tripartite Agreement Assignment of Factoring Proceeds (Advances)
executed and delivered June 6, 1995, by the Company, and accepted
and agreed to by The Hongkong and Shanghai Banking Corporation
Limited and NationsBanc Commercial Corporation (2)
10.36.1 Amendment to Three Party Special Deposit Account Agreement (8)
10.37 Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) entered into
as of June 6, 1995, by and between the Hongkong and Shanghai
Banking Corporation Limited and the Company (2)
10.38 Security Agreement (Tarrant Co. Ltd. Draft Acceptance) entered into
as of June 6, 1995, by and between The Hongkong and Shanghai
Banking Corporation Limited and the Company (2)
10.39 Agreement dated March 14, 1995, by and among Tarrant Company
Limited, Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin
Fong (3)
10.40 Agreement dated March 17, 1995, by and among Tarrant Company
Limited, Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin
Fong (3)
10.41 Underwriting Agreement dated as of July 24, 1995, by and among the
Company, Gerard Guez, Todd Kay and Prudential Securities
Incorporated (5)
10.42 Letter agreement dated August 10, 1995, by and among the Company
and NationsBanc Commercial Corporation (4)
10.42.1 Amendment dated June 9, 1997 to Factoring Agreement effective as of
September 28, 1993, as amended, by and between the Company and
NationsBanc Commercial Corporation (8)
10.43 Letter agreement dated January 30, 1996, by and between Tarrant
Company Limited and The Hongkong Shanghai Banking Corporation
Limited (5)
10.43.1 Letter agreement dated May 28, 1996, by and between Tarrant Company
Limited and The Hongkong and Shanghai Banking Corporation Limited
(8)
10.43.2 Letter agreement dated April 16, 1998, by and between Tarrant
Company Limited and The Hongkong and Shanghai Banking Corporation
Limited (11)
10.44 Promissory Note in the principal amount of $3 million dated March
25, 1996, by GET in favor of the Company (6)
10.45 Deed of Trust dated March 25, 1996 by and Between GET and the
Company (6)
5
EXHIBIT
NUMBER DESCRIPTION
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10.46 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Gerard Guez and the Company (6)
10.47 Guaranty, Pledge & Security Agreement entered into as of March 25,
1996, by and between Todd Kay and the Company (6)
10.48 Letter agreement dated February 22, 1996, by and between Tarrant
Company Limited and Standard Chartered Bank (7)
10.49 Letter agreement dated March 8, 1996, by and between Tarrant
Company Limited and Standard Chartered Bank (7)
10.50 Guarantee Agreement entered into as of August 30, 1996, by and
between Standard Chartered Bank and the Company (7)
10.51 Letter of Undertaking entered into as of August 30, 1996, by and
between Standard Chartered Bank and the Company (7)
10.52 Intercreditor Agreement entered into as of November 1, 1996,
between The Hongkong and Shanghai Banking Corporation Limited,
Standard Chartered Bank and Tarrant Company Limited (7)
10.53 Security Agreement entered into as of November 1, 1996, by and
between Standard Chartered Bank and the Company (7)
10.53.1 Termination Agreement dated as of March 29, 2002, by and between
Standard Chartered Bank and Tarrant Apparel Group (25)
10.54 Amendment to Security Agreement (Guaranty of Tarrant Co. Ltd. Debt)
entered into as of November 1, 1996, between The Hongkong and
Shanghai Banking Corporation Limited and the Company (7)
10.55 Agreement dated January 29, 1997 by and among Tarrant Company
Limited, Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin
Fong (7)
10.56 Form of Indemnification Agreement with directors and certain
executive officers (8)
10.57 Special Deposit Account Agreement (8)
10.58 Accounts Receivable Financing Agreement dated June 13, 1997, by
between the Company and The CIT GroupCommercial Services, Inc. (8)
10.58.1 Letter Agreement dated October 1, 1997 regarding Accounts
Receivable Financing Agreement, by and between the Company and The
CIT GroupCommercial Service., Inc. (13)
10.59* Asset Purchase Agreement dated February 18, 1998, by and between
Marble Limited and MGI International Limited (10)
6
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------------
10.60* Asset Purchase Agreement dated February 18, 1998, by and between
the Company and Marshall Gobuty International U.S.A., Inc. (10)
10.61 Employment Agreement dated February 23, 1998, by and between the
Company and Marshall Gobuty (10)
10.62 Noncompetition Agreement dated February 23, 1998, by and between
Marshall Gobuty International U.S.A., Inc. and Marshall Gobuty, on
the one hand, and the Company, on the other hand (10)
10.63 Noncompetition Agreement dated February 23, 1998, by and between
MGI International Limited and Marshall Gobuty, on the one hand, and
the Company, on the other hand (10)
10.64 Loan Agreement dated as of July 1, 1998, between the Company and
Standard Chartered Bank (12)
10.65 Partnership Interest Purchase Agreement dated as of July 2, 1998,
among Rocky Acquisition, LLC, the Company, Limited Direct
Associates, L.P., Rocky Apparel, Inc., and Gabriel Manufacturing
Company (13)
10.66 Escrow Agreement made as of July 2, 1998, by and among the Company,
Gabriel Manufacturing Company and Rocky Apparel, Inc. (13)
10.67 Facility Development Agreement dated as of December 2, 1998, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V. (13)
10.67.1 Letter of Intent to Purchase Twill Mill dated August 30, 2002. (27)
10.68+ Agreement for Purchase of Assets dated as of February 22, 1999, by
and among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de
C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
Benavides Montes De Oca (13)
10.68.1 Final Agreement for Purchase of Assets dated as of April 18, 1999,
by and among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A.
de C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
Benavides Montes De Oca (15)
10.69 Agreement for Purchase of Assets effective as of the twenty-third
day of March, 1999, by and among CMG, Inc., Charles Ghailian,
CHAZZZ Acquisition, L.L.C. and the Company (14)
10.70 Employment Agreement effective as of the twenty-third day of March,
1999, by and between Charles Ghailian and the Company to pay CMG
Inc. (14)
10.71 Non-Negotiable Promissory Note dated March 23, 1999 to pay CMG Inc.
(14)
10.71.1 Non-Negotiable Promissory Note dated February 14, 2000 to pay CMG
Inc. (20)
7
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------------
10.72 Escrow Agreement, by and among the Company, Tarrant Mexico, S. de
R.L. de C.V. and Jamil Textil, S.A. de C.V. dated as of April 1,
1999 (14)
10.72.1 Final Escrow Agreement dated as of May 24, 1999, by and among
Tarrant Apparel Group, Tarrant Mexico, S. de R.L. de C.V., Jamil
Textil, S.A. de C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel
Nacif and Irma Benavides Montes De Oca (15)
10.73 Employment Agreement dated as of April 1, 1999 by and between Kamel
Nacif and Tarrant Mexico, S. de R.L. de C.V. (14)
10.73.1 Amendment to Employment Agreement entered into August 7, 2000 by
and between Tarrant Mexico, S. de R.L. de C.V. and Kamel Nacif (20)
10.74 Agreement for Purchase of Stock dated as of August 1, 1999, by and
among Tag Mex, Inc., NO! Jeans, Inc., Antonio Haddad Haddad,
Tarrant Apparel Group and the shareholders of Industrial
Exportadora Famian, S.A. de C.V. and Coordinados Elite, S.A, de
C.V.* (15)
10.75 Noncompetition Agreement dated as of August 1, 1999, by and among
Tag Mex, Inc., NO! Jeans, Inc., Antonio Haddad, Tarrant Apparel
Group and the shareholders of Industrial Exportadora Famian, S.A.
de C.V. and Coordinados Elite, S.A, de C.V. (16)
10.77 Loan Agreement dated September 1, 1999 by and between General
Electric Capital Corporation and Tarrant Apparel Group (16)
10.77.1 Amendment No. 1 to Loan Agreement dated September 12, 1999 by and
between General Electric Capital Corporation and Tarrant Apparel
Group (16)
10.77.2 Modification Agreement entered into as of June 7, 2002, by and
between General Electric Capital Corporation and Tarrant Apparel
Group. (26)
10.78 Promissory Note dated September 1, 1999 to pay to the order of
General Electric Capital Corporation the loan amount referred to in
Exhibit 10.77 (16)
10.79 Corporate Guaranty dated September 1, 1999 by Tarrant Mexico, S. de
R.L. de C.V. in connection with loan agreement referred to in
Exhibit 10.77 (16)
10.79.1 Amendment No. 1 to Corporate Guaranty dated September 12, 1999 by
Tarrant Mexico, S. de R.L. de C.V. in connection with loan
agreement referred to in Exhibit 10.77 (16)
10.80 Master Security Agreement made as of September 1, 1999 by and
between General Electric Capital Corporation and Tarrant Mexico, S.
de R.L. de C.V. in connection with loan agreement referred to in
Exhibit 10.77 (16)
10.80.1 Amendment No. 1 to Master Security Agreement made as of September
12, 1999 by and between General Electric Capital Corporation and
Tarrant Mexico, S. de R.L. de C.V. in connection with loan
agreement referred to in Exhibit 10.77 (16)
8
EXHIBIT
NUMBER DESCRIPTION
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10.81 Loan Agreement dated December 30, 1999 by and between Standard
Chartered Bank and Tarrant Apparel Group (17)
10.82 Factoring Agreement dated November 24, 1999 by and between MTB Bank
and Rocky Apparel, LLC. (17)
10.83 Machinery and Equipment Agreement dated November 17, 1999 by and
between Tarrant Mexico, S. de R.L. de C.V and Banc of America
Leasing & Capital, L.L.C. (17)
10.84 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Antonio Haddad
Haddad (17)
10.85 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Mario Alberto
Haddad Yunes (17)
10.86 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Marco Antonio
Haddad Yunes (17)
10.87 Employment Agreement dated as of August 1, 1999 by and between
Industrial Exportadora Famian, S.A. de C.V. and Miguel Angel Haddad
Yunes (17)
10.88 Non-Negotiable Promissory Note dated August 1, 1999 to pay to the
order of Antonio Haddad Haddad (17)
10.89 Stock Pledge Agreement dated August 1, 1999 by and between TAG MEX,
INC. and those individuals whose names appear on the signature page
(17)
10.90 Revolving Credit, Factoring and Security Agreement dated January
21, 2000 by and between Tarrant Apparel Group, Tag Mex, Inc., and
GMAC Commercial Credit LLC (17)
10.90.1 First Amendment to Revolving Credit, factoring and security
agreement dated January 21, 2000 by and between Tarrant Apparel
Group, Tag Mex, Inc. and GMAC Commercial Credit LLC (20)
10.90.2 Second Amendment to Revolving Credit, factoring and security
agreement dated January 21, 2000 by and between Tarrant Apparel
Group, Tag Mex, Inc. and GMAC Commercial Credit LLC (20)
10.90.3 Third Amendment to Revolving Credit, factoring and security
agreement dated January 21, 2000 by and between Tarrant Apparel
Group, Tag Mex, Inc. and GMA Commercial Credit LLC (20)
10.90.4 Letter agreement dated June 29,2001 by and between the Company and
GMAC Commercial Credit (22)
10.90.5 Waiver agreement dated November 2001 by and between Tarrant Apparel
Group And GMAC Commercial Credit (24)
9
EXHIBIT
NUMBER DESCRIPTION
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10.90.6 Letter Amendment dated March 2002 by and between Tarrant Apparel
Group, Tag Mex, Inc., Fashion Resource (TCL), Inc., United Apparel
Ventures, LLC and GMAC Commercial Credit, LLC. Reference is made to
Revolving Credit, Factoring and Security Agreement dated January
21, 2000. (25)
10.90.7 Letter Amendment dated January 24, 2003 between Tarrant Apparel
Group, Tag Mex, Inc., Fashion Resource (TCL), Inc., United Apparel
Ventures, LLC and GMAC Commercial Credit, LLC. Reference is made to
Revolving Credit, Factoring and Security Agreement dated January
21, 2000. (29)
10.90.8 Waiver dated November 13, 2002 between Tarrant Apparel Group, Tag
Mex, Inc., Fashion Resource (TCL), Inc., United Apparel Ventures,
LLC and GMAC Commercial Credit, LLC. Reference is made to Revolving
Credit, Factoring and Security Agreement dated January 21, 2000.
(29)
10.91 Agreement for Purchase of Assets dated April 12, 2000, by and among
Harvest Wear, Inc., a California corporation (HW), Mapa Trading,
LTD, a Hong Kong corporation (Mapa), Needletex, Inc., a California
corporation (Needletex), Patrick Bensimon (the Shareholder), Jane
Doe International LLC, (formally Needletex, LLC) a Delaware limited
liability company (the Purchaser) (19)
10.92 Amendment No. 1 to Facility Development Agreement dated as of March
30, 2000, by and between Tarrant Mexico, S. de R.L. de C.V. and Tex
Transas, S.A. de C.V. (18)
10.93 Equipment Purchase Agreement dated as of October 16, 2000, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V. (18)
10.94 Secured Promissory Note dated October 5, 2000 in the principal
amount of U.S. $47,702,128 of Tex Transas, S.A. de C.V. (18)
10.94.1 Amended Secured Promissory Note dated October 5, 2000 in the
principal amount of U.S. $47,702,128 of Tex Transas, S.A. de C.V
(Amended and Restated as of December 18, 2001). (29)
10.94.2 Amendment No. 2 to Secured Promissory Note dated January 2, 2002
between Trans Textil International, S.A. de. C.V. and Tarrant
Company Limited and Trade Link Holdings Company. (29)
10.95 Equipment Lease dated as of October 16, 2000, by and between
Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de C.V.
(18)
10.96 Production Agreement dated as of October 16, 2000, by and between
Tag Mex, Inc. and Tex Transas, S.A. de C.V. (18)
10.97 Pledge Security Agreement dated as of October 16, 2000, by and
between Tarrant Mexico, S. de R.L. de C.V. and Tex Transas, S.A. de
C.V. (18)
10
EXHIBIT
NUMBER DESCRIPTION
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10.98 Promissory note dated February 28, 2001 in the amount of US
$4,119,545.06 to pay to the order of Standard Chartered Bank (20)
10.99 Stock repurchase agreement entered into July 10, 2000 by and among
Tarrant Apparel Group and Gabriel Manufacturing Company (20)
10.99.1 Consulting Agreement effective as of October 9, 2001 by and between
Gabriel Zeitounti and the Company (23)
10.100 Agreement for Purchase of Assets dated August 1, 2000 by and among
Tarrant Mexico, S. de R.L. de C.V., Confecciones Jamil, S.A.de R.L.
de C. and Inmobiliaria Cuadros, S.A. de C.V. (21)
10.101 Limited Liability Company Operating Agreement of United Apparel
Ventures, LLC effective as of July 1,2001 (23)
10.101.1 Amendment to Operating Agreement dated as of October 23, 2001 by
and among Azteca Production International, Inc. ("Azteca") and "TAG
MEX". (25)
10.101.2 Second amendment to Operating Agreement dated as of January 2, 2002
by and among Azteca Production International, Inc. ("Azteca") and
"TAG MEX". (25)
10.101.3 Third Amendment to Operating Agreement dated as of July 5, 2002, by
and between Azteca Production International, Inc, and TAG Mex, Inc.
(26)
10.102 Employment Agreement effective January 1, 2002 by and between Eddie
Yuen and the Company (24)
10.103 Employment Agreement effective January 7, 2002 by and between
Patrick Chow and the Company (24)
10.103.1 First Amendment to Employment Agreement dated January 2, 2003,
between Patrick Chow and the Company. (29)
10.104 Security Agreement entered in to as of April 9, 2001, by and
between Banco Nacional De Comercio Exterior, Industrial Exportadora
Famian S.A. and Tarrant Apparel Group (24)
10.105 Guaranty Agreement dated as of May 30, 2002 by and between UPS
Capital Global Trade Finance Corporation and Tarrant Apparel Group
and Fashion Resource (TCL), Inc. (26)
10.105.1 Conditional Consent Agreement dated December 31, 2002, between UPS
Capital Global Trade Finance Corporation and Fashion Resource
(TCL), Inc. (29)
10.106 Guaranty Agreement dated as of May 30, 2002 by and between UPS
Capital Global Trade Finance Corporation and Gerard Guez. (26)
11
EXHIBIT
NUMBER DESCRIPTION
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10.107 Syndicated Letter of Credit Facility dated June 13, 2002 by and
between Tarrant Company Limited, Marble Limited and Trade Link
Holdings Limited as Borrowers and UPS Capital Global Trade Finance
Corporation as Agent and Issuer and Certain Banks and Financial
Institutions as Banks. (26)
10.107.1 Charge Over Shares dated June 13, 2002 by Fashion Resource (TCL),
Inc. in favor of UPS Capital Global Trade Finance Corporation. (26)
10.107.2 Syndicated Composite Guarantee and Debenture dated June 13, 2002
between Tarrant Company Limited, Marble Limited and Trade link
Holdings Limited and UPS Capital Global Trade Finance Corporation.
(26)
10.108 Assignment of Promissory Note by Tarrant Apparel Group to Tarrant
Company Limited and to Trade Link Holdings Company dated December
26, 2001. (26)
10.110 Assignment of Promissory Note for full settlement of indebtedness
issued by Tex Transas, S.A. de C.V. due to Tarrant Company Limited,
Trade Link Holdings Limited dated December 26, 2001. (26)
10.111 Promissory Note dated July 1, 2002 by Tarrant Apparel Group in
favor of Todd Kay. (26)
10.111.1 Amendment to Promissory Note dated January 2, 2003, between Todd
Kay and the Company. (29)
10.112 Agreement for Purchase of Assets and Stock dated December 31, 2002,
by and among the Registrant, Tarrant Mexico, S. de R.L. de C.V.,
Machrima Luxembourg International, Sarl, Trans Textil
International, S.A. de C.V., Inmobiliaria Cuadros, S.A. de C.V.,
Rosa Lisette Nacif Benavides, Gazi Nacif Borge, Jorge Miguel
Echevarria Vazquez, and Kamel Nacif Borge.+ (28)
23.1 Consent of Ernst & Young LLP
24 Power of Attorney. (29)
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-------------------------------
* Confidential treatment has been requested for portions of this document.
+ All schedules and or exhibits have been omitted. Any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange
Commission upon request.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on May 4, 1995 (File No.
33-91874).
(2) Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 15, 1995.
(3) Filed as an exhibit to Amendment No. 2 to Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 11, 1995.
12
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 30, 1995.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(10) Filed as exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
(11) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(12) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(15) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
(16) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
(17) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
(18) Filed as an exhibit on Form 8K 10/21/2000.
(19) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(20) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2000.
(21) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2001.
(22) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2001.
(23) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending September 30, 2001.
(24) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2001.
(25) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending March 31, 2002.
(26) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending June 30, 2002.
(27) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
quarter ending September 30, 2002.
13
(28) Filed as an exhibit to the Company's Current Report on Form 8K dated
December 31, 2002 and filed on January 15, 2003.
(29) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
14
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
FINANCIAL STATEMENTS
Report of Independent Auditors..........................................F-2
Consolidated Balance Sheets--December 31, 2001 and 2002.................F-3
Consolidated Statements of Operations--Three year period
ended December 31, 2002............................................F-4
Consolidated Statements of Shareholders' Equity--Three year
period ended December 31, 2002.....................................F-5
Consolidated Statements of Cash Flows--Three year period
ended December 31, 2002............................................F-6
Notes to Consolidated Financial Statements..............................F-7
FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts.........................F-28
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Tarrant Apparel Group
We have audited the accompanying consolidated balance sheets of Tarrant Apparel
Group and subsidiaries as of December 31, 2001 and 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tarrant Apparel
Group and subsidiaries at December 31, 2001 and 2002 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule when considered in relation to the basic financial
statements, taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 6 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142.
/S/ ERNST & YOUNG LLP
Los Angeles, California
March 14, 2003
F-2
TARRANT APPAREL GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
2001 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents .................. $ 1,524,447 $ 1,388,482
Accounts receivable, net ................... 58,576,654 65,287,902
Due from affiliates ........................ 2,064,923 10,269,251
Due from officers .......................... 87,456 456,500
Inventory .................................. 50,600,584 44,782,154
Temporary quota ............................ 369,849 --
Current portion of note receivable--
related party ............................ 3,468,490 --
Prepaid expenses and other receivables ..... 6,274,330 5,135,672
Income taxes receivable .................... 692,868 280,200
------------- -------------
Total current assets ......................... 123,659,601 127,600,161
Property and equipment, net ................ 90,173,451 159,998,629
Permanent quota, net ....................... 73,978 --
Note receivable--related party, less
current portion .......................... 41,430,564 --
Other assets ............................... 3,932,146 2,539,040
Excess of cost over fair value of net
assets acquired, net ..................... 29,196,886 28,064,019
------------- -------------
Total assets ................................. $ 288,466,626 $ 318,201,849
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings ................. $ 22,085,349 $ 29,326,924
Accounts payable ........................... 31,560,131 39,142,350
Accrued expenses ........................... 9,648,389 12,566,475
Income taxes ............................... 7,177,324 12,640,388
Deferred tax liabilities ................... 514,913 --
Due to shareholders ........................ 2,307,687 486,875
Current portion of long-term obligations ... 25,256,628 21,706,502
------------- -------------
Total current liabilities .................... 98,550,421 115,869,514
Long-term obligations ........................ 63,993,808 55,903,976
Deferred tax liabilities ..................... -- 407,751
Minority interest in UAV ..................... 757,927 3,205,167
Minority interest in Tarrant Mexico .......... -- 21,654,538
Commitments and contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized;
none (2001) and 100,000 shares (2002)
issued and outstanding ..................... -- 8,820,573
Common stock, no par value, 20,000,000 shares
authorized; 15,840,815 shares (2001) and
15,846,315 shares (2002) issued and
outstanding ................................ 69,341,090 69,368,239
Contributed capital .......................... 1,434,259 1,434,259
Retained earnings ............................ 62,958,375 56,873,094
Notes receivable from shareholders ........... (12,118,773) (5,601,804)
Accumulated other comprehensive income (loss) 3,549,519 (9,733,458)
------------- -------------
Total shareholders' equity ................... 125,164,470 121,160,903
------------- -------------
Total liabilities and shareholders' equity ... $ 288,466,626 $ 318,201,849
============= =============
See accompanying notes.
F-3
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------ ------------ ------------
Net sales ......................... $395,169,020 $330,253,548 $347,390,930
Cost of sales ..................... 332,333,227 277,525,010 302,082,144
------------ ------------ ------------
Gross profit ...................... 62,835,793 52,728,538 45,308,786
Selling and distribution expenses . 17,580,135 14,345,356 10,757,029
General and administrative expenses 40,326,636 33,136,008 30,082,061
Amortization of excess of cost over
fair value of net assets acquired 2,840,505 3,317,428 --
------------ ------------ ------------
Income from operations ............ 2,088,517 1,929,746 4,469,696
Interest expense .................. (9,849,502) (7,807,918) (5,443,995)
Interest income ................... 1,294,909 3,255,843 4,748,144
Minority interest ................. 1,312,651 (412,022) (4,580,766)
Other income ...................... 1,350,367 1,853,066 2,647,975
Other expense ..................... (193,359) (855,994) (2,004,073)
------------ ------------ ------------
Loss before provision for income
taxes and cumulative effect of
accounting change ............... (3,996,417) (2,037,279) (163,019)
Provision (credit) for income taxes (1,478,675) 851,977 1,051,018
------------ ------------ ------------
Loss before cumulative effect of
accounting change ............... $ (2,517,742) $ (2,889,256) $ (1,214,037)
Cumulative effect of accounting
change .......................... -- -- (4,871,244)
------------ ------------ ------------
Net loss .......................... $ (2,517,742) $ (2,889,256) $ (6,085,281)
============ ============ ============
Net loss per share - Basic and
Diluted:
Before cumulative effect of
accounting change ............. $ (0.16) $ (0.18) $ (0.08)
Cumulative effect of accounting
change ........................ -- -- (0.30)
After cumulative effect of
accounting change ............. $ (0.16) $ (0.18) $ (0.38)
Weighted average shares outstanding:
Basic and Diluted .............. 15,814,693 15,824,750 15,834,122
See accompanying notes.
F-4
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other Notes Total
Preferred Common Contributed Retained Comprehensive from Shareholders'
Stock Stock Capital Earnings Income (Loss) Shareholders Equity
---------- ----------- ----------- ------------ ------------- ------------ -------------
Balance at December 31, 1999 $ -- $69,595,141 $ 1,434,259 $68,365,373 $ 8,698 $ -- $139,403,471
Net loss ................ -- -- -- (2,517,742) -- -- (2,517,742)
Currency translation .... -- -- -- -- (727,702) -- (727,702)
------------
Comprehensive loss ...... -- -- -- -- -- -- (3,245,444)
Exercise of stock options -- 198,000 -- -- -- -- 198,000
Repurchase of shares .... -- (518,525) -- -- -- -- (518,525)
Income tax benefit from
exercise of stock
options ............... -- 28,067 -- -- -- -- 28,067
Advances to shareholders,
net ................... -- -- -- -- -- (5,376,486) (5,376,486)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 2000 -- 69,302,683 1,434,259 65,847,631 (719,004) (5,376,486) 130,489,083
Net loss ................ -- -- -- (2,889,256) -- -- (2,889,256)
Currency translation .... -- -- -- -- 4,268,523 -- 4,268,523
------------
Comprehensive income .... -- -- -- -- -- -- 1,379,267
Exercise of stock options -- 33,750 -- -- -- -- 33,750
Income tax benefit from
exercise of stock
options ............... -- 4,657 -- -- -- -- 4,657
Advances to shareholders,
net ................... -- -- -- -- -- (6,742,287) (6,742,287)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 2001 -- 69,341,090 1,434,259 62,958,375 3,549,519 (12,118,773) 125,164,470
Net loss ................ -- -- -- (6,085,281) -- -- (6,085,281)
Currency translation .... -- -- -- -- (13,282,977) -- (13,282,977)
------------
Comprehensive loss ...... -- -- -- -- -- -- (19,368,258)
Exercise of stock options -- 24,135 -- -- -- -- 24,135
Income tax benefit from
exercise of stock
options ............... -- 3,014 -- -- -- -- 3,014
Issuance of preferred
stock ................. 8,820,573 -- -- -- -- -- 8,820,573
Repayment from share-
holders, net .......... -- -- -- -- -- 6,516,969 6,516,969
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balance at December 31, 2002 $ 8,820,573 $69,368,239 $ 1,434,259 $56,873,094 $ (9,733,458) $ (5,601,804) $121,160,903
=========== =========== =========== =========== ============ ============ ============
See accompanying notes
F-5
TARRANT APPAREL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 2001 2002
------------- ------------- -------------
Operating activities:
Net loss ...................................... $ (2,517,742) $ (2,889,256) $ (6,085,281)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Deferred taxes ............................. (553,087) 1,273,305 (107,162)
Depreciation and amortization .............. 12,580,992 14,564,623 10,130,132
Accrued interest on note receivable ........ -- -- (4,452,490)
Cumulative effect of accounting change ..... -- -- 4,871,244
(Gain) loss on sale of fixed assets ........ (10,202) 26,861 5,291
Unrealized (gain) loss on foreign currency . (411,811) (103,705) 1,014,696
Minority interest .......................... (1,312,650) 757,927 4,426,080
Gain on legal settlement ................... -- -- (473,041)
Provision for returns and discounts ........ 1,127,089 1,830,841 453,167
Changes in operating assets and liabilities:
Accounts receivable ..................... 3,485,045 5,902,995 (7,141,536)
Due from affiliates ..................... (2,058,234) (2,102,811) (10,746,255)
Inventory ............................... 445,238 10,474,030 5,818,431
Temporary quota ......................... 4,293,572 (142,221) 369,849
Prepaid expenses and other receivables .. (4,837,206) 1,385,875 1,551,324
Accounts payable ........................ 1,301,541 2,343,419 7,646,926
Accrued expenses and income tax payable . 7,806,018 (3,270,616) 8,211,770
------------- ------------- -------------
Net cash provided by operating
activities ........................ 19,338,563 30,051,267 15,493,145
Investing activities:
Purchase of fixed assets ...................... (18,883,236) (3,918,602) (2,984,547)
Acquisitions, net of cash ..................... (2,734,828) (6,750,391) (2,355,954)
Purchase of permanent quota ................... (221,934) -- --
Collection on note receivable ................. 766,150 2,036,924 --
(Increase) decrease in other assets ........... (7,173,379) (594,660) 509,524
Advances to shareholders/officers ............. (3,194,640) (6,218,458) (1,008,591)
Repayments of advances from shareholders/
officers ................................... -- -- 169,991
------------- ------------- -------------
Net cash used in investing
activities ........................ (31,441,867) (15,445,187) (5,669,577)
Financing activities:
Short-term bank borrowings, net ............... (11,359,688) (16,927,528) 7,241,576
Proceeds from long-term obligations ........... 36,746,378 52,894,023 198,551,201
Payment of long-term obligations and bank
borrowings ................................. (9,608,034) (40,376,783) (211,894,730)
Repayments to shareholders/officers ........... (39,321,130) (11,543,640) (2,359,847)
Borrowings from shareholders/officers ......... 37,029,219 -- --
Repurchase of shares .......................... (518,525) -- --
Exercise of stock options including related
tax benefit ................................ 226,067 38,407 27,149
------------- ------------- -------------
Net cash provided by (used in)
financing activities .............. 13,194,287 (15,915,521) (8,434,651)
Effect of changes in foreign currency ......... (681,197) 184,591 (1,524,882)
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents ................................ 409,786 (1,124,850) (135,965)
Cash and cash equivalents at beginning of
year ....................................... 2,239,511 2,649,297 1,524,447
------------- ------------- -------------
Cash and cash equivalents at end of year ...... $ 2,649,297 $ 1,524,447 $ 1,388,482
============= ============= =============
See accompanying notes
F-6
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF CONSOLIDATION
The accompanying financial statements consist of the consolidation of Tarrant
Apparel Group, a California corporation (formerly "Fashion Resource, Inc.") (the
"Parent Company" or the "Company"), and its wholly owned Subsidiaries located
primarily in the U.S., Mexico, and Asia. The Company owns 51% of Jane Doe
International, LLC ("JDI"), and 50.1% of United Apparel Ventures ("UAV"). The
Company consolidates both of these entities and reflects the minority interests
in earnings (losses) of the ventures in the accompanying financial statements.
All inter-company amounts are eliminated in consolidation.
The Company serves both specialty retail and mass merchandise store chains by
designing, merchandising and contracting for the manufacture, manufacturing
directly and selling of casual, moderately priced apparel, for women, men and
children under private label. The Company also sources apparel and operates its
own vertically integrated manufacturing facilities.
REVENUE RECOGNITION
Revenue is recognized at the point of shipment for all merchandise sold based on
FOB shipping point. For merchandise shipped on landed duty paid (LDP) terms,
revenue is recognized at the point of either leaving Customs for direct
shipments or at the point of leaving our warehouse where title is transferred.
SHIPPING AND HANDLING COSTS
Freight charges are included in selling and distribution expenses in the
statement of operations and amounted to $3,022,000, $2,509,000 and $2,136,000
for the years ended December 31, 2000, 2001 and 2002, respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.
ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS
The Company evaluates the collectibility of accounts receivable and chargebacks
(disputes from the customer) based upon a combination of factors. In
circumstances where the Company is aware of a specific customer's inability to
meet its financial obligations (such as in the case of bankruptcy filings or
substantial downgrading of credit sources), a specific reserve for bad debts is
taken against amounts due to reduce the net recognized receivable to the amount
reasonably expected to be collected. For all other customers, the Company
recognizes reserves for bad debts and chargebacks based on its historical
collection experience. If collection experience deteriorates (for example, due
to an unexpected material adverse change in a major customer's ability to meet
its financial obligations to us), the estimates of the recoverability of amounts
due the Company could be reduced by a material amount.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
COST OF SALES
Cost of sales includes costs related to product costs, direct labor,
manufacturing overhead, duty, quota, freight in, brokerage and warehousing.
F-7
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SELLING AND DISTRIBUTION EXPENSES
Selling and distribution expenses include expenses related to samples, travel
and entertainment, salaries, rent and other office expenses, professional fees,
freight out and selling commissions incurred in the sales process.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include expenses related to research and
product development, travel and entertainment, salaries, rent and other office
expenses, depreciation, professional fees and bank charges.
PRODUCT DESIGN, ADVERTISING AND SALES PROMOTION COSTS
Product design, advertising and sales promotion costs are expensed as incurred.
Product design, advertising and sales promotion costs included in operating
expenses in the accompanying statements of operations (excluding the costs of
manufacturing samples) amounted to approximately $1,931,000, $1,621,000 and
$1,340,000 in 2000, 2001 and 2002, respectively.
QUOTA
The Company purchases quota rights to be used in the importation of its products
from certain foreign countries. The effect of quota transactions is accounted
for as a product cost.
Permanent quota entitlements were principally obtained through free allocations
by the Hong Kong Government pursuant to an import restraint between Hong Kong
and the United States and are renewable on an annual basis, based upon the prior
year utilization. Permanent quota entitlements acquired from outside parties are
amortized over three years on a straight-line basis, and amounted to $418,000,
net of amortization of $1.8 million at December 31, 2000, $74,000, net of
amortization of $2.1 million at December 31, 2001 and $0, net of amortization of
$2.2 million at December 31, 2002.
Temporary quota represents quota rights acquired from other permanent quota
entitlement holders on a temporary basis. Temporary quota has a maximum life of
twelve months. The cost of temporary quota purchased for use in the current year
has been assigned to inventory purchases while the cost of temporary quota
acquired for usage in the year following the balance sheet date is recorded as a
current asset.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Additions and betterments are
capitalized while repair and maintenance costs are charged to operations as
incurred. Depreciation of property and equipment is provided for by the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized using the straight-line method over the lesser of their estimated
useful lives or the term of the lease. Upon retirement or disposal of property
and equipment, the cost and related accumulated depreciation are eliminated from
the accounts and any gain or loss is reflected in the statements of operations.
Repair and maintenance costs are charged to expense as incurred. The estimated
useful lives of the assets are as follows:
Buildings 35 to 40 years
Equipment 7 to 15 years
Furniture and Fixtures 5 to 7 years
Vehicles 5 years
Leasehold Improvements Term of lease
INTANGIBLES
The excess of cost over fair value of net assets acquired was amortized over
five to thirty years through December 31, 2001. Effective January 1, 2002, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." According
to
F-8
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
this statement, goodwill and other intangible assets with indefinite lives are
no longer subject to amortization, but rather an annual assessment of impairment
applied on a fair-value-based test. The Company adopted SFAS No. 142 in fiscal
2002 and performed its first annual assessment of impairment, which resulted in
an impairment loss of $4.9 million.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of long-lived asserts are reviewed when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment loss has occurred based on
the lowest level of identifiable expected future cash flow, then a loss is
recognized in the statement of operations using a fair value based model.
DEFERRED FINANCING COST
Included in the other assets are deferred financing costs of $949,000 and
$638,000 at December 31, 2001 and 2002, respectively. These costs of obtaining
financing are being amortized as interest expense over the term of the related
debt.
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes", which
prescribes the use of the liability method to compute the differences between
the tax basis of assets and liabilities and the related financial reporting
amounts using currently enacted tax laws and rates.
The Company's Hong Kong corporate affiliates are taxed at an effective Hong Kong
rate of 16%. No domestic tax provision has been provided for $48.7 million of
un-remitted retained earnings of these Hong Kong corporations, as the Company
intends to maintain these amounts in Hong Kong on a permanent basis in support
of its working capital requirements.
NET LOSS PER SHARE
Net loss per share has been computed in accordance with SFAS No. 128, "Earnings
Per Share". All options have been excluded from the computation in 2000, 2001
and 2002 as the impact would be anti-dilutive.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Mexico and Hong Kong subsidiaries are translated
at the rate of exchange in effect on the balance sheet date; income and expenses
are translated at the average rates of exchange prevailing during the year. The
functional currencies in which the Company transacts business are the Hong Kong
dollar and the peso in Mexico.
Foreign currency gains and losses resulting from translation of assets and
liabilities are included in other comprehensive income (loss). Transaction gains
or losses, other than inter-company debt deemed to be of a long-term nature, are
included in net income (loss) in the period in which they occur. At December 31,
2002, the Hong Kong subsidiaries have retained earnings of $67.2 million and an
inter-company receivable due from Tarrant Apparel Group of $19.8 million.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Considerable judgment
is required in estimating fair values. Accordingly, the estimates may not be
indicative of the amounts that the Company could realize in a current market
exchange. The carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair values. The carrying amounts of the Company's
variable rate borrowings under the various short-term borrowings and long-term
debt arrangements approximate fair value.
F-9
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentration of
credit risk consist primarily of cash equivalents, trade accounts receivable and
amounts due from factor.
The Company's products are primarily sold to mass merchandisers and specialty
retail stores. These customers can be significantly affected by changes in
economic, competitive or other factors. The Company makes substantial sales to a
relatively few, large customers. In order to minimize the risk of loss, the
Company assigns certain of its domestic accounts receivable to a factor without
recourse or requires letters of credit from its customers prior to the shipment
of goods. For non-factored receivables, account-monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required. The
following table presents the percentage of net sales concentrated with certain
customers. Customer A represents a group of customers under common ownership.
2000 2001 2002
-----------------------------
Customer A................................... 44.2% 22.8% 22.6%
Customer B (formerly part of A in 2000)...... -- 20.5% 17.6%
Customer C................................... 9.1 12.2% 9.7%
Customer D................................... -- 7.8% 17.4%
The Company maintains demand deposits with several major banks. At times, cash
balances may be in excess of Federal Deposit Insurance Corporation or equivalent
foreign insurance limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EMPLOYEE STOCK OPTIONS
The Company accounts for employee stock options using the intrinsic value method
rather than the alternative fair-value accounting method. Under the
intrinsic-value method, if the exercise price of the employee's stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. No compensation cost is reflected in net
income related to our stock option plans for the periods presented.
Pro forma information regarding net income and earnings per share is required by
Statement 148, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
weighted-average risk-free interest rate of 6% for 2000 and 2001, and 4% for
2002; dividend yields of 0% for 2000, 2001 and 2002; weighted-average volatility
factors of the expected market price of the Company's Common Stock of 1.28 for
2000, 1.22 for 2001, and 0.65 for 2002; and a weighted-average expected life of
the option of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in the
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
F-10
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2000 2001 2002
------------ ------------ ------------
Pro forma net loss ............ $ (7,445,975) $ (7,035,501) $ (9,519,060)
Pro forma compensation expense,
net of tax .................. $ (4,928,233) $ (4,146,245) $ (3,433,779)
Net loss as reported .......... $ (2,517,742) $ (2,889,256) $ (6,085,281)
Pro forma loss per share
Basic ....................... $ (0.47) $ (0.44) $ (0.60)
Diluted ..................... $ (0.47) $ (0.44) $ (0.60)
Net loss per share
Basic ....................... $ (0.16) $ (0.18) $ (0.38)
Diluted ..................... $ (0.16) $ (0.18) $ (0.38)
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses the financial
accounting and reporting for the impairment and disposal of long-lived assets.
It supercedes and addresses significant issues relating to the implementation of
SFAS No. 121, "Accounting for the Impairment of Disposal of Long-Lived Assets
and For Long-Lived Assets to Be Disposed Of". SFAS No. 144 retains many of the
fundamental provisions of SFAS No. 121 and establishes a single accounting
model, based on the framework established in SFAS No. 121, for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired.
The Company adopted this standard as of the beginning of fiscal 2002. The
application of SFAS No. 144 did not have a material impact on the Company's
results of operations or financial position.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The provisions of
this statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The impact on future
financial statements will depend on future exit or disposal activities.
In the current year, the Company adopted the provisions of SFAS No. 148
"Accounting for Stock-Based Compensation--Transition and Disclosure", which
amends SFAS No. 123, "Accounting for Stock-Based Compensation" and Accounting
Principles Board Opinion 28, "Interim Financial Reporting," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock based compensation and the effect of the method used on
reported results. The Company has adopted the disclosure provisions of SFAS No.
148, which require expanded disclosure regarding stock-based compensation in the
accounting policies footnote to the consolidated financial statements. The
expanded disclosure will be required in our quarterly financial reports
beginning in the first quarter of 2003.
CURRENCY RATE HEDGING
The Company manufactures in a number of countries throughout the world,
including Hong Kong and Mexico, and, as a result, is exposed to movements in
foreign currency exchange rates. Periodically the Company will enter into
various currency rate hedges. The primary purpose of the Company's foreign
currency hedging activities is to manage the volatility associated with foreign
currency purchases of materials and equipment in the normal course of business.
The Company utilizes forward exchange contracts with maturities of one to three
months. The Company enters into certain foreign currency derivative instruments
that do not meet hedge accounting criteria. These primarily are intended to
protect against exposure related to financing transactions (equipment) and
income from international operations. The net impact of the related gains and
losses was not material.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-11
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
DECEMBER 31,
-------------------------------
2001 2002
------------ ------------
U.S. trade accounts receivable ........... $ 41,266,134 $ 42,979,762
Foreign trade accounts receivable ........ 17,846,606 16,445,868
Due from factor .......................... 1,507,089 4,176,598
Other receivables ........................ 4,123,073 6,002,295
Allowance for returns, discounts
and bad debts ......................... (6,166,248) (4,316,621)
------------ ------------
$ 58,576,654 $ 65,287,902
============ ============
The Debt Facility includes a factoring arrangement whereby the Company factors
with GMAC accounts receivables from customers with debt ratings below BBB. The
Company does not receive advances against these receivables, and is paid only
upon collection of proceeds. For this credit insurance arrangement, the Company
pays the factor a commission of 60 basis points.
3. INVENTORY
Inventory consists of the following:
DECEMBER 31,
---------------------------
2001 2002
----------- -----------
Raw materials, fabric and trim accessories ..... $16,708,651 $12,451,447
Raw cotton ..................................... 2,096,792 1,017,963
Work-in-process ................................ 7,735,827 9,948,700
Finished goods shipments-in-transit ............ 3,706,735 4,877,002
Finished goods ................................. 20,352,579 16,487,042
----------- -----------
$50,600,584 $44,782,154
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------------------
2001 2002
------------- -------------
Land ..................................... $ 1,443,744 $ 1,285,267
Buildings ................................ 14,798,596 61,697,034
Equipment ................................ 89,427,176 120,270,968
Furniture and fixtures ................... 2,442,717 2,428,858
Leasehold improvements ................... 11,719,752 10,657,364
Vehicles ................................. 1,246,800 1,099,538
------------- -------------
121,078,785 197,439,029
Less accumulated depreciation and
amortization .......................... (30,905,334) (37,440,400)
------------- -------------
$ 90,173,451 $ 159,998,629
============= =============
Depreciation expense, including amortization of assets recorded under capital
leases, totaled $9,352,087, $10,903,237 and $10,056,154 for the years ended
December 31, 2000, 2001 and 2002, respectively.
F-12
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. ACQUISITIONS
TWILL MILL
On December 2, 1998, the Company contracted to acquire a fully operational
facility being constructed in Puebla, Mexico by Tex Transas, S.A. de C.V. ("Tex
Transas"). Construction of this facility commenced in the third quarter of 1998,
and it was anticipated that the Company would take possession of this facility
in fiscal 2000. On October 16, 2000, the Company revised its agreement regarding
the fully operational facility to extend its option to purchase the facility.
On December 31, 2002, the Company acquired certain assets of this twill mill
located in Puebla, Mexico from Tex Transas and Inmobiliaria Cuadros, S.A. de
C.V. ("Cuadros"), both of which are affiliated with Kamel Nacif. The price paid
for the asset acquisition consisted of 100,000 shares (the Shares) of Series A
Preferred Stock of the Company valued at $8.8 million, a 25% equity stake in
Tarrant's wholly-owned subsidiary, Tarrant Mexico S. de R.L. de C.V., the
cancellation of approximately $56.9 million of certain notes and accounts
receivables due from the sellers and their affiliates and a cash payment of
$500. The acquisition of the twill mill has been accounted for as the
acquisition of a discrete operating asset. Therefore no amounts were recorded as
goodwill, but were allocated to either the assets acquired or the consideration
paid based on independent valuations received by the Company.
On December 31, 2002, the Company recorded $4.5 million of interest income,
which represented accrued interest on one of the canceled notes receivable. The
interest was recorded as the cash was collected. Pursuant to the terms of the
purchase agreement, interest was accrued through December 31, 2002 as part of
the purchase price.
UNITED APPAREL VENTURES
On July 1, 2001, the Company formed an entity to jointly market, share certain
risks and achieve economics of scale with Azteca Production International, Inc.
("Azteca"), a corporation owned by the brothers of Gerard Guez, the Chairman of
the Company, called United Apparel Ventures, LLC ("UAV"). This entity was
created to coordinate the production of apparel for a single customer of the
Company's branded business. UAV is owned 50.1% by Tag Mex, Inc., a wholly owned
subsidiary of the Company, and 49.9% by Azteca. The results of UAV have been
consolidated into the Company's results commencing in July 2001 with the
minority partner's share of earnings (losses) provided for in the Company's
financial statements. Since October 2002, both parties have contributed the
Express relationship and future orders into the entity.
AJALPAN
On March 29, 2001, the Company completed the acquisition of a sewing facility
located in Ajalpan Mexico from Confecciones Jamil, S.A. de C.V, which is
majority owned by Kamel Nacif, a principal shareholder of the Company. This
facility, which was newly constructed during 1999 and commenced operations in
2000, was used by the Company for production during 2000 and 2001. The results
of Ajalpan have been consolidated into the Company's results commencing on March
29, 2001.
The Company paid $11 million for this operating facility. This entire amount had
been paid in cash and the transfer of certain receivables of the Company to the
seller. The assets acquired include land, buildings and all equipment. This
transfer has been accounted for as a purchase and the purchase price has been
allocated based on the fair market value of assets acquired and liabilities
assumed. The excess of cost over fair value of net assets acquired was $4.7
million. Included in the SFAS No. 142 charge was a $1.7 million impairment loss
related to Ajalpan.
EXCLUSIVE PRODUCTION AGREEMENT
On June 28, 2000, the Company signed an exclusive production agreement with
Manufactures Cheja ("Cheja") through February 2002. The Company has agreed on a
new contract to extend the agreement for an additional quantity of 6.4 million
units beginning April 1, 2002, which was amended on November 8, 2002, for the
manufacturing of 5.7 million units through September 30, 2004. The Company has
unrecouped advances to Cheja of approximately $2.9 million related to the
production agreement to be recouped out of future production.
F-13
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JANE DOE
On April 12, 2000, the Company formed a new company, Jane Doe International, LLC
("JDI"). This company was formed for the purpose of purchasing the assets of
Needletex, Inc., owner of the Jane Doe brand. JDI is owned 51% by Fashion
Resource (TCL), Inc., a subsidiary of the Company, and 49% by Needletex, Inc. In
March 2001, the Company converted JDI from an operating company to a licensing
company and entered into two licenses in regard to the use of the Jane Doe
trademark. The licensing activities on this trademark have been largely dormant
in 2002 pending the outcome of the litigation with Patrick Bensimon. See Note 9
for the discussion of this litigation. Included in the SFAS No. 142 charge was a
$3.2 million impairment loss related to JDI.
6. GOODWILL - ADOPTION OF STATEMENT NO. 142
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142 "Goodwill and Other Intangible Assets," which establishes financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. The Company adopted SFAS No.
142 beginning with the first quarter of 2002. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized but, instead, tested at least annually for impairment while intangible
assets that have finite useful lives continue to be amortized over their
respective useful lives. Accordingly, the Company ceased amortization of all
goodwill.
SFAS No. 142 requires that goodwill and other intangibles be tested for
impairment using a two-step process. The first step is to determine the fair
value of the reporting unit, which may be calculated using a discounted cash
flow methodology, and compare this value to its carrying value. If the fair
value exceeds the carrying value, no further work is required and no impairment
loss would be recognized. The second step is an allocation of the fair value of
the reporting unit to all of the reporting unit's assets and liabilities under a
hypothetical purchase price allocation. Based on the evaluation performed to
adopt SFAS No. 142 along with continuing difficulties being experienced in the
industry, the Company recorded a non-cash charge of $4.9 million to reduce the
carrying value of goodwill to the estimated fair value. This charge is
non-operational in nature and is reported as a cumulative effect of an
accounting change in the accompanying consolidated statement of operations. The
Company utilized the discounted cash flow methodology to estimate fair value.
The following table presents the results of the Company on a comparable basis:
F-14
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
Reported net loss ................. $(2,517,742) $(2,889,256) $(1,214,037)
Goodwill amortization, net of tax . 1,789,518 2,089,980 --
----------- ----------- -----------
Adjusted net loss before cumulative
effect of accounting change .... (728,224) (799,276) (1,214,037)
Cumulative effect of accounting
change ......................... -- -- (4,871,244)
Adjusted net loss ................. $ (728,224) $ (799,276) $(6,085,281)
----------- ----------- -----------
Basic and diluted earnings per
common share:
Reported loss before cumulative
effect of accounting change .... $ (0.16) $ (0.18) $ (0.08)
Goodwill amortization, net of taxes 0.11 0.13 --
----------- ----------- -----------
Adjusted loss before cumulative
effect of accounting change .... (0.05) (0.05) (0.08)
Cumulative effect of accounting
change ......................... -- -- (0.30)
----------- ----------- -----------
Adjusted net loss ................. $ (0.05) $ (0.05) $ (0.38)
The following table displays the change in the gross carrying amount of goodwill
by business units at the end of December 31, 2002:
TARRANT TARRANT TAG MEX INC. TAG MEX INC.
MEXICO - MEXICO - - ROCKY - CHAZZZ &
TOTAL JANE DOE AJALPAN FAMIAN DIVISION MGI DIVISION
-------------- --------------- -------------- --------------- -------------- ---------------
Balance as of
December 31, 2001 $29,196,886 $1,904,529 $4,427,843 $7,260,134 $7,521,536 $8,082,844
Additional purchase
price 3,050,000 -- -- 2,550,000 -- 500,000
Additional liabilities
assumed 1,428,588 1,428,588 -- -- -- --
Impairment losses (4,871,244) (3,182,779) (1,688,465) -- -- --
Foreign currency translation (740,211) -- -- (740,211) -- --
-------------- --------------- -------------- --------------- -------------- ---------------
Balance as of
December 31, 2002 $28,064,019 $ 150,338 $2,739,378 $9,069,923 $7,521,536 $8,582,844
-------------- --------------- -------------- --------------- -------------- ---------------
F-15
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT
Debt consists of the following:
2001 2002
------------ ------------
Short-term bank borrowings:
Import trade bills payable ............... $ 4,521,675 $ 5,686,327
Bank direct acceptances .................. 13,838,270 11,272,375
Other Hong Kong credit facilities ........ 361,108 6,206,103
Other Mexican credit facilities .......... 1,282,593 4,968,309
Uncleared checks ......................... 2,081,703 1,193,810
------------ ------------
$ 22,085,349 $ 29,326,924
============ ============
Long-term debt:
Vendor financing ......................... $ 11,043,449 $ 7,257,683
Equipment financing ...................... 13,931,997 9,682,290
Debt facility ............................ 62,863,990 58,193,505
Other debt (including capital leases) .... 1,411,000 2,477,000
------------ ------------
89,250,436 77,610,478
Less current portion ..................... (25,256,628) (21,706,502)
------------ ------------
$ 63,993,808 $ 55,903,976
============ ============
IMPORT TRADE BILLS PAYABLE
On June 13, 2002, the Company entered into a letter of credit facility of $25
million with UPS Capital Global Trade Finance Corporation ("UPS") to replace the
credit facility of The Hong Kong and Shanghai Banking Corporation Limited in
Hong Kong. Under this facility, the Company may arrange for the issuance of
letters of credit and acceptances. The facility is a one-year facility subject
to renewal on its anniversary and is collateralized by the shares and debentures
of all of the Company's subsidiaries in Hong Kong, as well as the Company's
permanent quota holdings in Hong Kong. In addition to the guarantees provided by
Tarrant Apparel Group and Fashion Resource (TCL) Inc and Machrima Luxembourg
SARL, a new holding company the Company set up during 2002. Mr. Gerard Guez, the
Company's chairman, also signed a guarantee of $5 million in favor of UPS to
secure this facility. This facility is also subject to certain restrictive
covenants, including no two consecutive quarterly losses, aggregate net worth of
$105 million and $109 million at the end of 2002 and 2003, respectively;
interest cover of 1.5 times, fixed charge ratio of 1.25 to 1 and leverage ratio
of 2.1 to1 in 2002 and 1.6 to 1 in 2003. As of December 31, 2002, $24.2 million,
of which $12.9 million were letters of credits, was outstanding under this
facility. The Company was in violation of the fixed charge ratio covenant and a
waiver has been obtained at a fee of $5,000.
OTHER MEXICAN CREDIT FACILITIES
As of December 31, 2002, Grupo Famian had a short-term advance from Banco Bilbao
Vizcaya amounting to $298,000. This subsidiary also had a credit facility with
Banco Nacional de Comercio Exterior SNC the Company guaranteed. This facility
provided for a $10 million credit line based on purchase orders and is
restricted by certain covenants. As of December 31, 2002, the outstanding amount
was $4.7 million. After the merger of Grupo Famian into Tarrant Mexico, the bank
has agreed that Tarrant Mexico was to repay the outstanding amount of $4.7
million by $523,000 per month starting March 26, 2003.
VENDOR FINANCING
During 2000, 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%, and are payable in semiannual payments commencing in February
2000. Of this amount, $7.3 million was outstanding as of December 31, 2002. Of
the $7.3 million, $4.6 million is denominated in
F-16
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Euro. The remainder is payable in U.S. dollars. The Company has covered its
exchange risks by forward exchange contracts.
From time to time, the Company opens letters of credit under an uncommitted
credit arrangement with Aurora Capital Associates who issues these credits
through Israeli Discount Bank. As of December 31, 2002, $2.3 million are open in
letters of credit under this arrangement.
An unrealized gain of $412,000 and $104,000 and an unrealized loss of $1.0
million was recorded at December 31, 2000, 2001 and 2002, respectively, related
to this fluctuation and is recorded in other income in the accompanying
financial statements. In addition, during the year ended December 31, 2000, the
Company entered into a hedge contract for Euros related to this debt.
Annual maturities for the long term debt and capital lease obligations are
$21,706,502 (2003), $10,834,036 (2004), $45,025,284 (2005), $12,854 (2006),
$13,647 (2007) and $18,155 (thereafter). The weighted average interest rate on
short-term bank borrowing as of December 31, 2002 and 2001 were 4.1% and 6.7%,
respectively.
EQUIPMENT FINANCING
The Company has two equipment loans with the initial borrowings of $16.25
million and $5.2 million from GE Capital Leasing ("GE Capital") and Bank of
America Leasing ("BOA"), respectively. The leases are secured by equipment
located in Puebla and Tlaxcala, Mexico. The amounts outstanding as of December
31, 2002 were $7.1 million due to GE Capital and $2.4 million due to BOA.
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 BOA in the year 2004. The GE Capital
facilities are subject to covenants on Tangible Net Worth ($30 million),
leverage ratio of not more than two times and no losses for two consecutive
quarters. The Company was in violation of the covenant on consecutive quarterly
losses and obtained a waiver from the bank on March 28, 2002 for a fee of
$10,000 and acceleration by $25,000 of monthly repayment of principal. The
Company has reclassified the GE Capital obligation as a current liability
because of the potential that it may violate one of the covenants in the first
quarter of 2003. The BOA facility is subject to a financial benchmark on
interest coverage (3 to 1) and a leverage ratio of not more than 2 times.
The Debt Facility with GMAC and the credit facilities with GE Capital, UPS and
BOA all carry cross-default clauses. A breach of a financial covenant set by
GMAC, UPS or GE Capital constitutes an event of default, entitling these banks
to demand payment in full of all outstanding amounts under their respective debt
and credit facilities. Similarly, if the Company breaches a financial benchmark
set by BOA, the bank can accelerate repayment of all outstanding principal
amount to become six equal monthly installments.
DEBT FACILITY
On January 21, 2000, the Company entered into a new revolving credit, factoring
and security agreement (the "Debt Facility") with a syndicate of lending
institutions. The Debt Facility initially provided a revolving facility of
$105.0 million, including a letter of credit facility not to exceed $20.0
million, and matures on January 31, 2005. The Debt Facility provides for
interest at LIBOR plus the LIBOR rate margin determined by the Total Leverage
Ratio (as defined). The Debt Facility is collateralized by receivables,
intangibles, inventory and various other specified non-equipment assets of the
Company. In addition, the facility is subject to various financial covenants
with quarterly targets, including provisions for tangible net worth of not less
than $98.5 million subject to adjustment for the fluctuation of the exchange
rate of the Mexican peso at December 31, 2000 or that of the preceding year-end
fixed charge ratio of 1.1 to 1, and interest coverage ratios of 3.2 to 1,
leverage ratio of not more than 1.6 to 1 at year-end and prohibits the payment
of dividends. On March 2, 2001, the Company entered into an amendment of our
Debt Facility with GMAC, who solely assumed the facility in 2000. This amendment
reduced the $105.0 million facility to $90.0 million. The over-advance line of
$25 million was converted to a term facility to be repaid by monthly
installments of $500,000 before August 2001 and $687,500 thereafter. A total of
$58 million was outstanding under the Debt Facility at December 31, 2002.
F-17
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 2002, the Company was in violation of covenants on interest
coverage, total leverage ratio and fixed charge under the Debt Facility. The
Company received a waiver from GMAC with respect to its violation of these
covenants, and also received a waiver from GMAC with respect to compliance at
March 31, 2003 with all financial covenants under the Debt Facility. The Company
paid GMAC $45,000 for this waiver. The Company and GMAC have agreed to set new
financial covenants for the remainder of fiscal 2003 based on the Company's
projections before May 1, 2003.
Within the Debt Facility, the credit agreement with GMAC provides for a
factoring arrangement whereby the Company factor with GMAC accounts receivables
from customers with debt ratings below BBB. The Company did not receive advances
against these receivables, and was paid only upon collection of proceeds. For
this credit insurance arrangement, the Company pays the factor a commission of
60 basis points.
8. INCOME TAXES
The provision (credit) for domestic and foreign income taxes is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 2001 2002
----------- ----------- -----------
Current:
Federal ................ $(4,661,591) $(1,272,918) $ (307,684)
State .................. 6,503 1,079 293,055
Foreign ................ 3,729,499 850,511 1,162,798
----------- ----------- -----------
(925,589) (421,328) 1,148,169
Deferred:
Federal ................ (346,982) 999,201 --
State .................. (197,513) 232,821 --
Foreign ................ (8,591) 41,283 (97,151)
----------- ----------- -----------
(553,086) 1,273,305 (97,151)
----------- ----------- -----------
Total ........... $(1,478,675) $ 851,977 $ 1,051,018
=========== =========== ===========
The source of income (loss) before the provision for taxes and cumulative effect
of accounting change is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 2001 2002
------------ ------------ ------------
Federal ............... $(18,125,699) $ (8,582,448) $(11,061,937)
Foreign ............... 14,129,282 6,545,169 10,898,918
------------ ------------ ------------
Total ........ $ (3,996,417) $ (2,037,279) $ (163,019)
============ ============ ============
Foreign deferred income taxes result primarily from temporary differences in the
recognition of bad debt and depreciation expenses for tax and financial
reporting purposes. The resulting foreign deferred income tax liability amounted
to approximately $48,000, $89,000 and $0 at December 31, 2000, 2001 and 2002
respectively.
F-18
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the statutory federal income tax provision (benefit) to the
reported tax provision (benefit) on income is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
Income tax (benefit) based on
federal statutory rate ......... $(1,358,782) $ (713,048) $(1,761,992)
State income taxes, net of federal
benefit ........................ (122,246) 152,035 190,486
Effect of foreign income taxes .... (324,219) 1,494,708 1,162,798
Increase in valuation allowance
and other ...................... 326,572 (81,718) 1,459,726
----------- ----------- -----------
$(1,478,675) $ 851,977 $ 1,051,018
=========== =========== ===========
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
deferred tax assets (liabilities) are as follows:
DECEMBER 31,
----------------------------
2001 2002
----------- -----------
Deferred tax assets:
Provision for doubtful accounts and
unissued credits ......................... $ 1,238,401 $ 835,980
Provision for other reserves ............... 976,597 2,608,101
Net operating loss carry forward ........... -- 850,326
Deferred compensation and benefits ......... 231,245 238,232
State taxes ................................ 1,960 --
----------- -----------
Total deferred tax assets ........... 2,448,203 4,532,639
Deferred tax liabilities:
Unrealized gain ............................ (583,100) (80,858)
----------- -----------
(583,100) (80,858)
Valuation allowance for deferred tax
assets ..................................... (2,380,016) (4,859,532)
----------- -----------
Net deferred tax liabilities ................. $ (514,913) $ (407,751)
=========== ===========
The Company has ongoing tax audits related to Federal tax returns. Management
believes adequate reserves have been provided for potential claims.
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into various non-cancelable operating lease agreements,
principally for executive office, warehousing facilities and production
facilities with unexpired terms in excess of one year. Certain of these leases
provided for scheduled rent increases. The Company records rent expense on a
straight-line basis over the term of the lease. The future minimum lease
payments under these non-cancelable operating leases are as follows:
F-19
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RELATED PARTY OTHER
---------- ----------
2003 ............................................. $2,180,217 $ 950,949
2004 ............................................. 1,208,974 601,801
2005 ............................................. 898,366 428,691
2006 ............................................. 925,317 356,840
2007 ............................................. 953,076 356,840
Thereafter ....................................... 2,938,808 952,573
---------- ----------
Total future minimum lease payments ..... $9,104,758 $3,647,694
========== ==========
Several of the operating leases contain provisions for additional rent based
upon increases in the operating costs, as defined, per the agreement. Total rent
expense under the operating leases amounted to approximately $2,548,000,
$2,968,000 and $3,166,000 for 2000, 2001 and 2002, respectively.
The Company had open letters of credit of $17,778,561 and $15,458,189 as of
December 31, 2001 and 2002, respectively.
The Company has two employment contracts dated January 1, 1998 with two
executives providing for base compensation and other incentives. Commitments
under these agreements for base compensation amount to $1,000,000 for each of
the two executives annually through December 31, 2002. Each contract also
provides for annual bonuses of up to $2,000,000 for each executive and vesting
of stock options based on attaining specified performance criteria. Effective
January 10, 2000, these contracts were amended reducing the base salary to
$500,000 for each of the two executives and extending the term of the agreements
to March 31, 2003.
On April 1, 1999, the Company entered into a three-year employment agreement
with Mr. Nacif, pursuant to which Mr. Nacif initially was entitled to receive
(i) an annual base salary of $1 million, (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 vested in three equal installments
on April 1, 2000, 2001 and 2002. 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. As of January
1, 2000, the Company and Mr. Nacif amended Mr. Nacif's employment agreement to
reduce his annual salary from $1 million to $250,000 starting in 2000.
The Company entered into a consulting agreement with Gabe Zeitouni, the former
President of the Company's Rocky division, through December 31, 2002. Under the
terms of this agreement, Mr. Zeitouni was paid $140,000 through December 2002.
In conjunction with this consulting agreement, Mr. Zeitouni's Put Option
Agreement of July 10, 2000 was amended. As of December 31, 2002, the Company
advanced approximately $1.1 million to Mr. Zeitouni. The Company has also
changed the time frame of Mr. Zeitouni's right to require the Company to
purchase 80,890 of shares at $18.54 to be the three-month period commencing on
January 1, 2003 and ending on March 31, 2003. Mr. Zeitouni exercised his right
in February 2003. The cost of the Put Option (excess of $18.54 over the current
market value of the Company's stock) is being amortized over the consulting
period.
In connection with the establishment of JDI (see Note 5), JDI entered into an
employment agreement with Bensimon, which provided for the payment of a salary
to Bensimon and a bonus tied to the new company's sales performance. The
existing lenders to Needletex, Inc. agreed to the asset transfer in return for,
among other things, the confirmation of Bensimon's continuing guaranty of the
loan obligations, the assumption of the loan obligations by JDI and a guaranty
of those obligations by the Company. The Company received an express indemnity
by Needletex, Inc. and Bensimon to reimburse us for all amounts we paid to those
lenders for the account of Needletex and Bensimon. Thereafter a dispute arose as
to
F-20
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
whether Bensimon had performed in accordance with his terms of employment set
forth in the Employment Agreement. When an amicable resolution of this dispute
could not be achieved, Bensimon commenced an arbitration preceding against his
employer (JDI), Fashion Resource (TCL), Inc., the managing member of Jane Doe
International and the Company. The Company and other respondents contested and
vigorously opposed the matter.
On January 21, 2003, after a hearing, the arbitration panel issued an interim
award in favor of Bensimon awarding him $1,425,655 for salary and bonus plus
interest accrued thereon and legal fees and costs to be determined. The Company
has accrued an additional $1.3 million reserve for litigation in 2002 in
addition to the previously recorded accrual of $315,000 included in accrued
liabilities.
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of the Company's management, resolution of such
matters will not have a material effect on its financial position or results of
operations.
10. EQUITY
The Company has elected to follow Accounting Principles Board Opinion No. 25,"
Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company's Employee Incentive Plan, formerly the 1995 Stock Option Plan, as
amended and restated in May 1999 (the "Plan") and amended in 2002, has
authorized the grant of both incentive and non-qualified stock options to
officers, employees, directors and consultants of the Company for up to
5,100,000 shares (as adjusted for a stock split effective May 1998) of the
Company's Common Stock. The exercise price of incentive options must be equal to
100% of fair market value of common stock on the date of grant and the exercise
price of non-qualified options must not be less than the par value of a share of
Common Stock on the date of grant. The Plan was also amended to expand the types
of awards, which may be granted pursuant thereto to include stock appreciation
rights, restricted stock and other performance-based benefits.
In October 1998, the Company granted 1,000,000 non-qualified stock options not
under the Plan. The options were granted to the Chairman and President of the
Company at $13.50 per share, the closing sales price of the Common Stock on the
day of the grant. The options expire in 2008 and vest over four years, subject
to certain performance criteria. In May 2002, the Company granted 3,000,000
non-qualified stock options not under the Plan. The options were granted to the
Chairman, President of the Company and Mr. Kamel Nacif at $5.50 per share, the
closing sales price of the Common Stock on the day of the grant. The options
expire in 2012 and vest over three years, subject to certain performance
criteria.
F-21
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
2000 2001 2002
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- --------- ---------- ----------
Options outstanding at
beginning of year 2,876,737 $14.43 2,697,487 $14.29 3,520,737 $11.90
Granted 95,750 9.61 955,000 5.18 3,004,000 5.50
Exercised (20,000) 4.28 (8,500) 3.97 (5,500) 4.39
Forfeited (255,000) 13.99 (123,250) 12.65 (142,750) 12.14
---------- ------ ---------- ------ --------- ------
Options outstanding at
end of year 2,697,487 $14.29 3,520,737 $11.90 6,376,487 $ 8.89
========== ====== ========== ====== ========= ======
Exercisable at end of
year 1,631,220 2,173,587 3,535,487
Weighted average per
option fair value
of options granted
during the year $ 7.88 $ 3.89 $ 2.89
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
------------------------------------------------------ ---------------------
$ 3.00 - 5.09 968,112 7.4 $ 4.89 576,362 $ 4.82
5.50 3,004,000 9.4 5.50 750,000 5.50
5.55 - 9.97 718,000 5.4 7.17 602,000 7.39
13.50 - 15.50 1,026,000 5.7 13.51 1,022,250 13.51
18.44 - 18.54 116,875 5.5 18.53 41,875 18.49
25.00 500,000 6.3 25.00 500,000 25.00
33.13 - 39.97 41,500 6.2 39.31 41,500 39.31
45.50 2,000 6.3 45.50 1,500 45.50
------------------------------------------------------ ---------------------
$ 3.00 - 45.50 6,376,487 7.7 $ 8.89 3,535,487 $11.35
====================================================== =====================
11. PREFERRED STOCK
In connection with the twill mill acquisition, the Company issued 100,000 Series
A Preferred Shares ("Preferred Shares"). The Preferred Shares accrue dividends
at an annual rate of 7% of the initial stated value of $88.20 per share and have
no voting rights. The Shares issued will become convertible into three million
shares of common stock if the Company's common shareholders approve the
conversion at the 2003 annual meeting. If the Company's shareholders do not
approve the issuance of the conversion shares at the next shareholder meeting,
the Company will then have the right to redeem any or all of the Preferred
Shares for a price equal to the stated value plus all accrued and unpaid
dividends.
The Company granted the holder of the shares of common stock issuable upon
conversion of the Preferred Shares "piggyback" registration rights, which
provide such holder the right, under certain circumstances, to have such shares
registered for resale under the Securities Act of 1933. In the event of a
liquidation, dissolution or winding-up of the
F-22
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company, the Preferred Shares will be entitled to receive, prior to any
distribution on the common stock, a distribution equal to the initial stated
value of the Preferred Shares plus all accrued and unpaid dividends.
12. SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
2000 2001 2002
----------- ----------- -----------
Cash paid for interest ............. $ 8,685,000 $ 4,473,000 $ 2,361,000
=========== =========== ===========
Cash paid (refunded) for income
taxes ........................... $ 3,861,000 $(2,554,000) $(5,086,000)
=========== =========== ===========
During 2000, in a non-cash transaction, the Company sold certain equipment and
other assets to a related party at net book value. The purchase price of such
assets, together with $12.5 million previously advanced is represented by a
$48.0 million note receivable. In addition, during 2001 the Company transferred
$5.5 million in receivables to the seller in connection with the purchase of
Ajalpan. In 2002, the Company acquired certain assets of a twill mill located in
Puebla, Mexico. Included in the consideration paid were 100,000 shares of Series
A Preferred Stock valued at $8.8 million, a 25% equity stake in Tarrant's
wholly-owned subsidiary, Tarrant Mexico and the cancellation of approximately
$56.9 million of certain notes and accounts receivables due from the sellers and
their affiliates. These non-cash transactions have been excluded from the
respective statements of cash flows.
13. RELATED-PARTY TRANSACTIONS
Related-party transactions, consisting primarily of purchases and sales of
finished goods and raw materials, are as follows:
2000 2001 2002
----------- ----------- -----------
Sales to related parties .......... $ 4,069,000 $ 8,340,000 $ 4,864,000
Purchases from related parties .... $20,972,000 $32,095,000 $76,231,000
As of December 31, 2001 and 2002, related party affiliates were indebted to the
Company in the amounts of $14.2 million and $15.9 million, respectively. These
include amounts due from principal shareholders of the Company of $12.1 million
and $5.6 million at December 31, 2001 and 2002, respectively, which have been
shown as reductions to shareholders' equity in the accompanying financial
statements. Total interest paid by related party affiliates and the Chairman and
President were $70,000 and $368,000 for the years ended December 31, 2001 and
2002, respectively. During 2001, Kamel Nacif advanced the Company a total of
$18.1 million for working capital purposes. Such advances were short-term and
paid back by the Company within 30 days of the advance. No amounts were due to
Mr. Nacif at December 31, 2002.
From time to time, the Company has borrowed funds from, and advanced funds to,
certain officers and principal shareholders, including Messrs. Guez and Kay. The
maximum amount of such borrowings from Mr. Kay during 2002 was $2,317,000. The
maximum amount of such advances to Mr. Guez during 2002 was approximately
$4,923,000. As of December 31, 2002, the Company was indebted to Mr. Kay in the
amount of $487,000. Mr. Guez had an outstanding advance from the Company of
$4,879,000 as of December 31, 2002. As of December 31, 2001, the Company was
indebted to Mr. Kay in the amount of $2,308,000. Mr. Guez had an outstanding
advance from the Company of $4,116,000 as of December 31, 2001. As of December
31, 2001 and 2002, Mr. Kamel Nacif was indebted to the Company for $8.0 million
and $723,000, respectively. All advances to, and borrowings from, Mr. Guez and
Mr. Kay in 2002 bore interest at the rate of 7.75%. All existing loans to
officers and directors before July 30, 2002 are grandfathered under the
Sarbanes-Oxley Act of 2002. No further personal loans will be made to officers
and directors in compliance with the Sarbanes-Oxley Act.
Under lease agreements entered into between the Company and two entities owned
by the Chairman and President, the Company paid $1,299,000 in 2000, $1,299,000
in 2001 and $1,330,000 in 2002 for rent for office and warehouse facilities. In
addition during 2000 and 2001, the Company leased an airplane from 477 Aviation
LLC for the purpose of transporting employees of the Company. 477 Aviation LLC
is wholly owned by the Company's principal shareholder. Lease payments
F-23
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
amounted to $705,000 for the year ended December 31, 2000. The Company did not
lease the plane in 2001 and 2002. The Company reimbursed the principal
shareholder fuel and related expenses whenever the Company's executives used the
aircraft for business purposes.
Under lease agreements entered into between the Company and the former owners of
Grupo Famian, the Company paid $136,000 in 2000, $832,000 in 2001 and $843,000
in 2002 for rent for sewing and washing facilities in Tehuacan, Mexico.
In 1998, a California limited liability company owned by the Chairman and
President of the Company purchased 2,300,000 shares of the Common Stock of Tag-
It Pacific, Inc. ("Tag-It") (or approximately 37% of such Common Stock then
outstanding). Tag-It is a provider of brand identity programs to manufacturers
and retailers of apparel and accessories. Tag-It assumed the responsibility for
managing and sourcing all trim and packaging used in connection with products
manufactured by or on behalf of the Company in Mexico. This arrangement is
terminable by either the Company or Tag-It at any time. The Company believes
that the terms of this arrangement, which is subject to the acceptance of the
Company's customers, are no less favorable to the Company than could be obtained
from unaffiliated third parties. The Company purchased $20.9 million, $17.9
million and $23.9 million of trim inventory from Tag-it for the years ended
December 31, 2000, 2001 and 2002, respectively. As of December 31, 2001 and
2002, there were $556,000 million and $4.4 million of outstanding invoices in
Accounts Payable, respectively.
The Company purchased $5.8 million and $37.0 million of finished goods from
Azteca for the years ended December 31, 2001 and 2002, respectively. Total sales
of fabric from the Company to Azteca in 2002 were $2.9 million. Two and one half
percent of gross sales as management fees were paid in 2002 to each of the
members of UAV, per the operating agreement.
The Company purchased $8.5 million and $12.3 million of fabric from Trans Textil
in 2001 and 2002. As of December 31, 2001 and 2002, there was $2.5 million and
$7.0 million outstanding invoices in Accounts Payable, respectively.
As of December 31, 2000, Aris Industries, Inc. ("Aris") owed the Company
approximately $5.8 million for goods manufactured and shipped by the Company. On
February 12, 2001, Aris and the Company entered into an agreement under which
Aris issued to the Company 1.5 million shares of its common stock and undertook
to repay either $2.5 million in cash or its equivalent in common stock to the
Company on December 31, 2001 in full satisfaction of the debt. As of February
20, 2002, Aris had issued the Company an aggregate of 8,117,647 shares of its
common stock including the 1.5 million shares previously issued in full
satisfaction of this debt. On March 27, 2002, the Company sold this stock to an
unrelated third party for an aggregate of $1,785,882. As of December 31, 2002,
Messrs. Guez and Kay jointly owned approximately 7% of the outstanding shares of
Aris.
F-24
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATIONS BY GEOGRAPHIC AREAS
The Company operates primarily in one industry segment, the design,
manufacturing and importation of private label, moderately priced, casual
apparel. Information about the Company's operations in the United States and
Asia is presented below. Inter-company revenues and assets have been eliminated
to arrive at the consolidated amounts.
ADJUSTMENTS
AND
UNITED STATES ASIA MEXICO ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
2000
Sales ............. $ 368,308,000 $ 16,874,000 $ 9,987,000 $ -- $ 395,169,000
Inter-company sales 47,632,000 107,860,000 84,664,000 (240,156,000) --
------------- ------------- ------------- ------------- -------------
Total revenue ..... $ 415,940,000 $ 124,734,000 $ 94,651,000 $(240,156,000) $ 395,169,000
============= ============= ============= ============= =============
Income (loss) from
operations ..... $ (8,131,000) $ 8,217,000 $ 2,003,000 $ -- $ 2,089,000
============= ============= ============= ============= =============
Total assets ...... $ 245,165,000 $ 97,246,000 $ 159,971,000 $(194,290,000) $ 308,092,000
============= ============= ============= ============= =============
2001
Sales ............. $ 312,587,000 $ 5,952,000 $ 11,714,000 $ -- $ 330,253,000
Inter-company sales 12,341,000 86,291,000 77,062,000 (175,694,000) --
------------- ------------- ------------- ------------- -------------
Total revenue ..... $ 324,928,000 $ 92,243,000 $ 88,776,000 $(175,694,000) $ 330,253,000
============= ============= ============= ============= =============
Income (loss) from
operations ..... $ 5,364,000 $ 5,369,000 $ (8,803,000) $ -- $ 1,930,000
============= ============= ============= ============= =============
Total assets ...... $ 176,178,000 $ 97,175,000 $ 121,188,000 $(106,074,000) $ 288,467,000
============= ============= ============= ============= =============
2002
Sales ............. $ 332,877,000 $ 3,943,000 $ 10,571,000 $ -- $ 347,391,000
Inter-company sales 14,474,000 90,830,000 82,531,000 (187,835,000) --
------------- ------------- ------------- ------------- -------------
Total revenue ..... $ 347,351,000 $ 94,773,000 $ 93,102,000 $(187,835,000) $ 347,391,000
============= ============= ============= ============= =============
Income (loss) from
operations ..... $ 6,916,000 $ 4,950,000 $ (7,396,000) $ -- $ 4,470,000
============= ============= ============= ============= =============
Total assets ...... $ 185,086,000 $ 107,266,000 $ 202,741,000 $(176,891,000) $ 318,202,000
============= ============= ============= ============= =============
15. EMPLOYEE BENEFIT PLANS
On August 1, 1992, Tarrant Hong Kong established a defined contribution
retirement plan covering all of its Hong Kong employees whose period of service
exceeds 12 months. Plan assets are monitored by a third-party investment manager
and are segregated from those of Tarrant Hong Kong. Participants may contribute
up to 5% of their salary to the plan. The Company makes annual matching
contributions. Costs of the plan charged to operations for 2000, 2001 and 2002
amounted to approximately $119,000, $155,000 and $149,000 respectively.
On July 1, 1994, the Company established a defined contribution retirement plan
covering all of its U.S. employees whose period of service exceeds 12 months.
Plan assets are monitored by a third-party investment manager and are segregated
from those of the Company. Participants may contribute from 1% to 15% of their
pre-tax compensation up to effective limitations specified by the Internal
Revenue Service. The Company's contributions to the plan are based on a 50%
(100% effective July 1, 1995) matching of participants' contributions, not to
exceed 6% (5% effective July 1, 1995) of the participants' annual compensation.
In addition, the Company may also make a discretionary annual contribution to
the plan. Costs of the plan charged to operations for 2000, 2001 and 2002
amounted to approximately $257,000, $289,000 and $249,000 respectively.
F-25
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On December 27, 1995, the Company established a deferred compensation plan for
executive officers. Participants may contribute a specific portion of their
salary to such plan. The Company does not contribute to the Plan.
On December 20, 1996, the Compensation Committee of the Company's Board of
Directors established the Incentive Compensation Plan, which provides for both
discretionary bonuses and bonus amounts upon achieving certain earnings
thresholds for certain members of management. The adoption of this plan received
shareholder approval at the 1997 annual meeting.
16. OTHER INCOME AND EXPENSE
Other income and expense consists of the following:
2000 2001 2002
---------- ---------- ----------
Rental income ........................... $ 71,576 $ 586,305 $ 495,754
Unrealized gain on foreign currency ..... 441,811 103,705 --
Realized gain on foreign currency ....... -- -- 1,123,076
Royalty income .......................... -- 180,833 62,166
Sales of damaged goods and samples ...... -- 192,680 --
Gain on legal settlement ................ -- -- 473,041
Other items ............................. 836,980 789,543 493,938
---------- ---------- ----------
Total other income ...................... $1,350,367 $1,853,066 $2,647,975
========== ========== ==========
Royalty expense ......................... $ -- $ 500,000 $ 655,691
Unrealized loss on foreign currency ..... -- -- 1,014,696
Other items ............................. 193,359 355,994 333,686
---------- ---------- ----------
Total other expense ..................... $ 193,359 $ 855,994 $2,004,073
========== ========== ==========
F-26
TARRANT APPAREL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2002:
QUARTER ENDED YEAR
---------------------------------------------- ENDED
MAR. 31(2) JUN. 30 SEP. 30 DEC. 31(1) DEC. 31
--------- --------- --------- --------- ---------
(In thousands, except per share data)
2001
Net sales .......................... $ 84,330 $ 96,126 $ 78,175 $ 71,622 $ 330,253
Gross profit ....................... 14,419 15,814 10,071 12,424 52,728
Operating income (loss) ............ 891 3,300 (3,349) 1,088 1,930
Net income (loss) .................. $ 446 $ 1,706 $ (4,229) $ (812) $ (2,889)
Net income (loss) per common share:
Basic ........................... $ .03 $ .11 $ (.27) $ (0.05) $ (0.18)
Diluted ......................... $ .03 $ .11 $ (.27) $ (0.05) $ (0.18)
Weighted average shares outstanding:
Basic ........................... 15,822 15,832 15,824 15,831 15,825
Diluted ......................... 15,825 15,905 15,824 15,831 15,825
2002
Net sales .......................... $ 65,164 $ 95,307 $ 94,328 $ 92,592 $ 347,391
Gross profit ....................... 8,419 14,424 14,230 8,236 45,309
Operating income (loss) ............ (831) 4,780 3,626 (3,105) 4,470
Income (loss) before cumulative
effect of accounting change ..... $ (1,726) $ 1,302 $ 1,127 $ (1,917) $ (1,214)
Net income (loss) .................. $ (6,597) $ 1,302 $ 1,127 $ (1,917) $ (6,085)
Income (loss) per share before
cumulative effect of accounting
change:
Basic ........................... $ (.11) $ .08 $ .07 $ (0.12) $ (0.08)
Diluted ......................... $ (.11) $ .08 $ .07 $ (0.12) $ (0.08)
Net income (loss) per common share:
Basic ........................... $ (.41) $ .08 $ .07 $ (0.12) $ (0.38)
Diluted ......................... $ (.41) $ .08 $ .07 $ (0.12) $ (0.38)
Weighted average shares outstanding:
Basic ........................... 15,832 15,832 15,836 15,836 15,834
Diluted ......................... 15,832 16,099 15,931 15,836 15,834
-----------------------------
(1) In the fourth quarter of 2000, the Company recorded a book to physical
adjustment of $3.2 million, a $965,000 loss on a foreign currency hedge
and the write-off of certain assets of $350,000 related to abandonment of
leasehold improvements in Mississippi and Mexico.
(2) Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." According to this statement, goodwill and other
intangible assets with indefinite lives are no longer subject to
amortization, but rather an annual assessment of impairment applied on a
fair-value-based test. The Company adopted SFAS No. 142 in fiscal 2002 and
performed its first annual assessment of impairment, which resulted in an
impairment loss of $4.9 million recorded in the first quarter of 2002.
18. CONSOLIDATED STATEMENTS OF CASH FLOWS
Advances to officers and shareholders for the 2000, 2001 and 2002 periods have
been reclassified in the accompanying statements of cash flows. Consequently,
"Net cash provided by operating activities" for 2000 has changed from
$14,863,469 to $19,338,563. "Net cash used in investing activities" for the
2000, 2001 and 2002 periods has changed from $(28,247,227), $(9,226,729) and
$(4,830,977) respectively, to $(31,441,867), $(15,445,187) and $(5,669,577)
respectively. Additionally, "Net cash provided by (used in) financing
activities" for the 2000, 2001 and 2002 periods has changed from $14,474,741,
$(22,133,979), and $(9,273,251) respectively, to $13,194,287, $(15,915,521) and
$(8,434,651) respectively.
F-27
SCHEDULE II
TARRANT APPAREL GROUP
VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
of Year Expenses Accounts Deductions of Year
---------- ---------- --------- ---------- ----------
For the year ended
December 31, 2000
Allowance for returns
and discounts......... $2,868,658 $1,024,082 $ -- $ -- $3,892,740
Allowance for bad debt. $ 339,660 $ 103,007 $ -- $ -- $ 442,667
========== ========== ========= =========== ==========
For the year ended
December 31, 2001
Allowance for returns
and discounts......... $3,892,740 $ -- $(758,754) $ (452,385) $2,681,601
Allowance for bad debt. $ 442,667 $2,283,226 $ 758,754 $ -- $3,484,647
========== ========== ========= =========== ==========
For the year ended
December 31, 2002
Allowance for returns
and discounts......... $2,681,601 $ 453,167 $ -- $ -- $3,134,768
Allowance for bad debt. $3,484,647 $ -- $ -- $(2,302,794) $1,181,853
========== ========== ========= =========== ==========
F-28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TARRANT APPAREL GROUP
By: /s/ Gerard Guez
---------------------------------------
Gerard Guez
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ GERARD GUEZ Chief Executive Officer and May 15, 2003
----------------------- Chairman of the Board of Directors
Gerard Guez
* President and Vice Chairman of the May 15, 2003
----------------------- Board of Directors
Todd Kay
* Chief Financial Officer, Treasurer May 15, 2003
----------------------- and Director (Principal Financial
Patrick Chow and Accounting Officer)
Director
-----------------------
Larry Russ
Director
-----------------------
Stephane Farouze
* Director May 15, 2003
-----------------------
Mitchell Simbal
* Director May 15, 2003
-----------------------
Barry Aved
* Director May 15, 2003
-----------------------
Joseph Mizrachi
* Director May 15, 2003
-----------------------
Milton Koffman
* By: /s/ Gerard Guez
-------------------------------
Gerard Guez
Attorney-In-Fact
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Gerard Guez, certify that:
1. I have reviewed this annual report on Form 10-K of Tarrant Apparel
Group;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Gerard Guez
-------------------------
Gerard Guez
Chief Executive Officer
Certification of CFO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Patrick Chow, certify that:
1. I have reviewed this annual report on Form 10-K of Tarrant Apparel
Group;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Patrick Chow
-------------------------
Patrick Chow
Chief Financial Officer