UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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: 0-26006
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 if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registration is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant is approximately $51,515,376 based upon the closing price of
the Common Stock on June 30, 2005.
Number of shares of Common Stock of the Registrant outstanding as of
March 30, 2006: 30,543,763.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the 2006 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
EXPLANATORY NOTE
We are filing this Annual Report on Form 10-K/A for the year ended
December 31, 2005 (the "Amended Annual Report"), to amend our Annual Report on
Form 10-K for the year ended December 31, 2005 (the "Original Annual Report"),
which was originally filed with the Securities and Exchange Commission (the
"SEC") on March 31, 2006. The Company is filing this Amended Annual Report in
response to comments received from the SEC. The following Items amend the
Original Annual Report, as permitted by the rules and regulations of the SEC.
Unless otherwise stated, all information contained in this Amended Annual Report
is as of March 31, 2006. All capitalized terms used herein but not otherwise
defined shall have the meanings ascribed to them in the Original Annual Report.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read together with the
Consolidated Financial Statements of Tarrant Apparel Group and the "Notes to
Consolidated Financial Statements" included elsewhere in this Form 10-K. This
discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of Tarrant
Apparel Group for the fiscal years ended December 31, 2003, 2004 and 2005.
Except for historical information, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward looking statements that involve risks and uncertainties and are based
upon judgments concerning various factors that are beyond our control. See
"Cautionary Statement Regarding Forward-Looking Statements" and "Item 1A. Risk
Factors."
OVERVIEW
Tarrant Apparel Group is a design and sourcing provider of private
label and private brand casual apparel serving mass merchandisers, department
stores, branded wholesalers and specialty chains located primarily in the United
States. Our private brands include American Rag Cie, No! Jeans, Alain Weiz, Gear
7, Souvenir by Cynthia Rowley and brands associated with Jessica Simpson, which
include "JS by Jessica Simpson", "Princy by Jessica Simpson" and "Sweet Kisses
by Jessica Simpson."
We generate revenues from the sale of apparel merchandise to our
customers that we have manufactured by third party contract manufacturers
located outside of the United States. Revenues and net income (loss) for the
years ended December 31, 2003, 2004 and 2005 were as follows (dollars in
thousands):
REVENUES AND NET LOSS: 2003 2004 2005
--------- --------- ---------
Net sales .................... $ 320,423 $ 155,453 $ 214,648
Net income (loss) ............ $ (35,885) $(104,677) $ 993
Cash flows for the years ended December 31, 2003, 2004 and 2005 were as
follows (dollars in thousands):
CASH FLOWS: 2003 2004 2005
-------- -------- --------
Net cash provided by (used in)
operating activities ............... $ 9,935 $ 12,168 $(12,900)
Net cash provided by (used in)
investing activities ............... $ (1,504) $ 1,250 $ 3,555
Net cash provided by (used in)
financing activities ............... $ (6,295) $(15,552) $ 9,772
SIGNIFICANT DEVELOPMENTS IN 2005
PRIVATE LABEL
Private label business has been our core competency for over twenty
years, and involves a one to one relationship with a large, centrally controlled
retailer with whom we can develop product lines that fit with the
characteristics of their particular customer. Private label sales in 2005 were
$159.6 million compared to $133.8 million in 2004.
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The success of our private brands collections has created new
opportunities within the private label business to add value in the development
and marketing of new initiatives for Sears, Mothers Work, Avenue, Chico's, and
other retailers. These initiatives were launched during 2005, and are on track
to be significant growth areas for 2006.
PRIVATE BRANDS
We launched our private brands initiative in 2003, pursuant to which we
acquire ownership of or license rights to a brand name and sell apparel products
under this brand, generally to a single retail company within a geographic
region. Private brands sales in 2005 were $55.0 million compared to $21.7
million in 2004. At December 31, 2005, we owned or licensed rights to the
following private brands:
o AMERICAN RAG CIE: During the first quarter of 2005, we
extended our agreement with Macy's Merchandising Group for six
years, pursuant to which we exclusively distribute our
American Rag Cie brand through Macy's Merchandising Group's
national Department Store organization of more than 500
stores. Net sales of American Rag Cie branded apparel totaled
$21.8 million in 2005.
o ALAIN WEIZ: We continue to sell Alan Weiz apparel exclusively
to Dillard's Department Stores. Net sales of Alain Weiz
branded apparel totaled $5.3 million in 2005.
o SOUVENIR BY CYNTHIA ROWLEY: We are in discussions with
retailers to identify a potential distribution alliance for
the 2006 fall or holiday season for Souvenir by Cynthia
Rowley.
o GEAR 7: During the fourth quarter of 2005, K-Mart discontinued
sales of Gear 7 products, which resulted in a decline in sales
for this brand in the fourth quarter of 2005. Net sales of
Gear 7 branded apparel totaled $14.4 million in 2005. We do
not anticipate sales of Gear 7 branded apparel in 2006.
o JESSICA SIMPSON brands: The JS by Jessica Simpson brand was
originally launched as a denim line with Charming Shoppes.
However, Charming Shoppes informed us that they would not go
forward with the line, resulting in reduced sales for this
brand in the fourth quarter of 2005. Net sales of JS by
Jessica Simpson and Princy by Jessica Simpson, which is the
department store and better specialty store brand, totaled
$12.6 million in 2005. In March 2006, we became involved in a
dispute with the licensor of the Jessica Simpson brands over
our continued rights to these brands. Accordingly, we do not
anticipate sales of Jessica Simpson branded apparel after the
first quarter of 2006 unless and until we successfully resolve
our dispute with the licensor.
o HOUSE OF DEREON BY TINA KNOWLES: We began shipping products
for the House of Dereon by Tina Knowles brand in the fourth
quarter of 2005, resulting in net sales of $309,000 in 2005.
In March 2006, we terminated our license agreement for this
brand, and sold our remaining inventory to the licensor. Prior
to December 31, 2005, we had written off the capitalized
balance of $1.2 million related to the agreement and
recognized a loss accordingly in 2005. The loss was classified
as royalty expense on our consolidated statements of
operations.
INTERNAL REVENUE SERVICE AUDIT
In January 2004, the Internal Revenue Service completed its examination
of our Federal income tax returns for the years ended December 31, 1996 through
2001. The IRS has proposed adjustments to
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increase our income tax payable for the six years under examination. This
adjustment would also result in additional state taxes and interest. In
addition, in July 2004, the IRS initiated an examination of our Federal income
tax return for the year ended December 31, 2002. In March 2005, the IRS proposed
an adjustment to our taxable income of approximately $6 million related to
similar issues identified in their audit of the 1996 through 2001 federal income
tax returns. The proposed adjustments to our 2002 federal income tax return
would not result in additional tax due for that year due to the tax loss
reported in the 2002 federal return. However, it could reduce the amount of net
operating losses available to offset taxes due from the preceding tax years. We
believe that we have meritorious defenses to and intend to vigorously contest
the proposed adjustments made to our federal income tax returns for the years
ended 1996 through 2002. If the proposed adjustments are upheld through the
administrative and legal process, they could have a material impact on our
earnings and cash flow. We believe we have provided adequate reserves for any
reasonably foreseeable outcome related to these matters on the consolidated
balance sheets included in the Consolidated Financial Statements under the
caption "Income Taxes". The maximum amount of loss in excess of the amount
accrued in the financial statements is $7.7 million. We do not believe that the
adjustments, if any, arising from the IRS examination, will result in an
additional income tax liability beyond what is recorded in the accompanying
consolidated balance sheets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. We are required to make assumptions about
matters, which are highly uncertain at the time of the estimate. Different
estimates we could reasonably have used or changes in the estimates that are
reasonably likely to occur could have a material effect on our financial
condition or result of operations. Estimates and assumptions about future events
and their effects cannot be determined with certainty. On an ongoing basis, we
evaluate estimates, including those related to returns, discounts, bad debts,
inventories, intangible assets, income taxes, and contingencies and litigation.
We base our estimates on historical experience and on various assumptions
believed to be applicable and reasonable under the circumstances. These
estimates may change as new events occur, as additional information is obtained
and as our operating environment changes. In addition, management is
periodically faced with uncertainties, the outcomes of which are not within its
control and will not be known for prolonged period of time.
Management believes our financial statements are fairly stated in
accordance with accounting principles generally accepted in the United States of
America and provide a meaningful presentation of our financial condition and
results of operations.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a further discussion on the application of these and
other accounting policies, see Note 1 of the "Notes to Consolidated Financial
Statements."
ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS
We evaluate the collectibility of accounts receivable and chargebacks
(disputes from the customer) based upon a combination of factors. In
circumstances where we are 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
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customers, we recognize reserves for bad debts and chargebacks based on our
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 us could be reduced by a material amount.
As of December 31, 2005, the balance in the allowance for returns,
discounts and bad debts reserves was $3.0 million, compared to $2.4 million at
December 31, 2004.
INVENTORY
Our inventories are valued at the lower of cost or market. Under
certain market conditions, we use estimates and judgments regarding the
valuation of inventory to properly value inventory. Inventory adjustments are
made for the difference between the cost of the inventory and the estimated
market value and charged to operations in the period in which the facts that
give rise to the adjustments become known.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL
We assess the impairment of identifiable intangibles, long-lived assets
and goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important that could
trigger an impairment review include, but are not limited to, the following:
o a significant underperformance relative to expected historical
or projected future operating results;
o a significant change in the manner of the use of the acquired
asset or the strategy for the overall business; or
o a significant negative industry or economic trend.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards 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.
We utilized the discounted cash flow methodology to estimate fair
value. At December 31, 2005, we have a goodwill balance of $8.6 million, and a
net property and equipment balance of $1.7 million, as compared to a goodwill
balance of $8.6 million and a net property and equipment balance of $1.9 million
at December 31, 2004. Our net property and equipment balance at December 31,
2004 reflects the disposal of our Mexico fixed assets of $123.3 million in the
fourth quarter of 2004. During the year ended December 31, 2005, we did not
recognize any impairment related to goodwill and property and equipment.
We assess the carrying value of long-lived assets in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
In 2004, we evaluated the long-lived assets in Mexico for recoverability and
concluded that the book value of the asset group was significantly higher than
the expected future cash flows and that impairment had occurred. Accordingly, we
recognized a non-cash impairment loss of approximately $78 million in the second
quarter of 2004. The impairment charge was the difference between the carrying
value and fair value of the impaired assets. Our determination of fair value was
determined based on independent appraisals of the property and equipment
obtained in June 2004.
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FOREIGN CURRENCY TRANSLATION
Assets and liabilities of our 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 respective periods. The functional currency in which we transact business in
Hong Kong is the Hong Kong dollar and in Mexico is the peso.
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.
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,
net of an estimate of returned merchandise and discounts. Customers are allowed
the rights of return or non-acceptance only upon receipt of damaged products or
goods with quality different from shipment samples. We do not undertake any
after-sale warranty or any form of price protection.
We often arrange, on behalf of manufacturers, for the purchase of
fabric from a single supplier. We have the fabric shipped directly to the
cutting factory and invoice the factory for the fabric. Generally, the factories
pay us for the fabric with offsets against the price of the finished goods.
INCOME TAXES
As part of the process of preparing our consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for book and tax purposes. These timing differences
result in deferred tax assets and liabilities, which are included in our
consolidated balance sheets. Management records a valuation allowance to reduce
its deferred tax assets to the amount that is more likely than not to be
realized. Management has considered future taxable income and ongoing tax
planning strategies in assessing the need for the valuation allowance. Increases
in the valuation allowance result in additional expense to be reflected within
the tax provision in the consolidated statement of operations.
In addition, accruals are also estimated for ongoing audits regarding
U.S. Federal tax issues that are currently unresolved, based on our estimate of
whether, and the extent to which, additional taxes will be due. We routinely
monitor the potential impact of these situations and believe that amounts are
properly accrued for. If we ultimately determine that payment of these amounts
is unnecessary, we will reverse the liability and recognize a tax benefit during
the period in which we determine that the liability is no longer necessary. We
will record an additional charge in our provision for taxes in any period we
determine that the original estimate of a tax liability is less than we expect
the ultimate assessment to be. See Note 10 of the "Notes to Consolidated
Financial Statements" for a discussion of current tax matters.
DEBT COVENANTS
Our debt agreements require certain covenants including a minimum level
of net worth as discussed in Note 8 of the "Notes to Consolidated Financial
Statements." If our results of operations erode and we are not able to obtain
waivers from the lenders, the debt would be in default and callable by our
lenders. In addition, due to cross-default provisions in our debt agreements,
substantially all of our
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long-term debt would become due in full if any of the debt is in default. In
anticipation of us not being able to meet the required covenants due to various
reasons, we either negotiate for changes in the relative covenants or an advance
waiver or reclassify the relevant debt as current. We also believe that our
lenders would provide waivers if necessary. However, our expectations of future
operating results and continued compliance with other debt covenants cannot be
assured and our lenders' actions are not controllable by us. If projections of
future operating results are not achieved and the debt is placed in default, we
would be required to reduce our expenses, including by curtailing operations,
and to raise capital through the sale of assets, issuance of equity or
otherwise, any of which could have a material adverse effect on our financial
condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of recent accounting pronouncements including the
respective expected dates of adoption and effects on results of operations and
financial condition, see Note 1 of the "Notes to Consolidated Financial
Statements."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in our consolidated statements of income as a percentage of net sales:
YEARS ENDED DECEMBER 31,
----------------------------------------
2003 2004 2005
---------- ---------- ----------
Net sales ........................................... 100.0 % 100.0 % 100.0 %
Cost of sales ....................................... 90.0 86.5 79.1
---------- ---------- ----------
Gross profit ........................................ 10.0 13.5 20.9
Selling and distribution expenses ................... 3.5 6.0 5.0
General and administration expenses ................. 9.9 20.6 12.5
Royalty Expenses .................................... 0.1 0.4 1.7
Impairment charges .................................. 7.0 50.2 --
Cumulative translation loss ......................... -- 14.7 --
---------- ---------- ----------
Income (loss) from operations ....................... (10.5) (78.4) 1.7
Interest expense .................................... (1.7) (1.8) (2.2)
Interest income ..................................... 0.1 0.2 1.0
Minority interest ................................... 1.0 9.9 0.0
Interest in income of equity method investee ........ 0.0 0.5 0.3
Other income ........................................ 1.5 4.1 0.1
Other expense ....................................... (0.3) (0.3) (0.0)
---------- ---------- ----------
Income (loss) before provision for income taxes ..... (9.9) (65.8) 0.9
Provision for income taxes .......................... (1.3) (1.5) (0.4)
---------- ---------- ----------
Net Income (loss) ................................... (11.2)% (67.3)% 0.5%
========== ========== ==========
COMPARISON OF 2005 TO 2004
Net sales increased by $59.2 million, or 38.1%, from $155.5 million in
2004 to $214.6 million in 2005. The increase in net sales was primarily due to
increased sales of private brands, which was $55.0
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million in 2005 compared to $21.7 million in 2004. Gear 7, JS by Jessica Simpson
and Princy by Jessica Simpson recorded significant sales contributions in 2005,
as compared to sales of $1.2 million for these brands in 2004. We expect sales
of these brands to decline significantly in 2006 due to the discontinuance of
the Gear 7 line by K-Mart, the dispute over our continued rights to the Jessica
Simpson line and the discontinuation of House of Dereon. Private label sales in
2005 were $159.6 million compared to $133.8 million in 2004, with the increase
resulting primarily from increased sales in 2005 to Wal-Mart, Chico's, Mothers
Work and Macy's Merchandising Group.
Gross profit consists of net sales less product costs, direct labor,
manufacturing overhead, duty, quota, freight in, and brokerage. Gross profit for
2005 was $44.9 million, or 20.9% of net sales, compared to $21.0 million, or
13.5 % of net sales, for 2004, representing an increase of $23.9 million or
114.1%. The increase in gross profit for 2005 occurred primarily because of an
increase in sales volume and gross margin. The improvement in gross margin is
primarily attributable to the change of relative product mix in favor of the
higher margin private brands business as compared to private label as well as
improved margins in the private label business due to expansion of our business
to include more knitwear and woven tops at better margins using private brand
product developments.
Selling and distribution expenses increased by $1.4 million, or 15.5%,
from $9.3 million in 2004 to $10.7 million in 2005. As a percentage of net
sales, these variable expenses decreased from 6.0% in 2004 to 5.0% in 2005 due
to the significant increase in sales volume during 2005.
General and administrative expenses decreased by $5.2 million, or
16.3%, from $32.1 million in 2004 to $26.9 million in 2005. The decrease was
primarily due to the depreciation and amortization of our Mexico assets of $6.8
million and $1.1 million of severance paid to the Mexican workers in 2004 as
compared to no such expense in 2005 after disposition of our fixed assets in
Mexico in late 2004. As a percentage of net sales, these expenses decreased from
20.6% in 2004 to 12.5% in 2005.
Royalty and marketing allowance expenses increased by $3.1 million, or
505.8%, to $3.7 million in 2005 from $605,000 in 2004. The increase was
primarily due to increased sales under the licensed Alain Weiz and Jessica
Simpson brands and a write-off of the remaining balance of $1.2 million of
prepaid royalty on House of Dereon in 2005 as a result of termination of our
agreement to design, market and sell House of Dereon by Tina Knowles branded
apparel in March 2006. See Note 11 of the "Notes to Consolidated Financial
Statements." As a percentage of net sales, these expenses increased to 1.7% in
2005 from 0.4% in 2004.
Impairment charges were $78.0 million in 2004 or (50.2)% of net sales,
compared to no such expense in 2005. The expense in 2004 was the impairment of
long-lived assets of our Mexico operations due to our decision to sell the
manufacturing operations in Mexico. See Note 5 and Note 7 of the "Notes to
Consolidated Financial Statements."
Cumulative translation loss attributable to liquidated Mexico
operations was $22.8 million in 2004, or (14.7)% of net sales, compared to no
such expense in 2005. We incurred this charge upon the sale of our fixed assets
in Mexico in the fourth quarter of 2004.
Income from operations was $3.6 million in 2005, or 1.7% of net sales,
compared to loss from operation of $121.8 million in 2004, or (78.4)% of net
sales, due to the factors described above.
Interest expense increased by $1.7 million, or 61.9%, from $2.9 million
in 2004 to $4.6 million in 2005. As a percentage of net sales, this expense
increased to 2.2% in 2005 from 1.8% in 2004. The increase was primarily due to
an interest expense of $1.3 million in 2005 related to interest payments to
holders of convertible debentures and amortization of debt discount arising from
issuing convertible
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debentures, compared to no such expense in 2004. Interest income increased by
$1.7 million, or 451.3% from $378,000 in 2004 to $2.1 million in 2005. The
increase was primarily due to the interest earned from the notes receivable
related to the sale of our fixed assets in Mexico of $1.9 million in 2005,
compared to no such income in 2004. Other income decreased by $6.0 million, or
94.4%, from $6.4 million in 2004 to $354,000 in 2005, due primarily to $5.5
million of lease income received for the lease of our facilities and equipment
in Mexico in 2004, compared to no such income in 2005 due to the sale of our
Mexico operations in the fourth quarter of 2004. Other expenses were $529,000 in
2004 compared to $1,000 in 2005.
In 2005, we allocated $75,000 of profit to minority interest, which
consisted of profit shared with the minority partner in the PBG7, LLC. Loss
allocated to minority interests in 2004 was $15.3 million, representing $471,000
attributed to the minority shareholder in United Apparel Ventures, LLC, for its
49.9% share in the loss and $14.8 million attributed to the minority shareholder
in Tarrant Mexico for its 25% share in the loss.
Income before provision for income taxes was $1.9 million in 2005 and
loss before provision for income taxes was $102.3 million in 2004, representing
0.9% and (65.8)% of net sales, respectively. The increase in income before
provision for income taxes was due to the factors discussed above.
Provision for income taxes was $927,000 in 2005 compared to $2.3
million in 2004, representing (0.4)% and (1.5)% of net sales, respectively.
Net income was $1.0 million in 2005 as compared to net loss of $104.7
million in 2004, representing 0.5% and (67.3)% of net sales, respectively.
Included in the $104.7 million loss in 2004 were charges of $78.0 million for
the impairment of long-lived assets and $22.8 million of cumulative translation
loss attributable to liquidated Mexico operations. There were no such charges in
2005.
COMPARISON OF 2004 TO 2003
Net sales decreased by $165.0 million, or 51.5%, from $320.4 million in
2003 to $155.5 million in 2004. The decrease in net sales was largely
attributable to a decrease in Mexican sourced sales from $139.1 million in 2003
to $19.5 million in 2004. Several of our larger customers for Mexico produced
jeans wear refused to place orders with us following the restructuring of our
Mexico operations and resulting labor unrest in Mexico, which resulted in a
decline in revenue of approximately $75 million from sales of Mexico-produced
merchandise during 2004 as compared to 2003. Additionally, in 2004 we
experienced a decline in sales to certain customers of Mexico-sourced
merchandise that was unrelated to the labor unrest. In 2004, we also experienced
a reduction of sales of fabric to Mexican manufacturers of approximately $17
million. We also experienced a reduction of sales from our import operations in
the Far East of approximately $40 million, due in part to several of our larger
customers reducing their back-to-school and holiday order placements.
Gross profit for 2004 was $21.0 million, or 13.5% of net sales,
compared to $32.0 million, or 10.0 % of net sales, for 2003, representing a
decrease of $11.0 million or 34.5%. The decrease in gross profit for 2004 was
primarily due to the substantial decrease in sales volume. The lower gross
profit, especially in the fourth quarter, was primarily due to unplanned air
freight costs and higher quota costs in some categories coupled with additional
inventory markdowns. The increase in gross profit as a percentage of net sales
for 2004 when compared to 2003 was primarily because of an inventory write-down
of $11 million and severance payments to Mexican workers of approximately $2.5
million included in cost of goods sold in 2003. Excluding the inventory
write-down and severance payments in 2003, gross profit as a percentage of net
sales for 2003 was 14.2% compared to 13.5% for 2004.
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Selling and distribution expenses decreased by $2.0 million, or 18%,
from $11.3 million in 2003 to $9.3 million in 2004. As a percentage of net
sales, these variable expenses increased from 3.5% in 2003 to 6.0% in 2004 due
to the significant decline in sales during 2004.
General and administrative expenses increased by $317,000, or 1.0%,
from $31.8 million in 2003 to $32.1 million in 2004. As a percentage of net
sales, these expenses increased from 9.9% in 2003 to 20.6% in 2004 due to
significant decline in sales during 2004. This increase was partly caused by the
reclassification of $3.2 million of depreciation of our Mexican facilities from
cost of goods sold in the fourth quarter of 2003, compared to $6.8 million of
depreciation and $1.1 million of severance payments to Mexican workers in 2004.
Royalty and marketing allowance expenses increased by $363,000, or
149.5%, to $605,000 in 2004 from $242,000 in 2003. As a percentage of net sales,
these expenses increased to 0.4% in 2004 from 0.1% in 2003.
Impairment charges were $78.0 million in 2004 or (50.2)% of net sales,
compared to $22.3 million in 2003 or (7.0)% of net sales. The expense in 2004
was the impairment of long-lived assets of our Mexico operations due to our
decision to sell the manufacturing operations in Mexico. The expense in 2003
included $19.5 million of the impairment of our goodwill and intangible assets
and $2.8 million of write-off of prepaid expenses due to our decision to cease
directly operating a substantial majority of our equipment and fixed assets in
Mexico commencing in the third quarter of 2003. See Note 5 and Note 7 of the
"Notes to Consolidated Financial Statements."
Cumulative translation loss attributable to liquidated Mexico
operations was $22.8 million in 2004, or (14.7)% of net sales, compared to no
such expense in 2003. As discussed above, we incurred this charge upon the sale
of our fixed assets in Mexico in the fourth quarter of 2004.
Loss from operations was $121.8 million in 2004, or (78.4)% of net
sales, compared to $33.6 million in 2003, or (10.5)% of net sales, due to the
factors described above.
Interest expense decreased by $2.7 million, or 49.0%, from $5.6 million
in 2003 to $2.9 million in 2004. This decrease in interest expense was a result
of a decrease of the amount we financed under our main credit facility in 2004.
Interest income was $378,000 in 2004 compared to $425,000 in 2003. Other income
increased by $1.6 million, or 33.1%, from $4.8 million in 2003 to $6.4 million
in 2004, due to $3.7 million of lease income received for our facilities and
equipment in Mexico in 2003, compared to $5.5 million in 2004. Other expenses
decreased from $1.2 million in 2003 to $529,000 in 2004.
Loss allocated to minority interests in 2004 was $15.3 million,
representing $471,000 attributed to the minority shareholder in United Apparel
Ventures, LLC, for its 49.9% share in the loss and $14.8 million attributed to
the minority shareholder in Tarrant Mexico for its 25% share in the loss. Loss
allocated to minority interests in 2003 was $3.5 million, representing the
minority partner's share of profit in UAV of $3.5 million, offset by $7.0
million attributed to the minority shareholder in Tarrant Mexico for its 25%
share in the loss including $4.4 million for its share in the special write-down
on goodwill and inventory of Tarrant Mexico.
Loss before provision for income taxes was $102.3 million in 2004 and
$31.8 million in 2003, representing (65.8)% and (9.9)% of net sales,
respectively. The increase in loss before provision for income taxes was due to
the factors discussed above.
Provision for income taxes was $2.3 million in 2004 versus $4.1 million
in 2003, representing (1.5)% and (1.3)% of net sales, respectively.
10
Loss after taxes and cumulative effect of accounting change was $104.7
million in 2004 and $35.9 million in 2003, representing (67.3)% and (11.2)% of
net sales, respectively. Included in the $104.7 million loss in 2004 were
charges of $78.0 million for the impairment of long-lived assets and $22.8
million of cumulative translation loss attributable to liquidated Mexico
operations. Included in the $35.9 million loss in 2003 were non-cash charges of
$22.3 million for the impairment of assets and an inventory write-down of $11
million.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in our consolidated statements of income in millions of dollars and as a
percentage of net sales:
QUARTER ENDED
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
2004 2004 2004 2004 2005 2005 2005 2005
------- ------- ------- ------- ------- ------- ------- -------
Net Sales ....... $ 42.2 $ 38.5 $ 38.1 $ 36.7 $ 44.8 $ 50.5 $ 69.6 $ 49.7
Gross profit .... 7.5 5.3 4.1 4.1 8.9 11.5 14.5 10.0
Operating income
(loss) ......... (6.0) (84.6) (3.6) (27.6) 0.2 1.5 3.0 (1.1)
Net income (loss) (3.0) (68.6) (4.0) (29.1) (0.1) 0.9 1.7 (1.5)
QUARTER ENDED
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
2004 2004 2004 2004 2005 2005 2005 2005
------- ------- ------- ------- ------- ------- ------- -------
Net sales ....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit .... 17.8 13.7 10.9 11.1 20.0 22.7 20.9 20.0
Operating income
(loss) ......... (14.1) (219.8) (9.5) (75.2) 0.5 2.8 4.3 (2.1)
Net income (loss) (7.1) (178.1) (10.5) (79.3) (0.2) 1.7 2.5 (3.0)
As is typical for us, quarterly net sales fluctuated significantly
because our customers typically place bulk orders with us, and a change in the
number of orders shipped in any one period may have a material effect on the net
sales for that period.
11
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise from the funding of our working
capital needs, principally inventory, finished goods shipments-in-transit,
work-in-process and accounts receivable, including receivables from our contract
manufacturers that relate primarily to fabric we purchase for use by those
manufacturers. Our primary sources for working capital and capital expenditures
are cash flow from operations, borrowings under our bank and other credit
facilities, issuance of long-term debt, sales of equity and debt securities, and
vendor financing. In the near term, we expect that our operations and borrowings
under bank and other credit facilities will provide sufficient cash to fund our
operating expenses, capital expenditures and interest payments on our debt. In
the long-term, we expect to use internally generated funds and external sources
to satisfy our debt and other long-term liabilities.
Our liquidity is dependent, in part, on customers paying on time. Any
abnormal chargebacks or returns may affect our source of short-term funding. Any
changes in credit terms given to major customers may have an impact on our cash
flow. Suppliers' credit is another major source of short-term financing and any
adverse changes in their terms will have negative impact on our cash flow.
Other principal factors that could affect the availability of our
internally generated funds include:
o deterioration of sales due to weakness in the markets in which
we sell our products;
o decreases in market prices for our products;
o increases in costs of raw materials; and
o changes in our working capital requirements.
Principal factors that could affect our ability to obtain cash from
external sources include:
o financial covenants contained in our current or future bank
and debt facilities; and
o volatility in the market price of our common stock or in the
stock markets in general.
The disposition of our Mexico operations in 2004 enabled us to return
to the business model that was profitable prior to implementation of our
vertically integrated manufacturing operations that required major capital
expenditures and substantial working capital. The lease and subsequent sale of
our Mexican facilities significantly reduced our working capital requirements
due to fewer employees and the elimination of fixed overhead. Investment in
inventory also was substantially reduced as we no longer need to purchase raw
materials, such as cotton, at commencement of the manufacturing process and
carry the costs of such materials until finished goods are shipped to our
customers. Reduced working capital and capital expenditures in Mexico has
resulted in a corresponding reduction of outstanding indebtedness and interest
payments. Furthermore, we no longer need to accept orders with low or negative
margins to fill production capacity in slow seasons, which should improve
margins and allow us to source production in the best locations worldwide.
Certain of our private brands product lines are generally associated
with higher selling, general and administrative expenses, due to significant
design, development, and marketing costs compared to our private label business.
12
Cash flows for the years ended December 31, 2003, 2004 and 2005 were as
follows (dollars in thousands):
CASH FLOWS: 2003 2004 2005
-------- -------- --------
Net cash provided by (used in)
operating activities ............... $ 9,935 $ 12,168 $(12,900)
Net cash provided by (used in)
investing activities ............... $ (1,504) $ 1,250 $ 3,555
Net cash provided by (used in)
financing activities ............... $ (6,295) $(15,552) $ 9,772
Net cash used in operating activities was $12.9 million in 2005, as
compared to net cash provided by operating activities in 2004 of $12.2 million
and $9.9 million in 2003. Net cash used in operating activities in 2005 resulted
primarily from a net income of $1.0 million, reduced by increases of $16.8
million in accounts receivable and $8.5 million in inventory, partially offset
by depreciation and amortization of $2.1 million and an increase of $9.2 million
in accounts payable. The increase in accounts receivable, inventory and accounts
payable in 2005 was primarily due to increase in sales volume.
During 2005, net cash provided by investing activities was $3.6
million, as compared to net cash provided by investing activities of $1.3
million in 2004 and net cash used in investing activities of $1.5 million in
2003. Cash provided by investing activities in 2005 included approximately $2.5
million of collection of advances from our Chairman and $1.2 million of
collection on notes receivable.
During 2005, net cash provided by financing activities was $9.8 million
as compared to net cash used in financing activities of $15.6 million in 2004
and $6.3 million in 2003. Net cash provided by financing activities in 2005
included $13.9 million net proceeds from our credit facilities and offset by
$4.1 million net repayment of our short-term bank borrowings.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Following is a summary of our contractual obligations and commercial
commitments available to us as of December 31, 2005 (in millions):
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
CONTRACTUAL OBLIGATIONS Less than Between Between After
Total 1 year 2-3 years 4-5 years 5 years
--------------------------------------- ---------- ---------- ---------- ---------- ----------
Long-term ............................. $ 36.3 $ 36.1 $ 0.2 $ -- $ --
debt(1)
Convertible debentures, net ........... $ 6.9 $ -- $ 6.9 $ -- $ --
Operating leases ...................... $ 6.8 $ 1.2 $ 1.3 $ 1.2 $ 3.1
Minimum royalties ..................... $ 17.2 $ 4.9 $ 5.5 $ 2.2 $ 4.6
Purchase commitment ................... $ 45.4 $ 5.4 $ 10.0 $ 10.0 $ 20.0
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations .... $ 112.6 $ 47.6 $ 23.9 $ 13.4 $ 27.7
---------------------------------------
(1) Excludes interest on long-term debt obligations. Based on outstanding
borrowings as of December 31, 2005, and assuming all such indebtedness
remained outstanding during 2006 and the interest rates remained
unchanged, we estimate that our interest cost on long-term debt would
be approximately $3.4 million.
13
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL AMOUNTS -------------------------------------------------------------
OTHER COMMERCIAL COMMITTED Less than Between Between After
COMMITMENTS AVAILABLE TO US TO US 1 year 2-3 years 4-5 years 5 years
------------------------------------- ------------- ------------- ------------- ------------- -------------
Lines of credit ..................... $ 61.9 $ 61.9 -- -- --
Letters of credit
(within lines of credit) .......... $ 16.9 $ 16.9 -- -- --
Total Commercial Commitments ........ $ 61.9 $ 61.9 -- -- --
On June 13, 2002, we entered into a letter of credit facility of $25
million with UPS Capital Global Trade Finance Corporation ("UPS"). Under this
facility, we may arrange for the issuance of letters of credit and acceptances.
The facility is collateralized by the shares and debentures of all of our
subsidiaries in Hong Kong. In addition to the guarantees provided by Tarrant
Apparel Group and our subsidiaries, Fashion Resource (TCL) Inc. and Tarrant
Luxembourg Sarl, Gerard Guez, our Chairman, also signed a guarantee of $5
million in favor of UPS to secure this facility. This facility bore interest at
10.25% per annum at December 31, 2005. Under this facility, we were subject to
certain restrictive covenants, including that we maintain a specified tangible
net worth, fixed charge ratio, and leverage ratio. On June 27, 2005, we amended
the letter of credit facility with UPS to extend the expiration date of the
facility from June 30, 2005 to August 31, 2005 and to reduce the tangible net
worth requirement at June 30, 2005. On August 31, 2005, we amended the letter of
credit facility with UPS to further extend the expiration date of the facility
to October 31, 2005, immediately reduce the maximum amount of borrowings to
$14.5 million on September 1, 2005 and further reduced the maximum amount of
borrowing to $14.0 million on October 1, 2005. On October 31, 2005, we further
amended the letter of credit facility with UPS to extend the expiration date of
the facility to January 31, 2006 and amend the interest rate to "prime rate"
plus 3%. The facility amendment also provided for reduction in the maximum
amount of borrowings to $13.5 million commencing on November 1, 2005, to $13.0
million commencing on December 1, 2005, and to $12.5 million commencing on
January 1, 2006. Additionally, Gerard Guez, our Chairman, pledged to UPS 4.6
million shares of our common stock held by Mr. Guez to secure the obligations
under the credit facility. On January 27, 2006, we further amended the letter of
credit facility with UPS to extend the expiration date of the facility from
January 31, 2006 to July 31, 2006. The amendment provides for reduction of the
maximum amount of borrowings under the facility to $12.0 million commencing on
April 1, 2006, $11.5 million commencing on May 1, 2006, $11.0 million commencing
on June 1, 2006 and to $10.5 million commencing on July 1, 2006. Under the
amended letter of credit facility, we are subject to restrictive financial
covenants of maintaining tangible net worth of $25 million as of December 31,
2005 and the last day of each fiscal quarter thereafter. There is also a
provision capping maximum capital expenditures per quarter of $800,000. As of
December 31, 2005, we were in compliance with the covenants. As of December 31,
2005, $9.2 million was outstanding under this facility with UPS and an
additional $2.5 million was available for future borrowings. In addition, $1.3
million of open letters of credit was outstanding as of December 31, 2005.
On December 31, 2004, our Hong Kong subsidiaries entered into a new
loan agreement with UPS pursuant to which UPS made a $5 million term loan, the
proceeds of which were used to repay $5 million of indebtedness owed to UPS
under the letter of credit of facility. The principal amount of this loan is due
and payable in 24 equal monthly installments of approximately $208,333 each,
plus interest equivalent to the "prime rate" plus 2% commencing on February 1,
2005. This facility bore interest at 9.25% per annum at December 31, 2005. On
June 27, 2005, we amended the loan agreement with UPS to reduce the tangible net
worth requirement at June 30, 2005. Under the amended loan agreement, we are
subject to restrictive financial covenants of maintaining tangible net worth of
$25 million at December 31, 2005 and the last day of each fiscal quarter
thereafter. There is also a provision capping maximum capital expenditure per
quarter at $800,000. As of December 31, 2005, we were in compliance with the
14
covenants. As of December 31, 2005, $2.7 million was outstanding. The
obligations under the loan agreement are collateralized by the same security
interests and guarantees provided under our letter of credit facility with UPS.
Additionally, the term loan is secured by two promissory notes payable to
Tarrant Luxembourg Sarl in the amounts of $2,550,000 and $1,360,000 and a pledge
by Gerard Guez, our Chairman, of 4.6 million shares of our common stock.
Since March 2003, DBS Bank (Hong Kong) Limited (formerly known as Dao
Heng Bank) has made available a letter of credit facility of up to HKD 20
million (equivalent to US $2.6 million) to our subsidiaries in Hong Kong. This
is a demand facility and is secured by the pledge of our office property, which
is owned by Gerard Guez, our Chairman and Todd Kay, our Vice Chairman, and by
our guarantee. The letter of credit facility was increased to HKD 30 million
(equivalent to US$3.9 million) in June 2004. As of December 31, 2005, $2.9
million was outstanding under this facility. In addition, $1.1 million of open
letters of credit was outstanding and $0 was available for future borrowings as
of December 31, 2005. In October 2005, a tax loan for HKD 6.233 million
(equivalent to US $804,000) was also made available to our Hong Kong
subsidiaries. As of December 31, 2005, $675,000 was outstanding under this tax
loan.
On October 1, 2004, we amended and restated our previously existing
debt facility with GMAC Commercial Credit, LLC ("GMAC") by entering into a new
factoring agreement with GMAC. The amended and restated agreement (the factoring
agreement) extended the expiration date of the facility to September 30, 2007
and added as parties our subsidiaries Private Brands, Inc and No! Jeans, Inc. In
addition, in connection with the factoring agreement, our indirect
majority-owned subsidiary PBG7, LLC entered into a separate factoring agreement
with GMAC. Pursuant to the terms of the factoring agreement, we and our
subsidiaries agree to assign and sell to GMAC, as factor, all accounts which
arise from our sale of merchandise or rendition of service created on a going
forward basis. At our request, GMAC, in its discretion, may make advances to us
up to the lesser of (a) up to 90% of our accounts on which GMAC has the risk of
loss and (b) $40 million, minus in each case, any amount owed by us to GMAC.
Pursuant to the terms of the PBG7 factoring agreement, PBG7 agreed to assign and
sell to GMAC, as factor, all accounts, which arise from PBG7's sale of
merchandise or rendition of services created on a going-forward basis. At PBG7's
request, GMAC, in its discretion, may make advances to PBG7 up to the lesser of
(a) up to 90% of PBG7's accounts on which GMAC has the risk of loss, and (b) $5
million minus in each case, any amounts owed to GMAC by PBG7. The facility bears
interest at 7.385% per annum and the facility under PBG7, LLC bears interest at
7.75% per annum at December 31, 2005. Restrictive covenants under the revised
facility include a limit on quarterly capital expenses of $800,000 and tangible
net worth of $25 million at December 31, 2005 and at the end of each fiscal
quarter thereafter. As of December 31, 2005, we were in compliance with the
covenants. A total of $30.6 million was outstanding with respect to receivables
factored under the GMAC facility at December 31, 2005.
In May 2005, we amended our factoring agreement with GMAC to permit
our subsidiaries party thereto and us, to borrow up to the lesser of $3 million
or fifty percent (50%) of the value of eligible inventory. In connection with
this amendment, we granted GMAC a lien on certain of our inventory located in
the United States. On January 23, 2006, we further amended our factoring
agreement with GMAC to increase the amount we may borrow against inventory to
the lesser of $5 million or 50% of the value of eligible inventory. The $5
million limit will be reduced to $4 million on April 1, 2006 and will be further
reduced to $3 million on July 1, 2006. The maximum borrowing availability under
the factoring agreement, based on the borrowing base formula remains at $40
million. A total of $3.0 million was outstanding under the GMAC facility at
December 31, 2005 with respect to collateralized inventory.
The credit facility with GMAC and the credit facility with UPS carry
cross-default clauses. A breach of a financial covenant set by GMAC or UPS
constitutes an event of default under the other credit
15
facility, entitling both financial institutions to demand payment in full of all
outstanding amounts under their respective debt and credit facilities.
The amount we can borrow under the factoring facility with GMAC is
determined based on a defined borrowing base formula related to eligible
accounts receivable. A significant decrease in eligible accounts receivable due
to the aging of receivables, can have an adverse effect on our borrowing
capabilities under our credit facility, which may adversely affect the adequacy
of our working capital. In addition, we have typically experienced seasonal
fluctuations in sales volume. These seasonal fluctuations result in sales volume
decreases in the first and fourth quarters of each year due to the seasonal
fluctuations experienced by the majority of our customers. During these
quarters, borrowing availability under our credit facility may decrease as a
result of decrease in eligible accounts receivables generated from our sales.
On December 14, 2004, we completed a $10 million financing through the
issuance of 6% Secured Convertible Debentures ("Debentures") and warrants to
purchase up to 1,250,000 shares of our common stock. Prior to maturity, the
investors may convert the Debentures into shares of our common stock at a price
of $2.00 per share. The warrants have a term of five years and an exercise price
of $2.50 per share. The Debentures bear interest at a rate of 6% per annum and
have a term of three years. We may elect to pay interest on the Debentures in
shares of our common stock if certain conditions are met, including a minimum
market price and trading volume for our common stock. The Debentures contain
customary events of default and permit the holders thereof to accelerate the
maturity if the full principal amount together with interest and other amounts
owing upon the occurrence of such events of default. The Debentures are secured
by a subordinated lien on certain of our accounts receivable and related assets.
The placement agent in the financing, received compensation for its services in
the amount of $620,000 in cash and issuance of five year warrants to purchase up
to 200,000 shares of our common stock at an exercise price of $2.50 per share.
In June 2005, holders of our Debentures converted an aggregate of $2.3
million of Debentures into 1,133,687 shares of our common stock. In August 2005,
holders of our Debentures converted an aggregate of $820,000 of Debentures into
410,000 shares of our common stock. The Debentures were converted at the option
of the holders at a price of $2.00 per share. Debt discount of $248,000 related
to the intrinsic value of the conversion option of $804,000 was expensed upon
the conversion. Of the $620,000 financing cost paid to the placement agent,
$191,000 was expensed upon the conversion. The intrinsic value of the conversion
option, and the value of the warrant amortized in 2005 was $474,000. Total
deferred financing cost amortized in 2005 was $189,000. Total interest paid to
the holders of the Debentures in 2005 was $539,000. As of December 31, 2005,
$6.0 million, net of $0.9 million of debt discount, remained outstanding under
the Debentures.
On February 14, 2005, we borrowed $5 million from Max Azria, which
amount bore interest at the rate of 4% per annum and was payable in weekly
installments of $250,000 beginning on February 28, 2005. In early August 2005,
we repaid the remaining balance of this loan in its entirety. On January 19,
2006, we borrowed an additional $4 million from Max Azria, which amount bears
interest at the rate of 5.5% per annum and is payable in weekly installments of
$200,000 beginning on March 1, 2006. This is an unsecured loan.
We had three equipment loans outstanding at December 31, 2005 totaling
$83,000. One of these equipment loans bears interest at 6% payable in
installments through 2009, the second loan bears interest at 15.8% payable in
installments through 2007, and the third loan bears interest at 6.15% payable in
installments through 2007.
During 2000, we financed equipment purchases for a manufacturing
facility with certain vendors. A total of $16.9 million was financed with
five-year promissory notes, which bear interest ranging from
16
7.0% to 7.5%, and were payable in semiannual payments commencing in February
2000. All remaining balances under these notes were paid off in February 2005. A
portion of the debt was denominated in Euros. Unrealized transaction (loss) gain
associated with the debt denominated in Euros totaled $(561,000), $367,000 and
$0 for the years ended December 31, 2003, 2004 and 2005, respectively. These
amounts were recorded in other income (expense) in the accompanying consolidated
statements of operations.
From time to time, we open letters of credit under an uncommitted line
of credit from Aurora Capital Associates who issues these letters of credit out
of Israeli Discount Bank. As of December 31, 2005, $1.0 million was outstanding
under this facility and $7.1 million of letters of credit were open under this
arrangement. We pay a commission of 2.25% on all letters of credits issued under
this arrangement.
The effective interest rates on short-term bank borrowing as of
December 31, 2004 and 2005 were 5.7% and 7.8%, respectively.
We have financed our operations from our cash flow from operations,
borrowings under our bank and other credit facilities, issuance of long-term
debt (including debt to or arranged by vendors of equipment purchased for our
Mexican twill and production facility), and sales of equity and debt securities.
Our short-term funding relies very heavily on our major customers, banks and
suppliers. From time to time, we have had temporary over-advances from our
banks. Any withdrawal of support from these parties will have serious
consequences on our liquidity.
From time to time in the past, we borrowed funds from, and advanced
funds to, certain officers and principal shareholders, including Gerard Guez and
Todd Kay. See disclosure under "-Related Party Transactions" below.
The Internal Revenue Service has proposed adjustments to our Federal
income tax returns to increase our income tax payable for the years ended
December 31, 1996 through 2001. This adjustment would also result in additional
state taxes and interest. In addition, in July 2004, the IRS initiated an
examination of our Federal income tax return for the year ended December 31,
2002. In March 2005, the IRS proposed an adjustment to our taxable income of
approximately $6 million related to similar issues identified in their audit of
the 1996 through 2001 federal income tax returns. We believe that we have
meritorious defenses to and intend to vigorously contest the proposed
adjustments made to our federal income tax returns for the years ended 1996
through 2002. We believe that we have meritorious defenses to and intend to
vigorously contest the proposed adjustments. If the proposed adjustments are
upheld through the administrative and legal process, they could have a material
impact on our earnings and, in particular, cash flow. We may not have an
adequate cash reserve to pay the final adjustments resulting from the IRS
examination. As a result, we may be required to arrange for payments over time
or raise additional capital in order to meet these obligations. We believe we
have provided adequate reserves for any reasonably foreseeable outcome related
to these matters on the consolidated balance sheets included in the consolidated
financial statements under the caption "Income Taxes." The maximum amount of
loss in excess of the amount accrued in the financial statements is $7.7
million. We do not believe that the adjustments, if any, arising from the IRS
examination, will result in an additional income tax liability beyond what is
recorded in the accompanying consolidated balance sheets.
We may seek to finance future capital investment programs through
various methods, including, but not limited to, borrowings under our bank credit
facilities, issuance of long-term debt, sales of equity securities, leases and
long-term financing provided by the sellers of facilities or the suppliers of
certain equipment used in such facilities. To date, there is no plan for any
major capital expenditure.
17
We do not believe that the moderate levels of inflation in the United
States in the last three years have had a significant effect on net sales or
profitability.
RELATED PARTY TRANSACTIONS
We lease our principal offices and warehouse located in Los Angeles,
California from GET and office space in Hong Kong from Lynx International
Limited. GET and Lynx International Limited are each owned by Gerard Guez, our
Chairman of the Board of Directors, and Todd Kay, our Vice Chairman of the Board
of Directors. We believe, at the time the leases were entered into, the rents on
these properties were comparable to then prevailing market rents. Our Los
Angeles offices and warehouse is leased on a month to month basis. On January 1,
2006, we entered into a one year lease agreement with Lynx International Limited
for our office space in Hong Kong. We paid $1,330,000 in each of 2003 and 2004,
and $1,019,000 in 2005 in rent for office and warehouse facilities at these
locations.
In February 2004, our Hong Kong subsidiary entered into a 50/50 joint
venture with Auto Enterprises Limited, an unrelated third party, to source
products for Seven Licensing Company, LLC and our private brands subsidiary in
mainland China. On May 31, 2004, after realizing an accumulated loss from the
venture of approximately $200,000 (our share being half), we sold our interest
for $1 to Asia Trading Limited, a company owned by Jacqueline Rose, wife of
Gerard Guez. The venture owed us $221,000 as of December 31, 2004. This amount
was repaid in the first quarter of 2005.
On October 16, 2003, we leased to affiliates of Mr. Kamel Nacif, a
shareholder at the time of the transaction, for a substantial portion of our
manufacturing facilities and operations in Mexico including real estate and
equipment. We leased our twill mill in Tlaxcala, Mexico, and our sewing plant in
Ajalpan, Mexico, for a period of 6 years and for an annual rental fee of $11
million. In connection with this lease transaction, we also entered into a
management services agreement pursuant to which Mr. Nacif's affiliates agreed to
manage the operation of our remaining facilities in Mexico in exchange for the
use of such facilities. The term of the management services agreement was also
for a period of 6 years. In 2004, $5.5 million of lease income was recorded in
other income. We agreed to purchase annually, six million yards of fabric
manufactured at the facilities leased and/or operated by Mr. Nacif's affiliates
at market prices to be negotiated. We purchased $3.6 million and $5.3 million of
fabric under this agreement in 2003 and 2004, respectively.
In August 2004, we entered into a purchase and sale agreement to sell
to Mr. Nacif's affiliates, substantially all of our assets and real property in
Mexico, including the equipment and facilities we previously leased to Mr.
Nacif's affiliates. Upon completion of this transaction in the fourth quarter of
2004, we entered into a purchase commitment agreement with Mr. Nacif's
affiliates to replace our previous purchase commitment agreement. Pursuant the
purchase commitment agreement we agreed to purchase $5 million of fabric
manufactured at the facilities we sold to Mr. Nacif's affiliates annually over
the ten-year term of the agreement, at negotiated market prices. See Note 5 of
the "Notes to Consolidated Financial Statements". In 2005, we purchased $6.4
million of fabric, of which $2.4 million was paid in cash and $4.0 million was
offset against the notes receivable principal and accrued interest on the note
receivable from the affiliates of Mr. Kamel Nacif. Net amount due from Mr. Kamel
Nacif and his affiliates was $236,000 as of December 31, 2005.
From time to time in the past we had advanced funds to, Mr. Guez. These
were net advances to Mr. Guez or payments paid on his behalf before the
enactment of the Sarbanes-Oxley Act in 2002. The promissory note documenting
these advances contains a provision that the entire amount together with accrued
interest is immediately due and payable upon our written demand. The greatest
outstanding balance of such advances to Mr. Guez during 2005 was approximately
$4,766,000. At December 31, 2005, the entire balance due from Mr. Guez totaling
$2.3 million was reflected as a reduction of
18
shareholders' equity. All advances to, and borrowings from, Mr. Guez bore
interest at the rate of 7.75% during the period. Total interest paid by Mr. Guez
was $374,000, $370,000 and $209,000 for the years ended December 31, 2003, 2004
and 2005, respectively. Mr. Guez paid expenses on our behalf of approximately
$400,000 and $397,000 for the years ended December 31, 2004 and 2005,
respectively, which amounts were applied to reduce accrued interest and
principal on Mr. Guez's loan. These amounts included fuel and related expenses
incurred by 477 Aviation, LLC, a company owned by Mr. Guez, when our executives
used this company's aircraft for business purposes. Since the enactment of the
Sarbanes-Oxley Act in 2002, no further personal loans (or amendments to existing
loans) have been or will be made to officers or directors of Tarrant.
On July 1, 2001, we formed an entity to jointly market, share certain
risks and achieve economies of scale with Azteca Production International, Inc.
("Azteca"), called United Apparel Ventures, LLC ("UAV"). Azteca is owned by the
brothers of Gerard Guez, our Chairman. This entity was created to coordinate the
production of apparel for a single customer of our branded business. UAV is
owned 50.1% by Tag Mex, Inc., our wholly owned subsidiary, and 49.9% by Azteca.
Results of the operation of UAV have been consolidated into our results since
July 2001 with the minority partner's share of all gains and loses eliminated
through the minority interest line in our financial statements. Due to the
restructuring of our Mexico operations, we discontinued manufacturing for UAV
customers in the second quarter of 2004. Two and one half percent of gross sales
as management fees were paid in 2003 and 2004 to each of the members of UAV, per
the operating agreement. We purchased $37.1 million, $11.5 million and $135,000
of finished goods and service from Azteca and its affiliates for the years ended
December 31, 2003, 2004 and 2005, respectively. Our total sales of fabric and
service to Azteca in 2003, 2004 and 2005 were $9.9 million, $1.0 million and
$88,000, respectively.
Since June 2003, UAV had been selling to Seven Licensing Company, LLC
("Seven Licensing"), jeans wear bearing the brand "Seven7", which is ultimately
purchased by Express. Seven Licensing is beneficially owned by Gerard Guez. In
the third quarter of 2004, in order to strengthen our own private brand
business, we decided to discontinue sourcing for Seven7. Total sales to Seven
Licensing in the year ended December 31, 2003, 2004 and 2005 were $8.1 million,
$2.6 million and $0, respectively.
At December 31, 2005, Messrs. Guez and Kay beneficially owned 590,000
and 1,003,500 shares, respectively, of common stock of Tag-It Pacific, Inc.
("Tag-It"), collectively representing 8.7% of Tag-It Pacific's common stock at
December 31, 2005. 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 our behalf in Mexico. We believe
that the terms of this arrangement, which is subject to the acceptance of our
customers, are no less favorable to us than could be obtained from unaffiliated
third parties. Due to the restructuring of our Mexico operations, Tag-It no
longer manages our trim and packaging requirements. We purchased $16.8 million,
$1.0 million and $450,000 of trim from Tag-It during the years ended December
31, 2003, 2004 and 2005. We sold to Tag-It $1.5 million from our trim and fabric
inventory for the year ended December 31, 2003. In the past, we guaranteed the
indebtedness of Tag-It for the purchase of trim on our behalf. See Note 8 of the
"Notes to Consolidated Financial Statements."
We believe that each of the transactions described above has been
entered into on terms no less favorable to us than could have been obtained from
unaffiliated third parties. We have adopted a policy that any transactions
between us and any of our affiliates or related parties, including our executive
officers, directors, the family members of those individuals and any of their
affiliates, must (i) be approved by a majority of the members of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors and (ii) be on terms no less favorable to us than could be obtained
from unaffiliated third parties.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK. Our earnings are affected by fluctuations in the
value of the U.S. dollar as compared to foreign currencies as a result of doing
business in Mexico as well as certain debt denominated in Euro. As a result, we
bear the risk of exchange rate gains and losses that may result in the future as
a result of this financing. At times we use forward exchange contracts to reduce
the effect of fluctuations of foreign currencies on purchases and commitments.
These short-term assets and commitments are principally related to trade
payables positions and fixed asset purchase obligations. We do not utilize
derivative financial instruments for trading or other speculative purposes. We
actively evaluate the creditworthiness of the financial institutions that are
counter parties to derivative financial instruments, and we do not expect any
counter parties to fail to meet their obligations.
INTEREST RATE RISK. Because our obligations under our various credit
agreements bear interest at floating rates (primarily prime rates), we are
sensitive to changes in prevailing interest rates. Any major increase or
decrease in market interest rates that affect our financial instruments would
have a material impact on earning or cash flows during the next fiscal year. As
of December 31, 2005, we had $7.1 million of fixed-rate borrowings and $49.1
million of variable-rate borrowings outstanding. A one percentage point increase
in interest rates would result in an annualized increase to interest expense of
approximately $0.5 million on our variable-rate borrowings.
Our interest expense is sensitive to changes in the general level of
U.S. interest rates. In this regard, changes in U.S. interest rates affect
interest paid on our debt. A majority of our credit facilities are at variable
rates.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Members of the company's management, including our Chief Executive
Officer and Chief Financial Officer, have evaluated the effectiveness of our
disclosure controls and procedures, as defined by paragraph (e) of Exchange Act
Rules 13a-15 or 15d-15, as of December 31, 2005, the end of the period covered
by this report. Members of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
our internal control over financial reporting to determine whether any changes
occurred during the further quarter of 2005 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.
CHANGES IN CONTROLS AND PROCEDURES
During the fourth quarter of 2005, there were no changes in our
internal control over financial accounting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
20
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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) Exhibits. See the Exhibit Index attached to this Form 10-K
annual report.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TARRANT APPAREL GROUP
By: /S/ GERARD GUEZ
----------------------------
Gerard Guez
Chairman of the Board
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chief Executive Officer January 31, 2007
/S/ GERARD GUEZ and Chairman of the Board
-------------------------- of Directors (Principal
Gerard Guez Executive Officer)
* Vice Chairman of the January 31, 2007
-------------------------- Board of Directors
Todd Kay
/S/ CORAZON REYES Chief Financial Officer,
Treasurer and Director January 31, 2007
-------------------------- (Principal Financial and
Corazon Reyes Accounting Officer)
* Director January 31, 2007
--------------------------
Milton Koffman
* Director January 31, 2007
--------------------------
Stephane Farouze
* Director January 31, 2007
--------------------------
Mitchell Simbal
* Director January 31, 2007
--------------------------
Joseph Mizrachi
* Director January 31, 2007
--------------------------
Simon Mani
* By: /S/ CORAZON REYES
----------------------------------
Corazon Reyes, As Attorney-In-Fact
S-1
TARRANT APPAREL GROUP
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------
3.1 Restated Articles of Incorporation. (1)
3.1.1 Certificate of Amendment of Restated Articles of Incorporation. (7)
3.1.2 Certificate of Amendment of Restated Articles of Incorporation. (7)
3.1.3 Certificate of Amendment of Restated Articles of Incorporation. (14)
3.2 Restated Bylaws. (1)
4.1 Specimen of Common Stock Certificate. (2)
4.2 Rights Agreement dated as of November 21, 2003, between Tarrant Apparel
Group and Computershare Trust Company, as Rights Agent, including the
Form of Rights Certificate and the Summary of Rights to Purchase
Preferred Stock, attached thereto as Exhibits B and C, respectively.
(13)
4.3 Certificate of Determination of Preferences, Rights and Limitations of
Series B Preferred Stock. (15)
4.4 Form of 6% Secured Convertible Debenture. (22)
10.1 Tarrant Apparel Group Employee Incentive Plan.* (19)
10.2 Services Agreement dated as of October 1, 1994, by and between the
Company and Lynx International Limited. (1)
10.3 Indemnification Agreement dated as of March 14, 1995, by and among
Tarrant Apparel Group, Gerard Guez and Todd Kay. (2)
10.4 Employment Agreement effective January 1, 1998, by and between Tarrant
Apparel Group and Gerard Guez.* (4)
10.4.1 First amendment to Employment Agreement dated as of January 10, 2000 by
and between Gerard Guez and Tarrant Apparel Group.* (6)
10.4.2 Second Amendment to Employment Agreement dated April 1, 2003 between
Tarrant Apparel Group and Gerard Guez.* (10)
10.4.3 Third Amendment to Employment Agreement, effective as of April 1, 2004,
between Tarrant Apparel Group and Gerard Guez.* (20)
10.5 Employment Agreement effective January 1, 1998, by and between Tarrant
Apparel Group and Todd Kay.* (4)
10.5.1 First Amendment to Employment Agreement dated as of January 10, 2000 by
and between Todd Kay and Tarrant Apparel Group.* (6)
10.5.2 Second Amendment to Employment Agreement dated April 1, 2003 between
Tarrant Apparel Group and Todd Kay.* (10)
EX-1
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------
10.5.3 Third Amendment to Employment Agreement, effective as of April 1, 2004,
between Tarrant Apparel Group and Todd Kay.* (20)
10.6 Buying Agency Agreement executed as of April 4, 1995, by Azteca
Production International, Inc. and Tarrant Company Ltd., with Tarrant
Apparel Group acknowledging as to certain matters. (2)
10.7 Form of Indemnification Agreement with directors and certain executive
officers. (3)
10.8 Factoring Agreement dated as of September 29, 2004 by and among GMAC
Commercial Finance LLC and Tarrant Apparel Group, Fashion Resource
(TCL), Inc., TAG Mex, Inc., United Apparel Ventures, LLC, Private
Brands, Inc. and NO! Jeans, Inc. (20)
10.8.1 First Amendment Factoring Agreement dated as of May 9, 2005 by and
among GMAC Commercial Finance LLC and Tarrant Apparel Group, Fashion
Resource (TCL), Inc., TAG Mex, Inc., United Apparel Ventures, LLC,
Private Brands, Inc. and NO! Jeans, Inc. (25)
10.8.2 Inventory Security Agreement by and among GMAC Commercial Finance LLC
and Tarrant Apparel Group, Fashion Resource (TCL), Inc., TAG Mex, Inc.,
United Apparel Ventures, LLC, Private Brands, Inc. and NO! Jeans, Inc.
(25)
10.9 Promissory note dated February 28, 2001 in the amount of US
$4,119,545.06 to pay to the order of Standard Chartered Bank (5)
10.10 Amended and Restated Limited Liability Company Operating Agreement of
United Apparel Ventures, dated as of October 1, 2002, between Azteca
Production International, Inc. and Tag Mex, Inc. (9)
10.11 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. (7)
10.11.1 Conditional Consent Agreement dated December 31, 2002, between UPS
Capital Global Trade Finance Corporation and Fashion Resource (TCL),
Inc. (8)
10.12 Guaranty Agreement dated as of May 30, 2002 by and between UPS Capital
Global Trade Finance Corporation and Gerard Guez. (7)
10.13 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. (7)
10.13.1 Charge Over Shares dated June 13, 2002 by Fashion Resource (TCL), Inc.
in favor of UPS Capital Global Trade Finance Corporation. (7)
10.13.2 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. (7)
10.13.3 Charge Over Shares dated February 26, 2003, between Machrima Luxembourg
International Sarl and UPS Global Trade Finance Corporation. (9)
10.13.4 Fourth Deed of Variation to Syndicated Letter of Credit Facility dated
June 18, 2003 among Tarrant Company Limited, Marble Limited and Trade
Link Holdings Limited and UPS Capital Global Trade Finance Corporation.
(10)
EX-2
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------
10.13.5 Letter Agreement dated September 1, 2003, among Tarrant Company
Limited, Marble Limited, Trade Link Holdings Limited and UPS Capital
Global Trade Finance Corporation. (12)
10.13.6 Fifth Deed of Variation to Syndicated Letter of Credit Facility dated
December 23, 2003 among Tarrant Company Limited, Marble Limited and
Trade Link Holdings Limited and UPS Capital Global Trade Finance
Corporation. (17)
10.13.7 Sixth Deed of Variation to Syndicated Letter of Credit Facility dated
March 17, 2004 among Tarrant Company Limited, Marble Limited and Trade
Link Holdings Limited and UPS Capital Global Trade Finance Corporation.
(18)
10.13.8 Seventh Deed of Variation to Syndicated Letter of Credit Facility dated
May 5, 2004 among Tarrant Company Limited, Marble Limited and Trade
Link Holdings Limited and UPS Capital Global Trade Finance Corporation.
(19)
10.13.9 Eighth Deed of Variation to Syndicated Letter of Credit Facility
effective as of May 10, 2004 among Tarrant Company Limited, Marble
Limited and Trade Link Holdings Limited and UPS Capital Global Trade
Finance Corporation. (19)
10.13.10 Ninth Deed of Variation to Syndicated Letter of Credit Facility
effective as of September 30, 2004 among Tarrant Company Limited,
Marble Limited and Trade Link Holdings Limited and UPS Capital Global
Trade Finance Corporation. (20)
10.13.11 Tenth Deed of Variation to Syndicated Letter of Credit Facility
effective as of December 31, 2004 among Tarrant Company Limited, Marble
Limited and Trade Link Holdings Limited and UPS Capital Global Trade
Finance Corporation. (23)
10.13.12 Loan Agreement dated December 31, 2004 by and among Tarrant Company
Limited, Marble Limited and Trade Link Holdings Limited and UPS Capital
Global Trade Finance Corporation. (23)
10.13.13 Amendment Agreement to Syndicated Composite Guarantee and Debenture
dated December 31, 2004, by and among Tarrant Company Limited, Marble
Limited and Trade Link Holdings Limited and UPS Capital Global Trade
Finance Corporation. (23)
10.13.14 Guaranty and Security Agreement dated December 31, 2004 by and among
Tarrant Apparel Group, Fashion Resource (TCL), Inc. and UPS Capital
Global Trade Finance Corporation. (23)
10.13.15 Guaranty and Security Agreement dated December 31, 2004 by and between
Tarrant Luxembourg Sarl and UPS Capital Global Trade Finance
Corporation. (23)
10.13.16 Amendment Agreement to Charge Over Shares dated December 31, 2004 by
and between Tarrant Luxembourg Sarl and UPS Capital Global Trade
Finance Corporation. (23)
10.13.17 Eleventh Deed of Variation to Syndicated Letter of Credit Facility
among Tarrant Company Limited, Marble Limited and Trade Link Holdings
Limited and UPS Capital Global Trade Finance Corporation. (25)
10.13.18 Twelfth Deed of Variation to Syndicated Letter of Credit Facility
effective as of June 27, 2005 among Tarrant Company Limited, Marble
Limited and Trade Link Holdings Limited and UPS Capital Global Trade
Finance Corporation. (25)
10.13.19 First Deed of Variation to Loan Agreement effective as of June 27, 2005
among Tarrant Company Limited, Marble Limited and Trade Link Holdings
Limited and UPS Capital Global Trade Finance Corporation. (25)
EX-3
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------
10.13.20 Second Deed of Variation to Loan Agreement effective as of July 29,
2005 among Tarrant Company Limited, Marble Limited and Trade Link
Holdings Limited and UPS Capital Global Trade Finance Corporation. (26)
10.13.21 Thirteenth Deed of Variation to Syndicated Letter of Credit Facility
effective as of July 29, 2005 among Tarrant Company Limited, Marble
Limited and Trade Link Holdings Limited and UPS Capital Global Trade
Finance Corporation. (26)
10.13.22 Fourteenth Deed of Variation to Syndicated Letter of Credit Facility
effective as of August 31, 2005 among Tarrant Company Limited, Marble
Limited and Trade Link Holdings Limited and UPS Capital Global Trade
Finance Corporation. (26)
10.13.23 Fifteenth Deed of Variation to Syndicated Letter of Credit Facility
effective as of October 31, 2005 among Tarrant Company Limited, Marble
Limited and Trade Link Holdings Limited and UPS Capital Global Trade
Finance Corporation. (27)
10.14 Assignment of Promissory Note by Tarrant Apparel Group to Tarrant
Company Limited and to Trade Link Holdings Company dated December 26,
2001. (7)
10.15 Exclusive Distribution Agreement dated April 1, 2003, between Federated
Merchandising Group, an unincorporated division of Federated Department
Stores, and Private Brands, Inc. (9)
10.15.1 Amendment No. 1 to Exclusive Distribution Agreement dated as of June
22, 2004, between Federated Merchandising Group, an unincorporated
division of Federated Department Stores, and Private Brands, Inc. (19)
10.15.2 Amendment No. 2 to Exclusive Distribution Agreement dated as of March
7, 2005, between Macy's Merchandising Group, LLC and Private Brands,
Inc. (24)
10.15.3 Trademark Sublicense Agreement dated as of March 3, 2005, between
Macy's Merchandising Group, LLC and Private Brands, Inc. (24)
10.16 Unconditional Guaranty of Performance dated April 1, 2003, by Tarrant
Apparel Group. (9)
10.17 Promissory Note dated May 31, 2003 made by Gerard Guez in favor of
Tarrant Apparel Group. (10)
10.18 Indemnification Agreement dated April 10, 2003 between Tarrant Apparel
Group and Seven Licensing Company, LLC. (10)
10.19 Registration Rights Agreement dated October 17, 2003, by and among
Tarrant Apparel Group and Sanders Morris Harris Inc. as agent and
attorney-in-fact for the Purchasers identified therein. (11)
10.20 Common Stock Purchase Warrant dated October 17, 2003, by and between
Tarrant Apparel Group and Sanders Morris Harris Inc. (11)
10.21 Employment Agreement, effective as of September 1, 2003, between the
Company and Barry Aved. (12)
10.22 Employment Agreement, dated September 16, 2005, between Tarrant Company
Limited and Henry Chu. (26)
10.23 Common Stock Purchase Warrant dated January 26, 2004 between Tarrant
Apparel Group and Sanders Morris Harris Inc. (16)
10.24 Agreement for Purchase of Assets dated August 13, 2004 among Tarrant
Mexico S. de R.L. de C.V., Acabados Y Cortes Textiles S.A. de C.V. and
Construcciones Solticio S.A. de C.V. (20)
EX-4
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------
10.24.1 Amendment No. 1 to Agreement for Purchase of Assets dated October 29,
2004 among Tarrant Mexico S. de R.L. de C.V., Acabados Y Cortes
Textiles S.A. de C.V. and Construcciones Solticio S.A. de C.V. (20)
10.25 Termination Agreement dated August 13, 2004 among Tarrant Mexico, S. de
R.L. de C.V., Inmobiliaria Cuadros, S.A., de C.V. and Acabados y Cortes
Textiles S.A. de C.V. (20)
10.26 Securities Purchase Agreement dated December 6, 2004, by and between
Tarrant Apparel Group and the investors listed on the signature pages
thereto. (21)
10.27 Registration Rights Agreement dated December 14, 2004, by and among
Tarrant Apparel Group and the investors listed on the signature pages
thereto. (22)
10.28 Security Agreement dated December 14, 2004, by and among Tarrant
Apparel Group and the investors listed on the signature pages thereto.
(22)
10.29 Intercreditor Agreement dated December 14, 2004 by and among Tarrant
Apparel Group, GMAC Commercial Finance, LLC, UPS Capital Global Trade
Finance Corporation and T.R. Winston & Company, LLC. (22)
10.30 Common Stock Purchase Warrant dated December 14, 2004 issued by Tarrant
Apparel Group in favor of T.R. Winston & Company, LLC. (22)
10.31 Form of Common Stock Purchase Warrant. (22)
10.32 Promissory Note in the principal amount of $5,000,000 dated as of
February 15, 2005, issued by Tarrant Apparel Group in favor of Max
Azria. (24)
10.33 Tenancy Agreement, dated July 1, 2005, between Tarrant Company Limited
and Lynx International Limited. (26)
14.1 Code of Ethical Conduct. (17)
21.1 Subsidiaries. (27)
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP. (27)
23.2 Consent of Grant Thornton LLP. (27)
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities and Exchange Act of 1934, as amended.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities and Exchange Act of 1934, as amended.
32.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) under
the Securities and Exchange Act of 1934, as amended.
32.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) under
the Securities and Exchange Act of 1934, as amended.
-------------------------------
* Management contract or compensatory plan or arrangement.
(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 the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
EX-5
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ending December 31, 2000.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ending March 31, 2001.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for
the quarter ending June 30, 2002.
(8) Filed as an exhibit to the Company's Annual Report on Form 10K for the
year ending December 31, 2002.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for
the quarter ending March 31, 2003.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for
the quarter ending June 30, 2003.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 16, 2003.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10Q for
the quarter ending September 30, 2003.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 12, 2003.
(14) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 4, 2003.
(15) Filed as an exhibit to the Company's Amendment to Current Report on
Form 8-K/A, filed December 12, 2003.
(16) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 23, 2004.
(17) Filed as an exhibit to the Company's Annual Report on Form 10-K for
year ending December 31, 2003.
(18) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ending March 31, 2004.
(19) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ending June 30, 2004.
(20) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ending September 30, 2004.
(21) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 6, 2004.
(22) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 14, 2004.
(23) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ending December 31, 2004.
(24) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ending March 31, 2005.
(25) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ending June 30, 2005.
(26) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ending September 30, 2005.
(27) Previously filed on Form 10-K for the year ended December 31, 2005.
EX-6