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As filed with the Securities and Exchange Commission on April 1, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) |
For the fiscal year ended December 31, 2001
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) |
For the transition period from
to
Commission File Number: 0-26430
TARRANT APPAREL GROUP
(Exact name of registrant as specified in its charter)
| California
(State or other jurisdiction
of incorporation or
organization) |
|
95-4181026
(I.R.S. Employer
Identification Number) |
3151 East Washington Boulevard
Los Angeles, California 90023
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (323) 780-8250
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
As of March 15, 2002, the aggregate market value of the
Common Stock held by non-affiliates of the Registrant was approximately $79,367,493 based upon the closing price of the Common Stock on that date.
Number of shares of Common Stock of the Registrant outstanding as of March 15, 2002: 15,841,815.
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 2002 Annual Meeting are incorporated by reference into Part III of this Report. Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the Registrant’s fiscal year ended December 31, 2001.
PART I
Item
1. BUSINESS
General
This 2001 Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things, the ability of the
Company to profitably manage a vertically integrated sourcing and distribution business, the financial strength of the Company’s major customers, the continued acceptance of the Company’s existing and new products by its existing and new
customers, dependence on key customers, the risks of foreign manufacturing, competitive and economic factors in the textile and apparel markets, the availability of raw materials, the ability to manage growth, weather-related delays, dependence on
key personnel, general economic conditions, China’s entry into WTO, global manufacturing costs and restrictions, and other risks and uncertainties that may be detailed herein See “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Factors That May Affect Future Results.”
Tarrant Apparel Group (the
“Company”), a leading provider of private label casual apparel, serves specialty retail, mass merchandise and department store chains and major international brands by designing, merchandising, contracting for the manufacture of,
manufacturing directly and selling casual, moderately-priced apparel for women, men and children. Since 1988, when the Company began designing and supplying private label denim jeans to a single specialty retail store chain, it has successfully
expanded its product lines and customer base to service over 25 customers during 2001. Since 1999, the Company has transformed itself from sourcing apparel solely from contract manufacturers in the Far East to also being a vertically integrated
manufacturer in Mexico . The Company’s current products are manufactured in a variety of woven and knit fabrications and include jeans wear, casual pants, t-shirts, shorts, blouses, shirts and other tops, dresses and jackets. See “
Products and Customers.”
The Company achieved a compound annual growth rate in net sales of approximately 19% from $205
million in 1995 to $395 million in 1999. In 2000, the Company’s net sales remained flat as compared to 1999, and in 2001, the Company’s net sales decreased by 16.4% to $330 million.In 2000 and 2001, the Company experienced a net loss of
$2.5 million and $2.9 million, respectively. See “Item 7. Management’s Discussion and Analysis of Financial Condition of Results of Operations.”
From inception, the Company relied primarily on independent contract manufactures located primarily in the Far East. Commencing in the third quarter of 1997 and taking advantage of the North American Free Trade
Agreement (“NAFTA”), the Company substantially expanded its use of independent cutting, sewing and finishing contractors in Mexico, primarily for basic garments. Since 1999, the Company has engaged in an ambitious program to develop a
vertically integrated manufacturing operation in Mexico. The gross sale of products sourced in Mexico was approximately $170 million in 2001 (or 52% of net sales) compared to approximately $200 million in 2000 (or 51% of net sales). In addition, the
Company has maintained its sourcing operation from the Far East. The vertical integration of its manufacturing operations through the development and acquisition of fabric and production capacity in Mexico concluded in 2001. In addition, the Company
focused on coordinating and improving the efficiencies of its operations throughout the year. The Company believes that the dual strategy of maintaining independent contract manufacturers in the Far East and a Company controlled manufacturing
network in Mexico can best serve the different needs of its customers and enable it to take the best advantage of both markets. In addition, the Company believes it has diversified its business risks associated with doing business abroad (including
transportation delays, economic or political instability, currency fluctuations, restrictions on the transfer of funds and the imposition of tariffs, export duties, quota, and other trade restrictions).
Major apparel retailers are increasingly outsourcing apparel merchandise management programs to minimize inventory risks, to increase profitability and
return on investment, and to enable them to replenish inventory rapidly. Furthermore, many retailers are consolidating the number of their suppliers to ensure the best service and the volume required for lower cost products. The Company believes
that both its sourcing operation in the Far East and its Mexican manufacturing operations are well positioned to capitalize on these trends.
The continuing predominance of casual wear in the workplace and emphasis on a casual, active lifestyle have increased the demand for casual, moderately priced, private label products. The Company believes its
production flexibility of denim and twill products in Mexico and its sourcing ability in the Far East can satisfy the different requirements from its various customers. See “Products.”
The Company believes that to a large extent, the cost, problems and inefficiencies initially encountered in its vertical integration strategy have been corrected and the benefits of lower cost production
should improve margins. From the end of 2000 through 2001, the U.S. economy experienced an economic downturn, which was exacerbated by the events of September 11. In Mexico, the Company faced the challenge of an industry wide slowdown coupled with
the fixed costs associated with its manufacturing facilities.
The Company responded by implementing programs to cut operating costs, including reducing its workforce by approximately 20% in
Mexico and Hong Kong and 50% in the U.S. The Company believes the consolidation of its worldwide operations has helped
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overcome the economic challenges in the past year. The Company also believes that overhead reductions and the current operating efficiency will result in a stronger operating position.
China’s entry into the World Trade Organization (“WTO”) may pose serious challenges to Mexican products due to
the elimination of U.S. quotas on Chinese apparel products in 2005. Because the Company still maintains a strong sourcing operation in the Far East, the Company believes it will be able to take advantage of improved pricing from China, and its
Mexican operation will continue to maintain its competitiveness due to the tariff advantages afforded by NAFTA. See “Item 7.—Management Discussion and Analysis of Financial Condition and Results of Operations.”
Business Strategy
Management believes
that the following trends are currently affecting apparel retailing and manufacturing:
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The continued predominance of casual apparel in the workplace and emphasis on a casual, active lifestyle have increased the demand for casual, moderately priced private label
products. |
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Consolidation among apparel retailers has increased their ability to demand value-added services from apparel manufacturers, including fashion expertise, rapid response,
just-in-time delivery, Electronic Data Interchange (“EDI”) and favorable pricing. |
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A decline in brand loyalty and increased competition among retailers due to consolidation have resulted in an increased demand for private label apparel which generally offers
retailers higher margins and permits them to differentiate their products. |
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The current fashion cycle requires more design and product development, in addition to quickly responding to emerging trends. Apparel manufacturers offering these capabilities
are in demand. |
The Company believes that it has the capabilities to take advantage of these trends and to
become a principal value-added supplier of casual, moderately priced, private label apparel because of the following key elements:
Design Expertise. As one of the very few sourcing companies with its own design team, the Company believes that it has established a reputation with its customers as a fashion resource and manufacturer that is
capable of providing design assistance to customers in the face of rapidly changing fashion trends.
Research and Development
Ability. The Company believes its design team and its two sample rooms in Mexico and China have made significant contributions to customers in developing new fabrics, washes and finishes.
Sample-Making and Market-Testing Ability. The Company seeks to support customers with its design expertise, sample-making
capability and ability to rapidly produce small test orders of products.
On Time Delivery. The
Company has developed a diversified network of international contract manufacturers and fabric suppliers which, together with its vertically integrated Mexican manufacturing operations enables the Company to accept orders of varying sizes and
delivery schedules and to produce a broad range of garments at varying prices depending upon lead time and other requirements of the customer. The Company believes its Mexican operation has the added geographical advantage of being capable of
delivering large quantities with much shorter lead-time.
Quality and Competitively Priced
Products. While the Company continues to maintain a quality sourcing operation in the Far East, it has also developed a vertically integrated manufacturing operation in Mexico. The Company believes that this strategy has
increased its sales capacity, increased its control over the production process, improved quality control, lowered costs and shortened lead times.
Product Diversification. The Company’s modern spinning and weaving equipment in Mexico has the flexibility to produce either denim or twill. See “Products”.
Low-Cost Operations. The initial need for certain duplicate operational costs when setting up the Mexican
operation has largely been eliminated. Beginning in 2001, the Company sought to reduce its operational overhead to the level experienced before 1999. The Company believes this objective will be achieved in the coming years.
IT Initiative
The Company began a
comprehensive information technology initiative during the fourth quarter of 1999. This initiative consisted of four phases.
3
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A company wide hardware and operating system upgrade |
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The enhancement of the software developed by the Company for tracking its Hong Kong production |
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Standardization of the Company’s accounting software |
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Installation of a complete computerized production and accounting system allowing data to flow seamlessly between all facilities in the U.S. and Mexico
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While the above initiative has been largely completed, the Company continues to invest in new technologies to tighten its
inventory and production controls and streamline its production costs as opportunities arise. The Company believes its ability to receive orders and issue invoices to serve customers through Electronic Data Interchange (“EDI”) has
maintained its competitiveness.
Acquisitions—General
United Apparel Ventures
On July 1, 2001, the Company
entered into a joint venture with Azteca Production International, Inc. (“Azteca”), a corporation owned by the brother of Gerard Guez, the Chairman of the Company, called United Apparel Ventures, LLC (“UAV”). This joint venture
was created to coordinate the production of apparel for a single customer of the Company’s branded business. UAV is owned 50.1% by Tag Mex, Inc., a wholly owned subsidiary of the Company, and 49.9% by Azteca. The results of UAV have been
consolidated into the Company’s results commencing in July 2001 with the minority partner’s share of earnings (losses) provided for in the Company’s financial statements.
Jane Doe
On April 12, 2000, the Company formed a new
company, Jane Doe International, LLC (“JDI”). This company was formed for the purpose of purchasing the assets of Needletex, Inc., owner of the Jane Doe brand. JDI is owned 51% by Fashion Resource (“TCL”), Inc., a subsidiary of
the Company, and 49% by Needletex, Inc. In March 2001, the Company converted JDI from an operating company to a licensing company. To date, JDI has entered into two licenses with regards to the use of the Jane Doe trademark. The Company is
anticipating entering into additional licenses in 2002.
C M G (Chazzz)
On March 23, 1999, the Company purchased certain assets of CMG, Inc., a California corporation (“CMG”). CMG designs, produces and sells
private label and CHAZZZ(R) branded woven (denim and twill) and knit apparel for women, children and men for national
chain stores, including J.C. Penney, Sears and Mervyns. This transaction has been accounted for as a purchase, and the purchase price has been allocated based on the fair value of assets acquired and liabilities assumed. The operations of CMG have
been included with those of the Company commencing on March 23, 1999.
Acquisitions—Vertical Integration
In 1997, the Company commenced the vertical integration of its business in Mexico. Key elements of this strategy include (i) establishing cutting,
sewing, washing, finishing, packing, shipping and distribution activities in company-owned facilities or through the acquisition of established contractors and (ii) establishing fabric production capability through the acquisition of established
textile mills or the construction of new mills. The Company believes that vertical integration should reduce product cost, allow the Company to better control production variances and make the Company more competitive in today’s business
environment. In addition, such operations are subject to the customary risks associated with owning a manufacturing business, including, but not limited to, the maintenance and management of manufacturing facilities, equipment, employees and
inventories. See “Item 7—Management Discussions and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results .”
Acquisition of Ajalpan
On March 29, 2001, the Company
completed the acquisition of a sewing facility located in Ajalpan Mexico from Confecciones Jamil, S.A. de C.V, which is majority owned by Kamel Nacif, a principal shareholder of the Company. This facility, which was newly constructed during 1999 and
commenced operations in 2000, was used by the Company for production during 2000 and 2001. The facility contains 98,702 square feet and eight sewing lines containing up to 840 sewing machines, which can generate a maximum capacity of six million
units per year.
The Company paid $11 million for this operating facility. This entire amount had been paid through advances and
other trade receivables. The assets acquired include land, buildings and all equipment, in addition to a trained labor force in place of about 2,000 employees. This acquisition completes the Company’s garment production core which consists
Grupo Famian and Ajalpan are owned by the Company, Tlaxcala, which is currently leased, the UAV joint venture and production agreement with Manufactures Cheja.
4
Exclusive Production Agreement
On June 28, 2000, the Company signed an exclusive production agreement with Manufactures Cheja (“Cheja”) through February 2002. The Company has agreed on a new contract to extend the agreement for an
additional quantity of 6,400,000 units beginning April 1, 2002 which will cover an eighteen-month period. The Company has provided Cheja approximately $3.2 million in advances related to the production agreement to be recouped out of future
production.
Acquisition of Production Facilities
On August 1, 1999, the Company acquired all of the outstanding stock of Industrial Exportadora Famian, S.A. de C.V. and Coordinados Elite, S.A. de C.V., both Mexican corporations
(“Grupo Famian”). Grupo Famian operated seven apparel production facilities in and near Tehuacan, Mexico which have the capacity to provide full package production (i.e., cut, sew, launder, finish and pack) of 110,000 units per week. The
purchase price consisted of (i) $1,000,000 cash paid at closing, (ii) a $3,000,000 non-interest bearing promissory note paid in three installments of $1,000,000 during 1999 and (iii) $8,000,000 payable in installments through September 30, 2002. A
total of $5.0 million of the consideration is contingent upon the Grupo Famian subsidiary meeting specified pretax income requirements. This transaction has been accounted for as a purchase, and the purchase price was allocated based on the fair
value of assets acquired and liabilities assumed. The excess of cost over fair value of net assets acquired will be amortized over 15 years. The operations of Grupo Famian are included with those of the Company commencing on August 1, 1999.
During 2000, the Company invested approximately $6 million to increase the capacity of Grupo Famian by adding six new sewing
facilities consisting of approximately 46,000 square feet and 6 sewing lines. After the addition of this facility, total sewing capacity has been increased to 240,000 units per week and cutting, laundry, and finishing capacity was increased to
180,000 units per week. The Company is continuing to expand this operation to be a balanced full package producer.
Acquisition of Denim Mill
On April 18, 1999, the Company finalized an agreement to acquire certain assets of a
denim mill located in Puebla, Mexico, from which Mr. Kamel Nacif is the principal shareholder, with an annual capacity of 18 million meters (“Jamil”). The purchase price consisted of $22.0 million in cash paid on May 7, 1999 and 1,724,000
shares (“the Shares”) of the Company’s Common Stock issued on May 24, 1999 valued at $45.3 million. The Shares were to be distributed to the sellers in three equal installments on April 1, 2000, 2001 and 2002; provided, however, that
any distribution (i) shall be offset by any claims of the Company against the sellers under the asset purchase agreement and (ii) will be proportionally reduced in the event the assets fail to produce at least 15 million yards of marketable denim in
the fiscal year immediately preceding the dates of such distributions of Shares. In addition, the Company has granted the holders of the Shares certain registration rights and the right to vote the Shares. The Shares are being held by the Company as
collateral pursuant to option on the twill mill. See “Acquisition of Twill Mill and Garment Processing Facility”. The Company has also assumed the obligations of the sellers under an existing collective bargaining agreement; provided,
however, that the sellers shall reimburse the Company for any costs (including, but not limited to, salaries and benefits) arising before the closing date or as a result of this acquisition.
On April 1, 1999, the Company entered into a three-year employment agreement with Mr. Nacif, pursuant to which Mr. Nacif initially was entitled to receive (i) an annual base salary of $1
million, (ii) reimbursement of all reasonable and documented business expenses, (iii) participation in all plans sponsored by the Company for employees in general and (iv) the right (the “Option”) for ten years to purchase up to 500,000
shares of the Company’s Common Stock at an exercise price of $25 per share. The Option vests in three equal installments on April 1, 2000, 2001 and 2002. In the event the Company terminates Mr. Nacif’s employment without cause (as
defined), the Company shall remain obligated to pay Mr. Nacif an amount equal to his base salary for the remainder of the stated term. In the event Mr. Nacif’s employment is terminated for any other reason (including death, disability,
resignation or termination with cause), neither party shall have any further obligation to the other, except that the Company shall pay to Mr. Nacif, or his estate, all reimbursable expenses and such compensation as is due prorated through the date
of termination. As of January 1, 2000, the Company and Mr. Nacif amended Mr. Nacif’s employment Agreement to reduce his annual salary from $1 million to $250,000 starting in 2000. To induce Mr. Nacif to renew his contract for another three
years, the Board of Directors has approved the grant to him, subject to shareholder approval of options to purchase an additional one million in shares at the closing price on the date of grant is ratified by shareholders. See “ Ratification of
Executive Stock Options Grants.”
Acquisition of Twill Mill and Garment Processing Facility
On December 2, 1998, the Company contracted with an affiliate of Mr. Nacif, the seller of the sewing facility and the denim mill described above, for
the construction of a fully operational facility near Puebla, Mexico for the production of twill fabric. The facility also houses ancillary facilities. Initially, if the Company were to exercise its option to purchase this facility, the purchase
price would have been the sum of (i) the cost of construction and equipment installed, which cost will not include operating expenses, estimated to be approximately $70 million, and (ii) a promissory note of the Company (“the Note”) in the
principal amount of $28 million, payable on the third anniversary date of the closing date, and bearing interest payable semi-annually in arrears on each June 30 and December 31, at the rate of 7% per annum.
During the fourth quarter of 1999, the Company began using a portion of this facility to wash, finish and pack. Construction of the facility was
5
completed during fiscal 2000. On October 16, 2000, the Company revised its agreement (the “Amendment”) regarding this facility (i) to extend its option to purchase the facility until
September 30, 2002 and (ii) to provide that the purchase price would be the fair market value of the fully operational facility. The twill mill portion of the facility is currently being operated by an affiliate of Mr. Nacif. The Company began
operating the garment processing center and distribution facilities of this facility in the fourth quarter of 1999. The Company has also entered into a production agreement with the operator of the twill mill granting the Company the first right to
purchase all production capacity of the twill mill. Concurrently with the Amendment, the Company (i) sold for $33,820,279 certain denim manufacturing equipment and other personal property purchased by the Company for use in the facility, (ii) sold
for $1,412,225 certain cotton, work-in-progress and twill and denim manufactured in the pre-production testing of the facility, and (iii) leased through September 30, 2002 to Mr. Nacif, certain denim manufacturing equipment purchased by the Company
for use at the facility, all to the operator of the twill mill. The purchase price for such assets, together with approximately $12.5 million previously advanced by the Company to the developer of the facility, is represented by a promissory note of
approximately $48 million payable over five years and bearing interest at eight and one-half percent with the remaining balance due October 5, 2005 on a ten year amortization. The equipment sold and 1,724,000 shares of the Common Stock of the
Company have been pledged as collateral for this note. For complete description of this transaction, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 31, 2000. Currently, the Company
intends to exercise its option to purchase the production facility. The terms of the agreement are under negotiations.
Products
While women’s jeans have historically been, and continue to be, the Company’s principal product, in recent years the Company has
expanded its sales of moderately-priced, women’s apparel to include casual, denim and non-denim, including twill, woven tops and bottoms and has commenced the sale of men’s and children’s apparel in 1998. The Company’s
women’s apparel products currently include jeans wear, casual pants, t-shirts, shorts, blouses, shirts and other tops, dresses and jackets. These products are manufactured in petite, standard and large sizes and are sold at a variety of
wholesale prices generally ranging from less than $4.00 to over $25.00 per garment.
Over the past three years, approximately
63% of net sales were derived from the sale of pants and jeans, approximately 15% from the sale of shorts and approximately 6% from the sale of shirts. The balance of net sales consisted of sales of skirts, dresses, jackets and other products.
While denim continues to be in strong demand, the Company’s modern spinning and weaving equipment in Mexico has the
flexibility to produce both denim and twill.
The Company, in the ordinary course of its business, regularly evaluates new
markets and potential acquisitions and believes that numerous opportunities exist due, in part, to the adverse effect on the earnings of many apparel companies of the recent decline in retail sales, and consolidation among retailers. Such
opportunities could include transactions involving acquisitions or brand affiliations. See “Acquisitions—General and Acquisitions—Vertical Integration”.
Customers
For the year ended December 31, 2001, affiliated stores owned by The Limited,
including Express, Lerner New York and Limited Stores accounted for approximately 22.8 % of the Company’s net sales. Lane Bryant, currently owned by Charming Shoppes in 2001 but by the Limited in 2000, accounted for 20.5% of net sales in 2001.
Net sales in 2000 to affiliated stores owned by the Limited Inc., including Lane Bryant, accounted for approximately 44.2% of the Company’s net sales. In addition, in 2001 sales to Walmart, Mervyn’s and Tommy Hilfiger accounted for
approximately 12.2%, 7.9% and 7.8% of net sales respectively. No other customer accounted for more than 5.0% of the Company’s net sales. In the same period, virtually all of the Company’s sales were of private label apparel and several
major international brands. The Company currently serves over 25 customers, which also include K-Mart, Kohl’s, Mervyns, Sears, Abercrombie & Fitch, Northern Reflection, Tropical Sports Wear and J.C. Penney. Additionally, the Company
manufactures branded merchandise for several major designers. See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—General”.
The Company generally targets only high-volume retailers that it believes could grow into major accounts. By limiting its customer base to a select group of larger accounts, the
Company seeks to build stronger long-term relationships and leverage its operating costs against large bulk orders. Although the Company continues to diversify its customer base, the majority of any growth in sales is expected to come from existing
customers.
On October 22, 1998, Limited Direct Associates LP, an entity 100% owned by The Limited Inc. (“LDA”),
acquired one million shares of the Company’s Common Stock through the exercise of an option granted by Mr. Guez and Mr. Kay, the Chairman and President, respectively, of the Company, to LDA at the time of the Company’s initial public
offering. The option granted LDA the right to purchase 10% of the total shares of Common Stock outstanding at the time of the initial public offering, or 1,299,998 shares, at a price of $3.60 per share (as adjusted for a two-for-one stock split
effective May 8, 1998). The transaction was done on a cashless basis, whereby Mr. Guez and Mr. Kay transferred ownership of one million shares to LDA and, in lieu of receiving cash, Mr. Guez
and Mr. Kay retained ownership of the remaining 299,998 shares. The one million shares were subject to a lockup provision, which expired October 9, 1999.
The Company does not have long-term contracts with any of its customers and, therefore, there can be no assurance that any customer will continue to place orders with the Company of the
same magnitude as it has in the past, or at all. In addition, the apparel industry historically has
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been subject to substantial cyclical variation, with consumer spending for purchases of apparel and related goods tending to decline during recessionary periods. To the extent that these
financial difficulties occur, there can be no assurance that the Company’s financial condition and results of operations would not be adversely affected. See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Factors That May Affect Future Results.”
Design, Merchandising and Sales
While many private label producers only arrange for the bulk production of styles specified by their customers, the Company not only designs garments,
but also assists some of its customers in market testing new designs. The Company believes that its design, sample-production and test-run capabilities give it a competitive advantage in obtaining bulk orders from its customers. The Company also
often receives bulk orders for garments it has not designed because many of its customers allocate bulk orders among more than one producer.
The Company has developed integrated teams of design, merchandising and support personnel, some of whom serve on more than one team, that focus on designing and producing merchandise that reflects the style and image
of their customers. Teams generally are divided between import and domestic sourcing operations.
Each team is responsible for
all aspects of its customer’s needs, including designing products, developing product samples and test items, obtaining orders, coordinating fabric choices and procurement, monitoring production and delivering finished products. In particular,
the team seeks to identify prevailing fashion trends that meet its customer’s retail strategies and design garments incorporating those trends. The team also works with the buyers of its customer to revise designs as necessary to better reflect
the style and image that the customer wishes to project to consumers. During the production process, the team is responsible for informing the customer about the progress of the order, including any difficulties that might affect the timetable for
delivery. In this way, the Company and its customer can make appropriate arrangements regarding any delay or other change in the order. The Company believes that this team approach enables its employees to develop an understanding of the
customer’s distinctive styles and production requirements in order to respond effectively to the customer’s needs. During 2000, the Company opened an office in Bentonville, Arkansas to support this approach and better service the needs of
Walmart. The Company also operates a similar office in Columbus, Ohio for The Limited, which opened in 1999.
As part of the
Company’s merchandising strategy, the Company produces, at its own expense, five collections a year from Hong Kong and Mexico embodying new designs and fabrics. The Company produces samples at its facilities in Guangdong Province, China, Hong
Kong and Mexico. The facilities in China and Mexico currently furnish the majority of the Company’s sample requirements.
From time to time and at scheduled seasonal meetings, the Company presents its samples to the customer’s buyers who determine which, if any, of those samples will be produced on a test run or a bulk scale. Samples are often presented
in coordinated groupings or as part of a product line. Some customers, particularly specialty retail stores such as divisions of The Limited, may require that a product be tested before placing a bulk order. Testing involves the production of as few
as several hundred copies of a given sample in different size, fabric and color combinations. The customer pays for these test items, which are placed in selected stores to gauge consumer response. The production of test items enables the
Company’s customers to identify garments that may appeal to consumers and also provides the Company with important information regarding the cost and feasibility of the bulk production of the tested garment. If the test is determined to be
successful, the Company generally receives a significant percentage of the customer’s total bulk order of the tested item. In addition, as is typical in the private label business, the Company receives bulk production orders to produce
merchandise designed by its competitors or other designers, since most customers allocate bulk orders among a number of suppliers.
Sourcing
General
When bidding for or filling an order, the Company’s international sourcing network enables it to choose from among a number of suppliers and manufacturers based on the customer’s price requirements, product
specifications and delivery schedules. Historically, the Company manufactured its products through independent cutting, sewing and finishing contractors located primarily in Hong Kong and China and has purchased its fabric from independent fabric
manufacturers with weaving mills located primarily in Hong Kong and China. In recent years, the Company expanded its network to include suppliers and manufacturers located in a number of additional countries, including Thailand, Egypt and Mexico.
Most recently, Mexico, through the Company’s vertical integration strategy, has become the source for more than 50% of its merchandise. Key elements of the Company’s sourcing strategy include (i) continuing to maintain its strong sourcing
ability in the Far East and (ii) continuing to expand its production of basic denim and twill products in Mexico. The following table sets forth the percent of the Company’s merchandise, on the basis of the free on board cost at the
supplier’s plant (“FOB Basis”), by country for the periods indicated:
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1999
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2000
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2001
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| International Sourcing |
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| Hong Kong and China |
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36.3 |
% |
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30.1 |
% |
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29.3 |
% |
| Other(1) |
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12.3 |
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11.7 |
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9.5 |
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| Domestic Sourcing |
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| United States |
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2.6 |
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7.5 |
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9.3 |
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| Mexico and Central America |
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48.8 |
|
|
50.7 |
|
|
51.9 |
|
(1) |
|
In 2001, such countries consisted of Thailand, Egypt, Cambodia, Mongolia and Nepal. |
Dependence on Contract Manufacturers
The use of contract
manufacturers and the resulting lack of direct control over the production of its products could result in the Company’s failure to receive timely delivery of products of acceptable quality. Although the Company believes that alternative
sources of cutting, sewing and finishing services are readily available, the loss of one or more contract manufacturers could have a materially adverse effect on the Company’s results of operations until an alternative source is located and has
commenced producing the Company’s products. During the Back to School season of 2000, the Company experienced this problem when its production was dropped by one such independent contractor. To avoid this in the future, the Company has reduced
its reliance on outside third party contractors through its Mexico vertical integration strategy. The Company’s garment production core business of Grupo Famian and Ajalpan which the Company owns, Tlaxcala, which is currently leased, the UAV
joint venture, and the production agreement with Manufactures Cheja. All international sourcing is still manufactured by independent cutting, sewing and finishing Contractors. See “Acquisition—Vertical Integration.”
Although the Company monitors the compliance of its independent contractors with applicable labor laws, the Company does not control its
contractors or their labor practices. The violation of federal, state or foreign labor laws by one of the Company’s contractors can result in the Company being subject to fines and the Company’s goods, which are manufactured in violation
of such laws, being seized or their sale in interstate commerce being prohibited. From time to time, the Company has been notified by federal, state or foreign authorities that certain of its contractors are the subject of investigations or have
been found to have violated applicable labor laws. To date, the Company has not been subject to any sanctions that, individually or in the aggregate, could have a material adverse effect upon the Company, and the Company is not aware of any facts on
which any such sanctions could be based. There can be no assurance, however, that in the future the Company will not be subject to sanctions as a result of violations of applicable labor laws by its contractors, or that such sanctions will not have
a material adverse effect on the Company. In addition, the Company’s customers require strict compliance by their apparel manufacturers, including the Company, with applicable labor laws. To that end, the Company is regularly inspected by some
of its major customers. There can be no assurance that the violation of applicable labor laws by one of the Company’s contractors will not have a material adverse effect on the Company’s relationship with its customers.
Except for the Company’s production agreement with the operator of the twill mill near Puebla, Mexico, the Company does not have any
long-term contracts with independent fabric suppliers. The loss of any of its major fabric suppliers could have a material adverse effect on the Company’s financial condition and results of operations until alternative arrangements are secured.
The impact of such a loss may be offset in part by the acquisition or development of fabric mills and production facilities in Mexico. See “ Acquisitions—Vertical Integration.”
Diversified Production Network
The Company believes
that it has the ability, through its production network, to operate on production schedules with lead times as short as 45 days. Typically, the Company’s specialty retail customers attempt to respond quickly to changing fashion trends and are
increasingly less willing to assume the risk that goods ordered on long lead times will be out of fashion when delivered. These retailers, including divisions of The Limited, frequently require production schedules with lead times ranging from 30 to
120 days. Although mass merchandisers, such as Walmart, are beginning to operate on shorter lead times, they are occasionally able to estimate their needs as much as six months to one year in advance for “program” business—basic
products that do not change in style significantly from season to season. The Company’s ability to operate on production schedules with a wide range of lead times helps it to meet its customers’ varying needs.
By allocating an order among different manufacturers, the Company seeks to fill the high-volume orders of its customers, while meeting their delivery
requirements. Upon receiving an order, the Company determines which of its suppliers and manufacturers (both owned and third party contractors) can best fill the order and meet the customer’s price, quality and delivery requirements. The
Company considers, among other things, the price charged by each manufacturer and the manufacturer’s available production capacity to complete the order, as well as the availability of quota for the product from various countries and the
manufacturer’s ability to produce goods on a timely basis subject to the customer’s quality specifications. The Company’s personnel also consider the
transportation lead times
required to deliver an order from a given manufacturer to the customer. In addition, some customers prefer not to carry excess inventory and therefore require that the Company stagger the delivery of products over several weeks.
8
International Sourcing
The Company conducts and monitors its international sourcing operations from its international offices. At December 31, 2001, the Company had offices in Hong Kong, Thailand and Mexico.
The staffs at these locations have extensive knowledge about and experience with sourcing and production in their respective regions, including purchasing, manufacturing and quality control. Several times each year, members of the Company’s
senior management, including local staff, visit and inspect the facilities and operations of the Company’s international suppliers and manufacturers.
Foreign manufacturing is subject to a number of risk factors, including, among other things, transportation delays and interruptions, political instability, expropriation, currency fluctuations and the imposition of
tariffs, import and export controls, other non-tariff barriers (including changes in the allocation of quotas), natural disasters and cultural issues. In addition to these risk factors, the Company faces additional risks arising from the uncertainty
regarding the future status of Hong Kong since resumption of Chinese sovereignty on July 1, 1997, the continuation of favorable trade relations between the U.S. and China (in particular the continuation of China’s Normal Trade Relations
(“NTR”) status for tariff purposes), and the continuation of economic reform programs in China which encourage private economic activity. Each of these factors could have a material adverse effect on the Company.
While the Company is in the process of establishing business relationships with manufacturers and suppliers located in countries other than Hong Kong or
China, the Company still primarily contracts with manufacturers and suppliers located primarily in Hong Kong and China for its international sourcing needs (not including Mexico), and currently expects that it will continue to do so for the
foreseeable future. Any significant disruption in the Company’s operations or its relationships with its manufacturers and suppliers located in Hong Kong or China could have a material adverse effect on the Company.
The Company commenced manufacturing basic denim and twill products through independent contractors in Mexico in the second quarter of 1997, and is
continuing to expand its use of manufacturing facilities in this region. During 1999 and 2000, the Company expanded its Mexico production capabilities, and acquired several Mexico manufacturing operations. The Company believes that after absorbing
the high startup costs, risks and overhead associated with the process, the further diversification of its international sourcing network by increasing the use of manufacturing facilities in Mexico along with its vertical integration strategy has
(i) reduced its cost of goods, (ii) enhanced the proximity of the Company’s sourcing operations to the Company’s customers and the Company’s executive offices, thereby improving delivery times and increasing management’s control,
and (iii) lessened certain risks of doing business in the Far East. See “Acquisitions—Vertical Integration.”
The Import Sourcing Process
As is customary in industry, the Company does not have any long-term contracts with
its manufacturers. During the manufacturing process, the Company’s quality control personnel visit each factory to inspect garments when the fabric is cut, as it is being sewn and as the garment is being finished. Daily information on the
status of each order is transmitted from the various manufacturing facilities to the Company’s offices in Hong Kong, Mexico and Los Angeles. The Company, in turn, keeps its customers apprised, often through daily telephone calls and frequent
written reports. These calls and reports include candid assessments of the progress of a customer’s order, including a discussion of the difficulties, if any, that have been encountered and the Company’s plans to rectify them.
The Company often arranges, on behalf of manufacturers, for the purchase of fabric from a single supplier. The Company has the
fabric shipped directly to the cutting factory and invoices the factory for the fabric. Generally, the factories pay the Company for the fabric with offsets against the price of the finished goods. For its longstanding program business, the Company
may purchase or produce fabric in advance of receiving the order, but in accordance with the customer’s specifications. By procuring fabric for an entire order from one source, the Company believes that production costs per garment are reduced
and customer specifications as to fabric quality and color can be better controlled.
The Manufacturing Process
The Company, through its Mexican subsidiaries, has become a vertically integrated apparel manufacturer. Its vertical integration has reduced product
costs, allowing the Company to better control production variances and making the Company more competitive in today’s business environment. In Mexico, the Company owns the assets including a denim plant along with cutting, sewing, washing,
finishing and warehousing facilities and equipment.
As in the case of the products sourced from independent contractors, the
manufacturing process begins with the merchandising department in the U.S. working closely with the customers and developing the product. Once the customer places an order for product, the manufacturing process begins. The Mexico and U.S. operations
share, via frame relay, the same computer system and communications. When an order is entered into the computer system, either electronically or manually, the Mexico operation schedules production for the appropriate facility. Based on the
production schedule, fabric is acquired from either the Company’s denim plant, the twill plant, which is owned by a related party, or an outside third party. The fabric is then cut using computerized as
well as manual methods. The cutwork is then transferred to the sewing facility where it is sewn into garments. Once sewn, the Company’s state-of-the-art washing facilities can perform the complex fashion washing
techniques prevalent in today’s denim market. The finishing facility trims and packs the garments for delivery to customers and, finally, the
9
finished garments are shipped to the customer by truck.
Distribution
Based on the Company’s world wide sourcing capability and in order to properly fulfill orders, the Company has tailored its distribution
system to meet the needs of the customer. Some customers, like Walmart and Kohl’s, use Electronic Data Interchange (“EDI”) to send orders and receive merchandise and invoices. The EDI distribution function has been centralized in the
Company’s Los Angeles corporate headquarters in order to expedite and control the flow of merchandise and electronic information, and insure that the special requirements of its EDI customers are met.
For orders sourced outside the United States and Mexico, the merchandise is shipped from the production facility by truck to a port where it is
consolidated and loaded on containerized vessels for ocean transport to the United States. For customers having West Coast and Mid West distribution centers, the merchandise is brought into the port of Los Angeles. After customs clearance, the
merchandise is shipped by truck to either the Los Angeles warehouse facility or an independent bonded warehouse in Ohio. Proximity to the customer’s distribution center is key to customer support. For merchandise produced in the Middle East and
destined for an East Coast customer distribution center, the port of entry is New York. After customs clearance, the merchandise is trucked to an independent public warehouse in New Jersey. The independent warehouses are instructed in writing by the
Los Angeles office when to ship the merchandise to the customer.
Backlog
At February 26, 2002, the Company had unfilled customer orders of approximately $160 million as compared to approximately $140 million at February 26, 2001. The Company believes that all
of its backlog of orders as of February 26 , 2002 will be filled within the second quarter of fiscal 2002. Backlog is based on the Company’s estimates derived from internal management reports. The amount of unfilled orders at a particular time
is affected by a number of factors, including the scheduling of manufacturing and shipping of the product, which in some instances, depends on the customer’s requirements. Accordingly, a comparison of unfilled orders from period to period is
not necessarily meaningful and may not be indicative of eventual annual bookings or actual shipments. The Company’s experience has been that the cancellations, rejections or returns of orders have not materially reduced the amount of sales
realized from its backlog.
Import Restrictions
Quotas
The Company imported approximately 91% of its products (on an FOB Basis) in 2001,
including approximately 52% imported from Mexico. In the case of Mexico, imports are subject to special rules under the North American Free Trade Agreement (“NAFTA”). While certain apparel imports may enter free of duty and of quota
restrictions, other apparel form Mexico remains subject to import duties and quantitative restrictions, but not to the same extent that imports are restricted from countries subject to bilateral textile agreements. Most of the remaining products
imported by the Company were manufactured in a foreign jurisdictions (e.g., Hong Kong and China) with which the U.S. has entered into bilateral textile agreements that, among other restrictions, imposes specific quantitative restraints, or quotas,
on the amounts of various categories of textiles and apparel that can be imported into the U.S. from that foreign jurisdiction during a particular quota year. These bilateral textile agreements also include provisions that allow the U.S. to impose
quotas on categories of textiles and apparel not previously under quota or to charge (i.e., impose deductions upon) the quotas for origin-related violations. Accordingly, the Company’s operations are subject to the restrictions imposed by these
bilateral agreements.
Through the early 1990s, the Arrangement Regarding International Trade in Textiles, known as the
Multifiber Arrangement (“MFA”), provided the international framework for the global regulation of the textile and apparel trade. Pursuant to the MFA, the U.S. entered into these bilateral textile agreements for the purpose of imposing
quota on the imports of textiles and apparel. However, under The Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations (the “Uruguay Round Agreement”) which was agreed to on a preliminary basis in December
1993 by 117 member nations of the General Agreement on Tariffs and Trade (“GATT”), and enacted into U.S. domestic law in December 1994 under the Uruguay Round Agreements Act (the “URAA”), the MFA has been replaced by the World
Trade Organization Agreement on Textiles and Clothing (the “ATC”). Under the ATC, quota implemented under the MFA on the importation of textiles and apparel from countries that are members of the World Trade Organization (the
“WTO”, which is the successor organization to GATT under the Uruguay Round Agreement) will be phased out over a ten-year period that commenced on January 1, 1995 (with the U.S. phasing out quota on most of the sensitive categories at the
end of this period). However, a member country may, under the Uruguay Round Agreement on Safeguards, re-impose quotas on textiles and apparel under certain specified conditions.
China is a signatory to the MFA, but was not a member of GATT and, therefore, was not a party to the Uruguay Round Agreement. China acceded to the WTO on December 11, 2001 and as of
2005, quota on Chinese origin apparel will be phased out, along with quota on apparel from other WTO countries. Because China is now a member of the WTO, its exports of textiles and
apparel to
the U.S. will be covered by the ATC. See “Item 7. Management’s Discussion and Analysis of Financial Conduct of Results of Operations.”
In 2001, products imported using Hong Kong quota accounted for approximately 26% of the Company’s net sales (on an FOB Basis). Under the U.S. and Hong Kong rules of origin currently in effect, the Company
conducts certain non-origin conferring manufacturing operations in
10
China for a significant portion of the products it imports using Hong Kong quota.
Duties and Tariffs
Merchandise imported by the Company
into the U.S. is subject to rates of duty established by U.S. statute. In general, these rates vary, depending on the type of product, from 3.11% to 42.77% of the appraised value of the product. In addition to duties, in the ordinary course of its
business, the Company, from time to time, may become subject to claims by the U.S. Customs Service for penalties, liquidated damages claims and other charges relating to import activities. Similarly, from time to time, the Company may be entitled to
refunds from the U.S. Customs Service due to the overpayment of duties.
Products imported from China into the U.S. receive the
same preferential tariff treatment accorded goods from countries granted NTR status. With China becoming a member of the WTO in December 2001, this status is now permanent.
The Company’s continued ability to source products from foreign jurisdictions may be adversely affected by additional bilateral and multilateral agreements, unilateral trade
restrictions, changes in trade policy, significant decreases in import quotas, embargoes, the disruption of trade from exporting countries as a result of political instability or the imposition of additional duties, taxes and other charges or
restrictions on imports.
Competition
There is intense competition in the sectors of the apparel industry in which the Company participates. The Company competes with many other manufacturers, many of which are larger and have greater resources than the
Company. The Company also faces competition from its own customers and potential customers, many of which have established, or may establish, their own internal product development and sourcing capabilities. For example, The Limited’s wholly
owned subsidiary, Mast Industries, Inc., competes with the Company and other private label apparel suppliers for orders from divisions of The Limited. The Company believes that it competes favorably on the basis of design and sample capabilities,
the quality and value of its products, price, the production flexibility that it enjoys as a result of its sourcing network and vertical integration initiatives and the long-term customer relationships it has developed.
Employees
At December 31, 2001, the Company had
approximately 150 full-time employees in the United States, 5,800 in Mexico (which includes all manufacturing labor to produce fabric, and cut, sew, trim, wash and pack finished garments), 120 in Hong Kong, 130 in China and five in Thailand. The
Company considers its relations with its employees to be good.
Item 2. PROPERTIES
The Company currently conducts its operations from 21 facilities, 19 of which are leased. The Company’s executive offices are located at 3151 East
Washington Boulevard, Los Angeles, California 90023. The Company leases this facility for an annual rent of approximately $650,000 from a California corporation which is owned by Mr. Guez and Mr. Kay. The base rent is subject to increase on January
1, 2002 based on the Consumer Price Index. The lease for this facility, under which the Company is responsible for the payment of taxes, utilities and insurance, terminates in December 2003 subject to a renewal option for five additional years. The
Company also leases 146,000 square feet of warehouse space in South Gate, California for an annual rent of $339,630 from an unrelated third party. In Bentonville, Arkansas the Company opened an administrative office during 2000 to handle business
related to Walmart. This facility is leased until 2002 for approximately 2,000 square feet at an annual rental of approximately $32,000. In Columbus, Ohio the Company opened an administrative office during 1999 to handle business related to The
Limited. This facility is leased until 2004, for approximately 6,000 square feet at an annual rental of approximately $75,000. The Company leases approximately 36,000 square feet of warehouse and office space in Hong Kong for an annual rent of
$674,000 from a Hong Kong corporation that is owned by Mr. Guez and Mr. Kay. The base rent is subject to increase every two years in accordance with market rates. The lease for this facility, under which the Company is responsible for the payment of
taxes, utilities and insurance, expires in June 2004. The Company leases approximately 50,000 square feet, which it uses to operate its sample-making facility in Giang Dong Province, China. The lease for this facility terminates in 2004 and the
annual rent is $60,000. The Company also leases office space in Bangkok, Thailand to house the small staff it maintains in these nations. The Company also owns two facilities in Ruleville, Mississippi with a aggregate of 70,000 square feet. The
Company also leases one location in New York City for showroom and sales operations. The square footage of this location is approximately 9,000 with an annual base rent of approximately $350,000. This lease expires in 2010. Through its subsidiary,
Grupo Famian, the Company leases seven sewing and washing plants in and around Tehuacan, Mexico from the former owners of Grupo Famian. These leases terminate in nine years and have a combined annual rental of $314,000. See “Note 8 to Notes to
Consolidated Financial Statements” for additional information with respect to these facilities.
On April 18, 1999, the
Company acquired a 250,000 square foot denim mill in Puebla, Mexico with an annual capacity of approximately 18 million meters of denim. In addition, the Company leases various ancillary facilities near Puebla, Mexico for an annual rent of $600,000.
Such lease covers 75 % of the facility. The facility is adjacent to the twill mill which the Company has the option to acquire. On March 29, 2001, the Company completed the acquisition of a sewing facility in Ajalpan, Mexico. This facility
contains 98,702 square feet. See “Acquisitions—Vertical Integration.”
11
The Company believes that all of its existing facilities are well maintained, in good operating condition and adequate to meet its current and foreseeable needs.
Item 3. LEGAL PROCEEDINGS
The Company’s former Chief Information Officer filed a complaint against the Company and its Chairman, Gerard Guez, on September 12, 2001 in Los Angeles County Superior Court which seeks punitive and unspecified monetary damages. The
complaint alleges (1) wrongful termination for retaliation; (2) breach of written employment contract; (3) fraud (concerning alleged misrepresentations to convince the former CIO to become an employee); and (4) quantum meruit (claiming he should
receive monies for the value of his services). The Defendants’ demurrer to dismiss the fraud and quantum meruit claims was sustained in Defendants’ favor without leave to amend. As a consequence, all claims against Mr. Guez have been
dismissed. The Company believes that it has valid defenses to all claims set forth in the plaintiff’s complaint and intends to vigorously defend against such claims. It is management’s opinion that the final resolution of these matters
will not have a material adverse effect on the Company’s financial position or results of operations.
On December 4, 2001,
the former President of Jane Doe International, LLC (“JDI”), filed a demand for arbitration with the American Arbitration Association asserting a claim against the Company, its subsidiary and JDI for breach of employment contract arising
out of his termination from JDI. The demand seeks alleged damages of $585,000 in unpaid salary, $725,815 plus the “present value” of $3,074,000 in unpaid bonuses; $24,000 in unreimbursed expenses; $2,000,000 in punitive damages;
unspecified attorney’s fees; and unspecified consequential and other damages. The Company believes that the defendants have valid defenses to the arbitration claims and intends to vigorously defend against them. It is management’s opinion
that the final resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operation.
The Company purchased a very large piece of equipment from Brugman Machinefabriek, N.V. (“Brugman”) for installation at its subsidiary in Mexico. The total purchase price was $3,100,000. The equipment did
not work as represented or warranted and there were significant discussions with the seller about modifications and improvements. Before these modifications and improvements could be completed, Brugman filed for bankruptcy in The Netherlands at the
end of November 2001. The payment obligations were evidenced by a series of ten drafts drawn upon, and accepted by, the Company. Half of the drafts were paid by the Company. The draft due on November 15, 2001 in the amount of $300,390 was not paid
because of the pending dispute with Brugman. Demands for payment have been made on the Company by Fortis Bank, N.V. in The Netherlands, which claims to be the owner of the drafts free of any of the defect claims. Additionally, the payment
obligations of the Company pursuant to the drafts are claimed to have been insured by Nederlandsche Credietverzekering Maatschappij N.V. (“NCM”). The Company has refused the payment demands. Additionally, on February 27, 2002, the Company
and Tarrant Mexico filed an action in the Superior Court for the State of California, County of Los Angeles, for declaratory relief seeking a declaration that because of the defects in the equipment, neither the Company nor Tarrant Mexico, a
subsidiary of the Company, owes any money to Fortis Bank or NCM under any of the remaining drafts accepted by the Company evidencing the purchase obligation. The complaint is in the process of being served on the defendants and no answer has been
received or filed. The Company intends to prosecute the case vigorously.
At the same time, the Company has filed a claim with
the Receiver for Brugman in the amount of the damages it has sustained and will sustain by reason of the failure of the equipment to perform as represented or warranted. At this time, it is not possible to know or estimate how much, if anything will
be distributed to the Company by the Receiver on account of this claim.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of fiscal 2001.
12
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NASDAQ Listing
The Company’s Common Stock began trading on The Nasdaq Stock Market’s National Market (“NASDAQ”) under
the symbol TAGS on July 24, 1995.
The following table sets forth, for the periods indicated, the range of high and low sale
prices for the Company’s Common Stock as reported by Nasdaq.
| |
|
Low
|
|
High
|
| 2000 |
|
|
|
|
|
| First Quarter |
|
$ |
5.875 |
|
10.250 |
| Second Quarter |
|
|
6.250 |
|
9.125 |
| Third Quarter |
|
|
5.375 |
|
8.875 |
| Fourth Quarter |
|
|
2.063 |
|
7.500 |
| 2001 |
|
|
|
|
|
| First Quarter |
|
|
3.063 |
|
6.000 |
| Second Quarter |
|
|
4.500 |
|
7.120 |
| Third Quarter |
|
|
3.250 |
|
6.620 |
| Fourth Quarter |
|
|
2.760 |
|
5.480 |
| 2002 |
|
|
|
|
|
| First Quarter (through February 28) |
|
|
4.300 |
|
5.600 |
On March 1, 2002, the last reported sale price of the Company’s Common Stock
as reported on Nasdaq was $4.900. Shareholders are urged to obtain current market quotations for the Common Stock. As of March 1, 2002, there were 23 shareholders of record of the Company. However, proxy data indicates that there are over 1,243
beneficial owners of shares of the Common Stock.
Dividend Policy
The Company intends to retain any future earnings for use in its business and, therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future. The
declaration and payment of any cash dividends in the future will depend upon the Company’s earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors. In addition, the Company’s credit
agreement prohibits the payment of dividends during the term of the agreement. See “Note 6 to Notes to Consolidated Financial Statements.”
13
Item 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by, and should be read in conjunction with, the other information and financial statements, including the notes
thereto, appearing elsewhere herein.
| |
|
Year Ended December 31,
|
|
| |
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
| |
|
(In thousands, except per share data) |
|
| Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
260,092 |
|
|
$ |
378,155 |
|
|
$ |
395,341 |
|
|
$ |
395,169 |
|
|
$ |
330,253 |
|
| Cost of sales |
|
|
220,996 |
|
|
|
307,077 |
|
|
|
329,131 |
|
|
|
332,333 |
|
|
|
277,525 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
39,097 |
|
|
|
71,078 |
|
|
|
66,210 |
|
|
|
62,836 |
|
|
|
52,728 |
|
| Selling and distribution expenses |
|
|
8,499 |
|
|
|
11,274 |
|
|
|
13,692 |
|
|
|
17,580 |
|
|
|
14,345 |
|
| General and administrative expenses |
|
|
13,518 |
|
|
|
19,896 |
|
|
|
25,259 |
|
|
|
40,327 |
|
|
|
33,136 |
|
| Amortization of intangibles (1) |
|
|
— |
|
|
|
1,337 |
|
|
|
2,312 |
|
|
|
2,840 |
|
|
|
3,317 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from operations |
|
|
17,080 |
|
|
|