SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. _____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Soliciting Material Under Rule
[_] Confidential, For Use of the 14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
TARRANT APPAREL GROUP
================================================================================
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
________________________________________________________________________________
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[_] Fee paid previously with preliminary materials:
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[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
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4) Date Filed:
________________________________________________________________________________
TARRANT APPAREL GROUP
-----------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
-----------------------------------------------------
TIME.................................. 10:00 a.m. Pacific Time on
Wednesday, May 26, 2004
PLACE................................. Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
ITEMS OF BUSINESS..................... (1) To elect five Class II
members of the Board of
Directors for two-year
terms.
(2) To amend the Company's
Employee Incentive Plan
to increase from 100,000
to 2,000,000 the number
of shares of the
Company's Common Stock
which may be granted to
any individual in a
single year.
(3) To ratify the
appointment of Grant
Thornton LLP as the
Company's independent
public accountants for
the year ended December
31, 2004.
(4) To transact such other
business as may properly
come before the Meeting
and any adjournment or
postponement.
RECORD DATE........................... You can vote if at the close of
business on March 29, 2004, you
were a shareholder of the
Company.
PROXY VOTING.......................... All shareholders are cordially
invited to attend the Annual
Meeting in person. However, to
ensure your representation at the
Annual Meeting, you are urged to
vote promptly by signing and
returning the enclosed Proxy
card.
April 20, 2004 /S/ GERARD GUEZ
-----------------------------------
GERARD GUEZ, CHAIRMAN OF THE BOARD
TARRANT APPAREL GROUP
3151 EAST WASHINGTON BOULEVARD
LOS ANGELES, CALIFORNIA 90023
(323) 780-8250
PROXY STATEMENT
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These Proxy materials are delivered in connection with the solicitation by the
Board of Directors of Tarrant Apparel Group, a California corporation
("Tarrant," the "Company", "we", or "us"), of Proxies to be voted at our 2004
Annual Meeting of Shareholders and at any adjournments or postponements.
You are invited to attend our Annual Meeting of Shareholders on Wednesday, May
26, 2004, beginning at 10:00 a.m. Pacific Time. The meeting will be held at our
corporate headquarters, 3151 East Washington Boulevard, Los Angeles, California,
90023.
It is anticipated that the 2003 Annual Report and this Proxy Statement and the
accompanying Proxy will be mailed to shareholders on or about April 26, 2004.
SHAREHOLDERS ENTITLED TO VOTE. Holders of our common stock at the close of
business on March 29, 2004 are entitled to receive this notice and to vote their
shares at the Annual Meeting. Common stock is the only outstanding class of
securities of the Company entitled to vote at the Annual Meeting. As of March
29, 2004, there were 28,814,763 shares of common stock outstanding.
PROXIES. Your vote is important. If your shares are registered in your name, you
are a shareholder of record. If your shares are in the name of your broker or
bank, your shares are held in street name. We encourage you to vote by Proxy so
that your shares will be represented and voted at the meeting even if you cannot
attend. All shareholders can vote by written Proxy card. Your submission of the
enclosed Proxy will not limit your right to vote at the Annual Meeting if you
later decide to attend in person. IF YOUR SHARES ARE HELD IN STREET NAME, YOU
MUST OBTAIN A PROXY, EXECUTED IN YOUR FAVOR, FROM THE HOLDER OF RECORD IN ORDER
TO BE ABLE TO VOTE AT THE meeting. If you are a shareholder of record, you may
revoke your Proxy at any time before the meeting either by filing with the
Secretary of the Company, at its principal executive offices, a written notice
of revocation or a duly executed Proxy bearing a later date, or by attending the
Annual Meeting and expressing a desire to vote your shares in person. All shares
entitled to vote and represented by properly executed Proxies received prior to
the Annual Meeting, and not revoked, will be voted at the Annual Meeting in
accordance with the instructions indicated on those Proxies. If no instructions
are indicated on a properly executed Proxy, the shares represented by that Proxy
will be voted as recommended by the Board of Directors.
QUORUM. The presence, in person or by Proxy, of a majority of the votes entitled
to be cast by the shareholders entitled to vote at the Annual Meeting is
necessary to constitute a quorum. Abstentions and broker non-votes will be
included in the number of shares present at the Annual Meeting for determining
the presence of a quorum. Broker non-votes occur when a broker holding customer
securities in street name has not received voting instructions from the customer
on certain non-routine matters and, therefore, is barred by the rules of the
applicable securities exchange from exercising discretionary authority to vote
those securities.
VOTING. Each share of our common stock is entitled to one vote on each matter
properly brought before the meeting. Abstentions will be counted toward the
tabulation of votes cast on proposals submitted to shareholders and will have
the same effect as negative votes, while broker non-votes will not be counted as
votes cast for or against such matters.
ELECTION OF DIRECTORS. The Company's Restated Articles of Incorporation does not
authorize cumulative voting. In the election of directors, the five candidates
receiving the highest number of votes at the Annual Meeting will be elected. If
any nominee is unable or unwilling to serve as a director at the time of the
Annual Meeting, the Proxies will be voted for such other nominee(s) as shall be
designated by the current Board of Directors to fill any vacancy. The Company
has no reason to believe that any nominee will be unable or unwilling to serve
if elected as a director.
AMENDMENT OF EMPLOYEE INCENTIVE PLAN. The approval of the amendment of the
Company's Employee Incentive Plan, increasing from 100,000 to 2,000,000 the
number of shares of the Company's Common Stock which may be
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granted to any individual in a single year, will require the affirmative vote of
a majority of the shares of common stock present or represented and entitled to
vote at the Annual Meeting.
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS. The ratification of the
appointment of Grant Thornton LLP as our independent public accountants for the
year ending December 31, 2004 will require the affirmative vote of a majority of
the shares of common stock present or represented and entitled to vote at the
Annual Meeting.
OTHER MATTERS. At the date this Proxy Statement went to press, we do not know of
any other matter to be raised at the Annual Meeting.
In the event a shareholder proposal was not submitted to the Company prior to
March 11, 2004, the enclosed Proxy will confer authority on the Proxyholders to
vote the shares in accordance with their best judgment and discretion if the
proposal is presented at the Meeting. As of the date hereof, no shareholder
proposal has been submitted to the Company, and management is not aware of any
other matters to be presented for action at the Meeting. However, if any other
matters properly come before the Meeting, the Proxies solicited hereby will be
voted by the Proxyholders in accordance with the recommendations of the Board of
Directors. Such authorization includes authority to appoint a substitute nominee
for any Board of Directors' nominee identified herein where death, illness or
other circumstance arises which prevents such nominee from serving in such
position and to vote such Proxy for such substitute nominee.
3
ITEM 1: ELECTION OF DIRECTORS
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Item 1 is the election of five Class II members of the Board of Directors. The
Restated Articles of Incorporation of the Company provides that, commencing with
the 1998 annual meeting, the Board of Directors shall be divided into two
classes which are elected for staggered two year terms. One of the two classes
is elected each year to succeed the directors whose terms are expiring. The
Restated Bylaws of the Company provides that the number of directors of the
Company shall be fixed from time to time exclusively by the Board of Directors,
but shall not be less than six nor more than eleven. The Board of Directors has
fixed the number of directors at nine.
The Class II directors whose terms expire at the 2004 Annual Meeting are Gerard
Guez, Patrick Chow, Todd Kay Joseph Mizrachi and Larry Russ. The Board of
Directors, upon recommendation of the independent directors, has nominated
Gerard Guez, Patrick Chow, Todd Kay Joseph Mizrachi and Larry Russ to serve as
Class II directors for terms expiring in 2006. The Class I directors are serving
terms that expire in 2005.
Unless otherwise instructed, the Proxy holders will vote the Proxies received by
them for the nominees named below. If any nominee is unwilling to serve as a
director at the time of the Annual Meeting, the Proxies will be voted for such
other nominee(s) as shall be designated by the then current Board of Directors
to fill any vacancy. The Company has no reason to believe that any nominee will
be unable or unwilling to serve if elected as a director.
The Board of Directors proposes the election of the following nominees as Class
II directors:
Gerard Guez
Todd Kay
Patrick Chow
Joseph Mizrachi
Larry Russ
If elected, the foregoing five nominees are expected to serve until the 2006
Annual Meeting of Shareholders. The five nominees for election as Class II
directors at the Annual Meeting who receive the highest number of affirmative
votes will be elected.
The principal occupation and certain other information about the nominees, other
directors whose terms of office continue after the Annual Meeting and certain
executive officers are set forth on the following pages.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
NOMINEES LISTED ABOVE.
CLASS II DIRECTOR NOMINEES: TERMS EXPIRING IN 2006
GERARD GUEZ Gerard Guez founded the Company in 1988 and has
served as its Chairman of the Board since its
inception and as Chief Executive Officer from
inception until 2001. Mr. Guez was re-appointed as
Chief Executive Officer in March 2003. Mr. Guez also
founded Tarrant Company Limited ("Tarrant HK"), the
Company's Hong Kong subsidiary, in 1985, and he has
served as its Chairman since inception and Chief
Executive Officer from 1985 through October 2001.
Prior to founding Tarrant HK, Mr. Guez served as the
President of Sasson Jeans, L.A., Inc., which was a
manufacturer and distributor of denim apparel under
the "Sasson" license.
DIRECTOR SINCE: 1988 AGE: 48
MEMBER: EXECUTIVE COMMITTEE
TODD KAY Todd Kay has served as President of the Company from
1988 to September 1999 and from March 2000 to August
2003, and as Vice Chairman since September 7, 1999.
Mr. Kay has also served as a director of the Company
since 1988 and as a director of Tarrant HK since
1986. Prior to joining the Company, Mr. Kay was a
sales manager for Sasson Jeans, L.A., Inc. from 1979
to 1980 and served as President of JAG Beverly
Hills, Inc., an apparel manufacturer, from 1980 to
1985.
DIRECTOR SINCE: 1988 AGE: 47
MEMBER: EXECUTIVE COMMITTEE
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PATRICK CHOW Patrick Chow joined the Company as Treasurer in
November 1998 and was promoted to Chief Financial
Officer and elected as a director on January 7,
2002. From 1996 to 1998, he served as General
Manager of Fortune Chart Consultants Limited in Hong
Kong where he provided financial consulting services
to corporate clients. Mr. Chow has a Bachelor of
Arts degree from the University of Hong Kong and two
diplomas in Banking and Financial Studies from the
Chartered Institute of Bankers United Kingdom.
DIRECTOR SINCE: 2002 AGE: 50
MEMBER: EXECUTIVE COMMITTEE
JOSEPH MIZRACHI Joseph Mizrachi has served as a director of the
Company since June 6, 2001. Mr. Mizrachi is
currently engaged in capital funding to finance
buyouts of small and medium size companies. He is a
Registered Investment Advisor and a principal and
President of PAZ Securities, Inc., a registered
securities broker dealer. He is also the Chairman of
the Board of Midwest Properties Management, Inc.,
which is engaged in the management of real estate,
and is a member of the board of directors of
American Realty Investors Inc. He has held numerous
executive management positions with companies
specializing in all aspects of finance, insurance
and real estate, as well as providing administration
in estate and tax analysis. Mr. Mizrachi received an
undergraduate degree in Economics and Political
Science in 1968 and a Master's degree in Business
Administration in Finance and Marketing in 1971,
both from the Hebrew University in Jerusalem,
Israel. He became a member of the American Society
of Chartered Life Underwriter (CLU) in 1973 and a
Chartered Financial Consultant (CFC) in 1982. In
1978, he received another Master's degree in
Business Administration and Financial Counseling
(MFS) from The American college in Bryn Mawr,
Pennsylvania.
DIRECTOR SINCE: 2001 AGE: 57
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
LARRY RUSS Larry Russ has served as a director of the company
since May 2003. Mr. Russ is currently engaged as the
managing partner of the law firm of Russ, August &
Kabat. Prior to joining Russ, August & Kabat, Mr.
Russ was a partner in the law firm of Haines & Russ
from 1981 to 1987. Mr. Russ received his B.A. degree
from the University of California, Berkeley in 1975
and his J.D. degree from the University of
California, Hastings in 1978.
DIRECTOR SINCE: 2003 AGE: 51
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
CLASS I DIRECTORS: TERMS EXPIRING IN 2005
BARRY AVED Barry Aved has served as a director of the Company
since December 3, 1996 and as President of the
Company from September 7, 1999 until March 24, 2000
and from September 1, 2003 to present. From 1991
until 1995, Mr. Aved was the President of Lerner New
York, a division of The Limited, Inc.
DIRECTOR SINCE: 1996 AGE: 61
MEMBER: EXECUTIVE COMMITTEE
STEPHANE FAROUZE Stephane Farouze has served as a director of the
Company since May 2003. Mr. Farouze is currently a
Managing Director of Paradigm Global Advisors. From
March 2000 to November 2000, Mr. Farouze was
employed as the Global Head of Sales and
Restructuring of Societe General Asset Management.
From March 1998 to February 2000, Mr. Farouze was
Head of Foreign Exchanges for the Italian Market for
BNP. Mr. Farouze received a Bachelor of Science in
Applied Arts and Sciences and a Business
Administration (Finance) degree from San Diego State
University in 1992.
DIRECTOR SINCE: 2003 AGE: 35
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
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MILTON KOFFMAN Milton Koffman was elected as a director of the
Company on November 28, 2001. Mr. Koffman is
currently the Chairman of the Board for New Valu,
Inc., a multi- faceted provider of investment
capital, commercial loans and other financial
services for various operating companies.
Additionally, he is a founder and director of Global
Credit Services, a leading provider of business
information and analysis for manufacturing,
financial, lending and real estate companies. Mr.
Koffman has previously served on the boards of IEC
Electronics, Jayark Corporation, Sattlers Department
Stores, Walter Reed Theaters, Scoreboard, Inc. and
the Gruen Watch Company. Mr. Koffman received a B.S.
from Ohio State University in 1945.
DIRECTOR SINCE: 2001 AGE: 80
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
MITCHELL SIMBAL Mitchell Simbal has served as a director of the
Company since June 6, 2001. Mr. Simbal is currently
Vice President of Retail Operations for Park Place
Entertainment, which includes Caesars Palace, Paris
Las Vegas, Bally's and Flamingo Hilton. Mr. Simbal
has a B.S. in accounting from the University of
Hartford.
DIRECTOR SINCE: 2001 AGE: 50
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
OTHER EXECUTIVE OFFICERS
KAREN WASSERMAN Karen Wasserman joined the Company in 1988, and
until 1994, she served as a Vice President of the
Company. In 1994, Ms. Wasserman was named Executive
Vice President, General Merchandising Manager and a
director of the Company. Ms. Wasserman resigned as a
director of the Company in May 2003. In her current
position, she directs and manages the Company's
design teams and merchandisers and is responsible
for the Company's research of fashion themes and
development of product samples. Ms. Wasserman holds
a Bachelor of Fine Arts degree from Syracuse
University.
AGE: 51
CHARLES GHAILIAN Charles Ghailian joined the Company in March 1999
upon acquisition of certain assets of CMG, Inc.,
where he served as Chief Executive Officer since
1988. CMG, Inc. designed, produced and sold private
label and CHAZZZ branded woven and knit apparel for
women, children and men. He was named President of
Chazzz, a Division of Tag Mex, Inc., a wholly-owned
subsidiary of the Company. In April 2002, Mr.
Ghailian was appointed President of Tag Mex, Inc. In
addition to managing the day-to-day operations of
Tag Mex, Inc., Mr. Ghailian oversees developments
with certain customers including Sears, J.C. Penny
and Mervyn's.
AGE: 51
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS
MEETINGS AND COMMITTEES. The Board of Directors held 12 meetings during fiscal
2003. The Board of Directors has an Audit Committee, Compensation Committee and
Executive Committee. Holders of the Company's securities can send communications
to the Board of Directors via mail or telephone to the Secretary at the
Company's principal executive offices. While directors generally attend annual
meetings, the Company has not established a specific policy with respect to
members of the Board of Directors attending annual meetings.
The Audit Committee currently consists of Messrs. Farouze, Koffman, Mizrachi,
Russ and Simbal, all of whom are considered "independent" under Rule
4200(a)(15)of the National Association of Securities Dealers listing standards.
The Board of Directors has determined that Mitchell Simbal is an audit committee
financial expert, as defined in Item 401(h)(2) of Regulation S-K. The primary
purposes of the Audit Committee are (i) to review the scope of the audit and all
non-audit services to be performed by the Company's independent auditors and the
fees incurred by the
6
Company in connection therewith, (ii) to review the results of such audit,
including the independent accountants' opinion and letter of comment to
management and management's response thereto, (iii) to review with the Company's
independent accountants the Company's internal accounting principles, policies
and practices and financial reporting, (iv) to engage the Company's independent
auditors and (v) to review the Company's quarterly and annual financial
statements prior to public issuance. The role and responsibilities of the Audit
Committee are more fully set forth in a written Charter adopted by the Board of
Directors and attached to this Proxy Statement as Appendix A. The Audit
Committee held 6 meetings during fiscal 2003.
The Compensation Committee currently consists of Messrs. Farouze, Koffman,
Mizrachi, Russ and Simbal. The Compensation Committee is responsible for
considering and making recommendations to the Board of Directors regarding
executive compensation and is responsible for administering the Company's stock
option and executive incentive compensation plans. The Compensation Committee
held 6 meetings during fiscal 2003.
The Executive Committee is chaired by Mr. Guez, and currently consists of
Messrs. Aved, Guez, Kay and Chow. Subject to the limitations contained in the
California General Corporation Law, the Executive Committee has been granted all
of the authority of the Board of Directors.
DIRECTOR NOMINATIONS. The Company does not currently have a standing nominating
committee. The Board of Directors has adopted resolutions requiring that all
director nominations be approved or recommended for approval by a majority of
the independent directors (as defined by Nasdaq), voting in executive session
(the "Independent Board Members").
The Independent Board Members review those Board members who are candidates for
re-election to our Board of Directors, and make the determination to nominate a
candidate who is a current member of the Board of Directors for re-election for
the next two-year term. The nominating committee's methods for identifying
candidates for election to the Board of Directors (other than those proposed by
our shareholders, as discussed below) include the solicitation of ideas for
possible candidates from a number of sources--members of the Board of Directors;
our executives; individuals personally known to the members of the Board of
Directors; and other research. We may also from time to time retain one or more
third-party search firms to identify suitable candidates. The Independent Board
Members also nominate outside candidates for inclusion on the Board of
Directors.
A Tarrant shareholder may nominate one or more persons for election as a
director at an annual meeting of shareholders if the shareholder complies with
the notice, information and consent provisions contained in our Bylaws. In
addition, the notice must be made in writing and include (i) the qualifications
of the proposed nominee to serve on the Board of Directors, (ii) the principal
occupations and employment of the proposed nominee during the past five years,
(iii) directorships currently held by the proposed nominee and (iv) a statement
that the proposed nominee has consented to the nomination. The recommendation
should be addressed to our Secretary.
Among other matters, the Independent Board Members:
o Review the desired experience, mix of skills and other
qualities to assure appropriate Board composition, taking into
account the current Board members and the specific needs of
the Company and the Board;
o Conduct candidate searches, interview prospective candidates
and conduct programs to introduce candidates to the Company,
its management and operations, and confirm the appropriate
level of interest of such candidates;
o Recommend to the Board qualified candidates who bring the
background, knowledge, experience, independence, skill sets
and expertise that would strengthen and increase the diversity
of the Board;
o Conduct appropriate inquiries into the background and
qualifications of potential nominees; and
o Review the suitability for continued service as a director of
each Board member when he or she has a significant change in
status, such as an employment change, and recommend whether or
not such director should be re-nominated.
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Based on the foregoing, the Independent Board Members recommended the nomination
of Gerard Guez, Todd Kay, Patrick Chow, Joseph Mizrachi and Larry Russ for
re-election as Class II directors to the Board of Directors, subject to
shareholder approval, for a two-year term ending on the date of the 2006 Annual
Meeting.
All directors attended 75% or more of all the meetings of the Board of Directors
and those committees on which he or she served in fiscal 2003.
DIRECTORS' COMPENSATION. The Company pays to each director who is not employed
by the Company $4,000 per month for attending meetings of the Board of Directors
and committees of the Board of Directors, and reimburses such person for all
expenses incurred by him in his capacity as a director of the Company. In
addition, the Chairman of each committee receives $2,000 per year for such
service. The Board of Directors may modify such compensation in the future. In
addition, each director not employed by the Company, upon joining the Board of
Directors, will receive an option to purchase 20,000 shares of our common stock
and, thereafter, an option to purchase 4,000 shares of common stock on the date
of each annual meeting at which such person is reelected to serve as a director.
Such options will have an exercise price equal to the fair market value of such
shares on the date of grant, become exercisable so long as the recipient
continues to serve as a director in four equal annual installments commencing on
the first anniversary of the grant thereof, and expire on the tenth anniversary
of the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The Compensation
Committee of our Board of Directors currently consists of Messrs. Farouze,
Koffman, Mizrachi, Russ and Simbal. None of these individuals was an officer or
employee of the Company at any time during fiscal 2003. No current executive
officer of the Company has served as a member of the board of directors or
compensation committee of any entity for which a member of our Board of
Directors or Compensation Committee has served as an executive officer.
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ITEM 2: AMENDMENT OF EMPLOYEE INCENTIVE PLAN
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Item 2 is the amendment of the Company's Employee Incentive Plan to increase
from 100,000 to 2,000,000 the number of shares of the Company's Common Stock
which may be granted to any individual in a single year under the Employee
Incentive Plan. The proposal to amend the Employee Incentive Plan requires the
affirmative vote of a majority of the shares of Common Stock represented and
entitled to vote at the Meeting. A copy of the Employee Incentive Plan,
including the proposed amendment, is attached to this Proxy Statement as
Appendix B.
Pursuant to the provisions of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), and the regulations promulgated thereunder (as
discussed below), the 1996 Plan must provide a limit with respect to the number
of shares underlying stock options or other rights that may be granted by the
Company to any individual in a specified period. Currently, the maximum number
of shares of Common Stock with respect to which options or rights may be granted
under the Employee Incentive Plan to any individual during any fiscal year is
100,000, subject to certain adjustments in the event of a stock split,
recapitalization or similar event. The Board of Directors has proposed that the
per individual annual limitation be increased to 2,000,000 shares of Common
Stock.
The Employee Incentive Plan is designed to assist the Company in attracting,
retaining and compensating highly qualified individuals and to provide them with
a proprietary interest in the Company's Common Stock. For a summary of the
principal features of the Employee Incentive Plan, please see the description
below entitled "Description of the Plan."
SECTION 162(M) LIMITATIONS. The following is intended only as a brief summary of
the federal income tax rules relevant to the grant of options to certain
officers. These rules are highly technical and subject to change in the future.
Section 162(m) of the Code, generally disallows the deduction of compensation
income in excess of $1,000,000 paid to a "covered employee." Thus, if an officer
remains a "covered employee," meaning either the Chief Executive Officer or one
of the other four most highly compensated employees of the Company whose
compensation is required to be disclosed under the Securities Exchange Act of
1934, and he or she were to exercise his or her options such that he or she
receives more than $1,000,000 in compensation in any given taxable year, the
Company would not be allowed to deduct that portion of such officer's otherwise
deductible compensation that exceeded $1,000,000.
Section 162(m) of the Code does not apply, however, to compensation that meets
the following four criteria: (1) the compensation is based solely on the
attainment of performance goals; (2) the performance goals are determined by a
compensation committee of the Board of Directors comprised solely of two or more
outside directors; (3) the material terms of the compensation are disclosed to
stockholders and approved by a majority vote of the stockholders; and (4)
certification by the compensation committee that the performance goals have been
met. In addition, Treasury Regulation Section 1.162-27(e)(4)(iv) requires that
the compensation payable must be specific enough so that a stockholder can
determine the maximum amount of compensation that could be paid to any employee
during a specific period. A stock option plan that provides a limit with respect
to the maximum number of shares underlying stock options that may be granted to
any employee during a specified period and the exercise price of those options
satisfies Treasury Regulation Section 1.162-27(e)(4)(iv). The Employee Incentive
Plan is intended to meet the requirements of Section 162(m) of the Code.
OPTION EXERCISES AND HOLDINGS. As of December 31, 2003, there were 2,526,087
shares of our common stock subject to outstanding options granted under the
Employee Incentive Plan and 2,573,913 shares (subject to adjustment to prevent
dilution) available for awards granted under the Employee Incentive Plan. In
addition, as of December 31, 2003, there were 6,400,000 shares of our common
stock subject to outstanding options granted outside of the Employee of
Incentive Plan. For information concerning the grant of stock options during
fiscal 2003 to the Named Executive Officers and unexercised stock options held
by the Named Executive Officers as of December 31, 2003, see the tables entitled
"Stock Option Grants" and "Option Exercises and Holdings" below.
DESCRIPTION OF THE PLAN.
ADMINISTRATION. The Employee Incentive Plan is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee has the power to
construe and interpret the Employee Incentive Plan and,
9
subject to provisions of the Employee Incentive Plan, to determine the persons
to whom and the dates on which awards will be granted, the number of shares to
be subject to each award, the times during the term of each award within which
all or a portion of such award may be exercised, the exercise price, the type of
consideration and other terms and conditions of such award. The Compensation
Committee is composed solely of individuals who are "outside directors" within
the meaning of Section 162(m)(4)I of the Code, and who otherwise comply with the
requirements of Rule 16b-3 promulgated under the Securities and Exchange Act of
1934, as amended. The expenses for administering the Employee Incentive Plan are
borne by the Company.
ELIGIBILITY. Incentive stock options may be granted under the Employee Incentive
Plan only to employees (including directors if they are also employees) of the
Company and its subsidiaries. Employees, directors and independent contractors
are eligible to receive nonstatutory (non-qualified) stock options, stock
appreciation rights, restricted awards, performance awards and other awards
under the Employee Incentive Plan.
No incentive stock option may be granted under the Employee Incentive Plan to
any person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any subsidiary of the Company, unless the option exercise price is at least 110%
of the fair market value of the stock subject to the option on the date of the
grant and the term of the option does not exceed five years from the date of the
grant. In addition, the aggregate fair market value, determined at the time of
the grant, of the shares of Common Stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year (under all such plans of the Company and its subsidiaries) may not exceed
$100,000. The Employee Incentive Plan currently states that in the case of stock
options and stock appreciation rights, no person may receive in any year a stock
option to purchase more than 100,000 shares or a stock appreciation right
measured by more than 100,000 shares. Upon approval of the proposed amendment to
the Employee Incentive Plan, this annual limit on grants to any individual will
be increased to 2,000,000.
If awards granted under the Employee Incentive Plan expire, are canceled or
otherwise terminate without being exercised, the Common Stock not purchased
pursuant to the award again becomes available for issuance under the Employee
Incentive Plan.
TERMS OF AWARDS. The following is a description of the types of grants and
awards and the permissible terms under the Employee Incentive Plan. Individual
awards may be more restrictive as to any or all of the permissible terms
described below.
Stock options may be granted as "incentive stock options" within the meaning of
Section 422 of the Code or nonstatutory (non-qualified) stock options.
Stock appreciation rights ("SARs") may be granted specifying a period of time
for which increases in share price shall be measured, with the grantee eligible
to receive stock or cash at the end of the period based upon increases in the
share price.
Restricted awards may be granted specifying a period of time (the "Restriction
Period") applicable to the award, which may vary at the discretion of the
Committee. Common Stock awarded pursuant to a restricted stock award shall
entitle the holder to enjoy all the shareholder rights during the restriction
period except that certain limitations with respect to dividend distributions
and disposition of the stock shall apply.
Performance awards may be granted specifying a number of performance shares to
be credited to an account on behalf of the recipient, each share of which is
deemed to be the equivalent of one share of Common Stock of the Company. These
awards shall be subject to both time and Company performance objectives that are
specified at the time of the award at the discretion of the Committee. The value
of a performance share in a holder's account at the time of award or the time of
payment shall be the fair market value at any time of a share of the Common
Stock of the Company.
Other awards may be granted under the Employee Incentive Plan that are not in
the categories discussed above because the Employee Incentive Plan provides the
Compensation Committee with flexibility in designing compensation programs. An
award may also consist of one or more of the categories above or two or more of
them in tandem in the alternative.
10
EXERCISE PRICE; PAYMENT. The exercise of stock options under the Employee
Incentive Plan may not be less than the fair market value of the Common Stock
subject to the option on the date of the option grant and in some cases as
described above may not be less than 110% of fair market value. Similarly, SARs
are based upon the fair market value of a share of Common Stock on the date of
the grant compared with the fair market value of a share at the end of the
measuring period. The sole basis for compensation under these awards is an
increase in the stock's fair market value.
Restricted stock awards are payable in stock upon satisfaction of the
restrictions imposed with respect to the award. The Compensation Committee has
the discretion to pay other awards in cash, in shares of Common Stock, or a
combination of both.
PERFORMANCE GOALS. The Employee Incentive Plan is structured so that the
Compensation Committee may make awards that qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code. However, the
Employee Incentive Plan is flexible so that the Compensation Committee also has
the discretion to make awards that are not described in that section. Section
162(m) provides a limit of $1,000,000 on deductions for compensation paid to
certain corporate executives on a year-by-year basis. However,
"performance-based compensation" is excluded from that limitation. Whether any
particular award under the Employee Incentive Plan will qualify as
"performance-based compensation" will depend upon the terms of the award and
compliance with certain other procedural requirements under Section 162(m). The
Compensation Committee will take into account the overall tax and business
objectives of the Company in structuring awards under the Employee Incentive
Plan.
TERM. The maximum term of the Employee Incentive Plan is ten years, except that
the Board of Directors may terminate the Employee Incentive Plan earlier. The
term of each individual award will depend upon the written agreement between the
Company and the grantee setting forth the terms of the awards. In certain
circumstances, an award may remain outstanding for a period that extends beyond
the term of the Employee Incentive Plan or the period of the grantee's
employment.
ADJUSTMENTS. If there is any change in the stock subject to the Employee
Incentive Plan or subject to any award made under the Employee Incentive Plan
(through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in kind, stock split, liquidating dividend, combination or
exchange of shares, change in corporate structure or otherwise), the Employee
Incentive Plan and shares outstanding thereunder will be appropriately adjusted
as to the class and the maximum number of shares subject to the Employee
Incentive Plan and the class, number of shares and price per share of stock
subject to such outstanding options as determined by the Compensation Committee
to be fair and equitable to the holders, the Company and the shareholders. In
addition, the Compensation Committee may also make adjustments in the number of
shares covered by, and the price or other value of any outstanding awards under
the Employee Incentive Plan in the event of a spin-off or other distribution
(other than normal cash dividends) of Company assets to shareholders.
AMENDMENT. The Board of Directors may amend the Employee Incentive Plan at any
time and from time to time without shareholder approval, except that an
amendment may not, without shareholder approval: (i) increase the number of
shares authorized for issuance under the Employee Incentive Plan except as a
result of an adjustment; (ii) materially modify the requirements as to
eligibility for participation in the Employee Incentive Plan; or (iii)
materially increase the benefits accruing to participants under the Employee
Incentive Plan.
RESTRICTIONS ON TRANSFER. Under the Employee Incentive Plan, no award shall be
transferable by a holder other than by laws of descent and distribution. Option
rights shall be exercisable during the holder's lifetime only by the holder or
by his guardian or legal representative.
11
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN.
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2003.
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER EQUITY
WARRANTS AND RIGHTS RIGHTS COMPENSATION PLANS
-------------------------- --------------------------- ------------------------------
Equity compensation
plans approved by
security holders ....... 8,926,087 $7.13 2,573,913
Equity compensation
plans not approved by
security holders ....... 881,732 $4.65 --
-------------------------- --------------------------- ------------------------------
Total 9,807,819 $6.91 2,573,913
MATERIAL FEATURES OF INDIVIDUAL EQUITY COMPENSATION PLANS NOT APPROVED BY
SHAREHOLDERS
Sanders Morris Harris Inc. acted as placement agent in connection with our
October 2003 private placement financing transaction. As partial consideration
for their services as placement agent, we issued to Sanders Morris Harris a
warrant to purchase 881,732 shares of our common stock at an exercise price of
$4.65 per share. The warrant has a term of 5 years. The warrant vests and
becomes exercisable in full on April 17, 2004.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT OF THE
EMPLOYEE INCENTIVE PLAN.
12
ITEM 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
Item 3 is the ratification of Grant Thornton LLP as our independent public
accountant for the year ending December 31, 2004. The Audit Committee of the
Board of Directors recommended and the Board of Directors has selected, subject
to ratification by a majority vote of the shares of common stock present or
represented and entitled to vote at the Annual Meeting, the firm of Grant
Thornton LLP to continue as our independent public accountant for the current
fiscal year ending December 31, 2004. Grant Thornton LLP has served as the
principal independent public accounting firm utilized by us during the year
ended December 31, 2003. We anticipate that a representative of Grant Thornton
LLP will attend the Annual Meeting for the purpose of responding to appropriate
questions. At the Annual Meeting, a representative of Grant Thornton LLP will be
afforded an opportunity to make a statement if he or she so desires.
While there is no legal requirement that this proposal be submitted to
shareholders, it will be submitted at the Annual Meeting nonetheless, as the
Board of Directors believes that the selection of auditors to audit the
Company's consolidated financial statements is of sufficient importance to seek
shareholder approval. If the shareholders do not ratify this appointment, other
firms of certified public accountants will be considered by the Board of
Directors upon recommendation of the Audit Committee.
Ernst & Young LLP, the Company's former independent public accounts for the
fiscal years ended December 31, 1995 through 2002, was dismissed on July 2,
2003. The principal accountant's report on the financial statements for the
fiscal years ended December 31, 2001 and 2002 did not contain an adverse opinion
or a disclaimer of opinion, nor was the report qualified or modified as to
uncertainty, audit scope, or accounting principles. The decision to change
accountants was recommended and approved by the Audit Committee. During the
fiscal years ended December 31, 2001 and 2002, there were no disagreements with
the former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Ernst & Young, LLP would
have caused it to make reference to the subject matter of the disagreement in
connection with its report.
During 2003, E&Y advised us and discussed with the Audit Committee that, due in
part to certain acquisitions by our subsidiaries in Mexico and modifications to
our inventory costing methodology, certain improvements in the internal controls
of those subsidiaries were necessary to ensure reporting from the subsidiaries
would be sufficient for us to develop reliable financial statements. We have
authorized E&Y to respond to the inquiries of the successor accountant
concerning this matter. We have determined to address the deficiencies
identified by E&Y in consultation with our new independent public accountants.
The ratification of Grant Thornton LLP as the Company's independent public
accountants for the fiscal year ended December 31, 2004 will require the
affirmative vote of a majority of the shares of common stock present or
represented and entitled to vote at the Annual Meeting. All Proxies will be
voted to approve the Amendment unless a contrary vote is indicated on the
enclosed Proxy card.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF GRANT THORNTON LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS.
13
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and as to each
of the other four most highly compensated officers whose compensation exceeded
$100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to the Company in all
capacities for each of the three years ended December 31 indicated below.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
ALL
FISCAL YEAR OTHER ANNUAL NUMBER OF OTHER
NAME ENDED SALARY BONUS COMPENSATION SECURITIES COMPENSATION
---- DECEMBER ------ ----- ------------ UNDERLYING ------------
PRINCIPAL POSITION(1) 31, ($) ($) ($)(2) OPTIONS ($)(3)
--------------------- --- --- --- --- ------- ---
Gerard Guez(4).......... 2003 211,538(5) -- -- 1,000,000 --
CEO and Chairman of 2002 450,000 -- -- 1,000,000 50,000
the Board of Directors 2001 450,000 -- -- -- 50,000
Todd Kay................ 2003 500,000 -- -- 1,000,000 --
Vice Chairman 2002 450,000 20,000 -- 1,000,000 50,000
the Board of Directors 2001 450,000 -- -- -- 50,000
Karen Wasserman......... 2003 400,000 -- -- 25,000 --
Executive Vice 2002 345,000 -- -- -- --
President 2001 334,768 -- -- 50,000 --
and General
Merchandising Manager
Eddy Yuen(6)............ 2003 269,586 62,099 204,063(7) 100,000 --
2002 350,000 45,000 -- 50,000 --
2001 191,729 39,586 88,541(8) 100,000 --
Charles Ghailian(9)..... 2003 383,968 222,500 -- 25,000 --
President of 2002 383,968 170,000 -- -- --
Tag Mex, Inc. 2001 383,968 170,200 -- 100,000 --
Patrick Chow(10)........ 2003 250,000 100,000 -- 100,000 --
Chief Financial 2002 220,000 75,000 -- -- --
Officer 2001 160,000 30,000 -- 60,000 --
Barry Aved(11).......... 2003 123,077 -- -- 504,000 --
President 2002 -- -- -- -- --
2001 -- -- -- 4,000 --
----------
(1) For a description of the employment contracts between certain officers
and the Company, see "Employment Contracts," below.
(2) Certain of the Company's executive officers receive personal benefits in
addition to salary and cash bonuses, including car allowances, living and
relocation expenses and director fees. The aggregate amount of such
personal benefits does not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for the officer.
(3) Represents the Company's contribution to defined contribution plans or,
in the case of Messrs. Guez and Kay, contributions by the Company to a
deferred compensation plan.
(4) Mr. Guez served as the Company's Chief Executive Officer from the
Company's inception until 2001, and was re-appointed as Chief Executive
Officer in March 2003.
(5) Pursuant to the terms of the Mr. Guez's Employment Agreement, Mr. Guez is
entitled to receive an annual base salary of $500,000. During 2003, Mr.
Guez agreed to reduce his base salary to allow the Company to employ Mr.
Aved as President and assume a portion of the duties previously performed
by the CEO.
(6) Mr. Yuen served as the Company's Chief Executive Officer from October
2001 through March 2003 and as President of the Imports division of the
Company from April 2003 through August 2003.
(7) Includes approximately $17,765 paid to Mr. Yuen for outstanding leave and
$186,298 paid to Mr. Yuen as additional compensation for long-term
service upon Mr. Yuen's separation from the Company in August 2003.
14
(8) During Mr. Yuen's stay in Mexico in fiscal 2001, Mr. Yuen's family in the
U.S. received a living allowance of $36,000, car allowance of $12,000,
house rental allowance of $26,000, medical insurance allowance of $6,000
and utilities allowance of $15,000.
(9) Mr. Ghailian served as President of Chazzz, a division of Tag Mex Inc., a
wholly-owned subsidiary of the Company from 1999 until March 2002, and
was appointed President of Tag Mex Inc. on April 1, 2002. In 2001, bonus
of $170,000 was paid to CMG, Inc.
(10) Mr. Chow was appointed Chief Financial Officer on January 7, 2002.
(11) Mr. Aved was appointed President on September 1, 2003.
OPTION GRANTS IN FISCAL 2003
The following table sets forth certain information regarding the grant of stock
options made during fiscal 2003 to the Named Executive Officers.
PERCENT OF
TOTAL
OPTIONS POTENTIAL
NUMBER OF GRANTED TO REALIZABLE VALUE
SECURITIES EMPLOYEES AT ASSUMED
UNDERLYING IN EXERCISE RATE OF STOCK PRICE
OPTIONS FISCAL OR BASE EXPIRATION APPRECIATION FOR
NAME GRANTED YEAR(1) PRICE(2) DATE OPTION TERM(3)
---- ----------- ---------- -------- ----------- ----------------------
5% 10%
-- ---
Gerard Guez...... 1,000,000 30.9 $3.65 05/28/13 $2,295,465 $5,817,160
Todd Kay......... 1,000,000 30.9 $3.65 05/28/13 $2,295,465 $5,817,160
Karen Wasserman.. 25,000 0.8 $3.60 12/30/13 $56,601 $143,437
Eddy Yuen (4).... 100,000 3.1 $3.65 04/01/13 $229,547 $581,716
Charles Ghailian. 25,000 0.8 $3.60 12/30/13 $56,601 $143,437
Patrick Chow..... 100,000 3.1 $3.65 04/01/13 $229,547 $581,716
Barry Aved....... 504,000 15.6 (5) (5) $1,227,577 $3,110,922
----------
(1) Options covering an aggregate of 3,236,100 shares were granted to
employees during fiscal 2003.
(2) The exercise price and tax withholding obligations related to exercise
may be paid by delivery of already owned shares, subject to certain
conditions.
(3) The potential realizable value is based on the assumption that the common
stock appreciates at the annual rate shown (compounded annually) from the
date of grant until the expiration of the option term. These amounts are
calculated pursuant to applicable requirements of the SEC and do not
represent a forecast of the future appreciation of the common stock.
(4) Eddy Yuen resigned on August 28, 2003. All unexercised options held by
Mr. Yuen terminated 90 days after his resignation.
(5) Mr. Aved's options include the following grants with the following
exercise prices and expiration dates: 4,000 shares at an exercise price
of $2.84 per share, expiring on August 12, 2013; 100,000 shares at an
exercise price of $3.65 per share, expiring on September 23, 2013; and
400,000 shares at an exercise price of $3.939 per share, expiring on
December 4, 2013.
15
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
certain information regarding the exercise of stock options during fiscal 2003,
the number of shares of common stock underlying stock options held at fiscal
year-end and the value of options held at fiscal year-end based upon the last
reported sales price of the common stock on The Nasdaq National Market on
December 31, 2003 ($3.59 per share).
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ON VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
EXERCISE REALIZED DECEMBER 31, 2003 DECEMBER 31, 2003
------------------- --------- -------- ---------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Gerard Guez........ -- -- 1,266,668 1,500,000 -- --
Todd Kay........... -- -- 933,332 1,500,000 -- --
Karen Wasserman.... -- -- 97,500 37,500 -- --
Charles Ghailian... -- -- 147,000 50,000 -- --
Patrick Chow....... -- -- 47,000 115,000 -- --
Barry Aved......... -- -- 22,000 507,000 -- $3,000
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company has entered into employment contracts with the following Named
Executive Officers.
Pursuant to an employment contract dated as of January 1, 1998 (the "Guez
Agreement"), Gerard Guez has been employed as the Chairman of the Board and
Chief Executive Officer of the Company. The Guez Agreement initially provided
that Mr. Guez receive an annual salary of $1,000,000 and, provided the Company
reports specified amounts of pre-tax income as set forth in the agreement, an
annual bonus of up to $2,000,000 and an option to purchase up to 666,668 shares
of common stock. The Guez Agreement was amended on January 10, 2000 to provide
for a reduction of the annual base salary to $500,000 and to extend the
expiration of the Agreement from December 31, 2002 to March 31, 2003. Effective
April 1, 2003, the Board of Directors approved the extension of the Guez
Agreement for three additional years, providing for an annual base salary of
$500,000 for the period from April 1, 2003 until March 31, 2004, $750,000 for
the period from April 1, 2004 until March 31, 2005, and $1,000,000 for the
period from April 1, 2005 to March 31, 2006. Mr. Guez resigned as Chief
Executive Officer in October 2001, but was re-appointed to this position in
March 2003. During 2003, Mr. Guez agreed to reduce his base salary to allow the
Company to employ Mr. Aved as President and assume a portion of the duties
previously performed by the CEO.
Pursuant to an employment contract dated as of January 1, 1998 (the "Kay
Agreement"), Todd Kay has been employed by the Company. The Kay Agreement
initially provided that Mr. Kay receive an annual salary of $1,000,000 and,
provided the Company reports specified amounts of pre-tax income as set forth in
the agreement, an annual bonus of up to $2,000,000 and an option to purchase up
to 333,332 shares of common stock. The Kay Agreement was amended on January 10,
2000 to provide for a reduction of the annual base salary to $500,000 and to
extend the expiration of the Agreement from December 31, 2002 to March 31, 2003.
Effective April 1, 2003, the Board of Directors approved the extension of the
Kay Agreement for three additional years, providing for an annual base salary of
$500,000 for the period from April 1, 2003 until March 31, 2004, $750,000 for
the period from April 1, 2004 until March 31, 2005, and $1,000,000 for the
period from April 1, 2005 to March 31, 2006.
Pursuant to an employment contract dated January 7, 2002, as amended effective
January 1, 2003 (the "Chow Contract"), Patrick Chow has been employed as Chief
Financial Officer of the Company. The Chow Contract provides for an annual base
salary of $250,000. The contract will be subject to automatic renewal annually
and either party must give 60 days notice of intent to terminate employment
prior to the annual renewal date.
16
Pursuant to an employment contract dated September 1, 2003 (the "Aved
Agreement"), Barry Aved has been employed as President of the Company. The Aved
Agreement provides for an annual base salary of $400,000, and an option to
purchase 500,000 shares of the Company's Common Stock, vesting in equal annual
installments four years from the grant date. The contract will be subject to
automatic renewal annually and either party must give 60 days notice of intent
to terminate employment prior to the annual renewal dated.
Pursuant to an employment contract dated March 23, 1999, and as amended as of
April 1, 2002 (the "Ghailian Agreement"), Charles Ghailian is employed as
President of Tag Mex, Inc., a wholly-owned subsidiary of the Company. The
Ghailian Agreement originally provided for an annual base salary of $480,000,
but in 2000 the Company and Mr. Ghailian agreed to reduce Mr. Ghailian's annual
base salary by 20%. In addition, the agreement provides that, as long as Tag Mex
reports specified amounts of net sales and pre-tax income as set forth in the
Ghailian Agreement, Mr. Ghailian will receive an annual bonus of $170,000. The
Ghailian Agreement also provides for an additional bonus as the Company and Mr.
Ghailian mutually agree upon. Mr. Ghailian was initially granted options to
purchase 36,000 shares common stock under the Ghailian Agreement and an
additional 100,000 shares pursuant to the amendment effective April 1, 2002.
EMPLOYEE BENEFIT PLANS
The Company has adopted the Tarrant Apparel Group Employee Incentive Plan (the
"Employee Incentive Plan"). Up to 5,100,000 shares of our common stock are
authorized to be issued pursuant to the Employee Incentive Plan. The Employee
Incentive Plan currently provides for the issuance of incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock and
other performance-based benefits. The purpose of the Employee Incentive Plan is
to enable the Company to attract, retain and motivate officers, directors,
employees and independent contractors by providing for performance-based
benefits. The Employee Incentive Plan is administered by the Compensation
Committee of the Board of Directors. As of December 31, 2003, there were
2,526,087 shares of our common stock subject to outstanding options granted
under the Employee Incentive Plan and 2,573,913 shares (subject to adjustment to
prevent dilution) available for awards granted under the Employee Incentive
Plan. In addition, as of December 31, 2003, there were 6,400,000 shares of our
common stock subject to outstanding options granted outside of the Employee of
Incentive Plan.
In 1994, the Company adopted a Profit Sharing 401(k) Plan (the "Profit Sharing
Plan") which is intended to be qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended. To be eligible, an employee must have been
employed by the Company for at least one year. The Profit Sharing Plan permits
employees who have completed one year of service to defer from 1% to 15% of
their annual compensation into the Profit Sharing Plan. Additional annual
contributions may be made at the discretion of the Company, and a 50% (100%
effective July 1, 1995) matching contribution may be made by the Company up to a
maximum of 6% (5% effective July 1, 1995) of a participating employee's annual
compensation. Contributions made by the Company vest according to a schedule set
forth in the Profit Sharing Plan.
Tarrant HK has adopted a Mandatory Provident Fund Scheme - AIA-JF Premium MPF
Scheme under the Mandatory Provident Fund Schemes Ordinance, in which the
employees who have joined the Company since December 1, 2000 are eligible to
enroll. Monthly contributions are made based on 5% of the employees' relevant
income.
In addition Tarrant HK has adopted a defined contribution retirement benefits
scheme -the National Mutual Central Provident Fund Scheme (the "Provident Fund
scheme") which has been approved under Section 87A of the Inland Revenue
Ordinance of Hong Kong since 1992. This scheme has been registered as a
Mandatory Provident Fund exempted Occupational Retirement Schemes Ordinance
scheme under the Mandatory Provident Fund Schemes Ordinance. From August 1992,
an employee, upon completion of one full year's service with Tarrant HK, is
entitled to enroll in the Provident Fund scheme on voluntary basis. Since
December 1, 2000, no new members have been allowed to enroll in this scheme.
Monthly contributions are made based on 5% of the employees' basic salary. The
employees having completed more than 3 years of service with Tarrant HK are
entitled to the Company's vested benefits according the vesting scale of the
Provident Fund scheme.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee is charged with the responsibility of administering
all aspects of the Company's executive compensation programs. The Compensation
Committee, which currently is comprised of five independent, non-employee
directors also grants all stock options and otherwise generally administers the
Company's stock option plans. Following review and approval by the Compensation
Committee, determinations pertaining to executive compensation are submitted to
the full Board of Directors for approval. In connection with its deliberations,
the Compensation Committee seeks, and is significantly influenced by, the views
of the Chief Executive Officer with respect to appropriate compensation levels
of the other officers.
17
TOTAL COMPENSATION. It is the philosophy of the Compensation Committee
that executive compensation should be structured to provide an appropriate
relationship between executive compensation and performance of the Company and
the share price of the common stock, as well as to attract, motivate and retain
executives of outstanding abilities and experience. Since its inception, the
Company has maintained the philosophy that executive compensation should be
competitive with that provided by other companies in the women's apparel
industry to assist the Company in attracting and retaining qualified executives
critical to the Company's long-term success.
BASE SALARY. Base salaries are negotiated at the commencement of an
executive's employment with the Company or upon renewal of his or her employment
agreement, and are designed to reflect the position, duties and responsibilities
of each executive officer, the cost of living in the area in which the officer
is located, and the market for base salaries of similarly situated executives at
other companies engaged in businesses similar to that of the Company. Base
salaries may be annually adjusted in the sole discretion of the Compensation
Committee to reflect changes in any of the foregoing factors.
STOCK INCENTIVE PLAN OPTIONS AND AWARDS. Under the Employee Incentive
Plan, the Compensation Committee is authorized to grant any type of award which
might involve the issuance of shares of common stock, options, warrants,
convertible securities, stock appreciation rights or similar rights or any other
securities or benefits with a value derived from the value of the common stock.
The number of options granted to an individual is based upon a number of
factors, including his or her position, salary and performance, and the overall
performance and stock price of the Company.
ANNUAL INCENTIVES. The Compensation Committee believes that executive
compensation should be determined with specific reference to the Company's
overall performance and goals, as well as the performance and goals of the
division or function over which each individual executive has primary
responsibility. In this regard, the Compensation Committee considers both
quantitative and qualitative factors. Quantitative items used by the
Compensation Committee in analyzing the Company's performance include sales and
sales growth, results of operations and an analysis of actual levels of
operating results and sales to budgeted amounts. Qualitative factors include the
Compensation Committee's assessment of such matters as the enhancement of the
Company's image and reputation, expansion into new markets, and the development
and success of new products and new marketing programs.
The Company developed, and the Compensation Committee approved a
performance incentive plan for executives and employees for the year 2003 based
on specific goals and criteria. For management, there was a provision for a
bonus to be paid for sales that exceeded the budget by a fixed amount.
The Compensation Committee attributes various weights to the
qualitative factors discussed above based upon their perceived relative
importance to the Company at the time compensation determinations are made. Each
executive's performance is evaluated with respect to each of these factors, and
compensation levels are determined based on each executive's overall
performance.
DETERMINATION OF CHIEF EXECUTIVE OFFICER'S COMPENSATION. In fiscal year
2003, Eddy Yuen, served as the Company's Chief Executive Officer from January 1,
2003 to March 20, 2003 and then President of our Imports division from March 21,
2003 to August 28, 2003. As compensation, Mr. Yuen received total base salary of
$269,586 and a cash bonus of $62,099. Gerard Guez, the Company's Chief Executive
Officer from March 20, 2003 to the present received base salary of $211,538
during fiscal 2003 and was granted options to purchase 1,000,000 shares of the
Company's common stock. Pursuant to an employment agreement, Mr. Guez was
entitled to receive an annual base salary of $500,000 for the period from April
1, 2003 through March 31, 2004. However, during 2003, Mr. Guez agreed to reduce
his base salary to allow the Company to employ Mr. Aved as President and assume
a portion of the duties previously performed by the CEO. These compensation
packages were established based upon a comparative analysis of other similarly
situated chief executive officers conducted by the Compensation Committee. Our
Chief Executive Officer also participates in the management incentive plan
approved by the Compensation Committee.
The Compensation Committee intends to continue its policy of linking
executive compensation with maximizing shareholder returns and corporate
performance to the extent possible through the programs described above.
OMNIBUS BUDGET RECONCILIATION ACT IMPLICATIONS FOR EXECUTIVE
COMPENSATION. Effective January 1, 1994, under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), a public company generally
18
will not be entitled to a deduction for non-performance-based compensation paid
to certain executive officers to the extent such compensation exceeds $1.0
million. Special rules apply for "performance-based" compensation, including the
approval of the performance goals by the shareholders of the Company.
All compensation paid to the Company's employees in fiscal 2003 will be
fully deductible. With respect to compensation to be paid to executives in 2004
and future years, in certain instances such compensation may exceed $1.0
million. However, in order to maintain flexibility in compensating executive
officers in a manner designed to promote varying corporate goals, the
Compensation Committee has not adopted a policy that all compensation must be
deductible.
Compensation Committee
Stephan Farouze
Milton Koffman
Joseph Mizrachi
Larry Russ
Mitchell Simbal
REPORT OF AUDIT COMMITTEE
The Audit Committee of the Board of Directors, which consists of independent
directors (as that term is defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' Marketplace Rules), has furnished the
following report:
The Audit Committee assists the Board of Directors in overseeing and monitoring
the integrity of the Company's financial reporting process, its compliance with
legal and regulatory requirements and the quality of its internal and external
audit processes. The role and responsibilities of the Audit Committee are set
forth in a written Charter adopted by the Board of Directors, which is attached
as Appendix "A" to this Proxy Statement. The written Charter of the Audit
Committee was recently amended by the Board of Directors in light of enhanced
audit committee responsibilities resulting from recent legislation and
regulatory requirements. The Audit Committee reviews and reassesses the Charter
annually and recommends any changes to the Board of Directors for approval.
The Audit Committee is responsible for overseeing the Company's overall
financial reporting process. In fulfilling its responsibilities for the
financial statements for fiscal year 2003, the Audit Committee:
- Reviewed and discussed the audited financial statements for
the year ended December 31, 2003 with management and Grant
Thornton LLP (the "Auditors"), the Company's independent
auditors;
- Discussed with the Auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 relating
to the conduct of the audit; and
- Received written disclosures and the letter from the Auditors
regarding its independence as required by Independence
Standards Board Standard No. 1. The Audit Committee discussed
with the Auditors their independence.
The Audit Committee also considered the status of pending litigation and other
areas of oversight relating to the financial reporting and audit process that
the committee determined appropriate.
AUDIT FEES
Fees for audit services, as approved by the Audit Committee, totaled
approximately $624,000 in 2002 and approximately $464,000 in 2003, including
fees associated with the annual audit, the reviews of the Company's quarterly
reports on Form 10-Q, and statutory audits required internationally.
19
AUDIT-RELATED FEES
Fees for audit-related services, as approved by the Audit Committee, totaled
approximately $103,000 in 2002 and approximately $296,000 in 2003. Audit-related
services principally include due diligence in connection with acquisitions,
accounting consultations and benefit plan audits.
TAX FEES
Fees for tax services, including tax compliance, tax advice and tax planning, as
approved by the Audit Committee, totaled approximately $942,000 in 2002 and
$622,000 in 2003.
ALL OTHER FEES
There were no fees for any other services not included above in either 2003 or
2002.
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal accountant's independence.
Based on the Audit Committee's review of the audited financial statements and
discussions with management and the Auditors, the Audit Committee recommended to
the Board of Directors that the audited financial statements be included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2003
for filing with the SEC.
AUDIT COMMITTEE
Mitchell Simbal, Chairman
Stephane Farouze
Milton Koffman
Joseph Mizrachi
Larry Russ
20
PERFORMANCE GRAPH
The following graph sets forth the percentage change in cumulative total
shareholder return of our common stock during the five-year period from December
31, 1998 to December 31, 2003, compared with the cumulative returns of the
NASDAQ Stock Market (U.S. Companies) Index and companies with the standard
industrial classification (SIC) code 5137. The component entities of SIC Code
5137 were generated by Research Data Group, Inc. All the entities in SIC Code
5137 were incorporated into the peer group. The comparison assumes $100 was
invested on December 31, 1998 in our common stock and in each of the foregoing
indices. The stock price performance on the following graph is not necessarily
indicative of future stock price performance.
[GRAPHIC OMITTED]
Cumulative Total Return
--------------------------------------------------
12/98 12/99 12/00 12/01 12/02 12/03
TARRANT APPAREL GROUP 100.00 24.21 9.12 13.79 10.29 9.03
NASDAQ STOCK MARKET (U.S.) 100.00 186.20 126.78 96.96 68.65 108.18
PEER GROUP 100.00 100.02 13.95 11.65 14.79 15.03
21
CERTAIN TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Except as disclosed in this Proxy Statement, neither the nominees for election
as directors of the Company, the directors or senior officers of the Company,
nor any shareholder owning more than five percent of the issued shares of the
Company, nor any of their respective associates or affiliates, had any material
interest, direct or indirect, in any material transaction to which the Company
was a party during fiscal 2003, or which is presently proposed.
See "Employment Contracts" for a summary of employment agreements with certain
of our executive officers.
The Company leases its principal offices and warehouse located in Los Angeles,
California and office space in Hong Kong from corporations owned by Messrs. Guez
and Kay. The Company believes, at the time the leases were entered into, the
rents on these properties were comparable to then prevailing market rents. The
Company paid $1,330,000 in 2003 for rent for office and warehouse facilities.
On October 16, 2003, we leased to affiliates of Mr. Kamel Nacif, one of our
shareholders, 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. The assets subject to
these leases have a net book value of approximately $92 million as of December
31, 2003. In connection with this transaction, we also entered into a management
services agreement pursuant to which Mr. Nacif's affiliates will manage the
operation of our remaining facilities in Mexico in exchange for the use of such
facilities. The term of the management services agreement is also for a period
of 6 years. We have 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. Based on current market price, the purchase
commitment would be approximately $18 million annually.
From time to time, we borrowed funds from, and advanced funds to, certain
officers and principal shareholders, including Gerard Guez, Todd Kay and Kamel
Nacif. The greatest outstanding balance of such borrowings from Mr. Kay in 2003
was $487,000. The greatest outstanding balance of such advances to Mr. Guez
during 2003 was approximately $4,879,000. As of December 31, 2003, we were
indebted to Mr. Nacif and his affiliates in the net amount of $5.4 million for
working capital lent by him to us to support our Mexican operations. Mr. Guez
had an outstanding advance from us in the amount of $4,796,000 as of December
31, 2003 payable on demand. All advances to, and borrowings from, Messrs. Guez
and Kay bore interest at the rate of 7.75% during the period. Total interest
paid by the Chairman and the Vice Chairman were $368,000 and $374,000 for the
years ended December 31, 2002 and December 31, 2003, respectively. 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.
Since June 2003, United Apparel Venture LLC, a majority owned, controlled and
consolidated subsidiary of Tarrant, has been selling to Seven Licensing Company,
LLC, jeans wear bearing the brand "Seven7", which is ultimately purchased by
Express. Seven Licensing is beneficially owned by Gerard Guez. Total sales
during the year ended December 31, 2003 were $8.1 million.
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 Production
International, Inc. is owned by Hubert Guez, the brother of Gerard Guez, our
Chairman and Chief Executive Officer. 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., a wholly owned subsidiary of ours, 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 losses
eliminated through the minority interest line in our financial statements. Since
October 2002 and March 2003, UAV has begun to service both parties' business
with Express and Levi Strauss & Co., respectively. UAV makes purchases from two
related parties in Mexico, Azteca and Tag-It Pacific, Inc.
We purchased $5.8 million, $37.0 million and $37.1 million of finished goods and
service from Azteca and its affiliates for the years ended December 31, 2001,
2002 and 2003, respectively. Our total sales of fabric and service to Azteca in
2001, 2002 and 2003 were $7.2 million, $2.9 million and $9.9 million,
respectively. Two and one half percent of gross sales as management fees were
paid in 2002 and 2003 to each of the members of UAV, per the operating
agreement.
At December 31, 2003, Messrs. Guez and Kay beneficially owned 1,018,000 and
1,005,000 shares, respectively, of common stock of Tag-It Pacific, Inc.
("Tag-It"), collectively representing 17.5% of Tag-It Pacific's common stock
22
at December 29, 2003. 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. This
arrangement is terminable by either Tag-It or us at any time. 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. We purchased $17.9 million, $23.9 million and $16.8 million of
trim from Tag-It during the years ended December 31, 2001, 2002 and 2003. We
also sold Tag-It $1.5 million from our trim and fabric inventory during the year
ended December 31, 2003. From time to time we have guaranteed the indebtedness
of Tag-It for the purchase of trim on our behalf.
We have adopted a policy that any future 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.
The Board of Directors believes, based on its reasonable judgment, but without
further investigation, that the terms of each of the foregoing transactions or
arrangements between the Company on the one hand and the affiliates, officers,
directors or shareholders of the Company which were parties to such transactions
on the other hand, were, on an overall basis, at least as favorable to the
Company as could then have been obtained from unrelated parties.
23
PRINCIPAL SHAREHOLDERS
The following table sets forth as of March 15, 2004, unless otherwise indicated,
certain information relating to the ownership of our common stock by (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding shares of our common stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all of the
Company's Named Executive Officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, each such person has the sole voting and investment power with
respect to the shares owned. The address of each person listed is in care of the
Company, 3151 East Washington Blvd., Los Angeles, CA 90023, unless otherwise set
forth below such person's name.
NUMBER OF SHARES OF
COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED (1) PERCENT (1)
------------------------------------------------------------- ---------------------- -----------
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Gerard Guez.................................................. 6,861,519 (2) 22.8%
Todd Kay..................................................... 3,499,999 (3) 11.8%
Charles Ghailian............................................. 147,000 (4) *
Karen Wasserman.............................................. 142,500 (5) *
Barry Aved................................................... 82,000 (6) *
Patrick Chow................................................. 47,000 (4) *
Joseph Mizrachi.............................................. 11,000 (4) *
Milton Koffman............................................... 10,000 (4) *
Mitchell Simbal.............................................. 10,000 (4) *
Stephane Farouze............................................. 0 *
Larry Russ................................................... 0 *
5% HOLDERS:
Rosa Lisette Nacif Benavides................................. 3,000,000 (7) 10.4%
Edgar Allen #231, Col. Polanco, C.P. 11550, Mexico, D.F.
Kamel Nacif Borge............................................ 2,724,000 (8) 9.1%
Edgar Allen #231, Col. Polanco, C.P. 11550, Mexico, D.F.
The Pinnacle Fund, L.P....................................... 2,000,000 (9) 6.9%
4965 Preston Blvd, Suite 240, Plano, Texas 75093
Jamil Textil, S.A. de C.V.................................... 1,724,000 (10) 6.0%
Edgar Allen #231, Col. Polanco, C.P. 11550, Mexico, D.F.
Atlas Capital Management, L.P................................ 1,500,000 (11) 5.2%
100 Crescent Court, Suite 880, Dallas, Texas 75201
RHA, Inc..................................................... 1,500,000 (11) 5.2%
100 Crescent Court, Suite 880, Dallas, Texas 75201
Robert H. Alpert............................................. 1,500,000 (11) 5.2%
100 Crescent Court, Suite 880, Dallas, Texas 75201
Directors and officers as a group (11 persons)............... 10,811,018 (12) 34.5%
----------
* Less than one percent.
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are deemed to
be beneficially owned by a person if the person has the right to acquire
the shares (for example, upon exercise of an option) within 60 days of
the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of common stock
actually outstanding at March 15, 2004. Percentage ownership is based
upon 28,814,763 shares of common stock issued and outstanding as of March
15, 2004.
24
(2) Includes 461,518 shares held by GKT Investments, LLC, a Delaware limited
liability company owned 100% by Mr. Guez and 1,266,668 shares of common
stock reserved for issuance upon exercise of stock options which are or
will become exercisable on or prior to May 14, 2004. Mr. Guez has pledged
an aggregate of 5,494,851 of such shares to financial institutions to
secure the repayment of loans to Mr. Guez or corporations controlled by
Mr. Guez.
(3) Includes 933,332 shares of common stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to May 14, 2004. Mr. Kay has pledged an aggregate of 1,115,000 of
such shares to financial institutions to secure the repayment of loans to
Mr. Kay or corporations controlled by the Mr. Kay.
(4) Consists of shares of common stock reserved for issuance upon exercise of
stock options, which are or will become exercisable on or prior to May
14, 2004.
(5) Includes 97,500 shares of common stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to May 14, 2004.
(6) Includes 22,000 shares of common stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to May 14, 2004.
(7) Information regarding the beneficial ownership of Rosa Lisette Nacif
Benavides is taken from a Schedule 13G as filed on June 24, 2003.
(8) Includes 1,724,000 shares held by Jamil Textil, S.A. de C.V. ("Jamil
Textil") and 1,000,000 shares issuable upon exercise of stock options
held by Mr. Nacif which are or will become exercisable on or prior to May
14, 2004. Mr. Nacif is a principal shareholder and President of Jamil
Textil and in such role may be deemed to beneficially own shares held by
Jamil Textil. Mr. Nacif disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. Information
regarding the beneficial ownership of Mr. Nacif and Jamil Textil is taken
from a Schedule 13G as filed on February 17, 2004.
(9) Information regarding the beneficial ownership of The Pinnacle Fund, L.P.
is taken from a Schedule 13G as filed on December 11, 2003.
(10) Information regarding the beneficial ownership of Mr. Nacif and Jamil
Textil is taken from a Schedule 13G as filed on February 17, 2004.
(11) Information regarding the beneficial ownership of Atlas Capital
Management, L.P., RHA, Inc. and Robert H. Alpert is taken from a Schedule
13G as filed on December 11, 2003.
(12) Includes 2,544,500 shares of common stock reserved for issuance upon
exercise of stock options that are or will become exercisable on or prior
to May 14, 2004.
The information as to shares beneficially owned has been individually furnished
by the respective directors, Named Executive Officers, and other shareholders of
the Company, or taken from documents filed with the SEC.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors, and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the SEC. Executive officers, directors and
greater-than-ten percent shareholders are required by SEC regulations to furnish
the Company with all Section 16(a) forms they file. Based solely on its review
of the copies of the forms received by it and written representations from
certain reporting persons that they have complied with the relevant filing
requirements, the Company believes that, during the year ended December 31,
2003, all of the Company's executive officers, directors and greater-than-ten
percent shareholders complied with all Section 16(a) filing requirements except
the following: Barry Aved filed a Form 4 on November 3, 2003 reporting the
acquisition of options to purchase 100,000 shares of the Company's Common Stock,
which Form 4 should have been filed on or before September 25, 2003; Patrick
Chow filed a Form 4 on May 30, 2003 reporting the acquisition of options to
purchase 100,000 shares of the Company's Common Stock, which Form 4 should have
been filed on or before April 1, 2003; Stephane Farouze filed a Form 3 on June
23, 2003 reporting his election as a director of the Company, which Form 3
should have been filed on or before May 19, 2003; Rosa Lisette Nacif Benavides
filed a Form 3 on June 24, 2003 reporting the acquisition of shares of Series A
Convertible Preferred Stock convertible into 3,000,000 shares of the Company's
Common Stock, which Form 3 should have been filed on or before June 9, 2003, and
a Form 4 on July 7, 2003 reporting the conversion of shares of Series A
Convertible Preferred Stock into 3,000,000 shares of the Company's Common Stock,
which Form 4 should have been filed on or before June 16, 2003; Larry Russ filed
a Form 3 on June 9, 2003 reporting his election as a director of the Company,
which Form 3 should have been filed on or before May 19, 2003; and Eddy Yuen
filed a
25
Form 4 on June 5, 2003 reporting the acquisition of options to purchase 100,000
shares of the Company's Common Stock, which Form 4 should have been filed on or
before April 1, 2003.
SHAREHOLDER PROPOSALS
Any shareholder who intends to present a proposal at the 2005 Annual Meeting of
Shareholders for inclusion in the Company's Proxy Statement and Proxy form
relating to such Annual Meeting must submit such proposal to the Company at its
principal executive offices by December 21, 2004. In addition, in the event a
shareholder proposal is not received by the Company by March 6, 2005, the Proxy
to be solicited by the Board of Directors for the 2005 Annual Meeting will
confer discretionary authority on the holders of the Proxy to vote the shares if
the proposal is presented at the 2005 Annual Meeting without any discussion of
the proposal in the Proxy Statement for such meeting.
SEC rules and regulations provide that if the date of the Company's 2005 Annual
Meeting is advanced or delayed more than 30 days from the date of the 2004
Annual Meeting, shareholder proposals intended to be included in the proxy
materials for the 2005 Annual Meeting must be received by the Company within a
reasonable time before the Company begins to print and mail the proxy materials
for the 2005 Annual Meeting. Upon determination by the Company that the date of
the 2005 Annual Meeting will be advanced or delayed by more than 30 days from
the date of the 2004 Annual Meeting, the Company will disclose such change in
the earliest possible Quarterly Report on Form 10-Q.
SOLICITATION OF PROXIES
It is expected that the solicitation of Proxies will be by mail. The cost of
solicitation by management will be borne by the Company. The Company will
reimburse brokerage firms and other persons representing beneficial owners of
shares for their reasonable disbursements in forwarding solicitation material to
such beneficial owners. Proxies may also be solicited by certain of our
directors and officers, without additional compensation, personally or by mail,
telephone, telegram or otherwise.
ANNUAL REPORT ON FORM 10-K
THE COMPANY'S ANNUAL REPORT ON FORM 10-K, WHICH HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2003, WILL BE
MADE AVAILABLE TO SHAREHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO INVESTOR
RELATIONS, TARRANT APPAREL GROUP, 3151 EAST WASHINGTON BOULEVARD, LOS ANGELES,
CALIFORNIA 90023.
ON BEHALF OF THE BOARD OF DIRECTORS
/S/ GERARD GUEZ
-----------------------------------
GERARD GUEZ, CHAIRMAN OF THE BOARD
3151 East Washington Boulevard
Los Angeles, California 90023
April 20, 2004
26
APPENDIX "A"
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF TARRANT APPAREL GROUP
This Charter identifies the purpose, composition, meeting requirements,
committee responsibilities, annual evaluation procedures and investigations and
studies of the Audit Committee (the "COMMITTEE") of the Board of Directors (the
"BOARD") of Tarrant Apparel Group, a California corporation (the "COMPANY").
I. PURPOSE
The Committee has been established to: (a) assist the Board in its
oversight responsibilities regarding (1) the integrity of the Company's
financial statements, (2) the Company's compliance with legal and regulatory
requirements, (3) the independent accountant's qualifications and independence
and (4) the performance of the Company's internal audit function; (b) prepare
the report of the audit committee required by the United States Securities and
Exchange Commission (the "SEC") for inclusion in the Company's annual proxy
statement; (c) retain and terminate the Company's independent accountant; (d)
approve audit and non-audit services to be performed by the independent
accountant; and (e) perform such other functions as the Board may from time to
time assign to the Committee. In performing its duties, the Committee shall seek
to maintain an effective working relationship with the Board, the independent
accountant, the internal auditors and management of the Company.
II. COMPOSITION
The Committee shall be composed of at least three, but not more than
five, members (including a Chairperson), all of whom shall be "independent
directors," as such term is defined in the rules and regulations of the SEC and
the Nasdaq Stock Market, Inc.'s National Market System ("NASDAQ"). The members
of the Committee and the Chairperson shall be selected by the Board and serve at
the pleasure of the Board. A Committee member (including the Chairperson) may be
removed at any time, with or without cause, by the Board. The Board may
designate one or more independent directors as alternate members of the
Committee, who may replace any absent or disqualified member or members at any
meetings of the Committee. No person may be made a member of the Committee if
his or her service on the Committee would violate any restriction on service
imposed by any rule or regulation of the SEC or any securities exchange or
market on which shares of the common stock of the Company are traded. The
Chairperson shall maintain regular communication with the chief executive
officer, chief financial officer, the lead partner of the independent accountant
and the manager of the internal audit.
All members of the Committee shall have a working familiarity with
basic finance and accounting practices and be able to read and understand
financial statements. Committee members may enhance their familiarity with
finance and accounting by participating in educational programs conducted by the
Company or an outside consultant.
Except for Board and Committee fees, a member of the Committee shall
not be permitted to accept any fees paid directly or indirectly for services as
a consultant, legal advisor or financial advisor or any other fees prohibited by
the rules of the SEC and Nasdaq. In addition, no member of the Committee may be
an "affiliated person" of the Company or any of its subsidiaries (as such term
is defined by the SEC). Members of the Committee may receive their Board and
Committee fees in cash, Company stock or options or other in-kind consideration
as determined by the Board or the Compensation Committee, as applicable, in
addition to all other benefits that other directors of the Company receive. No
director may serve on the Committee, without the approval of the Board, if such
director simultaneously serves on the audit committee of more than three public
companies.
III. MEETING REQUIREMENTS
The Committee shall meet as necessary, but at least quarterly, to
enable it to fulfill its responsibilities. The Committee shall meet at the call
of any member of the Committee, preferably in conjunction with regular Board
meetings. The Committee may meet by telephone conference call or by any other
means permitted by law or the Company's Bylaws. A majority of the members of the
Committee shall constitute a quorum. The Committee shall
A-1
act on the affirmative vote of a majority of members present at a meeting at
which a quorum is present. Without a meeting, the Committee may act by unanimous
written consent of all members. The Committee shall determine its own rules and
procedures, including designation of a chairperson pro tempore, in the absence
of the Chairperson, and designation of a secretary. The secretary need not be a
member of the Committee and shall attend Committee meetings and prepare minutes.
The Committee shall keep written minutes of its meetings, which shall be
recorded or filed with the books and records of the Company. Any member of the
Board shall be provided with copies of such Committee minutes if requested.
The Committee may ask members of management, employees, outside
counsel, the independent accountant or others whose advice and counsel are
relevant to the issues then being considered by the Committee, to attend any
meetings and to provide such pertinent information as the Committee may request.
The Chairperson of the Committee shall be responsible for leadership of
the Committee, including preparing the agenda, presiding over Committee
meetings, making Committee assignments and reporting the Committee's actions to
the Board from time to time (but at least once each year) as requested by the
Board.
As part of its responsibility to foster free and open communication,
the Committee should meet periodically with management, the internal auditors
and the independent accountant in separate executive sessions to discuss any
matters that the Committee or any of these groups believe should be discussed
privately. In addition, the Committee or at least its Chairperson should meet
with the independent accountant and management quarterly to review the Company's
financial statements prior to their public release consistent with the
provisions set forth below in SECTION IV. The Committee may also meet from time
to time with the Company's investment bankers, investor relations professionals
and financial analysts who follow the Company.
IV. COMMITTEE RESPONSIBILITIES
In carrying out its responsibilities, the Committee's policies and
procedures should remain flexible to enable the Committee to react to changes in
circumstances and conditions so as to ensure the Company remains in compliance
with applicable legal and regulatory requirements. In addition to such other
duties as the Board may from time to time assign, the Committee shall have the
following responsibilities:
A. OVERSIGHT OF THE FINANCIAL REPORTING PROCESSES
1. In consultation with the independent accountant and
the internal auditors, review the integrity of the
organization's financial reporting processes, both
internal and external.
2. Review and approve all related-party transactions,
unless such responsibility has been reserved to the
full Board or delegated to another committee of the
Board.
3. Consider the independent accountant's judgments about
the quality and appropriateness of the Company's
accounting principles as applied in its financial
reporting. Consider alternative accounting principles
and estimates.
4. Annually review major issues regarding the Company's
auditing and accounting principles and practices and
its presentation of financial statements, including
the adequacy of internal controls and special audit
steps adopted in light of material internal control
deficiencies.
5. Discuss with management and legal counsel the status
of pending litigation, taxation matters, compliance
policies and other areas of oversight applicable to
the legal and compliance area as may be appropriate.
6. Meet at least annually with the chief financial
officer, the internal auditors and the independent
accountant in separate executive sessions.
A-2
7. Review all analyst reports and press articles about
the Company's accounting and disclosure practices and
principles.
8. Review all analyses prepared by management and the
independent accountant of significant financial
reporting issues and judgments made in connection
with the preparation of the Company's financial
statements, including any analysis of the effect of
alternative generally accepted accounting principle
("GAAP") methods on the Company's financial
statements and a description of any transactions as
to which management obtained Statement on Auditing
Standards No. 50 letters.(1)
9. Review with management and the independent accountant
the effect of regulatory and accounting initiatives,
as well as off-balance sheet structures, on the
Company's financial statements.
B. REVIEW OF DOCUMENTS AND REPORTS
1. Review and discuss with management and the
independent accountant the Company's annual audited
financial statements and quarterly financial
statements (including disclosures under the section
entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operation") and
any reports or other financial information submitted
to any governmental body, or the public, including
any certification, report, opinion or review rendered
by the independent accountant, considering, as
appropriate, whether the information contained in
these documents is consistent with the information
contained in the financial statements and whether the
independent accountant and legal counsel are
satisfied with the disclosure and content of such
documents. These discussions shall include
consideration of the quality of the Company's
accounting principles as applied in its financial
reporting, including review of audit adjustments
(whether or not recorded) and any such other inquires
as may be appropriate. Based on the review, the
Committee shall make its recommendation to the Board
as to the inclusion of the Company's audited
consolidated financial statements in the Company's
annual report on Form 10-K.
2. Review and discuss with management and the
independent accountant earnings press releases, as
well as financial information and earnings guidance
provided to analysts and rating agencies. The
Committee need not discuss in advance each earnings
release but should generally discuss the types of
information to be disclosed and the type of
presentation to be made in any earnings release or
guidance.
3. Review the regular internal reports to management
prepared by the internal auditors and management's
response thereto.
4. Review reports from management, the internal auditors
and the independent accountant on the Company's
subsidiaries and affiliates, compliance with the
Company's code(s) of conduct, applicable law and
insider and related party transactions.
5. Review with management and the independent accountant
any correspondence with regulators or government
agencies and any employee complaints or published
reports that raise material issues regarding the
Company's financial statements or accounting
policies.
6. Prepare the report of the audit committee required by
the rules of the SEC to be included in the Company's
annual proxy statement.
----------
(1) SAS No. 50 provides performance and reporting standards for written reports
from accountants with respect to the application of accounting principles to new
transactions and financial products or regarding specific financial reporting
issues.
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7. Submit the minutes of all meetings of the Committee
to, or discuss the matters discussed at each
Committee meeting with, the Board.
8. Review any restatements of financial statements that
have occurred or were recommended. Review the
restatements made by other clients of the independent
accountant.
C. INDEPENDENT ACCOUNTANT MATTERS
1. The Committee shall be directly responsible for
interviewing and retaining the Company's independent
accountant, considering the accounting firm's
independence and effectiveness and approving the
engagement fees and other compensation to be paid to
the independent accountant.
2. On an annual basis, the Committee shall evaluate the
independent accountant's qualifications, performance
and independence. To assist in this undertaking, the
Committee shall require the independent accountant to
submit a report (which report shall be reviewed by
the Committee) describing (a) the independent
accountant's internal quality-control procedures, (b)
any material issues raised by the most recent
internal quality-control review, or peer review, of
the accounting firm or by any inquiry or
investigations by governmental or professional
authorities (within the preceding five years)
respecting one or more independent audits carried out
by the independent accountant, and any steps taken to
deal with any such issues and (c) all relationships
the independent accountant has with the Company and
relevant third parties to determine the independent
accountant's independence. In making its
determination, the Committee shall consider not only
auditing and other traditional accounting functions
performed by the independent accountant, but also
consulting, legal, information technology services
and other professional services rendered by the
independent accountant and its affiliates. The
Committee shall also consider whether the provision
of any of these non-audit services is compatible with
the independence standards under the guidelines of
the SEC and of the Independence Standards Board.
3. Approve in advance any non-audit services to be
provided by the independent accountant and adopt
policies and procedures for engaging the independent
accountant to perform non-audit services.
4. Review on an annual basis the experience and
qualifications of the senior members of the audit
team. Discuss the knowledge and experience of the
independent accountant and the senior members of the
audit team with respect to the Company's industry.
The Committee shall ensure the regular rotation of
the lead audit partner and audit review partner as
required by law and consider whether there should be
a periodic rotation of the Company's independent
accountant.
5. Review the performance of the independent accountant
and terminate the independent accountant when
circumstances warrant.
6. Establish and periodically review hiring policies for
employees or former employees of the independent
accountant.
7. Review with the independent accountant any problems
or difficulties the auditor may have encountered and
any "management" or "internal control" letter
provided by the independent accountant and the
Company's response to that letter. Such review should
include:
(a) any difficulties encountered in the course
of the audit work, including any
restrictions on the scope of activities or
access to required information and any
disagreements with management;
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(b) any accounting adjustments that were
proposed by the independent accountant that
were not agreed to by the Company;
(c) communications between the independent
accountant and its national office regarding
any issues on which it was consulted by the
audit team and matters of audit quality and
consistency;
(d) any changes required in the planned scope of
the internal audit; and
(e) the responsibilities, budget and staffing of
the Company's internal audit function.
8. Communicate with the independent accountant regarding
(a) critical accounting policies and practices to be
used in preparing the audit report, (b) alternative
treatments of financial information within the
parameters of GAAP that were discussed with
management, including the ramifications of the use of
such alternative treatments and disclosures and the
treatment preferred by the independent accountant,
(c) other material written communications between the
independent accountant and management of the Company,
and (d) such other matters as the SEC and Nasdaq may
direct by rule or regulation.
9. Periodically consult with the independent accountant
out of the presence of management about internal
controls and the fullness and accuracy of the
organization's financial statements.
10. Oversee the independent accountant relationship by
discussing with the independent accountant the nature
and rigor of the audit process, receiving and
reviewing audit reports and ensuring that the
independent accountant has full access to the
Committee (and the Board) to report on any and all
appropriate matters.
11. Discuss with the independent accountant prior to the
audit the general planning and staffing of the audit.
12. Obtain a representation from the independent
accountant that Section 10A of the Securities
Exchange Act of 1934 has been followed.
D. INTERNAL AUDIT CONTROL MATTERS
1. Discuss with management policies with respect to risk
assessment and risk management. Although it is
management's duty to assess and manage the Company's
exposure to risk, the Committee should discuss
guidelines and policies to govern the process by
which risk assessment and management is handled and
review the steps management has taken to monitor and
control the Company's risk exposure.
2. Establish regular and separate systems of reporting
to the Committee by each of management, the
independent accountant and the internal auditors
regarding any significant judgments made in
management's preparation of the financial statements
and the view of each as to appropriateness of such
judgments.
3. Following completion of the annual audit, review
separately with each of management, the independent
accountant and the internal auditors any significant
difficulties encountered during the course of the
audit, including any restrictions on the scope of
work or access to required information.
4. Review with the independent accountant, the internal
auditors and management the extent to which changes
or improvements in financial or accounting practices
have been
A-5
implemented. This review should be conducted at an
appropriate time subsequent to implementation of
changes or improvements, as decided by the Committee.
5. Advise the Board about the Company's policies and
procedures for compliance with applicable laws and
regulations and the Company's code(s) of conduct.
6. Establish procedures for receipt, retention and
treatment of complaints and concerns regarding
accounting, internal accounting controls or auditing
matters, including procedures for confidential,
anonymous submissions from employees regarding
questionable accounting or auditing matters.
7. Periodically discuss with the chief executive officer
and chief financial officer (a) significant
deficiencies in the design or operation of the
internal controls that could adversely affect the
Company's ability to record, process, summarize and
report financial data and (b) any fraud that involves
management or other employees who have a significant
role in the Company's internal controls.
8. Ensure that no officer, director or any person acting
under their direction fraudulently influences,
coerces, manipulates or misleads the independent
accountant for purposes of rendering the Company's
financial statements materially misleading.
E. EVALUATION OF INTERNAL AUDITORS
1. Review activities, organizational structure and
qualifications of the internal auditors.
2. Review and concur in the appointment, replacement,
reassignment or dismissal of the manager of internal
auditing.
3. Consider and review with management and the manager
of internal auditing:
(a) significant findings during the year and
management's responses thereto;
(b) any difficulties encountered in the course
of internal audits, including any
restrictions on the scope of the internal
auditors' work or access to required
information;
(c) any changes required in the planned scope of
the internal auditors' audit plan;
(d) the internal auditors' budget and staffing;
and
(e) the internal auditors' compliance with The
Institute of Internal Auditors' Standards
for the Professional Practice of Internal
Auditing.
While the Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Committee to plan or conduct audits or
to determine that the Company's financial statements are complete and accurate
and are in accordance with generally accepted accounting principles. This is the
responsibility of management and the independent accountant.
V. ANNUAL EVALUATION PROCEDURES
The Committee shall annually assess its performance to confirm that it
is meeting its responsibilities under this Charter. In this review, the
Committee shall consider, among other things, (a) the appropriateness of the
scope and content of this Charter, (b) the appropriateness of matters presented
for information and approval, (c) the sufficiency of time for consideration of
agenda items, (d) frequency and length of meetings and (e) the quality of
written materials and presentations. The Committee may recommend to the Board
such changes to this Charter as the Committee deems appropriate.
A-6
VI. INVESTIGATIONS AND STUDIES
The Committee shall have the authority and sufficient funding to retain
special legal, accounting or other consultants (without seeking Board approval)
to advise the Committee. The Committee may conduct or authorize investigations
into or studies of matters within the Committee's scope of responsibilities as
described herein, and may retain, at the expense of the Company, independent
counsel or other consultants necessary to assist the Committee in any such
investigations or studies. The Committee shall have sole authority to negotiate
and approve the fees and retention terms of such independent counsel or other
consultants.
VII. MISCELLANEOUS
Nothing contained in this Charter is intended to expand applicable
standards of liability under statutory or regulatory requirements for the
directors of the Company or members of the Committee. The purposes and
responsibilities outlined in this Charter are meant to serve as guidelines
rather than as inflexible rules and the Committee is encouraged to adopt such
additional procedures and standards as it deems necessary from time to time to
fulfill its responsibilities. This Charter, and any amendments thereto, shall be
displayed on the Company's web site and a printed copy of such shall be made
available to any shareholder of the Company who requests it.
Adopted by the Audit Committee and approved by the Board of Directors on
November 12, 2003.
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APPENDIX B
TARRANT APPAREL GROUP
EMPLOYEE INCENTIVE PLAN
(Formerly the "1995 Stock Option Plan")
(Amended and Restated as of May 2, 1997)
(Amended as of May 3, 1999)
(Amended as of May 15, 2002)
(As proposed to be amended on May 26, 2004)
Tarrant Apparel Group, a California corporation (the "Company"), by
action of both its Compensation Committee and its Board of Directors as a whole,
hereby adopts the Tarrant Apparel Group Employee Incentive Plan (the "Plan")
with the following provisions:
1. PURPOSE. The purpose of the Plan is to promote and advance the
interests of the Company and its shareholders by enabling the Company and its
Subsidiaries to attract, retain and motivate officers, directors, employees and
independent contractors by providing for performance-based benefits, and to
strengthen the mutuality of interests between such persons and the Company's
shareholders. The Plan is designed to meet this intent by offering
performance-based stock and cash incentives and other equity-based incentive
awards, thereby providing a proprietary interest in pursuing the long-term
growth, profitability and financial success of the Company.
2. DEFINITIONS. For purposes of this Plan, the following terms
shall have the meanings set forth below:
(a) "Award" or "Awards" means an award or grant made to a
Participant under Sections 6 through 10, inclusive, of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as in
effect from time to time or any successor thereto, together with rules,
regulations and authoritative interpretations promulgated thereunder.
(d) "Committee" means the Compensation Committee of the
Board that is provided for in Section 3 of the Plan.
(e) "Common Stock" means the Common Stock of the Company
or any security of the Company issued in substitution, exchange or lieu thereof.
(f) "Company" means Tarrant Apparel Group, a California
corporation, or a Subsidiary or successor corporation, or any holding company
for Tarrant Apparel Group which is a parent of the Company within the meaning of
Code Section 424(e).
(g) "Date of Grant" means the date the Committee (or the
Board, as the case may be) takes formal action designating that a Participant
shall receive an Award, notwithstanding the date the Participant accepts the
Award, the date the Company and the Participant enter into a written agreement
with respect to the Award, or any other date.
(h) "Effective Date" means the date the Plan is approved
by the holders of a majority of the shares of Common Stock represented and
voting and entitled to vote at a meeting of the shareholders of the Company or
by written consent of a majority of the outstanding shares of Common Stock,
provided such approval of the shareholders of the Company occurs within twelve
(12) months before or after the Committee and the Board both adopt the Plan.
Awards may be granted prior to the Effective Date, but payment under such Awards
is contingent upon shareholder approval as provided above in this definition. In
the event the Company does not obtain shareholder approval of the Plan, any
Awards granted pursuant to the Plan shall be rescinded automatically.
B-1
(i) "Exchange Act" means the Securities Exchange Act of
1934, as amended and in effect from time to time, or any successor statute.
(j) "Fair Market Value" means on any given date, the
closing price for the Common Stock on such date, or, if the Common Stock was not
traded on such date, on the next preceding day on which the Common Stock was
traded, determined in accordance with the following rules.
(i) If the Common Stock is admitted to trading
or listing on a national securities exchange registered under the Exchange Act,
the closing price for any day shall be the last reported sale price regular way,
or in the case no such reported sale takes place on such date, the average of
the last reported bid and ask prices regular way, in either case on the
principal national securities exchange on which the Common Stock is admitted to
trading or listed, or
(ii) If not listed or admitted to trading on any
national securities exchange, the last sale price of the Common Stock on the
National Association of Securities Dealers Automated Quotation National Market
System ("NMS") or, in case no such reported sale takes place, the average of the
closing bid and ask prices on such date, or
(iii) If not quoted on the NMS, the average of the
closing bid and ask prices of the Common Stock on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or any comparable
system, or
(iv) If the Common Stock is not listed on NASDAQ
or any comparable system, the closing bid and ask prices as furnished by any
member of the National Association of Securities Dealers, Inc., selected from
time to time by the Company for that purpose.
(k) "Incentive Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of the Plan that is intended to
be and is specifically designated as an "incentive stock option" within the
meaning of Section 422 of the Code.
(l) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of the Plan that is not an
Incentive Stock Option.
(m) "Participant" means an officer, director, employee or
independent contractor with respect to the Company or a Subsidiary who is
granted an Award under the Plan.
(n) "Performance Award" means an Award granted pursuant
to the provisions of Section 9 of the Plan, the vesting of which is contingent
on the attainment of specified performance criteria.
(o) "Performance Share Grant" means an Award of units
representing shares of Common Stock granted pursuant to the provisions of
Section 9 of the Plan.
(p) "Performance Unit Grant" means an Award of monetary
units granted pursuant to the provisions of Section 9 of the Plan.
(q) "Plan" means this Tarrant Apparel Group Employee
Incentive Plan, as set forth herein and as it may be hereafter amended and from
time to time in effect.
(r) "Restricted Award" means an Award granted pursuant to
the provisions of Section 8 of the Plan.
(s) "Restricted Stock Grant" means an Award of shares of
Common Stock granted pursuant to the provisions of Section 8 of the Plan.
(t) "Restricted Unit Grant" means an Award of units
representing shares of Common Stock granted pursuant to the provisions of
Section 8 of the Plan.
B-2
(u) "Stock Appreciation Right" means an Award to benefit
from the appreciation of Common Stock granted pursuant to the provisions of
Section 7 of the Plan.
(v) "Stock Option" means an Award to purchase shares of
Common Stock granted pursuant to the provisions of Section 6 of the Plan.
(w) "Subsidiary" means any corporation or entity which is
a subsidiary of the Company within the meaning of Section 424(f) of the Code (or
successor sections).
(x) "Ten Percent Shareholder" means a person who owns
(after taking into account the constructive ownership rules of Section 424(d) of
the Code or successor sections) more than ten percent (10%) of the stock of the
Company.
3. ADMINISTRATION.
(a) The Plan is being established and shall be
administered by the Compensation Committee to be appointed from time to time by
the Board. The Committee shall be comprised solely of not less than two persons
who are all "outside directors" within the meaning of Section 162(m)(4)(C) of
the Code and not less than the minimum number (if any) of members of the Board
required by Rule 16b-3 of the Exchange Act (or any successor rule). All
Committee members must also be "disinterested persons" for securities law
purposes. Members of the Committee shall serve at the pleasure of the Board and
the Board may from time to time remove members from, or add members to, the
Committee. No person who is not an "outside director" within the meaning of
Section 162(m)(4)(C) of the Code and a "disinterested person" may serve on the
Committee. Appointment to the Committee of any person who is not an "outside
director" and a "disinterested person" shall automatically be null and void, and
any person on the Committee who ceases to be an "outside director" for purposes
of Section 162(m)(4)(C) of the Code and a "disinterested person" shall
automatically and without further action cease to be a member of the Committee.
(b) A majority of the members of the Committee shall
constitute a quorum for the transaction of business. Action approved in writing
by a majority of the members of the Committee then serving shall be as effective
as if the action had been taken by unanimous vote at a meeting duly called and
held. Two Committee members have signed the original Plan document below
signifying that the Committee, as well as the Board as a whole, has adopted and
established this Plan.
(c) The Committee is authorized to construe and interpret
the Plan, to promulgate, amend, and rescind rules and procedures relating to the
implementation of the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan. Any determination, decision, or
action of the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be binding upon all
Participants and any person claiming under or through any Participant. Although
the Committee is anticipated to make certain Awards that constitute
"performance-based compensation" within the meaning of Section 162(m)(4)(C) of
the Code, the Committee is also expressly authorized to make Awards that do not
constitute "performance-based compensation" within the meaning of that
provision. By way of example, and not by way of limitation, the Committee, in
its sole and absolute discretion, may issue an Award that is not based on a
performance goal, as set forth in (g) below, but is based solely on continued
service to the Company.
(d) The Committee may employ or retain persons other than
members of the Committee to assist the Committee to carry out its
responsibilities under such conditions and limitations as it may prescribe,
except that the Committee may not delegate its authority with regard to
selection for participation of and the granting of Awards to persons subject to
Section 16 of the Exchange Act or with regard to any of the duties of the
Committee under Section 162(m) of the Code necessary for awards under this Plan
to qualify as "performance-based compensation" for purposes of Section
162(m)(4)(C) of the Code.
(e) The Committee is expressly authorized to make such
modifications to the Plan as are necessary to effectuate the intent of the Plan
as a result of any changes in the income tax, accounting, or securities law
treatment of Participants and the Plan.
B-3
(f) The Company shall effect the granting of Awards under
the Plan in accordance with the determinations made by the Committee, by
execution of instruments in writing in such form as approved by the Committee.
(g) The Committee, in the case of each Award, shall
establish in writing at the time of making the Award the business criterion or
criteria (if any) that must be satisfied for payment pursuant to the Award and
the amount payable upon satisfaction of those standards. Those standards are
also referred to herein as performance goals. Such criterion or criteria (if
any) shall be established prior to the Participant rendering the services to
which they relate and while the outcome is substantially uncertain or at such
other time permitted under Treasury Regulations Section 1.162-27(e)(2). In
carrying out these duties, the Committee shall use objective written standards
for establishing both the performance goal and the amount of compensation such
that a third party with knowledge of the relevant facts would be able to
determine whether and to what extent the goal has been satisfied and the amount
of compensation payable. The Committee shall provide a copy of the document
setting forth such standards to the affected Participant and shall retain such
written material in its permanent books and records.
(h) The Committee may not increase an Award once granted,
although it may grant additional Awards to the same Participant.
(i) The Committee shall keep the Board informed as to its
actions and make available to the Board its books and records. Although the
Compensation Committee has the authority to establish and administer the Plan,
the Board reserves the right at any time to abolish the Committee and administer
the Plan itself.
(j) In the case of remuneration that is intended to
qualify as performance-based compensation for purposes of Code Section
162(m)(4)(C), the Committee and the Board shall disclose to the shareholders of
the Company the material terms under which such remuneration is to be paid under
the Plan, and shall seek approval of the shareholders by a majority vote in a
separate shareholder vote before payment of such remuneration. For these
purposes, the material terms include the individuals (or class of individuals)
eligible to receive such compensation, a description of the business criterion
or criteria on which the performance goal is based, either the maximum amount of
the compensation to be paid thereunder or the formula used to calculate the
amount of compensation if the performance goal is attained, and such other terms
as required under Code Section 162(m)(4)(C) and the Treasury Regulations
thereunder determined from time to time. The foregoing actions shall be
undertaken in conformity with the rules of Code Section 162(m)(4)(C)(ii) and
Treasury Regulations promulgated thereunder. Such remuneration shall not be
payable under this Plan in the absence of such an approving shareholder vote. In
the case of remuneration that is not intended to qualify as performance-based
compensation under Code Section 162(m)(4)(C), the Committee and the Board shall
make such disclosures to and seek such approval from the shareholders of the
Company as they reasonably determine are required by law.
(k) To the extent required under Code Section
162(m)(4)(C), before any payment of remuneration under this Plan, the Committee
must certify in writing that the performance goals and any other material terms
of the Award were in fact satisfied. Such certification shall be kept with the
permanent books and records of the Committee, and the Committee shall provide
the affected Participant with a copy of such certification.
(l) The Committee shall use its good faith best efforts
to comply with the requirements of Section 162(m)(4)(C) of the Code for Awards
that are intended to qualify under that section as "performance-based
compensation," but shall have no liability to the Company or any recipient in
the event one or more Awards do not so qualify.
4. DURATION OF AND COMMON STOCK SUBJECT TO THE PLAN.
(a) TERM. The Plan shall terminate automatically on the
tenth (10th) anniversary date of the date of adoption of the Plan by the
Committee, the date of adoption of the Plan by the Board, or the tenth (10th)
anniversary date of the date of shareholder approval of the Plan, whichever is
earlier (subject to earlier termination by action of the Board), except with
respect to Awards then outstanding.
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(b) SHARES OF COMMON STOCK SUBJECT TO THE PLAN. The
maximum total number of shares of Common Stock with respect to which aggregate
stock Awards may be granted under the Plan shall be Five Million One Hundred
Thousand (5,100,000).
(i) All of the amounts stated in this Paragraph
(b) are subject to adjustment as provided in Section 15 below.
(ii) For the purpose of computing the total
number of shares of Common Stock available for Awards under the Plan, there
shall be counted against the foregoing limitations the number of shares of
Common Stock subject to issuance upon exercise or used for payment or settlement
of Awards.
(iii) If any Awards are forfeited, terminated,
expire unexercised, settled or paid in cash in lieu of stock or exchanged for
other Awards, the shares of Common Stock which were theretofore subject to such
Awards shall again be available for Awards under the Plan to the extent of such
forfeiture or expiration of such Awards.
(c) SOURCE OF COMMON STOCK. Common Stock which may be
issued under the plan may be either authorized and unissued shares or issued
shares which have been reacquired by the Company. No fractional shares of Common
Stock shall be issued under the Plan.
5. ELIGIBILITY. Incentive Stock Options may be granted under the
Plan only to employees (including employee directors) of the Company and its
Subsidiaries. Officer, directors, employees, and independent contractors are
eligible to receive Non-Qualified Stock Options, Stock Appreciation Rights,
Restricted Awards, Performance Awards and other Awards under the Plan.
6. STOCK OPTIONS. Stock Options granted under the Plan may be in
the form of Incentive Stock Options or Non-Qualified Stock Options (collectively
referred to as "Stock Options"). Stock Options shall be subject to the terms and
conditions set forth below. Each written Stock Option agreement shall contain
such additional terms and conditions, not inconsistent with the express
provisions of the Plan, as the Committee shall deem desirable.
(a) GRANT. Stock Options shall be granted under the Plan
on such terms and conditions not inconsistent with the provisions of the Plan
and pursuant to written agreements with the optionee in such form as the
Committee may from time to time approve in its sole and absolute discretion. The
terms of individual Stock Option agreements need not be identical. Each Stock
Option agreement shall state specifically whether it is intended to be an
Incentive Stock Option agreement or a Non-Qualified Stock Option agreement.
Stock Options may be granted alone or in addition to other Awards under the
Plan. Only common law employees may receive grants of Incentive Stock Options.
No person may be granted (in any calendar year) options to purchase more than
two million (2,000,000) shares of Common Stock (subject to adjustment pursuant
to Section 15). The foregoing sentence is an annual limitation on grants and not
a cumulative limitation. Any Stock Option repriced during a year shall count
against this annual limitation.
(b) STOCK OPTION PRICE. The exercise price per share of
Common Stock purchasable under a Stock Option shall be determined by the
Committee at the time of grant. In no event shall the exercise price of a Stock
Option be less than one hundred percent (100%) of the Fair Market Value of the
Common Stock on the Date of the Grant of such Stock Option. In the case of a Ten
Percent Shareholder, the exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value of the Common Stock on its Date of
Grant.
(c) OPTION TERM. The term of each Stock Option shall be
fixed by the Committee. However, the term of any Stock Option shall not exceed
ten (10) years after the date such Stock Option is granted. Furthermore, the
term of an Incentive Stock Option granted to a Ten Percent Shareholder shall not
exceed five (5) years after its Date of Grant.
(d) EXERCISABILITY. A Stock Option shall be exercisable
at such time or times and subject to such terms and conditions as shall be
determined by the Committee at the Date of Grant and set forth in the written
Stock Option agreement. However, no Stock Option shall be exercisable during the
first six (6) months
B-5
after the date such Stock Option is granted. A written Stock Option agreement
may, if permitted pursuant to its terms, become exercisable in full upon the
occurrence of events selected by the Committee that are beyond the control of
the Participant (including, but not limited to, a Change in Control of the
Company as set forth in Section 16 below).
(e) METHOD OF EXERCISE. A Stock Option may be exercised,
in whole or in part, by giving written notice of exercise to the Company
specifying the number of shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price (i) in cash or (ii) if
acceptable to the Committee, in shares of Common Stock already owned by the
Participant or a promissory note. The Committee may also permit Participants,
either on a selective or aggregate basis, to simultaneously exercise Options and
sell the shares of Common Stock thereby acquired, pursuant to a brokerage or
similar arrangement, approved in advance by the Committee, and use the proceeds
from such sale as payment of part or all of the purchase price of such shares.
(f) SPECIAL RULE FOR INCENTIVE STOCK OPTIONS. With
respect to Incentive Stock Options granted under the Plan, the aggregate Fair
Market Value (determined as of the Date of Grant) of the number of shares with
respect to which Incentive Stock Options are exercisable for the first time by a
Participant during any calendar year (under this Plan and all other incentive
stock option plans of this Company or its Subsidiaries) shall not exceed one
hundred thousand dollars ($100,000) or such other limit as may be required by
the Code.
7. STOCK APPRECIATION RIGHTS. The grant of Stock Appreciation
Rights under the Plan shall be subject to the following terms and conditions.
Furthermore, the Stock Appreciation Rights shall contain such additional terms
and conditions, not inconsistent with the express terms of the Plan, as the
Committee shall deem desirable. The terms of each Stock Appreciation Right
granted shall be set forth in a written agreement between the Company and the
Participant receiving such grant. The terms of such agreements need not be
identical.
(a) STOCK APPRECIATION RIGHTS. A Stock Appreciation Right
is an Award determined by the Committee entitling a Participant to receive an
amount equal to the excess of the Fair Market Value of a share of Common Stock
on a fixed date, which shall be the date concluding a measuring period set by
the Committee upon granting the Stock Appreciation Right, over the Fair Market
Value of a share of Common Stock on the Date of Grant of the Stock Appreciation
Right, multiplied by the number of shares of Common Stock subject to the Stock
Appreciation Right. No Stock Appreciation Rights granted in any year to any
person may be measured by an amount of shares of Common Stock in excess of one
hundred thousand (100,000) shares, subject to adjustment under Section 15 below.
The foregoing sentence is an annual limitation on grants and not a cumulative
limitation.
(b) GRANT. A Stock Appreciation Right may be granted in
addition to or completely independent of any other Award under the Plan. Upon
grant of a Stock Appreciation Right, the Committee shall select and inform the
Participant regarding the number of shares of Common Stock subject to the Stock
Appreciation Right and the date that constitutes the close of the measuring
period.
(c) MEASURING PERIOD. A Stock Appreciation Right shall
accrue in value from the Date of Grant over a time period established by the
Committee, except that in no event shall a Stock Appreciation Right be payable
within the first six (6) months after the Date of Grant. In the written Stock
Appreciation Right agreement, the Committee may also provide (but is not
required to provide) that a Stock Appreciation Right shall be automatically
payable on one or more specified dates prior to the normal end of the measuring
period upon the occurrence of events selected by the Committee (including, but
not limited to, a Change in Control of the Company as set forth in Section 16
below) that are beyond the control of the Participant. The Committee may provide
(but is not required to provide) in the Stock Appreciation Right agreement that
in the case of a cash payment such acceleration in payment shall also be subject
to discounting of the payment to reasonably reflect the time value of money
using any reasonable discount rate selected by the Committee in accordance with
Treasury Regulations under Code Section 162(m).
(d) FORM OF PAYMENT. Payment pursuant to a Stock
Appreciation Right may be made (i) in cash, (ii) in shares of Common Stock,
(iii) a promissory note or (iv) in any combination of the above, as the
Committee shall determine in its sole and absolute discretion. The Committee may
elect to make this determination either at the time the Stock Appreciation Right
is granted, at the time of payment or at any time in between such dates.
However, any Stock Appreciation Right paid upon or subsequent to the occurrence
of a Change in Control (as defined in Section 16) shall be paid in cash.
B-6
8. RESTRICTED AWARDS. Restricted Awards granted under the Plan
may be in the form of either Restricted Stock Grants or Restricted Unit Grants.
Restricted Awards shall be subject to the following terms and conditions.
Furthermore, the Restricted Awards shall be pursuant to a written agreement
executed both by the Company and the Participant, which agreement shall contain
such additional terms and conditions, not inconsistent with the express
provisions of the Plan, as the Committee shall deem desirable in its sole and
absolute discretion. The terms of such written agreements need not be identical.
(a) RESTRICTED STOCK GRANTS. A Restricted Stock Grant is
an Award of shares of Common Stock transferred to a Participant subject to such
terms and conditions as the Committee deems appropriate, as set forth in
Paragraph (d) below.
(b) RESTRICTED UNIT GRANTS. A Restricted Unit Grant is an
Award of units (with each unit having a value equivalent to one share of Common
Stock) granted to a Participant subject to such terms and conditions as the
Committee deems appropriate, including, without limitation, the requirement that
the Participant forfeit all or a portion of such units upon termination of
employment for specified reasons within a specified period of time, and
restrictions on the sale, assignment, transfer or other disposition of such
units.
(c) GRANTS OF AWARDS. Restricted Awards may be granted
under the Plan in such form and on such terms and conditions as the Committee
may from time to time approve. Restricted Awards may be granted alone or in
addition to other Awards under the Plan. Subject to the terms of the Plan, the
Committee shall determine the number of Restricted Awards to be granted to a
Participant and the Committee may impose different terms and conditions
(including performance goals) on any particular Restricted Award made to any
Participant. Each Participant receiving a Restricted Stock Grant shall be issued
a stock certificate in respect of such shares of Common Stock. Such certificate
shall be registered in the name of such Participant, shall be accompanied by a
stock power duly executed by such Participant, and shall bear an appropriate
legend referring to the terms, conditions and restrictions applicable to such
Award. The certificate evidencing the shares shall be held in custody by the
Company until the restrictions imposed thereon shall have lapsed or been
removed.
(d) RESTRICTION PERIOD. Restricted Awards shall provide
that in order for a Participant to vest in such Awards, the Participant must
continuously provide services to the Company or its Subsidiaries, subject to
relief for specified reasons, for such period as the Committee may designate at
the time of the Award ("Restriction Period"). If the Committee so provides in
the written agreement with the Participant, a Restricted Award may also be
subject to satisfaction of such performance goals as are set forth in such
agreement. During the Restriction Period, a Participant may not sell, assign,
transfer, pledge, encumber, or otherwise dispose of shares of Common Stock
received under a Restricted Stock Grant. The Committee, in its sole discretion,
may provide for the lapse of restrictions during the Restriction Period upon the
occurrence of events selected by the Committee that are beyond the control of
the Participant (including, but not limited to, a Change in Control of the
Company under Section 16). The Committee may provide (but is not required to
provide) in the written agreement with the recipient that in the case of a cash
payment such acceleration in payment shall also be subject to discounting of the
payment to reasonably reflect the time value of money using any reasonable
discount rate selected by the Committee in accordance with Treasury Regulations
under Code Section 162(m). Upon expiration of the applicable Restriction Period
(or lapse of restrictions during the Restriction Period where the restrictions
lapse in installments or by action of the Committee), the Participant shall be
entitled to receive his or her Restricted Award or portion thereof, as the case
may be.
(e) PAYMENT OF AWARDS. A Participant who receives a
Restricted Stock Grant shall be paid solely by release of the restricted shares
at the termination of the Restriction Period (whether in one payment, in
installments or otherwise). A Participant shall be entitled to receive payment
for a Restricted Unit Grant (or portion thereof) in an amount equal to the
aggregate Fair Market Value of the shares of Common Stock covered by such Award
upon the expiration of the applicable Restriction Period. Payment in settlement
of a Restricted Unit Grant shall be made as soon as practicable following the
conclusion of the specified Restriction Period (i) in cash, (ii) in shares of
Common Stock equal to the number of units granted under the Restricted Unit
Grant with respect to which such payment is made, or (iii) in any combination of
the above, as the Committee shall determine in its sole and absolute discretion.
The Committee may elect to make this determination either at the time the Award
is granted, at the time of payment or at any time in between such dates.
B-7
(f) RIGHTS AS A SHAREHOLDER. A Participant shall have,
with respect to the shares of Common Stock received under a Restricted Stock
Grant, all of the rights of a shareholder of the Company, including the right to
vote the shares, and the right to receive any cash dividends. Such cash
dividends shall be withheld, however, until their release upon lapse of the
restrictions under the Restricted Award. Stock dividends issued with respect to
the shares covered by a Restricted Grant shall be treated as additional shares
under the Restricted Grant and shall be subject to the same restrictions and
other terms and conditions that apply to shares under the Restricted Grant with
respect to which the dividends are issued.
9. PERFORMANCE AWARDS. Performance Awards granted under the Plan
may be in the form of either Performance Share Grants or Performance Unit
Grants. Performance Awards shall be subject to the terms and conditions set
forth below. Furthermore, the Performance Awards shall be subject to written
agreements which shall contain such additional terms and conditions, not
inconsistent with the express provisions of the Plan, as the Committee shall
deem desirable in its sole and absolute discretion. Such agreements need not be
identical.
(a) PERFORMANCE SHARE GRANTS. A Performance Share Grant
is an Award of units (with each unit equivalent in value to one share of Common
Stock) granted to a Participant subject to such terms and conditions as the
Committee deems appropriate, including, without limitation, the requirement that
the Participant forfeit such units (or a portion of such units) in the event
certain performance criteria are not met within a designated period of time.
(b) PERFORMANCE UNIT GRANTS. A Performance Unit Grant is
an Award of units (with each unit representing such monetary amount as
designated by the Committee) granted to a Participant subject to such terms and
conditions as the Committee deems appropriate, including, without limitation,
the requirement that the Participant forfeit such units (or a portion of such
units) in the event certain performance criteria are not met within a designated
period of time.
(c) GRANTS OF AWARDS. Performance Awards shall be granted
under the Plan pursuant to written agreements with the Participant in such form
as the Committee may from time to time approve. Performance Awards may be
granted alone or in addition to other Awards under the Plan. Subject to the
terms of the Plan, the Committee shall determine the number of Performance
Awards to be granted to a Participant and the Committee may impose different
terms and conditions on any particular Performance Award made to any
Participant.
(d) PERFORMANCE GOALS AND PERFORMANCE PERIODS.
Performance Awards shall provide that, in order for a Participant to vest in
such Awards, the Company must achieve certain performance goals ("Performance
Goals") over a designated performance period selected by the Committee
("Performance Period"). The Performance Goals and Performance Period shall be
established by the Committee, in its sole and absolute discretion. The Committee
shall establish Performance Goals for each Performance Period before the
commencement of the Performance Period and while the outcome is substantially
uncertain or at such other time permitted under Treasury Regulations Section
1.162-27(e)(2). The Committee shall also establish a schedule or schedules for
such Performance Period setting forth the portion of the Performance Award which
will be earned or forfeited based on the degree of achievement of the
Performance Goals actually achieved or exceeded. In setting Performance Goals,
the Committee may use such measures as return on equity, earnings growth,
revenue growth, comparisons to peer companies, or such other measure or measures
of performance in such manner as it deems appropriate.
(e) PAYMENT OF AWARDS. In the case of a Performance Share
Grant, the Participant shall be entitled to receive payment for each unit earned
in an amount equal to the aggregate Fair Market Value of the shares of Common
Stock covered by such Award as of the end of the Performance Period. In the case
of a Performance Unit Grant, the Participant shall be entitled to receive
payment for each unit earned in an amount equal to the dollar value of each unit
times the number of units earned. The Committee, pursuant to the written
agreement with the Participant, may make such Performance Awards payable in
whole or in part upon the occurrence of events selected by the Committee that
are beyond the control of the Participant (including, but not limited to, a
Change in Control of the Company as set forth in Section 16 below). The
Committee may provide (but is not required to provide) in the written agreement
with the recipient that, in the case of a cash payment, acceleration in payment
of a Performance Award shall also be subject to discounting to reasonably
reflect the time value of money using any reasonable discount rate selected by
the Committee in accordance with Treasury Regulations under Code
B-8
Section 162(m). Payment in settlement of a Performance Award shall be made as
soon as practicable following the conclusion of the Performance Period (i) in
cash, (ii) in shares of Common Stock, or (iii) in any combination of the above,
as the Committee may determine in its sole and absolute discretion. The
Committee may elect to make this determination either at the time the Award is
granted, at the time of payment, or at any time in between such dates.
10. OTHER STOCK-BASED AND COMBINATION AWARDS.
(a) The Committee may grant other Awards under the Plan
pursuant to hich Common Stock is or may in the future be acquired, or Awards
denominated in stock units, including ones valued using measures other than
market value. Such other stock-based grants may be granted either alone or in
addition to any other type of Award granted under the Plan.
(b) The Committee may also grant Awards under the Plan in
combination with other Awards or in exchange of Awards, or in combination with
or as alternatives to grants or rights under any other employee plan of the
Company, including the plan of any acquired entity.
(c) Subject to the provisions of the Plan, the Committee
shall have authority to determine the individuals to whom and the time or times
at which the Awards shall be made, the number of shares of Common Stock to be
granted or covered pursuant to such Awards, and any and all other conditions
and/or terms of the Awards.
11. DEFERRAL ELECTIONS. The Committee may permit a Participant to
elect to defer his or her receipt of the payment of cash or the delivery of
shares of Common Stock that would otherwise be due to such Participant by virtue
of the exercise, earn out or vesting of an Award made under the Plan. If any
such election is permitted, the Committee shall establish rules and procedures
for such payment deferrals, including the possible (a) payment or crediting of
reasonable interest on such deferred amounts credited in cash, and (b) the
payment or crediting of dividend equivalents in respect of deferrals credited in
units of Common Stock. The Company and the Committee shall not be responsible to
any person in the event that the payment deferral does not result in deferral of
income for tax purposes.
12. DIVIDEND EQUIVALENTS. Awards of Stock Options, Stock
Appreciation Rights, Restricted Unit Grants, Performance Share Grants, and other
stock-based Awards may, in the sole and absolute discretion of the Committee,
earn dividend equivalents. In respect of any such Award which is outstanding on
a dividend record date for Common Stock, the Participant may be credited with an
amount equal to the amount of cash or stock dividends that would have been paid
on the shares of Common Stock covered by such Award had such shares been issued
and outstanding on such dividend record date. The Committee shall establish such
rules and procedures governing the crediting of dividend equivalents, including
the timing, form of payment, and payment contingencies of such dividend
equivalents, as it deems appropriate or necessary.
13. TERMINATION OF EMPLOYMENT. The terms and conditions under
which an Award may be exercised after a Participant's termination of employment
shall be determined by the Committee and reflected in the written agreement with
the Participant concerning the Award, except that in the event a Participant's
employment with the Company or a Subsidiary terminates for any reason within six
(6) months of the date of grant of any Award held by the Participant, the Award
shall expire as of the date of such termination of employment and the
Participant and the Participant's legal representative or beneficiary shall
forfeit any and all rights pertaining to such Award.
14. NON-TRANSFERABILITY OF AWARDS. No Award under the Plan, and no
rights or interest therein, shall be assignable or transferable by a Participant
except by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order within the meaning of the Code. Subject to
the foregoing, during the lifetime of a Participant, Awards are exercisable only
by, and payments in settlement of Awards will be payable only to, the
Participant or his or her legal representative.
15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the Awards granted
hereunder shall not affect or restrict in any way the right or power of the
Board or the shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any
B-9
merger or consolidation of the Company, any issue of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Company's Common
Stock or the rights thereof, the dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding.
(b) In the event of any change in capitalization
affecting the Common Stock of the Company after the Effective Date, such as a
stock dividend, stock split, recapitalization, merger, consolidation, split-up,
combination, exchange of shares, other form of reorganization, or any other
change affecting the Common Stock, such proportionate adjustments, if any, as
the Committee or the Board in its discretion may deem appropriate to reflect
such change shall be made with respect to (i) the aggregate number of shares of
Common Stock for which Awards in respect thereof may be granted under the Plan,
(ii) the maximum number of shares of Common Stock which may be sold or awarded
to any Participant, (iii) the number of shares of Common Stock covered by each
outstanding Award, and (iv) the price per share in respect of outstanding
Awards.
(c) The Committee or the Board may also make such
adjustments in the number of shares covered by, and the price or other value of
any outstanding Awards in the event of a spin-off or other distribution (other
than normal cash dividends) of Company assets to shareholders. In the event that
another corporation or business entity is being acquired by the Company, and the
Company agrees to assume outstanding employee stock option or stock appreciation
rights and/or the obligation to make future grants of options or rights to
employees of the acquired entity, the aggregate number of shares of Common Stock
available for Awards under Section 4 of the Plan may be increased accordingly.
16. CHANGE IN CONTROL.
(a) In the event of a Change in Control (as defined in
Paragraph (b) below) of the Company, and except as otherwise provided in Award
agreements:
(i) All Stock Options or Stock Appreciation
Rights then outstanding shall become fully exercisable as of the date of the
Change in Control (and shall terminate at such time as specified in the Award
agreement);
(ii) All restrictions and conditions of all
Restricted Stock Grants and Restricted Unit Grants then outstanding shall be
deemed satisfied as of the date of the Change in Control; and
(iii) All Performance Share Grants and Performance
Unit Grants shall be deemed to have been fully earned as of the date of the
Change in Control;
subject to the limitation that any Award which has been outstanding less than
six (6) months on the date of the Change in Control shall not be afforded such
treatment.
(b) A "Change in Control" shall be deemed to have
occurred upon the occurrence of any one (or more) of the following events:
(i) Any person, including a group as defined in
Section 13(d)(3) of the Exchange Act, becomes the beneficial owner of shares of
the Company with respect to which 25% or more of the total number of votes for
the election of the Board may be cast;
(ii) As a result of, or in connection with, any
cash tender offer, exchange offer, merger or other business combination, sale of
assets or contested election, or combination of the foregoing, persons who were
directors of the Company just prior to such event shall cease to constitute a
majority of the Board;
(iii) The shareholders of the Company shall
approve an agreement providing either for a transaction in which the Company
will cease to be an independent publicly owned corporation or for a sale or
other disposition of all or substantially all the assets of the Company;
(iv) A tender offer or exchange offer is made for
shares of the Company's Common Stock (other than one made by the Company) and
shares of Common Stock are acquired thereunder; or
B-10
(v) Formation of a holding company for the
Company in which the shareholdings of the holding company after its formation
are substantially the same as for the Company prior to the holding company
formation does not constitute a Change in Control for purposes of this Plan.
(c) In the event that any payment under this Plan (alone
or in conjunction with other payments) would otherwise constitute an "excess
parachute payment" under Section 280G of the Code (in the sole judgment of the
Company), such payment shall be reduced or eliminated to the extent the Company
determines necessary to avoid deduction disallowance under Section 280G of the
Code or the imposition of excise tax under Section 4999 of the Code. The Company
may consult with a Participant regarding the application of Section 280G and/or
Section 4999 to payments otherwise due to such Participant under the Plan, but
the judgment of the Company as to applicability of those provisions, the degree
to which a payment must be reduced to avoid those provisions, and which Awards
shall be reduced, is final. The Compensation Committee shall act on behalf of
the Company in interpreting and administering this limitation.
17. AMENDMENT AND TERMINATION. Without further approval of the
shareholders, the Board may at any time terminate the Plan, or may amend it from
time to time in such respects as the Board may deem advisable. However, the
Board may not, without approval of the shareholders, make any amendment which
would (a) increase the aggregate number of shares of Common Stock which may be
issued under the Plan (except for adjustments pursuant to Section 15 of the
Plan), (b) materially modify the requirements as to eligibility for
participation in the Plan, or (c) materially increase the benefits accruing to
Participants under the Plan. Notwithstanding the above, the Board may amend the
Plan to take into account changes in applicable securities laws, federal income
tax laws and other applicable laws. Further, should the provisions of Rule
16b-3, or any successor rule, under the Exchange Act be amended, the Board may
amend the Plan in accordance with any modifications to that rule without the
need for shareholder approval. Notwithstanding the foregoing, the Plan may not
be amended more than once every six months other than to comply with the changes
in the Code or the Employee Retirement Income Security Act of 1974 ("ERISA").
18. MISCELLANEOUS MATTERS.
(a) TAX WITHHOLDING. The Company shall have the right to
require Darlington or any other person legally entitled to exercise this warrant
to pay the Company any federal, state, or local taxes of any kind required by
law to be withheld with respect to the exercise of this Warrant or the sale of
the Share issued hereunder or to take such other action as may be necessary in
the opinion of the Company to satisfy all obligation for the payment of such
taxes. If Common Stock is used to satisfy tax withholding, such stock shall be
valued based on the Fair Market Value when the tax withholding is required to be
made.
(b) NO RIGHT TO EMPLOYMENT. Neither the adoption of the
Plan nor the granting of any Award shall confer upon any employee of the Company
or any Subsidiary any right to continued employment with the Company or any
Subsidiary, as the case may be, nor shall it interfere in any way with the right
of the Company or a Subsidiary to terminate the employment of any of its
employees at any time, with or without cause.
(c) UNFUNDED PLAN. The Plan shall be unfunded and the
Company shall not be required to segregate any assets that may at any time be
represented by Awards under the Plan. Any liability of the Company to any person
with respect to any Award under the Plan shall be based solely upon any written
contractual obligations that may be effected pursuant to the Plan. No such
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
(d) ANNULMENT OF AWARDS. The grant of any Award under the
Plan payable in cash is provisional until cash is paid in settlement thereof.
The grant of any Award payable in Common Stock is provisional until the
Participant becomes entitled to the certificate in settlement thereof. Payment
under any Awards granted pursuant to the Plan is wholly contingent upon
shareholder approval of the Plan. Where approval for an award sought pursuant to
Section 162(m)(4)(C)(ii) is not granted by the Company's shareholders, the Award
shall be annulled automatically. In the event the employment of a Participant is
terminated for cause (as defined below), any Award which is provisional shall be
annulled as of the date of such termination for cause. For purposes of the Plan,
the term "terminated for cause" means any discharge because of personal
dishonesty, willful misconduct, breach of fiduciary duty involving personal
profit, continuing intentional or habitual failure to perform stated duties,
violation
B-11
of any law (other than minor traffic violations or similar misdemeanor offenses
not involving moral turpitude), or material breach of any provision of an
employment or independent contractor agreement with the Company.
(e) OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS.
Payments and other benefits received by a Participant under an Award made
pursuant to the Plan shall not be deemed a part of a Participant's regular,
recurring compensation for purposes of the termination indemnity or severance
pay law of any state. Furthermore, such benefits shall not be included in, nor
have any effect on, the determination of benefits under any other employee
benefit plan or similar arrangement provided by the Company or a Subsidiary
unless expressly so provided by such other plan or arrangement, or except where
the Committee expressly determines that inclusion of an Award or portion of an
Award should be included. Awards under the Plan may be made in combination with
or in addition to, or as alternatives to, grants, awards or payments under any
other Company or Subsidiary plans. The Company or any Subsidiary may adopt such
other compensation programs and additional compensation arrangements (in
addition to this Plan) as it deems necessary to attract, retain, and motivate
officers, directors, employees or independent contractors for their service with
the Company and its Subsidiaries.
(f) SECURITIES LAW RESTRICTIONS. No shares of Common
Stock shall be issued under the Plan unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable federal and
state securities laws. Certificates for shares of Common Stock delivered under
the Plan may be subject to such stock-transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Common Stock is then listed, and any applicable federal or state
securities law. The Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(g) AWARD AGREEMENT. Each Participant receiving an Award
under the Plan shall enter into a written agreement with the Company in a form
specified by the Committee agreeing to the terms and conditions of the Award and
such related matters as the Committee shall, in its sole and absolute
discretion, determine.
(h) COSTS OF PLAN. The costs and expenses of
administering the Plan shall be borne by the Company.
(i) GOVERNING LAW. The Plan and all actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of California.
B-12
TARRANT APPAREL GROUP
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a shareholder of TARRANT APPAREL GROUP, a California
corporation (the "Company"), hereby nominates, constitutes and appoints Gerard
Guez and Patrick Chow, or either one of them, as proxy of the undersigned, each
with full power of substitution, to attend, vote and act for the undersigned at
the Annual Meeting of Shareholders of the Company, to be held on May 26, 2004,
and any postponements or adjournments thereof, and in connection therewith, to
vote and represent all of the shares of the Company which the undersigned would
be entitled to vote with the same effect as if the undersigned were present, as
follows:
A VOTE FOR ALL PROPOSALS IS RECOMMENDED BY THE BOARD OF DIRECTORS:
Proposal 1. To elect the Board of Directors' five nominees as directors:
Gerard Guez Todd Kay Patrick Chow Joseph Mizrachi Larry Russ
|_| FOR ALL NOMINEES LISTED ABOVE (except as marked to the contrary
below)
|_| WITHHELD for all nominees listed above
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space below:)
-----------------------------------------------------------------------
The undersigned hereby confer(s) upon the proxies and each of them
discretionary authority with respect to the election of directors in
the event that any of the above nominees is unable or unwilling to
serve.
Proposal 2. To approve an amendment of the Employee Incentive Plan
increasing from 100,000 to 2,000,000 the number of shares of the
Company's Common Stock which may be subject to awards granted
pursuant thereto.
|_| FOR |_| AGAINST |_| ABSTAIN
Proposal 3. To ratify the appointment of Grant Thornton LLP as the Company's
independent public accountants for the year ending December 31,
2004.
|_| FOR |_| AGAINST |_| ABSTAIN
The undersigned hereby revokes any other proxy to vote at the Annual
Meeting, and hereby ratifies and confirms all that said attorneys and proxies,
and each of them, may lawfully do by virtue hereof. With respect to matters not
known at the time of the solicitation hereof, said proxies are authorized to
vote in accordance with their best judgment.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH
ABOVE OR, TO THE EXTENT NO CONTRARY DIRECTION IS INDICATED, WILL BE TREATED AS A
GRANT OF AUTHORITY TO VOTE FOR ALL PROPOSALS. IF ANY OTHER BUSINESS IS PRESENTED
AT THE ANNUAL MEETING, THIS PROXY CONFERS AUTHORITY TO AND SHALL BE VOTED IN
ACCORDANCE WITH THE RECOMMENDATIONS OF THE PROXIES.
The undersigned acknowledges receipt of a copy of the Notice of Annual Meeting
and accompanying Proxy Statement dated April 20, 2004, relating to the Annual
Meeting.
Dated:___________________________, 2004
Signature:_____________________________
Signature:_____________________________
Signature(s) of Shareholder(s)
(See Instructions Below)
The Signature(s) hereon should correspond
exactly with the name(s) of the
Shareholder(s) appearing on the Share
Certificate. If stock is held jointly, all
joint owners should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as such.
If signer is a corporation, please sign the
full corporation name, and give title of
signing officer.
|_| Please indicate by checking this box if you anticipate
attending the Annual Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE