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. ____)
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|_| Preliminary Proxy Statement |_| Confidential, For Use of the
|X| Definitive Proxy Statement Commission Only (as permitted
|_| Definitive Additional Materials by Rule 14a-6(e)(2)
|_| Soliciting Material Pursuant to
ss.240.14a-12
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):
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[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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________________________________________________________________________________
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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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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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
________________________________________________________________________________
TARRANT APPAREL GROUP
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
TIME........................................ 10:00 a.m. Pacific Time on
Thursday, May 26, 2005
PLACE....................................... Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
ITEMS OF BUSINESS........................... (1) To elect four Class I
members of the Board of
Directors for two-year
terms.
(2) To ratify the
appointment of Grant
Thornton LLP as the
Company's independent
public accountants for
the year ended December
31, 2005.
(3) 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 31, 2005, 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 15, 2005 /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
--------------------------------------------------------------------------------
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 2005
Annual Meeting of Shareholders and at any adjournments or postponements.
You are invited to attend our Annual Meeting of Shareholders on Thursday, May
26, 2005, 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 2004 Annual Report and this Proxy Statement and the
accompanying Proxy will be mailed to shareholders on or about May 2, 2005.
SHAREHOLDERS ENTITLED TO VOTE. Holders of our common stock at the close of
business on March 31, 2005 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
31, 2005, 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. Our Articles of Incorporation do not authorize cumulative
voting. In the election of directors, the four 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. We have no reason to believe
that any nominee will be unable or unwilling to serve if elected as a director.
2
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, 2005 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 us prior to March 6,
2005, 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 us, 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
--------------------------------------------------------------------------------
Item 1 is the election of four Class I members of the Board of Directors. Our
Articles of Incorporation provide 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. Our Bylaws provide 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 I directors whose terms expire at the 2005 Annual Meeting are Barry
Aved, Stephane Farouze, Milton Koffman and Mitchell Simbal. The Board of
Directors, upon recommendation of the independent directors, has nominated Barry
Aved, Stephane Farouze, Milton Koffman and Mitchell Simbal to serve as Class I
directors for terms expiring in 2007. The Class II directors are serving terms
that expire in 2006.
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. We have 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
I directors:
Barry Aved
Stephane Farouze
Milton Koffman
Mitchell Simbal
If elected, the foregoing four nominees are expected to serve until the 2007
Annual Meeting of Shareholders. The four nominees for election as Class I
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 I DIRECTOR NOMINEES: TERMS EXPIRING IN 2007
-------------------------------------------------
BARRY AVED Barry Aved has served as a director of the Company
since December 3, 1996, served as our President
from September 1999 through March 2000 and from
September 1, 2003 to present, and has served as
our Chief Executive Officer since September 2004.
From 1991 until 1995, Mr. Aved was the President
of Lerner New York, a division of The Limited,
Inc.
DIRECTOR SINCE: 1996 AGE: 62
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.
Previously, 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: 36
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
4
MILTON KOFFMAN Milton Koffman was elected as a director of the
Company on November 28, 2001. Since 1997, Mr.
Koffman has been 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: 81
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
MITCHELL SIMBAL Mitchell Simbal has served as a director of the
Company since June 6, 2001. Since 1997, Mr. Simbal
has been Senior Vice President of Retail
Operations for Caesars Entertainment, which
includes Caesars Palace, Paris Las Vegas, Bally's
and Flamingo Hilton. In this position, Mr. Simbal
is responsible for a $100 million retail division.
Mr. Simbal has a B.S. in accounting from the
University of Hartford.
DIRECTOR SINCE: 2001 AGE: 51
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
CLASS II DIRECTORS: 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 and served
in that position until August 2004. 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: 49
MEMBER: EXECUTIVE COMMITTEE
TODD KAY Todd Kay has served as our President from 1988 to
September 1999 and from March 2000 to August 2003,
and has served 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 us, 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: 48
MEMBER: EXECUTIVE COMMITTEE
CORAZON REYES Corazon Reyes has been a director and has served
as our Chief Financial Officer since August 2004.
Ms. Reyes has held various positions at Tarrant
since its inception in 1988. Ms. Reyes served as
Chief Operating Officer of our Mexico operations
from January 2000 until August 2004. Previously,
Ms. Reyes served as Controller from 1988 until
1994, Chief Operating Officer from 1994 to 1999,
and as a director from inception until 1999. Ms.
Reyes has also served as a director of our Hong
Kong subsidiary since 1988. Ms. Reyes received a
B.S. in Business Administration from the
University of the East in the Philippines and was
a C.P.A. in that country.
DIRECTOR SINCE: 2004 AGE: 60
MEMBER: EXECUTIVE COMMITTEE
5
JOSEPH MIZRACHI Joseph Mizrachi has served as a director of the
Company since June 6, 2001. Since 1982, Mr.
Mizrachi has been engaged in capital funding to
finance buyouts of small and medium size
companies. He has also been the Chairman of the
Board of Midwest Properties Management, Inc. since
1980, which is engaged in the management of real
estate, and he was formerly a member of the board
of directors of American Realty Investors Inc.
(NYSE) and he was a director and member of the
loan committee of Heritage Bank in Washington, DC.
He 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: 59
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
SIMON MANI Simon Mani has served as a director of the company
since December 2004. Since 1994, Mr. Mani has
served as General Manager of Mani Borthers Real
Estate Investment Group, a privately-held real
estate investment firm that owns, renovates,
operates, manages, and leases over 1 million
square feet of commercial property. Previously,
Mr. Mani served as President of the Sara Lee Fresh
division of Sara Lee Bakery from 1992 until 2001.
In this position Mr. Mani supervised over 1,500
employees and managed over 500 distributors. Mr.
Mani and his brother founded the International
Baking Company, which the Manis sold to Sara Lee
Bakery in 1992.
DIRECTOR SINCE: 2004 AGE: 53
MEMBER: AUDIT COMMITTEE, COMPENSATION COMMITTEE
OTHER EXECUTIVE OFFICERS
------------------------
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: 52
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS
-----------------------------------------------------
MEETINGS AND COMMITTEES. The Board of Directors held 13 meetings during fiscal
2004. The Board of Directors has the following standing committees: Audit
Committee and Compensation Committee. While directors generally attend annual
shareholder 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,
Mani 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 our independent auditors and the fees
incurred by us in connection therewith, (ii) to review the results of such
audit, including the independent accountants' opinion and
6
letter of comment to management and management's response thereto, (iii) to
review with our independent accountants our internal accounting principles,
policies and practices and financial reporting, (iv) to engage our independent
auditors and (v) to review our 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. The
Audit Committee held 14 meetings during fiscal 2004.
The Compensation Committee currently consists of Messrs. Farouze, Koffman,
Mizrachi, Mani 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 4 meetings during fiscal 2004.
DIRECTOR NOMINATIONS. We do 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
Tarrant and the Board;
o Conduct candidate searches, interview prospective candidates
and conduct programs to introduce candidates to Tarrant, 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.
Based on the foregoing, the Independent Board Members recommended the nomination
of Barry Aved, Stephane Farouze, Milton Koffman and Mitchell Simbal for
re-election as Class I directors to the Board of Directors, subject to
shareholder approval, for a two-year term ending on the date of the 2007 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 2004.
7
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, Mani and Simbal. None of these individuals was an officer or
employee of the Company at any time during fiscal 2004. 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.
SHAREHOLDER COMMUNICATIONS. 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.
CODE OF ETHICS. We have adopted a Code of Ethical Conduct that is applicable to
all of our officers, directors and employees, including our principal executive
officer, principal financial officer, principal accounting officer and persons
performing similar functions. A copy of our Code of Ethical Conduct is filed as
an exhibit to our Annual Report on Form 10-K.
8
ITEM 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
Item 2 is the ratification of Grant Thornton LLP as our independent public
accountant for the year ending December 31, 2005. 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, 2005. Grant Thornton LLP has served as the
principal independent public accounting firm utilized by us during the years
ended December 31, 2004 and 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 our
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, Ernst & Young 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 Ernst & Young to respond to the inquiries of the
successor accountant concerning this matter. We determined to address the
deficiencies identified by Ernst & Young in consultation with our new
independent public accountants.
AUDIT FEES
Fees paid to Grant Thornton for audit services, as approved by the Audit
Committee, totaled approximately $492,000 in 2003 and approximately $483,000 in
2004, including fees associated with the annual audit, the reviews of the
Company's quarterly reports on Form 10-Q, and statutory audits required
internationally.
AUDIT-RELATED FEES
Fees paid to Grant Thornton for audit-related services, as approved by the Audit
Committee, totaled approximately $71,000 in 2003 and approximately $0 in 2004.
Audit-related services principally include due diligence in connection with
acquisitions, accounting consultations and benefit plan audits.
TAX FEES
Fees paid to Grant Thornton for tax services, including tax compliance, tax
advice and tax planning, as approved by the Audit Committee, totaled
approximately $0 in 2003 and $0 in 2004.
ALL OTHER FEES
There were no fees for any other services provided by Grant Thornton not
included above in either 2003 or 2004.
9
APPROVAL OF NON-AUDIT SERVICES
All non-audit services to be presented to the Audit Committee for pre-approval.
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal accountant's independence.
The ratification of Grant Thornton LLP as the Company's independent public
accountants for the fiscal year ended December 31, 2005 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 ratification of the appointment of the independent public
accountants 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.
10
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
$100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to the Company in all
capacities for each of the three years ended December 31 indicated below.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- ----------------------------
ALL
OTHER ANNUAL NUMBER OF OTHER
NAME FISCAL YEAR SALARY BONUS COMPENSATION SECURITIES COMPENSATION
---- ENDED ------ ----- ------------ UNDERLYING ------------
PRINCIPAL POSITION(1) DECEMBER 31, ($) ($) ($)(2) OPTIONS ($)(3)
------------------------- ------------ ------ ----- ------------ ---------- ------------
Barry Aved(4)............ 2004 415,385 -- -- 30,000 --
President and Chief 2003 123,077 -- -- 504,000 --
Executive Officer 2002 -- -- -- -- --
Gerard Guez(5)........... 2004 50,000 -- -- -- --
Chairman of the 2003 211,538(6) -- -- 1,000,000 --
Board of Directors 2002 450,000 -- -- 1,000,000 50,000
Todd Kay................. 2004 519,231 -- -- -- --
Vice Chairman 2003 500,000 20,000 -- 1,000,000 --
the Board of Directors 2002 450,000 -- -- 1,000,000 50,000
Charles Ghailian(7)...... 2004 398,736 170,000 -- -- --
President of 2003 383,968 222,500 -- 25,000 --
Tag Mex, Inc. 2002 383,968 170,000 -- -- --
Corazon Reyes(8)......... 2004 181,594 -- -- -- --
Chief Financial 2003 148,320 -- -- -- --
Officer
2002 148,320 -- -- -- --
Patrick Chow(9).......... 2004 225,769 -- -- 25,000 --
Chief Financial 2003 250,000 100,000 -- 100,000 --
Officer
2002 220,000 75,000 -- -- --
----------
(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 payment for unused
vacation days, 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. Aved was appointed President on September 1, 2003 and was appointed
as Chief Executive Officer on August 2, 2004.
(5) Mr. Guez served as the Company's Chief Executive Officer from the
Company's inception until 2001, and again from March 2003 through August
2, 2004.
(6) Pursuant to the terms of the Mr. Guez's Employment Agreement, Mr. Guez
was entitled to receive a base salary of $500,000 for fiscal year 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.
(7) 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.
(8) Ms. Reyes was appointed Chief Financial Officer on August 16, 2004.
(9) Mr. Chow was appointed Chief Financial Officer on January 7, 2002 and
resigned on August 16, 2004.
11
OPTION GRANTS IN FISCAL 2004
The following table sets forth certain information regarding the grant of stock
options made during fiscal 2004 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%
-- ---
Barry Aved..... 30,000 55% $3.68 1/2/2014 $69,430 $175,949
Patrick Chow... 25,000 45% $3.68 1/2/2014 $57,858 $146,624
----------
(1) Options covering an aggregate of 55,000 shares were granted to employees
during fiscal 2004.
(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.
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 2004,
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 Stock Market on December
31, 2004 ($2.44 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, 2004 DECEMBER 31, 2004
------------------- --------- -------- ---------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Barry Aved........... -- -- 150,000 409,000 -- --
Gerard Guez.......... -- -- 1,766,668 1,000,000 -- --
Todd Kay............. -- -- 1,433,332 1,000,000 -- --
Charles Ghailian..... -- -- 178,250 18,750 -- --
Corazon Reyes........ -- -- 90,612 0 -- --
Patrick Chow......... -- -- 87,000 100,000 -- --
EMPLOYMENT AND SEVERANCE AGREEMENTS
-----------------------------------
The Company has entered into employment contracts with the following Named
Executive Officers.
Pursuant to an employment contract dated September 1, 2003, Barry Aved has been
employed as our President. In August 2004, Mr. Aved was also appointed Chief
Executive Officer. Mr. Aved's employment agreement provides for an annual base
salary of $400,000, and an initial grant of options to purchase 500,000 shares
of our common stock, vesting in equal annual installments four years from the
grant date. The agreement is 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. This agreement provides that if we terminate Mr. Aved
without cause (as defined), then we will be obligated to continue to pay Mr.
Aved his then-current base salary and bonus through the remaining term of the
agreement.
12
Pursuant to an employment agreement originally entered into as of January 1,
1998 (and amended as of January 10, 2000, April 1, 2003 and April 1, 2004),
Gerard Guez is employed as the Chairman of our Board of Directors. Mr. Guez's
employment agreement, as amended, provides for an annual salary of $50,000 for
the remaining term of the agreement, which continues until March 31, 2006. This
agreement provides that if we terminate Mr. Guez without cause (as defined),
then we will be obligated to continue to pay Mr. Guez his then-current base
salary and bonus through the remaining term of the agreement.
Pursuant to an employment agreement originally entered into as of January 1,
1998 (and amended as of January 10, 2000, April 1, 2003 and April 1, 2004), Todd
Kay is employed as the Vice Chairman of our Board of Directors. Mr. Kay's
employment agreement, as amended, provides for an annual salary of $500,000 for
the remaining term of the agreement, which continues until March 31, 2006. This
agreement provides that if we terminate Mr. Kay without cause (as defined), then
we will be obligated to continue to pay Mr. Kay his then-current base salary and
bonus through the remaining term of the agreement.
Pursuant to an employment contract dated March 23, 1999, and as amended as of
April 1, 2002, Charles Ghailian is employed as President of Tag Mex, Inc., a
wholly-owned subsidiary of the Company. Mr. Ghailian's employment agreement
originally provided for an annual base salary of $480,000, but in 2000 we agreed
with Mr. Ghailian to reduce Mr. Ghailian's annual base salary by 20%. In
addition, the agreement provides that, as long as Tag Mex, Inc. reports
specified amounts of net sales and pre-tax income as set forth in the agreement,
Mr. Ghailian will receive an annual bonus of $170,000. The employment agreement
also provides for an additional bonus as Mr. Ghailian and we mutually agree
upon. In addition, the Mr. Ghailian was initially granted options to purchase
36,000 shares common stock under the 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, 2004, there were
2,181,962 shares of our common stock subject to outstanding options granted
under the Employee Incentive Plan and 2,918,038 shares (subject to adjustment to
prevent dilution) available for awards granted under the Employee Incentive
Plan. In addition, as of December 31, 2004, there were 6,150,000 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
13
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.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2004.
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 ........ 8,331,962 $7.22 2,918,038
Equity compensation
plans not approved by
security holders ........ 1,111,732 $4.23 --
----------------------- ------------------------- ----------------------------
Total ................... 9,443,694 $6.87 2,918,038
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. As of April 17,
2004, the warrant became fully vested and exercisable.
Sanders Morris Harris Inc. acted as placement agent in connection with
our January 2004 registered sale of 1,200,000 shares of our common stock. As
partial consideration for their services as placement agent, we issued to
Sanders Morris Harris a warrant to purchase 30,000 shares of our common stock at
an exercise price of $3.35 per share. The warrant is fully vested and
exercisable and has a term of five years.
T.R. Winston & Company acted as placement agent in connection our
December 2004 private placement financing transaction. As partial consideration
for their services as placement agent, we issued T.R. Winston & Company a
warrant to purchase 200,000 shares our common stock at an exercise price of
$2.50 per share. The warrant has a term of five years. The warrant will become
vested and exercisable on June 14, 2005.
REPORT OF COMPENSATION COMMITTEE
--------------------------------
The Compensation Committee is charged with the responsibility of administering
all aspects of our 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 our stock option
plans. Following review and approval by the Compensation Committee,
determinations pertaining to executive compensation are generally 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.
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 our company and
the share price of our common stock, as well as to attract, motivate and retain
executives of outstanding abilities and experience. Since its inception, we have
maintained the philosophy that executive compensation should be competitive with
that provided by other companies in the apparel industry to assist us in
attracting and retaining qualified executives critical to our long-term success.
14
BASE SALARY. Base salaries are negotiated at the commencement of an
executive's employment 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 our 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 our stock price.
ANNUAL INCENTIVES. The Compensation Committee believes that executive
compensation should be determined with specific reference to our 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 our 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 our image and reputation, expansion into new
markets, and the development and success of new products and new marketing
programs.
We developed, and the Compensation Committee approved a performance
incentive plan for executives and employees for the year 2004 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 us 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
2004, Gerard Guez served as our Chief Executive Officer from January 1, 2004 to
August 2, 2004, after which time Mr. Guez continued to serve as Chairman. As
compensation, Mr. Guez received total base salary of $50,000 and no cash bonus
during fiscal 2004. Barry Aved served as our Chief Executive Officer from August
2, 2004 to the present and also served as President for the full fiscal year. As
compensation, Mr. Aved received an annual base salary of $400,000 and no cash
bonus during fiscal 2004 and was granted options to purchase 30,000 shares of
our common stock. 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 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 our employees in fiscal 2004 will be fully
deductible. With respect to compensation to be paid to executives in 2005 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.
15
COMPENSATION COMMITTEE
Stephan Farouze
Milton Koffman
Joseph Mizrachi
Simon Mani
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. The written
Charter of the Audit Committee was amended by the Board of Directors in 2004 in
light of enhanced audit committee responsibilities resulting from new
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 2004, the Audit Committee:
- Reviewed and discussed the audited financial statements for the year ended
December 31, 2004 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.
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, 2004
for filing with the SEC.
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.
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal accountant's independence.
AUDIT COMMITTEE
Mitchell Simbal, Chairman
Stephane Farouze
Milton Koffman
Joseph Mizrachi
Simon Mani
16
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, 1999 to December 31, 2004, compared with the cumulative returns of the
NASDAQ Stock Market (U.S. Companies) Index and a peer group of companies. The
component entities of the peer group consist of BIB Holdings Limited, Jaclyn
Inc. and Nitches Inc. and were generated by Research Data Group, Inc. The
comparison assumes $100 was invested on December 31, 1999 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
-----------------------------------------------------------
12/99 12/00 12/01 12/02 12/03 12/04
TARRANT APPAREL GROUP ...... 100.00 37.66 56.94 42.49 37.30 25.35
NASDAQ STOCK MARKET (U.S.) . 100.00 60.30 45.49 26.40 38.36 40.51
PEER GROUP ................. 100.00 140.01 128.29 184.18 17.42 18.42
17
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 2004, or which is presently proposed.
See "Employment Contracts" for a summary of employment agreements with certain
of our executive officers.
We lease our principal offices and warehouse located in Los Angeles, California
from GET and office space in Hong Kong from Lynx International Limited. GET and
Lynx International Limited are each owned by Gerard Guez, our Chairman of the
Board of Directors, and Todd Kay, our Vice Chairman of the Board of Directors.
We believe, at the time the leases were entered into, the rents on these
properties were comparable to then prevailing market rents. We are currently
leasing both of these facilities on a month-to-month basis. We paid $1,330,000
in 2004 for rent for office and warehouse facilities at these locations.
In February 2004, our Hong Kong subsidiary entered into a 50/50 joint venture
with Auto Enterprises Limited, an unrelated third party, to source products for
Seven Licensing Company, LLC and our Private Brands subsidiary in mainland
China. On May 31, 2004, after realizing an accumulated loss from the venture of
approximately $200,000 (our share being half), we sold our interest for $1 to
Asia Trading Limited, a company owned by Jacqueline Rose, wife of Gerard Guez.
The venture owed us $221,000 as of December 31, 2004.
On October 16, 2003, we leased to affiliates of Mr. Kamel Nacif, a shareholder
at the time of the transaction, for a substantial portion of our manufacturing
facilities and operations in Mexico including real estate and equipment. We
leased our twill mill in Tlaxcala, Mexico, and our sewing plant in Ajalpan,
Mexico, for a period of 6 years and for an annual rental fee of $11 million. In
connection with this lease transaction, we also entered into a management
services agreement pursuant to which Mr. Nacif's affiliates agreed to manage the
operation of our remaining facilities in Mexico in exchange for the use of such
facilities. The term of the management services agreement was also for a period
of 6 years. In 2004, $5.5 million of lease income was recorded in other income.
We agreed to purchase annually, six million yards of fabric manufactured at the
facilities leased and/or operated by Mr. Nacif's affiliates at market prices to
be negotiated. We purchased $5.3 million of fabric under this agreement in 2004.
Net amount due from Mr. Kamel Nacif and his affiliates was $183,000 as of
December 31, 2004.
In August 2004, we entered into a purchase and sale agreement to sell to Mr.
Nacif's affiliates, substantially all of our assets and real property in Mexico,
including the equipment and facilities we previously leased to Mr. Nacif's
affiliates. Upon completion of this transaction in the fourth quarter of 2004,
we entered into a new purchase commitment agreement with Mr. Nacif's affiliates
to replace our previously purchase commitment agreement. Pursuant the new
purchase commitment agreement we agreed to purchase $5 million of fabric
manufactured at the facilities we sold to Mr. Nacif's affiliates annually over
the ten-year term of the agreement, at negotiated market prices.
From time to time in the past, we borrowed funds from, and advanced funds to,
certain officers and principal shareholders, including Gerard Guez and Todd Kay.
The greatest outstanding balance of such advances to Mr. Guez during 2004 was
approximately $4,796,000. Mr. Guez paid expenses on our behalf of approximately
$456,000 and $400,000 for the years ended December 31, 2003 and 2004,
respectively, which amounts were applied to reduce accrued interest and
principal on Mr. Geuz's loan. Subsequently, Mr. Guez repaid $2.3 million of this
indebtedness during January and February of 2005. This $2.3 million was included
in due from related parties in the accompanying consolidated balance sheet as of
December 31, 2004. The remaining balance of $2,466,000 is payable on demand and
had been shown as reductions to shareholders' equity as of December 31, 2004.
There were no outstanding advances from or borrowing to Mr. Kay during 2004. All
advances to, and borrowings from, Mr. Guez bore interest at the rate of 7.75%
during the period. Total interest paid by Mr. Guez was $374,000 and $370,000 for
the years ended December 31, 2003 and 2004, 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 ("Seven Licensing"), jeans wear bearing the brand "Seven7",
18
which is ultimately purchased by Express. Seven Licensing is beneficially owned
by Gerard Guez. In the third quarter of 2004, in order to strengthen our own
private brand business, we decided to discontinue sourcing for Seven7. Total
sales to Seven Licensing during the year ended December 31, 2004 were $2.6
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 is owned by
Hubert Guez, the brother of Gerard Guez, our Chairman. This entity was created
to coordinate the production of apparel for a single customer of our branded
business. UAV is owned 50.1% by Tag Mex, Inc., our wholly owned subsidiary, and
49.9% by Azteca. Results of the operation of UAV have been consolidated into our
results since July 2001 with the minority partner's share of all gains and loses
eliminated through the minority interest line in our financial statements. Due
to the restructuring of our Mexico operations, we discontinued manufacturing for
UAV customers in the second quarter of 2004. Two and one half percent of gross
sales as management fees were paid in 2003 and 2004 to each of the members of
UAV, per the operating agreement. We purchased $37.0 million, $37.1 million and
$11.5 million of finished goods and service from Azteca and its affiliates for
the years ended December 31, 2002, 2003 and 2004, respectively. Our total sales
of fabric and service to Azteca in 2002, 2003 and 2004 were $2.9 million, $9.9
million and $1.0 million, respectively.
At December 31, 2004, Messrs. Guez and Kay beneficially owned 961,000 and
1,003,500 shares, respectively, of common stock of Tag-It Pacific, Inc.
("Tag-It"), collectively representing 10.8% of Tag-It Pacific's common stock at
December 31, 2004. Tag-It is a provider of brand identity programs to
manufacturers and retailers of apparel and accessories. Tag-It assumed the
responsibility for managing and sourcing all trim and packaging used in
connection with products manufactured by or on our behalf in Mexico. We believe
that the terms of this arrangement, which is subject to the acceptance of our
customers, are no less favorable to us than could be obtained from unaffiliated
third parties. Due to the restructuring of our Mexico operations, Tag-it no
longer manages our trim and packaging requirements. We purchased $1.0 million of
trim from Tag-It during the year ended December 31, 2004. From time to time we
have guaranteed the indebtedness of Tag-It for the purchase of trim on our
behalf.
We believe the each of the transactions described above has been entered into on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. We have adopted a policy that any transactions between us and any
of our affiliates or related parties, including our executive officers,
directors, the family members of those individuals and any of their affiliates,
must (i) be approved by a majority of the members of the Board of Directors and
by a majority of the disinterested members of the Board of Directors and (ii) be
on terms no less favorable to us than could be obtained from unaffiliated third
parties.
19
PRINCIPAL SHAREHOLDERS
----------------------
The following table sets forth as of March 31, 2005, unless otherwise indicated,
certain information relating to the ownership of our common stock by (i) each of
our directors, (ii) each of our current named executive officers, and (iii) all
of our current named executive officers and directors as a group. Except as
listed below, there are no other persons known to us to the beneficial owner of
more than five percent of the outstanding shares of our common stock. 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.......................... 12,383,084 (2) 39.8%
Todd Kay............................. 4,495,999 (3) 14.6%
Corazon Reyes........................ 323,500 (4) 1.1%
Barry Aved........................... 218,500 (5) *
Charles Ghailian..................... 178,250 (6) *
Joseph Mizrachi...................... 18,000 (6) *
Milton Koffman....................... 16,000 (6) *
Mitchell Simbal...................... 16,000 (6) *
Stephane Farouze..................... 5,000 (6) *
Simon Mani........................... 0 --
DIRECTORS AND OFFICERS AS A GROUP
(10 PERSONS)...................... 17,654,333 (9) 52.7%
----------
* 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 31, 2005. Percentage ownership is based
upon 28,814,763 shares of common stock issued and outstanding as of March
31, 2005.
(2) Includes 461,518 shares held by GKT Investments, LLC, a Delaware limited
liability company owned 100% by Mr. Guez and 2,266,668 shares of common
stock reserved for issuance upon exercise of stock options which are or
will become exercisable on or prior to May 30, 2005. Mr. Guez has pledged
an aggregate of 3,394,851 of such shares to financial institutions to
secure the repayment of loans to Mr. Guez or corporations controlled by
Mr. Guez and has pledged 4,600,000 of such shares to UPS Capital Global
Trade Finance Corporation to secure his guarantee of our repayment of our
debt obligations to UPS.
(3) Includes 1,933,332 shares of common stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to May 30, 2005. 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) Includes 90,612 shares of common stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to May 30, 2005.
(5) Includes 158,500 shares of common stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to May 30, 2005.
(6) 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
30, 2005.
20
(7) Information regarding the beneficial ownership of The Pinnacle Fund, L.P.
is taken from a Schedule 13G as filed on December 11, 2003.
(8) 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.
(9) Includes 4,682,362 shares of common stock reserved for issuance upon
exercise of stock options that are or will become exercisable on or prior
to May 30, 2005.
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: Simon Mani filed one late Form 3 on January 10, 2005 reporting
his appointment as a director of the Company and initial grant of options to
purchase 20,000 shares of common stock, which Form 3 should have been filed on
or before December 16, 2004; and Rosa Lisette Nacif Benavides filed one late
Form 4 on December 14, 2004 reporting the sale of 3,000,000 shares of common
stock, which Form 4 should have been filed on or before December 6, 2004.
SHAREHOLDER PROPOSALS
---------------------
Any shareholder who intends to present a proposal at the 2006 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 January 3, 2006. In addition, in the event a
shareholder proposal is not received by the Company by March 18, 2006, the Proxy
to be solicited by the Board of Directors for the 2006 Annual Meeting will
confer discretionary authority on the holders of the Proxy to vote the shares if
the proposal is presented at the 2006 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 2006 Annual
Meeting is advanced or delayed more than 30 days from the date of the 2005
Annual Meeting, shareholder proposals intended to be included in the proxy
materials for the 2006 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 2006 Annual Meeting. Upon determination by the Company that the date of
the 2006 Annual Meeting will be advanced or delayed by more than 30 days from
the date of the 2005 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, 2004, WILL BE
MADE
21
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 15, 2005
22
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 Barry
Aved and Corazon Reyes, 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, 2005,
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' four nominees as directors:
Barry Aved Stephane Farouze Milton Koffman Mitchell Simbal
|_| 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 ratify the appointment of Grant Thornton LLP as the Company's
independent public accountants for the year ending December 31,
2005.
|_| 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 15, 2005, relating to the Annual
Meeting.
Dated:___________________________, 2005
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