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
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|_| Definitive Additional Materials by Rule 14a-6(e)(2)
|_| Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
TARRANT APPAREL GROUP
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(Name of Registrant as Specified in Its Charter)
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TARRANT APPAREL GROUP
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
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TIME............................... 10:00 a.m. Pacific Time on Wednesday,
May 28, 2003
PLACE.............................. Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, California 90023
ITEMS OF BUSINESS.................. (1) To elect three Class I members
of the Board of Directors for
two-year terms.
(2) To approve the issuance of up to
3 million shares of common stock
issuable upon conversion of the
outstanding shares of Series A
Preferred Stock.
(3) To ratify the grant of options
to purchase an aggregate of 2
million shares of common stock
to certain executive officers.
(4) To ratify the appointment of
Ernst & Young LLP as the
Company's independent public
accountants for the year ended
December 31, 2003.
(5) 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, 2003, 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 14, 2003 /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 2003
Annual Meeting of Shareholders and at any adjournments or postponements.
You are invited to attend our Annual Meeting of Shareholders on Wednesday, May
28, 2003, 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 2002 Annual Report and this Proxy Statement and the
accompanying Proxy will be mailed to shareholders on or about April 25, 2003.
SHAREHOLDERS ENTITLED TO VOTE. Holders of our common stock at the close of
business on March 31, 2003 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, 2003, there were 15,765,425 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 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.
APPROVAL OF ISSUANCE OF COMMON STOCK UPON CONVERSION OF SERIES A PREFERRED
STOCK. The approval of the issuance of up to 3 million shares of our common
stock issuable upon conversion of our outstanding shares of Series
2
A Preferred Stock 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 EXECUTIVE STOCK OPTION GRANTS. The ratification of the grant of
options to purchase an aggregate of 2 million shares of our common stock to
certain executive officers 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 Ernst & Young LLP as our independent public accountants for the
year ended December 31, 2003 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
February 27, 2003, 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.
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ITEM 1: ELECTION OF DIRECTORS
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Item 1 is the election of three Class I 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 I directors whose terms expire at the 2003 Annual Meeting are Karen
Wasserman, Milton Koffman, Barry Aved and Mitchell Simbal. The Board of
Directors has nominated Milton Koffman, Barry Aved and Mitchell Simbal to serve
as Class I directors for terms expiring in 2005. The Class II directors are
serving terms that expire in 2004. Ms. Wasserman will not stand for re-election
as a Class I director and her service as a member of the board of directors will
terminate at the Annual Meeting. At the conclusion of the Annual Meeting, there
will be one vacancy in the Class I directors.
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
I directors:
Milton Koffman
Barry Aved
Mitchell Simbal
If elected, the foregoing three nominees are expected to serve until the 2005
Annual Meeting of Shareholders. The three 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.
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CLASS I DIRECTOR NOMINEES: TERMS EXPIRING IN 2005
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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. From 1991 until
1995, Mr. Aved was the President of Lerner
New York, a division of The Limited, Inc.
DIRECTOR SINCE: 1996 AGE: 59
MEMBER: COMPENSATION COMMITTEE
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: 79
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: 49
MEMBER: AUDIT COMMITTEE, COMPENSATION
COMMITTEE
CLASS II DIRECTORS: TERMS EXPIRING IN 2004
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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: 47
MEMBER: EXECUTIVE COMMITTEE
TODD KAY Todd Kay has served as President of the
Company from 1988 to September 1999 and from
March 2000 to present, 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: 46
MEMBER: EXECUTIVE COMMITTEE
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
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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: 49
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
OTHER EXECUTIVE OFFICERS
------------------------
EDDY YUEN Eddy Yuen is President of the Company's Hong
Kong subsidiary, Fashion Resource (TCL), Inc.
Mr. Yuen has served the Company since 1987.
Mr. Yuen served as the Company's Chief
Executive Officer from October 2001 to March
2003. Mr. Yuen served as a director since
November 2001, and has submitted his
resignation from the Board of Directors
effective prior to the Annual Meeting. He was
President of Tarrant Mexico from August 2000
until his promotion to Chief Executive
Officer in October 2001. From 1987 until
August 2000, he was General Manager and a
director of Tarrant HK and from 1996 until
October 2001, he served as Executive Vice
President--Sourcing of the Company. Mr. Yuen
received a Higher Diploma in Textile
Technology from Hong Kong Polytechnic
University, and a graduate diploma in
Management from the Hong Kong University of
Science and Technology.
AGE: 48
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 will be
resigning as a director of the Company
effective as of the Annual Meeting. 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: 50
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MARK ARIGAN Mark Arigan joined the company in June of
1996 and has held several positions including
Director of Finance and Director of Internal
Audit. He was appointed as Secretary in March
of 2003. Prior to Tarrant, Mr. Arigan held
several financial positions with Carter Haley
Hale and Federated Department Stores. Mr.
Arigan has degrees in business finance and
accounting from Polytechnic University of
California and is a member of Institute of
Internal Auditors (IIA).
Age: 47
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS
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MEETINGS AND COMMITTEES. The Board of Directors held 12 meetings during fiscal
2002. The Board of Directors has an Audit Committee, Compensation Committee and
Executive Committee.
The Audit Committee currently consists of Messrs. Koffman, Mizrachi and Simbal,
all of whom are considered "independent" under Rule 4200(a)(14)of the National
Association of Securities Dealers listing standards. 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 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 make recommendations
regarding the selection of 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 4 meetings during fiscal 2002.
The Compensation Committee currently consists of Messrs. Aved, Koffman, Mizrachi
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 3 meetings during
fiscal 2002.
The Executive Committee is chaired by Mr. Guez, and currently consists of
Messrs. 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.
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 2002.
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. Aved, Koffman,
Mizrachi and Simbal. None of these individuals was an officer or employee of the
Company at any time during fiscal 2002. 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.
7
ITEM 2: APPROVAL OF ISSUANCE OF COMMON STOCK UPON CONVERSION OF SERIES A
PREFERRED STOCK
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Item 2 is the approval of the issuance of up to 3 million shares of our common
stock upon conversion of our outstanding shares of Series A Preferred Stock. The
Board of Directors has approved, contingent upon approval by the Company's
shareholders at the Annual Meeting, the issuance of up to 3,000,000 shares of
our common stock (the "Series A Conversion Shares") upon conversion of the
Company's outstanding shares of Series A Preferred Stock. The Board of Directors
is submitting the proposal to approve the issuance of the Series A Conversion
Shares to the shareholders for approval at the Annual Meeting.
The Series A Conversion Shares, when issued, would become part of the existing
class of common stock and would have the same rights and privileges as the
shares of common stock now issued and outstanding. There are no preemptive
rights relating to the common stock. As of March 31, 2003, there were 15,765,425
shares of our common stock issued and outstanding. If issued, the Series A
Conversion Shares would represent approximately 16.0% of our issued and
outstanding shares of common stock. The continued listing requirements of the
Nasdaq Stock Market's National Market System prohibit the Company from issuing
the Series A Conversion Shares unless and until the issuance has been approved
by the shareholders.
ACQUISITION OF TWILL MILL.
On December 31, 2002, the Company's wholly-owned subsidiaries, Tarrant Mexico,
S. de R.L. de C.V. ("Tarrant Mexico") and Machrima Luxembourg International,
Sarl ("Tarrant Luxembourg" and, together with Tarrant Mexico, the "Purchasers"),
acquired a denim and twill manufacturing plant in Tlaxcala, Mexico, including
all machinery and equipment used in the plant, the buildings, and the real
estate on which the plant is located (the "Acquisition"). The Acquisition was
made pursuant to an Agreement for the Purchase of Assets and Stock, dated as of
December 31, 2002 (the "Purchase Agreement"), by and among the Company, the
Purchasers, Trans Textil International, S.A. de C.V. ("Trans Textil"),
Inmobiliaria Cuadros, S.A. de C.V. ("Inmobiliaria"), Rosa Lisette Nacif
Benavides, Gazi Nacif Borge, Jorge Miguel Echevarria Vazquez, and Kamel Nacif
Borge.
Pursuant to the Purchase Agreement, Tarrant Mexico purchased from Trans Textil
all of the machinery and equipment used in and located at the plant, and the
Purchasers acquired from Jorge Miguel Echevarria Vazquez and Rosa Lisette Nacif
Benavides all the issued and outstanding capital stock of Inmobiliaria, which
owns the buildings and real estate. A portion of the purchase price for the
Inmobiliaria shares consisted of the issuance to Rosa Lisette Nacif Benavides of
100,000 shares of a newly created, non-voting Series A Preferred Stock of the
Company (the "Preferred Shares"), which will become convertible into 3,000,000
shares of common stock if the Company's common shareholders approve the issuance
of the Series A Conversion Shares.
Pursuant to the Purchase Agreement, the Company issued the Preferred Shares to a
subsidiary of the Company, and subsequently caused the transfer of the Preferred
Shares to Rosa Lisette Nacif Benavides as partial repayment of indebtedness owed
by Inmobiliaria to Ms. Benavides.
TERMS OF SERIES A PREFERRED STOCK.
Except as required by law, the Preferred Shares have no voting rights. The
Preferred Shares accrue dividends at an annual rate of 7% of the initial stated
value of $88.20 per share. In the event of a liquidation, dissolution or
winding-up of the Company, the Preferred Shares will be entitled to receive,
prior to any distribution on the common stock, a distribution equal to the
initial stated value of the Preferred Shares plus all accrued and unpaid
dividends.
If the shareholders approve the issuance of the Series A Conversion Shares, each
Preferred Share will be convertible, at the option of the holder, into 30 shares
of our common stock (as adjusted for stock dividends, combinations, splits or
similar events), for an aggregate of 3,000,000 shares of common stock. If the
shareholders do not approve the issuance of the conversion shares at the Annual
Meeting, the Company will then have the right to redeem any or all of the
Preferred Shares for a price equal to the stated value plus all accrued and
unpaid dividends.
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The Company granted the holder of the Series A Conversion Shares "piggyback"
registration rights, which provide such holder the right, under certain
circumstances, to have such shares registered for resale under the Securities
Act of 1933.
CERTAIN EFFECTS OF THE PROPOSAL.
The Board of Directors believes that the approval of the issuance of the Series
A Conversion Shares is in the best interests of the Company and the
shareholders. However, the following should be considered by a shareholder in
deciding how to vote upon the proposal.
If the issuance of the Series A Conversion Shares is approved by the
shareholders at the Annual Meeting, the holder or holders of the Preferred
Shares would immediately have the right to convert each Preferred Share into 30
shares of common stock, or an aggregate of 3,000,000 shares of common stock. The
holder or holders of the Preferred Shares are under no obligation to convert the
Preferred Shares into common stock even if the issuance of the Series A
Conversion Shares is approved.
When issued, the Series A Conversion Shares would represent approximately 16.0%
of the Company's outstanding shares of common stock, based upon the 15,765,425
shares of our common stock outstanding as of March 31, 2003. As a result,
following conversion of the Preferred Shares, the holder or holders of the
Preferred Shares will own a substantial portion of our voting securities. Rosa
Lisette Nacif Benavides, the current holder of the Preferred Shares, is the
daughter of Kamel Nacif Borge. Mr. Nacif is an employee of Tarrant Mexico and
the beneficial owner of 14.9% of our outstanding common stock as of February 28,
2003. Jamil Textil, S.A. de C.V., an entity controlled by Mr. Nacif, owns
1,724,000 shares of our common stock, representing approximately 10.9% of our
outstanding common stock as of February 28, 2003. Collectively, Ms. Benevides,
Mr. Nacif and Jamil Textil would beneficially approximately 29.0% of our
outstanding common stock following conversion of the Preferred Shares and
issuance of the Series A Conversion Shares. If acting together, such
shareholders would be able to exercise significant voting power on matters on
which the shareholders are entitled to act.
If the issuance of the Series A Conversion Shares is approved, the shareholders
would experience substantial dilution in the percentage of Company equity they
own upon conversion of the Preferred Shares and issuance of the Series A
Conversion Shares. The issuance of such additional shares might be
disadvantageous to current shareholders in that any additional issuances would
potentially reduce per share dividends, if any. Shareholders should consider,
however, that the possible impact upon dividends is likely to be minimal in view
of the fact that the Company has never paid dividends, has never adopted an
policy with respect to the payment of dividends and does not intend to pay any
cash dividends in the foreseeable future. The Company instead intends to retain
earnings for use in financing growth and additional business opportunities.
If the issuance of the Series A Conversion Shares is not approved, the Company
will then have the right to redeem any or all of the Preferred Shares for a
price equal to the stated value plus all accrued and unpaid dividends. The
aggregate stated value of the Preferred Shares is $3 million.
BOARD RECOMMENDATION AND VOTE.
The approval of the issuance of the Series A Conversion Shares 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. The Board of Directors
is of the opinion that the issuance of the Series A Conversion Shares is in the
best interests of the Company and recommends a vote for the approval of the
issuance of the Series A Conversion Shares. All Proxies will be voted to approve
the issuance of the Series A Conversion Shares unless a contrary vote is
indicated on the enclosed Proxy card.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
ISSUANCE OF UP TO 3,000,000 SHARES OF COMMON STOCK UPON CONVERSION OF THE SERIES
A PREFERRED STOCK.
9
ITEM 3: RATIFICATION OF EXECUTIVE STOCK OPTION GRANTS
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Item 3 is the ratification of the grants to Gerard Guez and Todd Kay of options
to purchase 1 million shares each of our common stock.
TERMS OF OPTION GRANTS.
Effective as of March 28, 2003, the Compensation Committee approved the grant to
Messrs. Guez and Kay of options to purchase 1 million shares each of the
Company's common stock (the "Executive Options"), subject to approval of the
Executive Options by the shareholders at the Annual Meeting. The exercise price
of the Executive Options is $3.65 per share, the closing price of our common
stock on the day the grants were approved by the Compensation Committee. As of
April 3, the closing price of our common stock as reported on the Nasdaq
National Market System was $3.86 per share. So long as Messrs. Guez and Kay
remain employed with the Company, the Executive Options will vest and become
exercisable in four equal annual installments of 250,000 shares commencing on
the first anniversary of the date of grant. These Executive Options will expire
on the tenth anniversary of the date of grant. The Executive Options are granted
to Messrs. Guez and Kay in consideration of their services as officers of the
Company.
CERTAIN EFFECTS OF THE PROPOSAL.
Unless the grant of the Executive Options complies with 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 Company may be
denied a deduction for compensation attributable to the Executive Options
granted to an optionee to the extent that such compensation exceeds $1 million
in a given year. Pursuant to the provisions of Section 162(m), the Executive
Options must be disclosed to and approved by the Company's shareholders. If the
shareholders do not approve the Executive Options at the Annual Meeting, the
Executive Options will not be granted. The Company believes it is in the best
interest of the Company and its shareholders for the shareholders to approve the
Executive Options so that the options will be issued and the Company will be
able to claim a compensation deduction attributable to the Executive Options.
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.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.
The following is a general discussion of the principal federal income tax
consequences of the Executive Options grants.
CONSEQUENCES TO OPTIONEES. The optionees will recognize no income at the time
Executive Options are granted. In general, at the time shares are issued to an
optionee pursuant to exercise of the Executive Options, the optionee will
recognize income taxable at ordinary income tax rates equal to the excess of the
fair market value of the shares on the date of exercise over the exercise price
of such shares. An optionee will recognize gain or loss on the subsequent sale
of shares acquired upon exercise of the Executive Options in an amount equal to
the difference between the selling price and the tax basis of the shares, which
will include the price paid plus the amount included in the optionee's taxable
income by reason of the exercise of the Executive Options. Provided the shares
are held as
10
a capital asset, any gain or loss resulting from a subsequent sale will be
short-term or long-term capital gain or loss depending upon the length of time
the shares have been held.
CONSEQUENCES TO COMPANY. The Company generally will be entitled to a deduction
for United States federal income tax purposes in the same year and in the same
amount as the optionee is considered to have recognized income taxable at
ordinary income tax rates in connection with the exercise of Executive Options.
In certain instances, the Company may be denied a deduction for compensation
attributable to the Executive Options granted to an optionee to the extent that
such compensation exceeds $1 million in a given year.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN.
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2002.
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 6,376,487 $8.89 1,723,513
security holders
Equity compensation
plans not approved by -- -- --
security holders
----------------------- ------------------------- ----------------------------
Total 6,376,487 $8.89 1,723,513
BOARD RECOMMENDATION AND VOTE.
The Shareholders will be asked at the Annual Meeting to consider and act upon a
proposal to ratify the grant of such options. The proposal to ratify the grant
of such options requires the affirmative vote of a majority of the shares of
common stock represented and entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
THE EXECUTIVE STOCK OPTION GRANTS.
11
ITEM 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
Item 4 is the ratification of Ernst & Young LLP as our independent public
accountant for the year ending December 31, 2003. 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 Ernst &Young
LLP to continue as our independent public accountant for the current fiscal year
ending December 31, 2003. Ernst & Young LLP has served as the principal
independent public accounting firm utilized by us during the years ended
December 31, 1995 through 2002. We anticipate that a representative of Ernst &
Young LLP will attend the Annual Meeting for the purpose of responding to
appropriate questions. At the Annual Meeting, a representative of Ernst & Young
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.
The ratification of Ernst & Young LLP as the Company's independent public
accountants for the fiscal year ended December 31, 2003 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 ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS.
12
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............. 2002 450,000 -- -- 1,000,000 50,000
CEO and Chairman of 2001 450,000 -- -- -- 50,000
the Board of Directors 2000 469,234 -- -- -- 50,000
Todd Kay................ 2002 450,000 -- -- 1,000,000 50,000
President and Vice 2001 450,000 -- -- -- 50,000
Chairman of Board 2000 469,234 -- -- -- 50,000
Eddy Yuen(4)............ 2002 350,000 45,000 -- 50,000 --
President of Fashion 2001 191,729 39,586 88,541(5) 100,000 8,849
Resource (TCL), Inc. 2000 191,729 116,129 28,588(6) -- 8,849
Karen Wasserman......... 2002 345,000 -- -- -- --
Executive Vice President 2001 334,768 -- -- 50,000 --
and General 2000 338,154 -- -- 5,000 --
Merchandising Manager
Patrick Chow(7)......... 2002 220,000 75,000 -- -- --
Chief Financial 2001 160,000 30,000 -- -- --
Officer 2000 160,000 -- -- -- --
----------
(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. Yuen served as the Company's Chief Executive Officer from October 2001
through March 2003.
(5) 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.
(6) During Mr. Yuen's stay in Mexico in fiscal 2000, Mr. Yuen's family in the
U.S. received a living allowance of $12,000, house rental allowance of
$9,000 and medical insurance and utilities allowance of $7,000.
(7) Mr. Chow was appointed Chief Financial Officer on January 7, 2002.
13
OPTION GRANTS IN FISCAL 2002
The following table sets forth certain information regarding the grant of stock
options made during fiscal 2002 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(3) PRICE(4) DATE OPTION TERM(5)
---- ----------- ---------- -------- ----------- --------------------
5% 10%
-- ---
Gerard Guez....... 1,000,000(1) 32.7% $5.50 5/15/12 3,458,920 4,508,920
Todd Kay.......... 1,000,000(1) 32.7% $5.50 5/15/12 3,358,920 4,508,920
Eddy Yuen......... 50,000(2) 1.6% $5.08 1/31/12 172,946 225,446
----------
(1) The stock options vest and become exercisable in four equal installments on
each of November 11, 2002, May 15, 2003, May 15, 2004 and May 15, 2005.
(2) These stock options vest and become exercisable in four equal installments
on each of January 31, 2002, July 31, 2002, January 31, 2003 and January
31, 2004.
(3) Options covering an aggregate of 3,054,000 shares were granted to employees
during fiscal 2002.
(4) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares, subject to certain conditions.
(5) 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 2002,
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, 2002 ($4.09 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, 2002 DECEMBER 31, 2002
------------------ -------- -------- --------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Gerard Guez.......... -- -- 1,016,668 750,000 -- --
Todd Kay............. -- -- 683,332 750,000 -- --
Eddy Yuen............ -- -- 204,000 87,500 -- --
Karen Wasserman...... -- -- 85,000 25,000 -- --
Patrick Chow......... -- -- 32,000 30,000 -- --
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
14
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.
The Board of Directors has approved the extension of the Guez Agreement for
three additional years. Mr. Guez resigned as Chief Executive Officer in October
2001, but was re-appointed to this position in March 2003.
Pursuant to an employment contract dated as of January 1, 1998 (the "Kay
Agreement"), Todd Kay has been employed as the President of 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. The Board of Directors has approved the extension of the Kay
Agreement for three additional years.
Pursuant to an employment contract dated January 1, 2002 (the "Yuen Contract"),
Eddy Yuen was employed as Chief Executive Officer of the Company. The Yuen
Contract provides for an annual salary of $350,000. 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. In March 2003,
Mr. Yuen resigned as CEO of the Company and therefore has terminated his
contract. However, Mr. Yuen has been appointed President of the Company's
subsidiary, Fashion Resource (TCL), Inc.
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.
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, 2002, there were
3,376,487 shares of our common stock subject to outstanding options, 1,723,513
shares (subject to adjustment to prevent dilution) available for awards granted
under the Employee 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.
In 1992, Tarrant HK adopted a National Mutual Central Provident Fund (the
"Provident Fund") which has been approved under Section 87A of the Inland
Revenue Ordinance by the Inland Revenue Department of Hong Kong. To be eligible,
an employee must have been employed by Tarrant HK for at least one service to
defer 5% of their annual compensation into the Provident Fund. Annual matching
contributions are made by Tarrant HK. Contributions made by Tarrant HK vest
according to a schedule set forth in the Provident Fund.
15
For 2003, the Company adopted an Incentive Compensation Plan (the "Incentive
Plan") for executives and employees based on specific goals and criteria. If the
Company is able to reach certain revenue targets in 2003, incentive payments
will be distributed, but the amounts will depend in part on individual
performance as well.
REPORT OF COMPENSATION COMMITTEE
--------------------------------
The Compensation Committee is charged with the responsibility of administering
all aspects of the Company's executive compensation programs. The committee,
which currently is comprised of four 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 committee, determinations
pertaining to executive compensation are submitted to the full Board of
Directors for approval. In connection with its deliberations, the 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 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 committee to
reflect changes in any of the foregoing factors.
STOCK INCENTIVE PLAN OPTIONS AND AWARDS. Under the Employee Incentive
Plan, the 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 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 committee considers both quantitative and qualitative factors.
Quantitative items used by the 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 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 committee approved a performance
incentive plan for executives and employees for the year 2002 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 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
2002, Eddy Yuen, the Company's Chief Executive Officer in 2002 received an
annual base salary of $350,000 and a cash bonus of $45,000 and was also granted
options to purchase 50,000 shares of the Company's common stock. This
compensation package was established based upon a comparative analysis of other
similarly situation chief executive officers conducted by the compensation
committee. Our Chief Executive Officer also participates in the management
incentive plan approved by the Compensation Committee.
16
The 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 the Company's employees in fiscal 2002 will be
fully deductible. With respect to compensation to be paid to executives in 2003
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
Barry Aved, Chairman
Milton Koffman
Joseph Mizrachi
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)(14) 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 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 2002, the Audit Committee:
- Reviewed and discussed the audited financial statements for the year ended
December 31, 2002 with management and Ernst & Young 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 totaled approximately $422,000 in 2001 and approximately
$624,000 in 2002, including fees associated with the annual audit, the reviews
of the Company's quarterly reports on Form 10-Q, and statutory audits
17
required internationally.
AUDIT-RELATED FEES
Fees for audit-related services totaled approximately $18,000 in 2001 and
approximately $103,000 in 2002. 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,
totaled approximately $652,000 in 2001 and $942,000 in 2002.
ALL OTHER FEES
There were no fees for any other services not included above in either 2002 or
2001.
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, 2002
for filing with the SEC.
AUDIT COMMITTEE
Mitchell Simbal, Chairman
Milton Koffman
Joseph Mizrachi
18
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, 1997 to December 31, 2002, 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, 1997 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.
[PERFORMANCE GRAPH OMITTED]
Cumulative Total Return
--------------------------------------------------
12/97 12/98 12/99 12/00 12/01 12/02
TARRANT APPAREL GROUP 100.00 508.80 123.20 46.40 70.14 52.35
NASDAQ STOCK MARKET (U.S.) 100.00 140.99 261.48 157.42 124.89 86.33
PEER GROUP 100.00 77.39 49.37 9.35 7.09 10.15
19
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 2002, 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 2002 for rent for office and warehouse facilities.
From time to time, the Company has borrowed funds from, and advanced funds to,
certain officers and principal shareholders, including Messrs. Guez and Kay. The
maximum amount of such borrowings from Mr. Kay during 2002 was $2,317,000. As of
December 31, 2002, the Company was indebted to Mr. Kay in the amount of
$487,000. The maximum amount of such advances to Mr. Guez during 2002 was
approximately $4,923,000. Mr. Guez had an outstanding advance from the Company
of $4,879,000 as of December 31, 2002. All advances to, and borrowings from, Mr.
Guez and Mr. Kay in 2002 bore interest at the rate of 7.75%. Section 402 of the
Sarbanes-Oxley Act of 2002, enacted in July 2003, prohibits publicly-traded
companies from providing personal loans to directors and executive officers. As
a result, the Company is no longer permitted to make advances or loans, or
materially amend the terms of any existing advances or loans, to any of its
directors or executive officers.
On December 31, 2002, the Company's wholly-owned subsidiaries, Tarrant Mexico
and Machrima Luxembourg, acquired a denim and twill manufacturing plant in
Tlaxcala, Mexico, including all machinery and equipment used in the plant, the
buildings, and the real estate on which the plant is located. Pursuant to an
Agreement for the Purchase of Assets and Stock, dated as of December 31, 2002,
Tarrant Mexico purchased from Trans Textil all of the machinery and equipment
used in and located at the plant, and the Purchasers acquired from Jorge Miguel
Echevarria Vazquez and Rosa Lisette Nacif Benavides (the "Inmobiliaria
Shareholders") all the issued and outstanding capital stock of Inmobiliaria,
which owns the buildings and real estate. The purchase price for the machinery
and equipment was paid by cancellation of $42 million in indebtedness owed by
Trans Textil to Tarrant Mexico. The purchase price for the Inmobiliaria shares
consisted of a nominal cash payment to the Inmobiliaria Shareholders of $500,
and the subsequent repayment by the Company and its affiliates of approximately
$34.7 million in indebtedness of Inmobiliaria to Kamel Nacif Borge, his daughter
Rosa Lisette Nacif Benavides, and certain of their affiliates, which payment was
made by: (i) delivery to Rosa Lisette Nacif Benavides of one hundred thousand
shares of a newly created, non-voting Series A Preferred Stock of the Company,
which shares will become convertible into three million shares of common stock
if the Company's common shareholders approve the conversion at the Annual
Meeting; (ii) delivery to Rosa Lisette Nacif Benavides of an ownership interest
representing twenty-five percent of the voting power of and profit participation
in Tarrant Mexico; and (iii) cancellation of approximately $14.9 million of
indebtedness of Mr. Nacif and his affiliates.
Kamel Nacif Borge is an employee of Tarrant Mexico and the beneficial owner of
more than 5% of the Company's outstanding common stock. Jamil Textil, S.A. de
C.V., an entity the Company believes is controlled by Mr. Nacif, owns 1,724,000
shares of the Company's common stock, representing approximately 10.9% of our
outstanding common stock as of December 31, 2002. Trans Textil, an entity
controlled by Mr. Nacif and his family members, was initially commissioned by
the Company to construct and develop the plant in December 1998. Subsequent to
completion, Trans Textil purchased and/or leased the plant's manufacturing
equipment from the Company and entered into a production agreement that gave the
Company the first right to all production capacity of the plant. This production
agreement included the option for the Company to purchase the facility and
discontinue the production agreement with Trans Textil through September 30,
2002. The Company exercised the option and acquired the plant as described
above.
From time to time, the Company has advanced funds to Mr. Nacif and his
affiliates, and Mr. Nacif and such affiliates have advanced funds to the
Company. Immediately prior to the mill acquisition, Mr. Nacif and his
20
affiliates owed the Company approximately $7.5 million, which indebtedness was
cancelled as part of the repayment by Inmobiliaria of indebtedness due Mr. Nacif
and his affiliates.
On July 1, 2001, the Company entered into a joint venture with Azteca Production
International, Inc. ("Azteca"), a corporation owned by the brothers of Gerard
Guez, the Chairman of the Company, called United Apparel Ventures, LLC ("UAV").
This joint venture was created to coordinate the production of apparel for a
single customer of the Company's branded business. UAV is owned 50.1% by Tag
Mex, Inc., a wholly-owned subsidiary of the Company, and 49.9% by Azteca.
Results of the operation of UAV have been consolidated into the Company's
results since July 2001 with the minority partner's share of all gains and loses
eliminated through the minority interest line in the Company's financial
statements. Since October 2002, both parties have contributed the Express
business into UAV and the results are consolidated in the company's financials.
UAV makes purchases from two related parties in Mexico, Azteca and Tag-it
Pacific, Inc.
In 1998, a California limited liability company owned by Mr. Guez and Mr. Kay
purchased 2,300,000 shares of the Common Stock of Tag- It Pacific, Inc.
("Tag-It") (or approximately 37% of such Common Stock then outstanding). Tag-It
is a provider of brand identity programs to manufacturers and retailers of
apparel and accessories. Tag-It assumed the responsibility for managing and
sourcing all trim and packaging used in connection with products manufactured by
or on behalf of the Company in Mexico. This arrangement is terminable by either
the Company or Tag-It at any time. The Company believes that the terms of this
arrangement, which is subject to the acceptance of the Company's customers, are
no less favorable to the Company than could be obtained from unaffiliated third
parties. The Company purchased $23.9 million of trim inventory from Tag-It
during the year ended December 31, 2002. From time to time the Company has
guaranteed the indebtedness of Tag-It for the purchase of trim on the Company's
behalf.
As of December 31, 2000, Aris Industries, Inc. ("Aris") owed the Company
approximately $5.8 million for goods manufactured and shipped by the Company. On
February 12, 2001, Aris and the Company entered into an agreement under which
Aris issued to the Company 1.5 million shares of its common stock and undertook
to repay either $2.5 million in cash or its equivalent in common stock to the
Company on December 31, 2001 in full satisfaction of the debt. As of February
20, 2002, Aris had issued the Company an aggregate of 8,117,647 shares of its
common stock including the 1.5 million shares previously issued in full
satisfaction of this debt. On March 27, 2002 the Company sold this stock to an
unrelated third party for an aggregate of $1,785,882. As of December 31, 2002,
Messrs. Guez and Kay jointly owned approximately 6% of the outstanding shares of
Aris.
The Company has adopted a policy that any transactions between the Company and
any of its affiliates or related parties, including its 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 the Company 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.
21
PRINCIPAL SHAREHOLDERS
----------------------
The following table sets forth as of February 28, 2003, 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............................ 6,611,519 (2) 39.2%
Todd Kay............................... 3,249,999 (3) 19.7%
Eddy Yuen.............................. 191,500 (4) 1.2%
Barry Aved............................. 111,500 (4) *
Karen Wasserman........................ 105,000 (5) *
Patrick Chow........................... 32,000 (4) *
Milton Koffman......................... 5,000 (4) *
Joseph Mizrachi........................ 5,000 (4) *
Mitchell Simbal........................ 5,000 (4) *
5% HOLDERS:
Kamel Nacif Borge...................... 2,474,000 (6) 14.9%
Edgar Allen #231, Col. Polanco,
C.P. 11550, Mexico, D.F.
Jamil Textil, S.A. de C.V.............. 1,724,000 (7) 10.9%
Edgar Allen #231, Col. Polanco,
C.P. 11550, Mexico, D.F.
Lord, Abbett & Co...................... 1,162,234 (8) 7.3%
90 Hudson Street,
Jersey City, NJ 07302
Emerald Point Inc...................... 1,019,093 (9) 6.4%
P.O. Box CR-54697,
Nassau, Bahamas
Directors and officers as a group
(9 persons)....................... 10,316,518 (10) 57.4%
----------
* 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
February 28, 2003. Percentage ownership is based upon 15,846,315 shares of
common stock issued and outstanding as of February 28, 2003.
(2) Includes 461,518 shares held by GKT Investments, LLC, a Delaware limited
liability company owned 100% by Mr. Guez and 1,016,668 shares of common
stock reserved for issuance upon exercise of stock options which are or
will become exercisable on or prior to April 29, 2003. 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.
22
(3) Includes 683,332 shares of common stock reserved for issuance upon exercise
of stock options, which are or will become exercisable on or prior to April
29, 2003. Mr. Kay has pledged an aggregate of 1,015,000 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 April
29, 2003.
(5) Includes 85,000 shares of common stock reserved for issuance upon exercise
of stock options, which are or will become exercisable on or prior to April
29, 2003.
(6) Includes 1,724,000 shares held by Jamil Textil, S.A. de C.V. ("Jamil
Textil") and 750,000 shares issuable upon exercise of stock options held by
Mr. Nacif which are or will become exercisable on or prior to April 29,
2003. 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 March 27, 2003.
(7) Information regarding the beneficial ownership of Mr. Nacif and Jamil
Textil is taken from a Schedule 13G as filed on March 27, 2003.
(8) As disclosed on Schedule 13G/A filed on January 28, 2002.
(9) As disclosed on Schedule 13D filed on September 13, 2002.
(10) Includes 2,135,000 shares of common stock reserved for issuance upon
exercise of stock options that are or will become exercisable on or prior
to April 29, 2003.
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,
2002, all of the Company's executive officers, directors and greater-than-ten
percent shareholders complied with all Section 16(a) filing requirements, except
that Kamil Nacif Borge and Jamil Textil, S.A. de C.V. (an entity of which Kamil
Nacif Borge is a controlling shareholder) each filed a Form 3 in March 2003
reporting as greater-than-ten percent shareholders which Form 3's should have
been filed on or before June 3, 1999.
SHAREHOLDER PROPOSALS
---------------------
Any shareholder who intends to present a proposal at the 2004 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 26, 2003. In addition, in the event a
shareholder proposal is not received by the Company by March 11, 2004, the Proxy
to be solicited by the Board of Directors for the 2004 Annual Meeting will
confer discretionary authority on the holders of the Proxy to vote the shares if
the proposal is presented at the 2004 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 2004 Annual
Meeting is advanced or delayed more than 30 days from the date of the 2003
Annual Meeting, shareholder proposals intended to be included in the proxy
materials for the 2004 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 2004 Annual Meeting. Upon determination by the Company that the date of
the 2004 Annual Meeting will be advanced or delayed by more than 30 days from
the date of the 2003 Annual Meeting, the Company will disclose such change in
the earliest possible Quarterly Report on Form 10-Q.
23
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, 2002, 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 14, 2003
24
APPENDIX "A"
AUDIT COMMITTEE CHARTER
The Audit Committee is appointed by the Board to assist the Board in
monitoring (1) the integrity of the financial statements of the Company, (2) the
compliance by the Company with legal and regulatory requirements and (3) the
independence and performance of the Company's internal and external auditors.
The members of the Audit Committee shall meet the independence and
experience requirements of the Nasdaq Stock Market, Inc. The members of the
Audit Committee shall be appointed by the Board.
The Audit Committee shall have the authority to retain special legal,
accounting or other consultants to advise the Committee. The Audit Committee may
request any officer or employee of the Company or the Company's outside counsel
or independent auditor to attend a meeting of the Committee or to meet with any
members of, or consultants to, the Committee.
The Audit Committee shall make regular reports to the Board.
The Audit Committee shall:
1. Review and reassess the adequacy of this Charter annually and recommend
any proposed changes to the Board for approval.
2. Review the annual audited financial statements with management,
including major issues regarding accounting and auditing principles and
practices as well as the adequacy of internal controls that could
significantly affect the Company's financial statements.
3. Review an analysis prepared by management and the independent auditor
of significant financial reporting issues and judgments made in
connection with the preparation of the Company's financial statements.
4. Review with management and the independent auditor the Company's
quarterly financial statements prior to the filing of its Form 10-Q.
5. Meet periodically with management to review the Company's major
financial risk exposures and the steps management has taken to monitor
and control such exposures.
6. Review major changes to the Company's auditing and accounting
principles and practices as suggested by the independent auditor,
internal auditors or management.
7. Recommend to the Board the appointment of the independent auditor,
which firm is ultimately accountable to the Audit Committee and the
Board.
8. Approve the fees to be paid to the independent auditor.
9. Receive periodic reports from the independent auditor regarding the
auditor's independence consistent with Independence Standards Board
Standard 1, discuss such reports with the auditor and, if so determined
by the Audit Committee, take or recommend that the Board take
appropriate action to oversee the independence of the auditor.
10. Evaluate together with the Board the performance of the independent
auditor and, if so determined by the Audit Committee, recommend that
the Board replace the independent auditor.
11. Review the appointment and replacement of the senior internal auditing
executive, if any.
12. Review any significant reports to management prepared by the internal
auditing department, if any, and management's responses.
1
13. Meet with the independent auditor prior to the audit to review the
planning and staffing of the audit.
14. Obtain from the independent auditor assurance that Section 10A of the
Securities Exchange Act of 1934 has not been implicated.
15. Obtain reports from management, the Company's senior internal auditing
executive, if any, and the independent auditor that the Company's
subsidiary/foreign affiliated entities are in conformity with
applicable legal requirements and the Company's code of conduct.
16. Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the
conduct of the audit.
17. Review with the independent auditor any problems or difficulties the
auditor may have encountered and any management letter provided by the
auditor and the Company's response to that letter. Such review should
include:
18. Supervise preparation of the report required by the rules of the
Securities and Exchange Commission to be included in the Company's
annual proxy statement.
a. Any difficulties encountered in the course of the audit work,
including any restrictions on the scope of activities or
access to required information.
b. Any changes required in the planned scope of the audit.
c. The responsibilities, budget and staffing of the internal
audit department, if any.
19. Advise the Board from time to time with respect to the Company's
policies and procedures regarding compliance with applicable laws and
regulations and with the Company's code of conduct.
20. Meet with the Company's legal counsel to review legal matters that may
have a material impact on the financial statements, the Company's
compliance policies and any material reports or inquiries received from
regulators or governmental agencies.
21. Meet at least annually with the Chief Financial Officer, the senior
internal auditing executive, if any, and the independent auditor in
separate executive sessions.
While the Audit Committee has the responsibilities and powers set forth
in this Charter, it is not the duty of the Audit 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 auditor. Nor is it
the duty of the Audit Committee to conduct investigations, to resolve
disagreements, if any, between management and the independent auditor or to
assure compliance with laws and regulations and the Company's code of conduct.
2
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 Todd Kay, 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 28, 2003, 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' three nominees as directors:
Barry Aved Mitchell Simbal Milton Koffman
|_| 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 the issuance of up to 3 million shares of common stock
issuable upon conversion of the outstanding shares of Series A
Preferred Stock.
|_| FOR |_| AGAINST |_| ABSTAIN
Proposal 3. To ratify the grant of options to purchase an aggregate of 2 million
shares of common stock to certain executive officers.
|_| FOR |_| AGAINST |_| ABSTAIN
Proposal 4. To ratify the appointment of Ernst & Young LLP as the Company's
independent public accountants for the year ending December 31,
2003.
|_| 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 14, 2003, relating to the
Annual Meeting.
Dated:___________________________, 2003
Signature:_____________________________
Signature:_____________________________
Signature(s) of Stockholder(s)
(See Instructions Below)
The Signature(s) hereon should
correspond exactly with the name(s) of
the Stockholder(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