<PAGE> 1
TARRANT APPAREL GROUP
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 2, 1997
------------------------
TO THE SHAREHOLDERS OF TARRANT APPAREL GROUP:
Notice is hereby given that the annual meeting (the "Meeting") of the
shareholders of Tarrant Apparel Group (the "Company") will be held at 11355 West
Olympic Boulevard, Los Angeles, California 90064, on Friday, May 2, 1997 at
10:00 a.m. (California time) for the following purposes:
1. ELECTION OF DIRECTORS. To elect seven persons to the Board of Directors of
the Company, to serve until the next annual meeting of shareholders and until
their successors have been elected and qualified. The following persons are
the Board of Directors' nominees:
<TABLE>
<S> <C>
Barry S. Aved Mark B. Kristof
Gerard Guez Corazon R. Reyes
Donald Hecht Karen S. Wasserman
Todd Kay
</TABLE>
2. AMENDMENT OF 1995 STOCK OPTION PLAN. To approve an amendment and restatement
of the 1995 Stock Option Plan increasing from 800,000 to 1,300,000 the number
of shares of the Company's Common Stock which may be subject to stock options
granted pursuant thereto and the types of awards which may be granted
pursuant thereto.
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. To ratify the
appointment of Ernst & Young LLP as the Company's independent certified
public accountants for the year ending December 31, 1997.
4. OTHER BUSINESS. To transact such other business as properly may come before
the Meeting or any adjournment thereof.
Only persons who are shareholders of record (the "Shareholders") at the
close of business on March 18, 1997 are entitled to notice of and to vote in
person or by proxy at the Meeting or any adjournment thereof.
The Proxy Statement which accompanies this Notice contains additional
information regarding the proposals to be considered at the Meeting, and
Shareholders are encouraged to read it in its entirety.
As set forth in the enclosed Proxy Statement, proxies are being solicited
by and on behalf of the Board of Directors of the Company. All proposals set
forth above are proposals of the Company. It is expected that these materials
first will be mailed to Shareholders on or about March 24, 1997.
IT IS IMPORTANT THAT ALL SHAREHOLDERS VOTE. WE URGE YOU TO SIGN AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING, YOU THEN MAY WITHDRAW YOUR
PROXY AND VOTE IN PERSON. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS
EXERCISE. IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS,
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
By Order of the Board of Directors,
TARRANT APPAREL GROUP
/S/ GERARD GUEZ
Gerard Guez,
Chairman of the Board and
Dated: March 24, 1997 Chief Executive Officer
Los Angeles, California
<PAGE> 2
TARRANT APPAREL GROUP
3151 EAST WASHINGTON BOULEVARD
LOS ANGELES, CALIFORNIA 90023
(213) 780-8250
------------------------
PROXY STATEMENT
1997 ANNUAL MEETING OF SHAREHOLDERS
MAY 2, 1997
------------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board of Directors") of Tarrant Apparel
Group (the "Company") for use at the 1997 annual meeting (the "Meeting") of the
shareholders of the Company to be held on Friday, May 2, 1997, at 11355 West
Olympic Boulevard, Los Angeles, California 90064, at 10:00 a.m. (California
time) and at any adjournment thereof. Gerard Guez and Todd Kay, the designated
proxyholders (the "Proxyholders"), are members of the Company's management. Only
shareholders of record (the "Shareholders") on March 18, 1997 (the "Record
Date") are entitled to notice of and to vote in person or by proxy at the
Meeting or any adjournment thereof. This Proxy Statement and the enclosed proxy
card (the "Proxy") will be first mailed to Shareholders on or about March 24,
1997.
MATTERS TO BE CONSIDERED
The matters to be considered and voted upon at the Meeting will be:
1. ELECTION OF DIRECTORS. To elect seven persons to the Board of Directors
of the Company, to serve until the next annual meeting of shareholders
and until their successors have been elected and qualified. The
following persons are the Board of Directors' nominees:
<TABLE>
<S> <C>
Barry S. Aved Mark B. Kristof
Gerard Guez Corazon R. Reyes
Donald Hecht Karen S. Wasserman
Todd Kay
</TABLE>
2. AMENDMENT OF 1995 STOCK OPTION PLAN. To approve an amendment and
restatement of the 1995 Stock Option Plan increasing from 800,000 to
1,300,000 the number of shares of the Company's Common Stock which may
be subject to stock options granted pursuant thereto and the types of
awards which may be granted pursuant thereto.
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. To ratify the
appointment of Ernst & Young LLP as the Company's independent certified
public accountants for the year ending December 31, 1997.
4. OTHER BUSINESS. To transact such other business as properly may come
before the Meeting or any adjournment thereof.
COST OF SOLICITATION OF PROXIES
This Proxy solicitation is made by the Board of Directors of the Company
and the Company will bear the costs of this solicitation, including the expense
of preparing, assembling, printing and mailing this Proxy Statement and any
other material used in this solicitation of Proxies. The solicitation of Proxies
will be made by mail and may be supplemented by telephone or other personal
contact to be made without special compensation by regular officers and
employees of the Company. If it should appear desirable to do so to ensure
adequate representation at the Meeting, officers and regular employees may
communicate with
<PAGE> 3
Shareholders, banks, brokerage houses, custodians, nominees and others, by
telephone, facsimile transmissions, telegraph, or in person to request that
Proxies be furnished. The Company will reimburse banks, brokerage houses and
other custodians, nominees and fiduciaries for their reasonable expenses in
forwarding proxy materials to their principals. The total estimated cost of the
solicitation of Proxies is $3,000.
OUTSTANDING SECURITIES AND VOTING RIGHTS; REVOCABILITY OF PROXIES
The authorized capital of the Company consists of (i) 10,000,000 shares of
common stock ("Common Stock"), of which 6,570,164 shares were issued and
outstanding on the Record Date and (ii) 2,000,000 shares of Preferred Stock,
none of which were issued and outstanding on the Record Date. A majority of the
outstanding shares of the Common Stock constitutes a quorum for the conduct of
business at the Meeting. Abstentions will be treated as shares present and
entitled to vote for purposes of determining the presence of a quorum.
Each Shareholder is entitled to one vote, in person or by proxy, for each
share of Common Stock standing in his or her name on the books of the Company as
of the Record Date on any matter submitted to the Shareholders, provided that
the candidates' names have been properly placed in nomination prior to
commencement of voting and a Shareholder has given notice prior to commencement
of voting of his or her intention to cumulate votes. If a Shareholder has given
such notice, all Shareholders may cumulate their votes for candidates in
nomination. Cumulative voting entitles a Shareholder to give one nominee a
number of votes equal to the number of directors to be elected multiplied by the
number of shares of Common Stock owned by such Shareholder, or to distribute his
or her votes on the same principle between two or more nominees as he or she
sees fit. Nominees receiving the highest number of votes on the foregoing basis
up to the total number of directors to be elected will be elected directors.
Discretionary authority to cumulate is hereby solicited by the Board of
Directors and the return of the Proxy shall grant such authority.
Each proposal described herein, other than the election of directors,
requires the affirmative vote of a majority of the outstanding shares of Common
Stock present in person or represented by proxy and entitled to vote at the
Meeting. Accordingly, broker non-votes and abstentions from voting on any
matter, other than the election of directors, will have the effect of a vote
"AGAINST" such matter.
Of the shares of Common Stock outstanding on the Record Date, 4,450,000
shares of Common Stock (or approximately 67.7% of the issued and outstanding
shares of Common Stock) were owned by directors and executive officers of the
Company. Such persons have informed the Company that they will vote "FOR" the
election of the nominees to the Board of Directors identified herein, "FOR" the
amendment and restatement of the 1995 Stock Option Plan (the "Stock Option
Plan") and "FOR" the ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors, all as described herein.
A Proxy for use at the Meeting is enclosed. The Proxy must be signed and
dated by you or your authorized representative or agent. Telegraphed or cabled
Proxies are also valid. You may revoke a Proxy at any time before it is
exercised at the Meeting by submitting a written revocation to the Secretary of
the Company or a duly executed Proxy bearing a later date or by voting in person
at the Meeting.
If you hold Common Stock in "street name" and you fail to instruct your
broker or nominee as to how to vote such Common Stock, your broker or nominee
may, in its discretion, vote such Common Stock "FOR" the election of the Board
of Directors' nominee and "FOR" the other proposals described herein. If,
however, you fail to instruct your broker or nominee as to how to vote such
Common Stock, your broker or nominee may not, pursuant to applicable stock
exchange rules, vote such Common Stock with respect to the proposal to ratify
the amendment and restatement of the Stock Option Plan.
Unless revoked, the shares of Common Stock represented by Proxies will be
voted in accordance with the instructions given thereon. In the absence of any
instruction in the Proxy, such shares of Common Stock will be voted (i) "FOR"
the election of the nominees for director identified herein, (ii) "FOR" the
amendment and restatement of the Stock Option Plan and (iii) "FOR" the
ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1997.
2
<PAGE> 4
The enclosed Proxy confers discretionary authority with respect to any
other proposals which properly may be brought before the Meeting. As of the date
hereof, 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 arise which prevent
such nominee from serving in such position and to vote such Proxy for such
substitute nominee.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of the Record Date by each person known to the Company to be the beneficial
owner of more than five percent of the outstanding shares of Common Stock (other
than depositories), by each executive officer, director and nominee for director
of the Company, and by all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL
OF BENEFICIAL OWNER(1) OWNERSHIP(2) PERCENTAGE
-------------------------------------------- ----------------- ----------
<S> <C> <C>
Gerard Guez................................. 3,000,000(4) 45.7%
Todd Kay.................................... 1,450,000(4) 22.1
Limited Direct Associates, L.P.............. 649,999(4) 9.9
Corinthian Capital Company.................. 345,900 5.3
Corazon R. Reyes............................ 42,500(5) *
Karen S. Wasserman.......................... 12,500(5) *
Eddy Yuen Tak Yu............................ 37,500(5) *
Donald Hecht................................ 2,500(5) *
All directors and executive officers as a
group (eight persons)..................... 4,545,000(6) 69.2
</TABLE>
- ---------------
* Less than 1%.
(1) The address of the directors and executive officers of the Company is 3151
East Washington Boulevard, Los Angeles, California 90023. The address of
Limited Direct Associates, L.P. is c/o The Limited, Inc., Three Limited
Parkway, P.O. Box 16000, Columbus, Ohio 43230. The address of Corinthian
Capital Company is 1700 Broadway, Suite 712, Denver, Colorado 80290.
(2) Except as set forth below, the named shareholder has sole voting power and
investment power with respect to the shares listed, subject to community
property laws where applicable.
(3) Shares of Common Stock which the person (or group) has the right to acquire
within 60 days after the Record Date are deemed to be outstanding in
calculating the percentage ownership of the person (or group) but are not
deemed to be outstanding as to any other person or group.
(4) Gerard Guez and Todd Kay have granted Limited Direct Associates, L.P.
("LDA"), a limited partnership, the general and limited partners of which
are subsidiaries of The Limited, an option to purchase up to 649,999 shares
(subject to certain anti-dilution provisions) of Common Stock at a price of
$7.20 per share. LDA has granted to Messrs. Guez and Kay the right to vote
such shares until the earlier of July 24, 1998 or one year from the date the
option is exercised. Messrs. Guez and Kay have a right of first refusal to
purchase such shares, subject to certain exceptions.
(5) Consists of shares of Common Stock issuable upon the exercise of stock
options granted to the named individual pursuant to the Stock Option Plan,
which options are exercisable at or within 60 days after the record Date.
(6) Excludes 323,667 shares which certain directors and executive officers will
have the right to purchase upon the exercise of stock options granted
pursuant to the Stock Option Plan, which options will become exercisable in
various installments commencing on May 30, 1997.
3
<PAGE> 5
PROPOSAL 1
ELECTION OF DIRECTORS
DIRECTORS AND EXECUTIVE OFFICERS
The Restated Bylaws of the Company 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 seven.
The persons named below, all of whom currently are members of the Board of
Directors of the Company, have been nominated for election to the Board of
Directors to serve until the next annual meeting of shareholders and until their
successors have been elected and qualified. All nominees have indicated their
willingness to serve and, unless otherwise instructed, Proxies will be voted in
such a way as to elect as many of these nominees as possible under applicable
voting rules. In the event that a nominee should be unable to serve as a
director, it is intended that the Proxies will be voted for the election of such
substitute nominee, if any, as shall be designated by the Board of Directors.
Management has no reason to believe that any nominee will be unavailable.
None of the directors, nominees for director or executive officers were
selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of the Company acting within their capacity as
such. There are no family relationships among directors or executive officers of
the Company as of the date hereof. Officers serve at the discretion of the Board
of Directors.
The following table sets forth certain information concerning the directors
and executive officers of the Company as of the Record Date.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- -------------------------------------------------------------
<S> <C> <C>
Gerard Guez(1) 41 Chairman of the Board, Chief Executive Officer and Director
Todd Kay(1) 40 President and Director
Corazon R. Reyes 53 Chief Operating Officer, Secretary and Director
Karen S. Wasserman 44 Executive Vice President, General Merchandising Manager and
Director
Mark B. Kristof 46 Vice President -- Finance, Chief Financial Officer and
Director
Eddy Yuen Tak Yu 42 Executive Vice President -- Sourcing and General
Manager -- Tarrant Company Limited
Barry S. Aved(1)(2) 53 Director
Donald Hecht(1)(2) 63 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
GERARD GUEZ founded the Company in 1988 and has served as its Chairman of
the Board and Chief Executive Officer since its inception. Mr. Guez also founded
Tarrant Company Limited ("Tarrant HK"), the Company's Hong Kong subsidiary, in
1985, and he has served as its Chairman and Chief Executive Officer since that
date. 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.
TODD KAY has served as President and a Director of the Company since 1988.
Mr. Kay has also served 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. JAG Beverly Hills, Inc. filed for bankruptcy
protection under the U.S. Bankruptcy Code in 1987.
CORAZON R. REYES has served as the Company's Chief Operating Officer since
1994. From the Company's inception in 1988 until 1994, Ms. Reyes served as the
Controller, Secretary and a Director of the Company, and she was responsible for
the Company's operations and administration. Ms. Reyes has also
4
<PAGE> 6
served as a Director of Tarrant HK since 1988. Ms. Reyes served in various
accounting and operations positions at Sasson Jeans, L.A., Inc. and other
affiliated garment manufacturing companies from 1980 to 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. She is a member of the American
Management Association.
KAREN S. 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. In
her current position, Ms. Wasserman directs and manages the Company's design
teams and merchandisers and she is responsible for the Company's research of
fashion themes and development of product samples. From 1983 to 1988, Ms.
Wasserman was employed by Express, an apparel retailer that is a division of The
Limited, Inc., where she served from 1986 to 1988 as a Vice President and
Merchandise Manager. In these capacities, she managed the merchandising of
shirts, dresses and jackets from initial product development through product
delivery and sales. Ms. Wasserman holds a Bachelor of Fine Arts degree from
Syracuse University and has over 16 years of experience in the apparel industry.
MARK B. KRISTOF has served as the Vice President -- Finance, Chief
Financial Officer and a Director of the Company since 1994. From 1992 until
joining the Company, Mr. Kristof served as the Vice President -- Finance and
Administration and Chief Financial Officer of Meridian Products, Inc., an
importer of seafood products. From 1989 to 1992, Mr. Kristof served as Treasurer
of L.A. Gear, Inc., a distributor of brand-name footwear and apparel, where he
was also named Vice President -- Finance in 1991. Mr. Kristof holds a Masters in
Business Administration from Carnegie-Mellon University and has a Bachelor's
degree in Mechanical Engineering from General Motors Institute.
EDDY YUEN TAK YU has served as General Manager and a Director of Tarrant HK
since 1987. He was named Executive Vice President -- Sourcing in 1996. Mr. Yuen
Tak Yu manages the Company's sourcing and manufacturing operations that are
based in Hong Kong. Prior to joining the Company in 1987, Mr. Yuen Tak Yu served
as the Sales Manager for Famous Horse Garment Factory, Ltd., a manufacturer of
woven garments, from 1985 to 1987. Mr. Yuen Tak Yu received a Higher Diploma in
Textile Technology from Hong Kong Polytechnic University and has over 15 years
of experience in the apparel industry.
BARRY S. AVED has served as a director of the Company since December 3,
1996. From 1961 until 1986, Mr. Aved held various sales, purchasing and
merchandising positions in apparel and footwear retailers, including The
Limited, Inc. From 1986 until 1989, Mr. Aved was the President of Brooks Fashion
Stores and from 1989 until 1991, he was the President of Ormond Stores, Inc.
From 1991 until 1995, Mr. Aved was the President of Lerner New York, a division
of The Limited, Inc.
DONALD HECHT has served as a director of the Company since May 1995. Mr.
Hecht is a senior partner at the certified public accounting firm of Hecht and
Company, P.C. and he has been associated with this firm and its predecessors
since 1966. Prior to 1993, Hecht and Company, P.C. served as the Company's
independent certified public accountants.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon the completion of the Company's initial public offering in July 1995,
the Board of Directors formed an Audit Committee and a Compensation Committee,
each of which committees consists of two or more directors who serve at the
discretion of the Board of Directors.
The Audit Committee is chaired by Mr. Hecht, and its members are Messrs.
Aved, Guez, Hecht and Kay. 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 certified public accountants 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
5
<PAGE> 7
independent accountants and (v) to review the Company's quarterly and annual
financial statements prior to public issuance.
The Compensation Committee is chaired by Mr. Aved, and its members are
Messrs. Aved and Hecht. The purposes of the Compensation Committee are (i) to
review and recommend to the Board of Directors the salaries, bonuses and
perquisites of the Company's executive officers, (ii) to determine the
individuals to whom, and the terms upon which, awards under the Company's profit
sharing plan and stock option plan will be granted, (iii) to make periodic
reports to the Board of Directors as to the status of such plans and (iv) to
review and recommend to the Board of Directors additional compensation plans.
The Board of Directors met four times during fiscal 1996, and the Audit
Committee and the Compensation Committee of the Board of Directors met seven and
four times, respectively, during fiscal 1996. All of the nominees who were
directors of the Company during fiscal 1996 attended at least 75% of the total
number of meetings of the Board of Directors and the total number of meetings
held by all committees on which they served during fiscal 1996, except for Mr.
Kay who attended 71% and Ms. Reyes who attended 50%.
PROCEDURES FOR SHAREHOLDER NOMINATIONS
The Board of Directors does not have a standing nominating committee. The
procedures for nominating directors, other than by the Board of Directors
itself, are set forth in the Bylaws. Nominations for the election of directors
may be made by the Board of Directors or any shareholder entitled to vote in the
election of directors. However, a shareholder may nominate a person for election
as a director at a meeting only if written notice of such shareholder's intent
to make such nomination has been given to the Secretary of the Company not later
than 90 days in advance of such meeting or, if later, the seventh day following
the first public announcement of the date of such meeting. Each such notice
shall set forth: (i) the name and address of the shareholder who intends to make
the nomination and of the person or persons to be nominated; (ii) a
representation that the shareholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting and nominate the person or persons specified in the notice;
(iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (iv) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the United States Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (v) the consent of each nominee to serve as a director
of the Company if so elected. In addition, the shareholder making such
nomination shall promptly provide any other information reasonably requested by
the Company. No person shall be eligible for election as a director of the
Company unless nominated in accordance with such procedures. The Chairman of any
meeting of shareholders shall direct that any nomination not made in accordance
with these procedures be disregarded.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16
Under Section 16(a) of the Exchange Act, the Company's directors, executive
officers and any person holding ten percent or more of the Common Stock are
required to report their ownership of Common Stock and any changes in that
ownership to the Securities and Exchange Commission (the "SEC") and to furnish
the Company with copies of such reports. Specific due dates for these reports
have been established and the Company is required to report in this Proxy
Statement any failure to file on a timely basis by such persons. Based solely
upon a review of copies of reports filed with the SEC, each person subject to
the reporting requirements of Section 16(a) has filed timely all reports
required to be filed in fiscal 1996.
DIRECTOR 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
6
<PAGE> 8
committee receives $2,000 per year for such service. The Board of Directors may
modify such compensation in the future. In addition, each director not employed
by the Company, upon joining the Board of Directors, will receive an option to
purchase 10,000 shares of the Common Stock of the Company and, thereafter, an
option to purchase 2,000 shares of Common Stock on the date of each annual
meeting at which such person is reelected to serve as a director. Such options
will have an exercise price equal to the fair market value of such shares on the
date of grant, become exercisable in four equal annual installments commencing
on the first anniversary of the grant thereof, and expire on the tenth
anniversary of the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid by the Company to its executive
officers (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------------------- ---------------------- ----------------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPENSA-
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) AWARDS($) SARS(#)(2) PAYOUTS($) TION($)(3)
- ------------------------------- ---- --------- -------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerard Guez, 1996 656,443 450,000 -- -- 50,000 -- 50,000
Chairman of the Board and 1995 575,000 300,000 -- -- -- -- --
Chief Executive Officer........ 1994 563,455 -- -- -- -- -- --
1996 656,443 450,000 -- -- 50,000 -- 50,000
Todd Kay, 1995 575,000 300,000 -- -- -- -- --
President...................... 1994 563,455 -- -- -- -- -- --
Corazon R. Reyes, 1996 179,039 29,000 -- -- 25,000 -- 7,500
Chief Operating Officer 1995 164,832 25,000 -- -- 75,000 -- 5,827
and Secretary.................. 1994 150,631 25,000 -- -- -- -- 2,432
Karen S. Wasserman, 1996 339,808 60,000 -- -- -- -- 7,500
Executive Vice President, 1995 330,000 25,000 -- -- 50,000 -- 6,921
General Merchandising 1994 300,000 -- -- -- -- -- 4,500
Manager........................
Mark B. Kristof, 1996 152,726 29,600 -- -- -- -- 7,500
Vice President -- Finance and 1995 131,539 25,000 -- -- 55,555 -- 3,375
Chief Financial Officer........ 1994 74,038 15,000 -- -- -- -- --
Eddy Yuen Tak Yu,
Executive Vice President -- 1996 148,388 129,032 -- -- 30,000 -- 6,849
Sourcing and General Manager -- 1995 143,921 109,677 -- -- 75,000 -- 6,625
Tarrant Company Limited........ 1994 129,032 100,645 -- -- -- -- 5,955
</TABLE>
- ---------------
(1) Certain of the Company's executive officers receive personal benefits in
addition to salary and cash bonuses, including car allowances. The aggregate
amount of such personal benefits does not exceed the lesser of $50,000 or
10% of the total of the annual salary and bonus reported for the Named
Executives.
(2) Consists of shares issuable pursuant to options granted under the Stock
Option Plan.
(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.
EMPLOYMENT AGREEMENTS
Pursuant to an employment contract dated as of January 1, 1995, as amended
(the "Guez Agreement"), Gerard Guez is employed as the Chairman of the Board and
Chief Executive Officer of the Company. The Guez Agreement provides that Mr.
Guez will receive an annual salary of $750,000 and at the discretion of the
Board of Directors, his salary may be increased, but not decreased, and he may
receive an annual bonus. Unless earlier terminated, the Guez Agreement will
continue in effect until December 31, 1997.
Pursuant to an employment contract dated as of January 1, 1995, as amended
(the "Kay Agreement"), Todd Kay is employed as the President of the Company. The
Kay Agreement provides that Mr. Kay will receive an annual salary of $750,000
and at the discretion of the Board of Directors, his salary may be increased,
but not decreased, and he may receive an annual bonus. Unless earlier
terminated, the Kay Agreement will continue in effect until December 31, 1997.
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<PAGE> 9
Pursuant to an employment contract dated as of November 18, 1994, as
amended (the "Kristof Agreement"), Mark B. Kristof is employed as the Chief
Financial Officer of the Company. The Kristof Agreement provides that Mr.
Kristof will receive the following compensation: (i) an annual base salary of
$160,000, subject to increase at the Company's sole discretion; (ii) options to
purchase 55,555 shares of Common Stock pursuant to the Stock Option Plan with an
exercise price of $9.00 per share (the "Kristof Options"); and (iii) such other
benefits as may be accorded to the Company's other executive employees. Unless
earlier terminated, the Kristof Agreement will continue in effect for seven
years. Under certain circumstances, including a change in control or termination
of the Kristof Agreement by the Company without cause prior to the expiration
thereof, Mr. Kristof will be entitled to receive from the Company an amount
equal to his annual base salary and continuation of his benefits for a period of
twelve months following the termination date and any unvested stock options held
by Mr. Kristof which were scheduled to vest in the twelve-month period
subsequent to the date of termination will vest immediately.
STOCK OPTION GRANTS
The following table sets forth certain information concerning the grant of
stock options during fiscal 1996 to the Named Executives pursuant to the Stock
Option Plan.
OPTION/SAR GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS/ APPRECIATION
UNDERLYING SARS GRANTED EXERCISE FOR OPTION TERM(1)
OPTIONS/SARS TO EMPLOYEES OR BASE EXPIRATION -----------------------
NAME GRANTED IN FY 1995 PRICE DATE 5% 10%
- ---------------------------- ------------ ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gerard Guez................. 50,000 13.3 $13.50 12/19/06 $424,575 $1,075,950
Todd Kay.................... 50,000 13.3 13.50 12/19/06 424,575 1,075,950
Eddy Yuen Tak Yu............ 30,000 8.0 13.50 12/19/06 254,745 645,570
Corazon R. Reyes............ 25,000 6.7 13.50 12/19/06 212,288 537,975
</TABLE>
- ---------------
(1) The Potential Realizable Value is the product of (a) the difference between
(i) the product of the closing sale price per share at the date of grant and
the sum of (A) 1 plus (B) the assumed rate of appreciation of the Common
Stock compounded annually over the term of the option and (ii) the per share
exercise price of the option and (b) the number of shares of Common Stock
underlying the option at December 31, 1996. These amounts represent certain
assumed rates of appreciation only. Actual gains, if any, on stock option
exercises are dependent on a variety of factors, including market conditions
and the price performance of the Common Stock. There can be no assurance
that the rate of appreciate presented in this table can be achieved.
8
<PAGE> 10
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information with respect to the
Named Executives concerning the exercise of options during fiscal 1996 and
unexercised options held by the Named Executives as of December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/96 AT 12/31/96(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerard Guez................. -- -- -- 50,000 -- --
Todd Kay.................... -- -- -- 50,000 -- --
Corazon R. Reyes............ -- -- 42,500 57,500 140,625 140,625
Karen S. Wasserman.......... -- -- 12,500 37,500 46,875 140,625
Mark B. Kristof............. -- -- 13,888 41,667 52,080 156,251
Eddy Yuen Tak Yu............ -- -- 37,500 67,500 140,625 140,625
</TABLE>
- ---------------
(1) The value of unexercised "in-the-money" options is the difference between
the closing sale price of the Common Stock on December 31, 1996 ($12.75 per
share) and the exercise price of the option, multiplied by the number of
shares subject to the option.
STOCK OPTION PLAN
For a description of the Stock Option Plan, see "AMENDMENT AND RESTATEMENT
OF THE 1995 STOCK OPTION PLAN."
INCENTIVE COMPENSATION PLAN
The Compensation Committee has established criteria under which Messrs.
Guez, Kay, Kristof and Yuen and Ms. Reyes and Wasserman could receive 1997
bonuses under the Incentive Compensation Plan of $800,000, $800,000, $64,000,
$192,000, $64,800 and $50,000, respectively, in the event the Company reports a
specified amount of pre-tax income and each such individual satisfies certain
performance-based criteria. For a description of the incentive compensation plan
see "AMENDMENT AND RESTATEMENT OF THE 1995 STOCK OPTION PLAN."
EMPLOYEE BENEFIT PLANS
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 contributions 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 year. The
Provident Fund permits employees who have completed one year of 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.
9
<PAGE> 11
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Report of the Compensation Committee of the Board of Directors shall
not be deemed filed under the Securities Act of 1993 (the "Securities Act") or
under the Securities Exchange Act of 1934 (the "Exchange Act").
REPORT OF THE COMPENSATION COMMITTEE
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.
Prior to the Company's initial public offering in July 1995 and the
establishment of this Committee, the Board of Directors approved employment
arrangements with certain executive officers in order to be assured of their
continued services and their experience, knowledge and abilities which have been
largely responsible for the Company's success to date. In determining the
salaries and the perquisites provided in such arrangements, the Board of
Directors considered, among other things, (i) the net sales and net income
history of the Company, both before and after the employment of these
individuals, (ii) the estimated near and intermediate term results of operations
of the Company, (iii) the position of the Company in its industry, (iv) the
expertise of these individuals, (v) the current sales, net income, growth and
capital structure of the Company and comparable companies and (vi) salaries and
perquisites of executives of comparable companies.
Payment of discretionary bonuses in fiscal 1996 was based upon the
satisfaction of individual performance objectives for each executive officer and
performance objectives for the Company as a whole, as well as a subjective
assessment of the individual's actual and potential contribution to the Company.
In the case of Messrs. Guez and Kay, the Committee was particularly influenced
by the achievement with regard to net sales and net income in a difficult retail
environment.
On December 20, 1996, the Committee adopted and on January 13, 1997 the
Board of Directors approved, subject to shareholder approval, an amendment and
restatement of the Company's 1995 Stock Option Plan increasing from 800,000 to
1,300,000 the number of shares of the Company's Common Stock which may be
subject to stock options granted pursuant thereto and the types of awards which
may be granted pursuant thereto. The purpose of the amended and restated Stock
Option Plan is to enable the Company to attract and retain employees by
providing for performance-based incentive compensation awards, including stock
options, stock appreciation rights and other performance-based awards.
Executive officers are also permitted to participate in the benefit plans
provided to employees generally, and certain executive officers are provided
long-term disability insurance, reimbursement of tax and accounting fees and
automobile allowances. The incremental cost to the Company of these benefits
provided to the Named Executives was not material in fiscal 1996.
In addition, the Company believes that stock ownership by executive
officers provides valuable incentives for such persons, who will benefit as the
Common Stock price increases, and that stock-based performance compensation
arrangements are beneficial in aligning employees' and shareholders' interests
by creating common incentives related to the possession by management of an
economic interest in the appreciation of the Company's Common Stock. In support
of these objectives, the Company granted stock options in 1996 to Messrs. Guez,
Kay and Yuen and Ms. Reyes through its stock option plan, and the Committee
established criteria under which Messrs. Guez, Kay, Kristof and Yuen and Ms.
Reyes and Wasserman could receive 1997 bonuses of $800,000, $800,000, $64,000,
$192,000, $64,800 and $50,000, respectively, in the event the Company reports a
specified amount of pretax income and each such individual satisfies certain
performance-based criteria.
Dated: March 24, 1997 THE COMPENSATION COMMITTEE
Barry S. Aved, Chairman
Donald Hecht
10
<PAGE> 12
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative total shareholder return on Common Stock with (i) the cumulative
total return of the NASDAQ market index and (ii) the cumulative total return of
companies with the standard industrial code (SIC) code 5137 over the period from
July 25, 1995 through February 28, 1997. The component entities of SIC Code 5137
were generated by Media General Financial Service, Inc. All the entities in SIC
Code 5137 were incorporated into the peer group. The graph assumes an initial
investment of $100 on July 25, 1995 and the reinvestment of dividends through
February 28, 1997. The graph is not necessarily indicative of future price
performance.
The graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Proxy Statement into any filing under
the Securities Act or under the Exchange Act, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
<TABLE>
<CAPTION>
Measurement Period Tarrant Apparel NASDAQ Market
(Fiscal Year Covered) Group SIC Code Index Index
<S> <C> <C> <C>
7/25/95 100 100 100
12/31/95 80.56 87.01 102.74
13/31/96 141.67 96.36 127.67
02/28/97 177.78 94.35 137.00
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1996, the Company advanced to a corporation owned by Messrs. Guez
and Kay an aggregate amount of $3 million. Such loan was repaid in November
1996, bore interest at the rate of 8.0% per annum and was secured by the
borrowers' interest in the Company's principal executive offices and certain
other assets.
In 1996, the Company advanced an aggregate of $2.0 million to Azteca
Production International, Inc., a corporation controlled by two brothers of Mr.
Guez, without interest. Each such advance was repaid within 15 days.
During 1996, the Company paid Hecht and Company, P.C. $47,156 for
professional accounting and tax services. Hecht and Company, P.C. served as the
Company's accountants prior to 1993. Donald Hecht, a director of the Company, is
a senior partner of Hecht and Company, P.C.
11
<PAGE> 13
The Company leases its principal offices located in Los Angeles, California
and office space in Hong Kong from corporations owned by Messrs. Guez and Kay.
The Company believes the rents on these properties are comparable to prevailing
market rents.
The Company has adopted a policy that future 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.
LIMITATION ON LIABILITY AND INDEMNIFICATION
The Restated Articles of Incorporation of the Company limit the liability
of the Company's directors for monetary damages arising from a breach of their
fiduciary duties to the Company and its shareholders, except to the extent
otherwise required by the California General Corporation Law. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company's Restated Bylaws provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by applicable law,
including circumstances in which indemnification is otherwise discretionary.
Such provisions may require the Company, among other things, (i) to indemnify
its officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers provided such persons acted
in good faith and in a manner reasonably believed to be in the best interests of
the Company and, with respect to any criminal action, had no cause to believe
their conduct was unlawful, (ii) to advance the expenses actually and reasonably
incurred by its officers and directors as a result of any proceeding against
them as to which they could be indemnified and (iii) to obtain directors' and
officers' insurance if available on reasonable terms. There is no action or
proceeding pending or, to the knowledge of the Company, threatened which may
result in a claim for indemnification by any director, officer, employee or
agent of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE BOARD OF
DIRECTORS' NOMINEES.
PROPOSAL 2
AMENDMENT AND RESTATEMENT OF THE
1995 STOCK OPTION PLAN
GENERAL
In May 1995, the Company and its shareholders adopted the 1995 Stock Option
Plan (the "Stock Option Plan"), which currently provides for the issuance of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and non-qualified stock options
to purchase shares of the Common Stock of the Company. On January 13, 1997, the
Board of Directors adopted an amendment and restatement of the Stock Option Plan
which, subject to shareholder approval, (i) increases the number of shares for
which options may be granted under the Stock Option Plan from 800,000 to
1,300,000 (subject to adjustments to prevent dilution) and (ii) expands the
types of awards which may be granted pursuant thereto to include stock options,
stock appreciation rights, restricted stock and other performance-based
benefits.
The purpose of the Stock Option Plan is to enable the Company to attract,
retain and motivate officers, directors, employees and independent contractors
by providing for performance-based benefits.
The Shareholders will be asked at the Meeting to consider and act upon a
proposal to approve this amendment and restatement of the Stock Option Plan. The
proposal to amend and restate the Stock Option Plan requires the affirmative
vote of a majority of the shares of Common Stock represented and entitled to
vote at the Meeting.
12
<PAGE> 14
OPTION EXERCISES AND HOLDINGS
As of March 18, 1997, there were 716,667 shares subject to outstanding
options, 13,169 shares available for option grants and eight directors and
executive officers and approximately 400 employees and consultants eligible to
participate in the Stock Option Plan. For information concerning the grant of
stock options during fiscal 1996 to the Named Executives, the exercise of stock
options during fiscal 1996 by the Named Executives and unexercised stock options
held by the Named Executives as of December 31, 1996, see "ELECTION OF DIRECTORS
- -- Stock Option Grants" and "ELECTION OF DIRECTORS -- Option Exercises and
Holdings."
DESCRIPTION OF THE AMENDED PLAN
Administration. The Stock Option Plan is administered by the Compensation
Committee of the Board of Directors. The Committee has the power to construe and
interpret the Stock Option Plan and, subject to provisions of the Stock Option
Plan, to determine the persons to whom and the dates on which options or awards
will be granted, the number of shares to be subject to each option or award, the
times during the term of each option or award within which all or a portion of
such option or award may be exercised, the exercise price, the type of
consideration and other terms and conditions of such option or award. The
Committee shall be composed solely of individuals who are "outside directors"
within the meaning of Section 162(m)(4)(C) of the Code.
Eligibility. Incentive stock options may be granted under the Stock Option
Plan only to employees (including directors if they are also key employees) of
the Company and its subsidiaries. Selected employees are eligible to receive
nonstatutory (non-qualified) stock options, stock appreciation rights,
restricted awards, performance awards and other awards under the Stock Option
Plan.
No option may be grated under the Stock Option Plan to any person who, at
the time of the grant, owns (or is deemed to own) stock possessing more than 10%
of the total combined voting power of the Company or any subsidiary of the
Company, unless the option exercise price is at least 110% of the fair market
value of the stock subject to the option on the date of the grant and the term
of the option does not exceed five years from the date of the grant. For
incentive stock options granted under the Stock Option Plan, the aggregate fair
market value, determined at the time of the grant, of the shares of Common Stock
with respect to which such options are exercisable for the first time by an
optionee during any calendar year (under all such plans of the Company and its
subsidiaries) may not exceed $100,000. As a result of enactment of Section
162(m) of the Code, and to provide the Compensation Committee flexibility in
structuring awards, the Stock Option Plan states that in the case of stock
options and stock appreciation rights, no person may receive in any year a stock
option to purchase more than 100,000 shares or a stock appreciation right
measured by more than 100,000 shares.
Except in the case of incentive stock options (for which each share award
may be used only once), if options or awards granted under the Stock Option Plan
expire, are canceled or otherwise terminate without being exercised, the Common
Stock not purchased pursuant to the option or award again becomes available for
issuance under the Stock Option Plan.
Terms of Awards. The following is a description of the types of grants and
awards and the permissible terms under the Stock Option Plan. Individual option
grants and share awards may be more restrictive as to any or all of the
permissible terms described below.
Stock options may be granted as "incentive stock options" within the
meaning of Section 422 of the Code or nonstatutory (non-qualified) stock
options.
Stock appreciation rights ("SARs") may be granted specifying a period of
time for which increases in share price shall be measured, with the grantee
eligible to receive stock or cash at the end of the period based upon increases
in the share price.
Restricted awards may be granted specifying a period of time (the
"Restriction Period") applicable to the award, which shall be not less than
three (3) years, but may be more than that and may vary at the discretion
13
<PAGE> 15
of the Committee. Common Stock awarded pursuant to a restricted stock award
shall entitle the holder to enjoy all the shareholder rights during the
restriction period except that certain limitations with respect to dividend
distributions and disposition of the stock shall apply.
Performance awards may be granted specifying a number of performance shares
to be credited to an account on behalf of the recipient, each share of which is
deemed to be the equivalent of one share of Common Stock of the Company. These
awards shall be subject to both time and Company performance objectives that are
specified at the time of the award at the discretion of the Committee. The value
of a performance share in a holder's account at the time of award or the time of
payment shall be the fair market value at any time of a share of the Common
Stock of the Company.
Other awards may be granted under the Plan that are not in the categories
discussed above because the Plan provides the Compensation Committee flexibility
in designing compensation programs.
Exercise Price; Payment. The exercise of stock options under the Stock
Option Plan may not be less than the fair market value of the Common Stock
subject to the option on the date of the option grant and in some cases as
described above may not be less than 110% of fair market value. Similarly, SARs
are based upon the fair market value of a share of Common Stock on the date of
the grant compared with the fair market value of a share at the end of the
measuring period. The sole basis for compensation under these awards is an
increase in the stock's fair market value.
Restricted stock awards are payable in stock upon satisfaction of the
restrictions imposed with respect to the award. The Compensation Committee has
the discretion to pay other awards in cash, in shares of Common Stock, or a
combination of both.
Performance Goals. The Stock Option Plan is structured so that the
Compensation Committee may make awards that qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, as that section
was enacted in 1993. However, the Stock Option Plan is flexible so that the
Compensation Committee also has the discretion to make awards that are not
described in that section. Section 162(m) provides a limit of $1,000,000 on
deductions for compensation paid to certain corporate executives on a
year-by-year basis. However, "performance-based compensation" is excluded from
that limitation. Whether any particular award under the Stock Option Plan will
qualify as "performance-based compensation" will depend upon the terms of the
award and compliance with certain other procedural requirements under Section
162(m). The Compensation Committee will take into account the overall tax and
business objectives of the Company in structuring awards under the Plan.
Term. The maximum term of the Stock Option Plan is ten years, except that
the Board of Directors may terminate the Stock Option Plan earlier. The term of
each individual award will depend upon the written agreement between the Company
and the grantee setting forth the terms of the awards. In certain circumstances,
an award may remain outstanding for a period that extends beyond the term of the
Stock Option Plan or the period of the grantee's employment.
Adjustments. If there is any change in the stock subject to the Stock
Option Plan or subject to any option grant or award made under the Stock Option
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in kind, stock split, liquidating dividend, combination or
exchange of shares, change in corporate structure or otherwise), the Stock
Option Plan and shares outstanding thereunder will be appropriately adjusted as
to the class and the maximum number of shares subject to the Stock Option Plan
and the class, number of shares and price per share of stock subject to such
outstanding options as determined by the Compensation Committee to be fair and
equitable to the holders, the Company and the shareholders. In addition, the
Compensation Committee may also make adjustments in the number of shares covered
by, and the price or other value of any outstanding awards under the Stock
Option Plan in the event of a spin-off or other distribution (other than normal
cash dividends) of Company assets to shareholders.
Amendment. The Board of Directors may amend the Stock Option Plan at any
time and from time to time without shareholder approval, except that an
amendment may not, without shareholder approval: (i) increase the number of
shares authorized for issuance under the Stock Option Plan except as a result of
an
14
<PAGE> 16
adjustment; (ii) materially modify the requirements as to eligibility for
participation in the Stock Option Plan; or (iii) materially increase the
benefits accruing to participants under the Stock Option Plan.
Restrictions on Transfer. Under the Stock Option Plan, no option right or
award shall be transferable by a holder other than by laws of descent and
distribution. Option rights shall be exercisable during the holder's lifetime
only by the holder or by his guardian or legal representative.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal federal income
tax consequences of the compensation awards to be granted under the Stock Option
Plan, and is based on existing federal law (including administrative regulations
and rulings) which is subject to change, in some cases retroactively. This
discussion is also qualified by the particular circumstances of individual
participants, which may substantially alter or modify the federal income tax
consequences herein discussed. Because of the wide range of awards that may be
made under the Stock Option Plan, the following discussion is confined to the
most common forms of awards likely to be made.
Incentive Stock Options. Generally under present law, when an option
qualifies as an incentive stock option under Section 422 of the Code: (i) an
optionee will not realize taxable income either upon the grant or the exercise
of the option; (ii) any gain or loss upon a qualifying disposition of the shares
acquired by the exercise of the option will be treated as capital gain or loss;
and (iii) no deduction will be allowed to the Company for federal income tax
purposes in connection with the grant or exercise of an incentive stock option
or a qualifying disposition of the shares. A disposition by an optionee of stock
acquired upon exercise of an incentive stock option will constitute a qualifying
disposition if it occurs more than two years after the grant of the option, and
one year after the transfer of the shares to the optionee. If such stock is
disposed of by the optionee before the expiration of those time limits, the
transfer would be a "disqualifying disposition" and the optionee, in general,
will recognize ordinary income equal to the lesser of: (i) the aggregate fair
market value of the shares as of the date of exercise less the option price; or
(ii) the amount realized on the disqualifying disposition less the option price.
The Company would become entitled to a corresponding deduction. Ordinary income
from a disqualifying disposition will constitute ordinary compensation income.
Any gain in addition to the amount reportable as ordinary income on a
"disqualifying disposition" generally will be capital gain.
Upon the exercise of an incentive stock option, the difference between the
fair market value of stock on the date of exercise and the option price
generally is treated as an adjustment to taxable income in that taxable year for
alternative minimum tax purposes, as are a number of other items specified by
the Code. These adjustments (along with tax preference items) form the basis for
the alternative minimum tax (presently at a graduated rate for individuals),
which may apply depending on the amount of the computed "regular tax" of the
employee for that year. Under certain circumstances the amount of alternative
minimum tax is allowed as a carryforward credit against tax liability in
subsequent years.
Non-Qualified Stock Options. In the case of stock options which do not
qualify as an incentive stock option (non-qualified stock options), no income
generally is realized by the optionee at the time of the grant of the option.
Under present law the optionee generally will realize and recognize ordinary
income at the time the non-qualified stock option is exercised equal to the
aggregate fair market value of the shares acquired less the option price.
Ordinary income from a non-qualified stock option will constitute compensation
for which withholding may be required under federal and state law.
Subject to special rules applicable when an optionee uses stock of the
Company to exercise an option, shares acquired upon exercise of a non-qualified
stock option will have a tax basis equal to their fair market value on the
exercise date or other relevant date on which ordinary income is recognized and
the holding period for the shares generally will begin on the date of exercise
or such other relevant date. Upon subsequent disposition of the shares, the
optionee generally will recognize capital gain or loss. Provided the shares are
held by the optionee for more than one year prior to disposition, the gain or
loss will be long-term capital gain or loss.
15
<PAGE> 17
The Company will generally be entitled to a deduction equal to the ordinary
income (i.e., compensation) portion of the gain recognized by the optionee in
connection with the exercise of a non-qualified stock option provided the
Company complies with any withholding requirements of federal and state law.
Stock Appreciation Rights. A recipient of an SAR will be taxed (and the
Company will receive a corresponding deduction) when the recipient receives
payment under the SAR. Income generated by such exercise will be ordinary
compensation income and will be measured by the amount of cash received or the
then-current fair market value of the stock received upon such event. The
Company will have a withholding obligation.
Restricted Stock. The income and deduction events in the case of restricted
stock grants generally are deferred until the restrictions on the stock lapse.
At that time, the recipient would report as ordinary compensation income the
difference between the then-current fair market value of the stock and the
amount (if any) paid for the stock. Subject to withholding obligations, the
Company is entitled to a corresponding deduction. The recipient may elect to
report the income with respect to the restricted stock upon its receipt rather
than at the time of the lapse of the restrictions. In that case, the valuation
used for income and deduction purposes is the value of the restricted stock at
the time of receipt, disregarding any restrictions other than those that will
never lapse.
Restricted Units. A recipient of a restricted unit grant will be taxed (and
the Company will receive a corresponding deduction) when the recipient receives
payment at the time the restrictions lapse. Income generated by the lapse and
payment will be ordinary compensation income and will be measured by the amount
of cash received or the then-current fair market value of the stock received
upon that event. The Company will have a withholding obligation.
Performance Shares and Performance Units. A recipient of a performance
share or performance unit will be taxed (and the Company will receive a
corresponding deduction) when the recipient receives payout at the end of the
performance period. The recipient will have ordinary compensation income
measured by the cash received and/or the then-current fair market value of the
stock received upon such event. The Company will have a withholding obligation.
Other Awards. The Stock Option Plan grants the Compensation Committee
considerable flexibility to design incentive-based compensation programs for
employees and directors. The tax consequences of these programs cannot be
determined at this time because the characteristics of awards will depend upon
future decisions by the Compensation Committee.
Restriction on Deductions. Not every amount paid as compensation for
services is currently deductible. For example, depending upon the services
rendered, some compensation payments must be capitalized or added to inventory
costs. Two other restrictions potentially applicable to deductions for executive
compensation payments are the restriction on deduction of so-called "excess
parachute payments" and the deduction limit of $1,000,000 per year for certain
executive compensation. Whether any of these restrictions will apply to specific
payments of compensation by the Company cannot be predicted at this time.
The Stock Option Plan provides a limitation on benefits when compensation
under the Stock Option Plan (alone or in conjunction with other payments) would
result in deduction disallowance or the imposition of the golden parachute
excise tax. The Compensation Committee has the discretion to reduce or eliminate
payments under the Stock Option Plan if it determines that such reduction or
elimination is necessary to avoid deduction disallowance or imposition of the
excise tax.
The Stock Option Plan has been designed with the intent of providing the
Compensation Committee flexibility to structure awards that either do or do not
qualify as "performance-based compensation" under Section 162(m). The
Compensation Committee will exercise this discretion by taking into account the
overall tax and business objectives of the Company.
One requirement for qualification as "performance-based compensation" is
that the arrangement must be disclosed to the shareholders and approved by them.
The shareholders of the Company are being asked under
16
<PAGE> 18
Proposal 2 at the Meeting to vote to approve the amendment and restatement of
the Stock Option Plan and the material terms under which awards will be made
under the amended and restated Stock Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT AND
RESTATEMENT OF THE 1995 STOCK OPTION PLAN.
PROPOSAL 3
RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has appointed Ernst & Young LLP as the Company's
independent certified public accountants for the fiscal year ending December 31,
1997. Ernst & Young LLP was retained effective December 29, 1995 for the
examination of the consolidated financial statements of the Company for the
fiscal year ended December 31, 1995. All professional services rendered by Ernst
& Young LLP during fiscal 1996 were furnished at customary rates and terms.
Representatives of Ernst & Young LLP will be invited to be present at the
Meeting, will have the opportunity to make a statement if they desire to do so
and will be available to respond to appropriate questions from shareholders.
Shareholders are being asked to ratify the appointment of Ernst & Young LLP
as the Company's independent public accountants for the fiscal year ending
December 31, 1997. Ratification of the proposal requires the affirmative vote of
a majority of the shares of Common Stock represented and voting at the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
OF THE COMPANY.
PROPOSALS OF SHAREHOLDERS
Under certain circumstances, shareholders are entitled to present proposals
at shareholder meetings. Any such proposal to be included in the proxy statement
for the Company's 1998 annual meeting of shareholders must be submitted by a
shareholder prior to November 23, 1997, in a form that complies with applicable
regulations.
ANNUAL REPORT
The Company's Annual Report of the fiscal year ended December 31, 1996
accompanies or has preceded this Proxy Statement. The Annual Report contains
consolidated financial statements of the Company and its subsidiaries and the
report thereon of Ernst & Young LLP, the Company's independent auditors.
SHAREHOLDERS MAY OBTAIN WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K, INCLUDING FINANCIAL STATEMENTS REQUIRED TO BE FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE EXCHANGE ACT FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996, BY WRITING TO THE COMPANY AT 3151 EAST
WASHINGTON BOULEVARD, LOS ANGELES, CALIFORNIA 90023, ATTENTION: MARK B. KRISTOF.
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<PAGE> 19
OTHER BUSINESS
Management knows of no business which will be presented for consideration
at the Meeting other than as stated in the Notice of Meeting. If, however, other
matters are properly brought before the Meeting, it is the intention of the
Proxyholders to vote the shares represented by the Proxies on such matters in
accordance with the recommendation of the Board of Directors and authority to do
so is included in the Proxy.
By Order of the Board of Directors,
TARRANT APPAREL GROUP
/S/ GERARD GUEZ
Gerard Guez,
Chairman of the Board and
Chief Executive Officer
Dated: March 24, 1997
Los Angeles, California
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<PAGE> 20
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES LISTED ABOVE, "FOR" THE AMENDMENT OF THE 1995 STOCK OPTION PLAN AND
"FOR" THE RATIFICATION OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT
AUDITORS. IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY SHALL BE
VOTED BY THE PROXYHOLDERS IN ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY
OF THE BOARD OF DIRECTORS.
The undersigned hereby ratifies and confirms all that said attorneys and
proxyholders, or either of them, or their substitutes, shall lawfully do or
cause to be done by virtue hereof, and hereby revokes any and all proxies
heretofore given by the undersigned to vote at the Meeting. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting and the Proxy
Statement accompanying said notice.
Date: ________________________ -------------------------
(Number of Shares)
-------------------------
(Name of Shareholder,
Printed)
-------------------------
(Signature of
Shareholder)
-------------------------
(Name of Shareholder,
Printed)
-------------------------
(Signature of
Shareholder)
(Please date this Proxy
and sign your name as it
appears on your stock
certificate(s).
Executors,
administrators, trustees,
etc., should give their
full titles. All joint
owners should sign.)
I (We) do [ ] do not [ ]
expect to attend the
Meeting.
This Proxy will be signed "FOR" the election of all nominees whose names
appear above unless authority to do so is withheld. Unless "AGAINST" or
"ABSTAIN" is indicated on the reverse hereof this Proxy will be voted "FOR" the
amendment of the 1995 Stock Option Plan and "FOR" the ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors. PLEASE
SIGN, DATE AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTAGE PREPAID
ENVELOPE PROVIDED.
<PAGE> 21
REVOCABLE PROXY TARRANT APPAREL GROUP REVOCABLE PROXY
ANNUAL MEETING OF SHAREHOLDERS -- MAY 2, 1997
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned shareholder(s) of Tarrant Apparel Group (the "Company")
hereby nominates, constitutes and appoints Gerard Guez and Mark B. Kristof, and
each of them, the attorney, agent and proxy of the undersigned, with full power
of substitution, to vote all stock of the Company which the undersigned is
entitled to vote at the Annual Meeting of Shareholders of the Company (the
"Meeting") to be held at 11355 West Olympic Boulevard, Los Angeles, California
90064, on Friday, May 2, 1997 at 10:00 a.m., and any adjournments thereof, as
fully and with the same force and effect as the undersigned might or could do if
personally thereat, as follows:
<TABLE>
<S> <C> <C>
1. ELECTION OF [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all
DIRECTORS (except as marked to the contrary below); nominees listed below:
Gerard Guez Todd Kay Mark B. Kristof Karen S. Wasserman
Donald Hecht Barry S. Aved Corazon R. Reyes
</TABLE>
(Instructions: To withhold authority to vote for any one or more nominees whose
name appears above with that nominee's or nominees' name(s) in the space
provided below)
- --------------------------------------------------------------------------------
2. AMENDMENT OF THE 1995 STOCK OPTION PLAN. To approve the amendment of the 1995
Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. To ratify the
appointment of Ernst & Young L.L.P. as the Company's independent auditors for
the year ending December 31, 1996.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. OTHER BUSINESS. In their discretion, the proxyholders are authorized to
transfer such other business as properly may come before the Meeting and any
adjournment or adjournments thereof.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
