SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
INNOVO GROUP INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
INNOVO GROUP INC.
1808 North Cherry Street
Knoxville, Tennessee 37917
(865) 546-1110
September __, 2000
Dear Stockholder:
You are cordially invited to attend the 2000 Annual Meeting of Stockholders of
Innovo Group Inc. to be held on Friday, October 20, 2000 at 10:00 a.m. (local
time) at The Auditorium, Tyson Place, 2607 Kingston Pike, Knoxville, Tennessee
37919.
At the annual meeting, you will be asked to vote in person or by proxy on the
election of directors for this year, the approval of new Company stock incentive
plans and a number of matters that are of critical importance to the Company.
Each of those proposals is described in the enclosed Notice of Annual Meeting
and Proxy Statement.
Regardless of your plans for attending in person, it is important that your
shares be represented and voted at the 2000 Annual Meeting. Accordingly, you
are urged to complete, sign and mail the enclosed proxy card as soon as
possible.
Sincerely,
/s/ Samuel J. Furrow
--------------------
Samuel J. Furrow
Chairman and
Chief Executive Officer
INNOVO GROUP INC.
1808 North Cherry Street
Knoxville, Tennessee 37917
(865) 546-1110
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 20, 2000
NOTICE IS HEREBY GIVEN that the 2000 Annual Meeting of Stockholders (the
"Annual Meeting") of Innovo Group Inc. (the "Company") will be held on Friday,
October 20, 2000 at 10:00 a.m. (local time) at The Auditorium, Tyson Place,
2607 Kingston Pike, Knoxville, Tennessee 37919, to consider and act upon the
following proposals:
1. To elect six directors to serve on the Board of Directors for one-year terms
and until their respective successors are elected and qualified;
2. To approve and adopt an amendment to Article Fourth of the Company's Amended
and Restated Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock from 15,000,000 to 40,000,000 shares;
3. To approve and ratify under Nasdaq Marketplace Rules and subject to agreed
terms and conditions the issuance to certain affiliates of the Company and of
Commerce Investment Group, LLC of (i) 1,500,000 shares of common stock, par
value $0.10 per share {"Common Stock"), at a purchase price of $1.00 per share
and (ii) warrants to purchase 4,800,000 shares of Common Stock at a purchase
price of $2.10 per share, and including the issuance of any securities of the
Company as dividends on or otherwise in respect of the Common Stock subject to
unexercised warrants in accordance with the terms thereof;
4. To approve and ratify under Nasdaq Marketplace Rules and subject to agreed
terms and conditions the issuance to certain affiliates of Joseph Mizrachi of
(i) $1,700,000 worth of shares of Common Stock with a purchase price equal to
the lesser of (a) a 20% discount to the average of the closing bid prices of
the Company's common stock for the 10 days prior to the date of the closing or
(b) $1.00 per share, and (ii) warrants to purchase 1,700,000 shares of Common
Stock at a purchase price of $2.00 per share, and including the issuance of
any securities of the Company as dividends on or otherwise in respect of the
Common Stock subject to unexercised warrants in accordance with the terms
thereof;
5. To approve the Company's 2000 Stock Option Plan 2000 Employee Stock Incentive
Plan;
6. To approve the Company's 2000 Director Stock Incentive Plan;
7. To ratify the appointment of BDO Seidman, LLP as the Company's independent
auditors for the fiscal year ending November 30, 2000; and
8. To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on August 21, 2000 as the
record date for the determination of stockholders entitled to notice of and to
vote at the Annual Meeting. Only holders of the Company's common stock of
record at the close of business on that date will be entitled to notice of and
to vote at the Annual Meeting or any adjournments thereof. A list of the
Company's stockholders entitled to vote at the Annual Meeting will be open to
the examination of any stockholder for any purpose germane to the meeting
during ordinary business hours for a period of ten days before the Annual
Meeting at the Company's offices. All stockholders are cordially invited to
attend the Annual Meeting.
By Order of the Board of Directors
/s/ Samuel J. Furrow
--------------------
Samuel J. Furrow
Chairman and Chief Executive Officer
Knoxville, Tennessee
September ___, 2000
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOU MAY, IF YOU WISH,
REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED.
INNOVO GROUP INC.
1808 NORTH CHERRY STREET
KNOXVILLE, TENNESSEE 37917
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 20, 2000
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying Notice of Annual Meeting and Proxy
Card are being furnished, on or about September ___, 2000, to the stockholders
of Innovo Group Inc. (the "Company") in connection with the solicitation of
proxies by the Board of Directors of the Company to be used at the 2000
Annual Meeting of Stockholders of the Company (the "Annual Meeting") to be held
on Friday, October 20, 2000 at 10:00 a.m. (local time) at The Auditorium, Tyson
Place, 2607 Kingston Pike, Knoxville, Tennessee 37919, and any adjournment
thereof.
If the enclosed form of proxy is properly executed and returned to the Company
in time to be voted at the Annual Meeting, the shares represented thereby will
be voted in accordance with the instructions thereon.
EXECUTED BUT UNMARKED PROXIES WILL BE VOTED: (I) "FOR" PROPOSAL 1 TO ELECT
THE BOARD OF DIRECTORS SIX NOMINEES FOR DIRECTOR; (II) "FOR" PROPOSAL 2 TO
APPROVE AN AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF THE COMPANY'S COMMON STOCK TO 40,000,000 SHARES; (III) "FOR"
PROPOSAL 3 TO APPROVE THE PROPOSED ISSUANCES OF WARRANTS TO AFFILIATES OF
THE COMPANY (THE "FURROW GROUP") AND OF COMMON STOCK AND WARRANTS TO
COMMERCE INVESTMENT GROUP, LLC AND ITS AFFILIATES (THE "COMMERCE
GROUP"); (IV) "FOR" PROPOSAL 4 TO APPROVE THE PROPOSED ISSUANCES OF COMMON
STOCK AND WARRANTS TO AFFILIATES OF JOSEPH MIZRACHI AND HIS ASSOCIATES
(THE "MIZRACHI GROUP"); (V) "FOR" PROPOSALS 5 AND 6 TO APPROVE, AS SEPARATE
ITEMS, THE COMPANY'S 2000 EMPLOYEE STOCK INCENTIVE PLAN AND 2000 DIRECTOR
STOCK INCENTIVE PLAN; AND (VI) "FOR" PROPOSAL 7 TO RATIFY THE APPOINTMENT
OF BDO SEIDMAN, LLP AS THE COMPANY'S INDEPENDENT AUDITORS. If any other matters
are properly brought before the Annual Meeting, proxies will be voted in the
discretion of the proxy holders. The Company is not aware of any other matters
to be presented at its Annual Meeting.
The cost of soliciting proxies in the form enclosed herewith will be borne
entirely by the Company. In addition to the solicitation of proxies by mail,
proxies may be solicited by Directors, officers and regular employees of the
Company, without extra remuneration, by personal interviews, telephone,
telegraph or otherwise. The Company will request persons, firms and
corporations holding shares in their name or in the names of their nominees,
which are beneficially owned by others, to send proxy materials to and obtain
proxies from the beneficial owners and will reimburse the holders for their
reasonable expenses in doing so.
The securities that may be voted at the Annual Meeting consist of shares of
common stock, par value $.10 per share ("Common Stock"), of the Company. Each
outstanding share of Common Stock entitles its owner to one vote on each matter
as to which a vote is taken at the Annual Meeting. The close of business on
August 21, 2000 has been fixed by the Board of Directors as the record date
(the "Record Date") for determination of stockholders entitled to vote at the
Annual Meeting. On the Record Date, 8,732,628 shares of Common Stock were
outstanding and entitled to vote. The presence, in person or by proxy, of the
holders of at least a majority of the shares of Common Stock issued and
outstanding and entitled to vote on the Record Date is necessary to constitute
a quorum at the Annual Meeting.
Assuming the presence of a quorum at the Annual Meeting, a plurality vote is
required for the election of a Director (Proposal 1), the affirmative vote of
a majority of the outstanding shares of Common Stock (or 4,339,220 shares) is
required to approve the amendments to the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation")(Proposal 2),
and the affirmative vote of a majority of the shares present in person or
represented by proxy and entitled to vote is required to approve the proposed
issuances of Common Stock and warrants, the Company option plans and to ratify
the appointment of BDO Seidman, LLP as the Company's independent public
accountants for the 2000 fiscal year (Proposals 3 through 7). Unless otherwise
required by law or the Company's Certificate of Incorporation or the Company's
Amended and Restated Bylaws (the "Bylaws"), any other matter put to a
stockholder vote will be decided by the affirmative vote of a majority of the
shares present in person or represented by proxy at the Annual Meeting and
entitled to vote on the matter.
Abstentions and broker non-votes will be treated as shares that are present, in
person or by proxy, and entitled to vote for purposes of determining the
presence of a quorum at the Annual Meeting. Because abstentions will be
counted for purposes of determining the shares present or represented at the
Annual Meeting and entitled to vote, abstentions will have the same effect as
a vote "against" Proposals 2 through 7. Abstentions on Proposal 1 will not have
any effect on the approval of Proposal 1. Broker non-votes on a
particular matter are not deemed to be shares present and entitled to vote on
such matter and, assuming presence of a quorum, will not affect whether any
proposal other than Proposal 2 is approved at the Annual Meeting.
The presence of a stockholder at the Annual Meeting will not automatically
revoke such stockholder's proxy. Stockholders may, however, revoke a proxy at
any time prior to its exercise by filing with the Secretary of the Company a
written notice of revocation, by delivering to the Company a duly executed
proxy bearing a later date or by attending the Annual Meeting and voting in
person.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF THE PROPOSALS SET FORTH IN THIS PROXY STATEMENT.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table provides information as of September ______, 2000 concerning
beneficial ownership of Common Stock by (1) each person or entity known by the
Company to beneficially own more than 5% of the outstanding Common Stock, (2)
each Director and nominee for election as a Director of the Company, (3) each
Named Executive Officer, and (4) all Directors and executive officers of the
Company as a group. The information as to beneficial ownership has been
furnished by the respective stockholders, Directors and executive officers of
the Company, and, unless otherwise indicated, each of the stockholders has
sole voting and investment power with respect to the shares beneficially owned.
Name and Shares Beneficially Owned (1)
Offices Number Percent
Samuel J. (Sam) Furrow 2,764,744 (2) 27.5%
Chairman and Chief Executive
Officer, Director
1808 North Cherry Street
Knoxville, Tennessee 37917
Hubert Guez 1,363,637 (3) 13.6%
5804 East Slauson Avenue
Commerce, California 90040
Patricia Anderson-Lasko 283,146 (4) 3.8%
President and Director
1808 North Cherry Street
Knoxville, Tennessee 37917
Daniel A. (Dan) Page 463,833 (5) 6.5%
Director
1808 North Cherry Street
Knoxville, Tennessee 37917
Samuel J. (Jay) Furrow, Jr. 700,057 (6) 7.0%
Vice President and Chief Operating
Officer; Acting Chief Financial Officer,
Director
1808 North Cherry Street
Knoxville, Tennessee 37917
Marc B. Crossman 34,828 (7) *
Director
1808 North Cherry Street
Knoxville, Tennessee 37917
John G. Looney, MD 133,500 1.3%
Director
1808 North Cherry Street
Knoxville, Tennessee 37917
All Executive Officers 4,380,108(2)(4)(5)(6)(7) 42.0%
and Directors as a Group
(6 persons)
_________________
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission, certain
shares of the Company's common stock that a beneficial owner set forth in this
table has a right to acquire within 60 days of the date hereof pursuant to the
exercise of options or warrants for the purchase of shares of common stock
are deemed to be outstanding for the purpose of computing the percentage
ownership of that owner but are not deemed outstanding for the purpose of
computing percentage ownership of any other beneficial owner shown in the table.
Percentages are calculated based on 10,042,075 shares outstanding as of
September ___, 2000.
(2) Includes 100,000 shares subject to currently exercisable options. Does not
include 750,000 shares subject to warrants that will be issued if Proposal 3 is
approved.
(3) Includes 500,000 shares held of record by SHD Investments, LLC, of which
Mr. Guez's brother is the Manager, 250,000 shares held of record by each to
two trusts for Mr. Guez's sons and of which Mr. Guez's mother is trustee, and
363,637 held of record by Commerce Investment Group, LLC, of which Mr. Guez is
the Manager (collectively, the "Commerce Group"). Mr. Guez disclaims beneficial
ownership the shares held by SHD Investments, LLC.
(4) Includes 120,000 shares subject to currently exercisable options.
(5) Includes 250,000 shares purchased by Ms. Anderson-Lasko pursuant to the 1997
Stock Purchase Right Award, awarded to her in February 1997. Under the terms of
the 1997 Stock Purchase Right Award, Ms. Anderson-Lasko was permitted to, and
elected to, pay for the purchase of the 250,000 shares (the "1997 Award Shares")
by the execution of a non-recourse note (the "Note") to the Company for the
exercise price of $2.8125 per share ($703,125) in the aggregate). The Note is
due, without interest, on April 30, 2002, and is collateralized by the 1997
Award Shares purchased therewith. Ms. Anderson-Lasko may pay or prepay (without
penalty) all or any part of the Note by (i) the payment of cash, or (ii) the
delivery to the Company of other shares of Common Stock (other than the 1997
Award Shares) that Ms. Anderson-Lasko has owned for a period of at least six
months, which shares would be credited against the Note on the basis of the
closing bid price for the Common Stock on the date of delivery. The 1997 Award
Shares will be forfeited and returned (at the rate of one shares per $2.8125)
to the Company to the extent the Note is not paid on or before its maturity;
accordingly, the number of shares owned by Ms. Anderson-Lasko could decrease
in the future.
(6) Includes 125,000 shares subject to currently exercisable options. Does not
include 750,000 shares subject to warrants that will be issued if Proposal 3 is
approved.
(7) Includes 33,328 shares subject to currently exercisable options.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Bylaws provide that the Board of Directors shall consist of not fewer than
three Directors, with the exact number of Directors (subject to such minimum
and any range of size established by the Company's stockholders) to be
determined by resolution of the Board of Directors. The Board of Directors
currently consists of six Directors. At the Annual Meeting, six Directors will
be elected to serve one-year terms. The Board of Directors' nominees for
election are set forth below.
Unless otherwise instructed on the proxy, properly executed proxies will be
voted for the election as Directors of all of the nominees set forth below.
The Board of Directors believes that all such nominees will stand for election
and will serve if elected. However, if any of the persons nominated by the
Board of Directors fails to stand for election or is unable to accept election,
proxies will be voted by the proxy holders for the election of such other person
or persons as the Board of Directors may recommend. Directors will be elected
by a plurality vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ITS
NOMINEES FOR DIRECTORS.
Information as to Nominees
The following table sets forth certain information regarding the persons
nominated for election as Directors of the Company as of
September _______, 2000.
Name Age Position with the Company
Samuel J. (Sam) Furrow Sr. (2) 59 Chairman of the Board, Chief
Executive Officer and Director
Patricia Anderson-Lasko 41 President and Director
Samuel J. (Jay) Furrow, Jr. 27 Vice President, Chief Operating
Officer and Director and Acting
Chief Financial Officer
Daniel A. (Dan) Page (1)(2) 51 Director
Marc B. Crossman (1) 29 Director
John G. Looney, MD (1)(2) 58 Director
____________________
(1) Member of the audit committee of the Board of Directors.
(2) Member of the executive compensation committee of the Board of Directors.
Following is information with respect to the business experience for at least
the last five years and certain other information regarding each of the nominees
for election as a Director.
Samuel J. (Sam) Furrow became a Director in April 1998 and the Company's
Chairman and Chief Executive Officer in October 1998. Mr. Furrow has also been
the Chairman of Furrow Auction Company (a real estate and equipment sales
company) since April 1968, Chairman of Furrow-Justice Machinery Corporation
(a six-branch industrial and construction equipment dealer) since September
1983, Owner of Knoxville Motor Company - Mercedes Benz since December 1980 and
of Land Rover of Knoxville since July 1997. Mr. Furrow has been a Director of
Southeastern Advertising Inc. (an advertising agency) since April 1968, a
Director of First American National Bank since September 1993, and of Goody's
Family Clothing, Inc, a publicly traded retail clothing store chain, since 1995.
Sam Furrow is Jay Furrow's father.
Patricia Anderson-Lasko has been President and a Director of the Company since
August 1990 and President of the Company's Innovo, Inc. subsidiary since she
founded that company in 1987. From August 1990 until August 1997,
Ms. Anderson-Lasko was also the Chairman and Chief Executive Officer of the
Company.
Daniel A. Page was the chief operating officer of the Company from August 1997
through April 1999 and has been a Director of the Company since August 1997.
From June 1993 until August 1997, Mr. Page was the principal operating and
executive officer of Southeast Mat Company, a privately held manufacturer of
automobile floor mats. Prior thereto Mr. Page was the president of Tennessee
Properties Company, a privately held real estate development company.
Samuel J. (Jay) Furrow, Jr. became the Company's Vice President for Corporate
Development and In-House Counsel in July 1998 and a Director in January 1999.
He has also served as the Company's Chief Operating Officer since April 1999
and its Acting Chief Financial Officer since August 2000. Mr. Furrow is an
attorney. Prior to joining the Company, Mr. Furrow attended the Southern
Methodist University School of Law beginning in August of 1995 and graduating
with a J.D. in May 1998. Mr. Furrow attended Vanderbilt University beginning
in 1991 and graduating with a BS degree in Political Science and Business in
1995. Jay Furrow is Sam Furrow's son, and the President of StanRo Development,
a real estate development company.
Marc B. Crossman has been a Director since January 1999. Mr. Crossman has also
been a Vice President and Equity Analyst with J.P. Morgan Securities Inc., New
York, New York, since January 1999, and was previously a Vice President and
Equity Analyst with CIBC Oppenheimer Corp. from September 1997 through January
1999 and an Associate and Equity Analyst with Dain Rauscher Wessels from
November 1994 through September 1997.
John G. Looney, MD has been a Director since August 1999. Dr. Looney is a
psychiatrist employed by the Duke Medical Center since 1986. Dr. Looney is
also currently working with Covenant Health Systems pursuant to a contract
between the Duke Medical Center and Covenant to develop a behavioral health
system for Covenant in Knoxville. He also participates in a variety of venture
capital investments independent of Duke, Covenant and the Company.
Each of the Company's Directors is elected at the annual meeting of stockholders
and serves until the next annual meeting and until a successor has been elected
and qualified or their earlier death, resignation or removal. Vacancies in the
Board of Directors are filled by a majority vote of the remaining members of the
Board of Directors.
Executive officers of the Company are elected on an annual basis and serve at
the discretion of the Board of Directors.
Commerce and Mizrachi Group Stock Purchase Agreements; Potential Change in
Control
In connection with the Phase I investment by the Commerce Group, the Company has
agreed to appoint to the Board of Directors one person designated by Mr. Guez.
Mr. Guez has not designated a Board member at this time. If the Phase II
investment is completed, Mr. Guez will be entitled to designate two additional
Board members. If the proposed investment by the Mizrachi Group is completed,
the Company has agreed to appoint to the Board of Directors one person, or
possibly two if permissible under Nasdaq rules, designated by Mr. Mizrachi.
The Company has also amended its Bylaws to provide that the number of Company
directors will be between three and seven, with the exact number to be
specified by the Board of Directors, until November 1, 2000, and that from
November 2, 2000 until November 1, 2003, the number of members of the Board of
Directors will be between three and twelve, with the exact number to be
designated by the Board of Directors. See "Approval of Share Issuance to
Commerce Group and Warrant Issuance to Commerce Group and Furrow Group (Proposal
3)" and "Approval of Share and Warrant Issuances to Mizrachi Group (Proposal 4)"
below.
If proposals 3 and 4 are approved and the related financing are completed, Mr.
Guez will be entitled to designate three members and Mr. Mizrachi will be
entitled to designate one or two members of the Company's Board of Directors.
If the warrants purchased by the Commerce Group were exercised in full, then the
Commerce Group would own 6,163,637 shares, or approximately 41.5% of the shares
then entitled to vote in the election of Directors and other matters submitted
to the Company's stockholders for approval. If the warrants purchased by the
Mizrachi Group were exercised in full, then the Mizrachi Group would own at
least 3,400,000 shares, or at least approximately 25.3% of the shares then
entitled to vote in the election of Directors and other matters submitted to
the Company's stockholders for approval.
Corporate Governance and Other Matters
The Board of Directors conducts its business through meetings and through its
committees. The Board of Directors acts as a nominating committee for selecting
candidates to stand for election as Directors. Other candidates may also be
nominated by any stockholder, provided such other nomination(s) are submitted
in writing to the Secretary of the Company no later than 120 days prior to the
anniversary date of the prior year's annual meeting of stockholders at which
Directors were elected, or such earlier date as the Board of Directors
may allow, together with the identity of the nominator and the number of shares
of the Company's stock owned, directly and indirectly, by the nominator. No
such nominations have been received as of the date hereof in connection with
the Annual Meeting.
The Board of Directors currently has two committees, the Audit Committee and the
Executive Compensation Committee.
The Audit Committee is primarily responsible for (i) monitoring the integrity of
the Company's financial reporting process and systems of internal controls
regarding finance, accounting, and legal compliance, (ii) monitoring the
independence and performance of the Company's independent auditors and
internal auditing department, and (iii) providing an avenue of communication
among the independent auditors, management, the internal auditing department,
and the Board. The Audit Committee has a charter that details its duties and
responsibilities. A copy of this charter is attached to this Proxy Statement
as Appendix A. The current members of the Audit Committee are Dr. Looney and
Messrs. Page and Crossman. The Executive Compensation Committee reviews and
recommends the compensation arrangements for management of the Company. The
current members of the Executive Compensation Committee are Dr. Looney and
Messrs. Page and Sam Furrow. The Executive Compensation Committee will also
administer the Company's 2000 Employee Stock Incentive Plan and 2000 Director
Stock Incentive Plan if approved pursuant to Proposals 5 and 6.
Each of Messrs. Guez and Mizrachi will be entitled to designate members of each
Board committee if their respective proposed investments are completed. See
"Commerce and Mizrachi Group Stock Purchase Agreements; Potential Change in
Control" above.
During the year ended November 30, 1999, the Board of Directors held six
meetings. During the same period, the Executive Compensation Committee and
the Audit Committee each met once. No incumbent Director attended fewer than
75% of the total number of meetings of the Board of Directors and committees
of the Board of Directors on which he served.
Director Compensation
Directors who are not employees of the Company do not currently receive a fee
for attending meetings of the Board of Directors or its committees. Mr. Page
received a grant of nonqualified stock options to purchase 120,000 shares of
Common Stock at an exercise price of $3.31 per share upon becoming a Director
in August 1997. All of such options are vested.
Sam Furrow received a grant of nonqualified stock options to purchase 100,000
shares of Common Stock at an exercise price of $4.75 per share upon becoming a
Director in March 1998. Jay Furrow received a grant of nonqualified stock
options to purchase 100,000 shares of Common Stock at an exercise price of
$4.75 per share upon becoming a Director in February 1999. Mr. Crossman received
a grant of nonqualified stock options to purchase 100,000 shares of Common Stock
at an exercise price of $4.75 per share upon becoming a Director in February
1999. The options vest and become exercisable at the rate of 2,083 shares per
month served.
If the 2000 Director Stock Incentive Plan is approved pursuant to Proposal 6,
each member of the Board of Directors will receive annual compensation in the
form of options to buy Common Stock with a nominal initial value of $10,000.
Each option will have an exercise price equal to one-half of the market price
on the date of grant, and will cover a number of shares equal to $10,000
divided the exercise price per share. See "Approval of 2000 Director Stock
Option Plan (Proposal 6)" below.
Executive Compensation and Other Information
Summary Compensation Table. The following table sets forth the compensation
paid to the Chief Executive Officers of the Company during 1999 and to the
other executive officer of the Company who received annual compensation in
excess of $100,000 during 1999 (the "Named Executive Officers") during fiscal
years 1999, 1998 and 1997.
Summary Compensation Table
Annual Compensation(1)
Long-term Compensation
Name and Other Annual Options/
Principal Position Year Salary Bonus Compensation(3) SARs
Samuel J. Furrow, 1999 -- -- -- --
Chairman and CEO(2) 1998 -- -- -- 100,000
Patricia Anderson-Lasko, 1999 $157,500 $15,750 $509 --
President 1998 188,000 -- -- --
1997 157,500 -- 4,070 --
(1) No executive officers received or held restricted stock awards during fiscal
1999, 1998 or 1997.
(2) Mr. Sam Furrow's employment by the Company began in October 1996 with no
salary. Mr. Furrow received a grant of nonqualified stock options to purchase
100,000 shares of Common Stock at an exercise price of $4.75 per share upon
becoming a Director in March 1998. The options vest and become exercisable at
the rate of 2,083 per month through 2002.
(3) During fiscal 1999, 1998 and 1997 Ms. Anderson-Lasko received life insurance
benefits in the aggregate amounts of $509, $0 and $4,070, respectively.
Option Grants. None of the Named Executive Officers received option grants
during 1999.
Option Exercises and Fiscal Year-End Values. The following table sets forth
information with respect to the Named Executive Officers concerning the number
of securities underlying unexercised options at 1999 year-end and the year-end
value of all unexercised in-the-money options held by such individuals. None of
the Named Executive Officers exercised any options during the fiscal year ended
November 30, 1999.
Aggregated Option/SAR Exercised in 1999 and Year-end Option/SAR Values
<TABLE>
Shares Number of Unexercised Value of Unexercised
Aquired Options/SARs at FY-End In-the-Money Options/SARs
On Value (#) Exercisable/ ($) Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- --------- --------- ---------------------- --------------------------
<S> <C> <C> <C> <C>
Samuel J. Furrow 0 0 59,990 / 40,010 Not applicable(1)
</TABLE>
(1) Based on a closing price per share of $1.594 for the Common Stock on
November 30, 1999 as reported by the Nasdaq SmallCap Market.
Stock Bonus Plan
The Board of Directors has authorized and may in the future authorize the
issuance of restricted stock to certain employees of the Company.
Certain Relationships and Related Transactions
The Company has adopted a policy requiring that any material transactions
between the Company and persons or entities affiliated with officers, Directors
or principal stockholders of the Company be on terms no less favorable to the
Company than reasonably could have been obtained in arms' length transactions
with independent third parties.
Anderson Stock Purchase Agreement. Pursuant to the 1997 Stock Purchase Right
Award awarded to her in February 1997, Ms. Anderson-Lasko purchased 250,000
shares of Common Stock (the "1997 Award Shares") with payment made by the
execution of a non-recourse note (the "Note") to the Company for the exercise
price of $2.8125 per share ($703,125 in the aggregate). The Note is due,
without interest, on April 30, 2002, and is collateralized by the 1997 Award
Shares. Ms. Anderson-Lasko may pay or prepay (without penalty) all or any
part of the Note by (i) the payment of cash, or (ii) the delivery to the
Company of other shares of Common Stock (other than the 1997 Award Shares)
that Ms. Anderson-Lasko has owned for a period of at least six months, which
shares would be credited against the Note on the basis of the closing bid
price for the Common Stock on the date of delivery.
Sam Furrow and Affiliate Loans. During the period from January 1999 to June
2000, Sam Furrow and affiliated companies made a total 24 loans in an aggregate
amount of $1,933,000 to the Company primarily to finance the Company's import of
product from the Orient and general operations. Each of the loans was
unsecured and provided for interest compounding annually at a rate of from 8.5%
to 10.0%. Most of the loans provided for a six-month term. The Board of
Directors determined in each instance that the loans were made on fair terms
and conditions that were more favorable to the Company than could be obtained
from third parties.
Of the amounts loaned by Sam Furrow and his affiliates, a total of $1,200,000
has been exchanged for Common Stock as described below under "Debt to Equity
Conversions." As of September 1, 2000, the total amount still owed by the
Company to Sam Furrow and affiliated companies was approximately $202,000
bearing interest at a rate of 10.0% annually.
Dan Page Loans. During the period from February 1999 to March 1999, Dan Page
made a total five loans in an aggregate amount of $200,000 to the Company
primarily to finance the Company's import of product from the Orient and
general operations. Each of the loans was unsecured and provided for interest
compounding annually at a rate of from 10.0%. The loans provided for a six-month
term. The Board of Directors determined in each instance that the loans were
made on fair terms and conditions that were more favorable to the Company
than could be obtained from third parties.
All of the $200,000 loaned Dan Page to the Company has been exchanged for Common
Stock as described below under "Debt to Equity Conversions."
Debt to Equity Conversions. On February 26, 1999, Sam Furrow and Dan Page each
exchanged $150,000 of the indebtedness owed by the Company to him for 75,000
restricted shares of common stock, or a price of $2.00 per share. On the date
that the Company's Board of Directors approved the debt exchanges, the average
closing sale price for the Common Stock as reported by Nasdaq for the prior 30
days was $2.00.
Jay Furrow acquired $50,000 of the indebtedness owed by the Company to Sam
Furrow on April 26, 1999 and exchanged that amount for restricted Common Stock
at a price of $1.00 per share on that date. On the same date, a third party
acquired $50,000 of the indebtedness owed by the Company to Dan Page and
exchanged that amount for restricted Common Stock at a price of $1.00 per
share. On the date that the Company's Board of Directors approved those debt
exchanges, the average closing sale price for the Common Stock as reported by
Nasdaq for the prior 15 days was $1.43.
On February 28, 2000, Sam Furrow exchanged $500,000 of the indebtedness owed by
the Company to him for 423,729 restricted shares of common stock, or a price of
$1.18 per share. On the date that the Company's Board of Directors approved the
debt exchange, the closing sale price for the Common Stock as reported by Nasdaq
was $1.15.
On August 11, 2000, Sam and Jay Furrow converted $1 million of outstanding
Company debt owed to third parties that it had previously assumed and an
additional $500,000 of Company debt that was previously owed to the Furrows
for 1,363,637 shares of common stock, or $1.10 per share, and warrants to
purchase 1,500,000 shares of Common Stock that have a three-year term and an
exercise price of $2.10 per share. The debt conversion to equity had been
required by the Commerce Group as a condition to making their Phase I
investment in the Company. The Furrows have also agreed to make the issuance
of the purchased warrants subject to stockholder approval pursuant to Proposal
3. See "Approval of Share Issuance to Commerce Group and Warrant Issuance to
Commerce Group and Furrow Group (Proposal 3)" below.
The $1.0 million of converted debt that had been assumed by the Furrows and that
had previously been guaranteed by him consisted of $650,000 owed to Commerce
Capital, Inc., a Nashville, Tennessee based finance company unrelated to the
Commerce Group, and $350,000 owed to First Independent Bank of Gallatin.
With respect to each of the debt to equity conversions discussed above, the
Board of Directors determined that the purchases of Common Stock were made on
fair terms and conditions and were in the Company's best interests in order to
increase the Company's net tangible assets for Nasdaq listing compliance
purposes and considering recent trading prices and a reasonable discount due
to the restricted nature of the issued shares. All of the shares issued
pursuant to the debt conversions were subject to registration rights, and
resales of all of such shares are now subject to effective registration
statements.
Facility Lease Arrangements. On October 7, 1998, the Company entered into a
Warehouse Lease Agreement with Furrow-Holrob Development II, LLC pursuant to
which the Company has leased the 78,900 square foot plant that now houses the
Company's executive offices and its manufacturing, administrative and shipping
facilities. The "triple net" lease provides for an annual base rental rate of
$2.00 per square foot, or $157,800 annually, plus a pro rata share of real
estate taxes, insurance premiums and common area expenses, with an initial five-
year term and two Company five-year renewal options (subject to agreement on any
change in the base rental rate). The Board of Directors, with Mr. Furrow
excusing himself from deliberations and not voting, unanimously approved the
Warehouse Lease Agreement. As required by the terms of the Phase I
financing, the Warehouse Lease Agreement was terminated on July 1, 2000. The
Company currently occupies the same facilities rent free pending arrangements
for new space.
Anticipated New Facility Lease Arrangements. The Company currently expects to
enter into a new lease for space with a company owned by Sam Furrow. The space
would be approximately 5,000 square feet consisting of the first floor of a
two-story building located in downtown Knoxville, Tennessee, with a monthly
rental of $3,500 triple net.
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's Directors, officers and
persons who beneficially 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 Securities and Exchange Commission (the "Commission").
Directors, officers and greater than ten percent beneficial owners are required
by the Commission's regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of copies of such forms furnished to the Company and
certain of the Company's internal records, or upon written representations that
no Form 5s were required, the Company believes that during the year ended
December 31, 1999, all Section 16(a) filing requirements applicable to its
Directors, officers and greater than ten percent beneficial owners were
satisfied on a timely basis.
APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
(PROPOSAL 2)
On August 11, 2000, the Board of Directors adopted an amendment to Article
Fourth of the Certificate of Incorporation, subject to stockholder approval at
the Annual Meeting, to increase the number of authorized shares of Common Stock
to 40,000,000 shares from 15,000,000 shares. At the Annual Meeting, the
stockholders of the Company will be asked pursuant to Proposal 2 to consider
and vote on the proposed amendment to Article Fourth. The amended and restated
form of Article Fourth of the Certificate of Incorporation as proposed is
attached to this Proxy Statement as Attachment B.
The Board of Directors recommends that the stockholders of the Company adopt
Proposal 2. If Proposal 2 is approved by the stockholders at the Annual Meeting,
the proposed amendment to the Certificate of Incorporation will become effective
upon the filing of a Certificate of Amendment of Certificate of Incorporation
with the Secretary of State of the State of Delaware, which is expected to
occur promptly after the Annual Meeting. Unless otherwise instructed on the
proxy, properly executed proxies will be voted in favor of approving the
proposed amendment to Article Fourth of the Certificate of Incorporation to
increase the number of authorized shares of Common Stock to 15,000,000. The
affirmative vote of a majority of the shares of Common Stock outstanding as
of the Record Date is required to approve Proposal 2.
The Certificate of Incorporation currently authorizes 15,000,000 shares of
Common Stock, of which 8,732,628 shares of Common Stock were issued and
outstanding on the Record Date. As of the Record Date, 852,040 shares of
Common Stock were subject to issuance upon exercise of outstanding options
previously issued by the Company.
The Board of Directors believes that the proposed increase in the authorized
shares of Common Stock is desirable to enhance the Company's flexibility in
connection with possible future actions, such as stock splits, stock dividends,
acquisitions, financing transactions, employee benefit plan issuances, and such
other corporate purposes as may arise. Having such authorized Common Stock
available for issuance in the future will give the Company greater flexibility
and will allow additional shares of Common Stock to be issued without the
expense and delay of a stockholders' meeting. Such a delay might deny the
Company the flexibility the Board views as important in facilitating the
effective use of the Company's securities. The rules of the National Association
of Securities Dealers, Inc. ("NASD") currently require stockholder approval by
issuers of securities quoted on the Nasdaq SmallCap Market, on which the Common
Stock is currently quoted, as to the issuance of shares of common stock or
securities convertible into common stock in several instances, including
actions resulting in a change of control of the company, acquisition
transactions involving Directors, officers or substantial security
holders where the present or potential issuance of such securities could result
in an increase in outstanding common shares or voting power of 5% or more,
acquisition transactions generally where the present or potential issuance of
such securities could result in an increase in the voting power or outstanding
common shares of 20% or more, and certain other sales or issuances of common
stock (or securities convertible into or exercisable for common stock) in a
non-public offering equal to 20% or more of the voting power outstanding before
the issuance for less than the greater of book or market value of the stock.
Exceptions to these rules may be made upon application to the NASD. In other
instances, the issuance of additional shares of Common Stock remains
within the discretion of the Board of Directors, without the requirement of
further action by stockholders except as otherwise required by applicable law or
any stock exchange on which the Company's securities may then be listed. The
Company is not currently engaged in any negotiations with respect to the use
of any shares of the additional authorized Common Stock, nor are there currently
any commitments, arrangements, understandings or plans with respect to the
issuance of such shares.
If the proposal to increase the authorized shares of Common Stock is approved,
the additional authorized shares will be part of the existing class of such
Common Stock and will increase the number of shares of Common Stock available
for issuance by the Company, but will have no effect upon the terms of the
Common Stock or the rights of the holders of such shares. If and when issued,
the proposed additional authorized shares of Common Stock will have the same
rights and privileges as the shares of Common Stock currently outstanding.
Holders of Common Stock will not have preemptive rights to purchase additional
shares of Common Stock.
The future issuance of additional shares of Common Stock on other than a pro
rata basis may dilute the ownership of current stockholders. Such additional
shares also could be used to block an unsolicited acquisition through the
issuance of large blocks of stock to persons or entities considered by the
Company's officers and Directors to be opposed to such acquisition, which
might be deemed to have an anti-takeover effect (i.e., might impede the
completion of a merger, tender offer or other takeover attempt). In fact, the
mere existence of such a block of authorized but unissued shares, and the
Board's ability to issue such shares without stockholder approval, might deter
a bidder from seeking to acquire shares of the Company on an unfriendly basis.
While the authorization of additional shares of Common Stock might have such
effects, the Board of Directors of the Company does not intend or view the
proposed increase in authorized Common Stock as an anti-takeover measure, nor
is the Company aware of any proposed transactions of this type.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF PROPOSAL 2.
APPROVAL OF SHARE ISSUANCE TO COMMERCE GROUP AND WARRANT
ISSUANCES TO COMMERCE GROUP AND FURROW GROUP
(PROPOSAL 3)
Background Information
In July 1997, the Commission and Nasdaq announced revised standards for listing
on the Nasdaq SmallCap Market that required that a company's listed securities
trade for not less than $1.00 per share and that the company have net tangible
assets (total assets, excluding goodwill, minus total liabilities) of at least
$2,000,000. The change became effective in February 1998.
Potential Delisting. Due to continued losses, the Company did not meet the
required net tangible asset level as of May 31, 2000. On July 19, 2000, the
Company was granted a temporary exception from this standard subject to Innovo
meeting certain conditions. The conditions require the Company to obtain a
minimum net tangible asset level of $4 million on or before August 11, 2000
("Phase I") and a minimum net tangible asset level of $5 million on or before
October 31, 2000 ("Phase II").
Completion of Phase I Financing. The Company met the Phase I net tangible asset
level of $4 million on August 11, 2000 by issuing 1,363,637 shares of Common
Stock ("Phase I Shares"} to Commerce Investment Group, LLC for $1.5 million
in cash (a price of $1.10 per share), with the proceeds being used by the
Company to purchase finished goods and services from Commerce and its affiliates
(collectively, the "Commerce Group"). As required by the Commerce Group as a
condition to making its Phase I investment in the Company, the Company also
increased its net tangible assets by issuing Common Stock and warrants to Sam
and Jay Furrow (the "Furrow Group"). The Furrow Group converted $1 million of
outstanding Company debt owed to third parties that it had previously assumed
and converted $500,000 of Company debt that was owed to the Furrow Group (the
"Furrow Debt Conversion") for 1,363,637 shares of Common Stock, or $1.10 per
share, and warrants to purchase 1,500,000 shares of Common Stock that have a
three-year term and an exercise price of $2.10 per share (the "Furrow
Warrants"). The Furrows agreed to make the issuance of the Furrow Warrants
subject to stockholder approval pursuant to Proposal 3.
Registration of Phase I Share Resales. As required by the terms of the Phase I
financing, the Company has registered the potential resales of the shares sold
to the Commerce Group and Furrow Group with the Commission. The same
registration statement also covers resales of an additional 1,117,718 shares
that were previously sold to Sam Furrow, Dr. Looney and other investors in
private placements that were completed prior to the Phase I financing.
Proposed Phase II Financing
If Proposal 3 is approved and other conditions are satisfied, the Company plans
to meet the $5 million Phase II requirements on or before October 31, 2000 by
selling an additional 1.5 million shares of Common Stock ("Phase II Shares")
and warrants to purchase an additional 3.3 million shares to the Commerce
Group (the "Purchase Warrants") for $1,500,000. The Purchase Warrants will
have an exercise price of $2.10 per share. Three million of the Purchase
Warrants will have a term of three years and the remaining 300,000 will vest
over two years and expire 3 years from the last vesting. The proceeds will be
used by the Company to purchase additional finished goods and services from the
Commerce Group and its affiliates.
Required Stockholder Approval Under Nasdaq Rules
The Common Stock is listed on the Nasdaq SmallCap Market ("Nasdaq"). Nasdaq
Rule 4460(i)(1)(D)(ii) ("Nasdaq 20% Rule") requires stockholder approval prior
to the issuance of securities under certain circumstances, including in
connection with a transaction (other than a public offering) involving the
sale or issuance by the Company of Common Stock, or securities convertible into
or exercisable for Common Stock, equal to 20% or more of the Common Stock or 20%
or more of the voting power outstanding before such issuance at a price (or in
the case of convertible securities, a conversion price) less than the greater of
the book or market value of the Common Stock. The Phase I sales of Common Stock
to the Commerce Group and Furrow Group described above did not require
stockholder approval because their purchase price exceeded the greater of the
book or market value of the Common Stock at that time.
Additionally, Nasdaq Rule 4460(i)(1)(B) (the "Nasdaq Control Rule") requires
stockholder approval of the issuance of securities by the Company that would
result in a change of control of the Company. The proposed Phase II sale of
1,500,000 shares and warrants to purchase 3.3 million shares to the Commerce
Group would equal 4.8 million shares, or 47.8% of the currently outstanding
10,042,075 shares of Common Stock if the warrants were fully exercised, and
32.3% on a fully diluted basis after the issuances (but before any issuances
of Common Stock and warrants to the Mizrachi Group as described in Proposal 4
or any exercises of warrants by the Furrow Group). Mr. Guez will also be
entitled to designate three members of the Company's Board of Directors if the
Phase II financing is completed. Although the Company does not believe that any
change of control (whether for purposes of the Nasdaq Control Rule or otherwise)
is occurring as a result of such transactions, there is no concrete test to
determine the amount of securities that the Company may issue to a person
without triggering the Nasdaq Control Rule. Depending on the facts and
circumstances, the issuance by the Company of securities representing less than
a majority of the Company's voting power may result in a change of control of
the Company under the Nasdaq Control Rule.
The Company is seeking stockholder approval of the Phase II issuance of Common
Stock and warrants to the Commerce Group pursuant to the Purchase Agreement
(including any securities of the Company issued as dividends or otherwise in
respect of the Common Stock subject to unexercised warrants in accordance
with the terms thereof) in order to ensure compliance with the Nasdaq 20% Rule
and the Nasdaq Control Rule (collectively, the "Nasdaq Rules"). The Company is
also seeking stockholder approval of the issuance of Phase I warrants to the
Furrow Group (including any securities of the Company issued as dividends or
otherwise in respect of the Common Stock subject to unexercised warrants in
accordance with the terms thereof) as agreed by the Furrows because the
Commerce Group could not receive warrants in Phase I prior to stockholder
approval. Stockholder approval of the Phase II transactions and the issuance
of the Phase I warrants to the Furrow Group is not otherwise required as a
matter of Delaware law or other applicable laws or rules or by the
Company's Certificate of Incorporation or Bylaws.
Summary of Commerce Group Investment Terms
The following summary of the provisions of the following agreements that were
entered into by the Company and Commerce Investment Group, LLC, a California
limited liability company of which Mr. Hubert Guez is the Manager ("Commerce
LLC"), on August 11, 2000 in order to complete the Phase I financing: (1)
the Common Stock and Warrant Purchase Agreement (the "Purchase Agreement")
between the Company and Commerce LLC; (2) the Investor Rights Agreement by and
among Sam Furrow, Jay Furrow, Pat Anderson, John G. Looney, MD, Marc B.
Crossman, and Dan Page, the Company and Commerce LLC (the "Investor
Agreement"); (3) the Supply Agreement (the "Supply Agreement") between the
Company and Commerce LLC with Azteca Production International, Inc., a
California corporation affiliated with Commerce LLC ("Azteca"),
to act as its subcontractor; (4) the Distribution Agreement (the "Distribution
Agreement") between the Company and Commerce LLC with Apparel Distribution
Services, LLC, a California limited liability company affiliated with Commerce
LLC ("ADS"), to act as its subcontractor; (5) the Support Agreements delivered
by each of the members of the Company's Board of Directors; and (6) the Stock
Purchase Warrants to be issued to the Commerce Group to purchase 3,000,000 and
300,000 shares of Common Stock, respectively, at a purchase price of $2.10 per
share.
Copies of these agreement and documents are not attached to this Proxy
Statement, but were filed by the Company on September ___, 2000 as Exhibits to
Amendment No. 1 (Form 8-K/A) to the Company's Current Report on Form 8-K dated
August 11, 2000. You may read and copy those and any other document we
file at the Securities and Exchange Commission's public reference rooms in
Washington, DC, New York, New York, and Chicago, Illinois. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference rooms. Our Securities and Exchange Commission filings
are also available to the public from the Securities and Exchange Commission's
website at http://www.sec.gov. You may also obtain copies free of charge by
writing to Innovo Group Inc., Attention: Investor Relations, 1808 North
Cherry Street, Knoxville, Tennessee 37917, or calling 800-627-2621.
The Purchase Agreement. The Purchase Agreement provides for both the Phase I and
the Phase II financings, and required the execution and delivery of the Investor
Agreement, the Supply Agreement, the Distribution Agreement and the Support
Agreements at the closing of the Phase I financing ("Phase I Closing")
on August 11, 2000. The Purchase Agreement also required the completion of the
Furrow Debt Conversion as a condition to completing the Phase I financing and
specified the forms of Stock Purchase Warrants to be delivered by the Company
at the closing of the Phase II financing ("Phase II Closing").
Phase I Closing Conditions. The Company was also required to satisfy the
following conditions prior to the Phase I Closing, each of which has been done:
Close its manufacturing and distribution facilities in Knoxville.
Cancel the lease for the Knoxville premises and receive a full and complete
release of both present and past due obligations from its landlord, an
affiliated with Sam Furrow.
Begin taking the steps necessary to realign all of its production and
distribution needs in accordance with the Supply Agreement and the
Distribution Agreement.
With the exception of sales, relocate all of the Company's operations,
including finance and accounting, to Los Angeles.
The Company's Board of Directors adopted the Bylaw amendment in the form
attached to this Proxy Statement in the form of Attachment C.
Conditions to Phase II Closing. The Purchase Agreement provides that the
following conditions must be satisfied before Commerce is obligated to proceed
with the purchase the Phase II Shares at the Phase II Closing:
The representations and warranties of the Company remain true and correct as
of the Phase II Closing date and there is no material adverse change in the
Company's financial condition or business.
Commerce is satisfied that the sale and issuance of the Purchased Shares and
the Warrants, and the proposed issuance by the Company to Commerce of the
Purchased Shares and the Warrants upon the exercise thereof are legally
permitted by all laws and regulations to which Commerce and the Company are
subject and there is no ruling, judgment or writ of any court prohibiting
the transactions contemplated by the Purchase Agreement.
At the Phase II Closing, Commerce receives an opinion of Sims Moss Kline &
Davis, LLP, counsel to the Company, in the specified form.
Commerce is satisfied that the Company is eligible to use Form S-3 to register
resales of the Phase II Shares and the Common Stock underlying the Warrants.
At the Phase II Closing, the Company has executed and delivered to Commerce
the appropriate Warrant agreements for the Purchase Warrants.
Commerce has received satisfactory confirmation from Nasdaq that it has no
present intention to proceed with any de-listing proceeding, including,
without limitation, the proceeding relating to a deficiency in net tangible
assets.
Two Commerce designees are concurrently appointed to the Board of Directors
and each committee thereof.
The Company has received stockholder approval pursuant to this Proposal 3.
The Company has executed and delivered to Commerce an amendment to the initial
S-3 or an additional S-3 Registration Statement ("New S-3") registering the
Phase II Shares and Common Stock underlying the Warrants in a form deemed by
counsel to Commerce to be in compliance with the applicable Commission filing
requirements which New S-3 is filed within 5 business days of the Phase II
Closing.
Potential Liquidated Damages. The Purchase Agreement provides that a delay in
the effectiveness of the New S-3 beyond 90 calendar days from the Phase II
Closing date (a "Registration Deadline") will result in late payments as
"Liquidated Damages" by the Company to Commerce LLC in accordance with the
following schedule (where "Number of Trading Days Late" is defined as the
number of Trading Days beyond the respective Registration Deadline): $3,000
per day up to 119 days late, and $6,000 per day thereafter.
Pre-Emptive Rights. Each "Eligible Investor" (generally , a Commerce Group
member or permitted assignee that holds at least 250,000 purchased shares)
will also have "pre-emptive rights" to purchase their pro rata share of any
Common Stock, preferred stock or convertible securities sold by the Company,
other than (i) shares of Common Stock (and/or options therefor) issued or
issuable to employees, officers, directors, contractors or consultants of the
Company and its subsidiaries pursuant to stock grant, stock purchase and/or
stock option plans or other stock incentive program, arrangement or agreement
which have been approved by the Board of Directors of the Company on or before
August 11, 2000, (ii) any shares of Common Stock or Warrants issued under the
Purchase Agreement, (iii) any securities issuable upon exercise of any options,
warrants or rights to purchase any securities of the Company outstanding on the
date of the Purchase Agreement ("Warrant Securities") and any securities
issuable upon the conversion of any Warrant Securities, (iv) shares of
the Common Stock or preferred stock issued in connection with any stock split or
stock dividend, (v) securities offered by the Company to the public pursuant to
a registration statement filed under the Securities Act.
Rights of First Refusal and Co-Sale Rights. Sam and Jay Furrow and Pat Anderson
have also agreed that until August 11, 2003, if the Commerce Group investors and
members of their families still own beneficially at least 25% of the Purchased
Shares, he will not transfer any securities of the Company owned by him directly
or indirectly by family members or affiliates without allowing co-sales or
giving rights of first refusal, to which Dr. Looney and Messrs. Page and
Crossman also agreed, to buy the shares, other than sales permitted by Rule 144
regardless of whether or not such sales would be required to be made in
accordance with the limitations of Rule 144, any transfer of stock by the
Furrow Group and approved by the Investor made pursuant to a merger or
consolidation of the Company with or into another corporation or corporations,
pursuant to the winding up and dissolution of the Company, to members of the
Commerce Group pursuant to the Investor Agreement, to the Company, any bona
fide gift to a not-for-profit organization as defined in Section 501(c)(3)
of the Internal Revenue Code of 1986, as amended, any bona-fide open market
sale pursuant to Rule 144 of the Securities Act. During the same period, members
of the Commerce Group have a right to participate pro rata in any private resale
of shares by members of the Furrow Group to third parties.
Board Representation. Except to the extent that any of the following provisions
is either (i) determined by Nasdaq to violate Nasdaq corporate governance rules
or (ii) is determined by Company counsel in a written opinion to violate the
fiduciary duty of a member of the Board of Directors under Delaware law, the
Company also agrees that Mr. Guez is entitled to designate one member of the
Board of Directors of the Company and of each subsidiary at the Phase I Closing
and two additional members at the Phase II Closing (the "Investor Directors").
In addition, until as long as August 11, 2003, each member of the Furrow Group
has agreed to vote all shares of Common Stock of the Company over which he has
voting control, and will take all other necessary or desirable actions within
his control and the Company will take all necessary and desirable actions within
its control, in order to cause (A) the election to the Board of Directors of the
Company of nominees designated by Mr. Guez (the "Investor Nominees"), and (B)
the election of Hubert Guez as one of the Investor Directors. The members of
the Furrow Group further agree to vote or cause to be voted all of their
shares of Common Stock to elect the Investor Nominees.
Support Agreements. Pursuant to the Support Agreements, each of the member of
the Company's Board of Directors also agreed to vote all of their shares of
Common Stock in favor approving the issuance of shares and warrants to the
members of the Commerce Group (this Proposal 3), as well as to vote against any
other proposals that would impede completion of the proposed transactions. The
Support Agreements entered into by the indicated person covered the respective
number of shares outstanding and entitled to vote on the Record Date:
Sam Furrow 1,737,024
Jay Furrow 120,512
Dan Page 283,333
Pat Anderson 283,116
Dr. John Looney 133,500
Marc Crossman 1,500
For a total of 2,558,985 shares, or 29.3% of the 8,732,628 shares issued and
outstanding on the Record Date and entitled to vote at the Annual Meeting.
Transaction Expenses. The Company is bearing its own expenses in connection with
the Phase I and Phase II financings. In addition, the Company, on the one hand,
and Commerce LLC, on the other, will share equally the fees and expenses of
counsel to Commerce LLC and also Commerce LLC's reasonable out-of-pocket costs
of up to $30,000 if the Phase II Closing occur. If (a) the Phase II Closing
does not occur and Commerce was prepared to close, but the Company is not, or
(b) Commerce elects not to close due to the discovery prior to the Phase II
Closing of a material omission or misstatement in the Company's disclosure to
Commerce, the Company must pay or reimburse, as the case may be, all of the
legal fees and expenses incurred by Commerce in connection with the
negotiations, drafting, diligence and related services provided by counsel
in connection with this transaction, together with the Commerce's reasonable
out-of-pocket expenses incurred in connection herewith. The Company will also
pay the reasonable fees and expenses of counsel to Commerce in connection with
(a) any follow-on work related to the sale of equity securities convertible
into or exchangeable for equity of the Company, and (b) any amendment,
modification or waiver of the terms of the Purchase Agreement, any Related
Agreement, Exhibits hereto or thereto, or any agreement or document
executed in connection with the transaction contemplated pursuant to the
Purchase Agreement or any related agreement.
Warrant Terms. All of the Purchase Warrants to purchase 3.3 million shares
Common Stock to be issued to the Commerce Group at the Phase II Closing and the
Furrow Warrants to be issued to the Furrow Group with respect to 1,363,637
shares of Common Stock pursuant to the Furrow Debt Conversion will have an
exercise price of $2.10 per share. Three million of the Purchase Warrants and
the Furrow Warrants will have a term of three years and the remaining 300,000
Purchase Warrants will vest over two years and expire 3 years from the last
vesting. All of the Purchase Warrants and Furrow Warrants will be covered by the
entitled to registration rights as described above under "Conditions to Phase II
Closing."
Supply and Distribution Agreements
As required by the Purchase Agreement as a condition to the Phase I Closing, the
Company entered into the Supply Agreement and the Distribution Agreement on
August 11, 2000. Pursuant to those agreements, Commerce manufactures and
supplies products for the Company, both pursuant to an aggregate "Minimum
Obligation" (as that term is defined below). Commerce may subcontract its
obligations under the Supply Agreement to Azteca and under the Distribution
Agreement to ADS. Azteca is, among other things, a manufacturer of t-shirts,
canvas and denim bags and other related products. ADS is in the business of
providing specialized logistic services including warehousing, forwarding,
distribution and related services.
Products, Orders and Pricing. Commerce shall supply to the Company specified
products (the "Products") during the term of the Supply Agreement
("Manufacturing Services"). The purchase price that the Company pays Azteca for
each of the Products is also specified in the Supply Agreement, all of which
result in lower combined Cost of Goods Sold and Selling, General and
Administrative Expenses than the Company's prior manufacturing and distribution
arrangements allowed. From time to time, the types of Products and pricing
may be revised upon written agreement of the parties. The "Minimum Obligation"
of the Company is to purchase a minimum of $1,500,000 worth of Manufacturing
Services and "D& O Services" (as defined in the Distribution Agreement) from
Commerce at or by the execution of the Supply Agreement and an additional
$1,500,000 worth of Manufacturing Services and D & O Services within 90
calendar days of execution of the Supply Agreement. As of September ___, 2000,
the Company had used or ordered an aggregate of $1,500,000 of Manufacturing
Services and D & O Services from Commerce.
D&O Services. The services provided under the Distribution Agreement ("D & O
Services") include the following: all warehousing functions, receiving, storage,
shipping, including shipping supplies, order processing, maintenance of
perpetual inventory, all direct labor and management services, space, utilities,
maintenance and repair, medical insurance, Operations Services, Order Entry,
Customer Service, MIS, Order Allocation, Billing and Office Supplies.
Term. The term of the Supply and Distribution Agreements is from August 11, 2000
for a period of two (2) years. The Agreements may be immediately terminated by
either party upon (i) failure of the other party to comply with laws and
regulations which materially affect such party's contracting rights or
reputation and where such failure is not cured within thirty (30) days of
receipt of written notice thereof; or (ii) any material breach of the Agreement
by the other party which is not cured within thirty (30) days of receipt of
written notice thereof. The Agreements will be automatically renewed for
consecutive two (2) year terms under the same terms and conditions unless
terminated by either party upon delivering written notice to the other party at
least ninety (90) days prior to the end of the then existing term. Renewals are
not subject to the Minimum Obligation amounts, and prices for Products will be
renegotiated in good faith based on increases in costs of raw materials and
labor.
Impact of the Private Placement on Existing Stockholders
Stockholders should consider the following factors in determining whether to
vote for this Proposal 3:
The issuance of the Phase II Shares, the Purchase Warrants and the Furrow
Warrants and the ability of the holders to exercise their warrants to receive
Common Stock may impact the trading patterns and adversely affect the market
price of the Common Stock.
Stockholders are subject to the risk of substantial dilution to their
interests which may result from the issuance of shares of Common Stock upon
exercises of the warrants. As a result of the issuance of such Common Stock,
the current stockholders will own a smaller percentage of the outstanding
Common Stock of the Company.
All of the Phase II Shares and the shares of Common Stock issuable upon
exercise of the warrants will be entitled to certain demand and incidental
registration rights. Consequently, if such shares are registered, such shares
will be freely transferable without restriction under the Securities Act of
1933, as amended (but may be subject to the short-swing profit rules and
other restrictions under the Exchange Act). Such free transferability could
materially and adversely affect the market price of our Common Stock.
The Commerce Group will have a very substantial ownership interest in the
Company after the Phase II Closing and may be in a position to control the
Company's management and operations as a result of such stock ownership. The
Company's ongoing operations and success will also be heavily dependent of the
manufacturing capabilities of the Commerce Group and affiliated companies.
No Appraisal Rights
Under Delaware law, stockholders are not entitled to appraisal rights with
respect to this Proposal 3.
Required Votes
Assuming the presence of a quorum at the Annual Meeting, the affirmative vote of
a majority of the shares present in person or represented by proxy and entitled
to vote is required to approve this Proposal 3. In addition, stockholders
holding a majority of the shares represented at the Annual Meeting, excluding
the shares held by members of the Commerce Group[ and by Sam and Jay Furrow],
must also vote "FOR" approval of this Proposal 3.
Board Recommendation
The Board of Directors believes that the share and warrant issuances discussed
above in this Proposal 3 are in the best interest of the Company and its
stockholders. Stockholder approval of Phase II financing transactions will
assist the Company in meeting the net tangible asset level listing requirements
required by Nasdaq. Furthermore, the transactions will allow the Company to
greatly increase its manufacturing, design and distribution capabilities while
reducing the Company's expenses associated with these functions. The Board of
Directors believes that the increase in manufacturing, design and distribution
capabilities combined with the reduction in expenses and increase in cash flow
will allow the Company to develop a revenue stream that will lead to
profitability and stockholder value.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL
OF PROPOSAL 3.
APPROVAL OF SHARE AND WARRANT ISSUANCE TO MIZRACHI GROUP
(PROPOSAL 4)
Subject to obtaining stockholder approval pursuant to this Proposal 4 and
satisfying other stated conditions, the Company intends to proceed with a sale
of Common Stock (the "Mizrachi Shares") and Common Stock purchase warrants (the
"Mizrachi Warrants") to Third Millennium Properties, Inc., JAML, LLC,
Innovation, LLC and their affiliates, all of which are controlled by affiliates
and associates of Mr. Joseph Mizrachi (collectively, the "Mizrachi Group"), for
$1,700,000, as well as additional transactions with the Mizrachi Group.
The Company entered into a binding letter agreement on August 8, 2000 with Third
Millennium Properties, Inc., JAML, LLC and Innovation, LLC (the "Letter
Agreement") providing for the sale of shares and warrants to purchase 1,700,000
shares to the Mizrachi Group for $1.7 million. The number of shares that the
Mizrachi Group will purchase will be equal to $1,700,000 divided by the lesser
of $1.00 and 80% of the average closing bid price for the Common Stock over the
10 days prior to day of the sale closing. The Mizrachi Warrants will have a term
of 36 months and be exercisable at a price of $2.00 per share. The first
$850,000 of the purchase price and one-half of the Mizrachi Shares and Mizrachi
Warrants will be delivered at closing (the "Initial Closing"), which is to occur
as soon as is practicable after approval of this Proposal 4, and the remaining
$850,000 and shares and warrants will be delivered within 30 days after the
Initial Closing.
A copy of the Letter Agreement is not attached to this Proxy Statement, but has
been filed by the Company with the Commission on September ___, 2000 as an
Exhibit to a Company Current Report on Form 8-K. You may read and copy those
and any other document we file at the Securities and Exchange Commission's
public reference rooms in Washington, DC, New York, New York, and Chicago,
Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the public reference rooms. Our Securities and
Exchange Commission filings are also available to the public from the Securities
and Exchange Commission's website at http://www.sec.gov. You may also obtain
copies free of charge by writing to Innovo Group Inc., Attention: Investor
Relations, 1808 North Cherry Street, Knoxville, Tennessee 37917, or
calling 800-627-2621.
Additional Mizrachi Group Investment Terms
The Letter Agreement. The Letter Agreement requires the execution and delivery
of a definitive Equity Purchase Agreement and related documents, Registration
Rights Agreement, a Sale/Leaseback Agreement, an Advisory Agreement and Support
Agreements by the Initial Closing.
Equity Purchase Agreement. The Equity Purchase Agreement will contain additional
representations and warranties of the Company concerning the financial
condition, assets, liabilities, material contracts, public disclosures,
litigation, environmental compliance, compliance with all laws, no adverse
changes, etc. as are customary in agreements of this type to assure full
disclosure and compliance with applicable law. These representations will
contain customary exceptions and "carve-outs" for materiality and similar
concepts. The Mizrachi Group will represent and warrant its status as an
accredited investor, that it is entering into the agreement for its own account
and not with a view to or for sale in connection with any distribution of the
shares and its authority to enter into the agreements. Appropriate mutual
indemnification will be provided in the event of any material breach of any
such representations or warranties.
Sale/Lease Agreement. A Sale/Lease Agreement with Third Millennium Properties,
Inc. will provide for the purchase of the Company's Lake Worth warehouse
facility at its book value in exchange for the assumption of the Company's
first mortgage on the property and a note for the balance. Third Millennium
Properties, Inc. will receive a placement fee if the note is paid within the
next 36 months. The rate for such lease will be for at least the current
mortgage payments and will be triple net.
Advisory Services. Third Millennium Properties, Inc. will be retained as
financial advisor for the Company and perform investor relation services for
the Company. Third Millennium Properties, Inc. will receive a customary fee
for its services. The investor relations' advisory agreement between Third
Millennium and the Company shall be cancelable by either party with 30 days
written notice from either party.
Exclusivity. As an inducement to the Mizrachi Group to engage in additional
discussions, the negotiation and investigation with respect to the proposed
transaction, which will involve the engagement of professionals and the
occurrence of substantial expense, the Company agreed that, until September 1,
2000, neither it, nor any of its respective affiliates, agents, counsel, or
investment bankers will, directly or indirectly, engage in any discussions,
negotiations or agreements with any person and/or entity other than any member
of the Mizrachi Group which will result in the sale, transfer or disposition by
the Company of any of its assets, except sales from inventory in the ordinary
course of business and as part of the Commerce Group transactions
and the Furrow Debt Conversion described above.
Additional Closing Conditions. The Company was also required to satisfy the
following conditions prior to the Initial Closing:
Completion of the Furrow Debt Conversion (which has been completed).
Enter into the Supply Agreement and the Distribution Agreement (which has been
completed).
Sam Furrow will continue to provide operational funds to the Company prior to
closing. These funds will be used primarily to finance the Company's imported
product from the Orient. As of closing, Sam Furrow shall be reimbursed for any
amounts owed to him up to $500,000.
The representations and warranties of the Company remain true and correct as
of the Initial Closing date and there is no material adverse change in the
Company's financial condition or business.
The Mizrachi Group is satisfied that the sale and issuance of the Mizrachi
Shares and the Mizrachi Warrants are legally permitted by all laws and
regulations to which The Mizrachi Group and the Company are subject and
there is no ruling, judgment or writ of any court prohibiting the transactions
contemplated by the Letter Agreement.
At the Closing, the Mizrachi Group receives an opinion of Sims Moss Kline &
Davis, LLP, counsel to the Company, in the specified form.
The Mizrachi Group is satisfied that the Company is eligible to use Form S-3
to register resales of the Mizrachi Shares and the Common Stock underlying the
Mizrachi Warrants.
At the Initial Closing, the Company has executed and delivered to the Mizrachi
Group the appropriate warrant agreements for the Mizrachi Warrants.
The Mizrachi Group has received satisfactory confirmation from Nasdaq that it
has no present intention to proceed with any de-listing proceeding, including,
without limitation, the proceeding relating to a deficiency in net tangible
assets.
Two Mizrachi Group designees are concurrently appointed to the Board of
Directors and each committee thereof.
The Company has received stockholder approval pursuant to this Proposal 4.
The Company has executed and delivered to the Mizrachi Group an S-3
Registration Statement registering the Mizrachi Shares and Common Stock
underlying the Mizrachi Warrants in a form deemed by counsel to the
Mizrachi Group to be in compliance with the applicable Commission filing
requirements which S-3 is filed within 5 business days of the Initial
Closing.
The Mizrachi Group is satisfied with respect to Company tax matters.
The Company has canceled the lease for the Knoxville premises and receive a
full and complete release of both present and past due obligations from its
landlord, an affiliate of Sam Furrow (which has been done).
With the exception of sales, relocate all of the Company's operations,
including finance and accounting, to Los Angeles.
Pre-Emptive Rights. Mizrachi Group members and permitted assignees will also
have "pre-emptive rights" to purchase their pro rata share of Common Stock,
preferred stock or convertible securities sold by the Company, other than (i)
shares of Common Stock (and/or options therefor) issued or issuable to
employees, officers, directors, contractors or consultants of the Company
and its subsidiaries pursuant to stock grant, stock purchase and/or stock
option plans or other stock incentive program, arrangement or agreement
which have been approved by the Board of Directors of the Company on or
before the Initial Closing, (ii) any securities issuable upon exercise of
any options, warrants or rights to purchase any securities of the Company
outstanding on the date of the Initial Closing ("Warrant Securities") and
any securities issuable upon the conversion of any Warrant Securities, (iii)
shares of the Common Stock or preferred stock issued in connection with any
stock split or stock dividend, (iv) securities offered by the Company to the
public pursuant to a registration statement filed under the Securities Act.
Rights of First Refusal and Co-Sale Rights. Sam and Jay Furrow and Pat
Anderson have also agreed that until August 11, 2003, if the Mizrachi Group
investors and members of their families still own beneficially at least 25%
of the Mizrachi Shares, he will not transfer any securities of the Company owned
by him directly or indirectly by family members or affiliates without allowing
co-sales or giving rights of first refusal, to which Dr. Looney and Messrs.
Page and Crossman also agreed, to buy the shares, other than sales permitted
by Rule 144 regardless of whether or not such sales would be required to be
made in accordance with the limitations of Rule 144, any transfer of stock by
the Furrow Group and approved by the Investor made pursuant to a merger or
consolidation of the Company with or into another corporation or corporations,
pursuant to the winding up and dissolution of the Company, to members of the
Commerce Group pursuant to the Investor Agreement, to the Company, any bona
fide gift to a not-for-profit organization as defined in Section 501(c)(3) of
the Internal Revenue Code of 1986, as amended, any bona-fide open market sale
pursuant to Rule 144 of the Securities Act.
During the same period, members of the Commerce Group have a right to
participate pro rata in any private resale of shares by members of the Furrow
Group to third parties.
Board Representation. Except to the extent that any of the following provisions
is either (i) determined by Nasdaq to violate Nasdaq corporate governance rules
or (ii) is determined by Company counsel in a written opinion to violate the
fiduciary duty of a member of the Board of Directors under Delaware law, the
Company also agrees that Mr. Mizrachi is entitled to designate two members of
the Board of Directors of the Company and of each committee thereof (the
"Investor Directors"). In addition, until as long as August 11, 2003, each
member of the Furrow Group has agreed to vote all shares of Common Stock of
the Company over which he has voting control, and will take all other necessary
or desirable actions within his control and the Company will take all necessary
and desirable actions within its control, in order to cause (A) the election to
the Board of Directors of the Company of nominees designated by Mr. Mizrachi
(the "Investor Nominees"), and (B) the election of Mr. Mizrachi as one of the
Investor Directors. The members of the Furrow Group further agree to vote or
cause to be voted all of their shares of Common Stock to elect the Investor
Nominees.
Support Agreements. Pursuant to the Support Agreements, each of the member of
the Company's Board of Directors will also agreed to vote all of their shares
of Common Stock in favor approving the issuance of shares and warrants to the
members of the Mizrachi Group (this Proposal 4), as well as to vote against
any other proposals that would impede completion of the proposed transactions.
The Support Agreements entered into by the indicated person covered the
respective number of shares outstanding and entitled to vote on the Record
Date:
Sam Furrow 1,737,024
Jay Furrow 120,512
Dan Page 283,333
Pat Anderson 283,116
Dr. John Looney 133,500
Marc Crossman 1,500
For a total of 2,558,985 shares, or 29.3% of the 8,732,628 shares issued and
outstanding on the Record Date and entitled to vote at the Annual Meeting.
Transaction Expenses. The Company is bearing its own expenses in connection with
the Mizrachi investments. In addition, the Company will pay the fees and
expenses of counsel to the Mizrachi Group and their reasonable out-of-pocket
costs of up to $34,000 if (a) the Initial Closing does not occur and the
Mizrachi Group was prepared to close, but the Company is not, or (b) the
Mizrachi Group elects not to close due to the discovery prior to the Initial
Closing of a material omission or misstatement in the Company's disclosure to
the Mizrachi Group. The Company will also pay the reasonable fees and expenses
of counsel to the Mizrachi Group in connection with (a) any follow-on work
related to the sale of equity securities convertible into or exchangeable for
equity of the Company, and (b) any amendment, modification or waiver of the
terms of the Mizrachi Group agreements, Exhibits hereto or thereto, or any
agreement or document executed in connection with the transaction contemplated
pursuant to the agreements.
Impact of the Private Placement on Existing Stockholders
Stockholders should consider the following factors in determining whether to
vote for this Proposal 4:
The issuance of the Mizrachi Shares and the Mizrachi Warrants and the ability
of the holders to exercise their warrants to receive Common Stock may impact
the trading patterns and adversely affect the market price of the Common
Stock.
Stockholders are subject to the risk of substantial dilution to their
interests which may result from the issuance of shares of Common Stock upon
exercises of the Mizrachi Warrants. As a result of the issuance of such
Common Stock, the current stockholders will own a smaller percentage of the
outstanding Common Stock of the Company.
All of the Mizrachi Shares and the shares of Common Stock issuable upon
exercise of the Mizrachi Warrants will be entitled to certain demand and
incidental registration rights. Consequently, if such shares are registered,
such shares will be freely transferable without restriction under the
Securities Act of 1933, as amended (but may be subject to the short-swing
profit rules and other restrictions under the Exchange Act). Such free
transferability could materially and adversely affect the market price of
our Common Stock.
The Mizrachi Group will have a very substantial ownership interest in the
Company after the Initial Closing and may be in a position to control the
Company's management and operations as a result of such stock ownership.
The Company's ongoing operations and success will also be heavily dependent
of the manufacturing capabilities of the Mizrachi Group and affiliated
companies.
No Appraisal Rights
Under Delaware law, stockholders are not entitled to appraisal rights with
respect to this Proposal 4.
Required Votes
Assuming the presence of a quorum at the Annual Meeting, the affirmative vote of
a majority of the shares present in person or represented by proxy and entitled
to vote is required to approve this Proposal 4. In addition, stockholders
holding a majority of the shares represented at the Annual Meeting, excluding
the shares held by members of the Mizrachi Group and the Commerce Group, must
also vote "FOR" approval of this Proposal 4.
Board Recommendation
The Board of Directors believes that the transactions discussed above in this
Proposal 4 are in the best interest of the stockholders and the Company.
Approval of the transactions will allow the Company to reduce interest expense,
acquire more favorable terms with vendors and financial institutions and provide
working capital to grow the Company's business going forward. Completion of the
transactions will also further ensure the Company's ability to meet the net
tangible assets levels required by Nasdaq for continued listing on the
Nasdaq SmallCap Market. As the Company continues to develop, the Board of
Directors believes that the active involvement of the Mizrachi Group investors
will have a positive impact on the Company and assist in increasing shareholder
value.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL
OF PROPOSAL 4.
APPROVAL OF 2000 EMPLOYEE STOCK INCENTIVE PLAN
(PROPOSAL 5)
Stockholders are asked to approve the adoption of the Company's 2000 Employee
Stock Incentive Plan (the "2000 Employee Plan"). The following summary of
principal features of the 2000 Employee Plan is not a complete description of
all the provisions of the plan. A copy of the 2000 Employee Plan is attached to
this Proxy Statement as Attachment D.
General
The 2000 Employee Plan provides for the grant of options to officers, employees
and consultants of the Company and its affiliates (an Affiliate"). The 2000
Employee Plan will continue in effect until March 2010, unless terminated
earlier. Options granted under the 2000 Employee Plan may be either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or nonqualified stock options.
The 2000 Employee Plan was adopted by the Company's Board of Directors on March
12, 2000, subject to stockholder approval. Up to 2,000,000 share of Common
Stock, subject to adjustment as provided in the 2000 Employee Plan, may be
issued under the 2000 Employee Plan. No options have been granted under the
2000 Employee Plan.
Purpose
The purposes of the 2000 Employee Plan are to attract and retain the best
available personnel, to provide additional incentives to employees of and
consultants to the Company and to promote the success of the Company's business.
Administration
The 2000 Employee Plan will be administered by the Executive Compensation
Committee of the Board of Directors (the "Plan Committee"). The Plan Committee
has the exclusive authority to grant stock options, interpret the plan and
otherwise administer the plan.
Eligibility
Options may be granted to employees (including officers and directors) and
consultants of the Company, its subsidiaries or other Affiliates. Outside
directors of the Company are eligible to receive grants as consultants. The
Plan Committee selects optionees and determines the number of shares to be
subject to each option, taking into account the duties and responsibilities
of the optionee, the value of the optionee's services, the optionee's present
and potential contribution to the success of the Company and other relevant
factors.
Under the Code, the aggregate market value of stock with respect to which
incentive stock options become exercisable for the first time by an individual
during any calendar year may not exceed $100,000.
Terms of Options
Exercise. The Plan Committee determines when options may be exercised.
Exercise Price. The Plan Committee determines the exercise price of an option,
which in the case of an incentive stock option may not be less than 100% of fair
market value of the Common Stock. In the case of an incentive stock option
granted to an optionee who owns more than 10% of the combined voting power of
all classes of stock of the Company, its parent or subsidiaries, the exercise
price must not be less than 110% of fair market value. Fair market value is
the 4 p.m. Eastern Time closing sales price of a share of Common Stock on
the Nasdaq Stock Market on the last trading day prior to the date of grant.
The Plan Committee has the authority to set the exercise price of nonqualified
stock options. The exercise price may be paid by cash, check, cashless exercise
through a broker, withholding of shares or other means determined by the Plan
Committee.
Termination of Employment. Options may be exercised not later than three months
(or other period not exceeding three months in the case of an incentive stock
option or six months in the case of a nonqualified stock option as determined
by the Plan Committee) after termination for any reason other than disability
or death, to the extent the option was exercisable on the date of termination.
The Plan Committee may extend exercise periods following termination, in its
discretion. No option may be exercised after the expiration of its term.
Disability or Death. Options may be exercised within six months (or other period
not exceeding 12 months as determined by the Plan Committee) after termination
because of disability or death to the extent exercisable on the date of
termination. The Plan Committee may extend exercise periods following
termination, in its discretion. No option may be exercised after its expiration
date. If an optionee dies within three months (or other period not exceeding
three months, unless otherwise extended by the Plan Committee) after
termination, an option may be exercised within six months after the date of
death to the extent that the optionee was entitled to exercise the option at
the date of death.
Term of Options. Options granted under the plan will have the term provided in
the option agreement except that an incentive stock option will have a term of
no more than ten years from the date of grant, or five years if an optionee owns
stock representing more than 10% of the combined voting power of all classes of
stock of the Company or any parent or subsidiary.
Options Not Transferable. An option generally may not be transferred except by
will or the laws of descent and distribution, however, the 2000 Employee Plan
gives the Plan Committee the discretion to grant nonqualified stock options
with limited rights to transfer an option to immediate family members, a living
trust or a charitable trust.
Adjustments Upon Changes in Capitalization
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment must be made in the exercise price of each
outstanding option, the number of shares subject to each option, the annual
limitation on grants to employees and the number of shares available for
issuance under the 2000 Employee Plan. In the event of proposed dissolution or
liquidation of the Company, each option will terminate unless otherwise provided
by the Plan Committee.
Corporate Transactions
In the event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, each
option must be assumed or an equivalent option must be substituted by the
successor corporation or its parent or subsidiary, unless the Plan Committee
determines that the optionee will have the right to exercise the option as to
some or all of the optioned stock, including shares as to which the option 3
would not otherwise be exercisable.
Amendment and Termination
The Board of Directors may amend the 2000 Employee Plan or may terminate it
without approval of the stockholders, except that stockholder approval is
required for any amendment that increases the number of shares that may be
issued as incentive stock options modifies eligibility requirements, the annual
limitation on the number of shares subject to grants or results in changes that
would require stockholder approval to qualify options as performance- based
compensation under Section 162(m) of the Code. The 2000 Employee Plan will
terminate in March 2010, but options then outstanding will remain outstanding
until they expire.
Section 162(m) of the Internal Revenue Code
Section 162(m) of the Code provides that a publicly held corporation cannot
deduct compensation of a covered employee (the CEO and the four other most
highly compensated employees for the taxable year whose compensation is required
to be reported under the Securities Exchange Act of 1934) to the extent the
compensation exceeds $1 million per tax year, except if the compensation is
based on the attainment of performance goals. Income derived from stock options
with an exercise price equal to fair market value on the date of grant qualify
for this exception and will be treated as performance-based compensation if
granted in accordance with requirements set forth in Section 162(m).
Federal Income Tax Aspects of the 2000 Employee Plan
The following is a brief summary of the U. S. federal income tax treatment
that will generally apply to options granted under the 2000 Employee Plan based
on federal income tax laws in effect as of this date. This summary is not
intended to be exhaustive and optionees should consult their own tax advisors
concerning tax implications of option grants and exercises and the disposition
of stock acquired upon such exercise.
With respect to an incentive stock option, generally an optionee is not taxed
and the Company is not entitled to a deduction on either the grant or exercise
of the incentive stock option as long as the requirements of Section 422
continue to be met. The exercise may, however, give rise to alternative
minimum tax (see discussion below). Upon the sale or exchange of the shares
more than two years after grant of the option and one year after receipt of
the shares by the optionee, any gain will be treated as long-term capital gain
under U.S. tax laws. If these holding periods are not satisfied, the optionee
will recognize ordinary income under U.S. tax laws upon sale of the shares
equal to the difference between the exercise price and the lower of the fair
market value of the stock at the date of the option exercise or the sale price
of the stock. The Company will be entitled to a deduction in the same amount.
Any gain recognized on such a premature disposition of the shares in excess
of the amount treated as ordinary income will be characterized under U. S.
tax laws as long-term capital gain if the sale occurs more than one year after
exercise of the option or as short-term capital gain if the sale is made
earlier.
Options that do not qualify as incentive stock options are referred to as
nonqualified stock options. An optionee will not recognize taxable income and
the Company will not be entitled to a deduction at the time of grant of a
nonqualified stock option. Upon its exercise, the optionee will recognize
ordinary income measured by the excess of the then fair market value of the
shares over the exercise price and the Company will be entitled to a deduction
in an equal amount. Income recognized by an optionee who is also an employee of
the Company will be subject to tax withholding by the Company. Upon resale of
such shares by the optionee, any difference between the sales price and the
exercise price, to the extent not recognized as ordinary income as provided
above, will be treated as capital gain or loss and will qualify for long-term
capital gain or loss treatment if the shares have been held for more than 12
months.
The exercise of an incentive stock option may subject the optionee to
alternative minimum tax under Section 55 of the Code. Alternative minimum tax
will be due if the tax determined under a prescribed formula exceeds the
regular tax of the taxpayer for the year. In computing alternative minimum
taxable income, shares purchased upon exercise of an incentive stock option
are treated as if they had been acquired by the optionee pursuant to exercise
of a nonqualified stock option. As a result, the optionee recognizes alternative
minimum taxable income equal to the excess of the fair market value of the
shares on the date of exercise over the option's exercise price. If an optionee
pays alternative minimum tax, the amount of such tax may be carried forward as
a credit against any subsequent year's regular tax in excess of the alternative
minimum tax for such year.
Required Vote
The affirmative vote of the holders of a majority of the shares of Common
Stock represented and voting at the Annual Meeting at which a quorum is
present is required for the approval of the 2000 Employee Plan.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR APPROVAL OF THE 2000
EMPLOYEE PLAN.
APPROVAL OF 2000 DIRECTOR STOCK INCENTIVE PLAN
(PROPOSAL 6)
Stockholders are asked to approve the adoption of the Company's 2000 Director
Stock Incentive Plan (the "2000 Director Plan"). The following summary of
principal features of the 2000 Director Plan is not a complete description of
all the provisions of the plan. A copy of the 2000 Director Plan is attached
to this Proxy Statement as Attachment E.
General
The 2000 Director Plan provides for the automatic grant of options to
directors of the Company and its affiliates and subsidiaries (an Affiliate").
The 2000 Director Plan will continue in effect until March 2010, unless
terminated earlier. Options granted under the 2000 Director Plan will be
nonqualified stock options.
The 2000 Director Plan was adopted by the Company's Board of Directors on
September __, 2000, subject to stockholder approval. A total of 1,000,000
share of Common Stock, subject to adjustment as provided in the 2000 Director
Plan, may be issued pursuant to the 2000 Director Plan. No options have been
granted under the 2000 Director Plan.
Purpose
The purposes of the 2000 Director Plan are to attract and retain the best
available directors, to further align directors interests with those of the
Company's stockholders and to promote the success of the Company's
business.
Administration
The 2000 Director Plan will be administered by the Executive Compensation
Committee of the Board of Directors (the "Plan Committee"). The Plan Committee
has the exclusive authority to interpret and administer the plan.
Eligibility
All directors will receive grants upon becoming a director and annually
thereafter so long as they remain a director.
Terms of Options
Number and Exercise Price. Director will receive each year an option to buy
Common Stock with a nominal initial value of $10,000. Each option will have an
exercise price equal to one-half of the market price on the date of grant, and
will cover a number of shares equal to $10,000 divided the exercise price per
share. Market value is the 4 p.m. Eastern Time closing sales price of a share of
Common Stock on the Nasdaq Stock Market on the last trading day prior to the
date of grant. The exercise price may be paid by cash, check, cashless exercise
through a broker, withholding of shares or other means determined by the Plan
Committee.
Termination of Board Membership. Options may be exercised not later than three
months after termination for any reason other than disability or death, to the
extent the option was exercisable on the date of termination. No option may be
exercised after the expiration of its term.
Disability or Death. Options may be exercised within six months after
termination because of disability or death to the extent exercisable on the
date of termination. No option may be exercised after its expiration
date. If an optionee dies within three after termination, an option may be
exercised within six months after the date of death to the extent that the
optionee was entitled to exercise the option at the date of death.
Term of Options. Options granted under the plan will have the term of ten
years.
Options Not Transferable. An option generally may not be transferred except by
will or the laws of descent and distribution.
Adjustments Upon Changes in Capitalization
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment must be made in the exercise price of each
outstanding option, the number of shares subject to each option and the number
of shares available for issuance under the 2000 Director Plan. In the event of
proposed dissolution or liquidation of the Company, each option will terminate
unless otherwise provided by the Plan Committee.
Corporate Transactions
In the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger of the Company with or into another corporation,
each option must be assumed or an equivalent option must be substituted by the
successor corporation or its parent or subsidiary, unless the Plan Committee
determines that the optionee will have the right to exercise the option as to
some or all of the optioned stock, including shares as to which the option would
not otherwise be exercisable.
Amendment and Termination
The Board of Directors may amend the 2000 Director Plan or may terminate it
without approval of the stockholders, except that stockholder approval is
required for any amendment that increases the number of shares that may be
issued as incentive stock options modifies eligibility requirements or results
in changes that would require stockholder approval to qualify options as
performance-based compensation under Section 162(m) of the Code. The 2000
Director Plan will terminate in September 2010, but options then outstanding
will remain outstanding until they expire.
Section 162(m) of the Internal Revenue Code
Section 162(m) of the Code provides that a publicly held corporation cannot
deduct compensation of a covered employee (the CEO and the four other most
highly compensated employees for the taxable year whose compensation is required
to be reported under the Securities Exchange Act of 1934) to the extent the
compensation exceeds $1 million per tax year, except if the compensation is
based on the attainment of performance goals. Income derived from stock options
with an exercise price equal to fair market value on the date of grant qualify
for this exception and will be treated as performance-based compensation if
granted in accordance with requirements set forth in Section 162(m).
Federal Income Tax Aspects of the 2000 Director Plan
The following is a brief summary of the U. S. federal income tax treatment
that will generally apply to options granted under the 2000 Director Plan based
on federal income tax laws in effect as of this date. This summary is not
intended to be exhaustive and optionees should consult their own tax advisors
concerning tax implications of option grants and exercises and the disposition
of stock acquired upon such exercise.
An optionee will not recognize taxable income and the Company will not be
entitled to a deduction at the time of grant of an option. Upon its exercise,
the optionee will recognize ordinary income measured by the excess of the then
fair market value of the shares over the exercise price and the Company will be
entitled to a deduction in an equal amount. Income recognized by an optionee who
is also an employee of the Company will be subject to tax withholding by the
Company. Upon resale of such shares by the optionee, any difference between
the sales price and the exercise price, to the extent not recognized as ordinary
income as provided above, will be treated as capital gain or loss and will
qualify for long-term capital gain or loss treatment if the shares have been
held for more than 12 months.
Required Vote
The affirmative vote of the holders of a majority of the shares of Common
Stock represented and voting at the Annual Meeting at which a quorum is present
is required for the approval of the 2000 Director Plan.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR APPROVAL OF THE 2000
DIRECTOR PLAN.
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
(Proposal 7)
The Board of Directors has appointed BDO Seidman, LLP ("BDO") as the Company's
independent auditors for the fiscal year ending November 30, 2000, subject to
ratification by stockholders at the Annual Meeting. Representatives of BDO
will be present at the Annual Meeting and will have the opportunity to make
a statement if they so desire and be available to respond to appropriate
questions. Unless otherwise instructed on the proxy, properly executed
proxies will be voted in favor of ratifying the appointment of BDO to audit
the books and accounts of the Company for the fiscal year ending November 30,
2000. The affirmative vote of a majority of the votes present in person or
represented by proxy at the Annual Meeting is required to approve Proposal 7.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 7.
DATE OF SUBMISSION OF STOCKHOLDER PROPOSALS
TO BE INCLUDED IN PROXY MATERIALS
Any proposal or proposals intended to be presented by any stockholder at the
2001 Annual Meeting of Stockholders must be received by the Company by November
30, 2000 to be considered for inclusion in the Company's Proxy Statement and
form of proxy relating to that meeting.
OTHER BUSINESS TO BE TRANSACTED
As of the date of this Proxy Statement, the Board of Directors knows of no other
business which may come before the Annual Meeting. If any other business is
properly brought before the Annual Meeting, it is the intention of the proxy
holders to vote or act in accordance with their best judgment with respect to
such matters.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED NOVEMBER 30, 1999 ACCOMPANIES THIS PROXY STATEMENT.
STOCKHOLDERS MAY OBTAIN, FREE OF CHARGE, AN ADDITIONAL COPY OF THE
COMPANY'S 1999 ANNUAL REPORT ON FORM 10-K (WITHOUT EXHIBITS) BY WRITING TO
INNOVO GROUP INC., ATTENTION: INVESTOR RELATIONS, 1808 NORTH CHERRY STREET,
KNOXVILLE, TENNESSEE 37917. THE COMPANY WILL PROVIDE COPIES OF THE
EXHIBITS TO THE FORM 10-K UPON PAYMENT OF A REASONABLE FEE.
INNOVO GROUP INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
HELD OCTOBER 20, 2000
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned stockholder of Innovo Group Inc. (the "Company") hereby appoints
Samuel J. Furrow, Sr. and Samuel J. Furrow, Jr., or either of them, with full
power of substitution, as proxies to cast all votes, as designated below, which
the undersigned stockholder is entitled to cast at the 2000 Annual Meeting of
Stockholders (the "Annual Meeting") to be held on Friday, October 20, 2000 at
10:00 a.m. (local time) at The Auditorium, Tyson Place, 2607 Kingston Pike,
Knoxville, Tennessee 37919, upon the following matters and any other matter
as may properly come before the Annual Meeting or any adjournments thereof.
1. Election of six Directors to serve on the Board of Directors:
[ ] FOR all the nominees listed above (except as marked to the contrary
below).
[ ] WITHHOLD AUTHORITY to vote for all the nominees listed above.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME ON THE SPACE
PROVIDED BELOW.)
______________________________________________________________________________
2. Proposal to approve the amendment to Article Fourth of the Company's Amended
and Restated Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 15,000,000 to 40,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve and ratify under Nasdaq Marketplace Rules and subject to agreed
terms and conditions the issuance to certain affiliates of the Company and of
Commerce Investment Group, LLC of (i) 1,500,000 shares of common stock, par
value $0.10 per share ("Common Stock"), at a purchase price of $1.00 per share
and (ii) warrants to purchase 4,800,000 shares of Common Stock at a purchase
price of $2.10 per share, and including the issuance of any securities of the
Company as dividends on or otherwise in respect of the Common Stock subject to
unexercised warrants in accordance with the terms thereof;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve and ratify under Nasdaq Marketplace Rules and subject to agreed
terms and conditions the issuance to certain affiliates of Joseph Mizrachi of
(i) $1,700,000 worth of shares of Common Stock with a purchase price equal to
the lesser of (a) a 20% discount to the average of the closing bid prices of
the Company's common stock for the 10 days prior to the date of the closing or
(b) $1.00 per share, and (ii) warrants to purchase 1,700,000 shares of Common
Stock at a purchase price of $2.00 per share, and including the issuance of
any securities of the Company as dividends on or otherwise in respect of the
Common Stock subject to unexercised warrants in accordance with the terms
thereof;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To approve the Company's 2000 Stock Option Plan 2000 Employee Stock Incentive
Plan;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. To approve the Company's 2000 Director Stock Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. Proposal to ratify the appointment of BDO Seidman, LLP as the independent
auditors of the Company for the fiscal year ending November 30, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(continued and to be dated and signed on reverse side.)
This proxy, when properly executed, will be voted as directed by the undersigned
stockholder and in accordance with the best judgment of the proxies as to other
matters. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" THE NOMINEES
LISTED IN PROPOSAL 1, "FOR" PROPOSALS 2, 3 AND 4, AND IN ACCORDANCE WITH THE
BEST JUDGMENT OF THE PROXIES AS TO OTHER MATTERS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED
IN PROPOSAL 1, AND "FOR" PROPOSALS 2, 3 AND 4.
The undersigned hereby acknowledges prior receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement dated March ___, 2000 and the
Annual Report on Form10-K for the year ended November 30, 1999, and hereby
revokes any proxy or proxies heretofore given. This Proxy may be revoked at
any time before it is voted by delivering to the Secretary of the Company
either a written revocation of proxy or a duly executed proxy bearing a later
date, or by appearing at the Annual Meeting and voting in person.
If you receive more than one proxy card, please sign and return all cards in the
accompanying envelope.
Date: ______________________ , 2000.
____________________________________________
Signature of Stockholder or Authorized Representative
Please date and sign exactly as name
appears hereon. Each executor,
administrator, trustee, guardian,
attorney-in-fact and other fiduciary
should sign and indicate his or her
full title. In the case of stock
ownership in the name of two or more
persons, all persons should sign.
[ ] I PLAN TO ATTEND THE OCTOBER 20, 2000 ANNUAL STOCKHOLDERS
MEETING
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY TO
ENSURE A QUORUM AT THE MEETING. IT IS IMPORTANT WHETHER YOU OWN FEW
OR MANY SHARES. DELAY IN RETURNING YOUR PROXY MAY SUBJECT THE
COMPANY TO ADDITIONAL EXPENSE.
ATTACHMENT A
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
OF INNOVO GROUP INC.
I. AUDIT COMMITTEE PURPOSE
The Audit Committee of the Board of Directors of Innovo Group Inc. (the
"Company") is appointed by the Board of Directors to assist the Board of
Directors in fulfilling its oversight responsibilities. The Audit Committee's
primary duties and responsibilities are to:
- Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal
compliance.
- Monitor the independence and performance of the Company's independent
auditors and internal auditing department.
- Provide an avenue of communication among the independent auditors,
management, the internal auditing department, and the Board of Directors.
The Audit Committee has the authority to conduct any investigation appropriate
to fulfilling its responsibilities and it has direct access to the independent
auditors as well as anyone in the organization. The Audit Committee has the
ability to retain, at the Company's expense, legal, accounting, or other
consultants or experts it deems necessary in the performance of its duties.
II. AUDIT COMMITTEE COMPOSITION AND MEETINGS
Audit Committee members shall meet the requirements of the National Association
of Securities Dealers, Inc. The Audit Committee shall be comprised of three or
more directors as determined by the Board of Directors, each of whom shall be
independent non-executive directors, free from any relationship that would
interfere with the exercise of his or her independent judgment. Under certain
exceptional and limited circumstances, one of the members of the Audit
Committee may not be independent as permitted by the rules of the National
Association of Securities Dealers, Inc. All members of the Audit Committee
shall have a basic understanding of finance and accounting and be able to
read and understand fundamental financial statements, and at least one member
of the Audit Committee shall have accounting or related financial management
expertise. Audit Committee members shall be appointed by the Board of Directors.
If an audit committee Chair is not designated or present, the members of the
Audit Committee may designate a Chair by majority vote of the Audit Committee
membership. The Audit Committee shall meet as frequently as circumstances
dictate. The Audit Committee Chair shall prepare and/or approve an agenda in
advance of each meeting. The Audit Committee should consult privately with
management, the director of the internal auditing department, the independent
auditors and as a committee to discuss any matters that the Audit Committee or
each of these groups believe should be discussed.
III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES REVIEW PROCEDURES
1. Review and reassess the adequacy of this Charter at least annually. Submit
the charter to the Board of Directors for approval and have the document
published at least every three years in accordance with the Securities and
Exchange Commission regulations.
2. Review the Company's annual audited financial statements. Review should
include discussion with management, independent auditors and internal auditing
department of significant issues regarding accounting principles, practices and
judgments. As a result of this review, recommend to the Board that the audited
financial statements be included in the Annual Report on Form 10-K.
3. In consultation with the management, the independent auditors and the
internal auditors, consider the integrity of the Company's financial reporting
processes and controls. Discuss significant financial risk exposures and the
steps management has taken to monitor, control and report such exposures.
Review significant findings prepared by the independent auditors and the
internal auditing department together with management's responses including
the status of previous recommendations.
INDEPENDENT AUDITORS
4. The independent auditors are ultimately accountable to the Audit Committee
and the Board of Directors. The Audit Committee shall review the independence,
and performance of the auditors and annually recommend to the Board of Directors
the appointment of the independent auditors or approve any discharge of auditors
when circumstances warrant.
5. Approve the audit fees and other significant compensation to be paid to the
independent auditors.
6. On an annual basis, the Audit Committee shall review and discuss with the
independent auditors all significant relationships they have with the Company
that could impair the auditors' independence.
7. Review the independent auditors audit plan -- discuss scope, staffing,
reliance upon internal audit and general audit approach.
8. Discuss the results of the year-end audit with the independent auditors.
Discuss certain matters required to be communicated to audit committees in
accordance with the American Institute of Certified Public Accountants Statement
of Auditing Standards No. 61.
9. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
INTERNAL AUDIT DEPARTMENT AND LEGAL COMPLIANCE
10. Review and approve the budget, plan, changes in plan, activities,
organizational structure, and qualifications of the internal audit department,
as needed.
11. Review and approve the appointment, performance and replacement of the
senior internal audit executive.
12. Review significant reports prepared by the internal audit department
together with management's response and follow-up to these reports.
13. As the Audit Committee deems necessary or appropriate, review with the
Company's counsel any legal matters that could have a significant impact on
the organization's financial statements, the Company's compliance with
applicable laws and regulations, inquiries received from regulators or
governmental agencies.
OTHER AUDIT COMMITTEE RESPONSIBILITIES
14. Annually prepare a report to stockholders as required by the Securities and
Exchange Commission. The report should be included in the Company's annual proxy
statement.
15. Perform any other activities consistent with this Charter, the Company's
By-laws and governing law, as the Audit Committee or the Board of Directors
deems necessary or appropriate.
16. Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
ATTACHMENT B
INNOVO GROUP INC.
PROPOSED AMENDED ARTICLE FOURTH OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
FOURTH: (a) The total number of shares of capital stock that the Corporation
shall be authorized to issue is 45,000,000 divided into two classes as follows:
(i) forty million (40,000,000) shares of common stock having a par value of $.10
per share ("Common Stock"), and (ii) five million (5,000,000) shares of serial
preferred stock in series having a par value of $.10 per share (the "Preferred
Stock").
(b) The Common Stock shall be subject to all of the rights, privileges,
preferences and priorities of the Preferred Stock as set forth herein and in
the certificate of designations filed to establish the respective series of
Preferred Stock. Each share of Common Stock shall have the same relative rights
as and be identical in all respects to all the other shares of Common Stock.
Whenever there shall have been paid, or declared and set aside for the Common
Stock as to the payment of dividends, the full amount of dividends and of
sinking fund or retirement payments, if any, to which such holders are
respectively entitled in preference to the Common Stock, then dividends may
be paid on the Common Stock and on any class or series of stock entitled to
participate therewith as to dividends, out of any assets legally available for
the payment of dividends thereon, but only when and as declared by the Board of
Directors of the Corporation. In the event of any dissolution, liquidation, or
winding up of the Corporation, whether voluntary or involuntary, the holders of
the Common Stock, and holders of any class or series of stock entitled to
participate therewith, in whole or in part, as to the distribution of assets
in such event, shall become entitled to participate in the distribution of any
assets of the Corporation remaining after the Corporation shall have paid, or
provided for payment of, all debts and liabilities of the Corporation and after
the Corporation shall have paid, or set aside for payment, to the holders of any
class of stock having preference over the Common Stock in the event of
dissolution, liquidation or winding up the full preferential amounts (if any)
to which they are entitled. Each holder of shares of Common Stock shall be
entitled to attend all special and annual meetings of the stockholders of the
Corporation and, share for share and without regard to class, together with the
holders of all other classes of stock entitled to attend such meetings and to
vote (except any class or series of stock having special voting rights), to
cast one vote for each outstanding share of Common Stock so held upon any
matter or thing (including, without limitation, the election of one or more
directors) properly considered and acted upon by the stockholders.
(c) The Board of Directors is authorized, subject to limitations prescribed by
the Delaware General Corporation Law and the provisions of this Amended and
Restated Certificate of Incorporation, to provide by resolution or resolutions
from time to time and filing a certificate pursuant to the applicable provision
of the Delaware General Corporation Law, for the issuance of the shares of
Preferred Stock in series, to establish from time to time the number of shares
to be included in each such series, to fix the powers, designation, preferences,
relative, participating, optional or other special rights of the shares of each
such series and the qualifications, limitations and restrictions thereof.
ATTACHMENT C
AMENDED INNOVO GROUP INC. BYLAWS
Section 4.18. Supermajority Requirements. (a) Except to the extent that any of
the following provisions of this Section 4.18 may violate Nasdaq corporate
governance rules: until November 1, 2000, the number of members of the Board
of Directors shall be set at between three and seven, with the exact number to
e designated by the Board of Directors, and the actions specified in subsection
4.18(b) hereof shall require the unanimous approval of all of the members of the
Board of Directors; and from November 2, 2000 until November 1, 2003, the number
of members of the Board of Directors shall be set at between three and twelve,
with the exact number to be designated by the Board of Directors, and the
actions specified in subsection 4.18(b) hereof shall require the approval of
a number of directors equal to the number of members of the Board of Directors
at the time the action is being considered, minus two.
(b) Neither the Company nor any of its subsidiaries shall, without the approval
of the Board of Directors as specified in subsection 4.18(a) above, do or commit
to do any of the following: (1) other than the sale of the Corporation's NASCO
Products International, Inc. subsidiary, sell all or substantially all of the
assets of the Corporation, merge or consolidate the Corporation or otherwise
effect the transfer of ownership of the Corporation (other than (i) where the
holders of voting securities of the Corporation immediately prior to such merger
or consolidation beneficially own, directly or indirectly, a majority of the
combined voting power of the surviving entity resulting from such merger or
consolidation, or (ii) a sale of all or substantially all of the assets of
the Corporation, merger or consolidation of the Corporation or other transfer
of ownership of the Corporation) or effect any dissolution, liquidation or
winding up of the Corporation;
(2) incur any indebtedness for borrowed money in excess of $500,000, or grant,
create or permit the imposition of any lien, charge, security interest or other
encumbrance upon any of the assets or properties of the Corporation or any
subsidiary, other than ordinary course trade payables, accounts receivable
factoring and financings of budgeted capital expenditures reflected in annual
budgets approved by the Board of Directors;
(3) amend or modify (A) the Restated Certificate of Incorporation of the
Corporation or any of its subsidiaries or (B) documentation relating to
indebtedness for borrowed money of the Corporation or any subsidiary, other
than indebtedness permitted under 4.18.(b)(2) above;
(4) enter into any transaction between or among the Corporation and/or any
subsidiary, on the one hand, and any of their respective equity owners,
directors, officers, employees or affiliates, on the other hand on terms less
favorable to the Corporation than it could otherwise receive in an arms length
transaction;
(5) make any payment on account of, or set aside any assets for a sinking or
other analogous fund for, the purchase redemption, defeasance, retirement or
other acquisition of any equity interest or the Corporation or any subsidiary;
(6) voluntarily liquidate, wind-up, dissolve or commence any bankruptcy,
insolvency, reorganization, debt arrangement or other case or proceeding
under any bankruptcy or insolvency law or make a general assignment for the
benefit of creditors;
(7) make any investment in one or more entities; or
(8) adopt any equity based or phantom incentive plan or program for the
Corporation or any subsidiary;
(9) prior to December 31, 2000, issue any form of Corporation equity except as
agreed in writing on or before August 11, 2000 and, until December 31, 2002,
issue any Corporation equity at or below market price. For purposes of this
paragraph 9, "market price" shall be defined as the closing average price of
the Common Stock for the 30 calendar days preceding the date of a
proposed issuance; or
(10) amend this Section 4.18.
INNOVO GROUP INC.
2000 EMPLOYEE STOCK INCENTIVE PLAN
SECTION 1: DEFINITIONS
1.1. Definitions. Whenever used herein, the masculine pronoun will be deemed
to include the feminine, and the singular to include the plural, unless the
context clearly indicates otherwise, and the following capitalized words and
phrases are used herein with the meaning thereafter ascribed:
(a) "Affiliate" means:
(1) an entity that directly or through one or more intermediaries is controlled
by the Company, and
(2) any entity in which the Company has a significant equity interest, as
determined by the Company.
(b) "Board of Directors" means the board of directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the committee appointed by the Board of Directors to
administer the Plan. The Board of Directors shall consider the advisability
of whether the members of the Committee shall consist solely of at
least two members of the Board of Directors who are both "outside directors"
as defined in Treas. Reg. 1.162-27(e) as promulgated by the Internal Revenue
Service and "non-employee directors" as defined in Rule 16b-3(b)(3) as
promulgated under the Exchange Act.
(e) "Company" means Innovo Group Inc., a Delaware corporation.
(f) "Disability" has the same meaning as provided in the long-term disability
plan or policy maintained or, if applicable, most recently maintained, by the
Company or, if applicable, any Affiliate of the Company for the Participant.
If no long-term disability plan or policy was ever maintained on behalf of the
Participant or, if the determination of Disability relates to an Incentive Stock
Option, Disability means that condition described in Code Section 22(e)(3), as
amended from time to time. In the event of a dispute, the determination of
Disability will be made by the Committee and will be supported by advice of a
physician competent in the area to which such Disability relates.
(g) Omitted
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
(i) "Fair Market Value" with regard to a date means the closing price at which
Stock was sold on the last trading date prior to that date as reported by the
Nasdaq Stock Market (or, if applicable, as reported by a national securities
exchange selected by the Committee on which the shares of Stock are then
actively traded) and published in The Wall Street Journal; provided that, for
purposes of granting awards other than Incentive Stock Options, Fair Market
Value of the shares of Stock may be determined by the Committee by reference
to the average market value determined over a period certain or as of specified
dates, to a tender offer price for the shares of Stock (if settlement of an
award is triggered by such an event) or to any other reasonable measure of
fair market value.
(j) "Option" means a non-qualified stock option or an incentive stock option.
(k) "Over 10% Owner" means an individual who at the time an Incentive Stock
Option is granted owns Stock possessing more than 10% of the total combined
voting power of the Company or one of its Subsidiaries,
determined by applying the attribution rules of Code Section 424(d).
(l) "Participant" means an individual who receives a Stock Incentive hereunder.
(m) Omitted
(n) Omitted
(o) "Plan" means the Innovo Group Inc. 2000 Employee Stock Incentive Plan.
(p) "Stock" means the Company's common stock.
(q) Omitted
(r) "Stock Award" means a stock award described in Section 3.4.
(s) "Stock Incentive Agreement" means an agreement between the Company and a
Participant or other documentation evidencing an award of a Stock Incentive.
(t) "Stock Incentive Program" means a written program established by the
committee, pursuant to which Stock Incentives are awarded under the Plan under
uniform terms, conditions and restrictions set forth in such written program.
(u) "Stock Incentives" means, collectively, incentive stock options,
non-qualified stock options and Stock Awards.
(v) "Subsidiary" means any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if, with respect to Incentive
Stock Options, at the time of the granting of the Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
(w) "Termination of Employment" means the termination of the employee-employer
relationship between a Participant and the Company and its Affiliates,
regardless of whether severance or similar payments are made to the Participant
for any reason, including, but not by way of limitation, a termination by
resignation, discharge, death, Disability or retirement. The committee will,
in its absolute discretion, determine the effect of all matters and questions
relating to a Termination of Employment, including, but not by way of
limitation, the question of whether a leave of absence constitutes a
Termination of Employment.
SECTION 2: THE STOCK INCENTIVE PLAN
2.1. Purpose of the Plan. The Plan is intended to: (a) provide incentive to
officers and key employees of the Company and its Affiliates to stimulate their
efforts toward the continued success of the Company and to operate and
manage the business in a manner that will provide for the long-term growth and
profitability of the Company; (b) encourage stock ownership by officers and key
employees by providing them with a means to acquire a proprietary interest in
the Company, acquire shares of Stock, or to receive compensation which is based
upon appreciation in the value of Stock; and (c) provide a means of obtaining,
rewarding and retaining key personnel and consultants.
2.2. Stock Subject to the Plan. Subject to adjustment in accordance with
Section 5.2, 2,000,000 shares of Stock (the "Maximum Plan Shares") are hereby
reserved exclusively for issuance pursuant to Stock Incentives. At no
time may the Company have outstanding under the Plan, Stock Incentives subject
to Section 16 of the Exchange Act and shares of Stock issued in respect of Stock
Incentives under the Plan in excess of the Maximum Plan Shares. The shares
of Stock attributable to the nonvested, unpaid, unexercised, unconverted or
otherwise unsettled portion of any Stock Incentive that is forfeited or canceled
or expires or terminates for any reason without becoming vested, paid,
exercised, converted or otherwise settled in full will again be available for
purposes of the Plan.
2.3. Administration of the Plan. The Plan is administered by the Committee.
The Committee has full authority in its discretion to determine the officers
and key employees of the Company or its Affiliates to whom Stock Incentives
will be granted and the terms and provisions of Stock Incentives, subject to
the Plan. Subject to the provisions of the Plan, the Committee has full and
conclusive authority to interpret the Plan; to prescribe, amend and rescind
rules and regulations relating to the Plan; to determine the terms and
provisions of the respective Stock Incentive Agreements and to make all other
determinations necessary or advisable for the proper administration of the
Plan. The Committee's determinations under the Plan need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly .
situated). The Committee's decisions are final and binding on all Participants.
2.4. Eligibility and Limits. Stock Incentives may be granted only to officers,
and key employees and consultants of the Company, or any Affiliate of the
Company; provided, however, that an incentive stock option may only be granted
to an employee of the Company or any Subsidiary. In the case of incentive stock
options, the aggregate Fair Market Value (determined as at the date an incentive
stock option is granted) of stock with respect to which stock options intended
to meet the requirements of Code Section 422 become exercisable for the first
time by an individual during any calendar year under all plans of the Company
and its Subsidiaries may not exceed $100,000; provided further, that if the
limitation is exceeded, the incentive stock option(s) which cause the
limitation to be exceeded will be treated as non-qualified stock option(s).
SECTION 3: TERMS OF STOCK INCENTIVES
3.1. Terms and Conditions of All Stock Incentives.
(a) The number of shares of Stock as to which a Stock Incentive may be granted
will be determined by the Committee in its sole discretion, subject to the
provisions of Section 2.2 as to the total number of shares available for
grants under the Plan and subject to the limits on Options in the following
sentence. To the extent required under Section 162(m) of the Code and the
regulations thereunder for compensation to be treated as qualified performance
based compensation, the maximum number of shares of Stock with respect to which
Options may be granted during any one year period to any employee may not exceed
500,000.
(b) Each Stock Incentive will either be evidenced by a Stock Incentive
Agreement in such form and containing such terms, conditions and restrictions
as the Committee may determine to be appropriate, or be made subject
to the terms of a Stock Incentive Program, containing such terms, conditions
and restrictions as the Committee may determine to be appropriate. Each Stock
Incentive Agreement or Stock Incentive Program is subject to the terms of the
Plan and any provisions contained in the Stock Incentive Agreement or Stock
Incentive Program that are inconsistent with the Plan are null and void.
(c) The date a Stock Incentive is granted will be the date on which the
Committee has approved the terms and conditions of the Stock Incentive and
has determined the recipient of the Stock Incentive and the number of
shares covered by the Stock Incentive, and has taken all such other actions
necessary to complete the grant of the Stock Incentive.
(d) Any Stock Incentive may be granted in connection with all or any portion of
a previously or contemporaneously granted Stock Incentive. Exercise or vesting
of a Stock Incentive granted in connection with another Stock Incentive may
result in a pro rata surrender or cancellation of any related Stock Incentive,
as specified in the applicable Stock Incentive Agreement or Stock Incentive
Program.
(e) Stock Incentives are not transferable or assignable except by will or by
the laws of descent and distribution and are exercisable, during the
Participant's lifetime, only by the Participant; or in the event of the
Disability of the Participant, by the legal representative of the Participant;
or in the event of death of the Participant, by the legal representative of the
Participant's estate or if no legal representative has been appointed, by the
successor in interest determined under the Participant's will.
3.2. Terms and Conditions of Options. Each Option granted under the Plan must
be evidenced by a Stock Incentive Agreement. At the time any Option is granted,
the Committee will determine whether the Option is to be an incentive stock
option described in Code Section 422 or a non-qualified stock option, and the
Option must be clearly identified as to its status as an incentive stock option
or a non-qualified stock option. Incentive stock options may only be
granted to employees of the Company or any Subsidiary. At the time any
incentive stock option granted under the Plan is exercised, the Company will
be entitled to legend the certificates representing the shares of Stock
purchased pursuant to the Option to clearly identify them as representing the
shares purchased upon the exercise of an incentive stock option.
An incentive stock option may only be granted within ten (10) years from the
earlier of the date the Plan is adopted or approved by the Company's
stockholders.
(a) Option Price. Subject to adjustment in accordance with Section 5.2 and the
other provisions of this Section 3.2, the exercise price (the "Exercise Price")
per share of Stock purchasable under any Option must be as set forth in the
applicable Stock Incentive Agreement, but in no event may it be less than the
Fair Market Value on the date the Option is granted. The Exercise Price of an
Option may not be amended or modified after the grant of the Option, and an
Option may not be surrendered in consideration of or exchanged for a grant of a
new Option having an Exercise Price below that of the Option which was
surrendered or exchanged.
(b) Option Term. Any incentive stock option is not exercisable after the
expiration of ten (10) years after the date the Option is granted. The term
of any non-qualified Stock Option must be as specified in the applicable Stock
Incentive Agreement.
(c) Payment. Payment for all shares of Stock purchased pursuant to exercise of
an Option will be made in any form or manner authorized by the Committee in the
Stock Incentive Agreement or by amendment thereto, including, but not limited
to, cash or, if the Stock Incentive Agreement provides:
(i) by delivery to the Company of a number of shares of Stock which have been
owned by the holder for at least six (6) months prior to the date of exercise
having an aggregate Fair Market Value of not less than the product of the
Exercise Price multiplied by the number of shares the Participant intends to
purchase upon exercise of the Option on the date of delivery;
(ii) in a cashless exercise through a broker; or
(iii) by having a number of shares of Stock withheld, the Fair Market Value of
which as of the date of exercise is sufficient to satisfy the Exercise Price.
In its discretion, the Committee also may authorize (at the time an Option is
granted or thereafter) Company financing to assist the Participant as to
payment of the Exercise Price on such terms as may be offered by the Committee
in its discretion. Payment must be made at the time that the Option or
any part thereof is exercised, and no shares may be issued or delivered upon
exercise of an option until full payment has been made by the Participant.
The holder of an Option, as such, has none of the rights of a stockholder.
d) Conditions to the Exercise of an Option. Each Option granted under the Plan
is exercisable by whom, at such time or times, or upon the occurrence of such
event or events, and in such amounts, as the Committee specifies in the Stock
Incentive Agreement; provided, however, that subsequent to the grant of an
Option, the Committee, at any time before complete termination of such Option,
may accelerate the time or times at which such Option may be exercised in whole
or in part, including, without limitation, upon a Change in Control and may
permit the Participant or any other designated person to exercise the Option,
or any portion thereof, for all or part of the remaining Option term,
notwithstanding any provision of the Stock Incentive Agreement to the contrary.
(e) Termination of Incentive Stock Option. With respect to an incentive stock
option, in the event of termination of employment of a Participant, the Option
or portion thereof held by the Participant which is unexercised will expire,
terminate, and become unexercisable no sooner than 30 days and no later than
the expiration of three (3) months after the date of termination of employment;
provided, however, that in the case of a holder whose termination of employment
is due to death or Disability, one (1) year will be substituted for such three
(3) month period; provided further, that such time limits may be exceeded by
the Committee under the terms of the grant, in which case, the incentive
stock option will be a nonqualified option if it is exercised after the time
limits that would otherwise apply. For purposes of this Subsection (e),
termination of employment of the Participant will not be deemed to have
occurred if the Participant is employed by another corporation (or a parent
or subsidiary corporation of such other corporation) which has assumed
the incentive stock option of the Participant in a transaction to which Code
Section 424(a) is applicable.
(f) Special Provisions for Certain Substitute Options. Notwithstanding
anything to the contrary in this Section 3.2, any Option issued in substitution
for an option previously issued by another entity, which substitution
occurs in connection with a transaction to which Code Section 424(a) is
applicable, may provide for an exercise price computed in accordance with
such Code Section and the regulations thereunder and may contain such other
terms and conditions as the Committee may prescribe to cause such substitute
Option to contain as nearly as possible the same terms and conditions
(including the applicable vesting and termination provisions) as those contained
in the previously issued option being replaced thereby.
3.3. [Omitted]
3.4. [Omitted]
3.5. [Omitted]
3.6. [Omitted]
3.7. [Omitted]
3.8. Treatment of Awards Upon Termination of Employment. Except as otherwise
provided by Plan Section 3.2(e), any award under this Plan to a Participant who
has experienced a Termination of Employment may be canceled, accelerated, paid
or continued, as provided in the applicable Stock Incentive Agreement or Stock
Incentive Program, or, in the absence of such provision, as the Committee may
determine. The portion of any award exercisable in the event of continuation
or the amount of any payment due under a continued award may be adjusted by
the Committee to reflect the Participant's period of service from the date of
grant through the date of the Participant's Termination of Employment or such
other factors as the Committee determines are relevant to its decision to
continue the award.
SECTION 4: RESTRICTIONS ON STOCK
4.1. Escrow of Shares. Any certificates representing the shares of Stock
issued under the Plan will be issued in the Participant's name, but, if the
applicable Stock Incentive Agreement or Stock Incentive Program so provides,
the shares of Stock will be held by a custodian designated by the Committee
(the "Custodian"). Each applicable Stock Incentive Agreement or Stock
Incentive Program providing for transfer of shares of Stock to the Custodian
must appoint the Custodian as the attorney-in-fact for the Participant for the
term specified in the applicable Stock Incentive Agreement or Stock Incentive
Program, with full power and authority in the Participant's name, place and
stead to transfer, assign and convey to the Company any shares of Stock held
by the Custodian for such Participant, if the Participant forfeits the shares
under the terms of the applicable Stock Incentive Agreement or Stock Incentive
Program. During the period that the Custodian olds the shares subject to this
Section, the Participant is entitled to all rights, except as provided in the
applicable Stock Incentive Agreement or Stock Incentive Program, applicable to
shares of Stock not so held. Any dividends declared on shares of Stock held by
the Custodian must provide in the applicable Stock Incentive Agreement or Stock
Incentive Program, be paid directly to the Participant or, in the alternative,
be retained by the Custodian or by the Company until the expiration of the term
specified in the applicable Stock Incentive Agreement or Stock Incentive Program
and shall then be delivered, together with any proceeds, with the shares of
Stock to the Participant or to the Company, as applicable.
4.2. Restrictions on Transfer. The Participant does not have the right to make
or permit to exist any disposition of the shares of Stock issued pursuant to the
Plan except as provided in the Plan or the applicable Stock Incentive Agreement
or Stock Incentive Program. Any disposition of the shares of Stock issued under
the Plan by the Participant not made in accordance with the Plan or the
applicable Stock Incentive Agreement or Stock Incentive Program will be void.
The Company will not recognize, or have the duty to recognize, any disposition
not made in accordance with the Plan and the applicable Stock Incentive
Agreement or Stock Incentive Program, and the shares so
transferred will continue to be bound by the Plan and the applicable Stock
Incentive Agreement or Stock Incentive
Program.
SECTION 5: GENERAL PROVISIONS
5.1. Withholding. The Company must deduct from all cash distributions under
the Plan any taxes required to
be withheld by federal, state or local government. Whenever the Company
proposes or is required to issue or transfer
shares of Stock under the Plan or upon the vesting of any Stock Award, the
Company has the right to require the recipient
to remit to the Company an amount sufficient to satisfy any federal, state and
local withholding tax requirements prior to
the delivery of any certificate or certificates for such shares or the vesting
of such Stock Award. A Participant may pay
the withholding tax in cash, or, if the applicable Stock Incentive Agreement or
Stock Incentive Program provides, a Participant may elect to have the number
of shares of Stock he is to receive reduced by, or with respect to a Stock
Award, tender back to the Company, the smallest number of whole shares of
Stock which, when multiplied by the Fair Market Value of the shares of Stock
determined as of the Tax Date (defined below), is sufficient to satisfy federal,
state and local, if any, withholding taxes arising from exercise or payment of a
Stock Incentive (a "Withholding Election"). A Participant may make a
Withholding Election only if both of the following conditions are met:
(a) The Withholding Election must be made on or prior to the date on which
the amount of tax required to be withheld is determined (the "Tax Date") by
executing and delivering to the Company a properly completed notice of
Withholding Election as prescribed by the Committee; and
(b) Any Withholding Election made will be irrevocable except on six months
advance written notice delivered to the Company; however, the Committee may
in its sole discretion disapprove and give no effect to the Withholding
Election.
5.2. Changes in Capitalization; Merger; Liquidation.
(a) The number of shares of Stock reserved for the grant of Options and Stock
Awards; the number of shares of Stock reserved for issuance upon the exercise or
payment, as applicable, of each outstanding Option and upon vesting or grant,
as applicable, of each Stock Award; the Exercise Price of each outstanding
Option and the specified number of shares of Stock to which each outstanding
Option and Stock Award pertains must be proportionately adjusted for any
increase or decrease in the number of issued shares of Stock resulting from a
subdivision or combination of shares or the payment of a stock dividend in
shares of Stock to holders of outstanding shares of Stock or any other
increase or decrease in the number of shares of Stock outstanding effected
without receipt of consideration by the Company.
(b) In the event of a merger, consolidation or other reorganization of the
Company or tender offer for shares of Stock, the Committee may make such
adjustments with respect to awards and take such other action as it deems
necessary or appropriate to reflect such merger, consolidation, reorganization
or tender offer, including, without limitation, the substitution of new awards,
or the adjustment of outstanding awards, the acceleration of awards, the
removal of restrictions on outstanding awards, or the termination of
outstanding awards in exchange for the cash value determined in good faith by
the Committee of the vested portion of the award. Any adjustment pursuant to
this Section 5.2 may provide, in the Committee's discretion, for the
elimination without payment therefor of any fractional shares that
might otherwise become subject to any Stock Incentive, but except as set forth
in this Section may not otherwise diminish the then value of the Stock
Incentive.
(c) The existence of the Plan and the Stock Incentives granted pursuant to the
Plan must not affect in any way the right or power of the Company to make or
authorize any adjustment, reclassification, reorganization or other
change in its capital or business structure, any merger or consolidation of
the Company, any issue of debt or equity
securities having preferences or priorities as to the Stock or the rights
thereof, the dissolution or liquidation of the Company, any sale or transfer
of all or any part of its business or assets, or any other corporate act or
proceeding.
5.3. Cash Awards. The Committee may, at any time and in its discretion, grant
to any holder of a Stock Incentive the right to receive, at such times and in
such amounts as determined by the Committee in its discretion, a cash
amount which is intended to reimburse such person for all or a portion of the
federal, state and local income taxes imposed upon such person as a consequence
of the receipt of the Stock Incentive or the exercise of rights thereunder.
5.4. Compliance with Code. All incentive stock options to be granted hereunder
are intended to comply with Code Section 422, and all provisions of the Plan
and all incentive stock options granted hereunder must be construed in
such manner as to effectuate that intent.
