-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RQ67gDQp67jw7NYlzb8NZufMxPeGXsI161/XrBlR8cRorx4IusnZsofbUBziLZrc MXjI25Qxo6RdFu93YRMaaw== 0000844143-97-000003.txt : 19970303 0000844143-97-000003.hdr.sgml : 19970303 ACCESSION NUMBER: 0000844143-97-000003 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970404 FILED AS OF DATE: 19970228 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVO GROUP INC CENTRAL INDEX KEY: 0000844143 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 112928178 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18926 FILM NUMBER: 97546856 BUSINESS ADDRESS: STREET 1: 27 N MAIN ST CITY: SPRINGFIELD STATE: TN ZIP: 37172 BUSINESS PHONE: 6153840100 MAIL ADDRESS: STREET 1: 27 N MAIN ST CITY: SPRINGFIELD STATE: TN ZIP: 37172 FORMER COMPANY: FORMER CONFORMED NAME: ELORAC CORP DATE OF NAME CHANGE: 19901009 DEF 14A 1 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: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] 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) N/A ____________________ (Name of Person(s) Filing Proxy Statement) Payment of Filing Fee (Check the appropriate box): [ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a- 6(i)(1), 14a-6(j)(2) or item 22(a)(2) of Schedule 14A. [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1. Title of each class of securities to which transaction applies: N/A ____________________ 2. Aggregate number of securities to which transaction applies: N/A ____________________ 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: N/A ____________________ 4. Proposed maximum aggregate value of transaction: N/A ____________________ 5. Total fee paid: N/A ____________________ [ ] 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: N/A ____________________ 2. Form, Schedule or Registration Statement No.: N/A ____________________ 3. Filing Party: N/A ____________________ 4. Date Filed: ____________________ Introductory Note Innovo Group Inc. ("the Company") meets the definition of a "small business issuer" of Rule 12b-2 under the Securities Exchange Act of 1934. Accordingly, notwithstanding the Company's use of Form 10-K and Form 10-Q (in lieu of Form 10-KSB and Form 10-QSB), the Company's proxy statement has been prepared in accordance with the disclosure items in Regulation S-B, pursuant to introductory Note F of Schedule 14A. INNOVO GROUP INC. 27 North Main Street Springfield, Tennessee 37172 March 5, 1997 Dear Stockholders: You are cordially invited to attend the 1997 annual stockholders' meeting for Innovo Group Inc., which will be held at 9:00 a.m. Central Time, on Friday, April 4, 1997 at the Company's offices at 27 North Main Street, Springfield, Tennessee, 37172. At the annual meeting you will have a report on the Company's activities for the last year, and you will be asked to vote on the matters listed in the accompanying notice and proxy statement. Whether or not you plan to attend the annual meeting, it is important that your shares be represented. Therefore, you are urged to complete the enclosed proxy and return it in time that your shares may be voted at the annual meeting on April 4, 1997. Completing and returning the enclosed proxy will not affect your right to vote your shares in person should you later decide to attend the annual meeting. For the Board of Directors, Schren L. Head Secretary INNOVO GROUP INC. Notice of Annual Meeting of Stockholders to be held on April 4, 1997 Notice is hereby given that the annual meeting of the stockholders of Innovo Group Inc. will be held at 9:00 a.m. central time, on Friday, April 4, 1997 at 27 North Main Street, Springfield, Tennessee 37172, for the following purposes: (1). To elect six members of the board of directors. (2). To consider and act upon a proposal to amend the Company's Certificate of Incorporation to increase the authorized common stock of the Company from 30,000,000 shares, par value $.01, to 70,000,000 shares, par value $.01. Stockholders are being asked to vote on and approve only the authorization of the additional shares of common stock. Except as discussed in the accompanying proxy statement, there are presently no plans or commitments for any transactions that would involve the issuance of any material number of shares of common stock; the accompanying proxy statement discusses certain outstanding common stock warrants, options, and conversion rights as for which shares would be reserved. However, Proposal 2 would, if approved, allow the board of directors to issue the additional shares of common stock without further stockholder approval. (3). To ratify the adoption of the Innovo Group Inc. 1997 Stock Option Plan (the "1997 Stock Option Plan"). (4). To consider and act upon a proposal to amend the Company's Certificate of Incorporation to create a class of preferred stock ("the preferred stock") and authorize the Company to issue up to 10,000,000 shares of the preferred stock, in one or more series, from time to time. (5). To transact such other business as may properly come before the meeting. Proposals 3 and 4 would, if approved, allow the board of directors to, respectively, issue stock options and awards under the 1997 Stock Option Plan, and issue shares of preferred stock, without further stockholder approval. The board of directors has set February 15, 1997 as the record date for the annual meeting. Stockholders of record at the close of business on that date will be entitled to vote at the meeting. By order of the Board of Directors, Schren L. Head Secretary CONTENTS Solicitation of Proxies 1 Voting Securities and Beneficial Ownership 2 Election of Directors 4 Compensation of Executive Officers 7 Proposal to Amend Certificate of Incorporation to Increase Number of Common Shares Authorized 11 Proposal to Ratify the Adoption of the 1997 1997 Stock Option Plan 15 Proposal to Amend Certificate of Incorporation to Create a Class of Preferred Stock 18 Relationships with Independent Public Accountants 20 Stockholder Proposals 20 Other Business 20 Appendix A: Form of Amended and Restated Certificate of Incorporation A-1 Appendix B: Innovo Group Inc. 1997 Stock Option Plan B-1 INNOVO GROUP INC. Proxy Statement for Annual Meeting of Stockholders to be held April 4, 1997 Solicitation of Proxies This Proxy Statement is furnished to stockholders of Innovo Group Inc. ("Innovo" or "the Company") in connection with the solicitation by the board of directors of proxies to be used at the annual meeting of the stockholders to be held at 9:00 a.m. central time, on Friday, April 4, 1997 at 27 North Main Street, Springfield, Tennessee 37172 ("the Annual Meeting"). Execution and return of the proxy in the form enclosed will not in any way affect a stockholder's right to attend the meeting and vote in person. A stockholder giving a proxy may revoke it at any time before it is exercised by giving notice to the Chairman of the Board of the Company in writing or in open meeting or by submitting to the Chairman of the Board a duly executed proxy bearing a later date. Proxies executed and returned in the form enclosed, unless previously revoked, will be voted at the Annual Meeting as set forth herein and in the proxies. The cost of the solicitation of proxies, including the cost of reimbursing expenses of brokers and other custodians, nominees or fiduciaries for forwarding proxy statements and proxies to their principals and obtaining their proxies, will be borne by the Company. In addition to the use of the mails, proxies may be solicited personally, or by telephone or telegraph, by a few regular employees of the Company without additional compensation. Officers and directors of the Company, or other affiliates, that own, or have the authority to vote, an aggregate of 10.2% of the shares of common stock eligible to vote have indicated that they intend to vote for each of the nominees for the board of directors, for the approval of the proposal to increase the number of authorized shares of common stock for the ratification of the adoption of the 1997 Stock Option Plan, and for the approval of the proposal to create a class of preferred stock. This Proxy Statement is being mailed to stockholders of record as of February 15, 1997, on or about March 5, 1997, together with a copy of the Company's Annual Report on Form 10-K for the year ended November 30, 1996. Copies of such Form 10-K will also be available for stockholders attending the Annual Meeting. Voting Securities and Beneficial Ownership The board of directors has set February 15, 1997 as the record date for the annual meeting. As of that date, the Company had outstanding 28,763,990 shares of common stock, par value $.01 per share. Stockholders are entitled to one vote for each full share of common stock registered in their names at the close of business on February 15, 1997. There are no cumulative voting rights. Votes cast at the meeting and submitted by proxy are counted by the inspector of the meeting, who is appointed by the Company. The following table sets forth information with respect to the beneficial ownership of the Company's common stock on February 15, 1997 by (i) each of the Company's executive officers and directors, (ii) each person known to the Company to be the beneficial owner of more than five percent of the outstanding shares of the common stock, and (iii) all directors, nominees for director and executive officers of the Company as a group. Patricia Anderson-Lasko 363,440 (2) 1.3% 27 North Main Street Springfield, TN 37172 Scott Parliament - - 27 North Main Street Springfield, TN 37172 Alexander K. Miller - - 27 North Main Street Springfield, TN 37172 Terrance Bond 1,000 (3) * 27 North Main Street Springfield, TN 37172 Felix Lee 1,050 (4) * 27 North Main Street Springfield, TN 37172 Reino C. Lanto, Jr. 61,286 (5) * 235 North Garrard St. Rantoul, IL 61866 Marvin M. Williamson 2,000 * 53 Fitch Lane New Canaan, CT 06840 Eleanor and Philip Schwartz 1,665,745 (6) 5.8% 23362 Water Circle Boca Raton, FL 33486 All Executive Officers 2,928,521 (2) (3) (4) (5) 10.2% and Directors as a Group (6) (7) (6 persons)
Shares Beneficially Owned (1) _____________________________ Name Number (1) Percent __________________________________________________________________________________________
_________________ * 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. Shares outstanding and eligible to vote exclude (i) 213,625 shares held by trusts established under the Plan of Reorganization of Spirco, Inc. (see Note 4 of Notes to Consolidated Financial Statements) and (ii) 200,000 shares held as an appeal bond for the Company's appeal of the Tedesco litigation (see Note 9 of Notes to Consolidated Financial Statements). Under the terms of the trusts and the bond, such shares are not eligible to vote. (2) Includes 79,432 shares owned by DWL International, a corporation in which Ms. Anderson-Lasko's spouse, Donald W. Lasko, holds a controlling interest. (3) Consists of 1,000 shares subject to options exercisable by Mr. Bond. (4) Includes 50 shares currently held by Mr. Lee and 1,000 shares subject to options exercisable by Mr. Lee. (5) Consists of 32,735 shares owned by Jeanene Lanto, the wife of Mr. Lanto, and 28,551 shares owned by a trust for the benefit of Jeanene Lanto of which Mr. Lanto is the trustee, as to all of which Mr. Lanto disclaims any beneficial ownership. (6) Pursuant to a voting agreement between Lee Schwartz, Eleanor Schwartz and Philip Schwartz, Lee Schwartz and Philip Schwartz have granted to Eleanor Schwartz the power to vote any shares owned by the for so long as Eleanor Schwartz is a member of the Company's board of directors, including 553,000 shares, owned by Lee Schwartz, that Eleanor Schwartz has the power to vote pursuant to such voting agreement. (7) Includes 834,000 shares held by Matthew Mulhern. Pursuant to an agreement between the Company and Mr. Mulhern, Mr. Mulhern has agreed to vote in accordance with the recommendations of the Company's board of directors. Election of Directors Nominations The Bylaws of the Company provide for the election of not less than three members of the board of directors. Each of the Company's directors serves until the next annual meeting of the stockholders or until his successor has been elected and qualified. Set forth below is information concerning the six individuals who have been nominated for election to the board of directors. Unless otherwise directed by a stockholder's proxy, the persons named as proxy voters in the accompanying proxy will vote for the nominees named below. In the event any of such nominees shall become unavailable, which is not anticipated, the board of directors in its discretion may designate substitute nominees, in which event the enclosed proxy will be voted for such substituted nominees. Proxies cannot be voted for a greater number of persons than the number of nominees named. A plurality of the votes cast at the meeting is required to elect the nominees as directors of the Company. As such, the six individuals who receive the largest number of votes cast at the meeting will be elected as directors. Shares not voted at the meeting, whether by abstention, broker nonvote, or otherwise, will not be treated as votes cast at the meeting. The board of directors recommends a vote FOR the election of all the persons nominated by the board. Nominees for Directors Patricia Anderson-Lasko 37 1990 Alexander K. Miller 51 1991 Reino C. Lanto, Jr. 54 1990 Eleanor V. Schwartz 64 1996 Marvin M. Williamson 58 1990 Scott Parliament 39 -
Name Age Director Since _____ ___ _____
Patricia Anderson-Lasko has been Chairman, President, Chief Executive Officer and a director of the Company since August 1990, and President of Innovo, Inc. since her founding of that company in 1987. Alexander K. Miller has been a director of the Company since December 1991. From June 1993 to December 1994, Mr. Miller also served as the Vice President of Administration of the Company, and in May, 1996 Mr. Miller rejoined the Company as Manager of Investor Relations. Prior to June, 1993, and between January, 1995 and May, 1995, Mr. Miller served the Company on a consulting basis, during which periods Mr. Miller was self-employed as a management and marketing consultant. From 1986 to 1993, he was a member of the faculty of California State Polytechnic University in San Luis Obispo, California, where he taught business administration. Reino C. Lanto, Jr. has been Secretary and a director of the Company since August 1990. He is an attorney licensed to practice in Illinois and has been a partner in the law firm of Wilson & Lanto since November 1982. Eleanor V. Schwartz became a director of the Company in April, 1996, upon the completion of the Company's acquisition of Thimble Square, Inc. ("Thimble Square"). Mrs. Schwartz, together with her husband Philip Schwartz, founded Thimble Square in 1985, and since that time has been a director of Thimble Square and its principal designer. Mrs. Schwartz has over 35 years of experience in buying, design and marketing of ladies apparel. Marvin M. Williamson has been a director of the Company since August 1990. From April 1982 to June 1987, he was a Vice President and Mortgage Sales Manager for First Boston Corp. in New York City. From June 1987 through August 1990 he was Vice President of Mortgage Sales for Greenwich Capital, Greenwich, Connecticut. From August 1990 to April 1991 Mr. Williamson was a Senior Vice President with Alliance Funding Co. in Montvale, New Jersey. In April 1991 he left Alliance Funding Co. to establish his own business, Marvin Williamson Associates, a mortgage investment brokerage and consulting firm in New Canaan, Connecticut. Mr. Williamson is currently a registered representative of First Sentinel Securities Ltd., a member firm of the National Association of Securities Dealers, Inc. Scott Parliament, a nominee for director, joined the Company as Senior Vice-President and chief operating officer in October, 1996. From November, 1993 until October, 1996, Mr. Parliament was a principal of Parlon Ventures, Ltd., a privately held consulting and investment firm. From March, 1990 until he joined Parlon Ventures, Ltd. Mr. Parliament held various positions with National Steel Service Center, Inc. Felix Lee, the Vice President of Manufacturing of Innovo, Inc., has not been nominated to stand for reelection as a director. Compensation of Directors Directors who are not employees of the Company receive no compensation. All directors receive reimbursement of expenses, if any, incurred in attending board of director and committee meetings. Meetings and Committees During fiscal 1996, the board of directors held 13 meetings. The committees of the board of directors have meetings as needed. Each director attended at least 75% of the total number of meetings of the board of directors and meetings of committees on which they serve. The Audit Committee, comprised of Ms. Anderson-Lasko and Messrs. Lanto and Williamson, met on one occasion in fiscal 1996. Its primary duties and responsibilities include: (1) annually recommending to the board of directors the independent public accounting firm to be appointed auditors of the Company and its subsidiaries; and (2) a review of the scope of and fees for the audit and a review of all reports received from the independent public accountants. The Executive Compensation Committee met one time during fiscal 1996. It is comprised of Messrs. Miller, Lanto and Williamson. Its primary duty is to make recommendations to the board of directors concerning its salaries, benefits and other terms of employment of the Company's Executive officers and other key employees. Compensation of Executive Officers Executive Officers The following sets forth contains information concerning the identity and background of the executive officers of the Company: Patricia Anderson-Lasko 37 Chairman of the Board, President and Chief Executive Officer Scott Parliament 39 Senior Vice President; Chief Operating Officer Felix Lee 47 Vice President of Manufacturing of Innovo, Inc. Terrance Bond 39 Controller
Name Age Position ____ ___ ________
Felix Lee has been a director of the Company since August 1990 and Vice President of Manufacturing of Innovo, Inc. since June 1989. From July 1981 through May 1989, Mr. Lee was plant manager at Industria Nacional De Artefactes, S.A., a luggage manufacturer in Panama City, Republic of Panama, where his responsibilities included production and manufacturing. Terrance Bond joined the Company as Controller in April 1993. From November 1988 until he joined Innovo Group, Mr. Bond was Director of Corporate Accounting at United Merchants and Manufacturers, Inc. Executive officers of the Company are elected annually and serve at the discretion of the board of directors. Executive Compensation The following table sets forth the summary information concerning compensation paid or accrued by or on behalf of the Company's chief executive officer, and of the one other executive officer who is compensated at an annual rate of $100,000 or higher. Patricia Anderson- 1996 $171,354(2) - $1,346(3) 0 0 0 - Lasko 1995 175,000(2) - 1,346(3) 0 0 0 - President, Chief 1994 175,000(2) - 2,791(3) 0 0 0 - Executive Officer, and Chairman of the Board Scott Parliament 1996 16,900(4) - - 0 0 0 - Senior Vice-President and Chief Operating Officer
Summary Compensation Table Long Term Compensation ______________________ Annual Compensation Awards Payouts ___________________ ______ _______ Other Annual Restricted LTIP All Other Compen- Stock Compen- Name and Principal sation Award(s) Options/ Payouts sation Position Year Salary($) Bonus($) ($) ($) (1) (#) ($) ($) ________ ____ _________ ________ _______ _______ ________ _______ ________
(1) No named executive officer received or held restricted stock awards during or at the end of fiscal 1996, 1995 or 1994, or received, exercised or held stock options during or at the end of fiscal 1996, 1995 or 1994. (2) At the request of the Company Ms. Anderson-Lasko deferred the payment of $51,000 of her fiscal 1995 salary until fiscal 1996. (3) During fiscal 1996, 1995 and 1994 Ms. Anderson-Lasko received life insurance benefits in the aggregate amount of $1,346, $1,346 and $2,019, respectively. During fiscal 1994 Ms. Anderson-Lasko received health insurance benefits in the aggregate amount of $772. (4) Represents salary paid to Mr. Parliament from October, 1996, the commencement of his employment, through November 30, 1996. Mr. Parliament is compensated at the rate of $120,000 annually. Employment Agreements In September, 1993 the Company entered into a revised employment agreement with Patricia Anderson-Lasko. The agreement expires in October 1997, but provides that its terms may be extended for additional one-year periods, starting in October 1995, at the election of the parties. The employment agreement provides that Ms. Anderson-Lasko shall be employed as the Chief Executive Officer of the Company at an annual base salary of $175,000 and shall be eligible for such increases in salary, other bonuses and payments as the board of directors shall direct. In January, 1997, Ms. Anderson-Lasko's employment contract was amended to eliminate provisions entiling her to a $100,000 mortgage loan from the Company. Ms. Anderson-Lasko had not taken the loan. The employment agreement of Ms. Anderson-Lasko contains provisions requiring certain severance payments in the event (i) the Company terminates Ms. Anderson-Lasko's employment other than for cause, death or disability or (ii) Ms. Anderson-Lasko terminates the contract after a change in control, or as the result of a breach of the agreement by the Company, including a change in Ms. Anderson-Lasko's responsibilities or authorities not provided for in the contract. In such event, Ms. Anderson-Lasko is entitled to a severance payment equal to the greater of three times the annual salary in effect at the date of termination or such annual salary multiplied by the number of years remaining in the term (including extensions thereof) of the contract. For purposes of the contracts, a change in control is defined to occur if any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but excluding the Company, its existing officers and directors and any other individual, entity or group whose acquisition of control is approved in advance by the board) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities issued by the Company representing 30% or more of the combined voting power of the Company's then- outstanding securities, or if during any period of two consecutive years during the term of the agreement, individuals who at the beginning of such period constitute the board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then in office who were directors at the beginning of the period. Stock Option Plan The Company has a stock option plan (the "1991 Plan") pursuant to which an aggregate of 100,000 shares of common stock had been reserved for issuance to officers, directors, consultants and employees of the Company and its subsidiaries upon exercise of non-qualified options and exercise of "incentive stock options" (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended) issuable under the 1991 Plan. The primary purpose of the 1991 Plan is to attract and retain capable executives, consultants and employees by offering them stock ownership in the Company. The 1991 Plan was originally adopted by the board of directors on December 11, 1991, and amended and ratified by the board of directors on April 10, 1992. The 1991 Plan was approved by the Company's stockholders at the annual meeting of stockholders on May 28, 1992. The 1991 Plan is administered by the Stock Option Committee (the "Committee") appointed by the Company's board of directors. The current members of the Committee are Messrs. Miller and Williamson. No member of the Committee is eligible to participate in a grant of options pursuant to the 1991 Plan. The Committee determines, among other things, the persons to be granted options, the number of shares subject to each option and the option price. The exercise price of any incentive stock option granted under the 1991 Plan to an eligible employee must be equal to the fair market value of the shares on the date of grant and, with respect to persons owning more than 10% of the outstanding common stock, the exercise price may not be less than 110% of the fair market value of the shares underlying such option on the date of grant. The exercise price for non-qualified options must be at least 50% of the fair market value of the shares on the date of issue. The Committee determines the terms of each option and the manner in which it may be exercised. No option may be exercisable more than ten years after the date of grant, except for those held by optionee who owns more than 10% of the Company's common stock, which may not be exercisable more than five years after the date of grant. Options are not transferable except upon the death of the optionee. The board of directors may amend the 1991 Plan from time to time; however, without stockholder approval, the Plan may not be amended to: (i) increase the aggregate number of shares subject to the Plan; (ii) materially increase the benefits accruing to participants under the Plan; (iii) change the class of individuals eligible to receive options under the Plan; or (iv) extend the term of the Plan. As of February 15, 1997, the Company had outstanding options to acquire a total of 3,000 shares of the Company's common stock to officers and other employees of the Company under the 1991 Plan. 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 In December, 1995, the Company obtained a $300,000 12% short term loan collateralized by the common stock of NP International from DWL International. Donald W. Lasko, the husband of Patricia Anderson-Lasko, is an officer and stockholder of DWL International. $200,000 of the loan was repaid in fiscal 1996, together with interest of $22,000. Compliance With Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors, and persons who own more than 10% of the registered class of the Company's equity securities to file reports of ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% stockholders are required by the regulations of the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the Forms 3, 4 and 5 and amendments thereto and certain written representations furnished to the Company, the Company believes that during fiscal 1996, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with. Form 5 is not required to be filed if there are not previously unreported transactions or holdings to report. Nevertheless, the Company is required to disclose the name of directors, executives officers and 10% shareholders who did not file a Form 5, unless the Company has obtained a written statement that no filing is due. The Company has been advised by those required to file Form 5 that no filings were due. Proposal To Amend Certificate of Incorporation To Increase Number of Common Shares Authorized On February 12, 1997, the board of directors approved, subject to stockholder approval, an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of common stock from 30 million to 70 million. The form of the Amended and Restated Certificate of Incorporation appears in Appendix A to this Proxy Statement. The principal reason for the proposal is to give the Company the ability to use the issuance of shares of its common stock to raise capital, retire debt, acquire assets, or utilize incentive stock compensation awards when such methods of financing or compensation are determined by the board of directors to be appropriate. However, except for certain shares, as discussed below, that would be reserved for outstanding common stock warrants, options, or conversion privileges there are presently no plans or commitments for any transactions that would involve the issuance of any material number of shares of common stock. There can be no assurance that the outstanding common stock warrants, options, or conversion privileges will, or will not, be exercised and that the related shares will, or will not, be issued in the future. As of February 15, 1997, the 28,763,990 shares of common stock outstanding, plus those reserved for outstanding warrants and options and those held as an appeal bond for the Company's appeal of the Tedesco litigation, utilizes virtually all of the Company's authorization of 30 million shares. Therefore, without the approval of this proposal, the Company would currently not have sufficient authorized but unissued shares to utilize its common stock for any of these financing or compensation purposes. Absent that ability, the Company might be forced to issue debt, forego business opportunities, or operate without adequate capital, and would have to incur additional debt or utilize other sources of cash to repay certain existing debt, aggregating $475,000, which, with an increase in the number of authorized shares of common stock, can be repaid through conversion or common stock issuance. If and when any of the newly authorized shares are issued, in general they would be issued to raise capital to fund operations or pursue the expansion of the Company's business, provide incentive compensation to retain and attract key employees at cash compensation levels that are lower than would otherwise be possible, or retire indebtedness incurred for these purposes. Except as described in the next seven paragraphs, there are currently no plans or commitments for any transaction that would involve the issuance of any material number of shares of common stock. In a separate proposal for the Annual Meeting, stockholders are being asked to ratify the adoption of the 1997 Stock Option Plan. As described more fully in that proposal, a principal reason for the adoption of the 1997 Stock Option Plan is to provide the Company with the ability to use stock compensation awards to supplement cash compensation, and thereby incentivize key employees while allowing the Company to retain and attract such employees at lower cash compensation levels than would otherwise be possible. In particular, awards under the 1997 Stock Option Plan, if its adoption is ratified, would allow the Company to maintain certain reductions in the cash compensation levels of senior and middle management instituted in fiscal 1996 (see "Proposal for Approval of Innovo Group Inc. 1997 Stock Option Plan"). However, options or other awards under the 1997 Stock Option Plan, if it is approved, would only be made to the extent the Company has available authorized, but unissued or otherwise unreserved, shares of common stock. As discussed above, currently the Company has virtually no authorized but unissued or otherwise unreserved shares. Accordingly, it is likely that if stockholders approve this proposal to increase the number of authorized common shares, any awards under the 1997 Stock Option Plan, if it is approved, will be made utilizing shares reserved or issued from the newly authorized shares. However, the proposals are separate, and stockholders may vote to approve the increase in the number of authorized common shares while voting not to approve the adoption of the 1997 Stock Option Plan, or vice versa. If the stockholders approve the adoption of the 1997 Stock Option Plan, but not the increase in the number of authorized common shares, then the board of directors may, if it chooses, award options or other awards to the extent shares become available from the Company's current authorization of 30 million common shares as the result of repurchases of common stock or the expiration of outstanding warrants or options. During the third quarter of fiscal 1996 the Company undertook a private placement of shares of its common stock together with Class H common stock purchase warrants (the "Class H Warrants"). A total of 775,758 Class H warrants were issued, which are exercisable at a price of $.52 per shares through August, 2001. Additionally, in connection with this private placement, and the private placement of the 8% Convertible Debentures, the Company issued to the placement agent 1,220,588 Class I common stock purchase warrants (the "Class I Warrants"), which are exercisable at a price of $.17 through August, 2001. In January, 1997, the Company issued 500,000 Class J common stock purchase warrants (the "Class J Warrants") in connection with the issuance of the 10% Unsecured Convertible Promissory Notes discussed below. The Class J Warrants are exercisable through January 6, 1998 at a price of $.34375 per share, except that the exercise price shall be the lesser of $.125 per share or the then market price if the Class J Warrants are exercised concurrently with the conversion of the Series I 10% Unsecured Convertible Promissory Notes. The terms of the Class H, Class I and Class J warrants provide that until such time as the Company's authorized common shares is increased to 40 million (i) the Class H, Class I and Class J warrants shall only be exercisable to the extent of authorized, but unissued or otherwise unreserved shares, and (ii) the Company shall not be obligated to reserve shares of common stock for issuance upon any exercise of the Class H, Class I or Class J warrants. Therefore, the Class H, Class I and Class J warrants are currently not exercisable; however, if the proposal to increase the number of authorized common shares is approved, the Company will reserve 2,496,346 shares for issuance upon the exercise, if any, of the Class H, Class I and Class J warrants. The Company would receive cash proceeds of $403,000 if all of the Class H warrants are exercised, and cash proceeds of $207,500 if all of the Class I warrants are exercised. The holders of the Class H, Class I and Class J warrants have not, as of the date hereof, delivered to the Company any notice of exercise. As of February 15, 1997, the Company has outstanding (i) $205,000 of 8% Convertible Subordinated Debentures which are convertible into an aggregate of 1,802,198 shares of common stock, (ii) $175,000 of Series I 10% Unsecured Convertible Promissory Notes, which will become convertible into an aggregate of 1.5 million shares of common stock commencing May 1, 1997, and (iii) $95,000 of Series II 10% Unsecured Convertible Promissory Notes, which will become convertible into 600,000 shares of common stock commencing April 6, 1997. The terms of the remaining 8% Convertible Subordinated Debentures, and those of the Series I and Series II 10% Unsecured Convertible Promissory Notes, provide, however, that such securities do not become convertible until and unless the number of common shares the Company is authorized to issue is increased to 40 million, 40 million and 50 million, respectively. Therefore, if the proposal to increase the number of authorized common shares is approved, such securities will become convertible as described above, and the Company will reserve 3,902,198 shares for issuance upon such conversions, if any. The holders of these securities have not, as of the date hereof, delivered to the Company notices of conversion. On February 12, 1997, the board of directors approved the award to Patricia Anderson-Lasko of a stock purchase right (the "Purchase Right") entitling Ms. Anderson-Lasko to purchase up to 4 million shares of the Company's common stock during the period April 30, 1997 to April 30, 2002 at a per share price equal to the greater of $.28125 per share or the average closing price for the five days ending April 4, 1997 ("the Exercise Price"). Under the Purchase Right Ms. Anderson-Lasko may pay for any shares purchased by the delivery of (i) cash, or (ii) a non-recourse promissory note, bearing no interest, due April 30, 2002. The note, if delivered, would be collateralized by the shares purchased therewith, which shares would be forfeited to the extent the note is not paid on or before maturity, and would be payable (including prepayable), in whole or in part, by the delivery to the Company of (i) cash payment, or (ii) other shares of the Company's common stock 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 Company's common stock on the date of delivery. The Purchase Right is fully vested, and is exercisable, until April 30, 2002, so long as Ms. Anderson-Lasko remains employed by the Company. The termination of Ms. Anderson-Lasko's employment would not, however, affect her rights to any shares already purchased pursuant to the Purchase Right, including the right to vote and receive dividends or other distributions with respect to those shares, including any shares collateralizing any unpaid notes, except that any dividends or distributions made with respect to shares collaterlizing any unpaid note will be held in the escrow to be established for such shares and note until such time, if any, as the related note is paid. However, because any shares purchased by Ms. Anderson-Lasko's delivery of a note will collateralize such note until it is paid, Ms. Anderson-Lasko will be unable to realize any profit from the shares until she has paid the Company, by delivery cash or other shares she owns, Exercise Price of such shares. In deciding to award the Purchase Right to Ms. Anderson-Lasko, the board of directors (with Ms. Anderson-Lasko excused from the meeting) noted that (i) Ms. Anderson-Lasko's services are considered critical to the Company's future success, and providing her with the ability to own a greater percentage (than her current 1.3%) of the Company's common stock is a means of encouraging and incentivizing those continued services, (ii) Ms. Anderson- Lasko has not received any increase in base salary, or bonus compensation, over the last five years, despite valuable services to the Company and, in the opinion of the board of directors improvements in the Company's financial position and, in fact, Ms. Anderson-Lasko's base salary was decreased in fiscal 1996, (iii) in December, 1992, Ms. Anderson-Lasko pledged 30,000 shares of common stock (300,000 shares adjusted for the effects of the July, 1995 reverse stock split), having a then market value of approximately $1.8 million, to the IRS to secure Spirco's indebtedness to the IRS and, as a result of Spirco's subsequent bankruptcy and reorganization, was required to forfeit those shares to the IRS, and, (iv) Ms. Anderson-Lasko has, and continues, to personally guarantee certain of the Company's indebtedness, including its indebtedness on its Tennessee property and its indebtedness to ICON Cash Flow Partners, L.P. Series D, without being compensated for providing such guarantees. The Purchase Right is not subject to stockholder approval. However, Ms. Anderson-Lasko may only exercise the Purchase Right to the extent the Company has authorized but unissued or otherwise unreserved shares. As discussed above, currently the Company has virtually no authorized but unissued or otherwise unreserved shares. If the stockholders approve this proposal to increase the number of authorized common shares, shares issuable upon Ms. Anderson-Lasko's exercise, if any, of the Purchase Right, will be reserved. If the stockholders do not approve this proposal to increase the number of authorized shares, the Purchase Right will, nonetheless, be exercisable to the extent the Company in the future has authorized but unissued or otherwise unreserved shares of common stock. Under the Company's by-laws the board of directors may issue authorized shares of common stock without soliciting additional stockholder approval. The existence of authorized but unissued shares of the Company's common stock could tend to discourage or render more difficult the completion of a hostile merger, tender offer or proxy contest. For example, if in the due exercise of its fiduciary obligations, the board of directors were to determine that a takeover proposal was not in the best interests of the Company and its stockholders, the ability to issue additional shares of stock without further stockholder approval could have the effect of rendering more difficult or costly the completion of the takeover transaction, by diluting the voting or other rights of the proposed acquiror or insurgent stockholder group, by creating or enlarging a substantial voting block in hands that might support the position of the board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise. As of the date hereof there exists, to the knowledge of the Company, no planned acquisition of or tender offer for the Company, nor any planned solicitation of proxies to vote shares of the Company's common stock, except for the proxy solicited by means of this Proxy Statement. The affirmative vote of the holders of a majority of the outstanding shares of the Company's common stock is required for approval of the amendment to the certificate of incorporation. The Board of Directors recommends a vote to APPROVE this amendment to the certificate of incorporation and the enclosed proxy will be voted in favor thereof unless the proxy specifically indicates otherwise. Proposal for Approval of Innovo Group Inc. 1997 Stock Option Plan The board of directors is proposing for stockholder approval the adoption of the 1997 Stock Option Plan. The board of directors has proposed the adoption of the 1997 Stock Option Plan, to replace the 1991 Plan, in order to provide it with a sufficient number of shares to offer meaningful incentive stock compensation, as well as to provide it with more flexibility in terms of the types of stock inventive compensation awards available and the ability to award options from a plan that complies with certain changes to Rule 16b-3 under the Exchange Act that has been promulgated since the adoption of 1991 Plan. During the fourth quarter of fiscal 1996 the Company instituted reductions in the salaries of all senior, and number of middle management, which averaged 12.3%. Additionally, certain positions were eliminated. The board of directors believes that the ability to offer meaningful incentive compensation will increase its ability to retain key employees without having to reinstate the salary reductions or recreate the eliminated positions. Additionally, the ability to offer meaningful incentive compensation would increase the Company's ability to attract new key employees who may be needed as the Company's business grows at cash compensation levels closer to the low end of the competitive range, and lower than the Company could otherwise offer without the ability to combine lower cash compensation with such incentives Finally, on an overall basis the board of directors wishes to increase the importance of incentive compensation. The existing 1991 Plan does not provide the board of directors with those abilities because of its limit of 100,000 shares. If the adoption of the 1997 Stock Option Plan is approved, awards under the 1991 Plan will be discontinued. The 1997 Stock Option Plan provides for the issuance of options to purchase a maximum of 5 million shares of the Company's common stock, subject to adjustment as described below. The 1997 Stock Option Plan will be administered by the Stock Option Committee, the composition of which will be intended to satisfy the provisions of Rule 16B-3 under the Exchange Act. During the 10-year period ending in 2007, the Committee will have authority, subject to the terms of the 1997 Stock Option Plan, to determine when and to whom to make grants under the plan, the number of shares to be covered by the grants, the types and terms of options and SARs to be granted and the exercise prices of options and SARs, to interpret and implement the 1997 Stock Option Plan, and to prescribe, amend and rescind rules and regulations relating to the 1997 Stock Option Plan. The Committee's determinations under the 1997 Stock Option Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the 1997 Stock Option Plan (whether or not such persons are similarly situated). The Company's board of directors may amend, suspend or discontinue the 1997 Stock Option Plan at any time except that, unless an amendment is approved (at a meeting held within 12 months before or after the date of such amendment) by the holders of a majority of the issued and outstanding shares of common stock entitled to vote, no such amendment may (i) materially increase the maximum number of shares as to which awards may be granted under the 1997 Stock Option Plan, except for adjustments to reflect stock dividends or other recapitalization affecting the number or kind of outstanding shares, (ii) materially increase the benefits accruing to 1997 Stock Option Plan participants, (iii) materially change the requirements as to eligibility for participation in the 1997 Stock Option Plan, (iv) provide for the grant of options or SARs having an exercise price or appreciation base (as defined in the 1997 Stock Option Plan) of less than 100% of the fair market value of common stock on the date of grant, (v) permit an option or unrelated SAR to be exercisable more than 10 years after the date of grant, or (vi) extend the term of the 1997 Stock Option Plan beyond the initial 10-year period. Under the terms of the 1997 Stock Option Plan, "incentive stock options" ("ISOs") within the meaning of section 422 of the Internal Revenue Code of 1986 (the "Code"), "non-qualified stock options" ("NQSOs") and SARs may be granted of officers, certain directors, key employees and consultants of the Company and any of its affiliates (as defined in the 1997 Stock Option Plan), except that ISOs may be granted only to employees of the Company and its subsidiaries. The Company estimates that approximately 50 individuals would be eligible to receive awards under the 1997 Stock Option Plan, if adopted. The 1997 Stock Option Plan contains no limitations upon the number of shares with respect to which options or SARs may be granted to an individual over the term of the 1997 Stock Option Plan. To the extent that the aggregate fair market value (as defined in the 1997 Stock Option Plan), determined as of the date of grant of an ISO, of common stock with respect to which ISOs granted under the 1997 Stock Option Plan and all other option plans of the Company, its subsidiaries or the relevant affiliate of the Company exercisable for the first time by an individual during any calendar year exceeds $100,000, such options shall be treated as options which are not ISOs. The foregoing limitation does not apply to NQSOs. Initially, each ISO will be exercisable over a period, determined by the Committee in its discretion but not to exceed 10 years from the date of grant, as required by the Code. In addition, in the case of an ISO granted to an individual who, at the time such ISO is granted, owns shares possessing 10% or more of the total combined voting power of all classes of stock of the Company or its subsidiary corporations (a "10% stockholder"), the exercise period for an ISO may not exceed five years from the date of grant. In the case of NQSO's the exercise period, not to exceed 10 years from the date of grant, shall in all cases be determined by the Committee. Options may be exercisable during the option period at such times, in such amounts, in accordance with such terms and conditions, and subject to such restrictions, as are set forth in the option agreement evidencing the grant of such options. The Committee may, in its discretion, with the grantee's consent, cancel any award of options or SARs and issue anew award in substitution thereof or accelerate the exercisability of any award granted under the 1997 Stock Option Plan or extend the scheduled expiration of an award. The exercise price of an ISO or an NQSO (the "Option Price") may not be less than the fair market value of the shares of the Common Stock on the date of grant, except that, in the case of an ISO granted to a 10% stockholder, the option price may not be less than 110% of such fair market value. The option price of, and the number of shares covered by, each option will not change during the life of the option, except for adjustments to reflect stock dividends, splits, other recapitalization or reclassifications or changes affecting the number or kind of outstanding shares. The shares purchased upon the exercise of an option are to be paid for in cash or, with the Committee's consent, in its discretion, by delivery of the optionee's promissory note, upon such terms and conditions as the Committee may prescribe, or, if so provided in the applicable option agreement, by delivery of previously acquired shares of Common Stock with a fair market value equal to the total Option Price, or in a combination of such methods. Options and SARs may be transferred by an optionee or grantee only by will or by the laws of descent and distribution, and may be exercise only by the optionee or grantee during his lifetime. Except as otherwise provided in the applicable plan agreement, all of an optionee's or a grantee's outstanding awards shall terminate upon his termination of employment or service for any reason. The committee may grant SARs either along ("unrelated SARs") or in conjunction with all or part of an option ("related SARs"). Upon the exercise of a SAR, a holder will generally be entitled, without payment to the Company, to receive cash, shares of common stock or any combination thereof, as determined by the Committee, in an amount equal to the excess of the fair market value of one share of common stock on the exercise date over the fair market value of one share of common stock on the grant date of (i) the related option (in the case of a related SAR) or (ii) the SAR (in the case of an unrelated SAR), multiplied by the number of shares in respect of which the SAR is exercised. The affirmative vote of a majority of the votes cast at the meeting is required to approve the adoption of the 1997 Stock Option Plan. Unless otherwise directed by a stockholder's proxy, the persons named as proxy voters in the accompanying proxy will vote for the approval of the 1997 Stock Option Plan. The Board of Directors recommends a vote FOR the approval of the 1997 Stock Option Plan. Proposal to Amend Certificate of Incorporation to Authorize Class of Preferred Stock On February 12, 1997, the board of directors approved, subject to stockholder approval, an amendment to the Company's Certificate of Incorporation to authorize the issuance of up to 10,000,000 shares of preferred stock, par value $.01, in one or more series on terms and conditions to be established by the board of directors from time to time. A copy of the Amended and Restated Certificate of Incorporation appears as Appendix A to this Proxy Statement. The principal reason for this proposal is to give the Company additional flexibility when considering the capital needs of the Company's business. Presently, because the Company does not have an authorized class of preferred stock, it is limited to issuing debt securities in situations where it desires or needs to raise additional capital, or acquire assets or businesses, but, due to market conditions or other factors, it is inadvisable or impractical to issue common stock. The board of directors believes that it is in the best interests of the Company, and its stockholders, that the Company have this flexibility. However, there are currently no plans or commitments for any transaction that would involve the issuance of any preferred stock. The preferred stock will constitute what is commonly referred to as "blank check" preferred stock because the amendment to the Certificate of Incorporation creating this class of preferred stock will authorize the board of directors, from time to time, to divide the preferred stock into series, to designate each series, to issue shares of any series, and to fix and determine separately for each series any one or more of the following relative rights and preferences: (i) the rate of dividends; (ii) the price at and the terms and conditions on which shares may be redeemed; (iii) the amount payable upon shares in the event of involuntary liquidation; (iv) the amount payable upon shares in the event of voluntary liquidation; (v) sinking fund provisions for the redemption or purchase of shares; (vi) the terms and conditions on which shares may be converted if the shares of any series are issued with the privilege of conversion; and (vii) voting rights. Dividends on shares of preferred stock, when and as declared by the board of directors out of any funds legally available therefor, may be cumulative and may have a preference over the Company's common stock as to the payment of such dividends. The provisions of a particular series, as designated by the board of directors, may include restrictions on the ability of the Company to purchase shares of the Company's common stock or restrictions or obligations relating to the redemption of a particular series of preferred stock. Depending upon the voting rights granted to any series of preferred stock issuance thereof could result in a reduction in the power of the holders of the Company's common stock. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of each series of the then outstanding preferred stock may be entitled to receive, prior to the distribution of any assets or funds to the holders of the Company's common stock, a liquidation preference established by the board of directors, together with all accumulated and unpaid dividends. Depending upon the consideration paid for preferred stock its issuance could result in a reduction in the assets available for distribution to the holders of the Company's common stock in the event of liquidation of the Company. Holders of preferred stock will not have preemptive rights to acquire any additional securities issued by the Company. Once a series has been designated and shares of that series are outstanding, the rights of holders of that series may not be modified adversely except by a vote of at least a majority of the outstanding shares constituting such series or by such other vote as may be required by the certificate designating such series. The board of directors may, if this proposal is approved, issued shares of its preferred stock without soliciting additional stockholder approval. The existence of authorized but unissued shares of the Company's preferred stock could tend to discourage or render more difficult the completion of a hostile merger, tender offer or proxy contest. For example, if in the due exercise of its fiduciary obligations, the board of directors were to determine that a takeover proposal was not in the best interests of the Company and its stockholders, the ability to issue additional shares of stock without further stockholder approval could have the effect of rendering more difficult or costly the completion of the takeover transaction, by diluting the voting or other rights of the proposed acquiror or insurgent stockholder group, by creating or enlarging a substantial voting block in hands that might support the position of the board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise. As of the date hereof there exists, to the knowledge of the Company, no planned acquisition of or tender offer for the Company, nor any planned solicitation of proxies to vote shares of the Company's common stock, except for the proxy solicited by means of this Proxy Statement. The affirmative vote of the holders of a majority of the outstanding shares of the Company's common stock is required for approval of this amendment to the certificate of incorporation. The board of directors recommends a vote to APPROVE this amendment to the certificate of incorporation and the enclosed proxy will be voted in favor thereof unless the proxy specifically indicates otherwise. Relationship With Independent Public Accountants The financial statements of the Company for the year ended November 30, 1996, have been audited by BDO Seidman, LLP, independent certified public accountants. A representative of BDO Seidman, LLP will be at the Annual Meeting and will have an opportunity to make a statement and will be available to answer appropriate questions. BDO Seidman, LLP has been reappointed by the board of directors as the independent public accountants of the Company and its subsidiaries for the year ending November 30, 1997. Stockholder Proposals Any stockholder proposal to be considered by the Company for inclusion in the 1998 Annual Meeting of Stockholders proxy material must be received by the Company no later than December 1, 1997. Other Business The board of directors is not aware of any matter to be presented for action at the meeting, other than the matters set forth herein. If any other business should come before the meeting, the proxy will be voted in respect thereof in accordance with the best judgment of the persons authorized therein, and discretionary authority to do so is included in the proxy. Stockholders are urged to sign and return the enclosed proxy in the enclosed envelope. A prompt response will be helpful and appreciated. BY ORDER OF THE BOARD OF DIRECTORS Schren L. Head Secretary March 5, 1997 EX-1 2 FORM OF PROXY INNOVO GROUP INC. 27 NORTH MAIN STREET SPRINGFIELD, TENNESSEE 37172 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Patricia Anderson-Lasko and Terrance J. Bond, or their duly appointed substitute, as Proxy, and hereby authorizes them to represent and to vote, as designated below, all of the shares of common stock of Innovo Group Inc. held of record by the undersigned on February 15, 1997 at the Annual Meeting of Stockholders to be held on April 4, 1997 or any adjournment thereof. A. Election of Directors Nominees: Patricia Anderson-Lasko, Alexander K. Miller, Reino C. Lanto, Jr., Scott Parliament, Eleanor V. Schwartz and Marvin M. Williamson (mark only one of the following lines): [ ] VOTE FOR all nominees listed above, except vote withheld as to the following nominees (if any): ______________________________ [ ] VOTE WITHHELD B. Ratify Amendment to Certificate of Incorporation to Increase Authorized Common Stock For [ ] Against [ ] Abstain [ ] C. Ratify the Adoption of the Innovo Group Inc. 1997 Stock Option Plan For [ ] Against [ ] Abstain [ ] D. Ratify Amendment to Certificate of Incorporation to Create a Class of Preferred Stock For [ ] Against [ ] Abstain [ ] E. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. This Proxy, when properly executed, will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this Proxy will be voted FOR Proposals A, B, C and D. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. Dated:____________________, 1997 ________________________________________ Signature ________________________________________ Signature if held jointly Please check here if you plan to attend [ ] EX-2 3 APPENDIX A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF INNOVO GROUP INC. It is hereby certified that: 1. (a) The present name of the corporation is Innovo Group Inc. (the "Corporation"). (b) The name under the Corporation was originally incorporated is Elorac Corporation and the date of filing the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is December 18, 1987. 2. The Certificate of Incorporation of the Corporation is hereby amended by striking out Articles First, Fourth, Sixth, Seventh, Eighth, Ninth and Tenth thereof and by substituting in lieu thereof new Articles First, Fourth, Sixth, Seventh, Eighth, Ninth and Tenth, which are set forth in the Amended and Restated Certificate of Incorporation hereinafter provided for. 3. The provisions of the Certificate of Incorporation of the corporation as heretofore amended and/or supplemented, and as herein amended, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Amended and Restated Certificate of Incorporation of Innovo Group Inc. without any further amendment other than the amendments herein certified and without any discrepancy between the provisions of the Certificate of Incorporation as previously amended and supplemented and the provisions of the said single instrument hereinafter set forth. 4. The amendments and the restatement of the Certificate of Incorporation herein certified have been duly adopted in writing by the stockholders in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the state of Delaware. Prompt written notice of the adoption of the amendments and of the restatement of the Certificate of Incorporation herein certified has been given to those stockholders who have not consented in writing thereto, as provided in Section 228 of the General Corporation Law of the state of Delaware. 5. The Certificate of Incorporation of the Corporation, as amended and restated and restated herein, shall read as follows: FIRST: The name of the corporation is INNOVO GROUP INC. (the "Corporation"). SECOND: The address, including street, number, city and county, of the registered office of the Corporation in the State of Delaware is 32 Lockerman Square, Suite L-100, Dover, Delaware 19901, County of Kent. The name of the registered agent of the Corporation at such address is The Prentice - -Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The maximum number of shares, comprising the total authorized capital stock of the corporation that the Corporation shall have authority to issue is: (a) Seventy million (70,000,000) of Common Stock, par value $.01 per share, all such hares having unlimited voting rights as a class with each share entitled to one (1) vote per share, and such class of shares being entitled to receive the remaining net assets of the Corporation upon dissolution subject to the rights of holders of any Preferred Stock having a liquidation preference over the Common Stock which may be issued; and (b) Ten million (10,000,000) shares of Preferred Stock, which shares shall be entitled to such preferences in the distribution of dividends and assets, and shall be divided by the Board of Directors of the Corporation into such series, as determined by the Board of Directors of the Corporation, with full authority in the Board of Directors to determine the relative voting powers, designations, rights and preferences or any other matter that lawfully may be determined by the Board of Directors with respect to the shares of any such series. FIFTH: The Corporation is to have perpetual existence. SIXTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three- fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: (a) The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need by written ballot. (b) The power to adopt, amend, or repeal the Bylaws of the Corporation may be exercised by the Board of Directors of the Corporation, provided, however, that the Board of Directors may not amend the Bylaws to take any action that is reserved exclusively by the Shareholders pursuant to the Delaware General Corporation Law. (c) Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of this Certificate of Incorporation shall be entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease (but not below the number of shares thereof outstanding) in the number of authorized shares of said class. EIGHTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of the subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. NINTH: (a) The Corporation shall, in the manner and to the full extent permitted by Section 145 of the General Corporation Law of the state of Delaware, as the same may be amended and supplemented, indemnify any officer or director (or the estate of any such person) who was or is a party to, or is threatened, to be made a party to, any threatened, pending or complete action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee or employee of another corporation, partnership, joint venture, trust or other enterprise (an "indemnitee"). To the full extent permitted by law, the indemnification and advances provided for herein shall include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement. Notwithstanding the foregoing, the Corporation shall not indemnify any such indemnitee (1) in any proceeding by the Corporation against such indemnitee; (2) in the event the board of directors determines that indemnification is not available under the circumstances because the officer or director has not met the standard of conduct set forth in Section 145 of the Delaware General Corporation Law; or (3) if a judgment or other final adjudication adverse to the indemnitee establishes his liability (i) for any breach of the duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) under Section 174 of the Delaware General Corporation Law. (b) The right to indemnification conferred in Section (a) of this Article NINTH shall include the right to be paid by the Corporation the expenses (including attorneys' fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, and advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Section (b) or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections (a) and (b) of this Article NINTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators. (c) The rights to indemnification and to the advancement of expenses conferred in this Article NINTH shall not be exclusive of any other right which any indemnitee may have or hereafter acquire under any statute, the Corporation's Amended and Restated Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such indemnitee's official capacity and as to action in another capacity while holding such office. (d) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. (e) The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article NINTH with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. TENTH: No amendment to or repeal of Article EIGHT or NINTH of this Amended and Restated Certificate of Incorporation shall apply to or have any effect on the rights of any individual referred to in Article EIGHT or NINTH for or with respect to acts or omissions of such individual occurring prior to such amendment or repeal. ELEVENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH. IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been executed by its President and attested by its Secretary, this ______ day of _________________, 1997. INNOVO GROUP INC. By:_________________________ President ATTEST: _________________________ Secretary EX-3 4 Appendix B Innovo Group Inc. 1997 Stock Option Plan Table of Contents PAGE ARTICLE I GENERAL 1 1.1 Purpose 1 1.2 Administration 1 1.3 Persons Eligible for Awards 1 1.4 Types of Awards Under Plan 2 1.5 Shares Available for Awards 2 1.6 Definitions of Certain Terms 3 ARTICLE II STOCK OPTIONS; STOCK APPRECIATION RIGHTS 3 2.1 Grant of Stock Options 3 2.2 Grant of Stock Appreciation Rights 4 2.3 Agreements Evidencing Stock Options and Stock Appreciation Rights 5 2.4 Exercise of Related Stock Appreciation Right Reduces Shares Subject to Option 6 2.5 Exercisability of Options and Stock Appreciation Rights 6 2.6 Payment of Option Price 7 2.7 Periods of Employment 7 2.8 Special ISO Requirements 7 ARTICLE III MISCELLANEOUS 8 3.1 Amendment of the Plan; Modification of Awards 8 3.2 Restrictions 9 3.3 Nontransferability 9 3.4 Withholding Taxes 10 3.5 Adjustments Upon Changes in Capitalization 10 3.6 Right of Discharge Reserved 11 3.7 No Rights as a Stockholder 11 3.8 Nature of Payments 11 3.9 Non-Uniform Determinations 12 3.10 Other Payments or Awards 12 3.11 Reorganization 12 3.12 Section Headings 13 3.13 Effective Date and Term of Plan 13 3.14 Governing Law 13 Innovo Group Inc. 1997 Stock Option Plan Article I General 1.1 Purpose. The purpose of this Innovo Group Inc. 1997 Stock Option Plan (the "1997 Plan") is to provide for the officers, certain directors, key employees and consultants of Innovo Group Inc. (the "Company") and certain of its Affiliates an incentive to maintain and enhance the long-term performance and profitability of the Company. 1.2 Administration. (a) The 1997 Plan shall be administered by a committee (the "Committee") appointed by the Board of Directors of the Company (the "Board"), which committee shall consist of two or more directors, each of whom is a "disinterested person" within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 or any successor rule thereto ("Rule 16b-3"). The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board. (b) The Committee shall have the authority (i) to exercise all of the powers granted to it under the 1997 Plan, (ii) to construe, interpret and implement the 1997 Plan and any Plan agreements executed pursuant to section 2.3, (iii) to prescribe, amend and rescind rules and regulations relating to the 1997 Plan, (iv) to make all determinations necessary or advisable in administering the 1997 Plan, and (v) to correct any defect, supply any omission and reconcile any inconsistency in the 1997 Plan. (c) The determination of the Committee on all matters relating to the 1997 Plan or any Plan agreement shall be conclusive. (d) No member of the Committee shall be liable for any action or determination made in good faith with respect to the 1997 Plan or any award hereunder. 1.3 Persons Eligible for Awards. Awards under the 1997 Plan may be made to such officers, directors and executive, managerial, professional or other employees and consultants ("key personnel") of the Company or its Affiliates, as the Committee shall in its sole discretion select. 1.4 Types of Awards Under Plan. (a) Awards may be made under the 1997 Plan in the form of (i) stock options ("options"), (ii) stock appreciation rights related to an option ("related stock appreciation rights"), and (iii) stock appreciation rights not related to any option ("unrelated stock appreciation rights"), all as more fully set forth in Article II. (b) Options granted under the 1997 Plan may be either (i) "nonqualified" stock options subject to the provisions of section 83 of the Internal Revenue Code of 1986, as amended (the "Code") or (ii) options intended to qualify for incentive stock option treatment described in Code section 422. (c) All options when granted are intended to be nonqualified stock options, unless the applicable Plan agreement explicitly states that an option is intended to be an incentive stock option. If an option is granted with the stated intent that it be an incentive stock option, and if for any reason such option (or any portion thereof) shall not qualify as an incentive stock option, then, to the extent of such nonqualification, such option (or portion) shall be regarded as a nonqualified stock option appropriately granted under the 1997 Plan provided that such option (or portion) otherwise satisfies the terms and conditions of the 1997 Plan relating to nonqualified stock options generally. 1.5 Shares Available for Awards. (a) Subject to section 3.5 (relating to adjustments upon changes in capitalization), as of any date the total number of shares of Common Stock with respect to which options and unrelated stock appreciation rights may be granted under the 1997 Plan shall be equal to the excess (if any) of (i) Five million (5,000,000) shares, over (ii) the sum of (A) the number of shares subject to outstanding options and outstanding unrelated stock appreciation rights granted under the 1997 Plan, (B) the number of shares previously transferred pursuant to the exercise of options granted under the 1997 Plan, and (C) the number of shares in respect of which stock appreciation rights granted under the 1997 Plan shall have previously been exercised. In accordance with (and without limitation upon the preceding sentence, shares of Common Stock covered by options or unrelated stock appreciation rights granted under the 1997 Plan which expire or terminate for any reason whatsoever shall again become available for awards under the 1997 Plan. (b) Shares of stock that shall be transferable pursuant to the exercise of options or stock appreciation rights granted under the 1997 Plan shall be authorized and unissued or treasury shares of Common Stock. (c) Without limiting the generality of the preceding provisions of this section 1.5, the Committee may, but solely with the grantee's consent, agree to cancel any award of options and/or stock appreciation rights under the 1997 Plan and issue a new award in substitution therefor, provided that the substituted award satisfies all applicable Plan requirements as of the date such new award is made. 1.6 Definitions of Certain Terms. (a) The term "Affiliate" as used herein means any person or entity which, at the time of reference, directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company. (b) The term "Common Stock" as used herein means the shares of common stock of the Company as constituted on the effective date of the 1997 Plan, and any other shares into which such common stock shall thereafter be changed by reason of a recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like. (c) The term "fair market value" as used herein as of any date and in respect of any share of Common Stock means the fair market value of a share of Common Stock on such date, as determined by the Committee in its sole discretion. In no event shall the fair market value of any share be less than its par value. Article 2 Stock Options; Stock Appreciation Rights 2.1 Grant of Stock Options. The Committee may grant options under the 1997 Plan to purchase shares of Common Stock to such key personnel, and in such amounts and subject to such terms and conditions, as the Committee shall from time to time determine in its sole discretion, subject to the terms and provisions of this Plan. 2.2 Grant of Stock Appreciation Rights. (a) The Committee may grant a related stock appreciation right in connection with all or any part of an option granted under the 1997 Plan, either at the time the related option is granted or any time thereafter prior to the exercise, termination or cancellation of such option, and subject to such terms and conditions as the Committee shall from time to time determine in its sole discretion, subject to the terms and provisions of the 1997 Plan. The grantee of a related stock appreciation right shall, subject to the terms and conditions of the 1997 Plan and the applicable Plan agreement, have the right to surrender to the Company for cancellation all or a portion of the related option granted under the 1997 Plan, but only to the extent that such option is then exercisable, and to be paid therefor an amount equal to the excess (if any) of (i) the aggregate fair market value of the shares of Common Stock subject to the option or portion thereof surrendered (determined as of the date of exercise of such stock appreciation right), over (ii) the aggregate appreciation base (determined pursuant to section 2.3(d)) of the shares of Common Stock subject to the stock appreciation right or portion thereof surrendered. (b) The Committee may grant an unrelated stock appreciation right to such key personnel, and in such amount and subject to such terms and conditions, as the Committee shall from time to time determine in its sole discretion, subject to the terms and provisions of the 1997 Plan. The grantee of an unrelated stock appreciation right shall, subject to the terms and conditions of the 1997 Plan and the applicable Plan agreement, have the right to surrender to the Company for cancellation all or a portion of such stock appreciation right, but only to the extent that such stock appreciation right is then exercisable, and to be paid therefor an amount equal to the excess (if any) of (i) the aggregate fair market value of the shares of Common Stock subject to the stock appreciation right or portion thereof surrendered (determined as of the date of exercise of such stock appreciation right), over (ii) the aggregate appreciation base (determined pursuant to section 2.3(d)) of the shares of Common Stock subject to the stock appreciation right or portion thereof surrendered. (c) Payment due upon exercise of a stock appreciation right shall be made (i) in cash, (ii) in Common Stock (valued at the fair market value thereof as of the date of exercise), or (iii) partly in cash and partly in Common Stock (valued at the fair market value thereof as of the date of exercise), all as determined by the Committee in its sole discretion. If the Committee shall determine to make all of such payments in Common Stock, no fractional shares shall be issued and no payments shall be made in lieu of fractional shares. 2.3 Agreements Evidencing Stock Options and Stock Appreciation Rights. (a) Options and stock appreciation rights granted under the 1997 Plan shall be evidenced by written agreements ("Plan agreements") which shall not be inconsistent with the terms and provisions of the 1997 Plan, and which shall contain such provisions as the Committee may in its sole discretion deem necessary or desirable. (b) Each Plan agreement with respect to the granting of an option or an unrelated stock appreciation right shall set forth the number of shares of Common Stock subject to the option or unrelated stock appreciation right granted thereby. Each Plan agreement with respect to the granting of a related stock appreciation right shall set forth the number of shares of Common Stock subject to the related option which shall also be subject to the related stock appreciation right granted thereby. (c) Each Plan agreement with respect to the granting of an option shall set forth the amount (the "option exercise price") payable by the grantee to the Company upon exercise of the option evidenced thereby. The option exercise price per share shall in no event be less than 100% of the fair market value of a share of Common Stock on the date the option is granted. (d) Each Plan agreement with respect to a stock appreciation right shall set forth the amount (the "appreciation base") over which appreciation will be measured upon exercise of the stock appreciation right evidenced thereby. The appreciation base per share of Common Stock subject to a stock appreciation right shall in no event be less than (i) in the case of an unrelated stock appreciation right, 100% of the fair market value of a share of Common Stock on the date the stock appreciation right is granted, or (ii) in the case of a related stock appreciation right, 100% of the fair market value of a share of Common Stock on the date the related option was granted. 2.4 Exercise of Related Stock Appreciation Right Reduces Shares Subject to Option. Upon any exercise of a related stock appreciation right or any portion thereof, the number of shares of Common Stock subject to the related option shall be reduced by the number of shares of Common Stock in respect of which such stock appreciation right shall have been exercised. 2.5 Exercisability of Options and Stock Appreciation Rights. Subject to the other provisions of this Plan: (a) Each Plan agreement with respect to an option or stock appreciation right shall set forth the period during which and the conditions subject to which the option or stock appreciation right evidenced thereby shall be exercisable, such periods and conditions to be determined by the Committee in its discretion. (b) Notwithstanding the foregoing or any other provision of the Plan, no Plan agreement shall permit an option or stock appreciation right to be exercisable more than 10 years after the date of grant. (c) Subject to any restrictions imposed by the applicable Plan agreement, a related stock appreciation right shall be exercisable at any time during the period that the related option may be exercised. (d) Unless the applicable Plan agreement otherwise provides, an option or stock appreciation right granted under the Plan may be exercised from time to time as to all or part of the shares as to which such option or stock appreciation right shall then be exercisable. (e) An option or stock appreciation right shall be exercisable by the filing of a written notice of exercise with the Company, on such form and in such manner as the Committee shall in its sole discretion prescribe. 2.6 Payment of Option Price. Any written notice of exercise of an option shall be accompanied by payment of the full purchase price for the shares being purchased. Such payment shall be made in any combination of the foregoing: (i) by certified or official bank check payable to the Company (or the equivalent thereof acceptable to the Committee); (ii) with the consent of the Committee in its sole discretion, by delivery of the Optionee's promissory note, upon such terms and conditions as the Committee may prescribe; and/or (iii) if so provided in the applicable Plan agreement, by delivery of previously acquired shares of Common Stock having a fair market value (determined as of the date such option is exercised) equal to the portion of the option exercise price being paid thereby. As soon as practicable after receipt of such payment, the Company shall, subject to the provisions of section 3.2, deliver to the grantee a certificate or certificates for the shares of Common Stock so purchased. 2.7 Periods of Employment. (a) Except as the 1997 Plan agreement may otherwise provide, all of a grantee's outstanding awards shall terminate upon his termination of employment for any reason (including death). (b) Subject to any limitations imposed by the applicable Plan agreement, references herein to an individual's employment shall include all periods during which such individual serves as a director of or consultant to the Company or any Affiliate but is not otherwise a common law employee. An individual shall be deemed to have terminated employment when he completely ceases to be employed (including employment within the meaning of the preceding sentence) by the Company and all of its Affiliates. The Committee may in its discretion determine (i) whether any leave of absence constitutes a termination of employment within the meaning of the 1997 Plan and (ii) the impact, if any, of any such leave of absence on awards under the 1997 Plan theretofore made to a grantee who takes such leave of absence. 2.8 Special ISO Requirements. If an option granted under the 1997 Plan is intended to be an incentive stock option, and if the grantee, at the time of grant, owns stock possessing 10 percent or more of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation (within the meaning of Code section 424), then (i) the option exercise price per share shall in no event be less than 110% of the fair market value of the Common Stock on the date of such grant and (ii) such option shall not be exercisable after the expiration of the five years after the date such option is granted. Article 3 Miscellaneous 3.1 Amendment of the 1997 Plan; Modification of Awards. (a) The Board may, without stockholder approval, at any time and from time to time suspend or discontinue the 1997 Plan or revise or amend it in any respect whatsoever, except that no such amendment shall impair any rights under any award theretofore made under the 1997 Plan without the consent of the person to whom such award was made. Furthermore, except as and to the extent otherwise permitted by section 3.5 or 3.11, no such amendment shall, without stockholder approval: (i) materially increase the benefits accruing to grantees under the 1997 Plan; (ii) materially increase, beyond the amounts set forth in section 1.5, the number of shares of Common Stock in respect of which options and unrelated stock appreciation rights may be issued under the 1997 Plan; (iii) materially modify the designation in section 1.3 of the class of persons eligible to receive awards under the 1997 Plan; (iv) provide for the grant of stock options or stock appreciation rights having an option exercise price or appreciation base per share of Common Stock less than 100% of the fair market value of a share of Common Stock on the date of grant; (v) permit a stock option or unrelated stock appreciation right to be exercisable more than 10 years after the date of grant; or (vi) extend the term of the 1997 Plan beyond the period set forth in section 3.13. (b) With the consent of the grantee and subject to the terms and conditions of the 1997 Plan (including section 3.1 (a)), the Committee may amend outstanding Plan agreements with such grantee, including, without limitation, any amendment which would (i) accelerate the time or times at which an award may be exercised and/or (ii) extend the scheduled expiration date of the award. 3.2 Restrictions. (a) If the Committee shall at any time determine that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any award under the 1997 Plan, the issuance or purchase of shares or other rights hereunder or the taking of any other action hereunder (each such action being hereinafter referred to as a "Plan Action"), then such Plan Action shall not be taken, in whole or in part, unless and until such Consent shall have been effected or obtained to the full satisfaction of the Committee. Without limiting the generality of the foregoing, in the event that (i) the Committee shall be entitled under the Plan to make any payment in cash, Common Stock or both, and (ii) the Committee shall determine that Consent is necessary or desirable as a condition of, or in connection with, payment in any one or more of such forms, then the Committee shall be entitled to determine not to make any payment whatsoever until such Consent shall have been obtained in the manner aforesaid. (b) The term "Consent" as used herein with respect to any Plan Action means (i) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or under any federal, state or local law, rule or regulation, (ii) any and all written agreements and representations by the grantee with respect to the disposition of shares, or with respect to any other matter, which the Committee shall deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made and (iii) any and all consents, clearances and approvals in respect of a Plan Action by any governmental or other regulatory bodies. 3.3 Nontransferability. No right granted to any grantee under the 1997 Plan or under any Plan agreement shall be assignable or transferable by the grantee other than by will or by the laws of descent and distribution. During the lifetime of the grantee, all rights granted to the grantee under the Plan or under any Plan agreement shall be exercisable only by him. 3.4 Withholding Taxes. (a) Whenever under the 1997 Plan shares of Common Stock are to be delivered upon exercise of an option or stock appreciation right, the Company shall be entitled to require as a condition of delivery that the grantee remit an amount sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto. Whenever under the 1997 Plan cash is to be paid upon exercise of a stock appreciation right (whether upon the simultaneous exercise of an option or otherwise), the Company shall be entitled to deduct therefrom an amount sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto or to the delivery of any shares of Common Stock under the 1997 Plan. (b) The Committee may in its sole discretion permit a grantee to satisfy, in whole or in part, the foregoing withholding requirements by delivery of shares of Common Stock owned by the grantee for at least six months (or such shorter or longer period as the Committee may approve or require) having a fair market value (determined as of the date of such delivery by the grantee) equal to all or part of the amount to be so withheld. Without limiting the generality of the foregoing: (i) the Committee may require, as a condition of accepting any such delivery of shares of Common Stock, that the grantee furnish to the Company an opinion of counsel to the effect that such delivery would not result in the grantee incurring any liability under Rule 16b; and (ii) the Committee may permit any such delivery to be made by withholding shares of Common Stock from the shares otherwise issuable pursuant to the exercise of the award(s) giving rise to the tax withholding obligation (in which event the date of delivery shall be deemed the date the award(s) was exercised). 3.5 Adjustments Upon Changes in Capitalization. If and to the extent specified by the Committee, the number of shares of Common Stock which may be transferred pursuant to options under the 1997 Plan, the number of shares of Common Stock subject to options and unrelated stock appreciation rights theretofore granted under the 1997 Plan, and the option exercise price and appreciation base of options and stock appreciation rights theretofore granted under the 1997 Plan may be appropriately adjusted (as the Committee may determine) for any increase or decrease in the number of issued shares of Common Stock resulting from the subdivision or combination of shares of Common Stock or other capital adjustments, or the payment of a stock dividend after the effective date of this Plan, or other increase or decrease in such shares of Common Stock effected without receipt of consideration by the Company; provided, however, that any options to purchase or unrelated stock appreciation rights covering fractional shares of Common Stock resulting from any such adjustment shall be eliminated, and provided further, that each incentive stock option granted under the 1997 Plan shall not be adjusted in a manner that causes such option to fail to continue to qualify as an "incentive stock option" within the meaning of Code section 422. Adjustments under this Section shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 3.6 Right of Discharge Reserved. Nothing in the 1997 Plan or in any Plan agreement shall confer upon any officer, director, employee or other person the right to continue in the employment or service of the Company or any of its Affiliates or affect any right which the Company or any of its Affiliates may have to terminate the employment or service of such officer, director, employee or other person. 3.7 No Rights as a Stockholder. No grantee or other person exercising an option or stock appreciation right shall have any of the rights of a stockholder of the Company with respect to shares subject to an option or shares deliverable upon exercise of a stock appreciation right until the issuance of a stock certificate to him for such shares. Except as otherwise provided in section 3.5, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. 3.8 Nature of Payments. (a) Any and all payments of shares of Common Stock or cash hereunder shall be granted, transferred or paid in consideration of services performed for the Company or for its Affiliates by the grantee. (b) All such grants, issuances and payments shall constitute a special incentive payment to the grantee and shall not, unless otherwise determined by the Committee, be taken into account in computing the amount of salary or compensation of the grantee for the purposes of determining any pension, retirement, death or other benefits under (i) any pension, retirement, life insurance or other benefit plan of the Company or any Affiliate or (ii) any agreement between the Company or any Affiliate, on the one hand, and the grantee on the other hand. 3.9 Non-Uniform Determinations. The Committee's determinations under the 1997 Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the 1997 Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things to make non-uniform and selective determinations, and to enter into non- uniform and selective Plan agreements, as to (i) the persons to receive awards under the 1997 Plan, (ii) the terms and provisions of awards under the 1997 Plan, (iii) the exercise by the Committee of its discretion in respect of the exercise of stock appreciation rights pursuant to the terms of the 1997 Plan, and (iv) the treatment of leaves of absence pursuant to section 2.7(b). 3.10 Other Payments or Awards. Nothing contained in the 1997 Plan shall be deemed in any way to limit or restrict the Company, any Affiliate or the Committee from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. 3.11 Reorganization. (a) In the event that the Company is merged or consolidated with another corporation and, whether or not the Company shall be the surviving corporation, there shall be any change in the shares of Common Stock by reason of such merger or consolidation, or in the event that all or substantially all of the assets of the Company are acquired by another person, or in the event of a reorganization or liquidation of the Company (each such event being hereinafter referred to as a "Reorganization Event") or in the event that the Board shall propose that the Company enter into a Reorganization Event, then the Committee may in its discretion take any or all of the following actions: (i) by written notice to each grantee, provide that his options and/or stock appreciation rights will be terminated unless exercised within 30 days (or such longer period as the Committee shall determine in its sole discretion) after the date of such notice (without acceleration of the exercisability of such awards); and/or (ii) advance the dates upon which any or all outstanding options and/ or stock appreciation rights shall be exercisable. (b) Whenever deemed appropriate by the Committee, any action referred to in section 3.11(a) may be made conditional upon the consummation of the applicable Reorganization Event. 3.12 Section Headings. The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said sections. 3.13 Effective Date and Term of Plan. (a) This Plan shall be deemed adopted and become effective upon the approval thereof by the Board; provided that, notwithstanding any other provision of this Plan, no award made under the 1997 Plan shall be exercisable unless the 1997 Plan is approved, directly or indirectly, by (i) the express consent of stockholders holding at least a majority of the Company's voting stock voting in person or by proxy at a duly held stockholders' meeting, or (ii) the unanimous written consent of the stockholders of the Company, within 12 months before or after the date the 1997 Plan is adopted. (b) The 1997 Plan shall terminate 10 years after the earlier of the date on which it becomes effective or the date on which it is approved by shareholders, and no awards shall thereafter be made under the 1997 Plan. Notwithstanding the foregoing, all awards made under the 1997 Plan prior to such termination date shall remain in effect until such awards have been satisfied or terminated in accordance with the terms and provisions of the 1997 Plan. 3.14 Governing Law. This 1997 Plan shall be governed by the laws of the State of Tennessee applicable to agreements made and to be performed entirely within such State. -----END PRIVACY-ENHANCED MESSAGE-----