Exhibit 4.1
STOCK PURCHASE AND SUBSCRIPTION AGREEMENT
THIS STOCK PURCHASE AND SUBSCRIPTION AGREEMENT (the
"Agreement") is made and entered into as of the date set forth
below by and between Innovo Group Inc., a Delaware corporation
with its headquarters located at 0000 X. Xxxxxxx Xxxxxx, Xxxxx
000, Xxxxxxxx, XX 00000 (the "Company"), and (see Exhibit A),
whose principal address is (intentionally left blank) (the
"Subscriber").
WHEREAS:
A. The Company is offering for sale (see Exhibit A) shares
of the common stock, par value $.10 per share, of the Company
(the "Common Stock"), at a price of $2.65 per share, for an
aggregate purchase price of $2.65 (the "Purchase Price").
B. The Subscriber agrees to purchase of the shares of
Common Stock (the "Shares").
NOW THEREFORE, the Company and the Subscriber hereby agree
as follows:
1. PURCHASE AND SALE OF SHARES.
1.1. Purchase of Shares. Subject to the receipt of
payment therefor, the Company agrees to issue and sell to
Subscriber and Subscriber agrees to purchase from the Company at
closing (the "Closing") the Shares at a purchase price of $ (see
attachment) per Share for an aggregate price of $ (see
attachment) . The aggregate purchase price for the Shares is
referred to herein as the "Purchase Price."
1.2. Closing Date. The date of the Closing (the
"Closing Date") shall be within five (5) business days following
the date hereof or such later date as is mutually agreed to by
the Company and Subscriber. The Closing shall occur on the
Closing Date at the offices of the Company or at any other
mutually agreeable location.
1.3 Form of Payment. On the Closing Date, the
Subscriber shall pay the Purchase Price to the Company for the
Shares by check backed by good, available funds payable to the
Company or by wire transfer of immediately available funds in
accordance with the Company's written wire instructions. Within
14 days after the Closing Date, the Company shall deliver to
Subscriber certificates representing the Shares, duly executed on
behalf of the Company and registered in the name of Subscriber
(the "Certificates").
2. RESTRICTED SECURITIES; SUBSEQUENT REGISTRATION.
2.1 Restrictions on Transfer. The Shares are being
issued in a transaction that is exempt from registration under
Section 4(2) of the 1933 Act and Regulation D promulgated under
the 0000 Xxx. As a result, the Shares will constitute
"restricted securities" as that term is defined under the 1933
Act. From and after their respective dates of issuance, none of
the Shares shall be transferable except upon the conditions
specified in this Section 2 which are intended to ensure
compliance with the provisions of the 1933 Act in connection with
the transfer of any Shares or any interest therein.
Notwithstanding the above restriction, the Company consents to
(i) the pledge or hypothecation of the Shares by the Subscriber
to secure a loan or loans, (ii) the acquisition of such Shares by
the lender at foreclosure sale, and (iii) the exercise by the
lender, after acquiring ownership of the Shares through
foreclosure sale, of any of the rights granted the Subscriber in
Sections 2.5 and 2.6; provided, however, any sale of the Shares
by the lender to a third party, whether by foreclosure sale or
otherwise, shall be subject to the restrictions set forth in
Sections 2.1, 2.2 and 2.3 and any exercise by the lender of
Subscriber's rights under Sections 2.5 and 2.6 shall be subject
to all of the terms and conditions of Sections 2.5, 2.6 and 2.7.
2.2 Restrictive Legends. Subscriber understands that
the certificates representing the Shares shall bear a restrictive
legend in substantially the following form (and a stop transfer
order may be placed against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company
shall issue a certificate without such legend to the holder of
the Shares upon which it is stamped if, unless otherwise required
by state securities laws, (i) the sale of the Shares is
registered under the 1933 Act, (ii) in connection with a sale
transaction, such holder provides the Company with an opinion of
counsel, in a generally acceptable form, to the effect that a
public sale, assignment or transfer of the Shares may be made
without registration under the 1933 Act, or (iii) such holder
provides the Company with reasonable assurances that the Shares
may be sold pursuant to Rule 144 without any restriction as to
the number of securities acquired as of a particular date that
can then be immediately sold.
2.3 Notice of Proposed Transfers. Prior to any
proposed transfer of the Shares other than a transfer (i) subject
to an effective registration statement under the 1933 Act, (ii)
to an affiliate of the Subscriber which is an "accredited
investor" within the meaning of Rule 501(a) under the 1933 Act,
provided that any such transferee shall agree to be bound by the
terms of this Agreement, and (iii) to be made in reliance on Rule
144 under the 1933 Act, the holder thereof shall give written
notice to the Company of such holder's intention to effect such
transfer, setting forth the manner and circumstances of the
proposed transfer, which shall be accompanied by an opinion of
counsel to the Company, confirming that such transfer does not
give rise to a violation of the 1933 Act, satisfactory
representation letters in form and substance reasonably
satisfactory to the Company to ensure compliance with the
provisions of the 1933 Act and letters in form and substance
reasonably satisfactory to the Company from each such transferee
stating such transferee's agreement to be bound by the terms of
this Agreement. Such proposed transfer may be effected only if
the Company shall have received such notice of transfer, opinion
of counsel, representation letters and other letters referred to
in the immediately preceding sentence, whereupon the holder of
such Shares shall be entitled to transfer such Shares in
accordance with the terms of the notice delivered by the holder
to the Company.
2.4 Piggy-Back Registration Rights. If at any time
prior to the expiration of the Registration Period (as
hereinafter defined) the Company proposes to file with the SEC a
registration statement relating to an offering for its own
account or the account of others under any of the Securities Acts
of any of its securities (other than on Form S-4 or Form S-8 or
their then equivalents relating to securities to be issued solely
in connection with any acquisition of an entity or business or
equity securities issuable as compensation or in connection with
a stock option or other Employee Benefit Plan), the Company shall
promptly send to the Subscriber written notice of the Company's
intention to file a registration statement and of the
Subscriber's rights under this Section 2.4. If within 20 days
after receipt of such notice, the Subscriber shall so request in
writing, the Company shall include in the registration statement
all or any part of the Shares the Subscriber requests to be
registered, subject to the priorities set forth in this Section
2.4.
2.5 Demand Registration Rights. Upon demand by the
Subscriber made no sooner than 30 days after the Closing Date,
the Company will use its best efforts to file a registration
statement or to include Subscriber in an existing registration
statement for the offer and sale of the Shares by the Subscriber
under the 1933 Act. The registration statement will be filed,
amended or supplemented as soon as is reasonably practical
following such demand, but in no event later than 45 days after
such demand, unless delayed by the Subscriber. The Company shall
seek to have such registration statement declared effective or to
be effective as regards Subscriber's resales as soon after filing
as is reasonably practicable. In the event that all of the
Shares are not registered or sold under such registration
statement, the Subscriber will be entitled to demand that the
Company use its best efforts to file a second registration
statement for the offer and sale of such remaining Shares by the
Subscriber under the 1933 Act. The second demand shall be
subject to the same timetable as the initial demand.
2.6 Other Agreements Respecting Registration of
Shares. In connection with the filing of a registration
statement by the Company which covers any of the Shares, the
parties agree that:
(a) Unless the offering is an underwritten
offering, the Company will use its best efforts to maintain the
effectiveness of such registration statement for at least nine
months following the effective date thereof, and from time to
time will amend or supplement such registration statement during
such nine month period to the extent necessary to comply with the
1933 Act.
(b) As and when the Company files a registration
statement with respect to any of the Shares, the Subscriber and
the Company will execute an agreement to cross-indemnify one
another, and will agree to contribute to the aggregate losses,
claims, damages and liabilities to which they may become subject,
on terms and conditions standard in the industry and negotiated
by them in good faith, including, without limitation, standard
limitations on the indemnification of selling stockholders in a
secondary offering.
(c) Whenever the Company is registering the offer
and sale of any of the Shares, the Subscriber agrees to provide
to the Company or its attorneys, promptly upon request, such
information and materials regarding the Subscriber as shall be
reasonably requested in order to effect the registration of the
offer and sale of the Shares.
(d) The Company shall bear all reasonable costs
and expenses to be incurred in connection with any registration
statement covering any of the Shares, including printing costs,
the fees of the registrant's counsel and accountants, and SEC and
NASD filing fees; however, the Company shall not be responsible
for the fees and expenses of any counsel engaged by the
Subscriber, or any underwriter engaged by the Subscriber, and
shall not be responsible for the underwriters', brokers' or
dealers' commissions, fees, expenses, discounts or other
compensation attributable to the offer or sale of any of the
shares of the Subscriber.
(e) If the offering in connection with which the
Subscriber demands piggy-back registration rights is an
underwritten offering, then the Subscriber shall, unless
otherwise agreed by the Company, offer and sell such Shares in an
underwritten offering using the same underwriter or underwriters
and, subject to the provisions of this Agreement, on the same
terms and conditions as other shares of common stock included in
the underwritten offering. If the registration is to be an
underwritten public offering for the account of the Company and
the managing underwriter(s) advise the Company in writing, that
in their reasonable good faith opinion, marketing or other
factors dictate that a limitation on the number of shares of
common stock which may be included in the registration statement
is necessary to facilitate and not adversely affect the proposed
offering, then the Company shall include in such registration,
pro rata, up to the limitation imposed by the managing
underwriter(s): (i) first, up to the full amount of securities
the Company proposes to sell for its own account, (ii) second, up
to the full amount of securities proposed to be registered for
the account of the holders of securities entitled to inclusion of
their securities in the registration statement by reason of the
exercise of demand registration rights, and (iii) third, the
securities requested to be registered by other holders of
securities (including securities requested to be registered by
the Subscriber under this Section 2.5) pursuant to piggy-back
registration rights, pro rata based on the number of securities
requested to be included in the registration.
(f) The Company shall not be obligated to
register the offer and sale of any of the Shares if, at the time
of the demand or request for registration or at the time
thereafter up to the time of the filing of the registration
statement, there has been any default or breach by the Subscriber
in the terms of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER.
The Subscriber represents as follows:
3.1 Authority. The Subscriber has the full power and
authority to enter into this Agreement and has taken all action
or will use its best efforts to take all action, corporate and
otherwise, necessary to authorize the execution, delivery and
performance of this Agreement, the completion of the transaction
contemplated hereby and the execution and delivery by it of any
and all instruments necessary or appropriate in order to
effectuate fully the terms and conditions of this Agreement.
3.2 Consents. No consent or approval of any court,
governmental agency or other public authority, or of any other
person, corporation or entity with any actual or alleged interest
is required as a condition to (i) the validity or enforceability
of this Agreement or any other instruments to be executed by the
Subscriber to effectuate this Agreement, or (ii) the completion
or validity of any of the transactions contemplated by this
Agreement except as provided in section 2.1 above.. This
Agreement has been properly executed and delivered by the
Subscriber and constitutes a valid and legally binding agreement
which is enforceable against it in accordance with its terms.
3.3 Commissions. No fees or commissions are payable
by the Subscriber by virtue of or in connection with the
transaction contemplated by this Agreement.
3.4 Investment Intent. The Subscriber is purchasing
the Shares for its own account, with the intention of holding
such Shares for investment and not with the intention of
immediately participating, directly or indirectly, in any resale
or distribution of the Shares.
3.5 Company Materials. Subscriber has received and
carefully reviewed the Company's Annual Report on Form 10-K for
the year ended December 1, 2001, its Quarterly Reports on Form 10-
Q for the periods ended March 2, 2002, June 1, 2002, and August
31, 2002, its current Report on Form 8-K dated July 26, 2002, its
proxy statement as filed September 11, 2002, its Post-effective
Amendment Number 1 to Form S-1 on Form S-3 Registration Statement
and a statement of "Risk Factors" attached hereto as Schedule 3.5
(collectively, the "Company Materials"). The Company has
provided Subscriber and Subscriber's advisors with all materials
relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Shares and
other ongoing capital raising activities as have been requested
by Subscriber or Subscriber's advisors, and Subscriber and
Subscriber's advisors have had a reasonable opportunity to ask
questions of and receive answers from the Company concerning the
Company and the Shares, and all such questions, if any, have been
answered to the satisfaction of Subscriber and Subscriber's
advisors (such additional information and responses,
collectively, the "Additional Information"). Except as set forth
in the Disclosure Materials, no additional representations or
warranties have been made to Subscriber by the Company or any
agent, employee or affiliate of the Company, and Subscriber is
relying only on the Disclosure Materials and the Additional
Information in deciding to acquire the Shares. None of the
Additional Information contradicts the Disclosure Materials in
any material respect. Except as set forth in the Company
Materials and the representations and warranties set forth in
this Agreement, no representations or warranties have been made
to the Subscriber by the Company or any agent, employee or
affiliate of the Company, and the Subscriber has relied only on
the Company Materials and the results of its own investigation in
deciding to acquire the Shares and no information acquired from
the Subscriber's own investigation contradicts the Company
Materials in any material respect. The Subscriber understands
that its investment in the Shares is a speculative investment
which involves a high degree of risk and that the entire
investment in the Shares could be lost. In addition to its
review of the Company Materials, the Subscriber has sought such
accounting, legal and tax advice as it has considered necessary
to make an informed investment decision with respect to the
acquisition of the Shares.
3.6 Sophistication; Accredited Investor Status.
Subscriber personally, or together with Subscriber's duly
appointed and qualified Subscriber Representative, has such
knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of an investment in
the Shares and to protect Subscriber's interests in connection
with investment in the Shares. In addition, Subscriber is an
"accredited investor" as that term is defined in Rule 501(a) of
Regulation D ("Regulation D") as promulgated by the Securities
and Exchange Commission (the "SEC") because the indicated
alternative below applies (please initial as appropriate):
Subscriber is an individual who
has a net worth, including assets held jointly
with Subscriber's spouse, if appropriate, of not
less than $1,000,000.
Subscriber is an individual who
had individual income in excess of $200,000 in
each of the two most recent years or joint income
with that person's spouse in excess of $300,000
in each of those years and has a reasonable
expectation of reaching the same income level in
the current year.
Subscriber is a bank as defined in
Section 3(a)(2) of the Securities Act of 1933.
Subscriber is a savings and loan
association as defined in Section 3(a)(5)(A) of
the Securities Act of 1933.
Subscriber is an insurance company
as defined in Section 2(13) of the Securities Act
of 1933.
Subscriber is an investment
company registered under the Investment Company
Act of 1940.
Subscriber is a business
development company as defined in Section
2(a)(48) of the Investment Company Act of 1940.
Subscriber is a Small Business
Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or
(d) of the Small Business Investment Act of 1958.
Subscriber is an employee benefit
plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974,
and one of the following applies [check one]:
(a) the investment decision is being made
by a plan fiduciary, as defined in Section 3(21)
of such Act, which is either a bank, insurance
company or registered investment advisor, or (b)
Subscriber has total assets in excess of
$5,000,000, or (c) if a self-directed
plan, Subscriber's investment decisions are made
solely by accredited investors.
Subscriber is a private business
development company as defined in Section
202(a)(22) of the Investment Advisers Act of
1940.
Subscriber(a) has total assets in
excess of $5,000,000, and (b) was not formed for
the specific purpose of acquiring the Shares, and
(c) is one of [check one]: an
organization described in Section 501(c)(3) of
the Internal Revenue Code (tax exempt
organization), or a corporation, or
a Massachusetts or similar business trust, or
a partnership or limited liability company.
Subscriber(a) is a trust with
total assets in excess of $5,000,000, and (b) was
not formed for the specific purpose of acquiring
the Shares, and (c) Subscriber's purchases are
directed by a person who has such knowledge and
experience in financial and business matters that
he is capable of evaluating the merits and risks
of investment in the Company and the Shares.
If Subscriber must rely exclusively on the
following alternative, each equity owner of
Subscriber must complete a separate
Supplemental Questionnaire provided by the
Company.
If Subscriber is an entity, each
owner of an equity interest in
Subscriber is an accredited entity under one of
the alternatives listed above.
3.7 Reliance. The Subscriber understand that the
Shares are being issued to it in reliance on specific exemptions
from the registration requirements of federal and state
securities laws and that the Company is relying upon the truth
and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Subscriber set forth
herein in order to determine the applicability of such exemptions
and the suitability of the Subscriber to acquire the Shares. The
Subscriber further understands that the issuance of the Shares
will not have been the subject of a registration statement filed
under the 1933 Act, and as a result will be "restricted
securities" as that term is defined under the 1933 Act.
Accordingly, the Shares may not be resold, in whole or in part,
unless they are the subject of registration under the 1933 Act
and any applicable state securities laws, or there is available
an exemption from such registration. A legend, as set forth in
Section 2.2 of this Agreement, will be placed on any certificate
or certificates representing the Shares.
3.8 Reporting Requirements. The Subscriber
understands that it may become subject to the reporting
requirements under Section 13 of the Securities Exchange Act of
1934 ("xxx 0000 Xxx") and of Regulation 13(d) promulgated
thereunder if its "beneficial ownership" exceeds 5% of the
outstanding shares of common stock. The Subscriber understands
that it is responsible for determining what reports, if any, must
be filed by it under Section 13 of the 1934 Act, including, but
not limited to, Schedule 13D, and to obtain such legal or other
professional advice, at its cost and expense, as it may desire or
require, and to prepare or have prepared for it, at its cost and
expense, such report or reports as may be required of it under
Section 13. The Subscriber understands that the Company assumes
no responsibility for the reporting by the Subscriber under
Section 13; provided, however, that merely as an accommodation,
and without assuming any responsibility for Section 13 reporting
by the Subscriber, the Company will, with respect to any report
which must be filed through the Securities and Exchange
Commission Electronic Data Gathering and Retrieval ("XXXXX")
system, upon the receipt from the Subscriber of such report
prepared in WordPerfect 6.1 or a computer word processing
language convertible into WordPerfect 6.1 together with such
identifying codes or passwords as may be required, convert any
such report to the language required for reports filed through
the XXXXX system and transmit such report to the XXXXX system.
3.9 No Governmental Review. The Subscriber
understands that no federal or state agency or any other
government or governmental authority has reviewed, approved or
made any recommendation or endorsement of the Shares or the
fairness or suitability of the investment in the Shares, nor has
any such authority passed upon or endorsed the merits of the
offering of the Shares.
3.10 Own Funds. The Subscriber represents that the
funds paid for its investment in the Shares will be the
Subscriber's own funds and the Shares are being acquired solely
for the Subscriber's own account.
3.11 No General Solicitation. The Subscriber has at no
time been solicited with respect to investment in the Shares by
any public promotional meeting, or newspaper, magazine, radio, or
television advertisement, or any other form of general
solicitation or general advertising.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents as follows:
4.1 Compliance with Reporting Requirements. The
Company is a reporting company under the 1934 Act. The Company
is in full compliance, to the extent applicable, with all
reporting obligations under either Section 13(a) or 15(d) of the
1934 Act. Common Stock of the Company is registered pursuant to
Section 12 of the Exchange Act and such stock is traded on the
NASDAQ Small Cap Market.
4.2 Authorization of Shares. Upon issuance hereunder,
the Shares will be duly authorized, validly issued, fully paid
and non-assessable.
4.3 Corporate Standing. The Company is a corporation
duly organized, validly existing, and in good standing under the
laws of the State of Delaware, and has full power and authority
to enter into this Agreement and to carry out the transactions
contemplated hereby. The Company has full power and authority to
carry on its business as it is now being conducted and to own its
assets. The Company is duly qualified to transact business and
is in good standing as a foreign corporation in each jurisdiction
where the nature of its business requires it to be so qualified
and where the failure so to qualify would have a material adverse
affect on the business of the Company. The execution, delivery
and performance of this Agreement by the Company does not, and
the consummation of the transactions contemplated hereby will not
(i) violate or result in a breach of any provisions of the
Company's Articles of Incorporation or Bylaws, (ii) conflict
with, or result in a breach or termination of, or constitute a
default under, any material lease, agreement, commitment or other
instrument, or any material order, judgment or decree, to which
the Company is a party or is bound or by which the Company's
assets are affected, or (iii) constitute a violation of any law,
regulation, rule or ordinance applicable to the Company.
4.4 Authorized and Outstanding Shares. The authorized
capital stock of the Company is 40 million shares of common
stock. As of the date hereof, there are approximately 14,901,264
shares outstanding, and there are warrants outstanding for the
purchase of approximately 832,484 shares of common stock. Except
as set forth in this Agreement or as disclosed in the Company
Materials, there is not outstanding, nor is the Company bound by,
any subscriptions, options, preemptive rights, warrants, calls,
commitments, synthetic stock, or agreements or rights of any
character requiring the Company to issue, or entitling any person
or entity to acquire, any additional shares of capital stock or
any other equity security of the Company, including any right of
conversion or exchange under any outstanding security or other
instrument, and the Company is not obligated to issue or transfer
any shares of its capital stock for any purpose. There are not
outstanding obligations of the Company to repurchase, redeem or
otherwise acquire any outstanding shares of capital stock of the
Company.
4.5 Authority. The Company has full power and
authority to enter into this Agreement and has taken all action,
corporate and otherwise, necessary to authorize (i) the
execution, delivery and performance of this Agreement and all
ancillary agreements to be executed, delivered and performed by
the Company in connection therewith, and (ii) the completion of
the transaction contemplated hereby and the execution and
delivery on behalf of the Company of any and all instruments
necessary or appropriate in order to effectuate fully the terms
and conditions of this Agreement and all ancillary agreements to
be executed, delivered and performed by the Company in connection
therewith. Upon delivery of the Shares, and the payment
therefor, title to the Shares will pass to the Subscriber free
and clear of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever except for the
restrictions set forth in Section 2 of this Agreement and the
obligations of the Subscriber hereunder.
4.6 No Governmental Consents. No consent or approval
of any court, governmental agency or other public authority, or
of any other person, corporation or entity with any actual or
alleged interest in the Company is required as a condition to (i)
the validity or enforceability of this Agreement or of any other
instruments to be executed by the Company to effectuate this
Agreement, or (ii) the completion or validity of any of the
transactions contemplated by this Agreement. This Agreement and
all ancillary agreements to be executed, delivered and performed
by the Company in connection therewith, have been properly
executed and delivered by the duly authorized officer of the
Company, and constitute valid and legally binding obligations of
the Company and are enforceable against the Company in accordance
with their terms.
4.7 No Misrepresentations in Company Materials.
(a) The disclosures in the Company Materials do
not fail to disclose any material fact, the disclosure of which
would be necessary to make the required statements contained
therein not misleading in the light of the circumstances under
which they are disclosed. Except as disclosed in the Company
Materials, there has been no material adverse change in, material
loss or destruction of, or material amount of damage to the
financial condition or business of the Company, whether or not
arising from transactions in the ordinary course of business.
The financial statements contained in the Company Materials
present fairly the financial condition of the Company as of the
respective dates and have been prepared in accordance with
generally accepted accounting principles applied on a consistent
basis throughout the periods involved. The Company has no
liabilities or obligations, whether accrued, absolute, contingent
or otherwise, which would materially and adversely affect the
financial condition of the Company, except and to the extent
recorded or disclosed in the Company Materials. No dividends are
due or unpaid by the Company.
(b) Except as set forth in the Company Materials,
there are no actions at law or in equity, proceedings,
governmental proceedings or investigations pending or threatened
against the Company or against or with respect to the business or
assets of the Company, and the Company is not in material default
with respect to any decree, injunction or other order of any
court or government authority. The Company is in substantial
compliance with all (and has not received any notice of any
claimed violation of any) applicable federal, state, county or
municipal laws, ordinances, and regulations. There is no action
at law or in equity, arbitration proceeding, governmental
proceeding or investigation, or motion or request to any court,
pending or threatened, against or with respect to the Company
with respect to this Agreement or the transaction contemplated
hereby and to the knowledge of the Company, no grounds exist for
any such action, proceeding or investigation.
(c) Except as set forth in the Company Materials,
to the best knowledge of the Company, there are no facts,
developments or circumstances, existing or threatened, that are
materially adverse to the assets, business, financial condition
or future prospects of the Company.
4.8 No Commissions. No fees or commissions are
payable by the Company by virtue or in connection with the
transaction contemplated by this Agreement.
5. CONDITIONS TO THE OBLIGATION TO PURCHASE AND SELL.
5.1 Conditions to the Subscriber's Obligation. The
obligation of the Subscriber hereunder to purchase the Shares at
the Closing is subject to the representations and warranties of
the Company being true and correct in all material respects as of
the date of this Agreement and as of the Closing Date as though
made at that time.
5.2 Conditions to the Company's Obligation. The
obligation of the Company hereunder to sell the Shares at the
Closing is subject to the representations and warranties of the
Subscriber being true and correct in all material respects as of
the date of this Agreement and as of the Closing Date as though
made at that time.
6. GOVERNING LAW; MISCELLANEOUS.
6.1. Governing Law; Arbitration. This Agreement shall
be governed by and interpreted in accordance with the laws of the
State of California applicable to agreements made and delivered
within that state and without regard to any contrary "conflict of
laws" principles. Any dispute or controversy between the parties
arising in connection with this Agreement or the subject matter
contemplated by this Agreement shall be resolved by arbitration
before a three-member panel of the American Arbitration
Association in accordance with the commercial arbitration rules
of said forum and the Federal Arbitration Act, 9 U.S.C. 1, et
seq., with the resulting award being final and conclusive. Said
arbitrators shall be empowered to award all forms of relief and
damaged claimed, including, but not limited to, attorney's fees,
expenses of litigation and arbitration, exemplary damages, and
prejudgment interest. Notwithstanding the foregoing, the
Subscriber may at any time and at its option, whether or not an
arbitration action is then pending, initiate a civil action for
temporary and permanent injunctive and other equitable relief
against the Company. The parties further agree that any
arbitration action between them shall be heard in Nashville,
Tennessee, and expressly consent to the jurisdiction and venue of
the United States District Court for the Middle District of
Tennessee, Nashville Division, for the adjudication of any civil
action asserted pursuant to this section.
6.2. Counterparts. This Agreement may be executed in
two or more identical counterparts, all of which shall be
considered one and the same agreement and shall become effective
when counterparts have been signed by each party and delivered to
the other party. In the event any signature page is delivered by
facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages
to be physically delivered to the other party within five (5)
days of the execution and delivery hereof.
6.3 Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement.
6.4 Severability. If any provision of this Agreement
shall be invalid or unenforceable in any jurisdiction, such
invalidity or unenforceability shall not affect the validity or
enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision
of this Agreement in any other jurisdiction.
6.5 Entire Agreement; Amendments. This Agreement
supersedes all other prior oral or written agreements between the
Subscriber, the Company, their affiliates and persons acting on
their behalf with respect to the matters discussed herein, and
this Agreement and the instruments referenced herein contain the
entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Subscriber makes
any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be
waived or amended other than by an instrument in writing signed
by the party to be charged with enforcement.
6.6 Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms
of this Agreement must be in writing and will be deemed to have
been delivered (i) upon receipt, when delivered personally; (ii)
upon receipt, when sent by facsimile, provided a copy is mailed
by U.S. certified mail, return receipt requested; (iii) three (3)
days after being sent by U.S. certified mail, return receipt
requested; or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Subscriber: The Purchasers listed on
Exhibit A attached hereto
If to the Company: Xxx Xxxxxx
Innovo Group Inc.
0000 X. Xxxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxx, XX 000000000
Telephone: (000) 000-0000
Facsimile: (323)
With a copy to: Xxxxxxx X. Xxxxx, Esq.
Xxxx Xxxx Xxxxx & Xxxxx LLP
Xxxxx Xxxxxxx Xxxxx, Xxxxx 0000
Xxxxxxx, Xxxxxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Either party to this Agreement may change the addressee, address,
and telephone and facsimile numbers to which notices hereunder
shall be sent by giving the other party written notice, as
provided herein, of the new addressee, address, telephone number
or facsimile number, as the case may be.
6.7 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their
respective successors and assigns; provided, however, the
Subscriber may not assign its rights hereunder without the
consent of the Company.
6.8 No Third Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any
other person.
6.9 Survival. The representations and warranties of
the Company and the Subscriber shall survive the Closing.
6.10 Publicity. The Company and the Subscriber shall
have the right to review and approve any press releases or any
other public statements with respect to the transactions
contemplated hereby in advance of their release; provided,
however, that the Company shall be entitled, without the prior
approval of the Subscriber, to make any press release or other
public disclosure with respect to such transactions as is
required by applicable law and regulations.
6.11 Further Assurances. Each party shall do and
perform, or cause to be done and performed, all such further acts
and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.
6.12 Termination. In the event that the Closing shall
not have occurred on or before the Closing Date due to the
failure of any of the conditions to Closing, either party shall
have the right to terminate this Agreement on or after the close
of business on such date without any party having liability to
any other party.
6.13 Finder. Neither the Company nor the Subscriber
has retained any broker or finder or will owe any fees relating
to or arising out of the transactions contemplated hereby.
6.14 No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties
to express its mutual intent, and no rules of strict construction
will be applied against any party.
6.15 Stock Split or Reverse Stock Split. In the event
that the Shares are subject to a stock split or a reverse stock
split, the number of Shares and the per share price shall be
adjusted in proportion to the stock split or reverse stock split
ratio, but the aggregate Purchase Price shall remain unchanged.
6.16 Governing Law. The terms of this Agreement and
interpretation thereof shall be governed by the laws of the State
of California, without reference to conflicts of law principles.
[SIGNATURES ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the Company and the Subscriber have
caused this Stock Sale Agreement to be duly executed as of (see
Exhibit A attached hereto).
COMPANY:
Innovo Group Inc.
By:/s/ Xxx Xxxxxx
--------------
Xxx Xxxxxx, CEO
SUBSCRIBER:
The Purchasers listed on
Exhibit A attached hereto
SCHEDULE 3.5
RISK FACTORS
In addition to other information provided to the Subscriber,
the Subscriber should carefully consider the following factors in
evaluating the Company and its business in evaluating the shares
the Subscriber will receive.
Risks Associated with the Company's Past Financial Results
The Company Could Be Required to Cut Back or Stop Operations If
It Is Unable to Raise or Obtain Needed Funding
The Company's ability to continue operations will depend on
its positive cash flow, if any, from future operations and on its
ability to raise additional funds through equity or debt
financing. The Company does not know if it will be able to raise
additional funding or if such funding will be available on
favorable terms. The Company could be required to cut back or
stop operations if it is unable to raise or obtain needed
funding.
The Company's cash requirements to run its business have
been and will continue to be significant. Since 1997, the
Company's negative operating cash flow and losses from continuing
operations have been as follows:
Negative Cash Flow
from Operating Losses from
Activities of Continuing
Fiscal year ended: Continuing Operations Operations
December 1, 2001 $ 632,000 $ 618,000
November 30,2000 $4,598,000 $5,056,000
November 30,1999 $2,124,000 $1,340,000
November 30,1998 $1,238,000 $2,267,000
November 30,1997 $1,339,000 $1,729,000
As of August 31, 2002, the Company had an accumulated
deficit of approximately $33.5 million. The Company continued to
generate losses through the first quarter of fiscal 2002 before a
net profit of $207,000 for the second quarter and $820,000 for
the third quarter of fiscal 2002, respectively. Although the
Company has undertaken numerous measures to increase sales and
operate more efficiently, the Company may experience further
losses and negative cash flows. The Company can give you no
assurance that it will in fact operate profitably in the future.
Risks Associated with the Company's Business
The Company Must Expand Sales of Its Existing Products and
Successfully Introduce New Products to Increase Revenues and
Attain Profitability
The Company's success will depend on its ability to expand
sales of its current products to new and existing customers, as
well as the development or acquisition of new product designs and
the acquisition of new licenses. The Company has little control
over the demand for its existing products, and it cannot assure
you that the new products it introduces will achieve acceptance.
Failure to expand sales of existing products and new products
would significantly and negatively affect the Company's ability
to achieve sustained profitability.
The Loss of One Major Customer Would Substantially Reduce
Revenues and the Potential for Profitable Operations
For fiscal 2001, three customers accounted for aggregate
sales in excess of 36.1% of gross sales: Wal-Mart, Michael's and
Joannes accounted for 26.4%, 4.3% and 5.4%, respectively. Wal-
Mart has continued to be a major customer for the company and the
loss of Wal-Mart as a customer would have a material adverse
effect on the company.
The Company is Dependent on Certain Contractual
Relationships to Generate Revenues
The Company's sales are dependent to some degree upon the
contractual relationships it can establish with licensors to
exploit, on a generally non-exclusive basis, proprietary rights
in well known logos, marks and characters. Although the Company
believes it will continue to meet all of its material obligations
under such license agreements, there can be no assurance that
such licensing rights will continue or will be available for
renewal on favorable terms. Failure to obtain new licenses or
extensions on current licenses or to sell such products, for any
reason, could have a significant negative impact on the Company's
business.
The Company is Currently Dependent on Supply and
Distribution Arrangements to Generate a Substantial Portion of
Its Revenues
During 2000, the Company entered into arrangements with
Commerce Investment Group, LLC, and affiliated entities
(collectively, the "Commerce Group"). Under the terms of the
arrangements, the Commerce Group purchased equity securities of
the Company and the Company became obligated to manufacture and
distribute all of its craft products with the Commerce Group for
a two-year period. Those arrangements, which renewed
automatically for an additional two-year term but without minimum
purchase obligations, could adversely affect the Company's
ability to obtain distribution and manufacturing services at the
lowest available cost in the future.
The Seasonal Nature of the Company's Business Makes
Management More Difficult, Severely Reduces Cash Flow and
Liquidity During Parts of the Year and Could Force the Company to
Curtail Operations
The Company's business is seasonal. The majority of its
marketing and sales activities take place from late fall to early
spring. The Company's greatest volume of shipments and sales
occur from late spring through the summer, which coincides with
the Company's second and third fiscal quarters. The Company's
cash flow is strongest in the third and fourth fiscal quarters.
Unfavorable economic conditions affecting retailers during the
fall and holiday seasons in any year could have a material
adverse effect on its results of operations for the year. The
Company is likely to experience periods of negative cash flow
throughout each year and a drop-off in business commencing each
December, which could force the company to curtail operations if
adequate liquidity is not available. The Company cannot assure
you that the effects of such seasonality will diminish in the
future.
The Company has a Large Number of Competitors With
Substantially Greater Financial, Technical and Other Resources
than We Do
The industry in which the Company operates is fragmented and
highly competitive. The Company competes against a large number
of manufacturers, importers, and other companies that distribute
products similar to the company's. Some of the Company's
competitors possess substantially greater financial, technical
and other resources than we do, including the ability to
implement more extensive marketing campaigns. The Company does
not hold a dominant competitive position in any market, and its
ability to sell its products is dependent upon the anticipated
popularity of its designs, the logos or characters its products
bear, the price and quality of its products and its ability to
meet its customers' delivery schedules.
Risks Associated with the Company's Securities
The Company Does Not Anticipate Paying Any Dividends on the
Common Stock
The Company has not paid any dividends nor does it
anticipate paying any dividends on the common stock in the
foreseeable future. The Company's operating subsidiaries are
currently restricted as to the payment of dividends to the
Company. It is also the Company's present policy to retain
earnings, if any, for the use in the development and expansion of
the company's business.
The Company Has a Substantial Number of Authorized Preferred
and Common Shares Available for Future Issuances that Could Cause
Dilution of Stockholder Interests
The Company has a total of 40,000,000 authorized shares of
common stock and 5,000,000 authorized shares of "blank check"
preferred stock. The Company expects to seek financing which
could result in the issuance of additional shares of its capital
stock and/or rights to acquire additional shares of its capital
stock. Those additional issuances of capital stock would result
in a reduction of your percentage interest in the Company.
Furthermore, the book value per share of common stock may be
reduced. This reduction would occur if the exercise price of the
options or warrants or the conversion ratio of the preferred
stock were lower than the book value per share of common stock at
the time of such exercise or conversion.
The addition of a substantial number of shares of common
stock, into the market or by the registration of any other of the
Company's securities under the Securities Act may significantly
and negatively affect the prevailing market price for the common
stock. The future sales of shares of common stock issuable upon
the exercise of outstanding warrants and options may have a
depressive effect on the market price of the common stock, as
such warrants and options would be more likely to be exercised at
a time when the price of the common stock is in excess of the
applicable exercise price.
The Company's board of directors has the power to establish the
dividend rates, preferential payments on any liquidation, voting
rights, redemption and conversion terms and privileges for any
series of preferred stock. The sale or issuance of any shares of
preferred stock having rights superior to those of the common
stock may result in a decrease in the value or market price of
the common stock. The issuance of preferred stock could have the
effect of delaying deferring or preventing a change of ownership
without further vote or action by the stockholders and may
adversely affect the voting and other rights of the holders of
common stock.
The Company is Controlled by Its Management and Other
Related Parties
The Company's executive officers, directors and their
affiliates as of February 20, 2002 beneficially owned or had the
right to acquire voting control over approximately 40% of the
common stock. In addition, two investor groups who have the
contractual rights to designate persons to be elected as
directors beneficially owned or had the right to acquire voting
control over approximately 37% (the Commerce Group) and 17% of
the company's common stock.
Because of their stock ownership and/or positions with the
company, these persons have been and will continue to be in a
position to greatly influence the election of directors and thus
control the affairs of the company. Additionally, the Company's
by-laws limit the ability of stockholders to call a meeting of
the stockholders. These by-law provisions could have the effect
of discouraging a takeover of the Company, and therefore may
adversely affect the market price and liquidity of the Company's
securities. The Company is also subject to a Delaware statute
regulating business combinations that may hinder or delay a
change in control of the company. The anti-takeover provisions of
the Delaware statute may adversely affect the market price and
liquidity of the company's securities.
The Company Stock Price Is Extremely Volatile and May
Decrease Rapidly
The trading price and volume of the Company's common stock
has historically been subject to wide fluctuation in response to
variations in actual or anticipated operating results,
announcements of new products or technological innovations by the
company or its competitors, and general conditions in the
company's industries. In addition, stock markets generally have
experienced extreme price and volume trading volatility in recent
years. This volatility has had a substantial effect on the market
prices of securities of many companies for reasons frequently
unrelated to the operating performance of the specific companies.
These broad market fluctuations may significantly and negatively
affect the market price of the Company's common stock.
There are a total of approximately 18 million shares that
may be sold in the Nasdaq SmallCap Market by selling stockholders
pursuant to registration statements filed by the Company. Sales
of those shares could also adversely affect the Company's stock
price.
If the Company Cannot Meet the Nasdaq SmallCap Market
Maintenance Requirements and Nasdaq Rules, Nasdaq May Delist the
Common Stock Which Could Negatively Affect the Price of the
Common Stock and Your Ability to Sell the Common Stock
In the future, the Company may not be able to meet the
listing maintenance requirements of the Nasdaq SmallCap Market
and Nasdaq rules, which require, among other things, minimum net
tangible assets of $2 million, a minimum bid price for the
company's common stock of $1.00, and stockholder approval prior
to the issuance of securities in connection with a transaction
involving the sale or issuance of common stock equal to 20
percent or more of a company's outstanding common stock before
the issuance for less than the greater of book or market value of
the stock. If the Company is unable to satisfy the Nasdaq
criteria for maintaining listing, the common stock would be
subject to delisting. Trading, if any, of the common stock would
thereafter be conducted in the over-the-counter market, in the so-
called "pink sheets" or on the National Association of Securities
Dealers, Inc. ("NASD") "electronic bulletin board." As a
consequence of any such delisting, a stockholder would likely
find it more difficult to dispose of, or to obtain accurate
quotations as to the prices, of the common stock.
If Nasdaq Delists the Company's Common Stock You Would Need
to Comply with the Xxxxx Stock Regulations Which Could Make it
More Difficult to Sell Your Common Stock
In the event that the Company's securities are not listed on
the SmallCap, trading of the common stock would be conducted in
the "pink sheets" or through the NASD's Electronic Bulletin Board
and covered by Rule 15g-9 under the Securities Exchange Act of
1934. Under such rule, broker/dealers who recommend these
securities to persons other than established customers and
accredited investors must make a special written suitability
determination for the Subscriber and receive the Subscriber's
written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per
share.
The Securities and Exchange Commission adopted regulations
that generally define a xxxxx stock as any equity security that
has a market price of less than $5.00 per share, with certain
exceptions. Unless an exception is available, the regulations
require the delivery, prior to any transaction involving a xxxxx
stock, of a disclosure schedule explaining the xxxxx stock market
and the risks associated with it. If the Company's common stock
were considered a xxxxx stock, the ability of broker/dealers to
sell the common stock and the ability of Subscribers in this
offering to sell their securities in the secondary market would
be limited. As a result, the market liquidity for the common
stock would be severely and adversely affected. The Company
cannot assure you that trading in its securities will not be
subject to these or other regulations in the future which would
negatively affect the market for such securities.
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table (including the notes thereto sets forth
a summary of selected consolidated financial information for the
Company. This summary of selected consolidated financial data is
derived from and qualified in its entirety by reference to the
consolidated financial statements and the notes thereto and
should be read in conjunction therewith, as well as in
conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing in the
Company's Annual Report on Form 10-K and Quarterly Report on Form
10-Q which constitute exhibits hereto. Results of Operations for
interim periods are not necessarily indicative of results to be
expected for the full year.
Years Ended
12/01/01 11/30/00 11/30/99 11/30/98 11/30/97
-------- -------- -------- -------- --------
(000's except per share data)
Net Sales $9,292 $5,767 $10,837 $6,790 $7,901
Costs of Goods Sold 6,333 5,195 6,252 4,493 5,303
------ ------ ------ ----- -----
Gross Profit 3,022 572 4,585 2,297 2,598
Operating Expenses 3,358 5,113 5,688 4,203 4,007
(3) ------ ------ ------ ------ -----
Loss from Operations (399) (4,541) (1,103) (1,906) (1,409)
Interest Expense (211) (446) (517) (503) (657)
Other Income (Expense) 81 (69) 280 142 337
----- ----- ------ ------ -----
Loss Before Income (529) (5,056) (1,340) (2,267) (1,729)
Taxes
Income Taxes 89 0 0 0 0
----- ----- ------ ------ -----
Loss from Continuing (618) (5,056) (1,340) (2,267) (1,729)
Operations
Discontinued
Operations(1) 0 0 (1) (1,747) (110)
Extraordinary Item(2) 0 (1,095) 0 0 524
----- ----- ------ ------ -----
Net Loss (618) $(6,151) $(1,341) $(4,014) $(1,315)
----- ----- ------ ------ -----
Loss per share from $(0.04) $ (0.62) $ (0.22) $ (0.49) $(0.50)
Continuing Operations
(basic and diluted)
Weighted Average 14,315 8,163 5,984 4,618 3,438
Shares Outstanding
Balance Sheet Data:
Total Assets $10,247 $7,416 $6,222 $7,232 $9,168
Long-Term Debt 4,225 1,340 2,054 2,604 2,065
Stockholders' Equity 4,519 3,758 1,730 1,722 3,791
(1) The amounts for 1998 and 1997 represent the operations of
Thimble Square. Thimble Square's operations were discontinued
during the fourth fiscal quarter of 1998.
(2) Represents gains from the early extinguishment of debt in
1997 and the loss from the early extinguishments of debt in 2000.
(3) Amount includes a $300,000 write down of long-term assets in
1998 and a $145,000 write down of long-term assets in 1999 as
well as $293,000 for the termination of a capital lease and
$100,000 for the settlement of a lawsuit in 1999, and a $600,000
write down of long-term assets in 2000.
Exhibit A
Subscriber Number of Total Date
Shares
Purchased
X. Xxxxxxxx 10,000 $26,500 March 19,
Xxxxxxxxxx INDV 2003
Xxxx Xxxxxxx INDV 10,000 $26,500 March 19,
2003
Bank of TN FBO 22,000 $58,300 March 19,
X.X. Xxxxxx 2003
Xxxxxxx X. 10,000 $26,500 March 19,
Xxxxxxx INDV 2003
Xxxxx Xxxxxxx 10,000 $26,500 March 19,
INDV 2003
Xxxx Xxxxxxxxx 15,000 $39,750 March 19,
INDV 0000
Xxxxxx X. Xxxx 10,000 $26,500 March 19,
Family Trust 2003
Xxxxxxx Xxxxxx 20,000 $53,000 March 19,
IND 2003
Xxxxx X. Xxxxxxxx 10,000 $26,500 March 19,
XXX 2003
Xxxxxx & Xxxxxx 5,000 $13,250 March 19,
Xxxxxx XX 2003
Xxxx Xxxx Family 2,000 $5,300 Xxxxx 00,
Xxxxx 0000
Xxxxxxx Xxxxxx 6,000 $15,900 March 19,
INDV 2003
Xxx X. Xxxxxx 5,000 $13,250 March 19,
INDV 2003
Xxxxxxxx Xxxxxxx 5,000 $13,250 March 19,
INDV 2003
Xxx & Xxxxxxx 5,000 $13,250 March 19,
Xxxxx XX 2003
Xxxx Xxxxxxxxxx 10,000 $26,500 March 19,
2003
Inwood Trust 10,000 $26,500 Xxxxx 00,
0000
Xxxxxxxxxxxxxxxx 10,000 $26,500 March 26,
& Associates MPPP 2003
FBO X. Xxxxxxx
Xxxx, Xxxxxxx & 20,000 $53,000 March 26,
Xxxxx PSP FBO J. 2003
Xxxxxxx
Xxxxxx Psmier 20,000 $53,000 March 26,
INDV 2003
Xxxxx Xxxxxx INDV 9,000 $23,850 March 26,
2003
Xxxxxxx X. Xxxx 4,500 $11,925 March 26,
2003
