STOCK PURCHASE AGREEMENT
by and between
X.X. Xxxxx, Xxx Xxxx, J. Xxxx Xxxxxxxxxxx and Xxxx Xxxxxx
and
Innovo Group Inc.
and
Xxxxxxxx Xxxxxxxx-Xxxxx
August 13, 1997
Stock Purchase Agreement
Contents
Section Page
Introduction 1
Recitals 1
1 Closing 1
2 Basic Transaction 1
3 Restricted Securities; Subsequent Registration 2
4 Representations and Warranties of the Purchasers5
5 Representations and Warranties of the Company 7
6 Representations and Warranties of Xxxxxxxx 9
7 Board of Directors of the Company 10
8 Indemnification of Xxxxxxxx 10
9 Closing 11
10 Miscellaneous 12
Exhibit Page
2.3A Employment Contract of X.X. Xxxxx A-1
2.3B Employment Contract of Xxx Xxxx B-1
2.3C Employment Contract of J. Xxxx Xxxxxxxxxxx C-1
2.3D Employment Contract of Xxxxxxxx Xxxxxxxx-Xxxxx D-1
Exhibit Page
2.3E Employment Contract of Xxxxxxxxx Xxxxxx E-1
2.4 Extension and Modification of DWL Loan F-1
2.5 Common Stock Resale Agreement between X.X. Xxxxx,
Xxx Xxxx, J. Xxxx Xxxxxxxxxxx and Innovo Group
Inc. and Xxxxxxxx Xxxxxxxx-Xxxxx G-1
2.6 Opinion of Counsel to Xxxxxxxx and the CompanyH-1
4.5 Risk Factors I-1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made this
13th day of August, 1997 by and among X.X. Xxxxx ("Xxxxx"), Xxx
Xxxx ("Page"), J. Xxxx Xxxxxxxxxxx ("Xxxxxxxxxxx") and Xxxx
Xxxxxx ("Xxxxxx") (collectively, the "Purchasers") and Innovo
Group Inc. (the "Company") and
Xxxxxxxx Xxxxxxxx-Xxxxx ("Xxxxxxxx").
WHEREAS, the Purchasers wish to purchase certain shares of
the common stock, par value $.01 per share ("common stock") of
the Company (the "Shares") and wish to become members of the
management and Board of Directors of the Company and;
WHEREAS, the Purchasers wish to obtain certain voting rights
with respect to certain shares of common stock owned by Xxxxxxxx,
certain rights of first refusal for themselves and the Company
with respect to certain shares of common stock owned by Xxxxxxxx,
and certain limitations on the resale, by Xxxxxxxx, of certain
shares of common stock owned by her; and
WHEREAS, the Company is agreeable to the purchase of the
Shares by the Purchasers and to having Xxxxx, Xxxx, Xxxxxxxxxxx
and Xxxxxx become members of the management and Board of
Directors of the Company on the terms and conditions described
herein; and
WHEREAS, Anderson, in order to induce Xxxxx, Xxxx,
Xxxxxxxxxxx and Xxxxxx to purchase the Shares, is willing to
grant to Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx certain voting
rights with respect to certain shares of common stock owned by
her, is willing to grant to Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx
and the Company certain rights of first refusal with respect to
certain shares of common stock owned by her, and is willing to
grant certain limitations on the resale of certain shares of
common stock owned by her on the terms and conditions described
herein;
NOW, THEREFORE, in consideration of the mutual agreements
set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Xxxxx,
Xxxx, Xxxxxxxxxxx and Xxxxxx, the Company and Xxxxxxxx hereby
agree as follows:
Agreement
1. Closing. The Closing of the transaction contemplated
by this Agreement shall take place upon the execution hereof at
the offices of the Company or at such other time and place as the
parties may agree to in writing (the "Closing Date").
2. Basic Transaction.
2.1 Purchase of Shares. At the Closing, the Company
shall sell, and the Purchasers shall purchase, 6,750,000 shares
of common stock for an aggregate purchase price of $1,350,000.
The Purchasers shall deliver payment to the Company in the form
of immediately available funds through wire transfer or cashier's
check, or in such other form of payment as the Company may agree
to. Simultaneously therewith, the Company shall deliver to
Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx certificate(s) for the
Shares, bearing the restrictive legend set forth in Section 3 of
this Agreement, issued in the names of Xxxxx, Xxxx, Xxxxxxxxxxx
and Xxxxxx in such share amounts (totaling 1,350,000 shares) as
Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx may instruct the Company.
2.2 Board of Directors of the Company. As of the
Closing, the composition of the Company's board of directors
shall be changed as set forth in Section 6 of this Agreement.
The Board of Directors of the Company, as reconstituted pursuant
to Section 6 of this Agreement, hereby agrees to nominate Xxxxx,
Xxxx, Xxxxxxxxxxx and Xxxxxx director nominees, together with the
remaining existing directors of the Company, to be elected at
the next scheduled annual meeting of the stockholders of the
Company. The policy of the Company as described in Section 6.4
of this Agreement shall not prohibit Xxxxx, Xxxx, Xxxxxxxxxxx and
Xxxxxx from voting to nominate the director nominees of the
Company described in this Section 2.2.
2.3 Employment Contracts. At the Closing, the Company
shall enter into the employment contracts with each of Xxxxx,
Xxxx, Xxxxxxxxxxx and Xxxxxx, Xxxxxxxx and Xxxxxxxxx Xxxxxx
("Xxxxxx") in the form set forth in Exhibits 2.3 A, B, C, D and
E, respectively, to this Agreement.
2.4 Extension and Modification of DWL Loan. Prior to
the Closing, the Company shall have received from DWL
International the extension and modification of the loan to NP
International, Inc. from DWL (the "DWL loan") set forth as
Exhibit 2.4 to this Agreement.
2.5 Resale Limitation and Rights of First Refusal on
Xxxxxxxx Shares. At the Closing, Xxxxx, Xxxx, Xxxxxxxxxxx and
Xxxxxx and the Company and Xxxxxxxx will execute the agreement
(the "Common Stock Agreement") set forth as Exhibit 2.5 to this
Agreement.
2.6 At the Closing, counsel for Xxxxxxxx and the
Company shall deliver an opinion substantially in the form
attached as Exhibit 2.6 to this Agreement.
3. Restricted Securities; Subsequent Registration.
3.1 Restrictions on Transfer. The Shares are being
issued in a transaction that is exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act") and Regulation D promulgated under the Act. 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 3, which
conditions are intended to ensure compliance with the provisions
of the 1933 Act in respect of the transfer of any of such Shares
or any interest therein. The Purchasers will require any
proposed transferee of any Shares held by them to agree to take
and hold such Shares subject to the provisions and upon the
conditions specified in this Section 3.
3.2 Restrictive Legends. Each certificate for Shares
issued to Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx or to a subsequent
transferee shall include a legend in substantially the following
form:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), IN
RELIANCE UPON THE EXEMPTION FROM REGISTRATION PROVIDED BY SECTION
4(2) OF THE 1933 ACT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES LAWS OF APPLICABLE STATES IN RELIANCE UPON APPLICABLE
EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES LAWS OF SUCH
STATES. THESE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES
ONLY AND MAY NOT BE OFFERED FOR SALE, HYPOTHECATED, SOLD OR
TRANSFERRED, NOR WILL ANY ASSIGNEE OR TRANSFEREE THEREOF BE
RECOGNIZED BY THE COMPANY AS HAVING ANY INTEREST IN THESE SHARES,
IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT WITH
RESPECT TO THE SHARES UNDER THE 1933 ACT AND APPLICABLE STATE
SECURITIES LAWS OR (ii) COMPLIANCE WITH APPLICABLE EXEMPTIONS
FROM REGISTRATION UNDER THE 1933 ACT AND APPLICABLE STATE
SECURITIES LAWS2. THE COMPANY MAY, IF IT DEEMS APPROPRIATE IN
ITS SOLE DISCRETION, REQUIRE AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT THE OFFER, SALE, HYPOTHECATION OR TRANSFER OF
THESE SHARES IS EXEMPT FROM REGISTRATION UNDER THE 1933 ACT AND
APPLICABLE STATE SECURITIES LAWS.
3.3 Notice of Proposed Transfers. Prior to any
proposed transfer of the Shares other than a transfer (i)
registered under the 1933 Act, (ii) to an affiliate of the
Purchasers 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 (a) 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.
3.4 Registration Rights. The Company hereby grants to
the Purchasers the right to have included in any registration
statement filed by the Company under the 1933 Act (except for
registration statements on Form S-4 or on Form S-8, or on such
forms as may at the time be in use to register transactions of
the type currently registered on Form S-4 or Form S-8), the offer
and sale of the Shares by the Purchasers. In connection with the
filing of any such registration statement, the parties agree
that:
(i) the Purchasers understand and acknowledge that the
Company shall be permitted to include the offering
and sale of other shares or units of its
securities in such registration statement, either
for its own account, the account of other selling
stockholders, or both;
(ii) 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;
(iii) as and when the Company files a registration
statement with respect to the offer and sale
of any of the shares under the 1933 Act, the
Purchasers 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;
(iv) whenever the Company is registering the offer and
sale of the Shares, the Purchasers agree to
provide to the Company, promptly upon its request,
such information and materials regarding the
Purchasers as the Company shall reasonably request
in order to effect the registration of the offer
and sale of the Shares;
(v) the Company shall bear all reasonable costs and
expenses to be incurred in connection with such
registration statement, 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 Purchasers, or any underwriter engaged by the
Purchasers, 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 Purchasers;
(vi) the Company shall not be obligated to register the
offer and sale of Shares if, at the time of the
filing of the registration statement, there has
been any default or breach by Xxxxx, Xxxx,
Xxxxxxxxxxx or Xxxxxx in the terms of this
Agreement or exhibits or any related agreements.
3.5 One-Time Registration. Upon demand by the Purchasers,
the Company will use its best efforts to file a registration
statement for the reoffer and resale of the Shares under the 1933
Act as soon as is reasonably practical following such demand, but
in no event later than 45 days after such demand and to have such
registration statement declared effective as soon thereafter as
is possible. The provisions of Sections 3.4(i) through 3.4(vi)
shall apply to such registration statement. In the event that
all of the Shares are not registered or sold under such
registration statement, the Purchasers will be entitled to demand
that the Company use its best efforts to file a second
registration statement for the reoffer and resale of such
remaining Shares under the 1933 Act within 45 days after such
second demand by the Purchasers.
4. Representations and Warranties of the Purchasers.
Each of the Purchasers represents as to himself:
4.1 Authority. Each of the Purchasers has the full
power and authority to enter into this Agreement and has taken
all action or will use his best efforts to take all action,
personal, 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 each of them of any and all instruments
necessary or appropriate in order to effectuate fully the terms
and conditions of this Agreement.
4.2 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 any
of the Purchasers to effectuate this Agreement, or (ii) the
completion or validity of any of the transactions contemplated by
this Agreement. This Agreement has been properly executed and
delivered by the Purchasers and constitutes a valid and legally
binding agreement which is enforceable against each of them in
accordance with its terms.
4.3 Commissions. No fees or commissions are payable
by the Purchasers by virtue of or in connection with the
transaction contemplated by this Agreement.
4.4 Investment Intent. The Purchasers are purchasing
the Shares for their own respective accounts, with the intention
of holding such Shares for investment and not with the intention
of participating, directly or indirectly, in any resale or
distribution of the Shares.
4.5 Company Materials. The Purchasers have received
and carefully reviewed the Company's Annual Report on Form 10-K
for the year ended November 30, 1996, its Quarterly Report on
Form 10-Q for the period ended February 28, 1997, its Quarterly
Report on Form 10-Q for the period ended May 31, 1997, its Form
8-K dated March 14, 1997, proxy statement as filed March 5, 1997,
and the statement of "Risk Factors" (attached hereto as Exhibit
4.5) (the "Company Materials") and such additional Company
records and information regarding historical and proposed
operations as the Purchasers or the Purchasers' advisers have
requested. The Purchasers further understand that the
information provided by the Company to the Purchasers was
compiled by the Company and has not been independently reviewed
or verified in any manner. Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx
have each had a reasonable opportunity to ask questions of and
receive answers from the Company concerning the Company and all
such questions, if any, have been answered to the full
satisfaction of Xxxxx, Xxxx, Xxxxxxxxxxx, and Xxxxxx. 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 Xxxxx, Xxxx, Xxxxxxxxxxx or Xxxxxx
by the Company or any agent, employee or affiliate of the
Company, and Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx are relying only
on the Company Materials and the results of their own
investigation in deciding to acquire the Shares and no such
information from such investigation contradicts the Company
Materials in any material respect.
4.6 Accredited Investors. Each of the Purchasers is
an "accredited investor" as that term is defined in Regulation D
under the 1933 Act and each of the Purchasers has (i) such
knowledge and experience in financial and business matters that
he is capable of evaluating the merits and risks of the
investment in the Shares, (ii) had such risk explained to him and
has determined that such investment is suitable in view of his
financial circumstances and available investment opportunities,
(iii) sufficient net worth and income to bear the economic risk
of losing this entire investment, and (iv) no current need for
liquidity of the investment and no reason to anticipate any
change in his financial circumstances which may cause or require
any sale, transfer or other distribution of the Shares.
4.7 Reliance. The Purchasers understand that the
Shares are being issued to them 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 each of the
Purchasers set forth herein in order to determine the
applicability of such exemptions and the suitability of the
Purchasers to acquire the Shares. The Purchasers further
understand 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 3.2 of this
Agreement, will be placed on any certificate or certificates
representing the Shares.
4.8 Reporting Requirements. The Purchasers understand
that as the result of their acquisition for the Shares, they may,
individually or as a group, 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. The Purchasers understand that it is their
responsibility, individually or as a group, to determine what
reports, if any, must be filed by them under Section 13 of the
1934 Act, including, but not limited to, Schedule 13D, and to
obtain such legal or other professional advice, at their cost and
expense, as they may desire or require, and to prepare or have
prepared for them, at their cost and expense, such report or
reports as may be required of them under Section 13. The
Purchasers understand that the Company assumes no responsibility
for the reporting by the Purchasers under Section 13; provided,
however, that merely as an accommodation, and without assuming
any responsibility for Section 13 reporting by the Purchasers,
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 Purchasers 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.
4.9 Residence and Cooperation. Each of Xxxxx, Xxxx
and Xxxxxxxxxxx represents that he is a resident of the State of
Tennessee. Xxxxxx represents that he is a resident of the State
of Georgia. Each Purchaser also agrees to cooperate in the
filing of a Form D by the Company and in compliance with the
requirements of Regulation D.
5. Representations and Warranties of the Company.
The Company represents as follow:
5.1 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. The Company has registered the Company common stock
pursuant to Section 12 of the Exchange Act and the Company common
stock is traded on the NASDAQ Small Cap Market.
5.2 Authorization of Shares. Upon issuance
hereunder, the Shares will be duly authorized, validly issued,
fully paid and non-assessable.
5.3 Corporate Standing. The Company is a corporation
duly organized, validly existing, and in good standing under the
laws of the State of Delaware, and it 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 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.
5.4 Authorized and Outstanding Shares. The authorized
capital stock of the Company is 70 million shares of common
stock. As of the date hereof, there are approximately 37,311,422
shares outstanding, and there are warrants outstanding for the
purchase of approximately 2,296,346 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.
5.5 Authority. The Company has full power and
authority to enter into this Agreement and has taken all action,
corporate and otherwise, necessary to authorize the execution,
delivery and performance of this Agreement and all ancillary
agreements to be executed, delivered and performed by the Company
in connection therewith, 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 therefore, title to the
Shares will pass, free and clear of all restrictions on transfer,
liens, encumbrances, security interests and claims whatsoever, to
the Purchasers, except for the obligations of the Purchasers
under the provisions of this Agreement and all ancillary
agreements to be executed, delivered and performed by the Company
in connection therewith.
5.6 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 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 constitutes the valid and legally binding agreement
of the Company and are enforceable against the Company in
accordance with its terms.
5.7 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 is
materially adverse to the assets, business, financial condition
or future prospects of the Company.
5.8 No Commissions. No fees or commissions are
payable by the Company by virtue or in connection with the
transaction contemplated by this Agreement.
6. Representations and Warranties of Xxxxxxxx.
6.1 Authority. Xxxxxxxx has the full power and
authority to enter into this Agreement and has taken all action
or will use her best efforts to take all action, personal,
corporate or otherwise, necessary to authorize the execution,
delivery and performance of this Agreement, the completion of the
transaction contemplated hereby and the execution and delivery on
behalf of Xxxxxxxx of any and all instruments necessary or
appropriate in order to effectuate fully the terms and conditions
of this Agreement.
6.2 Consents. No consent or approval of any court,
governmental agency or other public authority, or for 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
Xxxxxxxx to effectuate this Agreement, or (ii) the completion or
validity of any of the transactions contemplated by this
Agreement. This Agreement has been properly executed and
delivered by Xxxxxxxx.
6.3 Conflicts. The execution, delivery and
performance of this Agreement by Xxxxxxxx does not, and the
consummation of the transactions contemplated hereby will not (i)
conflict with, or result in a breach or termination of, or
constitute a default under, any agreement, commitment or other
instrument, or any material order, judgment or decree, to which
Xxxxxxxx is a party or is bound, or (ii) constitute a violation
of any law, regulation, rule or ordinance applicable to Xxxxxxxx,
which conflict, breach, termination, default or violation would
prevent fulfillment of her obligations under this Agreement.
7. Board of Directors of the Company.
7.1 Board Resignation. Upon Closing, the Company
shall obtain from one of the current members of the board of
directors his or her resignation, provided as such that after
such resignation (i) the board of directors shall have four
remaining members ("the Remaining Directors"), and (ii) one of
the Remaining Directors shall be an "independent director" as
that term is defined in the regulations of the National
Association of Securities Dealers, Inc.
7.2 Election of Purchasers to the Board. Following
the resignation described in subsection 7.1 above, the Remaining
Directors shall vote to increase the size of the board of
directors to eight, and shall elect to the board of directors
Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx. In connection herewith,
each of Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx represent that as to
himself, and as to the date hereof, there are no items
disclosable under Item 401(f) of Regulation S-K.
7.3 Board Committees. Following the election of
Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx as set forth in subsection
7.2 above, the board of directors shall vote to reconstitute the
Audit Committee to be comprised of the two "independent
directors" and Xxxxxx, the Executive Compensation Committee of
Xxxxxxxxxxx, Xxxxxxxx and the two independent directors, and the
Stock Option Committee of Xxxxxx and the two independent
directors.
7.4 Board Policy Regarding Conflicts. The Company's
board of directors shall continue to observe the policy of
requiring that any director who has a direct or indirect
financial interest (other than an interest as and the same as a
stockholder of the Company) in a transaction being discussed or
considered by the board or any committee of the board (i) absent
him or herself from the discussions of such transaction, and (ii)
abstain from any vote taken by the board or a committee of the
board with respect to such transaction.
8. Indemnification of Xxxxxxxx. Xxxxxxxx is a personal
guarantor of the obligations of the Company and its subsidiaries
to (i) ICON Cash Flow Partners, L.P., and (the "ICON loan") and
(ii) First National Bank of Galliten and the United States Small
Business Administration (the "SBA loan" and collectively with the
ICON loan the "Guaranteed Debts"). The ICON loan is anticipated
to have a principal balance of $247,814.78, as of the Closing,
and the SBA loan is anticipated to have a principal balance of
$_____, as of the Closing. With respect to the Guaranteed Debts:
(a) The Purchasers agree that they shall use their
best efforts to cause the Company to obtain the release of
Xxxxxxxx as a guarantor of the ICON Loan and of the SBA Loan; and
(b) The Purchasers agree that if at such time as
either ICON or SBA makes notification to Xxxxxxxx of an intent to
seek payment or indemnification from Xxxxxxxx by reason of her
guarantee the Company has not prior thereto obtained Xxxxxxxx'x
release as a guarantor, the Company will indemnify Xxxxxxxx with
respect to the guarantee to which such notice relates and the
Purchasers will, at the time of such notification, use their best
efforts to cause the Company to place in escrow as security for
such indemnification cash or other readily liquid risk free
assets in an amount equal to the difference between (a) the
principal balance of the outstanding loan as to which such
notification relates and (b) the fair market value of the first
lien collateral, if any, underlying the loan as to which the
notification relates as determined at the date of the
notification by an independent appraisal.
9. Closing.
9.1 Transactions at Closing.
9.1.1 Purchaser's Performances. At the
Closing, the Purchasers shall deliver to the Company the
following:
(a) cash, by cashier's check, check or wire
transfer, in the amount of $1,350,000 (less
prior advances to the Company in the amount
of $___________);
(b) the certificate of each of the Purchasers
described in Section 9.2; and
(c) such other evidence of the performance of all
the covenants and satisfaction of all of the
conditions required of the Purchasers by this
Agreement at or before the Closing as the
Company or its counsel may reasonably
require.
9.1.2 Company's Performance. At the Closing, the
Company shall deliver to the Purchasers the following:
(a) certificates representing the Shares,
reasonably satisfactory in form and substance
to the Purchasers and their counsel;
(b) the certificate of the President of the
Company described in Section 8.2;
(c) a certificate of good standing of the
Company, as of the most recent practicable
date, from the Secretary of State of
Tennessee;
(d) certified copies of resolutions of the Board
of Directors of the Company approving the
transactions set forth in this Agreement;
(e) the fully executed employment contracts
described in Section 2.3;
(f) evidence of the extension and modification of
the DWL Loan described in Section 2.4;
(g) the fully executed Common Stock Agreement
described in Section 2.5;
(h) the legal opinion described in Section 2.6;
(i) evidence of the board resignation and board
appointments described in Section 6; and
(j) certified resolutions of the Board of
Directors of the Company authorizing and
approving 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
(k) such other evidence of the performance of all
the covenants and satisfaction of all of the
conditions required of the Company by this
Agreement at or before Closing as the
Purchasers or their counsel any reasonably
require.
10. Miscellaneous.
10.1 Arbitration. Each Party agrees that any
controversy or claim by it against another Party arising directly
or indirectly out of this Agreement including, without
limitation, claims for breach of contract, breach of warranty,
claims arising from the purchase or sale of Shares, or claims for
fraud, whether due to false representations or failure to
disclose, shall be submitted to arbitration pursuant to the
Federal Arbitration Act ("FAA") and in accordance with the
Commercial Arbitration Rules of the American Arbitration
Association ("AAA") before a panel of three arbitrators and
judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction pursuant to the FAA. In
arbitration proceedings hereunder, the Parties shall be entitled
to any and all remedies that would be available in the absence of
this section and the arbitrators, in rendering their decision,
shall follow the substantive laws of the State of Delaware. The
arbitration of any dispute pursuant to this section shall be held
in Atlanta, Georgia. Notwithstanding the foregoing in order to
preserve the status quo pending the resolution by arbitration of
a claim seeking relief of an injunctive or equitable nature, any
party, upon submitting a matter to arbitration as required by
this section, may simultaneously or thereafter seek a temporary
restraining order or preliminary injunction from a court of
competent jurisdiction pending the outcome of the arbitration.
The losing Party in an arbitration under this section shall pay
all costs and expenses reasonably incurred by the prevailing
Party with respect to this arbitration including, but not limited
to, reasonable attorneys' fees.
10.2 Modification; Complete Agreement. This Agreement,
together with its exhibits and schedules, (i) represents the
complete understanding between Xxxxx, Xxxx, Xxxxxxxxxxx and
Xxxxxx and the Company and Xxxxxxxx with respect to the subjects
discussed herein, (ii) may only be modified by a written
instrument executed by Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx and
the Company and Xxxxxxxx, and (iii) shall inure to the benefit
of, and be binding upon Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx and
the Company and Xxxxxxxx their respective heirs, legal
representatives and successors.
10.3 Waiver. Any of the terms and conditions of this
Agreement which may be lawfully waived may be waived in writing
at any time by the Party that is entitled to the benefit thereof.
Any waiver of any provision of this Agreement shall be binding
only as set forth in an instrument in writing signed on behalf of
such Party. No failure to enforce any provision of this
Agreement shall be deemed to or shall constitute a waiver of such
provision of this Agreement, and no waiver of a provision shall
be deemed or constitute a waiver of any other provision of this
Agreement, whether or not similar, nor shall such waiver
constitute a continuing waiver.
10.4 Governing Law. This Agreement shall be governed
by the laws of the State of Delaware applicable to contracts made
and to be wholly performed therein.
10.5 Fees and Expenses. The Company shall bear the
expenses of the parties in connection with the negotiation and
consummation of the transactions contemplated by this Agreement.
10.6 Transfers and Assignments. Neither this
Agreement nor any of the rights of hereunder may be transferred
or assigned except as provided herein.
10.7 Gender. Unless the context otherwise requires,
all personal pronouns used in this Agreement, whether in the
masculine, feminine or neuter gender, shall include all other
genders.
10.8 Headings. The headings contained in this
Agreement are for reference only and shall not affect in any way
the meaning of interpretation of this Agreement.
10.9 Severability. Any provision of this Agreement
which is invalid, illegal or unenforceable in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of
such invalidity, illegality or unenforceability, without
affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this
Agreement invalid, illegal or unenforceable in any other
jurisdiction.
10.10 Notices. All notices or other communications
hereunder shall be in writing and shall be deemed to have been
duly given (i) on the date delivered personally or by confirmed
facsimile as set forth below; (ii) two (2) days after being sent
by Express Mail or such other similar service (i.e., Federal
Express) and addressed as set forth below; or (iii) four (4) days
after being mailed by certified or registered mail, return
receipt requested, postage prepaid, and addressed as set forth
below, as follows:
If to Innovo Group: Innovo Group Inc.
00 Xxxxx Xxxx Xxxxxx
Xxxxxxxxxxx, Xxxxxxxxx 00000
Attn: Xxxxxxxx Xxxxxxxx-Xxxxx, President
Facsimile: (000) 000-0000
With a copy to: Xxxx Moss Kline & Xxxxx LLP
000 Xxxxxxxxx Xxxx Xxxxxx, Xxxxx 000
1000 Xxxxxxxxx Road, N.E.
Xxxxxxx, Xxxxxxx 00000
Attn: Xxxxx X. Xxxx, Esq.
Facsimile: (000) 000-0000
If to Xxxxxxxx: Xxxxxxxx Xxxxxxxx-Xxxxx
00 Xxxxx Xxxx Xxxxxx
Xxxxxxxxxxx, Xxxxxxxxx 00000
Facsimile: (000) 000-0000
With a copy to: Xxxx Moss Kline & Xxxxx LLP
000 Xxxxxxxxx Xxxx Xxxxxx, Xxxxx 000
1000 Xxxxxxxxx Road, N.E.
Xxxxxxx, Xxxxxxx 00000
Attn: Xxxxx X. Xxxx, Esq.
Facsimile: (000) 000-0000
If to Xxxxx, Xxxx, Xxxxxxxxxxx, or Xxxxxx:
X.X. Xxxxx or Xxx Xxxx or J. Xxxx Xxxxxxxxxxx
or Xxxx Xxxxxx
c/o Innovo Group Inc.
00 Xxxxx Xxxx Xxxxxx
Xxxxxxxxxxx, Xxxxxxxxx 00000
Facsimile: (000) 000-0000
With a copy to:
Xxxxx, Day, Xxxxxx & Xxxxx
000 Xxxxxxxxx Xxxxxx, X.X.
Xxxxx 0000
Xxxxxxx, Xxxxxxx 00000-0000
Attn: Xxxxxxx Xxxxxx
Facsimile: (000) 000-0000
or to such other address as a Party shall have designated to the
other by like notice.
10.11 Public Announcements. Any and all public
announcements concerning the transactions contemplated or
completed under this Agreement shall require the approval of the
Company and the Purchasers.
10.12 Survival. The representations and warranties
of the Purchasers, the Company and Xxxxxxxx shall be true when
made, and true on the date of Closing, and all such
representations and warranties shall survive the Closing.
IN WITNESS WHEREOF, Xxxxx, Xxxx, Xxxxxxxxxxx and Xxxxxx and
the Company and Xxxxxxxx have executed this Stock Purchase
Agreement on the date first written above.
X.X. Xxxxx /s/ X. X. Xxxxx
_________________________
X.X. Xxxxx
Xxx Xxxx /s/ Xxx Xxxx
_________________________
Xxx Xxxx
J. Xxxx Xxxxxxxxxxx /s/ J. Xxxx Xxxxxxxxxxx
_________________________
J. Xxxx Xxxxxxxxxxx
Xxxx Xxxxxx /s/ Xxxx Xxxxxx
_________________________
Xxxx Xxxxxx
[signatures continued on subsequent page]
[signatures continued from preceding page]
Innovo Group Inc. By:/s/ Xxxxxxxx Xxxxxxxx-Xxxxx
_________________________
Xxxxxxxx Xxxxxxxx-Xxxxx, President
Xxxxxxxx Xxxxxxxx-Xxxxx /s/ Xxxxxxxx Xxxxxxxx-Xxxxx
_________________________
Xxxxxxxx Xxxxxxxx-Xxxxx
RISK FACTORS
In evaluating Innovo Group, Inc. (the "Company") and its
business, prospective investors should carefully consider the
following factors in addition to those discussed elsewhere in the
Company Materials. Information contained in the Company Materials
may contain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, which can
be identified by the use of forward-looking terminology such as
"may," "will," "would," "could," "expect," "anticipate,"
"estimate" or "continue," or the negative thereof, or other
variations thereon or comparable terminology. The following
matters constitute cautionary statements identifying important
factors with respect to any such forward-looking statements,
including certain risks and uncertainties, that could cause
actual results to differ materially from those reflected in any
such forward-looking statements.
Losses from Operations; Negative Cash Flow; Adverse
Operating History; Possibility of Future Losses and Negative Cash
Flows. The Company had losses from continuing operations of
$3,088,000, $67,000 and $7,905,000 for the years ended November
30, 1996, and October 31, 1995 and October 31, 1994,
respectively, and a loss from continuing operations of $1,096,000
for the six months ended May 31, 1997. Operating cash flows were
a negative $2,743,000 and $406,000 for fiscal 1995 and fiscal
1994. At May 31, 1996, the Company had an accumulated deficit of
$ 21.7 million. There can be no assurance that the Company will
operate profitably in the future.
Shift in Product Focus. In fiscal 1995 and continuing in
fiscal 1996, the Company has shifted its emphasis to developing
new products and marketing programs for its products in the
fashion, utility, and craft lines and for the premium and
advertising specialty markets to increase sales and lessen its
dependence on sports licensed products. In 1997, the Company is
continuing its efforts to lessen its dependence on sports
licensed products through its development of products to be
distributed under its Warner Bros. and Xxxx Disney licenses.
There can be no assurance that the Company will be successful in
its attempts to increase sales of other products, and the shift
in the Company's emphasis could result in a decrease in sales of
sports licensed products.
Dependence upon Contractual Relationships and Certain
Products. The Company's sales are dependent to some degree upon
the contractual relationships it establishes with licensors to
exploit, on a generally non-exclusive basis, proprietary rights
in well known logos, marks and characters, as well as league and
team logos and marks licensed by Major League Baseball, the
National Football League, the NBA, the National Hockey League,
and major colleges and universities. The sale of products
licensed from professional sports leagues and colleges and
universities represented 39.9% of the Company's net sales from
continuing operations in fiscal 1996. 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 to the Company. The Company's failure
to obtain new licenses or extensions on current licenses or the
Company's inability to sell such products, for any reason, could
have a significant negative impact on the Company's business.
See "Business - Products" and "Business - Licensing Agreements."
Need for Additional Financing. The Company's principal
working capital financing is derived from a factoring agreement
with Riviera Finance. Under the agreement, Riviera Finance
advances 80% of the balance of assigned accounts receivable of
Innovo and Thimble Square, up to a maximum of $1,000,000. The
Company also has certain short-term financing collateralized by
the common stock of its NP International subsidiary. However,
the Company has been, to date, unable to obtain more traditional
asset based financing, including financing for and collateralized
by its inventory.
To pursue its business plans, the Company needs to obtain a
credit facility having appropriate borrowing rates and limits,
either by obtaining a new facility to replace the current
agreement with Riviera Finance, or by negotiating revised terms
with Riviera Finance. Should the Company be unable to obtain
such a credit facility, it might not have the working capital
necessary to finance the inventory and accounts receivable
investments called for by its present or anticipated future
levels of sales. In that case, the Company might have to forgo
sales opportunities, and could lose customers as a result.
Substantially all of the Company's assets are pledged to secure
various borrowings. To the extent the Company's assets continue
to be pledged to secure outstanding indebtedness, such assets are
unavailable to secure additional debt financing, which may
adversely affect the Company's ability to borrow in the future.
Accordingly, there is no assurance that the Company will be able
to secure such financing. The Company's failure to obtain such
additional financing could materially adversely affect the
Company's operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Seasonality. The Company's business is seasonal due to the
nature of many of the Company's products, which are subject to
highest consumer demand in the late summer, early fall and
holiday seasons. The Company will typically ship the majority of
its orders during the second half of its fiscal year. As a
result, the Company's cash flow is not consistent throughout the
fiscal year, and the Company's annual earnings have been and are
expected to continue to be dependent on the results of operations
for the third and fourth quarters of its fiscal year.
Unfavorable economic conditions affecting retailers during the
fall and holiday seasons in any year could have a material
adverse effect on the Company's 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. There can be no assurance that the
effect of such seasonality will diminish in the future. See
"Managements Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality."
Dependence on Key Management. The Company is substantially
dependent upon the continued employment of Xxxxxxxx Xxxxxxxx-
Lasko, its Chairman of the Board, President and Chief Executive
Officer. Xx. Xxxxxxxx-Xxxxx is currently employed under a four-
year employment contract with the Company, which expires on
October 31, 1997 but which is terminable by either the Company or
Xx. Xxxxxxxx-Xxxxx for cause. Although Innovo currently
maintains $3,000,000 in the aggregate of "key-man" life insurance
on the life of Xx. Xxxxxxxx-Xxxxx, $950,000 of this key-man
insurance was pledged to collateralize certain loans to the
Company. Pursuant to certain undertakings given to the United
States Small Business Administration ("SBA") in connection with
the SBA's guarantee of a $950,000 loan to Leasall by First
Independent Bank, Gallatin, Tennessee, the Company is prohibited
from purchasing any additional key-man insurance on Xx. Xxxxxxxx-
Xxxxx without the written consent of the SBA. The loss of this
key executive could materially adversely affect the Company's
operations.
Competition. The marketplace for the Company's products is
highly competitive, and the Company is not a dominant factor in
any of the markets in which it competes. The Company competes
with other manufacturers, importers and distributors of textile
products and casual apparel. Although the manufacture and sale
of sports logoed products such as the Company's requires a
license, the Company's licenses are non-exclusive and the Company
does not have any control over the granting of additional
licenses by the licensing entities. Other manufacturers,
importers and distributors with greater financial, research,
staff and marketing resources than the Company could decide to
enter the business of manufacturing, importing and distributing
competitive products. There is no assurance that the Company
could compete effectively with such competitors. The Company's
ability to sell its products is dependent upon the price and
quality of its products and its ability to meet its customers'
schedules. See "Business - Competition."
Suppliers. The raw materials for the products produced
domestically by the Company are generally purchased from a small
number of suppliers. During fiscal 1996 the Company purchased
the majority of each type of raw material it uses from one or two
suppliers. The Company has no long-term supply agreement with
any supplier of domestic raw materials. The Company believes
that alternative sources of supplies are available in the United
States for its unfinished items. However, in the event the
Company was unable to obtain alternative sources of supplies on
comparable terms, the Company's financial condition could be
materially adversely affected.
The sport and gym bags and backpacks marketed overseas by NP
International are generally obtained from overseas manufacturers
in order to reduce the cost of obtaining these more labor
intensive products. The independent overseas contractors that
manufacture these products are responsible for obtaining the
necessary supply of raw materials and for manufacturing the
products to the Company's specifications. The Company generally
uses one independent contractor to fulfill all of its
requirements in order to maximize its control over production
quality and scheduling. Although the Company uses this, and
other methods, to reduce the risk that the independent contractor
will fail to meet the Company's requirements, the use of
independent overseas contractors does reduce the Company's
control over production and delivery and exposes the Company to
the other usual risks of sourcing products abroad. The Company
does not have any long-term supply agreements with independent
overseas contractors, but believes that there are a number of
contractors that could fulfill the Company's requirements.
The Company has generally utilized overseas contractors that
utilize production facilities located in China. As a result, the
products manufactured for the Company are subject to export
quotas and other restrictions imposed by the Chinese government.
To date the Company has not been adversely affected by such
restrictions; however, there can be no assurance that future
changes in such restrictions by the Chinese government would not
adversely affect the Company, even if only temporarily while the
Company shifted production to other countries or regions such as
Korea, Taiwan, or Latin America. See "Business - Manufacturing."
Availability of Labor. During fiscal 1996, Innovo
experienced an inability to obtain sufficient production labor
to, at times, meet the demand and customer delivery requirements
for its domestically produced products and, as a result, the
Company was unable to accept certain orders and experienced
production inefficiencies and excess overtime costs. In October
1996, the Company obtained a three-year lease on a sewing
facility in Red Boiling Springs, Tennessee which, in November
1996, began to produce Innovo products. The geographical
location of Red Boiling Springs, relative to Innovo's other
production facility in Springfield, Tennessee, is such that the
Red Boiling Springs facility draws its product labor from a
different labor pool while production at the two facilities can
be overseen by a single group of senior management. Accordingly,
the Company believes that the addition of the Red Boiling Springs
facility will reduce the Company's exposure to labor shortages,
which will favorably impact sales and production costs. However,
there can be no assurance that the Company will not again be
adversely affected by labor shortages in the future. See
"Business - Manufacturing."
Litigation. In August 1994, the trial court granted the
Company's motion for partial summary judgement and directed
verdicts with respect to certain of Xxxxxxx'x claims, including
those concerning his ownership of an interest in the "E.A.R.T.H."
trademark, or the existence of a partnership with the Company to
jointly own the trademark, and the state court jury returned
findings in favor of the Company on the remainder of the
plaintiff's claims concerning the trademark as well as his claims
for wrongful termination, fraud and conspiracy. However, the
jury awarded Xxxxxxx approximately $700,000, of which $50,000 was
assessed against Innovo Group and $650,000 was assessed against
Innovo, including pre-judgement interest and attorney's fees, on
the theory that he was entitled to have received certain
employment benefits, including employee stock awards, during, and
after, the term of his employment. The Company appealed the
jury's award, and in August 1996 (as revised in an amended
October 1996 opinion), the appeals court reversed approximately
$350,000 of the initial judgement as not supported by the
evidence or improper as a matter of law. As a result, the
judgement, including post-judgement interest through August 1996,
has been reduced to $420,000. In addition, the appeals court
ruled that the trial court erred in not submitting to the jury
the questions of the Company's counterclaim of breach of
fiduciary duty by Xxxxxxx, ruling that the trial record indicated
that there was evidence of such breach and damages therefrom.
The appeals court remanded the case to the trial court for trial
of the Company's claims of breach of fiduciary duty by Xxxxxxx.
The Company is filing motions with the trial court for the
scheduling of the ordered trial on its claims against the Xxxxxxx
award. The Company has also appealed to the Texas Supreme Court
the issue of the appeal courts' decision to uphold $200,000 of
the original judgement (which accounts for $340,000 of the August
1996 $420,000 amount). In connection with its appeal the Company
has pledged as an appeal bond 200,000 shares of its unissued
common stock.
The Company believes that its appeal arguments, and its
fiduciary duty claims against Xxxxxxx, are meritorious. However,
there can be no assurance that the Company's appeal, or its
claims against Xxxxxxx, will be successful, or that alternatively
the litigation can be settled on terms manageable to the Company.
The need to immediately satisfy the plaintiff's award in the
event the Company's appeal and claims are unsuccessful would have
a material adverse impact on the Company.
In May 1996, a foreign manufacturer that had previously
supplied imported products to NASCO Products filed suit against
NASCO Products asserting that it is owed approximately $300,000
in excess of the amount presently recorded by NASCO Products
(Pannoy Enterprises Corporation x. XXXXX Products, Inc., Case No.
12948, in the Chancery Court for Xxxxxxxxx County, Tennessee).
NASCO Products and the supplier had previously reached an
agreement on the balance owed (which is the balance recorded) ,
as well as an arrangement under which the schedule for NASCO
Products' payments reducing the balance would be based on future
purchases from that supplier of products distributed
internationally by NP International. The Company has denied the
supplier's claims, and has asserted affirmative defenses,
including the supplier's late shipment of the original products,
and the supplier's refusal to accept and fill NP International
orders on terms contained in the agreement. NASCO Products sold
its operations in July 1995, and that company currently has no
operations or unencumbered assets. Nonetheless, there can be no
assurance that an adverse outcome of the litigation would not
have a material adverse effect on the Company. See "Legal
Proceedings."
Voting Control by Existing Stockholders; Anti-takeover
Provisions. The Company's executive officers, directors and its
affiliates beneficially own or have voting control of
approximately 15.5% of the issued and outstanding 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 of the affairs of the Company. Additionally, the
Company's by-laws limit the ability of stockholders to call a
meeting of the stockholders. The Company's employment contract
with its chief executive officer contains provisions that could
require the payment of significant compensation in the event
employment terminates after a change in control that is not
approved by the board of directors, and the price at which the
Company could be required to repurchase certain shares of its
common stock would significantly increase in the event of such a
change in control. Further, the Certificate of Incorporation
authorizes the board of directors to issue additional shares of
common stock, up to the authorized capitalization of 70 million
shares, without further stockholder approval. The issuance of
common stock may have the effect of delaying, deferring or
preventing a change in control of the Company and may adversely
affect the voting and other rights of the holders of common
stock. These contractual obligations and by-law provisions, and
any issuance of common stock, 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.
Lack of Protection of Intellectual Property. The Company
possesses certain proprietary information with respect to which
it currently has no patent, copyright or trademark protection.
With the exception of Xx. Xxxxxxxx-Xxxxx, none of the Company's
executive officers, directors or employees has executed any
confidentiality or noncompete agreement with the Company. There
can be no assurance that the Company will be successful in
maintaining the confidentiality of its proprietary information or
barring others from exploitation of intellectual property rights
claimed by the Company. If such proprietary information were to
be disclosed, it could have a materially adverse effect on the
Company's business.
Dividends. The Company has not paid any dividends nor does
it anticipate paying any dividends on its Common Stock in the
foreseeable future. It is the Company's present policy to retain
earnings, if any, for use in the development and expansion of the
Company's business.
Shares Eligible for Future Sale. Of the 37,311,442 shares
of common stock of the Company outstanding as of the date of the
Agreement, 2,758,832 shares are restricted securities, as that
term is defined in Rule 144 promulgated under the Securities Act,
and an additional 284,007 shares are owned by affiliates of the
Company. Absent registration under the Securities Act, the sale
of such 3,042,839 shares is subject to Rule 144, as promulgated
under the Securities Act. In general, under Rule 144, subject to
the satisfaction of certain other conditions, a person, including
an affiliate of the Company, who has beneficially owned
restricted shares of common stock for at least one year is
entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number
of outstanding shares of the same class, or, if the common stock
is quoted on NASDAQ, the average weekly trading volume during the
four calendar weeks preceding the sale. A person who has not
been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned the
shares of common stock for at least two years is entitled to sell
such shares under Rule 144 without regard to any of the volume
limitations described above. Additionally, (i) the holders of
1,220,588 warrants for the purchase of shares of common stock
hold registration rights which entitle them to certain demand and
"piggy-back" registration of the shares issuable upon the
exercise of such warrants, (ii) the holders of 2,600,000
restricted shares are entitled to have the Company use its best
efforts to file, before September 6, 1997, a registration
statement with respect to the reoffer and resale of those shares,
and (iii) the Company has secured its appeal bond in the Xxxxxxx
litigation with 200,000 shares of its common stock which are
freely tradeable and which the court or the plaintiff would have
the right to sell if the Company losses its appeal and is thus
unable to satisfy the judgement through other means, or otherwise
defaults on the bond. No assurance can be made as to the effect,
if any, that sales of shares of common stock or the availability
of such shares for sale will have on market prices prevailing
from time to time. Nevertheless, the possibility that
substantial amounts of common stock may be sold in the public
market may adversely affect prevailing market prices for the
Company's securities and could impair the Company's ability to
raise capital in the future through the sale of equity
securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Reorganization of
Spirco," "Legal Proceedings," and "Shares Eligible for Future
Sale."
Possible Delisting of Securities from NASDAQ; Risks of Low-
Priced Stocks. The Company's common stock is currently listed on
NASDAQ SmallCap Market. Under the rules of the NASDAQ, a company
must, among other things, maintain total assets of $2 million,
stockholders' equity of $1 million, a minimum bid price of $1 (or
alternatively stockholders' equity of $2 million), and must
remain current in the filing of reports under the Exchange Act in
order to continue trading on the NASDAQ SmallCap Market.
Between March 1995 and July 1995, the Company's common stock
traded on the NASDAQ SmallCap Market pursuant to a temporary
exemption from the stockholders' equity, bid price and current
Exchange Act reporting criteria. In November 1995, the Company's
common stock traded on the NASDAQ SmallCap Market pursuant to
temporary exemptions granted while the Company took steps to
comply with the stockholders' equity requirement, which was met
when the Company's stockholders' equity increased to above $1
million during the first quarter of fiscal 1996. Additionally,
although the Company's common stock generally traded at prices
below $1.00 between November 1995 and May 1996, and has generally
traded at prices below $1.00 since July 1996, the Company has
been able to maintain its NASDAQ SmallCap listing by complying
with the alternative $2 million stockholders' equity requirement.
However, in November 1996, the NASDAQ proposed changes to its
listing standards that would, among other things, eliminate the
$2 million stockholders' equity alternative.
If the Company's stockholders' equity were to fall below $2
million due to operating losses or for other reasons, or if the
NASDAQ adopts final rules which eliminate the $2 million
stockholders' equity alternative, and the Company's common stock
was not trading at prices above $1.00, the Company could face
delisting unless it took action to increase the minimum bid price
of its common stock to $1.00, or, if the alternative standard is
still available, to increase its stockholders' equity to above $2
million. Although the Company will continually use its best
efforts to maintain its NASDAQ SmallCap listing, there can be no
assurance that it will be able to do so. If, in the future, the
Company is unable to satisfy the NASDAQ criteria for maintaining
listing, its securities would be subject to being delisted, and
trading, if any, in the Company's securities 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 Company's common stock.
Xxxxx Stock Regulation. The Securities and Exchange
Commission (the "Commission") has adopted rules that regulate
broker-dealer practices in connection with transactions in "xxxxx
stocks". Xxxxx stocks generally are equity securities with a
price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ,
provided that current price and volume information with respect
to transactions in such securities is provided by the exchange or
system, or securities of issuers that meet certain net asset or
average revenue tests). The xxxxx stock rules require a broker-
dealer, prior to a transaction in a xxxxx stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure
document prepared by the Commission that provides information
about xxxxx stocks and the nature and level of risks in the xxxxx
stock market. The broker-dealer must also provide the customer
with current bid and offer quotations for the xxxxx stock, the
compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market
value of each xxxxx stock held in the customer's account. The
bid and offer quotations and broker-dealer and salesperson
compensation information must be given to the customer orally or
in writing prior to effecting the transaction and must be given
in writing before or with the customer's confirmation. In
addition, the xxxxx stock rules require that prior to a
transaction in a xxxxx stock not otherwise exempt from such
rules, the broker-dealer must make a special written
determination that the xxxxx stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the xxxxx stock rules.
If the Company's securities become subject to the xxxxx stock
rules, the holders of its securities may find it more difficult
to sell such securities.
The Company believes that its common stock is outside the
definitional scope of a xxxxx stock because it is listed on the
NASDAQ, and because the Company's net revenues over the last
three years have exceeded the definitional threshold. However,
in the event the common stock were subsequently to become
characterized as a xxxxx stock, the market liquidity for the
Company's securities could be severely and adversely affected.
In such event, the regulations on xxxxx stocks could limit the
ability of broker-dealers to sell the Company's securities, and,
thus, the ability of holders to sell their securities in the
secondary market.
Board of Directors Ability to Authorize a Reverse Stock
Split. Pursuant to a resolution approved by the Company's
stockholders on July 25, 1994, the board of directors has the
authority to effect, at its discretion, one or more reverse
splits of the number of shares of common stock authorized, issued
and outstanding. Pursuant to that resolution on June 8, 1995 the
board of directors elected to effect a one-for-ten reverse stock
split, which was effective June 19, 1995. A reverse stock split
effected pursuant to the resolution could have the effect of
reducing the numbers of record and beneficial owners of the
Company's common stock, since any stockholder that, based on the
reverse split ratio selected by the board of directors, was
entitled to receive less than one share would instead receive a
cash payment for the fractional share, and would cease to be a
stockholder of the Company. Under the rules of the Commission, a
Company may suspend its obligation to file periodic and other
reports under the Exchange Act if the number of holders of record
of its common stock falls below 300. Although the June 19, 1995
reverse stock split did not, and the Company currently believes
that it is unlikely that any future reverse stock split effected
pursuant to the proposal would, reduce the number of record
holders to below 300, and although the board of directors
presently would not plan to discontinue filing reports under the
Exchange Act even if the number of record holders did fall below
300 for so long as there continued to be a public market for the
common stock, if a reverse stock split effected pursuant to the
resolution did have such an effect, the board of directors could,
at its discretion and without further stockholder action, elect
to suspend filing reports under the Exchange Act. A suspension
of the Company's reporting under the Exchange Act would decrease
the amount of information about the Company available to current
investors, and would exempt the Company from the Commission's
requirements concerning the form of proxy solicitation materials.
Additionally, it would result in the delisting of the Company's
common stock from the NASDAQ, since the listing requirements of
the National Association of Securities Dealers, Inc. ("NASD")
require, among other things, the filing of reports under the
Exchange Act. The NASD also requires, among other things, that
there be at least 300 beneficial owners, and 100,000 publicly
held shares, of any class of common stock traded on the NASDAQ.
If the Company's common stock was delisted from the NASDAQ, it
could continue to trade in the over-the-counter market; however,
such market is generally less liquid than the NASDAQ, and the
value and liquidity of a stockholder's investment could be
adversely affected. However, as previously indicated, the board
of directors would not currently plan to discontinue filing
reports under the Exchange Act. Additionally, the Company
currently believes that it is unlikely that a reverse stock split
effected pursuant to this resolution would cause the Company to
no longer meet the other NASDAQ listing requirements described
above.