-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BT9rhbspXdMH7c45GIKq5xJCEzDB3YLv5KFOkpWakd3JEnPHmJugsYnjwKZhkhib DBnMcrRgiMG1xXJq+DuKmQ== 0000844143-01-000011.txt : 20010606 0000844143-01-000011.hdr.sgml : 20010606 ACCESSION NUMBER: 0000844143-01-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010303 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVO GROUP INC CENTRAL INDEX KEY: 0000844143 STANDARD INDUSTRIAL CLASSIFICATION: 2390 IRS NUMBER: 112928178 STATE OF INCORPORATION: TN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18926 FILM NUMBER: 1604021 BUSINESS ADDRESS: STREET 1: 2633 KINGSTON PIKE STE 100 CITY: KNOXVILLE STATE: TN ZIP: 37917 BUSINESS PHONE: 8655461110 MAIL ADDRESS: STREET 1: 2633 KINGSTON PIKE STE 100 CITY: KNOXVILLE STATE: TN ZIP: 37917 FORMER COMPANY: FORMER CONFORMED NAME: ELORAC CORP DATE OF NAME CHANGE: 19901009 10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 3, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 0-18926 INNOVO GROUP INC. (Exact name of registrant as specified in its charter) Delaware 11-2928178 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2633 Kingston Pike, Suite 100, Knoxville, Tennessee 37919 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (865) 546-1110 Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.10 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or (for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ As of April 15, 2001, 14,221,264 shares of common stock were outstanding. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INNOVO GROUP INC AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (000's except for share data) (unaudited) 3/3/01 11/30/00 ------ -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 426 $ 1,179 Accounts receivable, net of allowance 744 712 Inventories 2,741 3,343 Prepaid expenses & other current assets 28 94 Due from related parties 220 -- ------ ------ TOTAL CURRENT ASSETS 4,189 5,328 PROPERTY, PLANT and EQUIPMENT, net 45 56 PROPERTY, PLANT and EQUIPMENT, held for sale 2,028 2,028 LICENSING RIGHTS 476 -- OTHER ASSETS 4 4 ------ ------ TOTAL ASSETS $ 6,742 $ 7,416 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 37 $ 449 Current maturities of long-term debt 84 94 Accounts payable and accrued expenses 1,261 1,869 ------ ------ TOTAL CURRENT LIABILITIES 1,382 2,412 LONG-TERM DEBT, less current maturities 1,238 1,246 ------ ------ TOTAL LIABILITIES 2,620 3,658 ------ ------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $0.10 par - shares Authorized 15,000,000 Outstanding 13,721,264 in 2001 and 6,822,761 in 2000 1,421 1,371 Additional paid - in capital 39,394 38,977 Deficit note - officer (33,564) (33,461) Promissory note - officer (703) (703) Treasury stock (2,426) (2,426) ------ ------ TOTAL STOCKHOLDERS' EQUITY 4,122 3,758 ------ ------ TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 6,742 $ 7,416 ====== ====== See accompanying notes to consolidated condensed financial statements INNOVO GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (000's except share and per share data) (unaudited) Three Months Ended 3/3/01 2/29/00 ------ ------- NET SALES $ 1,153 $ 812 COST OF GOODS SOLD 654 526 ------ ------ Gross profit 499 286 OPERATING EXPENSES Selling, general and administrative 544 923 Depreciation and amortization 11 79 ------ ------ 555 1,002 LOSS FROM OPERATIONS (56) (716) INTEREST EXPENSE (73) (82) OTHER INCOME (EXPENSE), net 26 (25) ------ ------ INCOME (LOSS) BEFORE INCOME TAXES (103) (823) INCOME TAXES (BENEFIT) -- -- ------ ------ NET INCOME (LOSS) $ (103) $ (823) ====== ====== NET INCOME (LOSS) PER SHARE: Basic and diluted $ (0.01) $ (0.13) WEIGHTED AVERAGE SHARES OUTSTANDING 13,855 6,310 See accompanying notes to consolidated condensed financial statements INNOVO GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (000's except per share data) (unaudited) Three Months Ended 3/3/01 2/29/00 ------ ------- CASH FLOWS USED IN OPERATING ACTIVITIES $ (288) $ (675) ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES Captial Expenditures -- (102) ------ ------- Cash Used in Investing Activities -- (102) ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES Additions to Notes Payable -- 798 Repayments on Notes Payable (412) -- Repayments of Long -Term Debt (19) (21) Other (34) -- ------ ------- Cash (Used In) Provided by Financing Activities (465) 777 ------ ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (753) -- CASH AND CASH EQUIVALENTS, at beginning of period 1,179 -- ------ ------- CASH AND CASH EQUIVALENTS, at end of period $ 426 $ -- ====== ======= See accompanying notes to consolidated condensed financial statements INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of consolidation The accompanying condensed consolidated financial statements include the accounts of Innovo Group Inc. ("Innovo Group") and its wholly owned subsidiaries (collectively the "Company"). All significant intercompany transactions and balances have been eliminated. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended November 30, 2000. In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements contain all necessary adjustments to present fairly the financial position, the results of operations and cash flows for the periods reported. All adjustments are of the normal recurring nature. The results of operations for the above periods are not necessarily indicative of the results to be expected for the full year. NOTE 2 - INVENTORY Inventories are stated at the lower of cost, as determined by the first-in, first-out method, or market. March 3, November 30, 2001 2000 ------- -------- (000's) (000's) Finished goods $ 1,342 $ 1,071 Raw materials 1,476 2,350 ------ ------ 2,818 3,421 Less allowance for obsolescence and slow moving inventory (77) (78) ------ ------ $ 2,741 $ 3,343 ====== ====== NOTE 3 - NOTES PAYABLE Notes payable consisted of the following: March 3, November 30, 2001 2000 ------ ------ (000's) (000's) Accounts receivable factoring facility $ 13 $ 411 Other 24 38 ----- ----- $ 37 $ 449 ===== ===== NOTE 4 - LONG-TERM DEBT Long-term debt consisted of the following: March 3, November 30, 2001 2000 ------ ------- (000's) (000's) First mortgage loan $ 664 $ 673 Non-recourse first mortgage on Florida property 658 667 ------ ------ Total long-term debt 1,322 1,340 Less current maturities (84) (94) ------ ------ $ 1,238 $ 1,246 ====== ====== NOTE 5 - STOCKHOLDERS' EQUITY On February 7, 2001, the Company issued to JD Design, LLC ("JD") 500,000 shares of the Company's Common Stock. Additionally, the Company issued JD a warrant granting JD the right to purchase 250,000 shares of the Company's Common Stock at $1.00 per share in the event that certain sales targets of products bearing the Joe's label are reached by the Company's newly formed subsidiary Joe's Jeans, Inc.. The warrant, in the event JD obtains the rights to exercise it, has a four-year term and vests in 24 equal monthly installments, commencing as of the date of issuance. As consideration for the shares, the Company obtained from JD the licensing rights for Joe's Jeans, a high-end women's denim jean and knit shirt apparel line. Pursuant to the terms of the transactions, the Company employed Joe Dahan, the Manager of JD, as a designer for the Company. As part of his employment agreement, the Company granted Dahan an option to purchase 250,000 shares of Company Common Stock at $1 per share. The option vests in 24 equal monthly installments and has a four-year term. The value of the 500,000 shares of common stock, $480,000, was recorded as licensing rights in the accompanying balance sheet and is being amortized over a ten year term. NOTE 6 - SUBSEQUENT EVENTS On March 26, 2001, the Company entered into a licensing agreement with Candies Inc. ("Candies") pursuant to which the Company obtained the right to design, manufacture and distribute bags, belts and small leather/pvc goods bearing the Bongo trademark. The agreement is to terminate on March 31, 2003 unless the Bongo brand is sold in its entirety, in which case the licensing agreement would terminate immediately. The Company pays Candies a 5% royalty and a 2% advertising fee on the net sales of the Company's goods bearing the Bongo trademark. On March 27, 2001 the Company signed a four-year business consulting agreement with Basic Investor, Inc. ("Basic"), pursuant to which Basic will provide the Company with management and financial consulting services. As consideration, the Company issued Basic a warrant with a three year term, granting Basic the right to purchase the Company's Common Stock as follows: 100,000 shares at $1.50, 100,000 shares at $2.00 and 50,000 shares at $2.50. Additionally, the Company will pay Basic $2,000 per month over the first 18 months of the agreement. The agreement is cancelable by either party with 60 days written notice. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains some forward-looking statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 which involve substantial risks and uncertainties including, without limitation, continued acceptance of the Company's product, product demand, competition, capital adequacy and the potential inability to raise additional capital if required. These forward-looking statements can generally be identified by the use of forward-looking words like "may", "will", "except", "anticipate", "intend", "estimate", "continue", "believe" or other similar words. Similarly, statements that describe our future expectations, objectives and goals or contain projections of our future results of operations or financial condition are also forward-looking statements. Our future results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements. Results of Operations Comparison of the Three Months Ended March 3, 2001 to the Three Months Ended February 29, 2000 Net Sales for the quarter ended March 3, 2001 increased 42% from $812,000 in 2000 to $1,153,000 in 2001. This increase is primarily the result of an greater demand for the Company's craft products and the Company's ability to better meet the production demands associated with orders placed by customers. Additionally, the Company's revenues increased as a result of the sales generated from the Company's newly created Joe's Jeans subsidiary. Joe's Jeans designs, sources, distributes and markets high-end women denim jeans and knit shirts to retail department stores and boutiques. For the period ended March 3, 2001, revenue for the Company's Joe's Jeans' division totaled $200,000. For the first three months of fiscal 2001, the Company's gross margin percentage increased 7.9 percentage points from 35.3% in 2000 to 43.2% in 2001. The increase is a result of the Company's ability to obtain better pricing on imported products from the Orient and the advantageous pricing the Company receives on craft products from its strategic partner, Commerce Investment Group, LLC. The Company's gross margin percentage also increased as a result of the high margins associated with the products sold under the Company's Joe's Jeans division. The Joe's Jeans division experienced a 59% gross margin on the $200,000 of sales of Joe's Jeans products. Selling, General and Administrative costs decreased $379,000 or 41% for the same period as a result of the Company's operational restructuring during the end of fiscal 2000. The Company's operational restructuring included the closure of its domestic production and distribution facilities, a reduction of employees and a decrease in the Company's fixed and variable expenses. Depreciation expenses decreased $68,000 or 86% in the first quarter of 2001 compared to same period in 2000 as a result of the Company's closing of its manufacturing and distribution facility at the end of 2000, and the subsequent disposal of the machinery and equipment used therewith. Furthermore, the Company has listed for sale two real estate properties currently owned by the Company and thus has ceased depreciating these assets. Interest expense for the three months ended March 3, 2001 decreased to $73,000 from $82,000 for the three months ended February 29, 2000 due to the extinguishment of long term debt throughout the end 2000. The interest reduction also reflects the fact that, due to sufficient cash reserves, the Company has reduced the number of receivables presented for factoring. Other income for the comparable period increased from an expense of $25,000 to income of $26,000 due primarily from income generated from tenants who are leasing portions of the Company's former manufacturing facility located in Springfield, TN. Liquidity and Capital Resources Innovo Group Inc. is a holding company and its principal assets are the common stock of the operating subsidiaries. As a result, to satisfy its obligations Innovo Group Inc. is dependent on cash obtained from the operating subsidiaries, either as loans, repayments of loans made by Innovo Group Inc. to the subsidiary, or distributions, or on the proceeds from the issuance of debt or equity securities by Innovo Group Inc.. The subsidiaries primary sources of liquidity are cash flows from operations, including credit from vendors and borrowings. Cash flows from operations were a negative $753,000 for the three months ended March 3, 2001. The primary reason was a net loss of $103,000 as well as cash used to decrease accrued expenses, accounts payable and notes payable. Additionally, the Company's cash flow was effected by an increase in amounts due from related parties, prepaid expenses, other assets and accounts receivables. Influencing the Company's cash flow positively during the quarter was a decrease in inventory of approximately $602,000. The Company has advanced funds to related parties for use in the production and distribution of the Company's products. Such amounts totaled $220,000 as of March 3, 2001 and are payable on demand by the Company or, at the Company's discretion, maybe offset against payables owed by the Company to the related parties. For the first three months of 2001, the Company relied primary on factoring its accounts receivables, trade credit with customers and cash on hand to fund operations. The Company's principal credit facility for working capital has historically been is its accounts receivable factoring arrangements. In July of 2000, the Company's accounts receivable factoring facility with First American was terminated due to First American's decision to cease its factoring operations. In July of 2000, the Company entered into a factoring facility with KBK. This agreement was signed to provide financing for invoices not factored by the Company's existing factoring arrangement with Riviera Finance. The agreement with KBK provides for factoring on 85% of the qualified receivables up to $5,000,000. The agreement calls for a 2% fee on every invoice funded in addition to a per annum rate equal to KBK's base rate in effect on the date of the purchase of the invoice plus 2% per annum. During the first three months of 2001, the Company reduced the number of invoices it presented for factoring due to sufficient cash reserves to meet working capital needs. The Company is currently in negotiations with a new factor in an attempt to obtain more attractive rates. However, there can be no guarantees that the Company will be successful in obtaining a new factoring facility at more favorable rates. As a result, on March 20, 2001, the Company terminated its relationship with Riveria and KBK. In regards to the sales under the Company's Joe's Jeans division, due to the inability of the Company to establish new accounts for the Company's new Joe's Jeans customers with its then exisiting factor in a timely fashion and thus obtain credit approval prior to shipment, the Company factored the receivables associated with the Joe's Jeans products under a factoring arrangement of a related party. The Company believes that its current cash on hand and cash received pursuant to factored receivables under the proposed factoring arrangement should provide sufficient working capital to fund operations and required debt reductions during fiscal 2001. However, due to the seasonality of the Company's business and negative cash flow during the first three months of the year, the Company may be required to obtain additional capital through debt or equity financing. The Company believes that any additional capital, to the extent needed, could be obtained from the sale of equity securities or short-term working capital loans. However, there can be no assurance that this or other financing will be available if needed. The inability of the Company to be able to fulfill any interim working capital requirements would force the Company to constrict its operations. Seasonality The Company's business is seasonal. The majority of the marketing and sales activities take place from late fall to early spring. The greatest volume of shipments and sales are generally made from late spring through the summer, which coincides with the Company's second and third fiscal quarters and the Company's cash flow is strongest in its third and fourth fiscal quarters. Due to the seasonality of the business, the third quarter results are not necessarily indicative of the results for the fourth quarter. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is hereby made to Part I, Item 3 of the Company's Annual Report filed on Form 10-K for the year ended November 30, 2000, which is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES Pursuant to the terms of the Company's Director Stock Incentive Plan (the "Plan"), each non-employee Director is entitled to receive each year an option to buy Common Stock with a nominal initial value of $10,000. The Plan calls for each option to have an exercise price equal to one-half of the market price on the date of grant, and cover a number of shares equal to $10,000 divided the exercise price per share. Market value is the 4 p.m. Eastern Time closing sales price of a share of Common Stock on the Nasdaq Stock Market on the last trading day prior to the date of grant. Consequently, as of December 13, 2000, the Company has issued to four independent Directors options to purchase the Company's Common Stock pursuant to the terms of the Plan and will incur $40,000 of compensation expense which will be amortized over fiscal 2001. On December 19, 2000, the Company issued to Basic Investors Inc. ("Basic") a five-year warrant granting Basic the right to purchase 20,000 shares of Company Common Stock at $0.90 per share. On February 7, 2001, the Company issued to JD Design, LLC ("JD") 500,000 shares of the Company's Common Stock and a warrant granting JD the right to purchase 250,000 shares of the Company's Common Stock at $1.00 per share in the event certain sales targets are reached by the Company's newly formed subsidiary Joe's Jeans, Inc. The warrant has a four-year term and vests in 24 equal monthly installments, commencing as of the date of issuance. Furthermore, the Company granted Joe Dahan an employee incentive option to purchase 250,000 shares of Company Common Stock at $1 per share. The option vests in 24 equal monthly installments and has a four-year term. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Reference Number Description No. 10.79 JD Design, LLC Common Stock and Warrant Purchase Agreement 10.79 10.80 JD Design, LLC Stock Purchase Warrant 10.80 10.81 Employment Agreement, Joe Dahan 10.81 10.82 Option Agreement, Joe Dahan 10.82 10.83 Joe's Jeans Licensing Agreement 10.83 (b) Reports on Form 8-K On March 15, 2001, the Company filed a Current Report on Form 8-K reporting a change in the Company's fiscal year. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVO GROUP INC. April 17, 2001 By: /s/ Samuel J. Furrow, Jr. -------------------------- Samuel J. Furrow, Jr President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature and Title Date /s/ Pat Anderson Chief Executive Officer April 17, 2001 - - ---------------- Pat Anderson Chief Executive Officer and Director /s/ Jay Furrow Acting Chief Financial Officer April 17 , 2001 - - -------------------- Jay Furrow President Exhibit 10.79 COMMON STOCK AND WARRANT PURCHASE AGREEMENT THIS COMMON STOCK AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made and entered into as of the date set forth below by and between Innovo Group Inc., a Delaware corporation (the "Issuer"), and JD Design, LLC , a California limited liability company (the "Purchaser"). RECITALS WHEREAS, Issuer and Purchaser have entered into agreements of even date herewith, which grant Issuer (a) the exclusive right to exploit the "Joe's" trademark (see the "Licensing Agreement", attached hereto as Exhibit A and incorporated herein by reference) and (b) the right to Purchaser's current book of business and customer lists including the right to market the Purchaser's current product lines (see the "Bill of Sale", attached hereto as Exhibit B and incorporated herein by reference); WHEREAS, in consideration ( the "Consideration") for rights granted under the Licensing Agreement and the Bill of Sale Issuer has agreed, inter alia, to issue to Purchaser 500,000 shares of Issuer's common stock, par value $.10 per share (the "Shares"); and WHEREAS, the Issuer and the Purchaser are executing and delivering this Agreement with the understanding that the Shares will be subject to an effective registration statement filed pursuant to the Securities Act of 1933, as amended (the "1933 Act"). NOW THEREFORE, the Issuer and the Purchaser hereby agree as follows: 1. PURCHASE AND SALE OF SHARES. 1.1 Purchase of Shares. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 4 and 5 below, and as Consideration pursuant to the terms of the Licensing Agreement and Bill of Sale, the Issuer shall sell to the Purchaser and the Purchaser shall purchase from the Issuer at closing (the "Closing") the Shares free and clear of all liens and encumbrances. 1.2 Closing Date. The date of the Closing (the "Closing Date") shall be February 7, 2001. The Closing shall occur on the Closing Date at the offices of the Issuer or at any other mutually agreeable location. 1.3 Payment. On the Closing Date, the Purchaser shall pay the Consideration to the Issuer as follows: (a) the Purchaser shall execute and deliver to the Issuer the Licensing Agreement, and (b) the Purchaser shall execute and deliver to the Issuer the Bill of Sale. At the Closing the Issuer shall counter-execute and deliver to the Purchaser the Licensing Agreement and the Issuer shall deliver to the Purchaser certificates representing the Shares with such stock transfers and powers of attorney duly executed on behalf of the Issuer in accordance with the Purchaser's written instructions. 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) and Regulation D promulgated under the 1933 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 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 Issuer consents to (a) the pledge or hypothecation of the Shares by the Purchaser to secure a loan or loans, (b) the acquisition of any such pledged or hypothecated Shares by the lender at a foreclosure sale, and (c) the exercise by the lender, after acquiring ownership of the Shares through foreclosure sale, of any of the rights granted the Purchaser 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 Purchaser'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. Each certificate for Shares issued to the Purchaser or to a subsequent transferee (except as a result of a transfer determined by Issuer's counsel to be free from such restrictions) 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 LAWS. 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. 2.3 Notice of Proposed Transfers. Prior to any proposed transfer of the Shares other than a transfer (a) subject to an effective registration statement under the 1933 Act, (b) to an affiliate of the Purchaser 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 (c) to be made in reliance on Rule 144 under the 1933 Act, the holder thereof shall give written notice to the Issuer 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 Issuer, 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 Issuer to ensure compliance with the provisions of the 1933 Act and letters in form and substance reasonably satisfactory to the Issuer 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 Issuer 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 Issuer. 2.4 [Omitted]. 2.5 Piggy-Back Registration Rights. If at any time prior to the expiration of the Registration Period (as hereinafter defined) the Issuer 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 Issuer shall promptly send to the Purchaser written notice of the Issuer's intention to file a registration statement and of the Purchaser's rights under this Section 2.5. If within 20 days after receipt of such notice, the Purchaser shall so request in writing, the Issuer shall include in the registration statement all or any part of the Shares the Purchaser requests to be registered, subject to the priorities set forth in this Section 2.5. 2.6 Demand Registration Rights. Upon demand by the Purchaser made no sooner than 30 days after the Closing Date, the Issuer will use its best efforts to file a registration statement or to include Purchaser in an existing registration statement for the offer and sale of the Shares by the Purchaser 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 Purchaser. The Issuer shall seek to have such registration statement declared effective or to be effective as regards Purchaser'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 Purchaser will be entitled to demand that the Issuer use its best efforts to file a second registration statement for the offer and sale of such remaining Shares by the Purchaser under the 1933 Act. The second demand shall be subject to the same timetable as the initial demand. 2.7 Other Agreements Respecting Registration of Shares. In connection with the filing of a registration statement by the Issuer which covers any of the Shares, the parties agree that: (a) Unless the offering is an underwritten offering, the Issuer 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 Issuer files a registration statement with respect to any of the Shares, the Purchaser and the Issuer 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 Issuer is registering the offer and sale of any of the Shares, the Purchaser agrees to provide to the Issuer or its attorneys, promptly upon request, such information and materials regarding the Purchaser as shall be reasonably requested in order to effect the registration of the offer and sale of the Shares. (d) The Issuer 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 Issuer shall not be responsible for the fees and expenses of any counsel engaged by the Purchaser, or any underwriter engaged by the Purchaser, 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 Purchaser. (e) If the offering in connection with which the Purchaser demands piggy- back registration rights is an underwritten offering, then the Purchaser shall, unless otherwise agreed by the Issuer, 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 Issuer and the managing underwriter(s) advise the Issuer 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 Issuer 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 Issuer 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 Purchaser 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 Issuer 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 Purchaser in the terms of this Agreement. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents as follows: 3.1 Authority. The Purchaser 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 (a) the validity or enforceability of this Agreement or any other instruments to be executed by the Purchaser to effectuate this Agreement, or (b) 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 Purchaser 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 Purchaser by virtue of or in connection with the transaction contemplated by this Agreement. 3.4 Investment Intent. The Purchaser 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 Issuer Materials. The Purchaser has received and carefully reviewed the Issuer's Amended Annual Report on Form 10-K for the year ended November 30, 1999 filed April 27, 2000, its Quarterly Reports on Form 10-Q for the periods ended February 28, 2000, May 31, 2000 and August 31, 2000, the Company's Current Reports on Form 8-K dated August 11, 2000 and as amended September 15, 2000 (regarding the completion of Phase I the Company's Guez equity financing), September 22, 2000 (regarding the Company's financing arrangements with Mizrachi), October 31, 2000 (regarding the Company's completion of Phase II the Company's Guez equity financing, the first part of the Mizrachi financing, satisfaction at that time of the tangible net worth requirements for listing on the Nasdaq SmallCap Market and the possible change in control of the Company), and December 29, 2000 (regarding the Company's dismissal of BDO Seidman, LLP as the Company's independent public accountants and the retention of Ernst & Young LLP in that capacity), and the Company's Definitive Proxy Statement filed September 19, 2000, and the statement of "Risk Factors" (attached hereto as Schedule 3.5) (collectively, the "Issuer Materials") and such additional Issuer records and information regarding historical and proposed operations as the Purchaser or the Purchaser's advisers have requested. The Purchaser further understands that the information provided by the Issuer to the Purchaser was compiled by the Issuer and has not been independently reviewed or verified in any manner. The Purchaser has had a reasonable opportunity to ask questions of and receive answers from the Issuer concerning the Issuer and all such questions, if any, have been answered to the full satisfaction of the Purchaser. Except as set forth in the Issuer Materials and the representations and warranties set forth in this Agreement, no representations or warranties have been made to the Purchaser by the Issuer or any agent, employee or affiliate of the Issuer, and the Purchaser has relied only on the Issuer Materials and the results of its own investigation in deciding to acquire the Shares and no information acquired from the Purchaser's own investigation contradicts the Issuer Materials in any material respect. The Purchaser 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 Issuer Materials, the Purchaser 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 Accredited Investors. The Purchaser (or each of its shareholders) is an "accredited investor" as that term is defined in Regulation D under the 1933 Act and the Purchaser has (a) such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Shares, (b) had such risk explained to it and has determined that such investment is suitable in view of its financial circumstances and available investment opportunities, (c) sufficient net worth and income to bear the economic risk of losing this entire investment, and (d) no current need for liquidity of the investment and no reason to anticipate any change in its financial circumstances which may cause or require any sale, transfer or other distribution of the Shares. 3.7 Reliance. The Purchaser 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 Issuer is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of the Purchaser to acquire the Shares. The Purchaser 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 and until 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 Purchaser understands that it may become subject to the reporting requirements under Section 13 of the Securities Exchange Act of 1934 ("the 1934 Act") and of Regulation 13(d) promulgated thereunder if its "beneficial ownership" exceeds 5% of the outstanding shares of common stock. The Purchaser 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 Purchaser understands that the Issuer assumes no responsibility for the reporting by the Purchaser under Section 13; provided, however, that merely as an accommodation, and without assuming any responsibility for Section 13 reporting by the Purchaser, the Issuer will, with respect to any report which must be filed through the Securities and Exchange Commission Electronic Data Gathering and Retrieval ("EDGAR") system, upon the receipt from the Purchaser 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 EDGAR system and transmit such report to the EDGAR system. 3.9 No Governmental Review. The Purchaser 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 Purchaser represents that the Consideration paid for its investment in the Shares is the sole personal property of the Purchaser and the Shares are being acquired solely for the Purchaser's own account. 3.11 No General Solicitation. The Purchaser 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 ISSUER. The Issuer represents as follows: 4.1 Compliance with Reporting Requirements. The Issuer is a reporting company under the 1934 Act. The Issuer 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 Issuer 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 Issuer 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 Issuer has full power and authority to carry on its business as it is now being conducted and to own its assets. The Issuer 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 Issuer. The execution, delivery and performance of this Agreement by the Issuer does not, and the consummation of the transactions contemplated hereby will not (a) violate or result in a breach of any provisions of the Issuer's Articles of Incorporation or Bylaws, (b) 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 Issuer is a party or is bound or by which the Issuer's assets are affected, or (c) constitute a violation of any law, regulation, rule or ordinance applicable to the Issuer. 4.4 Authorized and Outstanding Shares. The authorized capital stock of the Issuer is 40 million shares of common stock. As of the date hereof, there are approximately 13,721,264 shares outstanding, and there are warrants outstanding for the purchase of approximately 6,687,023 shares of common stock. Except as set forth in this Agreement or as disclosed in the Issuer Materials, there are not outstanding, nor is the Issuer bound by, any subscriptions, options, preemptive rights, warrants, calls, commitments, synthetic stock, or agreements or rights of any character requiring the Issuer to issue, or entitling any person or entity to acquire, any additional shares of capital stock or any other equity security of the Issuer, including any right of conversion or exchange under any outstanding security or other instrument, and the Issuer is not obligated to issue or transfer any shares of its capital stock for any purpose. There are not outstanding obligations of the Issuer to repurchase, redeem or otherwise acquire any outstanding shares of capital stock of the Issuer. 4.5 Authority. The Issuer has full power and authority to enter into this Agreement and has taken all action, corporate and otherwise, necessary to authorize (a) the execution, delivery and performance of this Agreement and all ancillary agreements to be executed, delivered and performed by the Issuer in connection therewith, and (b) the completion of the transaction contemplated hereby and the execution and delivery on behalf of the Issuer 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 Issuer in connection therewith. Upon delivery of the Shares, and the payment therefor, title to the Shares will pass to the Purchaser 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 Purchaser 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 Issuer is required as a condition to (i) the validity or enforceability of this Agreement or of any other instruments to be executed by the Issuer 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 Issuer in connection therewith, have been properly executed and delivered by the duly authorized officer of the Issuer, and constitute valid and legally binding obligations of the Issuer and are enforceable against the Issuer in accordance with their terms. 4.7 No Misrepresentations in Issuer Materials. (a) The disclosures in the Issuer 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 Issuer 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 Issuer, whether or not arising from transactions in the ordinary course of business. The financial statements contained in the Issuer Materials present fairly the financial condition of the Issuer 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 Issuer has no liabilities or obligations, whether accrued, absolute, contingent or otherwise, which would materially and adversely affect the financial condition of the Issuer, except and to the extent recorded or disclosed in the Issuer Materials. No dividends are due or unpaid by the Issuer. (b) Except as set forth in the Issuer Materials, there are no actions at law or in equity, proceedings, governmental proceedings or investigations pending or threatened against the Issuer or against or with respect to the business or assets of the Issuer, and the Issuer is not in material default with respect to any decree, injunction or other order of any court or government authority. The Issuer 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 Issuer with respect to this Agreement or the transaction contemplated hereby and to the knowledge of the Issuer, no grounds exist for any such action, proceeding or investigation. (c) Except as set forth in the Issuer Materials, to the best knowledge of the Issuer, 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 Issuer. 4.8 No Commissions. No fees or commissions are payable by the Issuer 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 Purchaser's Obligation. The obligation of the Purchaser hereunder to purchase the Shares at the Closing is subject to the representations and warranties of the Issuer 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, as well as the Issuer's execution of the Licensing Agreement. 5.2 Conditions to the Issuer's Obligation. The obligation of the Issuer hereunder to sell the Shares at the Closing is subject to the representations and warranties of the Purchaser 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, and of the Purchaser's execution of the Licensing Agreement and delivery of the Bill of Sale. 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 Delaware 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 Purchaser 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 Issuer. The parties further agree that any arbitration action between them shall be heard in Los Angeles, California, and expressly consent to the jurisdiction and venue of the United States District Court for the Central District of California, 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 Purchaser, the Issuer, 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 Issuer nor the Purchaser 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 (a) upon receipt, when delivered personally; (b) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (c) three (3) days after being sent by U.S. certified mail, return receipt requested; or (d) 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 Purchaser: JD Design, LLC Joe Dahan 5804 E. Slauson Ave Commerce, CA 90040 With a copy to: Deborah Greaves, Esq. 5804 E. Slauson Avenue Commerce, Ca 90040 If to the Issuer: Jay Furrow 2633 Kingston Pike, Suite 100 Knoxville, TN 37919 Telephone: (865) 546-1110 Facsimile: (865) 546-9277 With a copy to: Jerry L. Sims, Esq. Sims Moss Kline & Davis LLP 400 Northpark Town Center, Suite 310 1000 Abernathy Road, N.E. Atlanta, Georgia 30328 Telephone: (770) 481-7200 Facsimile: (770) 481-7210 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 Purchaser may not assign its rights hereunder without the consent of the Issuer. 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 Issuer and the Purchaser shall survive the Closing. 6.10 Publicity. The Issuer and the Purchaser 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 Issuer shall be entitled, without the prior approval of the Purchaser, 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 Issuer nor the Purchaser 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 Merger. This Agreement contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. 6.17 Governing Law. The terms of this Agreement and interpretation thereof shall be governed by the laws of the State of Delaware, without reference to conflicts of law principles. IN WITNESS WHEREOF, the Issuer and the Purchaser have caused this Stock Sale Agreement to be duly executed as of the 7th day of February, 2001. ISSUER: INNOVO GROUP INC. By: /s/ Jay Furrow --------------- Jay Furrow, President PURCHASER: JD DESIGN, LLC By: /s/ Joe Dahan -------------- Joe Dahan Manager Exhibit A See Exhibit 10.83 filed herewith Exhibit B BILL OF SALE FOR VALUE RECEIVED, the undersigned JD Design, LLC of Commerce, CA (Seller) hereby sells and transfers unto Innovo Group Inc. of Knoxville, TN (Buyer), and its successors and assigns forever, Seller's current book of business, as more particularly described on Exhibit A, attached hereto ("Property"). Seller warrants and represents that it has good title to said Property, full authority to sell and transfer same and that said goods and chattels are being sold free and clear of all liens, encumbrances, liabilities and adverse claims, of every nature and description. Seller further warrants that it shall fully defend, protect, indemnify and save harmless the Buyer and its lawful successors and assigns from any and all adverse claim that may be made by any party against said Property. It is provided, however, that Seller disclaims any implied warranty of condition, merchantability or fitness for a particular purpose, said Property being sold in its present condition "as is" and "where is." Seller acknowledges and agrees that at any time and without any further action, Buyer may transfer the Property assigned to Buyer herein to a wholly owned subsidiary of Buyer that is formed for the sole purpose of conducting business with respect to the Property. Signed this 7th day of February,2001. SELLER In the presence of: JD Design, LLC Name: /s/ Joe Dahan /s/ Deborah Greaves --------------- - - ------------------- Title: Manager Deborah Greaves Witness EXHIBIT A of Bill of Sale All of Seller's current book of business and customer lists including the right to manufacture and market all of Seller's current product lines and all of the good will and business associated therewith. A list of Seller's open orders is annexed hereto as schedule I. SCHEDULE 3.5 RISK FACTORS RISK FACTORS This offering involves a high degree of risk, including those risks described below. You should carefully consider these risk factors, together with all of the other information in this prospectus, before deciding to invest in shares of our common stock. RISKS ASSOCIATED WITH OUR PAST FINANCIAL RESULTS We have a history of Losses We have incurred losses in each of the five fiscal years in the period ended November 30, 1999 and have incurred a loss in the current fiscal year to date of $1,853,000 for the nine months ended August 31, 2000. As of August 31, 2000, we have an accumulated deficit of $29,163,000. There can be no assurances that we will generate net income or positive cash flow in the future. We Could Be Required to Cut Back or Stop Operations If We Are Unable to Raise or Obtain Needed Funding Our ability to continue operations will depend on our positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing. We do not know if we will be able to raise additional funding or if such funding will be available on favorable terms. We could be required to cut back or stop operations if we are unable to raise or obtain needed funding. Our cash requirements to run our business have been and will continue to be significant. Since 1997, our 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 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 The company has continued to generate losses through the first three quarters of fiscal 2000. As of August 31, 2000 we had an accumulated deficit of approximately $29,163,000. Although we have undertaken numerous measures to increase sales and operate more efficiently, the company may experience further losses and negative cash flows. We can give you no assurance that the company will in fact operate profitably in the future. Risks Associated with Our Business We Must Expand Sales of Our Existing Products and Successfully Introduce New Products to Increase Revenues and Attain Profitability Our success will depend on our ability to expand sales of our current products to new and existing customers, as well as the development or acquisition of new product designs and the acquisition of new licenses. We have little control over the demand for our existing products, and we cannot assure you that the new products we introduce will achieve acceptance. Failure to expand our sales of existing products and new products would significantly and negatively affect our ability to achieve profitability. The Loss of One Major Customer Would Substantially Reduce Revenues and the Potential for Profitable Operations For fiscal 1999, two customers accounted for sales in excess of 54.1% of net sales: Wal-Mart, which accounted for 26.9% of net sales, and National Car Rental, which accounted for 27.2% of net sales as the result of a single promotional campaign order. During the nine month period ended August 31, 2000, Wal-Mart continues to be a major customer. The loss of Wal-Mart as an ongoing customer would have a material adverse effect on the Company. We Are Dependent on Certain Contractual Relationships to Generate Our Revenues Our sales are dependent to some degree upon the contractual relationships we establish with licensors to exploit, on a generally non-exclusive basis, proprietary rights in well known logos, marks and characters such as league and team logos and marks licensed by Major League Baseball, the National Football League, certain NASCAR drivers and major colleges and universities. Although we believe we will continue to meet all of our 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 our business. The Seasonal Nature of Our Business Makes Management More Difficult, Severely Reduces Cash Flow and Liquidity During Parts of the Year and Could Force Us to Curtail Operations Our business is seasonal. The majority of our marketing and sales activities take place from late fall to early spring. Our greatest volume of shipments and sales occur from late spring through the summer, which coincides with our second and third fiscal quarters. Our 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 our results of operations for the year. We are likely to experience periods of negative cash flow throughout each year and a drop-off in business commencing each December, which could force us to curtail operations if adequate liquidity is not available. We cannot assure you that the effects of such seasonality will diminish in the future. We Have 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 products of the company's wholly owned subsidiary, Innovo, Inc. ("Innovo"). Although the manufacture and sale of products bearing sports logos requires a license, our licenses are non-exclusive and we do not have any control over the granting of additional licenses by the licensing entities. Some of our competitors possess substantially greater financial, technical and other resources than we do, including the ability to implement more extensive marketing campaigns. We do not hold a dominant competitive position in any market, and our ability to sell our products is dependent upon the anticipated popularity of our designs, the logos or characters our products bear, the price and quality of our products and our ability to meet our customers' delivery schedules. RISKS ASSOCIATED WITH OUR SECURITIES We Do Not Anticipate Paying Any Dividends on the Common Stock The company has not paid any dividends nor do we anticipate paying any dividends on the common stock in the foreseeable future. Our operating subsidiaries are currently restricted as to the payment of dividends to us. It is also our present policy to retain earnings, if any, for the use in the development and expansion of the company's business. We Have 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. We may expect to seek financing which could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. Those additional issuances of capital stock would result in a reduction of your percentage interest in our 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, including the shares offered by this prospectus, into the market or by the registration of any other of our securities under the Securities Act may significantly and negatively affect the prevailing market price for the common stock. In addition, 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. Our board of directors has the power to establish the dividend rates, preferential payments on our 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. We Are Currently Controlled by Our Management and Other Related Parties Our executive officers, directors and their affiliates as of December 15, 2000 beneficially owned or had voting control over approximately 4,035,000 shares, or approximately 29.4% of outstanding shares of common stock, and have the right to acquire approximately 1,845,000 additional shares pursuant to outstanding options and warrants, for total beneficial ownership of 42.9% of outstanding shares if all of such options and warrants were exercised. Because of their stock ownership and/or positions with the company, these persons have been 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. A Change in Control of the Company May Occur and We Are Dependent on New Supply Arrangements with the Guez Group to Generate a Substantial Portion of Our Revenues During August 2000, the Company entered into investment and supply and distribution agreements with Commerce Investment Group, LLC ("Commerce") and affiliated entities controlled by Mr. Hubert Guez (collectively the "Guez Group"). Under the terms of the agreements, the Guez Group purchased $1,500,000 worth of shares of the company's common stock for $1.10 per share. Contemporaneously, the company entered into a Supply Agreement and a Distribution Agreement pursuant to which the Guez Group provides certain distribution and manufacturing services to the company. After stockholder approval on October 2000, the Guez Group purchased an additional 1.5 million shares of company common stock as well as three-year term warrants to purchase 3.3 million shares of stock at $2.10 for an additional $1.5 million in cash and are entitled to appoint three members of the company's Board of Directors. The company also used those investment proceeds to purchase goods and services from the Commerce affiliates under the terms of the Supply and Distribution Agreements. Members of the Guez Group currently hold 23.1% of the outstanding common stock and would own 44.9% if they exercised the 3,000,000 warrants that are currently exercisable, which would increase their ownership to a position larger than that of existing management and could result in a change in control of the company. Although the Supply and Distribution Agreements were entered into on arms-length terms, management expects that the company will be dependent on the Guez Group for its domestic manufacturing and distribution for an extended period and future modifications of those agreements could be determined by the Guez Group, which has a conflict of interest as to their terms. Our Stock Price Is Extremely Volatile and May Decrease Rapidly The trading price and volume of our 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 us or our competitors, and general conditions in our 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 our common stock. Including the 10,125,000 shares subject to this prospectus, there are a total of approximately 20,221,264 shares that may be sold in the Nasdaq SmallCap Market by selling stockholders pursuant to registration statements filed by the company. Sales by those selling stockholders could cause substantial declines in the market price of the common stock. If We 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, we 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 our 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 we are 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. "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. On March 15, 2000, Nasdaq notified the company that it was not in compliance with the minimum net tangible assets requirements of $2 million. While the Company continued to fall short of the required net tangible level as of the end of May 2000, the Company was granted a temporary exception from this standard subject to Innovo meeting certain conditions. The conditions required the Company to obtain a minimum net tangible asset level of $4 million prior to August 11, 2000, which was accomplished, and a minimum net tangible asset level of $5 million on or before October 31, 2000. The company met the requirements through stock and warrant sales to the Guez Group and others, but there can be no assurance that the company will continue to meet Nasdaq listing requirements in the future if we experience substantial losses or if the common stock trades at under $1.00, which it has done recently. In the future if we experience substantial losses or the stock continues to trade below $1.00 our stock could be delisted. If Nasdaq Delists Our Common Stock You Would Need to Comply with the Penny Stock Regulations Which Could Make it More Difficult to Sell Your Common Stock In the event that our 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 purchaser and receive the purchaser'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 penny 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 penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with it. If our common stock were considered a penny stock, the ability of broker/dealers to sell the common stock and the ability of purchasers 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. We cannot assure you that trading in our securities will not be subject to these or other regulations in the future which would negatively affect the market for such securities. Exhibit 10.80 NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT. STOCK PURCHASE WARRANT To Purchase 250,000 Shares of Common Stock of INNOVO GROUP, INC. THIS CERTIFIES that, for value received, JD Design, LLC (the "Holder"), is entitled, upon the terms and subject to the conditions hereinafter set forth and set forth in the Licensing Agreement of even date herewith between Holder and Company (see "Licensing Agreement" attached hereto as Exhibit A and incorporated herein by reference), on or prior to the close of business on the fourth anniversary of the date of issuance of this Warrant (the "Termination Date"), but not thereafter, to subscribe for and purchase from Innovo Group Inc., a Delaware corporation (the "Company"), up to Two Hundred and Fifty Thousand (250,000) shares (the "Warrant Shares") of Common Stock, $.10 par value, of the Company (the "Common Stock"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be $1.00, as provided for in that certain Common Stock and Warrant Purchase Agreement dated as of February 7, 2001 pursuant to which this Warrant has been issued (the "Purchase Agreement"). The Exercise Price and the number of shares for which the Warrant s exercisable shall be subject to adjustment as provided herein. In the event of any conflict between the terms of this Warrant and the Purchase Agreement, the Purchase Agreement shall control. Capitalized terms used and not otherwise defined herein shall have the meanings set forth for such terms in the Purchase Agreement. The Warrant Shares shall vest in 24 equal monthly installments, commencing with the issuance of the Warrant (the "Vesting Schedule"). 1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and the terms of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed (see Annex 1). 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Except as provided in Section 5 herein, exercise of the purchase rights represented by this Warrant may be made at any time or times pursuant to the Vesting Schedule, and before the close of business on the Termination Date by the surrender of this Warrant and the duly executed Notice of Exercise Form annexed hereto (see Annex 2), at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased by wire transfer or cashier's check drawn on a United States bank, the holder of this Warrant shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the holder hereof within five (5) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Holder faxes a Notice of Exercise to the Company, provided that (a) such fax notice is followed by delivery of the original notice, (b) the Exercise Price has been paid to the Company, and (c) any taxes required to be paid by Holder pursuant to Section 5 have been paid within three (3) Trading Days of such fax notice. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or federal or state transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant. 7. Transfer, Division and Combination. (a) The Holder (and its transferees and assigns), by acceptance of this Warrant, covenants and agrees that it is acquiring the Warrants evidenced hereby, and, upon exercise hereof, the Warrant Shares, for its own account as an investment and not with a view to distribution thereof. The Warrant Shares have not been registered under the Securities Act or any state securities laws and no transfer of any Warrant Shares shall be permitted unless the Company has received notice of such transfer, at the address of its principal office set forth in the Purchase Agreement, in the form of assignment attached hereto, accompanied by an opinion of counsel reasonably satisfactory to the Company that an exemption from registration of such Warrants or Warrant Shares under the Securities Act is available for such transfer, except that no such opinion shall be required after the registration for resale by the Holder of the Warrant Shares, as set forth in the Purchase Agreement. Upon any exercise of the Warrants, certificates representing the Warrant Shares shall bear a restrictive legend substantially identical to that set forth on the face of this Warrant certificate. Any purported transfer of any Warrant or Warrant Shares not in compliance with the provisions of this section shall be null and void. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 8(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 8. (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. 8. No Rights as Shareholder until Exercise. This Warrant does not entitle the Holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant certificate or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which shall not exceed that customarily charged by the Company's transfer agent), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Adjustments of Exercise Price and Number of Warrant Shares, Stock Splits, etc. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: in the event the Company (i) pays a dividend in shares of Common Stock or makes a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivides its outstanding shares of Common Stock into a greater number of shares of Common Stock, (iii) combines its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issues any shares of its capital stock in a reclassification of the Common Stock. In the event of any of the foregoing occurrences, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder of this Warrant shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder of this Warrant shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 13. For purposes of this Section 13, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 13 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Holder of this Warrant notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such notice, in the absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Notice of Corporate Action. If at any time: (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other righ; or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to another corporation; or (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the record date for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 18(d). 16. Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Principal Market upon which the Common Stock may be listed. The Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would cause an adjustment reducing the current Exercise Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate 3 action which may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Common Stock at such adjusted Exercise Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. (a) Jurisdiction. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant shall constitute a contract under the laws of Delaware without regard to its conflict of law, principles or rules. (b) Restrictions. The Holder hereof acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company fails to comply with any provision of this Warrant, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement. (e) Limitation of Liability. No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or Holders of Warrant Shares. (h) Indemnification. The Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of any failure by the Company to perform or observe in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Warrant; provided, however, that the Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements are found in a final non-appealable judgment by a court to have resulted from Holder's negligence, bad faith or willful misconduct. (i) Amendment. This Warrant may be modified or amended or the provisions hereof waived only with the written consent of the Company and the Holder. (j) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (k) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: February 7, 2001 INNOVO GROUP, INC. By: /s/ Jay Furrow -------------- Jay Furrow President NOTICE OF EXERCISE To: Innovo Group, Inc. (1) The undersigned hereby elects to purchase _________ shares of Common Stock (the "Common Stock"), of Innovo Group, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: _______________________________ (Name) _______________________________ (Address) _______________________________ Dated: ______________________________ Signature ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is _______________________________________________________________. _______________________________________________________________ Dated: ______________, _______ Holder's Signature: _____________________________ Holder's Address: _______________________________ _______________________________ Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. Exhibit 10.81 EMPLOYMENT AGREEMENT BETWEEN INNOVO GROUP INC. AND JOE DAHAN THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between INNOVO GROUP INC., a Delaware corporation (the "Company"), and JOE DAHAN (the "Employee"), shall be effective as of the 7th day of February, 2001. RECITALS WHEREAS, the Company is entering into an agreement, of even date herewith, with JD Design, LLC, a California limited liability company, the terms of which grant Company the right to use and exploit the "Joe's" trademark ("the Licensing Agreement"); WHEREAS, the Company is creating the "Joe's Division" for the purposes of exercising its rights under the Licensing Agreement; and WHEREAS, the Company desires to hire the Employee as the President of the Joe's Division of the Company and Employee desires to accept such employment, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the Company and the Employee do hereby agree as follows: 1. Definitions. (a) "Accrued Obligations" shall mean (i) any amounts deferred by the Employee and not yet paid by the Company pursuant to a valid election to defer the receipt of all or a portion of such payments made in accordance with any plan of deferred compensation sponsored by the Company, (ii) any earned but unpaid vacation pay for the current year, (iii) any amounts owing to the Employee for reimbursement of expenses properly incurred by the Employee through the Date of Termination and which are reimbursable in accordance with the reimbursement policy of the Company. (b) "Base Salary" shall have the meaning set forth in Section 5(a). (c) "Board" shall mean the Board of Directors of the Company. (d) "Cause" shall mean that the Employee has, in the judgment of a majority of the Board (i) committed a felony, or committed an act of fraud, embezzlement or theft in connection with his duties with the Company or in the course of his employment with the Company; (ii) willfully caused damage to property of the Company; (iii) been convicted of a criminal offense (either a misdemeanor involving acts of dishonesty, theft or moral turpitude, or a felony); or (iv) engaged in a willful and deliberate material breach of his obligations under Section 4 of this Agreement which breach (under this clause iv) has been communicated to the Employee with specificity by written notice, and which has not been cured to the reasonable satisfaction of the Board within a reasonable period of time, which shall not be less than ten (10) days, nor more than thirty (30) days, following receipt of such written notice by the Employee. The Board shall provide the Employee with an opportunity to meet with the Board in order to provide the Employee an opportunity to refute or explain acts or omissions referred to in such written notice. For the purpose of this Section, no act or omission shall be considered willful unless done or omitted to be done in bad faith and without reasonable belief that such act or omission was done in the best interest of the Company. (e) (omitted) (f) (omitted) (g) "Constructive Termination" shall mean a material breach by the Company of its obligations under Section 4(a) or another material obligation of the Company under this Agreement, which failure has been communicated to the Company with specificity by written notice and which has not been cured within a reasonable period of time, which shall not be less than ten (10) days, nor more than thirty (30) days, following receipt of such written notice by the Company. (h) "Date of Termination" shall have the meaning set forth in Section 6(e). (i) "Disability" shall mean disability whereby the Employee is unable to render the services provided for by this Agreement by reason of illness, injury or incapacity (whether physical, mental, emotional or psychological) for a period of either (i) ninety (90) consecutive days or (ii) one hundred eighty (180) days in any consecutive three hundred sixty-five (365) day period. (j) "Incentive Plan" shall have the meaning as set forth in Section 5(b). (k) "Notice of Termination" shall have the meaning as set forth in Section 6(d). (l) "Qualified Plan" shall mean any retirement plan that may be maintained by the Company which is intended to meet the requirements of the Internal Revenue Code of 1986, as amended. (m) "Subsidiary" shall mean any majority-owned subsidiary of the Company. 2. Employment. The Company hereby employs the Employee as the President of "Joe's Division", and Employee hereby accepts such employment. 3. Term. The initial term (the "Initial Term") of this Agreement shall commence on the date hereof and shall continue until the second anniversary of the date hereof (the "Initial Expiration Date"); provided, however, that this Agreement shall at all times be subject to earlier termination in accordance with the provisions hereof. On the Initial Expiration Date and each anniversary of the Initial Expiration Date, the term of this Agreement automatically shall be extended for an additional one (1) year term (the "Extended Term") unless either party gives written notice to the other not less than sixty (60) days prior to the end of the then current term that it does not desire to extend the Term. For purposes of this Agreement, "Term" means the Initial Term and, as so extended, the Extended Term. 4. Position and Duties; Business Time. (a) Position and Duties. The Employee shall serve as the President of the Joe's Division of the Company or another position which shall be either of comparable rank or a promotion and shall have such responsibilities and duties as assigned to him by the Chief Executive Officer of the Company or the Board from time to time, provided: (i) such assignment of such responsibilities and duties are those which are customarily associated with the responsibilities of a president of an apparel division involved in the creation and production of a trademarked line; (ii) the position in which the Employee shall serve, if different from the position specified in this subsection shall not have materially diminished responsibilities or authority as compared with those of the position expressly set forth in this subsection. (b) Business Time. The Employee agrees to devote his full business time to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to her hereunder, to the extent necessary to discharge such responsibilities. Notwithstanding the foregoing, Employee may provide services to other companies and may pursue his own business interests, provided that (i) no such outside activities conflict with Employee's duties to the Company under this Agreement, and (ii) Employee continues to fully perform his obligations under this Agreement. 5. Compensation. The Employee shall be entitled to the following compensation and benefits for so long as the Employee remains an employee of the Company: (a) Base Salary. The Employee shall receive a Base Salary payable in equal bi-weekly installments (or such other installments as are provided by the Company for employees generally) at an annual rate of $100,000. The Company shall review the Base Salary periodically and in light of such review may, in its sole discretion, increase (but not decrease) the Base Salary taking into account any change in the Employee's responsibilities, increases in compensation of other Employees with comparable responsibilities, performance of the Employee and other pertinent factors, and such adjusted Base Salary shall then constitute the "Base Salary" for purposes of this Agreement. (b) Incentive and Savings Plans; Retirement and Death Benefit Programs. In so far as the Company has implemented any plan or program for its employees, the Employee shall be entitled to participate in all incentive and savings plans and programs, including stock option plans and other equity-based compensation plans, and in all employee retirement, Employee retirement and Employee death benefit plans on a basis no less favorable than that basis generally available to Employees of the Company holding comparable positions or having comparable responsibilities. (c) Other Benefit Plans. The Employee, his spouse and their eligible dependents (as defined in, and to the extent permitted by, the applicable plan), as the case may be, shall be entitled to participate in or be covered under all medical, dental, group disability, group life, severance, accidental death and travel accident insurance plans and programs of the Company to the extent such plans and programs are generally available to Employees of the Company holding comparable positions or having comparable responsibilities. (d) Other Perquisites. The Employee shall also be entitled to: (i) prompt reimbursement for all reasonable expenses incurred by the Employee in the performance of his duties and in accordance with the policies and procedures of the Company; (ii) two (2) weeks paid vacation, such paid vacation time to be increased (but not decreased) in accordance with Company policy. (e) Equity Opportunity. The Employee shall be granted a qualified stock option under the Company's stock option plan on the date of commencement of his employment with the Company for the purchase of an aggregate of two hundred and fifty thousand (250,000) shares of common stock of the Company at an exercise price of one dollar ($1) per share, which option shall have a term of 4 years and shall vest in equal percentages monthly over a 24 month period (see Exhibit A attached hereto and incorporated herein by reference). In the event the Employee's employment is terminated (i) by the Employee, (ii) due to Employee's death or Disability, or (iii) by the Company for Cause, any and all rights to any unvested options shall terminate. In the event there is a Constructive Termination of the Employee's employment or the Company terminates Employee's employment for any reason other than for Cause, then Employee's rights in the options shall fully vest. 6. Termination of Employment. (a) Disability; Death. The Company may terminate the Employee's employment after having established the Employee's Disability, by giving to the Employee written notice of its intention to terminate his employment, and his employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice if the Employee shall fail to return to full-time performance of his duties within thirty (30) days after such receipt. Notwithstanding the foregoing, the Company may not terminate Employee due to a disability if such termination would contravene any applicable Federal or State law. If the Employee dies during the term of this Agreement, his employment hereunder shall be deemed to cease as of the date of his death. (b) Termination by the Company. The Company at any time may terminate the Employee's employment for Cause or without Cause. In the event that Employee is terminated without cause, Employee shall still be entitled to receive, inter alia, all Accrued Obligations as well as the rights granted in Section 5(e) herein. (c) Constructive Termination. In the event of a Constructive Termination, the Employee may terminate his employment but shall still be entitled to receive, inter alia, all Accrued Obligations as well as the rights granted in Section 5(e) herein. (d) Notice of Termination. Any termination by the Company for Cause or by the Employee based on Constructive Termination shall be communicated by a written Notice of Termination to the other party hereto given in accordance with Section 14(c). For purposes of this Agreement, a "Notice of Termination" means a written notice given in the case of a termination for Cause, and in the case of Constructive Termination a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty (30) days after the receipt of such notice). (e) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Employee's employment terminates. 7. Obligations of the Company Upon Termination. Upon termination of the Employee's employment with the Company, the Company shall have the following obligations: (a) Death or Disability. If the Employee's employment is terminated by reason of the Employee's death or Disability, the Company shall have no further obligations to the Employee's legal representatives under this Agreement other than payment of the Accrued Obligations and obligations that may be statutorily imposed. (b) Termination other than by Death or Disability. If the Employee's employment shall be terminated by the Company for Cause, or for any reason other than for Cause or the Employee's employment shall be terminated due to death or Disability, or the Employee terminates his employment, the Company shall pay the Employee the Accrued Obligations. With the exception of accrued vacation time which must be paid to the Employee upon the Date of Termination, the Employee shall be paid all such Accrued Obligations in a lump sum in cash within thirty (30) days of the Date of Termination and the Company shall have no further obligations to the Employee under this Agreement, unless otherwise required by Section 5 (e) hereof, by a Qualified Plan, pursuant to a valid election to defer the receipt of all or a portion of such payments made in accordance with any plan of deferred compensation sponsored by the Company, or as otherwise may be statutorily required. 8. (omitted) 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company and for which the Employee may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Employee may have under any other agreements with the Company, including, but not limited to stock option agreements. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 10. (omitted) 11. Dispute Resolution. (a) Consultations. Employee and Company acknowledge that the expeditious and equitable settlement of disputes arising with respect to the interpretation or performance of this Agreement or in connection herewith is to their mutual advantage. To this end, the parties therefore agree to use their best endeavors to resolve all differences of opinion and to settle all disputes with respect to such interpretation or performance of which any party shall have notified the other party in writing through cooperation and consultation between themselves. (b) Disputes. NOTIWTHSTANDING THE FOREGOING, ANY DISPUTE, CONROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE SUBMITTED FOR FINAL AND BINDING ARBITRATION IN LOS ANGELES COUNTY, CALIFORNIA, BY AN INDEPENDENT RETIRED JUDGE OF THE SUPERIOR COURT OF CALIFORNIA AVAILABLE FOR ALTERNATIVE DISPUTE RESOLUTION, IN ACCORDANCE WITH THE APPLICABLE REULES OF JUDICIAL ARBITRATION AND MEDIATION SERVICE (:JAMS/ENDISPUTE), OR SUCH OTHER ALTERNATIVE DISPUTE ENTITY AGREED TO BY THE PARTIES IN WRITING; provided that: (i) any party wishing to submit such dispute to arbitration shall give a written notice of such intention to the other party, which shall describe in reasonable detail the issue in dispute and any other relevant facts; (ii) in no event shall the arbitrator be related to, employed by or have had at any time a substantial or ongoing business relationship with any of the parties or their respective affiliates; (iii) the jurisdiction of the arbitrator shall not be limited to any dispute or disputes identified in the said written notice; (iv) each party shall pay its share of the fees required by JAMS/ENDISPUTE, such as arbitrator fees, a s and when required by JAMS/ENDISPUTE, subject to the arbitrator's discretion to reallocate such fees as part of any award or determination, and if any party fails to pay its share when requested, the other party may move on ten days' prior written notice before the arbitrator (or tribunal administrator if no arbitrator has yet been appointed) for a default award against the non-paying party); (v) JAMS/ENDISPUTE shall have the right and power to render all forms of relief, including equitable relief, but each party shall have the right to seek injunctive or other relief in court if necessary to protect its rights during the pendency of any arbitration; (vi) if any proceeding must be brought to compel arbitration or if for any reason arbitration is found to be inapplicable, then the parties expressly agree that any action at law or in equity arising out of or relating to this Agreement) other than an action to enforce a judgment, award or ruling of a court or arbitrator) will be filed only in the Courts of the State of California for the County of Los Angeles, or the United States District Court for the Central District of California, and the parties hereby consent and submit expressly to the jurisdiction of such courts for the purpose of litigating any such action; (vii) each party agrees that any arbitral award resulting from any such arbitration shall be enforceable against it in any jurisdiction to which such party or the assets thereof shall be subject; and (viii) each party agrees not to impede the enforceability of any decision or award of the arbitrators in any way, and without limiting the generality of the foregoing, no party will file objections against any such decision or award, each party hereby waiving the right to do so the extent permitted by applicable law. 12. Confidential Information and Non-Solicitation. (a) The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data, including without limitation all trade secrets, relating to the Company and its business (i) obtained by the Employee during his employment by the Company, and (ii) which is not otherwise publicly known (other than by reason of an unauthorized act by the Employee) and is subject to efforts that are reasonable under the circumstances to maintain its secrecy. After termination of the Employee's employment with the Company, the Employee shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Upon termination of the Employee's employment for any reason, the Employee, for the twelve (12) month period following the Notice of Termination (or the Date of Termination if no such notice is given), shall not, on his own behalf or on behalf of any person or entity, directly or indirectly solicit or aid in the solicitation of any employees of the Company to leave their employment. (c) The Employee agrees that the covenants of confidentiality and non- solicitation contained in this Section 12 are reasonable covenants under the circumstances and necessary to protect the business interests and properties of the Company. The Employee agrees that irreparable loss and damage will be suffered by the Company should the Employee breach any of the covenants contained in this Section 12. Accordingly, the Employee agrees that the Company, in addition to all remedies provided at law or in equity, shall be entitled to a temporary restraining order and temporary and permanent injunctions to prevent a breach or contemplated breach of any of the covenants contained in this Section 12. In addition, in the event that this Section 12 is determined to be unenforceable in part, it shall be construed to be enforceable to the maximum extent permitted by law. (d) As used in this Section 12, "Company" shall include all subsidiaries, affiliates and divisions of the Company. 13. Successors and Assignment. (a) This Agreement is personal to the Employee and, without the prior written consent of the Company, shall not be assignable by the Employee otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. (c) Both parties agree that this Agreement may be assigned to a wholly owned subsidiary of the Company, which subsidiary shall be formed for the sole purpose of the terms of, and operations under, the Licensing Agreement. 14. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, applied without reference to principles of conflict of laws. (b) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors or legal representatives. (c) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party, by overnight delivery or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: Joe Dahan 5804 E. Slauson Avenue Commerce, CA 90040 If to the Company: Innovo Group Inc 2633 Kingston Pike, Suite 100 Knoxville, TN 37919 Attn: General Counsel (with a copy to the attention of the Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith). Communications delivered by hand or by overnight delivery shall be deemed received on the date of delivery and communications sent by registered or certified mail shall be deemed received three (3) business days after the sending thereof. (d) Tax Withholding. The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (f) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (g) Entire Agreement. This Agreement expresses the entire understanding and agreement of the parties regarding the terms and conditions governing the Employee's employment with the Company; provided, however, that except as specifically provided herein, the terms of this Agreement do not supersede the terms of any grant or award to the Employee under any stock option or profit sharing program of the Company. IN WITNESS WHEREOF, the Employee has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, all effective as of the day and year first above written. INNOVO GROUP INC. By: /s/ Jay Furrow -------------- Jay Furrow Its: President /s/ Joe Dahan ------------- JOE DAHAN (Employee) Exhibit 10.82 NEITHER THIS OPTION NOR THE UNDERLYING COMMON SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE CORPORATION WILL NOT TRANSFER THIS OPTION OR THE UNDERLYING COMMON SHARES UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH OPTION OR SUCH SHARES, AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATES SECURITIES LAWS, (ii) IT FIRST RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933. INNOVO GROUP, INC. STOCK INCENTIVE AGREEMENT This Stock Incentive Agreement (this "Agreement") is entered into this 7th day of February, 2001 by and between INNOVO GROUP INC., a Delaware corporation with its offices located at 2633 Kingston Pike, Suite 100, Knoxville, TN 37919, (the "Corporation"), and Joe Dahan, a California resident whose principal address is 2872 Nichols Canyon Road, Los Angeles, CA 90046 ("Dahan"). WHEREAS, the Corporation has entered into an Employment Agreement with Dahan of even date herewith, a copy of which is attached hereto as Exhibit A and the terms of which are incorporated herein by reference (the "Employment Agreement"); WHEREAS, the terms of the Employment Agreement provide that the Corporation provide an option for Dahan to purchase shares of the Corporation's common stock ("Shares"); WHEREAS, this Agreement will provide equity incentives for Dahan to become and remain a key employee of the Corporation, by granting Dahan options to purchase shares of the Corporation's common stock ; WHEREAS, in order to provide the aforementioned equity incentives to Dahan the Board has determined to grant Dahan an incentive option ("Option") to purchase 250,008 shares under the Corporation's 2000 Employee Stock Incentive Plan (the "Plan") subject to the further terms and conditions stated in this Agreement. NOW THEREFORE, IT IS AGREED AS FOLLOWS: Section 1. Grant of Option. Subject to the terms and conditions of the Plan, this Agreement and the Employment Agreement, the Corporation hereby grants to Dahan, during the period ending at 5:00 p.m. Knoxville, Tennessee time on February 7, 2005 ("Expiration Date"), the option to purchase from the Corporation, from time to time, at a price of $1.00 per Share ("Exercise Price"), up to, but not to exceed, an aggregate of 250,008 Shares ("Option Shares"). Section 2. Exercise of Option. 2.1 Date Exercisable. This Option shall become exercisable by Dahan with respect to 10,417 Shares per month for the next 24 months after the date of this Agreement and during which time Dahan continues to serve as an employee of the Corporation, up to a maximum of 250,008 Shares. 2.2 Manner of Exercise. This Option may be exercised in whole or in part by delivery to the Corporation, from time to time, of a written notice in substantially the form set forth in Exhibit B hereto, signed by Dahan, specifying the number of Option Shares that Dahan then desires to purchase, together with cash, certified check, or bank draft payable to the order of the Corporation, or other form of payment acceptable to the Corporation, for an amount of United States dollars equal to the Exercise Price of such shares. The Corporation may, in its sole discretion, elect to allow payment of all or a portion of the Exercise Price to be secured by a pledge, the form and substance of which must be in a form satisfactory to the Corporation. 2.3 Certificates. Promptly after any exercise in whole or in part of this Option by Dahan, the Corporation shall deliver to Dahan a certificate or certificates for the number of Option Shares with respect to which this Option was so exercised, registered in Dahan's name. 2.4 Duration of Option. This Option, to the extent not previously exercised, shall terminate upon the earliest of the following dates: 2.4.1 the Expiration Date; 2.4.2 immediately upon Dahan's resignation or upon the termination of Dahan by the Company for cause, as "cause" is defined in the Employment Agreement; or 2.4.3 upon Dahan's termination as an employee, if such termination is by reason of Dahan's disability (as defined in IRC Section 22(e)(3)) or death. Section 3. Transferability. 3.1 Restriction. This vested portion of this Option is not transferable or assignable except by will or by the laws of descent and distribution. 3.2 Exercise in Event of Death or Disability. Whenever the word "Dahan" is used in any provision of this Agreement under circumstances when the provision should logically be construed to apply to Dahan's guardian, legal representative, executor, administrator, or the person or persons to whom the vested portion of this Option may be transferred by testamentary will or by the laws of descent and distribution, the word "Dahan" shall be deemed to include such person or persons. 3.3 No Rights As Shareholder Prior To Exercise. Dahan shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, unless and until this Option is exercised. The rights of Dahan are limited to those expressed in this Option and are not enforceable against the Corporation except to the extent set forth herein. Section 4. Anti-Dilution Provisions. 4.1 The number and kind of Shares purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time as follows: 4.1.1 In case the Corporation shall (i) pay a dividend or make a distribution on the outstanding Shares payable in Shares, (ii) subdivide the outstanding Shares into a greater number of Shares, (iii) combine the outstanding Shares into a lesser number of Shares, or (iv) issue by reclassification of the Shares any Shares of the Corporation, Dahan shall thereafter be entitled, upon exercise, to receive the number and kind of shares which, if this Option had been exercised immediately prior to the happening of such event, Dahan would have owned upon such exercise and been entitled to receive upon such dividend, distribution, subdivision, combination, or reclassification. Such adjustment shall become effective on the day next following (i) the record date of such dividend or distribution, or (ii) the day upon which such subdivision, combination, or reclassification shall become effective. 4.1.2 In case the Corporation shall consolidate or merge into or with another corporation, or in case the Corporation shall sell or convey to any other person or persons all or substantially all the property of the Corporation, Dahan shall thereafter be entitled, upon exercise, to receive the kind and amount of shares, other securities, cash, and property receivable upon such consolidation, merger, sale, or conveyance by a holder of the number of Shares which might have been purchased upon exercise of this Option immediately prior to such consolidation, merger, sale, or conveyance, and shall have no other conversion rights. In any such event, effective provision shall be made, in the certificate or articles of incorporation of the resulting or surviving corporation, in any contracts of sale and conveyance, or otherwise so that, so far as appropriate and as nearly as reasonable may be, the provisions set forth herein for the protection of the rights of Dahan shall thereafter be made applicable. 4.1.3 Whenever the number of Shares purchasable upon exercise of this Option is adjusted pursuant to this Section, the Exercise Price per Share in effect immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon exercise of this Option immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately after such adjustment, shall be adjusted so that so that the aggregate Exercise Price of this Option remains the same. 4.1.4 No adjustment in the number of Shares which may be purchased upon exercise of this Option shall be required unless such adjustment would require an increase or decrease of more than 1/100 of a Share in the number of Shares which may be so purchased, provided, however, that any adjustment which by reason of this Section is not required to be made shall be carried forward cumulatively and taken into account in any subsequent calculation. All calculations under this Section shall be made to the nearest cent or to the nearest one-hundredth of a Share, as the case may be. 4.1.5 In the event that at any time, as a result of an adjustment made pursuant to this Section,Dahan shall become entitled to receive upon exercise of this Option cash, property, or securities other than Shares, then references to Shares in this Section shall be deemed to apply, so far as appropriate and as nearly as may be, to such cash, property, or other securities. 4.1.6 Irrespective of any adjustments in the Exercise Price or in the number or kind of Shares purchasable upon exercise of this Option, the form of Options theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Option. Section 5. Officer's Certificate. Whenever the number or kind of securities purchasable upon exercise of this Option or the Exercise Price shall be adjusted as required by the provisions of Section 4, the Corporation shall forthwith file with its Secretary or its Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted number of kind of securities purchasable upon exercise of this Option and the adjusted Exercise Price determined as herein provided and setting forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustments. Each such officer's certificate shall be made available at all reasonable times for inspection by Dahan and the Corporation shall, forthwith after each such adjustment, mail by certified mail a copy of such certificate to Dahan. Section 6. No Effect On Powers of Corporation. The existence of this Option shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustments, recapitalizations, reorganization, or other changes in the Corporation's capital structure or its business, or any merger or consolidation of the Corporation, or any issue of bonds, debentures, preferred shares with rights greater than or affecting the Shares, or the dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Section 7. No Waiver of Corporation's Right to Terminate Employment. Nothing in this Agreement shall be construed to confer or shall be deemed to confer on Dahan any right to continue as an employee of the Corporation, or to continue any other relationship with, the Corporation or any parent or subsidiary of the Corporation, or limit in any way the right of the Corporation or its shareholders to terminate Dahan's employment or other relationship at any time, with or without cause, subject to the provisions of the Employment Agreement. Section 8. Compliance With Securities Laws. 8.1 No Exercise Until Compliance. If the Corporation at any time determines that registration or qualification of the Shares or this Option under state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable, then this Option may not be exercised, in whole or in part, until such registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation.. 8.2 Investment Interest. If required by the Corporation at the time of any exercise of this Option as a condition to such exercise, Dahan shall enter into an agreement with the Corporation in form satisfactory to counsel for the Corporation by which Dahan (i) shall represent that the Shares are being acquired for Dahan's own account for investment and not with a view to, or for sale in connection with, any resale or distribution of such Shares, and (ii) shall agree that, if Dahan should decide to sell,transfer, or otherwise, dispose of any of such Shares, Dahan may do so only if the shares are registered under the Securities Act of 1933 and the relevant state securities laws, unless, in the opinion of counsel for the Corporation, such registration is not required, or the transfer is pursuant to the Securities and Exchange Commission Rule 144; provided, however, that the Corporation agrees to use its best efforts to cause a Registration Statement on Form S-8 with respect to the Shares issuable upon exercise of this Option to be filed and declared effective as soon as is practicable, and to maintain the effectiveness of such Registration Statement until such time as the Option has been fully exercised or terminated. Section 9. Violation. Any provision of this Agreement to the contrary notwithstanding, this Option shall not be exercisable at any time, in whole or in part, if issuance and delivery of the Option Shares would violate any law or registration. The Corporation hereby warrants and represents that it presently has no reason to believe that the Agreement violates any laws or registrations. Section 10. Representations of Dahan. Dahan represents that he has been advised that he is not being represented in this transaction by the Corporation's attorneys and that Dahan has been advised to seek separate legal counsel for advice in this matter. Section 11. Notices. Any notice under this Agreement shall be in writing and shall be effective when actually delivered in person or three days after being deposited in the U.S. mail, registered or certified, postage prepaid and addressed to the party at the address stated in this Option or such other address as either party may designate by written notice to the other. Section 12. Law Governing. This Option shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the date first above written. INNOVO GROUP INC. By: /s/ Jay Furrow -------------- Jay Furrow, President /s/ Joe Dahan ------------- Joe Dahan EXHIBIT B INNOVO GROUP INC. NOTICE OF EXERCISE OF OPTION I hereby exercise my rights under the Stock Incentive Agreement ("Agreement") granted by INNOVO GROUP INC. ("Corporation") and seek to purchase _____________ shares of common stock of the Corporation pursuant to said Agreement. I understand that this exercise is subject to all the terms and provisions of the Agreement. Enclosed is my check in the sum of $_______________ in payment for such shares. Dated:_____________,________ ____________________________ Signature ___________________________ Address ___________________________ City, State, Zip ___________________________ Social Security Number Receipt is hereby acknowledged of the delivery to me by INNOVO GROUP INC. of certificates for _________________________ common shares of the Corporation purchased by me pursuant to the terms and conditions of the Agreement referred to above. Date:_____________,________ __________________________ Signature Exhibit 10.83 LICENSE AGREEMENT THIS LICENSE AGREEMENT made as of February 7th, 2001,by and between JD Design, LLC, a California limited liability company ("Licensor"), with a principal place of business at 5804 E. Slauson Avenue, Commerce, CA 90040, and Innovo Group Inc., a Delaware corporation ("Licensee"), with a principal place of business at 2633 Kingston Pike, Suite 100, Knoxville, TN 37919. WHEREAS, Licensor has developed a brand of high quality apparel, accessories and related merchandise bearing the "Joe's" label; and WHEREAS, Licensee desires to obtain, and Licensor is willing to grant, an exclusive license pursuant to which Licensee shall have the right to use the "Joe's" label on a world-wide basis for the purposes and on the terms set forth herein; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and undertakings hereinafter set forth, the parties hereto agree as follows: 1. Definitions. As used herein, the term: 1.1 "License" shall mean the exclusive, non-assignable right to use the Trademarks in connection with the manufacture and/or importation and sale of Licensed Products in the Territory. 1.2 "Licensed Products" shall mean those items set forth on Schedule A attached hereto and made a part hereof, and all bearing the Trademarks. 1.3 "Licensor" shall mean JD Design, LLC, a California limited liability company. 1.4 "Licensee" shall mean Innovo Group Inc., a corporation organized under the laws of Delaware. 1.5 "Territory" shall mean all parts of the world including, without limitation, the United States of America, its territories and possessions (including Puerto Rico) and any military bases and duty free shops situated therein. 1.6 "Trademarks" shall mean the trademarks set forth on Schedule B attached hereto. Licensor shall have the sole right to determine the manner in which each Trademark shall be used in connection with each particular Licensed Product. The parties hereto acknowledge that approval of the Trademarks set forth on Schedule B are pending approval by the U.S. Patent and Trademark Office. 2. Grant of License. 2.1 Subject to the terms and provisions hereof, Licensor hereby grants Licensee and Licensee hereby accepts the License. Licensor shall neither use nor authorize third parties to use the Trademarks in connection with the manufacture, sale and/or importation of Licensed Products in the Territory during the term of this Agreement without Licensee's prior approval. 2.2 Licensee shall not have the right to use Licensee's name and label on or in connection with the Licensed Products, except with the prior approval by Licensor of the use and placement of Licensee's name. Licensee shall, at the option of Licensor, include on its business materials and/or the Licensed Products an indication of the relationship of the parties hereto in a form approved by Licensor. 2.3 Licensor represents and warrants that it has full corporate right, power and authority to enter into this Agreement, to perform all of its obligations hereunder, and to consummate all of the transactions contemplated herein. 2.4 Except as specifically authorized under this Agreement, Licensee shall not purport to grant any right, permission or license hereunder to any third party, whether at common law or otherwise. 2.5 Licensee recognizes that there are many uncertainties in the business contemplated by this Agreement. Licensee agrees and acknowledges that no representations, warranties or guarantees of any kind have been made to Licensee, either by Licensor or by anyone acting on its behalf, other than those expressly contained in this Agreement. For example, no representations concerning the value of the Licensed Products or the prospects for sales or profit levels have been made; rather Licensee has made it's own independent business evaluation in deciding to manufacture and distribute the Licensed Products pursuant to the terms of this Agreement. 3. Design Standards and Prestige of Licensed Products. 3.1 Licensee acknowledges that the Trademarks have established prestige and goodwill and are recognized in the minds of the public, and that it is of great importance to each party that the high standards and reputation that Licensor has established be maintained in the manufacture and sale of the Licensed Products. Accordingly, all items of Licensed Products manufactured by or on behalf of the Licensee shall be of high quality and high workmanship. Licensee shall supply Licensor with samples of the Licensed Products (including, if Licensor so requests, samples of labeling and packaging used in connection therewith) and shall obtain Licensor's approval prior placing such items in production. Licensor shall provide such approval in writing within 10 days from receipt of any such samples. Licensor's failure to provide written approval or rejection of any such items within 10 days from receipt thereof shall be deemed to be an approval. Licensee shall also provide Licensor with samples of Licensed products, labeling and packing from time to time during production, and shall, at all times during the term hereof, upon Licensor's request, make its manufacturing facilities available to Licensor, and shall use its best efforts to make available each subcontractor's manufacturing facilities for inspection by Licensor's representatives during normal working hours. 3.2 In the event that any Licensed Product is, in the judgment of Licensor, not being manufactured, distributed or sold with first quality workmanship, Licensor shall notify Licensee thereof in writing and Licensee shall promptly adjust the manufacturing, distribution and sales processes for such Licensed Product to conform thereto. If a Licensed Product does not strictly conform after Licensor's request and such strict conformity is not achieved after at least one (1) resubmission, at the option of Licensor the Trademarks shall be promptly removed from all defective Licensed Product. In that event the Licensed Product may be sold by Licensee, provided the product does not contain any tags, labels or other identifying marks which bear the Trademarks without Licensor's prior approval. 3.3 Licensee shall make its personnel, and shall use its best efforts to make the personnel of any of its sublicensees, contractors, suppliers and other resources, available by appointment during normal business hours for consultation with the Licensor. Licensee shall make available to Licensor, upon reasonable notice, marketing plans, reports and information which Licensee may have with respect to Licensed Products in the Territory. At least once each year during the term hereof, if so desired by Licensor, senior executive personnel of Licensor and Licensee shall arrange meetings to discuss the conduct of all activities hereunder (including, without limitation, strategies for maintaining brand images in the Territory) and to pursue in good faith the resolution of problems which may be encountered by them. 4. Marketing. 4.1 The sale and distribution of the Licensed Products in the Territory shall be performed exclusively by Licensee or under its supervision or control. 4.2 Licensee acknowledges that in order to preserve the goodwill attached to the Trademark, the Licensed Products are to be sold at prices and terms reflecting the prestigious nature of the Trademarks, it being understood, however, that Licensor is not empowered to fix or regulate the prices at which the Licensed Products are to be sold, either at the wholesale or retail level. 4.3 Licensee shall maintain the high standards of the Trademark and the Licensed Products, in all advertising, packaging and promotion of the Licensed Products. Licensee shall not employ or otherwise release any of such advertising or packaging or other business materials relating to any Licensed Products or bearing the Trademark, unless and until Licensee shall have received approval by Licensor. Licensee may include on its business materials an indication of the relationship of the parties hereto in a form approved by Licensor. .4 Consistent with the high quality and prestige of the Trademark and products manufactured by, or under license from, Licensor and its affiliates, Licensee undertakes, during the term hereof, diligently to manufacture and sell all Licensed Products, to use its best efforts to create a demand therefore, supply such demand, and maintain adequate arrangements and facilities for the distribution of Licensed Products throughout the Territory. As an essential part of its distribution program, Licensee shall maintain adequate inventories (consistent with good industry practice) of all Licensed Products at distribution points reasonably adequate to satisfy the requirements of its customers for a full line of such Licensed Products and to expedite the delivery thereof. 5. Trademark Protection. 5.1 Licensee shall cooperate fully and in good faith with Licensor for the purpose of securing and preserving Licensor's rights in and to the Trademarks. If Licensor and Licensee agree that registering Licensee's exclusive rights with respect to the Trademarks in the Territory is appropriate, each of them shall undertake such action as may be necessary to obtain such registration; provided, however, that the cost of obtaining and maintaining such registration shall be borne by Licensee. Neither Licensor nor Licensee shall act unreasonably with respect to a request of the other in connection with the preceding sentence. 5.2 Licensee shall not, during the term of this Agreement or thereafter, (a) attack Licensor's title or rights in and to the Trademarks in any jurisdiction or attack the validity of this License or the Trademarks or (b) contest the fact that Licensee's rights under this Agreement (i) are solely those of a licensee, manufacturer and distributor and (ii) subject to the provisions of paragraph 10 hereof, cease upon termination of this Agreement. The provisions of this paragraph 5.2 shall survive the termination of this Agreement. 5.3 All right, title and interest in and to all samples, patterns, sketches, designs, artwork, logos and other materials furnished by or to Licensor, whether created by Licensor or Licensee, are hereby assigned in perpetuity to, and shall be the sole property of, Licensor, as the case may be. Licensee shall assist Licensor to the extent necessary in the protection of or the procurement of any protection of Licensor's rights to the Trademarks and the designs, design patents and copyrights furnished hereunder, and Licensor, if Licensor so desires, may commence or prosecute any claims or suits in Licensor's own name or, if legally necessary and permissible, in the name of Licensee or join Licensee as a party thereto. Licensee shall promptly notify Licensor in writing of any uses which may be infringements or imitations by others of the Trademark on articles similar to those covered by this Agreement which may come to Licensee's attention. Licensor shall have the sole right to determine whether or not any action shall be taken on account of any such infringements or imitations, and shall bear one hundred percent (100%) of the costs of all actions or proceedings it elects to take; provided, however, that if Licensor declines to take action with respect to a particular infringer Licensee may, with Licensor's prior written consent, undertake such action at Licensee's expense. 6. Royalties and Warrant. 6.1 Licensee shall pay to Licensor earned royalties based on the net sales price of all Licensed Products sold by Licensee. Earned royalties shall be an amount equal to three percent (3%) applied to the "Net Sales" of all Licensed Products sold under this Agreement, including, without limitation, any sales made pursuant to the terms of paragraph 10 hereof. Licensee shall prepare or cause to be prepared a "Statement of Operations" which reflects the computation of the Net Sales for all Licensed Product sold during the period commencing on the date hereof and ending on July 31, 2001 and for each six-month period ending the last day of July and January of each consecutive year thereafter ("Reporting Periods"). A Statement of Operations shall be furnished to Licensor together with payment of the earned royalties, if any, for each Reporting Period no later than September 30 (for Reporting Periods ending on the last day of July) or March 31 (for Reporting Periods ending on the last day of January). The term "Net Sales" shall mean with respect to customers who are not affiliates of Licensee, gross sales less trade discounts, merchandise returns, sales taxes or VAT taxes. In the event Licensee sells Licensed Products to any of its affiliates, Net Sales Price shall be calculated by determining the bona fide gross sales price for such Licensed Product to comparable independent (non- affiliate) customers, irrespective of Licensee's internal accounting treatment of such sales, and deducting therefrom customary trade discounts, merchandise returns, sales taxes or VAT taxes. All merchandise returns shall be reflected in the Statement of Operations for the Reporting Period in which the returns are actually made. For purposes of this Agreement, affiliates of Licensee shall mean all persons and business entities, whether corporations, partnerships, joint ventures or otherwise, which now or hereafter control, or are owned or controlled, directly or indirectly by Licensee, or are under common control with Licensee. Licensee shall separately account for all sales to affiliates in all Statements of Operations provided to Licensor. 6.2 If the payment of any installment of royalties is delayed for any reason, interest shall accrue on the unpaid principal amount of such installment from and after the date which is 10 days after the date the same became due pursuant to paragraph 6.1 hereof at the prime rate of interest then in effect at Chase Manhattan Bank, New York, New York or any successor bank. 6.3 The obligation of Licensee to pay royalties hereunder shall be absolute notwithstanding any claim which Licensee may assert against Licensor. Licensee shall not have the right to set-off, compensate or make any deduction from such royalty payments for any reason whatsoever. 6.4 All references to dollars in this Agreement shall, except as otherwise expressly provided herein, mean U.S. dollars. All royalties due hereunder shall be paid in U.S. dollars. 6.5 In the event both the Net Sales Target and the Gross Profit Target of Licensed Products are achieved with respect to the any of the years ending on the dates provided in the schedule below, then Licensor shall be entitled to additional royalty payments ("Additional Royalty Payments") established by the schedule with respect to those years in which both the Net Sales and Gross Profit Targets are achieved: Year Ending Revenue Target Gross Profit Target Add. Roaylty Payment - - ----------- -------------- ------------------- -------------------- 12-31-01 $ 2 million 55% $ 60,000 12-31-02 $ 4 million 55% $100,000 12-31-03 $ 8 million 55% $160,000 12-31-04 $15 million 55% $225,000 The Licensor shall have the option to receive any Additional Royalty Payments in cash or Innovo Group Inc. common stock. If the Licensor chooses to receive Additional Royalty Payments in Innovo Group Inc. common stock, the stock shall be priced at the 10-day average closing market price prior to January 31st of the year following the year in which the Net Sales and Gross Profit Targets where achieved. For purposes of this Agreement, Net Sales shall mean gross sales minus dilution, including, but not limited to, chargebacks, returns, promotions and allocations. For purposes of this Agreement, Gross Profit shall be calculated in accordance with Generally Accepted Accounting Principles (GAAP) and shall mean Nets Sales less costs of goods sold. Cost of goods sold shall include, but shall not be limited to, costs of raw materials, trims, labels, and packaging materials, as well as manufacturing and assembly costs actually incurred by Licensor. 6.6 In the event that the Net Sales and Gross Profit Targets established by the schedule in paragraph 6.5 are achieved in any one of the scheduled years, then Licensor shall receive warrants for 250,000 shares of Innovo Group Inc. common stock with an exercise price of $1 per share, with a 4-year term and equal monthly vesting over the first 24 months. When a Revenue Target is achieved, the warrants shall be issued immediately following the year end of the year in which the Net Sales Target is achieved and the vesting period and term shall commence immediately upon issuance. Licensor shall not be entitled to any additional warrants if the Net Sales Targets are reached in more than one of the scheduled years. 7. Accounting. 7.1 Licensee shall at all times keep an accurate account of all operations within the scope of this Agreement and shall render a full statement of such operations for each Reporting Period in writing to Licensor in its Statement of Operations in accordance with paragraph 6.1 hereof. The Statement of Operations shall account separately for each different category of Licensed Products and shall itemize aggregate gross sales, trade discounts, merchandise returns, sales of miscuts and damaged merchandise and net sales for the Reporting Period. Such statements shall be in sufficient detail to be audited from the books of Licensee. Once annually, if requested in writing by Licensor, which may be in connection with the regular annual audit of Licensee's books, Licensee shall furnish an annual Statement of Operations reflecting aggregate gross sales, trade discounts, merchandise returns sales taxes and VAT taxes and resulting Net Sales of all Licensed Products made or sold by Licensee which is certified by Licensee's chief financial officer or, if Licensee's records are examined by an independent accountant, by such independent accountant. Each Statement of Operations furnished by the Licensee shall be certified by the chief financial officer of Licensee. 7.2 Licensor and its duly authorized representatives shall have the right, on reasonable notice and during regular business hours, for the duration of the term of this Agreement and for one (1) year after the expiration of the disposal period set forth in paragraph 10.2 hereof, to examine the books of account and records and all other documents, materials and inventory in the possession or under the control of Licensee and its successors with respect to the statements and information required pursuant to paragraphs 6.1 and 7.1 hereof. All such books of account, records and documents shall be maintained and kept available by Licensee for at least the duration of this Agreement and for five (5) years thereafter. Licensor shall have free and full access thereto in the manner set forth above and shall have the right to make copies and/or extracts therefrom. 8. Term. (a) The term of this Agreement shall commence as of the date hereof and shall terminate on February 7, 2011 (the "Initial Term"). (b) If no Event of Default (as defined in paragraph 9.1 hereof) shall have occurred and not been cured or waived, Licensee shall have the option, upon providing notice to Licensor on or before June 30, 2010, to renew this Agreement for an additional (10) year period (the "First Renewal Term") so as to expire on February 7, 2021, on the terms and conditions set forth herein. (c) If no Event of Default (as defined in paragraph 9.1 hereof) shall have occurred and not been cured or waived, Licensee shall have the option, upon providing notice to Licensor on or before June 30, 2020, to renew this Agreement for an additional ten (10) year period (the "Second Renewal Term") so as to expire on February 7, 2031, on the terms and conditions set forth herein, except that there shall be no further option of renewal. 9. Default; Change of Control. 9.1 Each of the following shall constitute an event of default ("Event of Default") hereunder: (i) Any installment of royalty payments is not paid when due and such default continues for more than fifteen (15) days after written notice thereof to Licensee; or (ii) Licensee defaults in performing any of the other terms of this Agreement and continues in such default for a period of thirty (30) days after notice thereof (unless the default cannot be cured within such thirty (30) day period and Licensee shall have commenced to cure the default and proceeds diligently thereafter to cure within an additional fifteen (15) day period); or (iii) If Licensee shall, after thirty (30) days' written notice from Licensor, continue to use the Trademarks in an unauthorized or improper manner and/or if Licensee shall make an unauthorized disclosure of confidential information or materials given or loaned to Licensee by Licensor which, unless it relates to designs or business plans for upcoming seasons, is expressly designated by Licensor as confidential when so given or loaned; or (iv) Licensee institutes proceedings seeking relief under a bankruptcy act or any similar law, or consents to entry of any order for relief against it in any bankruptcy or insolvency proceeding or similar proceeding, or files a petition for or consent or answer consenting to reorganization or other relief under any bankruptcy act or other similar law, or consents to the filing against it of any petition for the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of it or of any substantial part of its property, or a proceeding seeking such an appointment shall have been commenced without Licensee's consent and shall continue undismissed for sixty (60) days or an order providing for such an appointment shall have been entered, or makes an assignment for the benefit of creditors, or admits in writing its inability, to pay its debts as they become due or fails to pay its debts as they become due, or takes any action in furtherance of the foregoing; or (v) The calling of a meeting of creditors, appointment of a committee of creditors or liquidating agents, or offering a composition or extension to creditors by, for or of Licensee. 9.2 If any Event of Default described in paragraphs 9.1(i), (ii), or (iii) shall occur, Licensor shall have the right, exercisable in its sole discretion, to terminate this Agreement and the License upon ten (10) days' written notice to Licensee of its intention to do so, and upon the expiration of such ten (10) day period, this Agreement and the License shall terminate and come to an end. If the Event of Default described in paragraphs 9.1(iv) or (v) shall occur, this Agreement and the License shall thereupon forthwith terminate and come to an end without any need for notice to Licensee. Any termination of this Agreement shall be without prejudice to any remedy of Licensor for the recovery of any monies then due it under this Agreement or in respect to any antecedent breach of this Agreement, and without prejudice to any other right of Licensor including, without limitation, damages for breach to the extent that the same may be recoverable and Licensee agrees to reimburse Licensor for any costs and expenses (including attorneys' fees) incurred by Licensor in enforcing its rights hereunder. No assignee for the benefit of creditors, receiver, liquidator, sequestrator, trustee in bankruptcy, sheriff or any other officer of the court or official charged with taking over custody of Licensee's assets or business shall have any right to continue the performance of this Agreement. 9.3 During the term of this Agreement, Licensee shall not dissolve, liquidate or wind-up its business. In addition, Licensee shall not, without prior written notice to Licensor (i) merge or consolidate with or into any other corporation, or (ii) directly or indirectly sell or otherwise dispose of all or of a substantial portion of its business or assets. Licensor shall have the option, upon receipt of such notice, to terminate this Agreement upon notice to Licensee. 10. Disposal of Stock Upon Termination or Expiration. 10.1 Within fifteen (15) days following the termination of this Agreement for any reason whatsoever including the expiration of the term hereof, and on the last of each month during the disposal period set forth in paragraph 10.2 hereof, Licensee shall furnish to Licensor a certificate of Licensee listing its inventories of Licensed Products (which defined term for purposes of this paragraph 10.1 shall include, but shall not be limited to, all fabrics, trim and packaging which are used in the manufacture and marketing of Licensed Products) on hand or in process wherever situated. Within fifteen (15) days after delivery of such certificate, Licensor shall have the right to conduct a physical inventory of Licensed Products in Licensee's possession or under Licensee's control. Licensor or Licensor's designee shall have the option (but not the obligation) to purchase from Licensee all or any part of Licensee's then existing inventory of Licensed Products upon the following terms and conditions: (i) Licensor shall notify Licensee of its or its designee's intention to exercise the foregoing within 30 days of delivery of the certificate referred to above and shall specify the items of Licensed Products to be purchased. (ii) The price for Licensed Products manufactured by or on behalf of Licensee on hand or in process shall be Licensee's standard cost (the actual manufacturing cost) for each such Licensed Product. The price for all other Licensed Products which are not manufactured by Licensee shall be Licensee's landed costs therefor. Landed costs for the purposes hereof means the F.0.B. price (as defined under the INCOTERMS 1990 of the International Chamber of Commerce) of the Licensed Products together with customs, duties, and brokerage, freight and insurance. (iii) Licensee shall deliver the Licensed Products purchased within twenty (20) days of receipt of the notice referred to in clause (i) above. Payment of the purchase price for the Licensed Products so purchased by Licensor or its designee shall be payable upon delivery thereof, provided that Licensor shall be entitled to deduct from such purchase price any amounts owed it by Licensee (and/or to direct payment of any part of such merchandise to any supplier of Licensed Products in order to reduce an outstanding balance due to such supplier from Licensee). 10.2 In the event Licensor chooses n ot to exercise the option referred to in paragraph 10.1 hereof with respect to all or any portion of Licensed Products, for a period of one hundred and twenty (120) days after termination of this Agreement for any reason whatsoever, except on account of breach of provisions of paragraph 3, 4 or 6 hereof, Licensee may dispose of Licensed Products which are on hand or in the process of being manufactured at the time of termination of this Agreement, provided that (i) Licensee fully complies with the provisions of this Agreement, including specifically those contained in paragraphs 3, 4 and 6 hereof in connection with such disposal, and (ii) said disposal takes place within one hundred and twenty (120) days after the termination or expiration of the term hereof, as the case may be. 10.3 Notwithstanding anything to the contrary contained herein, in the event that upon the expiration or termination of the term hereof for any reason Licensee has not rendered to Licensor all accounting statements then due, and paid (i) all royalties and other amounts then due to Licensor and (ii) all amounts then due to any supplier of Licensed Products or components thereof (collectively, "Payments"), Licensee shall have no right whatsoever to dispose of any inventory of Licensed Products in any manner. In addition, if during any disposal period Licensee fails timely to render any accounting statements, or certificates of inventory as required under paragraph 10.1 hereof, or to make all Payments when due, Licensee's disposal rights hereunder shall immediately terminate without notice. 11. Effect of Termination. 11.1 It is understood and agreed that except for the License to use the Trademarks only as specifically provided for in this Agreement, Licensee shall have no right, title or interest in or to the Trademarks. Upon and after the termination of this License, all rights granted to Licensee hereunder, together with any interest in and to the Trademarks which Licensee may acquire, shall forthwith and without further act or instrument be assigned to and revert to Licensor. In addition, Licensee will execute any instruments requested by Licensor which are necessary to accomplish or confirm the foregoing. Any such assignment, transfer or conveyance shall be without consideration other than the mutual agreements contained herein. Licensor shall thereafter be free to license to others the right to use the Trademarks in connection with the manufacture and sale of the Licensed Products covered hereby, and Licensee will refrain from further use of the Trademarks or any further reference to them, direct or indirect, or any other trademark, trade name or logo that is confusingly similar to the Trademarks, or associated with the Trademark in any way, in connection with the manufacture, sale or distribution of Licensee's products, except as specifically provided in paragraph 10 hereof. It is expressly understood that under no circumstances shall Licensee be entitled, directly or indirectly, to any form of compensation or indemnity from Licensor or their affiliates, as a consequence to the termination of this Agreement, whether as a result of the passage of time, or as the result o any other cause of termination referred to in this Agreement. Without limiting the generality of the foregoing, by its execution of the present Agreement, Licensee hereby waives any claim which it has or which it may have in the future against Licensor or their affiliates, arising from any alleged goodwill created by Licensee for the benefit of any or all of the said parties or from the alleged creation or increase of a market for Licensed Products. Licensee does not hereby waive any claim which might arise against Licensor for damages as a result of any breach of this Agreement by Licensor. 11.2 Licensee acknowledges and admits that there would be no adequate remedy at law for its failure (except as otherwise provided in paragraph 10 hereof) to cease the manufacture or sale of the Licensed Products covered by this Agreement at the termination of the License, and Licensee agrees that, notwithstanding anything to the contrary contained in paragraph 16.7 hereof, in the event of such failure Licensor shall be entitled to equitable relief by the way of temporary and permanent injunction and such other and further relief as any court with jurisdiction may deem just and proper. 12. (ommited) 13. Indemnity. 13.1 Licensor shall indemnify and hold harmless Licensee from and against any and all liability, claims, causes of action, suits, d amages and expenses (including reasonable attorneys' fees and expenses in actions involving third parties or between the parties hereto) which Licensee is or becomes liable for, or may incur solely by reason of its use within the Territory, in strict accordance with the terms and conditions of this Agreement, of the Trademarks or the designs furnished to Licensee by Licensor, to the extent that such liability arises through infringement of another's design patent, trademark, copyright or other proprietary rights; provided, however, that Licensee gives Licensor prompt notice of, and full cooperation in the defense against, such claim. If any action or proceeding shall be brought or asserted against Licensee in respect of which indemnity may be sought from Licensor under this paragraph 13.1, Licensee shall promptly notify Licensor thereof in writing, and Licensor shall assume and direct the defense thereof. Licensee may thereafter, at its own expense, be represented by its own counsel in such action or proceeding. Licensor shall, promptly after a request from Licensee no more than once each year, provide Licensee with an updated list of the trademark applications and registrations it owns in the Territory. 13.2 To the extent not inconsistent with paragraph 13.1 hereof, Licensee shall indemnify and save and hold Licensor, individually, harmless from and against any and all liability, claims, causes of action, suits, damages and expenses (including reasonable attorneys' fees and expenses in actions involving third parties or between the parties hereto), which they, or any of them, are or become liable for, or may incur, or be compelled to pay by reason of any acts, whether of omission or commission, that may be committed or suffered by Licensee or any of its servants, agents or employees in connection with Licensee's performance of this Agreement, including Licensee's use of Licensee's own designs, in connection with Licensed Products manufactured by or on behalf of Licensee or otherwise in connection with Licensee's business. 14. (omitted) 15. Disclosure. 15.1 Licensor and Licensee, and their affiliates, employees, attorneys, accountants and bankers shall hold in confidence and not use or disclose, except as permitted by this Agreement, (i) confidential information of the other or (ii) the terms of this Agreement, except upon consent of the other or pursuant to, or as may be required by law, or in connection with regulatory or administrative proceedings and only then with reasonable advance notice of such disclosure to the other. Licensee shall take all reasonable precautions to protect the secrecy of the material used pursuant to this Agreement prior to the commercial distribution or the showing of samples for sale, and shall not sell any merchandise employing or adapted from any of said designs sketches, artwork, logos, and other materials or their use except under the Trademark. 16. Miscellaneous. 16.1 All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been properly given or sent (i) on the date when such notice, request, consent or communication is personally delivered or (ii) five (5) days after the same was sent, if sent by certified or registered mail or (iii) two (2) days after the same was sent, if sent by overnight courier delivery or confirmed telecopier, as follows: (a) if to Licensee, addressed as follows: Innovo Group Inc. Attn: Jay Furrow 2633 Kingston Pike, Suite 100 Knoxville, TN 37919 (b) if to Licensor, addressed as follows: JD Design, LLC Attn: Joe Dahan 5804 E. Slauson Ave Commerce, CA 90040 Anyone entitled to notice hereunder may change the address to which notices or other communications are to be sent to it by notice given in the manner contemplated hereby. 16.2 Nothing herein contained shall be construed to place the parties in the relationship of partners or joint venturers, and no party hereto shall have any power to obligate or bind any other party hereto in any manner whatsoever, except as otherwise provided for herein. 16.3 None of the terms hereof can be waived or modified except by an express agreement in writing signed by the party to be charged. The failure of any party hereto to enforce, or the delay by any party in enforcing, any of its rights hereunder shall not be deemed a continuing waiver or a modification thereof and any party may, within the time provided by applicable law, commence appropriate legal proceedings as set forth in paragraphs 11.2 and 16.7 hereof to enforce any and all of such rights. All rights and, except as provided in paragraph 16.7 hereof, remedies, provided for herein shall be cumulative and in addition to any other rights or remedies such parties may have at law or in equity. Any party hereto may employ any of the remedies available to it with respect to any of its rights hereunder without prejudice to the use by it in the future of any other remedy with respect to any of such rights. No person, firm or corporation other than the parties hereto shall be deemed to have acquired any rights by reason of anything contained in this Agreement. 16.4 This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. Licensor may assign all or any portion of the royalties payable to Licensor hereunder, as designated by Licensor, and in addition, Licensor may, upon thirty (30) days' written notice to Licensee, assign all of its rights, duties and obligations hereunder to any entity to which the Trademarks, or the right to use the Trademarks, has been transferred, or to an affiliate of any such entity. The rights granted to Licensee hereunder are unique and personal in nature, and neither this Agreement nor the License may be assigned by Licensee without Licensor's prior written consent. Any attempt by Licensee to transfer any of its rights or obligations under this Agreement, whether by assignment, sublicense or otherwise, without having received the prior written consent of Licensor shall constitute an Event of Default, and shall otherwise be null and void. Notwithstanding the foregoing, both parties hereby agree that Licensee my assign this Agreement to a wholly owned subsidiary of Licensee, which subsidiary shall be formed for the sole purpose of carrying out the terms of, and operations under, this Agreement. Licensee may employ subcontractors subject to the prior approval of Licensor for the manufacture of the Licensed Products; provided, however, that in any event, (i) the supervision of production of Licensed Products shall remain under the control of Licensee, (ii) Licensee shall maintain appropriate quality control to assure compliance with the quality standards set forth herein, (iii) such subcontractors shall comply with all other requirements of Licensor consistent with the terms of this Agreement and (iv) Licensee shall cause such subcontractors to sell off any seconds or defective merchandise exclusively to Licensee, and shall be responsible for ensuring that such subcontractors do not violate any customs, quota or other such laws, rules and regulations, or any laws, rules or regulations in respect of the use of child labor, wages,workplace safety, environmental compliance and all related matters. 16.5 Licensee shall comply with all laws, rules, regulations and requirements of any governmental body which may be applicable to the operations of Licensee contemplated hereby, including, without limitation, as they relate to the manufacture, importation, distribution, sale or promotion of Licensed Products, notwithstanding the fact that Licensor may have approved such item or conduct. Nothing contained herein or shall obligate either party hereto to act in violation of any applicable law, rule, regulation or requirement of any governmental body. 16.6 This Agreement shall be construed in accordance with and governed by the laws of the State of California, applicable to contracts made and to be wholly performed therein without regard to its conflicts of law rules. 16.7 Dispute Resolution. (a) Consultations. Licensor and Licensee acknowledge that the expeditious and equitable settlement of disputes arising with respect to the interpretation or performance of this Agreement or in connection herewith is to their mutual advantage. To this end, the parties therefore agree to use their best endeavors to resolve all differences of opinion and to settle all disputes with respect to such interpretation or performance of which any party shall have notified the other party in writing through cooperation and consultation between themselves. (b) Disputes. NOTIWTHSTANDING THE FOREGOING, ANY DISPUTE, CONROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE SUBMITTED FOR FINAL AND BINDING ARBITRATION IN LOS ANGELES COUNTY, CALIFORNIA, BY AN INDEPENDENT RETIRED JUDGE OF THE SUPERIOR COURT OF CALIFORNIA AVAILABLE FOR ALTERNATIVE DISPUTE RESOLUTION, IN ACCORDANCE WITH THE APPLICABLE REULES OF JUDICIAL ARBITRATION AND MEDIATION SERVICE (:JAMS/ENDISPUTE), OR SUCH OTHER ALTERNATIVE DISPUTE ENTITY AGREED TO BY THE PARTIES IN WRITING; provided that: (i) any party wishing to submit such dispute to arbitration shall give a written notice of such intention to the other party, which shall describe in reasonable detail the issue in dispute and any other relevant facts; (ii) in no event shall the arbitrator be related to, employed by or have had at any time a substantial or ongoing business relationship with any of the parties or their respective affiliates; (iii) the jurisdiction of the arbitrator shall not be limited to any dispute or disputes identified in the said written notice; (iv) each party shall pay its share of the fees required by JAMS/ENDISPUTE, such as arbitrator fees, as and when required by JAMS/ENDISPUTE, subject to the arbitrator's discretion to reallocate such fees as part of any award or determination, and if any party fails to pay its share when requested, the other party may move on ten days' prior written notice before the arbitrator (or tribunal administrator if no arbitrator has yet been appointed) for a default award against the non-paying party); (v) JAMS/ENDISPUTE shall have the right and power to render all forms of relief, including equitable relief, but each party shall have the right to seek injunctive or other relief incourt if necessary to protect its rights during the pendency of any arbitration; (vi) if any proceeding must be brought to compel arbitration or if for any reason arbitration is found to be inapplicable, then the parties expressly agree that any action at law or in equity arising out of or relating to this Agreement) other than an action to enforce a judgment, award or ruling of a court or arbitrator) will be filed only in the Courts of the State of California for the County of Los Angeles, or the United States District Court for the Central District of California, and the parties hereby consent and submit expressly to the jurisdiction of such courts for the purpose of litigating any such action; (vii) each party agrees that any arbitral award resulting from any such arbitration shall be enforceable against it in any jurisdiction to which such party or the assets thereof shall be subject; and (viii) each party agrees not to impede the enforceability of any decision or award of the arbitrators in any way, and without limiting the generality of the foregoing, no party will file objections against any such decision or award,each party hereby waiving the right to do so the extent permitted by applicable law. 16.8 The provisions hereof are severable, and if any provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such provision, or part thereof in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction, or any other provision in this Agreement in any jurisdiction. To the extent legally permissible, an arrangement which reflects the original intent of the parties shall be substituted for such invalid or unenforceable provision. 16.9 The paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any ambiguity in this Agreement shall not be construed against the party who prepared this Agreement. 16.10 This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused the same to be executed by a duly authorized officer as of the day and year first above written. J.D. DESIGN, LLC, a California limited liability company By: /s/ Joe Dahan ------------- Joe Dahan Its: Manager INNOVO GROUP INC., a Delaware Corporation By: /s/ Jay Furrow -------------- Jay Furrow Its: President Schedule A LICENSED PRODUCTS Licensed Products shall mean all apparel, accessories and bags, including, but not limited to, the following products, bearing one of the Trademarks as designated by Licensor, in its sole discretion: 1. "Menswear Licensed Products", as follows: men's suits, jackets, slacks, jeans, overcoats, top coats, sports outerwear, sweaters, knit shirts, dress shirts, sport shirts, raincoats, scarves, robes, socks, gloves, watches, handkerchiefs, underwear, pajamas, ties (including bow ties, ascot ties, pocket squares and cummerbunds) hats and caps and such other items as may from time-to- time be designated upon written agreement by the parties. 2. "Boyswear Licensed Products", sizes 4-20, as follows: boy's dress, knit and woven sport shirts, suits, sportcoats, vests, sweaters, topcoats, neckwear, long and short pants and slacks, jeans, socks, gloves, underwear, pajamas, hats and caps, handkerchiefs and swimsuits, and such other items as may from time-to-time be designated upon written agreement by the parties. 3. "Girlswear Licensed Products", sizes 3-14, as follows: shirts, blouses, knit shirts, dresses, coats, sport jackets, sweaters, slacks, jeans, socks, gloves, hats, scarves, swimwear, handkerchiefs and skirts and such other items as may from time-to-time be designated upon written agreement by the parties. 4. "Infants and Toddlers Licensed Products", as follows: newborn, infant and toddler apparel including, without limitation, playwear, sportswear, outerwear and sleepwear. 5. Accessory Licensed Products", as follows: personal leather goods, luggage and ladies' handbags, including, but not limited to wallets, portfolios, key cases, eyeglass cases, schoolbags, jewelry boxes, cosmetic cases, cosmetics, document bags, all bag related products, executive stationery accessories, brief cases, attache cases and men's toiletries and accessories, employing, fabrics or synthetic leather substitutes, and men's, women's and children's belts, suspenders and watch bands. 6. "Women's Licensed Products", as follows: shirts, blouses, skirts, knit shirts, dresses, jackets, suits, sweaters, pants, shorts, jeans, vests, coats, raincoats, scarves, outerwear, hosiery (including sheer hosiery and panty hose), gloves, swimwear, hats and caps, watches and jewelry and such other items as may from time-to-time be designated upon written agreement by the Parties. Schedule B TRADEMARKS Joe's JD (Symbol) Such other trademarks (including various seasonal logos adopted by Licensor) as Licensor may rom time-to-time designate for use in connection with particular Licensed Products. -----END PRIVACY-ENHANCED MESSAGE-----