UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q\A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 1, 2002
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 July 16, 2002, 14,921,264 shares of common stock were outstanding.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONSDENSED BALANCE SHEETS
(000's except for share data)
(unaudited)
06/01/02 12/01/02
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equvalents $ 97 $ 292
Accounts receivable, and due from factor net of
allowance for uncollectible accounts of $167 (2002)
and $164 (2001) 2,056 1,466
Inventories 2,942 2,410
Prepaid expenses & other current assets 177 180
-------- -------
TOTAL CURRENT ASSETS 5,272 4,348
-------- -------
PROPERTY, PLANT and EQUIPMENT, net 1,279 973
INTANGIBLE ASSETS, NET 4,842 4,926
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TOTAL ASSETS $ 11,393 $ 10,247
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Due to related parties $ 2,470 $ 806
Current maturities of long-term debt 722 845
Accounts payable and accrued expenses 948 697
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TOTAL CURRENT LIABILITIES 4,140 2,348
LONG-TERM DEBT, less current maturities 3,014 3,380
------- -------
TOTAL LIABILITES 7,154 5,728
8% Redeemable preferred stock, $0.10 par value
195,295 shares (2002) -- --
STOCKHOLDERS' EQUITY
Common Stock, $0.10 par - shares
authorized 40,000,000
issued and outstanding 14,901,264 (2002)
14,921,264 (2001) 1,490 1,491
Additional paid-in capital 40,322 40,277
Deficit note (34,368) (34,079)
Promissory note-officer (703) (703)
Treasury stock (2,502) (2,467)
------- -------
TOTAL STOCKHOLDERS' EQUITY 4,239 4,519
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,393 $10,247
------- -------
------- -------
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 Six Months Ended
06/01/02 06/02/01 06/01/02 06/02/01
-------- -------- -------- --------
NET SALES $ 6,802 $ 1,968 $ 10,071 $ 3,122
COST OF GOODS SOLD 4,457 1,222 6,813 1,877
------- ------- ------- -------
Gross profit 2,345 746 3,258 1,245
OPERATING EXPENSES
Selling, general and administrative 1,959 651 3,195 1,195
Depreciation and amortization 58 11 116 22
------- ------- ------- -------
2,017 662 3,311 1,217
INCOME (LOSS) FROM OPERATIONS 328 84 (53) 28
INTEREST EXPENSE (119) (63) (219) (137)
OTHER INCOME (EXPENSE), net 14 20 20 47
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 223 41 (252) (62)
INCOME TAXES 16 -- 37 --
------- ------- ------- -------
NET INCOME (LOSS) $ 207 $ 41 $ (289) $ (62)
------- ------- -------- --------
------- ------- -------- --------
NET INCOME (LOSS) PER SHARE:
Basic 0.01 0.00 (0.02) 0.00
Diluted 0.01 0.00 (0.02) 0.00
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 14,859 14,221 14,861 14,040
Diluted 15,330 14,221 14,861 14,040
See accompanying notes to consolidated condensed financial statements
INNOVO GROUP INC. AND SUBSIDIARIES
COLSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(000's except per share)
(unaudited)
Six Months Ended
06/01/02 06/02/01
-------- --------
CASH FLOWS PROVIDED BY OPERATING 667 (357)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Held For Sale Assets -- 1,081
Capital Expenditures (338) (5)
------ ------
Cash Used in Investing Activities (338) 1,076
CASH FLOWS FROM FINANCING ACTIVITIES
Treasury Stock Acquistions (35) --
Repayments on Notes Payable -- (445)
Reaymetns of Long-Term Debt (489) (688)
Other -- (34)
------ ------
Cash Used in Financing Activities (524) (1,167)
NET CHANGE IN CASH AND CASH EQUIVALENTS (195) (448)
CASH AND CASH EQUIVALENTS, at beginning of period 292 1,179
------ ------
CASH AND CASH EQUIVALENTS, at end of period 97 731
------ ------
------ ------
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
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 December 1, 2001.
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
June 1, December 1,
2002 2001
---- ----
(000's) (000's)
Finished goods 3,007 2,535
Less allowance for obsolescence and
slow moving inventory (65) (125)
----- -----
2,942 2,410
----- -----
----- -----
NOTE 3 - LONG-TERM DEBT
Long-term debt consisted of the following:
June 1, December 1,
2002 2001
---- ----
(000's) (000's)
First mortgage loan $ 589 $ 625
Promissory note to Azteca (related party) 875 1,000
Promissory note to Azteca (related party) 2,272 2,600
----- -----
Total long-term debt 3,736 4,225
Less: Current portion (722) (845)
----- -----
$3,014 $3,380
----- -----
----- -----
NOTE 4 - INVESTMENTS
On April 5, 2002, the Company through a newly formed real estate subsidiary
Innovo Realty, Inc. ("IRI"), closed on a transaction pursuant to which IRI
purchased limited partner interests in 22 limited partnerships. Subsequently,
the limited partnerships purchased 28 apartment buildings consisting of
approximately 4,000 apartment units ("Properties") located nationwide. The
Company believes that the investment will increase the Company's cash flow and
do so with a minimal amount of risk.
The Company issued 195,295 of cumulative, non-convertible preferred shares with
an 8% coupon ("Preferred Shares"), valued at $100 per share for transactional
purposes, to IRI which in turn contributed the Preferred Shares to the limited
partnerships. Subsequently, the limited partnerships transferred the Preferred
Shares to the sellers as part of the purchase price for the Properties. The
value of the Preferred Shares represented approximately 20% of the $98,079,000
purchase price paid to the sellers for the Properties by the limited
partnerships. The remaining purchase price was funded through third party
investors and third party financing which included the principals of Commerce
Investment Group and Joseph Mizrachi, both affiliated parties of the Company.
None of the Company's Board Members or executives participated in the
transaction.
The Preferred Shares 8% coupon is funded entirely and solely through
partnership distributions from cash flows generated by the operation and sale
of the Properties. In the event the cash flows from the Properties are
insufficient to cover the 8% coupon, the Company will have no obligation to
cover any shortcomings. The Company is required to redeem the preferred shares
from partnership distributions. The Company is to receive partnership
distributions that are in excess of current and accrued 8% coupon dividends and
the excess partnership distributions will be used by the Company to redeem the
Preferred Shares. In addition, IRI shall be entitled to receive fees equal to
1% of the gross annual revenues from the Properties, plus an additional 1% to
the extent that there is excess cash flow (i.e., cash remaining after payment
of debt service, all other amounts due in connection with the mortgage land and
all property expenses then due and payable, including, the 1% of gross annual
revenues the Company is to receive). These fees are to be paid quarterly and
there is no requirement that they be used toward the payment of the 8% coupon
or the redemption of preferred shares. In addition, IRI will be entitled to
30% of the excess cash flow generated by the operation and sale of the
Properties after complete redemption of the preferred shares and the payment of
lien holders and preferred distributions and returns to investors and others.
The Company has not given accounting recognition to the value of its investment
in the real estate partnerships, as the Company is obligated to pay the 8%
coupon and redeem $19.5 million of Preferred Shares from the cash flow from the
partnerships, prior to the Company being able to recover the underlying value
of its investment. Additionally, the Company has determined that the Preferred
Shares will not be accounted for as a component of equity as the shares are
redeemable outside of the Company's control. No value has been ascribed to the
value of the Preferred Shares as the Company is obligated to pay the 8% coupon
or redeem the shares only if the Company receives cash flow from the
partnerships adequate to make the payments. The Company intends to record the
management fee as income using the accrual basis of accounting.
NOTE 5-JOE'S JEANS JAPAN
On May 1, 2002, the Company created Joe's Jeans Japan, Inc. ("JJJ"), a Japanese
corporation focused on the marketing and distribution of Joe's Jeans products
in the Japanese market. JJJ is a wholly owned subsidiary of Joe's Jeans, Inc..
JJJ currently has an office and showroom located in Tokyo with 5 full time
employees. JJJ's results are consolidated with the financial results of the
Company.
NOTE 6 - ACQUISITIONS
On August 24, 2001, Innovo Group Inc. through a newly formed subsidiary Innovo
Azteca Apparel Inc. ("IAA") completed the first phase of a two phase
acquisition ("Acquisition") of Azteca Production International, Inc.'s
("Azteca") knit apparel division ("Knit Division"). Azteca is an affiliate of
Commerce, a significant shareholder of the Company's common stock. Pursuant to
the terms of the first phase closing, the Company purchased the Knit
Division's customer list, the right to manufacture and market all of the Knit
Division's current products and entered into certain non-compete and non-
solicitation agreements and other intangible assets associated with the Knit
Division ("Phase I Assets"). As consideration for the Phase I Assets, the
Company has issued to Azteca, 700,000 shares of Company's common stock valued
at $1.27 per share based upon the closing price of the common stock on
August 24, 2001, and promissory notes in the amount of $3.6 million.
The second phase of the Acquisition called for the Company to purchase for
cash the inventory of the Knit Division prior to November 30, 2001, with the
consideration not to exceed $3 million. The acquisition of the inventory was
subject to the Company obtaining adequate financing. The Company did not
complete the second phase of the acquisition prior to the expiration date.
The Acquisition was accounted for under the purchase method of accounting for
business combinations pursuant to FAS 141. Accordingly, the accompanying
consolidated financial statements include the results of operations and other
information for the Knit Division for the period commencing August 24, 2001.
In the event that the sales of the Knit Division do not reach $10.0 million
during the 18 month period following the closing date of the Acquisition, any
remaining unpaid principal of the $1.0 million promissory note shall be
reduced by an amount equal to the sum of $1.5 million less 10% of the net
sales of the Knit Division during the 18-month period following the closing
date.
The purchase price of $4,521,000, including acquisition costs of $36,000, have
been allocated to the non-compete agreement ($250,000) and the remainder to
goodwill ($4,271,000). The non-compete agreement is being amortized over two
years, based upon the term of the agreement. The total amount of the goodwill
is expected to be deductible for income tax purposes.
The following table shows the Company's unaudited pro forma consolidated
results of operations for the three and six month periods ended June 2, 2001,
respectively assuming the Acquisition had occurred at the beginning of the
year (in thousands):
Unaudited Pro Forma
Three Months Ended Six Months Ended
June 2, 2001 June 2, 2001
------------ ------------
Net Sales $ 4,393 $ 9,064
Net Income $ 44 $ 279
Loss per share:
Basic and diluted $ 0.00 $ 0.02
The pro forma operating results do not reflect any anticipated operating
efficiencies or synergies and are not necessarily indicative of the actual
results which might have occurred had the operations and management of the
companies been combined during the two fiscal periods.
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
The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of income as a percentage of sales:
Three Months Ended Six Months Ended
06/01/02 06/02/01 06/01/02 06/02/01
-------- -------- -------- --------
NET SALES 100.0% 100.0% 100.0% 100.0%
COST OF GOODS SOLD 65.5% 62.1% 67.6% 60.2%
----- ----- ----- -----
Gross profit 34.5% 37.9% 32.4% 39.8%
OPERATING EXPENSES
Selling, general and administrative 28.8% 33.1% 31.7% 38.2%
Depreciation and amortization 0.9% 0.6% 1.2% 0.7%
----- ----- ----- -----
29.4% 33.6% 32.9% 38.9%
INCOME (LOSS) FROM OPERATIONS 4.8% 4.3% (0.5%) 0.9%
INTEREST EXPENSE (1.7%) (3.2%) (2.2%) (4.3%)
OTHER INCOME(EXPENSE), net 0.2% 1.0% 0.2% 1.5%
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES 3.6% 2.1% (2.5%) (1.9%)
INCOME TAXES 0.2% 0.0% 0.4% 0.0%
----- ----- ----- -----
NET INCOME (LOSS) 3.0% 2.1% (2.9%) (1.9%)
----- ----- ----- -----
----- ----- ----- -----
Comparison of the Three Months Ended June 1, 2002 to the Three Months Ended
June 2, 2001
Net Sales for the quarter ended June 1, 2002 increased 245% from $1,968,000 in
2001 to $6,802,000 in 2002. The increase is attributable to significant
increase in revenues from the Company's accessory and craft subsidiary Innovo,
Inc. ("Innovo") as well as from the Company's high end apparel subsidiary
Joe's Jeans, Inc. ("Joe's"). The increase in revenues also reflects the impact
from the Company's general apparel division, Innovo Azteca Apparel, Inc.
("IAA") which was formed in the third quarter of 2001. Innovo experienced a
96% increase for the period compared to the same period in 2001 primarily as a
result of increased demand for its craft products, success from Innovo's Bongo
product line and fashion accessory products sold to new private label
customers. Joe's revenues for the period, which increased 165% compared to the
second quarter of 2001, enjoyed increased demand for its products both
domestically and internationally as a result of Joe's efforts to market its
products in Japan through its subsidiary Joe's Jeans Japan, Inc. and via short
term distribution agreements with European distributors. Innovo Azteca Apparel
accounted for the remaining increase in revenues.
For the second three months of fiscal 2002, the Company's gross margin
Percentage decreased 3.4 percentage points from 37.9% in 2001 to 34.5% in
2002. The decrease in gross margin is attributable to an increase in air
freight associated with the timely importing of Innovo accessory products to
meet increased demand. Additionally, the Company's revenues for the period
include those of IAA which, as a result of the products distributed by IAA,
traditionally has a lower gross margin than the Company's other divisions.
Selling, general and administrative expenses increased $1,308,000 or 200% for
the same period as a result of an increase in the expenses associated with and
necessary for the increased revenues generated during the period. These
expenses primarily included royalties, commissions, freight, samples, product
development and distribution charges. The SG&A expenses increased also as a
result of the costs incurred to hire employees to support the Company's growth
domestically and internationally. The Company's international operations,
including Joe's Jeans Japan, Inc. and Innovo Hong Kong, Ltd, added to the
Company's expenses during the quarter. Due to the fact the Company did not
have international operations in the comparative period of 2001, the 2001
results did not include any expense associated with international operations.
The Company also incurred an increase in the expenses associated with the
professional and investor relations functions of the Innovo Group Inc. public
holding company.
Depreciation and amortization expenses increased to $58,000 in 2002 from
$11,000 in the same period of 2001 largely as a result of the deprecation
associated with assets purchased pursuant to the knit division acquisition in
2001 and the depreciation of the Company's former manufacturing facility in
Springfield, TN which in the comparative period was held as an asset for sale.
Interest expense for the three months ended June 1, 2002 increased to $119,000
from $63,000. The increase is associated with promissory notes entered into
for the acquisition of the knit division from Azteca in 2001 and an increase
in the interest expense associated with increased funding from the Company's
factorer to support additional working capital needs resulting from the
Company's increased revenues.
Other income for the comparable period decreased from income of $20,000 to
$14,000 due primarily to a decrease in the rental income from the Company's
property located in Springfield, TN.
Comparison of the Six Months Ended June 1, 2002 to the Six Months Ended
June 2, 2001
For the first six months of 2001, net sales increased 222% to $10,071,000 from
$3,122,000 in the same period of 2001. The increase is a result of a
substantial increase in the Company's Innovo accessory division and Joe's
specialty apparel division, coupled with the impact of the Company's general
apparel division IAA which was formed in the third quarter of 2001 and thus
not included in the 2001 results.
The Company's gross profit margin, for the six months ended June 1, 2002,
decreased to 32.4% from 39.8% in the comparative period of 2001. The decrease
is attributable to an increase in freight expense incurred to meet the
deadlines of new private label customers. Furthermore, the gross margin
decrease reflects the fact that the Company's IAA primarily markets products
to private label customers which traditionally have a lower gross margin
associated with them.
Selling, general and administrative costs increased to $3,195,000 from
$1,195,000, or 167%, as a result in increased marketing and product
development expense, increased commissions and royalties associated with the
increased revenue, an increase in payroll expense necessary to support the
Company's growth domestically and internationally, sales shows and
professional and legal fees.
Depreciation and amortization expense increased $94,000 to $116,000 for the
period in 2002 compared to 2001. The increase is largely a result of the
amortization expense associated with the knit division acquisitions and the
formation of IAA.
Interest expense for the period increased to $219,000 from $137,000 in 2001
primarily as a consequence of the promissory notes associated with the
acquisition of the knit business which resulted in the creation of IAA.
Additionally, the Company's interest expense increased as a result of an
increase in the number of receivables factored during the period to meet the
Company's increasing cash flow needs.
Other income decreased to $20,000 in 2002 compared to an income of $47,000 in
2001 in comparative periods. The decrease is attributable to a reduction in
rental income from the Company's Springfield property.
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 from the Company's factorer and certain related
parties.
Cash flows from operating activities provided cash of $667,000 for the six
months ended June 1, 2002. The positive cash flow is a result of a net income
of $227,000 as well as an increase in cash flow generated from a greater
amount of receivables factored and amounts borrowed from related parties.
For the second quarter of fiscal 2002, the Company relied primarily on 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.
During the second quarter of 2002, the Company increased the number of
Invoices it presented for factoring due to the need to fund the growth
experienced during the period and the projected growth anticipated in future
periods. The Companies subsidiaries' Joe's Jeans, Inc., Innovo, Inc. and
Innovo Azteca Apparel, Inc. have factoring agreements with CIT Group, Inc.
("CIT"). According to the terms of the agreements, the subsidiaries have the
option to factor their receivables with CIT on a non-recourse basis. The
agreements call for a 0.8% factoring fee on invoices factored with CIT and a
per annum rate equal to the prime rate plus 0.25% on funds borrowed against
the factored receivables.
As of June 1, 2002, the Company was in compliance with financial and other
covenants included in the Company's borrowing agreements and promissory notes.
These obligations arise from the Company's promissory note securing the
Company's financial obligation for the Company's Springfield, TN property and
promissory notes issued pursuant to the Knit Acquisition.
The Company's operating leases include the Company's Innovo, Inc. accessory
showroom in New York City and the Company's offices and storage space located
in Knoxville, TN. On May 1, 2002 the Company signed a 5 year lease agreement,
with a rental rate of $5,307, for the Company's showroom in New York. The
Company's office lease in Knoxville, which was entered into on October 3, 2000
has a 10-year term and a rate of 3,500 per month triple net with a six month
cancellation provision. Additionally, the Company rents storage space in
Knoxville for $420 per month, on a month-to-month basis. The Company's
Chairman is the principal of the entities in which the Company's offices and
storage facilities are located in Knoxville.
Following is a summary of the Company's contractual obligations as of June 1,
2002:
Less than 1
Contractual Obligations Total Year 1-3 years 4-5 years After 5 years
----------------------- ----- ------ --------- --------- -------------
Long-Term Debt $3,728,449 $348,366 $2,454,098 $844,228 $ 81,757
Operating Leases 632,340 43,581 349,141 120,618 119,000
--------- ------- ---------- ------- --------
Total Contractual Cash Obligations $4,360,789 $391,947 $2,803,239 $964,846 $200,757
--------- ------- --------- ------- -------
--------- ------- --------- ------- -------
Pursuant to the real estate transaction completed on April 5, 2002, the Company
issued 195,295 shares of cumulative, non-convertible, redeemable preferred
stock with a transactional value of $100 per share with an 8% coupon. The
Preferred Shares 8% coupon is funded entirely and solely through partnership
distributions from cash flows generated by the operation and sale of the
Properties. In the event the cash flows from the Properties are insufficient
to cover the 8% coupon, the Company will have no obligation to cover any
shortcomings.
The Company is required to redeem the preferred shares from partnership
distributions. The Company is to receive partnership distributions that are
in excess of current and accrued 8% coupon dividends and the excess
partnership distributions will be used by the Company to redeem the Preferred
Shares.
The Company believes that its current cash on hand and cash received pursuant
to factored receivables under the factoring arrangements with CIT should
provide sufficient working capital to fund operations and required debt
reductions during fiscal 2002. 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. 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.
Management's Discussion of Critical Accounting Policies
Management believes that the accounting policies discussed below are
important to an understanding of our financial statements because they
require management to exercise judgment and estimate the effects of
uncertain matters in the preparation and reporting of financial results.
Accordingly, management cautions that these policies and the judgments and
estimates they involve are subject to revision and adjustment in the future.
While they involve less judgment, management believes that the other
accounting policies discussed in Note 1 "Summary of Significant Accounting
Policies" of the Consolidated Financial Statements (unaudited) included
elsewhere in this Form 10-Q, and Note 2 "Summary of Significant Accounting
Polices" of the Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended December 1, 2001 are also important
to an understanding of our financial statements.
The Company determines its allowance for doubtful accounts using a number of
factors including historical collection experience, the financial prospects
of specific customers and market sectors, and general economic conditions.
Generally, the Company establishes an allowance for doubtful accounts based
on our collection experience when measured by the amount of time an account
receivable is past its payment due date. In certain circumstances where the
Company believes an account is unable to meet its financial obligations, the
Company records a specific allowance for doubtful accounts to reduce the
account receivable to the amount the Company believes will be collected.
The Company evaluates its long-lived assets for impairment based on
accounting pronouncements that require management to assess fair value of
these assets by estimating the future cash flows that will be generated by
the assets and then selecting an appropriate discount rate to determine the
present value of these future cash flows. An evaluation for impairment must
be conducted when circumstances i ndicate that an impairment may exist; but
not less frequently than on an annual basis. The determination of impairment
is subjective and based on facts and circumstances specific to the company
and the relevant long-lived asset. Factors indicating an impairment
condition exists may include permanent declines in cash flows, continued
decreases in utilization of a long-lived asset or a change in business
strategy. We adopted Financial Accounting Standards (SFAS) No. 142 "Goodwill
and Other Intangible Assets," beginning with the first quarter of 2002. SFAS
No. 142 requires that goodwill and intangible assets that have indefinite
useful lives not be amortized but, instead, tested at least annually for
impairment while intangible assets that have finite useful lives continue to
be amortized over their respective useful lives. SFAS No. 142 requires that
goodwill be tested for impairment using a two-step process. The first step
is to determine the fair value of the reporting unit, which may be
calculated using a discounted cash flow methodology, and compare this
value to its carrying value. If the fair value exceeds the carrying value,
no further work is required and no impairment loss would be recognized. The
second step is an allocation of the fair value of the reporting unit to all
of the reporting unit's assets and liabilities under a hypothetical
purchase price allocation.
While the Company believes that its long-lived assets are currently being
carried on the Company's books at there fair value. However, as a result
of the recent decrease in rental revenue from the Company's Springfield
facility, the Company will be monitoring the fair value of the facility
in accordance with SFAS No. 144.
The Company has entered into agreements and transaction with related
parties and the Company has adopted a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, Directors or principal stockholders of the Company be on
terms no less favorable to the Company than reasonably could have been
obtained in arms' length transactions with independent third parties.
Anderson Stock Purchase Agreement. Pursuant to the 1997 Stock Purchase
Right Award awarded to her in February 1997, Ms. Anderson purchased
250,000 shares of Common Stock (the "1997 Award Shares") with
payment made by the execution of a non-recourse, non-interest bearing
note (the "Note") to the Company for the exercise price of $2.8125 per
share ($703,125 in the aggregate). The Note which was due on
April 30, 2002, was collateralized by the 1997 Award Shares. Additional
terms of the Note allowed Ms. Anderson to pay or prepay (without penalty)
all or any part of the Note by (i) the payment of cash, or (ii) the
delivery to the Company of other shares of Common Stock (other than
the 1997 Award Shares) that Ms. Anderson has owned for a period of
at least six months, which shares would be credited against the Note on
the basis of the closing bid price for the Common Stock on the date
of delivery. Ms. Anderson did not repay the Note on April 30, 2002. The
Company is currently reviewing the possibility of extending the term of
the Note with the remaining provisions of the Note to remain the same.
We continually evaluate the composition of our inventories, assessing
slow-turning, ongoing product as well as product from prior seasons.
Market value of distressed inventory is valued based on historical sales
trends of our individual product lines, the impact of market trends and
economic conditions, and the value of current orders relating to the
future sales of this type of inventory.
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 December 2, 2001, which is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
On April 5, 2002, the Company through a newly formed real estate
subsidiary Innovo Realty, Inc. ("IRI"), closed on a transaction pursuant
to which IRI purchased limited partner interests in 22 limited
partnerships. Subsequently, the limited partnerships purchased 28
apartment buildings consisting of approximately 4,000 apartment units
("Properties") located nationwide. The Company believes that the
investment will increase the Company's cash flow and do so with a
minimal amount of risk.
The Company issued 195,295 of cumulative, non-convertible preferred
shares with an 8% coupon ("Preferred Shares"), valued at $100 per share
for transactional purposes, to IRI which in turn contributed the
Preferred Shares to the limited partnerships. Subsequently, the limited
partnerships transferred the Preferred Shares to the sellers as part of
the purchase price for the Properties. The value of the Preferred Shares
represented approximately 20% of the $98,079,000 purchase price paid to
the sellers for the Properties by the limited partnerships. The
remaining purchase price was funded through third party investors and
third party financing which included the principals of Commerce
Investment Group and Joseph Mizrahi, both affiliated parties of the
Company. None of the Company's Board Members or executives participated
in the transaction.
The Preferred Shares 8% coupon is funded entirely and solely through
partnership distributions from cash flows generated by the operation and
sale of the Properties. In the event the cash flows from the Properties
are insufficient to cover the 8% coupon, the Company will have no
obligation to cover any shortcomings.
The Company is required to redeem the preferred shares from partnership
distributions. The Company is to receive partnership distributions that
are in excess of current and accrued 8% coupon dividends and the excess
partnership distributions will be used by the Company to redeem the
Preferred Shares.
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
4.2 Certificate of Resolution of Designation, Preferences and Other Rights,
$100 Redeemable 8% Cumulative Preferred Stock, Series A dated
April 4, 2002
4.3 Amendment to Certificate of Resolution of Designation, Preferences and
Other Rights, $100 Redeemable 8% Cumulative Preferred Stock, Series A,
dated April 14, 2002.
10.85 Form of Investment Letter
10.86 Form of Limited Partnership Agreement
10.87 Form of Sub-Asset Management Agreement
10.88 Distribution of Cash Flow and Capital Events Proceeds Letter
Agreement dated April 5, 2002, by and between Innovo Realty, Inc.,
Innovo Group Inc., Income Opportunity Realty Investors, Inc.,
Transcontinental Realty Investors, Inc., American Realty
Investors, Inc., and Metra Capital, LLC
10.89 Distribution of Capital Events Letter Agreement dated April 5, 2002,
by and between Metra Capital, LLC, Innovo Realty, Inc., Innovo Group
Inc., Income Opportunity Realty Investors, Inc., Transcontinental
Realty Investors, Inc., and American Realty Investors, Inc.
10.90 Reimbursement of Legal Fees Letter Agreement dated April 5, 2002, by
and between Innovo Realty, Inc., Innovo Group Inc., Income
Opportunity Realty Investors, Inc., Transcontinental Realty
Investors, Inc., American Realty Investors, Inc., and Third
Millennium Partners, LLC
(b) Reports on Form 8-K
None
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.
Jul 25 , 2002 By:/s/ Samuel Joseph Furrow, Jr.
-----------------------------
Samuel Joseph 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
/a/ Pat Anderson Chief Executive Officer July 25, 2002
----------------
Pat Anderson
Chief Executive Officer
and Director
/s/Jay Furrow Acting Chief Financial Officer July 25, 2002
-------------
Jay Furrow
President,
Acting Chief Financial Officer
and Director
Exhibit 4.2
CERTIFICATE OF RESOLUTION OF DESIGNATION,
PREFERENCES AND OTHER RIGHTS
$100 Redeemable 8% Cumulative Preferred Stock, Series A
INNOVO GROUP INC., Par value $.10 per Share
Pursuant to section 151 of the General Corporation Law of the State of
Delaware (the "Delaware Corporation Act"), Innovo Group Inc. (the "Company"),
a corporation organized existing under the Delaware Corporation Act, hereby
certifies as follows:
FIRST: The Fifth Amended and Restated Certificate of Incorporation of the
Company authorizes the issuance of up to 5,000,000 shares of serial Preferred
Stock, par value $.10 per share (the "Preferred Stock"), and further
authorizes the Board of Directors of the Corporation by resolution or
resolutions to provide for the issuance of Preferred Stock in series and to
establish the number of shares to be included in each such series and to fix
the powers, designation, preferences and relative, participating, optional or
other special rights of the shares of each such series and the qualifications,
limitations or restrictions thereof.
SECOND: The Board of Directors of the Corporation, by action by written
consent dated as of March 18, 2002 and amended by resolution adopted April 4,
2002, duly adopted the following resolution authorizing the creation and
issuance of a series of Preferred Stock to be designated as $100 Redeemable 8%
Cumulative Preferred Stock, Series A:
RESOLVED, pursuant to paragraph Fourth, subparagraph (c) of the Fifth Amended
and Restated Certificate of Incorporation of Innovo Group, Inc. ("Company"),
and the provisions of the Delaware Corporation Act, that the Board of Directors
of the Company does hereby provide in this Resolution of Designation,
Preferences and Other Rights (the "Designation") for the issuance of shares of
preferred stock in a series to consist of 200,000 shares, to be known as the
"$100 Redeemable 8% Cumulative Preferred Stock, Series A", and does hereby fix
the distinguishing characteristics, including the designation, preferences and
relative participating, optional or other special rights, and the
qualifications, limitations, or restrictions thereof, of such series of stock,
as follows:
* * * * * * *
There is hereby designated, from the authorized but unissued shares of
preferred stock of the Company, a series thereof to consist of not more than
200,000 shares, and the voting powers, designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, of the shares of such series (in
addition to those set forth in the Articles of Incorporation which are
applicable to the Preferred Stock of all series), shall be as follows:
1. Definitions:
"Company" shall mean Innovo Group Inc., a Delaware corporation.
"Designation" shall mean this Resolution of Designation, Preferences and
Other rights.
"Date of Redemption" shall mean the date designated by the Company on
which an Optional Redemption, Mandatory Redemption or Final Redemption
of Series A Shares pursuant to Subsections 5(a), 5(b) or 5(c) is
to become effective.
"Dividends" shall mean the cumulative cash dividends payable at the rate of
$2.00 per share of Series A Shares, for each calendar quarter of each
calendar year and interest accruing thereon in accordance with Section 4
below.
"Excess Funds" shall be determined each February 1, May 1, August 1 and
November 1 and shall mean all funds remaining in the Sinking Fund after the
(i) payment of all Dividends accrued through the close of the prior calendar
quarter, and (ii) the deduction of all funds held with respect to any prior
distribution of Dividends or redemption of Series A Shares.
"Final Redemption" shall mean the redemption of all issued and outstanding
Series A Shares, as provided in Subsection 5(c).
"Holders" shall mean the beneficial Owners of Series A Shares upon
consummation of the transactions contemplated by this Designation and their
assignees. The initial Holders shall be American Realty Investors, Inc.,
Transcontinental Realty Investors, Inc. and Income Opportunity Realty
Investors, Inc. and their assignees.
"IRI" shall mean Innovo Realty, Inc., a California corporation and wholly
owned subsidiary of the Company.
"Mandatory Redemption" shall mean any redemption of Series A Shares which is
mandatory to the Company pursuant to Subsection 5(b) below.
"Optional Redemption" shall mean any redemption of Series A Shares which is
optional to the Company pursuant to Subsection 5(a) below.
"Partnerships" shall mean one or more of the following partnerships
identified on Schedule "A."
"Properties" shall mean those income producing properties identified on the
attached Schedule "A."
"Redemption Price" shall mean, for each Series A Share to be redeemed
pursuant to Subsections (4)(a) or 4(b), $100 plus all accrued but unpaid
Dividends through the Date of Redemption. The Redemption Price for any
final redemption pursuant to Subsection 5(c) shall be adjusted as provided
therein.
"Series A Shares" shall mean the "$100 Redeemable 8% Cumulative Preferred
Stock" designated in Section 2, below.
"Sinking Fund" shall mean the fund maintained in trust for the Holders in
accordance with the provisions of Section 9, below.
2. Designation. The designation of this series of Preferred Stock shall be
"$100 Redeemable 8% Cumulative Preferred Stock, Series A" (hereinafter
called "Series A Shares").
3. Issuance and Assignment. It is anticipated that all Series A Shares shall
be issued to the Company's wholly owned subsidiary, IRI as part of its
initial capitalization. It is further anticipated that the Series A
Shares will be transferred by IRI to the Partnerships which will, in turn,
upon consummation of the transactions contemplated hereby, transfer the
Series A Shares and other consideration to the Holders in exchange for the
Properties. No transfer of Series A Shares shall be of any force and
effect unless and until the all of the following have occurred: (i) a
document of transfer or assignment ("Assignment") is executed by the owner
of record of such Series A Shares, (ii) the assignee executes an agreement
in a form acceptable to the Company (the "Acknowledgment") acknowledging,
and agreeing to be bound by the terms of the Company's subscription
agreement for Series A Shares (the "Subscription"), (iii) the assignee
provides to the satisfaction of the Company all of the information
required from subscribers by the Subscription, (iv) the Company receives
executed originals of the Assignment and the Acknowledgment and (v) the
Company acknowledges in writing its acceptance of the Assignment and
Acknowledgment and the entry of the Assignee on the Company's stock
records as the owner of record of such shares. The Company agrees that it
will not unreasonably withhold acceptance of any assignment of Series A
Shares in compliance with subparts (i) through (iv) of the preceding
sentence, provided the assignment is not made in violation of applicable
law, including securities law.
4. Dividends.
(a) The Holders of Series A Shares shall be entitled to receive Dividends
from the Sinking Fund, to the extent such funds are by law available for the
payment of dividends. Dividends shall be payable on each January 1, April 1,
July 1 and October 1. Dividends on Series A Shares shall be prorated for
partial quarters. Accumulated Dividends on Series A Shares shall bear interest
at the rate of Eight (8%) percent per annum, compounded annually.
(b) Dividends shall begin accruing and be cumulative from the day upon which
the Series A Shares are transferred to the Holders.
(c) For the purposes of this Section 4 no Series A Share shall be deemed to
be issued or outstanding at any time it is held by or for the account of
the Company or by or for the account of any majority-owned subsidiary of
the Company.
(d) Dividends on Series A Shares shall be payable only from the Sinking
Fund. Holders shall have no recourse or remedies of any kind or nature
against the Company for the payment of Dividends except to the extent
that funds for such purpose have been paid to the Company pursuant to
the last sentence of Subsection 5(e), to the extent that IRI fails to
deposit funds into the Sinking Fund as required by Section 9, or to the
extent that the Holders are damaged by a breach by the Company of the
covenants set forth in Section 10. If sufficient funds are not available
in the Sinking Fund for the payment of full quarterly Dividends, then
partial Dividend payments shall be made to the extent funds are
available in the Sinking Fund. Funds allocated to an Optional or
Mandatory redemption may not be used to pay Dividends.
(e) Notwithstanding anything contained in this Section 4 or in Sections 9,
10 or 11 to the contrary, no Dividends shall be paid with respect to
Series A Shares and no funds shall be deposited into the Sinking Fund
for such purpose, except to the extent that funds are legally available
for the payment of Dividends.
5. Redemption of Series A Shares.
(a) Optional to the Company. The Company may for any purpose, at any time,
or from time to time, upon not less than 30 days' advance written notice
to all Holders of all then outstanding Series A Shares, elect to make an
Optional redemption of Series A Shares from any funds (except funds in
the Sinking Fund specifically reserved for another purpose) legally
available to the Company for such purpose. Funds sufficient to pay the
Redemption Price for all shares subject to the Optional Redemption shall
be deposited at least fifteen days before the date of redemption into
the Sinking Fund and held in a sub-account of the Sinking Fund dedicated
to the payment of the Redemption Price for all Series A Shares subject
to the Optional Redemption. The notice of an Optional Redemption shall
specify the following: (i) the Date of Redemption, (ii) the total number
of shares being redeemed from each Holder, (iii) the Redemption Price
per share and (iv) the name of the Bank or Trust Company holding the
Sinking Fund into which funds to pay the Redemption Price will be
deposited and held in trust for the Holders. No exercise by the Company
of Optional Redemption rights shall be effective until the Company has
placed legally available funds into the Sinking Fund which are
sufficient to pay the redemption Price for all Series A Shares that are
subject to the Optional Redemption. Upon the placing of such funds in
the Sinking Fund, all such funds shall be reserved in a sub-account of
the Sinking Fund dedicated to the payment of the Redemption Price for
all Series A Shares that are subject to the Optional Redemption.
(b) Mandatory to the Company. So long as there are Series A Shares
outstanding, the Company shall be required to redeem that the largest
possible number of whole Series A Shares that can be redeemed from
Excess Funds at the Redemption Price, if there is more than $100,000 in
Excess Funds in the Sinking Fund as of February 1, May 1, August 1, or
November 1("Determination Date") of any calendar year. The Company shall
use its reasonable best efforts to give all Holders of all then
outstanding Series A Shares at least 30 days advance written notice of
any Mandatory Redemption of Series A Shares. The notice of redemption
shall specify (i) the total number of shares being redeemed from each
Holder, (ii) the Redemption Price per share and (iii) the name of the
Bank or Trust Company holding the Sinking Fund into which funds to pay
the Redemption Price will be deposited and held in trust for the Holders
and (iv) the Date of Redemption. The Date of Redemption so designated
shall be the 15th day of the month next following the Determination Date
of the Mandatory Redemption. Upon the sending of notice of a Mandatory
Redemption, the Excess Funds shall be reserved in a sub-account of the
Sinking Fund dedicated to the payment of the Redemption Price for all
Series A Shares that are subject to the Mandatory Redemption.
(c) Final Redemption. If there are ever sufficient funds in the Sinking
Fund (whether deposited by the Company pursuant to an Optional
Redemption or deposited by IRI to pay all accrued Dividends and to
redeem all then outstanding Series A Shares, then as promptly as
reasonably practical, the Company shall redeem all Series A Shares by
paying each Holder the Redemption Price for all outstanding Series A
Shares then held by such Holder. If after all of the Properties are
sold and the proceeds of the sale of the Properties and cash flow
derived from such Properties has been placed in the Sinking Fund and
the total amount of funds remaining in the Sinking Fund is insufficient
to pay the full Redemption Price for all then outstanding Series A
Shares, then the Company (or IRI) shall pay $1.00 into the Sinking Fund
and the Redemption Price shall be adjusted so that it equals (x) the
total amount of funds available for distribution, minus (y) all direct
costs of maintaining the Sinking Fund and making distributions
therefrom, divided by (z) the number of then outstanding Series A
Shares. In such event the Company shall, as promptly as reasonably
practical, redeem all Series A Shares which remain outstanding by
paying from the Sinking Fund to each Holder the adjusted Redemption
Price for all outstanding Series A Shares then held by such Holder. The
funds shall be paid to each Holder, pro rata based on the number of
issued and outstanding Series A Shares held by each Holder. The
adjusted Redemption Price shall be and represent full and final payment
for the redemption of all Series A Shares. The Company shall give
notice of any Final Redemption to all Holders of then outstanding
Series A Shares at least 30 days in advance of the Date of Redemption
of the Final Redemption. The notice of redemption shall specify (i)
that the redemption is the Final Redemption of all then outstanding
Series a Shares, (ii) the Redemption Price per share showing the
details of the calculation of any adjusted Redemption Price , (iii) the
name of the Bank or Trust Company holding the Sinking Fund into which
funds to pay the Redemption Price will be deposited and held in trust
for the Holders and (iv) the Date of Redemption. If the Final
Redemption is to be made at the full Redemption Price without
adjustment, then funds sufficient to pay the Redemption Price and all
direct costs of maintaining the Sinking Fund and making distributions
therefrom shall be reserved in a sub-account of the Sinking Fund
dedicated to the payment of the Redemption Price for all then
outstanding Series A Shares. Any funds remaining in the Sinking Fund
after such allocation shall be paid to the Company.
(d) Termination of Rights to Redeemed Shares. If less than all the
outstanding shares of Series A Shares are to be redeemed, the
particular shares to be redeemed shall be chosen by allocation among
the respective Holders of the Series A Shares, pro rata, as determined
by resolution of the Company's Board of Directors. All Holders shall
be obligated to accept any redemption of Series A Shares made in
accordance with the Provisions hereof. All rights of the Holders to
the shares being redeemed shall cease and terminate as of the Date of
Redemption, except the right of the Holders thereof to receive the
Redemption Price.
(e) Payment of Redemption Price. The respective Holders of record of Series
A Shares to be redeemed shall be entitled to receive the Redemption
Price upon actual physical delivery to the Company or its designated
agent, as the case may be, of certificates for the shares being
redeemed. Such certificates, if required by the Company, shall be duly
endorsed in blank or accompanied by proper instruments of assignment
and transfer thereof duly executed in blank. Within twenty days after
delivery by a Holder of redeemed shares to the Company or its designee,
payment of the Redemption Price shall be sent to the Holder by first-
class mail, postage prepaid, to the address of such Holder as the same
shall appear on the stock register of the Company. If a Holder of
redeemed shares fails to surrender any such shares to the Company or
its designee within ninety days after the Date of Redemption, the
Company shall mark the shares cancelled on its books and records and
give notice to the Holder of such cancellation and of the Holder's
right to receive the Redemption Price upon the delivery of the
certificates representing such shares to the Company or its designee.
The notice shall be delivered to the Holders address as last reflected
on the Company's stock books. Funds held in the Sinking Fund for the
redemption of Series A Shares which have not been claimed within two
years from the Date of the Final Redemption together with any interest
thereon, shall be paid to the Company, and the Holder of any shares who
has failed to claim the Redemption Price may thereafter look only to
the Company for payment thereof.
(f) Obligations of Company Respecting Redemption. The Holders shall have
no recourse against the Company and the Company shall have no
obligation or liability for the payment of any Redemption Price in the
case of an Optional, Mandatory or Final Redemption except to the extent
that funds for such purpose have been paid to the Company pursuant to
the last sentence of Subsection 5(e), to the extent that IRI fails to
deposit funds into the Sinking Fund as required by Section 9, or to the
extent that the Holders are damaged by a breach by the Company of the
covenants set forth in Section 10. Otherwise, the sole recourse and
remedy of the Holders of Class A Shares shall be against the Sinking
Fund, but such recourse shall be limited to funds therein which have
been allocated (or are required hereunder to be allocated) for the
specific Optional or Mandatory Redemption in question. Notwithstanding
anything contained in this Section 5 or in Sections 9, 10 or 11 to the
contrary, no Redemption Price shall be paid for Series A Shares and no
funds shall be deposited into the Sinking Fund for such purpose, except
to the extent that funds are legally available for the redemption of
Series A Shares.
6. Rights on Liquidation, Dissolution, Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of Series A Shares having claims against the Company
pursuant to Subsection 5(f) shall be entitled to receive payment on its
claim out of the assets of the Company available for distribution to its
stockholders, whether from capital, surplus or earnings, before any
payment shall be made to the holders of any stock ranking on liquidation
junior to Series A Shares. Holders of Series A Shares shall be entitled
to no other payments of any kind or nature from the Company in connection
with, or with respect to, such shares. No funds received by IRI or the
Company from the Partnerships with respect to the Properties shall be
paid or distributed to any shareholders other than the Holders of Series
A Shares unless and until the full Redemption Price had been paid in
Final Redemption of all Series A Shares. If upon voluntary or involuntary
liquidation, dissolution or winding up of the Company, the assets of the
Company available for distribution to its stockholders shall be
insufficient to pay the claims of Holders of Series A Shares and of any
stock ranking on liquidation on a parity with Series A Shares the full
amounts to which they respectively shall be entitled, the holders of
Series A Shares and of such parity stock shall share ratably in any
distribution of assets according to the respective amounts which would be
payable to them if all amounts payable to them were paid in full. Written
notice of any voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company within the meaning of this
Section 6 shall be given by the Company to each Holder of Series A
Shares.
7. Rights on Merger or Consolidation. The merger or consolidation of the
Company into or with any other entity, the merger or consolidation of any
other entity into or with the Company, or the sale, transfer, mortgage,
pledge or lease of all or any part of the assets of the Company shall not
be deemed to be a liquidation, dissolution or winding up of the Company
within the meaning of Section 6. In addition, the sale, transfer or
exchange of all or substantially all of the assets of the Company in
exchange for securities of another entity followed by the liquidation of
the Company and the distribution of such securities to the shareholders
of the Company shall not be deemed to be a liquidation, dissolution or
winding up of the Company, within the meaning of Section 6, if as a
result of such sale, transfer or exchange and liquidation the Holders of
Series A Shares shall receive shares of the transferee entity having
substantially the same rights as Series A Shares. No merger or
consolidation of the Company into or with any other entity and no merger
or consolidation of any other entity into or with the Company, shall be
permitted unless: (x) if the Company is not be the surviving entity in
such transaction, the Holders of Series A Shares receive shares of the
surviving entity having substantially the same rights as Series A Shares
and the surviving entity acquires all of the stock of IRI and
acknowledges its obligations to the Holders, or (y) if the Company is the
surviving entity in such a transaction, the transaction does not effect
any amendment or repeal of any of the terms and provisions of the
outstanding Series A Shares in any manner, or (z) such transaction shall,
in addition to any other vote required, be authorized by the vote of the
Holders of Series A Shares required by Section 11. Written notice shall
be given to each Holder of Series A Shares of any merger or consolidation
of the Company into or with any other entity, any merger or consolidation
of any other entity into or with the Company, or any sale, or transfer of
all or any material part of the assets of the Company.
8. Conversion Rights. There are no conversion rights with respect to the
Series A Shares.
9. Sinking Fund.
(a) A fund (the "Sinking Fund") shall be established and maintained by the
Company or IRI as a trust account for the benefit of the Holders of
Series A Shares. The Sinking Fund shall be maintained with a federally
insured bank or trust company selected by the Company's board of
directors. Funds deposited into the Sinking Fund shall not be property
of the Company but shall be held in trust for the exclusive benefit of
the Holders of Series A Shares. All Dividends shall be paid from the
Sinking Fund and all payments in redemption of Series A Shares shall be
made from the Sinking Fund.
(b) Until all Series A Shares have been redeemed, IRI shall be required to
deposit into the Sinking Fund all funds it receives from the
Partnerships with respect to the Properties. In addition IRI shall be
required to be reasonably diligent in the enforcement of its right to
receive funds with respect to the Properties. The Company shall not be
required to deposit any funds into the Sinking Fund except to the
extent that IRI fails to deposit funds into the Sinking Fund as
required by the preceding sentence. IRI shall take such actions as
shall be necessary or appropriate to perform its obligations to deposit
funds into the Sinking Fund and to enforce its right to receive funds
from the Partnerships with respect to the Properties.
(c) If IRI fails to perform any obligation to deposit funds into the
Sinking Fund or to enforce its right to receive funds with respect to
the Properties, then any Holder may bring a legal action on behalf of
all Holders against IRI and the Company to require (i) the deposit into
the Sinking Fund of all amounts which should have been so deposited but
were not or (ii) reasonable diligence in the enforcement of IRI's right
to receive funds with respect to the Properties.
(d) The Obligation of IRI to deposit funds into the Sinking Fund shall
terminate as of the Date of Redemption of the Final Redemption.
10. Company Obligations Respecting IRI and Series A Shares.
(a) So long as Series A Shares remain outstanding, the Company, as sole
shareholder of IRI, shall take all actions which are necessary to cause
IRI to (i) deposit into the Sinking Fund in accordance with Section 10
above, the funds IRI receives with respect to the Properties, (ii)
enforce IRI's rights to receive funds from the Partnerships with
respect to the Properties, (iii) guarantee the payment and performance
to Holders of the Company's obligations to pay Dividends with respect
to, and redeem, Series A Shares, (iv) not engage in any business or
transactions of any kind except as necessary to enforce IRI's rights to
receive funds from the Partnerships with respect to the Properties and
to deposit such funds into the Sinking Fund in accordance with Section
10 above, (v) not incur any liabilities except as provided hereunder,
(vi) not have any employees, (vii) not agree to any modification or
amendment to the any agreement governing any of the Partnerships that
would reduce or impair its right to receive funds from the Partnerships
with respect to the Properties, (viii) not issue any securities of any
kind or nature other than the 1000 shares of common stock of IRI
currently issued and owned by the Company.
(b) So long as Series A Shares remain outstanding, the Company covenants
and agrees that (i) it will issue no Series A Shares except as
stipulated in this Designation, (ii) it will issue no securities other
than Series A Shares which have any rights to funds received by IRI or
the Company with respect to the Partnerships, (iii) it will not
transfer, pledge or otherwise dispose of any of its shares of IRI
common stock, and (iv) it will take such reasonably available actions
as are necessary or appropriate to enable it to have sufficient,
legally available funds for the payment of Dividends and the redemption
of Series A Shares as required by this Designation.
(c) So long as Series A Shares remain outstanding, the Company represents
and warrants that (i) it is the sole shareholder of IRI (ii) it owns
1000 shares of common stock of IRI, (iii) IRI is a newly formed
corporation with no liabilities, and (iv) that IRI will have no assets
at any time that Series A Shares remain outstanding other than the
interests in the Partnerships.
(d) Neither the Company nor IRI shall have any obligation to use or apply,
or any liability for the use or application of, any funds or
distributions received pursuant to a Sub-Asset Management Agreement
between IRI and Metra Management L.P ("Sub-Management Fees"), for the
payment of Dividends on, or the payment of the Purchase Price for the
redemption of, Series A Shares; rather all Sub-Management Fees received
by IRI may be distributed by IRI to the Company and used by the Company
for any purposes.
11. Voting Rights. An affirmative vote of the Holders of record of a
majority of the Series A Shares shall be required for approval of the
following matters:
(i) Any amendment to this Designation which changes any rights, privileges,
preferences, protections, voting rights of Holders of record of Series A
Shares or which changes any obligations of the Company or IRI set forth
herein, including without limitation the obligations of the Company set
forth in Section 10 and the obligations of the Company and IRI to pay
Dividends, to redeem Series A Shares, and to deposit funds into the
Sinking Fund;
(ii) Any use of proceeds of the Properties which is not in accordance with
this Designation;
(iii) Any action which limits the ability of the Company or IRI to perform
their obligations under this Designation;
(iv) Any sale or disposition (i) by the Company of an interest in IRI, or (ii)
by IRI of any interest in any of the Partnerships, before sufficient
funds have been deposited to the Sinking Fund to pay all accrued
Dividends and redeem all Series A Shares.
12. Preferences and Security. Series A Shares shall have a first priority
liquidation preference to the extent of accrued Dividends and the
Redemption Price of all outstanding Series A Shares to (i) all funds
received by IRI or the Company from the Partnerships with respect to the
Properties, (ii) all shares of IRI. The Company shall take such actions to
effectuate the foregoing preference for Series A Shares by such board
resolutions, agreements, and other actions as are reasonable, necessary and
appropriate. Series a Shares shall have no other preference.
13. Certain Provisions Concerning Redemption, Conversion and Retirement. Upon
the redemption of any Series A Shares, such shares shall be deemed retired.
Series A Shares shall be restored to the status of authorized but unissued
Preferred Stock of the Company. Any and all Series A Shares which are not
transferred to the Holders on or before April 15, 2002, shall be retired as
of that date.
14. Amendment. The Board of Directors reserves the right to amend this
resolution subject to the provisions of Section 11.
IN WITNESS WHEREOF, the undersigned officer of the Company has executed this
certificate on behalf of the Company this 4th day of April, 2002.
INNOVO GROUP INC.
By: /s/ Patricia Anderson
---------------------
Patricia Anderson
Title: CEO
ATTEST:
/s/ Donna Drewrey
-----------------
Donna Drewrey
Title: Secretary
SCHEDULE A
List of Partnerships and Properties Acquired
PROPERTY OWNER (Delaware limited partnerships)
Fountains at Waterford Metra Cross Pool 1, LP
Sinclair Place
Signature Place Fairways
Apple Lane Metra Cross Pool 2, LP
Oak Park IV
Governor's Square
Timbers on Broadway
Westwood Metra Westwood, LP
Park Avenue Villas Metra Park Avenue Villas, LP
Wood Hollow Metra Wood Hollow, LP
Arbor Pointe Metra Arbor Pointe, LP
Brighton Court Metra Brighton Court, LP
Delmar Valley Metra Delmar Valley, LP
Enclave Metra Enclave, LP
Meridian Metra Meridian, LP
Treehouse Metra Treehouse-SA, LP
Harper's Ferry Metra Harper's Ferry, LP
Fountain Lake Metra Fountain Lake, LP
Willow Creek Metra Willow Creek, LP
Fairway View Metra Fairway View, LP
Quail Oaks Metra Quail Oaks, LP
Sunchase Metra Sunchase, LP
Windsor Tower Metra Windsor Tower, LP
Seville Metra Seville, LP
Oak Hill Metra Oak Hill, LP
Bay Anchor Metra Bay Anchor, LP
Grand Lagoon Cove Metra Grand Lagoon Cove, LP
EXHIBIT 4.3
AMENDMENT TO
CERTIFICATE OF RESOLUTION OF DESIGNATION,
PREFERENCES AND OTHER RIGHTS
$100 Redeemable 8% Cumulative Preferred Stock, Series A
INNOVO GROUP INC., Par value $0.10 per Share
Pursuant to a resolution of the Board of Directors of Innovo Group Inc. and
Section 151 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Act"), Innovo Group Inc. (the "Company", a corporation
organized existing under the Delaware Corporation Act, hereby certifies as
follows:
FIRST: The Board of Directors of the Corporation duly adopted a resolution
authorizing the creation and issuance of a series of Preferred Stock
to be designated as $100 Redeemable 8% Cumulative Preferred Stock,
Series A ("Series A Shares").
SECOND: The Company filed a Certificate of Resolution of Designation,
Preferences and Other Rights for the Series A Shares (the
"Certificate of Designation") with the Delaware Secretary of State
on April 4, 2002.
RESOLVED, pursuan t to paragraph Fourth, subparagraph (c) of the Fifth
Amended and Restated Certificate of Incorporation of Innovo Group, Inc.
("Company"), and the provisions of the Delaware Corporation Act, that the
Board of Directors of the Company does hereby provide in this Amendment to
the Certificate of Designation, as follows:
The Designation is hereby amended by deleting Section 13 thereof in its
entirety and substituting in lieu thereof the following:
13. Certain Provisions Concerning Redemption, Conversion and Retirement.
Upon the redemption of any Series A Shares, such shares shall be deemed
retired. Series A Shares shall be restored to the status of authorized but
unissued Preferred Stock of the Company. All 200,000 Series A Shares issued
by the Company to IRI on or about April 5, 2002 shall remain issued and
outstanding until redeemed except that all of such Shares which have not been
transferred to the Holders on or before June 15, 2002, shall be retired as of
that date.
As amended above, the Certificate of Designation shall remain and continue
in full force and effect.
IN WITNESS WHEREOF, the undersigned officer of the Company has executed
this certificate on behalf of the Company this 14th day of April, 2002.
INNOVO GROUP INC.
By: /s/ Patricia Anderson
---------------------
Patricia Anderson
Title: CEO
ATTEST:
/s/ Donna Drewrey
-----------------
Donna Drewrey
Title: Secretary
EXHIBIT 10.85
INVESTMENT LETTER
April 4, 2002
Innovo Group Inc.
2633 Kingston Pike, Suite 100
Knoxville, Tennessee 37919
Dear Sir:
1. Receipt of Stock. In connection with the sale of certain real properties,
______________________, a Nevada corporation (the "Undersigned") has agreed to
accept as partial payment a total of shares of $100 Redeemable 8% Cumulative
Preferred Stock, Series A, having a par value of $0.10 (the "Securities") of
Innovo Group, Inc., a Delaware corporation (the "Company"). The Securities
were contributed by the Company to Innovo Realty, Inc. ("IRI") and IRI in
turn, in exchange for interests in the limited partnerships listed on the
attached Schedule A ("Partnerships"), transferred, sold and assigned the
Securities to the Undersigned for the benefit of the Partnerships in
connection with their respective acquisitions from the Undersigned of the real
properties listed on Schedule A beside their names.
2. Designation, Definitions. The rights and preferences of the Securities
are established by a Certificate of Designation, Preferences and Other Rights
filed with the Secretary of State of the State of Delaware (the
"Designation"), a true and correct copy of which is attached hereto as
Schedule "B." The capitalized terms used herein or in the Schedules attached
hereto and not defined herein shall have the meanings set forth in the
Designation.
3. No Registration. The Undersigned acknowledges that the Securities have not
been and will not be registered under the Federal Securities Act of 1933, as
amended (the "1933 Act"), on the ground that this transaction is exempt from
such registration under Section 4(2) thereof as part of an issue not involving
a public offering and applicable state securities laws. The Undersigned
acknowledges that reliance by the Company on such exemptions is predicated in
part on the Undersigned's representations contained in this letter.
4. Representations and Warranties. The Undersigned represents and warrants to,
and covenants and agrees with, the Company as follows:
(a) Investment Intent. The Undersigned is purchasing the Securities for the
Undersigned's own account, with the intention of holding such Securities for
investment and not with the intention of participating, directly or indirectly,
in any resale or distribution of the Securities.
(b) Limitations on Resale. The Undersigned understands that the Company is
under no obligation (i) to register the Securities under the 1933 Act or any
state securities laws or (ii) to comply with the requirements for any exemption
which might otherwise be available thereunder with respect to any resale of
securities. Further, the Undersigned acknowledges that the Company has made no
agreement to register the Securities under any such laws or to take action to
provide for the future availability of any exemption thereunder. The
Undersigned understands and agrees that no transfer, assignment or sale of any
of the Securities shall be of any force and effect unless and until the all of
the following have occurred: (i) a document of transfer, assignment or sale
("Assignment") is executed by the owner of record of the Securities, (ii) the
assignee, transferee or purchaser ("Assignee") executes an agreement in a form
acceptable to the Company (the "Acknowledgment") acknowledging, and agreeing to
be bound by the terms of this agreement (the "Investment Letter"), (iii) the
Assignee provides to the satisfaction of the Company all of the information and
assurances required by the Investment Letter including assurances satisfactory
to the Company and its counsel that the Assignment of the Securities is exempt
from registration requirements of all applicable securities laws and does not
violate other applicable law, (iv) the Company receives executed originals of
the Assignment and the Acknowledgment and (v) the Company acknowledges in
writing (i) its acceptance of the Assignment and Acknowledgment and (ii) its
entry of the Assignee on the Company's stock records as the owner of record of
such shares. The Company agrees that it will not unreasonably withhold approval
of any Assignment of Securities that is in compliance with subparts (i) through
(iv) of the preceding sentence. The Undersigned understands and agrees that
the Company may refuse to permit the Undersigned to sell, transfer, or
otherwise dispose of the Securities, unless such transfer or other disposition
is made either under an effective registration statement or an applicable
exemption from registration as to which the Undersigned has furnished an
opinion of counsel, satisfactory to counsel for the Company, to the effect that
such exemption is valid, applicable and continuing.
(c) Due Diligence. The Undersigned hereby acknowledges receipt of a copy of
the following information and materials ("Due Diligence Materials") including
(i) Risk Factors of the Company dated March 26, 2002 a true and correct copy of
which is attached hereto as Schedule "C"; (ii) the Company's 10-k Annual Report
for the fiscal year ended December 1, 2002; (iii) the partnership agreements
between IRI and the Partnerships, and (iv) the Sub-Asset Management Agreement
between IRI and Metra Management, L.P. In addition, the Undersigned
acknowledges that the Company has made all other documents which the
Undersigned has requested available to the Undersigned. The Undersigned
represents that its counsel has reviewed and participated in negotiations with
respect to the delineation of the rights, privileges and terms of the
Securities that are set forth in the Designation, that its counsel and its
representatives have reviewed the Designation, that they fully understand its
terms and that the Undersigned accepts and agrees to the terms of the
Designation. The Undersigned represents that it has read the Due Diligence
Materials, including without limitation, the "Risk Factors" and is fully aware
of the risks in making the investment contemplated herein. The Undersigned has
relied solely upon the Due Diligence Materials, the documents and materials
submitted therewith, and independent investigations made by the Undersigned in
making the decision to acquire the Securities. The Undersigned has not relied
on any oral statements concerning an investment in the Securities.
(d) Accreditation. The Securities are being offered and sold to the
Undersigned in reliance upon exemptions from registration under the 1933 Act.
In that regard, the Undersigned hereby warrants and represents that it is an
"Accredited Investor," as that term is defined in Rule 501(a) of Regulation D
under said Act.
(e) Suitability. The Undersigned expressly represents that: (a) it has such
knowledge and experience in financial and business matters in general and in
investments of the type described in the Due Diligence Materials in particular,
that it is capable of evaluating the merits and risks of the prospective
investment; (b) an investment in the Securities is not liquid and its financial
condition is such that he has no need for liquidity with respect to this
investment in the Securities to satisfy any existing or contemplated
undertaking or indebtedness; (c) it is able to bear the economic risk of his
investment in the Securities for an indefinite period of time, including the
risk of losing all of its investment,; (d) it has secured independent
valuations and tax advice with respect to the Securities, upon which it is
solely relying, (e) it has consulted with his own attorney regarding legal
matters concerning the Company; (f) it is not seeking a current cash return
with respect to his investment in the Securities and has no need of a current
return on his investment in the Company; (g) it has participated in the
syndication of other privately placed investments and, by reason of its
knowledge and experience in business and financial matters, has acquired the
capacity to protect its own interest in investments of the subject nature, and
is capable of evaluating the risks, merits and other facets of the subject
investment; and (h) after reasonable inquiry, considering its investment
objectives, financial situation and needs, it believes that the Securities are
a suitable investment.
(f) Principal Office. The principal office of the Undersigned is located in
the State of Texas at the address set forth below its signature
(g) Representations are True and Complete. All information that the
Undersigned has provided concerning itself and its financial position is
correct and complete as of the date set forth below, and if there should be any
material change in such information prior to the acceptance of the undersigned
as an assignee and owner of record of the Securities, the Undersigned will
immediately provide such information to the Company.
(h) Company's Reliance on Representations. The Undersigned acknowledges that
the Company is relying on the truth and accuracy of the representations made by
the Undersigned herein.
(i) Stop Transfer Instructions; Legends. The Undersigned understands and
agrees that stop-transfer instructions may be noted on the appropriate records
of the Company, and that there will be placed on the certificates for the
Securities, or any substitutions therefor, a restrictive legend consistent with
the provisions hereof and applicable securities law.
(j) No Public Solicitation. The Undersigned acknowledges that there has been
no public solicitation or advertisement of an offer in connection with the
issuance and or Assignment of the Securities to the Undersigned.
5. Indemnification. The Undersigned hereby agrees to indemnify the Company,
and hold it harmless against any and all loss, damage, liability or expense,
including reasonable attorney's fees, which they or any of them may suffer,
sustain, or incur by reason of or in connection with any misrepresentation or
breach of warranty or agreement made by the Undersigned in this Investment
Letter, or in connection with any sale or distribution of any of the Securities
by the Undersigned in violation of the Act or any other applicable law.
6. Miscellaneous. This Investment Letter and the representations and
warranties contained herein shall be binding upon the Undersigned and it
successors and assigns. This Investment Letter shall be governed by the laws
of the State of Delaware.
Very truly yours,
[ENTITY NAME]
By: ______________________________
Name:
Title:
Tax I.D. No.:
Address of Principal Office:
Accepted and agreed to as of this _____ day of April, 2002.
Innovo Group Inc.
By: ______________________________
SCHEDULE A
List of Partnerships and Properties Acquired
PROPERTY OWNER (Delaware limited partnerships)
Fountains at Waterford Metra Cross Pool 1, LP
Sinclair Place
Signature Place
Fairways
Apple Lane Metra Cross Pool 2, LP
Oak Park IV
Governor's Square
Timbers on Broadway
Westwood Metra Westwood, LP
Park Avenue Villas Metra Park Avenue Villas, LP
Wood Hollow Metra Wood Hollow, LP
Arbor Pointe Metra Arbor Pointe, LP
Brighton Court Metra Brighton Court, LP
Delmar Valley Metra Delmar Valley, LP
Enclave Metra Enclave, LP
Meridian Metra Meridian, LP
Treehouse Metra Treehouse-SA, LP
Harper's Ferry Metra Harper's Ferry, LP
Fountain Lake Metra Fountain Lake, LP
Willow Creek Metra Willow Creek, LP
Fairway View Metra Fairway View, LP
Quail Oaks Metra Quail Oaks, LP
Sunchase Metra Sunchase, LP
Windsor Tower Metra Windsor Tower, LP
Seville Metra Seville, LP
Oak Hill Metra Oak Hill, LP
Bay Anchor Metra Bay Anchor, LP
Grand Lagoon Cove Metra Grand Lagoon Cove, LP
SCHEDULE B
CERTIFICATE OF RESOLUTION OF DESIGNATION,
PREFERENCES AND OTHER RIGHTS
$100 Redeemable 8% Cumulative Preferred Stock, Series A
INNOVO GROUP INC., Par value $.10 per Share
Pursuant to section 151 of the G eneral Corporation Law of the State of
Delaware (the "'elaware Corporation Act"), Innovo Group Inc. (the "Company"), a
corporation organized existing under the Delaware Corporation Act, hereby
certifies as follows:
FIRST: The Fifth Amended and Restated Certificate of Incorporation of the
Company authorizes the issuance of up to 5,000,000 shares of serial Preferred
Stock, par value $.10 per share (the "Preferred Stock"), and further
authorizes the Board of Directors of the Corporation by resolution or
resolutions to provide for the issuance of Preferred Stock in series and to
establish the number of shares to be included in each such series and to fix
the powers, designation, preferences and relative, participating, optional or
other special rights of the shares of each such series and the qualifications,
limitations or restrictions thereof.
SECOND: The Board of Directors of the Corporation, by action by written
consent dated as of March 18, 2002 and amended by resolution adopted April 4,
2002, duly adopted the following resolution authorizing the creation and
issuance of a series of Preferred Stock to be designated as $100 Redeemable 8%
Cumulative Preferred Stock, Series A:
RESOLVED, pursuant to paragraph Fourth, subparagraph (c) of the Fifth Amended
and Restated Certificate of Incorporation of Innovo Group, Inc. ("Company"),
and the provisions of the Delaware Corporation Act, that the Board of Directors
of the Company does hereby provide in this Resolution of Designation,
Preferences and Other Rights (the "Designation") for the issuance of shares of
preferred stock in a series to consist of 200,000 shares, to be known as the
"$100 Redeemable 8% Cumulative Preferred Stock, Series A", and does hereby fix
the distinguishing characteristics, including the designation, preferences and
relative participating, optional or other special rights, and the
qualifications, limitations, or restrictions thereof, of such series of stock,
as follows:
* * * * * * * *
There is hereby designated, from the authorized but unissued shares of
preferred stock of the Company, a series thereof to consist of not more than
200,000 shares, and the voting powers, designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, of the shares of such series (in addition
to those set forth in the Articles of Incorporation which are applicable to the
Preferred Stock of all series), shall be as follows:
1. Definitions:
"Company"shall mean Innovo Group Inc., a Delaware corporation.
"Designation" shall mean this Resolution of Designation, Preferences and
Other rights.
"Date of Redemption" shall mean the date designated by the Company on which
an Optional Redemption, Mandatory Redemption or Final Redemption of Series A
Shares pursuant to Subsections 5(a), 5(b) or 5(c) is to become effective.
"Dividends" shall mean the cumulative cash dividends payable at the rate of
$2.00 per share of Series A Shares, for each calendar quarter of each calendar
year and interest accruing thereon in accordance with Section 4 below.
"Excess Funds" shall be determined each February 1, May 1, August 1 and
November 1 and shall mean all funds remaining in the Sinking Fund after the (i)
payment of all Dividends accrued through the close of the prior calendar
quarter, and (ii) the deduction of all funds held with respect to any prior
distribution of Dividends or redemption of Series A Shares.
"Final Redemption" shall mean the redemption of all issued and outstanding
Series A Shares, as provided in Subsection 5(c).
"Holders" shall mean the beneficial Owners of Series A Shares upon
consummation of the transactions contemplated by this Designation and their
assignees. The initial Holders shall be American Realty Investors, Inc.,
Transcontinental Realty Investors, Inc. and Income Opportunity Realty Investors,
Inc. and their assignees.
"IRI" shall mean Innovo Realty, Inc., a California corporation and wholly
owned subsidiary of the Company.
"Mandatory Redemption" shall mean any redemption of Series A Shares which is
mandatory to the Company pursuant to Subsection 5(b) below.
"Optional Redemption" shall mean any redemption of Series A Shares which is
optional to the Company pursuant to Subsection 5(a) below.
"Partnerships" shall mean one or more of the following partnerships
identified on Schedule "A."
"Properties" shall mean those income producing properties identified on the
attached Schedule "A."
"Redemption Price" shall mean, for each Series A Share to be redeemed
pursuant to Subsections (4)(a) or 4(b), $100 plus all accrued but unpaid
Dividends through the Date of Redemption. The Redemption Price for any final
redemption pursuant to Subsection 5(c) shall be adjusted as provided therein.
"Series A Shares" shall mean the "$100 Redeemable 8% Cumulative Preferred
Stock" designated in Section 2, below.
"Sinking Fund" shall mean the fund maintained in trust for the Holders in
accordance with the provisions of Section 9, below.
2. Designation. The designation of this series of Preferred Stock shall be
"$100 Redeemable 8% Cumulative Preferred Stock, Series A" (hereinafter called
"Series A Shares").
3. Issuance and Assignment. It is anticipated that all Series A Shares shall
be issued to the Company's wholly owned subsidiary, IRI as part of its initial
capitalization. It is further anticipated that the Series A Shares will be
transferred by IRI to the Partnerships which will, in turn, upon consummation
of the transactions contemplated hereby, transfer the Series A Shares and other
consideration to the Holders in exchange for the Properties. No transfer of
Series A Shares shall be of any force and effect unless and until the all of
the following have occurred: (i) a document of transfer or assignment
("Assignment") is executed by the owner of record of such Series A Shares, (ii)
the assignee executes an agreement in a form acceptable to the Company (the
"Acknowledgment") acknowledging, and agreeing to be bound by the terms of the
Company's subscription agreement for Series A Shares (the "Subscription"),(iii)
the assignee provides to the satisfaction of the Company all of the information
required from subscribers by the Subscription, (iv) the Company receives
executed originals of the Assignment and the Acknowledgment and (v) the Company
acknowledges in writing its acceptance of the Assignment and Acknowledgment and
the entry of the Assignee on the Company's stock records as the owner of record
of such shares. The Company agrees that it will not unreasonably withhold
acceptance of any assignment of Series A Shares in compliance with subparts (i)
through (iv) of the preceding sentence, provided the assignment is not made in
violation of applicable law, including securities law.
4. Dividends.
(a) The Holders of Series A Shares shall be entitled to receive Dividends
from the Sinking Fund, to the extent such funds are by law available for the
payment of dividends. Dividends shall be payable on each January 1, April 1,
July 1 and October 1. Dividends on Series A Shares shall be prorated for
partial quarters. Accumulated Dividends on Series A Shares shall bear interest
at the rate of Eight (8%) percent per annum, compounded annually.
(b) Dividends shall begin accruing and be cumulative from the day upon which
the Series A Shares are transferred to the Holders.
(c) For the purposes of this Section 4 no Series A Share shall be deemed to
be issued or outstanding at any time it is held by or for the account of the
Company or by or for the account of any majority-owned subsidiary of the
Company.
(d) Dividends on Series A Shares shall be payable only from the Sinking Fund.
Holders shall have no recourse or remedies of any kind or nature against the
Company for the payment of Dividends except to the extent that funds for such
purpose have been paid to the Company pursuant to the last sentence of
Subsection 5(e), to the extent that IRI fails to deposit funds into the Sinking
Fund as required by Section 9, or to the extent that the Holders are damaged by
a breach by the Company of the covenants set forth in Section 10. If sufficient
funds are not available in the Sinking Fund for the payment of full quarterly
Dividends, then partial Dividend payments shall be made to the extent funds are
available in the Sinking Fund. Funds allocated to an Optional or Mandatory
redemption may not be used to pay Dividends.
(e) Notwithstanding anything contained in this Section 4 or in Sections 9,
10 or 11 to the contrary, no Dividends shall be paid with respect to Series A
Shares and no funds shall be deposited into the Sinking Fund for such purpose,
except to the extent that funds are legally available for the payment of
Dividends.
5. Redemption of Series A Shares.
(a) Optional to the Company. The Company may for any purpose, at any time, or
from time to time, upon not less than 30 days' advance written notice to all
Holders of all then outstanding Series A Shares, elect to make an Optional
redemption of Series A Shares from any funds (except funds in the Sinking Fund
specifically reserved for another purpose) legally available to the Company for
such purpose. Funds sufficient to pay the Redemption Price for all shares
subject to the Optional Redemption shall be deposited at least fifteen days
before the date of redemption into the Sinking Fund and held in a sub-account
of the Sinking Fund dedicated to the payment of the Redemption Price for all
Series A Shares subject to the Optional Redemption. The notice of an Optional
Redemption shall specify the following: (i) the Date of Redemption, (ii) the
total number of shares being redeemed from each Holder, (iii) the Redemption
Price per share and (iv) the name of the Bank or Trust Company holding the
Sinking Fund into which funds to pay the Redemption Price will be deposited and
held in trust for the Holders. No exercise by the Company of Optional
Redemption rights shall be effective until the Company has placed legally
available funds into the Sinking Fund which are sufficient to pay the
redemption Price for all Series A Shares that are subject to the Optional
Redemption. Upon the placing of such funds in the Sinking Fund, all such funds
shall be reserved in a sub-account of the Sinking Fund dedicated to the payment
of the Redemption Price for all Series A Shares that are subject to the
Optional Redemption.
(b) Mandatory to the Company. So long as there are Series A Shares
outstanding, the Company shall be required to redeem that the largest possible
number of whole Series A Shares that can be redeemed from Excess Funds at the
Redemption Price, if there is more than $100,000 in Excess Funds in the Sinking
Fund as of February 1, May 1, August 1, or November 1("Determination Date") of
any calendar year. The Company shall use its reasonable best efforts to give
all Holders of all then outstanding Series A Shares at least 30 days advance
written notice of any Mandatory Redemption of Series A Shares. The notice of
redemption shall specify (i) the total number of shares being redeemed from
each Holder, (ii) the Redemption Price per share and (iii) the name of the Bank
or Trust Company holding the Sinking Fund into which funds to pay the
Redemption Price will be deposited and held in trust for the Holders and (iv)
the Date of Redemption. The Date of Redemption so designated shall be the 15th
day of the month next following the Determination Date of the Mandatory
Redemption. Upon the sending of notice of a Mandatory Redemption, the Excess
Funds shall be reserved in a sub-account of the Sinking Fund dedicated to the
payment of the Redemption Price for all Series A Shares that are subject to the
Mandatory Redemption.
(c) Final Redemption. If there are ever sufficient funds in the Sinking Fund
(whether deposited by the Company pursuant to an Optional Redemption or
deposited by IRI to pay all accrued Dividends and to redeem all then
outstanding Series A Shares, then as promptly as reasonably practical, the
Company shall redeem all Series A Shares by paying each Holder the Redemption
Price for all outstanding Series A Shares then held by such Holder. If after
all of the Properties are sold and the proceeds of the sale of the Properties
and cash flow derived from such Properties has been placed in the Sinking Fund
and the total amount of funds remaining in the Sinking Fund is insufficient to
pay the full Redemption Price for all then outstanding Series A Shares, then
he Company (or IRI) shall pay $1.00 into the Sinking Fund and the Redemption
Price shall be adjusted so that it equals (x) the total amount of funds
available for distribution, minus (y) all direct costs of maintaining the
Sinking Fund and making distributions therefrom, divided by (z) the number of
then outstanding Series A Shares. In such event the Company shall, as promptly
as reasonably practical, redeem all Series A Shares which remain outstanding by
paying from the Sinking Fund to each Holder the adjusted Redemption Price for
all outstanding Series A Shares then held by such Holder. The funds shall be
paid to each Holder, pro rata based on the number of issued and outstanding
Series A Shares held by each Holder. The adjusted Redemption Price shall be and
represent full and final payment for the redemption of all Series A Shares. The
Company shall give notice of any Final Redemption to all Holders of then
outstanding Series A Shares at least 30 days in advance of the Date of
Redemption of the Final Redemption. The notice of redemption shall specify (i)
that the redemption is the Final Redemption of all then outstanding Series A
Shares, (ii) the Redemption Price per share showing the details of the
calculation of any adjusted Redemption Price , (iii) the name of the Bank or
Trust Company holding the Sinking Fund into which funds to pay the Redemption
Price will be deposited and held in trust for the Holders and (iv) the Date of
Redemption. If the Final Redemption is to be made at the full Redemption Price
without adjustment, then funds sufficient to pay the Redemption Price and all
direct costs of maintaining the Sinking Fund and making distributions therefrom
shall be reserved in a sub-account of the Sinking Fund dedicated to the payment
of the Redemption Price for all then outstanding Series A Shares. Any funds
remaining in the Sinking Fund after such allocation shall be paid to the
Company.
(d) Termination of Rights to Redeemed Shares. If less than all the
outstanding shares of Series A Shares are to be redeemed, the particular shares
to be redeemed shall be chosen by allocation among the respective Holders of
the Series A Shares, pro rata, as determined by resolution of the Company's
Board of Directors. All Holders shall be obligated to accept any redemption of
Series A Shares made in accordance with the Provisions hereof. All rights of
the Holders to the shares being redeemed shall cease and terminate as of the
Date of Redemption, except the right of the Holders thereof to receive the
Redemption Price.
(e) Payment of Redemption Price. The respective Holders of record of Series A
Shares to be redeemed shall be entitled to receive the Redemption Price upon
actual physical delivery to the Company or its designated agent, as the case
may be, of certificates for the shares being redeemed. Such certificates, if
required by the Company, shall be duly endorsed in blank or accompanied by
proper instruments of assignment and transfer thereof duly executed in blank.
Within twenty days after delivery by a Holder of redeemed shares to the Company
or its designee, payment of the Redemption Price shall be sent to the Holder by
first-class mail, postage prepaid, to the address of such Holder as the same
shall appear on the stock register of the Company. If a Holder of redeemed
shares fails to surrender any such shares to the Company or its designee within
ninety days after the Date of Redemption, the Company shall mark the shares
cancelled on its books and records and give notice to the Holder of such
cancellation and of the Holder's right to receive the Redemption Price upon the
delivery of the certificates representing such shares to the Company or its
designee. The notice shall be delivered to the Holders address as last
reflected on the Company's stock books. Funds held in the Sinking Fund for the
redemption of Series A Shares which have not been claimed within two years from
the Date of the Final Redemption together with any interest thereon, shall be
paid to the Company, and the Holder of any shares who has failed to claim the
Redemption Price may thereafter look only to the Company for payment thereof.
(f) Obligations of Company Respecting Redemption. The Holders shall have no
recourse against the Company and the Company shall have no obligation or
liability for the payment of any Redemption Price in the case of an Optional,
Mandatory or Final Redemption except to the extent that funds for such purpose
have been paid to the Company pursuant to the last sentence of Subsection 5(e),
to the extent that IRI fails to deposit funds into the Sinking Fund as required
by Section 9, or to the extent that the Holders are damaged by a breach by the
Company of the covenants set forth in Section 10. Otherwise, the sole recourse
and remedy of the Holders of Class A Shares shall be against the Sinking Fund,
but such recourse shall be limited to funds therein which have been allocated
(or are required hereunder to be allocated) for the specific Optional or
Mandatory Redemption in question. Notwithstanding anything contained in this
Section 5 or in Sections 9, 10 or 11 to the contrary, no Redemption Price shall
be paid for Series A Shares and no funds shall be deposited into the Sinking
Fund for such purpose, except to the extent that funds are legally available
for the redemption of Series A Shares.
6. Rights on Liquidation, Dissolution, Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of Series A Shares having claims against the Company
pursuant to Subsection 5(f) shall be entitled to receive payment on its claim
out of the assets of the Company available for distribution to its
stockholders, whether from capital, surplus or earnings, before any payment
shall be made to the holders of any stock ranking on liquidation junior to
Series A Shares. Holders of Series A Shares shall be entitled to no other
payments of any kind or nature from the Company in connection with, or with
respect to, such shares. No funds received by IRI or the Company from the
Partnerships with respect to the Properties shall be paid or distributed to
any shareholders other than the Holders of Series A Shares unless and until
the full Redemption Price had been paid in Final Redemption of all Series A
Shares. If upon voluntary or involuntary liquidation, dissolution or winding
up of the Company, the assets of the Company available for distribution to its
stockholders shall be insufficient to pay the claims of Holders of Series A
Shares and of any stock ranking on liquidation on a parity with Series A
Shares the full amounts to which they respectively shall be entitled, the
holders of Series A Shares and of such parity stock shall share ratably in any
distribution of assets according to the respective amounts which would be
payable to them if all amounts payable to them were paid in full. Written
notice of any voluntary or involuntary dissolution, liquidation or winding up
of the affairs of the Company within the meaning of this Section 6 shall be
given by the Company to each Holder of Series A Shares.
7. Rights on Merger or Consolidation. The merger or consolidation of the
Company into or with any other entity, the merger or consolidation of any
other entity into or with the Company, or the sale, transfer, mortgage, pledge
or lease of all or any part of the assets of the Company shall not be deemed
to be a liquidation, dissolution or winding up of the Company within the
meaning of Section 6. In addition, the sale, transfer or exchange of all or
substantially all of the assets of the Company in exchange for securities of
another entity followed by the liquidation of the Company and the distribution
of such securities to the shareholders of the Company shall not be deemed to
be a liquidation, dissolution or winding up of the Company, within the meaning
of Section 6, if as a result of such sale, transfer or exchange and
liquidation the Holders of Series A Shares shall receive shares of the
transferee entity having substantially the same rights as Series A Shares. No
merger or consolidation of the Company into or with any other entity and no
merger or consolidation of any other entity into or with the Company, shall be
permitted unless: (x) if the Company is not be the surviving entity in such
transaction, the Holders of Series A Shares receive shares of the surviving
entity having substantially the same rights as Series A Shares and the
surviving entity acquires all of the stock of IRI and acknowledges its
obligations to the Holders, or (y) if the Company is the surviving entity in
such a transaction, the transaction does not effect any amendment or repeal of
any of the terms and provisions of the outstanding Series A Shares in any
manner, or (z) such transaction shall, in addition to any other vote required,
be authorized by the vote of the Holders of Series A Shares required by
Section 11. Written notice shall be given to each Holder of Series A Shares of
any merger or consolidation of the Company into or with any other entity, any
merger or consolidation of any other entity into or with the Company, or any
sale, or transfer of all or any material part of the assets of the Company.
8. Conversion Rights. There are no conversion rights with respect to the
Series A Shares.
9. Sinking Fund.
(a) A fund (the "Sinking Fund") shall be established and maintained by the
Company or IRI as a trust account for the benefit of the Holders of Series A
Shares. The Sinking Fund shall be maintained with a federally insured bank or
trust company selected by the Company's board of directors. Funds deposited
into the Sinking Fund shall not be property of the Company but shall be held
in trust for the exclusive benefit of the Holders of Series A Shares. All
Dividends shall be paid from the Sinking Fund and all payments in redemption
of Series A Shares shall be made from the Sinking Fund.
(b) Until all Series A Shares have been redeemed, IRI shall be required to
deposit into the Sinking Fund all funds it receives from the Partnerships with
respect to the Properties. In addition IRI shall be required to be reasonably
diligent in the enforcement of its right to receive funds with respect to the
Properties. The Company shall not be required to deposit any funds into the
Sinking Fund except to the extent that IRI fails to deposit funds into the
Sinking Fund as required by the preceding sentence. IRI shall take such
actions as shall be necessary or appropriate to perform its obligations to
deposit funds into the Sinking Fund and to enforce its right to receive funds
from the Partnerships with respect to the Properties.
(c) If IRI fails to perform any obligation to deposit funds into the Sinking
Fund or to enforce its right to receive funds with respect to the Properties,
then any Holder may bring a legal action on behalf of all Holders against IRI
and the Company to require (i) the deposit into the Sinking Fund of all
amounts which should have been so deposited but were not or (ii) reasonable
diligence in the enforcement of IRI's right to receive funds with respect to
the Properties.
(d) The Obligation of IRI to deposit funds into the Sinking Fund shall
terminate as of the Date of Redemption of the Final Redemption.
10. Company Obligations Respecting IRI and Series A Shares.
(a) So long as Series A Shares remain outstanding, the Company, as sole
shareholder of IRI, shall take all actions which are necessary to cause IRI to
(i) deposit into the Sinking Fund in accordance with Section 10 above, the
funds IRI receives with respect to the Properties, (ii) enforce IRI's rights
to receive funds from the Partnerships with respect to the Properties, (iii)
guarantee the payment and performance to Holders of the Company's obligations
to pay Dividends with respect to, and redeem, Series A Shares, (iv) not engage
in any business or transactions of any kind except as necessary to enforce
IRI's rights to receive funds from the Partnerships with respect to the
Properties and to deposit such funds into the Sinking Fund in accordance with
Section 10 above, (v) not incur any liabilities except as provided hereunder,
(vi) not have any employees, (vii) not agree to any modification or amendment
to the any agreement governing any of the Partnerships that would reduce or
impair its right to receive funds from the Partnerships with respect to the
Properties, (viii) not issue any securities of any kind or nature other than
the 1000 shares of common stock of IRI currently issued and owned by the
Company.
(b) So long as Series A Shares remain outstanding, the Company covenants and
agrees that (i) it will issue no Series A Shares except as stipulated in this
Designation, (ii) it will issue no securities other than Series A Shares which
have any rights to funds received by IRI or the Company with respect to the
Partnerships, (iii) it will not transfer, pledge or otherwise dispose of any
of its shares of IRI common stock, and (iv) it will take such reasonably
available actions as are necessary or appropriate to enable it to have
sufficient, legally available funds for the payment of Dividends and the
redemption of Series A Shares as required by this Designation.
(c) So long as Series A Shares remain outstanding, the Company represents
and warrants that (i) it is the sole shareholder of IRI (ii) it owns 1000
shares of common stock of IRI, (iii) IRI is a newly formed corporation with no
liabilities, and (iv) that IRI will have no assets at any time that Series A
Shares remain outstanding other than the interests in the Partnerships.
(d) Neither the Company nor IRI shall have any obligation to use or apply,or
any liability for the use or application of, any funds or distributions
received pursuant to a Sub-Asset Management Agreement between IRI and Metra
Management L.P ("Sub-Management Fees"), for the payment of Dividends on, or
the payment of the Purchase Price for the redemption of, Series A Shares;
rather all Sub-Management Fees received by IRI may be distributed by IRI to
the Company and used by the Company for any purposes.
11. Voting Rights. An affirmative vote of the Holders of record of a
majority of the Series A Shares shall be required for approval of the
following matters:
(i) Any amendment to this Designation which changes any rights, privileges,
preferences, protections, voting rights of Holders of record of Series A
Shares or which changes any obligations of the Company or IRI set forth
herein, including without limitation the obligations of the Company set forth
in Section 10 and the obligations of the Company and IRI to pay Dividends, to
redeem Series A Shares, and to deposit funds into the Sinking Fund;
(ii) Any use of proceeds of the Properties which is not in accordance with
this Designation;
(iii) Any action which limits the ability of the Company or IRI to perform
their obligations under this Designation;
(iv) Any sale or disposition (i) by the Company of an interest in IRI, or
(ii) by IRI of any interest in any of the Partnerships, before sufficient
funds have been deposited to the Sinking Fund to pay all accrued Dividends and
redeem all Series A Shares.
12. Preferences and Security. Series A Shares shall have a first priority
liquidation preference to the extent of accrued Dividends and the Redemption
Price of all outstanding Series A Shares to (i) all funds received by IRI or
the Company from the Partnerships with respect to the Properties, (ii) all
shares of IRI. The Company shall take such actions to effectuate the
foregoing preference for Series A Shares by such board resolutions,
agreements, and other actions as are reasonable, necessary and appropriate.
Series a Shares shall have no other preference.
13. Certain Provisions Concerning Redemption, Conversion and Retirement. Upon
the redemption of any Series A Shares, such shares shall be deemed retired.
Series A Shares shall be restored to the status of authorized but unissued
Preferred Stock of the Company. Any and all Series A Shares which are not
transferred to the Holders on or before April 15, 2002, shall be retired as of
that date.
14. Amendment. The Board of Directors reserves the right to amend this
resolution subject to the provisions of Section 11.
IN WITNESS WHEREOF, the undersigned officer of the Company has executed this
certificate on behalf of the Company this 4th day of April, 2002.
INNOVO GROUP INC.
By: /s/ Patricia Anderson
---------------------
Patricia Anderson
Title: CEO
ATTEST:
/s/ Donna Drewrey
-----------------
Donna Drewery
Title: Secretary
SCHEDULE A
List of Partnerships and Properties Acquired
PROPERTY OWNER (Delaware limited partnerships)
Fountains at Waterford Metra Cross Pool 1, LP
Sinclair Place
Signature Place
Fairways
Apple Lane Metra Cross Pool 2, LP
Oak Park IV
Governor's Square
Timbers on Broadway
Westwood Metra Westwood, LP
Park Avenue Villas Metra Park Avenue Villas, LP
Wood Hollow Metra Wood Hollow, LP
Arbor Pointe Metra Arbor Pointe, LP
Brighton Court Metra Brighton Court, LP
Delmar Valley Metra Delmar Valley, LP
Enclave Metra Enclave, LP
Meridian Metra Meridian, LP
Treehouse Metra Treehouse-SA, LP
Harper's Ferry Metra Harper' Ferry, LP
Fountain Lake Metra Fountain Lake, LP
Willow Creek Metra Willow Creek, LP
Fairway View Metra Fairway View, LP
Quail Oaks Metra Quail Oaks, LP
Sunchase Metra Sunchase, LP
Windsor Tower Metra Windsor Tower, LP
Seville Metra Seville, LP
Oak Hill Metra Oak Hill, LP
Bay Anchor Metra Bay Anchor, LP
Grand Lagoon Cove Metra Grand Lagoon Cove, LP
SCHEDULE C
RISK FACTORS
RISK FACTORS ASSOCIATED WITH THE COMPANY
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
December 1, 2001 and have incurred a loss in the current fiscal year to date
of $$618,000 for the twelve months ended December 1, 2001. As of December 1,
2001, we have an accumulated deficit of approximately $33,000,000. 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. Our negative operating cash flow and losses from continuing
operations for fiscal 2001 were as follows:
Negative Cash Flow
from Operating Losses from
Activities of Continuing
Fiscal year ended: Continuing Operations Operations
December 1, 2001 $632,000 $618,000
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.
RISK FACTORS SPECEFIC TO THE SECURITIES
($100 REDEEMABLE 8% CUMULATIVE PREFERRED STOCK, SERIES A)
The payment of Dividends and the payment of the Redemption Price
established by the Declaration depends upon two critical factors:
First, the payment of Dividends and the redemption Price depends upon the
sufficiency of distributions to the Company's wholly owned subsidiary,
Innovo Realty, Inc. ("IRI") from the Partnerships. The funding of Dividend
payments and redemption payments will be exclusively limited to the funds
distributed from the Partnerships to IRI with respect to the properties.
Such funds will not include funds distributed to IRI from Metra Management,
L.P. under the Sub-Asset Management Agreement between IRI and Metra
Management, L.P.
Second, the payment of Dividends and the redemption of Series A Shares
could be adversely impacted by the Company's financial condition and
capitalization even if distributions to IRI from the Partnerships are
sufficient to fully fund Dividend and redemption payments. Dividend and
redemption payments can be made with respect to Series A Shares only to the
extent the Company has funds which are legally available for the payment of
dividends or the redemption of shares under applicable law. Should the
company become insolvent, the Company may be required to use funds that are
dedicated pursuant to the terms of the Declaration exclusively to the
payment of Dividends and to the redemption of Series A Shares for other
purposes, including making payments to creditors.
RISKS ASSOCIATED WITH THE COMPANY'S 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 2001, three customers accounted for aggregate sales in excess
of 36.1% of gross sales: Wal-Mart, Michael's and Joannes accounted for
26.4%, 4.3% and 5.4%, respectively. Wal-Mart has continued to be a major
customer for the Company and the loss of Wal-Mart as a customer would have
a material adverse effect on the Company.
We Are Dependent on Certain Contractual Relationships to Generate Our
Revenues
Innovo's sports-licensed accessory products display logos, insignias,
names, or slogans licensed from the various licensors. Innovo holds
licenses for the use of the logos and names of the teams of the National
Football League, Major League Baseball and over 130 colleges for various
products. 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 seasonal aspects of our business
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 THE COMPANY'S COMMON STOCK
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 Issuance 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. 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 shares of preferred stock such as Series A Shares may
result in a decrease in the value or market price of the common stock.
We Are Currently Controlled by Our Management and Other Related Parties
Our executive officers and directors as of March 1, 2001 beneficially
owned or had voting control over approximately 7,039,123 shares, or
approximately 32.1% of outstanding shares of common stock, and have the
right to acquire approximately 6,000,000 additional shares pursuant to
outstanding options and warrants. 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 6,746,637 shares and warrants or
31.3% of the Company if all the warrants were exercised. 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 v olume 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.
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 common stock could be delisted.
EXHIBIT 10.86
LIMITED PARTNERSHIP AGREEMENT
OF
_________________________, LP
This Limited Partnership Agreement (the "Agreement") of __________, LP
is entered into by the persons named on Schedule A hereto (the
"Partners") as of the 5th day of April, 2002.
The Partners hereby form a limited partnership under the Delaware
Revised Uniform Limited Partnership Act, as amended from time to time
(the "Act"), pursuant to this Agreement and the Certificate of Limited
Partnership which is being filed by the General Partner (as defined
below) with the Secretary of State of the State of Delaware in
connection with the execution of this Agreement, and hereby agree as
follows:
1. Name. (a) The name of the limited partnership is ______________, LP
(the "Partnership"). The business of the Partnership may be conducted
under any other name deemed necessary or desirable by the General
Partner (as defined below) in order to comply with local law.
(b) The parties hereto agree to form the Partnership as a limited
partnership pursuant to the provisions of the Act and of this Agreement
and agree that the rights and liabilities of the Partners shall be as
provided in the Act except as provided herein.
2. Purpose. The nature of the business and of the purposes to be
conducted and promoted by the Partnership, is to engage solely in the
following activities:
(a) To acquire certain parcels of real property, together with all
improvements located thereon (each a "Property," collectively, the
"Properties") commonly known by the name, and located in the City and
State, identified on Schedule B attached hereto and made a part hereof.
(b) To own, hold, sell, assign, transfer, operate, lease, mortgage,
pledge and otherwise deal with the Properties.
(c) To exercise all powers enumerated in the Act of the State of
Delaware necessary or convenient to the conduct, promotion or
attainment of the business or purposes otherwise set forth herein.
3. Registered Office; Registered Agent. The address of the registered
office of the Partnership in the State of Delaware is c/o Corporation
Service Company, 2711 Centerville Road, Wilmington, New Castle County,
Delaware 19808. The name and address of the registered agent of the
Partnership for service of process on the Partnership in the State of
Delaware is Corporation Service Company, 2711 Centerville Road,
Wilmington, Delaware 19808.
4. Principal Office. The principal office address of the Partnership
shall be c/o MidAtlantic Agency, Inc., 7700 Congress Avenue, Suite
3106, Boca Raton, Florida 33487, or such other place as the General
Partner may determine from time to time.
5. Partners. The general partner of the Partnership (the "General
Partner") shall be _________________, LLC, a Delaware limited liability
company. The limited partners shall be Metra Capital, LLC, a Delaware
limited liability company (the "Metra Limited Partner," and together
with the General Partner, the "Metra Partners") and INNOVO Realty,
Inc., a California corporation (the "INNOVO Partner," and together with
the Metra Limited Partner, the "Limited Partners"). The names and the
mailing addresses of the Partners are set forth in Schedule A hereto.
Each of the Partners is hereby admitted as a partner of the Partnership
and agrees to be bound by the terms of this Agreement.
6. Powers of General Partner. (a) Except as otherwise provided herein,
the General Partner shall have the power to do any and all acts
necessary or convenient to or for the furtherance of the purposes
described herein, including all powers, statutory or otherwise,
possessed by general partners under the laws of the State of Delaware.
(b) The General Partner is hereby authorized, without any further
act, vote or approval of any Partner, to execute, deliver and perform
on behalf of the Partnership any and all agreements, instruments,
certificates and documents necessary or advisable in connection with
the transactions contemplated by the Purchase and Sale Agreement and
the Senior Loan Documents (as defined below), provided, however, that
such authorization shall not be deemed a restriction on the power of
the General Partner to enter into any other agreements, instruments,
and documents on behalf of the Partnership. For purposes of this
Agreement, "Senior Loan Documents" shall mean each of the (i) Loan
Agreement (the "Loan Agreement") dated on or about the date hereof by
and among Bank of America, N.A., a national association (together with
its successors and assigns, "BOA"), as lender and the Partnership, (ii)
any documents entered into by the Partnership in connection with the
refinancing of the Senior Loan Documents and (iii) all other documents
contemplated by the terms and provisions of the Loan Agreement.
(c) Notwithstanding anything herein to the contrary, the General
Partner is expressly prohibited from doing any of the following without
obtaining the prior written consent of the INNOVO Partner, which
consent will not be unreasonably withheld or delayed:
(i) doing any act in contravention of this Agreement or the
Certificate of Limited Partnership of the Partnership;
(ii) amending or modifying the provisions of this Agreement or the
Certificate of Limited Partnership of the Partnership in a manner that
would materially and adversely effect the rights or preferences of the
INNOVO Partner; or
(iii) issuing any additional interest, the terms of which would
adversely effect the interest of the INNOVO Partner.
(d) Notwithstanding anything herein to the contrary, for so long as
any shares of INNOVO Preferred Stock remain outstanding, the following
actions shall be expressly prohibited without the prior written
consent of the holders of a majority of the INNOVO Preferred Stock,
which consent will not be unreasonably withheld or delayed:
(i) the INNOVO Partner shall not assign its Interest in the
Partnership, except to an Affiliate;
(ii) the Partnership shall not issue any additional interest; or
(iii) the Partners shall not amend or modify the provisions of this
Agreement or the Certificate of Limited Partnership of the Partnership
in a manner that would materially and adversely effect the rights or
preferences of the INNOVO Partner.
(e) The General Partner is expressly prohibited from entering into a
transaction with an Affiliate (an "Affiliate Transaction") unless such
Affiliate Transaction is on terms no less favorable to the Partnership
than those that would have been obtained in a comparable transaction
by the General Partner with an unrelated Person
7. Bankruptcy Actions. Notwithstanding any other provision of this
Agreement to the contrary, so long as any obligations under the Senior
Loan Documents shall remain outstanding (such obligations, the
"Loan"), the unanimous consent of the Board of Managers of the General
Partner is required for the Partnership to:
(a) take any Bankruptcy Action (as defined below); and
(b) except as otherwise required or permitted under the Senior Loan
Documents, engage in transactions with affiliates except on an arm's-
length basis and on commercially reasonable terms and on terms not
less favorable to it than would be obtained in a comparable arm's-
length transaction with an unrelated third party.
For purposes hereof, "Bankruptcy Action" means any one of the
following:
(i) Taking any action that knowingly shall cause the Partnership to
become insolvent;
(ii) Commencing any case, proceeding or other action on behalf of the
Partnership under any existing or future law of any jurisdiction
relating to bankruptcy, insolvency, reorganization or relief of
debtors;
(iii) Instituting proceedings to have the Partnership adjudicated as
bankrupt or insolvent;
(iv) Consenting to the institution of bankruptcy or insolvency
proceedings against the Partnership;
(v) Filing a petition or consent to a petition seeking
reorganization, arrangement, adjustment, winding-up, dissolution,
composition, liquidation or other relief on behalf of the Partnership
of its debts under any federal or state law relating to bankruptcy;
(vi) Seeking or consenting to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator, custodian or similar
official for the Partnership or a substantial portion of its
properties; or
(vii) Making any assignment for the benefit of the Partnership's
creditors.
8. Negative Covenants. Notwithstanding any other provision of this
Agreement to the contrary, so long as any mortgage lien in favor of
BOA shall remain outstanding, the Partnership shall not take, and the
General Partner shall not authorize the Partnership to take, any of
the following actions:
(a) engage in any business or activity other than as set forth in
Section 2;
(b) incur any indebtedness or assume or guarantee any indebtedness
in excess of the amount necessary to acquire, operate and maintain the
Properties;
(c) subject to the Senior Loan Documents, issue any additional
partnership interest in the Partnership or transfer of any direct or
indirect ownership interest in the Partnership such that the
transferee owns, in the aggregate with the ownership interests of its
affiliates and family members in the Partnership more than a 49%
interest in the Partnership, unless such transfer is conditioned upon
the delivery of an acceptable non-consolidation opinion to the holder
of the Loan and to any applicable rating agency concerning, as
applicable, the Partnership, the new transferee and/or their
respective owners;
(d) enter into transactions with affiliates unless such transactions
are on an arm's-length basis and on commercially reasonable terms and
are on terms no less favorable than would be obtained in a comparable
arm's-length transaction with an unrelated third party;
(e) seek or consent to any dissolution, winding up, or liquidation,
in whole or in part;
(f) subject to the Senior Loan documents, seek or consent to any
consolidation or merger or merge with or into any other entity or
convey or transfer its properties and assets substantially as an
entirety to any person or entity, unless (i) the person or entity (if
other than the Partnership) formed or surviving such consolidation or
merger or that acquires by conveyance or transfer the properties and
assets of the Partnership substantially as an entirety (a) shall be
organized and existing under the laws of the United States of America
or any state or the District of Columbia, (b) shall include in its
organizational documents the same limitations set forth in Section 8
and Section 9, and (c) shall expressly assume the due and punctual
performance of the Partnership's obligations; and (ii) immediately
after giving effect to such transaction, no default or event of
default under any agreement to which it is a party shall have been
committed by this entity or person and be continuing;
(g) take any action that knowingly shall cause the Partnership to
become insolvent;
(h) admit in writing the Partnership's inability to pay debts as
they become due; or
(i) amend the Certificate of Limited Partnership and/or this
Agreement in a material manner without first obtaining approval of
the mortgagee holding the Loan on any portion of the Properties, or,
after the securitization of the Loan, only if the Partnership
receives (i) confirmation from each of the applicable rating agencies
that such amendment would not result in the qualification, withdrawal
or downgrade of any securities rating and (ii) approval of such
amendment by the mortgagee holding the Loan.
9. Affirmative Covenants. Notwithstanding any other provision of
this Agreement to the contrary, so long as the Loan shall remain
outstanding, the Partnership shall:
(a) establish and maintain an office through which its business
shall be conducted separate and apart from those of its parent and
any affiliate(s) or, if it shares office space with its parent or any
affiliate(s), it shall allocate fairly and reasonably any overhead
and expense for shared office space;
(b) not own and will not own any asset or property other than (i)
the Properties and (ii) incidental personal property necessary for
the ownership or operation of the Properties;
(c) not engage, directly or indirectly, in any business other than
the ownership, management and operation of the Properties and it will
conduct and operate its business as presently conducted and operated;
(d) It shall at all times have a special purpose general partner
with an Independent Manager. An "Independent Manager" shall mean a
manager of the General Partner who is not at the time of initial
appointment, or at any time while serving as a member of the General
Partner's Board of Managers and has not been at any time during the
preceding five (5) years: (i) a stockholder, director (with the
exception of serving as the Independent Manager of the General
Partner's Board of Managers), officer, employee, partner, attorney or
counsel of the Partnership or the General Partner or any affiliate of
any of them; (ii) a customer, supplier or other person who derives
any of its purchases or revenues from its activities with the
Partnership or the General Partner or any affiliate of any of them;
(iii) a person or other entity controlling or under common control
with any such stockholder, partner, customer, supplier or other
person; or (iv) a member of the immediate family of any such
stockholder, director, officer, employee, partner, customer, supplier
or other person. (As used herein, the term "control" means the
possession, directly or indirectly, of the power to direct or cause
the direction of management, policies or activities of a person or
entity, whether through ownership of voting securities, by contract
or otherwise);
(e) not incur any indebtedness, secured or unsecured, direct or
indirect, absolute or contingent (including guaranteeing any
obligation), other than (i) the indebtedness secured by the mortgage
lien and (ii) trade payables or accrued expenses incurred in the
ordinary course of the business of operating the property with trade
creditors and in amounts as are normal and reasonable under the
circumstances. No indebtedness other than the indebtedness secured
by the mortgage lien may be secured (subordinate or pari passu) by
the Properties;
(f) not make any loans or advances to any third party, any
affiliate of the Partnership or constituent party of the Partnership
and shall not acquire obligations or securities of its affiliate(s);
(g) remain solvent and will pay its debts and liabilities
(including, as applicable, shared personnel and overhead expenses)
from its assets as the same shall become due;
(h) do all things necessary to observe organizational formalities
and preserve its existence, and it will not amend, modify or
otherwise change the Certificate of Limited Partnership and/or the
provisions of this Agreement without the prior written consent of the
mortgage lien holder or, after the securitization of the Loan, only
if the Partnership receives (i) confirmation from each of the
applicable rating agencies that such amendment would not result in
the qualification, withdrawal, or downgrade of any securities rating
and (ii) approval of such amendment by the mortgagee holding the
Loan;
(i) maintain all of its books, records, financial statements and
bank accounts separate from those of its affiliate(s) and any
constituent party and the Partnership will file its own separate tax
returns. It shall maintain its books, records, resolutions and
agreements as official records;
(j) at all times hold itself out to the public as, a legal entity
separate and distinct from any other entity (including any affiliate
or any constituent party of the Partnership), shall correct any known
misunderstanding regarding its status as a separate entity, shall
conduct and operate its business in its own name, shall not identify
itself or any of its affiliates as a division or part of the other
and shall maintain and utilize a separate telephone number and
separate stationery, invoices and checks;
(k) maintain adequate capital for the normal obligations reasonably
foreseeable in a business of its size and character and in light of
its contemplated business operations.
(l) not seek or permit the dissolution, winding up, liquidation,
consolidation or merger in whole or in part, of the Partnership, or
acquire by purchase or otherwise all or substantially all the
business or assets of, or any stock or other evidence of beneficial
ownership of any other person or entity;
(m) not commingle the funds and other assets of the Partnership
with those of any affiliate or constituent party, or any affiliate of
any constituent party, or any other person;
(n) maintain its assets in such a manner that it will not be costly
or difficult to segregate, ascertain or identify its individual asset
or assets, as the case may be, from those of any affiliate or
constituent party, or any affiliate of any constituent party, or any
other person;
(o) not pledge its assets and does not and will not hold itself out
to be responsible for the debts or obligations of any other person;
(p) pay any liabilities out of its own funds, including salaries of
any employees.
(q) maintain a sufficient number of employees in light of its
contemplated business operations;
(r) not guarantee or become obligated for the debts of any other
entity or person;
(s) have a partner which shall be organized to be a single purpose,
"bankruptcy remote" entity with organizational documents
substantially similar to the organizational documents of the current
general partner of the Partnership; and
(t) not own any subsidiary, or make any investment in any Person.
For purpose of this Section 9, the following terms shall have the
following meanings:
"Affiliate" means any person controlling or controlled by or under
common control with the Partnership including, without limitation (i)
any person who has a familial relationship, by blood, marriage or
otherwise with any partner or employee of the Partnership, its
parent, or any affiliate thereof and (ii) any person which receives
compensation for administrative, legal or accounting services from
the Partnership, its parent or any affiliate. For purposes of this
definition, "control" when used with respect to any specified person,
means the power to direct the management and policies of such person,
directly or indirectly, whether through the ownership of voting
securities or by contract; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company,
trust (including any beneficiary thereof), unincorporated
organization, or government or any agency or political subdivision
thereof.
10. Capital Contributions. The Partners have made or will make
contributions to the capital of the Partnership in the amounts and
proportions set forth in Schedule A hereto.
11. Additional Contributions. (a) Each Partner shall make such
additional capital contributions to the Partnership as the General
Partner may deem necessary or advisable in connection with the
business of the Partnership. If the General Partner makes a capital
call and any Partner fails to make its proportionate capital
contribution then, any amounts contributed by any other Partner
shall be treated as a participating loan (a "Participating Loan") to
the Partnership. Participating Loans shall bear interest at a rate of
the greater of (i) 15% and (ii) 900 basis points in excess of 10 year
US treasuries, and principal and interest thereon shall be paid prior
to any distributions to the Partners.
(b) The provisions of Section 10 and this Section 11 are intended
solely to benefit the Partners of the Partnership and, to the fullest
extent permitted by law, shall not be construed as conferring any
benefit upon any creditor of the Partnership other than the Partners
(and no such creditor of the Partnership other than the Partners
shall be a third party beneficiary of this Agreement), and no Partner
of the Partnership shall have a duty or obligation to any creditor of
the Partnership (other than to the Partners of the Partnership) to
make any contribution to the Partnership and no partner of the
Partnership shall have any duty or obligation to any creditor of the
Partnership (other than to the Partners of the Partnership) to issue
any call for capital pursuant to this Section 11.
(c) In the event the Partnership is liquidated within the meaning
of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations, if
either Metra Partner's Capital Account has a deficit balance (after
giving effect to all contributions, distributions, and allocations
for all fiscal years, including the fiscal year during which such
liquidation occurs), such Partner shall contribute to the Capital of
the Partnership the amount (in no event to exceed with respect to
either Metra Partner that Partner's pro rate share, based on
Percentage Interests, of twenty million dollars) necessary to restore
such deficit balance to zero in compliance with Treasury Regulations
Section 1.704-1(b)(2)(ii)(b)(3).
12. Capital Accounts. The Partnership shall maintain capital accounts
("Capital Accounts") for the Partners in compliance with Section 704
of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Treasury Regulations promulgated thereunder.
(a) Positive Adjustments. Each Partner shall have a Capital
Account, which Capital Account shall be increased by:
(1) the amount of such Partner's cash capital contributions to the
Partnership and the fair market value of capital contributions of
property contributed by such Partner to the Partnership (net of
liabilities securing such contributed property that the Partnership
is considered to assume or take subject to under Section 752 of the
Code);
(2) the amount of profits and items of income or gain allocated to
it pursuant to this Agreement, including, without limitation, Section
13; and
(3) any additional contributions made by such Partner to the
Partnership pursuant to this Agreement.
(b) Negative Adjustments. Each Partners' Capital Account shall be
decreased by:
(1) the amount of losses and items of loss or deduction allocated
to such Partner pursuant to this Agreement, including without
limitation Section 13, and the fair market value of property, if any,
distributed to such Partner by the Partnership (net of liabilities
securing such distributed property that such Partner is considered to
assume or take subject to under Section 752 of the Code);
(2) all amounts distributed to such Partner pursuant to this
Agreement, including, without limitation, Section 14; and
(3) such Partner's distributive share of expenditures of the
Partnership described in Section 705(a)(2)(B) of the Code (relating
to expenditures which are neither deductible nor properly chargeable
to capital).
(c) Additional Adjustments. Further, each Partner's Capital Account
will be increased (credited) or decreased (debited) by any such
amounts or items as required by Treasury Regulations Section
1.704-1(b). Except as otherwise provided in this Agreement, whenever
it is necessary to determine the Capital Account of a Partner for
purposes of this Agreement, the Capital Account of such Partner shall
be determined after giving effect to the allocation for the
Partnership's current year to date of gross income, net income, net
gains and net losses under this Agreement. Loans by a Partner to the
Partnership shall not be considered capital contributions.
13. Allocation of Profits and Losses. (a)(i). Allocations of
Operating Net Profits and Net Losses. Except as otherwise provided in
this Section, Net Profits and Net Losses for any fiscal year or other
applicable period that does not include a distribution pursuant to
Section 14(c) shall be allocated to the Partners to produce Capital
Account balances equal to the amount that would be distributed to the
Partners if the Partnership sold all of its assets (at book value)
and distributed the net proceeds pursuant to Section 14(b). For this
purpose, Capital Account balances shall be increased by any prior
allocations of Depreciation to the Partners. Following such
tentative allocation, Depreciation shall be allocated 50% to the
INNOVO Partner and 50% to the Metra Partners.
(ii) Allocation of Capital Net Profits and Net Losses. Except as
otherwise provided in this Section, Net Profits and Net Losses for
each fiscal year or other applicable period that includes a
distribution pursuant to Section 14(c) shall be allocated to produce
Capital Account balances equal to the amount that would be
distributed to the Partners if the Partnership sold all of its assets
(at book value) and distributed the net proceeds pursuant to
Section 14(c).
(b) Regulatory Tax and Other Allocations. Notwithstanding the
provisions of Section 13(a) hereof, the following provisions shall
control.
(i) Gross deductions which are Partner Nonrecourse Deductions for
any taxable year shall be allocated to the Partner that bears the
economic risk of loss with respect to the loan to which such Partner
Nonrecourse Deductions are attributable in accordance with Treasury
Regulation section 1.704-2(i).
(ii) If during any taxable year there is a net decrease in minimum
gain (as such term is defined by Treasury Regulation sections
1.704-(b)(2) and (d) with respect to partnership minimum gain), then
the Partners shall be allocated gross income for such taxable year
(and, if necessary, for subsequent taxable years) in the manner
provided in Treasury Regulations section 1.704-2(f) and (j). This
Section 13 (b) (ii) is intended to comply with, and shall be
interpreted to be consistent with, the minimum gain chargeback
requirements of Treasury Regulations section 1.704-2(b)(2).
(iii) Except as otherwise provided in Treasury Regulations Section
1.704-2(i)(4), notwithstanding any other provision of this Section
13, if there is a net decrease in Partner Nonrecourse Debt Minimum
Gain attributable to a Partner Nonrecourse Debt during any taxable
year, each Partner who has a share of the Partner Nonrecourse Debt
Minimum Gain attributable to such Partner Nonrecourse Debt,
determined in accordance with Treasury Regulations Section 1.704-2(i)
(5), shall be specially allocated items of Partnership income an
gain for such taxable year (and , if necessary, subsequent taxable
years) in an amount equal to such Partner's share of the net decrease
in Partner Nonrecourse Debt Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Treasury Regulations
Section 1.704-2(i)(4). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items so allocated
shall be determined in accordance with Treasury Regulations Sections
1.704-2(i)(4) and 1.704-2(j)(2). This section 13(b)(iii) is intended
to comply with the minimum gain chargeback requirement in Treasury
Regulations Section 1.704-2 (i) (4) and shall be interpreted
consistently therewith.
For purposes of this Section 13(b)(iii), "Partner Nonrecourse Debt"
has the meaning set forth in Treasury Regulations Section 1.704-2(b)
(4); "Partner Nonrecourse Debt Minimum Gain" means an amount, with
respect to each Partner Nonrecourse Debt, equal to the partnership
minimum gain (as defined in Treasury Regulations Sections 1.704-2(b)
(2) and 1.704-2(d)) that would result if such Partner Nonrecourse
Debt were treated as a nonrecourse liability (as defined in Treasury
Regulations Section 1.704-2(b)(3)), determined in accordance with
Treasury Regulations Section 1.704-2(i)(3); and "Partner Nonrecourse
Deductions" has the meaning set forth in Treasury Regulations
Sections 1.704-2(i)(1) and 1.704-2(i)(2).
(iv) Solely for purposes of allocating excess nonrecourse
liabilities of the Partnership among the Partners in connection with
the determination of the Partners' adjusted tax bases in their
interests in the Partnership in accordance with Code Section 752 and
the Treasury Regulations from time to time promulgated thereunder,
the Partners agree that their respective interests in the profits of
the Partnership are equal to their respective Percentage Interests,
unless another amount permitted under the Code and Treasury
Regulations is agreed upon by all of the Partners.
(v) In the event a Partner unexpectedly receives any adjustments,
allocations, or distributions described in Treasury Regulation
section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) which cause a deficit
balance or increase the deficit balance in such Partner's Capital
Account, items of Partnership gross income and gain shall be
allocated to such Partner in an amount and manner sufficient to
eliminate the deficit balance in its Capital Account as quickly as
possible; provided, however, that for this purpose, a Partner's
Capital Account balance shall be increased by its share of the
Partnership minimum gain as of the end of the taxable year of the
Company.
(vi) If taxable gain to be allocated pursuant to Section 13(a)
includes income treated as ordinary income for income tax purposes
because it is attributable to the recapture of depreciation
deductions, such gain allocated to the Partners shall be treat as
ordinary income in proportion to their prior depreciation allocations
which gave rise to such recapture.
(vii) Any Profit or Loss allocable to an interest in the Partnership
which has been transferred during any year shall be allocated among
the Persons who were holders of such interest during such year
pursuant to any method under the Code and Treasury Regulations agreed
upon by the Partners.
(viii) Except as otherwise expressly provided herein, the respective
interests of the Partners in and to all real personal property,
moneys and profits of the Partnership and their respective shares of
all losses, expenses, obligations and liabilities of the Partnership
shall, as of the effective date of this agreement, be in the
Percentage Interests of such Partners as set forth on Schedule A
attached hereto and made a part hereof. If the Percentage Interests
of such Partners are changed pursuant to the terms of this Agreement
during any fiscal year, then the amount of all items allocable to
such entire Fiscal year which are to be credited or charged to, or
which are to be distributed to, the Partners for such entire fiscal
year in accordance with their respective Percentage Interests shall
be allocated between the portion of such fiscal year which precedes
the date of such change (and, if there shall have been a prior change
in such fiscal year, which commences on the date of such change,
(and, if there shall be a subsequent change in such fiscal year,
which precedes the date of such subsequent change), based upon an
interim closing of the books of the Partnership, or such other
permitted method selected by the Manager.
(ix) Notwithstanding any provision of this Agreement to the
contrary, in determining each Partner's distributive share of the
taxable income or loss of the Partnership, depreciation, cost
recovery allowance or gain or loss realized by the Partnership with
respect to any property which has a fair market value which differs
from its adjusted tax basis shall be allocated among the Partners in
a manner which takes into account such difference in accordance with
Section 704(c) of the Code, and the principles thereof, in a manner
determined by the General Partner.
(x) For purposes of allocating and determining Net Profits and
Net Losses pursuant to Section 13(a)(i) only, Depreciation (as
defined below) shall not be taken into account and Depreciation
shall be allocated as provided in th e last sentence of such
subsection. In lieu of depreciation, amortization and other cost
recovery deductions taken into account in computing taxable income
or loss, there will be taken into account depreciation for the
taxable year or other period as determined in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(g) ("Depreciation").
(c) Definitions.
For purposes of this Agreement, "Loss" means, for each fiscal year
or other period of determination, an amount equal to the
Partnership's items of taxable deduction and loss for such year or
other period, determined in accordance with Section 703(a) of the
Code (including all items of loss or deduction required to be stated
separately under Section 703(a)(1) of the Code), with the following
adjustments:
(i) Any expenditures of the Partnership described in Section 705
(a)(2)(B) of the Code or treated as Section 705(a)(2)(B)
expenditures under Treasury Regulation Section 1.704-1(b)(2)(iv)
(i) , and not otherwise taken into account in computing Loss, will
be considered an item of Loss; and
(ii) Any items of deduction and loss specially allocated pursuant
to Section 13(b) of this Agreement will not be considered in
determining Loss.
For purposes of this Agreement, "Profit" means, for each fiscal
year or other period of determination, an amount equal to the
Partnership's taxable income and gain for such year or other
period, determined in accordance with Section 703(a) of the Code
(including all items of income and gain required to be stated
separately under Section 703(a)(1) of the Code), with the following
adjustments:
(i) Any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profit
or Loss will be added to taxable income or loss; and
(ii) Any items of income or gain specially allocated pursuant to
Section 13(b) of this agreement will not be considered in
determining Profit.
For purposes of this Agreement, "Net Loss" means, for any period,
the excess of items of Loss over items of Profit, if applicable,
for such period determined without regard to any items of Profit or
Loss allocated pursuant to Section 13(b)(1)-(4), inclusive, of this
Agreement.
For purposes of this Agreement, "Net Profit" means, for any
period, the excess of items of Profit over items of Loss, if
applicable, for such period determined without regard to any items
of Profit or Loss allocated pursuant to Section 13(b)(1)-(4),
inclusive, of this Agreement.
14. Distributions. (a) The Partners shall not (i) be entitled to
interest on their respective capital contributions to the
Partnership, or (ii) have the right to distributions or the return
of any contribution to the capital of the Partnership except (A)
for distributions in accordance w ith this Section 14 or (B) upon
dissolution of the Partnership. Except as required under the Act,
the Partners shall not be liable for the return of any such
amounts.
(b) Distributions of Cash Flow (as defined below) shall be made
not less often than quarterly and, in the discretion of the General
Partner, monthly, as follows:
(1) first, to the Metra Partners, pro rata, in an amount, when
taken together with amounts distributed under Section 14(c)(1)
hereof, sufficient to provide the Metra Partners with (i) a fifteen
percent (15%) cumulative compounded annual rate of return on the
Metra Partners Unreturned Capital (as defined below) and (ii) a
cumulative annual amount of .50% of the average outstanding balance
of the mortgage indebtedness secured by any of the Properties for
the period in respect of which the distribution is being made;
(2) second, on a quarterly basis, to Third Millennium Partners,
LLC in an amount, when take together with amounts distributed under
Section 14 (c)(3) equals the product of (x) a fraction, the
numerator of which is the aggregate purchase price of the
properties purchased by the Partnership as set forth on Schedule B
hereto and the denominator of which is $98,079,000, multiplied by
(y) $63,000, until such time as aggregate distributions under this
Section and Section 14(c)(3) have been made in an amount equal to
the product of (x) a fraction, the numerator of which is the
aggregate purchase price of the properties purchased by the
Partnership as set forth on Schedule B hereto and the denominator
of which is $98,079,000 multiplied by (y) $252,000;
(3) third, to the INNOVO Partner, in an amount, when taken
together with amounts distributed under Section 14(c)(4) hereof,
sufficient to provide the INNOVO Partner with an eight percent (8%)
cumulative compounded annual rate of return on the INNOVO Partner's
Unreturned Capital;
(4) fourth, to the INNOVO Partner, in an amount, when taken
together with amounts distributed under Section 14(c)(5) hereof,
sufficient to return to the INNOVO Partner its Unreturned Capital
until the INNOVO Partner has received an amount equal to such
Unreturned Capital; and
(5) thereafter, seventy percent (70%) pro rata to the Metra
Partners and thirty percent (30%) pro rata to the INNOVO Partner
(each of such percentages the "Residual Percentage" of the
respective Partner).
(c) Distributions of Capital Event Proceeds (as defined below)
shall be made to the Partners within 60 days after the
consummation of the respective Capital Event (as defined below),
as follows:
(1) first, to the Metra Partners, pro rata, in an amount, when
taken together with amounts distributed under Section 14(b)(1)
hereof, sufficient to provide the Metra Partners with (i) a
fifteen percent (15%) cumulative compounded annual rate of return
on the Metra Partners Unreturned Capital and (ii) a cumulative
annual amount of .50% of the average outstanding balance of the
mortgage indebtedness secured by any of the Properties the
period in respect of which the distribution is being made;
(2) second, to the Metra Partners, pro rata, in an amount equal
to 125% of the Allocated Amount (as defined below) in respect of
the property that is the subject of the Capital Event until the
Metra Partners have received an amount equal to the Metra Partners
Unreturned Capital;
(3) third, on a quarterly basis, to Third Millennium Partners,
LLC in an amount, when take together with amounts distributed
under Section 14(b)(2) equals the product of (x) a fraction, the
numerator of which is the aggregate purchase price of the
properties purchased by the Partnership as set forth on Schedule B
hereto and the denominator of which is $98,079,000, multiplied by
(y) $63,000, until such time as aggregate distributions under this
Section and Section 14(b)(2) have been made in an amount equal to
the product of (x) a fraction, the numerator of which is the
aggregate purchase price of the properties purchased by the
Partnership as set forth on Schedule B hereto and the denominator
of which is $98,079,000 multiplied by (y) $252,000;
(4) fourth, to the INNOVO Partner in an amount, when taken
together with amounts distributed under Section 14(b)(3) hereof,
sufficient to provide the INNOVO Partner with an eight percent
(8%) cumulative compounded annual rate of return on the INNOVO
Partner's Unreturned Capital;
(5) fifth, to the INNOVO Partner in an amount, when taken
together with amounts distributed under Section 14(b)(4) hereof,
sufficient to return to the INNOVO Partner the INNOVO Partner's
Unreturned Capital until the INNOVO Partner has received an
amount equal to such Unreturned Capital; and
(6) thereafter, seventy percent (70%), pro rata, to the Metra
Partners and 30% to the INNOVO Partner.
(d) For the purposes of this Section 14, the following terms
shall have the following meanings:
"Allocated Amount" means the allocated amount for each property
as set forth on Schedule B hereto.
"Cash Flow" means the aggregate of any and all cash and other
proceeds received by the Partnership from any source, other than
proceeds that are derived from a Capital Event, less the sum of
(without duplication) (i) all Partnership expenditures,
including, without limitation, any default or other fees
associated with the financing of the Properties, (ii) amounts set
aside as reasonable reserves, (iii) amounts required to be set
aside or expended under the Senior Loan Documents for capital
items and (iv) amounts necessary to pay principal and interest on
any Participating Loan.
"Capital Event" means any sale, exchange, or any other
disposition of all or any portion of any Property owned by the
Partnership and any loan or refinancing of any loan secured by
such Property.
"Capital Event Proceeds" means gross proceeds from any Capital
Event, reduced by the sum of (a) all expenditures made by the
Partnership that are required in connection with such sale,
exchange or other disposition or loan or refinancing thereof,
plus (b) loan repayments made from such proceeds, plus (c)
amounts set aside as reasonable reserves therefrom, plus (d) any
amounts required to fund the Partnership's capital expenditures
that are required to be withheld by loan documents to which the
Partnership is a party, plus (e) amounts used to repay other
indebtedness of the Partnership or required to be withheld by
loan documents to which the Partnership is a party.
"Unreturned Capital" means (a) with respect to the Metra
Partners, the aggregate amount of their capital contributions
less any amounts distributed to them pursuant to Section 14(c)
(2) and (b) with respect to the INNOVO Partner, the aggregate
amount of its capital contribution less any amounts distributed
to it pursuant to Sections 14(b)(4) and 14(c)(5).
(e) INNOVO Partner shall be obligated to distribute all
amounts that it receives pursuant to this Section 14 to INNOVO
Parent in order to permit INNOVO Parent to pay dividends on its
Series A Preferred Stock (the "INNOVO Preferred Stock"). The
Partners hereby acknowledge and agree that for so long as any
shares of INNOVO Preferred Stock are outstanding, if INNOVO
Partner receives a distribution hereunder and fails to make a
corresponding distribution to INNOVO Parent, or if INNOVO
Parent fails to make a corresponding dividend payment in
accordance with the INNOVO Preferred Stock Certificate of
Designation, then all amounts distributable to INNOVO Partner
hereunder shall (i) for so long as any shares of INNOVO
Preferred Stock are outstanding, be paid directly by the
Partnership to the holders of the INNOVO Preferred Stock on
behalf of INNOVO Parent, and any amounts so paid shall be
deemed a distribution to INNOVO Partner in accordance with the
provisions of this Section 14 and (ii) if no shares of INNOVO
Preferred Stock are outstanding, all amounts otherwise
distributable to INNOVO Partner shall be distributed to Metra
Partners.
15. Fiscal Year; Tax Matters. (a) The fiscal year of the
Partnership for accounting and tax purposes shall begin on
January 1 and end on December 31 of each year, except for the
short taxable years in the years of the Partnership's formation
and termination and as otherwise required by the Internal
Revenue Code of 1986, as amended (the "Code").
(b) Proper and complete records and books of account of the
business of the Partnership, including the schedule of
Partners, shall be maintained at the Partnership's principal
place of business. Each of the Partners acknowledges and
agrees that the Partnership is intended to be classified and
treated as a partnership for income tax purposes. The
Partnership's books of account shall be maintained on a basis
consistent with such treatment and on the same basis utilized
in preparing the Partnership's United States federal income tax
return. Each Partner and its duly authorized representatives
may, for any reason reasonably related to its interest as a
Partner of the Partnership, examine the Partnership's books of
account and make copies and extracts therefrom at its own
expense. The General Partner shall maintain, at the
Partnership's expense, the records of the Partnership for five
(5) years following the termination of the Partnership.
(c) The General Partner shall use commercially reasonable
efforts to issue to each of the Limited Partners quarterly
unaudited financials of the Partnership prepared by the General
Partner or its designee (including sources and uses of funds,
distributions and loans), within 45 days after the end of each
calendar quarter.
(d) The General Partner shall issue to each of the Limited
Partners annual audited financial statements of the Partnership
prepared by the Partnership's accountants (including sources
and uses of funds, distributions, tax information, changes in
financial position, distributions and loans), within 75 days
after the close of each Partnership fiscal year.
(e) The General Partner shall use its best efforts to cause
the Partnership's accountants to prepare and deliver to each
Limited Partner by March 15th of each year an information
reporting return (K-1) reflecting each Limited Partner's
distributive share of all income, gain, loss, deductions,
allowances or credits of the Partnership for the prior
Partnership fiscal year.
(f) The General Partner shall act as the "Tax Matters
Partner" as defined in the Code and shall make such elections
under the Code and other relevant tax laws as to the
treatment of items of Partnership income, gain, loss,
deduction and credit, and as to all other relevant matters,
as the Tax Matters Partner deems necessary or appropriate.
(g) The Partners hereby agree that the General Partner
shall be authorized to take any measures necessary (or, if
applicable, refrain from any action) on behalf of the
Partnership and the Partners to ensure that the Partnership
is treated as a partnership for federal income tax purposes.
16. Assignments and Transfers of Interests. Any purported
transaction in violation of this provision shall be void ab
initio. Subject to the provisions of Section 6(d) hereof,
the Limited Partners shall not assign their interests in the
Partnership without the prior written consent of the General
Partner, except to an Affiliate of each respective Limited
Partner. The General Partner may assign all or any portion
of its interest in the Partnership to its Affiliates in
accordance with the provisions of this Agreement. With
respect to any assignment contemplated by this Section 16,
any assignee shall agree to be bound by the provisions of
this Agreement as an additional Limited Partner or General
Partner, as the case may be. Notwithstanding any other
provision of this Agreement to the contrary, so long as the
Loan is outstanding, no Partner may transfer, assign or
pledge any direct or indirect ownership interest in the
Partnership except as otherwise permitted herein and in
accordance with the terms and conditions of the Senior Loan
Documents. The parties hereto acknowledge that certain side
letter, a form of which is attached hereto as Schedule C and
made a part hereof.
17. Admission of Additional Partners. Subject to the
provisions of Sections 6 and 8 hereof, one (1) or more
additional Partners may be admitted to the Partnership with
the consent of the General Partner, provided that the Senior
Loan Documents permit the admission of additional Partners.
18. Indemnification. (a). The General Partner shall not be
liable to the Partnership or to any of its Limited Partners
for any loss or damage occasioned by any acts or omissions
in the performance of its services under this Agreement,
unless such loss or damage is due to the gross negligence,
recklessness or willful misconduct of the General Partner,
or as otherwise required by law.
(b) The General Partner (which shall include for this
purpose each partner, director, officer, employee or agent
of, or any person who controls, the General Partner, and
their executors, heirs, assigns, successors or other legal
representatives) shall be indemnified to he fullest extent
permitted by law by the Partnership (but not the Partners
individually) against any cost, expense (including
attorneys' fees), judgment or liability reasonably incurred
by or imposed upon it in connection with any action, suit or
proceeding (including any proceeding before any
administrative or legislative body or agency) to which it
may be made a party or otherwise be involved or with which
it shall be threatened by reason of being or having been a
General Partner; provided, however, that the General Partner
shall ot be so indemnified to the extent such cost,
expense, judgment or liability shall have been finally
determined in a decision on the merits in any such action,
suit or proceeding to have been incurred or suffered by the
General Partner by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties
involved in the conduct of the General Partner's office. The
right to indemnification granted by this Section 18(b) shall
be in addition to any rights to which the General Partner
may otherwise be entitled and shall inure to the benefit of
the successors or assigns of the General Partner. The
Partnership shall pay the expenses incurred by the General
Partner in defending a civil or criminal action, suit or
proceeding in advance of the final disposition of such
action, suit or proceeding, upon receipt of an undertaking
by the General Partner to repay such payment if there shall
be an adjudication or determination that it is not entitled
to indemnification as provided herein. The General Partner
may not satisfy any right of indemnity or reimbursement
granted in this Section 18(b) or to which it may be
otherwise entitled except out of the assets of the
Partnership, and no Partner shall be personally liable with
respect to any such claim for indemnity or reimbursement.
The General Partner may, at the Partnership's expense,
obtain appropriate insurance on behalf of the Partnership to
secure the Partnership's obligations hereunder.
(c) Notwithstanding the foregoing, any indemnification of
the General Partner shall be fully subordinated to any
obligations respecting the Properties or any portion thereof
(including, without limitation, the Loan) and such
indemnification shall not constitute a claim against the
Partnership in the event that cash flow necessary to pay
holders of such obligations is insufficient to pay such
obligations.
19. Dissolution of Partnership. (a) Except as provided
below, the Partnership shall be dissolved upon any date on
which the General Partner shall elect to dissolve the
Partnership, and otherwise in accordance with Section 17-801
of the Act.
(b) Subject to applicable law, dissolution of the
Partnership shall not occur so long as the Partnership
remains owner of the Properties subject to the Loan.
(c) Upon dissolution of the Partnership, the General
Partner shall promptly liquidate the business and
administrative affairs of the Partnership, except that if
the General Partner is unable to perform this function, a
liquidator elected by Limited Partners whose partnership
percentages represent more than fifty percent (50%) of the
aggregate partnership percentages of all Limited Partners
shall liquidate the business and administrative affairs of
the Partnership. The Partnership's net profit and net loss
during the fiscal period which includes the period of
liquidation shall be allocated pursuant to Section 13. The
proceeds from liquidation shall be distributed in the
following manner:
(i) the debts, liabilities and obligations of the
Partnership, other than debts to Partners, and the expenses
of liquidation (including legal and accounting expenses
incurred in connection therewith), up to and including the
date that distribution of the Partnership's assets to the
Partners has been completed, shall first be paid;
(ii) such debts as are owing to the Partners shall next be
paid; and
(iii) any balance shall be distributed to the Partners
pursuant to Section 14(c), as adjusted pursuant to Section
12 to reflect allocations for the fiscal period ending on
the date of the distributions under this Section 19(b)(iii).
20. Amendments. Notwithstanding any other provision of this
Agreement to the contrary, so long as the Loan is
outstanding, the Partners are prohibited from amending the
provisions specified in Sections 2, 6, 7, 8, 9, 16, 17, 19,
20 and 21 herein without the prior written consent of BOA,
or, after the securitization of the Loan, only if the
Partnership receives (i) confirmation from each of the
applicable rating agencies that such amendment would not
result in the qualification, withdrawal or downgrade of any
securities rating with respect to the securities issued
under the securitization and (ii) approval of such amendment
by BOA or its assigns. The provisions of Section 6(d)
hereof shall not be amended without the prior written
consent of the holders of a majority of the INNOVO Preferred
Stock.
21. Acknowledgement. The General Partner acknowledges and
agrees that its limited liability company agreement (such
limited liability company agreement as amended and modified
from time to time, the "GP LLC Agreement") contains certain
restrictions that affect the General Partner's right to take
certain actions with respect to the Partnership which are
set forth in Section 7(c) of the GP LLC Agreement. The
Limited Partners acknowledge and agree that the GP LLC
Agreement contains certain restrictions that affect the
Limited Partners' right to take certain actions with respect
to the Partnership. Except with respect to Sections 2, 6,
7, 8, 9, 16, 17, 19, 20 and 21 hereof, then notwithstanding
anything contained in this Agreement to the contrary, to the
extent there is any inconsistency between the terms of this
Agreement and Section 7(c) of the GP LLC Agreement, Section
7(c) of the GP LLC Agreement shall govern and control.
22. Governing Law. This Agreement shall be governed by, and
construed under, the laws of the State of Delaware, all
rights and remedies being governed by said laws. The
Partners intend the provisions of the Act to be controlling
as to any matters not set forth in this Agreement.
23. Arbitration. Any dispute or disagreement between the
parties arising out of or in relation to this Agreement
shall be settled by arbitration conducted in New York, New
York under the then current rules for commercial arbitration
of the American Arbitration Association, and any judgment
upon the award may be entered in any court having
jurisdiction thereof. The arbitration shall be conducted by
three (3) arbitrators with expertise in conducting business
operations for companies that invest in real estate or real
estate related assets selected by the American Arbitration
Association. The arbitrators must have at least ten (10)
years' experience in the operation, management and financing
of companies that invest in real estate or real estate
related assets. The arbitrator's fees and all other costs
and expenses, including, without limitation, attorneys' fees
and expenses, witness' fees and expenses, and any other out-
of-pocket expenses incurred by the respective parties in
connection with the arbitration shall be borne by the non-
revailing party as determined by the panel.
IN WITNESS WHEREOF, the undersigned, intending to be
legally bound hereby, have duly executed this Limited
Partnership Agreement as of the day first above written.
General Partner:
_______________________GP, LLC
By: ____________________, LLC,
its sole member
By: ____________________
Name:
Title:
Limited Partners:
METRA CAPITAL, LLC
By: _________________________
Name:
Title:
INNOVO REALTY, INC.
By: ________________________
Name:
Title:
SCHEDULE A
Name and Address Initial Capital Percentage
of Partners Contribution ($) Interest (%)
General Partner
_____________, LLC $1.00 1%
Limited Partners
Metra Capital, LLC $69.00 69%
INNOVO Realty, Inc. $30.00 30%
SCHEDULE B
Property Purchase Allocated Loan Allocated Amount -
Price Amount Investor Funds
SCHEDULE C
EXHIBIT 10.87
SUB-ASSET MANAGEMENT AGREEMENT
THIS SUB-ASSET MANAGEMENT AGREEMENT (the "Agreement") is made and entered
into as of the __ day of April, 2002, by and between METRA MANAGEMENT, L.P., a
Delaware limited partnership, having an office at c/o MidAtlantic Agency,Inc.,
7700 Congress Avenue, Suite 3106, Boca Raton, Florida 33487 (the "Owner's
Agent"), and INNOVO REALTY, INC., a Delaware corporation, having an office at
___________________ (the "Sub-Asset Manager").
W I T N E S S E T H:
WHEREAS, __________________, a Delaware limited partnership (the
"Partnership") is the owner of the real property more particularly described
on Exhibit "A" annexed hereto and made a part hereof;
WHEREAS, the Land contains certain improvements which include, but are not
limited to, that certain multi-family residential complex known as __________
located in ___________ (the "Building");
WHEREAS, the Land, the Building and any parking facilities or other
structures located on the Land are sometimes collectively referred to herein
as the "Property";
WHEREAS, the Owner's Agent has entered into an Asset Management Agreement
as of the date hereof with the Partnership (the "Asset Management
Agreement");
WHEREAS, Owner's Agent, from time to time, may retain third party managers
to provide certain services relations to the Partnership and Property;
WHEREAS, the Owner's Agent desires to appoint, and Sub-Asset Manager
desires to accept the appointment of, Sub-Asset Manager to supervise the
overall management and operation of the Property and to advise the Owner's
Agent in connection therewith; and
WHEREAS, this Agreement is entered into for the purpose of setting forth
the terms upon which Sub-Asset Manager will provide services to the Owner's
Agent.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
and for Ten Dollars ($10.00) and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged, the parties hereto do
covenant and agree as follows:
ARTICLE 1
SUB-ASSET MANAGEMENT SERVICES
Advise and Recommend. The Sub-Asset Manager shall provide the Owner's Agent
with advice and recommendations on all aspects of the operation of the
Property, including, without limitation, guidance on all legal disputes,
claims and related matters.
ARTICLE 2
FIXED COMPENSATION
Sub-Asset Management Fees. A fixed sub-asset management fee shall be
payable to the Sub-Asset Manager, quarterly, in an amount equal to one
percent (1%) of the gross annual revenues from the Properties and an
incentive management fee shall be payable in addition thereto in an amount
of one percent (1%) of the gross annual revenues from the Properties in
accordance with Exhibit "B" attached hereto, less administrative, filing
and similar costs incurred by the Owner's Agent associated with (i)
maintenance of the Partnerships, (ii) all fees for third party
professional services relating to the review of accounting records of the
Partnership or Property, (iii) all fees arising out of studies conducted by
third party professional services regarding property disposition
opportunities, and (iv) travel costs related to the inspection of the
Property.
ARTICLE 3
LIMITATION OF LIABILITY OF SUB-ASSET MANAGER
3.1 Except to the extent provided in this Agreement, the Sub-Asset
Manager shall not be liable for any debt, claim, demand, judgment, decree,
liability or obligation of any kind, against or with respect to the
Partnership, arising out of any action taken or omitted for or on behalf
of the Partnership and the Partnership shall be solely liable therefor and
resort shall be had solely to the respective Partnership's assets for the
payment or performance thereof.
3.2 The Sub-Asset Manager shall not be liable to the Partnership and/or
Owner's Agent for errors in judgment, but nothing contained in this
Agreement shall limit Sub-Asset Manager's liability for acts in bad faith,
gross negligence, willful misconduct, or reckless disregard of duty. The
Sub-Asset Manager shall be entitled to rely on the advice of counsel for
the Partnership and/or Owner's Agent with respect to any actions
undertaken by it or proposed to be undertaken by it under the terms of
this Agreement, and shall not be liable for any action undertaken or
omitted-in good faith upon the advice of counsel.
ARTICLE 4
TERM
4.1 This Agreement shall commence effective as of April __, 2002 and
shall end on April __, 2003 (the "Term") or sooner upon the termination
of the Asset Management Agreement. Thereafter, the Term will
automatically renew for one (1) year terms, unless on or before sixty
(60) days prior to the date of the expiration of the initial term or
renewal term of this Agreement, the Sub-Asset Manager shall notify the
Owner's Agent in writing of its intention to terminate this Agreement, in
which case, this Agreement shall be terminated at the end of the then
current term.
ARTICLE 5
ASSIGNABILITY
5.1 The Sub-Asset Manager shall not have the right to assign this
Agreement and all of its rights, title and interest hereunder.
ARTICLE 6
MISCELLANEOUS
The following provisions shall apply to this Agreement:
31. Governing Law. This Agreement shall be governed, with respect to
each Property, by the laws of the State of New York.
32. Notices. All notices required under this Agreement shall be in
writing and shall be deemed to have been duly given if they are either
delivered personally, transmitted via telecopy transmission followed by
telephone confirmation of receipt, or mailed by express mail delivery
service to the party's address as set forth on page 1 of this Agreement
or as subsequently changed by the giving of notice under this
Subparagraph.
33. Entire Agreement. This Agreement is intended as, and shall be,
the complete and exclusive statement of the terms of the agreement
between the parties and it may not be amended or modified except by a
written amendment executed by all of the parties.
34. Construction. Whenever required by the context hereof, the
singular shall include the plural and vice versa; the masculine gender
shall include the feminine and neuter genders and vice versa; and the
word "person" shall include a corporation, company, or other form of
association it;
35. Severability. If any provision of this Agreement is ultimately
determined to be invalid or unenforceable, the remaining terms and
provisions shall not be affected by that determination. Each remaining
term and provision of this Agreement shall be valid and shall be
enforced to the fullest extent permitted by law. If the construction
of any remaining term or provision is unclear as a result of this
severance provision, then that term or provision shall be construed in
a manner most likely to carry out the original intention of the
parties.
36. Arbitration. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by
arbitration administered by the American Arbitration Association in
accordance with its Commercial or other Arbitration Rules, and judgment
on the award rendered by the arbitrator(s) may be entered in any court
having hereinunder.
Within 15 days after the commencement of arbitration, each party
shall select one person to act as arbitrator and the two selected shall
select a third arbitrator within 10 days of their appointment. If the
arbitrators selected by the parties are unable or fail to agree upon
the third arbitrator, the third arbitrator shall be selected by the
American Arbitration Association.
37. Fees and Expenses. In the event either party brings suit to
enforce this Agreement or for damages on account of the breach of any
covenant contained herein, the prevailing party shall be entitled to
recover from the other, reasonable attorneys' and paralegals' fees and
costs incurred as determined by a court of competent jurisdiction.
(h) Counterparts. To facilitate execution, this Agreement may be
executed in counterparts. All counterparts shall collectively
constitute a single agreement.
[Balance of page intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives effective as of
the day and year first above written.
OWNER'S AGENT:
METRA MANAGEMENT, L.P., a Delaware limited partnership
By: Metra Management GP Corp., its
general partner
By: ____________________________
Name:
Title:
SUB-ASSET MANAGER:
Innovo Realty, Inc., a Delaware corporation
By: ____________________________
Name:
Title:
EXHIBIT A
Legal Description
EXHIBIT B
Achievement Conditions
EXHIBIT 10.88
April 5, 2002
Each of the Entities listed on
Schedule A hereto
Re: Distribution of Cash Flow and Capital Event Proceeds
Gentlemen:
Reference is made to those certain 22 limited partnership agreements
(collectively the "Partnership Agreements" and each a "Partnership Agreement")
entered into in connection with the formation of the 22 limited partnerships
set forth on Schedule B hereto (collectively the "Partnerships" and each a
"Partnership"). All defined terms used and not defined herein shall have the
meaning ascribed to them in each Partnership Agreement.
The undersigned, INNOVO Realty, Inc., a California corporation ("INNOVO"),
in its capacity as a limited partner of each Partnership, hereby acknowledge
and agrees that notwithstanding any provision in any of the Partnership
Agreements to the contrary, no distributions shall be made by the Partnerships
to INNOVO, in accordance with the provisions of Section 14(b)(3)of each
respective Partnership Agreement until such time as the Metra Partners have
received distributions in an aggregate amount equal to the aggregate amount
that the Metra Partners would be entitled to receive as distributions in
accordance with the provisions of Section 14(b)(1) and Section 14(b)(2) of
each respective Partnership Agreement.
INNOVO further acknowledges and agrees that notwithstanding any provision in
any of the Partnership Agreements to the contrary, no distributions shall be
made by the Partnerships to INNOVO, in accordance with the provisions of
Section 14(c)(4) of each respective Partnership Agreement until such time as
the Metra Partners have received distributions in an aggregate amount equal to
the aggregate amount that the Metra Partners would be entitled to receive as
distributions in accordance with the provisions of Section 14(c)(1), Section
14(c)(2) and Section 14(c)(3)of each respective Partnership Agreement.
INNOVO further acknowledges and agrees that notwithstanding any provision in
any of the Partnership Agreements to the contrary, no distributions shall be
made by the Partnerships to INNOVO, in accordance with the provisions of
Section 14(b)(3) or Section 14(c)(4) of each respective Partnership Agreement,
if the general partner of the respective partnership determines in its sole
discretion and in good faith, that any of such amounts need to be contributed
to another Partnership(s) as an additional contribution because the property
underlying said partnership(s) is potentially at risk (e.g., requires capital
for operating expenses or to meet debt service payments). Any amounts so
contributed shall not be deemed a Participating Loan, and as such shall not
accrue interest as provided for in Section 11(a) of the Partnership
Agreements.
INNOVO further acknowledges and agrees that notwithstanding any provision in
any of the Partnership Agreements to the contrary, to the extent that the
Partnership(s) pay security deposit amounts to vacating tenants and the
Partnership is not reimbursed for such amounts by new tenants, amounts
otherwise distributable equal to the amount of such unreturned security
deposit will be retained by the Partnership as reserves and not distributed to
INNOVO pursuant to the provisions of Section 14(b)(3) or Section 14(c)(4) of
each respective Partnership Agreement.
Once the provisions of this Letter Agreement have been complied with in
their entirety, this Letter Agreement shall be of no further force and effect
and all distributions shall thereafter be distributed in accordance with all
of the provisions of Section 14 of each Partnership Agreement.
[Signature page follows]
IN WITNESS WHEREOF, the parties hereto have executed this Letter Agreement
as of the day and year first written above.
INNOVO REALTY, INC.
By: /s/ Samuel J. Furrow, Jr.
--------------------------
Name: Samuel J. Furrow, Jr.
Title: President
Accepted and Acknowledged
As of April 4, 2002
INNOVO GROUP INC.
By: /s/ Samuel J. Furrow, Jr.
---------------------------
Name: Samuel J. Furrow, Jr.
Title: President
INCOME OPPORTUNITY REALTY INVESTORS, INC.
By: /s/ A. Cal Rossi
----------------------------
Name: A. Cal Rossi
Title: Vice President
TRANSCONTINENTAL REALTY INVESTORS, INC.
By: /s/ A. Cal Rossi
----------------------------
Name: A. Cal Rossi
Title: Vice President
AMERICAN REALTY INVESTORS, INC.
By: /s/ A. Cal Rossi
----------------------------
Name: A. Cal Rossi
Title: Vice President
METRA CAPITAL, LLC
(on behalf of itself and in its capacity as the
sole member of each of the entities listed on
Schedule A hereto)
By: /s/ Simon Mizrachi
---------------------------
Name: Simon Mizrachi
Title: Authorized Person
SCHEDULE A
Metra Capital, LLC
Metra Cross Pool 1 GP, LLC
Metra Cross Pool 2 GP, LLC
Metra Westwood GP, LLC
Metra Park Avenue Villas GP, LLC
Metra Wood Hollow GP, LLC
Metra Arbor Pointe GP, LLC
Metra Brighton Court GP, LLC
Metra Delmar Valley GP, LLC
Metra Enclave GP, LLC
Metra Meridian GP, LLC
Metra Treehouse-SA GP, LLC
Metra Harper's Ferry GP, LLC
Metra Fountain Lake GP, LLC
Metra Willow Creek GP, LLC
Metra Fairway View GP, LLC
Metra Quail Oaks GP, LLC
Metra Sunchase GP, LLC
Metra Windsor Tower GP, LLC
Metra Seville GP, LLC
Metra Oak Hill GP, LLC
Metra Bay Anchor GP, LLC
Metra Grand Lagoon Cove GP, LLC
SCHEDULE B
Metra Cross Pool 1, LP
Metra Cross Pool 2, LP
Metra Westwood, LP
Metra Park Avenue Villas, LP
Metra Wood Hollow, LP
Metra Arbor Pointe, LP
Metra Brighton Court, LP
Metra Delmar Valley, LP
Metra Enclave, LP
Metra Meridian, LP
Metra Treehouse-SA, LP
Metra Harper's Ferry, LP
Metra Fountain Lake, LP
Metra Willow Creek, LP
Metra Fairway View, LP
Metra Quail Oaks, LP
Metra Sunchase, LP
Metra Windsor Tower, LP
Metra Seville, LP
Metra Oak Hill, LP
Metra Bay Anchor, LP
Metra Grand Lagoon Cove, LP
EXHIBIT 10.89
April 5, 2002
Income Opportunity Realty Investors, Inc.
Transcontinental Realty Investors, Inc.
American Realty Investors, Inc.
c/o Basic Capital Management, Inc.
One Hickory Centre
1800 Valley View Lane, Suite 300
Dallas, Texas 75234
Re: Distribution of Capital Event Proceeds
Gentlemen:
Reference is made to those certain 22 limited partnership agreements
(collectively the "Partnership Agreements" and each a "Partnership Agreement")
entered into in connection with the formation of the 22 limited partnerships
set forth on Schedule A hereto (collectively the "Partnerships" and each a
"Partnership"). All defined terms used and not defined herein shall have the
meaning ascribed to them in each Partnership Agreement.
Each of the undersigned, Metra Capital, LLC, a California limited liability
company, in its capacity as the sole member of the general partner of each
Partnership and a limited partner of each Partnership, and INNOVO Realty,
Inc., a California corporation ("INNOVO"), in its capacity as a limited
partner of each Partnership, hereby agree that upon the distribution by a
Partnership of Capital Event Proceeds, no distributions shall be made pursuant
to Section 14(c)(6) of the respective Partnership Agreement until all of the
shares of $100 Redeemable 8% Cumulative Preferred Stock, Series A (the
"Preferred Stock") held by Income Opportunity Realty Investor, Inc.,
Transcontinental Realty Investors, Inc. and American Realty Investors, Inc.
(collectively the "Holders") shall have been redeemed by INNOVO Group Inc.
("Group").
Until all of the shares of Preferred Stock held by the Holders have been
redeemed by Group all amounts that would otherwise be distributed under
Section 14(c)(6) of the respective Partnership Agreement shall be applied to
the redemption of the Preferred Stock held by the Holders, regardless of
whether the Preferred Stock allocable to any particular Partnership has
already been completely redeemed. Any amounts so applied shall reduce the
Unreturned Capital of INNOVO with respect to the Partnership that the
Preferred Stock being redeemed relates, as if such amounts were received by
INNOVO as a distribution pursuant to Section 14(c)(5).
In addition, notwithstanding any provisions in the Partnership Agreements to
the contrary, no distributions shall be made by the Partnerships to INNOVO, in
accordance with Section 14(c)(5) until such time as INNOVO has received
distributions in an aggregate amount equal to the aggregate amount that INNOVO
would be entitled to receive as distributions in accordance with the
provisions of Section 14(c)(4) of each respective Partnership Agreement.
Once the provisions of this Letter Agreement have been complied with in
their entirety, this Letter Agreement shall be of no further force and effect
and Capital Event Proceeds shall thereafter be distributed in accordance with
all of the provisions of Section 14(c) of each Partnership Agreement.
[Signature page follows]
IN WITNESS WHEREOF, the parties hereto have executed this Letter Agreement
as of the day and year first written above.
METRA CAPITAL, LLC
By: /s/ Simon Mizrachi
--------------------------
Name: Simon Mizrachi
Title: Authorized Person
INNOVO REALTY, INC.
By: /s/ Samuel J. Furrow, Jr.
--------------------------
Name: Samuel J. Furrow, Jr.
Title: President
Accepted and Acknowledged
As of April 4, 2002
INCOME OPPORTUNITY REALTY INVESTORS, INC.
By: /s/ A. Cal Rossi
---------------------------
Name: A. Cal Rossi
Title: Vice President
TRANSCONTINENTAL REALTY INVESTORS, INC.
By: /s/ A. Cal Rossi
---------------------------
Name: A. Cal Rossi
Title: Vice President
AMERICAN REALTY INVESTORS, INC.
By: /s/ A. Cal Rossi
----------------------------
Name: A. Cal Rossi
Title: Vice President
SCHEDULE A
Metra Cross Pool 1, LP
Metra Cross Pool 2, LP
Metra Westwood, LP
Metra Park Avenue Villas, LP
Metra Wood Hollow, LP
Metra Arbor Pointe, LP
Metra Brighton Court, LP
Metra Delmar Valley, LP
Metra Enclave, LP
Metra Meridian, LP
Metra Treehouse-SA, LP
Metra Harper's Ferry, LP
Metra Fountain Lake, LP
Metra Willow Creek, LP
Metra Fairway View, LP
Metra Quail Oaks, LP
Metra Sunchase, LP
Metra Windsor Tower, LP
Metra Seville, LP
Metra Oak Hill, LP
Metra Bay Anchor, LP
Metra Grand Lagoon Cove, LP
EXHIBIT 10.90
LETTER AGREEMENT
April 5, 2002
MidAtlantic Agency, Inc.
7700 Congress Avenue, Suite 3106
Boca Raton, Florida 33487
Attn: Joseph Mizrachi
Re: Reimbursement of Legal Fees
Sir:
Reference is made to those certain 22 limited partnership agreements
(collectively the "Partnership Agreements" and each a "Partnership Agreement")
entered into in connection with the formation of the 22 limited partnerships
set forth on Schedule A hereto (collectively the "Partnerships" and each a
"Partnership"). Reference is also made t o that certain Certificate of
Resolution of Designation, Preferences and Other Rights relating to $100
Redeemable 8% Cumulative Preferred Stock, Series A of INNOVO Group Inc.
("Group"), par value $.10 per share (the "Preferred Stock") as filed with the
Delaware Secretary of State on April 4, 2002 (the "Certificate"). All
defined terms used and not defined herein shall have the meaning ascribed to
them in each Partnership Agreement.
Each of the undersigned, INNOVO Realty, Inc.("INNOVO"), in its capacity as a
limited partner of each of the Partnerships, Group, in its capacity as the
sole shareholder of INNOVO, Income Opportunity Realty Investors, Inc.
("IORI"), Transcontinental Realty Investors ("TRI") and American Realty
Investors, Inc. ("ARI"), each of IORI, TRI and ARI in its capacity as a holder
of shares of Preferred Stock, hereby agrees to reimburse MidAtlantic Agency,
Inc. for legal fees incurred in connection with the transactions contemplated
by the Partnership Agreements in an aggregate amount of $456,000, in the
manner set forth below.
The parties hereby acknowledge and agree that the purpose of Section 14(b)
(2) and Section 14(c)(3) in each Partnership Agreement is to provide Third
Millennium Partners, LLC, prior to amounts otherwise distributable by the
Partnerships to INNOVO, in accordance with the provisions of Section 14(b)(3)
or Section 14(c) (4) of each respective Partnership Agreement, with an
aggregate of $456,000 (the "Reimbursement Amount"). The Reimbursement
Amount shall be paid, subject to the provisions of that certain side letter
dated even date herewith re: Distribution of Cash flow and Capital Event
Proceeds, pro rata by each Partnership in an aggregate amount not to exceed
$114,000 each quarter.
[Signature page follows]
IN WITNESS WHEREOF, the parties hereto have executed this Letter Agreement
as of the day and year first written above.
INNOVO REALTY, INC.
By:/s/ Samuel J. Furrow, Jr.
-------------------------
Name: Samuel J. Furrow, Jr.
Title: President
INNOVO GROUP INC.
By:/s/ Samuel J. Furrow, Jr.
-------------------------
Name: Samuel J. Furrow, Jr.
Title: President
INCOME OPPORTUNITY REALTY
INVESTORS, INC.
By:/s/ A. Cal Rossi
-------------------------
Name: A. Cal Rossi
Title: Vice President
TRANSCONTINENTAL REALTY
INVESTORS, INC.
By:/s/ A. Cal Rossi
----------------------------
Name: A. Cal Rossi
Title: Vice President
AMERICAN REALTY INVESTORS,
INC.
By:/s/ A. Cal Rossi
---------------------------
Name: A. Cal Rossi
Title: Vice President
Accepted and Acknowledged
As of April 4, 2002
THIRD MILLENNIUM PARTNERS, LLC
By: GM 1 Partners, Inc.
Its managing member
By:/s/ Simon Mizrachi
------------------
Name: Simon Mizrachi
Title: Authorized Person
SCHEDULE A
Metra Cross Pool 1, LP
Metra Cross Pool 2, LP
Metra Westwood, LP
Metra Park Avenue Villas, LP
Metra Wood Hollow, LP
Metra Arbor Pointe, LP
Metra Brighton Court, LP
Metra Delmar Valley, LP
Metra Enclave, LP
Metra Meridian, LP
Metra Treehouse-SA, LP
Metra Harper's Ferry, LP
Metra Fountain Lake, LP
Metra Willow Creek, LP
Metra Fairway View, LP
Metra Quail Oaks, LP
Metra Sunchase, LP
Metra Windsor Tower, LP
Metra Seville, LP
Metra Oak Hill, LP
Metra Bay Anchor, LP
Metra Grand Lagoon Cove, LP