ASSET PURCHASE AGREEMENT

Exhibit 2.2

ASSET PURCHASE AGREEMENT

by

and

among

CYGNE DESIGNS, INC.,

INNOVO AZTECA APPAREL, INC.,

AND INNOVO GROUP, INC.

Dated March 31, 2006

TABLE OF CONTENTS

 

 

i

 

ii

EXHIBITS

 

SCHEDULES

 

 

iii

Asset Purchase Agreement

This Asset Purchase Agreement dated March 31, 2006 (the “ Execution Date ”), is by and among (i) CYGNE DESIGNS, INC., a Delaware corporation (“ Buyer ”), (ii) INNOVO AZTECA APPAREL, INC., a California corporation (“ Seller ”) and (iii) INNOVO GROUP, INC., a Delaware Corporation (“ Innovo ”).

RECITALS

A. Seller is engaged in the business of designing, manufacturing and wholesaling denim and other related apparel and products.

B. Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, certain assets and properties used by Seller in the operation of its private label portion of its business (the “ Business ”), all on the terms and subject to the conditions set forth herein.

C. Innovo has joined as a party to this Agreement as a result of certain assignments, assumptions and releases contemplated herein to which it is an interested party.

AGREEMENT:

NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants contained herein, the Parties agree as follows:

ARTICLE 1.

DEFINITIONS

“ Action ” means any action, appeal, petition, plea, charge, complaint, claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry, investigation or similar event, occurrence, or proceeding.

“ Active Employees ” is defined in Section 8.8(a)

“ AEO ” means American Eagle Outfitters, Inc. and its subsidiaries, divisions and Affiliates.

“ Affiliate ” or “ Affiliated ” with respect to any specified Person means a Person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such specified Person. For this definition, “control” (and its derivatives) means the possession, directly or indirectly, or as trustee or executor, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting Equity Interests, as trustee or executor, by Contract or credit arrangements or otherwise.

“ Affiliated Group ” means an affiliated group under Code Section 1504(a) or any similar group defined under provisions of applicable Law.

“ Agreement ” means this Asset Purchase Agreement, together with all Exhibits and Schedules hereto, as the same may be amended, supplemented or otherwise modified from time to time in accordance with Section 12.12 .

“ APA ” means that certain Asset Purchase Agreement by and among Azteca Production International, Inc. (“ API ”), Seller and Hubert Guez and Paul Guez dated July 17, 2003.

“ Assumption and Assignment Agreement ” means the Assumption and Assignment Agreement in substantially the form of Exhibit C .

“ Assumed Liabilities ” means the liabilities of Seller listed in Schedule 2.2 hereto.  

“ AZT International ” means AZT International SA DE CV, a Mexico corporation and wholly-owned subsidiary of API.

“ Azteca Note ” means the promissory note issued by Seller to API dated July 17, 2003, pursuant to the APA, a copy of which is attached hereto as Exhibit B .

“ Basis ” means any past or current fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction about which the relevant Person has Knowledge that forms or could form the basis for any specified consequence.

“ Best Efforts ” means the efforts, time, and costs that a prudent Person desirous of achieving a result would use, expend, or incur in similar circumstances to ensure that such result is achieved as expeditiously as possible; provided , however , that no such use, expenditure, or incurrence will be required if it would have a Material Adverse Effect on such Person calculated immediately prior to the Closing Date.

“ Bill of Sale ” means the Bill of Sale and Assignment of Contract Rights in the form of Exhibit A .

“ Breach ” means (a) any breach, inaccuracy, failure to perform, failure to comply, conflict with, failure to notify, default, or violation or (b) any other act, omission, event, occurrence or condition the existence of which would (i) permit any Person to accelerate any obligation or terminate, cancel, or modify any right or obligation or (ii) require the payment of money or other consideration.

“ Business ” is defined in the Recitals to this Agreement.

“ Buyer ” is defined in the preamble to this Agreement.

“ Buyer Note ” means the promissory note of Buyer in substantially the form of Exhibit B .

“ Cash ” means cash and cash equivalents (including marketable securities and short term investments) calculated in accordance with GAAP applied on a basis consistent with the preparation of the Financial Statements.

 

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“ Closing ” is defined in Section 4.1 .

“ Closing Date ” has the meaning specified in Section 4.1 .

“ Code ” means the Internal Revenue Code of 1986, as amended.

“ Commitment ” means (a) options, warrants, convertible securities, exchangeable securities, subscription rights, conversion rights, exchange rights, or other Contracts that could require a Person to issue any of its Equity Interests or to sell any Equity Interests it owns in another Person; (b) any other securities convertible into, exchangeable or exercisable for, or representing the right to subscribe for any Equity Interest of a Person or owned by a Person; (c) statutory pre-emptive rights or pre-emptive rights granted under a Person’s Organizational Documents; and (d) stock appreciation rights, phantom stock, profit participation, or similar rights with respect to a Person.

“ Confidential Information” means any information concerning the businesses and affairs of either the Buyer, on the one hand, or the Business and Seller, on the other hand.

“ Consent ” means any consent, approval, notification, waiver, or other similar action that is necessary or convenient.

“ Contract ” means any contract, agreement, arrangement, commitment, letter of intent, memorandum of understanding, heads of agreement, promise, obligation, right, instrument, document, purchase order, or other similar understanding, whether written or oral.

“ Copyrights ” means copyrights, whether registered or unregistered, in published works and unpublished works, and pending applications to register the same.

“ Customer Consents ” means the written consents by AEO and Target to the Transactions in a form reasonably satisfactory to the Seller and Buyer.

“ Encumbrance ” means any Order, Security Interest, Contract, easement, covenant, community property interest, equitable interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership.

“ Enforceable ” a Contract is “Enforceable” if it is the legal, valid, and binding obligation of the applicable Person enforceable against such Person in accordance with its terms, except as such enforceability may be subject to the effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws relating to or affecting the rights of creditors, and general principles of equity.

“ Environmental, Health, and Safety Requirements ” means all Orders, Contracts, Laws, and programs (including those promulgated or sponsored by industry associations, insurance companies, and risk management companies) concerning or relating to public health and safety, worker/occupational health and safety, and pollution or protection of the environment, including those relating to the presence, use, manufacturing, refining, production, generation, handling, transportation, treatment, recycling, transfer, storage, disposal, distribution, importing, labeling,

 

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testing, processing, discharge, release, threatened release, control, or other action or failure to act involving cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, or radiation, each as amended and as now or hereafter in effect.

“ Equity Interest ” means (a) with respect to a corporation, any and all shares of capital stock and any Commitments with respect thereto, (b) with respect to a partnership, limited liability company, trust or similar Person, any and all units, interests, or other partnership/limited liability company interests , and any Commitments with respect thereto, and (c) any other direct or indirect equity ownership or participation.

“ ERISA ” means the Employee Retirement Income Security Act of 1974.

“ ERISA Affiliate ” means each business or entity which is a member of a “controlled group of corporations,” under “common control” or an “affiliated service group” with Seller within the meaning of Sections 414(b), (c), or (m) of the Code, or required to be aggregated with Seller under Section 414(o) of the Code, or is under “common control” with Seller within the meaning of Section 4001(a)(14) of ERISA.

“ Execution Date ” is defined in the preamble to this Agreement.

“ Expiration Date ” means June 30, 2006.

“ GAAP ” means United States generally accepted accounting principles as in effect from time to time.

“ Governmental Body ” means any legislature, agency, bureau, branch, department, division, commission, court, tribunal, magistrate, justice, multi-national organization, quasi-governmental body, or other similar recognized organization or body of any federal, state, county, municipal, local, or foreign government or other similar recognized organization or body exercising similar powers or authority.

“ Hired Active Employees ” is defined in Section 8.8(b)(i) .

“ Indemnification Claim ” is defined in Section 11.4(a) .

“ Indemnified Buyer Parties ” means Buyer and its officers, directors, managers, employees, agents, representatives, controlling Persons, stockholders, and their Affiliates.

“ Indemnified Parties ” means, individually and as a group, the Indemnified Buyer Parties and the Indemnified Seller.

“ Indemnified Seller ” means Seller and its officers, directors, managers, employees, agents, representatives, controlling Persons, and stockholders (including Innovo).

“ Indemnitor ” means any Party having any Liability to any Indemnified Party under this Agreement.

 

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“ Innovo ” is defined in the preamble to this Agreement.

“ Innovo Shareholder Approval ” is defined in Section 9.2(c) .

“ Intellectual Property ” means any rights, licenses, liens, security interests, charges, encumbrances, equities, and other claims that any Person may have to claim ownership, authorship or invention, to use, to object to or prevent the modification of, to withdraw from circulation, or control the publication or distribution of any Marks, Patents, Copyrights, or Trade Secrets.

“ IRS ” means the Internal Revenue Service.

“ Knowledge ” means the knowledge of a Person’s officers and directors as of the Execution Date and the Closing Date after due investigation. With respect to particular areas of interest, “Knowledge” will include the knowledge of such Person’s employees charged with responsibility for a particular area of such Person’s operations.

“ Law ” means any law (statutory, common, or otherwise), constitution, treaty, convention, ordinance, equitable principle, code, rule, regulation, executive order, or other similar authority enacted, adopted, promulgated, or applied by any Governmental Body, each as amended and now and hereinafter in effect.

“ Liability ” or “ Liable ” means any liability or obligation, whether known or unknown, asserted or unasserted, absolute or contingent, matured or unmatured, conditional or unconditional, latent or patent, accrued or unaccrued, liquidated or unliquidated, or due or to become due.

“ Marks ” means all fictitious business names, trading names, corporate names, registered and unregistered trademarks, service marks, and applications.

“ Material Adverse Change (or Effect) ” means a change (or effect) in the condition (financial or otherwise), properties, assets, Liabilities, rights, obligations, operations, business, or prospects of a Person which change (or effect), individually or in the aggregate, could reasonably be expected to be materially adverse to such Person’s condition, properties, assets, Liabilities, rights, obligations, operations, business, or prospects.

“ Material Consents ” is defined in Section 9.1(e) .

“ Material Contracts ” is defined in Section 6.12 .

“ Order ” means any order, ruling, decision, verdict, decree, writ, subpoena, mandate, precept, command, directive, consent, approval, award, judgment, injunction, or other similar determination or finding by, before, or under the supervision of any Governmental Body, arbitrator, or mediator.

“ Ordinary Course of Business ” means the ordinary course of business consistent with past custom and practice (including with respect to quantity, quality and frequency) of the relevant Person and its Subsidiaries in the industry in which the relevant Person and its Subsidiaries does business.

 

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“ Organizational Documents ” means the articles of incorporation, certificate of incorporation, charter, bylaws, articles of formation, regulations, operating agreement, certificate of limited partnership, partnership agreement, and all other similar documents, instruments or certificates executed, adopted, or filed in connection with the creation, formation, or organization of a Person, including any amendments thereto.

“ Parties ” is defined in the preamble to this Agreement.

“ Patents ” means all (a) patents and patent applications, and (b) business methods, inventions, and discoveries that may be patentable.

“ PBGC ” means the Pension Benefit Guaranty Corporation.

“ Permit ” means any permit, license, certificate, approval, consent, notice, waiver, franchise, registration, filing, accreditation, or other similar authorization required by any Law, Governmental Body, or Contract.

“ Person ” means any individual, partnership, limited liability company, corporation, association, joint stock company, trust, entity, joint venture, labor organization, unincorporated organization, or Governmental Body.

“ Purchase Price ” is defined in Section 3.1 .

“ Purchased Assets ” means all right, title and interest that Seller possesses and has the right to transfer in and to all of the assets listed on Schedule 1.1 hereto.

“ Qualifying Offer ” means an offer of employment by Buyer to an Active Employee that would provide such Active Employee (i) an annual base salary or wage that is at least one hundred percent (100%) of the applicable Active Employee’s current base salary or wage level, (ii) eligibility to participate in employee benefit plans (within the meaning of Section 3(3) of ERISA) that are substantially similar to those provided to similarly situated employees of Buyer who are not covered by a collective bargaining agreement, and (iii) substantially similar duties and responsibilities as such Active Employee had prior to Closing.

“ Schedules ” mean the Schedules to this Agreement.

“ Security Interest ” means any security interest, deed of trust, mortgage, pledge, lien, charge, claim, or other similar interest or right, except for (i) liens for Taxes, assessments, governmental charges, or claims that are being contested in good faith by appropriate Actions promptly instituted and diligently conducted and only to the extent that a reserve or other appropriate provision, if any, has been made on the face of the Financial Statements in an amount equal to the Liability for which the lien is asserted, (ii) statutory liens of landlords and warehousemen’s, carriers’, mechanics’, suppliers’, materialmen’s, repairmen’s, or other like liens (including Contractual landlords’ liens) arising in the Ordinary Course of Business and with respect to amounts not yet delinquent and being contested in good faith by appropriate

 

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proceedings, only to the extent that a reserve or other appropriate provision, if any, has been made on the face of the Financial Statements in an amount equal to the Liability for which the lien is asserted; and (iii) liens incurred or deposits made in the Ordinary Course of Business in connection with workers’ compensation, unemployment insurance and other similar types of social security.

“ Seller ” is defined in the preamble to this Agreement.

“ Seller Release ” means the Release in the form of Exhibit H .

“ Software ” means computer software or middleware.

“ Subsidiary ” means, with respect to any Person: (a) any corporation of which more than 50% of the total voting power of all classes of the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of directors is owned by such Person directly or through one or more other Subsidiaries of such Person and (b) any Person other than a corporation of which at least a majority of the Equity Interest (however designated) entitled (without regard to the occurrence of any contingency) to vote in the election of the governing body, partners, managers or others that will control the management of such entity is owned by such Person directly or through one or more other Subsidiaries of such Person.

“ Target ” means Target Corporation and its subsidiaries, divisions and Affiliates.

“ Tax ” and “Taxes” includes (1) any federal, state, local or foreign income, gross receipts, capital, franchise, import, goods and services, value added, sales and use, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll, license, employee withholding, unclaimed property, escheat or other tax of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing, (2) any liability for the payment of any amounts of the type described in (1) as a result of being a member of a consolidated, combined, unitary or aggregate group for any Taxable period, and (3) any liability for the payment of any amounts of the type described in (1) or (2) as a result of being a transferee or successor to any Person or as a result of any express or implied obligation to indemnify any other Person.

“ Tax Return ” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes required to be filed with any Governmental Body, including any schedule or attachment thereto, and including any amendment thereof.

“ Termination Date ” means the earlier to occur of (a) the Expiration Date and (b) the date on which this Agreement is terminated pursuant to Section 10.1 (other than Section 10.1(b) ).

“ Threatened ” means a demand or statement has been made (orally or in writing) or a notice has been given (orally or in writing), or any other event has occurred or any other circumstances exist that would lead a prudent Person to conclude that a cause of Action or other matter is likely to be asserted, commenced, taken, or otherwise initiated.

 

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“ Trade Secrets ” means all know-how, trade secrets, confidential information, customer lists, Software (source code and object code), technical information, data, process technology, plans, drawings, and blue prints.

“ Transaction Documents ” means this Agreement, Assumption and Assignment Agreement, the Azteca Note and the Bill of Sale.

“ Transactions ” means: (a) the sale of the Purchased Assets by Seller to Buyer and Buyer’s delivery of the Purchase Price therefor; (b) the execution, delivery, and performance of all of the documents, instruments, and agreements to be executed, delivered, and performed in connection herewith including each Transaction Document; and (c) the performance by Buyer and the Seller of their respective covenants and obligations (pre- and post-Closing) under this Agreement.

“ Treas. Reg. ” means the proposed, temporary and final regulations promulgated under the Code.

“ WARN Act ” is defined in Section 6.16(c) .

ARTICLE 2.

PURCHASE AND SALE OF ASSETS

2.1 Purchase and Sale of Assets.

On and subject to the terms and conditions of this Agreement, Buyer agrees to purchase from Seller, and Seller agrees to sell, transfer, convey, and deliver to Buyer, all of the Purchased Assets, free and clear of any Encumbrances (other than the Assumed Liabilities) for the consideration specified in ARTICLE 3 below.

2.2 Assumed Liabilities.

Buyer agrees to assume and be responsible for the Assumed Liabilities listed on Schedule 2.2 hereof at the Closing and will enter into the Assumption and Assignment Agreement with Seller and Innovo. Buyer will not assume or have any responsibility, however, with respect to any other liability or obligation of Seller not listed on such Schedule (any such liability or obligation of Seller not listed on such Schedule being hereinafter referred to as an “Excluded Liability” ).

ARTICLE 3.

PURCHASE PRICE

3.1 Purchase Price.

(a) The aggregate purchase price for the Purchased Assets shall be $10,436,654.71 (the “ Purchase Price ”), subject to adjustment under Section 3.1(b) below, consisting of Buyer’s assumption of the Assumed Liabilities at Closing as set forth in Section 2.2 above, including (i) the Buyer Note to be executed by Buyer at Closing in favor of API, the principal amount of which shall be the outstanding amounts owed by Seller under the Azteca

 

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Note as of the Closing Date, with the Azteca Note to be cancelled and satisfied by API at Closing and all obligations of Seller thereunder assumed by Buyer under the Buyer Note and (ii) the Related Party Balance; and

(b) The Purchase Price is based on the estimation that the liabilities assumed at the Closing (excluding the Azteca Note) consist of $2,500,000 of Innovo’s obligations to API (the “Related Party Balance” ). If the Related Party Balance as of the Closing Date exceeds $2,600,000 (the “Related Party Balance Threshold” ), then the Purchase Price shall be increased, dollar for dollar, by the amount of the difference between the Related Party Balance and the Related Party Balance Threshold. To the extent that the aggregate value of the Related Party Balance does not exceed or is below the Related Party Balance Threshold then no adjustment shall be made to the Purchase Price.

(c) Schedule 3.1 sets forth an allocation of the Purchase Price (and all other capitalized costs) among the Purchased Assets of the Seller in accordance with Section 1060 of the Code and the Treasury regulations thereunder (and any similar provision of state, local or foreign law, as appropriate), subject to any adjustment to the Purchase Price pursuant to Section 8.7(d) and Article 11. Buyer and Seller and their respective Affiliates shall report, act and file Tax Returns (including, but not limited to IRS Forms 8594) in all respects and for all purposes consistent with Schedule 3.1. Neither Buyer nor Seller shall take any position (whether in audits, Tax Returns or otherwise) which is inconsistent with such allocation unless required to do so by applicable law.

ARTICLE 4.

CLOSING

4.1 The Closing.

The closing of the purchase and sale of the Purchased Assets (the “ Closing ”) will take place at the offices of Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New York 10103, or any other mutually agreed upon location or time, on the third business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the purchase and sale of the Purchased Assets (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as Buyer and Seller may mutually determine (the “ Closing Date ”).

4.2 Deliveries at the Closing.

At the Closing:

(a) Seller will deliver to Buyer:

(i) The Bill of Sale, duly executed by Seller.

(ii) The Assumption and Assignment Agreement, duly executed by Seller, Innovo and Buyer.

(iii) The Customer Consents duly executed by AEO and Target.

 

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(iv) Such other bills of sale, assignments, and other instruments of transfer or conveyance as Buyer may reasonably request or as may be otherwise necessary to evidence and effect the sale, assignment, transfer, conveyance, and delivery of the Purchased Assets to Buyer.

(v) An Officers’ Certificate, substantially in the form of Exhibit D , duly executed on Seller’s behalf, as to whether each condition specified in Sections 9.1(a) through 9.1(d) has been satisfied in all respects.

(vi) A duly executed certificate in the form specified by Treasury Regulation Section 1.1445-2(b)(2).

(vii) A Secretary’s certificate for Seller, substantially in the form of Exhibit E , duly executed on behalf of Seller.

(b) Buyer will deliver the following to Seller:

(i) The Assumption and Assignment Agreement, duly executed by Buyer.

(ii) An Officers’ Certificate, substantially in the form of Exhibit F , duly executed on Buyer’s behalf, as to whether each condition specified in Sections 9.2(a) through 9.2(d)(i) has been satisfied in all respects.

(iii) A Secretary’s certificate, substantially in the form of Exhibit G , duly executed on Buyer’s behalf.

4.3 Obtaining Further Consents.

Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any of the Purchased Assets or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assign thereof, without the consent of a third Person, would constitute a breach or other contravention thereof or in any way adversely affect the rights of Buyer thereunder. The Seller will use its Best Efforts to obtain the consent of any such Person for the assignment to Buyer of any such Purchased Asset. If such consent is not obtained prior to Closing, or if an attempted assignment thereof would be ineffective or would adversely affect the rights of Seller thereunder so that Buyer would not in fact receive all such rights, then Buyer, its sole discretion, may elect to waive the closing condition and in such event the Seller and Buyer agree to cooperate in devising and implementing a mutually satisfactory arrangement under which Buyer would obtain substantially all of the benefits from and after the Closing Date in accordance with this Agreement.

ARTICLE 5.

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller that the statements contained in this ARTICLE 5 are correct and complete as of the Execution Date and will be correct and complete as of the Closing Date (as though made then and except as expressly provided in a representation or

 

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warranty, as though the Closing Date were substituted for the Execution Date throughout this ARTICLE 5 ), except as set forth in the Schedules that Buyer has delivered to Seller on the Execution Date.

5.1 Organization of Buyer.

Buyer is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware. Buyer has the requisite corporate power and authority necessary to own or lease its properties and to carry on its businesses as currently conducted. There is no pending or Threatened Action (or Basis therefor) for the dissolution, liquidation, insolvency, or rehabilitation of Buyer.

5.2 Authority of Buyer; Enforceability.

Buyer has the relevant corporate power and authority necessary to execute and deliver each Transaction Document to which it is a party and to perform and consummate the Transactions contemplated by this Agreement. Buyer has taken all corporate action necessary to authorize the execution and delivery of each Transaction Document to which Buyer is a party, the performance of its obligations thereunder, and the consummation of the Transactions. Each Transaction Document to which Buyer is a party has been duly authorized, executed, and delivered by, and is Enforceable against, Buyer.

5.3 No Violation.

Except as listed on Schedule 5.3 , the execution and the delivery of the Transaction Documents to which Buyer is a party by Buyer and the performance of the Transactions by Buyer will not (a) Breach any Law or Order to which Buyer is subject or any provision of Buyer’s Organizational Documents; (b) Breach any Contract, Order, or Permit to which Buyer is a party or by which it is bound or to which any of the Purchased Assets are subject; or (c) require any Consent.

5.4 No Finder.

Buyer has no Liability to pay any compensation to any broker, finder, or agent with respect to the Transactions for which any Seller could become Liable.

5.5 [Intentionally Omitted].

5.6 Litigation.

Schedule 5.6 sets forth each instance in which Buyer (a) is subject to any outstanding Order or (b) is a party, the subject of, or, to the Buyer’s Knowledge, is Threatened to be made a party to or the subject of any Action. No Action required to be set forth in Schedule 5.6 questions the Enforceability of this Agreement or the Transactions, or could result in any Material Adverse Change with respect to Buyer.

 

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5.7 Solvency.

Buyer is not now insolvent, nor will Buyer be rendered insolvent by any of the Transactions. As used herein, “insolvent” means that the sum of the Liabilities of Buyer exceeds the fair present value of Buyer’s assets.

5.8 Representations Complete.

Except as and to the extent set forth in this Agreement, Buyer makes no representations or warranties whatsoever (INCLUDING ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) to Seller and hereby disclaims all Liability and responsibility for any representation, warranty, statement, or information not included herein that was made, communicated, or furnished (orally or in writing) to Seller or its representatives (including any opinion, information, projection, or advice that may have been or may be provided to Seller by any director, officer, employee, agent, consultant, or representative of Buyer or Affiliate thereof).

ARTICLE 6.

REPRESENTATIONS AND WARRANTIES CONCERNING INNOVO, SELLER AND THE BUSINESS

Seller represents and warrants to Buyer that the statements contained in this ARTICLE 6 are correct and complete as of the Execution Date and will be correct and complete as of the Closing Date (as though made then and, except as expressly provided in a representation or warranty, as though the Closing Date were substituted for the Execution Date throughout this ARTICLE 6) , except as set forth in the Schedules Seller has delivered to Buyer on the Execution Date.

6.1 Entity Status.

Seller is a corporation duly organized, validly existing, and in good standing under the Laws of the State of California. Seller is duly authorized to conduct the Business and is in good standing under the laws of each jurisdiction where the nature or operation of the Business makes such qualification necessary, all of which jurisdictions are set forth on Schedule 6.1 . Seller has the requisite corporate power and authority necessary to own, lease and operate the Business as currently conducted and as proposed to be conducted. Seller has delivered to Buyer correct and complete copies of Seller’s Organizational Documents, as amended to date. Seller is not in Breach of any provision of its Organizational Documents. There is no pending or Threatened Action (or Basis therefor) for the dissolution, liquidation, insolvency, or rehabilitation of Seller.

6.2 Power and Authority; Enforceability.

Each of Seller and Innovo has the relevant corporate power and authority necessary to execute and deliver each Transaction Document to which it is a party and to perform and consummate the Transactions. Each of Seller and Innovo has taken all action necessary to authorize the execution and delivery of each Transaction Document to which it is a party, the performance of its respective obligations thereunder, and the consummation of the Transactions.

 

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Each Transaction Document to which Seller and/or Innovo is a party has been duly authorized, executed, and delivered by, and is Enforceable against Seller and/or Innovo, as applicable.

6.3 No Violation.

Except as listed on Schedule 6.3 , the execution and the delivery of the applicable Transaction Documents by Seller and Innovo and the performance of its respective obligations hereunder and thereunder, and consummation of the Transactions by Seller or Innovo will not (a) Breach any Law or Order to which Seller or Innovo is subject or any provision of the Organizational Documents of Seller or Innovo; (b) Breach any Contract, Order, or Permit to which Seller or Innovo is a party or by which it is bound or to which any of the Purchased Assets are subject (or result in the imposition of any Encumbrance upon the Purchased Assets); (c) require any Consent; (d) Breach any other note, instrument, agreement, mortgage, base, license, franchise, permit or other authorization, rights, restriction or obligation to which Seller, Innovo or API is a party or any of the Purchased Assets is subject or by which Seller or Innovo is bound

6.4 Brokers’ Fees.

Neither Seller nor Innovo has any Liability to pay any compensation to any broker, finder, or agent with respect to the Transactions for which Buyer could become directly or indirectly Liable.

6.5 Financial Statements.

Set forth on Schedule 6.5 are the following financial statements for the Business (collectively the “Financial Statements” ):

(a) Unaudited statements of revenues, direct expenses and identified corporate expenses before interest and taxes as of and for each of the fiscal years ended November 29, 2003, November 27, 2004 and November 26, 2005 for the Business and the three months ended February 25, 2006 and February 26, 2005. The fiscal year ended November 26, 2005 is referred to herein as the “Most Recent Fiscal Year” .

(b) Unaudited balance sheets as of November 26, 2005 and February 25, 2006 (the “Most Recent Balance Sheet Date” ) for the Business.

(c) The Financial Statements, which have been extracted from the books and records of Seller (which books and records are the basis for Seller’s audited consolidated financial statements), have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, present fairly the financial condition of the Business as of such dates and the results of operations of the Business for such periods, are correct and complete, and are consistent with the books and records of Seller. Since the Most Recent Balance Sheet Date, Seller has not effected any change in any method of accounting or accounting practice, except for any such change required because of a concurrent change in GAAP.

Seller has no Knowledge that the Financial Statements cannot be audited in accordance with Generally Accepted Auditing Standards within 75 days after the date hereof.

 

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The Liabilities constituting the Related Party Balance were incurred in the Ordinary Course of Business.

6.6 Subsequent Events.

Except as set forth in Schedule 6.6 , since January 31, 2006, Seller has operated the Business in the Ordinary Course of Business and there have been no events, series of events or the lack of occurrence thereof which, singularly or in the aggregate, could reasonably be expected to have a Material Adverse Effect on the Business.

6.7 Compliance with Law.

The Seller has complied in all material respects with, is not in violation in any material respect of and has not received any notices of violation with respect to, any applicable Law with respect to the ownership or operation of the Business. No investigation or review by any Governmental Body (including without limitation any audit or similar review by any federal, state or local taxing authority) with respect to the Business is pending or, to the Seller’s Knowledge, Threatened, nor has any Governmental Body indicated in writing to the Seller an intention to conduct the same.

6.8 Legal Compliance.

Seller and its respective predecessors and Affiliates have conducted the Business in compliance with all applicable Laws, and no Action is pending or Threatened (and there is no Basis therefor) against them alleging any failure to so comply. No expenditures in excess of $25,000 are, or based on applicable Law, will be required of Seller or Buyer for the Business to remain in compliance with applicable Law.

6.9 Tax Matters.

There are no Liabilities for Taxes relating to the Business, including Taxes relating to prior periods, other than those for which Seller has adequately reserved funds for payment. Seller has duly filed when due all Tax Returns required to be filed by or with respect to Seller, including in connection with and in respect of the Business and the assets and employees related thereto. All such Tax Returns have been properly prepared and timely filed and are true, correct and complete in all material respects and have been completed in accordance with applicable Law. All Taxes due and owing by Seller (whether or not shown or required to be shown on any Tax Return) have been timely paid and discharged. Seller has withheld and paid all Taxes required to be withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and has otherwise complied in all material respects with applicable Law relating to the payment and withholding of Taxes. Seller has made available to Buyer accurate and complete copies of all of its Tax reports and Tax Returns relating to the Business for all periods, except those periods for which returns are not yet due. No Tax Return concerning or relating to Seller or its operations has been audited or examined by a government or taxing authority for any period after December 31, 2000, nor is any audit or examination in process or pending, and Seller has not been notified of any request for such an audit or other examination. To its Knowledge, Seller is not a party to any Action for assessment or collection of Taxes. No claim has been made by a taxing authority in a

 

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jurisdiction where Tax Returns concerning or relating to the Business or the Purchased Assets have not been filed such that it is or may be subject to taxation by that jurisdiction. Seller has not received any notice of any Tax deficiency outstanding, proposed or assessed against or allocable to it in respect of the Business, its assets or employees, and has not executed any waiver of any statute of limitations on the assessment or collection of any Tax or executed or filed with any Governmental Body any Contract now in effect extending the period for assessment or collection of any Taxes against it in respect of the Business, its assets or employees. There are no Encumbrances for Taxes upon, or pending or Threatened against, any Purchased Asset. Seller is not subject to any Tax allocation or sharing Contract relating to the Business. Seller (i) has not been a member of an Affiliated Group filing a consolidated federal income Tax Return (other than a group the common parent of which was Seller) or (ii) has no Liability for the Taxes of any Person under Treas. Reg. Section 1.1502-6 or similar Law, as a transferee or successor, by Contract, or otherwise.

6.10 Title to Purchased Assets.

Seller has good, marketable, and indefeasible title to all of the Purchased Assets, in each case free and clear of all Encumbrances. Upon and following the Closing, Buyer will have good, marketable, and indefeasible title to all of the Purchased Assets, in each case free and clear of all Encumbrances. The Purchased Assets constitute all the assets used in the operation of the business since January 31, 2005 (other than inventory sold and accounts receivable in the Ordinary Course of Business).

6.11 Intellectual Property.

(a) With respect to each Trade Secret constituting Purchased Assets, the documentation provided to Buyer relating to such Trade Secret is current, accurate, and sufficient in detail and content to identify and explain it and to allow its full and proper use by Buyer without reliance on any individual’s knowledge or memory. Seller has taken all reasonable precautions to protect such Trade Secret’s secrecy, confidentiality, and value. No such Trade Secret is part of the public knowledge or literature or, to Seller’s Knowledge, has been used, divulged, or appropriated either for the benefit of any third person or the detriment of the Business. No such Trade Secret required is subject to any adverse claim nor has any adverse claim been Threatened with respect to any such Trade Secret and there is no Basis therefor.

(b) Seller owns or has the right to use pursuant to an Enforceable Contract all Intellectual Property necessary or desirable to operate the Business. Each item of Intellectual Property used by Seller in the operation of the Business immediately prior to the Closing will be owned or available for use by Buyer on identical terms and conditions immediately subsequent to the Closing. Seller has taken all necessary and desirable action to maintain and protect the ownership, confidentiality and value of each item of Intellectual Property that it owns or uses.

(c) Seller has delivered to Buyer correct and complete copies of all written documentation evidencing ownership and prosecution (if applicable) of each item of

 

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Intellectual Property used by Seller in the operation of the Business. With respect to each such item of Intellectual Property:

(i) Seller possesses all right, title, and interest in and to the item, free and clear of any Encumbrance;

(ii) the item is not subject to any outstanding Order;

(iii) no Action is pending or Threatened (and there is no Basis therefor) which challenges the Enforceability, use, or ownership of the item; and

(iv) Seller has never agreed to indemnify any person for or against any interference, infringement, misappropriation, or other conflict with respect to the item.

(d) In respect of the Business, Seller has not interfered with, infringed upon, misappropriated, or otherwise come into conflict with any other person’s Intellectual Property, and Seller has never received any notice alleging any such interference, infringement, misappropriation, violation or conflict (including any claim that Seller must license or refrain from using any other person’s Intellectual Property). No third Person has any Intellectual Property that interferes or would be likely to interfere with Buyer’s use of any of its Intellectual Property. Buyer’s use of such Intellectual Property in the same manner as used by Seller will not interfere with, infringe upon, misappropriate, or otherwise come into conflict with, any Intellectual Property rights of any other Person as a result of the continued operation of the Business as currently conducted and as currently proposed to be conducted. To Seller’s Knowledge, no other Person has interfered with, infringed upon, misappropriated, or otherwise come into conflict with the Intellectual Property used in the operation of the Business.

(e) No former and current employees engaged in the Business have executed written Contracts with Seller that assign to Seller all rights to any inventions, improvements, discoveries, or information relating to the Business. No employee engaged in the Business has entered into any Contract that restricts or limits in any way the scope or type of work in which the employee may be engaged or requires the employee to transfer, assign, or disclose information concerning his work or her work to any person other than Seller.

6.12 Contracts.

Each material Contract (as amended to date) related to the Business, including the Contracts with AEO and Target, is listed in Schedule 6.12 (the “ Material Contracts ”). Seller has delivered to Buyer a correct and complete copy of each such contract. With respect to each such Material Contract:

(i) the Contract is Enforceable;

(ii) the Contract will continue to be Enforceable on identical terms following the consummation of the Transactions;

 

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(iii) Seller is, and to Seller’s Knowledge the other parties to such Contracts are, not in Breach of such Contract, and no event has occurred that, with notice or lapse of time, would constitute a Breach under the Contract; and

(iv) no party to the Contract has repudiated any provision of the Contract.

6.13 Purchase Commitments.

As of March 21, 2006, the aggregate of all accepted and unfulfilled orders for the sale of merchandise relating to the Business entered into by Seller is at least $17,991,242.13, all of which orders and commitments were made in the Ordinary Course of Business and are listed on Schedule 6.13 and, to Seller’s Knowledge, all of such orders will be fulfilled within the time specified by such order. There are no claims against Seller to return merchandise relating to the Business by reason of alleged overshipments, defective merchandise or otherwise, or of merchandise in the hands of customers under an understanding that such merchandise would be returnable. No ordinary purchase or outstanding lease commitment of Seller relating to the Business presently is in excess of the normal, ordinary and usual requirements of the Business or was made at any price in excess of the now current market price or contains terms and conditions more onerous than those usual and customary in the Business.

6.14 Litigation.

Schedule 6.14 sets forth each instance in which Seller (a) is subject to any outstanding Order or (b) is a party, the subject of, or, to Seller’s Knowledge, is Threatened to be made a party to or the subject of any Action. No Action required to be set forth in Schedule 6.14 questions the Enforceability of this Agreement or the Transactions, or could result in any Material Adverse Change with respect to Seller.

6.15 Product Warranty.

Each product manufactured, sold, leased, or delivered by Seller for the Business has been in conformity with all applicable Law, Contracts, and all express and implied warranties, and neither Seller nor the Business has any Liability (and there is no Basis for any present or future Action against Seller or the Business giving rise to any Liability) for replacement or repair thereof or other damages in connection therewith. No product designed, manufactured, sold, leased, or delivered by Seller for the Business is subject to any guaranty, warranty, or other indemnity or similar Liability beyond the applicable standard terms and conditions of sale or lease.  Schedule 6.15 includes copies of the standard terms and conditions of sale or lease for products and services offered by the Business.

6.16 Employees.

(a)  Schedule 6.16(a) contains a complete and accurate list of the following information for each employee, director, independent contractor, consultant and agent of Seller primarily engaged in the Business, including each employee on leave of absence or layoff status: employer; name; job title; date of hiring or engagement; date of commencement of employment or engagement; current compensation paid or payable

 

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and any change in compensation since January 1, 2005; sick and vacation leave that is accrued but unused; and service credited for purposes of vesting and eligibility to participate under any Employee Benefit Plan, or any other employee or director benefit plan.

(b)  Schedule 6.16(b) states the number of employees engaged in the Business terminated by Seller since September 1, 2005, and contains a complete and accurate list of the following information for each employee engaged in the Business who has been terminated or laid off, or whose hours of work have been reduced by more than fifty percent (50%) in the six (6) months prior to the Execution Date: (i) the date of such termination, layoff or reduction in hours; (ii) the reason for such termination, layoff or reduction in hours; and (iii) the location to which the employee was assigned.

(c) Seller has not violated, and the consummation of the transactions contemplated hereby will not violate, the Worker Adjustment and Retraining Notification Act (the “ WARN Act ”) or any similar state or local Law.

(d) To Seller’s Knowledge, no employee, consultant, or contractor engaged in the Business is bound by any Contract that purports to limit the ability of such employee, consultant, or contractor (i) to engage in or continue or perform any conduct, activity, duties or practice relating to the Busin