SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-18926
INNOVO GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2928178
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2633 Kingston Pike, 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 1, 2002, 14,921,264 shares of common stock were outstanding. The
aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $8.0 million at the close of business on
March 1, 2002.
Documents incorporated by reference: None
INNOVO GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management 22
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 27
SIGNATURES 33
Statements contained herein which are not purely historical facts are
forward-looking statements, including statements containing the words believe",
"estimate", "project", "expect" or similar expressions. These statements are
made pursuant to the safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934, as amended. All forward-looking statements are based
upon information available to Innovo Group Inc. on the date of this filing. Any
forward-looking statement inherently involves risks and uncertainties that
could cause actual results to differ materially from the forward-looking
statements. Factors that would cause or contribute to such differences include,
but are not limited to, continued acceptance of the Company's products in the
marketplace, successful implementation of its strategic plan, the extension or
refinancing of its existing bank facility and the restrictions any such
extension or refinancing could place on the Company, the ability to obtain new
financing from other financing sources, the ability to generate positive cash
flow from operations and asset sales, competitive factors, dependence upon
third-party vendors and other outside risks. Readers are cautioned not to place
undue reliance on forward-looking statements.
PART I
ITEM 1. BUSINESS
Introduction
The Company, a Delaware Company organized, is a multidivisional sales
and marketing organization which designs, imports and distributes accessories,
craft and apparel consumer products to the retail, private label and specialty
markets through its wholly owned subsidiaries Innovo, Inc. ("Innovo"), Joe's
Jeans, Inc. ("Joe's")and Innovo-Azteca Apparel, Inc. ("IAA"). Additionally, the
Company's subsidiary Leaseall Management, Inc., owns and invests in certain
real estate properties. The Company's sales and marketing offices are located
in Los Angeles, CA and Knoxville, TN with showrooms in New York City and
Los Angeles, CA. The Company's administrative and distribution operations
are located in Los Angeles, CA. The Company's products are sourced directly
with factories in the Orient or are produced in Mexico.
The principal executive offices of the Company are located at 2633 Kingston
Pike, Suite 100, Knoxville, Tennessee 37919 and at 5900 S. Eastern Ave, Suite
124, Commerce, CA 90040. Its telephone numbers are (865) 546-1110 (TN) and
(323) 725-5516 (CA).
Principal Operating Subsidiaries
Innovo. The Company, through its Innovo subsidiary, develops craft canvas
and denim totebags and aprons for mass retail and craft department stores such
as Wal-Mart, Michaels and Joannes. Innovo also develops licensed and non-
licensed, branded and non-branded accessory products for the fashion and non-
fashion markets. These products are sold through mass retail, department
stores, private label companies and premium organizations including such
organizations as Wal-Mart, Goody's, Sears, Target, American Eagle and other
venues in the United States. Innovo's craft products are produced in Mexico by
affiliates of its strategic partner the Commerce Investment Group. Innovo's
accessory products are sourced out of the Orient directly from Oriental
suppliers.
Joe's. The Company's high-end apparel line incorporates the Joe's Jeans
brand of men's and women's denim apparel products and knit shirts. The Joe's
Jeans product line is sold to high-end retailers, and specialty boutiques such
as Barney's, Neiman Marcus, Nordstrom's and Fred Segal. Joe's Jeans production
is managed by the Company's internal staff and sourced domestically in Los
Angeles, CA from the Commerce Investment Group's affiliates or from other
outside contractors.
IAA. The Company's subsidiary, IAA, specializes in knit tops and other
general apparel items for the private label and retail markets focusing on
customers such as Tommy Hilfiger, Calvin Klein, Express and J. Crew. IAA's
sources its products in Mexico or the Orient.
Products
Innovo. The following are the principal products that Innovo distributes in
the United States to the craft market or to the fashion and licensed accessory
markets:
Craft Fashion Accessory Licensed Accessory
Tote bags Tote bags Travel and tote bags
Adult and children's aprons Beach bags Waist packs
Christmas stockings Duffle bags Duffle bags
Coolers Stadium totes/cushions
Gourmet/BBQ aprons Insulated lunch bags
Backpacks Soft coolers
Pencil Cases
Waist packs
Purses and wallets
Handbags
Joe's. Joe's Jeans focuses on the design of high-fashion women's and men's
apparel products for distribution on a worldwide basis. The product line
currently consists of the following:
Women Men
Denim Jeans Denim Jeans
Denim Skirts
Denim Jackets
Knit Shirts
Handbags
IAA. IAA currently develops products primarily for the private label market.
IAA's products consist of knit tops and bottoms for both the men's and women's
markets. The product lines include, but are not limited to the following:
Tops Bottoms
Knit Fashion Shirts Fleece Sweatpants
Fashion T-shirts Knit Pants
Basic T-shirts
Fleece Sweatshirts
Thermal Pullovers
Product Design.
Innovo. Innovo develops the designs and artwork for all products through its
in-house design staff. Innovo markets its craft products, without artwork, to
be sold for finishing by retail craft customers. Innovo's fashion and licensed
accessory products are produced with the logos or other designs licensed from
licensors or produced bearing the Company's own private brands.
Joe's. Joe's products are designed in house by Joe's designers. The design
staff is headed by Joe Dahan, the creator of the Joe's brand.
IAA. IAA's products are designed by the IAA's merchandising staff or in
conjunction with the design teams of the customer.
Licensing Agreements
Innovo. On March 26, 2001, Innovo entered into a licensing agreement with
Candies Inc. ("Candies") pursuant to which Innovo obtained the right to design,
manufacture and distribute bags, belts and small leather/pvc goods bearing the
Bongo trademark. The agreement is to terminate on March 31, 2003 unless the
Bongo brand is sold in its entirety, in which case the licensing agreement
would terminate immediately. Innovo pays Candies a 5% royalty and a 2%
advertising fee on the net sales of the Company's goods bearing the Bongo
trademark. According to the terms of the licensing agreement, Innovo shall
guarantee payment to Candies during the term of the agreement in an amount
equal to or greater than $50,000 (5% of Minimum Net Sales of $1 million). In
the event that prior to March 31, 2003, Innovo has failed to pay to Candies an
amount equal or greater than $50,000, Innovo shall be obligated to pay to
Candies the difference between the amount of the royalties actually paid to
Candies during the period and $50,000. The licensing agreement does not grant
the Company any renewal options.
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.
Each of the sports-license agreements grant Innovo either an exclusive or
non-exclusive license for use in connection with specific products and/or
specific territories. The license agreements with the major professional sports
licensing organizations are generally non-exclusive. While the Company is
continuing to develop products bearing the sport licenses, the Company is
placing more time and resources developing other product lines which the
Company believes will have greater potential in the marketplace.
The following sets forth certain information concerning the license
agreements currently held by the Company.
Licensor Types of Products Geographical Minimum Expiration
Areas Royalties
Major League Tote, lunch, shoe and United States $15,000 12/31/02
Baseball laundry bags, stadium for 2002
seat cushions, sports
bags and backpacks
National Tote, lunch, shoe and United States N/A 3/31/02
Football laundry bags, stadium
League seat cushions, sports
bags and backpacks
Cooleges/logos Tote, lunch, shoe and United States $8,000 12/31/02
of approx. laundry bags, stadium
130 colleges seat cushions, sports
bags and backpacks
Bongo Bags, belts, small North & South $50,000 3/31/03
leather/pvc goods America and prior to
U.S. expiration
Territories
Innovo believes that it will continue to be able to obtain the renewal of all
material licenses; however, there can be no assurance that competition for an
expiring license from another entity, or other factors will not result in the
non-renewal of a license.
Innovo believes that it is in substantial compliance with the terms of all
material licenses, excluding the sports licenses previously held for
international markets. In the event the Company cannot successfully negotiate
a reasonable settlement with certain international licensors, the Company has
accrued for what it deems to be the reasonable expense or obligation associated
with these licensing agreements.
Joe's. In February, 2001, the Company's Joe's Jeans subsidiary acquired the
licensing rights to the JD logo and the Joe's Jeans trademark for all apparel
and accessory products. The license agreement with JD Design, LLC, has a ten-
year term with two ten-year renewal periods. Additionally, pursuant to the
terms of the agreement, Joe Dahan is to receive a 3% royalty on the net
revenues of Joe's.
Summary of Significant 2001 Developments
During fiscal 2001, the Company completed the transformation
from a manufacturing based organization into a sales and marketing
trading organization. The Company was able to accomplish this as a result
of the closing of its manufacturing facilities in 2000 and the transactions
completed with the Commerce Investment Group and its affiliates. The
transition has allowed the Company to focus on increasing revenues
without proportionately increasing expenses. It has also enabled
management's to more effectively utilize the Company's assets.
In February 2001, the Company successfully launched Joe's Jeans,
thus propelling the Company into the high-fashion denim business. Joe's
has expanded the Company's customer base and has generated positive
synergies between Joe's and the Company's existing divisions and
product lines. Joe's is establishing brand recognition
in the marketplace and the Company, based on the current success, believes
that the brand has the ability to attract a strong worldwide audience. The
Company intends to continue to expand the product lines
beyond its existing offerings thus maximizing the equity of the Joe's brand.
The Company acquired the licensing rights to Joe's from JD Design, LLC ("JD").
In addition to the licensing rights to the Joe's Jeans label, the Company also
acquired the rights to market the current product line and assumed existing
sales orders in exchange for 500,000 shares of the Company's Common Stock and,
if certain sales objectives are reached, a warrant, with a 4 year term, granting
JD the right to purchase 250,000 shares of the Company's Common Stock priced at
$1.00 per share. Additionally, Joe Dahan, the designer of the Joe's line,
joined the Company as an employee and received an option to purchase an
additional 250,000 shares of the Company's Common Stock at $1.00 per share,
vesting monthly over 24 months. The options granted to Joe Dahan have a term of
4 years.
In the second quarter fiscal 2001, the Company's subsidiary Innovo,
Inc., obtained the licensing rights to the Bongo trademark for bags, belts
and small pvc/leather goods. Innovo has since successfully launched the
line to major retailers across the country and is receiving a strong
response in the marketplace. In an attempt to support the momentum of
Innovo's Bongo line, the Company has opened an accessory showroom in
New York City. The showroom is utilized to showcase the Company's Bongo
products as well as Innovo's other accessory products.
In the third quarter of fiscal 2001, the Company acquired Azteca
Productions International, Inc.'s knit division and formed the
subsidiary Innovo-Azteca Apparel, Inc. IAA focuses on marketing and
distributing knit products to private label customers such as Tommy
Hilfiger, Calvin Klein, J. Crew and others. Management expects that
IAA will increase the Company's revenues and should
continue to enhance the Company's efforts to expand its customer base.
The knit purchase agreement called for a two phase transaction with the
second phase to result in the Company purchasing the then existing Azteca
knit inventory. With the first phase closed, the second phase was
scheduled to close prior to November 30, 2001 subject to the Company
obtaining the necessary funding to purchase the goods. The second phase
of the transaction did not close prior to November 30, 2001 and thus will
not be completed.
The Company, in 2001, has made many improvements operationally and
financially and management believes these advancements should lay the
foundation for success in the future. As the Company's historical
customer base and product lines continue to be strengthened, the Company
is now positioned to take advantage of the blossoming Joe's Jeans division
and the opportunities associated with IAA division.
Growth Strategy and Product Development
The Company believes that growth in its business can be accomplished
through the increase in sales of its existing Innovo products and through
its continued expansion into the apparel market. During 2001, the Company
greatly increased the quality of its products, made significant
advancements in the design of its products, greatly improved its customer
base as a result of acquisitions and licensing agreements and increased the
Company's product offerings.
More specifically, the Company believes that it can continue to increase
sales of its craft products due to the high quality and competitive pricing
of its p roducts as a r esult of the Company's strategic relationship with the
Commerce Investment Group and its related parties. Innovo's growth with its
accessory product lines will be based on the Innovo's ability to continue to
increase the quality and design of its products, deliver competitive
products in a timely fashion, maximize the Bongo product line and continue to
grow its business with its private label customers.
The Company intends to establish itself as a significant player in the
apparel market. The Company believes that Joe's has tremendous potential
to generate substantial growth and profitability and the Company expects
Joe's to play an important role in the Company's future development in
the apparel arena. Additionally, management believes that IAA will allow
the Company to penetrate new markets and expose the Company to the largest
private label companies in the apparel industry. With the expertise acquired
through the IAA acquisition and through the Company's strategic relationship
with the Commerce Investment Group, management believes that the Company is
well positioned to further penetrate the
apparel industry.
The Company continues to review possible acquisition candidates in order
to continue to increase its market share. The Company's growth plans are
focused on internal as well as external growth and management
intends to use its relationships and expertise to seek accretive
acquisitions as part of its growth strategy.
Marketing and Customers
Innovo. During fiscal 2001, the Company's Innovo operations sold products
to a mix of mass merchandisers (such as Wal-Mart), department stores, sporting
goods stores, grocery stores, craft and drug store chains, mail order
retailers and other retail accounts. The Company estimates that its products
are carried in over 8,000 retail outlets in the United States. Generally the
Company's accounts are serviced by the Company's sales personnel working
with marketing organizations that have sales representatives which are
Compensated on a commission basis.
In marketing its products, the Company attempts to emphasize the
competitive pricing and quality of its products, its ability to assist
customers in designing marketing programs, its short lead times, and the
high sell-through its products have historically achieved.
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.
Joe's. Joe's customer base is high-end department stores and boutiques
located throughout the world. Joe's products are currently sold
through sales representatives' showrooms located in New York City
and Los Angeles where customers review the latest collections offered
by Joe's and place orders. The Company currently sells to such retailers
as Barney's, Neiman Marcus, Saks Fifth Ave, Intermix and Fred Segal.
Late in fiscal 2001, the Company introduced the Joe's line into
certain overseas markets. International customers are serviced as in-house
accounts or through sales representatives in the foreign markets.
IAA. IAA develops apparel products, with a focus on knit tops, primarily
for the private label market. The Company currently sells to or is
developing products for customers such as American Eagle, Tommy Hilfiger,
J. Crew, Express and other retailers who have their own private label brands.
IAA is currently relying on a few key customers for a majority of its
business. During fiscal 2001, Tommy Hilfiger represented 100% of IAA's sales.
The Company is currently focused on broadening IAA's customer base.
Backlog
Although the Company may at any given time have significant business booked
in advance of ship dates, customers' purchase orders are typically filled
and shipped within two to six weeks. As of December 1, 2001, there
were no significant backlogs.
Sourcing
Innovo. Innovo's craft products are purchased from the Commerce
Investment Group, which manufactures the Company's products primarily
in Mexico, with Innovo obtaining its accessory products from overseas
suppliers through short term manufacturing agreements. The Company is
obligated, as defined in the supply agreement with the Commerce
Investment Group, to purchase all of its craft products from the
Commerce Group through August of 2002. The independent contractors
that manufacture Innovo's products are responsible for obtaining the
necessary supply of raw materials and for manufacturing the products to
Innovo's specifications. While Innovo attempts to mitigate its exposure
to manufacturing, the use of independent contractors does reduce Innovo's
control over production and delivery and exposes Innovo to the other
usual risks of sourcing products from independent suppliers. Innovo does
not have any long-term supply agreements with independent overseas
contractors, notwithstanding the production agreement with the Commerce
Investment Group, but believes that there are a number of contractors
that could fulfill Innovo's requirements. See "Certain Relationships
and Related Transactions".
Innovo has generally utilized overseas contractors that employ
production facilities located in China. As a result, the products
manufactured for Innovo are subject to export quotas and other
restrictions i mposed by the Chinese government. To date the
Company has not been adversely affected by such restrictions;
however, there can be no assurance that future changes in such
restrictions by the Chinese government would not adversely affect
Innovo, even if only temporarily while Innovo shifted production
to other countries or regions such as Mexico, Korea, Taiwan or Latin
America. It is anticipated that in fiscal 2002 more than 75% of
Innovo's sales will be imported products which are subject to United
States import quotas, inspection or duties.
Joe's. Joe's products are sourced through Azteca Production
International, Inc., an affiliate of the Commerce Investment Group
or domestic contractors generally located in the Los Angeles area.
Joe's staff, however, controls the production schedules in order to
secure quality and on time deliveries. The Company is currently
reviewing the option of sourcing products from international sources.
IAA. IAA's products are sourced from Mexico through independent
contractors. IAA currently controls the production process through
its Los Angeles staff. The Company constantly reviews alternative
foreign sourcing possibilities, but with IAA's knowledge of the Mexican
production market, the Company is usually able to provide its customers
with competive pricing and is able do so in a timely manner.
The Company is currently heavily reliant on the Commerce Investment
Group's ability to source and supply the Company's products. The Company
expects its reliance on Commerce Investment Group to decrease in the future
as the Company begins to purchase more of its products from third party
suppliers. During 2001, the Company purchased $5,216,000 or 82% of its
products from Commerce Investment Group.
Competition
The industries in which the Company operates are fragmented and
highly competitive. The Company competes against a large number of
marketing organizations and importers, and other generally small companies
that distribute products similar to the Company's. The Company does
not hold a dominant competitive position, and its ability to sell its
products is dependent upon the anticipated popularity of its designs,
the brands its products bear, the price and quality of its products
and its ability to meet its customers' delivery schedules.
The Company believes that it is competitive in each of the above-described
areas with companies producing goods of like quality and pricing, and that
new product development, product identity through marketing, promotions and
low price points will allow it to maintain its competitive position. However,
many of the Company's competitors possess substantially greater financial,
technical and other resources than the Company, including the ability
to implement more extensive marketing campaigns.
Intellectual Property
Innovo's fashion line includes tote bags imprinted with the E.A.R.T.H.
("EVERY AMERICAN'S RESPONSIBILITY TO HELP") BAG trademark. E.A.R.T.H. Bags
are marketed as a reusable bag that represents an environmentally conscious
alternative to paper or plastic bags. Sales of E.A.R.T.H. Bags, while
significant in Innovo's early years, have not been significant in
the last five years. The Company still considers the trademark to
be a valuable asset, and has registered it with the United States Patent
and Trademark Office.
The Company has also applied for a trademark for its product lines
known as "Friendship", "Clear Gear" and "Toteworks". The Company
anticipates that these trademarks will be registered during 2002.
Employees
As of February 17, 2002, the Company employed 45 fulltime employees.
Innovo Group Inc. accounted for 3 of the employees, Innovo employed 15
individuals including 3 individuals in Innovo's New York showroom, Joe's
employed 14 individuals out of its Los Angeles offices, and IAA employed 13
individuals.
ITEM 2. PROPERTIES
The Company's Tennessee sales and marketing headquarters is located in
approximately 5,000 square feet of office spaces located near downtown
Knoxville, Tennessee. The Company pays $3,500 per month, triple net for the
office space. The space being leased in Knoxville is owned by an entity that is
controlled by the Company's Chairman.
The Company's Los Angeles offices are located in an office complex located in
Commerce, CA. The Company occupies the space under an agreement with Azteca
Productions International, Inc., an affiliate of the Commerce Investment Group
with a reasonable allocation being allotted to the Company depending upon the
amount of space used by the Company.
The Company currently leases office space for its Innovo accessory showroom in
New York City on an annual basis. The Company pays $2,888 a month for the
property. The showroom is located at 10 West 33rd Street, Suite 1118, New York,
NY, 10001.
Joe's products are displayed in showrooms in New York City and Los Angeles
through a sales representation arrangement, thus the Company does not lease or
own the space in which Joe's products are sold.
The Company's previous headquarters and manufacturing facilities were located
in Springfield, Tennessee. The Springfield facilities are currently owned by
Leaseall Management, Inc. ("Leaseall"), a wholly owned subsidiary of Innovo
Group, Inc. The main Springfield complex is situated on seven acres of land with
approximately 220,000 square feet of usable space, including 30,000 square feet
of office space and 35,000 square feet of cooled manufacturing area. A warehouse
annex contained 30,000 square feet. First Independent Bank of Gallatin,
Tennessee holds a First Deed of Trust on the Springfield real property. The
Springfield facilities are currently being leased with approximately 15% of the
facilities being leased as of December 1, 2001.
On May 25,2001, the Company sold the Company's Good Deal Mall property located
in Lake Worth, FL for gross proceeds of $1,175,000 to an outside third party.
After the extinguishment of $657,000 of debt associated with the property,
paying sales commissions, closing fees and property taxes, the Company
recognized a small book gain on the sale of the property. The Good Deal Mall
was originally established by the Company to serve as a retail outlet for the
Company's products.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to lawsuits and other contingencies in the ordinary
course of its business. The Company does not believe that it is probable that
the outcome of any individual action will have a material adverse effect, or
that it is likely that adverse outcomes of individually insignificant actions
will be sufficient enough, in number or magnitude, to have a material adverse
effect in the aggregate on the Company's financial condition.
In December 1991, a former employee filed suit against the Company, Patricia
Anderson-Lasko and others alleging breach of an employment agreement and
conversion of his interest in certain property rights (Michael J. Tedesco v.
Innovo, Inc., et al., Case No. 91-64033, District Court of Harris County,
Texas, 164th Judicial Circuit). Following an appeal and a second trial, a final
judgment was rendered against Innovo for $194,045 on August 17, 1998.
Thereafter, 20,000 shares of Common Stock that had been held in the registry of
the court, as security during the appeal and subsequent trial, were released to
the plaintiff. During the second quarter 2001, the Company reached an agreement
with the plaintiff whereas the judgment was settled for $205,000 and the
outstanding 20,000 shares of Common Stock previously released to the plaintiff.
In December 1999, the American Apparel Contractors Association Workers'
Compensation Fund filed suit against the Company's Thimble Square subsidiary
for approximately $13,000 plus interest of 1.5% per month from the due date
(American Apparel Contractors Association Workers' Compensation Self-Insured
Fund v. Thimble Square and Innovo Group). This amount represents the allocation
to Thimble Square of the excess workers' compensation claims paid under the
plan. The Company has not accrued for the disputed funds in this case and does
not believe that Company has any liability associated with the claim.
In March 2001, the Company received notice from Z-Tex, a former vendor of the
Company, claiming that the Company owes Z-Tex $36,054 based on a payment
arrangement the two parties entered into in May of 1998. The claim was
settled during the second quarter of 2001 for $18,000.
During the fourth quarter of 2001, Levi Strauss & Co. filed a trademark
infringement suit against Joe's Jeans, Inc. and Innovo Group Inc.. Levi's is
alleging that the stitching and pocket design on Joe's Jeans jeans is in
violation of the Levi's trademarked stitching design. While the Company
believes that it has meritous defenses to Levi's claims, the Company has
concluded that it is not financially advantageous to defend against Levi's
claims. As such, the Company, through its counsel, has approached Levi's with
the proposed modifications to the stitching on the Joe's Jeans jean's pockets
and other terms and conditions under which the Company would be willing to
settle the claims. Levi's has agreed in principal to the modifications, and the
Company believes that the suit will be settled consistent therewith. The
Company does not believe there will be any monetary consequences as a result of
the suit other than the legal fees required to defend against the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of a security holders during the
Company's fourth fiscal quarter.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is currently traded under the symbol "INNO" on the Nasdaq
SmallCap Market maintained by The Nasdaq Stock Market, Inc ("Nasdaq"). The
following sets forth the high and low bid quotations for the common stock in
such market for the periods indicated. This information reflects inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions. No representation is made by the
Company that the following quotations necessarily reflect an established
public trading market in the Common Stock.
Fiscal 2001 High Low
First Quarter $1.156 $0.813
Second Quarter 1.12 1.03
Third Quarter 2.06 1.23
Fourth Quarter 2.67 2.25
Fiscal 2000 High Low
First Quarter $1.59 $1.03
Second Quarter 2.12 0.87
Third Quarter 1.43 0.81
Fourth Quarter 1.18 0.78
Fiscal 1999 High Low
First Quarter $3.94 $1.09
Second Quarter 2.56 1.31
Third Quarter 2.75 1.09
Fourth Quarter 3.00 1.50
As of March 1, 2002, there were approximately 900 record holders of the Common
Stock.
The Company has never declared or paid a cash dividend and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
In deciding whether to pay dividends on the Common Stock in the future, the
Company's Board of Directors will consider factors it deems relevant,including
the Company's earnings and financial condition and its capital expenditure
requirements.
In July 1997, the Securities and Exchange Commission and Nasdaq
announced revised standards for listing on the Nasdaq SmallCap Market
that required that a company's listed securities trade for not less than
$1.00 per share and that the company have net tangible assets (total assets,
excluding goodwill, minus total liabilities) of at least $2,000,000. The
change became effective in February 1998.
Although the Company will continually use its best efforts to maintain
its Nasdaq SmallCap listing, there can be no assurance that it will be able to
do so. If in the future, the Company is unable to satisfy the Nasdaq
criteria for maintaining listing, its securities would be subject to delisting,
and trading, if any, the Company's securities would thereafter be conducted in
the over-the-counter market, in the so-called "pink sheets" or on the National
Association of Securities Dealers, Inc. ("NASD") "Electronic Bulletin Board."
As a consequence of any such delisting, a stockholder would likely find
it more difficult to dispose of, or to obtain accurate quotations as to
the prices, of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The table below (includes the notes hereto) sets forth a summary of
selected consolidated financial data. The selected consolidated financial
data should be read in conjunction with the related consolidated financial
statements and notes thereto.
Years Ended
12/01/01 11/30/00 11/30/99 11/30/98 11/30/97
-------- -------- -------- -------- --------
(000's except per share data)
Net Sales $ 9,292 $ 5,767 $10,837 $ 6,790 $ 7,901
Costs of Goods Sold 6,333 5,195 6,252 4,493 5,303
------ ------ ------ ------ ------
Gross Profit 3,022 572 4,585 2,297 2,598
Operating Expenses (3) 3,358 5,113 5,688 4,203 4,007
------ ------ ------ ------ ------
Loss from Operations (399) (4,541) (1,103) (1,906) (1,409)
Interest Expense (211) (446) (517) (503) (657)
Other Income (Expense) 81 (69) 280 142 337
------ ------ ------ ------ ------
Loss Before Income Taxes (529) (5,056) (1,340) (2,267) (1,729)
Income Taxes 89 0 0 0 0
------ ------ ------ ------ ------
Loss from Continuing
Operations (618) (5,056) (1,340) (2,267) (1,729)
------ ------ ------ ------ ------
Discontinued Operations(1) 0 0 (1) (1,747) (110)
Extraordinary Item (2) 0 (1,095) 0 0 524
------ ------ ------ ------ ------
Net Loss $ (618) $(6,151) $(1,341) $(4,014) $(1,315)
Loss per share from Continuing
Operations (basic and diluted) $(0.04) $(0.62) $(0.22) $(0.49) $(0.50)
Weighted Average Shares Outstanding 14,315 8,163 5,984 4,618 3,438
Balance Sheet Data:
Total Assets $10,247 $ 7,416 $ 6,222 $ 7,232 $ 9,168
Long-Term Debt 4,225 1,340 2,054 2,604 2,065
Stockholders' Equity 4,519 3,758 1,730 1,722 3,791
(1) The amounts for 1998 and 1997 represent the operations of Thimble Square.
Thimble Square's operations were discontinued during the fourth fiscal quarter
of 1998.
(2) Represents gains from the early extinguishment of debt in 1997 and the loss
from the early extinguishments of debt in 2000.
(3) Amount includes a $300,000 write down o f long-term assets in 1998 and a
$145,000 write down of long-term assets in 1999 as well as $293,000 for the
termination of a capital lease and $100,000 for the settlement of a lawsuit in
1999, and a $600,000 write down of long-term assets in 2000.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Historically, the Company's operating losses have resulted from inadequate
sales, limited production capacity, high internal production and operational
costs and inadequate working capital. Management has been addressing these
issues in an attempt to make the Company profitable. The Company has made
significant changes in the operational and financial structure of the Company
and believes that the changes discussed below will significantly improve the
Company's ability to obtain profitability.
In 2001, the Company took advantage of the operational restructuring that
occurred during the prior year. In 2000, the Company entered into a supply and
distribution agreement with the Commerce Investment Group and its affiliates.
Under the terms of the agreement, the Company will purchase from the Commerce
Investment Group all of the products the Company previously manufactured
domestically and the Commerce Investment Group will distribute all of the
Company's products.
This group of transactions is significant because a large number of the
historical problems of the Company can be attributed to the limited production
and distribution capabilities of the Company's previous manufacturing
operations, the overhead associated therewith and the lack of competitive
pricing due to the higher cost of domestically manufactured goods.
Furthermore, these transactions allowed the Company to significantly reduce
the headcount of the Company and downsize its operations, reducing its
operational fixed expenses. The resulting operating model is one that is based
on outsourcing all non-core competency functions to third parties. The Company
believes that this structure will provide the Company with the necessary
foundation to successfully support its operations going forward.
Additionally, during 2000 the Company entered into various equity
transactions which have allowed the Company to meet its financial demands
during 2001. As a result of these transactions, the Company has been able to
reduce its debt and interest expense, decrease payables and increase its
cash on hand. The equity transactions referred to above, while greatly
improving the Company's financial health, may represent a change in control
for income tax purposes which would have the effect of substantially limiting
the availability and utilization of the Company's net operating losses for
income tax purposes.
The Company's increase in revenues for 2001 is attributable to the Company's
entry into the apparel business through the creation of the Company's two new
subsidiaries Joe's Jeans, Inc. ("Joe's") and Innovo-Azteca Apparel, Inc.
("IAA"). Joe's markets high-end fashion products to both domestic and
international retailers. IAA markets and sources knit apparel products for the
private label market. As the Company moves forward, the Company anticipates
that its apparel divisions will play a significant role in the Company's
growth process. The growth is expected to come from within the Company's
existing apparel divisions as well as through licensing agreements and
acquisitions.
While the Company's revenues on an existing product line basis were flat for
the year, the Company has established the groundwork that it believes will
lead to growth in 2002. The Company has greatly increased its presence in the
craft market as a result of the Company's ability to provide an improved
product at a lower cost. Furthermore, in 2001 the Company obtained the
licensing rights for Bongo accessories, and subsequently therewith,
successfully launched a line of Bongo bags in the retail market. While the
Company continues to develop its other accessory product lines, the Company
has begun to place additional focus on the fashion market and
private label customers thus allowing the Company to maximize its expertise in
developing and sourcing fashion accessory products.
The developments in 2001 have postured the Company to move forward. The
Company has addressed its production and financial shortcomings and has begun
to take the necessary steps to generate the revenues necessary to pull the
Company to profitability.
Results of Operations
The following table sets forth certain statement of operations data for the
years indicated:
Years
Ended
12/01/01 11/30/00 11/30/99
-------- -------- --------
Net Sales $ 9,292 $ 5,767 $10,837
Costs of Goods Sold 6,333 5,195 6,252
------ ------ ------
Gross Profit 2,959 572 4,585
Selling, General & Administrative 3,191 4,147 4,963
Write down of long-term assets -- 600 145
Termination of a Capital Lease -- -- 293
Other -- 116 --
Depreciation & Amortization 167 250 287
------ ------ ------
Loss from Operations (399) (4,451) (1,103)
Interest Expense (211) (446) (517)
Other Income (expense) 81 (69) 279
------ ------ ------
Loss Before Income Taxes and
extraordinary items (529) (5,056) (1,341)
Income Taxes 89 -- --
------ ------ ------
Loss before extraordinary (618) (5,056) (1,341)
------ ------ ------
Extraordinary Item -- (1,095) --
------ ------ ------
Net Loss $ (618) $(6,151) $(1,341)
Comparison of Fiscal Year Ended December 1, 2001, to Fiscal Year Ended
November 30, 2000
Net sales for the year ended December 1, 2001 increased $3,525,000 or 61.1%
from $5,767,000 in 2000 to $9,292,000 in 2001. While internal growth remained
flat in 2001, the increase in sales can be attributed to the Company's two new
apparel subsidiaries Joe's Jeans and Innovo Azteca Apparel (IAA). These two new
apparel divisions accounted for combined sales of $3,650,000. Since the
acquisitions of the licensing rights in February of 2001, Joe's Jeans
sales for the period totaled $1,520,000. Additionally, IAA's revenues
since August of 2001, totaled $2,130,000.
The Company's gross margin percentage increased from 9.9% in 2000 to 31.8% in
2001. The increase is attributable in part to a $300,000 inventory adjustment
in 2000 for liquidated inventory, thus increasing the cost of goods. Also, as
a result of closing its manufacturing and distribution operations, the Company
wrote off $250,000 of capitalized overhead that was associated with its
production facility and the manufacturing process. These adjustments, coupled
with the advantages of the Company's strategic partners purchasing power on
Innovo Inc.'s (II) crafts, improved pricing on II's products sourced out the
Orient, and Joe's high-margins account for the increase in the gross margin
percentage.
Selling, General and Administrative expenses decreased in 2001 by 23.1% from
$4,147,000 in 2000 to $3,191,000 in 2001. The change in Selling, General and
Administrative expense resulted primarily from the Company's new business model
which attempts to outsource all non-core operating functions. Additional
savings resulted from the Company's restructuring and reduction in headcount,
which commenced in 2000 and ended in 2001.
Depreciation and Amortization expenses were not significantly different from
2000 to 2001 due to the lack of significant purchases of fixed assets and
intangible assets during 1999.
Interest expense for the year ended December 1, 2001 decreased by $235,000 to
$211,000 as a result of decreased borrowing from the Company's factoring
facility and the Company's higher cash reserves offset by interest on $3.6
million of debt related to the knit division acquisition.
Other Income (expense) was income of $81,000 in 2001 compared to expense of
$69,000 in 2000. The increase can largely be attributed to rental income of
approximately $70,000 derived from tenants in the Company's former headquarters
in Springfield, TN and other miscellaneous income of $12,000, offset by a
$2,000 loss on the sale and/or disposal of the equipment resulting from the
closure of the Company's manufacturing facility and sale of the Company's
Florida property.
Comparison of Fiscal Year Ended November 30, 2000 to Fiscal Year Ended
November 30, 1999
Net sales for the year ended November 30, 2000 decreased $5,070,000 or 46.8%
from $10,837,000 in 1999 to $5,767,000 in 2000. The decrease in sales can
largely be attributed to the Company's inability to meet customer demand as a
result of labor and production shortages, a large premium order of $2.5 million
placed in 1999 but not repeated in 2000, a decrease in the sales of clear
backpacks and sports bags in 2000 compared to 1999, non-competitive pricing, an
increase in customer discounts and allowances and the reduction in sales and
marketing staff in an attempt to reduce costs and focus the Company's sales and
marketing efforts on its core products and key customers.
Customer discounts and allowances recorded as a reduction of net sales
increased by $590,000 during 2000. The increase is substantially due to the
Company recording advertising and other allowances that are based on a
percentage of a customer's sales as a reduction of net sales whereas in prior
periods such amounts were recorded as selling expenses. The 1999 and 1998
statements of operations have not been adjusted to reflect the 2000
presentation of sales allowances as the information for those periods was not
tracked by the Company in a manner that would allow for an accurate
reclassification of prior period amounts and in any event management believes
that such amounts were not material to the 1999 and 1998 statements of
operations.
The Company's gross margin percentage decreased 32.4% from 42.3% in 1999 to
9.9% in 2000. The reduction is attributable to a decrease in the sales of
high margin imported products in 2000 compared to 1999 and the high cost of
goods manufactured and distributed domestically during the first 10 months of
2000. Additionally, with the closure of the Company's domestic manufacturing
and distribution operations in October of 2000, the Company concluded that it
was more cost effective to liquidate certain inventories as opposed to
incurring the costs associated with shipping the products to the Company's
new distribution center in Los Angeles, CA. Consequently, the Company took a
$300,000 inventory adjustment for liquidated inventory thus increasing the
cost of goods sold. The Company's cost of goods sold, as a result of closing
its manufacturing and distribution operations, further increased in 2000 by
$250,000 due to the write off of capitalized overhead that was associated with
its production facility and the manufacturing process. In addition, during
2000, the Company recorded approximately $250,000 of expenses related to
advertising allowances granted to its customers as a reduction of sales, as
the allowances were based on a percentage of the customers' purchases.
Selling, General and Administrative expenses decreased in 2000 by 16.4% from
$4,963,000 in 1999 to $4,147,000 in 2000. The change in Selling, General and
Administrative expense resulted primarily from decreases in both fixed and
variable costs as the Company downsized due to a lack of working capital as
well as expense savings realized as a result of the closing of the Company's
manufacturing facilities. In addition, as discussed above the Company's
Selling, General and Administrative expenses decreased by approximately
$250,000 as a result of the reclassification of advertising allowances as a
reduction of sales and not as a component of Selling, General and
Administrative expenses. As a result of closing its manufacturing and
distribution facilities in 2000, the Company incurred $116,000 of expenses
associated with the factory shutdown.
Under the guidelines of SFAS 121 the Company recorded a $600,000 impairment
loss representing a valuation adjustment on a building and parcel of real
estate the Company owns. The property and improvements are currently listed
for sale and the Company is currently in negotiations with multiple buyers who
are interested in purchasing the property. Due to the fact the Company ceased
manufacturing and no longer used certain manufacturing equipment, the Company
incurred $99,000 of other expense upon the disposal of the manufacturing
machinery and equipment in 2000.
Depreciation and Amortization expenses were not significantly different from
1999 to 2000 due to the lack of significant purchases of fixed assets and
intangible assets during 1998.
Interest expense for the year ended November 30, 2000 decreased by $71,000
to $446,000 as a result of decreased borrowing from the factor due to
decreased sales and lower average outstanding indebtedness due to the
conversion of $2,000,000 of debt to equity.
Other Income (expense) was expense of $69,000 in 2000 compared to income of
$280,000 in 1999. The decrease can largely be attributed to the fact that in
1999 the Company received income under a warehousing agreement between the
Company and Z. Metro, Inc., an unrelated company. Other expense in 2000 is
comprised of the income derived from tenants in the Company's former
headquarters in Springfield, TN and royalties paid to the Company pursuant to
a licensing arrangement with the Accessory Network Group, offset by a $99,000
loss on the sale and/or disposal of the equipment resulting from the closure
of the Company's manufacturing facility. The Company does not expect to
receive royalties from the Accessory Network Group in 2001 due to the decrease
in sales by the Accessory Network Group of the licensed products subject to
the licensing agreement. In addition, the Company incurred $99,000 of other
expense in 2000 related to the disposal of fixed assets.
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 fiscal year. Cash flow is strongest in the Company's third and
fourth fiscal quarters. During the first half of the calendar year, the
Company incurs the expenses of maintaining corporate offices, administrative,
sales employees, and developing the marketing programs and designs for the
majority of its sales campaigns. Inventory levels also increase during the
first half of the year in anticipation of sales during the third and fourth
quarters. Consequently, during the first half of each calendar year,
corresponding to the Company's first and second fiscal quarters, the Company
utilizes substantial working capital and its cash flows are diminished,
whereas the second half of the calendar year, corresponding to the Company's
third and fourth fiscal quarters, generally provides increased cash flows
and the build-up of working capital.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flows from operations,
including credit from vendors and borrowings from the factoring of accounts
receivables and cash obtained from the sale of the Company's Common Stock.
The Company relied on three primary sources to fund operations during
fiscal 2001:
1. An accounts receivable factoring agreement with CIT Group, Inc. ("CIT")
2. Cash reserves
3. Trade credit with its domestic and international suppliers
Cash used in operating activities was $632,000 for the year ended December
1, 2001. The use of cash primarily resulted from the Company's net loss, an
increase in accounts receivables of $882,000 and a reduction in accounts
payable and accrued expenses of $1,064,000 offset by a decrease in inventory
of $933,000 and an increase in amounts due to related parties of $698,000.
The Company's principal credit facility for working capital is its accounts
receivable factoring arrangements. The Company, through its subsidiaries,
entered into factoring agreements with 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. The CIT
agreements may be terminated by CIT with 60 days notice by CIT, or on the
anniversary date, by the Company provided 60 days written notice is given.
The following table sets forth the Company's contractual obligations and
commercial commitments as of December 1, 2001:
Contractual Obligations Payments Due by Period
Total Less than 1-3 4-5 After 5
1 year years years years
----- --------- ----- ----- -----
Long Term Debt $4,225 $ 845 $2,454 $ 926 $ --
Operating Leases 425 78 144 84 119
Other Long Term
Obligations-Minimum Royalties 73 23 50 -- --
The Company believes that the existing factoring relationships and cash
reserves should provide sufficient working capital to fund operations during
fiscal 2002 and the Company's internal growth. However, due to the
seasonality of the Company's business and negative cash flow during certain
periods during 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, may be obtained from the sale of
equity securities or through short-term working capital loans. However,
there can be no assurance that this or other financing will be available if
needed. The inability of the Company to be able to fulfill any interim
working capital requirements would force the Company to constrict its
operations. The Company intends to pursue acquisitions which may result in
the Company raising additional capital through debt or equity financing.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, (FAS 141)
and No. 142, (FAS 142), Goodwill and Other Intangible Assets, effective for
fiscal years beginning after December 1, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company has applied the non-amortization provisions of FAS 141 for
acquisitions occurring after June 30, 2001 and will apply the provisions of
the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2002. Application of the non-
amortization provisions of the Statement is not expected to result in a
material change to net income. During 2002, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This standard sets forth the
impairment of long-lived assets, whether they are held and used or are
disposed of by sale or other means. It also broadens and modifies the
presentation of discontinued operations. The standard will be effective for
the Company's fiscal year 2003, although early adoption is permitted, and
its provisions are generally to be applied prospectively. The Company is in
the process of evaluating the adoption of this standard, but does not
believe it will have a material impact on its consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes its exposure to market risk is relatively low. The
Company has no investments in derivative instruments. Transactions with
foreign customers and suppliers are made in U.S. currency. The Company's
primary exposure to market risk relates to outstanding borrowings with
variable interest rate terms associated with the factoring of the
Company's receivables.
ITEM 8. FINANCIAL STATEMENTS
See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K" for the Company's financial statements and notes thereto, and
the financial statement schedule filed on part of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
persons elected as Directors of the Company as of February 12, 2002.
Name Age Position with the Company
Samuel J. (Sam) Furrow Sr. (2) 60 Chairman of the Board,
and Director
Patricia Anderson-Lasko 42 Chief Executive Officer;
Director
Samuel J. (Jay) Furrow, Jr. 28 President,
Director and Acting Chief
Financial Officer
Daniel A. (Dan) Page (1)(2) 51 Director
Marc B. Crossman (1) 30 Director
John G. Looney, MD (1)(2) 58 Director
____________________
(1) Member of the audit committee of the Board of Directors.
(2) Member of the executive compensation committee of the Board of
Directors.
Following is information with respect to the business experience for at least
the last five years and certain other information regarding each of the nominees
for election as a Director.
Samuel J. (Sam) Furrow became a Director in April 1998 and the Company's
Chairman and Chief Executive Officer in October 1998. He served as Chief
Executive Officer until December, 2000, when Ms. AndersonLasko resumed that
position. Mr. Furrow has also been the Chairman of Furrow Auction Company (a
real estate and equipment sales company) since April 1968, Chairman of Furrow-
Justice Machinery Corporation (a six-branch industrial and construction
equipment dealer) since September 1983, Owner of Knoxville Motor Company-
Mercedes Benz since December 1980 and of Land Rover of Knoxville since July
1997. Mr. Furrow has been a Director of Southeastern Advertising Inc. (an
advertising agency) since April 1968, a Director of First American National
Bank since September 1993, and of Goody's Family Clothing, Inc, a publicly
traded retail clothing store chain, since 1995. Sam Furrow is Jay Furrow's
father.
Patricia Anderson-Lasko has been President and a Director of the Company
since August 1990 and President of the Company's Innovo, Inc. subsidiary since
she founded that company in 1987. From August 1990 until August 1997,
Ms. Anderson-Lasko was also the Chairman and Chief Executive Officer of the
Company, and she reassumed to title of Chief Executive Officer in December,
2000.
Daniel A. Page was the chief operating officer of the Company from August
1997 through April 1999 and has been a Director of the Company since August
1997. From June 1993 until August 1997, Mr. Page was the principal operating
and executive officer of Southeast Mat Company, a privately held manufacturer
of automobile floor mats. Prior thereto Mr. Page was the president of
Tennessee Properties Company, a privately held real estate development company.
Samuel J. (Jay) Furrow, Jr. became the Company's Vice President for Corporate
Development and In-House Counsel in July 1998 and a Director in January 1999.
He has also served as the Company's Chief Operating Officer since April 1999
and its Acting Chief Financial Officer since August 2000. Mr. Furrow is an
attorney. Prior to joining the Company, Mr. Furrow attended the Southern
Methodist University School of Law beginning in August of 1995 and graduating
with a J.D. in May 1998. Mr. Furrow attended Vanderbilt University beginning
in 1991 and graduating with a BS degree in Political Science in 1995. Jay
Furrow is Sam Furrow's son, and the President of StanRo Development, a real
estate development company. Mr. Furrow assumed the role of President in
December of 2000.
Marc B. Crossman has been a Director since January 1999. Mr. Crossman has
also been a Vice President and Equity Analyst with J.P. Morgan Securities Inc.,
New York, New York, since January 1999, and was previously a Vice President and
Equity Analyst with CIBC Oppenheimer Corp. from September 1997 through January
1999 and an Associate and Equity Analyst with Dain Rauscher Wessels from
November 1994 through September 1997.
John G. Looney, MD has been a Director since August 1999. Dr. Looney is a
psychiatrist employed by the Duke Medical Center since 1986. Dr. Looney just
completed a role as Medical Director of Peninsula Behavioral Health, a multi-
hospital psychiatric treatment system in East Tennessee. He was responsible
for building the clinical programs of this large enterprise. Dr. Looney is
currently working with Carolinas' Medical Center in Charlotte, North Carolina,
pursuant to a contract between the Duke Medical Center and Carolinas' Medical
Center. He also participates in a variety of venture capital investments
independent of Duke, Carolinas' Medical Center and the Company.
Each of the Company's Directors is elected at the annual meeting of
stockholders and serves until the next annual meeting and until a successor
has been elected and qualified or their earlier death, resignation or
removal. Vacancies in the Board of Directors are filled by a majority vote of
the remaining members of the Board of Directors.
Executive officers of the Company are elected on an annual basis and serve at
the discretion of the Board of Directors.
Commerce and Mizrachi Group Stock Purchase Agreements
In connection with investments by the Commerce Investment Group during August
2000, the Company has agreed to appoint to the Board of Directors and each of
it committees one person designated by Mr. Guez. Mr. Guez has not designated a
Board member at this time. In connection with additional investments made in
2000, Mr. Guez is entitled to designate two additional Board members. The
Company has also agreed to appoint to the Board of Directors and each of it
committees one person designated by Mr. Mizrachi. Mr. Mizrachi has not
appointed a member at this time. The Company has also amended its Bylaws to
provide that the number of Company directors will be between three and seven,
with the exact number to be specified by the Board of Directors, until November
1, 2000, and that from November 2, 2000 until November 1, 2003, the number of
members of the Board of Directors will be between three and twelve, with the
exact number to be designated by the Board of Directors.
Corporate Governance and Other Matters
The Board of Directors conducts its business through meetings and through its
committees. The Board of Directors acts as a nominating committee for selecting
candidates to stand for election as Directors. Other candidates may also be
nominated by an y stockholder, provided such other nomination(s) are submitted
in writing to the Secretary of the Company no later than 120 days prior to the
anniversary date of the prior year's annual meeting of stockholders at which
Directors were elected, or such earlier date as the Board of Directors may
allow, together with the identity of the nominator and the number of shares of
the Company's stock owned, directly and indirectly, by the nominator. No such
nominations have been received as of the date hereof in connection with the
Annual Meeting.
The Board of Directors currently has two committees, the Audit Committee and
the Executive Compensation Committee.
The Audit Committee is primarily responsible for (i) monitoring the integrity
of the Company's financial reporting process and systems of internal controls
regarding finance, accounting, and legal compliance, (ii) monitoring the
independence and performance of the Company's independent auditors and internal
auditing department, and (iii) providing an avenue of communication among the
independent auditors, management, the internal auditing department, and the
Board. The Audit Committee has a charter that details its duties and
responsibilities. The current members of the Audit Committee are Dr. Looney
and Messrs. Page and Crossman. The Executive Compensation Committee reviews and
recommends the compensation arrangements for management of the Company. The
current members of the Executive Compensation Committee are Dr. Looney and
Messrs. Page and Sam Furrow. The Executive Compensation Committee also
administers the Company's 2000 Employee Stock Incentive Plan and 2000 Director
Stock Incentive Plan.
Pursuant to Nasdaq listing requirements, Innovo maintains an Audit Committee
of its Board of Directors that is composed of three directors. As permitted
by a listing requirements exception, two of the committee members are
"independent" under Nasdaq guidelines while the third member, Dan Page, is not
independent under the guidelines becuase he has been an Innovo employee within
the prior three years. With the remaining Board members being current
employee's of the Company and due to Mr. Page's operational knowledge of the
Company, Innovo's Board of Directors determined that it is in the best
interest of the Company and its stockholders that Mr. Page serve as a member
of the Audit Committee and we are providing this letter to you to inform you
of that determination as specified by the listing requirements.
Each of Messrs. Guez and Mizrachi is entitled to designate members of each
Board committee. See "Commerce and Mizrachi Group Stock Purchase Agreements"
above.
During the year ended December 1, 2001, the Board of Directors held 2
meetings. During the same period, the Executive Compensation Committee met once
and the Audit Committee met 5 times. No incumbent Director attended fewer than
75% of the total number of meetings of the Board of Directors and committees
of the Board of Directors on which he served.
Director Compensation
Directors who are not employees of the Company do not currently receive a
cash fee for attending meetings of the Board of Directors or its committees.
Mr. Page received a grant of nonqualified stock options to purchase 120,000
shares of Common Stock at an exercise price of $3.31 per share upon becoming a
Director in August 1997. All of such options are vested.
Sam Furrow received a grant of nonqualified stock options to purchase
100,000 shares of Common Stock at an exercise price of $4.75 per share upon
becoming a Director in March 1998. Jay Furrow received a grant of nonqualified
stock options to purchase 100,000 shares of Common Stock at an exercise price
of $4.75 per share upon becoming a Director in February 1999. Mr. Crossman
received a grant of nonqualified stock options to purchase 100,000 shares of
Common Stock at an exercise price of $4.75 per share upon becoming a Director
in February 1999. The options vest and become exercisable at the rate of 2,083
shares per month served.
Each non-management member of the Board of Directors also receives annual
compensation in the form of options to buy Common Stock with a nominal initial
value of $10,000. Each option has an exercise price equal to one-half of the
market price on the date of grant, and covers a number of shares equal to
$10,000 divided the exercise price per share. See "2000 Director Stock Option
Plan" below.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
paid to the Chief Executive Officers of the Company during 2001 and to the
other executive officer of the Company who received annual compensation in
excess of $100,000 during 2001 (the "Named Executive Officers") during fiscal
years 2001, 2000 and 1999.
Summary Compensation Table
Annual Compensation(1) Long-term Compensation
Name and
Principal Position Year Salary Bonus Other Annual Options/C
Compensation(3) SARs
- ------------------ ---- ------ ----- ----------- ----
Samuel J. Furrow, Chairman 2001 -- -- -- --
and CEO (2) 2000 -- -- -- --
1999 -- -- -- --
Patricia Anderson-Lasko, 2001 200,000 -- -- --
President and CEO (3) 2000 195,000 -- -- --
1999 157,000 15,750 509 --
Samuel J. Furrow, Jr. (Jay) 2001 150,000 -- -- --
President and COO 2000 100,000 -- -- --
(1) No executive officers received or held restricted stock awards during
fiscal 2001, 2000, or 1999.
(2) Mr. Sam Furrow's employment by the Company began in October 1998 with no
salary and served as CEO until December 2000. Mr. Furrow received a grant of
nonqualified stock options to purchase 100,000 shares of Common Stock at an
exercise price of $4.75 per share upon becoming a Director in March 1998. The
options vest and become exercisable at the rate of 2,083 per month through
2002.
(3) During fiscal 1999 Ms. Anderson-Lasko received life insurance benefits in
the aggregate amounts of $509. Ms. Anderson-Lasko became CEO in December 2000.
Option Grants. During 2001, Pat Anderson and Jay Furrow received 300,000 and
150,000 options priced at $1.25 with an expiration date of June 5, 2005.
Aggregated Option/SAR Exercised in 2001 and Year-end Option/SAR Values
Shares Number of Unexercised Value of Unexercised
Acquired Options/SARs at FY-End In-the-Money Options/SARs
on Value (#) Exercisable/ ($) Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ----- -------- -------- ------------- -------------
Samuel J. Furrow 0 0 119,392/6,249 Not Applicable (1)
Pat Anderson 0 0 300,000/0 $213,000/0
Jay Furrow 0 0 240,128/34,872 $106,500/0
(1) Based on a closing price per share of $1.96 for the Common Stock on
December 1, 2001 as reported by the Nasdaq SmallCap Market.
2000 Employee Stock Incentive Plan
The 2000 Employee Stock Incentive Plan (the "2000 Employee Plan") provides
for the grant of options to officers, employees and consultants of the
Company and its affiliates (an Affiliate"). The 2000 Employee Plan continue
in effect until March 2010, unless terminated earlier. Options granted under
the 2000 Employee Plan may be either "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified stock options.
The 2000 Employee Plan was adopted by the Company's Board of Directors on
March 12, 2000 and approved by stockholders at the 1999 annual meeting. Up
to 2,000,000 shares of Common Stock, subject to adjustment as provided in the
2000 Employee Plan, may be issued under the 2000 Employee Plan.
2000 Director Stock Incentive Plan
The 2000 Director Stock Incentive Plan (the "2000 Director Plan") provides
for the automatic grant of options to directors of the Company and its
affiliates and subsidiaries (an "Affiliate") in place of director's fee
payable in cash. The 2000 Director Plan will continue in effect until
September 2010, unless terminated earlier. Options granted under the 2000
Director Plan are nonqualified stock options.
The 2000 Director Plan was adopted by the Company's Board of Directors on
September 13, 2000 and approved by stockholders at the 1999 annual meeting.
A total of 500,000 share of Common Stock, subject to adjustment as provided
in the 2000 Director Plan, may be issued pursuant to the 2000 Director Plan.
Stock Bonus Plan
The Board of Directors has authorized and may in the future authorize the
issuance of restricted stock to certain employees of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table provides information as of March 1, 2002 concerning
beneficial ownership of Common Stock by (1) each person or entity known by
the Company to beneficially own more than 5% of the outstanding Common
Stock, (2) each Director and nominee for election as a Director of the
Company, (3) each Named Executive Officer, and (4) all Directors and
executive officers of the Company as a group. The information as to
beneficial ownership has been furnished by the respective stockholders,
Directors and executive officers of the Company, and, unless otherwise
indicated, each of the stockholders has sole voting and investment power
with respect to the shares beneficially owned.
Name and Shares Beneficially Owned (1)
Offices Number Percent
Samuel J. (Sam) Furrow 3,496,114(2)(9) 18.9%
Chairman and Director
2633 Kingston Pike, Suite 100
Knoxville, Tennessee 37919
Hubert Guez 6,746,637(3) 31.3%
5804 East Slauson Avenue
Commerce, California 90040
Patricia Anderson-Lasko 550,000(4) 3.56%
Chief Executive Officer and Director
2633 Kingston Pike, Suite 100
Knoxville, Tennessee 37919
Daniel A. (Dan) Page 472,774(5)(9) 3.55%
Director
2633 Kingston Pike, Suite 100
Knoxville, Tennessee 37919
Samuel J. (Jay) Furrow, Jr. 1,588,701(6) 9.62%
President and Acting
Chief Financial Officer,
and Director;
2633 Kingston Pike, Suite 100
Knoxville, Tennessee 37919
Marc B. Crossman 117,684(7)(9) *
Director
2633 Kingston Pike, Suite 100
Knoxville, Tennessee 37919
John G. Looney, MD 160,041 1.06%
Director
2633 Kingston Pike, Suite 100
Knoxville, Tennessee 37919
Joseph Mizrachi 2,738,500(8) 15.5%
6971 N. Federal Highway, #203
Boca Raton, Florida 33487
Joe Dahan 653,809(10) 4.19%
5900 S. Eastern
Commerce, CA 90040
All Executive Officers 7,039,123(2)(4)(5)(6)(7) 32.1%
and Directors as a Group
(7 persons)
_________________
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission, certain
shares of the Company's common stock that a beneficial owner set forth in this
table has a right to acquire within 60 days of the date hereof pursuant to the
exercise of options or warrants for the purchase of shares of common stock are
deemed to be outstanding for the purpose of computing the percentage ownership
of that owner but are not deemed outstanding for the purpose of computing
percentage ownership of any other beneficial owner shown in the table.
Percentages are calculated based on 14,921,264 shares outstanding as of
March 1, 2002.
(2) Includes 100,000 shares subject to currently exercisable options and
750,000 shares subject to exercisable warrants with a 3-year term expiring
October 2003 and an exercise price of $2.10 per share.
(3) Includes 500,000 shares held of record by SHD Investments, LLC, of which
Mr. Guez's brother is the Manager, 250,000 shares held of record by each to
two trusts for Mr. Guez's sons and of which Mr. Guez's mother is trustee,
and 1,863,637 held of record by Commerce Investment Goup, LLC, of which
Mr. Guez is the Manager (collectively, the "Commerce Group"). Mr. Guez
disclaims beneficial ownership the shares held by SHD Investments, LLC and the
trusts for his sons. Also includes 3,000,000 shares subject to immediately
exercisable warrants with a purchase price of $2.10 per share and 200,000
shares subject to warrants with a purchase price of $2.10 per share that become
exercisable over two years. Also included is 700,000 shares owned by Azteca
Production International, Inc., of which Mr. Guez is an owner.
(4) Includes 250,000 shares purchased by Ms. Anderson-Lasko pursuant to the
1997 Stock Purchase Right Award, awarded to her in February 1997. Under the
terms of the 1997 Stock Purchase Right Award, Ms. Anderson-Lasko was permitted
to, and elected to, pay for the purchase of the 250,000 shares (the "1997 Award
Shares") by the execution of a non-recourse note (the "Note") to the Company
for the exercise price of $2.8125 per share ($703,125) in the aggregate). The
Note is due, without interest, on April 30, 2002, and is collateralized by the
1997 Award Shares purchased therewith. Ms. Anderson-Lasko may 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-Lasko 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. The
1997 Award Shares will be forfeited and returned (at the rate of one shares
per $2.8125) to the Company to the extent the Note is not paid on or before
its maturity; accordingly, the number of shares owned by Ms. Anderson-Lasko
could decrease in the future.
Also includes 300,000 shares subject to exercisable options pursuant to a
400,000 option grant of nonqualified options made in June 2001 with an
exercise price of $1.25 per share and expiring June 5, 2005.
(5) Includes 120,000 shares subject to exercisable options at an exercise price
of $3.315 per share and expiring August 2002.
(6) Includes 100,543 shares subject to currently exercisable options and
750,000 shares subject to currently exercisable warrants with a 3-year term
expiring October 2003 and an exercise price of $2.10 per share.
Also includes 150,000 shares subject to exercisable options pursuant to a
200,000 option grant of nonqualified options made in June 2001 with an
exercise price of $1.25 per share and expiring June 5, 2005.
(7) Includes 75,543 shares subject to currently exercisable options expiring
February 2004 and with an exercise price of $4.75 per share.
(8) Includes 10,000 shares of common stock owned by the wife of Joseph
Mizrachi, Cheryl Mizrachi through CJ Rahm, LP and includes 1,241,000
warrants to purchase shares of common stock (including 16,000 warrants
owned by the wife of Joseph Mizrachi, Cheryl Mizrachi through CJ Rahm, L.P.).
(9) Includes 25,164 shares subject to exercisable 20-year term options granted
under the Company's 2000 Director Stock Incentive Plan in lieu of cash
directors' fees with an exercise price of $0.39 per share. See "2000 Director
Stock Incentive Plan" below.
(10) Includes 500,000 shares as to which Mr. Dahan, President of the Joes
Jeans subsidiary, shares beneficial ownership and 153,809 shares subject to
options exercisable at a price of $1 per share until February 7, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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-Lasko purchased
250,000 shares of Common Stock (the "1997 Award Shares") with payment made by
the execution of a non-recourse note (the "Note") to the Company for the
exercise price of $2.8125 per share ($703,125 in the aggregate). The Note is
due, without interest, on April 30, 2002, and is collateralized by the 1997
Award Shares. Ms. Anderson-Lasko may 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-Lasko 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.
Sam Furrow and Affiliate Loans. During the period from January 1999 to
June 2000, Sam Furrow and affiliated companies made a total 24 loans in an
aggregate amount of $1,933,000 to the Company primarily to finance the
Company's import of product from the Orient and general operations. Each of
the loans was unsecured and provided for interest compounding annually at a
rate of from 8.5% to 10.0%. Most of the loans provided for a six-month term.
The Board of Directors determined in each instance that the loans were made
on fair terms and conditions that were more favorable to the Company than
could be obtained from third parties.
Of the amounts loaned by Sam Furrow and his affiliates, a total of
$1,200,000 has been exchanged for Common Stock as described below under "Debt
to Equity Conversions." As of December 15, 2000, all amounts owed by the
Company to Sam Furrow and affiliated companies has been paid off in its
entirety.
Dan Page Loans. During the period from February 1999 to March 1999, Dan
Page made a total five loans in an aggregate amount of $200,000 to the
Company primarily to finance the Company's import of product from the Orient
and general operations. Each of the loans was unsecured and provided for
interest compounding annually at a rate of from 10.0%. The loans provided for
a six-month term. The Board of Directors determined in each instance that the
loans were made on fair terms and conditions that were more favorable to the
Company than could be obtained from third parties.
All of the $200,000 loaned Dan Page to the Company has been exchanged for
Common Stock as described below under "Debt to Equity Conversions."
Debt to Equity Conversions. On February 26, 1999, Sam Furrow and Dan Page
each exchanged $150,000 of the indebtedness owed by the Company to him for
75,000 restricted shares of common stock, or a price of $2.00 per share. On
the date that the Company's Board of Directors approved the debt exchanges,
the average closing sale price for the Common Stock as reported by Nasdaq
for the prior 30 days was $2.00.
Jay Furrow acquired $50,000 of the indebtedness owed by the Company to Sam
Furrow on April 26, 1999 and exchanged that amount for restricted Common
Stock at a price of $1.00 per share on that date. On the same date, a third
party acquired $50,000 of the indebtedness owed by the Company to Dan Page
and exchanged that amount for restricted Common Stock at a price of $1.00 per
share. On the date that the Company's Board of Directors approved those debt
exchanges, the average closing sale price for the Common Stock as reported by
Nasdaq for the prior 15 days was $1.43.
On February 28, 2000, Sam Furrow exchanged $500,000 of the indebtedness
owed by the Company to him for 423,729 restricted shares of common stock, or
a price of $1.18 per share. On the date that the Company's Board of Directors
approved the debt exchange, the closing sale price for the Common Stock as
reported by Nasdaq was $1.15.
On August 11, 2000, Sam and Jay Furrow converted $1 million of outstanding
Company debt owed to third parties that it had previously assumed and an
additional $500,000 of Company debt that was previously owed to the Furrows
for 1,363,637 shares of common stock, or $1.10 per share, and warrants to
purchase 1,500,000 shares of Common Stock that have a three-year term and an
exercise price of $2.10 per share. The debt conversion to equity had been
required by the Commerce Group as a condition to making their Phase I
investment in th e Company. The Furrows have also agreed to make the
issuance of the purchased warrants subject to stockholder approval.
The $1.0 million of converted debt that had been assumed by the Furrows
and that had previously been guaranteed by him consisted of $650,000 owed to
Commerce Capital, Inc., a Nashville, Tennessee based finance company
unrelated to the Commerce Group, and $350,000 owed to First Independent Bank
of Gallatin.
With respect to each of the debt to equity conversions discussed above,
the Board of Directors determined that the purchases of Common Stock were
made on fair terms and conditions and were in the Company's best interests
in order to increase the Company's net tangible assets for Nasdaq listing
compliance purposes and considering recent trading prices and a reasonable
discount due to the restricted nature of the issued shares. All of the
shares issued pursuant to the debt conversions were subject to registration
rights, and resales of all of such shares are now subject to effective
registration statements.
Facility Lease Arrangements. On October 7, 1998, the Company entered into
a Warehouse Lease Agreement with Furrow-Holrob Development II, LLC pursuant
to which the Company leased 78,900 square feet of production and office
space. The "triple net" lease provided for an annual base rental rate of
$2.00 per square foot, or $157,800 annually, plus a pro rata share of real
estate taxes, insurance premiums and common area expenses, with an initial
five-year term and two Company five-year renewal options (subject to
agreement on any change in the base rental rate). The Board of Directors,
with Mr. Furrow excusing himself from deliberations and not voting,
unanimously approved the Warehouse Lease greement. The agreement was
terminated on July 1, 2000 pursuant to the Company's restructuring in 2000.
New Facility Lease Arrangements. The Company has entered into a new lease
for space with a company owned by Sam Furrow. The space is approximately
5,000 square feet consisting of the first floor of a two-story building
located in downtown Knoxville, Tennessee, with a monthly rental of $3,500
triple net.
Commerce Investment Group. Commerce Investment Group is a related party
to the Company as a result of the fact that Commerce Investment Group,
directly or indirectly, owns more than 10% of the Company's outstanding
common stock. Pursuant to the supply and distribution agreements entered
into with Commerce Investment Group and its affiliates, the Company in 2001
purchased $5,216,000 of the goods its sold to customers from Commerce. In
addition, the Company paid $382,000 to a Commerce affiliate for the
distribution of the Company's products to its customers and $137,000 to
Commerce Investment Group for operational services. These services
included but where not limited to accounts receivable collections, certain
general accounting functions, inventory management and distribution
logistics. Additionally, this charge included the allocation associated
with the Company occupying space in Commerce's Commerce, CA facility and
the use of general business machines and communication services. The
Company from time to time will advance or loan funds to Commerce for use
in the production process of the Company's goods or for other
expenses associated with the Company's operations. The Company believes
that all the transactions conducted between the Company and Commerce
where completed on terms that where competitive and at market rates.
JD Design, LLC. Joe's, pursuant to the license agreement entered into
with JD Design, LLC underwhich the Company obtained the licensing rights
to Joe's Jeans, is obligated to pay Joe Dahan a 3% royalty on the net sales
of all products bearing the Joe's Jeans or JD trademark or logo. For
fiscal 2001, this amount totaled $46,000.
Azteca Production International, Inc. In the third quarter of fiscal 2001,
the Company acquired Azteca Productions International, Inc.'s knit division
and formed the subsidiary Innovo-Azteca Apparel, Inc.. Pursuant to equity
transactions completed in 2000, the principals of Azteca Production
International, Inc. became affiliates of the Company. 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. As consideration, the Company 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. Reference is made to the Index to
Financial Statements and Schedule on age F-1 for a list of financial
statements and the financial statement schedule filed as part of this
report. All other schedules are omitted because they are not applicable
or the required information is shown in the Company's financial statements
or the related notes thereto.
(b) Reports on Form 8-K
On September 10, 2001, the Company filed a Current Report on Form 8-K
reporting completion of the first phase of a two phase acquisition of
Azteca Production International Inc.'s ("Azteca") kint apparel division.
On November 7, 2001, the Company filed an amendment to its Current
Report on Form 8-K filed on September 10, 2001, to include financial
statements of the Knit Division of Azteca International, Inc., as
required by Item 7(a) Financial Statements of Business Acquired.
(c) Exhibits
Exhibit Reference
Number Description No.
3.1 Fifth of Amended and Restated Certificate
of Incorporation of Registrant. 10.73
3.2 Amended and Restated Bylaws of Registrant.* 4.2(5)
4.1 Article Four of the Registrant's Amended and
Restated Certificate of Incorporation (included in Exhibit 3.1)*
10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2)
10.3 Note executed by NASCO, Inc. and payable to
First Independent Bank, Gallatin, Tennessee
in the principal amount of $950,000 dated
August 6, 1992.* 10.21 (2)
10.4 Deed of Trust between NASCO, Inc. and First
Independent Bank, Gallatin, Tennessee dated
August 6, 1992.* 10.22 (2)
10.5 Authorization and Loan Agreement from the
U.S. Small Business Administration, Nashville,
Tennessee dated July 21, 1992.* 10.23 (2)
10.6 Indemnity Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee.* 10.24(2)
10.7 Compliance Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee
dated August 6, 1992.* 10.25 (2)
10.8 Assignment of Life Insurance Policy issued
by Hawkeye National Life Insurance Company
upon the life of Patricia Anderson-Lasko to
First Independent Bank, Gallatin, Tennessee
dated July 31, 1992.* 10.26 (2)
10.9 Guaranty of Patricia Anderson-Lasko on behalf
of NASCO, Inc. in favor of First Independent
Bank, Gallatin, Tennessee dated August 6, 1992.* 10.27 (2)
10.10 Guaranty of Innovo Group Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.28 (2)
10.11 Guaranty of Innovo, Inc. on behalf of NASCO,
Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.29 (2)
10.12 Guaranty of NASCO Products, Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.30 (2)
10.22 Form of Common Stock Put Option.* 10.61 (6)
10.28 License Agreement dated January 24, 1994
between NFL Properties Europe B.V. and NASCO
Marketing, Inc.* 10.66 (9)
10.29 License Agreement dated July 7, 1997 between
National Football League Properties, Inc. and
Innovo Group Inc.
10.32 Form of Amendment to Common Stock Put Option.* 10.72 (9)
10.33 Agreement dated July 31, 1995 between NASCO
Products, Inc. and Accessory Network Group, Inc.* 10.1 (11)
10.36 License Agreement dated August 9, 1995 between
Innovo, Inc. and NHL Enterprises, Inc.* 10.49 (12)
10.37 License Agreement dated August 9, 1995 between
NASCO Products International, Inc. and NHL
Enterprises, B.V.* 10.50 (12)
10.38 License Agreement dated December 15, 1995
between Major League Baseball Properties, Inc.
and Innovo Group Inc.* 10.51 (12)
10.39 License Agreement dated October 6, 1995
between Major League Baseball Properties
and NASCO Products International, Inc.* 10.52 (12)
10.40 omitted
10.41 omitted
10.42 Merger Agreement dated April 12, 1996 between
Innovo Group Inc. and TS Acquisition, Inc.
and Thimble Square, Inc. and the Stockholders
of Thimble Square, Inc.* 10.1 (13)
10.43 Property Acquisition Agreement dated
April 12, 1996 between Innovo Group Inc.,
TS Acquisition, Inc. and Philip Schwartz
and Lee Schwartz.* 10.2 (13)
10.45 License Agreement between Innovo Group Inc.
and Warner Bros. dated June 25, 1996.* 10.45(15)
10.46 License Agreement between Innovo Group Inc.
and Walt Disney dated September 12, 1996.* 10.46(15)
10.47 Indenture of Lease dated October 12, 1993
between Thimble Square, Inc. and Development
Authority of Appling County, Georgia* 10.47(15)
10.48 Lease dated October 1, 1996 between Innovo,
Inc. and John F. Wilson, Terry Hale, and
William Dulworth* 10.48(15)
10.49 Incentive Stock Option between Samuel J. Furrow, Jr.
and Innovo Group Inc.* 10.49(16)
10.50 Incentive Stock Option between Samuel J. Furrow
and Innovo Group Inc.* 10.50(16)
10.51 Incentive Stock Option between Robert S. Talbott
and Innovo Group Inc.* 10.51(16)
10.53 Manufacturing and Distribution Agreement between
Nasco Products International and Action Performance
Companies, Inc.* 10.53(16)
10.56 Sale Agreement of property in Pembroke, GA between
Thimble Square and H.N. Properties, L.L.C.* 10.56(16)
10.57 Lease Agreement between Furrow-Holrob Development,
L.L.C. and Innovo Group, Inc.* 10.57(16)
10.59 Promissory Note dated October 29, 1999 between
Innovo Group Inc and Samuel J. Furrow* 10.59(17)
10.60 Promissory Note dated November 22, 1999 between
Innovo Group Inc and Samuel J. Furrow* 10.60(17)
10.61 License Agreement with Roundhouse* 10.61(17)
10.62 License Agreement with Paws, Inc.* 10.62(17)
10.63 Commerce Investment Group, LLC Common Stock
and Warrant Purchase Agreement* 10.63(18)
10.64 Commerce Investment Group, LLC Purchase Warrant
Agreement* 10.64(18)
10.65 Investor Rights Agreement pertaining to the
Commerce Investment Group, LLC Common Stock and
Warrant Purchase Agreement* 10.65(18)
10.66 Commerce Investment Group, LLC Purchase Warrant
Agreement* 10.66(18)
10.67 Legal Opinion of Sims, Moss, Kline and
Davis, LLP* 10.67(18)
10.68 Business Plan* 10.68(18)
10.69 Transfer Instructions pertaining to the delivery
of the Common Stock and Warrants purchased by
Commerce Investment Group, LLC* 10.69(18)
10.70 Disclosure Schedule* 10.70(18)
10.71 Samuel Furrow, Jr. Stock Purchase Agreement 10.71(18)
10.72 Samuel Furrow, Sr. Common Stock Purchase Agreement10.72(18)
10.73 Fifth of Amended and Restated Certificate
of Incorporation of Registrant 10.73
10.74 Mizrachi Group Stock Purchase Agreement 10.74
10.75 Mizrachi Group Investor Rights Agreement 10.75
10.76 Mizrachi Group Warrant Agreement A 10.76
10.77 Mizrachi Group Warrant Agreement B 10.77
10.78 Mizrachi Group Transaction Disclosure Schedule 10.78
10.79 JD Design, LLC Common Stock and Warrant Purchase
Agreement 10.79 (20)
10.80 JD Design, LLC Stock Purchase Warrant 10.80 (20)
10.81 Employment Agreement, Joe Dahan 10.81(20)
10.82 Option Agreement, Joe Dahan 10.82 (20)
10.83 Joe's Jeans Licensing Agreement 10.83 (20)
10.84 Innovo-Azteca Apparel, Inc. Purchase Agreement 2.1 (21)
21 Subsidiaries of the Registrant* 21 (13)
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Ernst & Young, LLP
_________________________
* Certain of the exhibits to this Report, indicated by an asterisk, are
incorporated by reference to other documents on file with the Securities and
Exchange Commission with which they were physically filed, to be part hereof as
of their respective dates. Documents to which reference is made are as follows:
(1) Amendment No. 4 Registration Statement on Form S-18 (No. 33-25912-NY) of
ELORAC Corporation filed October 4, 1990.
(2) Amendment No. 2 to the Registration Statement on Form S-1 (No. 33-51724)
of Innovo Group Inc. filed November 12, 1992.
(3) Annual Report on Form 10-K of Innovo Group Inc. (file no. 0-18926) for the
year ended October 31, 1993.
(4) Current Report on Form 8-K of Innovo Group Inc. (file no. 0-18926) dated
May 10, 1993 filed May 25, 1993.
(5) Registration Statement on Form S-8 (No. 33-71576) of Innovo Group Inc.
filed November 12, 1993.
(6) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the
year ended October 31, 1993.
(7) Amendment No. 2 to the Registration Statement on Form S-1 (No. 33-77984)
of Innovo Group Inc. filed July 25, 1994.
(8) Amendment No. 4 to the Registration Statement on Form S-1 (No. 33-77984)
of Innovo Group Inc. filed August 18, 1994.
(9) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the
year ended October 31, 1994.
(10) Registration Statement on Form S-8 (No. 33-94880) of Innovo Group Inc.
filed July 21, 1995.
(11) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated
July 31, 1995 filed September 13, 1995.
(12) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the
year ended October 31, 1995.
(13) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated
April 12, 1996, filed April 29, 1996.
(14) Registration Statement on Form S-1 (No. 333-03119) of Innovo Group Inc.,
as amended June 28, 1996.
(15) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the
year ended November 30, 1996.
(16) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the
year ended November 30, 1998.
(17) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the
year ended November 30, 1999.
(18) Current Report on Form 8-K/A of Innovo Group Inc. (file 0-18926) dated
September 15, 2000.
(19) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the
year ended November 30, 2000.
(20) Quarterly Report on Form 10-Q of Innovo Group Inc. (file 0-18926) dated
April 15, 2001.
(21) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated
September 10, 2001.
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.
By: /s/ Patricia Anderson
---------------------
Pat Anderson
Chief Executive Officer
March 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Signature and Title Date
/s/ Patricia Anderson-Lasko March 1,2002
- ---------------------------
Patricia Anderson-Lasko
Chief Executive Officer
and Director
/s/Samuel J. Furrow, Sr. March 1,2002
- ------------------------
Samuel J. Furrow, Sr.
Chairman of the Board and Director
/s/ Samuel J. Furrow, Jr. March 1,2002
- -------------------------
Samuel J. Furrow, Jr.
President, Acting CFO and Director
/s/ Marc B. Crossman March 1,2002
- --------------------
Marc B. Crossman
Director
/s/ Daniel Page March 1,2002
- ---------------
Daniel Page
Director
/s/ Dr. John Looney March 1,2002
- -------------------
Dr. John Looney
Director
Innovo Group and Subsidiaries
Index to Consolidated Financial Statements
Audited Financial Statements: Page
Report of Independent Auditors, Ernst & Young LLP F-2
Report of Independent Auditors, BDO Seidman, LLP F-3
Consolidated Balance Sheets at December 1, 2001 and
November 30, 2000 F-4
Consolidated Statements of Operations for the years ended
December 1, 2001, and November 30, 2000 and 1999 F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 1, 2001, and November 30, 2000
and 1999 F-7
Consolidated Statements of Cash Flows for the years ended
December 1, 2001, and November 30, 2000 and 1999 F-9
Notes to Consolidated Financial Statements F-11
Schedule II - Valuation of Qualifying Accounts F-42
Report of Independent Auditors
Board of Directors
Innovo Group Inc.
We have audited the accompanying consolidated balance sheets of Innovo Group
Inc. and subsidiaries as of December 1, 2001 and November 30, 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 1, 2001 and November 30, 2000. Our audits
also included the financial statement schedule listed in the index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innovo Group
Inc. and subsidiaries as of December 1, 2001 and November 30, 2000 and the
consolidated results of their operations and their cash flows for the years
ended December 1, 2001 and November 30, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Los Angeles, California
February 8, 2002
Report of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Innovo Group Inc. and subsidiaries
for the year ended November 30, 1999. We have also audited the accompanying
schedule of valuation and qualifying accounts as of and for the year ended
November 30, 1999. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements and schedule. We belive
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Innovo Group Inc. and subsidiaries for the
year ended November 30, 1999, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Atalanta, Georgia
January 13, 2000, except for Notes 11 and 14,
as to which the date is March 8, 2000
Innovo Group Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
December 1, November 30,
2001 2000
---- ----
Assets
Current assets:
Cash and cash equivalents $ 292 $ 1,179
Accounts receivable and due from factor,
net of allowance for uncollectible accounts
of $164 (2001) and $36 (2000) 1,466 712
Inventories 2,410 3,343
Prepaid expenses and other assets 180 94
------ -------
Total current assets 4,348 5,328
Property, plant and equipment, net 973 56
Assets held for sale -- 2,028
Intangible assets, net 4,926 --
Other assets -- 4
------ ------
Total assets $10,247 $ 7,416
------ ------
------ ------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 697 $ 1,761
Due to related parties 806 108
Notes payable -- 449
Current maturities of long-term debt 845 94
------ ------
Total current liabilities 2,348 2,412
Long-term debt, less current maturities 3,380 1,246
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value:
Authorized shares - 5,000
Issued and outstanding shares - none -- --
Common stock, $0.10 par value:
Authorized shares - 40,000
Issued and outstanding shares - 14,921 (2001)
and 13,721 (2000) 1,491 1,371
Additional paid-in capital 40,277 38,977
Accumulated deficit (34,079) (33,461)
Promissory note - officer (703) (703)
Treasury stock (2,467) (2,426)
------ ------
Total stockholders' equity 4,519 3,758
------ ------
Total liabilities and stockholders' equity $10,247 $ 7,416
------ ------
------ ------
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended
December 1 November 30
2001 2000 1999
---- ---- ----
Net sales $ 9,292 $ 5,767 $10,837
Cost of goods sold 6,333 5,195 6,252
------ ------ ------
Gross profit 2,959 572 4,585
Operating expenses:
Selling, general and administrative 3,191 4,147 4,963
Restructuring and other charges:
Asset impairment -- 600 145
Termination of capital lease -- -- 293
Other -- 116 --
Depreciation and amortization 167 250 287
------ ------ ------
3,358 5,113 5,688
------ ------ ------
Loss from operations (399) (4,541) (1,103)
Interest expense (211) (446) (517)
Other income (expense), net 81 (69) 279
------ ------ ------
Loss before income taxes and
extraordinary item (529) (5,056) (1,341)
Income taxes 89 -- --
------ ------ ------
Loss before extraordinary item (618) (5,056) (1,341)
Loss on early extinguishments of debt -- (1,095) --
------ ------ ------
Net loss and comprehensive loss $ (618) $(6,151) $(1,341)
------ ------ ------
------ ------ ------
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Operations (continued)
(In thousands, except per share data)
Year ended
December 1 November 30
2001 2000 1999
---- ---- ----
Loss per share - basic and diluted:
Loss before extraordinary items $ (.04) $ (0.62) $ (0.22)
Extraordinary item -- (0.13) --
------ ------ ------
Net loss $ (.04) $ (0.75) $ (0.22)
------ ------ ------
------ ------ ------
Weighted average shares outstanding -
basic and diluted 14,315 8,163 5,984
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except number of shares)
Additional Promissory Total
Common Stock Paid-in Accumulated Note Treasury Stockholders'
Shares Par Value Capital Deficit Officer Stock Equity
------ --------- ------- ------- ------- ------ ------
Balance, November 30, 1998 5,387,113 $ 538 $ 30,282 $(25,969) $ (703) $(2,426) $ 1,722
Issuance of common stock:
Issuance for compensation 45,919 5 59 -- -- -- 64
Issuance for debt service 45,000 4 89 -- -- -- 93
Issuance for debt conversion 250,000 25 375 -- -- -- 400
Issuance for cash 571,000 57 735 -- -- -- 792
Net loss -- -- -- (1,341) -- -- (1,341)
--------- ------ ------- ------ ------- ------ ------
Balance, November 30, 1999 6,299,032 629 31,540 (27,310) (703) (2,426) 1,730
Issuance of common stock for debt
conversion 1,787,365 179 1,821 -- -- -- 2,000
Sale of common stock, net of
offering expenses of $216 5,634,867 563 4,521 -- -- -- 5,084
Issuance of warrants -- -- 1,095 -- -- -- 1,095
Net loss -- -- -- (6,151) -- -- (6,151)
--------- ----- ------ ----- ------ ------ ------
Balance, November 30, 2000 13,721,264 1,371 38,977 (33,461) (703) (2,426) 3,758
Issuance of common stock for
acquisitions 1,200,000 120 1,249 -- -- -- 1,369
Common stock offering expenses -- -- (35) -- -- -- (35)
Expense associated with options
and warrants -- -- 86 -- -- -- 86
Treasury stock purchased -- -- -- -- -- (41) (41)
Net loss -- -- -- (618) -- -- (618)
---------- ----- ------ ----- ------ ------ ------
Balance, December 1, 2001 14,921,264 $1,491 $40,277 $(34,079) $ (703) $(2,467) $ 4,519
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended
December 1 November 30
2001 2000 1999
---- ---- ----
Operating activities
Net loss $ (618) $(6,151) $(1,341)
Adjustment to reconcile net loss
to cash used in operating activities
from continuing operations:
Loss from discontinued operations -- -- 1
Loss on early extinguishments of debt -- 1,095 --
Stock options and warrants issuanced
for services and compensation 86 -- 64
Loss on disposal of fixed assets 2 99 --
Depreciation and amortization 167 250 287
Asset impairment -- 600 145
Change in allowance for bad debt 128 (117) 86
Termination of capital lease -- -- 293
Changes in current assets and
liabilities:
Accounts receivable (882) 566 (539)
Inventories 933 (1,375) (867)
Prepaid expenses and other (86) 45 264
Accounts payable and accrued
expenses (1,064) 282 (473)
Due to related parties 698 108 --
Other 4 -- (44)
----- ----- -----
Cash used in operating activities of
continuing operations (632) (4,598) (2,124)
Cash used in operating activities of
discontinued operations -- -- (11)
----- ----- -----
Net cash used in operating activities (632) (4,598) (2,135)
Investing activities
Capital expenditures (61) (76) (161)
Net proceeds from sale of fixed assets 1,082 43 246
Purchase of Knit Division (36) -- --
----- ----- -----
Cash provided by (used in) investing
activities 985 (33) 85
Financing activities
Additional borrowings -- 1,420 710
Repayments of notes payable and
long-term debt (1,164) (644) (530)
Treasury stock purchases (41) -- --
Proceeds from issuance of common stock,
net (35) 5,034 792
----- ------ -----
Net cash (used in) provided by financing
activities (1,240) 5,810 972
----- ----- -----
Net (decrease) increase in cash and cash
equivalents (887) 1,179 (1,078)
Cash and cash equivalents, at beginning
of year 1,179 -- 1,078
----- ----- -----
Cash and cash equivalents, at end of
year $ 292 $1,179 $ --
----- ----- -----
----- ----- -----
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 110 $ 415 $ 493
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 1, 2001
1. Business Description
Innovo Group Inc. (the Company) is a holding company, the principal assets of
which are its wholly owned operating subsidiaries, Innovo, Inc. (Innovo), Joe's
Jeans, Inc. (Joe's) and Innovo Azteca Apparel, Inc. (IAA) . The Company also
operated one other subsidiary, NASCO Products International, Inc. (NP
International) which ceased operations in 2000.
Innovo designs, markets, sources and distributes fashion and sports licensed
nylon and canvas bags and products, for the retail, premium and advertising
specialty markets. Under licensing agreements, the Company's sports lines
feature the designs of major sports leagues and collegiate teams. The Company's
primary customers include major retailers such as Wal-Mart, Michael's, Hobby
Lobby, Dollar General, Goody's and Joanne's.
Joe's designs, markets and sources high end apparel products which are sold for
better retailer and specialty boutiques. IAA designs, markets and sources knit
tops and other general apparel items which are sold to retailers or to branded
apparel distributors.
The Company operates in two business segments. Sales to the top two customers
accounted for 25% and 23%, of the Company's net gross sales in fiscal 2001; and
the top two customers accounted for 42% and 11%, respectively of the
Company's net gross sales, in fiscal 2000; and the top two customers
accounted for 27.1% and 27%, respectively of the Company's net sales in
fiscal 1999.
During fiscal year 2001, the Company changed its fiscal year end from November
30 of each year to the Saturday closest to November 30. For fiscal year 2001,
the year ended on December 1, 2001.
Restructuring of Operations
During fiscal 2000, the Company restructured its operations to focus on its
core product categories with the highest volume and profit margin. The Company
also raised additional working capital and converted certain indebtedness to
equity (see Note 14). The restructuring was undertaken as a condition to the
equity investment by Commerce Investment Group, LLC (Commerce), a strategic
investment partner (see Note 11). In an effort to reduce product costs and
increase gross profit, the Company shifted manufacturing to third-party
foreign manufacturers and has outsourced the distribution function to Commerce
to increase the effectiveness of the distribution network and reduce freight
costs. In September 2000, the Company completed the closure of its Knoxville,
Tennessee, manufacturing and distribution operations and realigned these
functions in accordance with terms under certain s upply and distribution
agreements with Commerce.
These agreements provide for Commerce or its designated affiliates to
manufacture and supply specified products to the Company at agreed upon
prices. In addition, Commerce provides distribution services to the Company
for an agreed upon fee, including warehousing, shipping and receiving,
storage, order processing, billing, customer service, information systems,
maintenance of inventory records, and all direct labor and management
services. These agreements, which expire in 2002, may be renewed for
consecutive two-year terms unless terminated by either party with 90 days
notice. Purchases of goods and services during the initial term are subject
to a minimum of $3,000,000 (see Note 14). No minimum obligation is required
for the renewal periods. Purchase prices for goods and services for
subsequent periods will be renegotiated in good faith at the time of renewal
based on increases in material and labor costs.
Pursuant to the Commerce transaction and related agreements, the Company
relocated its distribution operations to Los Angeles, California, and
transitioned its manufacturing needs to Mexican production facilities
operated by an affiliate of Commerce. The Company continues to maintain a
small sales and administrative staff in Knoxville.
In addition to the forgoing, the Company also terminated the operations of
NP International during fiscal 2000, which had been profitable and approved
a plan to dispose of certain real property which was not central to the
Company's ongoing operations.
In connection with these restructuring activities, the Company incurred
certain one-time charges. These charges include loss on disposal of fixed
assets, salaries and other costs to exit the Knoxville operations,
relocation costs, loss on inventory liquidation and impairment charges
related to real properties held for disposal. Inventory liquidation losses
totaling $300,000 are included in cost of goods sold and the loss on sale of
fixed assets of $99,000 is included as a component of other expense in the
accompanying consolidated statements of operations for the year ended
November 30, 2000. The remaining charges have been included in Restructuring
and other charges in the accompanying consolidated statements of operations
for the year ended November 30, 2000.
The Company has experienced recurring operating losses and negative cash
flows from operations in recen t years. It is dependent on credit
arrangements with suppliers and factoring agreements for working capital
needs. From time to time, the Company has obtained short-term working
capital loans from senior members of the management and the Board of
Directors, and conducted equity financing through private placements (see
Notes 11 and 14).
Based on the foregoing, the investments by Commerce and other investors,
and the anticipated operating results of the Company, including the results
of the acquisition of Joe's and IAA during the year ended December 1, 2001,
the Company believes that existing working capital is sufficient to fund
operations and required debt reductions during fiscal 2002. Management also
believes that any additional capital, to the extent needed, could be
obtained from the sale of equity securities or short-term working capital
loans. In addition to the restructuring activities discussed above,
management continues to take steps to improve profitability and liquidity
by introducing new products lines, and by endeavoring to control and
minimize fixed costs.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant estimates
affect the evaluation of contingencies, and the determination of
allowances for accounts receivable and inventories. Actual results could
differ from these estimates.
Revenue Recognition
Revenues are recorded on the accrual basis of accounting when the
Company ships products to its customers. Sales returns must be approved
by the Company and are typically only allowed for damaged goods. Such
returns have historically not been material.
During the years ended December 1, 2001 and November 30, 2000, allowances
for co-op and other advertising programs when calculated as a percentage
of sales to a customer have been recorded as a reduction of gross sales.
In prior years all advertising allowances were recorded as a components
of selling, general and administrative expenses.
Shipping and Handling Costs
During the year ended November 30, 2000, the Company outsourced its
distribution function to Commerce. Shipping and handling costs include
costs to warehouse, pick, pack and deliver inventory to customers. In
certain cases the Company is responsible for the cost of freight to
deliver goods to the customer. Shipping and handling costs were
approximately $172,000 for the year ended December 1, 2001, and are
included in selling, general and administrative expenses.
Loss Per Share
Loss per share is computed using weighted average common shares and
dilutive common equivalent shares outstanding. Potentially dilutive
securities consist of outstanding options and warrants. Potentially
dilutive securities have been excluded from the calculation of the
diluted loss per share for the three years ended December 1, 2001 as
their effect would have been anti-dilutive.
Advertising Costs
Advertising costs are expensed as incurred, except for brochures and
catalogues which are capitalized and amortized over their expected
period of future benefits. Catalogues and brochures are included in
prepaid expenses and other current assets. Advertising expenses included
in selling, general and administrative expenses were approximately
$114,000 and $8,000 for the periods ended December 1, 2001 and
November 30, 2000, respectively.
Financial Instruments
The fair values of the Company's financial instruments (consisting of
cash, accounts receivable, accounts payable, notes payable, long-term
debt and notes payable) do not differ materially from their recorded
amounts because of the relatively short period of time between
origination of the instruments and their expected realization.
The Company neither holds, nor is obligated under, financial instruments
that possess off-balance sheet credit or market risk.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. During the years ended
November 30, 2000 and 1999, the Company recorded impairment charges of
$600,000 and $145,000, respectively, related to certain real and
personal properties (see Note 3).
Cash Equivalents
The Company considers all highly liquid investments that are both
readily convertible into known amounts of cash and mature within 90
days from their date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
accounts receivable and amounts due from factor. The Company maintains
cash and cash equivalents with various financial institutions. Its
policy is designed to limit exposure to any one institution. The
Company performs periodic valuations of the relative credit rating of
those financial institutions that are considered in the Company's
investment strategy.
Concentrations of credit risk with respect to accounts receivable are
limited due to the number of customers comprising the Company's
customer base. However, at December 1, 2001, $535,000 of total non-
factored accounts receivables, (or 57%) were due from four customers.
The Company does not require collateral for trade accounts receivable,
and, therefore, can be at risk for up to $949,000 if these customers
fail to pay. The Company provides an allowance for estimated losses to
be incurred in the collection of accounts receivable. Such losses have
been within management's expectations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed on a straight-line basis over the estimated useful lives of
the assets and includes capital lease amortization. Leasehold
improvements are amortized over the lives of the respective
leases or the estimated service lives of the improvements, whichever
is shorter. Routine maintenance and repairs are charged to expense as
incurred. On sale or retirement, the asset cost and related
accumulated depreciation or amortization are removed from the
accounts, and any related gain or loss is included in the
determination of income.
Reclassifications
Certain reclassifications have been made to prior year consolidated
financial statements to conform to the current year presentation.
Recently Issued Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, (FAS 141) and No. 142, (FAS 142), "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after
December 1, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will
be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized
over their useful lives.
The Company has applied the non-amortization provisions of FAS 141
for acquisitions occurring after June 30, 2001 and will apply the
provisions of the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002.
Application of the non-amortization provisions of the Statement is
not expected to result in a material change to net income. During
2002, the Company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets and has not
yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This standard sets
forth the impairment of long-lived assets, whether they are held
and used or are disposed of by sale or other means. It also broadens
and modifies the presentation of discontinued operations. The
standard will be effective for the Company's fiscal year 2003,
although early adoption is permitted, and its provisions are
generally to be applied prospectively. The Company is in the process
of evaluating the adoption of this standard, but does not believe it
will have a material impact on its consolidated financial
statements.
3. Acquisitions
On August 24, 2001, Innovo Group Inc. through its newly formed
subsidiary Innovo Azteca Apparel Inc. (IAA) completed the first phase
of a two phase acquisition (the Acquisition) of Azteca Production
International, Inc.'s (Azteca) knit apparel division (Knit Division).
Azteca is an affiliate of Commerce. Pursuant to the terms of the
first phase closing, the Company has 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 from August 24, 2001 through December 1,
2001.
The Acquisition was consummated to allow the Company to continue its
expansion into various segments of the apparel industry. The Company
believes that the acquisition of the Knit Division, its customer
list and certain personnel, will permit the Company to expand its
customer base and product offerings. 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 will be 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 fiscal years ended
December 1, 2001 and November 30, 2000 assuming the Acquisition had
occurred at the beginning of the respective year (in thousands):
(Unaudited) Pro Forma
Year Ended
December 1, November 30,
2001 2000
---------- -----------
Net sales $ 17,243 $ 23,649
Loss before extraordinary item $ (406) $ (3,589)
Net loss $ (406) $ (4,684)
Loss per share:
Basic and diluted $ (0.03) $ (0.53)
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 last two fiscal years.
Joe's Jeans License
On February 7, 2001, the Company acquired the licensing rights to the Joe's
Jeans label from JD Design, LLC (JD), along with the right to market the
previously designed product line and existing sales orders, in exchange for
500,000 shares of the Company's common stock and, if certain sales
objectives are reached, a warrant, with a four year term, granting JD the
right to purchase 250,000 share of the Company's common stock at a price
of $1.00 per share. Additionally, the designer of the Joe's Jeans line,
joined the Company as an employee and has received an option, with a four
year term, to purchase 250,000 shares of the Company's common stock at $1.00
per share, vesting over 24 months. Under the terms of the license, the Company
is required to pay a royalty of 3% of net sales, with a dditional royalty
amounts due in the event the Company exceeds certain minimum sales and gross
profit thresholds. No additional royalty was required for the period ended
December 1, 2001.
The purchase price of $480,000 was determined based upon the fair value of the
500,000 shares issued in connection with the acquisition. The entire purchase
price was allocated to licensing rights which is being amortized over the 10
year term of the license.
Joe's Jeans did not have substantial operations prior to the acquisition by
the Company. The Company's acquisition of Joe's Jeans was done to allow the
Company to expand its apparel offerings and to broaden the Company's customer
base to include specialty boutiques and high end retail stores.
(e) Loss per share
Loss per share is computed using weighted average common shares and dilutive
common equivalent shares outstanding. Potentially dilutive securities
consist of outstanding options and warrants. Potentially dilutive securities
were not considered in the computation of weighted average common shares as
their effect would have been antidilutive.
On September 13, 1998 the Company declared a reverse stock split of which
one share of new Common Stock was exchanged for ten shares of old Common
Stock. All share and per share amounts have been restated to reflect the
effects of the reverse stock split.
Capitalization policy
Cost incurred in the issuance of debt securities or to obtain bank financing
are capitalized and are amortized as a component of interest expense using
the level yield method.
The Company charges to expense in the year incurred costs to develop new
products and programs. Amounts charged to expense approximated $24,000,
$2,000 and $182,000 in fiscal 1999, 1998 and 1997 respectively.
(g) Financial Instruments
The fair values of the Company's financial instruments (consisting of cash,
accounts receivable, accounts payable, notes payable, long-term debt and
notes payable officer) do not differ materially from their recorded
amounts.
The Company neither holds, nor is obligated under, financial instruments
that possess off-balance sheet credit or market risk.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities"; as amended, is effective for all fiscal years beginning
after June 15, 2000. This statement requires recognition of all
derivative contracts as either assets or liabilities in the balance
sheet and the measurement of them at fair value. If certain conditions
are met, a derivative may b e specifically designated as a hedge, the
objective of which is to match the timing of any gains or losses on the
hedge with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. Historically, the Company
has not entered into derivative contracts either to hedge existing risks
or for speculative purposes. The adoption of the new standard on
January 1, 2000 will not affect the Company's financial statements.
4. Inventories
Inventories are stated at the lower of cost, as determined by the first-
in, first-out method, or market. Inventories consisted of the following
(in thousands):
2001 2000
----- -----
Finished goods $ 2,535 $ 1,071
Raw materials -- 2,350
------ ------
2,535 3,421
Less allowance for
obsolescence and slow
moving items (125) (78)
------ ------
$ 2,410 $ 3,343
------ ------
------ ------
5. Accounts Receivable
Accounts receivable consist of the following (in thousands):
2001 2000
----- -----
Nonrecourse receivables
assigned to factor $ 681 $ --
Nonfactored accounts
receivable 949 748
Allowance for customer
credits and doubtful
accounts (164) (36)
----- -----
$1,466 $ 712
----- -----
----- -----
On June 1, 2001, the Company entered into accounts receivable factoring
agreements with the CIT Group, Inc. (CIT) which may be terminated with 60 days
notice by CIT, or on the anniversary date, by the Company provided 60 days
written notice is given. Under the terms of the agreement, the Company has the
option to factor receivables, with CIT on a non-recourse basis, provided that
CIT approves the receivable in advance. The Company may at its option also
factor non-approved receivables on a recourse basis. The Company continues to
be obligated in the event of product defects and other disputes, unrelated to
the credit worthiness of the customer. The Company has the ability to obtain
advances against factored receivables up to 85% of the face amount of the
factored receivables. The agreement calls 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.
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
Useful
Lives
(Years) 2001 2000
------ ---- ----
Building, land and improvements 8-38 $ 1,248 $ --
Machinery and equipment 5-10 120 --
Furniture and fixtures 3-8 163 83
Transportation equipment 5 13 13
Leasehold improvements 5-8 4 --
------ -----
1,548 96
Less accumulated depreciation and
amortization (575) (40)
----- -----
Net property, plant and equipment $ 973 $ 56
----- -----
----- -----
Depreciation expense aggregated $88,000 and $250,000 for the years ended
December 31, 2001 and November 30, 2000.
Assets held for sale consisted of the following (in thousands):
2001 2000
---- ----
Building, land and improvements $ -- $ 2,500
Less accumulated depreciation -- (472)
------ ------
Net assets held for sale $ -- $ 2,028
------ ------
------ ------
During fiscal 2000, the Company approved a plan to dispose of a retail
property in Lake Worth, Florida, and its former headquarters and
manufacturing facility in Springfield, Tennessee, via a third party
sale. In connection with the plan of disposal, the Company recorded a
charge of $600,000 in fiscal 2000 to reduce the carrying value of the
Florida property to its estimated market value less costs to sell.
During fiscal year 2000, the Company sold its property located in Lake
Worth, Florida for $1,175,000. The Company recorded a loss on the sale
of the property of approximately $3,000 after consideration of the net
book value, expenses associated with the property and property taxes.
During the fourth quarter of fiscal year 2001, the Company commenced
a project to make certain repairs and improvements to the Springfield
facility in an effort to increase the Company's ability to lease the
remaining portions of the facility. In connection with the project,
the Company determined that it will continue to attempt to lease the
remaining portions of the property and will manage the property for
the foreseeable future. The Company continues to have the property
listed for sale, but has not received suitable offers. Accordingly,
the Company intends to operate the property and no longer classifies
the property as held for sale. At December 1, 2001, the related
assets have been reclassified and are presented as components of
property, plant and equipment, with a cost after writedowns of
$1,248,000 and accumulated depreciation of $322,000.
The carrying value was net of a $145,000 charge recorded in 1999 to
reduce the then carrying value of the property to its fair value in
accordance with the provisions of SFAS No. 121.
During fiscal 1999, the Company terminated a capital lease on a
building in Baxley, Georgia. The Company wrote off the remaining net
book value of the capitalized lease and removed the remaining
capitalized lease obligation resulting in a net charge to operations
of $293,000.
7. Intangible Assets
Intangible assets resulting from acquisitions consist of the
following (in thousands):
2001 2000
---- ----
License rights $ 480 $ --
Covenant not to compete 250 --
---- ----
730 --
Accumulated amortization (75) --
---- ----
655 --
Goodwill 4,271 --
----- ----
$4,926 $ --
----- ----
----- ----
8. Notes Payable
Notes payable consist of the following (in thousands):
2001 2000
---- ----
Accounts receivable factoring facilities $ -- $ 411
Other -- 38
---- ----
$ -- $ 449
---- ----
---- ----
At November 30, 2001, the Company's principal credit facility for working
capital was its accounts receivable factoring arrangements. The Company
factored the accounts receivable of one specific customer with recourse
with Riviera Finance(Riviera) under an agreement effective July 1999.
Under this agreement, Riviera advanced the Company 75% of the face value
of each approved invoice, with 24% placed in a reserve account (for
potential returns and uncollectible amounts) and 1% retained by Riviera as
a fee. In addition to the 1% factoring fee, the Company payed a monthly fee
of 0.5% of the maximum account or $5,000. This agreement had a maximum
credit limit of $1,000,000 and was secured by the Company's tangible and
intangible assets. This agreement was terminated during 2001 and replaced
by the CIT agreement.
The Company also had another factoring facility with First American, which
was terminated in July 2000. This agreement was replaced by a factoring
facility with ING/KBK Acceptance Corporation (KBK), to provide financing for
invoices not factored under the Riviera arrangement. The KBK agreement provided
for factoring on 85% of the qualified receivables up to $5,000,000 on a non-
recourse basis. The Company was charged a 2% fee on every invoice funded in
addition to a per annum rate equal to KBK's base rate in effect on the date of
the purchase of the invoice plus 2%.
Notes payable consisted of the following:
November 30,
1999 1998
---- ----
(000's) (000's)
Accounts receivable factoring facility $ 510 $ 439
Bank credit facility 349 349
Other -- 126
Borrowings from Director 100 --
----- -----
$ 959 $ 914
As of November 30, 1999, the Company had outstanding borrowings from a
director totaling $100,000. This money was borrowed under two promissory
notes bearing interest at 10%. These notes are due on June 30, 2000.
Under a factoring facility with First American National Bank ("First
American"), First American advances 70% to 90% of approved invoices.
There is no established limit on the total facility. First American
charges Innovo 1% for the first 15 days an invoice is outstanding and
.05% per day thereafter until paid, up to a maximum of 6%. The facility
is secured by first position on accounts receivable and inventory. The
agreement with First American terminates upon thirty day written notice
from either party.
In July of 1999, the Company entered into an additional factoring
arrangement with Riviera Finance ("Riviera") for the factoring of a
specific customer's receivables. Under the agreement, Riviera advances
the company 75% for each approved invoice with 24% placed in a reserve
account and 1% retained by Riviera as a fee. In addition to the 1%
factoring fee, the Company pays a monthly fee of 0.5% of the maximum
account or $5,000. This agreement has a limit on borrowing of $1 million
and expires on July 20, 2000.
As of November 30, 1998, Thimble Square had a note payable to a local bank
that used the Pembroke, Georgia facility as collateral. This interest
rate was 2.75 basis points over the prime rate per annum. The loan
balance of approximately $126,000 was repaid when the Pembroke facility
was sold in December 1998.
In December 1997 the Company entered into a revolving line of credit with
a bank for $350,000 at a fixed rate of 9.5%. The line is secured by
equipment and the personal guarantees of certain members of management.
In December 1998, the Company renewed the line of credit through February
27, 2000 at an interest rate of 10.75%. The Company is currently in
negotiation with the lender to renew the line of credit.
The weighted average interest rate on outstanding short-term borrowings
was 11.4% and 11.1% at November 30, 1999 and 1998, respectively.
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
2001 2000
---- ----
First mortgage loan on Springfield
property $ 625 $ 673
Non-recourse first mortgage on
Florida property -- 667
Promissory note to Azteca 1,000 --
Promissory note to Azteca 2,600 --
----- ------
Total long-term debt 4,225 1,340
Less current maturities 845 94
----- -----
$3,380 $1,246
----- -----
----- -----
The first mortgage loan is collateralized by a first deed of trust
on real property in Springfield, Tennessee (with a carrying value
of $925,000 at December 1, 2001), and by an assignment of key-man
life insurance on the chief executive officer of the Company in
the amount of $1 million. The loan bears interest at 2.75% over
the lender's prime rate per annum (which was 7.50% and 9.50% at
December 1, 2001 and November 30, 2000, respectively) and requires
monthly principal and interest payments of $9,900 through February 2010.
The loan is also guaranteed by the Small Business Administration (SBA).
In exchange for the SBA guarantee, the Company, Innovo, NP International,
and the chief executive officer of the Company have also agreed to act
as guarantors for the obligations under the loan agreement.
In connection with the acquisition of the Lake Worth, Florida property,
the Company had an $800,000 first lien non-recourse mortgaged secured by
the property, which bore interest at 9.5% and required quarterly payments
of $25,500. In connection with the sale of the property in 2001, the note
was repaid.
In April 1998, the Company entered into a secured note with an unrelated
third party bank (Commerce Capital, Inc.) for $650,000 at a rate of 13.5%
per annum. In August 2000, the note was assumed by the Furrow Group, in
exchange for the issuance of the Company's common stock and warrants (see
Notes 11 and 14).
In connection with the acquisition of the Knit Division from Azteca (see
Note 3), the Company issued promissory notes in the face amounts of $1.0
million and $2.6 million, that bear interest at 8.0% per annum and require
monthly payments of $20,276 and $52,719, respectively. The notes have a
five-year term and are unsecured.
The $1.0 million note is subject to adjustment in the event that the
sales of the Knit Division do not reach $10.0 million during the 18
month term following the closing of the Acquisition. The principal
amount 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 months
following the Acquisition.
In the event that the Company determines, from time to time, at the
reasonable discretion of the Company's management, that its available
funds are insufficient to meet the needs of its business, the Company
may elect to defer the payment of principal due under the promissory
notes for as many as six months in any one year (but not more than three
consecutive months) and as many as eighteen months, in the aggregate,
over the term of the notes. The term of the notes shall automatically
be extended by one month for each month the principal is deferred, and
interest shall accrue accordingly.
At the election of Azteca, the balance of the promissory notes may be
offset against monies payable by Azteca or its affiliates to the Company
for the exercise of issued and outstanding stock warrants that are owned
by Azteca or its affiliates (including Commerce).
Principal maturities of long-term debt as of December 1, 2001 are
as follows (in thousands):
2002 $ 845
2003 754
2004 816
2005 884
2006 736
Thereafter 190
-----
Total $4,225
-----
-----
10. Income Taxes
No provision for federal income tax has been provided for the
last three fiscal years, as income tax benefits arising from net
operating losses are offset by corresponding increases in the deferred
tax asset valuation allowance. In 2001, the Company recorded a provision
of approximately $89,000 related to state income and franchise taxes.
Net deferred tax assets result from the following temporary differences
between the book and tax bases of assets and liabilities at
(in thousands):
2001 2000
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 66 $ 5
Inventory reserves 87 25
Benefit of net operating loss
carryforwards 7,163 6,002
----- -----
Gross deferred tax assets 7,316 6,032
Valuation allowance (7,316) (6,032)
----- -----
Net deferred tax assets $ -- $ --
----- -----
----- -----
The reconciliation of the effective income tax rate to the federal
statutory rate for the years ended is as follows (in thousands):
2001 2000 1999
---- ---- ----
Computed tax benefit at the
statutory rate (34)% (34)% (34)%
State income tax 18% -- --
Change in valuation allowance 34% 34% 34%
--- --- ---
18% -- --
--- --- ---
--- --- ---
The Company has consolidated net operating loss carryforwards of
approximately $39.8 million expiring through 2020. However, as the
result of "changes in control" as defined in Section 382 of the
Internal Revenue Code, a significant portion of such carryforwards
may be subject to an annual limitation. Such limitation would have
the effect of limiting to the future taxable income which the Company
may offset through the year 2014 through the application of its net
operating loss carryforwards.
11. Stockholders' Equity
Private Placements and Stock Issuance
During 2001, connection with the Acquisition of the Knit Division
from Azteca (see Note 3), the Company issued 700,000 shares of its
common stock, and in connection with the acquisition of the Joe's
Jeans license from JD, the Company issued 500,000 shares of the
Company's common stock and a warrant to purchase 250,000 shares of
the Company's common stock at a price of $1.00 per share.
During fiscal 2000, the Company issued 1,787,365 shares of common
stock and warrants to purchase an additional 1,500,000 shares of
common stock at $2.10 per share to the Furrow Group in exchange for
the Furrow Group's assumption of $1,000,000 of the Company's debt and
the cancellation of $1,000,000 of indebtedness owed to members of the
Furrow Group. The issuance of the shares of common stock and warrants
resulted in a $1,095,000 charge for the extinguishment of debt.
During fiscal 2000, the Company issued 592,040 shares of its common
stock and warrants to purchase an additional 102,040 shares at $1.75
per share to private investors for $600,000. In August and October
2000, the Company issued an aggregate of 2,863,637 shares of common
stock to Commerce for $3,000,000 in cash. In addition, Commerce
received warrants to purchase an additional 3,300,000 shares of common
stock with warrants for 3,000,000 shares of common stock exercisable
over a three-year period at $2.10 per share. The remaining warrants
for 300,000 shares of common stock are subject to a two-year vesting
period and can be exercised over a five-year period, once vested at
$2.10 per share. The proceeds have been used to purchase inventory
and services from Commerce and its affiliates and to repay certain
outstanding debt (see Note 14). In October and November 2000, the
Company issued an aggregate of 2,125,000 shares of common stock and
warrants to purchase an additional 1,700,000 shares of common stock
in private placements to JAML, LLC, Innovation, LLC and Third Millennium
Properties, Inc. (the Mizrachi Group) for $1,700,000 in cash. The
warrants expire three years from the date of issuance and are exercisable
at $2 per share.
During fiscal 1999, the Company issued an aggregate of 250,000 shares
of common stock to certain officers to extinguish $400,000 in outstanding
debt and issued 45,000 shares of common stock to certain vendors as payment
for payables in the amount of $91,564. The carrying value of the debt and
trade payables approximated the fair value of the shares exchanged. During
fiscal 1999, the Company also issued 571,000 shares of common stock to
several individual investors in a private placement for consideration of
$792,000.
Warrants
The Company has issued warrants in conjunction with various private
placements of its common stock, debt to equity conversions, acquisitions
and in exchange for services. All warrants are currently exercisable except
for 150,000 warrants issued to Commerce in October 2000 which vest over 24
months from the grant date. At December 1, 2001, outstanding common stock
warrants are as follows:
Exercise
Price Shares Issued Expiration
- ----- ------ ------ ----------
$1.80 7,407 September 1996 March 2002
$1.75 102,040 July 2000 August 2003
$2.10 4,800,000 October 2000 October 2003
$2.00 1,700,000 October 2000 October 2003
$1.00 250,000 February 2001 February 2005
$0.90 20,000 December 2000 December 2004
$1.50 100,000 March 2001 March 2004
$2.00 100,000 March 2001 March 2004
$2.50 50,000 March 2001 March 2004
All grants from 1996-2000 were made in connection with private placements
of the Company's common stock except for warrants to purchase 1,500,000
shares at $2.10 per share issued in October 2000. These warrants were issued
in connection with the extinguishment of the Company's indebtedness and were
valued at $.73 per share using the Black-Scholes model on the date of grant
(see Note 4).
During 2001, the Company issued a warrant to purchase 250,000 shares at a
price of $1.00 per share, in the event that certain future sales performance
criteria are met, (see Note 3).
During 2001, the Company also issued warrants to a company in exchange
for certain services. Warrants to purchase 20,000, 100,000, 100,000 and
50,000, shares exercisable at $0.90, $1.50, $2.00 and $2.50 per share,
respectively, which were vested on the date of issuance and have a term
of three years, were issued in exchange for services which are to
be rendered over a four-year term.
Stock Based Compensation
In March 2000, the Company adopted the 2000 Employee Stock Option Plan
(2000 Employee Plan). Incentive and nonqualified options for up to 1,000,000
shares of common stock may be granted to employees, officers, directors and
consultants. The 2000 Employee Plan limits the number of shares that can be
granted to any employee in one year and the total market value of common stock
which becomes exercisable for the first time by any grantee during a calendar
year. Exercise price for incentive options may not be less than the fair market
value of the Company's common stock on the date of grant and the exercise
period may not exceed ten years. Vesting periods and option terms are
determined by the Board of Directors. The 2000 Employee Plan will expire in
March 2010.
In September 2000, the Company adopted the 2000 Director Stock Incentive
Plan (2000 Director Plan), under which nonqualified options for up to 500,000
shares of common stock may be granted. Upon appointment to the board and
annually thereafter during their term, each director will receive options
for common stock with aggregate fair value of $10,000. These options are
exercisable beginning one year from the date of grant and expire in ten
years. Exercise price is set at 50% of the fair market value of the common
stock on the date of grant. The discount is in lieu of cash director fees.
The 2000 Director Plan will expire in September 2010.
During 1999, the Company issued options to purchase 457,500 shares of its
common stock to employees, officers and board members. No options were
granted in 2000.
During 2001, options were granted to purchase 832,564 shares of the
Company's common stock exercisable at $0.39 per share for members of
the Board of Directors and $1.00 to $1.25 per share for employees.
Exercise price is at or above the fair value of the
Stock Based Compensation (continued)
common stock on the date of grant and ranges from $0.39 to $4.75
per share. Options are subject to vesting periods of zero to 48
months. In addition, during April 1998, an option to purchase
25,000 shares was granted to an employee of Commerce Capital, Inc.
as additional collateral for the $650,000 loan to the Company. This
option expires in 2003.
The Company follows the guidance set forth in APB No. 25 as it
pertains to the recording of expenses from the issuance of incentive
stock options. The Company has adopted the disclosure-only provisions
of SFAS No. 123. Accordingly, no compensation expense has been recorded
in conjunction with options issued to employees. Had compensation cost
been determined based on the fair value of the options at the grant date
and amortized over the option's vesting period, consistent with the
method prescribed by SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below (in
thousands except per share information):
2001 2000 1999
---- ---- ----
Net loss - as reported $ (618) $(6,151) $(1,341)
Net loss - pro forma (1,072) (6,241) (1,687)
Net loss per common share -
as reported (.04) (0.75) (0.22)
Net loss per common share -
pro forma (.08) (0.76) (0.28)
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 2001, and 1999; expected volatility of
68% and 35%; risk-free interest rate of 6.0% and 6.17%; expected lives
from one to four years and expected dividends of 0%. The Black-Scholes
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Stock option activity during the periods indicated is as follows:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year 685,417 $ 3.89 685,417 $ 3.89 542,500 $ 3.68
Granted 832,564 1.06 -- -- 207,500 4.64
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- (64,583) 4.75
------- ----- ------- ----- ------- ----
Outstanding at end
of Year 1,517,981 $ 2.33 685,417 $ 3.89 685,417 $ 3.89
--------- ----- ------- ----- ------- -----
--------- ----- -------- ----- ------- -----
Exercisable at end
of year 1,305,443 541,667 462,917
--------- ------- -------
--------- ------- -------
Weighted average per
option fair value of
options granted
during the year $ 0.59 $ -- $ 1.70
Weighted average
contractual life
remaining 3.4 years
(a) Common Stock
On September 13, 1998, the Company's Board of Directors approved a
reverse one for ten stock split. All references to the number of
shares and price per share have been adjusted to reflect the reverse split.
In September 1993 the Company issued 18,976 shares of restricted common
stock to extinguish notes payable and accrued interest of $1,423,000. The
holders of such shares hold options ("put options") that allowed them, until
April, 1995, to require that the Company repurchase any or all of the shares
at a price of $75 per share. The put options continue to be exercisable at
$300 per share, in the event of certain "changes in control" not approved by
the board of directors. The put options grant the Company a right of first
refusal to purchase any of the related shares upon the payment of the same
price offered to the holders by another party. Also, the Company can cancel
the put options by paying nominal consideration.
On August 4, 1997, the Company's president exercised a stock purchase right
(the "Purchase Right") awarded her by the board of directors on February
12, 1997. The Purchase Right entitled her to purchase up to 400,000 shares
of the Company's common stock during the period April 30, 1997, to April 30,
2002 at a price of $2.81 per share. The president paid for the shares by the
delivery of a non-recourse promissory note, bearing no interest, due April
30, 2002. The promissory note is collateralized by the shares purchased
therewith, which shares would be forfeited to the extent the note is not
paid on or before maturity, and would be payable (including prepayable),
in whole or in part, by the delivery to the Company of (i) cash or (ii)
other shares of the Company's common stock that the president 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 Company's common
stock on the date of delivery. Any dividends or distributions made
with respect to shares collateralizing any unpaid note will be held in an
escrow to be established for such shares and note until such time, if any,
as the related promissory note is paid. In November 1997, 150,000 shares
subject to this Purchase Right were returned to the Company for a pro-rata
reduction in the note. Concurrently, the President relinquished any further
rights to such 150,000 shares of common stock. At November 30, 1999,
$703,000 remains outstanding under this promissory note. The promissory
note, and the shares securing it, have been pledged by the Company to secure
a $650,000 loan. See Note 6.
On August 13, 1997, the Company issued 675,000 shares of common stock to a
group of investors ("the Smith Group") for $1,350,000 pursuant to a stock
purchase agreement also dated August 13, 1997 between members of the Smith
group, the Company and Patricia Anderson-Lasko. Concurrent with the execution
of the stock agreement and in conjunction with employment agreements with key
executives, the Company granted 292,500 in non-qualified stock options to those
executives. Subject to vesting provisions, the options remain exercisable until
August, 2002 at a price of $3.315 per share.
As of November 30, 1999, the Company has outstanding common stock purchase
warrants as follows:
Class Exercise Price Shares Expiration
- ----- -------------- ------ ----------
H $5.20 77,576 August 2001
$1.80 7,407 March 2002
On October 8, 1998, the Company sold 899,000 shares of common stock in
a private placement to Furrow-Holrob Development II, L.L.C. for $1,798,000.
During 1998, the Company issued options to acquire 200,000 shares of common
stock to two members of the Board of Directors. These shares are exercisable
at $4.75 per share and vest at the rate of 2,083 per month for 48 months. As
of November, 30, 1999, total number of shares vested under these option
agreements was 79,167. These options were accounted for as employee grants.
The options were issued at prices equal to fair market value at the time of
the grant.
During December 1998, the Company issued 45,000 shares to certain vendors as
payment for payables in the amount of $91,564 which approximated the fair
value of the shares.
In February 1999, the Company issued an aggregate of 150,000 shares to two
directors of the Company to convert $300,000 of debt. The $300,000
approximated the fair value of the shares.
During the second quarter of 1999, the Company issued 571,000 shares to
several individual investors in a private placement for consideration of
$792,000.
In 1999, the Company's shareholders approved the authorization of an
additional 8,000,000 shares of Common Stock to increase the total
authorized shares to 15,000,000 and the authorization of 6,000,000
shares of Preferred Stock.
12. Stock based compensation
The Company adopted a Stock Option Plan (the "1991 Plan") in December
1991 (amended in April 1992) under which 10,000 shares of the Company's
common stock have been reserved for issuance to officers, directors,
consultants and employees of the Company under the terms of the 1991 Plan.
The 1991 Plan will expire on December 10, 2001.
During 1998, the Company also issued options to acquire 25,000 shares of
common stock to a member of management. These shares are exercisable at
$3.33 per share and vest at the rate of 2,083 per month for 12 months.
As of November 30, 1999, the total number of shares vested under this
option agreement was 25,000.
During April 1998, an option to purchase 25,000 shares of Common Stock
was granted to an employee of Commerce Capital as additional collateral
for the $650,000 loan to the Company. This option expires in 2003.
The Company has reserved 685,417 shares for issuance upon the exercise
of the outstanding common stock purchase warrants and options. As of
November 30, 1999, 462,917 shares under option were vested.
The Company follows the guidance set forth in APB No. 25 as it pertains
to the recording of expenses from the issuance of incentive stock options.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recorded in conjunction
with options issued to employees. Had compensation cost been determined
based on the fair value of the options at the grant date, consistent
with the method prescribed by SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
(000's except per share information)
1999 1998 1997
---- ---- ----
Net income (loss) - as reported $(1,341) $(4,014) $(1,315)
Net income (loss) - pro forma (1,687) (4,325) (1,496)
Net income (loss) per common
share - as reported (0.22) (0.87) (0.38)
Net income (loss) per common
share - pro forma (0.28) (0.94) (0.44)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1998 and 1999; expected volatility of 35%; risk-free
interest rate of 6.17%; and expected lives from one to four years.
Stock option activity during the periods indicated is as follows:
Number Weighted-average
of shares exercise price
--------- --------------
Balance at November 30, 1997 292,500 $3.32
Granted 250,000 $4.14
Forfeited -- --
-------- --------------
Balance at November 30, 1998 542,500 $3.68
Granted 207,500 $4.64
Forfeited (64,583) ($4.75)
------- --------------
Balance at November 30, 1999 685,417 $3.89
Options exercisable at November 30, 1997 36,562
Options exercisable at November 30, 1998 255,722
Options exercisable at November 30, 1999 462,917
The weighted average fair value of options granted for the year ended
November 30, 1997, 1998 and 1999 were $3.315, $1.54 and $1.70, respectively.
12. Commitments and Contingencies
Leases
The Company leases certain property, buildings, a showroom and equipment.
Rental expense for the years ended 2001, 2000 and 1999 was approximately
$107,000, $160,000 and $182,000, respectively. During September 2000, the
Company entered into a lease agreement with a related party (Mabry Partner
Partnership) to lease office space. The lease rate is $3,500 per month for
approximately 5,000 square feet of office space, has a ten-year term and is
cancelable with six months written notice (see Note 13).
The future minimum rental commitments under operating leases as of
December 1, 2001 are as follows (in thousands):
2002 $ 78
2003 60
2004 42
2005 42
2006 and thereafter 203
---
Total future minimum lease
payments $ 425
License Agreements
On March 26, 2001, the Company entered into a licensing agreement with
Candies Inc. (Candies) pursuant to which the Company obtained the right
to design, manufacture and distribute bags, belts and small leather/pvc
goods bearing the Bongo trademark. The agreement is to terminate on March
31, 2003 unless the Bongo brand is sold in its entirety, in which case the
licensing agreement would terminate immediately. The Company pays Candies a
5% royalty and a 2% advertising fee on the net sales of the Company's goods
bearing the Bongo trademark. The Company is obligated to pay minimum royalties
of $50,000 under the initial term of 24 months under the license agreement.
On February 7, 2001, in connection with the acquisition of the Joe's Jeans
licensing rights, the Company entered into a ten-year license agreement which
requires the payment of a royalty based upon 3% of net sales, subject to
additional royalty amounts in the event certain sales and gross profit
thresholds are met on an annual basis.
The Company displays names and logos on its products under license agreements
that require royalties ranging from 7% to 17% of sales. The agreements expire
through December 2002 and require annual advance payments (included in prepaid
expenses) and certain annual minimum payments. Royalty expense was $132,000,
$373,000 and $742,000 for the years ending December 1, 2001, and November 30,
2000 and 1999, respectively.
Litigation
The Company is involved from time to time in routine legal matters incidental
to its business. In the opinion of the Company's management, resolution of
such matters will not have a material effect on its financial position or
results of operations.
(a) Leases
The Company leases certain property, buildings and equipment. Rental expense
for the years ended November 30, 1999, 1998 and 1997 was approximately $182,000,
$40,000 and $63,000 respectively. The minimum rental commitments under
noncancellable operating leases as of November 30, 1999 are as follows: 2000,
$218,180; 2001, $217,085; 2002, $211,811 and 2003, $176,509. During October of
1998, the Company entered into a lease agreement with a related party (Furrow-
Holrob Development II, L.L.C.) to lease a production facility. The five year
term began December 15, 1998 at a lease rate of $2 per square foot.
License Agreements
The Company displays characters, names and logos on its products under
license agreements that require royalties ranging from 7% to 17% of sales.
The agreements expire through 1999 and require annual advance payments
(included in prepaid expenses) and certain annual minimums. Royalties
were $742,000, $346,000, and $363,000 for fiscal 1999, 1998 and 1997,
respectively.
(c) Contingencies
The Company is a party to lawsuits and other contingencies in the ordinary
course of its business. While the damages sought in some of these actions
are material, the Company does not believe that it is probable that the
outcome of any individual action will have a material adverse effect, or
that it is likely that adverse outcomes of individually insignificant
actions will be sufficient enough, in number or magnitude, to have a
material adverse effect in the aggregate.
In December 1999, the American Apparel Contractors Association Workers'
Compensation Fund filed suit against the Company's Thimble Square subsidiary
for $13,000 plus interest of 1.5% per month from the due date (American Apparel
Contractors Association Workers' Compensation Self-Insured Fund v. Thimble
Square and Innovo Group). This amount represents the allocation to
Thimble Square of the excess workers' compensation claims paid under the
plan. The Company has not accrued for the disputed funds in this case.
In November, 1999, the Company received a notice from the Internal Revenue
Service ("IRS") asserting deficiencies in federal corporate income taxes for
the Company's 19991 tax year. The total tax proposed by the IRS amounts to
approximately $5.5 million plus interest. The Company believes that it has
meritorious legal defenses to those deficiencies, as well as available net
operating losses to offset any such deficiencies, and believes that the
ultimate resolution of this matter will not have a material effect on the
Company's financial statements.
In May, 1996, a foreign manufacturer that had previously supplied imported
products to a nonoperating subsidiary, NASCO Products, filed suit against
NASCO Products asserting that it is owed approximately $470,000, which was
approximately $300,000 in excess of the amount previously recorded on the
books of NASCO Products. NASCO Products and the supplier had previously
reached an agreement on the balance owed (which was the balance recorded),
as well as an arrangement under which the schedule for NASCO Products'
payments reducing the balance would be based on future purchases from
that supplier of products distributed internationally by NP International.
The Company denied the supplier's claims, and asserted affirmative defenses,
including the supplier's late shipment of the original products, and the
supplier's refusal to accept and fill NP International orders on terms
contained in the agreement. This suit was settled and paid by the Company in
1999 for $200,000. The Company had previously recorded a liability of
$170,000 for this suit and recorded the remaining settled amount in the third
quarter of 1999.
In December 1991, a former employee filed suit against the Company, Patricia
Anderson-Lasko and others alleging breach of an employment agreement and
conversion of his interest in certain property rights (Michael J. Tedesco
v. Innovo, Inc.., et al., Case No. 91-64033, District Court of Harris
County, Texas, 164th Judicial Circuit). Following an appeal and a second
trial, a final judgment was rendered against Innovo for $194,045.62 on
August 17, 1998. Thereafter, 20,000 shares of Common Stock which has been held
in the registry of the court, as security during the appeal and subsequent
trial, were released to the plaintiff. If the sale of that stock does not
generate sufficient net proceeds to pay the judgment, then Innovo will be
liable for any shortfall. The Company monitors the price of its stock in
the market and makes adjustments to the amount recorded in the financial
statements as necessary.
In July 1992, a former employee filed suit against the Company and Spirco
for alleging breach of an employment agreement and asserting other related
claims (Wayne Copelin v. Innovo Group, Inc., et al., Case No. 11950, in the
Chancery Court of Robertson County, Tennessee). When Spirco filed for
bankruptcy in August 1993, the case proceeded against Innovo Group and a summary
judgment of $100,000 was entered against it in March 1995. However, because the
Copelin judgment was classified as a Class 8 Claim in the Spirco bankruptcy, the
Company believed that the judgment was fully paid when it issued 35,211 shares
of Common Stock to Copelin, in compliance with the confirmed Plan of
Reorganization. When Copelin sought to enforce the judgment, Innovo Group, as
the successor by merger to Spirco, brought a motion in the Spirco bankruptcy
to enforce the terms of the Plan of Reorganization against Copelin. The
bankruptcy judge granted the motion and permanently enjoined Copelin from
enforcing the judgment in an order entered on October 18, 1996. Copelin
appealed to the United States District Court and on April 13, 1998, the
District Court reversed. The case was appealed to the United States Third
Circuit Court of Appeals. This court upheld the previous courts ruling.
The Company recorded the $100,000 liability as of November 30, 1999.
(d) Liquidity
The Company has experienced recurring operating losses and negative cash
flows from operations. Management is currently taking steps to improve
profitability by increasing the number of marketing personnel, introducing
new products lines and by endeavoring to control and minimize fixed costs.
The Company has taken several steps to improve liquidity during fiscal year
2000, as discussed in Note 13 Subsequent Events.
Based on the foregoing, the Company believes that working capital will be
sufficient to fund operations and required debt reductions during fiscal
2000. The Company believes that any additional capital, to the extent needed,
could be obtained from the sale of equity securities or short-term working
capital loans. However, there can be no assurance that this or other financing
will be available if needed. The inability of the Company to able to satisfy
its interim working capital requirements would require the Company to constrict
its operations and would have a materially unfavorable effect on the Company's
financial statements.
13. Segment Disclosures
Current Operating Segments
During 2001, the Company began to operate in two segments, Crafts and
Accessories, and the Apparel segment. The Crafts and Accessories segment
represents the Company's historical line of business as conducted by
Innovo. The Apparel segment is comprised of the operations of Joe's
and IAA, both of which began in 2001, as a result of acquisitions.
The operating segments have been classified based upon the nature of
their respective operations, customer base and the nature of the
products sold.
Prior to November 30, 2000, the Company had two reportable segments
based on the business activities from which they earned revenues or
incurred expenses. The revenue-generating operations were segregated
into the domestic and international segments based on the geographic
markets in which the Company's products were sold. These reportable
segments were managed separately because they had different customers
and distribution processes or had different business activities. During
2000, the Company significantly reduced its international sales efforts
and ceased to operate as two reportable segments.
The Company evaluates performance and allocates resources based on gross
profits, and profit or loss from operations before interest and income
taxes. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies.
Information for each reportable segment during the three years
ended December 1, 2001, are as follows (in thousands):
Crafts and
December 1, 2001 Accessories Apparel Other(A) Total
- ---------------- ----------- ------- ------- -----
Revenues, net $ 5,642 $ 3,650 $ -- $ 9,292
Gross profit 1,751 1,208 -- 2,959
Depreciation and amortization 45 35 87 167
Interest expense 32 79 100 211
Segment assets 2,705 6,658 884 10,247
Expenditures for segment
assets 32 -- 29 61
(A) Other includes corporate expenses and assets and expenses related to
real estate operations.
(B)
November 30, 2000 Domestic International Total
- ----------------- -------- ------------- -----
Revenues, net $ 5,686 $ 81 $ 5,767
Gross profit 558 14 572
Depreciation and amortization 250 -- 250
Interest expense 446 -- 446
Extinguishment of debt 1,095 -- 1,095
Segment assets 7,413 3 7,416
Expenditures for segment assets 76 -- 76
(B) Segment operating results include $600,000 charge for impairment
of long-lived assets held for sale related to the Lake Worth, Florida,
retail property.
(C)
November 30, 1999 Domestic International Total
- ----------------- -------- ------------- -----
Revenues, net $ 10,138 $ 699 $ 10,837
Gross profit 4,438 147 4,585
Depreciation 287 -- 287
Interest expense 517 -- 517
Segment assets 6,065 157 6,222
Expenditures for segment assets 126 -- 126
(C) Segment operating results include a charge for impairment of long-lived
assets held for use related to the Springfield, Tennessee, property ($145)
and loss from the termination of a capital lease on the Baxley, Georgia,
facility ($293).
1997
Domestic International Corporate Total
-------- ------------- --------- -----
Revenues (net) $ 6,351 $ 1,550 $ -- $ 7,901
Gross Profits 1,946 652 -- 2,598
Depreciation 107 -- 160 267
Interest Expense -- -- 657 657
Segment Assets 2,312 211 6,645 9,168
Expenditures for
Segment Assetes 35 -- 434 469
14. Related Party Transactions
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 a Stock Purchase Right Award granted in February 1997, the
Company's chief executive officer purchased 250,000 shares of common
stock (the Award Shares) with payment made by the execution of a non-
recourse note (the Note) for the exercise price of $2.81 per share
($703,125 in the aggregate). The Note is due, without interest, on
April 30, 2002, and is collateralized by the 1997 Award Shares. The
Note may be paid or prepaid (without penalty) by (i) cash, or (ii)
the delivery of the Company's common stock (other than the Award Shares)
held 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. At December 1, 2001, $703,000 remains
outstanding under this promissory note.
Sam Furrow and Affiliate Loans
During the period from January 1999 to June 2000, Sam Furrow (Chairman
of the Board of Directors) and affiliated companies made a total of 24
loans in an aggregate amount of $1,933,000 to the Company, primarily to
finance the import of products from Asia and general operations. Each of
the loans was unsecured and provided for interest compounding annually at
a rate of from 8.5% to 10.0%. Most of the loans provided for a six-month
term. Of the amounts loaned by Sam Furrow and his affiliates, $1,200,000
has been exchanged for common stock in 2000 and 1999 as described below
under "Debt to Equity Conversions." As of December 15, 2000, all amounts
owed by the Company to Sam Furrow and affiliated companies have been
repaid.
Dan Page Loans
During the period from February 1999 to March 1999, Dan Page (a director
of the Company) made a total of five loans in an aggregate amount of
$200,000 to the Company primarily to finance the import of product
from Asia and general operations. Each of the loans was unsecured, had a
term of six months and provided for interest compounding annually at a
rate of 10%. All of the $200,000 has been exchanged for common stock as
described below under "Debt to Equity Conversions" below.
Debt to Equity Conversions
On February 28, 2000, notes payable to Sam Furrow totaling $500,000 were
converted to 423,729 shares of common stock at $1.18 per share, which
approximated its fair value on the date of conversion. Sam and Jay Furrow
(collectively the Furrow Group) also assumed $1,000,000 of the Company's
outstanding debt previously guaranteed by Sam Furrow. The debt consisted
of $650,000 owed to Commerce Capital, Inc. (a Nashville, Tennessee, based
finance company) and $350,000 owed to First Independent Bank of Gallatin.
On August 11, 2000, the Furrow Group converted the $1,000,000 of assumed
indebtedness and $500,000 of notes payable to Sam Furrow for 1,363,637
shares of common stock at $1.10 per share (its approximate fair value)
and warrants to purchase an additional 1,500,000 shares. The warrants
are exercisable over three years at $2.10 per share. The fair value of
the warrants totaling $1,095,000 was recorded as a charge for the
extinguishment of debt and a corresponding increase in additional
paid-in capital. The conversion of the debt to equity was required by
Commerce as a condition to its investment in the Company.
On February 26, 1999, Sam Furrow and Dan Page each exchanged $150,000 of
the indebtedness owed by the Company for 75,000 shares of common stock,
at a price of $2.00 per share. On April 26, 1999, Jay Furrow acquired
$50,000 of the indebtedness owed by the Company to Sam Furrow and
exchanged that amount for common stock at a price of $1.00 per share.
On the same date, a third party acquired $50,000 of the indebtedness
owed by the Company to Dan Page and exchanged that amount for common
stock at a price of $1.00 per share.
With respect to each of the debt to equity conversions discussed above,
the Board of Directors determined that the purchases of common stock were
made on fair terms and conditions and were in the Company's best interests
in order to increase the Company's net tangible assets for NASDAQ listing
compliance purposes. The per share price approximated recent trading prices
with a reasonable discount due to the restricted nature of the issued shares.
All of the shares issued pursuant to the debt conversions are restricted and
are subject to registration rights.
Purchases of Goods and Services
As required under the terms of the Commerce investment, the Company purchased
$5,216,000 and $3,108,000, respectively, in goods, $382,000 and $196,000 in
distribution services and $137,000 and $0 in operational services from
Commerce during fiscal 2001 and 2000, respectively. These services included
but were not limited to accounts receivable collections, certain general
accounting functions,inventory management and distribution logistics.
Additionally, this charge included the allocation associated with the Company
occupying space in Commerce's Commerce, California facility and the use of
general business machines and communication services. The Company from time
to time will advance or loan funds to Commerce for use in the production process
of the Company's goods or for other expenses associated with the Company's
operations. The Company believes that all the transactions conducted between
the Company and Commerce were completed on terms that where competitive and
at market rates.
JD Design, LLC
Pursuant to the license agreement entered into with JD Design, LLC under
which the Company obtained the licensing rights to Joe's Jeans, Joe's is
obligated to pay a 3% royalty on the net sales of all products bearing
the Joe's Jeans or JD trademark or logo. For fiscal 2001, this amount
totaled $46,000.
Azteca Production International, Inc.
In the third quarter of fiscal 2001, the Company acquired Azteca
Productions International, Inc.'s Knit Division and formed the
subsidiary Innovo-Azteca Apparel, Inc. Pursuant to equity transactions
completed in 2000, the principals of Azteca Production International,
Inc. became affiliates of the Company. The Company purchased the Knit
Division's customer list, the right to manufacture and market all of
the Knit Division's currentproducts and entered into certain non-compete
and non-solicitation agreements and other intangible assets associated
with the Knit Division. As consideration, the Company 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.
Included in due to related parties is $806,000 at December 1, 2001
relating to amounts due to Commerce for goods and services described
above, and accrued interest of $71,000 due to Azteca pursuant to the
terms of the promissory notes.
Facility Lease Arrangements
On October 7, 1998, the Company entered into a Warehouse Lease
Agreement with Furrow-Holrob Development II, LLC (a shareholder)
to lease a 78,900-square-foot plant that housed the Company's executive
offices and manufacturing, administrative and shipping facilities. The
"triple net" lease provides for an annual base rental rate of $2.00 per
square foot, or $157,800 annually, plus a pro rata share of real estate
taxes, insurance premiums and common area expenses, with an initial five-
year term and two five-year renewal options (subject to agreement on any
change in the base rental rate). As required by the terms of the Commerce
investment, the Warehouse Lease Agreement was terminated on July 1, 2000.
After the termination of the Warehouse Lease Agreement, the Company entered
into a new office lease with a company owned by Sam Furrow. The "triple net"
lease covers a 5,000-square-foot facility in downtown Knoxville, Tennessee,
for $3,500 per month.
15. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
three years (in thousands, except per share amounts):
2001
Quarter ended
February 29 May 31 August 31 December 1
----------- ------ --------- ----------
Net sales $ 1,153 $ 1,968 $ 2,625 $ 3,546
Gross profit 499 746 951 763
Loss before income
taxes (103) 41 (16) (451)
Net (income) loss (103) 41 (16) (540)
Loss per share (basic
and diluted): $ (.01) $ .00 $ .00 $ (.04)
2000
Quarter ended
February 29 May 31 August 31 November 30(1)
----------- ------ --------- -----------
Net sales $ 812 $ 1,101 $ 3,579 $ 275
Gross profit 286 302 1,138 (1,154)
Loss before
extraordinary item (823) (740) (288) (3,205)
Extraordinary item -- -- -- (1,095)
Net loss (823) (740) (288) (4,300)
Per share (basic and
diluted):
Loss before
extraordinary
item $ (0.13) $ (0.10) $ (0.04) $ (0.35)
Net loss (0.13) (0.10) (0.04) (0.48)
(1) During the fourth quarter of fiscal 2000, the Company modified
its accounting for sales discounts related to advertising allowances
calculated as a percent of sales to a customer, resulting in the
reclassification of approximately $250,000 previously reported as a
component of selling, general and administrative expenses to reduce
net sales. In addition, the Company recorded charges in the fourth
quarter of $250,000 in cost of sales to write-off previously
capitalized manufacturing overhead, $600,000 related to the
write-down of land and buildings held for sale, $99,000 related
to the loss on disposal of fixed assets related to the closure
of the Company's manufacturing facility, $1,095,000 in connection
with the issuance of common stock and warrants in exchange for
the assumption and conversion of debt facilities, $300,000 in
cost of sales related to the write down of inventory disposed
of prior to the relocation of the Company's distribution
facility and approximately $300,000 as a reduction of net
sales in connection with other sales, returns and allowances.
Innovo Group Inc. and Subsidiaries
Schedule II
Valuation of Qualifying Accounts
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expense Accounts Deductions Period
- ----------- ------ ------- -------- ----------- ------
Allowance for doubtful accounts:
Year ended November 30, 2001 $ 36,000 $ 128,000 $ -- $ -- $ 164,000
Year ended November 30, 2000 153,000 99,000 -- 216,000(A) 36,000
Year ended November 30, 1999 67,000 87,000 -- 1,000(A) 153,000
Allowance for inventories:
Year ended November 30, 2001 78,000 47,000 -- -- 125,000
Year ended November 30, 2000 104,000 60,000 -- 86,000 78,000
Year ended November 30, 1999 36,000 68,000 -- -- 104,000
Allowance for deferred taxes:
Year ended November 30, 2001 6,032,000 1,284,000 -- -- 7,316,000
Year ended November 30, 2000 4,267,000 1,765,000 -- -- 6,032,000
Year ended November 30, 1999 3,808,000 459,000 -- -- 4,267,000
Note A - Uncollected receivables written off, net of recoveries.
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Innovo Group Inc
Knoxville, Tennessee.
We hereby consent to the incorporation by reference in the Registrations
Statements on Form S-3 (Nos. 333-44330, 333-79505 and 333-35981) of our
report dated January 13, 2001, except for Notes 11 and 14, as to which
the date is March 8, 2000, relating to the consolidated financial statements
and schedule of Innovo Group Inc. apprearing in the Company's Annual Report
on Form 10-K for the year ended December 1, 2001.
/s/ BDO Seidman, LLP
- ---------------------------
BDO Seidman, LLP
Atlanta, Georgia
February 28, 2002
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
Form S-3 No. 333-44330, No. 333-79505 and No. 333-35981 of Innovo Group,
Inc. and Subsidiaries and in the related Prospectus of our report dated
February 8, 2002, with respect to the consolidated financial statements
and schedule of Innovo Group, Inc. and Subsidiaries included in this Form
10-K for the year ended December 1, 2001.
/s/ ERNST & YOUNG LLP
- ---------------------
ERNST & YOUNG LLP
Los Angeles, California
February 27, 2002