SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported.) September 10, 2001
---------------------
INNOVO GROUP INC.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 5199 11-2928178
-----------------------------------------------------------------------------
(State or other Jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation) Classification Code Number) Identification No.)
2633 Kingston Pike, Suite 100
Knoxville, TN 37919
-----------------------------------------------------------------
(Address of prinicpal executive offices) (Zip Code)
Registrant's telephone number, including area code: (865) 546-1110
N/A
-----------------------------------------------------------------
(Former Name or Former Address, if Changes Since Last Report)
Item 2. Acquisition or Disposition of Assets
This Form 8-K/A amends the current report on Form 8-K dated 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.
On August 24, 2001, the registrant, through its newly formed subsidiary Innovo
Apparel Inc.("IAI"), purchased certain assets of Azteca Production International
Inc.'s knit division (the "Knit Division") and the outstanding shares of PDS
pursuant to a two phase transaction. Azteca's Knit Division designs, produces
and markets knit apparel products for private label and retail customers with a
product base consisting of women's and men's fashion and basic t-shirts, golf
shirts and sportswear. PDS, a Mexican corporation, will distribute the
Company's product directly out of Mexico, thus allowing the Company to take
advantage of the financial benefits of PDS's qualifications as a Mexican
corporation. As of the closing of the first phase, PDS had essentially no
assets or liabilities.
Pursuant to the first phase of the transaction ("Phase I"), the Company
purchased the Knit Division's customer lists, the right to manufacture and
market all of the Knit Division's current products, non-compete and non-
solicitation agreements and other intangible assets associated with the Knit
Division. As consideration for the Phase I assets, the Company issued
to Azteca, 700,000 shares of Company common stock and promissory notes in
the amount of $3.6 million. Furthermore, IAI, as of the Phase I closing
date, hired certain employees of the Knit Division to assist in the
management of IAI.
The second phase ("Phase II") of the transaction calls for the Company to
purchase the inventory of the Knit Division as of October 31, 2001 for cash,
with the consideration not to exceed $3 million. Phase II of the transaction is
scheduled to close based upon the completion of the October 31, 2001 physical
inventory count and customary closing conditions.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
Financial Statements of Azteca Production International Inc. Knit Division
(i) Report of Independent Auditors
(ii) Statements or Revenues and Direct Expenses Before Interest and Taxes for
the years ended January 31, 2001 and 2000 and the six months ended
July 31, 2001 (unaudited) and 2000 (unaudited)
(iii) Notes to the Financial Statements
(b) Pro Forma Financial Information
(i) Introduction to Unaudited Pro Forma Condensed Combined Financial
Information
(ii) Unaudited Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 1, 2001
(iii) Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended November 30, 2000
(iv) Notes to Unaudited Pro Forma Condensed Financial Information
Shareholders
Azteca Productions International Inc.
We have audited the accompanying statement of revenues, direct expenses and
identified corporate expenses before interest and taxes of the knit division of
Azteca Production International Inc. (the "Business") for the years ended
January 31, 2001 and 2000. These financial statements are the responsibility of
Azteca Production International Inc's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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 overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the revenues, direct expenses and identified corporate expenses before
interest and taxes for the years ended January 31, 2001 and 2000 in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 2 to the financial statements, the Business comprises a
division of Azteca. The Business receives managerial, administrative and other
support from Azteca Productions International, Inc. Certain expenses included
in the financial statements represent allocations of amounts from Azteca. As a
result, the results of the revenues, direct expenses and identified corporate
expenses before interest and taxes of the business may not be indicative of
conditions that would have existed or results that would have occurred had the
Business operated as a separate stand-alone entity.
Ernst & Young LLP
Los Angeles, California
November 2, 2001
Azteca Productions International Inc. Knit Division
Statements of Revenues, Direct Expenses, and Identified Corporate Expenses
Before Interest and Taxes
Year ended January 31 Six months ended July 31
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
Net sales $17,882,276 $24,228,901 $3,949,517 $10,089,628
Cost of goods sold 14,246,105 21,226,157 3,387,604 8,168,282
---------- ---------- --------- ---------
Gross profit 3,636,171 3,002,744 561,913 1,921,346
Selling general and
administrative expenses 1,681,195 2,881,834 502,108 970,596
---------- ---------- --------- ---------
Income before interest
and taxes $ 1,954,976 $ 120,910 $ 59,805 $ 950,750
---------- --------- -------- ---------
---------- --------- -------- ---------
The accompanying notes are an integral part of these financial statements.
1. Organization and Operations
Azteca Production International Inc's knit division (the Business), is engaged
in the sourcing and sale of knit apparel products, principally t-shirts, to
branded apparel companies and specialty retailers in the United States.
Historically, the Business has obtained a significant portion of its finished
goods inventory from Azteca Productions International Inc. (Azteca).
2. Basis of Presentation and Summary of Significant Accounting Polices
Basis of Presentation
The Business is not a "stand-alone" division or subsidiary of Azteca and was
not generally accounted for separately. As a result, the distinct and separate
accounts necessary to present individual balance sheets and income statements
of the business as of August 24, 2001 (date of sale) and for the years ended
January 31, 2001 and 2000 have not been maintained.
The Business does not maintain stand-alone corporate treasury, legal, tax and
other similar corporate support functions. Corporate general and administrative
expenses have not been previously allocated to the business. For purposes of
preparing the financial statements, certain of these corporate costs along with
other administrative and warehouse expenses were allocated using allocation
methods (see Note 2). However, Azteca's systems and procedures do not provide
sufficient information to develop a reasonable cost allocation for income
taxes, corporate debt and interest expense.
With respect to cash flows, purchases of inventory, payroll, and other
expenditures are funded by Azteca. Accordingly, the Business does not maintain
cash accounts.
Financial Statement Presentation
Due to the limitations noted above, we are presenting Statements of Revenues,
Direct Expenses and Identified Corporate Expenses before Interest and Taxes,
including all corporate cost allocations for which a reasonable method of
allocating the cost to the operations can be developed.
Statement of Cash Flows is not presented as the Business has essentially no
cash flow.
Statement of Assets Acquired is not presented as the assets acquired in the
first phase of the closing (See Note 3) have no historical accounting basis. On
August 24, 2001 the first phase of the sale of the Business' assets was
completed. Pursuant to the terms of the first phase closing, Innovo Group Inc.
(Innovo) acquired from Azteca, the Business' customer lists, the right to
manufacture and market all of the Business' current products and entered into
certain non-compete and non-solicitation agreements associated with the
Business.
Revenue Recognition
Revenues are recognized when the Business ships products to its customers,
net of anticipated returns, allowances, and discounts.
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, revenues
and expenses during the reported period. Actual results could differ from those
estimates. Sales returns and allowances and corporate cost allocations of
certain selling, general and administrative expenses represent significant
estimates.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial information has been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial reporting. In the opinion of management,
the accompanying financial information is presented on a basis consistent with
the audited financial statements and reflects all adjustments (consisting of
normal recurring items) necessary for a fair presentation of results for the
interim periods presented. Results for the interim periods are not necessarily
indicative of the results to be expected for the year.
Corporate Allocations
The Business does not maintain stand-alone corporate treasury, legal, tax
and other similar corporate support functions. The Business does record
certain corporate expenses related primarily to employee payroll and benefits.
For purposes of preparing the financial information for the Business, certain
expenses of Azteca were allocated based upon a variety of factors which
include pro rata sales of the Business, headcount measures, and the
identification of costs specifically attributable to the Business.
Management believes that these allocations are based on assumptions that
are reasonable under the circumstances; however, the Business's results of
revenues, direct expenses and identified corporate expenses before interest
and taxes may not be indicative of conditions that would have existed or
results that would have occurred had the Business operated as an unaffiliated
entity.
The following represents a summary of the corporate costs allocated to the
Business which were included in the Statements of Revenues, Direct Expenses
and Identified Corporate Expenses before Interest and Taxes for the years
ended January 31:
2001 2000
General and administrative expenses $1,234,417 $1,839,073
3. Sale of the Business
On August 16, 2001, Azteca entered into a two phase Asset Purchase Agreement
with Innovo. The first phase which closed on August 24, 2001 involved the
purchase of certain assets and intellectual properties of the Business by
Innovo. The purchase price for the assets acquired in the first phase of
$4,489,000 consists of $3.6 million in promissory notes and 700,000 shares of
the common stock of Innovo. Phase two involves the purchase of the certain
inventory from Azteca at historical cost (not to exceed $6.6 million) less
$3.6 million. The consummation of phase two is contingent upon Innovo
obtaining adequate financing for the purchase.
The following unaudited pro forma condensed combined statement of operations
sets forth the combined results of operations for Innovo Group, Inc. (Innovo)
and the knit division (the Business) using the purchase method of accounting
and assumes that the combination was consummated as of the beginning of the
earliest period presented.
The unaudited pro forma i nformation combines the historical statement of
operations of Innovo for the nine months ended September 1, 2001 and the
fiscal year ended November 30, 2000 (Innovo Historical) with the historical
statements of revenues and direct expenses before interest and taxes of the
Business for the nine months ended July 31, 2001 and the fiscal year ended
January 31, 2001 (Knit Historical), respectively. For pro forma presentation
purposes for the interim period, the results of operations of the Business for
the fourth quarter of the year ended January 31, 2001 have been added to the
results of operations for the six months ended July 31, 2001 to derive the
results of operations for a nine month period.
The following unaudited pro forma condensed combined information is
presented for illustration purposes only and is not necessarily indicative of
the financial position or results of operations which would actually have been
reported had the combination been in effect during those periods or which may
be reported in the future. The statements should be read in conjunction with
the historical financial statements and notes thereto which have been included
elsewhere herein and in the Annual Report of the Company on Form 10-K.
An unaudited pro forma combined consolidated balance sheet is excluded from
this amended filing as the September 1, 2001 condensed consolidated balance
sheet included in the Company's 10-Q filed on October 16, 2001 reflects the
above noted acquisition.
Innovo Group Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands, except per share data )
Innovo Historical Knit Historical
Year Ended Year Ended Pro forma Pro forma
November 30, 2000 January 31, 2001 Adjustments Total
----------------- ---------------- ----------- -----
Net sales $5,767 $17,882 $ -- $23,649
Cost of goods sold 5,195 14,246 -- 19,441
----- ------ ------ ------
Gross profit 572 3,636 -- 4,208
Operating expenses:
Selling, general and administrative 4,147 1,545 -- 5,692
Asset impairment 600 -- -- 600
Other 116 -- -- 116
Depreciation and amortization 250 136 200 586
----- ------ ------ ------
5,113 1,681 200 6,994
Income (loss) from operations (4,541) 1,955 (200) (2,786)
Interest expense (446) -- (288) (734)
Other income (expense), net (69) -- -- (69)
----- ------ ------ ------
Income (loss) before income taxes (5,056) 1,955 (488) (3,589)
Income taxes -- -- -- --
----- ------ ------ ------
Income (loss) from continuing operations
before extraordinary item (5,056) 1,955 (488) (3,589)
Loss on early extinguishments of debt (1,095) -- -- (1,095)
----- ------ ------ ------
Net income (loss) $(6,151) $ 1,955 $ (488) $(4,684)
----- ------ ------ ------
----- ------ ------ ------
Loss per share - basic and diluted:
Continuing operations $(0.62) $(0.40)
Extraordinary item $(0.13) $(0.12)
Net loss $(0.75) $(0.53)
Shares used in computing basic and diluted 8,163 700 8,863
The pro forma adjustment to reflect the purchase of certain assets of the Business
in connection with the phase one closing for consideration of $3.6 million in
promissory notes and 700,000 shares of Innovo Group, Inc. common stock.
The pro forma adjustment to reflect the amortization over five years of
identifiable intangible assets recorded in accounting for the purchase of the
Business. Final allocation of the purchase price may involve revaluation of
certain assets.
The pro forma adjustment to reflect the increase in interest expense related to
the additional promissory notes issued in connection with the acquisition of the
Business.
Innovo Group Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands, except per share data )
Innovo Historical Knit Historical
Nine months Nine months
ended ended Pro forma Pro forma
September 1, 2001 July 31, 2001 Adjustments Total
----------------- ------------- ------------ ---------
Net sales $ 5,747 $ 7,951 $ -- $13,698
Cost of goods sold 3,551 6,576 -- 10,127
----- ----- ----- ------
Gross profit 2,196 1,375 -- 3,571
Operating expenses:
Selling, general and administrative 2,142 829 -- 2,971
Depreciation and amortization 38 38 150 226
----- ----- ----- ------
2,180 867 150 3,197
Income (loss) from operations 16 508 (150) 374
Interest expense (161) -- (216) (377)
Other income, net 70 -- -- 70
----- ----- ----- ------
Income (loss) before income taxes (75) 508 (366) 67
Income taxes -- -- -- --
----- ----- ---- ------
Net income (loss) $ (75) $ 508 $ (366) $ 67
----- ----- ---- ------
----- ----- ---- ------
Loss per share - basic and diluted: $(0.00) $0.00
Shares used in computing basic and
diluted 14,126 700 14,826
The pro forma adjustment to reflect the purchase of certain assets of
the Business in connection with the phase one closing for consideration
of $3.6 million in promissory notes and 700,000 shares of Innovo
Group, Inc. common stock.
The ro forma adjustment to reflect the amortization over five years of
identifiable intangible assets recorded in accounting for the purchase
of the Business. Final allocation of the purchase price may involve
revaluation of certain assets.
The pro forma adjustment to reflect the increase in interest expense
related to the additional promissory notes issued in connection with
the acquisition of the Business.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
INNOVO GROUP, INC.
Dated: November 7, 2001 By: /s/ Samuel J. Furrow, Jr.
---------------- -------------------------
Samuel J. Furrow, Jr.
President and Acting Chief
Financial Officer